UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1996.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-6654
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)
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.................................................8
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, subject to various forms of regulation. These
telecommunications services include: local and intrastate
toll services; network access service, which links customers'
premises to the facilities of other carriers; and other
services such as digital transmission of data and transmission
of radio and television programs, packet switched data network
and private line services. 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 1996, approximately 85% of the Telephone Company's revenues
were derived from 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 70% of
the operating revenues from telecommunication services were
attributable to intrastate operations, with the remainder
attributable to interstate access services.
The Telephone Company's access lines in service grew to
2,163,000 at December 31, 1996 from 2,073,000 at December 31,
1995, an increase of 4.3%. The increase resulted primarily
from growth in Centrex business lines and second residential
lines. The network access lines provided by the Telephone
Company to customers' premises can be interconnected with the
access lines of other telephone companies in the United States
and with telephone systems in most other countries. The
following table sets forth, for the Telephone Company, the
number of network access lines in service at the end of each
year:
Network Access Lines in
Service (thousands) 1996 1995 1994 1993 1992
Residence 1,444 1,415 1,379 1,355 1,340
Business 719 658 630 609 597
Total 2,163 2,073 2,009 1,964 1,937
The Telephone Company is subject to the jurisdiction of the
Federal Communications Commission ("FCC") with respect to
interstate rates, services, access charges and other matters,
including the prescription of a uniform system of accounts.
The FCC also prescribes the principles and procedures
(referred to as "separations procedures") used to separate
investments, revenues, expenses, taxes and reserves between
the interstate and intrastate jurisdictions. In addition, the
FCC has adopted accounting and cost allocation rules for the
separation of costs of regulated from non-regulated
3
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].
Competition
As a result of legislative and regulatory reform, the
Telephone Company continues to experience an increasingly
competitive environment with respect to telecommunications
services in Connecticut. Competitors include interexchange
carriers and competitive access providers with respect to the
Telephone Company's existing services. In 1996, major
carriers intensified their marketing efforts to sell
intrastate long-distance services with full implementation of
intrastate equal access. In addition, providers began
offering local exchange service to businesses in certain areas
of the state. Management supports bringing to customers the
benefit of competition and affording all competitors the
opportunity to compete fairly under reduced regulation.
The Telephone Company's currently regulated services are
subject to competition from companies and carriers, including
competitive access providers, that construct and operate their
own communications systems and networks, as well as from
companies that resell the telecommunications systems and
networks of underlying carriers. Since the introduction of
intrastate long-distance toll competition, in excess of 170
telecommunications providers have received approval from the
DPUC to offer intrastate long-distance services. In addition,
over 50 companies have filed for initial certificates of
public convenience and necessity in order to offer intrastate
long-distance services and are awaiting DPUC approval. The
reduction in intrastate toll rates, and the increasingly
competitive intrastate toll market continue to place
significant downward pressure on intrastate toll revenues.
To provide competitive toll products, the Telephone Company,
with its affiliate SNET America, Inc. ("SNET America"), led
the industry in 1996 by introducing the option of one-second
rating for all toll calls so customers only pay for the time
they talk. Under a joint marketing effort approved by the
DPUC, the Telephone Company and SNET America also successfully
promoted the one bill feature of SNET All Distance[R], a
seamless toll service product line which provides discount
calling plans that include intrastate, interstate and
international calling.
Concerning competition for local exchange service, seventeen
telecommunications providers have been granted certificates of
public convenience and necessity for local service and one
additional application is pending before the DPUC. With only
a few smaller companies offering local service in 1996,
including a cable television company, competition did not have
the impact on local service revenues as originally
anticipated. Local service competition is expected to grow
significantly in
4
1997; however, the financial impact cannot be predicted at this
time. Based on existing state and federal regulations, the
Telephone Company expects that many competitors will resell
the Telephone Company's network and that increased network access
revenues will offset a significant portion of local service revenues
lost to competition.
The Telephone Company's ability to compete is dependent upon
regulatory reform that will allow pricing flexibility to meet
competition and provide a level playing field with similar
regulation for similar services and with reduced regulation to
reflect an emerging competitive marketplace.
Regulatory Matters
Federal Regulatory Initiatives
On February 8, 1996, Congress passed the Telecommunications
Act of 1996 ("Act"). The Act was designed to overhaul U.S.
Telecommunication policy by removing barriers to local
competition. The Federal Communications Commission's ("FCC")
First and Second Report and Order ("Order"), adopted August 1,
1996, implements the Act and contains numerous provisions
regarding the interconnection of the Telephone Company's
network with those of its competitors. Significant changes to
network and data systems will be required for the Telephone
Company to comply with the Order. In addition, the Order
would require fundamental changes in the development of the
prices that the Telephone Company would charge competitors for
purchasing regulated network products and services. These
decisions are the first of three major rule makings to carry
out the Act. Future decisions will include universal service
and access charge reform, discussed below. The Order, as well
as universal service and access charge reform, could have a
material negative impact on the Telephone Company.
The Order was appealed and a stay was requested by various
local telephone companies, including the Telephone Company,
the National Association of Regulatory Utility Commissioners
and individual state regulatory commissions. On October 15,
1996, the Eighth Circuit Court of Appeals ("Eighth Circuit")
issued a partial stay of the Order, delaying the effectiveness
of the pricing provisions and the rule allowing competitors to
"pick and choose" isolated terms out of negotiated
interconnection agreements. The FCC appealed the Eighth
Circuit's decision to stay these rules to the Supreme Court.
The Supreme Court, however, subsequently declined to hear the
appeal. Oral arguments on the Order were heard by the Eighth
Circuit on January 17, 1997. A decision is expected in the
first half of 1997. In the meantime, the Telephone Company
has proceeded to negotiate several interconnection agreements
with other carriers in accordance with the FCC's directives
not affected by the Eighth Circuit's stay.
In accordance with the Act, the Federal-State Joint Board
adopted a Recommended Decision on Universal Service on
November 7, 1996. The recommendation addresses the universal
service provisions of the Act and proposes that one federal
fund be established to provide support for universal service.
The proposal calls for interstate telecommunications service
providers to contribute to the fund based on their
telecommunications revenue, net of payments to other carriers.
The revenue to be assessed may either be total interstate and
intrastate revenue, or interstate revenue only, depending on
further discussion of these issues. By May 1997, the FCC is
required to issue an order implementing the universal service
section of the Act.
5
On December 24, 1996, the FCC also released a Notice For
Proposed Rule Making, seeking comments on proposed changes to
the way the Telephone Company recovers interstate access
charges from interstate toll providers, including SNET
America. A full analysis of the implications of the FCC's
proposal has not yet been completed. However, the industry
could experience reduced access revenues. The Telephone
Company provided comments to the FCC proposal on January 27,
1997. A decision from the FCC regarding this matter is
expected in April or May 1997.
On June 24, 1996, the FCC approved the Telephone Company's
1996 annual interstate access tariff filing. These tariffs
became effective July 1, 1996. Consistent with 1995, the
Telephone Company elected a 4.0% productivity factor and will
be allowed to earn up to a 12.25% interstate rate of return
annually before any sharing. The filing is anticipated to
decrease interstate network access rates by $2.3 million for
the period July 1, 1996 to June 30, 1997. Management expects
this decrease to be offset by increased demand. As of
December 31, 1996, the Telephone Company's interstate rate of
return was below the 12.25% threshold.
The Telephone Company's 1995 annual interstate access tariff
filing under price cap regulation took effect August 1, 1995.
This filing, which was approved by the FCC, incorporated rate
reductions of approximately $10 million in decreased
interstate network access revenues for the period August 1,
1995 to June 30, 1996. The decrease was offset by increased
demand. The calendar year 1995 interstate rate of return of
11.58%, which was below the 12.25% threshold, was reported to
the FCC.
The Telephone Company will file its 1997 annual interstate
access tariff in April 1997 to become effective July 1, 1997.
The filing will adjust interstate access rates for an
experienced rate of inflation, the FCC's productivity target
and exogenous cost changes, if any. The Telephone Company
does not anticipate changing its 4.0% productivity factor
election 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 1995 indicating it is
in compliance with its CAM, and is currently undergoing an
audit for the year 1996.
State Regulatory Initiatives
In compliance with the Act, the Telephone Company has filed
with the DPUC numerous cost studies supporting its proposed
wholesale (i.e., resale) and unbundled rates for
interconnection services. In light of the Order, on March 4,
1997, the DPUC issued a second draft decision setting a 17.8%
discount rate for local residence service. A final decision
is expected in late March 1997.
The DPUC's review of the Telephone Company's cost studies
related to unbundled elements is still pending. Hearings were
held the first week in February 1997, with a final decision
expected in April 1997. This decision is expected to address
the Telephone Company's offerings of unbundled elements of its
facilities and associated interconnection arrangements.
In March 1996, the DPUC issued a final decision that replaces
traditional rate of return regulation with alternative (price
based) regulation, effective April 1, 1996, during the
transition to full competition. The decision contains the
following major items: price cap regulation for non-
6
competitive services; a five year monitoring period on
financial results; and a price cap formula on services
categorized as non-competitive (utilizing an inflation factor,
a 5% productivity offset, a narrowly defined exogenous factor,
a potential service quality adjustment and various pricing
bands). In addition, basic local service rates for residence,
business and coin may not be raised above current levels until
January 1, 1998, at which time the price cap formula becomes
effective for these services, unless they have been
reclassified into the emerging competitive or competitive
categories. The decision also authorized a rate of return on
the Telephone Company's common equity of 11.90% during the
monitoring period. The impact of these changes on the
Telephone Company's operating results will depend on the
timing of classifying the various products and services into
categories (non-competitive, emerging competitive and
competitive) for pricing (banding) changes. As of December
31, 1996, the Telephone Company's rate of return was 7.95%.
On November 27, 1996, the DPUC issued a final decision
granting the Telephone Company's request to reclassify message
toll and calling card services from the non-competitive
category to competitive in its entire service territory.
Reclassification provides the Telephone Company with the
opportunity to gain additional promotional and pricing
flexibility for its products and services, and to operate
under regulatory guidelines similar to its competitors.
On January 24, 1997, the Corporation filed a proposal with the
DPUC outlining steps to structure its business, including the
Telephone Company, into separate retail and wholesale
subsidiary companies. Under the proposal, the new retail
organization, a competitive local exchange carrier, will
compete under the same regulations as all other retail
telecommunications providers in the state and will bring
innovative packages of products and services to the consumer.
The LEC, primarily the Telephone Company's wholesale business,
will provide network services and functionality to retail
providers, including the Corporation's new retail business, on
neutral terms. The directory publishing operations will also
be structured as a separate subsidiary of the Corporation. A
decision is expected in late June 1997.
Directory Publishing Operations
The Telephone Company's publishing operations produces and
distributes traditional paper products including White and
Yellow Pages directories throughout Connecticut and adjacent
communities. To strategically widen its business focus and
position itself for the future, the publishing operations
introduced electronic publishing services, such as SNET
Access[SM], Consumer Tips and Electronic Yellow Pages.
The Connecticut advertising marketplace is undergoing major
structural changes and is becoming increasingly more
fragmented and competitive. The publishing division faces
increased competition from traditional directory publishers
and non-traditional services such as on-line services, desktop
publishing, electronic shopping services, CD-ROM and the
expansion of cable television. Furthermore, additional
competition may arise from the Regional Bell Operating
Companies' ability to offer information services.
The publishing operations will be structured as a separate
subsidiary of the Corporation as of January 1, 1998, subject
to DPUC approval of the Corporation's January 24, 1997
proposal [see Regulatory Matters].
7
Employee Relations
The Telephone Company employed approximately 8,702 persons at
February 28, 1997, of whom approximately 66% 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 Connecticut Union of Telephone Workers, Inc.
("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 bargaining-
unit employees accepted the offer at that time and left the
Telephone Company by June 1996. CUTW members who remained
with the Telephone Company received a combination of basic
wage and lump sum increases to their wages or cash balance
pension plan account totaling 4.0% in January 1996 and 3.0% in
January 1997. In January 1998, they will receive a
combination of basic wage and lump sum increases totaling
3.0%. In addition, the contract also provided a sign-on bonus
and health benefit and pension enhancements. The new labor
agreement will expire on August 8, 1998. The contract is
intended to keep layoffs to a minimum while enabling the
Telephone Company to position itself to meet increasing
competition.
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, 1996, central office equipment
represented 41%; connecting lines not on customers' premises,
the majority of which are over or under public roads, highways
or streets and the remainder over or under private property,
represented 38%; land and buildings (occupied principally by
central offices) represented 10%; and other, principally
vehicles and general office equipment, represented 11%.
Substantially all of the central office equipment
installations and administrative offices are located in
Connecticut in buildings owned by the Telephone Company
situated on land which it owns in fee. Many garages, service
centers and some administrative offices are located in rented
quarters.
The Telephone Company has a significant investment in the
properties, facilities and equipment necessary to conduct its
business. Management believes that the Telephone Company's
facilities and equipment are suitable and adequate for the
business.
Capital Expenditures
The Telephone Company has been making, and expects to continue
to make, significant capital expenditures to meet the demand
for telecommunications services and to further improve such
services. The total gross investment in telephone plant
increased from $3.8 billion at December 31, 1991 to $4.3
billion at December 31, 1996, 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 1996 1995 1994 1993 1992
Cash Expended for
Capital Additions $319 $280 $235 $232 $269
8
In 1996, the Telephone Company funded its cash expenditures
for capital additions entirely through cash flows from
operations. In 1997, capital additions are expected to be
approximately $336 million, including estimated additions of
$262 million to the network. The Telephone Company expects to
fund substantially all of its 1997 capital additions through
cash flows from operations.
The buildout of I-SNET, a $4.5 billion investment, is expected
to be completed by 2007. I-SNET, a statewide telephony and
information superhighway, is an advanced network capable of
delivering voice, video and a full range of information and
interactive multimedia services. I-SNET passed approximately
234,000 households by December 1996 and is expected to pass
approximately 334,000 households by December 1997. The
Telephone Company plans to support this investment primarily
through increased productivity from the new technology
deployed, cost-reduction initiatives and customer demand for
the new services offered, including SNET americast, a cable
television offering by its affiliate, SNET Personal Vision,
Inc.
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 $208.9 in 1996 compared
to $213.6 in 1995. Financial results are summarized as
follows:
Dollars in Millions, For the Years Ended 1996 1995
Income before extraordinary charge $ 208.9 $ 213.6
Extraordinary charge, net of taxes - (716.3)
Net Income (Loss) $ 208.9 $ (502.7)
Income before extraordinary charge decreased $4.7, or 2.2%, in
1996 due to increased operating costs caused primarily by
higher contract services, bad debt and marketing expenses,
offset significantly by strong growth in demand for local
service and network access.
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 [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 $30.8, or 2.0%, in 1996. The
components of total revenues are summarized as follows:
Dollars in Millions, For the Years Ended 1996 1995
Local service $ 673.7 $ 641.7
Network access 388.1 369.4
Intrastate toll 251.2 266.4
Publishing and other 233.0 237.7
Total Revenues $1,546.0 $1,515.2
Local Service - Local service revenues, derived from the
provision of local exchange, advanced calling features and
local private line services, increased $32.0, or 5.0%, in
1996. The increase was due primarily to strong growth of 4.3%
in access lines in service, including significant growth in
Centrex business lines and second residential access lines.
The 1996 increase of 90,012 access lines was the largest
annual increase experienced by the Telephone Company. Local
service revenues also increased due to growth in subscriptions
to SmartLink [R] vertical calling services, including Caller ID,
missed call dialing, call blocking and call tracing. Management
expects competition to impact
10
local service revenues in 1997 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 1996, network access revenues increased
$18.7, or 5.1%. The increase was due primarily to continued
growth in interstate minutes of use of approximately 8% and
the increase in access lines in service discussed previously.
Partially offsetting the impact of the increase in minutes of
use was a decrease in rates due to discount plans and reduced
access tariffs [see Item 1. Federal Regulatory Matters]. In
addition, intrastate access revenues increased due primarily
to an increase in intrastate minutes of use by competitive
providers of intrastate long-distance service.
Intrastate Toll - In 1996, intrastate toll revenues, which
include primarily revenues from toll and WATS "800" services,
decreased $15.2, or 5.7%. Reduced intrastate toll rates due
to the migration of customers to several of the Telephone
Company's discount calling plans was the primary factor in the
decrease. Also contributing to the decrease was a reduction
in toll message volume of approximately 1%. Increased volume
in the first half of the year from higher customer demand
during inclement weather was offset by decreased volume in the
second half of the year as a result of the increasingly
competitive toll market. Customer migration to discount
calling plans and increasing competition will continue to
place downward pressure on intrastate toll revenues.
Publishing and Other - Publishing and other revenues include
revenues from directory publishing, services rendered on
behalf of interexchange carriers, rent and late fee revenues.
The 1996 decrease was due primarily to the discontinuance of
the provision of billing services for a major long-distance
carrier, offset partially by growth in yellow pages
advertising.
Costs and Expenses
Total costs and expenses increased $45.9, or 4.1%, in 1996.
Cost per access line was $332 in 1996 and $320 in 1995. The
increase was due primarily to an increased demand for services
coupled with an inexperienced work force, resulting in higher
contract services and overtime. Total costs and expenses are
summarized as follows:
Dollars in Millions, For the Years Ended 1996 1995
Operating $ 472.9 $ 449.4
Maintenance 347.9 319.5
Total Operating Costs 820.8 768.9
Depreciation and amortization 300.4 300.9
Taxes other than income 48.3 53.8
Total Costs and Expenses $1,169.5 $1,123.6
Management expects to incur computer system related costs in
order to avoid complications with the recognition of the year
2000. These costs will be incurred over the next three to
four years, with related expenses estimated to be
approximately $15 to $20 in 1997.
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. In 1996, total operating costs
11
increased $51.9, or 6.7%, due primarily to higher contract services,
bad debt and marketing expenses. The increase in contract services
was due primarily to outsourcing certain functions which experienced
lower work force levels, including the data processing,
network and collection areas. Bad debt expenses increased
primarily from increased credit risk in a competitive
environment and reduced collection efforts. The residential
and business collection efforts were negatively impacted
during a period of transition when employees departed under
the EOO and most of the collection function was outsourced to
an external agency.
Employee-related expenses were relatively flat in 1996.
Savings from the EOO and severance programs under the 1993
restructuring program [see Note 5] were offset partially by
the costs from a higher work force level in the second half of
the year. The Telephone Company's work force increased to
8,558 employees at year-end 1996, from 8,192 employees at year-
end 1995, primarily in the network area to meet increased
service demands. Also offsetting the savings were higher
pension expenses (excluding net settlement gains and
curtailment losses), annual compensation increases and
additional overtime.
Depreciation and Amortization - In 1996, depreciation and
amortization expense remained relatively flat due primarily to
a decrease in the average net telephone plant compared with
the previous year offset by shorter asset lives in a
competitive environment.
Taxes Other Than Income
In 1996, taxes other than income decreased $5.5 due primarily
to the absence of gross earnings tax amortization. The gross
earnings tax balance, a regulatory asset, was eliminated upon
the discontinuance of SFAS No. 71 [see Note 2].
Interest Expense
Dollars in Millions, For the Years Ended 1996 1995
Interest Expense $45.5 $52.9
Even though long-term debt was relatively flat in 1996,
interest expense decreased $7.4, due primarily to the
reporting of $7.2 of capitalized interest as a reduction to
interest expense. In 1995, prior to the discontinuance of
SFAS No. 71, capitalized interest was reported as a component
of other income, net.
Other Income, net
Dollars in Millions, For the Years Ended 1996 1995
Other Income, net $4.9 $8.8
Other income, net is comprised primarily of interest income
and, prior to 1996, capitalized interest. The 1996 decrease
was due primarily to the change in the classification of
capitalized interest from other income, net to interest
expense discussed previously.
12
Income Taxes
Dollars in Millions, For the Years Ended 1996 1995
Income Taxes $126.9 $133.9
The Telephone Company's combined federal and state effective
tax rate in 1996 was 37.8% compared with 38.5% in 1995. The
lower 1996 effective tax rate was due primarily to a higher
level of state tax credits, primarily relating to certain
personal property taxes. 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 employee separations as well as incremental costs
of implementing appropriate reengineering solutions, including
designing and developing new processes and tools [see Note 5].
Beginning in 1997, the Telephone Company anticipates annual
savings of approximately $100 from reduced employee-related
expenses, net of costs for provisional employees. These
anticipated savings will be offset by growth in the business.
Balance Sheet Activities
During 1996, the consolidated balance sheet changed as a
result of operating activities. Even though revenues
increased 2.0%, accounts receivable and the related allowance
for uncollectibles decreased due primarily to higher write-
offs in 1996. The higher write-offs reflect the impact of an
increasingly competitive environment and reduced collection
efforts discussed previously. As a result of the changing
environment, management revised its procedure to write-off
uncollectible accounts within a shorter time frame. In
addition, management enhanced its evaluation of the adequacy
of the allowance for uncollectibles by placing additional
emphasis on the risks associated with a competitive
environment. Other balance sheet changes included a decrease
in the current portion of deferred income taxes due primarily
to costs incurred in 1996 under the restructuring program and
a decrease in other liabilities and deferred credits as a
result of a pension settlement gain.
Other Activities
On February 18, 1997, the Telephone Company redeemed $80.0 of
8.70% medium-term notes due 2031, which were satisfied with
cash and short-term borrowings from the Corporation. The early
extinguishment of debt will result in an extraordinary charge
to the Telephone Company's first quarter 1997 earnings of
approximately $3.7 after-tax.
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, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted
accounting principles. 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, 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.
Hartford, Connecticut COOPERS & LYBRAND L.L.P.
January 21, 1997
14
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
Dollars in Millions, For the
Years Ended December 31, 1996 1995 1994
Revenues
Local service $ 673.7 $ 641.6 $ 618.8
Network access 388.1 369.4 354.5
Intrastate toll 251.2 266.4 295.4
Publishing and other 233.0 237.8 226.2
Total Revenues 1,546.0 1,515.2 1,494.9
Costs and Expenses
Operating 472.9 449.4 465.3
Maintenance 347.9 319.5 322.3
Depreciation and amortization 300.4 300.9 295.8
Taxes other than income 48.3 53.8 53.6
Total Costs and Expenses 1,169.5 1,123.6 1,137.0
Operating Income 376.5 391.6 357.9
Interest expense 45.5 52.9 53.9
Other income, net 4.9 8.8 1.6
Income Before Income Taxes 335.9 347.5 305.6
Income taxes 127.0 133.9 121.8
Income Before Extraordinary Charge 208.9 213.6 183.8
Extraordinary charge, net of tax - (716.3) -
Net Income (Loss) $ 208.9 $ (502.7) $ 183.8
Retained Earnings, Beginning of Period $ 31.8 $ 648.0 $ 572.2
Net income (loss) 208.9 (502.7) 183.8
Dividends declared to parent (148.1) (113.5) (108.0)
Retained Earnings, End of Period $ 92.6 $ 31.8 $ 648.0
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, 1996 1995
Assets
Cash and temporary cash investments $ 56.8 $ 70.5
Accounts receivable, net of allowance for
uncollectibles of $18.0 and $26.1, respectively 270.8 298.1
Accounts receivable from affiliates 11.1 10.9
Materials and supplies 14.3 10.7
Prepaid publishing 35.2 37.2
Deferred income taxes 35.2 57.8
Other current assets 11.9 25.2
Total Current Assets 435.3 510.4
Land 16.8 17.5
Buildings 386.4 396.2
Central office equipment 1,743.0 1,657.2
Outside plant facilities and equipment 1,732.4 1,640.3
Furniture and office equipment 310.0 310.6
Station equipment and connections 22.5 22.7
Plant under construction 98.0 122.4
Total telephone plant, at cost 4,309.1 4,166.9
Accumulated depreciation (2,964.5) (2,832.9)
Net Telephone Plant 1,344.6 1,334.0
Deferred income taxes 52.9 42.2
Other assets 24.4 11.0
Total Assets $1,857.2 $1,897.6
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, 1996 1995
Liabilities and Shareholder's Equity
Accounts payable and accrued expenses $ 180.2 $ 180.9
Advance billings and customer deposits 42.6 43.0
Accrued compensated absences 29.1 33.8
Accounts payable to affiliates 19.5 29.6
Restructuring charge 11.1 59.0
Other current liabilities 76.6 61.8
Total Current Liabilities 359.1 408.1
Long-term debt 746.9 746.6
Unamortized investment tax credits 15.5 17.6
Other liabilities and deferred credits 112.0 162.4
Total Liabilities 1,233.5 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 92.6 31.8
Treasury stock; 42,696 shares, at cost (1.4) (1.4)
Total Shareholder's Equity 623.7 562.9
Total Liabilities and Shareholder's Equity $1,857.2 $1,897.6
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, 1996 1995 1994
Operating Activities
Net income (loss) $ 208.9 $(502.7) $ 183.8
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 300.4 300.9 295.8
Extraordinary charge, net of tax - 716.3 -
Provision for uncollectible accounts 27.5 15.5 18.5
Restructuring payments (109.0) (88.3) (62.2)
Operating cash flows from:
Increase in accounts receivable, net (.4) (53.2) (34.2)
(Increase) decrease in materials and
supplies (3.6) (4.4) 1.8
Decrease in deferred income taxes 22.6 15.3 15.2
(Decrease) increase in accounts payable
accrued expenses and compensated
absences (11.9) 37.0 2.3
Decrease in investment tax credits (2.1) (6.9) (7.9)
Net change in other assets and liabilities 13.1 (5.4) (4.8)
Other, net (6.5) (4.0) (.6)
Net Cash Provided by Operating Activities 439.0 420.1 407.7
Investing Activities
Cash expended for capital additions (318.8) (279.8) (235.4)
Other, net 4.2 6.5 (2.6)
Net Cash Used by Investing Activities (314.6) (273.3) (238.0)
Financing Activities
Cash dividends paid (138.1) (120.5) (100.0)
Repayments of long-term debt - - (240.0)
Net Cash Used by Financing Activities (138.1) (120.5) (340.0)
(Decrease) Increase in Cash and
Temporary Cash Investments (13.7) 26.3 (170.3)
Cash and temporary cash investments,
beginning of year 70.5 44.2 214.5
Cash and Temporary Cash Investments,
End of Year $ 56.8 $ 70.5 $ 44.2
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"). Effective January 1, 1996, the Telephone
Company discontinued using Statement of Financial Accounting
Standard ("SFAS") No. 71, "Accounting for the Effects of
Certain Types of Regulation" [see Note 2].
The Telephone Company derives substantially all of its
revenues from the telecommunications service industry by
providing local and in-state long-distance communication
services, network services and advertising. The Telephone
Company's operations and customers are located primarily in
Connecticut.
The 1995 and 1994 Telephone Company financial statements have
been reclassified to conform to the current year presentation.
Use of Estimates - 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.
As a result of the increasingly competitive environment,
management revised its procedure to write-off uncollectible
accounts receivable within a shorter time frame in 1996. In
addition, management enhanced its evaluation of the adequacy
of the allowance for uncollectibles by placing additional
emphasis on the risks associated with an increasingly
competitive environment.
Cash and Temporary Cash Investments - Cash and temporary cash
investments include all highly liquid investments, with
original maturities of three months or less. The Telephone
Company records payments made by draft as accounts payable
until the banks honoring the drafts have presented them for
payment. At December 31, 1996 and 1995, accounts payable
included drafts outstanding of $30.4 and $26.3, 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
straight-line depreciation method or the composite vintage
group method.
As a result of the discontinuance of SFAS No. 71, the
Telephone Company is using estimated useful lives, effective
January 1, 1996, that are shorter than the economic lives
historically prescribed by
19
regulators. A comparison of average asset lives before and
after the discontinuance of SFAS No. 71, for the most
significantly affected categories of telephone plant, is as
follows:
Asset Category Before After
Digital Switch 17 10.5
Digital Circuit 11.5 8.2
Conduit 55 55
Copper 22 - 26 10.5 - 16
Fiber 32 - 40 30
Under the composite group method, the cost of depreciable
telephone plant retired, net of removal costs and salvage
(i.e., gains or losses), is charged to accumulated
depreciation. All long-lived assets are reviewed for
impairment whenever events or changes in circumstance indicate
that the carrying amount may not be recoverable, and any
necessary adjustment is made. Replacements, renewals and
betterments 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.
Revenue Recognition - Revenues are recognized when earned
regardless of the period in which billed. Revenues for
directory advertising are recognized over the life of the
related directory, normally one year.
Capitalized Interest Cost - Upon the discontinuance of SFAS No.
71, effective January 1, 1996, the Telephone Company reports
capitalized interest as a cost of telephone plant and a
reduction in interest expense, in accordance with SFAS No. 34,
"Capitalization of Interest Cost." Prior to the
discontinuance of SFAS No. 71, the Telephone Company included
in its telephone plant accounts an imputed cost of debt and
equity for funds used during the construction of telephone
plant.
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 $77.0 in 1996, $58.4 in 1995 and $46.5 in 1994. In
addition, the Telephone Company charges affiliates for network
services at tariffed rates. These amounts are included in
revenue and totaled $33.4 in 1996, $18.4 in 1995 and $13.3 in
1994. The Telephone Company is charged for management
functions performed by the Corporation. The cost of these
management functions totaled $27.1 in 1996, $26.0 in 1995 and
$29.3 in 1994. Additionally, the Telephone Company rents
certain space from SNET Real Estate, Inc. The rental expense
totaled $9.4 in 1996, $7.0 in 1995 and $8.7 in 1994.
Advertising Costs - Costs for advertising products and services
are expensed as incurred.
Computer Software Costs - The Telephone Company capitalizes
initial operating systems for central office switching
equipment. Right-to-use fees, additions, upgrades and
modifications to operating software programs and applications
are expensed.
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.
20
The Telephone Company computes income taxes under SFAS No.
109, "Accounting for Income Taxes". Deferred tax assets and
liabilities are determined based on all temporary differences
between the financial statement and tax bases of assets and
liabilities using the currently enacted rates. Additionally,
the Telephone Company will 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.
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 follows accounting
principles which are more appropriate for a competitive
environment. This determination was made based on the
significant changes in technology and the increase in
telecommunications competition in Connecticut brought about by
legislative and regulatory policy changes. This accounting
change is for financial reporting purposes only and does not
affect the Telephone Company's accounting and reporting for
regulatory purposes. As a result of the discontinued use of
SFAS No. 71, in accordance with the provisions of SFAS No.
101, "Accounting for the Discontinuance of Application of FASB
Statement No. 71," the 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 1995's 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
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 technological development and differed
significantly from those economic useful lives used by
unregulated companies. Plant balances were adjusted by
increasing the accumulated depreciation reserve. The increase
to the accumulated depreciation reserve was determined by a
discounted cash flow analysis which considered technological
replacement and 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.
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
21
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.
Additionally upon the discontinuance of SFAS No. 71, the tax-
related regulatory assets and liabilities were eliminated and
the related deferred tax balances were adjusted to reflect
application of SFAS No. 109, consistent with other unregulated
companies.
As asset lives were shortened, the related investment tax
credits associated with those assets were also adjusted for
the shortened lives and the result ($11.0) was included in the
extraordinary charge as a credit to income, net of associated
deferred income taxes.
NOTE 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 (i.e., lump-sum,
monthly pension or a combination of both) at the time of
separation. The EOO was available to the bargaining-unit work
force during July 1995 and approximately 2,600 employees, or
41.4% of the bargaining-unit work force, accepted the offer
and left the Telephone Company through June 1996. In
addition, approximately 400 management employees accepted a
severance plan with enhanced benefits during 1996. The 1996
net settlement gains and the 1995 net curtailment losses
related to these separation offers were recorded to the
restructuring reserve in the respective years [see Note 5].
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 made to a trust fund. Plan assets consist
primarily of listed stocks, corporate and governmental debt
and real estate. The Corporation's policy is to fund the
pension cost for these plans in conformity with the Employee
Retirement Income Security Act of 1974 using the aggregate
cost method. For purposes of determining contributions, the
assumed investment earnings rate on plan assets was 9.5% in
1996 and declines to 7.5% in 1998.
The Telephone Company's portion of the Corporation's pension
(income) cost computed using the projected unit credit
actuarial method was $(58.6), $67.4 and $12.4 for 1996, 1995
and 1994, respectively. The 1996 settlement gain of $61.3 and
the 1995 and 1994 net curtailment losses of $76.3 and $12.2,
respectively were associated with the severance programs and
were recorded to the
22
restructuring reserve in the respective years [see Note 5].
Excluding these items, net pension cost (income) recorded to
expense was $2.7, $(8.9) and $.2 in 1996, 1995 and 1994,
respectively. The 1996 increase in net pension cost (income)
recorded to expense was due primarily to lower returns on
plan assets, reflecting a combination of a lower asset base
and a generally weaker capital market return when compared with 1995.
SFAS No. 87, "Employers' Accounting for Pension" requires a
comparison of the actuarial present value of projected benefit
obligations with the fair value of plan assets, the disclosure
of the components of net periodic pension costs and a
reconciliation of the funded status of the plans with amounts
recorded on the balance sheets. The Telephone Company
participates in the Corporation's benefit plans and therefore,
such disclosures cannot be presented for the Telephone Company
because this information is not determined on an individual
basis.
The actuarial assumptions used to calculate the plans' funded
status at December 31, 1996 and 1995 include a discount rate
of 7.5% and 7.0%, respectively, and an increase in future
management compensation levels of 4.5% in both years. The
expected long-term rate of return on plan assets used to
calculate pension expense was 8.0% in 1996, 1995 and 1994.
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.
The Telephone Company's portion of the postretirement benefit
cost, recorded to expense, including the amortization of the
transition obligation, was approximately $45 for 1996, 1995
and 1994. The 1996, 1995 and 1994 net curtailment losses of
$.2, $23.3 and $.7, respectively, were associated with the
severance programs and were recorded to the restructuring
reserve in the respective years [see Note 5].
The Corporation funds trusts for postretirement health
insurance benefits using Voluntary Employee Beneficiary
Association. Plan assets consist primarily of investments in
domestic corporate equity and government and corporate debt
securities.
SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" requires a comparison of the
actuarial present value of projected postretirement benefit
obligations with the fair value of plan assets, the disclosure
of the components of net periodic postretirement benefit costs
and a reconciliation of the funded status of the plans with
amounts recorded on the balance sheets. The Telephone Company
participates in the Corporation's benefit plans and therefore,
such disclosures cannot be presented for the Telephone Company
because this information is not determined on an individual
basis.
23
The actuarial assumptions used to calculate the plans' funded
status at December 31, 1996 and 1995 include a discount rate
of 7.5% and 7.0%, respectively, and an increase in future
compensation levels of 4.5% in both years. The expected long-
term rate of return on plan assets was 7.0% in 1996, 1995 and
1994 for the management health trust and 7.5% in 1996, 1995
and 1994 for the bargaining-unit health trust and the retiree
life insurance trust. The assumed health care cost trend rate
used to measure the expected cost of these benefits for 1997
was 6.9% and declines to 3.8% by 2001.
NOTE 4: INCOME TAXES
Income tax expense includes the following components:
For the Years Ended December 31, 1996 1995 1994
Federal
Current $ 98.0 $ 91.6 $ 87.9
Deferred 9.9 20.1 8.7
Investment tax credits, net (2.1) (6.9) (7.9)
Total Federal 105.8 104.8 88.7
State
Current 19.0 24.1 32.7
Deferred 2.2 5.0 .4
Total State 21.2 29.1 33.1
Total Income Taxes $ 127.0 $133.9 $121.8
Deferred income tax expense resulted primarily from
restructuring program costs incurred in 1996, 1995 and 1994.
In April 1995, new Connecticut state income tax rates were
enacted to accelerate the reduction of current rates. The
1996 Connecticut state income tax rate of 10.75% will
gradually decrease to 7.5% in 2000.
A reconciliation between income taxes and taxes computed by
applying the statutory federal income tax rate to pre-tax
income is as follows:
For the Years Ended December 31, 1996 1995 1994
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
Federal income taxes at statutory rate $117.6 $121.6 $107.0
State income taxes, net of federal
income tax effect 13.8 18.9 21.5
Depreciation of telephone plant
construction costs previously
deducted for tax purposes - 5.1 5.1
Amortization of investment tax credits (2.1) (6.9) (7.9)
Prior years' tax adjustments and
other differences, net (2.3) (4.8) (3.9)
Income Taxes $127.0 $133.9 $121.8
Effective Tax Rate 37.8% 38.5% 39.9%
24
Deferred income tax assets (liabilities) are comprised of the following:
At December 31, 1996 1995
Postretirement benefits other than pensions $ 30.6 $ 18.8
Software 12.7 14.9
Compensated absences 12.2 11.5
Restructuring charge 10.0 30.2
Allowance for uncollectibles 8.2 11.4
Unamortized investment tax credits 6.2 7.2
Pension 3.9 26.0
Depreciation (7.4) (28.1)
Other 11.7 8.1
Deferred Income Taxes $ 88.1 $100.0
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. The charge
included: $160.0 for employee separation costs; $145.0 for
process and systems reengineering; and $30.0 for exit and
other costs.
Costs incurred for employee separations included payments for
severance, unused vacation and health care continuation, as
well as non-cash net pension and postretirement settlement
gains of $61.1 in 1996 and net 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. Exit and other costs included expenses related to
the reduction of overall corporate space requirements.
A summary of costs incurred under the restructuring program is
as follows:
For the Years Ended December 31, 1996 1995 1994
Employee separation (gains) costs $(42.7) $107.8 $38.6
Process and systems reengineering 83.1 74.2 35.0
Exit and other costs 7.5 5.9 1.5
Total Costs Incurred $ 47.9 $187.9 $75.1
Total employee separations under the restructuring program
approximated 4,100 employees utilizing the EOO and severance
plans: 890 employees through the end of 1994; 2,140 employees
in 1995; and 1,070 employees in 1996. Total employee
separations were substantially offset by an increase in
provisional employees to support greater demand for services.
The hiring of provisional employees also provides flexible
work force levels as business needs change in the future.
The Telephone Company has implemented network operations,
customer service, repair and support programs and developed
new processes to reduce the costs of business while improving
quality and customer service. These new integrated processes
have enabled the Telephone Company to increase
25
its responsiveness to customer specific needs and to eliminate
certain current labor-intensive interfaces between the
existing systems.
As of December 31, 1996, the restructuring reserve balance of
$24.1 is adequate for the future residual costs under the 1993
restructuring program, primarily exit costs relating to the
delayed reduction of overall space requirements and timing of
remaining charges.
NOTE 6: LONG-TERM DEBT
The components of long-term debt are as follows:
At December 31, Interest Rates Maturing 1996 1995
Unsecured notes: 6.13% to 7.13% 2003-2007 $380.0 $380.0
7.25% to 8.70% 2031-2033 325.0 325.0
Debentures 4.38% 2001 45.0 45.0
Total Long-term Debt 750.0 750.0
Unamortized discount and
premium, net (3.2) (3.5)
Capital lease obligations .1 .1
Long-term Debt $746.9 $746.6
Scheduled maturities of total long-term debt include $45.0 in
2001 and $705.0 thereafter.
At December 31, 1996, the Telephone Company had remaining
securities registered with the Securities and Exchange
Commission to issue up to $95.0 of medium-term unsecured notes
through shelf registrations.
On February 18, 1997, the Telephone Company redeemed $80.0 of
8.70% medium-term notes due 2031, which were satisfied with
cash and proceeds of short-term debt from the Corporation. The
early extinguishment of debt will result in an extraordinary
charge to the Telephone Company's first quarter 1997 earnings
of approximately $3.7 after-tax.
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Telephone Company has entered into both operating and
capital leases for facilities and equipment used in its
operations. Rental expense under operating leases was $25.0,
$24.9 and $28.7 for 1996, 1995 and 1994, respectively. Future
minimum rental commitments under third party, noncancelable
leases include $19.5 in 1997, $19.3 in 1998, $16.7 in 1999,
$14.9 in 2000, $10.8 in 2001 and $36.7 thereafter, for a total
of $117.9. Capital leases were not significant.
Included in future minimum rental commitments for operating
leases are amounts attributable to leases with affiliates
totaling $57.4.
The Telephone Company expects total capital expenditures of
approximately $336 for additions to telephone plant during
1997. In connection with the capital program, the Telephone
Company has made certain commitments for the purchase of
material and equipment.
26
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 the Telephone
Company's financial instruments are as follows:
At December 31, 1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and temporary cash investments $ 56.8 $ 56.8 $ 70.5 $ 70.5
Long-term debt (746.8) (731.6) (746.5) (776.6)
Concentrations 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 primarily one financial
institution, a New England regional bank. Concentrations of
credit risk with respect to trade receivables are limited due
to the large number of customers in the 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.
27
NOTE 10: STOCK-BASED COMPENSATION PLAN
Management employees of the Telephone Company participate in
a stock option plan sponsored by the Corporation. The SNET
1995 Stock Incentive Plan is a stock-based compensation plan
which enables the awarding of incentive compensation,
including stock options, to all employees at the discretion
of the Board of Directors or an appointed committee. Under
the plan, the exercise price of each option may not be less
than 100% of the fair market value of the shares on the date
of grant. All options are exercisable no earlier than one
year after the date of grant, with most options vesting
ratably over two or four years, and have a maximum life of
ten years.
The Telephone Company has elected to continue following
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in
accounting for its employee stock-based compensation plan.
Accordingly, no compensation cost has been recognized for
the plan. Had the Telephone Company adopted the cost
recognition method provided under SFAS No. 123, "Accounting
for Stock-Based Compensation" for 1996 and 1995, net income
(loss) would approximate the pro forma amounts below:
For the Years
Ended December 31, 1996 1995
As Reported Pro Forma As Reported Pro Forma
Net Income (Loss) $208.9 $205.3 $(502.7) $(502.7)
The effects of applying SFAS No. 123 in this pro forma
disclosure are not necessarily indicative of future amounts.
The awarding of additional options to Telephone Company
employees is uncertain at this time.
The Black-Scholes option pricing model was used to estimate
the options' grant date fair value with the following
assumptions: 20% volatility; risk free interest rate ranging
from 5.4% to 5.5%; yearly dividends of $1.76 per share of
the Corporation's stock; and an estimated period to exercise
of three or five years. The weighted average fair value of
options granted during the year was $6.01 in 1995. No
options were granted to Telephone Company employees in 1996.
SFAS No. 123 requires certain disclosures to be made for
each income statement period with regard to outstanding and
exercisable options, option activity, weighted average
exercise price per option and weighted average remaining
contractual life of outstanding options. Since the stock
option activity relates only to the Corporation's
shareholders' equity, this information is not presented for
the Telephone Company.
28
NOTE 11: SUPPLEMENTAL FINANCIAL INFORMATION
Supplemental Cash Flow Information
For the Years Ended December 31, 1996 1995 1994
Interest Paid, net of amounts capitalized $ 45.5 $ 53.0 $ 61.3
Income Taxes Paid $ 108.7 $ 122.1 $ 123.9
Supplemental Income Statement Information
For the Years Ended December 31, 1996 1995 1994
Advertising Expense $25.7 $18.5 $15.6
Depreciation and amortization:
Depreciation $296.1 $297.6 $292.7
Amortization 4.3 3.3 3.1
Total Depreciation and Amortization $300.4 $300.9 $295.8
Interest expense:
Long-term debt $52.4 $52.6 $53.0
Short-term debt - - .5
Capitalized interest (7.2) - -
Other .3 .3 .4
Total Interest Expense $45.5 $52.9 $53.9
During 1996, 1995 and 1994, revenues earned from providing services to
AT&T Corp. accounted for 9.9%, 11.2% and 11.9%, respectively,
of total revenues.
Supplemental Balance Sheet Information
At December 31, 1996 1995
Other current liabilities:
Dividends payable $33.0 $23.0
Accrued postemployment benefit obligation 11.0 11.1
Accrued interest 10.2 10.2
Other current liabilities 22.4 17.5
Total Other Current Liabilities $76.6 $61.8
Other liabilities and deferred credits:
Accrued pension cost $ 15.7 $67.8
Restructuring charge 13.0 13.0
Other 83.3 81.6
Total Other Liabilities and Deferred Credits $112.0 $162.4
29
NOTE 12: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended December 31, 1st QTR 2nd QTR 3rd QTR 4th QTR Full Year
1996
Total Revenues $388.4 $388.4 $383.7 $ 385.5 $1,546.0
Operating Income $108.5 $101.9 $ 84.6 $ 81.5 $ 376.5
Net Income $ 59.7 $ 56.1 $ 47.6 $ 45.5 $ 208.9
1995
Total Revenues $376.7 $376.7 $383.7 $ 378.1 $1,515.2
Operating Income $100.2 $ 88.2 $ 97.4 $ 105.8 $ 391.6
Income before extraordinary
charge $ 53.5 $ 46.8 $ 55.6 $ 57.7 $ 213.6
Extraordinary charge
[see Note 2] - - - (716.3) (716.3)
Net Income (Loss) $ 53.5 $ 46.8 $ 55.6 $(658.6) $ (502.7)
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 Income (Loss) and Retained
Earnings - for the years 15
ended December 31, 1996, 1995 and 1994
Balance Sheets - as of December 31, 1996 and 1995 16
Statements of Cash Flows - for the years ended 18
December 31, 1996, 1995 and 1994
Notes to Financial Statements 19
(2) Financial Statement Schedule Covered by Report of
Independent Accountants for the three years ended
December 31, 1996:
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)16 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). Amendments
effective April 1, 1996 through December 18, 1996
(Exhibit 10(iii)(A)6 to 1996 Form 10-K dated 3/20/97,
File No. 1-9157).
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
February 14, 1996 (Exhibit 10(iii)(A)12 to 1996
Form 10-K dated 3/20/97, File No. 1-9157). Amendment
dated February 14, 1996 (Exhibit 10(iii)(A)12 to
1996 Form 10-K dated 3/20/97, File No. 1-9157).
10(iii)(A)13 SNET Non-Employee Director Stock Plan effective
January 1, 1994 (Exhibit 4.4 to Registration
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).
10(iii)(A)16 SNET Non-Employee Director Stock Plan effective
June 1, 1996 (Exhibit 4.2 to Registration No. 333-
05757 on Form S-8, File No. 1-9157).
33
(3) Exhibits (continued):
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
24a Powers of Attorney.
24b Board of Directors' Resolution.
27 Financial Data Schedule
99a Annual Report on Form 11-K for the plan year ended
December 31, 1996 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1997.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1996 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1997.
(b) Reports on Form 8-K:
On October 22, 1996, the Telephone Company filed a report on
Form 8-K, dated October 22, 1996, announcing the
Corporation's financial results for the third quarter of
1996.
On January 21, 1997, the Telephone Company filed a report on
Form 8-K, dated January 21, 1996, announcing the
Corporation's 1996 financial results.
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, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
Daniel J. Miglio*
Chairman, President, Chief Executive Officer and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
Donald R. Shassian By /s/ Donald R. Shassian
Senior Vice President (Donald R. Shassian, as attorney-
and Chief Financial Officer in-fact and on his own behalf)
DIRECTORS:
William F. Andrews*
Richard H. Ayers*
Zoe Baird*
Robert L. Bennett*
Barry M. Bloom* March 20, 1997
Frank J. Connor*
William R. Fenoglio*
Claire L. Gaudiani*
James R. Greenfield*
Ira D. Hall*
Burton G. Malkiel*
Frank R. O'Keefe, Jr.*
* by power of attorney
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 1996 $26.1 $27.5 $3.6 (a) $39.2 (b) $18.0
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
Restructuring Charge:
Year 1996 $ 72.0 $ - $ - $47.9 (c) $ 24.1
Year 1995 259.9 - - 187.9 (c) 72.0
Year 1994 335.0 - - 75.1 (c) 259.9
(a) Includes amounts previously written off that were credited directly to
this account when recovered and miscellaneous amounts.
(b) Includes amounts written off as uncollectible. 1996 also includes fully
reserved amounts written off of $17.8 as a result of a revised procedure
to write-off uncollectible accounts receivable within a shorter time
frame.
(c) Includes non-cash net pension and postretirement settlement gain charged
against the restructuring reserve of $61.1 in 1996 and curtailment
losses of $99.6 and $12.9 in 1995 and 1994, respectively.
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). Amendments
effective April 1, 1996 through December 18, 1996
(Exhibit 10(iii)(A)6 to 1996 Form 10-K dated 3/20/97,
File No. 1-9157).
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
February 14, 1996 (Exhibit 10(iii)(A)12 to 1996
Form 10-K dated 3/20/97, File No. 1-9157). Amendment
dated February 14, 1996 (Exhibit 10(iii)(A)12 to
1996 Form 10-K dated 3/20/97, File No. 1-9157).
10(iii)(A)13 SNET Non-Employee Director Stock Plan effective
January 1, 1994 (Exhibit 4.4 to Registration
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).
10(iii)(A)16 SNET Non-Employee Director Stock Plan effective
June 1, 1996 (Exhibit 4.2 to Registration No. 333-
05757 on Form S-8, File No. 1-9157).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
24a Powers of Attorney.
24b Board of Directors' Resolution.
27 Financial Data Schedule
99a Annual Report on Form 11-K for the plan year ended
December 31, 1996 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1997.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1996 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1997.
EXHIBIT 12
1996 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, 1996
Income before income taxes $335.9
Add:
Interest on indebtedness 45.2
Portion of rents representative of
the interest factor 8.3
Earnings before fixed charges and
income taxes (1) $389.4
Fixed charges
Interest charges $ 52.4
Portion of rents representative of
the interest factor 8.3
Fixed charges (2) $ 60.7
Ratio of earnings to fixed charges 6.42
[(1) divided by (2)]
Coopers Coopers & Lybrand L.L.P.
& Lybrand
a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our report
dated January 21, 1997, which include an explanatory paragraph
related to the discontinuance of SFAS No. 71, "Accounting for
Certain Types of Regulation," effective January 1, 1996, on our
audits of the consolidated financial statements and financial
statement schedule of The Southern New England Telephone Company
as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996, 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.
Hartford, Connecticut /s/ Coopers & Lybrand L.L.P.
March 20, 1997 Coopers & Lybrand L.L.P.
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 12th day of March 1997.
Principal Executive Officer: Directors:
/s/ Daniel J. Miglio
Daniel J. Miglio
Chairman, President, Chief
Executive Officer and Director
/s/ William F. Andrews
William F. Andrews, Director
/s/ Richard H. Ayers
Richard H. Ayers, Director
/s/ Zoe Baird
Zoe Baird, Director
/s/ Robert L. Bennett
Robert L. Bennett, Director
/s/ Barry M. Bloom
Barry M. Bloom, Director
/s/ Frank J. Connor
Frank J. Connor, Director
/s/ William R. Fenoglio
William R. Fenoglio, Director
/s/ James R. Greenfield
James R. Greenfield, Director
/s/ Ira D. Hall
Ira D. Hall, Director
/s/ Burton G. Malkiel
Burton G. Malkiel, Director
/s/ Frank R. O'Keefe, Jr.
Frank R. O'Keefe, Jr., Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, 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, an annual report on Form 10-K;
and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald R. Shassian her attorney-in-fact for her and
in her name, place and stead, and in her capacity as director
of the 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 the undersigned has executed this Power
of Attorney this 17th day of March 1997.
/s/ Claire L. Gaudiani
Claire L. Gaudiani, Director
C E R T I F I C A T E
This is to certify that at a regular meeting of the Board of
Directors of The Southern New England Telephone Company held on
March 12, 1997, the following vote was adopted and, as of the date of this
Certificate, has not been amended, modified or rescinded and is in full
force and effect:
"VOTED: That the Chief Executive Officer and the Chief Financial
Officer are, or either one of them is, authorized to execute, personally
or by attorney, in the name and on behalf of the Company, and to cause
to be filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, the Company's Annual Report
on Form 10-K, for the fiscal year ended December 31, 1996, in substantially
the form submitted to this meeting, but with such changes, additions and
revisions as the officer executing the same shall approve, such approval
to be conclusively evidenced by such execution and thereafter to execute
personally, and to cause to be filed, any amendments or supplements to
such report and to do any other acts and to execute and deliver any other
documents necessary or advisable in connection with the foregoing."
Attest:
/s/ Paula M. Anderson
Paula M. Anderson
Assistant Secretary
New Haven, Connecticut
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE 1996 ANNUAL REPORT ON FORM 10-K OF THE
SOUTHERN NEW ENGLAND TELEPHONE COMPANY AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 56,800
<SECURITIES> 0
<RECEIVABLES> 299,900
<ALLOWANCES> 18,000
<INVENTORY> 14,300
<CURRENT-ASSETS> 435,300
<PP&E> 4,309,100
<DEPRECIATION> 2,964,500
<TOTAL-ASSETS> 1,857,200
<CURRENT-LIABILITIES> 359,100
<BONDS> 746,900
0
0
<COMMON> 380,400
<OTHER-SE> 243,300
<TOTAL-LIABILITY-AND-EQUITY> 1,857,200
<SALES> 0
<TOTAL-REVENUES> 1,546,000
<CGS> 0
<TOTAL-COSTS> 1,169,500
<OTHER-EXPENSES> (4,900)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,500
<INCOME-PRETAX> 335,900
<INCOME-TAX> 127,000
<INCOME-CONTINUING> 208,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 208,900
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
