UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS CORPORATION, MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION H(2).
- 1 -
Form 10-Q - Part I The Southern New England Telephone Company
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1998 1997
REVENUES
Local service $163.5 $ 169.4
Network access 105.9 102.6
Intrastate toll 49.3 53.4
Other 16.4 58.1
Total Revenues 335.1 383.5
COSTS AND EXPENSES
Operating and maintenance 181.2 203.1
Depreciation and amortization 74.1 77.4
Taxes other than income 11.5 11.5
Total Costs and Expenses 266.8 292.0
OPERATING INCOME 68.3 91.5
Interest expense 10.9 11.2
Other (expense) income, net (2.0) (.2)
INCOME BEFORE INCOME TAXES 55.4 80.1
Income taxes 20.4 31.3
INCOME BEFORE EXTRAORDINARY CHARGE 35.0 48.8
Extraordinary charge, net of related
taxes of $2.7 - (3.7)
NET INCOME $ 35.0 $ 45.1
Retained Earnings, Beginning of Period $ 128.3 $ 92.6
Net income 35.0 45.1
Cash dividends declared to parent (30.8) (40.0)
Transfers pursuant to corporate
restructure (84.8) -
Retained Earnings, End of Period $ 47.7 $ 97.7
The accompanying notes are an integral part of these financial statements.
- 2 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEETS
Dollars in Millions March 31, 1998 December 31, 1997
(Unaudited)
ASSETS
Cash and temporary cash investments $ 31.5 $ 28.3
Accounts receivable, net of allowance
for uncollectibles of $14.2 and $19.4,
respectively 254.0 259.9
Accounts receivable from affiliates 45.8 86.4
Materials and supplies 13.3 14.7
Prepaid publishing - 35.8
Prepaid taxes 27.9 .6
Deferred income taxes and other
current assets 26.7 32.8
Total Current Assets 399.2 458.5
Total telephone plant, at cost 4,352.4 4,430.0
Accumulated depreciation (2,980.4) (3,028.7)
Net Telephone Plant 1,372.0 1,401.3
Deferred income taxes and other assets 90.6 93.7
Total Assets $1,861.8 $1,953.5
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued expenses $ 85.5 $ 166.9
Advance billings and customer deposits 32.3 46.4
Accounts and notes payable to affiliates 277.7 178.2
Other current liabilities 103.8 115.6
Total Current Liabilities 499.3 507.1
Long-term debt 667.2 667.1
Other liabilities and deferred credits 116.5 119.9
Total Liabilities 1,283.0 1,294.1
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 47.7 128.3
Treasury stock; 42,696 shares, at cost (1.4) (1.4)
Total Shareholder's Equity 578.8 659.4
Total Liabilities and Shareholder's Equity $1,861.8 $1,953.5
The accompanying notes are an integral part of these financial statements.
- 3 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1998 1997
OPERATING ACTIVITIES
Net income $ 35.0 $ 45.1
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 74.1 77.4
Extraordinary charge, net of tax - 3.7
Decrease in accounts receivable from affiliates 34.4 1.3
(Decrease) increase in advance billing and
customer deposits (13.1) 2.2
Change in operating assets and liabilities, net 3.0 (4.5)
Other, net 3.0 4.3
Net Cash Provided by Operating Activities 136.4 129.5
INVESTING ACTIVITIES
Cash expended for capital additions (79.5) (83.6)
Other, net .3 (1.8)
Net Cash Used by Investing Activities (79.2) (85.4)
FINANCING ACTIVITIES
Repayment of long-term debt - (80.0)
Transfers pursuant to corporate restructure (12.2) -
Cash dividends paid (41.8) (33.0)
Net proceeds of short-term debt from affiliate - 17.9
Other, net - (5.8)
Net Cash Used by Financing Activities (54.0) (100.9)
Increase (decrease) in Cash and Temporary
Cash Investments 3.2 (56.8)
Cash and Temporary Cash Investments at
beginning of period 28.3 56.8
Cash and Temporary Cash Investments at End of
Period $ 31.5 $ -
Income Taxes Paid $ 1.0 $ 7.6
Interest Paid, net of amounts capitalized $ 6.1 $ 9.1
The accompanying notes are an integral part of these financial statements.
- 4 -
Form 10-Q - Part I The Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
Note 1: Basis of Presentation
The Southern New England Telephone Company ("Telephone Company")
is a wholly-owned telephone operating subsidiary of Southern New
England Telecommunications Corporation ("Corporation"). The
condensed financial statements on the following pages have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments, which are normal and
recurring in nature, necessary for fair presentation for each
period shown. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted pursuant to such SEC rules and regulations.
Management believes that the disclosures made are adequate to
make the information presented not misleading. Operating results
for any interim periods, or comparisons between interim periods,
are not necessarily indicative of the results that may be
expected for full fiscal years. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto included in the Telephone Company's
1997 Annual Report on Form 10-K.
Note 2: Planned Merger
On January 4, 1998, the Corporation and SBC Communications Inc.
("SBC") approved a definitive merger agreement whereby the
Corporation will become a wholly-owned subsidiary of SBC. On
February 20, 1998, the Corporation and SBC filed a Joint
Application for Approval of a Change of Control with the
Department of Public Utility Control ("DPUC"). In addition, on
the same day, the Corporation and SBC filed with the Federal
Communications Commission ("FCC") Transfer of Control
Applications for various FCC licenses held by the Corporation.
Approval by both the DPUC and FCC are expected by year-end 1998.
On March 27, 1998, a special meeting of the Corporation's
shareholders was held to vote on the proposed merger. The merger
was approved by the Corporation's shareholders.
Note 3: Corporate Restructure
As discussed in the Telephone Company's 1997 Annual Report on
Form 10-K, in a decision issued June 25, 1997, the DPUC
approved the Corporation's proposal to establish separate
wholesale and retail organizations. As part of the restructure,
the directory publishing operations were transferred from the
Telephone Company and incorporated into a separate subsidiary of
the Corporation on January 1, 1998. In addition, the Telephone
Company made dividends to the Corporation that consisted primarily
of non-telephone-related fixed assets with a net book value of
approximately $36 and prepaid directory costs of approximately $36.
The fixed assets consisted of equipment supporting the organizations
which were transferred from the Telephone Company, and included computers,
corporate communications equipment and motor vehicles. All
telecommunications network plant and property remained with the
Telephone Company to support its wholesale operations. Additionally,
net assets (including cash of approximately $12) related to inside wire
and voice mail operations were transferred from the Telephone Company to
other affiliated companies.
- 5 -
Form 10-Q - Part I The Southern New England Telephone Company
Item 2. Management's Discussion and Analysis
(Dollars in Millions)
Planned Merger
On January 4, 1998, the Corporation and SBC Communications Inc.
("SBC") approved a definitive merger agreement whereby the
Corporation will become a wholly-owned subsidiary of SBC. On
February 20, 1998, the Corporation and SBC filed a Joint
Application for Approval of a Change of Control with the
Department of Public Utility Control ("DPUC"). In addition, on
the same day, the Corporation and SBC filed with the Federal
Communications Commission ("FCC") Transfer of Control
Applications for various FCC licenses held by the Corporation.
Approval by both the DPUC and FCC are expected by year-end 1998.
On March 27, 1998, a special meeting of the Corporation's
shareholders was held to vote on the proposed merger. The merger
was approved by the shareholders.
Corporate Restructure
As discussed in the Telephone Company's 1997 Annual Report on
Form 10-K, in a decision issued June 25, 1997, the DPUC approved
the Corporation's proposal to establish separate wholesale and
retail organizations. As part of the restructure, the directory
publishing operations were transferred from the Telephone Company
and incorporated into a separate subsidiary of the Corporation on
the Corporation on January 1, 1998. In addition, the Telephone
Company made dividends to the Corporation that consisted primarily
of non-telephone-related fixed assets with a net book value of
approximately $36 and prepaid directory costs of approximately $36.
The fixed assets consisted of equipment supporting the organizations
which were transferred from the Telephone Company, and included computers,
corporate communications equipment and motor vehicles. All
telecommunications network plant and property remained with the
Telephone Company to support its wholesale operations. Additionally,
net assets (including cash of approximately $12) related to inside
wire and voice mail operations were transferred from the Telephone
Company to other affiliated companies.
Comparison of three months ended March 31, 1998 vs. three months
ended March 31, 1997
Operating Results
Income before extraordinary charge was $35.0 in 1998 compared
with $48.8 in 1997. The decrease in results of operations is due
primarily to the transfer of directory publishing operations,
inside wire and voice mail operations from the Telephone Company
to affiliated companies, in conjunction with the Corporate
restructure. Also negatively impacting the comparison of current
year results to prior year results is the absence of payphone
operations which the Telephone Company transferred to an
affiliated company in April 1997 in conjunction with the pay
telephone reclassification and compensation provisions of the
Federal Telecommunications Act of 1996 ("Act").
- 6 -
Form 10-Q - Part I The Southern New England Telephone Company
Revenues and Sales
For the Three Months Ended March 31, 1998 1997
Local service $163.5 $169.4
Network access 105.9 102.6
Intrastate toll 49.3 53.4
Other 16.4 58.1
Total Revenues $335.1 $383.5
Local service revenues, derived from providing local exchange,
advanced calling features and local private line services,
decreased $5.9, or 3.5%, in 1998. The decrease was due
primarily to the 1997 transfer of payphone operations to an
affiliate in conjunction with the pay telephone reclassification
and compensation provisions of the Act and the January 1998
transfer of inside wire operations to an affiliated company, in
conjunction with the Corporate restructure. Partially
offsetting the decrease caused by such transfers was an increase
in revenues resulting from growth of 4.8% in access lines in
service to approximately 2,296,000 in 1998. Also offsetting the
decrease in local revenues was an increase in directory
assistance revenue resulting from increased rates and
elimination of free calls and increased volume. Management
expects competition to impact local service revenues as other
telecommunications providers continue to expand their offerings
of local service [see Competition].
Network access revenues, generated primarily from intrastate and
interstate services, increased $3.3, or 3.2%. Intrastate access
revenues increased $2.5 due to an increase in intrastate minutes
of use by competitive providers of intrastate long-distance
service. Interstate access revenue increased by $.8 as a result
of growth in access lines and minutes of use and the absence in
1998 of 1997 proposed tariff changes and discount plans. Also
contributing to the growth in revenues is the recovery of
amounts used to fund Universal Service, in accordance with FCC
regulation. Significantly offsetting the impact of these items
was a decrease in tariff rates in accordance with the Telephone
Company's January 1998 FCC filing under price cap regulation.
Intrastate toll revenues, which include primarily revenues from
toll and WATS services, decreased $4.1, or 7.7%. The decrease
was due primarily to the transfer of payphone operations to an
affiliated company, a 7.3% reduction in toll message volume and
reduced intrastate toll rates. Lower toll volume was due
primarily to the increasingly competitive toll market. The decline
in rates was attributable to customer migration to several of
the Telephone Company's discount calling plans that provide
competitive options to business and residential customers.
Increasing competition and the offering of competitive discount
calling plans will continue to place downward pressure on
intrastate toll revenues.
The decrease of $41.7 in Other revenues was due primarily to the
transfer of directory publishing operations to an affiliated
company in January 1998 in conjunction with the Corporate
restructure.
Costs and Expenses
For the Three Months Ended March 31, 1998 1997
Operating costs $181.2 $203.1
Depreciation and amortization 74.1 77.4
Taxes other than income 11.5 11.5
Total Costs and Expenses $266.8 $292.0
- 7 -
Form 10-Q - Part I The Southern New England Telephone Company
Operating costs - Operating costs consist primarily of employee-
related expenses, including wages and benefits. Cost of
services and general and administrative expenses, including
marketing, represent the remaining portion of these expenses.
Total operating costs decreased $21.9, or 10.8%. The decrease
was caused primarily by the transfer of directory publishing
operations, inside wire and voice mail operations from the
Telephone Company to affiliated companies (in conjunction with
the Corporate restructure) and the 1997 transfer of payphone
operations to an affiliated company in conjunction with the pay
telephone reclassification and compensation provisions of the
Act, and a decrease in network software license fees. Partially
offsetting the decrease were costs incurred in connection with
local number portability, payment of amounts to fund Universal
Service (in accordance with FCC regulation) and expenditures
made for Year 2000 compliance.
Depreciation and amortization - Depreciation and amortization
expense decreased $3.3, or 4.3%, due primarily to the transfer
of assets to affiliated companies in conjunction with the
Corporate restructure.
Taxes other than income - Taxes other than income were flat.
Interest Expense and Other (Expense) Income, net
For the Three Months Ended March 31, 1998 1997
Interest expense $ 10.9 $ 11.2
Other (expense) income, net $ (2.0) $ (.2)
Interest expense decreased $.3, or 2.7%, due primarily to
savings from the February 18, 1997 redemption of $80.0 of medium-
term notes with an interest rate of 8.70%, offset partially by a
decrease in the amount of interest which was capitalized. The
decrease in other (expense) income, net was due primarily to
contract cancellation fees.
Income Taxes
For the Three Months Ended March 31, 1998 1997
Income taxes $20.4 $31.3
The decrease in income taxes was due primarily to a decrease in
income before income taxes. The exclusion of pre-tax income of
publishing operations in the first quarter of 1998, caused tax
credits, which remained relatively flat, to have a greater impact
in reducing the effective tax rate, when compared to the first
quarter of 1997.
Comparison of balances as of March 31, 1998 vs. December 31, 1997
The decrease in accounts payable (trade) and accrued expenses
with a corresponding increase in accounts and notes payable to
affiliates is due primarily to the transfer by the Telephone
Company of all related disbursement and cash processing functions
to the Corporation. The Telephone Company's liability to
affiliates represents drafts payable issued by the Telephone Company
which were or will be paid by the Corporation.
Accounts receivable from affiliates decreased because the
Telephone Company was reimbursed for payments it made in 1997,
related to activities which were transferred as part of the
Corporate restructure.
- 8 -
Form 10-Q - Part I The Southern New England Telephone Company
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations of
$136.4 during the three months ended March 31, 1998 as compared
with $129.5 during the three months ended March 31, 1997.
Capital expenditures were the primary use of corporate funds.
The Telephone Company transferred to the Corporation $12.2 of
cash belonging to inside wire and voice mail operations,
pursuant to the Corporate restructure.
On February 18, 1997, the Telephone Company redeemed $80.0 of
8.70% medium-term notes due 2031, resulting in an extraordinary
charge of $3.7, net of related taxes of $2.7, for the early
extinguishment of debt.
Competition
The Telephone Company continues to experience an increasingly
competitive environment with respect to telecommunications
services in Connecticut. Competitors include companies that
construct and operate their own communications systems and
networks and/or companies that resell the telecommunications
systems and networks of underlying carriers.
Local service competition grew in 1997 and continued growth is
expected particularly upon commencement of the DPUC-mandated
balloting process which is scheduled to begin in January 1999.
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 its network and that
increased network access revenues will offset a significant
portion of local service revenues lost to competition.
Regulatory Matters
Effective April 1, 1996, the DPUC replaced traditional rate of
return regulation with alternative (price-based) regulation,
during the transition to full competition. Alternative regulation
includes a five-year monitoring period on financial results and a
price cap formula based on certain services categorized as non-
competitive. The DPUC has reopened the alternative regulation
docket to review the application of the price cap formula to
local residential and wholesale services. A decision is expected
in the third quarter of 1998.
In February and March 1998, the Telephone Company filed
applications with the DPUC for approval to reclassify Custom
Calling Services, Private Line Services, Direct Inward Dialing
and Hunting Services from the non-competitive to the emerging-
competitive category. The DPUC has opened dockets to review
these applications. Decisions are expected in 1998. The impact
of alternative regulation 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 changes.
As part of its June 25, 1997 decision allowing the Corporation to
restructure and establish separate retail (i.e., competitive
local exchange carrier or "CLEC") and wholesale (i.e., incumbent
local exchange carrier or "ILEC") organizations, the DPUC
mandated that Connecticut customers choose their local
exchange carrier via a balloting process. In order for the
balloting process to commence, the ILEC must demonstrate that the
systems offered to CLECs provide full technical and operational
- 9 -
Form 10-Q - Part I The Southern New England Telephone Company
support. The DPUC will examine and critically evaluate the
respective Operations Support System ("OSS") platforms offered to
the CLECs. The DPUC's evaluation will determine the suitability of
the ILEC's OSS to support a competitive local exchange market and
will determine if the interfaces proposed by the ILEC offer the
comparability required under the provisions of the Federal
Telecommunications Act of 1996. On February 25, 1998, the DPUC
issued a Draft Decision in the OSS docket and concluded that by
providing access to the same system that the Corporation's CLEC
would use, the ILEC has provided a comparable interface. On
April 1, 1998, the DPUC announced that the hearings originally
scheduled for mid-April in this proceeding would be postponed
until after the Corporation has completed implementing its OSS
plan currently scheduled for July 1. The DPUC will call hearings
no later than 28 days after being notified by the Corporation that
it has completed implementing its OSS plan. Coincident with this
announcement, the DPUC also reopened three dockets to review
and address the terms and conditions under which competitive local
exchange service may be offered in Connecticut in order to facilitate
the balloting process.
In February 1998, the DPUC opened two new dockets to examine the
provision of: (i) combinations of unbundled network elements and
(ii) shared transport to CLECs. Decisions in both dockets are
expected in the third quarter of 1998 and may affect existing
interconnection agreements between the ILEC and CLECs operating
in Connecticut.
Also in February 1998, the DPUC held hearings to investigate the
intrastate access rates which carriers pay to access the public
switched telecommunications network. The Telephone Company has proposed
that intrastate access rates continue to be in parity with the
FCC's interstate access rates. A decision is expected in June 1998.
- 10 -
Form 10-Q - Part II The Southern New England Telephone Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the first
quarter of 1998.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On January 6, 1998, the Telephone Company filed a
report on Form 8-K, dated January 5, 1998,
announcing the execution of an agreement between
the Corporation and SBC Communications Inc.,
whereby the Corporation will become a wholly-owned
subsidiary of SBC.
On January 27, 1998, the Telephone Company filed a
report on Form 8-K, dated January 27, 1998,
announcing the Corporation's 1997 financial
results.
On April 27, 1998, the Telephone Company filed a
report on Form 8-K, dated April 24, 1998,
announcing the Corporation's financial results for
the first quarter of 1998.
- 11 -
Form 10-Q - Part II The Southern New England Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Southern New England Telephone Company
May 7, 1998
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and Chief Financial Officer
- 12 -
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
1ST QUARTER OF 1998 FORM 10-Q OF THE SOUTHERN NEW ENGLAND TELEPHONE
COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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