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, 1997.
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 I(1) (a) AND (b) OF FORM 10-K
AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION I(2).
1
TABLE OF CONTENTS
Item Page
PART I
1. Business............................................................3
2. Properties.........................................................11
3. Legal Proceedings..................................................11
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 I(2))...............12
8. Financial Statements and Supplementary Data........................18
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................37
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...37
* Omitted pursuant to General Instruction I(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 is a local exchange carrier 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. Up until January 1, 1998, through
its directory publishing operations, in addition to selling the
advertising, the Telephone Company published and distributed
telephone directories throughout Connecticut and certain
adjacent communities and also developed and provided electronic
publishing services. Directory publishing operations were
incorporated into a separate subsidiary of the Corporation on
January 1, 1998 [see Directory Publishing Operations].
In 1997, approximately 85% of the Telephone Company's revenues
were derived from telecommunications 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. Approximately
68% of the operating revenues from telecommunications services
were attributable to intrastate operations, with the remainder
attributable to interstate access services.
Planned Merger
On January 4, 1998, the Corporation's Board of Directors
approved a definitive merger agreement ("Agreement") with SBC
Communications Inc. ("SBC") whereby the Corporation will become
a wholly-owned subsidiary of SBC. The Board's deliberations
focused on the complementary strengths and the possible
advantages of a combination. Under the original terms of the
Agreement, each share of the Corporation's common stock was to
be exchanged for 0.8784 shares of SBC common stock. On January
30, 1998, SBC announced a two-for-one stock split, which
modified the exchange ratio to 1.7568. The transaction is
intended to be accounted for as a pooling-of-interests and as a
tax-free reorganization under the applicable provisions of the
Internal Revenue Code.
The process leading to the Board's adoption of the merger began
in late 1996 with a review of strategic goals in the context of
rising costs (including non-recurring items such as Year 2000
costs) and a rapidly changing regulatory environment. As a
result of this review, the Board concluded that the Corporation
would need to substantially increase the scale and scope of its
operations in order to continue to compete successfully and in
a cost-effective manner in the increasingly competitive
telecommunications industry, and to provide customers with the
broad range of telecommunications products and services they
would demand and to meet the goals of its shareholders.
During 1997, management explored possibilities for various
joint ventures and business alliances in specific
3
product areas with a view toward increasing the scale and scope
of operations. In the fall of 1997, management ultimately
concluded that a combination with a major telecommunications
company was the best alternative in order to achieve the
Corporation's strategic and financial objectives.
The merger has been reviewed by the U.S. Department of Justice
and must still be approved by the Corporation's shareholders,
the Connecticut Department of Public Utility Control ("DPUC")
and the Federal Communications Commission ("FCC"). The
Corporation is currently authorized to provide interexchange
services in 46 states. For the majority of these states these
authorizations have been utilized solely to provide calling
card services to Connecticut-based customers traveling in the
respective states. The Corporation does, however, provide long-
distance service to a small number of customers in states where
SBC is an Incumbent Local Exchange Carrier ("ILEC"). The
Corporation may be required to modify or withdraw its
interexchange authorizations in the states where SBC is an
ILEC. In addition, authorizations may be required from a
number of other states to allow the Corporation to transfer its
existing long-distance authorizations to SBC. Once the
necessary approvals are obtained, the merger is expected to
close by December 31, 1998.
Management believes that the merger with SBC is in the best
interest of the Corporation's shareholders because it offers
them the opportunity of becoming investors in a company with
global presence and a track record of success in growing long-
term value for shareholders. In addition, the merger will
likely strengthen the Corporation's ability to compete in the
increasingly competitive telecommunications industry.
Corporate Restructure
In a decision issued June 25, 1997, the DPUC approved the
Corporation's proposal to establish separate wholesale and
retail organizations [see State Regulatory Matters]. As a
result, the Telephone Company will become an ILEC, providing
network services and functionality to retail providers under
the wholesale provisions of the Federal Telecommunications Act
of 1996 ("Act"). The Telephone Company will be treated as a
public service company, and will continue to be subject to
alternative forms of regulation. In a separate order, SNET
America, Inc. ("SAI"), an affiliated corporation, was certified
to operate as a competitive local exchange carrier ("CLEC"),
allowing it to provide competitive retail service to customers
with the same flexibility as all other CLECs in the state. As
part of the DPUC's decision allowing the restructure,
Connecticut customers must choose their local exchange provider
via a balloting process. Until balloting is complete, the
Telephone Company and SAI will jointly offer retail
telecommunications services to the public. Once the balloting
process is completed, SAI will become the sole provider of
retail service for the Corporation. In addition, as part of
the restructure, the directory publishing operations were
incorporated into a separate subsidiary of the Corporation on
January 1, 1998.
The Telephone Company began implementing parts of the
restructure plan by transferring over 1400 employees to the
Corporation, primarily from the information technology organization
in September of 1997. In January of 1998, over 300 employees
from its directory publishing operations were transferred to
SNET Information Services, Inc., a new subsidiary of the
Corporation. Approximately $17 million of pension and other
employee-related liabilities were moved to the appropriate
companies at the time the employees were transferred. 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 $53 million and prepaid
directory costs of approximately $36 million. The fixed
assets consisted of equipment supporting the organizations
which were transferred from the Telephone Company, and
included computers, corporate communications equipment and motor
4
vehicles. All telecommunications network plant and property
remained with the Telephone Company to support its wholesale
operations.
The separation into wholesale and retail organizations should
have no material effect on the consolidated financial results
of the Corporation. However, had the establishment of the
separate publishing subsidiary occurred in 1997, approximately
$182 million of revenues and $52 million of operating costs,
along with other related expenses and taxes, would not have
been reflected on the Telephone Company.
TELECOMMUNICATIONS SERVICES
The Telephone Company's access lines in service grew to
2,265,000 at December 31, 1997 from 2,163,000 at December 31,
1996, an increase of 4.7%. 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) 1997 1996 1995 1994 1993
Residence 1,498 1,444 1,415 1,379 1,355
Business 767 719 658 630 609
Total 2,265 2,163 2,073 2,009 1,964
The Telephone Company is subject to the jurisdiction of the FCC
with respect to interstate rates, services, access charges and
other matters, including the prescription of a uniform system
of accounts. The FCC also prescribes the principles and
procedures (referred to as "separations procedures") used to
separate investments, revenues, expenses, taxes and reserves
between the interstate and intrastate jurisdictions. In
addition, the FCC has adopted accounting and cost allocation
rules for the separation of costs of regulated from non-
regulated telecommunications services for interstate ratemaking
purposes. The Telephone Company's interstate services have
been subject to price cap regulation since January 1991. Price
caps are a form of incentive regulation to limit prices and
improve productivity.
The Telephone Company, in providing telecommunications services
in the State of Connecticut, is subject to regulation by the
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. 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 Matters].
5
Competition
As a result of legislative and regulatory reform, the Telephone
Company continues to experience an increasingly competitive
environment. 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, including the Telephone
Company.
In 1997, major interexchange carriers continued to intensify
their marketing efforts to sell intrastate long-distance
services since the Telephone Company's full implementation of
intrastate equal access. Since the introduction of intrastate
long-distance toll competition, in excess of 230
telecommunications providers have received approval from the
DPUC to offer intrastate long-distance services with an
additional 70 filed and awaiting DPUC approval. The reduction
in intrastate toll rates and the increasingly competitive
intrastate toll market continue to place significant downward
pressure on the Telephone Company's intrastate toll revenues.
Thirty-five telecommunications providers have been granted
approvals for local service and twelve additional applications
are pending before the DPUC. These providers began offering
local exchange service to business and residential customers
throughout the state. There has been growth in local service
competition in 1997 and continued growth is expected,
particularly upon commencement of the DPUC-mandated balloting
process [see State Regulatory Matters], 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.
Management supports bringing customers the benefits of
competition and affording all competitors the opportunity to
compete fairly under reduced regulation.
To provide competitive toll products, the Telephone Company,
with its affiliate SAI, 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 use. Under a joint marketing effort
approved by the DPUC, the Telephone Company and SAI also
successfully promoted the one bill feature of SNET All
Distance[R], a seamless toll service which provides discount
calling plans that include intrastate, interstate and
international calling.
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. In addition, the separation
into wholesale and retail affiliates will provide the
Corporation additional flexibility to compete at the retail
level.
Federal Regulatory Matters
On February 8, 1996, Congress passed the Act which was designed
to overhaul U.S. telecommunications policy by removing barriers
to local competition. The FCC's First and Second Report and
Order ("Order") implements the Act and contains numerous
provisions regarding the interconnection of the Telephone
Company's network with those of its competitors. The Order
requires significant changes in the way business is conducted,
how the network is designed and the systems that support it
(including repair and service ordering). In addition, the
Order requires fundamental changes in the development of the
prices that the Telephone Company would charge competitors for
purchasing regulated network products and services. This
order, as well as the orders discussed below, could have a
material adverse financial impact on the Telephone Company.
6
Certain provisions in the Order have been appealed by various
local telephone companies, including the Telephone Company, the
National Association of Regulatory Utility Commissioners and
individual state regulatory commissions. On July 18, 1997, 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 and struck down those key provisions and other terms
under which potential competitors can lease pieces of the
Telephone Company's network. The Eighth Circuit declared that
the FCC had overstepped its authority and concluded that "the
Act plainly grants the state commissions, not the FCC, the
authority to determine the rates involved in the implementation
of the local competition provisions of the Act." The Eighth
Circuit's decision is a strong endorsement of Congress'
intention that the states play a primary role in implementing
local telecommunications competition. This decision should
allow the Telephone Company to implement local competition on
the course mapped out by the DPUC and the Connecticut state
legislature.
On October 14, 1997, the Eighth Circuit also vacated a portion
of the FCC's rules which required ILECs to provide combinations
of network elements that effectively recreated the end-to-end
service at a significant discount to CLECs. The Eighth Circuit
indicated that the Act requires ILECs to provide access to
unbundled network elements, not access to platforms used by
ILECs in which network elements are combined. The Eighth
Circuit's decisions have now been appealed to the Supreme Court
which has agreed to review the case in the fall 1998 session.
A decision is expected in 1999.
On August 18, 1997, the FCC also released its Third Report and
Order requiring ILECs, including the Telephone Company, to
provide shared transport to new entrants as an unbundled
network element at cost-based prices. Several companies,
including the Telephone Company, have filed Petitions for
Review, which will be heard by the Eighth Circuit. A decision
in this matter is expected in 1998.
On May 8, 1997, the FCC issued an order regarding Universal
Service. The order revises the current universal service
programs for low income customers and high cost areas and
establishes new federal support for telecommunications services
provided to schools, libraries and rural health care
facilities. The federal universal service mechanisms are
funded, beginning January 1, 1998, by an assessment on the end
user revenues of all telecommunications service providers.
Funding for the new federally supported services provided to
schools, libraries and rural healthcare facilities will come
from both interstate and intrastate end user revenues, while
funding for the revised high cost support and low income
support programs will be from interstate end user revenues.
ILECs can recover their contributions to the federal universal
service mechanisms through their interstate access charges.
The Universal Service Order is on appeal in the Fifth Circuit
Court. The Telephone Company has intervened in the appeal.
The FCC has no timeline currently to resolve this issue and the
Corporation cannot determine when it will be resolved.
On May 16, 1997, the FCC issued an order regarding access
charge reform which changes the way the Telephone Company
recovers interstate access charges from interstate toll
providers, including SAI. Specifically, the order establishes
flat-rated per-call carrier access charges, rather than usage-
based charges. This order establishes a prescriptive mechanism
to ensure that interstate access charges will be driven toward
the levels that competition would be expected to produce.
Management expects this order to pressure earnings but is
currently unable to quantify any such impact. The Access
Reform Order is being appealed and is pending in the Eighth
Circuit. The Telephone Company has intervened in the appeal.
The FCC is also expected to release a Pricing Flexibility Order
in 1998. This order will establish a market-based approach to
pricing.
7
On May 21, 1997, the FCC released its Price Cap Order revising
its price cap plan for regulating ILECs. This order
establishes a single productivity factor of 6.5% and eliminates
the sharing requirements of the prior rules. This order is
being appealed in the District of Columbia Circuit Court. On
August 13, 1997, the Telephone Company filed a Petition for
Waiver from the 6.5% productivity factor, requesting that the
FCC establish a productivity factor of 5.3% for the Telephone
Company. A decision is still pending.
The Telephone Company filed its 1997 annual interstate access
price cap revisions, in which the Telephone Company elected to
use a 6.5% productivity factor, which took effect July 1, 1997.
The FCC required all price cap ILECs, including the Telephone
Company, to adjust their Price Cap Indices, effective July 1,
1997, to reflect the 6.5% productivity factor for both the 1996-
1997 and 1997-1998 tariff years. The filing would decrease
interstate network access rates by approximately $28 million
for the period July 1, 1997 to June 30, 1998. The Telephone
Company expects that this decrease will be partially offset by
increased demand.
In addition, the FCC has released Reports and Orders on the
Implementation of the Pay Telephone Reclassification and
Compensation Provisions of the Act. The orders, among other
things, mandate that all ILECs, including the Telephone
Company, unbundle payphone instruments, file tariffs on
payphone service lines and make them available on a non-
discriminatory basis to Payphone Service Providers ("PSPs").
Additionally, the orders establish mechanisms for the full and
fair compensation to PSPs, including per-call compensation for
subscriber "800" and access code calls from payphones. The
Telephone Company has filed the necessary revisions to its
interstate access charges with the FCC and has filed with the
DPUC new retail and wholesale Pay Telephone Access Line Service
offerings in accordance with the FCC's order.
In December 1996, the FCC acted on an outstanding petition by
the New England Public Communications Council, Inc. and
preempted a prior DPUC decision which only authorized ILECs and
CLECs to provide payphone service in Connecticut.
Noting the need to revise its jurisdictional separations rules
as a result of the increasingly competitive nature of the
telecommunications industry, the FCC initiated on October 7,
1997, a rulemaking proceeding to begin separations reform.
Jurisdictional separations assigns telecommunications property
costs, revenues, expenses, taxes and reserves to specific
categories that are then allocated between the interstate and
intrastate jurisdictions. Comprehensive reform in this area
could result in changes to the structure of ILEC pricing.
Management is currently unable to determine the impact any
change would have on the Telephone Company.
In accordance with the Act, the FCC requires ILECs, including
the Telephone Company, to implement a long term solution for
portability of local telephone numbers. The Telephone Company
is required to construct and operate a system that will permit
end user customers to retain their telephone numbers when they
elect a different carrier for local service. The system is to
be operational by mid-1998 for a large percentage of the
Telephone Company's access lines. The FCC, however, has not
yet decided on a method to recover the substantial investment
and operating costs relating to the number portability system.
Local number portability expenditures were approximately $4
million in 1997 and are estimated to be $19 million in 1998.
8
State 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. 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 plan becomes effective for these services,
unless they have been reclassified into the emerging-
competitive or competitive categories. The impact of these
changes on the Telephone Company's operating results will
depend on the timing of classifying the various products and
services from non-competitive into the emerging-competitive and
competitive categories for pricing changes.
On June 25, 1997, the DPUC issued a final decision allowing the
Corporation to establish separate wholesale and retail
affiliates. As a result, the Telephone Company will become an
ILEC, providing network services and functionality to retail
providers under the wholesale provisions of the Act. The
Telephone Company will be treated as a public service company
and will continue to be subject to alternative forms of
regulation. In a separate order SAI, an affiliated
corporation, was granted authority to operate as a CLEC,
allowing it to provide competitive retail service to customers
with the same flexibility as all other CLECs in the state. In
addition, on January 1, 1998, the directory publishing
operations were incorporated into a separate subsidiary of the
Corporation.
As part of the decision, however, the DPUC mandated that
Connecticut customers must choose their local exchange provider
via a balloting process. Customers who do not choose a carrier
will be assigned a CLEC based on the proportion of votes in a
local service area. The specific details of the balloting
process will be addressed in further technical discussions
among the participants and the DPUC. The balloting process is
scheduled to begin on January 4, 1999 and to be completed by
May 1999. Until balloting is complete, the Telephone Company
and SAI will jointly offer retail telecommunications services
to the public. Once the balloting process is completed, SAI
will become the sole provider of retail service for the
Corporation.
In order for the balloting process to commence, the ILEC must
demonstrate that the systems offered to CLECs provide full
technical and operational support as required by the Act. The
DPUC will examine and critically evaluate the respective
Operations Support System ("OSS") platforms offered to the
CLECs. The DPUC's evaluation will establish a set of tests and
standards that can be used to 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 Act. A
final decision is due on June 24, 1998. The DPUC's decision to
allow the Corporation to establish separate wholesale and
retail affiliates has been challenged by other parties in both
state court and federal court. In an oral decision, the
federal court has denied the other parties' motion for summary
judgment and granted the Corporation's motion for summary
judgment. A written decision is expected in the first quarter
of 1998. A decision is also expected from the state court in
1998.
In compliance with the Act, the ILEC has filed with the DPUC
numerous cost studies supporting its proposed wholesale (i.e.,
resale) and unbundled rates for interconnection services. On
March 24, 1997, the DPUC issued a final decision setting a
uniform 17.8% discount rate off the Telephone Company's current
retail prices for telecommunications services sold to CLECs.
9
On April 23, 1997, the DPUC issued a final decision addressing
the proposal for allocation of Hybrid Fiber Coax ("HFC")
network joint costs between broadband and telephony and the
Telephone Company's costs and rates associated with unbundled
loops, ports, multiplexing and inter-wire center transport. In
this decision, the DPUC approved the Telephone Company's
proposed 50/50 allocation of HFC network joint costs between
broadband and telephony. In addition, the DPUC approved the
cost studies based on Total Service Long Run Incremental Cost
("TSLRIC"). Subsequently, the DPUC opened a new docket to
determine appropriate TSLRIC-based rates for the remaining
unbundled elements (non-loop) defined by the FCC. The cost
allocation decision has been appealed by the cable television
industry to state Superior Court. A decision is expected in
1998.
DIRECTORY PUBLISHING OPERATIONS
Up until January 1, 1998, through its directory publishing
operations, the Telephone Company, in addition to selling the
advertising, produced and distributed traditional paper
products including White and Yellow Pages directories
throughout Connecticut and adjacent communities and also
developed and provided electronic publishing services.
As part of the Corporation's plan to restructure into separate
wholesale and retail organizations, the directory publishing
operations were incorporated into a separate subsidiary of the
Corporation on January 1, 1998 [see Item 1. - Corporate
Restructure].
EMPLOYEE RELATIONS
The Telephone Company employed 6,791 persons at February 27,
1998, of whom approximately 77% were represented by the
Connecticut Union of Telephone Workers, Inc. ("CUTW"), an
unaffiliated union.
In January 1998, under the current union contract, bargaining-
unit employees received a general wage increase totaling 3.0%;
made up of various forms and combinations of basic wage
increases, one-time cash payments and/or Cash Balance Plan
Account credits. The current labor agreement will expire on
August 8, 1998. Management and the union expect to begin
negotiations on a new labor agreement early in 1998.
10
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, 1997, central office equipment represented 43%;
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 9%.
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 $3.9 billion at December 31, 1992 to $4.2
billion at December 31, 1997, after giving effect to
retirements, but before deducting accumulated depreciation at
either date. Since 1993, cash expended for capital additions
was as follows:
Dollars in Millions, For
the Years Ended 1997 1996 1995 1994 1993
Cash Expended for
Capital Additions $374 $326 $283 $237 $233
In 1997, the Telephone Company funded its cash expenditures for
capital additions substantially through cash flows from
operations. In 1998, capital additions are expected to be
approximately $347 million, including estimated additions of
$290 million to the wireline network. These additions include
expenditures primarily related to the modernization, growth and
upgrading of central office switching and circuit equipment, to
meet customer demand for new services. Additionally, to reduce
maintenance costs and to meet access line growth, increased
focus is being placed on replacing and supplementing the
existing core network of twisted copper wire and fiber-optic
and coaxial cable.
Item 3. Legal Proceedings
The Telephone Company is involved in various claims and
lawsuits that arise in the normal conduct of its 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.
11
Items 4 through 6.
Information required under Items 4 and 6 is omitted pursuant to
General Instruction I(2). Item 5 is not applicable.
PART II
Item 7. Management's Discussion and Analysis (Dollars in Millions)
(Abbreviated pursuant to General Instruction I(2))
Planned Merger
On January 4, 1998, the Corporation and SBC Communications Inc.
("SBC") approved a definitive merger agreement ("Agreement")
whereby the Corporation will become a wholly-owned subsidiary
of SBC. Under the original terms of the Agreement, each share
of the Corporation's common stock was to be exchanged for
0.8784 shares of SBC common stock. On January 30, 1998, SBC
announced a two-for-one stock split, which modified the
exchange ratio to 1.7568. The transaction is intended to be
accounted for as a pooling-of-interests and as a tax-free
reorganization under the applicable provisions of the Internal
Revenue Code.
The merger has been reviewed by the U.S. Department of Justice
and must still be approved by the Corporation's shareholders,
the DPUC, and the FCC. The Corporation is currently authorized
to provide interexchange services in 46 states. For the
majority of these states these authorizations have been
utilized solely to provide calling card services to Connecticut-
based customers traveling in the respective states. The
Corporation does, however, provide long-distance service to a
small number of customers in states where SBC is an Incumbent
Local Exchange Carrier ("ILEC"). The Corporation may be
required to modify or withdraw its interexchange authorizations
in the states where SBC is an ILEC. In addition,
authorizations may be required from a number of other states to
allow the Corporation to transfer its existing long-distance
authorizations to SBC. Once the necessary approvals are
obtained, the merger is expected to close by December 31, 1998.
Management believes that the merger with SBC is in the best
interest of the Corporation's shareholders because it offers
them the opportunity of becoming investors in a company with
global presence and a track record of success in growing long-
term value for shareholders. In addition, the merger will
likely strengthen the Corporation's ability to compete in the
increasingly competitive telecommunications industry.
Corporate Restructure
In a decision issued June 25, 1997, the DPUC approved the
Corporation's proposal to establish separate wholesale and
retail organizations [see Item 1. - Telecommunications Services
- - State Regulatory Matters]. As a result, the Telephone
Company will become an ILEC, providing network services and
functionality to retail providers under the wholesale
provisions of the Federal Telecommunications Act of 1996
("Act"). The Telephone Company will be treated as a public
service company, and will continue to be subject to alternative
forms of regulation. In a separate order, SNET America, Inc.
("SAI"), an affiliated corporation, was certified to operate as
a competitive local exchange carrier ("CLEC"), allowing it to
provide competitive retail service to customers with the same
flexibility as all other CLECs in the state. As part of the
DPUC's decision allowing the restructure, Connecticut customers
must choose their local exchange provider via a balloting
process. Until balloting is complete, the Telephone Company
and SAI will jointly offer
12
retail telecommunications services to the public. Once the
balloting process is completed, SAI will become the sole
provider of retail service for the Corporation. In
addition, as part of the restructure, the directory
publishing operations were incorporated into a separate
subsidiary of the Corporation on January 1, 1998.
The Telephone Company began implementing parts of the
restructure plan by transferring over 1400 employees to the
Corporation, primarily from the information technology
organization in September of 1997. In January of 1998, over
300 employees from its directory publishing operations were
transferred to SNET Information Services, Inc., a new
subsidiary of the Corporation. Approximately $17 of pension
and other employee-related liabilities were moved to the
appropriate companies at the time the employees were
transferred. 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 $53
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.
The separation into wholesale and retail organizations should
have no material effect on the consolidated financial results
of the Corporation. However, had the establishment of the
separate publishing subsidiary occurred in 1997, approximately
$182 of revenues and $52 of operating costs, along with other
related expenses and taxes, would not have been reflected on
the Telephone Company.
Operating Results
Income before extraordinary charge was $195.4 in 1997 compared
to $208.9 in 1996. The reduced results were primarily due to
the increases in network access and local service revenue being
more than offset by the combination of revenue decreases in
intrastate toll as a result of competition, the year 2000
compliance costs, revenue reductions and cost increases
associated with the implementation of regulatory mandates, and
increased depreciation expense.
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 funding from the Corporation.
The early extinguishment of debt resulted in an extraordinary
charge of $3.7, net of tax benefits of $2.7.
13
Revenues
Total revenues decreased $2.5, or .2%, in 1997. The components
of total revenues are summarized as follows:
Dollars in Millions, For the
Years Ended 1997 1996
Local service $ 674.7 $ 673.7
Network access 424.9 388.1
Intrastate toll 209.6 251.2
Publishing and other 234.3 233.0
Total Revenues $1,543.5 $1,546.0
Local Service - Local service revenues, derived from providing
local exchange, advanced calling features and local private
line services, although flat overall, contained significant
offsets. There was a $24.2 increase in revenues due primarily
to continued strong growth of 4.7% in access lines in service
to approximately 2,265,000 lines as of December 31, 1997. This
increase included significant growth in Centrex business lines
and second residential access lines. Local service revenues
also increased due to growth of $4.7 in vertical services.
These increases were significantly offset by a $14.9 decrease
in public telephone revenues, as a significant portion of
payphone operations were transferred to a non-regulated
affiliate in conjunction with the pay telephone
reclassification and compensation provisions of the Act [see
Item 1. - Telecommunications Services - Federal Regulatory
Matters]. Additionally, there was a $10.4 decrease in revenues
recognized from wireless carriers, (due primarily to a decrease
in the generic wireless tariff in accordance with the Act) and
customer migration from flat-rate services to lower priced
Centrex services. Management expects increased competition to
negatively impact local service revenues as other
telecommunications providers offer local service and as the
DPUC-mandated balloting process commences in 1999 [see Item 1.
- - Telecommunications Services - Competition].
Network Access - Network access revenues, generated primarily
from interstate and intrastate services, increased $36.8 or
9.5%. Interstate access revenues increased $22.0 or 6.1%, due
primarily to the effects of the reversal of proposed 1996
tariff changes and interconnection discount plans, and to
growth in interstate minutes of use and an increase in access
lines in service. Partially offsetting these increases was the
impact of a decrease in tariff rates in accordance with the
Telephone Company's July 1997 Federal Communications Commission
("FCC") filing under price cap regulation [see Item 1. -
Telecommunications Services - Federal Regulatory Matters].
Intrastate access revenues increased $14.9, or 52.6%, due
primarily to an increase in intrastate minutes of use by
competitive providers of intrastate long-distance service.
Intrastate Toll - In 1997, intrastate toll revenues, which
include primarily revenues from toll and WATS services,
decreased $41.6, or 16.6%. The decrease was due primarily to a
12.2% reduction in toll message volume, as well as reduced
intrastate toll rates. Lower toll volume was due primarily to
the highly competitive toll market as a result of full
intrastate equal access. The decline in intrastate toll rates
was attributable to customer migration to several discount
calling plans that provide competitive options to business and
residential customers. Increasing competition and the offering
of competitive discount calling plans will continue to place
downward pressure on intrastate toll revenues.
14
Costs and Expenses
Dollars in Millions, For the
Years Ended 1997 1996
Operating costs $ 815.7 $ 820.8
Depreciation and amortization 316.3 300.4
Taxes other than income 45.4 48.3
Total Costs and Expenses $1,177.4 $1,169.5
Operating Costs - Operating costs consist primarily of employee-
related expenses, including wages and benefits. Cost of
services and general and administrative expenses, including
marketing, represent the remaining portion of these expenses.
In 1997, total operating costs decreased $5.1, or .6%.
Increases in operating costs were expenses to comply with
regulatory mandates and to address Year 2000 compliance. These
increases were offset partially by an approximate $8 decrease
in expenses related to the provision of public telephone
service, as a significant portion of payphone operations was
transferred to a non-regulated affiliate in conjunction with
the pay telephone reclassification and compensation provisions
of the Act [see Item 1. - Telecommunications Services - Federal
Regulatory Matters].
Year 2000 costs increased from approximately $2 in 1996 to
approximately $14 in 1997. These costs will continue to be
incurred over the next two to three years, with related
expenses to be approximately $23 to $26 in 1998, with overall
costs estimated to be $50 to $70. The Telephone Company
anticipates all business-critical systems will be converted and
tested prior to the end of 1999, however, some work on other
systems is anticipated to continue into 2000.
The Telephone Company has established a plan which addresses
the business risks and systems exposures of Year 2000
compliance across business, communications, and technology
systems and processes. The plan covers Year 2000 compliance
related to systems, telephone equipment and infrastructure,
vendors and suppliers, and internal company operations.
Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use,"
was issued on March 4, 1998. This SOP requires the
capitalization of certain costs of computer software developed
or obtained for internal use and is effective for financial
statements for fiscal years beginning after December 15, 1998.
Management currently estimates that based on historical
information, $20 to $40 of 1998 expenses would be capitalized
and amortized over lives ranging from 3 to 15 years.
Depreciation and Amortization - In 1997, depreciation and
amortization expense increased $15.9, or 5.3%, due primarily to
an increase in the average depreciable telecommunications
property, plant and equipment.
Taxes other than income - In 1997, taxes other than income
decreased $2.9 due primarily to savings in property taxes as a
result of the continuing reduction of overall corporate space.
15
Interest Expense
Dollars in Millions, For the
Years Ended 1997 1996
Interest Expense $44.6 $45.5
Interest expense decreased $.9, or 2.0%, 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 an increase in interest expense resulting from
borrowings from the Corporation to satisfy the redemption and a
decrease in the amount of interest which was capitalized.
Other (Expense) Income, net
Dollars in Millions, For the
Years Ended 1997 1996
Other (expense) income, net $(1.1) $4.9
The decrease in other (expense) income, net was due primarily
to a decrease in interest income from the Corporation, as the
Telephone Company's cash balance was used to satisfy the
previously-mentioned redemption.
Income Taxes
Dollars in Millions, For the
Years Ended 1997 1996
Income Taxes $125.0 $127.0
The Telephone Company's combined federal and state effective
tax rate in 1997 was 39.0% compared with 37.8% in 1996. The
decrease in income taxes was primarily due to a corresponding
decrease in income before income taxes. The lower 1996
effective tax rate was due primarily to a settlement of tax
matters relating to state tax credits. A reconciliation of
these effective tax rates to the statutory tax rates is
disclosed in Note 5 of the Notes to the Financial Statements.
Extraordinary Charge
Dollars in Millions, For the
Years Ended 1997 1996
Extraordinary charge, net of tax $(3.7) -
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 funding from the Corporation. The
early extinguishment of debt resulted in an extraordinary
charge of $3.7, net of related tax benefits of $2.7.
16
Liquidity and Capital Resources
Operating Activities - During 1997, the consolidated balance
sheet changed as a result of operating activities. The
previously-discussed redemption of debt led to a decrease in
long-term debt, and was the primary factor for the decrease in
cash and temporary cash investments. Accounts receivable from
affiliates increased primarily because the Corporation owed the
Telephone Company for payments made by it, related to
activities which were transferred as part of the restructure.
Other balance sheet changes included an increase in accounts
and notes payable to affiliates because the Corporation made
payments related to activities which were transferred as part
of the restructure.
The Corporation manages the cash practices of all its
affiliates, including the Telephone Company, by providing short-
term financing to fund working capital requirements and
investing short-term, excess funds on their behalf.
Financing Activities - On February 13, 1998, the Corporation was
notified that Moody's Investor Services, Inc., the credit
rating agency, lowered the debt rating on the Telephone
Company's debt from Aa2 to Aa3. The primary factor for the
reduced rating was the removal of the directory publishing
operations from the Telephone Company [see Item 1. - Directory
Publishing Operations].
17
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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, 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 3 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 /s/ COOPERS & LYBRAND L.L.P.
March 4, 1998
18
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
Dollars in Millions, For the
Years Ended December 31, 1997 1996 1995
Revenues
Local service $ 674.7 $ 673.7 $ 641.6
Network access 424.9 388.1 369.4
Intrastate toll 209.6 251.2 266.4
Publishing and other 234.3 233.0 237.8
Total Revenues 1,543.5 1,546.0 1,515.2
Costs and Expenses
Operating and maintenance 815.7 820.8 768.9
Depreciation and amortization 316.3 300.4 300.9
Taxes other than income 45.4 48.3 53.8
Total Costs and Expenses 1,177.4 1,169.5 1,123.6
Operating Income 366.1 376.5 391.6
Interest expense 44.6 45.5 52.9
Other (expense) income, net (1.1) 4.9 8.8
Income Before Income Taxes 320.4 335.9 347.5
Income taxes 125.0 127.0 133.9
Income Before Extraordinary Charge 195.4 208.9 213.6
Extraordinary charge, net of tax (3.7) - (716.3)
Net Income (Loss) $ 191.7 $ 208.9 $ (502.7)
Retained Earnings, Beginning of Period $ 92.6 $ 31.8 $ 648.0
Net income (loss) 191.7 208.9 (502.7)
Dividends declared to parent (156.0) (148.1) (113.5)
Retained Earnings, End of Period $ 128.3 $ 92.6 $ 31.8
The accompanying notes are an integral part of these financial statements.
19
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
BALANCE SHEETS
Dollars in Millions, at December 31, 1997 1996
Assets
Cash and temporary cash investments $ 28.3 $ 56.8
Accounts receivable, net of allowance for
uncollectibles of $19.4 and $18.0, respectively 259.9 270.8
Accounts receivable from affiliates 86.4 11.1
Materials and supplies 14.7 14.3
Prepaid publishing 35.8 35.2
Deferred income taxes 29.1 35.2
Other current assets 4.3 11.9
Total Current Assets 458.5 435.3
Land 16.5 16.8
Buildings 398.4 386.4
Central office equipment 1,850.8 1,743.0
Outside plant facilities and equipment 1,798.4 1,732.4
Furniture and office equipment 255.5 310.0
Station equipment and connections 24.9 22.5
Plant under construction 85.5 98.0
Total telephone plant, at cost 4,430.0 4,309.1
Accumulated depreciation (3,028.7) (2,964.5)
Net Telephone Plant 1,401.3 1,344.6
Deferred income taxes 64.8 52.9
Other assets 28.9 24.4
Total Assets $1,953.5 $1,857.2
The accompanying notes are an integral part of these financial statements.
20
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
BALANCE SHEETS (Cont.)
Dollars in Millions
At December 31, 1997 1996
Liabilities and Shareholder's Equity
Accounts and notes payable to affiliates $ 178.2 $ 19.5
Accounts payable and accrued expenses 166.9 180.2
Advance billings and customer deposits 46.4 42.6
Accrued compensated absences 24.4 29.1
Other current liabilities 91.2 87.7
Total Current Liabilities 507.1 359.1
Long-term debt 667.1 746.9
Unamortized investment tax credits 14.0 15.5
Other liabilities and deferred credits 105.9 112.0
Total Liabilities 1,294.1 1,233.5
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 128.3 92.6
Treasury stock; 42,696 shares, at cost (1.4) (1.4)
Total Shareholder's Equity 659.4 623.7
Total Liabilities and Shareholder's Equity $1,953.5 $1,857.2
The accompanying notes are an integral part of these financial statements.
21
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
Dollars in Millions, For the Years
Ended December 31, 1997 1996 1995
Operating Activities
Net income (loss) $ 191.7 $ 208.9 $(502.7)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 316.3 300.4 300.9
Extraordinary charge, net of tax 3.7 - 716.3
Provision for uncollectible accounts 29.0 27.5 15.5
Restructuring payments (15.0) (109.0) (88.3)
Operating cash flows from:
Increase in accounts receivable, net (18.0) (.2) (57.9)
(Increase) decrease in accounts receivable
from affiliates (75.3) (.2) 4.7
(Increase) decrease in materials and supplies (.4) (3.6) (4.4)
(Increase) decrease in deferred income taxes (5.8) 22.6 15.3
(Decrease) increase in accounts and notes
payable, accrued expenses and compensated
absences (19.7) (1.8) 19.7
Increase (decrease) in accounts payable
to affiliates 158.7 (10.1) 17.3
Decrease in investment tax credits (1.5) (2.1) (6.9)
Net change in other assets and
liabilities 17.0 13.1 (5.4)
Other, net .5 .7 (.6)
Net Cash Provided by Operating Activities 581.2 446.2 423.5
Investing Activities
Cash expended for capital additions (374.1) (326.0) (283.2)
Other, net (2.8) 4.2 6.5
Net Cash Used by Investing Activities (376.9) (321.8) (276.7)
Financing Activities
Cash dividends paid (147.0) (138.1) (120.5)
Repayments of long-term debt (80.0) - -
Other, net (5.8) - -
Net Cash Used by Financing Activities (232.8) (138.1) (120.5)
(Decrease) Increase in Cash and Temporary
Cash Investments (28.5) (13.7) 26.3
Cash and temporary cash investments,
beginning of year 56.8 70.5 44.2
Cash and Temporary Cash Investments,
End of Year $ 28.3 $ 56.8 $ 70.5
The accompanying notes are an integral part of these financial statements.
22
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 telephone
operating 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 3].
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 up until January 1, 1998, directory advertising
[see Item 1. - Directory Publishing Operations]. The Telephone
Company's operations and customers are located primarily in
Connecticut.
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. Estimates
are used when accounting for depreciation, taxes, employee
benefits, allowance for uncollectible accounts receivable,
restructuring reserves and contingencies, among others.
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, 1997 and 1996, accounts payable
included drafts outstanding of $23.4 and $30.4, 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.
Effective January 1, 1996, as a result of the discontinuance of
SFAS No. 71, the Telephone Company is using estimated useful
lives that are shorter than the economic lives historically
prescribed by 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 25
23
Under the composite group method, the cost of depreciable
telephone plant sold or 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
non-telecommunications services including advertising, customer
service, marketing and space rental for the Corporation and its
affiliates. The Telephone Company records substantially all
the revenues from such services as a reduction of the cost
incurred to provide such services. Amounts billed to
affiliates for such services totaled $123.0 in 1997, $77.0 in
1996 and $58.4 in 1995. In addition, the Telephone Company
provides telecommunications services including local, toll and
access services to the Corporation and its affiliates. These
services are recorded as revenues and totaled $48.3 in 1997,
$33.4 in 1996 and $18.4 in 1995.
The Telephone Company receives certain services associated with
corporate functions, including legal, financial, external
affairs and governmental relations, human resources and
corporate strategy, performed on the behalf of the Telephone
Company by the Corporation. The cost of these management
functions totaled $30.1 in 1997, $27.1 in 1996 and $26.0 in
1995. Beginning in September 1997, the Telephone Company is
also charged for information technology functions performed by
the Corporation since the transfer of the information
technology organization from the Telephone Company to the
Corporation [see Note 12]. The cost of the information
technology functions totaled $32.6 in 1997. Additionally, the
Telephone Company rents certain space from an affiliate. The
rental expense totaled $12.7 in 1997, $9.4 in 1996 and $7.0 in
1995.
The Corporation manages the cash practices of all its
affiliates, including the Telephone Company, by providing short-
term financing to fund working capital requirements and
investing short-term, excess funds on their behalf. The net
end-of-month working capital (requirements) for the Telephone
Company for 1997, 1996 and 1995, ranged from ($96.8) to $28.3,
$56.9 to $124.2. and $26.4 to $93.6, respectively.
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, all applications,
and computer software acquired or developed for internal use
are expensed. Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use," was issued on March 4, 1998. This SOP requires the
24
capitalization of certain costs of computer software
developed or obtained for internal use and is effective for
financial statements for fiscal years beginning after December
15, 1998.
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.
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: MERGER
On January 4, 1998, the Corporation and SBC Communications Inc.
("SBC") approved a definitive merger agreement ("Agreement")
whereby the Corporation will become a wholly-owned subsidiary
of SBC. Under the terms of the original Agreement, each share
of the Corporation's common stock was to be exchanged for
0.8784 shares of SBC common stock. On January 30, 1998, SBC
announced a two-for-one stock split, which modified the
exchange ratio to 1.7568.
The transaction is intended to be accounted for as a pooling-of-
interests and as a tax-free reorganization under the applicable
provisions of the Internal Revenue Code. The merger has been
reviewed by the U.S. Department of Justice and must still be
approved by the Corporation's shareholders, the DPUC, and the
FCC. Once the necessary approvals are obtained, the merger is
expected to close by December 31, 1998.
NOTE 3: 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.
25
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
Accelerated amortization of investment
tax credits - 11.0
Total Non-cash, Extraordinary Charge $(1,250.6) $(716.3)
The adjustment of $1,178.0 to net telephone plant was necessary
since estimated useful lives and depreciation methods
historically prescribed by regulators did not reflect the rapid
pace of 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, the effects of any
actions of regulators that had been recognized as assets and
liabilities pursuant to SFAS No. 71, but would not have been
recognized as assets and liabilities by unregulated companies.
The elimination of net regulatory assets relates principally to
net curtailment costs associated with other postretirement
benefits, vacation pay costs and gross earnings tax which were
being amortized as they were recognized in the ratemaking
process.
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 4: EMPLOYEE BENEFITS
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.
26
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 1997 and
declines to 7.5% in 1999.
The Telephone Company's portion of the Corporation's pension
(income) cost computed using the projected unit credit
actuarial method was $(.4), $(58.6) and $67.4 for 1997, 1996
and 1995, respectively. The 1996 settlement gain of $61.3 and
the 1995 net curtailment loss of $76.3, were associated with
the severance programs and were recorded to the restructuring
reserve in the respective years [see Note 6]. Excluding these
items, net pension (income) cost recorded to expense was $(.4),
$2.7 and $(8.9) in 1997, 1996 and 1995, respectively. The 1997
decrease in net pension cost (income) recorded to expense was
due primarily to strong investment performance and a change in
the discount rate. The 1996 increase 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, 1997 and 1996 include a discount rate of
7.0% and 7.5%, 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 1997, 1996 and 1995.
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 1997, 1996 and
1995. The 1996 and 1995 net curtailment losses of $.2 and
$23.3, respectively, were associated with the severance
programs and were recorded to the restructuring reserve in the
respective years [see Note 6].
27
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.
The actuarial assumptions used to calculate the plans' funded
status at December 31, 1997 and 1996 include a discount rate of
7.0% and 7.5%, 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 1997, 1996 and
1995 for the management health trust and 7.5% in 1997, 1996 and
1995 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 1998 was
5.5% and declines to 4.5% by 2002.
Savings and Stock Ownership Plans - The Telephone Company
participates in the employee savings plans under section 401(k)
of the Internal Revenue Code sponsored by the Corporation. The
plans cover substantially all employees. As part of the
savings plans, the Corporation has established an Employee
Stock Ownership Plan ("ESOP"). The Corporation provides
matching contributions based on qualified employee
contributions through its ESOP plan. Under the ESOP, the
Corporation's matching contributions are invested entirely in
common stock of the Corporation and are held by the ESOP.
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 6].
28
NOTE 5: INCOME TAXES
Income tax expense includes the following components:
For the Years Ended December 31, 1997 1996 1995
Federal
Current $102.0 $ 98.0 $ 91.6
Deferred .1 9.9 20.1
Investment tax credits, net (1.5) (2.1) (6.9)
Total Federal 100.6 105.8 104.8
State
Current 24.3 19.0 24.1
Deferred .1 2.2 5.0
Total State 24.4 21.2 29.1
Total Income Taxes $125.0 $127.0 $133.9
In April 1995, new Connecticut state income tax rates were
enacted to accelerate the reduction of current rates. The 1997
Connecticut state income tax rate of 10.50% 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, 1997 1996 1995
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
Federal income taxes at statutory rate $112.1 $117.6 $121.6
State income taxes, net of federal
income tax effect 15.8 13.8 18.9
Depreciation of telephone plant construction
costs previously deducted for tax purposes - - 5.1
Amortization of investment tax credits (1.5) (2.1) (6.9)
Prior years' tax adjustments and
other differences, net (1.4) (2.3) (4.8)
Income Taxes $125.0 $127.0 $133.9
Effective Tax Rate 39.0% 37.8% 38.5%
Deferred income tax assets (liabilities) are comprised of the following:
At December 31, 1997 1996
Postretirement benefits other than pensions $ 34.1 $ 30.6
Software 23.5 12.7
Compensated absences 6.4 12.2
Allowance for uncollectibles 6.4 8.2
Savings plans 5.7 5.7
Unamortized investment tax credits 5.6 6.2
Restructuring charge 2.8 10.0
Depreciation .6 (7.4)
Other 8.8 9.9
Deferred Income Taxes $ 93.9 $ 88.1
29
NOTE 6: 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 in
1995. 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, 1997 1996 1995
Employee separation costs (gains) $ 5.0 $(42.7) $107.8
Process and systems reengineering 2.8 83.1 74.2
Exit and other costs 7.2 7.5 5.9
Total Costs Incurred $ 15.0 $ 47.9 $187.9
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 its
responsiveness to customer-specific needs and to eliminate
certain labor-intensive interfaces between the existing
systems.
As of December 31, 1997, the restructuring reserve balance of
$6.5 is adequate for the future residual costs, primarily
1998's exit costs relating to the delayed reduction of overall
corporate space requirements.
30
NOTE 7: LONG-TERM DEBT
The components of long-term debt are as follows:
At December 31, Interest Rates Maturing 1997 1996
Unsecured notes: 6.13% to 7.13% 2003-2007 $380.0 $380.0
7.25% to 8.70% 2031-2033 245.0 325.0
Debentures 4.38% 2001 45.0 45.0
Total Long-term Debt 670.0 750.0
Unamortized discount and
premium, net (3.0) (3.2)
Capital lease obligations .1 .1
Long-term Debt $667.1 $746.9
Scheduled maturities of total long-term debt include $45.0 in
2001 and $625.0 thereafter.
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 funding from the Corporation.
The early extinguishment of debt resulted in an extraordinary
charge of $3.7, net of tax benefits of $2.7.
At December 31, 1997, 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.
NOTE 8: 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 $27.3,
$25.0 and $24.9 for 1997, 1996 and 1995, respectively. Future
minimum rental commitments under third party, noncancelable
leases include $19.0 in 1998, $15.3 in 1999, $13.7 in 2000,
$9.2 in 2001, $5.1 in 2002 and $16.2 thereafter, for a total of
$78.5. Capital leases were not significant.
Included in future minimum rental commitments for operating
leases are amounts attributable to leases with affiliates
totaling $33.7.
The Telephone Company expects total capital expenditures of
approximately $347 for additions to telephone plant during
1998. In connection with the capital program, the Telephone
Company has made certain commitments for the purchase of
material and equipment.
In 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
appealed the decision and on July 31, 1997, the Second Circuit
Court of Appeals affirmed the U.S. District Court's decision.
As required by the Court's decision, in October 1997, the
Corporation and the Telephone Company paid back wages,
liquidating damages and interest (from the date of the District
Court's judgment) to the employees involved in this action. In
1995, the Telephone Company recorded a liability of $11.0 which
was adequate to cover the cost of total damages for this
matter.
31
NOTE 9: 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, 1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and temporary cash investments $ 28.3 $ 28.3 $ 56.8 $ 56.8
Long-term debt $(667.0) $(674.8) $(746.8) $(731.6)
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 in short-term, high quality commercial paper
which is rated at least A-1 by Standard and Poor's and P-1 by
Moody's Investors Services, Inc. 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 10: 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.
32
NOTE 11: 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 Corporation 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 by the
Corporation, including the Telephone Company. Had the
Corporation, including the Telephone Company, adopted the cost
recognition method provided under SFAS No. 123, "Accounting for
Stock-Based Compensation", net income would approximate the pro
forma amounts below:
For the Years Ended December 31, 1997 1996 1995
Net Income $190.3 $207.6 $(502.8)
Since the stock option activity relates only to the
Corporation's shareholders' equity, the pro forma amounts
reflect the push-down of options granted based upon estimated
year-end Telephone Company employee option holders. The
effects of applying SFAS No. 123 in this pro forma disclosure
are not indicative of future amounts.
The Black-Scholes option pricing model was used, by the
Telephone Company, to estimate the options' grant date fair
value with the following assumptions: 20% volatility; risk
free interest rate ranging from 6.0% to 6.7%; 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
$6.86, $7.83 and $6.06 in 1997, 1996 and 1995, respectively.
SFAS No. 123 requires certain disclosures to be made for each
income statement period with regard to outstanding 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.
33
NOTE 12: CORPORATE RESTRUCTURE
In a decision issued June 25, 1997, the DPUC approved the
Corporation's proposal to establish separate wholesale and
retail organizations [see Item 1. - Telecommunications Services
- - State Regulatory Matters]. As a result, the Telephone
Company will become an ILEC, providing network services and
functionality to retail providers under the wholesale
provisions of the Federal Telecommunications Act of 1996
("Act"). The Telephone Company will be treated as a public
service company, and will continue to be subject to alternative
forms of regulation. In a separate order, SNET America, Inc.
("SAI"), an affiliated corporation, was certified to operate as
a competitive local exchange carrier ("CLEC"), allowing it to
provide competitive retail service to customers with the same
flexibility as all other CLECs in the state. As part of the
DPUC's decision allowing the restructure, Connecticut customers
must choose their local exchange provider via a balloting
process. Until balloting is complete, the Telephone Company
and SAI will jointly offer retail telecommunications services
to the public. Once the balloting process is completed, SAI
will become the sole provider of retail service for the
Corporation. In addition, as part of the restructure, the
directory publishing operations were incorporated into a
separate subsidiary of the Corporation on January 1, 1998.
The Telephone Company began implementing parts of the
restructure plan by transferring over 1400 employees to the
Corporation, primarily from the information technology
organization in September of 1997. In January of 1998, over
300 employees from its directory publishing operations were
transferred to SNET Information Services, Inc., a new
subsidiary of the Corporation. Approximately $17 of pension
and other employee-related liabilities were moved to the
appropriate companies at the time the employees were
transferred. 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 $53
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.
The separation into wholesale and retail organizations should
have no material effect on the consolidated financial results
of the Corporation. However, had the establishment of the
separate publishing subsidiary occurred in 1997, approximately
$182 of revenues and $52 of operating costs, along with other
related expenses and taxes, would not have been reflected on
the Telephone Company.
On February 13, 1998, the Corporation was notified that Moody's
Investor Services, Inc., the credit rating agency, lowered the
debt rating on the Telephone Company's debt from Aa2 to Aa3.
The primary factor for the reduced rating was the removal of
the directory publishing operations from the Telephone Company
[see Item 1. - Directory Publishing Operations].
34
NOTE 13: SUPPLEMENTAL FINANCIAL INFORMATION
Supplemental Cash Flow Information
For the Years Ended December 31, 1997 1996 1995
Interest Paid, net of amounts capitalized $ 47.2 $ 45.5 $ 53.0
Income Taxes Paid $121.6 $113.2 $125.1
Supplemental Income Statement Information
For the Years Ended December 31, 1997 1996 1995
Advertising Expense $ 22.6 $ 25.7 $ 18.5
Depreciation and amortization:
Depreciation $310.2 $296.1 $297.6
Amortization 6.1 4.3 3.3
Total Depreciation and Amortization $316.3 $300.4 $300.9
Interest expense:
Long-term debt $ 46.2 $ 52.4 $ 52.6
Capitalized interest (4.6) (7.2) -
Other 3.0 .3 .3
Total Interest Expense $ 44.6 $ 45.5 $ 52.9
During 1997, 1996 and 1995, revenues earned from providing
services to AT&T Corp. accounted for 9.6%, 9.9% and 11.2%,
respectively, of total revenues.
Supplemental Balance Sheet Information
At December 31, 1997 1996
Other current liabilities:
Dividends payable $ 42.0 $ 33.0
Accrued postemployment benefit obligation 10.0 11.0
Accrued interest 7.5 10.2
Restructuring charge 6.5 11.1
Other current liabilities 25.2 22.4
Total Other Current Liabilities $ 91.2 $ 87.7
Other liabilities and deferred credits:
Accrued postretirement benefit obligation $ 72.4 $ 78.9
Accrued pension cost 9.0 15.7
Restructuring charge - 13.0
Other 24.5 4.4
Total Other Liabilities and Deferred Credits $ 105.9 $112.0
35
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1st 2nd 3rd 4th Full
QTR QTR QTR QTR Year
1997
Total Revenues $383.5 $383.1 $383.6 $393.3 $1,543.5
Operating Income $ 91.5 $ 90.3 $ 85.9 $ 98.4 $ 366.1
Income before extraordinary charge $ 48.8 $ 48.3 $ 45.0 $ 53.3 $ 195.4
Extraordinary charge [see Note 7] (3.7) - - - (3.7)
Net Income $ 45.1 $ 48.3 $ 45.0 $ 53.3 $ 191.7
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
36
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 I(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 18
Financial Statements Covered by Report of
Independent Accountants
Statements of Income (Loss) and Retained Earnings -
for the years ended December 31, 1997, 1996 and 1995 19
Balance Sheets - as of December 31, 1997 and 1996 20
Statements of Cash Flows - for the years ended
December 31, 1997, 1996 and 1995 22
Notes to Financial Statements 23
(2) Financial Statement Schedule Covered by Report of
Independent Accountants for the three years ended
December 31, 1997:
II - Valuation and Qualifying Accounts 42
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.
37
(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)17 are
management contracts or compensatory plans required to be filed
as exhibits pursuant to Item 14 (c) of Form 10-K.
Exhibit
Number
2 Agreement and Plan of Merger dated as of January
4, 1998, between Southern New England
Telecommunications Corporation, SBC Communications
Inc. and SBC (CT), Inc. (Exhibit 2 to Form 8-K
dated 1/5/98, File No. 1-6654).
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 through
January 1, 1998 (Exhibit 10(iii)(A)5 to 1997 Form
10-K dated 3/20/98, 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).
Amendments effective July 9, 1997 through January
1, 1998 (Exhibit 10(iii)(A)6 to 1997 Form 10-K
dated 3/20/98, File No. 1-9157).
38
(3) Exhibits (continued):
Exhibit
Number
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). Amendment dated
January 4, 1998 (Exhibit 10(iii)(A)11 to 1997 Form
10-K dated 3/20/98, File No. 1-9157).
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).
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 as amended through January 1, 1998 (Exhibit
10(iii)(A)14 to 1997 Form 10-K dated 3/20/98, 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).
Amendment dated January 4, 1998 (Exhibit
10(iii)(A)15 to 1997 Form 10-K dated 3/20/98, 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).
10(iii)(A)17 SNET Stay Bonus Program effective January 4, 1998
(Exhibit 10(iii)(A)17 to 1997 Form 10-K dated 3/20/98,
File No. 1-9157).
39
(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, 1997 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1998.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1997 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1998.
(b) Reports on Form 8-K:
On October 23, 1997, the Telephone Company filed a report on
Form 8-K, dated October 23, 1997, announcing the
Corporation's financial results for the third quarter of
1997.
On January 6, 1998, the Telephone Company filed a report on
Form 8-K, dated January 5, 1998, announcing the execution of
an agreement with SBC Communications Inc., whereby the
Corporation will become a wholly-owned subsidiary of SBC.
On January 28, 1998, the Telephone Company filed a report on
Form 8-K, dated January 27, 1998, announcing the
Corporation's 1997 financial results.
40
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, 1998
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 and (Donald R. Shassian, as attorney-
Chief Financial Officer in-fact and on his own behalf)
DIRECTORS:
William F. Andrews*
Richard H. Ayers*
Robert L. Bennett*
Barry M. Bloom* March 20, 1998
Frank J. Connor*
William R. Fenoglio*
Claire L. Gaudiani*
Ira D. Hall*
Burton G. Malkiel*
Frank R. O'Keefe, Jr.*
Joyce M. Roche* * by power of attorney
41
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 1997 $18.0 $29.0 $7.3 (a) $34.9 (b) $19.4
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
Restructuring Charge:
Year 1997 $ 24.1 $ - $ - $ 17.6 $ 6.5
Year 1996 72.0 - - 47.9 (c) 24.1
Year 1995 259.9 - - 187.9 (c) 72.0
(a) Includes amounts previously written off that were credited
directly to this account when recovered and miscellaneous
amounts.
(b) Includes amounts written off as uncollectible. 1997
reflects the continuous collection difficulties as the
competitive environment increases despite the Telephone
Company's increased emphasis on collections. 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 in 1995.
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC,
are incorporated herein by reference as exhibits hereto.
Exhibit
Number
2 Agreement and Plan of Merger dated as of January
4, 1998, between Southern New England
Telecommunications Corporation, SBC Communications
Inc. and SBC (CT), Inc. (Exhibit 2 to Form 8-K
dated 1/5/98, File No. 1-6654).
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 through
January 1, 1998 (Exhibit 10(iii)(A)5 to 1997 Form
10-K dated 3/20/98, 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).
Amendments effective July 9, 1997 through January
1, 1998 (Exhibit 10(iii)(A)6 to 1997 Form 10-K
dated 3/20/98, 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). Amendment dated
January 4, 1998 (Exhibit 10(iii)(A)11 to 1997 Form
10-K dated 3/20/98, File No. 1-9157).
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).
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 as amended through January 1, 1998 (Exhibit
10(iii)(A)14 to 1997 Form 10-K dated 3/20/98, 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).
Amendment dated January 4, 1998 (Exhibit
10(iii)(A)15 to 1997 Form 10-K dated 3/20/98, 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).
10(iii)(A)17 SNET Stay Bonus Program effective January 4, 1998
(Exhibit 10(iii)(A)17 to 1997 Form 10-K dated 3/20/98,
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, 1997 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1998.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1997 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1998.
EXHIBIT 12
1997 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, 1997
Income before income taxes $320.4
Add:
Interest on indebtedness 41.5
Portion of rents representative of
the interest factor 9.1
Earnings before fixed charges and income taxes (1) $371.0
Fixed charges
Interest charges $ 46.2
Portion of rents representative of the interest factor 9.1
Fixed charges (2) $ 55.3
Ratio of earnings to fixed charges [(1) divided by (2)] 6.71
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 March 4,
1998, which includes 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, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997, 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.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut Coopers & Lybrand L.L.P.
March 19, 1998
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, 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.
- 2 -
IN WITNESS WHEREOF each of the undersigned has executed this Power of
Attorney this 11th day of March 1998.
/s/ William F. Andrews /s/ Claire L. Gaudiani
William F. Andrews, Director Claire L. Gaudiani, Director
/s/ Richard H. Ayers /s/ Ira D. Hall
Richard H. Ayers, Director Ira D. Hall, Director
/s/ Robert L. Bennett /s/ Burton G. Malkiel
Robert L. Bennett, Director Burton G. Malkiel, Director
/s/ Barry M. Bloom /s/ Frank R. O'Keefe, Jr.
Barry M. Bloom, Director Frank R. O'Keefe, Jr. Director
/s/ Frank J. Connor /s/ Daniel J. Miglio
Frank J. Connor, Director Daniel J. Miglio, Chairman,
President, Chief Executive
Officer and Director
/s/ William R. Fenoglio
William R. Fenoglio, Director /s/ Joyce M. Roche
Joyce M. Roche, Director
C E R T I F I C A T E
This is to certify that by unanimous consent of the Board of Directors
of The Southern New England Telephone Company dated March 11, 1998,
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, 1997, in substantially
the form submitted, 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."
This Consent has the same force and effect as a vote in favor of such
action at a regular constituted meeting of the Board of Directors of
the Company called for such purpose.
Attest:
/s/ Paula M. Anderson
Paula M. Anderson
Assistant Secretary
New Haven, Connecticut
March 19, 1998
<TABLE> <S> <C>
<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE 1997 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.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<SECURITIES> 0
<RECEIVABLES> 365,700
<ALLOWANCES> 19,400
<INVENTORY> 14,700
<CURRENT-ASSETS> 458,500
<PP&E> 4,430,000
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<TOTAL-ASSETS> 1,953,500
<CURRENT-LIABILITIES> 507,100
<BONDS> 667,100
0
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<COMMON> 380,400
<OTHER-SE> 279,000
<TOTAL-LIABILITY-AND-EQUITY> 1,953,500
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<TOTAL-COSTS> 1,177,400
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<INTEREST-EXPENSE> 44,600
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