SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1994.
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 1-9157
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1157778
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No .
Common stock, par value $1.00 per share: 64,148,242 shares
outstanding as of April 29, 1994
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Form 10-Q - Part I Southern New England Telecommunications Corporation
PART I - FINANCIAL INFORMATION
Southern New England Telecommunications Corporation ("Corporation") was
incorporated under the laws of the State of Connecticut on January 7, 1986
and has its principal executive office at 227 Church Street, New Haven,
Connecticut 06510 (telephone number (203) 771-5200).
The condensed, consolidated financial statements on the following pages have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of the management, include
all adjustments, consisting of a normal recurring nature necessary for fair
presentation for each period shown. The 1993 financial statements have been
reclassified to conform to the current-year presentation. Certain information
and footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. Management
believes that the disclosures made are adequate to make the information
presented not misleading. Operating results for any interim periods, or
comparisons between interim periods, are not necessarily indicative of the
results that may be expected for full fiscal years. It is suggested that
these condensed, consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Corporation's 1993 Annual Report on Form 10-K.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
For the Three Months Ended
March 31,
1994 1993
Revenues and Sales
Local service $ 152.0 $ 131.4
Intrastate toll 79.0 89.4
Network access 86.8 85.8
Publishing 44.7 45.3
Sales and other 60.7 50.4
Total Revenues and Sales 423.2 402.3
Costs and Expenses
Operating and maintenance 235.4 234.8
Depreciation and amortization 80.7 63.6
Taxes other than income 14.2 16.4
Total Costs and Expenses 330.3 314.8
Income Before Interest, Income Taxes
and Accounting Changes 92.9 87.5
Interest 19.8 23.8
Income Before Income Taxes
and Accounting Changes 73.1 63.7
Income taxes 29.6 27.2
Income Before Accounting Changes 43.5 36.5
Accounting changes - (220.2)
Consolidated Net Income (Loss) $ 43.5 $ (183.7)
Weighted Average Common Shares Outstanding
(in thousands) 63,982 63,522
Earnings (Loss) Per Common Share:
Income Before Accounting Changes $ .68 $ .58
Cumulative effect of accounting changes - (3.47)
Earnings (Loss) Per Common Share $ .68 $ (2.89)
Dividends Declared Per Common Share $ .44 $ .44
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
ASSETS March 31, 1994 Dec. 31, 1993
Current Assets
Cash and temporary cash investments $ 48.9 $ 224.8
Accounts receivable, net of allowance
for uncollectibles of $27.8 and
$26.7, respectively 262.0 266.8
Materials, supplies and inventories 21.2 21.6
Prepaid publishing 41.8 40.5
Deferred income taxes, prepaid taxes
and other assets 125.0 93.8
Total Current Assets 498.9 647.5
Telecommunications plant, property
and equipment, at cost 4,321.0 4,298.4
Less: Accumulated depreciation
and amortization 1,586.2 1,528.3
Telecommunications Plant, Property and
Equipment, Net 2,734.8 2,770.1
Deferred charges, leases and
other assets 334.8 343.9
Total Assets $3,568.5 $3,761.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEET (Continued)
(Dollars in millions)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 1994 Dec. 31, 1993
Current Liabilities
Obligations maturing within one year $ 100.4 $ 290.0
Accounts payable and accrued expenses 182.8 208.1
Restructuring charge - current 130.2 113.0
Advance billings and customer deposits 54.9 54.0
Accrued compensated absences 33.7 37.3
Other current liabilities 98.4 90.4
Total Current Liabilities 600.4 792.8
Long-term obligations 977.0 984.3
Deferred income taxes 345.2 321.0
Postretirement benefits other than pension 327.2 328.9
Restructuring charge - long-term 206.4 242.0
Unamortized investment tax credits 48.8 50.8
Other liabilities and deferred credits 185.9 187.1
Total Liabilities 2,690.9 2,906.9
Stockholders' Equity
Common stock; $1.00 par value;
300,000,000 shares authorized;
66,762,826 and 66,608,360
issued, respectively 66.8 66.6
Proceeds in excess of par value 661.9 656.7
Retained earnings 331.4 315.7
Less: Treasury stock; 2,758,512
shares, at cost (104.7) (104.7)
Unearned compensation related
to ESOP (77.8) (79.7)
Total Stockholders' Equity 877.6 854.6
Total Liabilities and Stockholders' Equity $3,568.5 $3,761.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in millions)
(Unaudited)
For the Three Months Ended
March 31,
1994 1993
COMMON STOCK, PAR VALUE
Balance at beginning of period $ 66.6 $ 66.1
Common stock issued, at market .2 .2
Balance at end of period $ 66.8 $ 66.3
PROCEEDS IN EXCESS OF PAR VALUE
Balance at beginning of period $ 656.7 $ 639.6
Common stock issued, at market 5.2 5.9
Balance at end of period $ 661.9 $ 645.5
RETAINED EARNINGS
Balance at beginning of period $ 315.7 $ 744.2
Consolidated net income (loss) 43.5 (183.7)
Dividends declared (28.2) (27.9)
Tax benefit of dividends declared
on shares held in ESOP .4 .4
Balance at end of period $ 331.4 $ 533.0
TREASURY STOCK
Balance at beginning and end
of period $ (104.7) $ (104.7)
UNEARNED COMPENSATION RELATED
TO EMPLOYEE STOCK OWNERSHIP PLAN
Balance at beginning of period $ (79.7) $ (91.4)
Reduction of ESOP debt 6.6 6.2
ESOP earned compensation accrual (4.7) (4.4)
Balance at end of period $ (77.8) $ (89.6)
TOTAL STOCKHOLDERS' EQUITY $ 877.6 $1,050.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
For the Three Months Ended
March 31
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss) $ 43.5 $(183.7)
Adjustments to reconcile consolidated net
income (loss) to cash provided by
operating activities:
Cumulative effect of accounting changes - 220.2
Depreciation and amortization 80.7 63.6
Discontinued operations - (1.4)
Effect of business restructuring (18.4) -
Change in operating assets and
liabilities, net 6.9 10.4
Other, net 1.1 13.4
Net cash provided by operating activities 113.8 122.5
CASH FLOWS FROM INVESTING ACTIVITIES
Cash expended for capital additions (77.5) (74.7)
Repayment of loan made to ESOP .4 .4
Discontinued operations - 7.9
Other, net 4.7 .5
Net cash used by investing activities (72.4) (65.9)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) of short-term borrowings 58.7 (11.4)
Repayments of long-term borrowings (251.7) (8.7)
Cash dividends (24.3) (24.0)
Discontinued operations - (6.6)
Other, net - (.1)
Net cash used by financing activities (217.3) (50.8)
(Decrease) increase in cash and temporary
cash investments (175.9) 5.8
Cash and temporary cash investments at
beginning of period 224.8 7.2
Cash and temporary cash investments at
end of period $ 48.9 $ 13.0
Income taxes paid $ 8.5 $ 14.1
Interest paid $ 23.6 $ 35.7
The accompanying notes are an integral part of the financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(a) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Changes - The Corporation implemented Statement of Financial
Accounting Standards ("SFAS") No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions", SFAS No. 112 "Employers'
Accounting for Postemployment Benefits" and SFAS No. 109 "Accounting for
Income Taxes" effective January 1, 1993. The cumulative effect of these
accounting changes as of January 1, 1993 resulted in a one-time,
non-cash charge which reduced 1993 net income and earnings per common
share reported in the condensed, consolidated statement of income by
$220.2 million and $3.47, respectively.
(b) FINANCIAL DATA ON SUBSIDIARIES
Selected financial data on the Corporation's subsidiaries is provided
below.
For the Three Months Ended
March 31,
Dollars in Millions 1994 1993
Revenues and Sales:
The Southern New England
Telephone Company $ 369.0 $ 353.4
SNET Diversified Group, Inc.(1) 24.6 31.6
Cellular operations(2) 21.3 14.8
All others(3) 9.0 4.7
Intercompany sales (.7) (2.2)
Consolidated Revenues and Sales $ 423.2 $ 402.3
Income from Operations
Before Accounting Changes:
The Southern New England
Telephone Company $ 43.1 $ 38.7
SNET Diversified Group, Inc.(1) .3 (.4)
Cellular operations(2) .8 (.3)
All others(3) (.7) (1.5)
Income From Operations Before
Accounting Changes $ 43.5 $ 36.5
(1) For comparative purposes, the first quarter 1993 results of SNET
Systems, Inc. are shown with SNET Diversified Group, Inc.
(2) Cellular operations consists of the Corporation's wholesale and
retail cellular businesses, SNET Cellular, Inc. and SNET Mobility,
Inc., net of intercompany amounts.
(3) All others include SNET Real Estate, Inc., SNET Paging, Inc., SNET
America, Inc. and Parent Company operations.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of quarter ended March 31, 1994 vs. quarter ended
March 31, 1993
Revenues and Sales:
Local service revenues increased $20.6 million, or 15.7%, due
primarily to new rates for basic local service implemented
beginning on July 9, 1993 in accordance with The Southern New
England Telephone Company's ("Telephone Company") 1993 general
rate award. Revenue from directory assistance and coin
telephone increased primarily as a result of an increase in
rates also implemented in accordance with the 1993 general
rate award. Also contributing to the increase in local
service revenues was an increase in access lines in service
and an expansion of the local-calling service area in several
exchanges during September of 1993, which resulted in a shift
of revenue from intrastate toll to local service. Access
lines in service grew 1.8% from approximately 1,945,000 at
March 31, 1993 to approximately 1,979,000 at March 31, 1994.
In addition, growth experienced in subscriptions to premium
services, such as an 8.2% increase in Totalphone [SM], also
contributed to the increase in local service revenues.
Intrastate toll revenues, which includes revenues from toll
and WATS services, decreased $10.4 million, or 11.6%. The
majority of this decrease was due primarily to the shift of
revenues to local service caused by the extension of the local-
calling service area in several exchanges as discussed above.
Also contributing to the decrease was a reduction in
intrastate toll rates, including several toll discount plans,
which were implemented in accordance with the 1993 general
rate award, as well as the increasingly competitive toll and
WATS market. Toll message volumes decreased approximately 3%
reflecting the negative impact of the extension of the local-
calling service areas. In addition, WATS revenues decreased
$3.5 million, or 29.6%, due primarily to lower WATS message
volumes, customers migrating to lower priced services offered
by the Telephone Company and the impact competitive providers
have had on this market.
Network access revenues increased $1.0 million, or 1.2%, due
primarily to an increase in interstate minutes of use of
approximately 5%. Partially offsetting the increase in
interstate minutes of use was a decrease, effective July 2,
1993, in interstate access tariff rates in accordance with the
Telephone Company's 1993 annual Federal Communications
Commission ("FCC") filing under price cap regulation. As of
March 31, 1994, the Telephone Company's interstate rate of
return was below the 12.25% authorized under price cap
regulation.
Sales and other revenues increased $10.3 million, or 20.4%.
Sales and other revenues include revenues from the
Corporation's non-telephone businesses; billing and
collections, and other non-access services rendered on behalf
of interexchange carriers; provision for the Telephone
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of quarter ended March 31, 1994 vs. quarter ended
March 31, 1993
Revenues and Sales (continued):
Company's uncollectible accounts receivable; and net
investment income. In total, sales from the Corporation's non-
telephone businesses increased $5.0 million, or 10.0%. Sales
of the Corporation's cellular operations, which consist of
wholesale, SNET Cellular, Inc. and retail, SNET Mobility,
Inc., increased $6.5 million, or 43.9%, due mainly to an
increase in the number of customers and strong revenues from
roaming services. Sales for SNET Paging, Inc. increased $3.1
million due primarily to the impact of the purchase and
consolidation, in October 1993, of the remaining 50.5%
interest in a paging partnership. Partially offsetting the
impact of these items was a decrease in revenues of $7.6
million, or 43.2%, of Business Communications, a division of
SNET Diversified Group, Inc. The decline in sales reflects
the planned phase out of the large PBX system business in
favor of focusing on the Telephone Company's central-office
based solutions.
Costs and Expenses:
Operating and maintenance expenses increased $.6 million, or
.3%. Wage and salary costs decreased approximately $5 million
primarily as a result of a decrease in the average work force
of 10.3%. This decrease is primarily a result of the initial
implementation of the work force reduction portion of the
Corporation's restructuring program announced in December
1993. As of March 31, 1994, approximately 900 employees,
representing 16% of the total number of management employees
and 5% of the total number of bargaining-unit employees, had
left the Corporation as a result of the work force reduction
plan. Also, in 1993 approximately 570 bargaining-unit
employees accepted an early retirement incentive offer with
most leaving the Corporation by March 19, 1993. Partially
offsetting the decrease in the average work force was a 3.0%
wage increase for bargaining-unit employees effective October
1993. The decrease in wage and salary costs was offset by an
increase in costs associated with the Corporation's investment
in new products and services, such as SNET America, Inc.
("SNET America") and licensed software fees for network
switching which increased slightly during the first quarter of
1994. Annual expenses for licensed software are expected to
increase approximately $10 million over 1993 as the Telephone
Company continues to replace and modernize its network
switching operations.
Depreciation and amortization expense increased $17.1 million,
or 26.9%. The increase in depreciation and amortization was
attributable primarily to revised depreciation rate schedules
for both intrastate and interstate plant of the Telephone
Company, as approved by the Connecticut Department of Public
Utility Control ("DPUC") and FCC, respectively. The increase in
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of quarter ended March 31, 1994 vs. quarter ended
March 31, 1993
Costs and Expenses (continued):
depreciation expense relating to intrastate plant was
approximately $10 million while interstate plant accounted for
approximately $3 million of the increase. An increase in the
average depreciable telecommunications plant, property and
equipment also contributed to the increase in depreciation and
amortization expense.
Interest Expense:
Interest expense decreased $4.0 million, or 16.8%. This
decrease was due primarily to interest savings from previous
debt refinancings, a decrease in average debt outstanding and
the absence in 1994 of $1.2 million of interest expense
related to the settlement of sales tax issues in 1993.
Income Taxes:
The effective tax rate in 1994 was 40.5% as compared with
42.7% in 1993. For 1993, income taxes include adjustments
reflecting the resolution of certain tax matters.
Comparison of balances at March 31, 1994 vs. December 31, 1993
Cash and temporary cash investments:
Cash and temporary cash investments decreased $175.9 million
due primarily to the repayment of Telephone Company debt [see
Liquidity and Capital Resources] partially offset by timing of
cash requirements for the Corporation.
Deferred income taxes, prepaid taxes and other assets:
Deferred income taxes, prepaid taxes and other assets
increased $31.2 million due primarily to an increase in
prepaid property taxes. The increase in prepaid property
taxes is a result of the Telephone Company's annual payment of
property taxes in March 1994. The prepaid property taxes will
be amortized over the remainder of 1994.
Obligations maturing within one year:
Obligations maturing within one year decreased $189.6 million
due primarily to the repayment of Telephone Company debt [see
Liquidity and Capital Resources] partially offset by a net
increase in short-term debt outstanding of $58.5 million.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $113.8
million during the three months ended March 31, 1994 as compared
with $122.5 million during the three months ended March 31, 1993.
The primary use of capital resources continued to be capital
expenditures. The Corporation believes that cash flows from
operations will be sufficient to fund all of its anticipated
capital expenditures.
In January 1994, the proceeds of $200.0 million of Telephone
Company 6.125% unsecured notes issued in December 1993 were used
to redeem $200.0 million of 8.625% debentures called irrevocably
on December 14, 1993. In addition, $40.0 million of Telephone
Company notes, effectively tendered in December 1993, were paid
in January 1994.
As of March 31, 1994, cash expenditures, before-tax, relating to
the Corporation's restructuring charge announced in December 1993
amounted to approximately $18 million. Substantially all of the
expenditures related to initial severance payments associated
with work force reductions. The Corporation began implementing
the reengineering program during the first quarter of 1994.
These expenditures were funded from cash flows from operations.
The Corporation continues to expect total 1994 cash expenditures
related to the reengineering program to approximate $100 million,
pre-tax.
The Corporation's ratio of debt to total capitalization decreased
from December 31, 1993. The ratio at March 31, 1994 was 55.1% as
compared with 59.9% at December 31, 1993. The decrease in the
debt ratio is due primarily to the reduction in the current
portion of long-term debt. The current portion of long-term debt
was reduced by the debt payments discussed previously. For the
first quarter 1994, the Corporation's Board of Directors declared
a dividend of $.44 per share.
Regulatory Matters
On April 19 and April 27, 1994, the State of Connecticut House of
Representatives and Senate, respectively, unanimously passed a
bill providing a new regulatory model for Connecticut
telecommunications. The bill, which resulted from
recommendations submitted by a telecommunications task force in
February 1994, opens Connecticut telecommunication services to
full competition, including local phone service currently
provided primarily by the Telephone Company. The bill is
currently pending review and signature by the Governor. If
signed, the law is expected to take effect in July 1994.
On April 13, 1994, the DPUC approved a marketing arrangement
between the Telephone Company and SNET America enabling the
Telephone Company to sell SNET America's interstate and
international products, and SNET America to sell the Telephone
Company's intrastate products and services. This arrangement
will enable the Corporation to satisfy its customer's complete
long distance calling needs with a single point of contact.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Regulatory Matters (continued)
On April 13, 1994, the DPUC opened hearings on the Telephone
Company's request to develop and provide electronic information
services ("EIS"), including electronic publishing services. For
the last three years, AT&T and the Regional Bell Operating
Companies ("RBOCs") have been permitted to enter the electronic
publishing and information services markets. For the same
reasons that the U.S. District Court lifted the ban on
information services and electronic publishing services for AT&T
and the RBOCs, the Corporation believes that the DPUC should
allow the Telephone Company to begin to offer EIS. A final
decision on this issue is expected in June 1994.
On April 1, 1994, the Telephone Company filed with the FCC its
1994 annual interstate access tariff under price cap regulation
for effect on July 1, 1994. The Telephone Company maintained its
selection of the 3.3% productivity factor and will be allowed to
earn up to a 12.25% interstate rate of return annually before any
sharing mechanism is invoked. The filing, if approved by the
FCC, is anticipated to decrease interstate network access
revenues approximately $6 million for the period July 1, 1994
to June 30, 1995.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the first
quarter of 1994.
Item 6. Exhibits and Reports on Form 8-K
(b) On April 21, 1994, the Corporation and the
Telephone Company filed, separately, reports on
Form 8-K, dated April 21, 1994 announcing the
Corporation's financial results for the first
quarter of 1994.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Southern New England Telecommunications Corporation
May 10, 1994
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller
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