<PAGE>
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 September 30, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Common stock, par value $1.00 per share: 64,411,081 shares
outstanding as of October 31, 1994
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<PAGE>
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 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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<PAGE>
Form 10-Q - Part I Southern New England Telecommunications Corporation
<TABLE>
CONDENSED, CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
<S> 1994 1993 1994 1993
Revenues and Sales <C> <C> <C> <C>
Local service $ 156.0 $ 147.2 $ 462.3 $ 412.9
Intrastate toll 72.8 81.7 227.7 261.9
Network access 88.7 85.9 263.9 258.1
Publishing 44.6 45.0 135.0 135.4
Sales and other 67.5 54.3 191.7 158.8
Total Revenues and Sales 429.6 414.1 1,280.6 1,227.1
Costs and Expenses
Operating and maintenance 236.0 224.6 708.9 690.0
Depreciation and amortization 81.6 77.8 243.6 211.6
Taxes other than income 13.9 14.1 42.5 45.3
Total Costs and Expenses 331.5 316.5 995.0 946.9
Income Before Interest, Income
Taxes and Accounting Changes 98.1 97.6 285.6 280.2
Interest 18.4 22.4 57.2 68.8
Income Before Income Taxes and
Accounting Changes 79.7 75.2 228.4 211.4
Income taxes 32.5 26.5 92.4 85.3
Income Before Accounting Changes 47.2 48.7 136.0 126.1
Accounting changes - - - (220.2)
Consolidated Net Income (Loss) $ 47.2 $ 48.7 $ 136.0 $ (94.1)
Weighted Average Common Shares
Outstanding (in thousands) 64,271 63,750 64,130 63,637
Earnings (Loss) Per Common
Share:
Income Before Accounting Changes $ .73 $ .77 $ 2.12 $ 1.99
Accounting changes - - - (3.47)
Earnings (Loss) Per Common Share $ .73 $ .77 $ 2.12 $ (1.48)
Dividends Declared Per Common
Share $ .44 $ .44 $ 1.32 $ 1.32
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
ASSETS September 30, 1994 December 31, 1993
Current Assets
Cash and temporary cash investments $ 19.9 $ 224.8
Accounts receivable, net of allowance
for uncollectibles of $28.5 and
$26.7, respectively 285.6 266.8
Materials, supplies and inventories 24.0 21.6
Prepaid publishing 38.2 40.5
Deferred income taxes, prepaid taxes
and other assets 133.1 93.8
Total Current Assets 500.8 647.5
Telecommunications plant, property
and equipment, at cost 4,355.3 4,298.4
Less: Accumulated depreciation
and amortization 1,677.7 1,528.3
Telecommunications Plant, Property
and Equipment, Net 2,677.6 2,770.1
Deferred charges, leases and
other assets 313.9 343.9
Total Assets $3,492.3 $3,761.5
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEET (continued)
(Dollars in millions)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31,
1994 1993
Current Liabilities
Obligations maturing within one year $ 31.7 $ 290.0
Accounts payable and accrued expenses 149.8 208.1
Restructuring charge - current 143.2 113.0
Advance billings and customer deposits 57.0 54.0
Accrued compensated absences 33.4 37.3
Other current liabilities 94.9 90.4
Total Current Liabilities 510.0 792.8
Long-term obligations 953.3 984.3
Deferred income taxes 369.3 321.0
Postretirement benefits other than pension 327.2 328.9
Restructuring charge - long-term 155.7 242.0
Unamortized investment tax credits 44.9 50.8
Other liabilities and deferred credits 201.3 187.1
Total Liabilities 2,561.7 2,906.9
Stockholders' Equity
Common stock; $1.00 par value;
300,000,000 shares authorized;
67,053,910 and 66,608,360 issued,
respectively 67.1 66.6
Proceeds in excess of par value 670.8 656.7
Retained earnings 368.1 315.7
Less: Treasury stock; 2,758,512 shares, at cost (104.7) (104.7)
Unearned compensation related to ESOP (70.7) (79.7)
Total Stockholders' Equity 930.6 854.6
Total Liabilities and Stockholders' Equity $ 3,492.3 $ 3,761.5
The accompanying notes are an integral part of these financial
statements.
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<PAGE>
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in millions)
(Unaudited)
For the 3 Months For the 9 Months
Ended Ended
September 30, September 30,
1994 1993 1994 1993
COMMON STOCK, PAR VALUE
Balance at beginning of period $ 66.9 $ 66.4 $ 66.6 $ 66.1
Common stock issued, at market .2 .1 .5 .4
Balance at end of period $ 67.1 $ 66.5 $ 67.1 $ 66.5
PROCEEDS IN EXCESS OF PAR VALUE
Balance at beginning of period $ 666.2 $ 649.3 $ 656.7 $ 639.6
Common stock issued, at market 4.6 3.6 14.1 13.3
Balance at end of period $ 670.8 $ 652.9 $ 670.8 $ 652.9
RETAINED EARNINGS
Balance at beginning of period $ 348.8 $ 546.3 $ 315.7 $ 744.2
Consolidated net income (loss) 47.2 48.7 136.0 (94.1)
Dividends declared (28.3) (28.0) (84.7) (84.0)
Tax benefit of dividends
declared on shares held in
ESOP .4 .4 1.1 1.3
Balance at end of period $ 368.1 $ 567.4 $ 368.1 $ 567.4
TREASURY STOCK
Balance at beginning and end
of period $ (104.7) $ (104.7) $ (104.7) $ (104.7)
UNEARNED COMPENSATION RELATED
TO EMPLOYEE STOCK OWNERSHIP
PLAN
Balance at beginning of period $ (73.4) $ (84.3) $ (79.7) $ (91.4)
Reduction of ESOP debt 3.6 3.0 10.2 9.2
ESOP earned compensation accrual (.9) (.2) (1.2) .7
Balance at end of period $ (70.7) $ (81.5) $ (70.7) $ (81.5)
TOTAL STOCKHOLDERS' EQUITY $ 930.6 $1,100.6 $ 930.6 $1,100.6
The accompanying notes are an integral part of these financial statements.
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<PAGE>
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
For the 9 Months Ended
September 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss) $ 136.0 $ (94.1)
Adjustments to reconcile consolidated net
income (loss) to cash provided by operating
activities:
Cumulative effect of accounting changes - 220.2
Depreciation and amortization 243.6 211.6
Discontinued operations - 4.3
Effect of business restructuring (56.1) -
Change in operating assets and
liabilities, net (19.1) (35.7)
Other, net 17.5 47.9
Net cash provided by operating activities 321.9 354.2
CASH FLOWS FROM INVESTING ACTIVITIES
Cash expended for capital additions (185.0) (201.0)
Increase in Investments - (7.0)
Repayment of loan made to ESOP .8 .8
Discontinued operations - 90.7
Other, net 21.6 (6.3)
Net cash used by investing activities (162.6) (122.8)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments of short-term borrowings - (32.2)
Repayments of long-term borrowings (291.3) (27.3)
Cash dividends (72.8) (72.4)
Discontinued operations - (54.2)
Other, net (.1) (.8)
Net cash used by financing activities (364.2) (186.9)
(Decrease) increase in cash and temporary
cash investments (204.9) 44.5
Cash and temporary cash investments at
beginning of period 224.8 7.2
Cash and temporary cash investments at
end of period $ 19.9 $ 51.7
Income taxes paid $ 79.5 $ 65.9
Interest paid $ 59.7 $ 80.9
The accompanying notes are an integral part of the financial statements.
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<PAGE>
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 3 Months For the 9 Months
Ended September 30, Ended September 30,
Dollars in millions 1994 1993 1994 1993
Revenues and Sales:
The Southern New
England Telephone $367.5 $363.2 $1,107.5 $1,077.0
Company
SNET Diversified 26.2 27.1 75.5 87.0
Group, Inc.
Cellular operations(1) 26.1 18.3 70.7 50.3
All others (2) 10.2 5.3 28.6 15.6
Intercompany sales (.4) .2 (1.7) (2.8)
Consolidated Revenues $429.6 $414.1 $1,280.6 $1,227.1
and Sales
Income From Operations
Before Accounting
Changes:
The Southern New
England Telephone $ 45.4 $ 45.2 $ 136.3 $ 128.0
Company
SNET Diversified .9 .1 .9 2.7
Group, Inc.
Cellular operations(1) 2.0 1.8 4.0 3.0
All others (2) (1.1) 1.6 (5.2) (7.6)
Income From
Operations Before $ 47.2 $ 48.7 $ 136.0 $ 126.1
Accounting Changes
(1) Cellular operations consists of the Corporation's wholesale
and retail cellular businesses, SNET Cellular, Inc. and
SNET Mobility, Inc., net of intercompany amounts.
(2) All others include SNET America, Inc., SNET Real Estate,
Inc., SNET Paging, Inc. and Parent Company operations.
- 8 -
<PAGE>
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 September 30, 1994 vs. quarter ended
September 30, 1993
Revenues and Sales:
Local service revenues increased $8.8 million, or 6.0%, due
primarily to growth experienced in subscriptions to premium
services, such as Totalphone[SM] and SmartLink[SM], as well as
increased Totalphone[SM] rates resulting from The Southern New
England Telephone Company's ("Telephone Company") 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 2.1% from approximately 1,956,000 at
September 30, 1993 to approximately 1,997,000 at September 30,
1994. Also, in accordance with the 1993 general rate award,
changes to rates for basic local service went into effect on
July 9, 1994. Residence flat rates increased $.26 a month and
business rates dropped between $.69 and $1.23 depending on the
type of local service selected.
Intrastate toll revenues, which include revenues from toll and
WATS services, decreased $8.9 million, or 10.9%. A portion of
this decrease was due to the shift of revenues to local
service caused by the expansion 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 2.1% reflecting the impact of
the expansion of the local-calling service areas. In
addition, WATS revenues decreased $3.7 million, or 34.9%, due
primarily to lower WATS message volumes resulting from
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 $2.8 million, or 3.3%, due
to an increase in interstate minutes of use of approximately
3.0%. Partially offsetting the increase in interstate minutes
of use was a reduction in interstate access tariff rates,
effective July 1, 1994, in accordance with the Telephone
Company's 1994 annual Federal Communications Commission
("FCC") filing under price cap regulation.
Sales and other revenues increased $13.2 million, or 24.3%.
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
- 9 -
<PAGE>
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 September 30, 1994 vs. quarter ended
September 30, 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 $12.6 million, or 25.3%. Sales
of the Corporation's cellular operations, wholesale and retail
through SNET Cellular, Inc. ("Cellular"), general partner in
the Springwich partnership, and SNET Mobility, Inc.
("Mobility"), respectively, increased $7.8 million, or 42.6%.
This increase was due mainly to continued growth in the number
of cellular customers and associated activation fees as well
as strong revenues from roaming services. Sales for SNET
Paging, Inc. ("Paging") increased $3.7 million due primarily
to the impact of the purchase and consolidation, in October
1993, of the remaining 50.5% interest in a paging partnership.
Costs and Expenses:
Operating and maintenance expenses increased $11.4 million, or
5.1%. Employee related costs decreased approximately $3.0
million primarily as a result of a decrease in the average
work force of 8.6% over the comparable 1993 period. This
decrease is primarily the net result of the initial
implementation of the work force reduction phase of the
Corporation's restructuring program announced in December 1993
partially offset by overtime resulting from service outages
due to inclement weather during the late summer. As of
September 30, 1994, approximately 950 employees, representing
16.0% of the total number of management employees and 5.5% of
the total number of bargaining-unit employees, had left the
Corporation as a result of this work force reduction plan.
Partially offsetting the decrease in the average work force
was a 3.0% wage increase for bargaining-unit employees in
accordance with the 1992 Connecticut Union of Telephone
Workers ("CUTW") contract effective October 1993 and, to a
lesser extent, an average wage increase of approximately 4.0%
for management employees effective April 1994. For 1993,
operating and maintenance expenses included a $6.5 million
pension gain recognized as a result of an incentive offer made
to bargaining-unit employees. The $3.0 million decrease in
employee related costs noted above was more than offset by
higher costs of approximately $17.0 million from the
Corporation's non-telephone businesses. Specifically,
Cellular and Mobility experienced increased costs due to
aggressive marketing programs and an expanded customer base.
Also contributing to the higher costs was the Corporation's
increased marketing and operating efforts associated with new
products and services, such as multimedia technology and SNET
America, Inc. ("SNET America"), which offers interstate and
international long distance services. To a lesser extent, the
increase in costs was also attributable to Paging as a result
of the impact of the purchase and consolidation, as previously
discussed.
Depreciation and amortization expense increased $3.8 million,
or 4.9%. The increase in depreciation and amortization was
attributable primarily to an increase in the average
depreciable telecommunications plant, property and equipment.
- 10 -
<PAGE>
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 September 30, 1994 vs. quarter ended
September 30, 1993
Interest Expense:
Interest expense decreased $4.0 million, or 17.9% due
primarily to interest savings from previous debt refinancings
as well as a $65.0 million decrease in average debt
outstanding for the quarter.
Income Taxes:
The effective tax rate in 1994 was 40.8% as compared with
35.2% in 1993. For 1993, income taxes included an adjustment,
calculated in accordance with SFAS No. 109, for a change in
the enacted Federal corporate income tax rate. In August
1993, the Federal income tax rate was increased from 34.0% to
35.0%, retroactive to January 1, 1993. In addition, income
taxes were reduced in 1993 for an adjustment made by the
Telephone Company relating to the amortization of investment
tax credits.
- 11 -
<PAGE>
Form 10-Q - PartI Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of nine months ended September 30, 1994 vs. nine
months ended September 30, 1993
Revenues and Sales:
Local service revenues increased $49.4 million, or 12.0%, due
primarily to new rates implemented beginning on July 9, 1993
in accordance with the 1993 general rate award. In accordance
with the 1993 general rate award, changes to rates for basic
local service also went into effect on July 9, 1994. 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 2.1% from approximately 1,956,000 at September 30, 1993
to approximately 1,997,000 at September 30, 1994. In
addition, growth experienced in subscriptions to premium
services, such as Totalphone[SM] and SmartLink[SM], contributed
to the increase in local service revenues, as well as
increased Totalphone[SM] rates resulting from the 1993 general
rate award.
Intrastate toll revenues decreased $34.2 million, or 13.1%. A
portion of this decrease was due to the shift of revenues to
local service caused by the expansion of the local-calling
service area in several exchanges as discussed previously.
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 2.9% reflecting
the impact of the expansion of the local-calling service
areas. In addition, WATS revenues decreased $11.0 million, or
32.8%, due primarily to lower WATS message volumes resulting
from 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 $5.8 million, or 2.2%, due
to an increase in interstate minutes of use of approximately
6.0%. Partially offsetting the increase in interstate minutes
of use were decreases in interstate access tariff rates.
These decreases, effective July 2, 1993 and July 1, 1994, were
in accordance with the Telephone Company's annual FCC filings
under price cap regulation for 1993 and 1994, respectively.
Sales and other revenues increased $32.9 million, or 20.7%.
In total, sales from the Corporation's non-telephone
businesses increased $23.3 million, or 15.5%. Sales of the
Corporation's cellular operations increased $20.4 million, or
40.6%, due mainly to increased growth in the number of
cellular customers and associated activation fees as well as
strong revenues from roaming services. Sales for Paging
increased $10.3 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 equipment system
sales of $13.5 million, or 30.9%, of Business Communications,
a division of SNET Diversified Group, Inc. The decline in
system sales is expected to continue as the Telephone Company
continues to concentrate on alternative network-based centrex
services.
- 12 -
<PAGE>
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 nine months ended September 30, 1994 vs. nine
months ended September 30, 1993
Costs and Expenses:
Operating and maintenance expenses increased $18.9 million, or
2.7%. Employee related costs decreased approximately $24.0
million primarily as a result of a decrease in the average
work force of 9.2% over the comparable 1993 period. This
decrease is primarily the result of the initial implementation
of the work force reduction phase of the Corporation's
restructuring program announced in December 1993. As of
September 30, 1994, approximately 950 employees, representing
16.0% of the total number of management employees and 5.5% of
the total number of bargaining-unit employees, had left the
Corporation as a result of this 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 in accordance with the 1992 CUTW
contract effective October 1993 and, to a lesser extent, an
average wage increase of approximately 4.0% for management
employees effective April 1994. The net decrease in employee
related costs was offset by higher costs of approximately
$47.0 million from the Corporation's non-telephone businesses.
Specifically, Cellular and Mobility experienced increased
costs due to an expanded customer base. Also contributing to
the higher costs was the Corporation's increased marketing and
operating efforts associated with new products and services,
such as multimedia technology and SNET America. To a lesser
extent, the increase in costs was also attributable to Paging
as a result of the impact of the purchase and consolidation,
as previously discussed.
Depreciation and amortization expense increased $32.0 million,
or 15.1%. The increase in depreciation and amortization was
attributable primarily to revised depreciation rate schedules
for intrastate plant of the Telephone Company, as approved by
the DPUC. The increase in depreciation expense relating to
revised depreciation rates for intrastate plant was
approximately $20.0 million. 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 $11.6 million, or 16.9% due
primarily to interest savings from previous debt refinancings
as well as a $62.0 million decrease in average debt
outstanding for the nine month period.
- 13 -
<PAGE>
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 nine months ended September 30, 1994 vs. nine
months ended September 30, 1993
Income Taxes:
The effective tax rate for the nine months ending September
30, 1994 was 40.5% as compared with 40.3% for the comparable
period in 1993. For 1993, income taxes included adjustments,
calculated in accordance with SFAS No. 109, for the change in
the enacted State of Connecticut and Federal corporate income
tax rates. The current State income tax rate of 11.5% will be
gradually reduced to 10.0% by January 1, 1998. In August
1993, the Federal income tax rate was increased from 34.0% to
35.0%, retroactive to January 1, 1993. Income taxes were also
reduced in 1993 for an adjustment made by the Telephone
Company relating to the amortization of investment tax
credits.
Comparison of balances at September 30, 1994 vs. December 31, 1993
Cash and temporary cash investments:
Cash and temporary cash investments decreased $204.9 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.
Obligations maturing within one year:
Obligations maturing within one year decreased $258.3 million
due primarily to the repayment of Telephone Company debt [see
Liquidity and Capital Resources].
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $321.9
million during the nine months ended September 30, 1994 as
compared with $354.2 million during the nine months ended
September 30, 1993. The primary use of cash flows from
operations continued to be 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
liquidated in January 1994.
- 14 -
<PAGE>
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 (continued)
As of September 30, 1994, total charges, pre-tax, relating to the
Corporation's restructuring plan announced in December 1993
amounted to approximately $56.0 million. Expenditures for
severance and other employee related payments associated with
work force reductions represented approximately $37.0 million of
the total charges. These charges included severance payments,
health care coverage, postemployment benefits as well as a $13.0
million non-cash charge for pension curtailment costs associated
with the work force reductions to date. Expenditures for direct
and incremental costs of analyzing and implementing reengineering
solutions to develop new processes and tools represented
approximately $19.0 million as of September 30, 1994. The
Corporation began implementing its restructuring program in
January 1994. All cash expenditures associated with the year to
date charges were funded from cash flows from operations. The
Corporation expects total 1994 cash expenditures related to the
restructuring program to range between $55 and $75 million, pre-
tax.
The Corporation's ratio of debt to total capitalization decreased
to 51.4% at September 30, 1994 as compared with 59.9% at December
31, 1993. The decrease in the debt ratio is due primarily to
debt payments discussed previously. For the third quarter 1994,
the Corporation's Board of Directors declared a dividend of $.44
per share.
Management believes that the Corporation has adequate internal
and external resources available to finance its business
development, construction, reengineering and dividend programs.
The Corporation maintains adequate credit facilities provided by
a syndicate of banks to provide support for borrowings and
general corporate purposes.
Competition
On June 10, 1994, the U.S. Court of Appeals ("Court") overturned
a 1992 FCC decision requiring local exchange carriers ("LECs"),
including the Telephone Company, to provide expanded special
access (private line) interconnection to permit carriers and
others to terminate their own transmission facilities and
physically colocate in LEC central offices. In response to the
Court's action, the FCC, on July 14, 1994, directed the LECs to
provide expanded interconnection through virtual colocation, but
exempted LECs from this mandatory virtual colocation requirement
in central offices in which the LECs chose to provide physical
colocation. Prior to the Court's decision, the Telephone Company
had begun to allow physical colocation for applications received
from competitive access providers for special access
interconnection in selected central offices of the Telephone
Company. On September 1, 1994, the Telephone Company notified
the FCC that it intends to continue to offer interconnection on a
physical colocation basis.
- 15 -
<PAGE>
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Competition (continued)
The Springwich partnership, in which Cellular is the general
partner and NYNEX Corp. ("NYNEX") is a minority partner, serves
the combined Connecticut and Springfield, Massachusetts areas.
On June 30, 1994, Bell Atlantic Corp. ("Bell Atlantic") and NYNEX
announced plans to combine their cellular phone operations in
order to jointly serve several U.S. markets, including
Connecticut. The proposed combination of Bell Atlantic and
NYNEX is pending Justice Department approval. The effect this
combined business will have on Cellular's operations and the
Springwich partnership, if approved, is not presently
quantifiable. Cellular has made and will continue to make
investments in network expansion and enhancements in order to
effectively meet the needs of its customers.
Regulatory Matters
State Regulatory Matters
In accordance with the Telephone Company's 1993 general rate
award, changes to rates for basic local service went into effect
on July 9, 1994. Residence flat rates increased $.26 a month and
business rates decreased between $.69 and $1.23 a month depending
on the type of local service selected.
On June 30, 1994, the DPUC issued a final decision on the
Telephone Company's request to develop and provide electronic
information services, including electronic publishing services.
The DPUC's decision will allow the Telephone Company to offer
several new services, such as SNET Access, Consumer Tips, and
Electronic Yellow Pages through its SNET Publishing division, as
well as other information and multimedia services through SNET
Diversified Group, Inc., a subsidiary of the Corporation.
On May 26, 1994 the Governor of the State of Connecticut signed
into law (Public Act 94-83) legislation which provides a new
regulatory framework for Connecticut telecommunications. The law,
which resulted from recommendations submitted by a
telecommunications task force in February 1994 and which took
effect July 1, opens Connecticut telecommunication services to
full competition, including local phone service currently
provided primarily by the Telephone Company and encourages the
DPUC to adopt alternative forms of regulation for telephone
companies' "noncompetitive" and "emerging competitive" services.
As a result of the new legislation, the DPUC has opened a number
of dockets to address the implementation of Public Act 94-83,
including an initial docket to determine the appropriate vision
for the Connecticut telecommunications infrastructure. In
addition, subject to federal restraints, the law permits any
entity, including a telecommunications company, to apply to the
DPUC to offer competing cable TV service within existing
franchise areas and permits cable TV companies to seek
certification to compete with LECs within their franchise areas.
As of September 30, 1994, approximately 30 companies have been
authorized to compete for intrastate toll business. The
Corporation is not currently able to quantify the effect that
this legislation will have on its operations.
- 16 -
<PAGE>
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)
State Regulatory Matters (continued)
On September 19, 1994, the Telephone Company and the Corporation
petitioned the DPUC to lift a nine year old restriction on the
Corporation's total investment in unregulated businesses. The
current regulation restricts the Corporation from investing more
than 25% of its total assets in unregulated diversified
activities without the approval of the DPUC. The Corporation
believes that removal of this restriction will be consistent with
a new regulatory model for telecommunications in Connecticut.
On April 13, 1994, the DPUC approved a joint 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 customers'
complete long distance calling needs with a single point of
contact through the SNET All Distance[SM] service offering.
As of September 30, 1994, the Telephone Company's intrastate rate
of return on common equity was below the 11.65% authorized by the
DPUC in the 1993 general rate award.
Federal Regulatory Matters
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 occurs. The filing, which was approved by the FCC
effective July 1, 1994, incorporated rate reductions which could
result, for the period July 1, 1994 to June 30, 1995, in
decreased annual interstate network access revenues of
approximately $7.0 million, to the extent the rate reductions are
not offset by increased demand.
On July 12, 1994, the Court reversed and remanded to the FCC a
ruling affecting the exogenous treatment of certain incremental
postretirement costs incurred by price cap carriers, including
the Telephone Company. The Telephone Company's tariffs which took
effect on July 2, 1993 and were subject to FCC further
investigation could be affected by the Court's decision. The
Telephone Company's tariffs which took effect on July 1, 1994
could also be affected by the Court's decision. The Corporation
does not expect this decision to have a material effect on its
revenues.
As of September 30, 1994, the Telephone Company's interstate rate
of return was below the 12.25% authorized under price cap
regulation.
- 17 -
<PAGE>
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Effects of Regulatory Accounting
The Telephone Company currently gives accounting recognition to
the actions of regulators where appropriate, as prescribed by
SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." Under SFAS No. 71, the Telephone Company records
certain assets and liabilities because of actions of regulators.
More significantly, amounts charged to operations for
depreciation expense reflect estimated lives and methods
prescribed by regulators rather than those consisting of useful
and economic lives that might otherwise apply to unregulated
enterprises. In the event that the Telephone Company no longer
meets the criteria for following SFAS No. 71, the accounting
impact to the Company would be an extraordinary non-cash charge
to operations of a material amount. In light of the new
regulatory framework for Connecticut telecommunications (see
"State Regulatory Matters"), the Telephone Company has reviewed
the criteria set forth in SFAS No. 71 and has determined that the
continuing application of the regulatory accounting standard is
appropriate at this time.
Employee Relations
On August 17, 1994, the Corporation and the CUTW reached a
settlement that called for an "early-out option" for bargaining-
unit employees to be negotiated no later than March 31, 1995.
The terms and conditions of the "early-out option" have not been
determined yet, however, the Corporation does not expect the
offer to have a material impact on operations. Reengineering
efforts and reorganization schedules will impact the timing of
employees leaving the Corporation. This force reduction measure
is a part of the Corporation's overall strategy to reduce costs
in an effort to compete effectively.
Under the terms of the 1992 CUTW contract, a general wage
increase of 5.0% went into effect on October 2, 1994, for all
bargaining-unit employees. This is the third and final increase
of the 1992 contract; a 2.0% increase was effective in September
1992, and a 3.0% increase was effective in October 1993. The
1992 CUTW contract will expire on August 5, 1995.
- 18 -
<PAGE>
Form 10-Q - Part II Southern New England Telecommunications Corporation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the third
quarter of 1994.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On July 21, 1994, the Corporation and the Telephone
Company filed, separately, reports on Form 8-K,
dated July 21, 1994 announcing the Corporation's
financial results for the second quarter of 1994.
On October 26, 1994, the Corporation and the
Telephone Company filed, separately, reports on
Form 8-K, dated October 26, 1994 announcing the
Corporation's financial results for the third
quarter of 1994.
- 19 -
<PAGE>
Form 10-Q - Part II 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
November 9, 1994
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller
- 20 -
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EXTRACTED FROM THE THIRD QUARTER 10-Q OF SOUTHERN NEW
ENGLAND TELECOMMUNICATIONS CORPORATION AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
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