<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 June 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: 64,267,669 shares
outstanding as of July 29, 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 6 Months Ended
June 30, June 30,
<S> 1994 1993 1994 1993
Revenues and Sales <C> <C> <C> <C>
Local service $ 154.3 $ 134.3 $ 306.3 $ 265.7
Intrastate toll 75.9 90.8 154.9 180.2
Network access 88.4 86.4 175.2 172.2
Publishing 45.7 45.1 90.4 90.3
Sales and other 63.5 54.1 124.2 104.6
Total Revenues and Sales 427.8 410.7 851.0 813.0
Costs and Expenses
Operating and maintenance 237.5 230.6 472.9 465.4
Depreciation and amortization 81.3 70.2 162.0 133.8
Taxes other than income 14.4 14.8 28.6 31.2
Total Costs and Expenses 333.2 315.6 663.5 630.4
Income Before Interest, Income
Taxes and Accounting Changes 94.6 95.1 187.5 182.6
Interest 19.0 22.6 38.8 46.4
Income Before Income Taxes and
Accounting Changes 75.6 72.5 148.7 136.2
Income taxes 30.3 31.6 59.9 58.8
Income Before Accounting Changes 45.3 40.9 88.8 77.4
Accounting changes - - - (220.2)
Consolidated Net Income (Loss) $ 45.3 $ 40.9 $ 88.8 $(142.8)
Weighted Average Common Shares
Outstanding (in thousands) 64,134 63,638 64,058 63,580
Earnings (Loss) Per Common
Share:
Income Before Accounting Changes $ .71 $ .64 $ 1.39 $ 1.22
Accounting changes - - - (3.47)
Earnings (Loss) Per Common Share $ .71 $ .64 $ 1.39 $ (2.25)
Dividends Declared Per Common
Share $ .44 $ .44 $ .88 $ .88
<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 June 30, 1994 Dec. 31, 1993
Current Assets
Cash and temporary cash investments $ 26.6 $ 224.8
Accounts receivable, net of allowance
for uncollectibles of $27.7 and
$26.7, respectively 271.6 266.8
Materials, supplies and inventories 21.7 21.6
Prepaid publishing 39.5 40.5
Deferred income taxes, prepaid taxes
and other assets 153.5 93.8
Total Current Assets 512.9 647.5
Telecommunications plant, property
and equipment, at cost 4,344.6 4,298.4
Less: Accumulated depreciation
and amortization 1,638.4 1,528.3
Telecommunications Plant, Property
and Equipment, Net 2,706.2 2,770.1
Deferred charges, leases and
other assets 323.8 343.9
Total Assets $3,542.9 $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 BALANCE SHEET (continued)
(Dollars in millions)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 1994 Dec. 31, 1993
Current Liabilities
Obligations maturing within one year $ 71.5 $ 290.0
Accounts payable and accrued expenses 159.4 208.1
Restructuring charge - current 156.8 113.0
Advance billings and customer deposits 53.2 54.0
Accrued compensated absences 33.6 37.3
Other current liabilities 89.2 90.4
Total Current Liabilities 563.7 792.8
Long-term obligations 977.1 984.3
Deferred income taxes 366.0 321.0
Postretirement benefits other than pension 327.2 328.9
Restructuring charge - long-term 166.6 242.0
Unamortized investment tax credits 46.9 50.8
Other liabilities and deferred credits 191.6 187.1
Total Liabilities 2,639.1 2,906.9
Stockholders' Equity
Common stock; $1.00 par value;
300,000,000 shares authorized;
66,907,626 and 66,608,360 issued,
respectively 66.9 66.6
Proceeds in excess of par value 666.2 656.7
Retained earnings 348.8 315.7
Less: Treasury stock; 2,758,512 shares, at cost (104.7) (104.7)
Unearned compensation related to ESOP (73.4) (79.7)
Total Stockholders' Equity 903.8 854.6
Total Liabilities and Stockholders' Equity $ 3,542.9 $ 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 6 Months
Ended Ended
June 30, June 30,
1994 1993 1994 1993
COMMON STOCK, PAR VALUE
Balance at beginning of period $ 66.8 $ 66.3 $ 66.6 $ 66.1
Common stock issued, at market .1 .1 .3 .3
Balance at end of period $ 66.9 $ 66.4 $ 66.9 $ 66.4
PROCEEDS IN EXCESS OF PAR VALUE
Balance at beginning of period $ 661.9 $ 645.5 $ 656.7 $ 639.6
Common stock issued, at market 4.3 3.8 9.5 9.7
Balance at end of period $ 666.2 $ 649.3 $ 666.2 $ 649.3
RETAINED EARNINGS
Balance at beginning of period $ 331.4 $ 533.0 $ 315.7 $ 744.2
Consolidated net income (loss) 45.3 40.9 88.8 (142.8)
Dividends declared (28.2) (28.0) (56.4) (55.9)
Tax benefit of dividends
declared on shares held in
ESOP .3 .4 .7 .8
Balance at end of period $ 348.8 $ 546.3 $ 348.8 $ 546.3
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 $ (77.8) $ (89.6) $ (79.7) $ (91.4)
Reduction of ESOP debt - - 6.6 6.2
ESOP earned compensation accrual 4.4 5.3 (.3) .9
Balance at end of period $ (73.4) $ (84.3) $ (73.4) $ (84.3)
TOTAL STOCKHOLDERS' EQUITY $ 903.8 $1,073.0 $ 903.8 $1,073.0
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 6 Months
Ended June 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss) $ 88.8 $(142.8)
Adjustments to reconcile consolidated net
income (loss) to cash provided by operating
activities:
Cumulative effect of accounting changes - 220.2
Depreciation and amortization 162.0 133.8
Discontinued operations - 3.2
Effect of business restructuring (31.6) -
Change in operating assets and
liabilities, net (44.3) (47.2)
Other, net 16.9 43.3
Net cash provided by operating activities 191.8 210.5
CASH FLOWS FROM INVESTING ACTIVITIES
Cash expended for capital additions (126.3) (141.8)
Repayment of loan made to ESOP .4 .4
Discontinued operations - 89.6
Other, net 6.8 7.1
Net cash used by investing activities (119.1) (44.7)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds of short-term borrowings 30.0 14.2
Repayments of long-term borrowings (252.3) (25.1)
Cash dividends (48.5) (48.2)
Discontinued operations - (54.2)
Other, net (.1) (.2)
Net cash used by financing activities (270.9) (113.5)
(Decrease) increase in cash and temporary
cash investments (198.2) (52.3)
Cash and temporary cash investments at
beginning of period 224.8 7.2
Cash and temporary cash investments at
end of period $ 26.6 $ 59.5
Income taxes paid $ 58.5 $ 58.1
Interest paid $ 46.3 $ 46.5
The accompanying notes are an integral part of the financial statements.
-7-
<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 onetime, 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 6 Months
Ended Ended
June 30, June 30,
Dollars in millions 1994 1993 1994 1993
Revenues and Sales:
The Southern New
England Telephone $371.0 $360.4 $740.0 $713.8
Company
SNET Diversified 24.7 28.3 49.3 59.9
Group, Inc.
Cellular operations(1) 23.3 17.2 44.6 32.0
All others (2) 9.4 5.6 18.4 10.3
Intercompany sales (.6) (.8) (1.3) (3.0)
Consolidated Revenues $427.8 $410.7 $851.0 $813.0
and Sales
Income From Operations
Before Accounting
Changes:
The Southern New
England Telephone $ 47.8 $ 44.1 $ 90.9 $ 82.8
Company
SNET Diversified (.3) 3.0 - 2.6
Group, Inc.
Cellular operations(1) 1.2 1.5 2.0 1.2
All others (2) (3.4) (7.7) (4.1) (9.2)
Income From
Operations Before $ 45.3 $ 40.9 $ 88.8 $ 77.4
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 June 30, 1994 vs. quarter ended
June 30, 1993
Revenues and Sales:
Local service revenues increased $20.0 million, or 14.9%,
due primarily to new rates implemented beginning on July 9,
1993 in accordance with The Southern New England
Telephone Company's ("Telephone Company") 1993 general rate
award.The primary services affected by the increase in
rates were directory assistance, coin telephone and basic
local service. 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 1.9% from
approximately 1,947,000 at June 30, 1993 to approximately
1,984,000 at June 30, 1994. In addition, growth experienced
in subscriptions to premium services, such as
Totalphone[sm] and SmartLink[sm] , also 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, which includes revenues from
toll and WATS services, decreased $14.9 million, or
16.4%. A portion of this decrease was due to the shift of
revenues to local service caused by the extension of the
local-calling service area in several exchanges. 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 3.5% reflecting the impact of the extension of
the local-calling service areas. In addition, WATS
revenues decreased $3.8 million, or 33.8%, 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 $2.0 million, or 2.3%,
due primarily to an increase in interstate minutes of
use of approximately 10.0%. Partially offsetting the
increase in interstate minutes of use was a reduction,
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.
Sales and other revenues increased $9.4 million, or
17.4%. 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
- 9 -
<PAGE>
Form 10-Q - Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of quarter ended June 30, 1994 vs. quarter ended
June 30, 1993
Revenues and Sales (continued):
Company's uncollectible accounts receivable; and net
investment income. In total, sales from the Corporation's
nontelephone businesses increased $7.4 million, or 14.8%.
Sales of the Corporation's cellular operations, which
consist of wholesale and retail businesses through SNET
Cellular, Inc. ("Cellular"), general partner in the
Springwich partnership, and SNET Mobility, Inc.
("Mobility"), respectively, increased $6.1 million, or 35.5%,
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 $3.5 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 $3.6 million, or 26.3%,
decrease in equipment system sales 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.
Costs and Expenses:
Operating and maintenance expenses increased $6.9 million,
or 3.0%. Employee related costs decreased approximately
$11.0 million primarily as a result of a decrease in the
average work force of 9.6% over the comparable 1993
period. This decrease is primarily the result of the
initial implementation of the work force reduction
portion of the Corporation's restructuring program
announced in December 1993. As of June 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 the work force reduction
plan. Partially offsetting the decrease in the average work
force was a 3.0% wage increase for bargaining-unit
employees 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 $18.0 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, 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 $11.1
million, or,15.8%. 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 Connecticut
Department of Public Utility Control ("DPUC"). The
increase in depreciation expense relating to intrastate plant
- 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 June 30, 1994 vs. quarter ended
June 30, 1993
Costs and Expenses (continued):
was approximately $10 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 $3.6 million, or 15.9%
due primarily to interest savings from previous debt
refinancings as well as a $97 million decrease in average
debt outstanding for the quarter.
Income Taxes:
The effective tax rate in 1994 was 40.1% as compared with
43.6% in 1993. For 1993, income taxes includes an adjustment,
calculated in accordance with SFAS No. 109, for a change in
the enacted State of Connecticut Corporate income tax rate.
The current State income tax rate of 11.5% will be gradually
reduced to 10.0% by January 1, 1998.
Comparison of six months ended June 30, 1994 vs. six months
ended June 30, 1993
Revenues and Sales:
Local service revenues increased $40.6 million, or 15.3%,
due primarily to new rates implemented beginning on July 9,
1993 in accordance with the Telephone Company's 1993
general rate award. The primary services affected by the
increase in rates were directory assistance, coin
telephone and basic local service. 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 1.9% from approximately 1,947,000 at June 30,
1993 to approximately 1,984,000 at June 30, 1994. In
addition, growth experienced in subscriptions to premium
services, such as Totalphone[sm] and SmartLink[sm], also
contributed to the increase in local service revenues, as
well as increased Totalphone[sm] rates resulting from
the 1993 general rate award.
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<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 six months ended June 30, 1994 vs. six months
ended June 30, 1993
Revenues and Sales (continued):
Intrastate toll revenues, which includes revenues from
toll and WATS services, decreased $25.3 million, or
14.0%. A portion of this decrease was due to the shift of
revenues to local service caused by the extension 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 3.2% reflecting the impact of
the extension of the local-calling service areas. In
addition, WATS revenues decreased $7.3 million, or 31.7%,
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 $3.0 million, or 1.7%,
due primarily to an increase in interstate minutes of
use of approximately 8.0%. 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 FCC
filing under price cap regulation.
Sales and other revenues increased $19.6 million, or
18.7%. In total, sales from the Corporation's non-
telephone businesses increased $12.4 million, or 12.5%.
Sales of the Corporation's cellular operations increased
$12.6 million, or 39.4%, 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 $6.6 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 $11.2 million, or 35.8%, of Business
Communications.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 six months ended June 30, 1994 vs. six months
ended June 30, 1993
Costs and Expenses:
Operating and maintenance expenses increased $7.5 million,
or 1.6%. Employee related costs decreased approximately
$20.0 million primarily as a result of a decrease in the
average work force of 9.5% over the comparable 1993
period. This decrease is primarily the result of the
initial implementation of the work force reduction
portion of the Corporation's restructuring program
announced in December 1993. As of June 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 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 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 $28.0
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, 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 $28.2
million, or 21.1%. 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 intrastate plant was
approximately $20 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 $7.6 million, or 16.4% due
primarily to interest savings from previous debt
refinancings as well as a $63 million decrease in average
debt outstanding for the six 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 six months ended June 30, 1994 vs. six months
ended June 30, 1993
Income Taxes:
The effective tax rate for the six months ending June 30,
1994 was 40.3% as compared with 43.2% for the comparable
period in 1993. For 1993, income taxes includes an
adjustment, calculated in accordance with SFAS No. 109, for
a change in the enacted State of Connecticut Corporate
income tax rate. The current State income tax rate of
11.5% will be gradually reduced to 10.0% by January 1, 1998.
Comparison of balances at June 30, 1994 vs. December 31, 1993
Cash and temporary cash investments:
Cash and temporary cash investments decreased $198.2
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 $218.5
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 approximately $30 million.
Liquidity and Capital Resources
The Corporation generated cash flows from operations of
$191.8 million during the six months ended June 30, 1994 as
compared with $210.5 million during the six months ended June
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.
As of June 30, 1994, total charges, pre-tax, relating to
the Corporation's restructuring plan announced in December
1993 amounted to approximately $32 million. Substantially all
of the expenditures related to severance and other
employee related payments associated with work force
reductions and to a lesser extent systems reengineering.
The Corporation began implementing its restructuring
program during the first half of 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 $75 and $95 million,
pretax.
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<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)
The Corporation's ratio of debt to total capitalization
decreased to 53.7% at June 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
second 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. The Telephone Company
will continue to review and evaluate each application and
determine the most effective method of colocation.
Currently, 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 expected to be
finalized by the second quarter of 1995 pending Justice
Department approval. The effect this combined business will
have on Cellular's operations, 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.
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<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
State Regulatory Matters
On June 30, 1994, the DPUC issued a final decision on
the Telephone Company's request to develop and provide
electronic information services ("EIS"), 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 a non-
telephone business 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 model 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. The Corporation is not
currently able to quantify the effect that this legislation
will have on its operations.
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 customer's complete long distance
calling needs with a single point of contact.
As of June 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 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 Corporation does not
expect this decision to have a material effect on its
revenues.
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<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)
Federal Regulatory Matters (continued)
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, which was
approved by the FCC effective July 1, 1994,
incorporated rate reductions which will result in
decreased annual interstate network access revenues of
approximately $7.0 million for the period July 1, 1994
to June 30, 1995.
As of June 30, 1994, the Telephone Company's interstate
rate of return was below the 12.25% authorized
under price cap regulation.
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 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 model
framework for Connecticut telecommunications (see
"State Regulatory Matters"), the Telephone Company
reviewed the criteria set forth in SFAS No. 71 and
determined that the continuing application of the
regulatory accounting standard is appropriate.
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<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 second
quarter of 1994.
Item 4. Submission of Matters to a Vote of Security Holders
On May 11, 1994, the Corporation held its Annual Meeting
of Shareholders.
(a) The following persons, having received the FOR
votes set opposite their respective names,
constituting in excess of a majority of the votes
cast at the Annual Meeting for the election of
Directors, were duly elected Class II Directors
for a term of three years:
Directors For Withheld
Dr. Frederick G. Adams 51,342,073 2,687,159
Zoe Baird 49,429,923 4,599,309
Robert L. Bennett 51,408,156 2,621,076
James R. Greenfield 51,382,293 2,646,939
The terms of office of the following Directors
continued after the Annual Meeting:William F.
Andrews, Richard H. Ayers, Dr. Barry M. Bloom,
Frank J. Connor, William R. Fenoglio, Dr. Claire
L. Gaudiani, Dr. Burton G. Malkiel, Daniel J.
Miglio, Frank R. O'Keefe, Jr.
(b) Shareholders ratified the appointment of Coopers &
Lybrand, as independent public accountants,
to examine the consolidated financial statements of
the Corporation for the current year ending
December 31, 1994. The vote was 51,778,561 shares
FOR and 1,538,333 shares AGAINST, with 712,338
shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
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.
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.
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<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
August 11, 1994
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller
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