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 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(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 .
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS CORPORATION, MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM
WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
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Form 10-Q - Part I The Southern New England Telephone Company
PART I - FINANCIAL INFORMATION
The Southern New England Telephone Company ("Telephone Company") is a
wholly owned telephone operating subsidiary of the Southern New England
Telecommunications Corporation ("Corporation") and has its principal
executive office at 227 Church Street, New Haven, Connecticut 06510
(telephone number (203) 771-5200).
The condensed financial statements on the following pages have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, include
all adjustments of a normal recurring nature necessary for fair
presentation for each period shown. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations.
Management believes that the disclosures made are adequate to make the
information presented not misleading. Operating results for any interim
periods, or comparisons between interim periods, are not necessarily
indicative of the results that may be expected for full fiscal years. It
is suggested that these financial statements be read in conjunction with
the financial statements and notes thereto included in the Telephone
Company's 1993 Annual Report on Form 10-K.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENT OF INCOME AND RETAINED EARNINGS
(Dollars in millions)
(Unaudited)
For the Three Months Ended
March 31,
1994 1993
Revenues
Local service $ 152.0 $ 131.4
Intrastate toll 79.0 89.4
Network access 86.8 85.8
Publishing and other 51.2 46.8
Total Revenues 369.0 353.4
Costs and Expenses
Operating and maintenance 195.4 199.2
Depreciation and amortization 73.7 58.1
Taxes other than income 13.6 15.6
Total Costs and Expenses 282.7 272.9
Operating Income 86.3 80.5
Other expense, net (.1) (.2)
Income Before Interest, Income Taxes
and Accounting Change 86.2 80.3
Interest 14.1 17.9
Income Before Income Taxes and
Accounting Change 72.1 62.4
Income taxes 29.0 23.7
Income Before Accounting Change 43.1 38.7
Accounting change - (6.5)
Net Income $ 43.1 $ 32.2
Retained Earnings -
Beginning of period $ 572.2 $ 763.7
Net income 43.1 32.2
Dividends declared to parent (23.0) (25.8)
End of period $ 592.3 $ 770.1
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEET
(Dollars in millions)
(Unaudited)
March 31, 1994 Dec. 31, 1993
ASSETS
Current Assets
Cash and temporary cash investments $ 8.1 $ 214.5
Accounts receivable, net of allowance
for uncollectibles of $21.3 and
$20.4, respectively 243.7 251.0
Prepaid publishing 41.8 40.5
Materials and supplies 5.9 8.0
Deferred income taxes, prepaid taxes
and other 107.6 80.2
Total Current Assets 407.1 594.2
Telephone plant, at cost 4,059.4 4,039.8
Less: Accumulated depreciation and
amortization 1,481.8 1,429.2
Net Telephone Plant 2,577.6 2,610.6
Deferred charges and other assets 262.1 265.7
Total Assets $3,246.8 $3,470.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEET (Continued)
(Dollars in millions)
(Unaudited)
March 31, 1994 Dec. 31, 1993
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 169.0 $ 192.7
Short-term borrowings from parent 12.3 -
Obligations maturing within one year - 240.0
Restructuring charge - current 119.1 103.0
Accrued compensated absences 30.6 33.9
Advance billings and customer deposits 43.1 41.0
Other current liabilities 87.0 70.4
Total Current Liabilities 461.1 681.0
Long-term obligations 746.1 746.1
Deferred income taxes 436.4 424.2
Restructuring charge - long-term 199.0 232.0
Unamortized investment tax credits 48.8 50.8
Other liabilities and deferred credits 232.0 233.1
Total Liabilities 2,123.4 2,367.2
Stockholder's Equity
Common stock; $12.50 par value;
30,428,596 shares issued and
30,385,900 outstanding at each
period end 380.4 380.4
Proceeds in excess of par value 152.1 152.1
Retained earnings 592.3 572.2
Less: Treasury stock (42,696 shares
at each period end) (1.4) (1.4)
Total Stockholder's Equity 1,123.4 1,103.3
Total Liabilities and Stockholder's Equity $3,246.8 $3,470.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
For the Three Months Ended
March 31,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 43.1 $ 32.2
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 73.7 58.1
Cumulative effect of accounting change - 6.5
Effect of business restructuring (16.9) -
Change in operating assets and liabilities, net 14.9 (1.3)
Other, net 2.6 16.7
Net cash provided by operating activities 117.4 112.2
CASH FLOWS FROM INVESTING ACTIVITIES
Cash expended for capital additions (73.7) (63.3)
Other, net (.3) (1.1)
Net cash used by investing activities (74.0) (64.4)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (22.0) (17.7)
Net proceeds (payments) of short-term borrowings
from affiliate 12.3 (26.1)
Repayment of long-term borrowings (240.1) -
Other, net - (.1)
Net cash used by financing activities (249.8) (43.9)
(Decrease) increase in cash and temporary
cash investments (206.4) 3.9
Cash and temporary cash investments at
beginning of period 214.5 6.4
Cash and temporary cash investments at
end of period $ 8.1 $ 10.3
Income taxes paid $ 8.6 $ 15.9
Interest paid $ 19.1 $ 31.4
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(a) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Changes - The Telephone Company 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 the accounting change for SFAS No. 112 as of
January 1, 1993 resulted in a one-time, non-cash charge which reduced
net income reported in the condensed statement of income by $6.5
million. For SFAS No. 106, the Telephone Company elected to amortize
the transition obligation over the average remaining service period,
therefore a cumulative effect was not recorded. In addition, a
cumulative effect was not recorded for the adoption of SFAS No. 109 in
compliance with the methods of adoption for regulated entities.
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Form 10-Q - Part I The Southern New England Telephone Company
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:
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 Telephone
Company's 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 in 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.
Publishing and other revenues increased $4.4 million, or 9.4%.
Publishing and other revenues include revenues from publishing
operations; billing and collection, and other non-access
services rendered on behalf of interexchange carriers; and
provision for the Telephone Company's uncollectible accounts
receivable. Miscellaneous revenues associated with the 1993
general rate award and a decrease in the provision for
uncollectible accounts receivable for the Telephone Company's
residence, business and directory customers account for the
majority of the variance.
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Form 10-Q - Part I The Southern New England Telephone Company
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:
Operating and maintenance expenses decreased $3.8 million, or
1.9%. Wage, salary and employee related costs for the first
quarter of 1994 decreased approximately $3 million over the
same period in 1993 due primarily to the combined effect of
the initial implementation of the work force reduction portion
of the Telephone Company's restructuring program announced in
December 1993 and the effect of the reorganization of an
affiliate which occurred in the first quarter of 1993
partially offset by a 3.0% wage increase for bargaining-unit
employees effective October 1993. As of March 31, 1994,
approximately 800 employees, representing 16% of the total
number of management employees and 5% of the total number of
bargaining-unit employees, had left the Telephone Company as a
result of the work force reduction plan. Licensed software
fees for network switching 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 $15.6 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 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 telephone plant, property and equipment
also contributed to the increase in depreciation and
amortization expense.
Interest Expense:
Interest expense decreased $3.8 million, or 21.2%. 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 40.2% as compared with
38.0% in 1993. For 1993, income taxes include an adjustment
reflecting the settlement of certain tax matters.
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Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of balances at March 31, 1994 vs. December 31, 1993
Cash and temporary cash investments:
Cash and temporary cash investments decreased $206.4 million
due primarily to the repayment of debt [see Liquidity and
Capital Resources].
Deferred income taxes, prepaid taxes and other assets:
Deferred income taxes, prepaid taxes and other assets
increased $27.4 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 $240.0 million
due primarily to the repayment of debt [see Liquidity and
Capital Resources].
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Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations of
$117.4 million during the three months ended March 31, 1994 as
compared with $112.2 million during the three months ended March
31, 1993. The primary use of capital resources continued to be
capital expenditures. The Telephone Company 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 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 notes,
effectively tendered in December 1993 were paid in January 1994.
As of March 31, 1994, cash expenditures, before-tax, related to
the restructuring charge announced in December 1993 amounted to
approximately $17 million. Substantially all of these
expenditures related to initial severance payments associated
with work force reductions. The Telephone Company began
implementing the reengineering program during the first quarter
of 1994. These expenditures were funded from cash flows from
operations. The Telephone Company continues to expect total 1994
cash expenditures related to the reengineering program to
approximate $95 million, pre-tax.
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, Inc. ("SNET
America"), a subsidiary of the Corporation, 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.
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 restrictions 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.
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Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
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, 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 II The Southern New England Telephone Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the first
quarter of 1994.
Item 6. Exhibits and Reports on Form 8-K
(b) On April 21, 1994, the Telephone Company filed a
report 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 II The Southern New England Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Southern New England Telephone Company
May 10, 1994
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller
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