SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1993.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _____ to _____.
Commission File Number 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x. No o.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF SOUTHERN NEW
ENGLAND TELECOMMUNICATIONS CORPORATION, MEETS THE CONDITIONS
SET FORTH IN GENERAL INSTRUCTION J (1) (a) AND (b) OF FORM 10-K
AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION J (2).
1
TABLE OF CONTENTS
Item Page
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders *
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters (Inapplicable)
6. Selected Financial Data *
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Abbreviated
pursuant to General Instruction J (2) ) 12
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
PART III
10. Directors and Executive Officers of the Registrant *
11. Executive Compensation *
12. Security Ownership of Certain Beneficial Owners
and Management *
13. Certain Relationships and Related Transactions *
PART IV
14. Exhibits, Financial Statements Schedules, and Reports
on Form 8-K 34
* Omitted pursuant to General Instruction J(2)
2
PART I
Item 1. Business
GENERAL
The Southern New England Telephone Company ("Telephone
Company") was incorporated in 1882 under the laws of the State
of Connecticut and has its principal executive offices at 227
Church Street, New Haven, Connecticut 06510 (telephone number
(203) 771-5200). The Telephone Company is a wholly owned
subsidiary of Southern New England Telecommunications
Corporation ("Corporation").
The Telephone Company, a local exchange carrier ("LEC"), is
engaged in the provision of telecommunications services in the
State of Connecticut, most of which are subject to rate
regulation. These telecommunications services include (i)
local and intrastate toll services, (ii) exchange access
service, which links customers' premises equipment ("CPE") to
the facilities of other carriers, and (iii) other services
such as digital transmission of data and transmission of radio
and television programs, packet switched data network and
private line services. Through its directory publishing
operations, the Telephone Company publishes and distributes
telephone directories throughout Connecticut and certain
adjacent communities.
In 1993, approximately 87% of the Telephone Company's revenues
were derived from the rate regulated telecommunication
services. The remainder were derived principally from
directory publishing operations and activities associated with
the provision of facilities and non-access services to
interexchange carriers. About 71% of the operating revenues
from rate regulated services were attributable to intrastate
operations, with the remainder attributable to interstate
access services.
State Regulatory Matters
The Telephone Company, in providing telecommunications
services in the State of Connecticut, is subject to regulation
by the Connecticut Department of Public Utility Control
("DPUC"), which has jurisdiction with respect to intrastate
rates and services, and other matters such as the approval of
accounting procedures, the issuance of securities and the
setting of depreciation rates on telephone plant utilized in
intrastate operations. The DPUC has adopted for intrastate
ratemaking purposes accounting and cost allocation rules,
similar to those adopted by the Federal Communications
Commission ("FCC"), for the separation of costs of regulated
from non-regulated activities.
State Regulation
On May 24, 1993, the DPUC issued a final decision on the
capital recovery portion of the November 1992 rate request
submitted by the Telephone Company ("Rate Request"). The
Telephone Company was granted an increase in the composite
intrastate depreciation rate from 5.7% to approximately 7.3%.
This equated to an increase in Telephone Company revenue
requirement of approximately $40 million annually. The new
depreciation rates were implemented effective July 1, 1993.
3
On July 7, 1993, the DPUC issued a final decision ("Final
Decision-I") in its three-phase review of the current and
future telecommunications requirements of Connecticut and a
final decision ("Final Decision-II") in the remainder of the
Rate Request docket. The Final Decision-I addressed the
issues of (i) competition [see Item 1., "Competition"]; (ii)
infrastructure modernization; (iii) rate design and pricing
principles; and (iv) regulatory and legislative frameworks.
With respect to "rate design and pricing principles," the DPUC
stated that the pricing of all services must be more in line
with the costs of providing these services. Historically, to
provide universal service, basic residential services have
been subsidized by other tariffed services, primarily message
toll and business services. In regard to the regulatory and
legislative framework, the DPUC endorsed the concept of
incentive-based regulation as a potentially more effective and
efficient regulatory system than the present rate of return
regulation.
The Final Decision-II authorized a rate of return on the
Telephone Company's common equity ("ROE") of 11.65% and an
increase in intrastate revenue of $37.5 million effective July
7, 1993. The Telephone Company was authorized previously to
earn a 12.75% ROE. On August 13, 1993, the DPUC granted the
Telephone Company an additional revenue requirement of $1.9
million to the $37.5 million previously awarded based on a
review of certain areas requested by the Telephone Company.
The total increase in intrastate revenue of $39.4 million is
virtually offset by the approximate $40 million increase in
capital recovery. In addition, the Final Decision-II
addressed areas of infrastructure modernization and incentive
regulation. Under infrastructure modernization, the Final
Decision-II supported, but did not mandate, implementation of
an infrastructure modernization program.
On December 3, 1993, the Telephone Company sought approval
from the DPUC to allow the Telephone Company to develop and
provide electronic information services ("EIS"), including
electronic publishing services. Since 1984, dramatic industry
changes in technology, regulation and competition have
eliminated any need for such a restriction. For the last
three years, AT&T and the Regional Bell Operating Companies
("RBOCs") have been permitted to enter the electronic
publishing and information services markets. For the same
reasons that the U.S. District Court lifted the ban on
information services and electronic publishing services for
AT&T and the RBOCs, the Company believes that the DPUC should
lift the ban on the Telephone Company offering of EIS. A
hearing in this matter is expected in the first half of 1994.
State legislation, signed into law effective July 1, 1993,
authorized the formation of a task force to study
Connecticut's telecommunications infrastructure and policies.
Draft legislation, based on the recommendations the task force
submitted in February 1994, provides a framework to move
forward with a new regulatory model for Connecticut. This
model would move telecommunications toward a fully competitive
marketplace and provide alternative forms of regulation.
Overall, the goals of the draft legislation are to: (i) ensure
high-quality and affordable universal telecommunications
service for Connecticut customers; (ii) promote effective
competition and the development of an advanced infrastructure;
and (iii) enhance the efficiency of government, educational,
and health care facilities through telecommunications.
4
Intrastate Rates
The Final Decision-II established rates designed to achieve
the increase in intrastate revenue of $39.4 million. The
following major provisions were included in the Final
Decision-II: (i) reductions in intrastate toll rates
including several toll discount plans; (ii) an increase in
basic local exchange rates for residential and business
customers to be phased in over a two-year period; (iii) a
reduction in the pricing ratio gap between business and
residential basic local service over a two-year period: (iv) a
$7.00 per month Lifeline credit for low-income residential
customer; (v) an increase in local calling service areas for
most customers with none being reduced: (vi) an increase in
the local coin telephone rate from $.10 to $.25; (vii) an
increase in the directory assistance charge from $.24 to $.40
and a decrease in the number of "free" directory assistance
calls; and (viii) a late payment charge of 1% monthly
effective January 1, 1994. This rate award was implemented on
July 9, 1993 through a combination of increases for coin
telephone calls, directory assistance calls along with an
approximate 15% interim surcharge on the remaining products
and services with authorized increases including local
exchange. On July 22, 1993, the DPUC issued a supplemental
decision reducing the interim surcharge implemented on July 9,
1993 to approximately 8%. The Telephone Company issued
credits during August of 1993 to customers who were charged at
the higher rate. The 8% surcharge was in effect until October
9, 1993, when the remaining new rates became effective,
including an average increase in residential basic local
exchange rates of $.32 a month and a slight decrease in
average monthly business rates. In addition, residential basic
local exchange rates will increase $.31 a month and business
rates will decrease an average of $.84 a month beginning in
July 1994. At December 31, 1993, the Telephone Company's
intrastate ROE was below the authorized 11.65%.
Federal Regulatory Matters
The Telephone Company is subject to the jurisdiction of the
FCC with respect to interstate rates, services, video dial
tone, access charges and other matters, including the
prescription of a uniform system of accounts and the setting
of depreciation rates on plant utilized in interstate
operations. The FCC also prescribes the principles and
procedures (referred to as "separations procedures") used to
separate investments, revenues, expenses, taxes and reserves
between the interstate and intrastate jurisdictions. In
addition, the FCC has adopted accounting and cost allocation
rules for the separation of costs of regulated from
non-regulated telecommunications services for interstate
ratemaking purposes.
Federal Regulation
On July 1, 1993, the FCC, in connection with its normal
triennial review of depreciation, granted the Telephone
Company new depreciation rates retroactive to January 1, 1993.
The new rates increased depreciation expense by approximately
$11 million in 1993. Under current price cap regulation,
however, any changes in depreciation rates cannot be reflected
in interstate access rates (see "Interstate Rates," below).
On January 19, 1994, the Telephone Company filed suit in the
U.S. District Court in New Haven claiming that the Cable
Communications Policy Act of 1984 ("Cable Act") violates the
Telephone Company's First and Fifth Amendment rights. The
Cable Act limits the in-territory provision of cable
programming by LECs such as the Telephone Company. The Cable
Act currently prohibits
5
LECs from owning more than 5% of any company that provides cable
programming in their local service area.
Since January 1, 1988, the Telephone Company has utilized an
FCC approved, company specific Cost Allocation Manual ("CAM"),
which apportions costs between regulated and non-regulated
activities, and describes transactions between the Telephone
Company and its affiliates. In addition, the FCC requires
larger LECs, including the Telephone Company, to undergo an
annual independent audit to determine whether the LEC is in
compliance with its approved CAM. The Telephone Company has
received audit reports for 1988 through 1992 indicating it is
in compliance with its CAM, and is currently undergoing an
audit for the year 1993.
Interstate Rates
The Telephone Company elected price cap regulation effective
July 1, 1991. Under price cap regulation, which replaces
traditional rate of return regulation, prices are no longer
tied directly to the costs of providing service, but instead
are capped by a formula that includes adjustments for
inflation, assumed productivity increases, and "exogenous"
factors, such as changes in accounting principles, in FCC cost
separation rules, and taxes. The treatment as exogenous of
various factors affecting a company's costs is subject to FCC
interpretation.
By electing price cap regulation, the Telephone Company is
provided the opportunity to earn a higher interstate rate of
return than that allowed under traditional rate of return
regulation. However, price cap regulation presents additional
risks since it establishes limits by which the Telephone
Company is able to increase rates, even if the Telephone
Company's interstate rate of return falls below the authorized
rate of return. The Telephone Company is allowed to annually
elect a productivity offset factor of 3.3% or 4.3%. Since
price cap regulation was elected in July 1991, the Telephone
Company has selected the 3.3% productivity factor and does not
anticipate changing its election for the next tariff period.
Choosing the 3.3% factor, the Telephone Company is allowed to
earn up to a 12.25% interstate rate of return annually.
Earnings between 12.25% and 16.25% would be shared equally
with customers, and earnings over 16.25% would be returned to
customers. Any amounts returned to customers would be in the
form of prospective rate reductions. In addition, the
Telephone Company's ability to achieve or exceed its
interstate rate of return will depend, in part, on its ability
to meet or exceed the assumed productivity increase. As of
December 31, 1993, the Telephone Company's interstate rate of
return was below the 12.25% threshold.
The Telephone Company filed tariffs under price cap regulation
on April 2, 1993 which took effect on July 2, 1993, subject to
the FCC's further investigation. The Telephone Company will
file its 1994 annual interstate access tariff filing on April
1, 1994 to become effective July 1, 1994. The filing will
adjust interstate access rates for an experienced rate of
inflation, the FCC's productivity target, and exogenous cost
changes, if any. In January 1994, the FCC began its scheduled
inquiry into the price cap plan for LECs, to determine whether
to revise the current plan to improve its performance in
meeting the FCC's objectives. Results of this inquiry are
expected in late 1994 or early 1995.
6
In an order released on January 9, 1990, which did not
directly apply to the Telephone Company, the FCC established a
precedent whereby a customer has a right to recover damages if
they can establish that a LEC exceeded its authorized rate of
return. The FCC, in a March 1993 order responding to a
complaint filed by Sprint Communications Company ("Sprint")
alleging overearnings in switched traffic sensitive access
charges, affirmed the Telephone Company's right to offset
overearnings in one access category with underearnings in
another category, and held that the Telephone Company had no
liability. Sprint has appealed the order to the U.S. Court of
Appeals.
Regulated Operations
The network access lines provided by the Telephone Company to
customers' premises can be interconnected with the access
lines of other telephone companies in the United States and
with telephone systems in most other countries. The following
table sets forth, for the Telephone Company, the number of
network access lines in service at the end of each year and
the number of intrastate toll and intrastate WATS messages
handled for each year:
1993 1992 1991 1990 1989
Network Access Lines
in Service 1,964 1,937 1,922 1,904 1,875
(in thousands)
Intrastate Toll and
WATS Messages 524 526 516 521 523
(in millions)
The Telephone Company has been making, and expects to continue
to make, significant capital expenditures to meet the demand
for regulated telecommunications services and to further
improve such services (see discussion of I-SNET in
"Competition"). The total gross investment in telephone plant
increased from approximately $3.4 billion at December 31, 1988
to approximately $4.0 billion at December 31, 1993, after
giving effect to retirements, but before deducting accumulated
depreciation at either date. Since 1989, cash expended for
capital additions was as follows:
Dollars in millions 1993 1992 1991 1990 1989
Cash Expended for
Capital Additions $231.6 $269.1 $296.3 $370.0 $338.8
In 1993, the Telephone Company funded its cash expenditures
for capital additions entirely through cash flows from
operations. In 1994, capital additions are expected to be
approximately $230 million. The Telephone Company expects to
fund substantially all of its 1994 capital additions through
cash flows from operations.
7
The Telephone Company currently accounts for the economic
effects of regulation in accordance with the provisions of
SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." In the event recoverability of operating costs
through rates becomes unlikely or uncertain, whether resulting
from competitive effects or specific regulatory actions, SFAS
No. 71 would no longer apply. The financial impact of an
accounting change, should the Telephone Company no longer
qualify for the provisions of SFAS No. 71, would be material.
Competition
The Telephone Company's regulated operations are subject to
competition from companies, carriers and competitive access
providers which construct and operate their own communications
systems and networks for the provision of services to others.
At present, regulation continues to provide for a system of
subsidies which prevent the Telephone Company's prices from
moving toward the cost of providing the service. The Telephone
Company's ability to compete depends to some degree on the action
of regulators regarding the pricing of local, toll and network
access services, and on the Telephone Company's continuing ability
to manage its costs effectively.
In the Final Decision-I, the DPUC concluded that currently
authorized intrastate competition has not adversely affected
either service availability or cost, and that a broadened
scope of intrastate competitive participation was prudent and
warranted. Accordingly, the DPUC found that 10XXX calling and
resale competition were in the public interest and should be
allowed beginning July 7, 1993 in accordance with recently
enacted State legislation. Using 10XXX calling, customers can
use any certified carrier for interexchange calling within
Connecticut by dialing 1, 0, and XXX (a three-digit carrier
code). Terms and conditions associated with the provision of
specialized/ancillary services, including monitoring,
reporting and compensation, would no longer apply.
Since the issuance of Final Decision-I, several interexchange
carriers have filed applications with and received approval
from the DPUC to offer 10XXX intrastate long-distance service.
In addition, a number of resellers have filed for initial
certificates of public convenience and necessity. The
Telephone Company anticipates additional applications will be
filed. The introduction of competition to intrastate long-
distance service and the Telephone Company's reduction in
intrastate toll rates will further erode the Telephone
Company's intrastate toll revenues. Pursuant to Final
Decision-I, the Telephone Company filed on October 1, 1993 its
proposed implementation plan for equal access based on
customer preference for dual primary interexchange carrier
capability (ability to choose one carrier for interstate
calling and either the same or a different carrier for
intrastate long distance calling). The Telephone Company's
position regarding cost recovery remains that interexchange
carriers should pay for the direct costs of implementing equal
access.
Regarding competition for local exchange services, in January
1994, MCI announced plans to construct and operate local
communication networks in large markets throughout the United
States, including parts of Connecticut in which the Telephone
Company operates. These networks would allow MCI to bypass
the Telephone Company's facilities and provide services
directly to customers. Pending DPUC approval, these services
are expected to be available in Connecticut within two to
three years. Also in January 1994, the Telephone Company
announced that it had reached an agreement to lease part of
its existing digital fiber optic ring network in the greater
Hartford metropolitan area to MFS Communications, Inc.
("MFS"). This agreement allows MFS to provide services to
large business customers on an intraexchange basis and
eliminates the need for MFS to construct their own facilities.
Teleport Communications Group, another competitive access provider,
recently announced plans to provide local telephone links for
interstate services to businesses and long distance companies
in the Hartford area.
8
In an order adopted in September 1992, the FCC required
certain LECs, including the Telephone Company, to offer
expanded special access interconnection to all interested
parties, permitting competitors to terminate their own
transmission facilities in LEC central offices. The Telephone
Company filed tariffs which were implemented in June 1993,
subject to investigation, and was granted some additional
pricing flexibility in light of this increased competition.
In August 1993, the FCC adopted rules, which largely mirror
the requirements adopted in September 1992 for special access
interconnection, requiring certain LECs, including the
Telephone Company, to offer expanded interstate switched
access interconnection. The Telephone Company tariffs which
implemented changes associated with switched access
interconnection became effective in February 1994. The
Telephone Company has received applications from competitive
access providers for special access interconnection in
selected central offices of the Telephone Company. The
Telephone Company anticipates additional applications for both
special and switched access interconnection will be filed. A
number of LECs, including the Telephone Company, have appealed
the FCC's orders to offer special and switched access
interconnection. Oral arguments on the appeal of the special
access order were heard in February 1994 with a decision
expected later in 1994. The appeal of the switched access
order has been delayed pending a decision on the special
access appeal.
The Telephone Company, expecting to see continued movement
toward a fully competitive telecommunications marketplace,
both on an interexchange and intraexchange basis, has taken
several steps to effectively position itself. On January 13,
1994, the Telephone Company announced its intention to invest
$4.5 billion over the next 15 years to build a statewide
information superhighway ("I-SNET"). I-SNET will be an
interactive multimedia network capable of delivering voice,
video and a full range of information and interactive
services. The Telephone Company expects I-SNET will reach
approximately 500,000 residences and businesses thru 1997. In
addition, the Telephone Company has reduced its intrastate
toll rates beginning in July 1993 [see Item 1., "Intrastate
Rates"], is committed to reducing its cost structure, remains
focused on providing quality customer service and has
introduced several new services as mentioned below.
New Services
On March 31, 1993, the Telephone Company together with Sprint
announced the introduction of 800 CustomLink Service[SM]. This
service allows the Telephone Company to offer its business
customers an 800 service enabling them to receive calls from
anywhere in the United States as well as international
locations.
In 1993, the Telephone Company launched the next generation of
CentraLink products, CentraLink[SM] 3100. CentraLink 3100 is a
central-office based product that allows flexibility to add
additional phone lines, locations and features to adapt to
customers' changing telecommunications requirements.
On October 21, 1993, the FCC approved the Telephone Company's
application to construct, operate, own, and maintain
facilities to conduct a technology and marketing trial for use
in providing video dial tone service in West Hartford,
Connecticut. With construction of the fiber
optic and coaxial facilities completed, the trial began in early
1994. The trial, offered to approximately 500 customers, provides
hundreds of choices of videos. On December 15, 1993, the
Telephone Company filed a request with the FCC for an
expansion of this trial. The proposal seeks to provide this
service to an additional 20,000 customers in other areas of
Connecticut.
9
On December 22, 1993, the Telephone Company filed with the
DPUC its application to conduct a twenty-four month market
trial for Digital Enhancer, an Integrated Services Digital
Network offering. Digital Enhancer provides customers with
integrated voice and data communications capabilities on a
single telephone access line. Digital Enhancer will be
offered from specially equipped digital central offices and
will require customer-provided terminal equipment to access
and use the service. This service will enable customers to
reduce their telecommunications costs by reducing wiring
requirements, increase productivity through increased data
transmission speed, and improve quality of service through
reduced data error rates.
Directory Publishing
The Telephone Company's directory publishing operation remains
sensitive to the Connecticut economy. The continuing decline
in new business formations and the acceleration of business
failures within the State will further suppress advertising
growth potential in the near term.
The Connecticut advertising marketplace continues to undergo
major structural changes and is becoming increasingly more
fragmented and competitive. Directory publishing faces
potential increased competition from non-traditional services
such as desktop publishing, electronic shopping services and
the expansion of cable television. Furthermore, additional
competition may arise from the RBOCs' ability to now offer
information services. The Telephone Company's directory
publishing operation will continue to strategically widen its
business focus and respond to emerging market opportunities to
position itself effectively against this potential competition
[see discussion of EIS in Item 1., "State Regulation"].
Employee Relations
The Telephone Company employed approximately 9,300 persons at
February 28, 1994, of whom approximately 70% are represented
by The Connecticut Union of Telephone Workers, Inc. ("CUTW"),
an unaffiliated union.
In December 1993, the Telephone Company announced a business
restructuring program designed to reduce costs and will result
in approximately 2,500 employees exiting the business over the
next two to three year period including those that began in
January 1994 [see Note 10].
Item 2. Properties
The principal properties of the Telephone Company do not lend
themselves to a detailed description by character and
location. Of the Telephone Company's investment in telephone
plant, property and equipment at December 31, 1993, central
office equipment represented 40%; connecting lines not on
customers' premises, the majority of which are on or under
public roads highways or streets and the remainder on or
under private property, represented 37%; land and buildings
(occupied principally by central offices) represented 10%;
telephone instruments and related wiring and equipment,
including private branch exchanges, substantially all of which
are on the premises of customers, represented 1%; and other,
principally vehicles and general office equipment, represented
12%.
10
Substantially all of the central office equipment
installations and administrative offices are located in
Connecticut in buildings owned by the Telephone Company
situated on land which it owns in fee. Many garages, service
centers and some administrative offices are located in rented
quarters.
The Telephone Company has a significant investment in the
properties, facilities and equipment necessary to conduct its
business wherein the overwhelming majority of this investment
relates to telephone operations. Management believes that the
Telephone Company's facilities and equipment are suitable and
adequate for the business.
As discussed previously, the Telephone Company plans to invest
$4.5 billion over the next 15 years to build I-SNET. The
Telephone Company plans to support this investment primarily
through increased productivity from the new technology
deployed, ongoing cost containment initiatives and customer
demand for the new services offered. The Telephone Company
does not plan to request a rate increase for this investment.
Item 3. Legal Proceedings
The Telephone Company is involved in various claims and
lawsuits that arise in the normal conduct of their business.
In the opinion of management, upon advice of counsel, these
claims will not have a material adverse effect on the
Telephone Company.
Items 4 through 6.
Information required under Items 4 through 6 is omitted
pursuant to General Instruction J(2).
11
PART II
Item 7. Management's Discussion and Analysis of Results of
Operations
Revenues
Total revenues, comprised of local service revenues,
intrastate (Connecticut) toll revenues, network access
(primarily interstate) revenues, and publishing and other
revenues, were $1,442.4 million in 1993 as compared with
$1,402.6 million in 1992.
Local service revenues, derived from the provision of local
exchange, public telephone and local private line services,
increased $43.7 million, or 8.4%, in 1993. The increase in
1993 was due primarily to new rates for basic local service
implemented in accordance with the 1993 general rate award
[see Item 1., "Intrastate Rates"]. A portion of the new
rates was implemented on July 9, 1993 with the remainder of
the new rates implemented in the form of a temporary surcharge
which amounted to approximately $9 million. The temporary
surcharge was in effect until October 9, 1993, when the
remaining new rates became effective. Revenue from directory
assistance and coin telephone increased primarily as a result
of the July 9th increase in rates. 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 intrastate toll revenue to local
service revenue. Access lines in service grew 1.4% to
1,963,972 at December 31, 1993 from 1,936,577 at December 31,
1992. In addition, growth experienced in subscriptions to
premium services, such as a 9.4% increase in Totalphone[SM],
also contributed to the increase in local service revenues.
In 1993, intrastate toll revenues, which includes revenues
from toll and WATS services, decreased $20.1 million, or 5.6%.
Of the total decrease in 1993, $12.6 million was due primarily
to reductions in intrastate toll rates, including several toll
discount plans, which were implemented in accordance with the
1993 general rate award [see Item 1., "Intrastate Rates"].
Toll message volumes grew approximately 2%, but were
negatively impacted by the expansion of the local-calling
service area in several exchanges as discussed with local
service revenues. In addition, WATS revenues (which includes
"800" services) decreased $7.4 million due primarily to: lower
WATS message volumes; customer migration to lower priced
services offered by the Telephone Company in response to
competition; and the continued impact of competitive providers
on this market.
Network access charges are assessed on interexchange carriers
and end users as a means for the Telephone Company to recover
its costs and earn a return on its investment in facilities
that provide access to the local exchange network. In 1993,
network access revenues increased $14.3 million or 4.4%. The
increase in 1993 was due primarily to an increase in
interstate minutes of use of approximately 5%. Partially
offsetting the impact of the increase in minutes of use was a
decrease in tariff rates implemented on July 2, 1993, in
accordance with the Telephone Company's 1993 annual FCC filing
under price cap regulation [see Item 1., "Interstate Rates"].
Publishing and other revenues (which includes revenues from
(i) directory publishing, (ii) marketing, billing and
collection, and other non-access services rendered on behalf
of interexchange carriers, and (iii) provision for
uncollectible accounts receivable) increased $1.9 million, or
1.0%, in 1993. The provision for uncollectible accounts
receivable for the Telephone Company's residence, business and
12
directory customers decreased $4.6 million in 1993. This
decrease is due primarily to lower directory publishing
uncollectible activity. Revenue from billing and collection
services increased $3.6 million. Partially offsetting the
impact of these items was a decrease in publishing revenues of
$7.1 million, or 3.8%. Publishing revenues, a significant
portion of which reflect directory contracts entered into
during the prior year, have decreased, as anticipated, due
primarily to economic conditions in 1992 having deteriorated
from 1991. Due primarily to the economic conditions in
Connecticut, management expects that revenues from directory
publishing for 1994 as compared with 1993 will continue to
decline.
Costs and Expenses
Total costs and expenses, excluding depreciation, amortization
and interest, were $1,183.3 million in 1993 as compared with
$833.4 million in 1992. Total costs and expenses in 1993
include a $335.0 million before-tax charge relating to
business restructuring as discussed in Note 10 to the
financial statements. Excluding the effect of this item as
well as depreciation, amortization and interest, total costs
and expenses would have been $848.3 million in 1993.
The restructuring charge recorded in 1993 by the Telephone
Company is part of a restructuring plan announced in December
1993. The total restructuring plan includes costs that will
be incurred for work force reductions involving approximately
2,500 employees over the next two to three year period
including those that began in January 1994. The charge also
includes the incremental costs of analyzing and implementing
reengineering solutions; designing and developing new
processes and tools to continue the Telephone Company's
provision of excellent service; and the training of employees
to help them keep pace with the changes the Telephone Company
is implementing to streamline its business and meet the
changing demands of customers.
Operating and maintenance expenses of $790.3 million increased
$13.3 million, or 1.7%, in 1993. These costs are composed
primarily of: (i) wages and salaries; (ii) pension and other
employee-benefit costs; and (iii) other general and
administrative expenses.
In August of 1992, a new three-year labor contract was
ratified by members of the CUTW. CUTW members received an
initial 2.0% wage increase on September 20, 1992, 3.0% in
October 1993 and will receive an additional increase of 5.0%
in October 1994. As part of the new bargaining-unit contract,
approximately 525 bargaining-unit employees accepted an early
retirement incentive offer, Special Pension Option ("SPO"),
with most leaving the Telephone Company by March 19, 1993 and
the remainder by September 17, 1993 [see Note 2]. The
Telephone Company recorded a before-tax pension gain of $6.0
million in 1993 as a result of the SPO.
Wage and salary costs of the Telephone Company increased
approximately $3 million, or 1% in 1993. The increase in wage
and salary costs in 1993 was primarily a result of wage
increases for bargaining-unit employees mentioned previously.
In addition, management employees received an average 3.5%
salary increase effective April 1992. Partially offsetting
these wage increases was a decrease in the Telephone Company's
average work force of 2.4%. The average work force was
reduced primarily through the SPO partially offset by an
increase in employees resulting from the reorganization of an
affiliate which occurred in the first quarter of 1993. Cost
savings are anticipated to be realized beginning in 1994 as
the Telephone Company has begun to implement the first phase
of the work force reduction portion of the restructuring plan.
13
The Telephone Company participates in the Corporation's
pension and other employee benefit plans and is allocated a
portion of these costs based on the relative number of
Telephone Company employees to total employees participating
in these plans. Its portion of the Corporation's pension and
benefit costs was approximately 90% in 1993 and 1992. Pension
and other employee benefit costs of the Corporation increased
$5.0 million, or 3.0%, in 1993, exclusive of costs related to
the voluntary separation offers and amortization of the
postretirement benefit transition obligation discussed below.
Health care benefit costs remained relatively unchanged in
1993 as a result of cost-containment efforts by the
Corporation. As discussed in Note 2, the Corporation has
reserved the right to require, beginning on July 1, 1996, all
employees who retire after a specified date to share premium
costs of health care benefits if these costs exceed certain
limits. Beginning in 1994, employees began to share a larger
portion of health care benefit costs. Management continues to
seek additional means to effectively manage its provision for
health care benefits for both active and retired employees
consistent with its need to offer employees a competitive
benefits package.
Effective January 1, 1993, the Telephone Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions" and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" [see Note 2]. With the adoption of
SFAS No. 106, the Telephone Company elected to defer, in
accordance with an FCC accounting order and final decision
issued by the DPUC on July 7, 1993, recognition of the
accumulated postretirement benefit obligation in excess of the
fair value of plan assets ("transition obligation") and
amortize it over the average remaining service period of 18.4
years. In 1993, amortization of the transition obligation
resulting from the adoption of SFAS No. 106 amounted to $18.5
million and is included in operating and maintenance expenses.
SFAS No. 112 requires employers to accrue benefits provided to
former or inactive employees after employment but before
retirement. For the Telephone Company, these benefits include
workers' compensation and disability benefits. The cumulative
effect of this accounting change reduced 1993 net income
reported in the statement of income by $6.5 million.
Partially offsetting these increases was a decrease in agency
commissions of $7.0 million. Agency commissions decreased due
primarily to an affiliate no longer providing these services
for the Telephone Company since their reorganization in the
first quarter of 1993.
Depreciation and Amortization
In 1993, depreciation and amortization expense increased $36.0
million, or 15.7%. The increase in depreciation and
amortization was attributable primarily to revised
depreciation rate schedules for both intrastate and interstate
plant, as approved by the DPUC and FCC, respectively [see Item
1., State and Federal Regulation]. Depreciation expense
related to intrastate plant increased approximately $20
million while interstate plant increased approximately $11
million. An increase in the average depreciable telephone
plant, property and equipment also contributed to the increase
in depreciation and amortization expense.
14
Interest Expense
Interest expense decreased $4.4 million, or 6.1%, in 1993.
This decrease is due primarily to lower interest rates charged
on short-term debt, interest savings from debt refinancings
and a decrease in average debt outstanding of approximately
$38 million. The debt refinancings completed in December 1993
[see Note 6] are anticipated to save approximately $8 million
in interest expense annually.
Income Taxes
The combined federal and state effective tax rate in 1993 was
a benefit of 58.6%. The unusually high effective tax rate in
1993 reflects the benefit of the operating loss coupled with
the amortization of investment tax credits and the turn around
of temporary deferred income taxes. A reconciliation of this
effective tax rate to the statutory tax rate is disclosed in
Note 3.
Effective January 1, 1993, the Telephone Company adopted SFAS
No. 109, "Accounting for Income Taxes" [see Note 3].
15
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
The Southern New England Telephone Company:
We have audited the accompanying financial statements and the
financial statement schedules of The Southern New England
Telephone Company listed in Item 14(a) of this Form 10-K.
These financial statements and financial statement schedules
are the responsibility of the Telephone Company's management.
Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of The Southern New England Telephone Company as of
December 31, 1993 and 1992, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally accepted
accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when
considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects, the
information required to be included therein.
As discussed in Note 1 to the financial statements, the
Corporation has changed its method of accounting for
postretirement benefits other than pensions, postemployment
benefits and income taxes.
Hartford, Connecticut COOPERS & LYBRAND
January 24, 1994
16
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
STATEMENT OF (LOSS) INCOME AND RETAINED EARNINGS
Dollars in millions,
For the years ended December 31, 1993 1992 1991
Revenues
Local service $ 566.7 $ 523.0 $ 509.1
Intrastate toll 339.8 359.9 356.7
Network access 342.8 328.5 316.6
Publishing and other 193.1 191.2 211.2
Total Revenues 1,442.4 1,402.6 1,393.6
Costs and Expenses
Operating 467.9 469.2 460.0
Maintenance 322.4 307.8 315.1
Provision for business 335.0 - -
restructuring
Depreciation and amortization 265.2 229.2 232.3
Property and other taxes 58.0 56.4 55.8
Provision for employee
separation benefits - - 33.9
Total Costs and Expenses 1,448.5 1,062.6 1,097.1
Operating (Loss) Income (6.1) 340.0 296.5
Other (expense) income, net (.8) 1.5 2.4
Interest expense 68.0 72.4 75.2
(Loss) Income Before Income
Taxes, Extraordinary Charge
and Accounting change (74.9) 269.1 223.7
Income taxes (43.9) 108.6 92.8
(Loss) Income Before
Extraordinary Charge and
Accounting Change (31.0) 160.5 130.9
Extraordinary charge from
early extinguishment of debt,
net of related taxes of $38.0,
$2.0 and $1.7, respectively 44.0 2.7 2.2
Accounting Change - cumulative
effect to January 1, 1993 6.5 - -
Net (Loss) Income $ (81.5) $ 157.8 $ 128.7
Retained Earnings, Beginning
of Period $ 763.7 $ 713.4 $ 671.7
Net (loss) income (81.5) 157.8 128.7
Less: Dividends declared to
parent 110.0 107.5 87.0
Retained Earnings, End of Period $ 572.2 $ 763.7 $ 713.4
The accompanying notes are an integral part of these financial
statements.
17
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
BALANCE SHEET
Dollars in millions, at December 31, 1993 1992
ASSETS
Cash and temporary cash investments $ 214.5 $ 6.4
Accounts receivable, net of
allowance for uncollectibles of
$20.4 and $18.7, respectively 226.3 241.5
Accounts receivable from affiliates 24.7 26.4
Prepaid publishing 40.5 43.5
Materials and supplies 8.0 10.4
Deferred income taxes, prepaid taxes
and other 80.2 26.2
Total Current Assets 594.2 354.4
Land 16.9 16.4
Buildings 375.9 358.7
Central office equipment 1,594.9 1,579.2
Outside plant facilities and
equipment 1,601.8 1,547.4
Furniture and office equipment 354.6 331.0
Station equipment and connections 21.7 19.2
Plant under construction 74.0 70.3
Total telephone plant, at cost 4,039.8 3,922.2
Less: Accumulated depreciation 1,429.2 1,301.3
Net Telephone Plant 2,610.6 2,620.9
Deferred charges and other assets 265.7 148.9
Total Assets $3,470.5 $3,124.2
The accompanying notes are an integral part of these financial
statements.
18
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
BALANCE SHEET (Cont.)
Dollars in millions, at December 31, 1993 1992
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued
expenses $ 180.3 $ 164.2
Short-term borrowings from parent - 72.6
Obligations maturing within one year 240.0 .3
Restructuring charge - current 103.0 -
Accrued compensated absences 33.9 33.5
Accounts payable to affiliates 12.4 24.3
Advance billing and customer
deposits 41.0 41.5
Other current liabilities 70.4 66.5
Total Current Liabilities 681.0 402.9
Long-term obligations 746.1 760.5
Deferred income taxes 424.2 566.4
Restructuring charge - long-term 232.0 -
Unamortized investment tax credits 50.8 61.3
Other liabilities and deferred credits 233.1 38.3
Total Liabilities 2,367.2 1,829.4
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 572.2 763.7
Less: Treasury stock (42,696
shares at each period end) (1.4) (1.4)
Total Stockholder's Equity 1,103.3 1,294.8
Total Liabilities and Stockholder's
Equity $3,470.5 $3,124.2
The accompanying notes are an integral part of these financial
statements.
19
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
STATEMENT OF CASH FLOWS
Dollars in millions,
For the years ended December 31, 1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net (loss) income $ (81.5) $ 157.8 $128.7
Adjustments to reconcile
consolidated net (loss) income to
cash provided by operating activities:
Depreciation and amortization 265.2 229.2 232.3
Provision for business
restructuring, before tax 335.0 - -
Cumulative effect of
accounting change, net of tax 6.5 - -
Provision for employee
separation benefits - - 33.9
Extraordinary charge from
early extinguishment of
debt, before tax 82.0 4.7 3.9
Provision for uncollectible accounts 24.9 30.0 24.3
Allowance for funds used
during construction (1.7) (3.0) (2.4)
Operating cash flows from
Increase in accounts receivable (11.1) (20.8) (30.1)
Decrease (increase) in materials
and supplies 2.4 2.3 (1.4)
(Decrease) increase in
accounts payable (16.7) 1.8 (23.3)
(Decrease) increase in
deferred income taxes (160.4) 21.9 5.5
Decrease in investment tax
credits (10.5) (7.0) (7.0)
Net change in other assets
and liabilities (11.6) 19.6 1.7
Other, net 12.9 9.1 1.0
Net Cash Provided by Operating
Activities 435.4 445.6 367.1
CASH FLOWS FROM INVESTING ACTIVITIES
Cash expended for capital additions (231.6) (269.1) (296.3)
Other, Net (4.0) .8 (2.6)
Net Cash Used by Investing Activities (235.6) (268.3) (298.9)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 420.1 173.8 79.3
Repayments of long-term borrowings (171.5) (258.5) (30.0)
Net proceeds (payments) of short-
term borrowings from affiliate (72.6) 31.9 (63.5)
Cash dividends (105.2) (120.7) (58.0)
Amounts placed in trust for debt
refinancing (62.1) - -
Other, net (.4) (3.3) (.5)
Net Cash Provided (Used) by
Financing Activities 8.3 (176.8) (72.7)
Increase (Decrease) in Cash and
Temporary Cash Investments 208.1 .5 (4.5)
Cash and temporary cash investments,
beginning of year 6.4 5.9 10.4
Cash and temporary cash investments,
end of year $214.5 $ 6.4 $ 5.9
The accompanying notes are an integral part of these
financial statements.
20
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Southern New England Telephone Company ("Telephone
Company") is a wholly owned subsidiary of the Southern New
England Telecommunications Corporation ("Corporation"). The
accounting policies of the Telephone Company are in conformity
with generally accepted accounting principles and conform with
accounting prescribed for telephone operating companies by the
Federal Communications Commission ("FCC") and the Connecticut
Department of Public Utility Control ("DPUC"). Substantially
all of the Telephone Company's operations and customer base
are located in the State of Connecticut.
REVENUE RECOGNITION: Revenues are recognized when earned
regardless of the period in which billed. Revenues for
directory advertising are recognized over the life of the
related directory, normally one year.
ACCOUNTING CHANGES: The Telephone Company implemented
Statements 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 as of January 1, 1993 resulted
in a one-time, non-cash charge which reduced net income
reported in the statement of income by $6.5 million for SFAS
No. 112. 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.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION: Regulatory
authorities require the Telephone Company to provide for a
return on capital invested in certain new telephone plant
while under construction by including an allowance for funds
used during construction ("AFUDC"), which includes both an
interest and equity return component, as an item of income
during the construction period and as an addition to the cost
of the plant constructed. Such income is not realized in cash
currently but will be realized over the service life of the
related plant as the resulting higher depreciation expense is
recovered in the form of increased revenues.
DEPRECIATION AND AMORTIZATION: The provision for depreciation
for interstate telephone plant is based on the FCC approved
equal life group ("ELG") straight-line depreciation method
using a remaining-life formula on a phased-in basis which
began in 1982. Vintages of interstate plant in service prior
to the phase in of ELG are being depreciated using a composite
vintage group method. For intrastate plant, the DPUC approved
ELG for 1993 vintages and subsequent periods. Vintages of
intrastate plant in service prior to 1993 are being
depreciated using a composite vintage group method. Assets
acquired under capital leases are generally amortized over the
life of the lease using the straight-line method.
21
TRANSACTIONS WITH AFFILIATES: The Telephone Company provides
certain services for the Corporation and affiliates. The
Telephone Company records substantially all the revenue from such
services as a reduction of the cost incurred to provide such
services. Amounts billed to affiliates for such services totaled
$35.6 million in 1993, $32.4 million in 1992 and $37.4 million in
1991. In addition, the Telephone Company charges affiliates for
network services at tariffed rates. These amounts are included in
revenue and totaled $9.2 million in 1993, $7.8 million in 1992 and
$7.5 million in 1991. The Telephone Company is charged for
management functions performed by the Corporation. The cost of
these management functions totaled $24.5 million in 1993, $23.3
million in 1992 and $22.5 million in 1991.
INCOME TAXES: The Telephone Company is included in the
consolidated federal income tax return and, where applicable,
combined state income tax returns filed by the Corporation.
Effective January 1, 1993, the Telephone Company changed the
method of computing income taxes from the deferred method
under Accounting Principles Board ("APB") Opinion No. 11 to
the liability method with the adoption of SFAS No. 109. Under
the liability method, deferred tax assets and liabilities are
determined based on all temporary differences between the
financial statement and tax bases of assets and liabilities
using the currently enacted rates. Additionally, under SFAS
No. 109, the Telephone Company may recognize deferred tax
assets if it is more likely than not that the benefit will be
realized.
Depreciation for income tax purposes is generally based upon
accelerated methods and shorter lives causing such
depreciation to be greater during the early years of plant
life than the depreciation charges for such assets reflected
in these financial statements. The accumulated net tax
effects of these and other temporary differences are recorded
as deferred income taxes in the accompanying consolidated
balance sheet.
Investment tax credits realized in prior years are being
amortized as a reduction to income taxes over the life of the
related plant that gave rise to the credits.
CASH: The Telephone Company records payments made by draft as
accounts payable until the banks honoring the drafts have
presented them for payment.
MATERIALS AND SUPPLIES: Materials and supplies, which are
carried at original cost, are primarily for the construction
and maintenance of telephone plant.
TELEPHONE PLANT: Telephone plant is stated at original cost
less accumulated depreciation and includes certain employee-
benefit costs and payroll taxes applicable to self-constructed
assets. The amounts shown do not purport to represent
replacement cost or current market value. The cost of
depreciable telephone plant retired, net of removal costs and
salvage, is charged to accumulated depreciation.
Replacements, renewals and betterments of telephone plant that
materially increase an asset's usefulness or remaining life
are capitalized. Minor replacements and all repairs and
maintenance are charged to expense.
DEFERRED CHARGES: Regulatory authorities require or permit
the exclusion of certain costs of the Telephone Company from
entering into ratemaking when they are incurred. When such
costs will be recovered through future rates, the Telephone
Company records these costs as deferred charges.
22
NOTE 2: EMPLOYEE BENEFITS
SEPARATION OFFERS: As part of the new bargaining-unit
contract negotiated in August 1992, pension benefits for
bargaining-unit employees were enhanced. Also, as part of the
contract, employees electing to retire or terminate their
employment between December 15, 1992 and February 16, 1993
were offered an early retirement incentive offer, Special
Pension Option ("SPO"). Most employees electing to retire or
terminate left the Telephone Company by March 19, 1993, with
the remainder having left by September 17, 1993.
Approximately 525 employees accepted the early retirement
offer. The Telephone Company recorded a before-tax $6.0
million pension gain in 1993 as a result of the SPO.
In May 1991, the Corporation announced the 1991 Voluntary
Separation Option Plan ("VSOP") for substantially all
bargaining-unit employees. Of the total number of Telephone
Company bargaining-unit employees, approximately 7% accepted
the VSOP and left the Telephone Company by September 1991. In
July 1991, the Corporation announced a separation offer, the
Voluntary Management Offer ("VMO"), for substantially all
management employees with at least one year of service. Of
the total number of Telephone Company management employees,
approximately 15% accepted the VMO and left the Corporation by
December 31, 1991. As a result of these offers, the Telephone
Company recorded a before-tax charge of $33.9 million in 1991
consisting of $17.4 million in severance costs and $16.5
million in pension costs. On an after-tax basis, the charge
reduced 1991 net income by $19.3 million.
PENSION PLANS: The Telephone Company participates in two non-
contributory, defined benefit pension plans of the
Corporation: one for management employees and one for
bargaining-unit employees. Benefits for management employees
are based on an adjusted career average pay plan. Benefits
for bargaining-unit employees are based on years of service
and pay during 1987 to 1991 as well as a cash balance
component.
Funding of the plans is achieved through irrevocable
contributions made to a trust fund. Plan assets consist
primarily of listed stocks, corporate and governmental debt,
and real estate. The Corporation's policy is to fund pension
cost for these plans in conformity with the Employee
Retirement Income Security Act of 1974 using the aggregate
cost method. For purposes of determining contributions, the
assumed investment earnings rate on plan assets was 8.5% in
1993 and declines to 6.0% by 1998.
The Telephone Company's portion of the Corporation's pension
(income) cost computed using the projected unit credit
actuarial method was approximately $(7.7) million, $(2.9)
million and $16.6 million for 1993, 1992 and 1991,
respectively. The increase in pension income for 1993 is due
primarily to the net effect of a settlement gain and charges
for special termination benefits associated with the SPO that
resulted in a gain of $6.0 million in 1993. Pension expense
decreased in 1992 as compared with 1991 due primarily to the
absence of the charge for special benefits relating to a
management retirement offer in 1991 and an increase in the
discount rate from 1990 to 1991.
When it is economically feasible to do so, the Corporation
amends periodically the benefit formulas under its pension
plans. Accordingly, pension cost has been determined in such
a manner as to anticipate that modifications to the pension
plans would continue in the future.
23
POSTRETIREMENT HEALTH CARE: The Telephone Company
participates in the health care benefit plans for retired
employees provided by the Corporation. Substantially all of
the Telephone Company's employees may become eligible for
these benefits if they retire with a service pension. In
addition, an employee's spouse and eligible dependents may
become eligible for health care benefits. Effective July 1,
1996, all bargaining-unit employees who retire after December
31, 1989 and all management employees who retire after
December 31, 1991 may have to share with the Corporation the
premium costs of postretirement health care benefits if these
costs exceed certain limits.
Prior to January 1, 1993, these benefits were recognized as an
expense only when paid (referred to as the "pay-as-you-go"
method). In 1991, in accordance with a DPUC decision in a
rate proceeding, the Telephone Company began to fund the
postretirement health care benefits. These costs have been
contributed to Voluntary Employees' Beneficiary Association
("VEBA") trusts. The Corporation's funding policy with regard
to health care costs has been to contribute an amount equal to
the service and interest cost of active employees, subject to
tax deductible limits, in order to contain the growth of the
unfunded postretirement health care liability. Based on the
DPUC's July 7, 1993 general rate award decision, the
Corporation contributed additional amounts to the VEBAs in the
fourth quarter of 1993. The additional amounts began to fund
the accumulated liability. In 1992 and 1991, the pay-as-you-
go expense combined with the VEBA contributions amounted to
$32.4 million and $25.2 million, respectively.
Effective January 1, 1993, the Telephone Company adopted SFAS
No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires that employers
accrue, during the years an employee renders service, the
expected cost, based on actuarial valuations, of health care
and other non-pension benefits provided to retirees and their
eligible dependents. With the adoption of SFAS No. 106, the
Telephone Company elected to defer, in accordance with an FCC
accounting order and final decision issued by the DPUC on July
7, 1993, recognition of the accumulated postretirement benefit
obligation in excess of the fair value of plan assets
("transition obligation") and amortize it over the average
remaining service period of 18.4 years. The Telephone
Company's portion of the postretirement benefit cost for 1993,
including the amortization of the transition obligation, was
approximately $45 million.
POSTEMPLOYMENT BENEFITS: Effective January 1, 1993, the
Telephone Company adopted SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." This statement requires
employers to accrue benefits provided to former or inactive
employees after employment but before retirement. These
benefits include workers' compensation, disability benefits
and health care continuation coverage for a limited period of
time after employment. The standard generally requires that
these benefits be accrued as earned when the right to the
benefits accumulate or vest. The cumulative effect of this
accounting change reduced 1993 net income reported in the
statement of income by $6.5 million. Health care continuation
costs, which do not vest, continue to be paid from company
funds and are expensed when paid.
24
NOTE 3: INCOME TAXES
Effective January 1, 1993, the Telephone Company adopted SFAS
No. 109, "Accounting for Income Taxes." As required under
SFAS No. 109, and in accordance with SFAS No. 71, "Accounting
for the Effects of Certain Types of Regulation," the Telephone
Company has a regulatory asset of $71.0 million (recorded in
Deferred charges and other assets) related to the cumulative
amount of income taxes on temporary differences previously
flowed through to ratepayers. These amounts relate
principally to capitalization of certain general overhead,
taxes and payroll-related construction costs for financial
statement purposes. In addition, the Telephone Company has a
regulatory liability of $98.9 million (recorded in Other
liabilities and deferred credits) relating to future tax
benefits to be flowed back to ratepayers associated with
unamortized investment tax credits and decreases in both
federal and state statutory tax rates. Both the regulatory
asset and liability are recognized over the regulatory lives
of the related taxable bases concurrent with the realization
in rates, except for the liability related to intrastate
excess state tax rates, which in accordance with the DPUC
final decision issued on July 7, 1993, will be returned to
ratepayers over three years. This method is a more
accelerated turnaround than the normal recognition period.
Income tax (benefit) expense includes the following
components:
Dollars in Millions
For the Years Ended December 31, 1993 1992 1991
FEDERAL
Current $ 77.2 $ 65.2 $ 63.4
Deferred (103.9) 12.9 1.5
Investment tax credits, net (10.5) (7.0) (7.1)
Total Federal (37.2) 71.1 57.8
STATE
Current 28.6 29.3 29.7
Deferred (35.3) 8.2 5.3
Total State (6.7) 37.5 35.0
Total Income Taxes $(43.9) $108.6 $ 92.8
Deferred income tax (benefit) expense results primarily from
temporary differences involving accelerated tax depreciation
and shorter tax lives for income tax purposes offset by the
1993 accrual for the restructuring charge, which was
deductible for financial statements purposes but not for tax.
In August 1993, the federal corporate income tax rate
increased from 34.0% to 35.0%, retroactive to January 1, 1993.
In addition, the enacted state corporate income tax rate will
be gradually reduced from the current 11.5% to 10.0% by
January 1, 1998. The net impact of these changes in the
enacted tax rates was not material to total income taxes or to
net deferred tax liabilities.
25
The effective federal income tax rates varied from the
statutory federal rate for the reasons set forth below:
For the Years Ended December 31, 1993 1992 1991
Statutory federal rate (35.0)% 34.0% 34.0%
a.State income taxes, net of (5.8) 9.2 10.4
federal income tax effect.
b.Temporary differences
associated with depreciation on
certain general overhead, taxes 8.4 1.6 2.1
and payroll-related construction
costs and AFUDC.
c.Amounts currently included in
taxable income for which
deferred taxes were provided in (10.7) (2.1) (2.7)
prior years at tax rates greater
than the statutory tax rate.
d.Amortization of investment tax
credits over the life of the
plant that gave rise to the
credits. Such amortization
reduced income tax expense for (14.0) (2.6) (3.1)
the years 1991 through 1993 by
the amounts shown in Note 11.
e.Prior years' tax adjustments. (1.1) .3 .9
f.Other differences, net. (.4) - (.1)
Effective Rate (58.6)% 40.4% 41.5%
Deferred income tax liabilities (assets) are composed of the
following at December 31, 1993
(in millions):
Tax Effect of Temporary Differences for:
Depreciation $ 488.3
Items previously flowed through to ratepayers 71.0
Deferred gross earnings tax 19.1
Restructuring charge (98.6)
Unamortized investment tax credits (37.0)
Other (18.6)
Net Deferred Income Tax Liabilities - Long-Term $ 424.2
NOTE 4: DEFERRED CHARGES
In accordance with the regulatory accounting practices
described in Note 1, deferred charges include the following
costs: (i) the Telephone Company's 1990 final gross earnings
tax ("GET") payment, which is being amortized over ten years
through 1999; (ii) accrued but unexpensed compensated
absences at December 31, 1987, which are being amortized over
ten years through December 31, 1997; (iii) debt refinancing
costs occurring prior to 1988, which were being amortized over
the life of the related new debt until 1993, when they were
written off as part of the extraordinary charge related to the
early extinguishment of debt [see Note 6], and (iv) expenses
incurred prior to April 1, 1988 in connection with modifying
the Telephone Company's network to provide customers with
equal access to interexchange carriers of their choice, which
were amortized over eight years through December 31, 1993.
Amortization of these costs is on a straight-line basis.
26
Amounts related to these costs are as follows:
In Millions, at December 31, 1993 1992
GET $46.5 $54.2
Compensated Absences $13.3 $16.6
Debt Refinancings - $33.6
Equal Access - $ 2.9
NOTE 5: SHORT-TERM DEBT
The Telephone Company has obtained short-term financing
through intercompany borrowings from the Corporation, which
obtains, when necessary, short-term funds for its subsidiaries
as a group. There were no amounts payable to the Corporation
for temporary cash needs as of December 31, 1993. As of
December 31, 1992 and 1991, the amounts payable to the
Corporation totaled $72.6 million and $40.8 million,
respectively.
Additional information regarding notes payable outstanding
during the year is as follows:
Dollars in Millions,
For the Years Ended December 31, 1993 1992 1991
Average amount outstanding during
the year (based on daily amounts) $ 46.8 $ 94.6 $107.6
Weighted average interest rate
during the year (based on daily 3.15% 3.81% 6.02%
amounts)
Maximum amount outstanding at any
month's end during the year $107.0 $129.3 $139.2
Weighted average interest rate at - 3.47% 4.76%
year end
27
NOTE 6: LONG-TERM OBLIGATIONS
The components of long-term obligations at December 31 are as
follows:
Dollars in Millions Interest 1993 1992
Rates
Debentures 4.38% to 5.75% $ 45.0 $ 90.0
8.63% 200.0 200.0
Total Debentures 245.0 290.0
Unsecured notes 6.13% to 7.25% 625.0 180.0
8.70% to 9.63% 120.0 300.0
Total Unsecured Notes 745.0 480.0
Total Long-Term Debt 990.0 770.0
Unamortized discount and (4.0) (9.7)
premium, net
Capital lease obligations .1 .5
Current portion of long-term (240.0 (.3)
obligations
Total Long-Term Obligations $746.1 $760.5
Maturities of long-term debt outstanding at December 31, 1993
by type of obligation are as follows (in millions):
Unsecured
Maturities Debentures Notes Total
1994 $200.0 $ 40.0 $240.0
1995 - - -
1996 - - -
1997 - - -
1998 - - -
1999-2008 45.0 380.0 425.0
2009-2018 - - -
Thereafter - 325.0 325.0
Total $245.0 $745.0 $990.0
On September 15, 1993, the Telephone Company called $45.0
million of 5.750% debentures due November 1, 1996. The
debentures were redeemed on November 1, 1993. The unamortized
costs associated with this redemption did not result in a
significant charge to the 1993 consolidated statement of
income.
28
On December 8, 1993, the Telephone Company filed a shelf
registration statement with the Securities and Exchange
Commission ("SEC") to sell up to $540.0 million in medium-term
notes. On December 14, 1993, the Telephone Company announced
that it would repurchase any and all of its $120.0 million of
9.625% and $100.0 million of 9.600% medium-term notes. The
Telephone Company repurchased $166.5 million of these notes
and on December 30, 1993, executed an "in-substance
defeasance" for the remainder of the medium-term notes not
repurchased. Sufficient U.S. Government securities were
deposited in an irrevocable trust to cover the outstanding
principal, interest and call premium payable February 15,
1995. Pursuant to this registration statement, the Telephone
Company sold, on December 21, 1993, with DPUC approval: (i)
$200.0 million of 6.125% notes due December 15, 2003 at 99.160
to yield 6.239%; and (ii) $245.0 million of 7.250% notes due
December 15, 2033 at 99.300 to yield 7.304%. The proceeds of
the $245.0 million issue were used to repurchase the debt
issues discussed previously and purchase securities placed in
the irrevocable trust established for the "in-substance
defeasance." On January 14, 1994, the proceeds of the $200.0
million issue were used to redeem $200.0 million of 8.625%
debentures called irrevocably on December 14, 1993. The call
premium, unamortized costs, defeasance premiums and tender
costs associated with these redemptions have been classified
as an extraordinary charge in the 1993 statement of income.
The extraordinary charge totaled $44.0 million, net of
applicable tax benefits of $38.0 million.
On April 2, 1992, the Telephone Company filed a shelf
registration statement with the SEC to sell up to $180.0
million in medium-term notes with maturities of up to 25
years. Pursuant to this registration statement, the Telephone
Company sold, on August 5, 1992, with DPUC approval, $110.0
million of 7.125% notes due August 1, 2007 at 99.317 to yield
7.200%, and $70.0 million of 7.000% notes due August 1, 2004
at face value. On September 8, 1992, the proceeds from the
sale of these medium-term notes were used to redeem $65.0
million of 7.750% debentures due June 1, 2004 and $110.0
million of 8.125% debentures due May 1, 2008, both of which
were called on August 6, 1992. The call premium, unamortized
debt issuance costs, and unamortized premium associated with
the redeemed debentures have been classified as an
extraordinary charge in the 1992 income statement. This charge
totaled $2.7 million, net of applicable tax benefits of $2.0
million.
Pursuant to a shelf registration filed in December 1989 with
the SEC to register $300.0 million of debt securities, the
Telephone Company sold, with DPUC approval, $80.0 million, the
remainder of the shelf registration, of 8.700% unsecured notes
in December 1991, which matures on August 15, 2031. The
proceeds of the $80.0 million issue were used to redeem $80.0
million of 9.625% debentures called irrevocably on December
20, 1991. Related to this redemption, the call premium and
unamortized costs associated with the called debentures have
been classified as extraordinary charges in the 1991 statement
of income. The extraordinary charge totaled $2.2 million, net
of applicable tax benefits of $1.7 million.
29
NOTE 7: LEASE OBLIGATIONS
The Telephone Company has entered into both capital and
operating leases for facilities and equipment used in its
operations. Rental expense under operating leases was $30.3
million, $32.9 million and $32.0 for 1993, 1992 and 1991,
respectively. Aggregate future minimum rental commitments
under noncancelable leases at December 31, 1993 were as
follows (in millions):
Operating
Year Leases
1994 $ 17.5
1995 17.4
1996 16.2
1997 15.3
1998 14.8
Thereafter 61.6
Total Minimum Lease Payments $142.8
Future minimum lease payments under capital leases as of
December 31, 1993 were $.1 million through 1998 and $.3
million thereafter, included in the total $.4 million minimum
lease payments is $.3 million, which represents future
interest.
Included in future minimum rental commitments for operating
leases are amounts attributable to leases with affiliates
totaling $55.3 million.
NOTE 8: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," requires companies to disclose the fair value of
all their financial instruments, including both assets and
liabilities. The following methods and assumptions were used
to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that
value:
CASH AND TEMPORARY CASH INVESTMENTS: The carrying amount
approximates fair value because of the short maturity of those
instruments.
SHORT-TERM BORROWINGS FROM PARENT: The carrying amount
approximates fair value because of the short maturity of those
instruments.
OBLIGATIONS MATURING WITHIN ONE YEAR: The carrying amount
approximates fair value because of the short maturity of those
instruments. The fair value of long-term debt called in 1993
and redeemed in 1994 is estimated based on the call price for
those issues.
30
LONG-TERM DEBT: The fair value of the Telephone Company's
long-term debt is estimated based on the quoted market prices
for the same or similar issues or on the current rates offered
to the Telephone Company for debt of the same remaining
maturities.
The estimated fair values of the Telephone Company's financial
instruments are as follows:
1993 1992
Dollars in Millions, Carry Fair Carrying Fair
At December 31, Amount Value Amount Value
Cash and temporary cash $214.5 $214.5 $ 6.4 $ 6.4
investments
Short-term borrowings from Parent - - (72.6) (72.6)
Obligations maturing within one (240.0) (253.9) (.3) (.3)
year
Long-term debt (746.1) (760.0) (760.5) (791.6)
NOTE 9: STOCKHOLDER'S EQUITY
COMMON, PREFERRED AND PREFERENCE SHARES
The Telephone Company has authorization for 70,000,000 shares
of common stock at a par value of $12.50 per share. The
Telephone Company also has authorization for 500,000 shares of
preferred stock at a par value of $50.00 per share and
50,000,000 shares of preference stock at a par value of $1.00
per share. No shares of preferred or preference stock have
been issued pursuant to these authorizations.
TREASURY STOCK
In February 1984, AT&T returned 42,000 shares of common stock
to the Telephone Company without payment. The 42,000 shares,
valued at the market price on the date received, represent the
original shares, adjusted for stock splits, that were issued
in 1884 for licenses provided to the Telephone Company. In
addition, the Telephone Company purchased at market price 696
shares of common stock in June 1986 from stockholders
dissenting to a reorganization that took effect on July 1,
1986 whereby the Telephone Company became a wholly owned
subsidiary of the Corporation.
NOTE 10: RESTRUCTURING CHARGE
In December 1993, the Telephone Company announced a business
restructuring program designed to reduce costs. The program
includes costs that will be incurred for work force reductions
involving approximately 2,500 employees over the next two to
three year period including those that began in January 1994.
The charge also includes the incremental costs of analyzing
and implementing reengineering solutions; designing and
developing new processes and tools to continue the
Corporation's provision of excellent service; and the training
of employees to help them keep pace with the changes the
Corporation is implementing to streamline its business and
meet the changing demands of customers. The estimated costs
of this restructuring program is $335.0 million and is shown
as a separate line item in the statement of income and
resulted in an after-tax charge of $192.7 million to
operations.
31
Management anticipates that expenditures, net of tax, for the
restructuring charge will approximate $55 million in 1994, $75
million in 1995 and $55 million in 1996. These expenditures
are expected to be funded from cash flows from operations.
As a result of this work force reduction coupled with the
election to amortize the transition obligation for
postretirement health care benefits, the Telephone Company
recognized a curtailment loss of $86 million. The curtailment
loss was recorded on the balance sheet as a regulatory asset
and is currently being recovered in rates.
NOTE 11: SUPPLEMENTAL FINANCIAL INFORMATION
Dollars in Millions,
For the Years Ended December 31, 1993 1992 1991
Amortization of investment tax $ 10.5 $ 7.0 $ 6.7
credits
Property and other taxes
Property $ 45.0 $ 43.2 $ 45.8
Other 13.0 13.2 10.0
Total Property and Other Taxes $ 58.0 $ 56.4 $ 55.8
Advertising expense $ 11.2 $ 9.7 $ 11.0
Interest expense
Long-term obligations $ 64.4 $ 66.9 $ 66.3
Short-term obligations 1.5 3.6 6.5
Other 2.1 1.9 2.4
Total Interest Expense $ 68.0 $ 72.4 $ 75.2
Interest paid $ 74.0 $ 68.2 $ 75.5
Income taxes paid $ 98.8 $ 87.0 $ 94.5
Dollars in Millions 1993 1992
Other current liabilities
Dividends payable $ 22.0 $ 17.7
Interest accrued 17.8 23.8
Postemployment benefits accrued 11.0 -
Taxes accrued 1.6 7.6
Other current liabilities 18.0 17.4
Total Other Current Liabilities $ 70.4 $ 66.5
During 1993, 1992 and 1991, revenues earned from providing
services to AT&T accounted for approximately 12.3%, 12.1% and
12.9%, respectively, of operating revenues. No other customer
accounted for more than 10% of operating revenues.
32
NOTE 12: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Dollars in Millions 1stQTR 2ndQTR 3rdQTR 4thQTR Total
1993
Revenues $353.4 $360.4 $363.2 $365.4 $1,442.4
Operating (Loss) 80.5 86.5 90.4 (263.5)(1) (6.1)
Income
(Loss) Income Before
Extraordinary Charge
and Accounting Change 38.7 44.1 45.2 (159.0) (31.0)
Extraordinary Charge - - - (44.0) (44.0)
Cumulative Effect
of Accounting
Change (6.5) - - - (6.5)
Net (Loss) Income $ 32.2 $ 44.1 $45.2 $(203.0) (81.5)
1992
Revenues $348.1 $352.0 $350.4 $352.1 $1,402.6
Operating Income 86.2 82.7 82.1 89.0 340.0
Income Before
Extraordinary
Charge 40.2 40.3 37.9 42.1 160.5
Extraordinary
Charge - - (2.7) - (2.7)
Net (Loss) Income $ 40.2 $ 40.3 $35.2 $42.1 $157.8
(1) Includes a before-tax charge of $335.0 million for
restructuring which reduced net income $192.7 million.
33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
No changes in or disagreements with accountants on any matter
of accounting or financial disclosure occurred during the
period covered by this report.
Items 10 through 13.
Information required under Items 10 through 13 is omitted
pursuant to General Instruction J(2).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Documents filed as part of the report: Page
(1) Report of Independent Accountants 16
Financial Statements Covered by Report of
Independent Accountants
Statement of (Loss) Income and Retained
Earnings - for the years ended 17
December 31, 1993, 1992 and 1991
Balance Sheet - as of December 31, 1993 18
and 1992
Statement of Cash Flows - for the years
ended December 31, 1993, 1992 and 1991 20
Notes to Financial Statements 21
(2) Financial Statement Schedules Covered by
Report of Independent Accountants for the
three years ended December 31, 1993:
V - Telephone Plant 39
VI - Accumulated Depreciation 43
VIII - Valuation and Qualifying Accounts 43
Schedules other than those listed above have been
omitted because the required information is
contained in the financial statements and notes
thereto, or because such schedules are not
applicable.
34
(3) Exhibits:
Exhibits identified in parentheses below, on file with the
SEC, are incorporated herein by reference as exhibits hereto.
Exhibit
Number
3a Amended and Restated Certificate of Incorporation
of the registrant as filed June 14, 1990 (Exhibit
3a to 1990 Form 10-K dated 3/25/91, File No. 1-
6654).
3b By-Laws of the registrant as amended and restated
through May 11, 1988 (Exhibit 3b to 1988 Form 10-K
dated 3/23/89, File No. 1-6654).
4 No instrument which defines the rights of holders
of long-term debt of the registrant is filed
herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation,
the registrant hereby agrees to furnish a copy of
any such instrument to the SEC upon request.
10(iii)(A)1 SNET Short Term Incentive Plan as amended March 1,
1993 (Exhibit 10(iii)(A)1 to 1992 Form 10-K dated
3/23/93, File No. 1-6654).
10(iii)(A)2 SNET Long Term Incentive Plan as amended March 1,
1993 (Exhibit 10(iii)(A)2 to 1992 Form 10-K dated
3/23/93, File No. 1-6654).
10(iii)(A)3 SNET Financial Counseling Program as amended
January 1987 (Exhibit 10-D to Form SE dated
3/23/87-1, File No. 1-9157).
10(iii)(A)4 Group Life Insurance Plan and Accidental Death and
Dismemberment Benefits Plan for Outside Directors
of SNET as amended July 1, 1986 (Exhibit 10-E to
Form SE dated 3/23/87-1, File No. 1-9157).
10(iii)(A)5 SNET Executive Non-Qualified Pension Plan and
Excess Benefit Plan as amended November 1, 1991
(Exhibit 10-A to Form SE dated 3/20/92, File No.
1-9157). Amendments dated December 8, 1993 (Exhibit
10(iii)(A)5 to 1993 Form 10-K dated 3/23/94, File
No. 1-9157).
35
(3) Exhibits (continued):
Exhibit
Number
10(iii)(A)6 SNET Management Pension Plan as amended November
1, 1987 (Exhibit 10-C to Form SE dated 3/21/88-1,
File No. 1-9157). Amendments dated September 1,
1988 and January 1, 1989 (Exhibit 10-C to Form SE
dated 3/21/89, File No. 1-9157). Amendments dated
January 1, 1989 through August 6, 1989 (Exhibit
10-B to Form SE dated 3/20/90, File No. 1-9157).
Amendments dated June 5, 1991 through September
25, 1991 (Exhibit 10-B to Form SE dated 3/20/92,
File No. 1-9157). Amendments dated January 1,
1993 (Exhibit 10(iii)(A)6 to 1992 Form 10-K dated
3/23/93, File No. 1-6654). Amendments dated
September 8, 1993 through December 8, 1993 (Exhibit
10(iii)(A)6 to 1993 Form 10-K dated 3/23/94, File
No. 1-9157).
10(iii)(A)7 SNET Incentive Award Deferral Plan as amended
March 1, 1993. (Exhibit 10(iii)(A)7 to 1992 Form
10-K dated 3/23/93, File No. 1-6654).
10(iii)(A)8 SNET Mid-Career Pension Plan as amended November
1, 1991 (Exhibit 10-D to Form SE dated 3/20/92,
File No. 1-9157). Amendments dated December 8, 1993
(Exhibit 10(iii)(A)8 to 1993 Form 10-K dated 3/23/94,
File No. 1-9157).
10(iii)(A)9 SNET Deferred Compensation Plan for Non-Employee
Directors as amended January 1, 1993. (Exhibit
10(iii)(A)9 to 1992 Form 10-K dated 3/23/93, File
No. 1-6654).
10(iii)(A)10 Change-in-Control Agreements (Exhibit 10-F to Form
SE dated 3/15/91, File No. 1-9157).
10(iii)(A)11 SNET 1986 Stock Option Plan as amended March 1,
1993. (Exhibit 10(iii)(A)11 to 1992 Form 10-K
dated 3/23/93, File No. 1-6654).
10(iii)(A)12 SNET Retirement and Disability Plan for Non-
Employee Directors as amended April 14, 1993
(Exhibit 10(iii)(A)12 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
10(iii)(A)13 SNET Non-Employee Director Stock Plan effective
January 1, 1994 (Exhibit 4.4 to Registration
Statement No. 33-51055, File No. 1-9157)
10(iii)(A)14 Description of SNET Executive Retirement Savings
Plan (Exhibit 10(iii)(A)14 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
36
(3) Exhibits (continued):
Exhibit
Number
24a Powers of Attorney.
24b Board of Directors' Resolution.
99a Annual Report on Form 11-K for the plan year ended
December 31, 1993 for the SNET Management Retirement
Savings Plan will be filed as an amendment prior to
June 30, 1994.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1993 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an amendment
prior to June 30, 1994.
(b) Reports on Form 8-K:
On November 3, 1993, the Telephone Company filed a report on
Form 8-K, dated November 3, 1993, announcing that effective
December 1, 1993, Donald R. Shassian, will assume the position
of Senior Vice President and Chief Financial Officer of both
the Corporation and the Telephone Company.
On December 8, 1993, the Telephone Company filed a report on
Form 8-K, dated December 8, 1993, announcing charges against
fourth quarter earnings totaling $4.08 per common share.
These charges include a restructuring charge for reengineering
and work force reductions, a refinancing charge and a charge
for discontinued operations.
On January 25, 1994, the Telephone Company filed a report on
Form 8-K, dated January 24, 1994, announcing the Corporation's
1993 financial results.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
By /s/ J. A. Sadek
J. A. Sadek, Vice President and Comptroller, March 23, 1994
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
D. J. Miglio*
Chairman, President, Chief Executive Officer
and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICERS:
D. R. Shassian*
Senior Vice President and
Chief Financial Officer
J. A. Sadek By: /s/ J. A. Sadek
Vice President and Comptroller (J. A. Sadek, as attorney-
in-fact and on his own behalf)
DIRECTORS:
F. G. Adams*
William F. Andrews*
Richard H. Ayers*
Zoe Baird*
Barry M. Bloom* March 23, 1994
F. J. Connor*
William R. Fenoglio*
Claire L. Gaudiani*
J. R. Greenfield*
N. L. Greenman*
Worth Loomis*
Burton G. Malkiel*
Frank R. O'Keefe, Jr.*
* by power of attorney
38
Schedule V - Sheet 1
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
SCHEDULE V--TELEPHONE PLANT
(Millions of Dollars)
COL. A COL. B COL. C COL. D COL. E COL. F
Balance
at Additions Other Balance
Year 1993 beginning at cost Retirements changes at end
Classification of period -Note(a) -Note(b) - Note(c) of period
Land $ 16.4 $ .5 $ - $ - $ 16.9
Buildings 358.7 26.8 9.2 (.4) 375.9
Central Office
Equipment 1,579.2 97.2 81.2 (.3) 1,594.9
Station Apparatus 19.2 3.2 .6 (.1) 21.7
Pole Lines 135.6 5.5 2.4 .2 138.9
Cable 1,083.6 50.8 13.6 .1 1,120.9
Underground
Conduit 212.3 9.5 .7 (.9) 220.2
Public Telephone
Equipment 16.9 4.3 (1.7) - 22.9
Other Communications
Equipment 65.8 7.2 1.9 .1 71.2
Furniture and
Office Equipment 265.2 36.6 17.5 (.9) 283.4
Vehicles and Other
Work Equipment 99.0 7.6 7.5 (.2) 98.9
Total Telephone
Plant in Service
Note(d) 3,851.9 249.2 132.9 (2.4) 3,965.8
Under Construction 70.3 1.9 - 1.8 74.0
TOTAL TELEPHONE
PLANT $3,922.2 $251.1 $132.9 $ (.6) $4,039.8
The notes on Sheet 4 are an integral part of this Schedule.
39
Schedule V - Sheet 2
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
SCHEDULE V--TELEPHONE PLANT
(Millions of Dollars)
COL. A COL. B COL. C COL. D COL. E COL. F
Balance
at Additions Other Balance
Year 1992 beginning at cost Retirements changes at end
Classification of period -Note(a) -Note(b) - Note(c) of period
Land $ 15.5 $ .8 $ - $ .1 $ 16.4
Buildings 343.9 20.2 4.8 (.6) 358.7
Central Office
Equipment 1,532.0 129.4 84.0 1.8 1,579.2
Station Apparatus 14.7 6.0 1.5 - 19.2
Pole Lines 131.3 5.9 1.6 - 135.6
Cable 1,029.8 69.2 15.3 (.1) 1,083.6
Underground
Conduit 197.4 15.1 .2 - 212.3
Public Telephone
Equipment 19.3 .5 2.9 - 16.9
Other Communications
Equipment 63.6 5.9 3.6 (.1) 65.8
Furniture and
Office Equipment 248.9 28.0 10.7 (1.0) 265.2
Vehicles and Other
Work Equipment 91.5 13.2 5.5 (.2) 99.0
Total Telephone
Plant in Service
Note(d) 3,687.9 294.2 130.1 (.1) 3,851.9
Under Construction 82.1 (10.9) - (.9) 70.3
TOTAL TELEPHONE
PLANT $3,770.0 $283.3 $130.1 $(1.0) $3,922.2
The notes on Sheet 4 are an integral part of this Schedule.
40
Schedule V - Sheet 3
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
SCHEDULE V--TELEPHONE PLANT
(Millions of Dollars)
COL. A COL. B COL. C COL. D COL. E COL. F
Balance
at Additions Other Balance
Year 1991 beginning at cost Retirements changes at end
Classification of period -Note(a) -Note(b) - Note(c) of period
Land $ 15.5 $ - $ - $ - $ 15.5
Buildings 322.2 23.0 1.3 - 343.9
Central Office
Equipment 1,496.6 126.4 91.0 - 1,532.0
Station Apparatus 16.0 1.3 2.6 - 14.7
Pole Lines 124.6 7.7 1.0 - 131.3
Cable 979.3 65.6 15.1 - 1,029.8
Underground
Conduit 188.1 9.5 .2 - 197.4
Public Telephone
Equipment 18.4 1.0 .1 - 19.3
Other Communications
Equipment 59.5 6.3 2.2 - 63.6
Furniture and
Office Equipment 239.1 33.0 23.2 - 248.9
Vehicles and Other
Work Equipment 82.0 13.8 4.3 - 91.5
Total Telephone
Plant in Service
Note(d) 3,541.3 287.6 141.0 - 3,687.9
Under Construction 76.0 6.1 - - 82.1
TOTAL TELEPHONE
PLANT $3,617.3 $293.7 $141.0 - $3,770.0
The notes on Sheet 4 are an integral part of this Schedule.
41
Schedule V - Sheet 4
Notes to Schedule V
(a) Additions shown include (1) the original cost of reused
material, which is concurrently credited to Material and
Supplies, and (2) an Allowance for Funds Used During
Construction.
(b) Items of telephone plant when retired, sold or
reclassified are deducted from the property accounts at
original cost.
(c) Represents current year transfers between
classifications, and other minor adjustments.
(d) For interstate telephone plant, the FCC has approved the
equal life group ("ELG") depreciation method using a
remaining-life formula on a phased-in basis beginning in
1982. Vintages of interstate plant in service prior to
the phase-in of ELG are being depreciated using a
composite vintage group method. In addition, the FCC
approved the use of straight-line amortization effective
January 1, 1987 to recover an interstate reserve
deficiency over a five-year period ended December 31,
1993. For intrastate plant, the DPUC approved ELG for
1993 vintages and subsequent periods. Vintages of
intrastate plant in service prior to 1993 are being
depreciated using a composite vintage group method. For
the years 1993, 1992 and 1991, depreciation expense on
telephone plant expressed as a percentage of average
depreciable plant was 6.8%, 6.1% and 6.4%, respectively.
Assets acquired under capital leases are generally
amortized over the life of the lease using the straight-
line method.
42
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
SCHEDULE VI--ACCUMULATED DEPRECIATION
(Millions of Dollars)
COL. A COL. B COL. C COL. D COL. E COL. F
Balance
at Additions Balance
beginning charged at end
of to Retirements Other of
Description period expense - Note (a) Changes period
Year 1993 $1,301.3 $263.8 $135.9 $ - $1,429.2
Year 1992 1,204.1 227.7 130.5 - 1,301.3
Year 1991 1,117.6 230.9 144.4 - 1,204.1
(a) Includes net salvage.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
(Millions of Dollars)
COL. A COL. B COL. C COL. D COL. E COL. F
Additions
Balance
at Additions Balance
beginning charged Charged to at end
of to other accounts Deductions of
Description period expense - Note (a) - Note (b) period
Allowance for Uncollectible
Accounts Receivable:
Year 1993 $18.7 $ 25.3 $2.3 $25.9 $ 20.4
Year 1992 15.0 30.6 3.6 30.5 18.7
Year 1991 9.5 30.1 3.4 28.0 15.0
Restructuring Charge:
Year 1993 $ - $335.0 $ - $ - $335.0
(a) Includes amounts previously written off that were
credited directly to this account when
recovered and miscellaneous debits and credits.
(b) Includes amounts written off as uncollectible.
43
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the
SEC, are incorporated herein by reference as exhibits hereto.
Exhibit
Number
3a Amended and Restated Certificate of Incorporation
of the registrant as filed June 14, 1990 (Exhibit
3a to 1990 Form 10-K dated 3/25/91, File No. 1-
6654).
3b By-Laws of the registrant as amended and restated
through May 11, 1988 (Exhibit 3b to 1988 Form 10-K
dated 3/23/89, File No. 1-6654).
4 No instrument which defines the rights of holders
of long-term debt of the registrant is filed
herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation,
the registrant hereby agrees to furnish a copy of
any such instrument to the SEC upon request.
10(iii)(A)1 SNET Short Term Incentive Plan as amended March 1,
1993 (Exhibit 10(iii)(A)1 to 1992 Form 10-K dated
3/23/93, File No. 1-6654).
10(iii)(A)2 SNET Long Term Incentive Plan as amended March 1,
1993 (Exhibit 10(iii)(A)2 to 1992 Form 10-K dated
3/23/93, File No. 1-6654).
10(iii)(A)3 SNET Financial Counseling Program as amended
January 1987 (Exhibit 10-D to Form SE dated
3/23/87-1, File No. 1-9157).
10(iii)(A)4 Group Life Insurance Plan and Accidental Death and
Dismemberment Benefits Plan for Outside Directors
of SNET as amended July 1, 1986 (Exhibit 10-E to
Form SE dated 3/23/87-1, File No. 1-9157).
10(iii)(A)5 SNET Executive Non-Qualified Pension Plan and
Excess Benefit Plan as amended November 1, 1991
(Exhibit 10-A to Form SE dated 3/20/92, File No.
1-9157). Amendments dated December 8, 1993 (Exhibit
10(iii)(A)5 to 1993 Form 10-K dated 3/23/94, File
No. 1-9157).
10(iii)(A)6 SNET Management Pension Plan as amended November
1, 1987 (Exhibit 10-C to Form SE dated 3/21/88-1,
File No. 1-9157). Amendments dated September 1,
1988 and January 1, 1989 (Exhibit 10-C to Form SE
dated 3/21/89, File No. 1-9157). Amendments dated
January 1, 1989 through August 6, 1989 (Exhibit
10-B to Form SE dated 3/20/90, File No. 1-9157).
Amendments dated June 5, 1991 through September
25, 1991 (Exhibit 10-B to Form SE dated 3/20/92,
File No. 1-9157). Amendments dated January 1,
1993 (Exhibit 10(iii)(A)6 to 1992 Form 10-K dated
3/23/93, File No. 1-6654). Amendments dated
September 8, 1993 through December 8, 1993 (Exhibit
10(iii)(A)6 to 1993 Form 10-K dated 3/23/94, File
No. 1-9157).
10(iii)(A)7 SNET Incentive Award Deferral Plan as amended
March 1, 1993. (Exhibit 10(iii)(A)7 to 1992 Form
10-K dated 3/23/93, File No. 1-6654).
10(iii)(A)8 SNET Mid-Career Pension Plan as amended November
1, 1991 (Exhibit 10-D to Form SE dated 3/20/92,
File No. 1-9157). Amendments dated December 8, 1993
(Exhibit 10(iii)(A)8 to 1993 Form 10-K dated 3/23/94,
File No. 1-9157).
10(iii)(A)9 SNET Deferred Compensation Plan for Non-Employee
Directors as amended January 1, 1993. (Exhibit
10(iii)(A)9 to 1992 Form 10-K dated 3/23/93, File
No. 1-6654).
10(iii)(A)10 Change-in-Control Agreements (Exhibit 10-F to Form
SE dated 3/15/91, File No. 1-9157).
10(iii)(A)11 SNET 1986 Stock Option Plan as amended March 1,
1993. (Exhibit 10(iii)(A)11 to 1992 Form 10-K
dated 3/23/93, File No. 1-6654).
10(iii)(A)12 SNET Retirement and Disability Plan for Non-
Employee Directors as amended April 14, 1993
(Exhibit 10(iii)(A)12 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
10(iii)(A)13 SNET Non-Employee Director Stock Plan effective
January 1, 1994 (Exhibit 4.4 to Registration
Statement No. 33-51055, File No. 1-9157)
10(iii)(A)14 Description of SNET Executive Retirement Savings
Plan (Exhibit 10(iii)(A)14 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
24a Powers of Attorney.
24b Board of Directors' Resolution.
99a Annual Report on Form 11-K for the plan year ended
December 31, 1993 for the SNET Management Retirement
Savings Plan will be filed as an amendment prior to
June 30, 1994.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1993 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an amendment
prior to June 30, 1994.
EXHIBIT 12
1993 Form 10-K
The Southern New England Telephone Company
Computation of
Ratio of Earnings to Fixed Charges
(dollars in millions)
Income from continuing operations before income taxes,
extraordinary charge and accounting changes $(74.9)
Add:
Interest on indebtedness 66.0
Portion of rents representative of
the interest factor 10.1
Earnings before fixed charges, income taxes
and extraordinary charge (1) $ 1.2
Fixed charges
Interest on indebtedness $ 66.0
Potion of rents representative of
the interest factor 10.1
Fixed charges $ 76.1
Ratio of earnings to fixed charges [(1) divided by (2)] .02
Coopers Certified Public Accountants
& Lybrand
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our report dated January
24, 1994 on our audits of consolidated financial statements and financial
statement schedules of The Southern New England Telephone Company as of
December 31, 1993 and 1992 and for each of the three years in the period
ended December 31, 1993, included in this Annual Report on Form 10-K, in
the following documents filed by The Southern New England Telephone
Company:
. Registration Statement No. 33-51371 on Form S-3 relating to the
registration of $540 million of Debt Securities.
COOPERS & LYBRAND
Hartford, Connnecticut
March 23, 1994
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, The Southern New England Telephone Company, a Connecticut
corporation (hereinafter referred to as the "Company"), proposes to file
shortly with the Securities and Exchange Commission, under the provisions
of the Securities Exchange Act of 1934, as amended, an annual report on
Form 10-K; and
WHEREAS, each of the undersigned is an officer or director, or both,
of the Company, and holds the office, or offices, in the Company herein
below indicated under his or her name;
NOW, THEREFORE, the undersigned, and each of them, hereby constitutes
and appoints J. A. Sadek their attorney-in-fact for them and in their
name, place and stead, and in each of their offices and capacities with
the Company, to execute and file such annual report, and thereafter to
execute and file any amendment or amendments thereto, hereby giving and
granting to said attorney full power and authority to do and perform each
and every act and thing whatsoever requisite and necessary to be done in
and about the premises, as fully, to all intents and purposes, as the
undersigned might or could do, if personally present at the doing
thereof, hereby ratifying and confirming all that said attorney may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF each of the undersigned has executed this Power of
Attorney this 9th day of March 1994.
Principal Executive Officers: Directors:
/s/ D. J. Miglio /s/ F. G. Adams
D. J. Miglio F. G. Adams, Director
Chairman, President and
Chief Executive Officer
/s/ William F. Andrews
William F. Andrews, Director
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and
Chief Financial Officer /s/ Zoe Baird
Zoe Baird, Director
/s/ Barry M. Bloom
Barry M. Bloom, Director
/s/ F. J. Connor
F. J. Connor, Director
/s/ William R. Fenoglio
William R. Fenoglio, Director
/s/ Claire L. Gaudiani
Claire L. Gaudiani, Director
/s/ J. R. Greenfield
J. R. Greenfield, Director
/s/ N. L. Greenman
N. L. Greenman, Director
/s/ Worth Loomis
Worth Loomis, Director
/s/ Burton G. Malkiel
Burton G. Malkiel, Director
/s/ Frank R. O'Keefe, Jr.
Frank R. O'Keefe, Jr., Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, The Southern New England Telephone Company, a Connecticut
corporation (hereinafter referred to as the "Company"), proposes to file
shortly with the Securities and Exchange Commission, under the provisions
of the Securities Exchange Act of 1934, as amended, an annual report on
Form 10-K; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints J. A.
Sadek his attorney-in-fact for him and in his name, place and stead, and
in his capacity as director of the Company, to execute and file such
annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorney full
power and authority to do and perform each and every act and thing
whatsoever requisite and necessary to be done in and about the premises,
as fully, to all intents and purposes, as the undersigned might or could
do, if personally present at the doing thereof, hereby ratifying and
confirming all that said attorney may or shall lawfully do, or cause to
be done, by virtue hereof.
IN WITNESS WHEREOF the undersigned has executed this Power of
Attorney this 4th day of March 1994.
/s/ Richard H. Ayers
Richard H. Ayers, Director
C E R T I F I C A T E
This is to certify that at a regular meeting of the Board of
Directors of The Southern New England Telephone Company held on
March 9, 1994, the following vote was adopted and, as of the date of this
Certificate, has not been amended, modified or rescinded and is in full
force and effect:
"VOTED: That the Chief Executive Officer, the Chief Financial
Officer and the Comptroller are, or either one of them is, authorized to
execute, personally or by attorney, in the name and on behalf of the
Company, and to cause to be filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, the
Company's Annual Report on Form 10-K, for the fiscal year ended
December 31, 1993, in substantially the form submitted to this meeting,
but with such changes, additions and revisions as the officer executing
the same shall approve, such approval to be conclusively evidenced by
such execution and thereafter to execute personally, and to cause to be
filed, any amendments or supplements to such report, and to do any and
all other acts and things, and to execute and deliver any and all other
documents necessary or advisable in connection with the foregoing."
Attest:
/s/ Valita H. Luckett
Valita H. Luckett
Assistant Secretary
New Haven, Connecticut
March 18, 1994
