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, 1994.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _____ to _____.
Commission File Number 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(State 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 .
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 11
3. Legal Proceedings 12
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) ) 13
8. Financial Statements and Supplementary Data 17
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
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 Statement Schedule, and Reports
on Form 8-K 35
* 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 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. The publishing division also develops and
provides electronic publishing services.
In 1994, approximately 86% of the Telephone Company's revenues
were derived from the rate regulated telecommunication
services. The remainder was 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.
The Telephone Company is subject to the jurisdiction of the
Federal Communications Commission ("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.
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 accounting and
cost allocation rules for intrastate ratemaking purposes,
similar to those adopted by the FCC, for the separation of
costs of regulated from non-regulated activities.
3
Competition
On May 26, 1994, Public Act 94-83 ("Act") was enacted
providing a new regulatory framework for the Connecticut
telecommunications industry. The Act which took effect on
July 1, 1994 represents a broad strategic response to the
changes facing the telecommunications industry in Connecticut
based on the premise that broader participation in the
Connecticut telecommunications market will be more beneficial
to the public than will broader regulation. The Act opens
Connecticut telecommunications services to full competition,
including local phone service currently provided primarily by
the Telephone Company and encourages the DPUC to adopt
alternative forms of regulation for telephone companies',
including the Telephone Company's, noncompetitive and emerging
competitive services.
The DPUC has opened a number of proceedings to determine an
appropriate vision for Connecticut's telecommunications
infrastructure and to address in the competitive phase: local
exchange service competition; universal service and lifeline
program policy issues; unbundling of LECs' local networks; and
reclassification of LECs' products and services into
competitive, emerging competitive and noncompetitive
categories. During the alternative regulation phase, also
underway, the Telephone Company intends to submit to the DPUC
an alternative regulation plan suggesting regulatory
flexibilities to replace rate of return regulation with price
regulation for noncompetitive and emerging competitive
services. The alternative regulation phase will also involve
a complete financial review of the Telephone Company and will
address cost of service, capital recovery and service
standards.
The Telephone Company's regulated operations are subject to
competition from companies and carriers, including competitive
access providers, that construct and operate their own
communications systems and networks for the provision of
services to others as well as from companies that resell the
telecommunications services of underlying carriers. Since the
July 1, 1993 effective date of "10XXX" competition, over 40
telecommunications providers have received approval from the
DPUC to offer "10XXX" or other competitive intrastate long-
distance services. In addition, over 20 companies have filed
for initial certificates of public convenience and necessity
and are awaiting DPUC approval. Increasing competition in
intrastate long-distance service and the Telephone Company's
reduction in intrastate toll rates will continue to place
significant downward pressure on the Telephone Company's
intrastate toll revenues as will the implementation of
intrastate equal access, which is required to be implemented
for all dual preferred interexchange carrier ("PIC") capable
switches no later than December 1, 1996. No balloting of
customers is required. Although the DPUC ordered the Company
to bear its proportionate share of the costs to deploy the
dual PIC technology, the DPUC added the estimated 1996 average
net toll revenue loss to the cost recovery formula. These
costs will be recovered through an intrastate equal access
rate element on the presubscribed lines of all carriers unless
the Office of Consumer Counsel's December 7, 1994 Petition for
Administrative Appeal to the Superior Court results in a
change.
Since the introduction of "10XXX" competition, AT&T and MCI
have increased their marketing efforts in Connecticut to sell
intrastate long-distance services primarily to residential
customers. In response to AT&T's, MCI's and other
competitors' efforts, the Telephone Company has undertaken a
number of initiatives. The Telephone Company remains focused
on providing excellent customer service and quality products
and has made several changes to its product lines to provide
creative options and flexible packages that meet and exceed
customers' expectations. Over the past year, the Telephone
Company has introduced a volume aggregation feature providing
steeper discounts to several of its long-distance services
that provides customers with the ability to
4
combine their in-state long-distance calling for all of their
"800" and WATS-like services. The Telephone Company has also
introduced term options to several products and services that
enable customers to gain additional discounts and rate stability
in return for committing to the service for a longer time period.
Concerning competition for local exchange service, 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 utilize
its own facilities to provide services directly to customers.
Pending DPUC approval, these services are expected to be
available in Connecticut within one to two years. On January
26, 1994, MCI Metro Access Transmission Services, Inc. ("MCI
Metro") was approved by the DPUC to offer non-switched, in-
state long-distance private line services in Connecticut and
has offered high capacity private line services to customers
in Connecticut since February 1994. On December 20, 1994, MCI
Metro filed an application with the DPUC to provide local
exchange telecommunications services to business customers in
Connecticut by 1996 with expansion to residential customers
thereafter. In addition to the expected facilities-based
local service competition, AT&T has requested that the
Telephone Company provide for the resale of its services
including local service.
Competitive access providers continue to deploy fiber-ring
technology throughout Connecticut. Their initial goal is to
provide access and private line services with the intent to
migrate customers to switched services. During 1994, the
Telephone Company reached an agreement to lease part of its
existing digital fiber-optic-ring network in the Hartford and
Stamford metropolitan areas to MFS Communications Company,
Inc. ("MFS"). This agreement will allow MFS to provide
services to large business customers on an intraexchange basis
utilizing the Telephone Company's facilities and eliminates
the need for MFS to construct its own facilities.
In February 1994, pursuant to FCC orders, the Telephone
Company's tariff for switched access expanded interconnection
(i.e., collocation) service became effective. This tariff
allows access customers, including interexchange carriers and
competitive access providers, to collocate their own
facilities in the Telephone Company's central offices and
connect to the Telephone Company's switched access services.
In June 1994, the FCC required LECs to provide a new form of
interconnection that offers signaling information from LECs'
end offices, allowing competitive access providers to offer
tandem switching services in competition with the LECs. The
Telephone Company filed its tariffs for tandem signaling in
September 1994, for effect on January 24, 1995. The FCC has
allowed the Telephone Company increased pricing flexibility
coincident with the operation of interconnection that will
allow it to compete with competitive access providers for
special access services. At this time, in accordance with the
DPUC's May 5, 1994 decision, the Telephone Company's federal
access tariff structure is also being utilized for the
provision of intrastate access service.
The Telephone Company expects to see continued movement toward
a fully competitive telecommunications marketplace, both on an
interexchange and intraexchange basis. The Telephone
Company's ability to compete is dependent upon regulatory
reform that will allow pricing flexibility to meet competition
and provide a level playing field with similar regulations for
similar services and with reduced regulation to reflect an
emerging competitive marketplace. The legislation and
regulatory proceedings that flow from it should produce a
telecommunications marketplace in Connecticut that, by
providing equal opportunity to all competitors, will work to
benefit Connecticut consumers.
5
Regulatory Matters
State Regulation Initiatives and New Services
On December 6, 1994, the Telephone Company received approval
from the DPUC to begin offering, in January 1995, a new voice
messaging service called SNET MessageWorks[SM]. SNET
MessageWorks is a voice messaging system that enables
communication via recorded messages and is intended to meet
the telephone answering and voice messaging needs of both
residential and business customers.
On February 15, 1995, the DPUC lifted a nine-year-old
restriction on the Corporation's total investment in
unregulated business. The restriction prohibited the
Corporation from investing more than 25% of its total assets
in unregulated diversified activities without approval of the
DPUC. The DPUC provided the Corporation greater flexibility
to diversify into new markets up to 40% of total consolidated
assets.
On April 13, 1994, the DPUC approved a joint marketing
arrangement between the Telephone Company and SNET America,
Inc. ("SNET America"), a subsidiary of the Corporation,
enabling the Telephone Company to sell SNET America's
interstate and international services, and SNET America to
sell the Telephone Company's intrastate products and services.
This arrangement will enable the Corporation to satisfy its
customers' long-distance calling needs with a single point of
contact through the SNET All Distance[SM] service offering.
On May 24, 1993, the DPUC issued a 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 the Telephone Company revenue
requirement of approximately $40 million annually. The new
depreciation rates were implemented effective July 1, 1993.
On July 7, 1993, the DPUC issued a 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 evolving
1993 issues of: (i) 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 had 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 $39.4 million effective July
7, 1993. The Telephone Company was authorized previously to
earn a 12.75% ROE. The increase in intrastate revenue of
$39.4 million was offset virtually by the approximate $40
million increase in capital recovery granted on May 24, 1993.
In addition, the Final Decision-II addressed areas of
6
infrastructure modernization and incentive regulation. Under
infrastructure modernization, the Final Decision-II supported,
but did not mandate, implementation of an infrastructure
modernization program.
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) a change in basic local service
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 customers; (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 and directory
assistance calls along with an interim surcharge on the
remaining products and services with authorized increases
including local exchange. The surcharge was in effect until
October 9, 1993, when the remaining new rates became
effective, including an average increase in residential basic
local service rates of $.32 a month while business basic local
service rates decreased by $.07 a month.
On July 9, 1994, the second and final phase of new rates
became effective. Residential basic local service rates
increased $.26 a month and business basic local service rates
decreased between $.69 and $1.23 a month depending on the type
of local service selected. At December 31, 1994, the
Telephone Company's intrastate ROE was below the authorized
11.65%.
Federal Regulation Initiatives
On January 19, 1994, the Telephone Company filed suit in the
U.S. District Court ("Court") in New Haven requesting the
Court find that the Cable Communications Policy Act of 1984
("Cable Act") violates the Telephone Company's First and Fifth
Amendment rights. The Cable Act restricts in-territory
provision of cable programming by LECs and prohibits LECs from
owning more than 5% of any company that provides cable
programming in their local service area. Several district
courts and the Fourth and Ninth Circuit Courts of Appeal have
rendered decisions consistent with the Telephone Company's
position.
Effective July 1, 1991, the Telephone Company elected the
FCC's price cap regulation, which replaced traditional rate of
return regulation. Under price cap 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, FCC cost
separation rules, and tax laws. The treatment of exogenous
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 on the Telephone Company's
ability 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
7
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. 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.
On April 1, 1994, the Telephone Company filed with the FCC its
1994 annual interstate access tariff under price cap
regulation for effect on July 1, 1994. The Telephone Company
maintained its selection of the 3.3% productivity factor and
is allowed to earn up to a 12.25% interstate rate of return
annually before any sharing occurs. The filing, which was
approved by the FCC, incorporated rate reductions of
approximately $7 million in decreased annual interstate
network access revenues for the period July 1, 1994 to June
30, 1995. Management expects this decrease to be fully offset
by increased demand. As of December 31, 1994, the Telephone
Company's interstate rate of return was below the 12.25%
threshold.
On July 12, 1994, the Court reversed and remanded to the FCC a
ruling addressing the exogenous treatment of certain
incremental postretirement costs incurred by price cap
carriers, including the Telephone Company. The Telephone
Company's tariffs, which took effect on July 2, 1993 and were
subject to FCC further investigation, could be affected by the
Court's decision. The Telephone Company's tariffs which took
effect on July 1, 1994 could also be affected by the Court's
decision. The Telephone Company expects the impact of this
decision to be immaterial to total revenues.
The Telephone Company will file its 1995 annual interstate
access tariff filing on April 3, 1995 under price cap
regulation to become effective July 1, 1995. The filing will
adjust interstate access rates for an experienced rate of
inflation, the FCC's productivity target and exogenous cost
changes, if any. The Telephone Company does not anticipate
changing its election for the next tariff period.
In February 1994, the FCC began its scheduled inquiry into the
price cap plan for LECs to determine whether to revise the
current plan to improve LECs' performance in meeting the FCC's
objectives. Results of this inquiry are expected in early
1995.
In July 1993, the FCC granted the Telephone Company increased
interstate depreciation rates in connection with its triennial
review of depreciation. The new depreciation rates were
effective retroactive to January 1, 1993 and increased
depreciation expense by approximately $11 million. However,
under current price cap regulation applicable to the Telephone
Company, any changes in depreciation rates cannot be reflected
in interstate access rates.
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 1993 indicating it is
in compliance with its CAM, and is currently undergoing an
audit for the year 1994.
8
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:
1994 1993 1992 1991 1990
Network Access Lines in
Service (thousands) 2,009 1,964 1,937 1,922 1,904
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[SM] in Item 2.
Properties]. The total gross investment in telephone plant
increased from approximately $3.6 billion at December 31, 1989
to approximately $4.1 billion at December 31, 1994, after
giving effect to retirements, but before deducting accumulated
depreciation at either date. Since 1990, cash expended for
capital additions was as follows:
Dollars in millions 1994 1993 1992 1991 1990
Cash Expended for
Capital Additions $235.4 $231.6 $269.1 $296.3 $370.0
In 1994, the Telephone Company funded its cash expenditures
for capital additions entirely through cash flows from
operations. In 1995, capital additions are expected to be
approximately $280 million, including approximately $80
million for I-SNET. The Telephone Company expects to fund
substantially all of its 1995 capital additions through cash
flows from operations.
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 area of 1,250 homes is provided with broadcast channels,
extensive pay-per-view channels and video-on-demand service,
which provides hundreds of video choices. On November 22,
1994, the FCC approved the Telephone Company's request to
expand the trial to an additional 150,000 homes in other areas
of Connecticut.
The Telephone Company gives accounting recognition to the
actions of regulatory authorities where appropriate, as
prescribed by Statement of Financial Accounting Standards
("SFAS") No. 71 "Accounting for the Effects of Certain Types
of Regulation." Under SFAS No. 71, the Telephone Company
records certain assets and liabilities because of actions of
regulatory authorities. More significantly, amounts charged
to operations for depreciation expense reflect estimated lives
and methods prescribed by regulatory authorities rather than
those consisting of useful and economic lives that might
otherwise apply to unregulated enterprises. In the event that
the Telephone
9
Company no longer meets the criteria for following SFAS
No. 71, the accounting impact to the Telephone Company would
be an extraordinary non-cash charge to operations of a
material amount.
On February 10, 1995, the Telephone Company filed with the
DPUC, pursuant to the Act discussed previously [see
Competition], its depreciation reserve studies indicating its
deficiency in accumulated depreciation could be approximately
$1 billion based on telecommunications plant investment levels
as of January 1, 1995. While the filing seeks to quantify the
Telephone Company's reserve deficiency, the recovery of the
deficiency will be addressed in subsequent proceedings on the
Telephone Company's financial condition and alternative forms
of regulation. These proceedings are currently scheduled by
the DPUC throughout 1995, with a decision expected in 1996.
In light of the new regulatory framework for Connecticut
telecommunications discussed previously [see Competition], the
Telephone Company has reviewed the criteria set forth in SFAS
No. 71 and has determined that the continuing application of
the regulatory accounting standard is appropriate.
Directory Publishing
The Telephone Company's publishing division provides
traditional paper products including White and Yellow Pages
directories throughout Connecticut. To strategically widen
its business focus and position itself for the future, the
publishing division is introducing new electronic publishing
services, such as SNET Access[SM], Consumer Tips and Electronic
Yellow Pages. On June 30, 1994, the DPUC lifted a restriction
which prohibited the Telephone Company from developing and
providing electronic information services, including
electronic publishing services.
Key trends affecting publishing revenues include the
Connecticut economy and competition. Publishing revenues, a
significant portion which reflect directory contracts entered
into in the prior year, continue to remain sensitive to the
Connecticut economy, which is in the early stages of recovery.
In addition, the Connecticut advertising marketplace is
undergoing major structural changes and is becoming
increasingly more fragmented and competitive. The publishing
division faces increased competition from non-traditional
services such as on-line services, desktop publishing,
electronic shopping services, CD-ROM and the expansion of
cable television. Furthermore, additional competition may
arise from the Regional Bell Operating Companies' ability to
offer information services.
Employee Relations
The Telephone Company employed approximately 9,070 persons at
February 28, 1995, of whom approximately 69% are represented
by the Connecticut Union of Telephone Workers, Inc. ("CUTW"),
an unaffiliated union.
On August 17, 1994, the Corporation and the CUTW reached an
agreement that called for an "early-out option" for bargaining-
unit employees to be negotiated no later than March 31, 1995.
The Corporation and the CUTW are currently negotiating a new
labor contract with the anticipation that it will be ratified
prior to the August 1995 expiration of the current three-year
contract.
10
In December 1993, the Telephone Company recorded a
restructuring charge to provide for a comprehensive
restructuring program designed to reduce costs and improve
delivery of service. The program included incremental costs
to be incurred for employee separations involving
approximately 2,400 employees beginning January 1994. This
estimate includes 750 to 1,000 management employees and 1,500
to 1,750 bargaining-unit employees. Through December 1994,
approximately 890 employees, representing 540, or 17.3% of the
total number of management employees and 350, or 5.4%, of the
total number of bargaining-unit employees, had left the
Telephone Company under severance plans and retirement
incentives. Additional employee separations are expected to
occur as a result of the early-out option discussed above and
outsourcing of approximately 150 data center operation
employees currently being negotiated with Computer Sciences
Corporation. Reengineering efforts and the early-out option
will impact the timing and mix of additional employee
separations of approximately 1,500 employees.
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
property, plant and equipment at December 31, 1994, 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%.
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 with the overwhelming majority of this investment
relating to telephone operations. Management believes that
the Telephone Company's facilities and equipment are suitable
and adequate for the business.
In 1993, the Telephone Company announced its intention to
invest $4.5 billion over the next 15 years to build I-SNET, a
statewide information superhighway. 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 160,000 residences and businesses by the end of
1995. 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. At this time,
the Telephone Company does not plan to request a rate increase
for this investment.
11
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).
12
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 $1,476.3 million in 1994 compared with $1,442.4
million in 1993.
Local service revenues, derived from the provision of local
exchange, public telephone and local private line services,
increased $52.1 million, or 9.2%, in 1994. In accordance with
the Telephone Company's 1993 general rate award, changes to
basic local service rates went into effect on July 9, 1993 and
July 9, 1994 resulting in increased local service revenues
[see Item 1. State Regulation Initiatives and New Services].
Also contributing to the increase was the expansion of the
local-calling service area in several exchanges during
September 1993, resulting in a shift of intrastate toll
revenues to local service revenues. In addition, revenue from
directory assistance and coin telephone increased primarily as
a result of the July 9, 1993 increase in rates. The increase
in 1994 was also attributable to growth in subscriptions to
premium services, such as a 16.9% increase in Totalphone[SM].
Access lines in service grew 2.3% to approximately 2,009,000
at December 31, 1994 from approximately 1,964,000 at December
31, 1993. Growth in premium subscriptions and access lines in
service reflects the slowly improving Connecticut economy.
In 1994, intrastate toll revenues, which include primarily
revenues from toll and WATS services, decreased $44.4 million,
or 13.1%. Toll message revenues decreased $32.5 million due
primarily to reduced intrastate toll rates, including several
toll discount plans implemented in accordance with the 1993
general rate award, and the increasingly competitive toll
market. Also contributing to the decrease was a reduction in
toll message volume of 1.9% during 1994. The decreased volume
was attributable primarily to the shift in revenues to local
service caused by the expansion of the local-calling service
areas. In addition, WATS revenues, which include "800"
services, decreased $13.8 million due primarily to: lower WATS
message volumes; customers migrating to lower priced services;
and the continued impact of competitive providers on this
market.
Network access charges are assessed on interexchange carriers
and end users for access to the local exchange network. In
1994, network access revenues increased $11.7 million, or
3.4%. The increase was due primarily to an increase in
interstate minutes of use of approximately 6%. Partially
offsetting the impact of the increase in minutes of use was a
decrease in tariff rates implemented on July 1, 1994, in
accordance with the Telephone Company's 1994 annual FCC filing
under price cap regulation [see Item 1. Federal Regulation
Initiatives].
Publishing and other revenues, which include revenues from (i)
directory publishing, (ii) billing and collection, and other
non-access services rendered on behalf of interexchange
carriers, (iii) provision for uncollectible accounts
receivable and (iv) miscellaneous revenues increased $14.5
million, or 7.5%, in 1994. A decrease of $6.3 million in the
provision for uncollectible accounts receivable for residence,
business and publishing customers contributed to the increase
in other revenues in 1994. This decrease was due primarily to
lower publishing uncollectible activity. In addition,
miscellaneous revenues increased $6.1 million due primarily to
the implementation of a 1%
13
monthly late payment charge effective January 1, 1994. Publishing
revenues, a significant portion of which reflect directory contracts
entered into in the prior year, have remained relatively flat, due
primarily to the continued weak economic conditions in Connecticut and
the Northeast during that time. Management expects publishing
revenues to remain sensitive to the Connecticut economy.
Publishing is diversifying from the traditional "paper"
product by introducing new products, including a CD-ROM
directory called SNET PinPoint[TM] Business Disc.
Costs and Expenses
Total costs and expenses, excluding depreciation and
amortization, were $819.4 million in 1994 compared with
$1,183.3 million in 1993. Total costs and expenses in 1993
would have been $848.3 million on a comparable basis excluding
a $335.0 million before-tax charge for business restructuring
[see Note 4].
Operating and maintenance expenses of $765.8 million decreased
$24.5 million, or 3.1%, in 1994. Employee-related costs,
including wages and employee-benefit costs, represent a
significant portion of these expenses. The remainder of these
costs is comprised primarily of general and administrative
expenses. The Telephone Company's operating and maintenance
expenses, excluding employee-related costs, decreased
approximately $15 million in 1994 due primarily to cost-
containment efforts in areas such as publishing and contracted
services.
In December 1993, the Telephone Company recorded a
restructuring charge to provide for a comprehensive
restructuring program designed to reduce costs and improve
delivery of service. The program included costs to be
incurred to facilitate employee separations involving
approximately 2,400 employees beginning in January 1994. The
charge also included incremental costs of implementing
appropriate reengineering solutions; designing and developing
new processes and tools to continue the Telephone Company's
provision of excellent service; and retraining of the
remaining employees to help them meet the changing demands of
customers.
In August 1992, a three-year labor contract was ratified by
members of the Connecticut Union of Telephone Workers
("CUTW"). CUTW members received wage rate increases of 2.0%
in September 1992, 3.0% in October 1993, and 5.0% in October
1994. As part of the bargaining-unit contract, approximately
525 employees accepted an early retirement incentive offer,
Special Pension Option ("SPO") in 1993 [see Note 2]. The
Telephone Company recorded a before-tax $6.0 million pension
gain in 1993 as a result of the SPO. In August 1994, the
Corporation and the CUTW reached a settlement that called for
an "early-out option" to be negotiated no later than March 31,
1995. The Corporation and the CUTW are currently negotiating
a new labor contract with the anticipation that it will be
ratified prior to the expiration of the current contract in
August 1995.
The Telephone Company's employee-related costs decreased
approximately $10 million in 1994. The decrease was due to
lower employee-benefit costs of approximately $16 million
offset partially by higher wages of approximately $6 million.
Excluding the impact of annual wage related increases and
overtime, wage and salary costs decreased approximately $17
million in 1994 as the Telephone Company began to realize
savings associated with its restructuring program. As a
result of employee separations, the Telephone Company's
average work force decreased 6.7% in 1994. Through December
1994, approximately 890 employees, representing 540, or 17.3%,
of the total number of management employees and 350, or 5.4%,
of the total number of bargaining-
14
unit employees, had left the Telephone Company under severance
plans and retirement incentives. Offsetting the impact of the
decrease in the average work force was a wage rate increase
for bargaining-unit employees discussed previously and an
average 4.0% salary increase for management employees effective
April 1994. In addition, paid overtime increased due to
weather-related service issues. Wage and salary cost savings
are anticipated in 1995 and 1996 as the Telephone Company
proceeds with the employee separation portion of its
restructuring program.
The Telephone Company participates in the Corporation's
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 employee-benefit costs was
approximately 90% in 1994 and 1993. The Telephone Company's
employee-benefit costs decreased approximately $16 million in
1994 as a result of a reduction in the work force, as well as
cost sharing and cost-containment efforts. As discussed in
Note 2, the Corporation has reserved the right to require,
beginning on July 1, 1996, all retirees who retire after a
specified date to share premium costs of health care benefits
if these costs exceed certain limits. Beginning in 1994,
active employees began to share a larger portion of health
care benefit costs. Management continues to seek additional
means to manage effectively 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 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. Annual 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. These benefits include workers' compensation and
disability benefits. The cumulative effect of this accounting
change reduced 1993 net income by $6.5 million.
Depreciation and Amortization
In 1994, depreciation and amortization expense increased $30.6
million, or 11.5%. The increase in depreciation and
amortization was due primarily to the first full-year impact
of revised depreciation rate schedules for the Telephone
Company's intrastate plant, as approved by the DPUC [see Item
1. State Regulation Initiatives and New Services]. This
impact increased 1994 depreciation expense by approximately
$20 million compared with 1993. Investments in telephone
property, plant and equipment also contributed to the increase
in depreciation and amortization expense.
15
Interest Expense
Interest expense decreased $14.1 million, or 20.7%, in 1994.
The decrease in interest expense in 1994 was due primarily to
annual interest savings of approximately $8 million from debt
refinancings completed in December 1993 and a decrease in
average debt outstanding of approximately $42 million.
Income Taxes
The combined federal and state effective tax rate in 1994 was
39.9% compared with 37.8% in 1993, excluding the effect of the
restructuring charge. The 1993 effective tax rate was a
benefit of 58.6% including the effect of the restructuring
charge coupled with the amortization of investment tax credits
and rate differentials associated with the reversal of
temporary deferred income taxes. A reconciliation of these
effective tax rates to the statutory tax rates is disclosed in
Note 3.
Effective January 1, 1993, the Telephone Company adopted SFAS
No. 109 "Accounting for Income Taxes" [see Note 3].
16
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 schedule of The Southern New England
Telephone Company listed in Item 14(a) of this Form 10-K.
These financial statements and the financial statement
schedule are the responsibility of the Telephone Company's
management. Our responsibility is to express an opinion on
these financial statements and the financial statement
schedule 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, 1994 and 1993, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted
accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information required to be included therein.
As discussed in Note 1 to the financial statements, in 1993
the Telephone Company changed its method of accounting for
postretirement benefits other than pensions, postemployment
benefits and income taxes.
Hartford, Connecticut COOPERS & LYBRAND L.L.P.
January 24, 1995
17
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS
Dollars in Millions,
For the Years Ended December 31, 1994 1993 1992
Revenues
Local service $ 618.8 $ 566.7 $ 523.0
Intrastate toll 295.4 339.8 359.9
Network access 354.5 342.8 328.5
Publishing and other 207.6 193.1 191.2
Total Revenues 1,476.3 1,442.4 1,402.6
Costs and Expenses
Operating 443.5 467.9 469.2
Maintenance 322.3 322.4 307.8
Provision for business
restructuring - 335.0 -
Depreciation and amortization 295.8 265.2 229.2
Taxes other than income 53.6 58.0 56.4
Total Costs and Expenses 1,115.2 1,448.5 1,062.6
Operating Income (Loss) 361.1 (6.1) 340.0
Other (expense) income, net (1.6) (.8) 1.5
Interest expense 53.9 68.0 72.4
Income (Loss) Before Income
Taxes, Extraordinary Charge
and Accounting Change 305.6 (74.9) 269.1
Income taxes 121.8 (43.9) 108.6
Income (Loss) Before
Extraordinary Charge and
Accounting Change 183.8 (31.0) 160.5
Extraordinary charge from
early extinguishment of debt,
net of related taxes of $38.0
and $2.0, respectively - (44.0) (2.7)
Cumulative effect of accounting
change - (6.5) -
Net Income (loss) $ 183.8 $ (81.5) $ 157.8
Retained Earnings, Beginning
of Period $ 572.2 $ 763.7 $ 713.4
Net income (loss) 183.8 (81.5) 157.8
Dividends declared to parent (108.0) (110.0) (107.5)
Retained Earnings, End of Period $ 648.0 $ 572.2 $ 763.7
The accompanying notes are an integral part of these financial
statements.
18
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
BALANCE SHEET
Dollars in Millions, at December 31, 1994 1993
ASSETS
Cash and temporary cash investments $ 44.2 $ 214.5
Accounts receivable, net of
allowance for uncollectibles of
$23.3 and $20.4, respectively 237.7 226.3
Accounts receivable from affiliates 15.6 11.3
Materials and supplies 6.2 8.0
Prepaid publishing 39.0 40.5
Deferred income taxes 92.6 73.4
Prepaid and other 25.3 20.2
Total Current Assets 460.6 594.2
Land 16.7 16.9
Buildings 384.3 375.9
Central office equipment 1,618.8 1,594.9
Outside plant facilities and
equipment 1,613.0 1,601.8
Furniture and office equipment 355.1 354.6
Station equipment and connections 23.9 21.7
Plant under construction 68.3 74.0
Total telephone plant, at cost 4,080.1 4,039.8
Less: Accumulated depreciation 1,539.2 1,429.2
Net Telephone Plant 2,540.9 2,610.6
Deferred charges and other assets 247.3 265.7
Total Assets $3,248.8 $3,470.5
The accompanying notes are an integral part of these financial
statements.
19
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
BALANCE SHEET (Cont.)
Dollars in Millions, Except Per Share Amounts
at December 31, 1994 1993
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued
expenses $ 169.3 $ 180.3
Obligations maturing within one year - 240.0
Restructuring charge - current 145.5 103.0
Accrued compensated absences 34.1 33.9
Accounts payable to affiliates 12.3 12.4
Advance billing and customer
deposits 42.3 41.0
Other current liabilities 72.7 70.4
Total Current Liabilities 476.2 681.0
Long-term obligations 746.3 746.1
Deferred income taxes 458.6 424.2
Restructuring charge - long-term 114.4 232.0
Unamortized investment tax credits 42.9 50.8
Other liabilities and deferred credits 231.3 233.1
Total Liabilities 2,069.7 2,367.2
Stockholder's Equity
Common stock, $12.50 par value;
(30,428,596 shares issued and
30,385,900 outstanding at each
period end) 380.4 380.4
Proceeds in excess of par value 152.1 152.1
Retained earnings 648.0 572.2
Less: Treasury stock (42,696
shares at each period end) (1.4) (1.4)
Total Stockholder's Equity 1,179.1 1,103.3
Total Liabilities and Stockholder's
Equity $3,248.8 $3,470.5
The accompanying notes are an integral part of these financial
statements.
20
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
STATEMENT OF CASH FLOWS
Dollars in Millions,
For the Years Ended December 31, 1994 1993 1992
Operating Activities
Net income (loss) $ 183.8 $ (81.5) $157.8
Adjustments to reconcile
net income (loss) to cash
provided by operating activities:
Depreciation and amortization 295.8 265.2 229.2
Effect of business restructuring,
before-tax (75.1) 335.0 -
Cumulative effect of
accounting change, net of tax - 6.5 -
Extraordinary charge, before-tax - 82.0 4.7
Provision for uncollectible
accounts 18.5 24.9 30.0
Allowance for funds used
during construction (1.3) (1.7) (3.0)
Operating cash flows from:
Increase in accounts receivable (34.2) (11.1) (20.8)
Decrease in materials and supplies 1.8 2.4 2.3
Increase (decrease) in
accounts payable 2.3 (16.7) 1.8
Increase (decrease) in
deferred income taxes 15.2 (160.4) 21.9
Decrease in investment tax
credits (7.9) (10.5) (7.0)
Net change in other assets
and liabilities (6.9) (11.6) 19.6
Other, net 15.7 12.9 9.1
Net Cash Provided by Operating
Activities 407.7 435.4 445.6
Investing Activities
Cash expended for capital additions (235.4) (231.6) (269.1)
Other, net (2.6) (4.0) .8
Net Cash Used by Investing Activities (238.0) (235.6) (268.3)
Financing Activities
Proceeds from long-term obligations - 420.1 173.8
Repayments of long-term obligations (240.0) (171.5) (258.5)
Net (payments) proceeds of short-
term obligations from affiliate - (72.6) 31.9
Cash dividends (100.0) (105.2) (120.7)
Amounts placed in trust for debt
refinancing - (62.1) -
Other, net - (.4) (3.3)
Net Cash (Used) Provided by
Financing Activities (340.0) 8.3 (176.8)
(Decrease) Increase in Cash and
Temporary Cash Investments (170.3) 208.1 .5
Cash and temporary cash investments,
beginning of year 214.5 6.4 5.9
Cash and Temporary Cash Investments,
End of Year $ 44.2 $214.5 $ 6.4
The accompanying notes are an integral part of these
financial statements.
21
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
regulatory authorities, the Federal Communications Commission
("FCC") and the Connecticut Department of Public Utility
Control ("DPUC"). Substantially all of the Telephone
Company's operations and customers are located in the State of
Connecticut.
Accounting Changes - Effective January 1, 1993, the Telephone
Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions," SFAS No. 112
"Employers' Accounting for Postemployment Benefits" and SFAS
No. 109 "Accounting for Income Taxes." The cumulative effect
of the accounting change for SFAS No. 112 as of January 1,
1993 resulted in a non-cash charge which reduced net income by
$6.5 million. For SFAS No. 106, the Telephone Company elected
to amortize the transition obligation over the average
remaining service period, therefore a cumulative effect was
not recorded. In addition, a cumulative effect was not
recorded for the adoption of SFAS No. 109 in compliance with
the methods of adoption for regulated entities.
Regulatory Accounting - The Telephone Company gives accounting
recognition to the actions of regulatory authorities where
appropriate, as prescribed by SFAS No. 71 "Accounting for the
Effect of Certain Types of Regulation." Under SFAS No. 71,
the Telephone Company records certain assets and liabilities
because of actions of regulatory authorities. More
significantly, amounts charged to operations for depreciation
expense reflect estimated lives and methods prescribed by
regulatory authorities rather than those consisting of useful
and economic lives that might otherwise apply to unregulated
enterprises. In the event that the Telephone Company no
longer meets the criteria for following SFAS No. 71, the
accounting impact to the Telephone Company would be an
extraordinary non-cash charge to operations of a material
amount.
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.
Regulatory authorities require the Telephone Company to
include in its telephone plant accounts an imputed cost of
debt and equity for funds used during the construction of
telephone plant. The imputed allowance for funds used during
construction ("AFUDC") is an addition to the cost of the plant
constructed and an income item during the construction period.
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.
Property, Plant and Equipment - Property, plant and equipment
is stated at cost. Depreciation is calculated on telephone
plant using either the equal life group ("ELG") straight-line
depreciation method or the composite vintage group method.
ELG was approved for FCC purposes on interstate assets placed
in service beginning in 1982 and for DPUC purposes on
intrastate assets placed in
22
service beginning in 1993. Composite vintage group method
is used for assets in service prior to the adoption of ELG.
Assets acquired under capital leases are generally amortized
over the life of the lease using the straight-line method.
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.
Cash and Temporary Cash Investments - Cash and temporary cash
investments include all highly liquid investments, with
original maturities of three months or less. 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.
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.
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 $46.5 million in 1994, $35.6 million in 1993 and $32.4
million in 1992. In addition, the Telephone Company charges
affiliates for network services at tariffed rates. These
amounts are included in revenue and totaled $11.8 million in
1994, $9.2 million in 1993 and $7.8 million in 1992. The
Telephone Company is charged for management functions
performed by the Corporation. The cost of these management
functions totaled $29.3 million in 1994, $24.5 million in 1993
and $23.3 million in 1992.
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 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. Consolidated income tax currently payable is
allocated by the Corporation to the Telephone Company based on
the Telephone Company's contribution to consolidated taxable
income and investment tax credits.
Investment tax credits realized in prior years are being
amortized as a reduction to income taxes over the life of the
related plant.
23
NOTE 2: EMPLOYEE BENEFITS
Separation Offer - As part of the bargaining-unit contract
negotiated in August 1992, 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"). Approximately 525
employees accepted the early retirement offer. Most employees
who elected to retire or terminate left the Telephone Company
by March 19, 1993, and the remainder left by September 17,
1993. The Telephone Company recorded a before-tax $6.0
million pension gain in 1993 as a result of the SPO.
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 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 the 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 9.5% in 1994 and
declines to 7.5% by 1998.
The Telephone Company's portion of the Corporation's pension
cost (income) computed using the projected unit credit
actuarial method was approximately $12.4 million, $(7.7)
million and $(2.9) million for 1994, 1993 and 1992,
respectively. The increase in pension cost for 1994 was due
primarily to the net effect of a lower discount rate, the
absence of a $6.0 million net settlement gain in 1993 and a
1994 curtailment loss of approximately $13 million for
employee separations. The curtailment loss was charged
against the restructuring program [see Note 4]. Pension
income increased in 1993 compared to 1992 due primarily to the
net effect of a settlement gain and charges for special
termination benefits associated with the 1993 SPO that
resulted in a net gain of $6.0 million.
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.
Postretirement Health Care Benefits - The Telephone Company
participates in the health care and life insurance 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
dependents may be 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). 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
24
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 1994 and 1993,
including the amortization of the transition obligation, was
approximately $45 million.
In 1991, in accordance with a DPUC decision in a rate
proceeding for the Telephone Company, the Corporation began to
fund the postretirement health care benefits. Based on the
DPUC's July 7, 1993 general rate award decision, the
Corporation continues to contribute additional amounts to
Voluntary Employee Beneficiary Association ("VEBA") trusts.
In 1992, the pay-as-you-go expense combined with the VEBA
contributions amounted to $32.4 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 requires that these
benefits be accrued as earned where the right to the benefits
accumulates or vests. The cumulative effect of this
accounting change reduced 1993 net 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.
NOTE 3: INCOME TAXES
Effective January 1, 1993, the Telephone Company adopted SFAS
No. 109 "Accounting for Income Taxes." In accordance with
SFAS No. 109 and SFAS No. 71, the Telephone Company has a
regulatory asset of $62.2 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 $84.2 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 historical 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 in July
1993, will be returned to ratepayers over three years. This
method is a more accelerated turnaround than the normal
recognition period.
25
Income tax expense (benefit) includes the following components:
Dollars in Millions
For the Years Ended December 31, 1994 1993 1992
Federal
Current $ 87.9 $ 77.2 $ 65.2
Deferred 8.7 (103.9) 12.9
Investment tax credits, net (7.9) (10.5) (7.0)
Total Federal 88.7 (37.2) 71.1
State
Current 32.7 28.6 29.3
Deferred .4 (35.3) 8.2
Total State 33.1 (6.7) 37.5
Total Income Taxes $121.8 $(43.9) $108.6
Deferred income tax expense (benefit) resulted primarily from
restructuring program costs incurred in 1994, which were
recorded in the financial statements in 1993 as a part of the
restructuring charge. In August 1993, the statutory federal
income tax rate increased from 34.0% to 35.0%, retroactive to
January 1, 1993. In addition, the enacted state income tax
rate will be gradually reduced from 11.5% in 1994 to 10.0% in
1998. The net impact of these changes in the enacted tax
rates was not material to total income taxes or to net
deferred income tax liabilities.
A reconciliation between income taxes and taxes computed by
applying the statutory federal income tax rate to income
(loss) before income taxes is as follows:
Dollars in Millions,
For the Years Ended December 31, 1994 1993 1992
Statutory federal income tax rate 35.0% (35.0)% 34.0%
Federal income taxes at statutory
rate $107.0 $(26.2) $ 91.5
State income taxes, net of federal
income tax effect 21.5 (4.3) 24.7
Depreciation of telephone plant
construction costs previously
deducted for tax purposes 5.1 6.3 4.4
Rate differentials applied to
reversing temporary differences (5.1) (7.9) (5.6)
Amortization of investment tax
credits (7.9) (10.5) (7.0)
Prior years' tax adjustments and
other differences, net 1.2 (1.3) .6
Income Taxes $121.8 $(43.9) $108.6
Effective Tax Rate 39.9% (58.6)% 40.4%
26
Deferred income tax liabilities (assets) are comprised of the
following:
Dollars in Millions, at December 31, 1994 1993
Depreciation $ 482.4 $ 488.3
Items previously flowed through to
ratepayers 62.2 71.0
Deferred gross earnings tax 15.9 19.1
Restructuring charge (110.4) (142.4)
Unamortized investment tax credits (31.1) (37.0)
Other (53.0) (48.2)
Deferred Income Taxes $ 366.0 $ 350.8
NOTE 4: RESTRUCTURING CHARGE
In December 1993, the Telephone Company recorded a before-tax
restructuring charge of $335.0 million, $192.7 million after-
tax, to provide for a comprehensive restructuring program.
The program included costs to be incurred to facilitate
employee separations involving approximately 2,400 employees
beginning in January 1994. This total includes 750 to 1,000
management employees and 1,500 to 1,750 bargaining-unit
employees. The charge also included incremental costs of
implementing appropriate reengineering solutions; designing
and developing new processes and tools to continue the
Telephone Company's provision of excellent service; and the
retraining of the remaining employees to help them meet the
changing demands of customers.
The 1993 restructuring charge was originally estimated as
follows:
Dollars in Millions, at December 31,1993
Employee separation costs $160.0
Process and systems reengineering 145.0
Exit and other costs 30.0
Total Restructuring Charge $335.0
In order to maintain quality customer service while at the
same time reengineering the business, the 1993 restructuring
program is expected to extend into 1997, rather than be
completed by 1996 as originally intended. It is also possible
that shifts in reserve categories may occur due to factors
beyond the Telephone Company's control. However, no
significant changes in the total cost of the 1993
restructuring program are likely to occur nor are any
adjustments anticipated to the original estimate.
The Telephone Company incurred costs during 1994 related to
the restructuring program which were charged against the
reserve as follows:
Dollars in Millions,
For the Year Ended December 31,1994
Employee separation costs $38.6
Process and systems reengineering 35.0
Exit and other costs 1.5
Total Incurred Costs $75.1
27
Costs incurred for employee separations included payments for
severance, unused compensated absences, health care
continuation and employee retraining, as well as a non-cash
charge of approximately $13 million for pension and
postretirement health care plan curtailment losses transferred
to the appropriate liability. Process and systems
reengineering costs included incremental costs incurred in
connection with the execution of numerous reengineering
programs involving network operations, customer service,
repair and support processes. Exit and other costs included
expenses related to the initial phase of redesigning work
space requirements due to downsizing.
In 1994, the Telephone Company implemented network operations,
customer service, repair and support programs and developed
new processes to substantially reduce the costs of business
while significantly improving customer service and quality.
The remaining employee separations will not be possible
without the development and installation of these new
processes which, among other things, will reduce or eliminate
the current labor intensive interfaces between the existing
systems.
During 1994, the Telephone Company began to realize savings
associated with its restructuring program. Through December
1994, approximately 890 employees, representing 540, or 17.3%,
of the total number of management employees and 350, or 5.4%,
of the total number of bargaining-unit employees, had left the
Telephone Company under severance plans and retirement
incentives. Additional employee separations are expected to
occur as a result of an "early-out option" for bargaining-unit
employees currently being negotiated with the Connecticut
Union of Telephone Workers and outsourcing of approximately
150 data center operation employees currently being negotiated
with Computer Sciences Corporation. Reengineering efforts and
the early-out option will impact the timing and mix of
additional employee separations of approximately 1,500
employees. Expected accumulated savings are dependent on
these factors and are currently estimated to be $60 million,
$90 million and $110 million for 1995, 1996 and 1997,
respectively. These anticipated savings will be substantially
offset by costs related to the growth in business, the
construction of I-SNET, a statewide information superhighway,
and the cost of adding other employees with different skills.
Cash expenditures are estimated at $115 million, $65 million
and $50 million in 1995, 1996 and 1997, respectively.
Incremental capital expenditures related to the restructuring
program approximated $20 million in 1994. These items have
been charged to property, plant and equipment and will be
reflected in increased depreciation expense in future years.
In addition, the Telephone Company anticipates incremental
capital expenditures of approximately $60 million over the
remaining life of the program.
28
NOTE 5: 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 and (ii) accrued but unexpensed compensated
absences at December 31, 1987, which are being amortized over
ten years through 1997. Amortization of these costs is on a
straight-line basis.
Amounts related to these costs are as follows:
Dollars in Millions, at December 31, 1994 1993
GET $38.7 $46.5
Compensated Absences $10.0 $13.3
NOTE 6: OBLIGATIONS MATURING WITHIN ONE YEAR
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, 1994 and 1993. As
of December 31, 1992, the amount payable to the Corporation
totaled $72.6 million.
Additional information regarding notes payable outstanding
during the year is as follows:
Dollars in Millions,
For the Years Ended December 31, 1994 1993 1992
Average amount outstanding during
the year (based on daily amounts) $ 15.0 $ 46.8 $ 94.6
Weighted average interest rate during
the year (based on daily amounts) 3.59% 3.15% 3.81%
Maximum amount outstanding at any
month's end during the year $ 75.9 $107.0 $129.3
Weighted average interest rate at
year-end - - 3.47%
29
NOTE 7: LONG-TERM OBLIGATIONS
The components of long-term obligations at December 31 are as
follows:
Dollars in Millions Interest Rates 1994 1993
Unsecured notes 6.13% to 7.25% $ 625.0 $ 625.0
8.70% to 9.63% 80.0 120.0
Total Unsecured Notes 705.0 745.0
Debentures 4.38% to 8.63% 45.0 245.0
Total Long-term obligations 750.0 990.0
Unamortized discount and
premium, net (3.8) (4.0)
Capital lease obligations .1 .1
Current portion of long-term
obligations - (240.0)
Total Long-term Obligations $ 746.3 $ 746.1
The aggregate principal amounts of long-term debt are
scheduled for repayment after 1999.
In September 1993, the Telephone Company called $45.0 million
of 5.75% debentures due November 1996. The debentures were
redeemed in November 1993. The costs associated with this
redemption did not result in a material charge in 1993.
In December 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 with maturities ranging from 10 to 40 years. In
December 1993, the Telephone Company called $200.0 million of
8.63% debentures and announced that it would repurchase up to
$220.0 million of medium-term notes with rates ranging from
9.60% to 9.63%. The Telephone Company repurchased $166.5
million of these notes and 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 the registration statement, the Telephone
Company sold, in December 1993, with DPUC approval, $445.0
million of unsecured notes with interest rates ranging from
6.13% to 7.25%. The proceeds of the sale were used to
repurchase the debt issues discussed previously and purchase
securities placed in the irrevocable trust established for the
"in-substance defeasance." The costs associated with the 1993
redemptions were recorded as an extraordinary charge totaling
$44.0 million, net of applicable tax benefits of $38.0
million. As of December 31, 1994, the issued notes were
outstanding. Additional notes may be sold in one or more
issues from time to time as market conditions warrant.
30
In April 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 ranging from 10
to 25 years. Pursuant to the registration statement, the
Telephone Company sold, in August 1992, with DPUC approval,
$180.0 million of unsecured notes with interest rates ranging
from 7.00% to 7.20%. The proceeds from the sale were used to
redeem $175.0 million of debentures with interest rates
ranging from 7.75% to 8.13%, which were called in August 1992.
The costs associated with the 1992 redemptions were recorded
as an extraordinary charge totaling $2.7 million, net of
applicable tax benefits of $2.0 million. As of December 31,
1994, the issued notes were outstanding.
NOTE 8: 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 $28.7
million, $30.3 million and $32.9 million for 1994, 1993 and
1992, respectively. Aggregate future minimum rental
commitments under noncancelable leases at December 31, 1994
were as follows (in millions):
Operating
Year Leases
1995 $ 20.4
1996 19.2
1997 18.0
1998 17.5
1999 15.3
Thereafter 47.1
Total Minimum Lease Payments $137.5
Future minimum lease payments under capital leases as of
December 31, 1994 are $.2 million through 1999 and $.2 million
thereafter. Of the total $.4 million minimum lease payments,
$.3 million represents future interest.
Included in future minimum rental commitments for operating
leases are amounts attributable to leases with affiliates
totaling $59.1 million.
31
NOTE 9: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
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 Debt - The carrying amount of short-term debt
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 was estimated based on the call price for
those issues.
Long-term Debt - The fair value of the Telephone Company's long-
term debt was 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 carrying amount and estimated fair value of the Telephone
Company's financial instruments are as follows:
Dollars in Millions, at December 31, 1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and temporary cash investments $ 44.2 $ 44.2 $214.5 $214.5
Short-term debt - - (240.0) (253.9)
Long-term debt (746.2) (655.8) (746.1) (760.0)
NOTE 10: 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.
32
NOTE 11: SUPPLEMENTAL FINANCIAL INFORMATION
Dollars in Millions,
For the Years Ended December 31, 1994 1993 1992
Advertising Expense $ 15.6 $ 11.2 $ 9.7
Interest expense:
Long-term obligations $ 53.0 $ 64.4 $ 66.9
Short-term obligations .5 1.5 3.6
Other .4 2.1 1.9
Total Interest Expense $ 53.9 $ 68.0 $ 72.4
Interest Paid $ 61.3 $ 74.0 $ 68.2
Income Taxes Paid $ 123.9 $ 98.8 $ 87.0
Dollars in Millions, at December 31, 1994 1993
Other current liabilities:
Dividends payable $ 30.0 $ 22.0
Postemployment benefits accrued 11.2 11.0
Interest accrued 10.3 17.8
Other current liabilities 21.2 19.6
Total Other Current Liabilities $72.7 $ 70.4
During 1994, 1993 and 1992, revenues earned from providing
services to AT&T accounted for approximately 11.9%, 12.3% and
12.1%, respectively, of operating revenues. No other customer
accounted for more than 10% of operating revenues.
33
NOTE 12: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Dollars in 1st 2nd 3rd 4th
Millions QTR QTR QTR QTR Total
1994
Total Revenues $369.0 $371.0 $367.5 $ 368.8 $1,476.3
Operating Income $ 86.3 $ 93.8 $ 90.4 $ 90.6 $ 361.1
Net Income $ 43.1 $ 47.8 $ 45.4 $ 47.5 $ 183.8
1993
Total Revenues $353.4 $360.4 $363.2 $ 365.4 $1,442.4
Operating Income
(Loss) $ 80.5 $ 86.5 $ 90.4 $(263.5)(1) $ (6.1)
Income (Loss) Before
Extraordinary Charge
and Accounting
Change $ 38.7 $ 44.1 $ 45.2 $(159.0)(1) $ (31.0)
Extraordinary Charge - - - (44.0) (44.0)
Cumulative effect of
accounting change (6.5) - - - (6.5)
Net Income (Loss) $ 32.2 $ 44.1 $ 45.2 $(203.0)(1) $ (81.5)
(1) Includes a before-tax charge of $335.0 million for
restructuring which reduced net income by $192.7 million.
34
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.
PART III
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 Schedule, and Reports on Form 8-K
(a) Documents filed as part of the report: Page
(1) Report of Independent Accountants 17
Financial Statements Covered by Report of
Independent Accountants
Statement of Income (Loss) and Retained Earnings -
for the years ended December 31, 1994, 1993 and 1992 18
Balance Sheet - as of December 31, 1994 and 1993 19
Statement of Cash Flows - for the years ended
December 31, 1994, 1993 and 1992 21
Notes to Financial Statements 22
(2) Financial Statement Schedule Covered by Report of
Independent Accountants for the three years ended
December 31, 1994:
II - Valuation and Qualifying Accounts 40
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.
35
(3) Exhibits:
Exhibits identified in parentheses below, on file with the
SEC, are incorporated herein by reference as exhibits hereto.
Exhibits numbered 10(iii)(A)1 through 10(iii)(A)14 are management
contracts or compensatory plans required to be filed as exhibits
pursuant to Item 14(c) of Form 10-K.
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 Indenture dated December 13, 1993 between the registrant and
Shawmut Bank Connecticut, National Association, Trustee,
issued in connection with the sale of $200,000,000 of
6 1/8% Medium-Term Notes, Series C, due December 15, 2003
and $245,000,000 of 7 1/4% Medium-Term Notes, Series C,
due December 15, 2033.
10(iii)(A)1 SNET Short Term Incentive Plan as amended February
8, 1995 (Exhibit 10 (iii)(A)1 to 1994 Form 10-K
dated 3/10/95, File No. 1-9157).
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 date December 8, 1993 (Exhibit
10(iii)(A)5 to 1993 Form 10-K dated 3/23/94, File
No. 1-9157). Amendment dated February 8, 1995
(Exhibit 10(iii)(A)5 to 1994 Form 10-K dated
3/10/95, File No. 1-9157).
36
(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). Amendment 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). Amendments dated June
1, 1994 through November 16, 1994 (Exhibit
10(iii)(A)6 to 1994 Form 10-K dated 3/10/95, 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). Amendment 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). Amendment dated
January 1, 1994 (Exhibit 10(iii)(A)12 to 1994 Form
10-K dated 3/10/95, 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).
37
(3) Exhibits (continued):
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
24a Powers of Attorney.
24b Board of Directors' Resolution.
27 Financial Data Schedule
99a Annual Report on Form 11-K for the plan year ended
December 31, 1994 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1995.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1994 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1995.
(b) Reports on Form 8-K:
On October 26, 1994, the Telephone Company filed a report on
Form 8-K, dated October 26, 1994, announcing the Corporation's
financial results for the third quarter of 1994.
On January 25, 1995, the Telephone Company filed a report on
Form 8-K, dated January 24, 1995, announcing the Corporation's
1994 financial results.
38
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 10, 1995
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*
Robert L. Bennett*
Barry M. Bloom* March 10, 1995
F. J. Connor*
William R. Fenoglio*
Claire L. Gaudiani*
J. R. Greenfield*
Burton G. Malkiel*
Frank R. O'Keefe, Jr.*
* by power of attorney
39
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Millions of Dollars)
COL. A COL. B COL. C(1) COL. C(2) COL. D COL. E
Additions
Balance at Charged to Balance
beginning Charged to other accounts Deductions at end
Description of period expense - Note (a) - Note (b) of period
Allowance for Uncollectible
Accounts Receivable:
Year 1994 $20.4 $18.5 $5.6 $21.2 $ 23.3
Year 1993 18.7 25.3 2.3 25.9 20.4
Year 1992 15.0 30.6 3.6 30.5 18.7
(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.
Additions
Balance at Charged to Charged to Deductions Balance
beginning expense other accounts -Note(a) at end
Description of period of period
Restructuring Charge:
Year 1994 $335.0 $ - $- $75.1 $259.9
Year 1993 - 335.0 - - 335.0
(a) Amount represents costs incurred that were charged against the
restructuring reserve.
40
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the
SEC, are incorporated herein by reference as exhibits hereto.
Exhibits numbered 10(iii)(A)1 through 10(iii)(A)14 are management
contracts or compensatory plans required to be filed as exhibits
pursuant to Item 14(c) of Form 10-K.
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 Indenture dated December 13, 1993 between the registrant and
Shawmut Bank Connecticut, National Association, Trustee,
issued in connection with the sale of $200,000,000 of
6 1/8% Medium-Term Notes, Series C, due December 15, 2003
and $245,000,000 of 7 1/4% Medium-Term Notes, Series C,
due December 15, 2033.
10(iii)(A)1 SNET Short Term Incentive Plan as amended February
8, 1995 (Exhibit 10 (iii)(A)1 to 1994 Form 10-K
dated 3/10/95, File No. 1-9157).
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 date December 8, 1993 (Exhibit
10(iii)(A)5 to 1993 Form 10-K dated 3/23/94, File
No. 1-9157). Amendment dated February 8, 1995
(Exhibit 10(iii)(A)5 to 1994 Form 10-K dated
3/10/95, 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). Amendment 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). Amendments dated June
1, 1994 through November 16, 1994 (Exhibit
10(iii)(A)6 to 1994 Form 10-K dated 3/10/95, 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). Amendment 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). Amendment dated
January 1, 1994 (Exhibit 10(iii)(A)12 to 1994 Form
10-K dated 3/10/95, 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.
27 Financial Data Schedule
99a Annual Report on Form 11-K for the plan year ended
December 31, 1994 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1995.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1994 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1995.