-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, WV7y5GZNS4gbVf1rL0GiHaShe9dstAC/V+ocBdw1BR6cbyI4KuGRFRrFUsXv9PY1 6gHvTfkF6F7jZGlivrUVCg== 0000790650-94-000003.txt : 19940324 0000790650-94-000003.hdr.sgml : 19940324 ACCESSION NUMBER: 0000790650-94-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORP CENTRAL INDEX KEY: 0000790650 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 061157778 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-09157 FILM NUMBER: 94517347 BUSINESS ADDRESS: STREET 1: 227 CHURCH ST CITY: NEW HAVEN STATE: CT ZIP: 06510 BUSINESS PHONE: 2037715200 MAIL ADDRESS: STREET 1: 227 CHURCH STREET CITY: NEW HAVEN STATE: CT ZIP: 06510 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1993 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from Commission File Number 1-9157 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) Connecticut 06-1157778 (State or other (I.R.S. Employer jurisdiction of Identification Number) incorporation or organization) 227 Church Street, New Haven, CT 06510 (Address of principal (Zip Code) executive offices) 203) 771-5200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common stock-par value $1 New York and Pacific Stock per share Exchanges Rights to purchase common New York and Pacific Stock stock Exchanges (Currently traded with common stock) 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 . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x At February 28, 1994, 64,001,753 common shares were outstanding. At February 28, 1994, the aggregate market value of the voting stock held by non-affiliates was $2,022,514,890. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1993 (Part II) (2) Portions of the registrant's definitive Proxy Statement dated March 28, 1994 issued in connection with the 1994 Annual Meeting of Stockholders (Part III) 1 TABLE OF CONTENTS Item Page 1. Business 3 2. Properties 15 3. Legal Proceedings 16 4. Submission of Matters to a Vote of Security Holders 16 PART II 5. Market for the Registrant's Common Stock and Related Shareholder Matters 18 6. Selected Financial Data 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 8. Financial Statements and Supplementary Data 18 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 10. Directors and Executive Officers of the Registrant 18 11. Executive Compensation 18 12. Security Ownership of Certain Beneficial Owners and Management 18 13. Certain Relationships and Related Transactions 18 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K 19 See page 17 for "Executive Officers of the Registrant." 2 PART I Item 1. Business GENERAL Southern New England Telecommunications Corporation (the "Corporation") was incorporated in 1986 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 Corporation is a holding company engaged through its subsidiaries in operations principally in the State of Connecticut: The Southern New England Telephone Company (providing for the most part regulated telecommunications services and directory publishing services); SNET America, Inc. (providing interstate and international long distance services to Connecticut customers); SNET Cellular, Inc., SNET MobileCom, Inc. and SNET Paging, Inc. (providing personal communications services); SNET Diversified Group, Inc. (primarily engaged in the leasing of communications equipment to residential and business customers; and providing other telecommunications services not subject to regulation); and SNET Real Estate, Inc. (engaging in leasing commercial real estate). The Corporation furnishes financial and strategic planning, and stockholder relation functions on its own behalf and on behalf of its subsidiaries. THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY The Southern New England Telephone Company ("Telephone Company"), a local exchange carrier ("LEC"), was incorporated in 1882 under the laws of the State of Connecticut and is engaged in the provision of telecommunications services in the State of Connecticut, most of which are subject to rate regulation. These telecommunications services include (i) local and intrastate toll services, (ii) exchange access service, which links customers' premises equipment ("CPE") to the facilities of other carriers, and (iii) other services such as digital transmission of data and transmission of radio and television programs, packet switched data network and private line services. Through its directory publishing operations, the Telephone Company publishes and distributes telephone directories throughout Connecticut and certain adjacent communities. In 1993, approximately 75% of the Corporation's consolidated revenues and sales were derived from the Telephone Company's rate regulated telecommunication services. The remainder were derived principally from the Corporation's other subsidiaries, 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. 3 State Regulatory Matters The Telephone Company, in providing telecommunications services in the State of Connecticut, is subject to regulation by the Connecticut Department of Public Utility Control ("DPUC"), which has jurisdiction with respect to intrastate rates and services, and other matters such as the approval of accounting procedures, the issuance of securities and the setting of depreciation rates on telephone plant utilized in intrastate operations. The DPUC has adopted for intrastate ratemaking purposes accounting and cost allocation rules, similar to those adopted by the Federal Communications Commission ("FCC"), for the separation of costs of regulated from non-regulated activities. State Regulation On May 24, 1993, the DPUC issued a final decision on the capital recovery portion of the November 1992 rate request submitted by the Telephone Company ("Rate Request"). The Telephone Company was granted an increase in the composite intrastate depreciation rate from 5.7% to approximately 7.3%. This equated to an increase in Telephone Company revenue requirement of approximately $40 million annually. The new depreciation rates were implemented effective July 1, 1993. On July 7, 1993, the DPUC issued a final decision ("Final Decision-I") in its three-phase review of the current and future telecommunications requirements of Connecticut and a final decision ("Final Decision-II") in the remainder of the Rate Request docket. The Final Decision-I addressed the issues of (i) competition [see Item 1., "Competition"]; (ii) infrastructure modernization; (iii) rate design and pricing principles; and (iv) regulatory and legislative frameworks. With respect to "rate design and pricing principles," the DPUC stated that the pricing of all services must be more in line with the costs of providing these services. Historically, to provide universal service, basic residential services have been subsidized by other tariffed services, primarily message toll and business services. In regard to the regulatory and legislative framework, the DPUC endorsed the concept of incentive-based regulation as a potentially more effective and efficient regulatory system than the present rate of return regulation. The Final Decision-II authorized a rate of return on the Telephone Company's common equity ("ROE") of 11.65% and an increase in intrastate revenue of $37.5 million effective July 7, 1993. The Telephone Company was authorized previously to earn a 12.75% ROE. On August 13, 1993, the DPUC granted the Telephone Company an additional revenue requirement of $1.9 million to the $37.5 million previously awarded based on a review of certain areas requested by the Telephone Company. The total increase in intrastate revenue of $39.4 million is virtually offset by the approximate $40 million increase in capital recovery. In addition, the Final Decision-II addressed areas of infrastructure modernization and incentive regulation. Under infrastructure modernization, the Final Decision-II supported, but did not mandate, implementation of an infrastructure modernization program. On December 3, 1993, the Telephone Company sought approval from the DPUC to allow the Telephone Company to develop and provide electronic information services ("EIS"), including electronic publishing services. Since 1984, dramatic industry changes in technology, regulation and competition have eliminated any need for such a restriction. For the last three years, AT&T 4 and the Regional Bell Operating Companies ("RBOCs") have been permitted to enter the electronic publishing and information services markets. For the same reasons that the U.S. District Court lifted the ban on information services and electronic publishing services for AT&T and the RBOCs, the Company believes that the DPUC should lift the ban on the Telephone Company offering of EIS. A hearing in this matter is expected in the first half of 1994. State legislation, signed into law effective July 1, 1993, authorized the formation of a task force to study Connecticut's telecommunications infrastructure and policies. Draft legislation, based on the recommendations the task force submitted in February 1994, provides a framework to move forward with a new regulatory model for Connecticut. This model would move telecommunications toward a fully competitive marketplace and provide alternative forms of regulation. Overall, the goals of the draft legislation are to: (i) ensure high-quality and affordable universal telecommunications service for Connecticut customers; (ii) promote effective competition and the development of an advanced infrastructure; and (iii) enhance the efficiency of government, educational, and health care facilities through telecommunications. Intrastate Rates The Final Decision-II established rates designed to achieve the increase in intrastate revenue of $39.4 million. The following major provisions were included in the Final Decision-II: (i) reductions in intrastate toll rates including several toll discount plans; (ii) an increase in basic local exchange rates for residential and business customers to be phased in over a two-year period; (iii) a reduction in the pricing ratio gap between business and residential basic local service over a two-year period: (iv) a $7.00 per month Lifeline credit for low-income residential customer; (v) an increase in local calling service areas for most customers with none being reduced: (vi) an increase in the local coin telephone rate from $.10 to $.25; (vii) an increase in the directory assistance charge from $.24 to $.40 and a decrease in the number of "free" directory assistance calls; and (viii) a late payment charge of 1% monthly effective January 1, 1994. This rate award was implemented on July 9, 1993 through a combination of increases for coin telephone calls, directory assistance calls along with an approximate 15% interim surcharge on the remaining products and services with authorized increases including local exchange. On July 22, 1993, the DPUC issued a supplemental decision reducing the interim surcharge implemented on July 9, 1993 to approximately 8%. The Telephone Company issued credits during August of 1993 to customers who were charged at the higher rate. The 8% surcharge was in effect until October 9, 1993, when the remaining new rates became effective, including an average increase in residential basic local exchange rates of $.32 a month and a slight decrease in average monthly business rates. In addition, residential basic local exchange rates will increase $.31 a month and business rates will decrease an average of $.84 a month beginning in July 1994. At December 31, 1993, the Telephone Company's intrastate ROE was below the authorized 11.65%. Federal Regulatory Matters The Telephone Company is subject to the jurisdiction of the FCC with respect to interstate rates, services, video dial tone, access charges and other matters, including the prescription of a uniform system of accounts and the setting of depreciation rates on plant utilized in interstate operations. The FCC also prescribes the principles and procedures (referred to as "separations procedures") used to separate investments, revenues, expenses, taxes and reserves between the interstate and 5 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. ratemaking purposes. Federal Regulation On July 1, 1993, the FCC, in connection with its normal triennial review of depreciation, granted the Telephone Company new depreciation rates retroactive to January 1, 1993. The new rates increased depreciation expense by approximately $11 million in 1993. Under current price cap regulation, however, any changes in depreciation rates cannot be reflected in interstate access rates (see "Interstate Rates," below). On January 19, 1994, the Telephone Company filed suit in the U.S. District Court in New Haven claiming that the Cable Communications Policy Act of 1984 ("Cable Act") violates the Telephone Company's First and Fifth Amendment rights. The Cable Act limits the in-territory provision of cable programming by LECs such as the Telephone Company. The Cable Act currently prohibits LECs from owning more than 5% of any company that provides cable programming in their local service area. Since January 1, 1988, the Telephone Company has utilized an FCC approved, company specific Cost Allocation Manual ("CAM"), which apportions costs between regulated and non-regulated activities, and describes transactions between the Telephone Company and its affiliates. In addition, the FCC requires larger LECs, including the Telephone Company, to undergo an annual independent audit to determine whether the LEC is in compliance with its approved CAM. The Telephone Company has received audit reports for 1988 through 1992 indicating it is in compliance with its CAM, and is currently undergoing an audit for the year 1993. Interstate Rates The Telephone Company elected price cap regulation effective July 1, 1991. Under price cap regulation, which replaces traditional rate of return regulation, prices are no longer tied directly to the costs of providing service, but instead are capped by a formula that includes adjustments for inflation, assumed productivity increases, and "exogenous" factors, such as changes in accounting principles, in FCC cost separation rules, and taxes. The treatment as exogenous of various factors affecting a company's costs is subject to FCC interpretation. By electing price cap regulation, the Telephone Company is provided the opportunity to earn a higher interstate rate of return than that allowed under traditional rate of return regulation. However, price cap regulation presents additional risks since it establishes limits by which the Telephone Company is able to increase rates, even if the Telephone Company's interstate rate of return falls below the authorized rate of return. The Telephone Company is allowed to annually elect a productivity offset factor of 3.3% or 4.3%. Since price cap regulation was elected in July 1991, the Telephone Company has selected the 3.3% productivity factor and does not anticipate changing its election for the next tariff period. Choosing the 3.3% factor, the Telephone Company is allowed to earn up to a 12.25% interstate rate of return annually. Earnings between 12.25% and 16.25% would be shared equally with customers, and earnings over 16.25% would be returned to customers. Any amounts returned to customers would be in the form of prospective rate reductions. In addition, the Telephone Company's ability to achieve or exceed its interstate rate of 6 return will depend, in part, on its ability to meet or exceed the assumed productivity increase. As of December 31, 1993, the Telephone Company's interstate rate of return was below the 12.25% threshold. The Telephone Company filed tariffs under price cap regulation on April 2, 1993 which took effect on July 2, 1993, subject to the FCC's further investigation. The Telephone Company will file its 1994 annual interstate access tariff filing on April 1, 1994 to become effective July 1, 1994. The filing will adjust interstate access rates for an experienced rate of inflation, the FCC's productivity target, and exogenous cost changes, if any. In January 1994, the FCC began its scheduled inquiry into the price cap plan for LECs, to determine whether to revise the current plan to improve its performance in meeting the FCC's objectives. Results of this inquiry are expected in late 1994 or early 1995. In an order released on January 9, 1990, which did not directly apply to the Telephone Company, the FCC established a precedent whereby a customer has a right to recover damages if they can establish that a LEC exceeded its authorized rate of return. The FCC, in a March 1993 order responding to a complaint filed by Sprint Communications Company ("Sprint") alleging overearnings in switched traffic sensitive access charges, affirmed the Telephone Company's right to offset overearnings in one access category with underearnings in another category, and held that the Telephone Company had no liability. Sprint has appealed the order to the U.S. Court of Appeals. Regulated Operations The network access lines provided by the Telephone Company to customers' premises can be interconnected with the access lines of other telephone companies in the United States and with telephone systems in most other countries. The following table sets forth, for the Telephone Company, the number of network access lines in service at the end of each year and the number of intrastate toll and intrastate WATS messages handled for each year: 1993 1992 1991 1990 1989 Network Access Lines in Service 1,964 1,937 1,922 1,904 1,875 (in thousands) Intrastate Toll and WATS Messages 524 526 516 521 523 (in millions The Telephone Company has been making, and expects to continue to make, significant capital expenditures to meet the demand for regulated telecommunications services and to further improve such services (see discussion of I-SNET in "Competition"). The total gross investment in telephone plant increased from approximately $3.4 billion at December 31, 1988 to approximately $4.0 billion at December 31, 1993, after giving effect to retirements, but before deducting accumulated depreciation at either date. Since 1989, cash expended for capital additions was as follows: 7 Dollars in millions 1993 1992 1991 1990 1989 Cash Expended for Capital Additions $231.6 $269.1 $296.3 $370.0 $338.8 In 1993, the Telephone Company funded its cash expenditures for capital additions entirely through cash flows from operations. In 1994, capital additions are expected to be approximately $230 million. The Telephone Company expects to fund substantially all of its 1994 capital additions through cash flows from operations. The Telephone Company currently accounts for the economic effects of regulation in accordance with the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." In the event recoverability of operating costs through rates becomes unlikely or uncertain, whether resulting from competitive effects or specific regulatory actions, SFAS No. 71 would no longer apply. The financial impact of an accounting change, should the Telephone Company no longer qualify for the provisions of SFAS No. 71, would be material. Competition The Telephone Company's regulated operations are subject to competition from companies, carriers and competitive access providers which construct and operate their own communications systems and networks for the provision of services to others. At present, regulation continues to provide for a system of subsidies which prevent the Telephone Company's prices from moving toward the cost of providing the service. The Telephone Company's ability to compete depends to some degree on the action of regulators regarding the pricing of local, toll and network access services, and on the Telephone Company's continuing ability to manage its costs effectively. In the Final Decision-I, the DPUC concluded that currently authorized intrastate competition has not adversely affected either service availability or cost, and that a broadened scope of intrastate competitive participation was prudent and warranted. Accordingly, the DPUC found that 10XXX calling and resale competition were in the public interest and should be allowed beginning July 7, 1993 in accordance with recently enacted State legislation. Using 10XXX calling, customers can use any certified carrier for interexchange calling within Connecticut by dialing 1, 0, and XXX (a three-digit carrier code). Terms and conditions associated with the provision of specialized/ancillary services, including monitoring, reporting and compensation, would no longer apply. Since the issuance of Final Decision-I, several interexchange carriers have filed applications with and received approval from the DPUC to offer 10XXX intrastate long-distance service. In addition, a number of resellers have filed for initial certificates of public convenience and necessity. The Telephone Company anticipates additional applications will be filed. The introduction of competition to intrastate long- distance service and the Telephone Company's reduction in intrastate toll rates will further erode the Telephone Company's intrastate toll revenues. Pursuant to Final Decision-I, the Telephone Company filed on October 1, 1993 its proposed implementation plan for equal access based on customer preference for dual primary interexchange carrier capability (ability to choose one carrier for interstate calling and either the same or a different carrier for intrastate long distance calling). The Telephone Company's position 8 regarding cost recovery remains that interexchange carriers should pay for the direct costs of implementing equal access. Regarding competition for local exchange services, in January 1994, MCI announced plans to construct and operate local communication networks in large markets throughout the United States, including parts of Connecticut in which the Telephone Company operates. These networks would allow MCI to bypass the Telephone Company's facilities and provide services directly to customers. Pending DPUC approval, these services are expected to be available in Connecticut within two to three years. Also in January 1994, the Telephone Company announced that it had reached an agreement to lease part of its existing digital fiber optic ring network in the greater Hartford metropolitan area to MFS Communications, Inc ("MFS"). This agreement allows MFS to provide services to large business customers on an intraexchange basis and eliminates the need for MFS to construct their own facilities. Teleport Communications Group, another competitive access provider, recently announced plans to provide local telephone links for interstate services to businesses and long distance companies in the Hartford area. In an order adopted in September 1992, the FCC required certain LECs, including the Telephone Company, to offer expanded special access interconnection to all interested parties, permitting competitors to terminate their own transmission facilities in LEC central offices. The Telephone Company filed tariffs which were implemented in June 1993, subject to investigation, and was granted some additional pricing flexibility in light of this increased competition. In August 1993, the FCC adopted rules, which largely mirror the requirements adopted in September 1992 for special access interconnection, requiring certain LECs, including the Telephone Company, to offer expanded interstate switched access interconnection. The Telephone Company tariffs which implemented changes associated with switched access interconnection became effective in February 1994. The Telephone Company has received applications from competitive access providers for special access interconnection in selected central offices of the Telephone Company. The Telephone Company anticipates additional applications for both special and switched access interconnection will be filed. A number of LECs, including the Telephone Company, have appealed the FCC's orders to offer special and switched access interconnection. Oral arguments on the appeal of the special access order were heard in February 1994 with a decision expected later in 1994. The appeal of the switched access order has been delayed pending a decision on the special access appeal. The Telephone Company, expecting to see continued movement toward a fully competitive telecommunications marketplace, both on an interexchange and intraexchange basis, has taken several steps to effectively position itself. On January 13, 1994, the Telephone Company announced its intention to invest $4.5 billion over the next 15 years to build a statewide information superhighway ("I-SNET"). I-SNET will be an interactive multimedia network capable of delivering voice, video and a full range of information and interactive services. The Telephone Company expects I-SNET will reach approximately 500,000 residences and businesses thru 1997. In addition, the Telephone Company has reduced its intrastate toll rates beginning in July 1993 [see Item 1., "Intrastate Rates"], is committed to reducing its cost structure, remains focused on providing quality customer service and has introduced several new services as mentioned below. 9 New Services On March 31, 1993, the Telephone Company together with Sprint announced the introduction of 800 CustomLink Service (service mark). This service allows the Telephone Company to offer it business customers an 800 service enabling them to receive calls from anywhere in the United States as well as international locations. In 1993, the Telephone Company launched the next generation of CentraLink products, CentraLink (service mark) 3100. CentraLink 3100 is a central-office based product that allows flexibility to add additional phone lines, locations and features to adapt to customers' changing telecommunications requirements. In 1993, the Corporation established SNET America, Inc. ("SNET America") under the laws of Connecticut. SNET America offers a complete range of interstate and international long distance services to Connecticut customers, including calling card and 800 service, along with volume discount plans such as Distance Plus (service mark). Distance Plus offers graduated discounts where the discount increases as the usage increases. SNET America began offering service in the third quarter of 1993. Under a proposed marketing arrangement between the Telephone Company and SNET America filed with the DPUC on January 7, 1994, the Telephone Company anticipates selling SNET America's interstate and international products, and SNET America will sell the Telephone Company's intrastate products. This arrangement will enable the Corporation to satisfy its customers complete long distance calling needs with a single point of contact. On October 21, 1993, the FCC approved the Telephone Company's application to construct, operate, own, and maintain facilities to conduct a technology and marketing trial for use in providing video dial tone service in West Hartford, Connecticut. With construction of the fiber optic and coaxial facilities completed, the trial began in early 1994. The trial, offered to approximately 500 customers, provides hundreds of choices of videos. On December 15, 1993, the Telephone Company filed a request with the FCC for an expansion of this trial. The proposal seeks to provide this service to an additional 20,000 customers in other areas of Connecticut. On December 22, 1993, the Telephone Company filed with the DPUC its application to conduct a market trial for Digital Enhancer, an Integrated Services Digital Network offering. Digital Enhancer provides customers with integrated voice and data communications capabilities on a single telephone access line. Digital Enhancer will be offered from specially equipped digital central offices and will require customer- provided terminal equipment to access and use the service. This service will enable customers to reduce their telecommunications costs by reducing wiring requirements, increase productivity through increased data transmission speed, and improve quality of service through reduced data error rates. Directory Publishing The Telephone Company's directory publishing operation remains sensitive to the Connecticut economy. The continuing decline in new business formations and the acceleration of business failures within the State will further suppress advertising growth potential in the near term. 10 The Connecticut advertising marketplace continues to undergo major structural changes and is becoming increasingly more fragmented and competitive. Directory publishing faces potential increased competition from non-traditional services such as desktop publishing, electronic shopping services and the expansion of cable television. Furthermore, additional competition may arise from the regional BOCs' ability to now offer information services. The Telephone Company's directory publishing operation will continue to strategically widen its business focus and respond to emerging market opportunities to position itself effectively against this potential competition [see discussion of EIS in Item 1., "State Regulation"]. 11 PERSONAL COMMUNICATIONS SERVICES The Corporation provides personal communications services, which consist of wholesale and retail cellular telephone communications and paging services, through its subsidiaries SNET Cellular, Inc. ("Cellular"), SNET MobileCom, Inc. ("MobileCom") and SNET Paging, Inc. ("Paging"). SNET Cellular, Inc. Cellular was incorporated in 1985 under the laws of the State of Connecticut. In 1990, Cellular formed the Springwich Cellular Limited Partnership ("Springwich") with NYNEX Mobile Communications Company ("NYNEX Mobile"), The Granby Telephone and Telegraph Company of Massachusetts, Inc., The Woodbury Telephone Company and a fifth partner (New York SMSA Limited Partnership, of which NYNEX Mobile is the managing partner). Springwich is authorized to provide wholesale cellular radio telecommunications services in the Hartford, New Haven, New London, and Fairfield, Connecticut New England County Metropolitan Areas ("NECMAs") and in the Springfield, Massachusetts NECMA. Springwich also is licensed to provide cellular wholesale service in three Rural Service Areas ("RSA"), Windham and Litchfield Counties in Connecticut and Franklin County in Massachusetts. The combined population of this region is approximately 4 million. Springwich is currently subject to FCC, DPUC and the Massachusetts Department of Public Utility jurisdictions. In January of 1993, Cellular incorporated SNET Springwich, Inc. ("SSI"), a wholly owned subsidiary of Cellular. Cellular transferred a 32% general partnership interest in Springwich to SSI in both 1993 and 1994 and anticipates transferring the remaining 18.5% partnership interest in Springwich to SSI in 1995. Springwich has "roamer agreements" with other cellular carriers which allow customers of Springwich access to cellular markets throughout the United States and Canada and allow customers of other carriers to use Springwich's network. On July 31, 1990, Springwich petitioned the DPUC to initiate a proceeding to address whether the conditions necessary to forebear from rate regulation of cellular mobile telephone service in Connecticut NECMAs were present, as required of the DPUC under Connecticut legislation enacted in 1985. Subsequent to the petition, the DPUC initiated a proceeding (Docket No. 90-08-03) to address this issue. In 1991, the DPUC issued a decision denying Springwich's petition for forbearance citing that the record did not indicate that forbearance would enhance or expedite the evolution of the cellular marketplace. On December 16, 1992, the DPUC reopened Docket No. 90-08-03 to reconsider its 1991 decision. The DPUC closed this docket on December 15, 1993 without a decision. Pursuant to a recent federal law, state regulation of cellular activities is pre-empted unless the FCC approves a petition by the state regulatory agency to continue its regulatory scheme. Such a filing, if one is to be made, must be done by August 10, 1994., In February 1993, Cellular announced that it had joined with other major mobile communications companies to form MobiLink (service mark) Partners. In July 1993, the MobiLink Partners set common standards for cellular service nationwide under the new brand name Mobilink (service mark). Mobilink includes a number of innovations designed to make cellular service easier to use and accessible to more cellular phone users across much of the United States and Canada. 12 On October 22, 1993, the FCC issued a report and order allocating radio spectrum to be licensed for use in providing personal communications services ("PCS"). These bandwidths of spectrum could provide new services such as advanced voice paging, two-way acknowledgment paging, data messaging, electronic mail and facsimile transmissions. Under the order, separate bandwidths would be auctioned to potential PCS providers in each geographic area of the United States. The FCC is seeking comments on the design of the auction process, financing alternatives for special interest licenses, and the classes of licenses and permits that should be included in the competitive bidding process. The auction of these bandwidths of spectrum will allow additional competitors to enter the market place Springwich serves. In 1992, Bell Atlantic Corporation ("Bell Atlantic") completed the acquisition of Metro Mobile CTS, Inc., a non-wireline provider of cellular services that operates in Springwich markets. Bell Atlantic, which operates under the name Bell Atlantic Mobile, has substantial capital, technological and marketing resources. Cellular has made and will continue to make significant investments in network expansion and enhancements in order to effectively compete. SNET MobileCom, Inc. MobileCom was incorporated in 1985 under the laws of the State of Connecticut. MobileCom purchases wholesale cellular communications service from Springwich and resells cellular communications service to the retail market under the servicemark LINX in Springwich's serving area. MobileCom markets its services through its internal sales force and through agreements with third-party distributors. MobileCom anticipates continuing competition from local, regional and national resellers. Over the past few years, intense competition for new customers has led to increases in selling and promotional costs. MobileCom anticipates that this trend will continue into the foreseeable future. In response to this competition, MobileCom has offered a new cellular service plan called Linx Omni that provides customers with a package of cellular services plus a free cellular phone when the customer signs a 24 month service agreement. SNET Paging, Inc. Paging was incorporated in February 1990 under the laws of the State of Connecticut. Paging launched service on April 1, 1991. Paging provides its customers with tone, numeric and alphanumeric paging services through its service trademark Page 2000 (service mark). Customers have a choice of either selecting local or regional coverage. Paging also serves as a reseller of SkyTel, a nationwide paging service. Currently Paging's network is capable of providing services in Connecticut, most of Massachusetts, southern New Hampshire, Rhode Island, Metropolitan New York City, and northern New Jersey. TNI Associates, Inc. ("TNIA"), formerly SNET Paging Acquisition Corporation, a wholly owned subsidiary of Paging, also was formed in February 1990 under the laws of the State of Connecticut. In October 1993, TINA purchased the remaining 50.5% partnership interest in the net assets of TNI Associates (the "TNI Partnership") from Telecommunications Network, Inc. The 13 TNI Partnership business purchased by TNIA operates a wide area paging network covering the seaboard area from Metropolitan New York to southern New Jersey and Philadelphia. Paging has three primary competitors in the Northeast region it serves. One is dominant in the Connecticut marketplace and is perceived as offering competitive pricing and a high quality network. The second offers multistate and regional services that focus on large metropolitan markets with less emphasis on Connecticut. The last is a large national carrier that offers the lowest price with an apparent strategy of building market share rapidly. SNET DIVERSIFIED GROUP, INC. SNET Diversified Group, Inc. ("Diversified") was incorporated in 1986 under the laws of the State of Connecticut in order to identify and develop new, non-regulated business opportunities. The majority of Diversified's activities are leasing and selling CPE to residential and small business customers. Prior to 1988, embedded CPE was leased under regulation to customers by the Telephone Company. As part of the 1993 SNET Systems, Inc. ("Systems") reorganization, Diversified established a new division, Business Communications, which continues to offer and maintain certain key products that are complementary to the Telephone Company's central-office based solutions. SNET Premium Services, which offers network related activities such as ConnNet (service mark) and Conference Calling, was transferred from the Telephone Company to Diversified effective January 1, 1993. Diversified faces significant competition from numerous department store, discount store, and business equipment retailers that carry CPE. Diversified has differentiated its product line from its competitors by offering a wide array of quality products coupled with superior customer assistance and by offering customers leasing options. SNET REAL ESTATE, INC. SNET Real Estate, Inc. ("Real Estate") was incorporated in 1983 under the laws of the State of Connecticut. Real Estate is an owner of commercial property which it leases under operating leases and is a participant in a partnership that also leases commercial property. Currently, Real Estate is managing its existing portfolio and is not actively pursuing additional real estate investments. Real Estate faces a risk that real estate markets in which its properties are located, primarily Connecticut, may further deteriorate from their current condition. This risk is minimized by the conservative nature of Real Estate's portfolio, a majority of which is leased to affiliates. SNET SYSTEMS, INC. SNET Systems, Inc. ("Systems") was incorporated in 1986 under the laws of the State of Connecticut and was subsequently dissolved in December 1993. Systems marketed a full range of sophisticated communications systems and services primarily to large business customers as well as provided consulting, installation and maintenance services related to communications systems. 14 On January 15, 1993, the Corporation announced that it would disband Systems and reassign its functions and employees to other organizations within the Corporation. This reorganization of Systems' operations is in line with the Corporation's strategy to focus on the Telephone Company's central-office based solutions. As discussed previously, a new division of Diversified, Business Communications, was formed as a result of this reorganization and will continue to offer and maintain certain key products that are complementary to central-office based solutions. SNET CREDIT, INC. SNET Credit, Inc. ("Credit") was incorporated in 1983 under the laws of the State of Connecticut. Credit provided lease financing of telecommunications and other equipment for Systems and third parties under operating, direct-financing and leveraged leases. In September 1992, the Corporation announced its intention to withdraw from the finance business by phasing out the activities of Credit because it no longer fit into the Corporation's long-term strategic business plan. During the first and second quarters of 1993, Credit sold portions of its direct-financing lease portfolio. Certain existing leveraged leases and direct financing leases have been retained as investments. Employee Relations The Corporation and its subsidiaries employed approximately 9,820 persons at February 28, 1994, of whom approximately 68% are represented by The Connecticut Union of Telephone Workers, Inc. ("CUTW"), an unaffiliated union. In December 1993, the Corporation announced a business restructuring program designed to reduce costs and will result in approximately 2,500 employees exiting the business over the next two to three year period. Item 2. Properties The principal properties of the Corporation and its subsidiaries do not lend themselves to a detailed description by character and location. The majority of telecommunications plant, property and equipment of the Corporation and its subsidiaries is owned by the Telephone Company. Of the Corporation's investment in telecommunications plant, property and equipment at December 31, 1993, central office equipment represented 39%; 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 35%; land and buildings (occupied principally by central offices) represented 12%; telephone instruments and related wiring and equipment, including private branch exchanges, substantially all of which are on the premises of customers, represented 2%; 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. 15 The Corporation has a significant investment in the properties, facilities and equipment necessary to conduct its business wherein the overwhelming majority of this investment relates to telephone operations. Management believes that the Corporation's facilities and equipment are suitable and adequate for the business. As discussed previously, the Telephone Company plans to invest $4.5 billion over the next 15 years to build I-SNET. The Telephone Company plans to support this investment primarily through increased productivity from the new technology deployed, ongoing cost containment initiatives and customer demand for the new services offered. The Telephone Company does not plan to request a rate increase for this investment. Item 3. Legal Proceedings The Corporation and certain of its subsidiaries are 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 or the Corporation. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. 16 Executive Officers of the Registrant (1) (as of January 1, 1994) Executive Officer Name Age(2) Position Since Daniel J. Miglio 53 Chairman, President and Chief Executive Officer 1/86 Robert F. Neal 58 Senior Vice President- Organization Development 1/87 Ronald M. Serrano 38 Senior Vice President- Corporate Development 1/93 Donald R. Shassian 38 Senior Vice President and Chief Financial Officer 12/93 Madelyn M. DeMatteo 45 Vice President, General Counsel and Secretary 5/90 John A. Sadek 60 Vice President and Comptroller 1/86 (1) Includes executive officers subject to Section 16 of the Securities Exchange Act of 1934. (2) As of December 31, 1993. Mr. Miglio, Mr. Neal, Mr. Sadek and Ms. DeMatteo have held high level managerial positions with the Corporation or its subsidiaries for more than the past five years. Mr. Serrano was a Vice President of Mercer Management Consulting, Inc., (formerly Strategic Planning Associates) for more than five years prior to joining the Corporation. Mr. Shassian was a partner with Arthur Andersen & Co., independent accountants, for more than five years prior to joining the Corporation. 17 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The common stock of the Corporation is listed on the New York and Pacific stock exchanges and the number of holders of record, computed on the basis of registered accounts, were approximately 57,177 as of February 28, 1994. Information with respect to the quarterly high and low sales price for the Corporation's common stock and quarterly cash dividends declared is included in the registrant's Annual Report to Stockholders on page 48 under the caption "Market and Dividend Data" and is incorporated herein by reference pursuant to General Instruction G(2). Items 6 through 8. Information required under Items 6 through 8 is included in the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1993 on pages 18 through 47 in their entirety and is incorporated herein by reference pursuant to General Instruction G(2). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on any 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 included in the registrant's Proxy Statement dated March 28, 1994 on pages 1 (commencing under the caption "Proxy Statement") through 17. Such information is incorporated herein by reference. Information regarding executive officers of the registrant required by Item 401(b) and (e) of Regulation S-K is included in Part I of this Annual Report on Form 10-K following Item 4. 18 PART IV Item 14. Exhibits, Financial Statement Schedules, and Page Reports on Form 8-K (a) Documents filed as part of the report: (1) Report on Consolidated Financial Statements * Report of Audit Committee * Report of Independent Accountants * Consolidated Financial Statements: Consolidated Statement of (Loss) Income - for the years ended December 31, 1993, 1992 and and 1991 * Consolidated Balance Sheet - as of December 31, 1993 and 1992 * Consolidated Statement of Changes in * Stockholders' Equity - for the years ended December 31, 1993, 1992, 1991 * Consolidated Statement of Cash Flows - for the years ended December 31, 1993, 1992 and 1991 * Notes to Consolidated Financial Statements * (2) Consolidated Financial Statement Schedules for the year ended December 31, 1993 Report of Independent Accountants 24 V - Telecommunications Plant, Property and 25 Equipment VI - Accumulated Depreciation 29 VIII - Valuation and Qualifying Accounts 30 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. * Incorporated herein by reference to the appropriate portions of the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1993 (see Part II). 19 (3) Exhibits: Exhibits identified in parentheses below, on file with the SEC, are incorporated herein by reference as exhibits hereto. Exhibit Number 3a Amended and Restated Certificate of Incorporation of the registrant as filed June 14, 1990 (Exhibit) 3-A to Form SE dated 3/15/91, File No. 1-9157). 3b By-Laws of the registrant as amended and restated through October 10, 1990 (Exhibit 3 to Form 8-K dated 10/10/90, File No. 1-9157). 4a Rights Agreement dated February 11, 1987 between Southern New England Telecommunications Corporation and The State Street Bank and Trust Company, as Rights Agent (Exhibit 1 to Form SE dated 2/13/87-1, File No. 1-9157). Amendment No. 1 dated December 13, 1989 (Exhibit 4 to Form SE dated 12/28/89, File No. 1-9157). Amendment No. 2 dated October 10, 1990 (Exhibit 4 to Form SE dated 10/12/90, File No. 1-9157). 4b No instrument which defines the rights of holders of long-term debt of the registrant is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. 10 (iii)(A)1 SNET Short Term Incentive Plan as amended March 1, 1993 (Exhibit 10(iii)(A)1 to 1992 Form 10-K dated 3/23/93, File No. 1-9157). 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. 1-9157). 10 (iii)(A)3 SNET Financial Counseling Program as amended January 1987 (Exhibit 10-D to Form SE dated 3/23/87-1, File No. 1-9157). 10 (iii)(A)4 Group Life Insurance Plan and Accidental Death and Dismemberment Benefits Plan for Outside Directors of SNET as amended July 1, 1986 (Exhibit 10-E to Form SE dated 3/23/87-1, File No. 1-9157). 10 (iii)(A)5 SNET Executive Non-Qualified Pension Plan and Excess Benefit Plan as amended November 1, 1991 (Exhibit 10-A to Form SE dated 3/20/92, File No. 1-9157). Amendments dated December 8, 1993. 20 (3) Exhibits (continued): Exhibit Number 10 (iii)(A)6 SNET Management Pension Plan as amended November 1, 1987 (Exhibit 10-C to Form SE dated 3/21/88-1, File No. 1-9157). Amendments dated September 1, 1988 and January 1, 1989 (Exhibit 10-C to Form SE dated 3/21/89, File No. 1-9157). Amendments dated January 1, 1989 through August 6, 1989 (Exhibit 10-B to Form SE dated 3/20/90, File No. 1-9157). Amendments dated June 5, 1991 through September 25, 1991 (Exhibit 10-B to Form SE dated 3/20/92, File No. 1-9157). Amendments dated January 1, 1993 (Exhibit 10(iii)(A)6 to 1992 Form 10-K dated 3/23/93, File No. 1-9157). Amendments dated September 8, 1993 through December 8, 1993. 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. 1-9157). 10 (iii)(A)8 SNET Mid-Career Pension Plan as amended November 1, 1991 (Exhibit 10-D to Form SE dated 3/20/92, File No. 1-9157). Amendments dated December 8, 1993. 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. 1-9157). 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. 1-9157). 10 (iii)(A)12 SNET Retirement and Disability Plan for Non- Employee Directors as amended April 14, 1993. 10 (iii)(A)13 SNET Non-Employee Director Stock Plan effective January 1, 1994 (Exhibit 4.4 to Registration No. 33-51055, File No. 1-9157) 10 (iii)A)14 Description of SNET Executive Retirement Savings Plan. 12 Computation of Ratio of Earnings to Fixed Charges. 13 Pages 18 through 48 of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1993. 21 Subsidiaries of the Corporation. 23 Consent of Independent Accountants. 21 (3)Exhibits (continued): Exhibit Number 24a Powers of Attorney. 24b Board of Directors' Resolution. 99a Annual Report on Form 11-K for the plan year ended December 31, 1993 for the SNET Management Retirement Savings Plan will be filed as an amendment prior to June 30, 1994. 99b Annual Report on Form 11-K for the plan year ended December 31, 1993 for the SNET Bargaining Unit Retirement Savings Plan will be filed as an amendment prior to June 30, 1994. The Corporation will furnish, without charge, to a stockholder upon request a copy of the Annual Report to Shareholders and Proxy Statement, portions of which are incorporated by reference, and will furnish any other exhibit at cost. (b) Reports on Form 8-K: On November 3, 1993, the Corporation and the Telephone Company filed, separately, reports on Form 8-K, dated November 3, 1993, announcing that effective December 1, 1993, Donald R. Shassian, will assume the position of Senior Vice President and Chief Financial Officer of both the Corporation and the Telephone Company. On December 8, 1993, the Corporation and the Telephone Company filed, separately, reports on Form 8-K, dated December 8, 1993, announcing charges against fourth quarter earnings totaling $4.08 per common share. These charges include a restructuring charge for workforce and reengineering reductions, a refinancing charge and a charge for discontinued operations. On January 25, 1994, the Corporation and the Telephone Company filed, separately, reports on Form 8-K, dated January 24, 1994, announcing the Corporation's 1993 financial results. 22 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. SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION By /s/ J. A. Sadek J. A. Sadek, Vice President and Comptroller, March 23, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. PRINCIPAL EXECUTIVE OFFICER: D. J. Miglio* Chairman, President, Chief Executive Officer and Director PRINCIPAL FINANCIAL AND ACCOUNTING OFFICERS: D. R. Shassian* Senior Vice President and Chief Financial Officer J. A. Sadek By /s/ J. A. Sadek Vice President and Comptroller (J. A. Sadek, as attorney-in-fact and on his own behalf) DIRECTORS: F. G. Adams* William F. Andrews* Richard H. Ayers* Zoe Baird* Barry M. Bloom* F. J. Connor* William R. Fenoglio* March 23, 1994 Claire L. Gaudiani* J. R. Greenfield* N. L. Greenman* Worth Loomis* Burton G. Malkiel* Frank R. O'Keefe, Jr.* *by power of attorney 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of Southern New England Telecommunications Corporation: Our report on the consolidated financial statements of Southern New England Telecommunications Corporation has been incorporated by reference in this Form 10-K from the 1993 Annual Report to Stockholders of Southern New England Telecommunications Corporation on page 29 therein. In connection with our audits of such financial statements, we have also audited the related financial statement schedules for each of the three years in the period ended December 31, 1993 listed in Item 14 (a) (2) of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Hartford, Connecticut COOPERS & LYBRAND January 24, 1994 24 Schedule V - Sheet 1 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION SCHEDULE V--TELECOMMUNICATIONS PLANT, PROPERTY and EQUIPMENT (Millions of Dollars) COL. A COL. B COL. C COL. D COL. E COL. F Balance at Additions Retirements Other Balance Year 1993 beginning at cost - Note (b) Changes at end Classification of period - Note(a) - Note (c) of period Land $ 28.4 $ .7 $ - $ - $29.1 Buildings 437.9 27.8 9.2 .7 457.2 Central Office Equipment 1,631.5 116.4 94.2 8.6 1,662.3 Station Apparatus 59.5 8.5 .6 (3.8) 63.6 Large Private Branch Exchange 9.2 - 8.4 - .8 Pole Lines 135.6 5.5 2.4 .2 138.9 Cable 1,083.6 50.8 13.6 .1 1,120.9 Underground Conduit 212.3 9.5 .7 (.9) 220.2 Public Telephone Equipment 16.9 4.3 (1.7) - 22.9 Other Communica- tions Equipment 65.8 7.2 1.9 - 71.1 Furniture and Office Equipment 300.7 44.5 24.0 (.4) 320.8 Vehicles and Other Work Equipment 108.0 8.6 9.9 - 106.7 Telecommunications Plant Property and Equipment Under Construction 84.0 2.1 - (6.6) 79.5 Other 2.0 1.4 - 1.0 4.4 TOTAL (d) $4,175.4 $287.3 $163.2 $(1.1) $4,298.4 The notes on Sheet 4 are an integral part of this Schedule. 25 Schedule V - Sheet 2 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION SCHEDULE V--TELECOMMUNICATIONS PLANT, PROPERTY and EQUIPMENT (Millions of Dollars) COL. A COL. B COL. C COL. D COL. E COL. F Balance at Additions Retirements Other Balance Year 1992 beginning at cost - Note (b) Changes at end Classification of period - Note(a) - Note (c) of period Land $ 27.4 $ .8 $ - $ .2 $28.4 Buildings 423.3 21.9 4.9 (2.4) 437.9 Central Office Equipment 1,578.1 136.4 84.0 1.0 1,631.5 Station Apparatus 74.4 9.8 24.8 .1 59.5 Large Private Branch Exchange 11.5 - 2.3 - 9.2 Pole Lines 131.3 5.9 1.6 - 135.6 Cable 1,029.8 69.2 15.3 (.1) 1,083.6 Underground Conduit 197.4 15.1 .2 - 212.3 Public Telephone Equipment 19.3 .5 2.9 - 16.9 Other Communica- tions Equipment 63.6 5.9 3.6 (.1) 65.8 Furniture and Office Equipment 281.5 30.7 11.0 (.5) 300.7 Vehicles and Other Work Equipment 99.6 15.5 6.8 (.3) 108.0 Telecommunications Plant Property and Equipment Under Construction 92.7 (7.9) - (.8) 84.0 Other 1.0 1.0 - - 2.0 TOTAL (d) $4,030.9 $304.8 $157.4 $(2.9) $4,175.4 The notes on Sheet 4 are an integral part of this Schedule. 26 Schedule V - Sheet 3 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION SCHEDULE V--TELECOMMUNICATIONS PLANT, PROPERTY and EQUIPMENT (Millions of Dollars) COL. A COL. B COL. C COL. D COL. E COL. F Balance at Additions Retirements Other Balance Year 1991 beginning at cost - Note (b) Changes at end Classification of period - Note(a) - Note (c) of period Land $ 27.3 $ .1 $ - $ - $27.4 Buildings 396.9 27.8 1.4 - 423.3 Central Office Equipment 1,545.2 135.6 91.2 (11.5) 1,578.1 Station Apparatus 80.0 4.2 9.8 - 74.4 Large Private Branch Exchange 13.0 - 1.5 - 11.5 Pole Lines 124.6 7.7 1.0 - 131.3 Cable 979.3 65.6 15.1 - 1,029.8 Underground Conduit 188.1 9.5 .2 - 197.4 Public Telephone Equipment 18.4 1.0 .1 - 19.3 Other Communica- tions Equipment 59.5 6.3 2.2 - 63.6 Furniture and Office Equipment 256.9 35.1 24.6 14.1 281.5 Vehicles and Other Work Equipment 92.3 14.8 4.9 (2.6) 99.6 Telecommunications Plant Property and Equipment Under Construction 82.9 9.8 - - 92.7 Other .1 .9 - - 1.0 TOTAL (d) $3,864.5 $318.4 $152.0 $ - $4,030.9 The notes on Sheet 4 are an integral part of this Schedule. 27 Schedule V - Sheet 4 Notes to Schedule V (a) For regulated telephone plant, additions shown include (1) the original cost of reused material, which is concurrently credited to Material and Supplies, and (2) an Allowance for Funds Used During Construction. (b) Items of telecommunications plant, property and equipment when retired, sold or reclassified are deducted from the property accounts at original cost. (c) Represents current year transfers between classifications, and other minor adjustments. (d) For interstate telephone plant, the FCC has approved the equal life group ("ELG") depreciation method using a remaining-life formula on a phased-in basis beginning in 1982. Vintages of interstate plant in service prior to the phase-in of ELG are being depreciated using a composite vintage group method. In addition, the FCC approved the use of straight-line amortization effective January 1, 1987 to recover an interstate reserve deficiency over a five-year period ended December 31, 1993. For intrastate plant, the DPUC approved ELG for 1993 vintages and subsequent periods. Vintages of intrastate plant in service prior to 1993 are being depreciated using a composite vintage group method. For the years 1993, 1992 and 1991, depreciation expense on telecommunications plant expressed as a percentage of average depreciable plant was 7.0%, 6.2% and 6.6%, respectively. Property and equipment other than regulated telephone plant is depreciated primarily using the straight-line method over the estimated useful lives of the assets. Assets acquired under capital leases are generally amortized over the life of the lease using the straight-line method. 28 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION SCHEDULE VI--ACCUMULATED DEPRECIATION (Millions of Dollars) COL. A COL. B COL. C COL. D COL. E COL. F Balance at Additions Retirements Other Balance beginning charged - Note (a) Changes at end Description of period to expense of period Year 1993 $1,408.0 $286.8 $162.4 $(4.2) $1,528.2 Year 1992 1,318.7 247.6 157.1 (1.2) 1,408.0 Year 1991 1,221.5 251.5 154.7 .4 1,318.7 (a) Includes net salvage. (b) Columns B and F include accumulated depreciation on the Corporation's nonregulated telecommunications plant, property and equipment, which is shown net of such accumulated depreciation in Note 13 to the consolidated financial statements. 29 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars) COL. A COL. B COL. C COL. D COL. E COL. F Additions Balance at Additions Charged Balance beginning charged to to other Deductions at end Description of period expense accounts - Note B of -Note (a) period Allowance for Uncollectible Accounts Receivable: Year 1993 $21.8 $ 28.9 $3.6 $27.6 $ 26.7 Year 1992 16.3 33.3 3.9 31.7 21.8 Year 1991 10.3 31.7 3.6 29.3 16.3 Allowance for Uncollectible Direct-Financing Lease Notes Receivable of Discontinued Operations: Year 1993 $ 8.2 $ 15.6 $ - $12.1 $ 11.7 Year 1992 4.6 9.2 - 5.6 8.2 Year 1991 2.7 4.8 - 2.9 4.6 Restructuring Charge: Year 1993 $ - $355.0 $ - $ - $355.0 (a) Includes amounts previously written off that were credited directly to this account when recovered and miscellaneous debits and credits. (b) Includes amounts written off as uncollectible. 30 Exhibit Index Exhibits identified in parentheses below, on file with the SEC, are incorporated herein by reference as exhibits hereto. Exhibit Number 3a Amended and Restated Certificate of Incorporation of the registrant as filed June 14, 1990 (Exhibit) 3-A to Form SE dated 3/15/91, File No. 1-9157). 3b By-Laws of the registrant as amended and restated through October 10, 1990 (Exhibit 3 to Form 8-K dated 10/10/90, File No. 1-9157). 4a Rights Agreement dated February 11, 1987 between Southern New England Telecommunications Corporation and The State Street Bank and Trust Company, as Rights Agent (Exhibit 1 to Form SE dated 2/13/87-1, File No. 1-9157). Amendment No. 1 dated December 13, 1989 (Exhibit 4 to Form SE dated 12/28/89, File No. 1-9157). Amendment No. 2 dated October 10, 1990 (Exhibit 4 to Form SE dated 10/12/90, File No. 1-9157). 4b No instrument which defines the rights of holders of long-term debt of the registrant is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. 10 (iii)(A)1 SNET Short Term Incentive Plan as amended March 1, 1993 (Exhibit 10(iii)(A)1 to 1992 Form 10-K dated 3/23/93, File No. 1-9157). 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. 1-9157). 10 (iii)(A)3 SNET Financial Counseling Program as amended January 1987 (Exhibit 10-D to Form SE dated 3/23/87-1, File No. 1-9157). 10 (iii)(A)4 Group Life Insurance Plan and Accidental Death and Dismemberment Benefits Plan for Outside Directors of SNET as amended July 1, 1986 (Exhibit 10-E to Form SE dated 3/23/87-1, File No. 1-9157). 10 (iii)(A)5 SNET Executive Non-Qualified Pension Plan and Excess Benefit Plan as amended November 1, 1991 (Exhibit 10-A to Form SE dated 3/20/92, File No. 1-9157). Amendments dated December 8, 1993. 10 (iii)(A)6 SNET Management Pension Plan as amended November 1, 1987 (Exhibit 10-C to Form SE dated 3/21/88-1, File No. 1-9157). Amendments dated September 1, 1988 and January 1, 1989 (Exhibit 10-C to Form SE dated 3/21/89, File No. 1-9157). Amendments dated January 1, 1989 through August 6, 1989 (Exhibit 10-B to Form SE dated 3/20/90, File No. 1-9157). Amendments dated June 5, 1991 through September 25, 1991 (Exhibit 10-B to Form SE dated 3/20/92, File No. 1-9157). Amendments dated January 1, 1993 (Exhibit 10(iii)(A)6 to 1992 Form 10-K dated 3/23/93, File No. 1-9157). Amendments dated September 8, 1993 through December 8, 1993. 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. 1-9157). 10 (iii)(A)8 SNET Mid-Career Pension Plan as amended November 1, 1991 (Exhibit 10-D to Form SE dated 3/20/92, File No. 1-9157). Amendments dated December 8, 1993. 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. 1-9157). 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. 1-9157). 10 (iii)(A)12 SNET Retirement and Disability Plan for Non- Employee Directors as amended April 14, 1993. 10 (iii)(A)13 SNET Non-Employee Director Stock Plan effective January 1, 1994 (Exhibit 4.4 to Registration No. 33-51055, File No. 1-9157) 10 (iii)A)14 Description of SNET Executive Retirement Savings Plan. 12 Computation of Ratio of Earnings to Fixed Charges. 13 Pages 18 through 48 of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1993. 21 Subsidiaries of the Corporation. 23 Consent of Independent Accountants. 24a Powers of Attorney. 24b Board of Directors' Resolution. 99a Annual Report on Form 11-K for the plan year ended December 31, 1993 for the SNET Management Retirement Savings Plan will be filed as an amendment prior to June 30, 1994. 99b Annual Report on Form 11-K for the plan year ended December 31, 1993 for the SNET Bargaining Unit Retirement Savings Plan will be filed as an amendment prior to June 30, 1994. EX-10 2 NQ PENSION PLAN Exhibit 10(iii)(A)5 SNET EXECUTIVE NON-QUALIFIED PENSION PLAN AND EXCESS BENEFIT PLAN The SNET Executive Non-Qualified Pension Plan and Excess Benefit Plan ("Plan") was amended at the December 8, 1993 Board of Directors meeting. The purpose of the amendments was a redesign of the executive pension plans to have the same pension formula apply for executives and management employees, and maximize the benefits which may be payable from the Pension Trust Fund. The redesign also replaces the Mid Career Pension Plan which differentiated based on age and position at time of hire with an executive pension plan which provides the appropriate level of income protection for all executives based on their length of service with the company. The amendments to the Plan are as follows: 1) Effective December 8, 1993, the election by an executive of the Pension Deferral Option under the SNETMPP which defers the commencement of the executive's service pension until no later than age 55 (to reduce or eliminate the early retirement discount), shall result in the deferral of the service benefit payable under the ENQPP for the same period. 2) Effective December 8, 1993, the ENQPP adjusted career income formula shall continue to apply only to those employees who are in executive positions as of December 8, 1993 until such time as there is a change in the SNETMPP formula at which time the executive's accrued vested pension benefit payable under the ENQPP shall be frozen; provided, however, that the amount payable under the ENQPP formula shall be limited to the amount by which the ENQPP benefit exceeds the benefit determined by applying the SNETMPP formula to the executive's Short Term Incentive Award. 3) Effective December 8, 1993, the ENQPP will replace the benefits provided under the SNET Mid Career Pension Plan (SNETMCPP) with a minimum pension benefit payable to executives based on the number of years and months of service completed as of the termination of employment date, and the average annual base salary for the three years immediately preceding the termination date. The ENQPP minimum pension benefit will ensure that the combined pension amounts payable under the SNETMPP, the ENQPP and the SNETMCPP, as applicable, provide a minimum benefit, for executives who terminate employment with up to 25 years of service, of 2 percent per year of service (maximum 40 percent) multiplied by the executives' three year average base salary; or for executives with more than 25 years of service, 1.6 percent per year of service multiplied by such average pay. 4) Effective January 1, 1994, the following provisions no longer apply to those employees who become eligible to participate after December 8, 1993 except for benefits available under Section 7 which shall remain available until replacement coverage is available under the SNET Executive Split Dollar Life Insurance Plan (SDLIP), and to participants as of December 8, 1993 upon the effective date of replacement coverage under the SDLIP: 1) Section 4, Paragraph 3(e), Automatic Survivor Annuity; 2) Section 6, Death Benefits; 3) Section 7, Post-Retirement Life Insurance Supplement Program; 4) Section 8, Survivor Annuity Options; and 5) Section 9, Paragraph 10, Lump Sum Payments. To the extent permitted under applicable tax laws, participants as of December 8, 1993 shall be provided an opportunity to maintain the Survivor Annuity Option provisions of the ENQPP at the time the SDLIP becomes effective; provided, however, that in such event the tax gross-up provisions related to such Survivor Annuity Option provisions will not be available. EX-10.1 3 PENSION PLAN Exhibit 10(iii)(A)6 SNET MANAGEMENT PENSION PLAN A summary of amendments to the SNET Management Pension Plan ("Plan") is as follows: Effective September 8, 1993 Section 4, Paragraph 2(e), Early Retirement Discount: Added the Pension Deferral Option to provide management employees who are eligible to receive a Discounted Service Pension with an opportunity to defer commencement of the pension payments to a later date, no later than age 55, to reduce or eliminate the amount of the early retirement discount applied to the pension payments. Employees may elect to commence receipt of pension payments prospectively at any time. Employees choosing this option will be classified as an SNET retiree, with all related retiree benefits to the extent that they remain available to retirees. Section 4, Paragraph 1(j) Transitional Retirement Status: Amended the Transitional Retirement Status to provide management employees whose employment with SNET terminates between September 8, 1993 and December 31, 1995, inclusive, with the ability to become eligible for a Service Pension if they would otherwise have become eligible by December 31, 1995. Under this provision, a Service Pension becomes payable on the date such employee would have been eligible to commence receipt of a Service Pension or a Discounted Service Pension if such employment had not ended. Employees in this status will be classified as an SNET retiree commencing upon termination of employment, with all related retiree benefits to the extent that they remain available to retirees. Effective December 8, 1993 Section 4, Paragraph 2(b)(iii), Compensation: Changed the definition of Compensation for employees who retire or terminate employment on or after December 8, 1993 to include the awards earned under the SNET Executive Short Term Incentive Plan for services performed after 1988, consistent with the recognition of eligible performance incentive compensation awards in the pension formula for all other management employees. Section 5, Death Benefits: Effective upon the effective date of replacement coverage becoming available under the SNET Executive Split Dollar Life Insurance Program (SDLIP), the Active Employee Death Benefits and the Retiree Death Benefits provisions shall no longer apply to active and retired employees who become covered by the SDLIP. EX-10.2 4 MID-CAREER PENSION PLAN Exhibit 10(iii)(A)8 SNET MID CAREER PENSION PLAN The SNET Mid Career Pension Plan ("Plan") was amended at the December 8, 1993 Board of Directors meeting. The purpose of the amendments was to reflect the redesign of the SNET Executive Non-Qualified Pension Plan and Excess Benefit Plan ("ENQPP"). Effective January 1, 1994, the ENQPP replaced the provisions of this Plan (which differentiated based on age and position at time of hire) with an executive pension plan which provides the appropriate level of income protection for all executives based on their length of service with the company. The amendments to this Plan are as follows: 1) For eligible executives on the active payroll as of December 8, 1993, the accrued and vested Mid Career Pension Plan pension benefits for such eligible executives shall be calculated as of December 31, 1993, and such vested pension benefits shall be frozen and continue to be payable under the Plan to such executives and any terminated executives with vested pension benefits, subject to offsets determined under the provisions of the ENQPP. 2) Effective upon the last payment of such vested and frozen pension benefits, the Plan shall terminate. EX-10.3 5 DISABILITY PLAN RETIREMENT AND DISABILITY PLAN FOR NON-EMPLOYEE DIRECTORS OF SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION Effective January 1, 1989 Amended April 14, 1993 RETIREMENT AND DISABILITY PLAN FOR NON-EMPLOYEE DIRECTORS OF SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION TABLE OF CONTENTS SECTION 1. STATEMENT OF PURPOSE.......................................... 1 SECTION 2. DEFINITIONS................................................... 1 SECTION 3. ADMINISTRATION................................................ 1 SECTION 4. NON-EMPLOYEE DIRECTOR BENEFITS................................ 2 1. Participation............................................. 2 2. Eligibility............................................... 2 a. Service Benefit....................................... 2 b. Deferred Benefit...................................... 2 c. Disability Benefit.................................... 3 3. Benefit Amounts........................................... 3 a. Service and Deferred Benefit.......................... 3 b. Disability Benefit.................................... 3 c. Payments.............................................. 3 SECTION 5. GENERAL PROVISIONS............................................ 4 SECTION 6. PLAN MODIFICATION............................................. 8 SECTION 1. STATEMENT OF PURPOSE The purpose of the Retirement and Disability Plan for Non-Employee Directors of Southern New England Telecommunications Corporation is to provide pension payments to such non-employee members of the Board of Directors of Southern New England Telecommunications Corporation and The Southern New England Telephone Company, pursuant to the terms and conditions of this Plan. SECTION 2. DEFINITIONS 1. The words "SNET" or "Corporation" shall mean the Southern New England Telecommunications Corporation, a Connecticut Corporation. 2. The words "Chairman of the Board," "President" and "Board of Directors" or "Board" shall mean the Chairman of the Board of Directors, the President and the Board of Directors, respectively, of the Corporation. 3. The word "Committee" shall mean the Committee on Board Affairs and Public Policy appointed by the Corporation to administer or arrange for the administration of this Plan. 4. The terms "Non-Employee Director" or "Participant" shall mean a member of the Corporation's Board of Directors on or after January 1, 1989, who is not at time of retirement from service on the Board, nor was ever, employed by SNET or any subsidiary or affiliate of SNET. 5. The term "Pension Act" shall mean the Employee Retirement Income Security Act of 1974 (ERISA) as may be amended from time to time. 6. The term "Pension Plan" shall mean the SNET Management Pension Plan. 7. The word "Plan" shall mean this Retirement and Disability Plan for SNET Non-Employee Directors. 8. The term "Retainer" shall mean the annual amount payable to a Non-Employee Director as compensation for service on the Board, excluding any additional compensation earned for service as Committee Chairman and excluding all meeting fees, whether for Board or Committee meetings. 9. The use in this Plan of personal pronouns of the masculine gender is intended to include both the masculine and feminine genders. 10. The use in this Plan of singular or plural nouns is intended to have individual or collective meaning as applicable to the context as used therein and is in no way to be construed narrowly or such as to limit this Plan or any of its provisions. SECTION 3. ADMINISTRATION 1. The Corporation shall be considered the Sponsor of this Plan as that term is defined in the Pension Act. The Corporation shall appoint the Committee on Board Affairs and Public Policy to administer this Plan. The Committee shall have the administrative responsibilities set forth below. - 2 - 2. The Committee shall have the specific powers elsewhere herein granted to it and shall have such other powers as may be necessary in order to enable it to administer this Plan, except for powers herein specifically granted or provided to be granted to others. 3. The Committee shall grant or deny claims for benefits under this Plan and shall authorize disbursements according to this Plan. Adequate notice shall be provided in writing to any Participant whose claim has been denied setting forth the specific reasons for such denial. 4. The Committee shall determine conclusively for all parties all questions arising in the administration of this Plan, and any decision of such Committee shall not be subject to further review. 5. The expenses of the Committee in administering this Plan shall be borne by the Corporation. 6. The Corporation and the Committee are each a named fiduciary as that term is used in the Pension Act with respect to the particular duties and responsibilities herein provided to be allocated to each of them. 7. The Corporation may delegate responsibilities for the operation and administration of this Plan consistent with the Plan's terms. The Corporation and other named fiduciaries may designate in writing other persons to carry out their respective responsibilities under this Plan and may employ persons to advise them with regard to any such responsibilities. 8. Any person or group of persons may serve in more than one fiduciary capacity with respect to this Plan. SECTION 4. NON-EMPLOYEE DIRECTOR BENEFITS 1. Participation. All persons who are Non-Employee Directors, as defined in Section 2, are deemed Participants in this Plan. 2. Eligibility. a) Service Benefit. Subject to the provisions set forth elsewhere in this Plan, a Participant who has served a minimum of five (5) years on the Board at any time prior or subsequent to the effective date of this Plan is eligible for a Service or Deferred Benefit pursuant to this Section 4 and will become fully vested in all benefits under this Plan at that time. b) Deferred Benefit. Subject to the provisions set forth elsewhere in this Plan, all eligible Non-Employee Directors who have served a minimum of five (5) years on the Board, shall be eligible to receive a Deferred Benefit upon reaching the age of sixty-five (65) in an amount and pursuant to the same terms and conditions as are set forth in Section 4.2(a). - 3 - c) Disability Benefit. In the event a Non-Employee Director becomes totally disabled as a result of sickness or of injury and is unable to perform his duties and responsibility as a Director, as determined by the Committee, before becoming fully vested in all benefits under this Plan pursuant to Section 4.2(a), the Board, in its sole discretion, may authorize the payment of a Disability Benefit pursuant to Section 4.3(b). The Board may require the Participant to furnish from time to time proof of continued disability. 3. Benefit Amounts. a) Service and Deferred Benefit. The benefit of each eligible Non-Employee Director who retires from service on or after January 1, 1989 and after having attained the age of sixty-five (65), shall equal ten percent (10%) of such Non-Employee Director's annual Retainer in effect as of retirement from service on the Board multiplied by such Director's full years of service on the Board up to a maximum of one hundred percent (100%) of such annual Retainer. Subject to Section 5.10 such annual benefit shall be payable in four (4) equal quarterly installments following commencement of benefits, as specified in Section 4.3(c). b) Disability Benefit. At the full discretion of the Board, Disability Benefit payments for eligible Participants shall be paid in an amount calculated pursuant to the same terms as are set forth in Section 4.3(a), or in such other amounts, terms and conditions as determined by the Board. c) Payments. (i) Except as may be otherwise determined by the Corporation or as otherwise required by Section 5.10, Service, Deferred and Disability Benefits granted under this Section 4 shall commence in the first month in the calendar quarter next following the date of each Participant's retirement from service, or at such other time as is herein provided for payment of a Deferred Benefit or Disability Benefit, and shall continue to the death, or termination of Disability, of such Participant, at which time any and all benefit entitlements under this Plan shall cease, except as provided in Section 4.3(c)(ii) below. (ii) In the event that benefit payments pursuant to this Plan have not commenced or have been made for a number of years less than a Participant's years of service on the Board at the time of his death, the aggregate value of those pension payments representing the number of years the Participant served on the Board less any payments made as of the date of death shall be paid as a death benefit in a lump sum to the spouse of the deceased Participant if living with him at the time of death or to the Participant's estate if there is no eligible spouse. Upon payment of the death benefit, any and all further benefit entitlements under this Plan shall cease. In the event of a Participant's death on or after January 1, 1994, a death benefit shall be payable to the Eligible Beneficiaries, if any, of those Participants who are either serving on the Board as of January 1, 1994 or retired from the Board as of January 1, 1994. The amount to be paid as a death benefit shall be paid in a lump sum, and shall not exceed the lesser of (i) the amount of the Retainer for - 4 - the year in which the eligible Participant retires, or (ii) the amount of the Retainer in effect on January 1, 1994. Eligible Beneficiaries shall mean the spouse of the deceased Participant if living with him at the time of his death, or the unmarried child or children of the deceased under the age of 23 years (or over that age if physically or mentally incapable of self-support) who were actually supported in whole or in part by the deceased Participant at the time of death, or a dependent parent who lives in the same household with the Participant or who lives in a separate household in the vicinity which is provided for the parent by the Participant. Upon payment of such death benefit or a determination that a Participant had no Eligible Beneficiaries, any and all further benefit entitlements under this Plan shall cease. SECTION 5. GENERAL PROVISIONS 1. Effective Date. This Plan is effective January 1, 1989. 2. Right to Benefits. Subject to the provision of Section 5.3, all Participants who have satisfied the eligibility provision contained in Section 4.2, whether or not currently receiving benefits under this Plan, shall have nonforfeitable and noncancellable rights in all benefits provided pursuant to this Plan. 3. Forfeiture of Benefits. Notwithstanding eligibility or right to benefits of a Participant under any provision or paragraph of this Plan (other than Section 5.10), all benefits for which a Participant would be otherwise eligible hereunder may be forfeited, at the discretion of the Board, when such Participant (i) engages in misconduct in connection with the Participant's service on the Board (as determined by the Board); (ii) without the Corporation's consent becomes associated with, employed by or renders services to, or owns an interest in, any business that is competitive with the Corporation or with any business with which SNET has a substantial interest (other than as a shareholder with a nonsubstantial interest in such business) as determined by the Board; or (iii) engages in activity in conflict with or adverse to the interests of the Corporation. 4. Assignment or Alienation. Assignment or alienation of any and all benefits under this Plan will not be permitted or recognized except as otherwise required by law. 5. Determination of Eligibility. In all questions relating to eligibility for any benefit hereunder the decision of the Committee based upon the Plan and upon the records of the Corporation and insofar as permitted by applicable law, shall be final. - 5 - 6. Method of Payment. All benefits payable pursuant to this Plan shall be paid from Corporation operating expenses or through the purchase of annuity contracts from an insurance company or through such other means or funding arrangements as is determined by the Corporation from time to time. 7. Amounts Accrued Prior to Death. Benefit amounts accrued from the prior calendar quarter but not actually paid at the time of death of a Participant shall be paid within thirty (30) days of the Participant's death and in accordance with the terms and provisions of Section 4. 8. Payments to Others. Benefits payable to a Participant unable to execute a proper receipt may be paid to other person(s) in accordance with the standards and procedures set forth in the Pension Plan. 9. Damage Claims or Suits. Should any Participant in this Plan commence litigation against the Corporation or any successor thereof regarding the alleged violation by the Corporation or any successor of the nonforfeitability, noncancellation and vesting provisions of the Plan, the Corporation or any successor which is the defendant in any such lawsuit shall pay all costs and expenses (including attorney fees) of any such Participant unless (1) the court in which the litigation is filed or any higher court to which an appeal is taken finds the Corporation or successor to be without liability on material substantive issues raised in the lawsuit or (2) the lawsuit is frivolous in nature. 10. Change of Control. Anything in the Plan to the contrary notwithstanding (including, without limitation, Section 5.3), upon and following the occurrence of a Change of Control, the Service, Deferred and Disability Benefit of each Participant shall be fully vested and payable in the amount determined under Section 4.3 at the time of the Participant's termination of employment for those individuals currently receiving or eligible to receive such payments under the Plan and, for those individuals serving on the Board of Directors upon the Change of Control as if the Participant had retired at that time. In the event of a Change of Control, the present value of all amounts to which a Participant is entitled under this Plan shall be paid in a single lump sum on the last day of the month following the month in which the Change of Control occurred. Lump sum payments payable by reason of this Section 5, Paragraph 10, shall be equal to the present value of such payments using the interest rate and mortality assumptions as provided under the Pension Plan (as in effect immediately prior to the Change of Control) for purposes of calculating the present value of lump sum pension payments for surviving spouses. For this purpose, a Change of Control shall mean: - 6 - (a) an acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); excluding, however, the following: (i) any acquisition directly from the Corporation, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Corporation, (ii) any acquisition by the Corporation, (iii) any acquisition by any employee benefit plan (or related trust) participated in by the Corporation or any corporation controlled by the Corporation or (iv) any acquisition by any corporation pursuant to a reorganization, merger, consolidation or similar corporate transaction (in each case, a "Corporate Transaction"), if, pursuant to such Corporate Transaction, the conditions described in clauses (i), (ii) and (iii) of subsection (C) of this Section 5.10 are satisfied; or (b) a change in the composition of the Board of Directors of the Corporation (the "Board") such that the individuals who, as of January 9, 1991, constitute the Board (the Board as of the above date shall be herein- after referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this Section 5.10, that any individual who becomes a member of the Board subsequent to the above date whose election, or nomination for election by the shareholders of the Corporation, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or (c) the approval by the shareholders of the Corporation of a Corporate Transaction or, if consummation of such Corporate Transaction is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Corporate Transaction pursuant to which (i) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to - 7 - such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction and the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors, in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (ii) no Person (other than the Corporation, any employee benefit plan (or related trust) participated in by the Corporation or such corporation resulting from such Corporate Transaction and any Person beneficially owning, immediately prior to such Corporate Transaction, directly or indirectly, 20% or more of the Outstanding Corporation Common Stock or Outstanding Voting Securities, as the case may be) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (d) the approval by the shareholders of the Corporation of (i) a complete liquidation or dissolution of the Corporation or (ii) the sale or other disposition of all or substantially all of the assets of the Corporation; excluding, however, such a sale or other disposition to a corporation, with respect to which following such sale or other disposition, (1) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors will be then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (2) no Person (other than the Corporation and any employee benefit plan (or related trust) participated in by the Corporation or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Corporation Common Stock or Outstanding Corporation Voting Securities, as the case may be) will beneficially own, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of such corporation. - 8 - SECTION 6. PLAN MODIFICATION. The Board may from time to time make changes in the Plan and the Board may terminate the Plan as it deems appropriate, without notice to Participants. In addition, the Vice President-Human Resources of the Southern New England Telephone Company with the concurrence of the Vice President and General Counsel of SNET shall be authorized to make minor or administrative amendments to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes). Such amendments or termination shall not affect the rights of any Participant to any benefit under this Plan to which such Participant may have previously become entitled. EX-10.4 6 EXEC. RETIRE SAV. PLAN Exhibit 10(iii)(A)14 SNET EXECUTIVE RETIREMENT SAVINGS PLAN The SNET Executive Retirement Savings Plan ("Plan") was adopted at the February 9, 1994 Board of Directors meeting to be effective for the 1994 Plan Year. The primary purpose of the Plan is to keep executives whole beginning January 1, 1994 with respect to the SNET Management Retirement Savings Plan (SNETMRSP) provisions regarding the company's matching contributions. This Plan's eligibility, vesting and level of matching contribution provisions are the same as the SNETMRSP as amended from time to time. Contributions under this Plan will be credited with annual earnings based on the applicable federal rate. Distributions will not be available until the executive terminates employment, retires or dies; provided, however, that there will be hardship distribution provisions for severe financial hardship situations, consistent with the hardship distributions allowed pursuant to the SNET incentive award deferral procedures. The Plan provides for the following credits beginning with the 1994 Plan Year: 1) The crediting of company matching contributions of 80 percent of up to six percent of the executive's annual base salary limited to the amount that cannot be contributed to the SNETMRSP due to limitations on eligible compensation and contributions which are imposed on qualified retirement plans by the Internal Revenue Code, provided that the executive's contributions to the SNETMRSP and deferrals of the Short Term Incentive Awards are sufficient to support the company matching contributions to the Plan. In the event the SNETMRSP's level of matching contribution for an employee's base salary changes, the level of matching contributions under this Plan shall change to the same level. 2) The crediting of company matching contributions equal to 66 2/3 percent of up to the first six percent of an executive's Short Term Incentive Award payable for the 1994 and later Plan Years which the executive elects to defer receipt. In the event the SNETMRSP's level of non-ESOP matching contribution changes, the level of matching contributions under this Plan shall change to the same level. The matching contributions will be credited each affected year, with the first credit beginning for Plan Year 1994, and will receive annual interest credits at the applicable federal rate. EX-12 7 RATIO EXHIBIT 12 1993 Form 10-K Southern New England Telecommunications Corporation Computation of Ratio of Earnings to Fixed Charges (dollars in millions) Income from continuing operations before income taxes, extraordinary charge and accounting changes $(87.8) Add: Interest on indebtedness 88.9 Portion of rents representative of the interest factor 11.8 Earnings before fixed charges, income taxes and extraordinary charge (1) $ 12.9 Fixed charges Interest on indebtedness $ 88.9 Potion of rents representative of the interest factor 11.8 Fixed charges $100.7 Ratio of earnings to fixed charges [(1) divided by (2)] .13 EX-13 8 ANNUAL REPORT FINANCIAL COMMENTARY RESULTS OF OPERATIONS REVENUES AND SALES Total revenues and sales were $1,653.6 million in 1993 as compared with $1,614.4 million in 1992 and $1,608.4 million in 1991. Local service revenues, derived from the provision of local exchange, public telephone and local private line services, increased $43.7 million, or 8.4%, in 1993 and $13.9 million, or 2.7%, in 1992. The increase in 1993 was due primarily to new rates for basic local service implemented in accordance with The Southern New England Telephone Company's ("Telephone Company") 1993 general rate award [see Regulatory Matters]. A portion of the new rates was implemented on July 9, 1993 with the remainder of the new rates implemented in the form of a temporary surcharge which amounted to approximately $9 million. The temporary surcharge was in effect until October 9, 1993, when the remaining new rates became effective. Revenue from directory assistance and coin telephone increased primarily as a result of the July 9th increase in rates. Also contributing to the increase in local service revenues was an increase in access lines in service and an expansion of the local-calling service area in several exchanges during September of 1993, which resulted in a shift of intrastate toll revenue to local service revenue. Access lines in service grew 1.4% to 1,963,972 at December 31, 1993 from 1,936,577 at December 31, 1992. In addition, growth experienced in subscriptions to premium services, such as a 9.4% increase in TotalphoneSM, also contributed to the increase in local service revenues. The increase in 1992 local service revenues was due primarily to new rates implemented in accordance with the 1991 general rate increase which were effective March 21, 1991 in the form of a temporary surcharge on local service rates pending approval of final local and intrastate toll rates. Effective July 21, 1991, final rates were implemented that replaced the surcharge and resulted in the shift of a portion of the increase awarded from local service revenues to intrastate toll revenues. Also contributing to the increase in 1992 was growth experienced in premium services and an increase in access lines in service. Access lines in service grew a modest 0.8% from 1,921,799 at December 31, 1991, reflecting the weak Connecticut economy. In 1993, intrastate toll revenues, which include revenues from toll and WATS services, decreased $20.1 million, or 5.6%, as compared with an increase of $3.2 million, or 0.9%, 1,875 1,904 1,922 1,937 1,964 1989 1990 1991 1992 1993 Network Access Lines in Service (in thousands of lines) in 1992. Of the total decrease in 1993, $12.6 million was due primarily to reductions in intrastate toll rates, including several toll discount plans, implemented in accordance with the 1993 general rate award [see Regulatory Matters]. Toll message volumes grew approximately 2%, but were impacted negatively by the expansion of the local-calling service area in several exchanges as discussed with local service revenues. In addition, WATS revenues (which includes "800" services) decreased $7.4 million due primarily to: lower WATS message volumes; customer migration to lower priced services offered by the Telephone Company in response to competition; and the continued impact of competitive providers on this market. The increase in 1992 was due primarily to an increase in operator surcharge rates implemented effective July 21, 1991 in accordance with the approved final rates of the 1991 general rate award. In addition, toll message volumes increased 3.3%. WATS revenues decreased $5.6 million due primarily to: lower WATS message volumes; a decrease in rates effective July 21, 1991 also implemented in accordance with the approved final rates of the 1991 general rate award; the migration of customers to lower priced services offered by the Telephone Company and the impact competitive providers have had on this market. Network access charges are assessed on interexchange carriers and end users as a means for the Telephone Company to recover its costs and earn a return on its investment in facilities that provide access to the local exchange network. In 1993, network access revenues increased $14.3 million or 4.4%, as compared with an increase of $11.9 million or 3.8%, in 1992. The increase in 1993 was due primarily to an increase in interstate minutes of use of approximately 5%. Partially offsetting the impact of the increase in minutes of use was a decrease in tariff rates implemented on July 2, 1993, in accordance with the Telephone Company's 1993 annual Federal Communications Commission ("FCC") filing under price cap regulation [see Regulatory Matters]. The $11.9 million increase in 1992 network access revenues was due primarily to a 4.1% increase in interstate minutes of use and an increase in tariff rates implemented on July 1, 1992, in accordance with the Telephone Company's 1992 annual FCC filing under price cap regulation. Partially offsetting the impact of these increases was a reduction in Carrier Common Line ("CCL") rates effective July 1, 1991. CCL rates are the method of recovering non-traffic sensitive interstate costs from interstate carriers. CCL rates were reduced to reflect certain FCC mandated changes in cost separation methodology that shifted costs to the intrastate jurisdiction. Sales of the Corporation's telecommunications products and services from its non-telephone businesses decreased $13.4 million, or 6.1%, in 1993 as compared with an increase of $6.3 million, or 3.0%, in 1992. On a combined basis, sales of SNET Systems, Inc. ("Systems") and Business Communications, the new division that resulted from the reorganization of Systems, decreased $36.3 million, or 39.0%. The decline in sales reflects the planned phase out of the large PBX system business in favor of focusing on the Telephone Company's central-office based solutions and a contract to sell interstate network services for AT&T not being renewed for 1993. Sales of the Corporation's cellular operations, which consist of wholesale, SNET Cellular, Inc. ("Cellular") and retail, SNET MobileCom, Inc. ("MobileCom"), increased $13.2 million, or 23.2%, net of intercompany amounts, due mainly to an increase in the number of customers. As in 1992, average revenues per customer continued to decline in 1993, in line with a nationwide trend, as lower volume users make up a larger portion of the customer base. Sales for SNET Paging, Inc. ("Paging") increased $3.6 million due primarily to the impact of the purchase and consolidation, in October 1993, of the remaining 50.5% interest in a paging partnership [see 523 521 516 526 524 1989 1990 1991 1992 1993 Intrastate Message Volume (in millions of messages) / / WATS Messages / / Toll Messages Note 2 to the Consolidated Financial Statements]. SNET Diversified Group, Inc.'s ("Diversified Group") revenues related to leasing and selling telephone sets to residential and small business customers increased $1.4 million, or 3.0%. This increase is attributable primarily to an increase in monthly lease rates effective on August 1, 1992. The increase in lease rates was offset partially by a trend of declining number of sets rented as customers continue to purchase their own equipment. Management expects this trend to continue into 1994. In 1992, sales of the Corporation's cellular operations increased $6.3 million, or 12.5%, net of intercompany amounts. The increase in sales was due mainly to an increase in the customer base and an increase in retail rates charged for the basic cellular package effective September 1991. However, average usage revenues per customer continued to decline in 1992 as compared with 1991 due to lower volume users making up a larger portion of the customer base and the weak economic conditions in the area served by cellular operations. Sales of Paging increased $2.5 million as a result of a continued increase in the customer base since beginning operations in April 1991. Sales for Systems decreased slightly by $2.1 million, or 2.2%. The decline in Systems' sales reflects the weak Connecticut econ- omy, reductions in revenues derived from rental programs and a focus in 1992 on sales of higher margin products that resulted in lower sales volume. Diversified Group revenues from leasing and selling telephone sets to residential and small business customers decreased $0.4 million, or 0.9%. This decrease reflects a trend of a declining number of sets rented. The decline in rental revenue was offset partially by an increase in monthly lease rates effective August 1, 1992 discussed previously. Publishing and other revenues (which includes revenues from (i) directory publishing, (ii) marketing, billing and collection, and other non-access services rendered on behalf of interexchange carriers, (iii) provision for the Telephone Company's uncollectible accounts receivable, and (iv) net investment income) increased $14.7 million, or 8.0%, in 1993 as compared with a decrease of $29.3 million, or 13.7%, in 1992. The provision for uncollectible accounts receivable for the Telephone Company's residence, business and directory customers decreased $4.6 million in 1993. This decrease is due primarily to lower directory publishing uncollectible activity. In 1993, revenues from leases retained by the Corporation on an investment basis after the discontinuance of SNET Credit, Inc. ("Credit") in September of 1992 increased $2.5 million. Revenue from billing and collection services increased $3.6 million. Partially offsetting the impact of these items was a decrease in publishing revenues of $7.1 million, or 3.8%. Publishing revenues, a significant portion of which reflect directory contracts entered into during the prior year, have decreased, as anticipated, due primarily to economic conditions in 1992 having deteriorated from 1991. Management expects that revenues from directory publishing for 1994 as compared with 1993 will continue to decline due primarily to the economic conditions in Connecticut. Publishing and other revenues decreased in 1992 due primarily to a decrease of $9.5 million, or 4.8%, in publishing revenues. Publishing revenues decreased due primarily to economic conditions in 1991 deteriorating from 1990. Also contributing to the decrease in directory publishing and other revenues in 1992 was an increase in the Telephone Company's provision for uncollectible accounts of $5.7 million. The increase in the provision for uncollectible accounts in 1992 was the result of the continued recessionary economic conditions in Connecticut. COSTS AND EXPENSES Total costs and expenses, excluding depreciation, amortization and interest, were $1,358.9 million in 1993 as compared with $997.8 million in 1992 and $1,044.2 million in 1991. Total costs and expenses in 1993 include a $355.0 million before-tax charge relating to business restructuring [see Note 5]. Total costs and expenses in 1991 include a $38.0 million before-tax charge relating to the cost of two voluntary separation offers, one for bargaining-unit employees and one for management employees [see Note 3]. Excluding the effect of these items as well as depreciation, amortization and interest, total costs and expenses would have been $1,003.9 million in 1993 and $1,006.2 million in 1991. The restructuring charge recorded in 1993 includes costs that will be incurred for work force reductions involving approximately 2,500 employees over the next two to three year period including those that began in January 1994. The charge also includes the incremental costs of analyzing and implementing reengineering solutions; designing and developing new processes and tools to continue the Corporation's provision of excellent service; and the training of employees to help them keep pace with the changes the Corporation is implementing to streamline its business and meet customers' changing demands. Operating and maintenance expenses of $943.3 million increased $4.8 million, or 0.5%, in 1993 compared with a decrease of $9.1 million, or 1.0%, in 1992. The Telephone Company's operating and maintenance expenses were approximately 80% of total operating and maintenance expenses in 1993, 1992 and 1991. These costs are composed primarily of wages and salaries, and pension and other employee-benefit costs. The remainder of these expenses relates to the Corporation's non-telephone businesses and is composed primarily of the cost of goods sold and general and administrative expenses. In August of 1992, a new three-year labor contract was ratified by members of The Connecticut Union of Telephone Workers ("CUTW"). CUTW members received an initial 2.0% wage increase in September 1992, 3.0% in October 1993 and will receive an additional increase of 5.0% in October 1994. As part of the new bargaining-unit contract, approximately 570 bargaining-unit employees accepted an early retirement incentive offer, Special Pension Option ("SPO"), with most leaving the Corporation by March 19, 1993 and the remainder by September 17, 1993 [see Note 3]. The Corporation recorded a before-tax pension gain of $6.5 million in 1993 as a result of the SPO. $1,066 $1,041 $1,044 $998 $1,359(1) 1989 1990 1991 1992 1993 Consolidated Costs and Expenses Excluding Depreciation, Amortization and Interest (in millions) (1)Includes $355 million for restructuring charge. Wage and salary costs of the Telephone Company increased approximately $3 million, or 1% in 1993 as compared with a decrease of approximately $8 million, or 2%, in 1992. The increase in wage and salary costs in 1993 was primarily a result of wage increases for bargaining-unit employees mentioned previously. In addition, management employees received an average 3.5% salary increase effective April 1992. Partially offsetting these wage increases was a decrease in the Telephone Company's average work force of 2.4%. The average work force was reduced primarily through the SPO offset partially by an increase in employees resulting from the reorganization of Systems. Cost savings are anticipated to be realized beginning in 1994 as the Corporation has begun to implement the first phase of the work force reduction portion of its restructuring plan. The $8 million decrease in wage and salary costs in 1992 was mainly a result of a 4.8% reduction in the Telephone Company's average work force. The Telephone Company's average work force was reduced primarily through two voluntary separation offers made in 1991, as discussed in Note 3, which resulted in approximately 1,000 employees leaving the Telephone Company during the last half of 1991. Partially offsetting the effect of the decrease in the average work force was a 4.5% and 2.0% increase in wage rates for bargaining-unit employees effective December 1991 and September 1992, respectively. In addition, management employees received an average 3.5% salary increase effective April 1992. Pension and other employee benefit costs of the Corporation increased $5.0 million, or 3.0%, in 1993 as compared with an increase of $12.6 million, or 8.2%, in 1992, exclusive of costs related to the voluntary separation offers. The Telephone Company's portion of these costs was approximately 90% in 1993, 1992 and 1991. Effective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 112, "Employers' Accounting for Postemployment Benefits" [see Note 3]. With the adoption of SFAS No. 106, the Corporation elected to record immediately the accumulated postretirement benefit obligation in excess of the fair value of plan assets ("transition obligation") as a change in accounting principle. The cumulative effect of this non-cash accounting change reduced 1993 net income and earnings per common share reported in the consolidated statement of income by $215.9 million and $3.39, respectively. SFAS No. 112 requires employers to accrue benefits provided to former or inactive employees after employment but before retirement. For the Corporation, these benefits include workers' compensation and disability benefits. The cumulative effect of this accounting change reduced 1993 net income and earnings per common share reported in the consolidated statement of income by $7.1 million and $0.11, respectively. Health care benefit costs remained relatively unchanged in 1993 as a result of cost-containment efforts by the Corporation. As discussed in Note 3, the Corporation has reserved the right to require, beginning on July 1, 1996, all employees who retire after a specified date to share premium costs of health care benefits if these costs exceed certain limits. Beginning in 1994, employees began to share a larger portion of health care benefit costs. Management continues to seek additional means to 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 April 1, 1991, the Corporation began to provide for the cost of postretirement health care benefits for employees who are active or who retired after January 1, 1991. The cost of these benefits was $12.7 million in 1992 as compared with $6.7 million in 1991. The increase was due primarily to a full year of costs being recognized in 1992 and a higher number of retirees, as a result of the two voluntary separation offers made in 1991. These costs have been contributed to Voluntary Employees' Beneficiary Association ("VEBA") trusts. In addition, health care benefits increased $5.0 million, or 7.1%, in 1992 reflecting primarily the rising medical costs nationwide. Operating and maintenance expenses of the Corporation's non-telephone businesses decreased $1.1 million, or 0.6%, in 1993. On a combined basis, Systems' and Business Communications' cost of goods sold decreased $13.0 million primarily reflecting the reduction in its sales. General and administrative expenses of the non-telephone businesses increased $10.1 million due primarily to an increase of $9.4 million associated with cellular operations which have experienced general growth in the customer base. Partially offsetting this increase was a decrease of approximately $6 million in lower employee-related costs as a result of a decrease in the non-telephone businesses' combined work force. Collectively, the non-telephone businesses experienced a 22.5% reduction in their average work force in 1993 due primarily to the reorganization of Systems offset partially by growth in cellular operations. In 1992, operating and maintenance expenses of these businesses decreased $12.1 million, or 6.5%. Systems' cost of goods sold decreased $4.1 million primarily reflecting the reduction in its sales. Systems' general and administrative expenses decreased $10.9 million due primarily to lower employee-related costs as a result of a decrease in Systems' work force. Partially offsetting these decreases was an increase of $1.4 million in the operating costs of Paging, which began operations in April 1991. Also, costs associated with cellular operations increased $1.3 million, due primarily to an increase in their provision for uncollectible accounts and general growth in the customer base. Collectively, the non-telephone businesses experienced an 11.7% reduction in its average work force in 1992 due primarily to the voluntary separation offers made in 1991. DEPRECIATION AND AMORTIZATION In 1993, depreciation and amortization expense increased $41.4 million, or 16.6% as compared with a decrease of $3.7 million, or 1.5%, in 1992. The increase in depreciation and amortization was attributable primarily to revised depreciation rate schedules for both intrastate and interstate plant of the Telephone Company, as approved by the Connecticut Department of Public Utility Control ("DPUC") and FCC, respectively [see Regulatory Matters]. Depreciation expense related to intrastate plant increased approximately $20 million while depreciation expense on interstate plant increased approximately $11 million. An increase in the average depreciable telecommunications plant, property and equipment also contributed to the increase in depreci- ation and amortization expense. The $3.7 million decrease in 1992 depreciation and amortization expense was attributable primarily to the absence in 1992 of the amortization of the interstate portion of a depreciation reserve deficiency, which was completed in December 1991. The amortization, which totaled $8.0 million in 1991, was ordered by the FCC for a five-year period beginning in 1987. Partially offsetting this decrease was the impact of the Telephone Company's increase in depreciation rates for intrastate plant that became effective on March 21, 1991, coincident with the 1991 general rate award. INTEREST EXPENSE Interest expense decreased $6.1 million, or 6.3%, in 1993 and $4.5 million, or 4.4%, in 1992. These decreases are due primarily to lower interest rates charged on short-term debt, interest savings from debt refinancings and decreases in average debt outstanding of approximately $67 million and $6 million, respectively. The debt refinancings completed in December 1993 [see Note 8] are anticipated to save the Corporation approximately $8 million in interest expense annually. INCOME TAXES The combined federal and state effective tax rate in 1993 was a benefit of 50.3% as compared with expense of 40.9% and 41.1% in 1992 and 1991, respectively. The unusually high effective tax rate in 1993 reflects the benefit of the operating loss coupled with the amortization of investment tax credits and the turn around of temporary deferred income taxes. A reconciliation of these effective tax rates to the statutory tax rates is disclosed in Note 4. Effective January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting for Income Taxes" [see Note 4]. SFAS No. 109 resulted in recording tax benefits, associated primarily with the effects of lower federal and state tax rates, applicable to the Corporation's non-telephone businesses. The cumulative effect of this accounting change increased 1993 net income and earnings per common share reported in the consolidated statement of income by $2.8 million and $.04, respectively. REGULATORY MATTERS On May 24, 1993, the DPUC issued a final decision on the capital recovery portion of the November 1992 rate request submitted by the Telephone Company ("Rate Request"). The Telephone Company was granted an increase in the composite intrastate depreciation rate from 5.7% to approximately 7.3%. This equated to an increase in 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 final decision ("Final Decision-I") in its three-phase review of the current and future telecommunications requirements of Connecticut ("Telecommunications Policy") and a final decision ("Final Decision-II") in the remainder of the Rate Request docket. The Final Decision-I addressed the issues of: (i) competition [see Competition]; (ii) infrastructure modernization; (iii) rate design and pricing principles; and (iv) regulatory and legislative frameworks. With respect to "rate design and pricing principles," the DPUC stated that the pricing of all services must be more in line with the costs of providing these services. Historically, to provide universal service, basic residential services have been subsidized by other tariffed services, primarily message toll and business services. In regard to the regulatory and legislative framework, the DPUC endorsed the concept of price cap regulation as a potentially more effective and efficient regulatory system than the present rate of return regulation. The Final Decision-II authorized a rate of return on the Telephone Company's common equity ("ROE") of 11.65% and an increase in intrastate revenue of $37.5 million effective July 7, 1993. The Telephone Company was authorized previously to earn a 12.75% ROE. The following major provisions were included in the Final Decision-II: (i) reductions in intrastate toll rates including several toll discount plans; (ii) an increase in basic local exchange rates of residential customers that will 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 coin telephone rate from $.10 to $.25; (vii) an increase in directory assistance charges from $.24 to $.40 and a decrease in the number of "free" directory assistance calls; and (viii) a late payment charge of 1% monthly effective January 1, 1994. This rate award was implemented on July 9, 1993 through a combination of increases for coin telephone calls, directory assistance calls along with an approximate 15% interim surcharge on the remaining products and services with authorized increases including local exchange. The DPUC neither continued the current incentive plan nor adopted a new plan. On July 22, 1993, the DPUC issued a supplemental decision ("Supplemental Decision") reducing the interim surcharge implemented on July 9, 1993 to approximately 8%. The Telephone Company issued credits during August of 1993 to customers who were charged at the higher rate. The 8% surcharge was in effect until October 9, 1993, when the remaining new rates became effective, including an increase in residential basic local exchange rates averaging $.55 a month over a two-year period. On August 13, 1993, the DPUC granted the Telephone Company an additional revenue requirement of $1.9 million to the $37.5 million previously awarded based on a review of certain areas requested by the Telephone Company. The total increase in intrastate revenue of $39.4 million is more than offset by the approximate $40 million increase in capital recovery granted on May 24, 1993. In addition, the Final Decision-II addressed areas of infrastructure modernization and incentive regulation. Under infrastructure modernization, the Final Decision-II supported, but did not mandate, implementation of an infrastructure modernization program for completion by July 1, 1997. State legislation authorized the formation of a task force to study Connecticut's telecommunications infrastructure and policies. Draft legislation, based on the recommendations the task force submitted in February 1994, provides a framework with opportunities to move forward with a new regulatory model for Connecticut. Overall, the goals of the draft legislation are to: (i) ensure high-quality and affordable universal telecommunications service for Connecticut customers; (ii) promote effective competition and the development of an advanced infrastructure; and (iii) enhance the efficiency of government, educational, and health care facilities through telecommunications. On March 20, 1991, the DPUC issued a final decision in the first phase of a general rate increase authorizing an increase in Telephone Company revenue requirements of $47.7 million to be implemented through a temporary surcharge on local service rates until the second phase was complete. On June 28, 1991, the DPUC issued a decision in the second phase establishing rates designed to achieve the $47.7 million rate award. The new rates were effective July 21, 1991 and replaced the temporary surcharge in effect since March 21, 1991. The decision, while raising rates overall, did authorize a decrease in WATS and "800" service rates and provided the Telephone Company the flexibility to offer special promotions of these services. Message toll service rates, which the Telephone Company had sought to reduce, were not changed. In addition, the June 1991 decision included an incentive regulation structure that provided for sharing earnings with ratepayers, provided certain benchmarks were met, based on a schedule of certain levels of return on the intrastate rate base ("ROR"). On April 2, 1993, the Telephone Company filed with the FCC its 1993 annual interstate access tariff under price cap regulation for effect on July 1, 1993. The Telephone Company maintained its selection of the 3.3% productivity factor and will be allowed to earn up to a 12.25% interstate rate of return annually before any sharing mechanism is invoked. The Telephone Company's 1993 filing included a reversal of the Lower Factor Adjustment Mark ("LFAM"), which was awarded as part of the 1992 annual tariff filing. The LFAM is an adjustment allowed in the price cap rules to bring interstate earnings up to the minimum interstate rate of return level of 10.25%. On June 24, 1993, the FCC released an order suspending rates and designating issues for investigation for all local exchange carriers' ("LECs"), including the Telephone Company's, 1993 annual interstate access tariff filings. The FCC allowed the Telephone Company's and other LECs' filings to take effect on July 2, 1993, subject to investigation. This filing is anticipated to decrease interstate network access revenues approximately $12 million for the period July 1, 1993 to June 30, 1994. As of December 31, 1993, the Telephone Company's interstate rate of return was below the 12.25% threshold. On April 2, 1992, the Telephone Company filed with the FCC its 1992 annual interstate access tariff filing under price cap regulation for effect on July 1, 1992. The Telephone Company was allowed to earn up to a 12.25% interstate rate of return annually based on a 3.3% productivity factor. The Telephone Company's 1992 filing included a LFAM. On June 29, 1992, the Telephone Company filed a revised 1992 annual interstate access tariff filing. The revised filing was approved on July 1, 1992. The Telephone Company's interstate rate of return was below the 12.25% threshold as of December 31, 1992. On July 1, 1993, the FCC granted the Telephone Company, on an interim basis, increased interstate depreciation rates in connection with its normal triennial review of depreciation. The new depreciation rates were effective beginning on June 1, 1993, retroactive to January 1, 1993. The new rates increased depreciation expense by approximately $11 million. Under current price cap regulation applicable to the Telephone Company, however, any changes in depreciation rates cannot be reflected in interstate access rates. The Telephone Company currently accounts for the economic effects of regulation in accordance with the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." In the event recoverability of operating costs through rates becomes unlikely or uncertain, whether resulting from competitive effects or specific regulatory actions, SFAS No. 71 would no longer apply. The financial impact of an accounting change, should the Telephone Company no longer qualify for the provisions of SFAS No. 71, would be material. COMPETITION AND NEW SERVICES COMPETITION In the Final Decision-I, the DPUC concluded that currently authorized intrastate competition has not adversely affected either service availability or cost, and that a broadened scope of intrastate competitive participation was prudent and warranted. Accordingly, the DPUC found that 10XXX calling and resale competition were in the public interest and should be allowed beginning July 7, 1993 in accordance with recently enacted state legislation. Using 10XXX calling, customers can use any certified carrier for interexchange calling within Connecticut by dialing 1, 0, and a three-digit carrier code. Terms and conditions associated with the provision of specialized/ancillary services, including monitoring, reporting and compensation, would no longer apply. Since the issuance of Final Decision-I, several interexchange carriers have filed applications with and received approval from the DPUC to offer 10XXX intrastate long-distance service. In addition, a number of resellers have filed for initial certificates of public convenience and necessity. The Telephone Company anticipates that additional applications will be filed. The introduction of competition to intrastate long-distance service and the Telephone Company's reduction in intrastate toll rates will further erode the Telephone Company's intrastate toll revenues. Pursuant to Final Decision-I, the Telephone Company filed on October 1, 1993 a detailed study on the implementation of 1+ intrastate interexchange equal access, including cost, availability of technology, possible date of implementation, and a proposed deployment process. The DPUC is expected to review 1+ intrastate interexchange equal access beginning in the second quarter of 1994. Regarding competition for local exchange services, in January 1994, MCI announced plans to construct and operate local communication networks in large markets throughout the United States, including parts of Connecticut in which the Telephone Company operates. These networks would allow MCI to bypass the Telephone Company's facilities and provide services directly to customers. Pending DPUC approval, these services are expected to be available in Connecticut in two to three years. Also in January 1994, the Telephone Company announced that it had reached an agreement to lease part of its existing digital fiber optic ring network in the greater Hartford metropolitan area to MFS Communications Company, Inc. This agreement will allow MFS Communications Company, Inc. to provide services to large business customers on an intraexchange basis. In an order adopted in September 1992, the FCC required certain LECs, including the Telephone Company, to offer expanded special access interconnection to all interested parties, permitting competitors to terminate their own transmission facilities in LEC central offices. The Telephone Company filed tariffs that were implemented on June 16, 1993, subject to investigation, and was granted some additional pricing flexibility in light of this increased competition. On August 3, 1993, the FCC adopted rules, which largely mirror the requirements adopted in September 1992 for special access interconnection, requiring certain LECs, including the Telephone Company, to offer expanded interstate switched access interconnection. The Telephone Company filed tariffs in the fourth quarter of 1993 to become effective in the first quarter of 1994. The Telephone Company, expecting to see continued movement toward a fully competitive telecommunications marketplace, both on an interexchange and intraexchange basis, has taken several steps to position itself effectively. On January 13, 1994, the Telephone Company announced its intention to invest $4.5 billion over the next 15 years to build a statewide information superhighway ("I-SNET"). I-SNET will be an interactive multimedia network capable of delivering voice, video and a full range of information and interactive services. The Telephone Company expects I-SNET will reach approximately 500,000 residences and businesses by 1997. In addition, the Telephone Company has reduced its intrastate toll rates beginning in July 1993 [see Regulatory Matters], has remained focused on providing quality customer service and has introduced several new services as mentioned below. NEW SERVICES On March 31, 1993, the Telephone Company together with Sprint announced the introduction of 800 CustomLink ServiceSM. This service allows the Telephone Company to offer its business customers an 800 service that enables them to receive calls from anywhere in the United States as well as international locations. On June 3, 1993, the Corporation announced the formation of a new subsidiary, SNET America, Inc., ("America") which offers a complete range of interstate and international long distance services to Connecticut customers, including calling card and 800 service, along with volume discount plans such as Distance PlusSM. Distance Plus offers graduated discounts where the discount increases as the usage increases. America began offering service in the third quarter of 1993. On October 21, 1993, the FCC approved the Telephone Company's application to construct, operate, own, and maintain facilities to conduct a technology and marketing trial for use in providing video dial tone service in West Hartford, Connecticut. With construction of the fiber optic and coaxial facilities completed, the trial began in early 1994. The trial, offered to approximately 500 customers, provides broadcast channels, extensive pay-per-view channels and on-demand service which will provide hundreds of choices of videos. On December 15, 1993, the Telephone Company filed a request with the FCC for an expansion of this trial. The proposal seeks to provide this service to an additional 20,000 customers in other areas of Connecticut. On January 19, 1994, the Telephone Company filed suit in the U.S. District Court in New Haven claiming that the Cable Communications Policy Act of 1984 ("Cable Act") violates the Telephone Company's First and Fifth Amendment rights. The Cable Act limits the in-territory provision of cable programming by LECs such as the Telephone Company. The Cable Act currently prohibits LECs from owning more than 5% of any company that provides cable programming in their local service area. LIQUIDITY AND CAPITAL RESOURCES The Corporation generated cash flows from operations of $478.7 million during 1993 as compared with $504.2 million during 1992 and $426.5 million during 1991. Cash flows from operations decreased in 1993 compared with 1992 due primarily to the funding of postretirement benefits other than pensions. The primary use of capital resources continued to be capital expenditures. Cash expended for capital additions was $267.3 million, $289.8 million and $320.7 million in 1993, 1992 and 1991, respectively. Capital additions for all years were funded entirely from cash flows from operations. The majority of these additions was for construction of the Telephone Company's regulated telephone plant. Managment anticipates that capital expenditures for consolidated telecommunications plant will approximate $280 million in 1994, of which approximately $230 million will be used primarily for expenditures relating to the Telephone Company's network. These additions are expected to be funded through cash flows from operations. As discussed previously in the Competition and New Services section, on January 13, 1994 the Telephone Company announced a plan to invest $4.5 billion over the next 15 years to build I-SNET. The Telephone Company plans to support this investment primarily through increased productivity from the new technology deployed, ongoing cost containment initiatives and customer demand for the new services offered. The Telephone Company does not plan to request a rate increase for this investment. Management anticipates that expenditures, net of tax, for the restructuring charge [see Note 5] will approximate $60 million in 1994, $80 million in 1995 and $55 million in 1996. These expenditures are expected to be funded from cash flows from operations. Over the past few years the Telephone Company has taken advantage of the general decline in interest rates by refinancing a number of debt instruments [see Note 8]. In September 1993, the Telephone Company called $45.0 million of 5.750% debentures. The costs associated with this redemption did not result in a significant charge to the 1993 consolidated statement of income. In December 1993, the Telephone Company refinanced: (i) $120.0 million of 9.625% medium-term notes; (ii) $100.0 million of 9.600% medium-term notes; and (iii) $200.0 million of 8.625% debentures. These refinancings were accomplished through the issuance of unsecured notes totaling $445.0 million. The unsecured notes were issued pursuant to a $540.0 million shelf registration statement filed with the Securities and Exchange Commission ("SEC") in December 1993. These refinancings are expected to save the Corporation approximately $8 million in interest expense annually. In September 1992, the Telephone Company refinanced a total of $175.0 million in debentures with interest rates ranging from 7.750% to 8.125%. The Telephone Company issued $180.0 million of unsecured medium-term notes to complete this refinancing. Also, in December 1991, the Telephone Company refinanced $80.0 million of 9.625% debentures with the issuance of $80.0 million of unsecured notes. The Corporation continues to reevaluate potential savings from refinancing outstanding debt. The remaining balance of the shelf registration statement filed in December 1993 would be used if further refinancings do take place and additional extraordinary charges would likely result. The Corporation filed a shelf registration statement with the SEC on June 20, 1991 for the sale of up to $165.0 million in debt securities with maturities of up to 15 years. Standard & Poor's has rated this issue AA and Moody's has assigned an A1 rating. Pursuant to the shelf registration, $110.0 million of medium-term, unsecured notes were sold during the second half of 1991 with principal amounts and 43.4% 51.6% 51.2% 47.4% 59.9% 1989 1990 1991 1992 1993 Debt Ratio / / Effect of Leveraged ESOP interest rates ranging from $10.0 million to $30.0 million and 7.200% to 8.000%, respectively. The proceeds were used to refinance the majority of $130.0 million of medium-term notes that matured during 1991. The remaining debt securities may be sold in one or more issues from time to time as market conditions warrant. On March 22, 1993 and April 2, 1993, $5.0 million of 8.590% and $10.0 million of 8.760% of the Corporation's medium-term notes matured, respectively. These medium-term notes were satisfied through the issuance of short-term debt. A medium-term note of $30.0 million will mature in September 1994 and is expected to be satisfied through the issuance of short-term debt. The Corporation has a bank credit facility to support its commercial paper program. As part of this credit facility, the Corporation has obtained a contractual commitment to a $100.0 million line of credit provided by a syndicate of banks. The annual commitment fee is currently 0.15% of the total line of credit. As of December 31, 1993, the entire $100.0 million was available. The establishment of the line of credit will facilitate the Corporation's ability to issue commercial paper. In connection with the establishment of the Employee Stock Ownership Plan ("ESOP") in 1990, the Corporation loaned the ESOP $10.0 million and guaranteed a $110.0 million loan to the ESOP by a third party. The Corporation has committed to make cash contributions to the ESOP that, together with dividends received on shares held by the ESOP, will enable the ESOP to make its principal and interest payments on both loans. Both loans mature in the year 2000. In 1993, the Corporation made cash payments to the ESOP for debt service of about $13 million and anticipates making cash payments of approximately $13 million during 1994. Due primarily to the impact that the cumulative effect of accounting changes and the restructuring charge had on common shareholders' equity, the Corporation's ratio of debt to total capitalization at year-end 1993 was 59.9% compared with 47.4% at year-end 1992 and 51.2% at year-end 1991. The formation of the ESOP increased the debt ratio at December 31, 1993 and 1992 by 3.9% and in 1991 by 4.3%. The book value per share at year-end 1993 was $13.38 compared with $19.79 at year-end 1992 and $18.78 at year-end 1991. The decrease in book value per share in 1993 was also attributable to the items that negatively impacted the ratio of debt to total capitalization discussed above. The quarterly dividend rate of $.44 per share has remained unchanged since the fourth quarter of 1989. Southern New England Telecommunications Corporation REPORT ON CONSOLIDATED FINANCIAL STATEMENTS The Corporation's consolidated financial statements have been prepared in conformity with generally accepted accounting principles and, where applicable, conform with accounting prescribed by the Federal Communications Commission and the Connecticut Department of Public Utility Control for telephone companies. The Corporation is responsible for the preparation and reliability of the data in these consolidated financial statements, including estimates and judgments relating to matters not concluded by year end. To this end, the Corporation maintains a highly developed system of internal controls and supports an extensive program of internal auditing to monitor compliance with the system. Management believes that this system provides reasonable, but not absolute, assurance at a reasonable cost that the transactions of the Corporation are executed in accordance with management's authorizations and are recorded properly. This system requires that the recorded assets be compared with existing assets at reasonable intervals and it provides reasonable assurance that access to assets is permitted only in accordance with management's authorization. The Corporation further seeks to assure the reliability of these financial statements by the careful selection of its managers, by organizational arrangements that provide appropriate division of responsibility and by communication and inspection programs aimed at assuring understanding of and compliance with its policies, standards and managerial authorities. These consolidated financial statements have been audited by Coopers & Lybrand, Independent Accountants. Their report, which appears on the following page, expresses an informed judgment that the Corporation's consolidated financial statements, considered in their entirety, present fairly, in conformity with the applicable generally accepted accounting principles, the Corporation's con- solidated financial position and operating results. John A. Sadek Vice President and Comptroller January 24, 1994 REPORT OF AUDIT COMMITTEE The Audit Committee of the Board of Directors reviews and reports to the full Board on the appropriateness of the Corporation's accounting policies, the adequacy of its internal controls and the reliability of the financial information reported to the public. The Committee, which consists of five non-employee directors, meets regularly with the Corporation's financial management, internal auditors and external auditors (Coopers & Lybrand, Independent Accountants) to review their work and the relationships between them in whatever depth considered necessary to fulfill the Committee's responsibilities. The Committee assesses the Corporation's relationship with the external auditors and recommends the appointment of the external auditors to the Board for ratification by the stockholders at the Annual Meeting. The internal auditors report directly to the Committee and, along with the external auditors, meet privately with and have unrestricted access to the Committee to discuss any matter that they believe should be brought to their attention. During the year, the Committee met with the Chairman, President and Chief Executive Officer, the Vice President and Comptroller, the Vice President and General Counsel, the General Internal Auditor and partners of Coopers & Lybrand to review and discuss the following: the Corporation's consolidated financial statements; the Coopers & Lybrand Management Letter and Management's Response; the scope and results of audits performed by Coopers & Lybrand and by Internal Auditing; the adequacy of the Corporation's system of internal controls; the status of pending litigation against the Corporation; Security's efforts in the preceding year; the Standards of Conduct for employees; and developments within the auditing, accounting and financial reporting fields, as well as the impact of these developments on the Corporation's accounting policies, practices and financial reporting. On the basis of these reviews, the Committee reported with confidence to the full Board that in its opinion, the Corporation's accounting policies, reported financial information and system of internal controls are appropriate to provide the assurances as to the integrity and reliability of financial reporting required by the Board. Barry M. Bloom Chairman, Audit Committee January 24, 1994 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of Southern New England Telecommunications Corporation: We have audited the consolidated balance sheet of Southern New England Telecommunications Corporation as of December 31, 1993 and 1992, and the related consolidated statements of (loss) income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated financial position of Southern New England Telecommunications Corporation as of December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Corporation has changed its method of accounting for postretirement benefits other than pensions, postemployment benefits and income taxes. Coopers & Lybrand Hartford, Connecticut January 24, 1994 Southern New England Telecommunications Corporation CONSOLIDATED STATEMENT OF (LOSS) INCOME
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- REVENUES AND SALES Local service $ 566.7 $ 523.0 $ 509.1 Intrastate toll 339.8 359.9 356.7 Network access 342.8 328.5 316.6 Sales 205.2 218.6 212.3 Publishing and other 199.1 184.4 213.7 - --------------------------------------------------------------------------------------------------------------------------- Total Revenues and Sales 1,653.6 1,614.4 1,608.4 - --------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Operating 629.8 630.1 631.9 Maintenance 313.5 308.4 315.7 Provision for business restructuring 355.0 -- -- Provision for employee separation benefits -- -- 38.0 Depreciation and amortization 291.1 249.7 253.4 Property and other taxes 60.6 59.3 58.6 Interest 91.4 97.5 102.0 - --------------------------------------------------------------------------------------------------------------------------- Total Costs and Expenses 1,741.4 1,345.0 1,399.6 - --------------------------------------------------------------------------------------------------------------------------- (Loss) Income from Continuing Operations Before Income Taxes, Extraordinary Charge and Accounting Changes (87.8) 269.4 208.8 Income taxes (44.2) 110.2 85.9 - --------------------------------------------------------------------------------------------------------------------------- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY CHARGE AND ACCOUNTING CHANGES (43.6) 159.2 122.9 - --------------------------------------------------------------------------------------------------------------------------- Discontinued Operations, net of related taxes (Loss) income from discontinued operations -- (1.1) 3.0 Loss on disposal of discontinued operations (10.3) (4.0) -- - --------------------------------------------------------------------------------------------------------------------------- (LOSS) INCOME BEFORE EXTRAORDINARY CHARGE AND ACCOUNTING CHANGES (53.9) 154.1 125.9 - --------------------------------------------------------------------------------------------------------------------------- Extraordinary charge from early extinguishment of debt, net of related taxes of $38.0, $2.0 and $1.7, respectively (44.0) (2.7) (2.2) Accounting changes cumulative effect to January 1, 1993 (220.2) -- -- - --------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED NET (LOSS) INCOME $ (318.1) $ 151.4 $ 123.7 - --------------------------------------------------------------------------------------------------------------------------- -------------------------------------------- Tax benefit of dividends declared on shares held in Employee Stock Ownership Plan ("ESOP") $ -- $ 2.3 $ 2.3 - --------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings for Per Share Calculation $ (318.1) $ 153.7 $ 126.0 - --------------------------------------------------------------------------------------------------------------------------- -------------------------------------------- Weighted Average Common Shares Outstanding (in thousands) 63,692 63,073 62,392 - --------------------------------------------------------------------------------------------------------------------------- -------------------------------------------- (LOSS) EARNINGS PER COMMON SHARE (IN DOLLARS) (Loss) income from continuing operations before extraordinary charge and accounting changes $ (.68) $ 2.56 $2.01 Discontinued operations (.16) (.08) .05 - --------------------------------------------------------------------------------------------------------------------------- (Loss) Income Before Extraordinary Charge and Accounting Changes (.84) 2.48 2.06 Extraordinary charge (.69) (.04) (.04) Cumulative effect of accounting changes (3.46) -- -- - --------------------------------------------------------------------------------------------------------------------------- (LOSS) EARNINGS PER COMMON SHARE $ (4.99) $ 2.44 $ 2.02 - --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------
The accompanying notes are an integral part of these financial statements. Southern New England Telecommunications Corporation CONSOLIDATED BALANCE SHEET
DOLLARS IN MILLIONS, AT DECEMBER 31, 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and temporary cash investments $ 224.8 $ 7.2 Accounts receivable, net of allowance for uncollectibles of $26.7 and $21.8, respectively 266.8 274.5 Materials and supplies 8.0 10.4 Inventories 13.6 12.0 Prepaid publishing 40.5 43.5 Deferred income taxes, prepaid taxes and other 93.8 28.2 - -------------------------------------------------------------------------------------------------------------------------- Total Current Assets 647.5 375.8 Telecommunications plant, property and equipment, net 2,770.1 2,767.4 Net assets of discontinued operations -- 60.9 Deferred charges, leases and other assets 343.9 280.5 - -------------------------------------------------------------------------------------------------------------------------- Total Assets $3,761.5 $3,484.6 - -------------------------------------------------------------------------------------------------------------------------- -------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Obligations maturing within one year $ 290.0 $ 82.8 Accounts payable and accrued expenses 208.1 187.7 Restructuring charge current 113.0 -- Advance billings and customer deposits 54.0 60.1 Accrued compensated absences 37.3 37.7 Other current liabilities 90.4 78.8 - -------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 792.8 447.1 Long-term obligations 984.3 1,048.3 Deferred income taxes 321.0 590.7 Postretirement benefits other than pensions 328.9 -- Restructuring charge long-term 242.0 -- Unamortized investment tax credits 50.8 61.3 Other liabilities and deferred credits 187.1 83.4 - -------------------------------------------------------------------------------------------------------------------------- Total Liabilities 2,906.9 2,230.8 - -------------------------------------------------------------------------------------------------------------------------- Common stock; $1.00 par value; 300,000,000 shares authorized; 66,608,360 and 66,117,339 issued, respectively 66.6 66.1 Proceeds in excess of par value 656.7 639.6 Retained earnings 315.7 744.2 Less: Treasury stock; 2,758,512 shares, at cost (104.7) (104.7) Unearned compensation related to ESOP (79.7) (91.4) - -------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 854.6 1,253.8 - -------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $3,761.5 $3,484.6 - -------------------------------------------------------------------------------------------------------------------------- --------------------------------
The accompanying notes are an integral part of these financial statements. Southern New England Telecommunications Corporation CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
UNEARNED COMMON COMPEN- TOTAL STOCK ISSUED PROCEEDS IN SATION STOCK- DOLLARS IN MILLIONS, ------------------------ EXCESS OF RETAINED TREASURY RELATED HOLDERS' EXCEPT PER SHARE AMOUNTS NUMBER PAR VALUE PAR VALUE EARNINGS STOCK TO ESOP EQUITY - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1991 64,798,298 $64.8 $598.5 $ 685.4 $(104.7) $(115.7) $1,128.3 - --------------------------------------------------------------------------------------------------------------------------------- Consolidated net income 123.7 123.7 Common stock issued, at market 592,190 .6 18.4 19.0 Dividends declared ($1.76 per share) (109.8) (109.8) Reduction of ESOP debt 7.7 7.7 Tax benefit of dividends declared on total shares held in ESOP 2.3 2.3 Excess of recorded ESOP expense over cash contributions to ESOP 4.9 4.9 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1991 65,390,488 65.4 616.9 701.6 (104.7) (103.1) 1,176.1 - --------------------------------------------------------------------------------------------------------------------------------- Consolidated net income 151.4 151.4 Common stock issued, at market 726,851 .7 22.7 23.4 Dividends declared ($1.76 per share) (111.1) (111.1) Reduction of ESOP debt 8.4 8.4 Tax benefit of dividends declared on total shares held in ESOP 2.3 2.3 Excess of recorded ESOP expense over cash contributions to ESOP 3.3 3.3 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1992 66,117,339 66.1 639.6 744.2 (104.7) (91.4) 1,253.8 - --------------------------------------------------------------------------------------------------------------------------------- Consolidated net loss (318.1) (318.1) Common stock issued, at market 491,021 .5 17.1 17.6 Dividends declared ($1.76 per share) (112.1) (112.1) Reduction of ESOP debt 9.2 9.2 Tax benefit of dividends declared on unallocated shares held in ESOP 1.7 1.7 Excess of recorded ESOP expense over cash contributions to ESOP 2.5 2.5 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 66,608,360 $66.6 $656.7 $ 315.7 $(104.7) $ (79.7) $ 854.6 - --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. Southern New England Telecommunications Corporation CONSOLIDATED STATEMENT OF CASH FLOWS
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net (loss) income $(318.1) $ 151.4 $ 123.7 Tax benefit of dividends on shares held in ESOP 1.7 2.3 2.3 Adjustments to reconcile consolidated net (loss) income to cash provided by operating activities: Depreciation and amortization 291.1 249.7 253.4 Provision for business restructuring, before tax 355.0 -- -- Cumulative effect of accounting changes, net of tax 220.2 -- -- Extraordinary charge from early extinguishment of debt, before tax 82.0 4.7 3.9 Provision for uncollectible accounts 32.1 32.6 25.9 Loss on disposal of discontinued operations, before tax 17.0 5.4 -- Provision for employee separation benefits, before tax -- -- 38.0 (Decrease) increase in deferred income taxes (138.0) 23.5 (1.1) Decrease in investment tax credits (10.5) (7.3) (7.1) Discontinued operations -- 9.1 7.4 Change in operating assets and liabilities, net (45.3) 4.8 (51.1) Other, net (8.5) 28.0 31.2 - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 478.7 504.2 426.5 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Cash expended for capital additions (267.3) (289.8) (320.7) Increase in investments (10.4) (10.4) (5.0) Disposal of assets and investments (5.6) (9.3) (10.9) Cash from sale of leased assets 80.7 -- -- Repayment of loan made to ESOP .8 .7 .6 Discontinued operations -- 5.7 (37.1) Other, net 8.4 28.6 21.0 - --------------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (193.4) (274.5) (352.1) - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 420.1 173.8 199.5 Repayments of long-term borrowings (270.3) (295.8) (188.3) Cash dividends (96.7) (95.4) (95.2) Amounts placed in trust for debt refinancing (62.1) -- -- Net (payments) proceeds of short-term borrowings (58.5) 1.9 (.6) Discontinued operations -- (23.3) 15.0 Other, net (.2) (.6) (1.3) - --------------------------------------------------------------------------------------------------------------------------- Net Cash Used by Financing Activities (67.7) (239.4) (70.9) - --------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Temporary Cash Investments 217.6 (9.7) 3.5 Cash and temporary cash investments at beginning of year 7.2 16.9 13.4 - --------------------------------------------------------------------------------------------------------------------------- Cash and Temporary Cash Investments at End of Year $ 224.8 $ 7.2 $ 16.9 - --------------------------------------------------------------------------------------------------------------------------- -----------------------------------------
The accompanying notes are an integral part of these financial statements. Southern New England Telecommunications Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements of the Southern New England Telecommunications Corporation (the "Corporation") are in conformity with generally accepted accounting principles and, for its telephone operating subsidiary, The Southern New England Telephone Company (the "Telephone Company") with accounting prescribed for telephone operating companies by the Federal Communications Commission ("FCC") and the Connecticut Department of Public Utility Control ("DPUC"). Substantially all of the Corporation's operations and customer base are located in the state of Connecticut. The consolidated financial statements include the accounts of the Corporation, all wholly owned subsidiaries and partnerships in which the Corporation effectively has control. Material investments in which the Corporation holds a 50% or less interest and in which the Corporation can exercise influence are reported on an equity basis. All other investments are reported at cost, which approximates market value. In accordance with industry practice and Statement of Financial Accounting Standards ("SFAS") No. 71 "Accounting for the Effects of Certain Types of Regulation," revenues of the Corporation's non-telephone businesses attributable to transactions with the Telephone Company's regulated operations have not been eliminated in the accompanying consolidated financial statements. Revenues of the Telephone Company earned from providing tariffed telephone services to its non-telephone businesses also have not been eliminated. All other significant intercompany transactions and accounts have been eliminated. ACCOUNTING CHANGES The Corporation implemented SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions," SFAS No. 112 "Employers' Accounting for Postemployment Benefits" and SFAS No. 109 "Accounting for Income Taxes" effective January 1, 1993. The cumulative effect of these accounting changes as of January 1, 1993 resulted in a one-time, non-cash charge that reduced 1993 net income and earnings per common share reported in the consolidated statement of income by $220.2 million and $3.46, respectively. 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. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION Regulatory authorities require the Telephone Company to provide for a return on capital invested in certain new telephone plant while under construction by including an allowance for funds used during construction ("AFUDC"), which includes both an interest and equity return component, as an item of income during the construction period and as an addition to the cost of the plant constructed. Such income is not realized in cash currently but will be realized over the service life of the related plant as the resulting higher depreciation expense is recovered in the form of increased revenues. DEPRECIATION AND AMORTIZATION The provision for depreciation for interstate telephone plant is based on the FCC approved equal life group ("ELG") straight-line depreciation method using a remaining-life formula on a phased-in basis which began in 1982. Vintages of interstate plant in service prior to the phase in of ELG are being depreciated using a composite vintage group method. For intrastate plant, the DPUC approved ELG for 1993 vintages and subsequent periods. Vintages of intrastate plant in service prior to 1993 are being depreciated using a composite vintage group method. Property and equipment other than telephone plant are depreciated primarily using the straight-line method over the estimated useful lives of the assets. Assets acquired under capital leases are generally amortized over the life of the lease using the straight-line method. INCOME TAXES The Corporation files a consolidated federal income tax return and, where allowable, combined state income tax returns. Effective January 1, 1993, the Corporation changed the method of computing income taxes from the deferred method under Accounting Principles Board ("APB") Opinion No. 11 to the liability method with the adoption of SFAS No. 109. Under the liability method, deferred tax assets and liabilities are determined based on all temporary differences between the financial statement and tax bases of assets and liabilities using the currently enacted rates. Additionally, under SFAS No. 109, the Corporation may recognize deferred tax assets if it is more likely than not that the benefit will be realized. Depreciation for income tax purposes is generally based upon accelerated methods and shorter lives causing such depreciation to be greater during the early years of telecommunications plant, property and equipment life than the depreciation charges for such assets reflected in these financial statements. The accumulated net tax effects of these and other temporary differences are recorded as deferred income taxes in the accompanying consolidated balance sheet. Investment tax credits realized in prior years by the Telephone Company are being amortized as a reduction to income taxes over the life of the related plant that gave rise to the credits. (LOSS) EARNINGS PER COMMON SHARE (Loss) earnings per common share are computed by dividing consolidated net (loss) income applicable to common stock by the weighted average number of common shares outstanding during the period. Effective in 1993, in accordance with the adoption of SFAS No. 109, the Corporation no longer adds the tax benefit of dividends declared on shares held by the Corporation's Employee Stock Ownership Plan ("ESOP") back to consolidated net (loss) income to compute (loss) earnings per common share. However, under SFAS No. 109, the tax benefit relating to dividends declared on allocated shares held by the ESOP is recorded as a reduction to income taxes and therefore is included in the calculation of (loss) earnings per common share. CASH AND TEMPORARY CASH INVESTMENTS Cash and temporary cash investments are stated at cost, which approximates market value, and include amounts that are readily convertible into cash and are not subject to significant risk from changes in interest rates. Temporary cash investments that have a maturity of 90 days or less are considered cash equivalents for purposes of the consolidated statement of cash flows. The Corporation records payments made by draft as accounts payable until the banks honoring the drafts have presented them for payment. MATERIALS, SUPPLIES AND INVENTORIES Materials and supplies, which are carried at original cost, are primarily for the construction and maintenance of telephone plant. Inventories, principally telephone systems and telephone sets, are carried at the lower of weighted average cost or market value. TELECOMMUNICATIONS PLANT, PROPERTY AND EQUIPMENT Telecommunications plant, property and equipment is stated at original cost less accumulated depreciation and includes certain employee-benefit costs and payroll taxes applicable to self-constructed assets. The cost of depreciable telephone plant retired, net of removal costs and salvage, is charged to accumulated depreciation. When depreciable property and equipment other than telephone plant are sold or retired, the resulting gain or loss is recognized currently as an element of income. Replacements, renewals and betterments of telecommunications plant, property and equipment that materially increase an asset's usefulness or remaining life are capitalized. Minor replacements and all repairs and maintenance are charged to expense. DEFERRED CHARGES Regulatory authorities require or permit the exclusion of certain costs of the Telephone Company from entering into ratemaking when they are incurred. When such costs will be recovered through future rates, the Telephone Company records these costs as deferred charges. In accordance with this practice, deferred charges include the Telephone Company's 1990 final gross earnings tax payment, which is being amortized over ten years through 1999 and accrued but unexpensed compensated absences at December 31, 1987, which are being amortized over ten years through December 31, 1997. Amortization of these costs is on a straight-line basis. LEASE NOTES RECEIVABLE Direct-financing and leveraged lease contracts as defined by SFAS No. 13, "Accounting for Leases," as amended, are accounted for by recording on the consolidated balance sheet the total minimum lease payments receivable, plus the estimated residual value, less the unearned lease income and, for leveraged leases, less the associated aggregate non-recourse debt obligation. The unearned lease income for direct-financing leases represents the excess of total minimum lease payments, plus estimated residual value expected to be realized, over the cost of the related equipment. For leveraged leases, the unearned income reflects the net positive cash flow to be generated from the lease. EMPLOYEE STOCK OWNERSHIP PLAN In accordance with accounting practices applicable to leveraged employee stock ownership plans, debt of the ESOP that has been guaranteed by the Corporation is recorded on the consolidated balance sheet as long-term debt and as a reduction of stockholders' equity. As the ESOP repays the debt, a corresponding reduction in long-term debt and an increase in stockholders' equity is recorded. NOTE 2: FINANCIAL DATA ON SUBSIDIARIES The Corporation derives substantially all of its revenues from the telecommunications service industry by providing network services, communications systems, information management services, long-distance, directory publishing, advertising, cellular mobile phone, and paging services. During 1993, 1992 and 1991, revenues earned from providing services to American Telephone and Telegraph Company ("AT&T") accounted for approximately 12.3%, 12.1% and 12.9%, respectively, of telephone operating revenues and 10.8%, 11.1% and 11.6%, respectively, of consolidated revenues and sales. A summary of the Telephone Company's operations, prepared from financial statements included in its Annual Report on Form 10-K, is presented as follows: CONDENSED STATEMENT OF (LOSS) INCOME
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - ----------------------------------------------------------------- Operating revenues $1,442.4 $1,402.6 $1,393.6 Operating expenses(1) 1,448.5 1,062.6 1,097.1 - ----------------------------------------------------------------- Operating (Loss) Income (6.1) 340.0 296.5 Interest expense 68.0 72.4 75.2 Other (expense) income, net (.8) 1.5 2.4 Income taxes (43.9) 108.6 92.8 - ----------------------------------------------------------------- (Loss) Income Before Extraordinary Charge and Accounting Change (31.0) 160.5 130.9 Extraordinary charge from early extinguishment of debt, net of related taxes of $38.0, $2.0 and $1.7, respectively 44.0 2.7 2.2 Accounting change cumulative effect to January 1, 1993 (6.5) -- -- - ----------------------------------------------------------------- Net (Loss) Income(1) $ (81.5) $ 157.8 $ 128.7 - -----------------------------------------------------------------
CONDENSED BALANCE SHEET
DOLLARS IN MILLIONS, AT DECEMBER 31, 1993 1992 - --------------------------------------------------------------- Current assets $ 594.2 $ 354.4 Telephone plant, net 2,610.6 2,620.9 Deferred charges and other assets 265.7 148.9 - --------------------------------------------------------------- Total Assets $3,470.5 $3,124.2 - --------------------------------------------------------------- Current liabilities(2) $ 681.0 $ 402.9 Long-term obligations 746.1 760.5 Other liabilities and deferred credits(2) 940.1 666.0 Stockholder's equity 1,103.3 1,294.8 - --------------------------------------------------------------- Total Liabilities and Stockholder's Equity $3,470.5 $3,124.2 - --------------------------------------------------------------- (1) Includes a $335.0 million before-tax charge for restructuring that reduced net income by $192.7 million. (2) Includes the liability for restructuring of which the current portion is $103.0 million and the long-term portion is $232.0 million.
Information on the Corporation's operations, exclusive of discontinued operations and the Telephone Company's regulated operations, is summarized as follows:
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - ---------------------------------------------------------------- SALES Cellular operations(1) $ 70.1 $ 56.9 $ 50.6 Business Communications(2) 56.9 93.2 95.3 SNET Diversified Group, Inc. 58.4 47.1 47.7 SNET Real Estate, Inc. 13.6 13.9 13.1 All others(3) 7.8 16.0 14.4 Intercompany eliminations (1.6) (8.5) (8.8) - ---------------------------------------------------------------- Total Sales $205.2 $218.6 $212.3 - ---------------------------------------------------------------- NET INCOME (LOSS) Cellular operations(1) $ 4.0 $ 4.0 $ 2.2 Business Communications(2) (4.5) (1.2) (7.3) SNET Diversified Group, Inc. 7.9 11.5 9.4 SNET Real Estate, Inc. (.5) (.5) (1.0) All others(3) (30.0) (18.5) (10.7) - ---------------------------------------------------------------- Combined Net Loss $(23.1) $ (4.7) $ (7.4) - ---------------------------------------------------------------- DOLLARS IN MILLIONS, AT DECEMBER 31, 1993 1992 1991 - ---------------------------------------------------------------- Combined Assets $282.4 $254.2 $241.0 - ---------------------------------------------------------------- (1) Cellular operations consist of the Corporation's wholesale and retail cellular businesses, SNET Cellular, Inc. ("Cellular") and SNET MobileCom, Inc. ("MobileCom"), net of intercompany amounts. (2) For comparative purposes, 1991, 1992 and the first quarter of 1993 results of SNET Systems, Inc. ("Systems") are shown with Business Communications. (3) For 1991 and 1992, all others include SNET Premium Services, SNET Paging, Inc. ("Paging"), SNET America, Inc. and Parent Company operations. For 1993, SNET Premium Services is included with SNET Diversified Group, Inc. ("Diversified Group").
In April 1993, Systems and AT&T entered into an agreement whereby AT&T assumed product support and maintenance for Systems' customers who own or rent their Private Branch Exchange ("PBX") equipment. This agreement is part of the implementation of the reorganization of Systems' operations announced in January 1993 and is in line with the Corporation's strategy to focus on the Telephone Company's central-office based solutions. The Corporation, through its new division, Business Communications, a part of Diversified Group, will continue to offer and maintain certain key products that are complementary to central-office based solutions. On October 20, 1993, TNI Associates, Inc. ("TNIA"), formerly SNET Paging Acquisition Corporation, a wholly owned subsidiary of Paging, purchased the remaining 50.5% partnership interest in the net assets of TNI Associates (the "TNI Partnership") from Telecommunications Network, Inc. The TNI Partnership business purchased by TNIA operates a wide-area paging network covering the seaboard area from metropolitan New York to southern New Jersey and Philadelphia. The purchase price totaling $21.9 million consists of $3.7 million of cash, the assignment of $.9 million of promissory notes and other assets, and the assumption of $17.3 million of the TNI Partnership's debt. TNIA has recorded $7.2 million of goodwill, which is being amortized over 15 years. TNIA's share of the partnership income is shown on the equity method prior to purchase and was fully consolidated beginning on the October 20, 1993 purchase date. If the purchase had occurred on January 1, 1993, 1993 consolidated revenues, loss from continuing operations before income taxes, extraordinary charge and accounting changes and consolidated net loss would have been $1,663.9 million, $(87.3) million and $(317.8) million, respectively. If the purchase had occurred on January 1, 1992, 1992 consolidated revenues, income from continuing operations before income taxes and extraordinary charge and net income would have been $1,624.2 million, $260.4 million and $149.2 million, respectively. SNET Real Estate, Inc. ("Real Estate") revenues include amounts attributable to leasing transactions with affiliates. These revenues totaled $10.3 million, $11.2 million and $9.4 million for 1993, 1992 and 1991, respectively. Real Estate's total assets were $71.5 million and $84.8 million at December 31, 1993 and 1992, respectively. Total assets were comprised primarily of land, buildings and equipment that were $65.2 million and $70.5 million at December 31, 1993 and 1992, respectively. Total liabilities were $68.7 million and $82.0 million at December 31, 1993 and 1992, respectively. Included in total liabilities was long-term debt of $43.2 million and $65.1 million at December 31, 1993 and 1992, respectively. Real Estate is a lessor of real property under operating leases. Future minimum receipts under third-party operating leases for Real Estate at December 31, 1993 are as follows (in millions):
OPERATING YEAR LEASES - -------------------------------------------------------------------- 1994 $2.3 1995 2.2 1996 1.5 1997 1.4 1998 .6 Thereafter -- - -------------------------------------------------------------------- Total $8.0 - --------------------------------------------------------------------
NOTE 3: EMPLOYEE BENEFITS SEPARATION OFFERS As part of the bargaining-unit contract negotiated in August 1992, pension benefits for bargaining-unit employees were enhanced. Also, as part of the contract, employees electing to retire or terminate their employment between December 15, 1992 and February 16, 1993 were offered an early retirement incentive offer, Special Pension Option ("SPO"). Most employees electing to retire or terminate left the Corporation by March 19, 1993, with the remainder having left by September 17, 1993. Approximately 570 employees accepted the early retirement offer. The Corporation recorded a before-tax $6.5 million pension gain in 1993 as a result of this SPO. In May 1991, the Corporation announced the 1991 Voluntary Separation Option Plan ("VSOP") for substantially all bargaining-unit employees. Of the total number of bargaining-unit employees approximately 7% accepted the VSOP and left the Corporation by September 1991. In July 1991, the Corporation announced a separation offer, the Voluntary Management Offer ("VMO"), for substantially all management employees with at least one year of service. Of the total number of management employees approximately 14% accepted the VMO and left the Corporation by December 31, 1991. As a result of these offers, the Corporation recorded a before-tax charge of $38.0 million in 1991 consisting of $19.6 million in severance costs and $18.4 million in pension costs. On an after-tax basis, the charge reduced 1991 consolidated net income and earnings per common share by $21.6 million and $.35, respectively. PENSION PLANS The Corporation sponsors several non-contributory, defined benefit pension plans: one for management employees and one for bargaining-unit employees; and two supplementary non-qualified, unfunded plans, one for executives and one for non-employee directors. 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. Benefits for the supplementary plans are based on years of service and average eligible pay for executives and final annual retainer for non-employee directors. Funding of the management and bargaining-unit plans is achieved through irrevocable contributions made to a trust fund. Plan assets consist primarily of listed stocks, corporate and governmental debt, and real estate. The Corporation's policy is to fund pension cost for these plans in conformity with the Employee Retirement Income Security Act of 1974 using the aggregate cost method. For purposes of determining contributions, the assumed investment earnings rate on plan assets was 8.5% in 1993 and declines to 6.0% by 1998. Pension (income) cost for all plans, computed using the projected unit credit actuarial method, for 1993, 1992 and 1991 includes the following components:
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - ----------------------------------------------------------------- Service cost $ 28.5 $ 25.9 $ 26.5 Interest cost on projected benefit obligation 103.0 100.3 96.0 Amortizations and deferrals, net 131.4 (44.4) 177.1 Positive return on plan assets (262.5) (83.1) (298.3) Settlement gain (20.0) -- -- Costs relating to special termination benefits 13.5 -- 18.4 - ----------------------------------------------------------------- Net Pension (Income) Cost $ (6.1) $ (1.3) $ 19.7 - -----------------------------------------------------------------
The increase in pension income for 1993 is due primarily to the net effect of a settlement gain and charges for special termination benefits associated with the SPO that resulted in a one-time net gain of $6.5 million in 1993. Pension expense decreased in 1992 compared with 1991 due primarily to the absence of the $18.4 million one-time charge for special termination benefits relating to the VMO in 1991 and an increase in the discount rate from 7.25% in 1990 to 7.50% in 1991. The following table sets forth the plans' funded status:
DOLLARS IN MILLIONS, AT DECEMBER 31, 1993 1992 - -------------------------------------------------------------- Actuarial present value of accumulated benefit obligation, including vested benefits of $1,240.3 and $1,190.6, respectively $1,337.9 $1,297.7 - -------------------------------------------------------------- Plan assets at fair value $1,894.1 $1,758.6 Less: Actuarial present value of projected benefit obligation 1,543.7 1,426.6 - -------------------------------------------------------------- Assets in excess of projected benefit obligation 350.4 332.0 Add: Unrecognized prior service costs 176.5 191.3 Less: Unrecognized transition asset 193.2 220.2 Unrecognized net gain since date of initial application 329.9 306.2 Adjustment required to recognize minimum liability 4.1 3.3 - -------------------------------------------------------------- Accrued Pension Cost $ (.3) $ (6.4) - --------------------------------------------------------------
The following assumptions were used to calculate the plans' funded status:
AT DECEMBER 31, 1993 1992 1991 - ------------------------------------------------------------- Discount rate for projected benefit obligation 7.00% 7.50% 7.50% Expected rate of increase in future management compensation levels 4.50% 4.50% 4.50% Expected long-term rate of return on plan assets 8.00% 8.00% 8.00% - -------------------------------------------------------------
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 Corporation provides health care benefits for retired employees. Substantially all of the Corporation's employees may become eligible for these benefits if they retire with a service pension. In addition, an employee's spouse and eligible dependents may 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). 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. These costs have been contributed to Voluntary Employee Beneficiary Association ("VEBA") trusts. The Corporation's funding policy with regard to health care costs has been to contribute an amount equal to the service and interest cost of active employees, subject to tax deductible limits, in order to contain the growth of the unfunded postretirement health care liability. Based on the DPUC's July 7, 1993 general rate award decision, the Corporation contributed additional amounts to the VEBAs in the fourth quarter of 1993. The additional amounts began to fund the accumulated liability. Effective January 1, 1993, the Corporation adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires that employers accrue, during the years an employee renders service, the expected cost, based on actuarial valuations, of health care and other non-pension benefits provided to retirees and their eligible dependents. With the adoption of SFAS No. 106, the Corporation elected to record immediately the accumulated postretirement benefit obligation in excess of the fair value of plan assets ("transition obligation") as a change in accounting principle. The cumulative effect of this accounting change decreased 1993 net income and earnings per common share reported in the consolidated statement of income by $215.9 million and $3.39, respectively. The Corporation's postretirement benefit cost for 1993 includes the following components:
DOLLARS IN MILLIONS, FOR THE YEAR ENDED DECEMBER 31, 1993 - ------------------------------------------------------------- Service cost $ 5.3 Interest cost of accumulated benefit obligation 32.0 Positive return on plan assets (13.1) Amortizations and deferrals, net 6.5 - ------------------------------------------------------------- Net Postretirement Benefit Cost $ 30.7 - -------------------------------------------------------------
The expected long-term rate of return on plan assets for 1993 is 8.0% for bargaining-unit health and 7.5% for management health trusts. The assumed health care cost trend rate used to measure the expected cost of these benefits in 1993 is 10.9% and declines to 6.8% by 2001. A one percentage point increase in the assumed health care cost trend rate would have increased the 1993 net postretirement benefit cost by approximately $2 million and would have increased the accumulated postretirement benefit obligation as of December 31, 1993 by approximately $26 million. In 1992 and 1991, the pay-as-you-go expense combined with the VEBA contributions amounted to $32.4 million and $25.2 million, respectively. The following table sets forth the plans' funded status:
DOLLARS IN MILLIONS, AT DECEMBER 31, 1993 - ------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 364.6 Fully eligible active plan participants 27.4 Other active plan participants 96.2 - ------------------------------------------------------------- Total Accumulated Postretirement Benefit Obligation 488.2 Plan assets at fair value (107.1) - ------------------------------------------------------------- Accumulated Postretirement Benefit Obligation in Excess of Plan Assets 381.1 Unrecognized net gain 31.8 - ------------------------------------------------------------- Accrued Postretirement Benefit Obligation $ 349.3 - -------------------------------------------------------------
The following assumptions were used to calculate the plans' funded status:
AT DECEMBER 31, 1993 - ------------------------------------------------------------ Discount rate for projected benefit obligation 7.00% Expected rate of increase in future compensation levels 4.50% - ------------------------------------------------------------
POSTEMPLOYMENT BENEFITS Effective January 1, 1993, the Corporation adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This statement requires employers to accrue benefits provided to former or inactive employees after employment but before retirement. These benefits include workers' compensation, disability benefits and health care continuation coverage for a limited period of time after employment. The standard generally requires that these benefits be accrued as earned where the right to the benefits accumulates or vests. The cumulative effect of this accounting change reduced 1993 net income and earnings per common share reported in the consolidated statement of income by $7.1 million and $.11, respectively. Health care continuation costs, which do not vest, continue to be paid from company funds and are expensed when paid. EMPLOYEE STOCK OWNERSHIP PLAN The Corporation has established a leveraged ESOP for substantially all employees as part of its existing savings plans. Under the ESOP, the Corporation's matching contributions are invested entirely in common stock of the Corporation and are held by the ESOP. In January 1990, the Corporation loaned the ESOP $10.0 million and in February 1990, the ESOP borrowed an additional $110.0 million, which the Corporation guaranteed, through a third party. The proceeds of the $10.0 million loan were used to acquire common stock of the Corporation through open market purchases. The proceeds of the $110.0 million loan were used to purchase both unissued common stock and treasury stock from the Corporation. The Corporation periodically makes cash payments to the ESOP that, together with dividends received on shares held by the ESOP, are used to make interest and principal payments on both loans. ESOP expense and ESOP trust activity are as follows:
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - ---------------------------------------------------------------- Compensation expense $16.5 $17.0 $17.6 Interest expense incurred 9.0 9.8 10.6 Dividends declared on ESOP shares (5.4) (5.4) (5.4) Interest income earned (.8) (.8) (.9) - ---------------------------------------------------------------- Total Expense $19.3 $20.6 $21.9 - ---------------------------------------------------------------- Dividends Used for Debt Service $ 5.4 $ 5.4 $ 5.4 - ---------------------------------------------------------------- Cash Contributions Used for Debt Service $13.2 $13.1 $13.1 - ----------------------------------------------------------------
NOTE 4: INCOME TAXES Effective January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 resulted in recording tax benefits, primarily associated with the effects of lower federal and state tax rates, applicable to the Corporation's non-telephone businesses. The cumulative effect of this accounting change increased consolidated net income by $2.8 million or $.04 per common share. As required under SFAS No. 109, and in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," the Telephone Company has a regulatory asset of $71.0 million (recorded in Deferred charges, leases and other assets) related to the cumulative amount of income taxes on temporary differences previously flowed through to ratepayers. These amounts related principally to capitalization of certain general overhead, taxes and payroll-related construction costs for financial statement purposes. In addition, the Telephone Company has a regulatory liability of $98.9 million (recorded in Other liabilities and deferred credits) relating to future tax benefits to be flowed back to ratepayers associated with unamortized investment tax credits and decreases in both federal and state statutory tax rates. Both the regulatory asset and liability are recognized over the regulatory lives of the related taxable bases concurrent with the realization in rates, except for the liability related to intrastate excess state tax rates, which in accordance with the DPUC final decision issued on July 7, 1993, will be returned to ratepayers over three years. This method is a more accelerated turnaround than the normal recognition period. Income tax (benefit) expense includes the following components:
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - ---------------------------------------------------------------- FEDERAL Current $ 57.1 $ 66.0 $67.8 Deferred (87.7) 13.0 (8.6) Investment tax credits, net (10.5) (7.3) (7.2) - ---------------------------------------------------------------- Total Federal (41.1) 71.7 52.0 - ---------------------------------------------------------------- STATE Current 27.0 30.5 29.1 Deferred (30.1) 8.0 4.8 - ---------------------------------------------------------------- Total State (3.1) 38.5 33.9 - ---------------------------------------------------------------- Total Income Taxes $(44.2) $110.2 $85.9 - ----------------------------------------------------------------
Deferred income tax (benefit) expense results primarily from temporary differences involving accelerated tax depreciation and shorter tax lives for income tax purposes offset by the 1993 accrual for the restructuring charge, which was deductible for financial statement purposes but not for tax. In August 1993, the federal corporate income tax rate increased from 34.0% to 35.0%, retroactive to January 1, 1993. In addition, the enacted state corporate income tax rate will be gradually reduced from the current 11.5% to 10.0% by January 1, 1998. The net impact of these changes in the enacted tax rates was not material to total income taxes or to net deferred tax liabilities. The Corporation had unused alternative minimum tax credits of $3.6 million as of December 31, 1993. The credits were the result of the Corporation being subject to the alternative minimum tax in 1991 and 1990. For financial statement purposes, unused alternative minimum tax credits have been applied as a reduction to deferred income taxes. For income tax purposes, a credit of $11.6 million was applied as a reduction to regular income tax in 1993, and remaining unused credit carry-overs are available to offset regular income tax in future years. The effective federal income tax rates varied from the statutory federal rates for the reasons set forth below:
FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - --------------------------------------------------------------------- Statutory federal rate (35.0)% 34.0% 34.0% a. State income taxes, net of federal income tax effect. (2.3) 9.4 10.7 b. Temporary differences associated with depreciation on certain general overhead, taxes and payroll-related construction costs and AFUDC. 7.2 1.6 2.3 c. Amounts currently included in taxable income for which deferred taxes were provided in prior years at tax rates greater than the statutory tax rate (Telephone Company only). (12.8) (2.1) (2.9) d. Amortization of investment tax credits over the life of the plant that gave rise to the credits. Such amortization reduced income tax expense for the years 1991 through 1993 by the amounts shown in Note 13. (11.9) (2.7) (3.4) e. Prior years' tax adjustments. 2.2 .6 .7 f. Other differences, net. 2.3 .1 (.3) - --------------------------------------------------------------------- Effective Rate (50.3)% 40.9% 41.1% - ---------------------------------------------------------------------
Consolidated deferred income tax liabilities (assets) are composed of the following at December 31, 1993 (in millions):
TAX EFFECT OF TEMPORARY DIFFERENCES FOR: - ------------------------------------------------------------- Depreciation $ 491.0 Items previously flowed through to ratepayers 71.0 Leveraged leases 32.2 Deferred gross earnings tax 19.1 Postretirement benefits other than pensions (145.5) Restructuring charge (102.8) Unamortized investment tax credits (37.0) Other (8.9) Asset valuation allowances 1.9 - ------------------------------------------------------------- Net Deferred Income Tax Liabilities Long -Term $ 321.0 - -------------------------------------------------------------
The asset valuation allowance of $1.9 million applies to state and local net operating loss carryforwards that may expire before the Corporation can utilize them. There was no net change in the valuation allowance during 1993. The allowance will continue to be evaluated based on evidence of the realization of all deferred tax assets. NOTE 5: RESTRUCTURING CHARGE In December 1993, the Corporation announced a business restructuring program designed to reduce costs. The program includes costs that will be incurred for work force reductions involving approximately 2,500 employees over the next two to three year period including those that began in January 1994. The charge also includes the incremental costs of analyzing and implementing reengineering solutions; designing and developing new processes and tools to continue the Corporation's provision of excellent service; and the training of employees to help them keep pace with the changes the Corporation is implementing to streamline its business and meet the changing demands of customers. The estimated costs of this restructuring program of $355.0 million are shown as a separate line item in the consolidated statement of income and resulted in an after-tax charge of $204.2 million, or $3.21 per common share, to continuing operations. NOTE 6: OBLIGATIONS MATURING WITHIN ONE YEAR Obligations maturing within one year, which include notes payable used to meet temporary cash needs, consist of the following:
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - ---------------------------------------------------------------- Current portion of long-term debt $290.0 $25.6 $109.7 Commercial paper -- 56.9 50.8 Current portion of capital lease obligations -- .3 .5 - ---------------------------------------------------------------- Total Obligations Maturing Within One Year $290.0 $82.8 $161.0 - ----------------------------------------------------------------
Additional information regarding commercial paper outstanding during the year is as follows:
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - ---------------------------------------------------------------- Average amount outstanding during the year (based on daily amounts) $ 49.0 $104.2 $122.4 - ---------------------------------------------------------------- Weighted average interest rate during the year (based on daily amounts) 3.20% 4.04% 6.08% - ---------------------------------------------------------------- Maximum amount outstanding at any month's end during the year $120.4 $135.4 $196.4 - ---------------------------------------------------------------- Weighted average interest rate at year end -- 3.29% 4.92% - ----------------------------------------------------------------
NOTE 7: LEASE OBLIGATIONS The Corporation has entered into both capital and operating leases for facilities and equipment used in its operations. Rental expense under operating leases was $35.2 million, $39.8 million and $37.8 million for 1993, 1992 and 1991, respectively. Aggregate future minimum rental commitments under third-party, noncancelable operating leases at December 31, 1993, were as follows (in millions):
OPERATING YEAR LEASES - --------------------------------------------------------------- 1994 $13.5 1995 12.8 1996 11.5 1997 10.1 1998 9.5 Thereafter 35.1 - --------------------------------------------------------------- Total Minimum Lease Payments $92.5 - ---------------------------------------------------------------
Future minimum lease payments under capital leases as of December 31, 1993 were $.1 million through 1998 and $.3 million thereafter. Included in the total $.4 million minimum lease payments is $.3 million, which represents future interest. NOTE 8: LONG-TERM OBLIGATIONS The components of long-term obligations at December 31 are as follows:
DOLLARS IN MILLIONS INTEREST RATES 1993 1992 - --------------------------------------------------------------- Debentures 4.38% to 5.75% $ 45.0 $ 90.0 8.63% 200.0 200.0 - --------------------------------------------------------------- Total Debentures 245.0 290.0 - --------------------------------------------------------------- Unsecured notes 6.13% to 8.00% 715.0 290.0 8.59% to 9.63% 140.0 315.0 - --------------------------------------------------------------- Total Unsecured Notes 855.0 605.0 - --------------------------------------------------------------- Guaranteed Debt of ESOP 9.35% 86.8 95.3 - --------------------------------------------------------------- Mortgage Notes 9.14% to 10.25% 53.4 66.9 - --------------------------------------------------------------- Bank Notes 8.50% to 10.50% 38.0 26.1 - --------------------------------------------------------------- Total Long -Term Debt 1,278.2 1,083.3 Unamortized discount and premium, net (4.0) (9.6) Capital lease obligations .1 .5 Current portion of long-term obligations (290.0) (25.9) - --------------------------------------------------------------- Total Long -Term Obligations $ 984.3 $1,048.3 - ---------------------------------------------------------------
Maturities of long-term debt outstanding at December 31, 1993 by type of obligation are as follows (in millions):
UNSECURED GUARANTEED MORTGAGE BANK MATURITIES DEBENTURES NOTES DEBT OF ESOP NOTES NOTES TOTAL - -------------------------------------------------------------------------------------------- 1994 $200.0 $ 70.0 $ 9.2 $10.2 $ .6 $ 290.0 1995 -- 20.0 10.1 1.7 .5 32.3 1996 -- 20.0 11.1 2.0 .5 33.6 1997 -- -- 12.2 2.2 .5 14.9 1998 -- -- 13.3 2.3 .4 16.0 1999-2008 45.0 420.0 30.9 35.0 31.9 562.8 2009-2018 -- -- -- -- 3.6 3.6 Thereafter -- 325.0 -- -- -- 325.0 - -------------------------------------------------------------------------------------------- Total $245.0 $855.0 $86.8 $53.4 $38.0 $1,278.2 - --------------------------------------------------------------------------------------------
On September 15, 1993, the Telephone Company called $45.0 million of 5.750% debentures due November 1, 1996. The debentures were redeemed on November 1, 1993. The unamortized costs associated with this redemption did not result in a significant charge to the 1993 consolidated statement of income. On December 8, 1993, the Telephone Company filed a shelf registration statement with the Securities and Exchange Commission ("SEC") to sell up to $540.0 million in medium-term notes. On December 14, 1993, the Telephone Company announced that it would repurchase any and all of its $120.0 million of 9.625% and $100.0 million of 9.600% medium-term notes. The Telephone Company repurchased $166.5 million of these notes and on December 30, 1993, executed an "in-substance defeasance" for the remainder of the medium-term notes not repurchased. Sufficient U.S. Government securities were deposited in an irrevocable trust to cover the outstanding principal, interest and call premium payable February 15, 1995. Pursuant to this registration statement, the Telephone Company sold, on December 21, 1993, with DPUC approval: (i) $200.0 million of 6.125% notes due December 15, 2003 at 99.160 to yield 6.239%; and (ii) $245.0 million of 7.250% notes due December 15, 2033 at 99.300 to yield 7.304%. The proceeds of the $245.0 million issue were used to repurchase the debt issues discussed previously and purchase securities placed in the irrevocable trust established for the "in-substance defeasance." On January 14, 1994, the proceeds of the $200.0 million issue were used to redeem $200.0 million of 8.625% debentures called irrevocably on December 14, 1993. The call premium, unamortized costs, defeasance premiums, and tender costs associated with these redemptions have been classified as an extraordinary charge in the 1993 consolidated statement of income. The extraordinary charge totaled $44.0 million, net of applicable tax benefits of $38.0 million, or $.69 per common share. On April 2, 1992, the Telephone Company filed a shelf registration statement with the SEC to sell up to $180.0 million in medium-term notes. Pursuant to this registration statement, the Telephone Company sold, on August 5, 1992, with DPUC approval, $110.0 million of 7.125% notes due August 1, 2007 at 99.317 to yield 7.200%, and $70.0 million of 7.000% notes due August 1, 2004 at face value. On September 8, 1992, the proceeds from the sale of these medium-term notes were used to redeem $65.0 million of 7.750% debentures due June 1, 2004 and $110.0 million of 8.125% debentures due May 1, 2008, both of which were called on August 6, 1992. The call premium, unamortized debt issuance costs and unamortized premium associated with the redeemed debentures have been classified as an extraordinary charge in the 1992 consolidated income statement. This charge totaled $2.7 million, net of applicable tax benefits of $2.0 million, or $.04 per common share. On June 20, 1991, the Corporation filed a shelf registration statement with the SEC for the sale of up to $165.0 million in debt securities with maturities ranging from three to 15 years. Pursuant to the shelf registration, the Corporation sold during the third and fourth quarters of 1991, $110.0 million of unsecured notes with interest rates ranging from 7.200% to 8.000%. These notes mature at various times through November 2001. Additional notes may be sold in one or more issues from time to time as market conditions warrant. The Corporation used the proceeds to refinance medium-term notes that matured during 1991. The Corporation established a bank credit facility to support its commercial paper program. Under this credit facility, the Corporation has obtained a contractual commitment to a $100.0 million line of credit provided by a syndicate of banks. At December 31, 1993, the entire $100.0 million remained available. The annual commitment fee is currently .15% of the total line of credit. Under the most restrictive terms of the credit facility, the Corporation must maintain a consolidated net worth, as defined, of at least $780 million. At December 31, 1993, consolidated net worth exceeded this amount by $74.6 million. The establishment of the line of credit will facilitate the Corporation's ability to issue commercial paper. Pursuant to a shelf registration filed in December 1989 with the SEC to register $300.0 million of debt securities, the Telephone Company sold, with DPUC approval, $80.0 million, the remainder of the shelf registration, of 8.700% unsecured notes in December 1991 which matures on August 15, 2031. The proceeds of the $80.0 million issue were used to redeem $80.0 million of 9.625% debentures called irrevocably on December 20, 1991. Related to this redemption, the call premium and unamortized costs associated with the called debentures have been classified as an extraordinary charge in the 1991 consolidated statement of income. The extraordinary charge totaled $2.2 million, net of applicable tax benefits of $1.7 million or $.04 per com- mon share. Real Estate has issued mortgage notes that are collat- eralized by the mortgaged properties. Real Estate is a 50% general partner in a real estate partnership and is contingently liable to the extent recourse liabilities exceed unrestricted assets of the partnership. At December 31, 1993, such contingent liability was approximately $4.5 million. TNIA has a bank note of $12.0 million. The note was assumed as part of the purchase of the remaining interest in the TNI Partnership [see Note 2]. This note is guaranteed by Paging. NOTE 9: DISCONTINUED OPERATIONS On September 9, 1992, the Corporation's Board of Directors approved a plan to withdraw from the finance business by phasing out the activities of SNET Credit, Inc. ("Credit"). As a result of this decision, previously reported financial statements have been restated to reflect the discontinuance of Credit. In connection with this plan, the Corporation recorded an estimate of the loss on the disposal of $4.0 million, net of applicable tax benefits of $1.4 million in 1992. During the first and second quarters of 1993, Credit sold portions of its direct-financing lease portfolio for a total of approximately $81 million in cash. The proceeds were used to pay all of its third-party debt outstanding. Due primarily to the net loss on the sales and a reevaluation of the additional direct-financing leases that will be retained, the Corporation increased the estimated loss on the disposal by $10.3 million, net of applicable tax benefits of $6.7 million, during the fourth quarter of 1993. Operating results of the discontinued operations were as follows:
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1992 1991 - ------------------------------------------------------------- Revenues $17.8 $ 24.4 Costs and expenses 18.9 19.1 - ------------------------------------------------------------- (Loss) Income Before Income Taxes (1.1) 5.3 Income taxes -- 2.3 - ------------------------------------------------------------- (Loss) Income from Discontinued Operations $(1.1) $ 3.0 - -------------------------------------------------------------
No tax benefit was recorded on the loss for 1992 due to the uncertainty of realization of current and prior year tax losses for state tax purposes. Net assets of the discontinued business, excluding leases to be retained as investments, at December 31, 1992 are as follows:
DOLLARS IN MILLIONS 1992 - ------------------------------------------------------------ Lease notes receivable, net $117.1 Other current and noncurrent assets 9.4 Long-term debt (54.2) Other current and noncurrent liabilities (11.4) - ------------------------------------------------------------ Net Assets of Discontinued Operations $ 60.9 - ------------------------------------------------------------
The Corporation retained on an investment basis the portfolio of leveraged leases and a group of direct-financing leases. The gross investment in these leases has been recorded on the consolidated balance sheet in Deferred charges, leases and other assets. The investment in direct-financing leases are in a commercial aircraft and other equipment. Investments in leveraged leases are in a coal-fired, electric generating facility and other equipment. The components of the lease notes receivable retained are as follows:
DOLLARS IN MILLIONS, AT DECEMBER 31, 1993 1992 - ----------------------------------------------------------------------- DIRECT- DIRECT- FINANCING LEVERAGED FINANCING LEVERAGED LEASES LEASES LEASES LEASES - ----------------------------------------------------------------------- Minimum rentals receivable $ 95.4 $ 26.9 $ 72.3 $ 27.6 Unearned income (39.2) (18.2) (37.0) (21.3) Estimated, unguaranteed residual value of leased assets 10.6 34.6 10.3 35.5 Initial direct costs .3 -- .3 -- - ----------------------------------------------------------------------- Lease Notes Receivable $ 67.1 43.3 $ 45.9 41.8 --------- --------- Deferred taxes arising from leveraged leases (32.2) (28.6) - ----------------------------------------------------------------------- Net Investment in Leveraged Leases $ 11.1 $ 13.2 - -----------------------------------------------------------------------
Future minimum receipts under the third-party direct-financing leases at December 31, 1993 are as follows (in millions): DIRECT- FINANCING YEAR LEASES - -------------------------------------------------------------------------------- 1994 $ 15.4 1995 9.7 1996 7.4 1997 5.5 1998 3.7 Thereafter 53.7 - -------------------------------------------------------------------------------- Total $ 95.4 - -------------------------------------------------------------------------------- NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires certain disclosures about the fair value of all financial instruments, including both assets and liabilities. The following methods and assumptions were used to estimate the fair value of each class of financial instrument 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. LONG -TERM INVESTMENTS The fair value of certain investments is estimated based on quoted market prices for those or similar investments. SHORT-TERM DEBT The carrying amount of commercial paper approximates fair value because of the short maturity of those instruments. The fair value of long-term debt called in 1993 and redeemed in 1994 is estimated based on the call price for those issues. LONG -TERM DEBT The fair value of the Corporation's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. INTEREST RATE SWAP AGREEMENTS The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the Corporation would receive or (pay) to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The estimated fair values of the Corporation's financial instruments are as follows:
DOLLARS IN MILLIONS, AT DECEMBER 31, 1993 1992 - -------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - -------------------------------------------------------------------- Cash and temporary cash investments $ 224.8 $ 224.8 $ 7.2 $ 7.2 Long-term investments 4.9 10.7 5.5 9.8 Short-term debt (290.0) (304.6) (82.5) (82.5) Long-term debt from operations: Continuing (984.2) (1,024.2) (1,048.1) (1,104.2) Discontinued -- -- (54.2) (55.2) Interest rate swaps -- (1.6) -- (2.5) - --------------------------------------------------------------------
NOTE 11: COMMON, PREFERRED AND PREFERENCE SHARES The Corporation is authorized to issue up to 300,000,000 shares of common stock at a par value of $1.00 per share ("Common Stock") as well as 2,000,000 preferred shares at a par value of $50.00 per share and 50,000,000 preference shares at a par value of $1.00 per share. No preferred or preference shares have been issued pursuant to these authorizations. Under a 1987 shareholders' rights plan ("Rights Plan"), as amended in 1990, each share of Common Stock has a purchase right that entitles the holder to purchase one additional share of Common Stock at an exercise price of $80.00. The rights are not exercisable or transferable apart from the Common Stock until a person or group has acquired, or has made an offer for, 20% or more of the outstanding Common Stock. In the event that a person or group acquires 20% or more of the outstanding Common Stock, each outstand- ing right, other than those held by the 20% acquirer, is entitled to purchase, at the exercise price of the rights, a number of shares of Common Stock having a market value of two times the exercise price of the right. The Rights Plan may be amended by the Board of Directors to reduce the threshold at which the rights are triggered to not less than 10% of the then outstanding Common Stock. Additionally, if the person or group acquires the Corporation in a merger or other business combination transaction, each right will entitle the owner to purchase common stock of the acquirer having a market value of two times the exercise price of the right. The rights are redeemable at one cent each prior to public announcement that a person or group has acquired beneficial ownership of 20% or more of the outstanding Common Stock. The rights expire on February 11, 1997. Compensation paid in the form of Common Stock for consideration other than cash, or in lieu of cash dividends, is as follows:
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - -------------------------------------------------------------- Common shares issued under the Corporation's savings and incentive plans $ 2.4 $ 8.1 $ 4.7 Dividends reinvested 15.2 15.3 14.4 - -------------------------------------------------------------- Total $17.6 $23.4 $19.1 - --------------------------------------------------------------
NOTE 12: STOCK OPTION PLAN The SNET 1986 Stock Option Plan is a plan providing stock options and stock appreciation rights ("SARs") to certain executives at the discretion of a committee of the Board of Directors (the "Committee"). The exercise price of each option may not be less than 100% of the fair market value of the shares on the date of grant. Options are exercisable at least one year after the date of grant and have a maximum life of ten years. SARs, which may be granted in tandem with the related stock option, permit the optionee to receive in cash or shares (at the Committee's discretion) the amount by which the fair market value on the exercise date exceeds the related option price. Exercise of an option cancels the related SAR, and exercise of a SAR cancels the related option. Information with respect to plan activity during 1993, 1992 and 1991 is as follows:
OPTIONS SHARES AVAILABLE UNDER AVERAGE FOR GRANT OPTION SARS PRICE - ---------------------------------------------------------------- Balance at 1/1/91 1,498,400 192,500 145,400 $ 30.53 Granted (52,550) 52,550 35,300 $ 34.34 SARs exercised -- (6,250) (6,250) $ 25.82 Cancelled 15,500 (15,500) (13,900) $ 35.07 - ----------------------------------------------------- Balance at 12/31/91 1,461,350 223,300 160,550 $ 31.24 - ----------------------------------------------------- Granted (55,600) 55,600 41,000 $ 30.25 SARs exercised -- (8,450) (8,450) $ 26.08 Options exercised -- (3,700) -- $ 26.09 Cancelled 5,200 (5,200) (1,400) $ 31.18 - ----------------------------------------------------- Balance at 12/31/92 1,410,950 261,550 191,700 $ 31.27 - ----------------------------------------------------- Granted (312,000) 312,000 -- $ 36.24 SARs exercised -- (11,275) (11,275) $ 26.58 Options exercised -- (5,000) -- $ 29.24 Cancelled 13,250 (13,250) (7,825) $ 32.58 - ----------------------------------------------------- Balance at 12/31/93 1,112,200 544,025 172,600 $ 34.20 - ----------------------------------------------------------------
At December 31, 1993, 159,925 SARs and 218,250 shares under option were exercisable. In addition, certain executives may be awarded shares based upon the attainment of performance goals over a three-year period under the SNET Long Term Incentive Plan. At the discretion of the employee, receipt of the stock may be deferred. Shares awarded under this plan and those for which receipt was deferred as of December 31, 1991 were 12,938 and 7,909, respectively. There were no shares awarded or deferred in 1992 or 1993. NOTE 13: SUPPLEMENTAL FINANCIAL INFORMATION
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - --------------------------------------------------------------- Amortization of investment tax credits $ 10.5 $ 7.3 $ 6.8 - --------------------------------------------------------------- Property and other taxes Property $ 47.6 $ 46.0 $ 48.7 Other 13.0 13.3 9.9 - --------------------------------------------------------------- Total Property and Other Taxes $ 60.6 $ 59.3 $ 58.6 - --------------------------------------------------------------- Advertising expense $ 17.0 $ 14.0 $ 15.5 - ---------------------------------------------------------------
NOTE 13: Supplemental Financial Information (continued)
DOLLARS IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 - --------------------------------------------------------------- Interest expense Long-term obligations $ 85.9 $ 90.3 $ 91.4 Short-term obligations 1.6 4.3 7.5 Other 3.9 2.9 3.1 - --------------------------------------------------------------- Total Interest Expense $ 91.4 $ 97.5 $102.0 - --------------------------------------------------------------- Interest paid, net of amounts capitalized $ 97.0 $ 93.3 $101.8 - --------------------------------------------------------------- Income taxes paid $ 73.9 $ 91.8 $ 83.4 - --------------------------------------------------------------- Cash change in operating assets and liabilities: Increase in accounts receivable $(15.9) $(21.1) $(28.8) Decrease in inventory, materials and supplies .5 2.9 .6 Increase (decrease) in accounts payable and compensated absences 2.7 5.1 (33.9) Change in other assets and liabilities, net (32.6) 17.9 11.0 - --------------------------------------------------------------- Net Cash Change in Operating Assets and Liabilities $(45.3) $ 4.8 $(51.1) - ---------------------------------------------------------------
DOLLARS IN MILLIONS, AT DECEMBER 31, 1993 1992 - -------------------------------------------------------------- Telecommunications plant, property and equipment, net Telephone plant, at cost In service $3,965.8 $3,851.9 Under construction 74.0 70.3 - -------------------------------------------------------------- Total Telephone Plant, at cost 4,039.8 3,922.2 Less: Accumulated depreciation 1,429.2 1,301.3 - -------------------------------------------------------------- Total Telephone Plant, net 2,610.6 2,620.9 Property and equipment, net 159.5 146.5 - -------------------------------------------------------------- Telecommunications Plant, Property and Equipment, net $2,770.1 $2,767.4 - -------------------------------------------------------------- Deferred charges, leases and other assets Deferred charges $ 61.0 $ 108.8 Leases 110.4 87.7 Other assets 172.5 84.0 - -------------------------------------------------------------- Total Deferred Charges, Leases and Other Assets $ 343.9 $ 280.5 - -------------------------------------------------------------- Other current liabilities Dividends payable $ 28.1 $ 27.9 Postretirement benefits accrued 20.4 -- Interest accrued 19.8 25.4 Other current liabilities 22.1 25.5 - -------------------------------------------------------------- Total Other Current Liabilities $ 90.4 $ 78.8 - --------------------------------------------------------------
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS - --------------------------------------------------------------------------------------------------------------------------------- 1ST QTR 2ND QTR 3RD QTR 4TH QTR ------------------------------------------------------------------------------------------------- 1993 1992 1993 1992 1993 1992 1993 1992 ------------------------------------------------------------------------------------------------- REVENUES AND SALES $ 402.3 $398.4(1) $410.7 $404.9(1) $414.1 $405.2 $ 426.5 $405.9 - --------------------------------------------------------------------------------------------------------------------------------- NET (LOSS) INCOME: Continuing Operations $ 36.5 $ 39.1 $ 40.9 $ 40.8 $ 48.7 $ 39.3 $(169.7)(2) $ 40.0 Discontinued Operations -- 1.0 -- .9 -- (7.0) (10.3) -- Extraordinary Charge -- -- -- -- -- (2.7) (44.0) -- Cumulative Effect of Accounting Changes (220.2) -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Consolidated $(183.7) $ 40.1 $ 40.9 $ 41.7 $ 48.7 $ 29.6 $(224.0) $ 40.0 - --------------------------------------------------------------------------------------------------------------------------------- (LOSS) EARNINGS PER COMMON SHARE: Continuing Operations(3) $ .58 $ .63 $ .64 $ .66 $ .77 $ .63 $ (2.66)(2) $ .64 Discontinued Operations -- .02 -- .01 -- (.11) (.16) -- Extraordinary Charge -- -- -- -- -- (.04) (.69) -- Cumulative Effect of Accounting Changes(3) (3.47) -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Consolidated $ (2.89) $ .65 $ .64 $ .67 $ .77 $ .48 $ (3.51) $ .64 - --------------------------------------------------------------------------------------------------------------------------------- (1) Quarterly revenues and sales have been restated to reflect the discontinuance of Credit in the third quarter of 1992. In 1992, Credit's sales were $6.3 million and $6.6 million during the first and second quarters, respectively. (2) Includes a before-tax charge of $355.0 million for restructuring that reduced net income and earnings per common share by $204.2 million or $3.21, respectively. (3) Per common share is computed independently for each quarter and, for 1993, the sum of the quarters does not equal the annual amount.
Southern New England Telecommunications Corporation FINANCIAL AND STATISTICAL DATA (UNAUDITED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1993 1992 1991 1990 1989 - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL DATA Revenues and sales $ 1,654 $ 1,614 $ 1,608 $ 1,599 $ 1,656 Costs and expenses (excluding depreciation, amortization and interest)(1) $ 1,359 $ 998 $ 1,044 $ 1,041 $ 1,066 Interest expense $ 91 $ 97 $ 102 $ 95 $ 70 Income taxes $ (44) $ 110 $ 86 $ 83 $ 142 Net (Loss) Income: From continuing operations(1) $ (44) $ 159 $ 123 $ 129 $ 186 Before extraordinary charge and accounting changes(1) $ (54) $ 154 $ 126 $ 132 $ 189 Net (loss) income(1) $ (318) $ 151 $ 124 $ 127 $ 189 (Loss) earnings applicable to common shares(1) $ (318) $ 154 $ 126 $ 129 $ 189 (Loss) earnings per common share: From continuing operations(1) $ (.68) $ 2.56 $ 2.01 $ 2.12 $ 2.99 Before extraordinary charge and accounting changes(1) $ (.84) $ 2.48 $ 2.06 $ 2.17 $ 3.04 Net (loss) income(1) $ (4.99) $ 2.44 $ 2.02 $ 2.08 $ 3.04 Dividends declared per common share $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.64 Cash flows provided by operations, net $ 479 $ 504 $ 427 $ 377 $ 422 Telephone plant capital additions, excluding AFUDC $ 255 $ 277 $ 295 $ 342 $ 354 Depreciation expense on telephone plant $ 265 $ 229 $ 232 $ 232 $ 214 Telephone plant, net $ 2,611 $ 2,621 $ 2,566 $ 2,500 $ 2,378 Total assets $ 3,762 $ 3,485 $ 3,451 $ 3,361 $ 3,127 Common stockholders' equity $ 855 $ 1,254 $ 1,176 $ 1,128 $ 1,203 Long-term obligations $ 984 $ 1,048 $ 1,072 $ 991 $ 859 - --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- STATISTICAL DATA Network access lines in service (thousands) 1,964 1,937 1,922 1,904 1,875 Annual growth 1.4% .8% .9% 1.6% 2.0% Intrastate toll and WATS messages (millions) 524 526 516 521 523 Annual growth (.4)% 1.9% (1.0)% (.4)% .8% Return of average total capital (10.3)% 10.3% 9.6% 9.7% 12.0% Return on average common equity (28.2)% 12.5% 10.8% 11.2% 15.8% Debt ratio 59.9% 47.4% 51.2% 51.6% 43.4% Pre-tax interest coverage (times) .1 3.8 3.0 3.2 5.7 Average total debt cost 7.7% 7.8% 8.1% 8.4% 7.8% Current ratio (times) .82 .84 .81 .69 .89 Average dividend yield 4.9% 5.4% 5.5% 5.2% 4.3% Payout ratio -- (2) 72.1% 87.1% 84.6% 53.9% Market price per common share: High $38.375 $38.000 $35.875 $45.875 $46.500 Low $33.625 $28.250 $29.000 $26.000 $26.750 Average market price per common share $ 35.70 $ 32.70 $ 32.23 $ 34.15 $ 37.71 Average book value per common share $ 17.69 $ 19.49 $ 18.68 $ 18.49 $ 19.31 Average price/earnings ratio (times) -- (2) 13 16 16 12 Weighted average common shares (thousands) 63,692 63,073 62,392 62,113 62,144 Number of common stockholders 57,352 59,089 60,619 61,862 60,242 Depreciation expense as a percentage of average depreciable telephone plant 6.8% 6.1% 6.4% 6.4% 6.3% Telephone plant depreciated 35.9% 34.0% 32.9% 31.8% 35.7% Telephone operations employees (excluding Directory Publishing) 9,087 9,532 9,557 10,430 10,809 Total employees 10,476 11,216 11,224 12,269 12,647 - --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- Certain amounts have been restated to reflect the discontinuance of Credit. (1) 1993 includes a before-tax charge of $355.0 million, $204.2 million or $3.21 per common share after tax, for a restructuring charge. 1991 includes a before-tax charge of $38.0 million, $21.6 million or $.35 per common share after tax, for the cost of employee separation plans. 1990 includes a before-tax charge of $33.8 million, $19.2 million or $.31 per common share after tax, from a reduction in the realizable value of accounts receivable. (2) Not calculated for 1993 based upon a loss per common share. A payout ratio of 69.6% and an average price/earnings ratio of 14 were calculated excluding the loss per common share impact of the restructuring charge of $3.21, discontinued operations of $.16, extraordinary charge of $.69 and cumulative effect of accounting changes of $3.46.
Southern New England Telecommunications Corporation INVESTOR INFORMATION CORPORATE INFORMATION - -------------------------------------------------------------------------------- Executive Office: SNET 227 Church Street New Haven, Connecticut 06510 203-771-5200 Stock Exchange Listings: New York Stock Exchange Pacific Stock Exchange Symbol: SNG Auditors: Coopers & Lybrand Independent Accountants 100 Pearl Street Hartford, Connecticut 06103 SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- Annual Meeting of Shareholders May 11, 1994, 10:00 a.m. SNET's General Office Building 300 George Street New Haven, Connecticut Shareholder Services Center 300 George Street New Haven, Connecticut 06511 New Haven area: 771-6542 From anywhere in the continental U.S.: 1-800-243-1110 The Form 10-K or quarterly reports may be obtained by contacting our Shareholder Services Center. SECURITY ANALYSTS AND PORTFOLIO MANAGERS - --------------------------------------- Direct inquiries to: Mr. James A. Magrone, DirectorInvestor Relations 227 Church Street New Haven, Connecticut 06510 203-771-4662. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN - -------------------------------------------------------------------------------- All owners of common stock are eligible for the plan, which allows participants to apply dividends and/or optional cash payments toward increased investment in the corporation. Shareholders do not pay any brokerage or administrative fees when purchasing additional shares through the plan. You can obtain a prospectus and enrollment forms by contacting our Shareholder Services Center. MARKET AND DIVIDEND DATA - -------------------------------------------------------------------------------- Market information was obtained from the composite tape, which encompasses trading on the principal U.S. stock exchanges as well as offboard trading.
Dividends Market Price Declared - -------------------------------------------- --------------- Calendar 1993 1992 1993 1992 Quarter High Low High Low - -------------------------------------------- --------------- 1st $37 $33 3/4 $33 7/8 $29 5/8 $.44 $.44 2nd 38 3/8 33 5/8 33 3/8 28 1/4 .44 .44 3rd 37 1/8 34 34 7/8 31 1/2 .44 .44 4th 38 1/8 33 7/8 38 31 3/8 .44 .44
REPRESENTATIVE TRADEMARKS - -------------------------------------------------------------------------------- CentraLink[SM], CentraLink 2100[SM], CentraLink 3100[SM], and Totalphone[SM] are servicemarks of The Southern New England Telephone Company. Distance Plus[SM] is a servicemark of SNET America, Inc. MobiLink[SM] is a registered servicemark of B-Side Carriers Limited Partnership. I-SNET[SM], SNET[Registered], We Go Beyond the Call [Registered], and SNET 800 CustomLink[SM] are registered trademarks and servicemarks of the Southern New England Telecommunications Corporation. Advantis[TM] is a trademark of Advantis. [RECYCLE LOGO] This Annual Report is Printed on Recycled Paper. Copyright SNET 1994 Design: Strata Design, Photography: David Arky EX-21 9 SUBSIDIARIES Southern New England Telecommunications Corporation Subsidiaries of the Registrant Name State of Incorporation The Southern New England Telephone Company Connecticut SNET America, Inc. Connecticut SNET Cellular, Inc. Connecticut SNET MobileCom, Inc. Connecticut SNET Paging, Inc. Connecticut SNET Diversified Group, Inc. Connecticut SNET Real Estate, Inc. Connecticut SNET Credit, Inc. Connecticut EX-23 10 CONSENT Coopers Certified Public Accountants & Lybrand CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference of our reports dated January 24, 1994 on our audits of consolidated financial statements and financial statement schedules of Southern New England Telecommunications Corporation as of December 31, 1993 and 1992 and for each of the three years in the period ended December 31, 1993, included or incorporated by reference in this Annual Report on Form 10-K, in the following documents filed by Southern New England Telecommunications Corporation: . Registration Statement No. 33-6320 on Form S-3 relating to the Shareholder Dividend Reinvestment and Stock Purchase Plan. . Post-Effective Amendment No. 3 to Registration Statement No. 33-6326 on Form S-8 relating to the SNET Bargaining Unit Retirement Savings Plan. . Post-Effective Amendment No. 2 to Registration Statement No. 33-6325 on Form S-8 relating to the SNET Management Retirement Savings Plan. . Registration Statement No. 33-19058 on Form S-8 relating to the SNET 1986 Stock Option Plan. . Registration Statement No. 33-41237 on Form S-3 relating to the registration of $165 million of Debt Securities. . Registration Statement No. 33-51055 on Form S-8 relating to the SNET Non-Employee Director Stock Plan. COOPERS & LYBRAND Hartford, Connnecticut March 23, 1994 EX-24 11 POWER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, Southern New England Telecommunications Corporation, a Connecticut corporation (hereinafter referred to as the "Corporation"), proposes to file shortly with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, each of the undersigned is an officer or director, or both, of the Corporation, and holds the office, or offices, in the Corporation herein below indicated under his or her name; NOW, THEREFORE, the undersigned, and each of them, hereby constitutes and appoints J. A. Sadek their attorney-in-fact for them and in their name, place and stead, and in each of their offices and capacities with the Corporation, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorney full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as the undersigned might or could do, if personally present at the doing thereof, hereby ratifying and confirming all that said attorney may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF each of the undersigned has executed this Power of Attorney this 9th day of March 1994. Principal Executive Officers: Directors: /s/ D. J. Miglio /s/ F. G. Adams D. J. Miglio F. G. Adams, Director Chairman, President and Chief Executive Officer /s/ William F. Andrews William F. Andrews, Director /s/ Donald R. Shassian Donald R. Shassian Senior Vice President and Chief Financial Officer /s/ Zoe Baird Zoe Baird, Director /s/ Barry M. Bloom Barry M. Bloom, Director /s/ F. J. Connor F. J. Connor, Director /s/ William R. Fenoglio William R. Fenoglio, Director /s/ Claire L. Gaudiani Claire L. Gaudiani, Director /s/ J. R. Greenfield J. R. Greenfield, Director /s/ N. L. Greenman N. L. Greenman, Director /s/ Worth Loomis Worth Loomis, Director /s/ Burton G. Malkiel Burton G. Malkiel, Director /s/ Frank R. O'Keefe, Jr. Frank R. O'Keefe, Jr., Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, Southern New England Telecommunications Corporation, a Connecticut corporation (hereinafter referred to as the "Corporation"), proposes to file shortly with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints J. A. Sadek his attorney-in-fact for him and in his name, place and stead, and in his capacity as director of the Corporation, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorney full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as the undersigned might or could do, if personally present at the doing thereof, hereby ratifying and confirming all that said attorney may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF the undersigned has executed this Power of Attorney this 4th day of March 1994. /s/ Richard H. Ayers Richard H. Ayers, Director EX-24.1 12 RESOLUTION C E R T I F I C A T E This is to certify that at a regular meeting of the Board of Directors of Southern New England Telecommunications Corporation held on March 9, 1994, the following vote was adopted and, as of the date of this Certificate, has not been amended, modified or rescinded and is in full force and effect: "VOTED: That the Chief Executive Officer, the Chief Financial Officer and the Comptroller are, or either one of them is, authorized to execute, personally or by attorney, in the name and on behalf of the Company, and to cause to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, the Company's Annual Report on Form 10-K, for the fiscal year ended December 31, 1993, in substantially the form submitted to this meeting, but with such changes, additions and revisions as the officer executing the same shall approve, such approval to be conclusively evidenced by such execution and thereafter to execute personally, and to cause to be filed, any amendments or supplements to such report, and to do any and all other acts and things, and to execute and deliver any and all other documents necessary or advisable in connection with the foregoing." Attest: /s/ Valita H. Luckett Valita H. Luckett Assistant Secretary New Haven, Connecticut March 18, 1994 -----END PRIVACY-ENHANCED MESSAGE-----