-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G5qBtDF+EqNMXc3aphmGF5GKAUHaa5o2y4HJ7prPNp5WJyCnjPt4AU9xlzP7tzAc CyYPzl2FkLaFK1aV5f+zYA== 0000790650-98-000005.txt : 19980323 0000790650-98-000005.hdr.sgml : 19980323 ACCESSION NUMBER: 0000790650-98-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORP CENTRAL INDEX KEY: 0000790650 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 061157778 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09157 FILM NUMBER: 98569957 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-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1997. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . Commission File Number 1-9157 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) Connecticut 06-1157778 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 227 Church Street, New Haven, CT 06510 (Address of principal executive offices) (Zip Code) (203) 771-5200 (Registrant's telephone number, including area code) 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 the settlement date of February 27, 1998, 67,292,621 common shares were outstanding. At the settlement date of February 27, 1998, the aggregate market value of the voting stock held by non-affiliates was $4,244,461,433. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's combined 1997 Annual Report to Shareholders and Proxy Statement dated March 26, 1998 issued in connection with the 1998 Annual Meeting of Shareholders [Part II and Part III] 1 TABLE OF CONTENTS Item Page PART I 1. Business...........................................................3 2. Properties........................................................13 3. Legal Proceedings.................................................14 4. Submission of Matters to a Vote of Security Holders...............14 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters.............................................14 6. Selected Financial Data...........................................15 7. Management's Discussion and Analysis of Financial Condition and Operating Results...........................................15 8. Financial Statements and Supplementary Data.......................15 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................15 PART III 10. Directors and Executive Officers of the Registrant................15 11. Executive Compensation............................................15 12. Security Ownership of Certain Beneficial Owners and Management.......................................................15 13. Certain Relationships and Related Transactions....................15 PART IV 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K...17 See page 16 for "Executive Officers of the Registrant" 2 PART I Item 1. Business GENERAL Southern New England Telecommunications Corporation ("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 wholly-owned subsidiaries in telecommunications services principally in Connecticut with expanded cellular services in Rhode Island and portions of Massachusetts. The Corporation has business units in the following telecommunications product groups: wireline; wireless; and information and entertainment. Wireline includes The Southern New England Telephone Company ("Telephone Company") and Woodbury Telephone Company ("Woodbury"), acquired in 1997, providing telecommunications services in Connecticut; SNET America, Inc. ("SAI"), providing national and international long-distance services to Connecticut customers; and SNET Diversified Group, Inc., providing premium telecommunications services and the selling and leasing of communications equipment to residential and business customers. Wireless includes SNET Cellular, Inc. and SNET Mobility, Inc., providing retail and wholesale cellular services, personal communications, equipment sales and paging resale services. Information and entertainment includes SNET Information Services, Inc. (providing publishing and internet services) and SNET Personal Vision, Inc. (providing cable television service). Other business activities include SNET Real Estate, Inc. (engaging in leasing commercial real estate primarily to affiliates) and the holding company (engaging in financial and strategic planning for the Corporation and its subsidiaries). In 1997, approximately 67% of the Corporation's consolidated revenues and sales were derived from the Telephone Company's telecommunications services and approximately 11% were derived from wireless sales. The remainder was derived principally from directory publishing operations, national and international long- distance services, the activities of the Corporation's other subsidiaries, and activities associated with the provision of facilities and non-access services to interexchange carriers. Approximately 68% of the operating revenues from the Telephone Company's telecommunications services were attributable to intrastate operations, with the remainder attributable to interstate access services. The number of access lines in service grew to 2,286,000 at December 31, 1997 (including approximately 21,000 lines acquired in the Woodbury purchase) from 2,163,000 at December 31, 1996, an increase of 5.7%. The increase excluding the Woodbury purchase was 4.7%. The increase included significant growth in Centrex business lines and second residential lines. The network access lines provided by the Telephone Company and Woodbury 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 the number of network access lines in service at the end of each year: Network Access Lines in Service (thousands): 1997 1996 1995 1994 1993 Residence 1,513 1,444 1,415 1,379 1,355 Business 773 719 658 630 609 Total 2,286 2,163 2,073 2,009 1,964 3 Planned Merger On January 4, 1998, the Corporation's Board of Directors approved a definitive merger agreement ("Agreement") with SBC Communications Inc. ("SBC") whereby the Corporation will become a wholly-owned subsidiary of SBC. The Board's deliberations focused on the complementary strengths and the possible advantages of a combination. Under the original terms of the Agreement, each share of the Corporation's common stock was to be exchanged for 0.8784 shares of SBC common stock. On January 30, 1998, SBC announced a two-for-one stock split, which modified the exchange ratio to 1.7568. The transaction is intended to be accounted for as a pooling-of-interests and as a tax-free reorganization under the applicable provisions of the Internal Revenue Code. In addition, the Agreement does not require any changes to the Corporation's quarterly dividend prior to closing. The process leading to the Board's adoption of the merger began in late 1996 with a review of strategic goals in the context of rising costs (including non-recurring items such as Year 2000 costs) and a rapidly changing regulatory environment. As a result of this review, the Board concluded that the Corporation would need to substantially increase the scale and scope of its operations in order to continue to compete successfully and in a cost-effective manner in the increasingly competitive telecommunications industry, and to provide customers with the broad range of telecommunications products and services they would demand and to meet the goals of its shareholders. During 1997, management explored possibilities for various joint ventures and business alliances in specific product areas with a view toward increasing the scale and scope of operations. In the fall of 1997, management ultimately concluded that a combination with a major telecommunications company was the best alternative in order to achieve the Corporation's strategic and financial objectives. The merger has been reviewed by the U.S. Department of Justice and must still be approved by the Corporation's shareholders, the Connecticut Department of Public Utility Control ("DPUC") and the Federal Communications Commission ("FCC"). The Corporation is currently authorized to provide interexchange services in 46 states. For the majority of these states these authorizations have been utilized solely to provide calling card services to Connecticut-based customers traveling in the respective states. The Corporation does, however, provide long-distance service to a small number of customers in states where SBC is an Incumbent Local Exchange Carrier ("ILEC"). The Corporation may be required to modify or withdraw its interexchange authorizations in the states where SBC is an ILEC. In addition, authorizations may be required from a number of other states to allow the Corporation to transfer its existing long-distance authorizations to SBC. Once the necessary approvals are obtained, the merger is expected to close by December 31, 1998. Management believes that the merger with SBC is in the best interest of shareholders because it offers them the opportunity of becoming investors in a company with global presence and a track record of success in growing long-term value for shareholders. In addition, the merger will likely strengthen the Corporation's ability to compete in the increasingly competitive telecommunications industry. 4 Corporate Restructure In a decision issued June 25, 1997, the DPUC approved the Corporation's proposal to establish separate wholesale and retail organizations [see Regulatory Matters - State]. As a result, the Telephone Company will become an ILEC, providing network services and functionality to retail providers under the wholesale provisions of the Federal Telecommunications Act of 1996 ("Act"). The Telephone Company will be treated as a public service company, and will continue to be subject to alternative forms of regulation. In a separate order, SNET America, Inc. ("SAI"), a subsidiary of the Corporation, was certified to operate as a competitive local exchange carrier ("CLEC"), allowing it to provide competitive retail service to customers with the same flexibility as all other CLECs in the state. As part of the DPUC's decision allowing the restructure, Connecticut customers must choose their local exchange provider via a balloting process. Until balloting is complete, the Telephone Company and SAI will jointly offer retail telecommunication services to the public. Once the balloting process is completed, SAI will become the sole provider of retail service for the Corporation. In addition, as part of the restructure, the directory publishing operations were incorporated into a separate subsidiary of the Corporation on January 1, 1998. WIRELINE The Southern New England Telephone Company The Southern New England Telephone Company, a local exchange carrier, was incorporated in 1882 under the laws of the State of Connecticut and is engaged in providing telecommunications services in Connecticut, subject to various forms of regulation. These telecommunications services include: local and intrastate toll services; network access service, which links customers' premises to the facilities of other carriers; and other services such as digital transmission of data and transmission of radio and television programs, packet switched data network and private line services. The Telephone Company is subject to the jurisdiction of the FCC with respect to interstate rates, services, access charges and other matters, including the prescription of a uniform system of accounts. The FCC also prescribes the principles and procedures (referred to as "separations procedures") used to separate investments, revenues, expenses, taxes and reserves between the interstate and intrastate jurisdictions. In addition, the FCC has adopted accounting and cost allocation rules for the separation of costs of regulated from non-regulated telecommunications services for interstate ratemaking purposes. The Telephone Company's interstate access services have been subject to price cap regulation since January 1991. Price caps are a form of incentive regulation to limit prices and improve productivity. The Telephone Company, in providing telecommunications services in Connecticut, is subject to regulation by the DPUC, which has jurisdiction with respect to intrastate rates and services and other matters such as the approval of accounting procedures and the issuance of securities. The DPUC has adopted accounting and cost allocation rules for intrastate ratemaking purposes, similar to those adopted by the FCC, for the separation of costs of regulated from non-regulated activities. In 1996, the DPUC replaced the Telephone Company's traditional rate of return regulation with alternative (price-based) regulation to be employed during the transition to full competition [see Regulatory Matters - State]. 5 As a result of legislative and regulatory reform, the Corporation continues to experience an increasingly competitive environment. Competitors include companies that construct and operate their own communications systems and networks and/or companies that resell the telecommunications systems and networks of underlying carriers. In 1997, major interexchange carriers continued to intensify their marketing efforts to sell intrastate long-distance services since the Telephone Company's full implementation of intrastate equal access. Since the introduction of intrastate long-distance toll competition, in excess of 230 telecommunications providers have received approval from the DPUC to offer intrastate long- distance services with an additional 70 filed and awaiting DPUC approval. The reduction in intrastate toll rates and the increasingly competitive intrastate toll market continue to place significant downward pressure on the Telephone Company's intrastate toll revenues. Thirty-five telecommunications providers have been granted approvals for local service and twelve additional applications are pending before the DPUC. These providers began offering local exchange service to business and residential customers throughout the state. There has been growth in local service competition in 1997 and continued growth is expected, particularly upon commencement of the DPUC-mandated balloting process [see Regulatory Matters - State], however, the financial impact cannot be predicted at this time. Based on existing state and federal regulations, the Corporation expects that many competitors will resell the Telephone Company's network and that increased network access revenues will offset a significant portion of local service revenues lost to competition. Management supports bringing customers the benefits of competition and affording all competitors the opportunity to compete fairly under reduced regulation. The Corporation's ability to compete is dependent upon regulatory reform that will allow pricing flexibility to meet competition and provide a level playing field with similar regulation for similar services. In addition, the Corporation's restructure into wholesale and retail affiliates will provide additional flexibility to compete at the retail level [see Regulatory Matters - State]. The competitive environment also allows opportunities for the Corporation to continue to increase its provision of interstate, international long-distance and cable television services. SNET America, Inc. SAI was incorporated in 1993 under the laws of the State of Connecticut. SAI resells 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 SNET All Distance Simple Solutions, a calling plan for small business and residence customers. Currently, SAI and the Telephone Company jointly sell toll services. This enables the Corporation to satisfy its customers' long-distance calling needs with a single point of contact through SNET All Distance[R], a seamless toll service product line which provides discount calling plans that include intrastate, interstate and international calling. The joint marketing as SNET All Distance[R] has produced such features as one-second rating and one bill for all toll calls. The migration of Connecticut customers to wireline's bundled calling plans resulted in significant growth for interstate and international long-distance services. As previously discussed, the DPUC has granted SAI the authority to operate as a CLEC in the state of Connecticut and as a result, SAI will be able to provide competitive retail services to end user customers with the same regulatory and pricing flexibility as all other CLEC's in the state [see Regulatory Matters - State]. 6 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 business opportunities. The majority of Diversified's activities is the offering of premium services, such as information and enhanced network-related services. Another activity is leasing and selling customer premises equipment ("CPE") to residential and small business customers. Key telephone systems and related products are offered and maintained which are complementary to the Telephone Company's central office-based solutions. 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 including leasing options. Woodbury Telephone Company Woodbury was incorporated in 1899 under the laws of the State of Connecticut. On July 23, 1997, the DPUC approved the Corporation's acquisition of Woodbury and on July 30, 1997, the Corporation completed its acquisition of Woodbury by issuing approximately 528,000 shares of the Corporation's treasury stock for the remaining 63.5% of Woodbury's common stock not formerly held by the Corporation. The total cost of completing the acquisition was $30.1 million, which includes the assumption of $9.0 million in long-term debt. Woodbury is the primary provider of local exchange telephone services, intrastate toll services, and access to long-distance telephone services in the major portions of the towns of Woodbury, Southbury, and Bethlehem, and also serves small portions of the towns of Oxford and Roxbury, Connecticut. Regulatory Matters The Telephone Company is regulated by the FCC and the DPUC. Historically, the FCC has regulated the Corporation's provision of interstate services, both at the wholesale (access service provided by the Telephone Company) and retail (long-distance toll charges provided by SAI as a non-dominant carrier) levels. Since the passage of the Federal Telecommunications Act ("Act") in 1996, the FCC has also been charged, by Congress, with the implementation of many of the provisions of the Act designed to foster local competition. The DPUC regulates the Telephone Company's provision of services within the state of Connecticut including local and in-state long- distance services. Since the passage of state legislation in 1994, regarding local competition, as well as the Act, the DPUC also regulates the provision of wholesale services within the state that are required for interconnection to the Telephone Company's network. A synopsis of key Federal and State regulatory decisions follows. Regulatory Matters - Federal On February 8, 1996, Congress passed the Act which was designed to overhaul U.S. telecommunications policy by removing barriers to local competition. The FCC's First and Second Report and Order ("Order") implements the Act and contains numerous provisions regarding the interconnection of the Telephone Company's network with those of its competitors. The Order requires significant changes in the way business is conducted, how the network is designed and the systems that support it (including repair and service ordering). In addition, the Order requires fundamental changes in the development of the prices that the Telephone Company would charge competitors for purchasing regulated network products and services. This Order, as well as the orders discussed below, could have a material adverse financial impact on the Telephone Company. 7 Certain provisions in the Order have been appealed by various local telephone companies, including the Telephone Company, the National Association of Regulatory Utility Commissioners and individual state regulatory commissions. On July 18, 1997, the Eighth Circuit Court of Appeals ("Eighth Circuit") issued a partial stay of the Order, delaying the effectiveness of the pricing provisions and the rule allowing competitors to "pick and choose" isolated terms out of negotiated interconnection agreements and struck down those key provisions and other terms under which potential competitors can lease pieces of the Telephone Company's network. The Eighth Circuit declared that the FCC had overstepped its authority and concluded that "the Act plainly grants the state commissions, not the FCC, the authority to determine the rates involved in the implementation of the local competition provisions of the Act." The Eighth Circuit's decision is a strong endorsement of Congress' intention that the states play a primary role in implementing local telecommunications competition. This decision should allow the Corporation to implement local competition on the course mapped out by the DPUC and the Connecticut state legislature. On October 14, 1997, the Eighth Circuit also vacated a portion of the FCC's rules which required ILECs to provide combinations of network elements that effectively recreated the end-to-end service at a significant discount to CLECs. The Eighth Circuit indicated that the Act requires ILECs to provide access to unbundled network elements, not access to platforms used by ILECs in which network elements are combined. The Eighth Circuit's decisions have now been appealed to the Supreme Court which has agreed to review the case in the fall 1998 session. A decision is expected in 1999. On August 18, 1997, the FCC also released its Third Report and Order requiring ILECs, including the Telephone Company, to provide shared transport to new entrants as an unbundled network element at cost-based prices. Several companies, including the Telephone Company, have filed Petitions for Review, which will be heard by the Eighth Circuit. A decision in this matter is expected in 1998. On May 8, 1997, the FCC issued an order regarding Universal Service. The order revises the current universal service programs for low income customers and high cost areas (including Woodbury) and establishes new federal support for telecommunications services provided to schools, libraries and rural health care facilities. The federal universal service mechanisms are funded, beginning January 1, 1998, by an assessment on the end user revenues of all telecommunications service providers. Funding for the new federally supported services provided to schools, libraries and rural healthcare facilities will come from both interstate and intrastate end user revenues, while funding for the revised high cost support and low income support programs will be from interstate end user revenues. ILECs can recover their contributions to the federal universal service mechanisms through their interstate access charges. The Universal Service Order is on appeal in the Fifth Circuit Court. The Telephone Company has intervened in the appeal. The FCC has no timeline currently to resolve this issue and the Corporation cannot determine when it will be resolved. On May 16, 1997, the FCC also issued an order regarding access charge reform which changes the way the Telephone Company recovers interstate access charges from interstate toll providers, including SAI. Specifically, the order establishes flat-rated per-call carrier access charges, rather than usage based charges. This order establishes a prescriptive mechanism to ensure that interstate access charges will be driven toward the levels that competition would be expected to produce. Management expects this order to pressure earnings but is currently unable to quantify any such impact. The Access Charge Reform Order is being appealed and is pending in the Eighth Circuit. The Telephone Company has intervened in the appeal. The FCC is also expected to release a Pricing Flexibility Order in 1998. This order will establish a market-based approach to pricing. 8 On May 21, 1997, the FCC released its Price Cap Order revising its price cap plan for regulating ILECs including the Telephone Company. This order establishes a single productivity factor of 6.5% and eliminates the sharing requirements of the prior rules. This order is being appealed in the District of Columbia Circuit Court. On August 13, 1997, the Telephone Company filed a Petition for Waiver from the 6.5% productivity factor, requesting that the FCC establish a productivity factor of 5.3% for the Telephone Company. A decision is still pending. The Telephone Company filed its 1997 annual interstate access price cap revisions, in which the Telephone Company elected to use a 6.5% productivity factor, which took effect July 1, 1997. The FCC required all price cap ILECs, including the Telephone Company, to adjust their Price Cap Indices, effective July 1, 1997, to reflect the 6.5% productivity factor for both the 1996- 1997 and 1997-1998 tariff years. The filing would decrease interstate network access rates by approximately $28 million for the period July 1, 1997 to June 30, 1998. The Telephone Company expects that this decrease will be partially offset by increased demand. In addition, the FCC has released Reports and Orders on the Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Act. The orders, among other things, mandate that all ILECs, including the Telephone Company, unbundle payphone instruments, file tariffs on payphone service lines and make them available on a non-discriminatory basis to Payphone Service Providers ("PSPs"). Additionally, the orders establish mechanisms for the full and fair compensation to PSPs, including per-call compensation for subscriber "800" and access code calls from payphones. The Telephone Company has filed the necessary revisions to its interstate access charges with the FCC and has filed with the DPUC new retail and wholesale Pay Telephone Access Line Service offerings in accordance with the FCC's order. In December 1996, the FCC acted on an outstanding petition by the New England Public Communications Council, Inc. and preempted a prior DPUC decision which only authorized ILECs and CLECs to provide payphone service in Connecticut. On July 1, 1997, the District of Columbia Circuit Court rendered its decision in Illinois Public Telecommunications Association v. FCC remanding back to the FCC its decision setting the per-call compensation rate for subscriber "800" and access code calls. The FCC on August 5, 1997, established a pleading and comment cycle on these remanded issues. The FCC released a subsequent order setting the per-call compensation rate at $.284. Noting the need to revise its jurisdictional separations rules as a result of the increasingly competitive nature of the telecommunications industry, the FCC initiated on October 7, 1997, a rulemaking proceeding to begin separations reform. Jurisdictional separations assigns telecommunications property costs, revenues, expenses, taxes and reserves to specific categories that are then allocated between the interstate and intrastate jurisdictions. Comprehensive reform in this area could result in changes to the structure of ILEC pricing. Management is currently unable to determine the impact any change would have on the Telephone Company. In accordance with the Act, the FCC requires ILECs, including the Telephone Company, to implement a long-term solution for portability of local telephone numbers. The Telephone Company is required to construct and operate a system that will permit end user customers to retain their telephone numbers when they elect a different carrier for local service. The system is to be operational by mid-1998 for a large percentage of the Telephone Company's access lines. The FCC, however, has not yet decided on a method to recover the substantial investment and operating costs relating to the number portability system. Local number portability expenditures were approximately $4 million in 1997 and are estimated to be $19 million in 1998. 9 Regulatory Matters - State Effective April 1, 1996, the DPUC replaced traditional rate of return regulation with alternative (price-based) regulation, during the transition to full competition. Alternative regulation includes a five-year monitoring period on financial results and a price cap formula based on certain services categorized as non-competitive. In addition, basic local service rates for residence, business and coin may not be raised above current levels until January 1, 1998, at which time the price cap plan becomes effective for these services, unless they have been reclassified into the emerging-competitive or competitive categories. The impact of these changes on the Telephone Company's operating results will depend on the timing of classifying the various products and services from non- competitive into the emerging-competitive and competitive categories for pricing changes. On June 25, 1997, the DPUC issued a final decision allowing the Corporation to establish separate wholesale and retail affiliates. Under the decision, the new retail organization, a CLEC, will compete under the same regulations as all other retail telecommunications providers in the state. As such, the CLEC will not be subject to price cap regulations. The wholesale organization, an ILEC, will provide network services and functionality to retail providers, including SAI, the Corporation's new CLEC, on comparable terms. The ILEC will be treated as a public service company and will continue to be subject to alternative forms of regulation. The directory publishing operations were incorporated into a separate subsidiary of the Corporation on January 1, 1998. As part of the decision, however, the DPUC mandated that Connecticut customers must choose their local exchange provider via a balloting process. Customers who do not choose a carrier will be assigned a CLEC based on the proportion of votes in a local service area. The specific details of the balloting process will be addressed in further technical discussions among the participants and the DPUC. The balloting process is scheduled to begin on January 4, 1999 and to be completed by May 1999. In order for the balloting process to commence, the ILEC must demonstrate that the systems offered to CLECs provide full technical and operational support as required by the Act. The DPUC will examine and critically evaluate the respective Operations Support System ("OSS") platforms offered to the CLECs. The DPUC's evaluation will establish a set of tests and standards that can be used to determine the suitability of the ILEC's OSS to support a competitive local exchange market and will determine if the interfaces proposed by the ILEC offer the comparability required under the provisions of the Act. A final decision is due on June 24, 1998. The DPUC's decision to allow the Corporation to establish separate wholesale and retail affiliates has been challenged by other parties in both state court and federal court. In an oral decision, the federal court has denied the other parties' motion for summary judgment and granted the Corporation's motion for summary judgment. A written decision is expected in the first quarter of 1998. A decision is also expected from the state court in 1998. On March 18, 1997, SAI filed an application with the DPUC to provide local and intrastate toll services throughout Connecticut. The DPUC issued a final decision granting approval on June 25, 1997. This grants SAI the authority to operate as a CLEC in the state of Connecticut and to provide competitive retail services to end user customers with the same regulatory and pricing flexibility as all other CLECs in the state. In compliance with the Act, the ILEC has filed with the DPUC numerous cost studies supporting its proposed wholesale (i.e., resale) and unbundled rates for interconnection services. On March 24, 1997, the DPUC issued a final decision setting a uniform 17.8% discount rate off the Telephone Company's current retail prices for telecommunications services sold to CLECs. 10 On April 23, 1997, the DPUC issued a final decision addressing the proposal for allocation of Hybrid Fiber Coax ("HFC") network joint costs between broadband and telephony and the Telephone Company's costs and rates associated with unbundled loops, ports, multiplexing and inter-wire center transport. In this decision, the DPUC approved the Telephone Company's proposed 50/50 allocation of HFC network joint costs between broadband and telephony. In addition, the DPUC approved the cost studies based on Total Service Long Run Incremental Cost ("TSLRIC"). Subsequently, the DPUC opened a new docket to determine appropriate TSLRIC-based rates for the remaining unbundled elements (non-loop) defined by the FCC. The cost allocation decision has been appealed by the cable television industry to state Superior Court. A decision is expected in 1998. WIRELESS The Corporation provides cellular (wholesale and retail), personal communications, equipment sales and resale of paging services in Connecticut, Rhode Island and portions of Massachusetts, through its subsidiaries SNET Cellular, Inc. ("Cellular") and SNET Mobility, Inc. ("Mobility"). SNET Cellular, Inc. Cellular was incorporated in 1985 under the laws of the State of Connecticut and provides directly or indirectly through affiliates retail and wholesale services in the states of Connecticut and Rhode Island and portions of Massachusetts. Cellular is currently subject to FCC jurisdiction. In November 1996, the DPUC opened an investigation to determine whether wireless service was a replacement for landline telephone service. If wireless service is determined to be a replacement for landline service, the DPUC may petition the FCC for rate regulation authority. In 1990, Cellular formed the Springwich Cellular Limited Partnership ("Springwich") with four other partners. 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 four Rural Service Areas, Windham and Litchfield Counties in Connecticut and Franklin and Berkshire Counties in Massachusetts. The Corporation through its subsidiaries holds over a 99.6% partnership interest in Springwich. Cellular has "roaming agreements" with other carriers which allow the carriers' subscribers access to Cellular's network and allow Cellular's subscribers access to other networks throughout the United States and Canada. Cellular is facing considerable competition as a result of the completion of the Bell Atlantic and NYNEX merger which created the largest wireless service provider on the East Coast and the second largest provider in the United States. In addition, Cellular expects increasing competition from new alliances and the impact from auctions of personal communications services ("PCS") and other licenses. A major long-distance provider has launched a digital PCS service in Connecticut during 1997, creating the third wireless provider in the state. Other wireless carriers are expected to begin offering services in the near future. Cellular has made and will continue to make investments in network expansion and enhancements. 11 SNET Mobility, Inc. Mobility was incorporated in 1985 under the laws of the State of Connecticut under its predecessor's name SNET MobileCom, Inc. Mobility purchases wholesale cellular communications service from Springwich and resells cellular communications service in the Connecticut retail market. In addition, Mobility also provides paging services. Mobility markets its services through its internal sales force and through agreements with third-party distributors and dealers. Mobility anticipates continuing competition from local, regional and national resellers. In response to this competition, Mobility continues to evaluate the quality of its distribution channels, price aggressively, bundle with other telecommunications services and introduce both creative customer acquisition programs and differentiated value-added services. INFORMATION AND ENTERTAINMENT SNET Information Services, Inc. In January 1998, the Telephone Company's directory publishing operations and internet services were transferred to SNET Information Services, Inc. which was incorporated in 1997 under the laws of the State of Connecticut. The directory publishing operations, in addition to selling the advertising, produces and distributes traditional paper products including White and Yellow Pages directories throughout Connecticut and adjacent communities. To strategically widen its business focus and position itself for the future, the publishing operations introduced electronic publishing services, such as SNET Access[SM], Consumer Tips and Electronic Yellow Pages. The Connecticut advertising marketplace continues to undergo major structural changes and is increasingly more fragmented and competitive. The publishing division faces increased competition from traditional directory publishers, established media, and emerging competitors such as on-line services, electronic shopping services, CD-ROM, and the expansion of cable television. On January 31, 1996, the Corporation launched SNET Internet[SM] access service, which allows all subscribers in the state of Connecticut to access the Internet with a local phone call. Internet customers have increased to over 85,000 at the end of 1997 from approximately 35,000 at the end of 1996. SNET Personal Vision, Inc. SNET Personal Vision, Inc. ("Personal Vision") was incorporated in 1996 under the laws of the state of Connecticut. On September 6, 1996, Personal Vision received an 11-year license from the DPUC to operate a cable television system that will serve the entire state of Connecticut. Personal Vision also became a partner in the americast joint venture with The Walt Disney Company and several large local exchange carriers. The partnership provides a full range of americast[TM] programming and marketing services. Personal Vision began deploying its cable service during the first quarter of 1997. The DPUC's decision granting the statewide franchise was appealed to state Superior Court by members of the cable industry. The Superior Court upheld the DPUC's decision and the cable industry has now appealed to the state Appellate Court. A decision is anticipated in 1998. 12 OTHER BUSINESS ACTIVITIES 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 the owner of commercial property which it leases under operating leases and is a 99% partner in a limited liability company 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 deteriorate from their current value. This risk is minimized by the conservative nature of Real Estate's portfolio, a majority of which is leased to affiliates. Holding Company The DPUC had limited the amount that the Corporation could invest in unregulated diversified activities, without DPUC approval, to 40% of its total assets. In January 1997, the Corporation requested the DPUC to completely lift the restriction. In June 1997, the DPUC lifted the restriction. EMPLOYEE RELATIONS The Corporation and its subsidiaries employed 9,841 persons at February 27, 1998, of whom approximately 63% are represented by the Connecticut Union of Telephone Workers, Inc. ("CUTW"), an unaffiliated union. In January 1998, under the current union contract, bargaining- unit employees received a general wage increase totaling 3.0%; made up of various forms and combinations of basic wage increases, one-time cash payments and/or Cash Balance Plan Account credits. The current labor agreement will expire on August 8, 1998. Management and the union expect to begin negotiations on a new labor agreement early in 1998. Item 2. Properties The principal properties of the Corporation do not lend themselves to a detailed description by character and location. The majority of telecommunications property, plant and equipment of the Corporation is owned by the Telephone Company. Of the Corporation's investment in telecommunications property, plant and equipment at December 31, 1997, central office equipment represented 43%; connecting lines not on customers' premises, the majority of which are over or under public roads, highways or streets and the remainder over or under private property, represented 35%; land and buildings (occupied principally by central offices) represented 11%; telephone instruments and related wiring and equipment, including private branch exchanges, substantially all of which are on the premises of customers, represented 1%; and other, principally vehicles and general office equipment, represented 10%. Substantially all of the central office equipment installations and administrative offices are located in Connecticut in buildings owned by the Telephone Company situated on land which it owns in fee. Many garages, service centers and some administrative offices are located in rented quarters. The Corporation has a significant investment in the properties, facilities and equipment necessary to conduct its business with the overwhelming majority of this investment relating to telephone operations. Management believes that the Corporation's facilities and equipment are suitable and adequate for the business. 13 Capital Expenditures The Corporation has been making, and expects to continue to make, significant capital expenditures to meet the demand for telecommunications services and to further improve such services. The total gross investment in property, plant and equipment increased from approximately $4.1 billion at December 31, 1992 to approximately $4.9 billion at December 31, 1997, after giving effect to retirements, but before deducting accumulated depreciation at either date. Since 1993, cash expended for capital additions was as follows: Dollars in Millions, For the Years Ended 1997 1996 1995 1994 1993 Cash Expended for Capital Additions $472 $374 $357 $283 $269 In 1997, the Corporation funded its cash expenditures for capital additions entirely through cash flows from operations. In 1998, capital additions are expected to be approximately $475 million, including estimated additions of $290 to the wireline network. These additions include expenditures primarily related to the modernization, growth and upgrading of wireline's central office switching and circuit equipment, to meet customer demand for new services. Additionally, to reduce maintenance costs and to meet access line growth, increased focus is being placed on replacing and supplementing the existing core network of twisted copper wire and fiber-optic and coaxial cable. 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 financial position, operating results or cash flows of the Corporation or its subsidiaries. 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. 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, was 47,787 as of February 27, 1998. Information with respect to the quarterly high, low and closing sales price for the Corporation's common stock and quarterly cash dividends declared is included in the registrant's combined 1997 Annual Report to Shareholders and Proxy Statement on page 34 under the caption "Market and Dividend Data" and is incorporated herein by reference pursuant to General Instruction G(2). 14 Items 6 through 8. Information required under Items 6 through 8 is included in the registrant's combined 1997 Annual Report to Shareholders and Proxy Statement dated March 26, 1998 on pages 6 through 33 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 combined 1997 Annual Report to Shareholders and Proxy Statement dated March 26, 1998 on pages 38 through 47. Such information is incorporated herein by reference pursuant to General Instruction G(3). 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 as follows: 15 Executive Officers of the Registrant(1) (as of February 27, 1998) Executive Officer Name Age(2) Position Since Daniel J. Miglio 57 Chairman, President and Chief Executive Officer 1/86 Madelyn M. DeMatteo 49 Senior Vice President- General Counsel and Secretary 1/98 Karin D. Mayhew(3) 46 Senior Vice President- Organization Development 1/98 Fred T. Page 51 Senior Vice President- Network Services 2/96 Ronald M. Serrano 42 Senior Vice President-Communication Information and Entertainment Group 1/93 Donald R. Shassian 42 Senior Vice President and Chief Financial Officer 12/93 (1) Executive officers subject to Section 16 of the Securities Exchange Act of 1934. (2) As of December 31, 1997. (3) Replaced Jean M. LaVecchia whose employment with the Corporation ended December 31, 1997. Mr. Miglio, Ms. DeMatteo, Ms. Mayhew and Mr. Page 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. 16 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a) Documents filed as part of the report: Page (1) Report of Management * Report of Independent Accountants * Consolidated Financial Statements: Consolidated Statements of Income (Loss) - for the years ended December 31, 1997, 1996 and 1995 * Consolidated Balance Sheets - as of December 31, 1997 and 1996 * Consolidated Statements of Changes in Shareholders' Equity - for the years ended December 31, 1997, 1996 and 1995 * Consolidated Statements of Cash Flows - for the years ended December 31, 1997, 1996 and 1995 * Notes to Consolidated Financial Statements * (2) Consolidated Financial Statement Schedule for the year ended December 31, 1997 Report of Independent Accountants 22 II - Valuation and Qualifying Accounts 23 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 combined 1997 Annual Report to Shareholders and Proxy Statement dated March 26, 1998 [see Part II]. 17 (3) Exhibits: Exhibits identified in parentheses below, on file with the SEC, are incorporated herein by reference as exhibits hereto. Exhibits numbered 10(iii)(A)1 through 10(iii)(A)17 are management contracts or compensatory plans required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. Exhibit Number 2 Agreement and Plan of Merger dated January 4, 1998, between Southern New England Telecommunications Corporation, SBC Communications Inc. and SBC (CT), Inc. (Exhibit 2 to Form 8-K dated 1/5/98, File No. 1- 9157). 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 December 11, 1996 between Southern New England Telecommunications Corporation and State Street Bank and Trust Company, as Rights Agent (Exhibit 4 to Form 8-K dated 12/11/96, File No. 1-9157). Amendment No. 1 dated January 4, 1998 (Exhibit 4.2 to Form 8-K dated 1/5/98, File No. 1- 9157). 4b Stock Option Agreement dated January 4, 1998, between Southern New England Telecommunications Corporation, SBC Communications Inc. and SBC (CT) Inc. (Exhibit 4.1 to Form 8-K dated 1/5/98, File No. 1-9157). 4c Indenture dated December 13, 1993 between The Southern New England Telephone Company and Fleet National Bank of Connecticut, Trustee, issued in connection with the sale of $200,000,000 of 6 1/8% Medium-Term Notes, Series C, due December 15, 2003 and $245,000,000 of 7 1/4% Medium-Term Notes, Series C, due December 15, 2033 (Exhibit 4b to 1994 Form 10-K dated 3/10/95, File No. 1-9157). 4d Indenture dated July 10, 1991 between the registrant and Fleet National Bank of Connecticut, Trustee, issued in connection with the sale of $100,000,000 of 6 1/2% Medium-Term Notes, Series 2, due August 15, 2000, $200,000,000 of 7% Medium-Term Notes, Series 2, due August 15, 2005 and $100,000,000 of 6 1/2% Medium-Term Notes, Series 2, due February 15, 2002 (Exhibit 4c to 1995 Form 10-K dated 3/20/96, File No. 1-9157). 10(iii)(A)1 SNET Short Term Incentive Plan as amended February 8, 1995 (Exhibit 10(iii)(A)1 to 1994 Form 10-K dated 3/10/95, File No. 1-9157). 10(iii)(A)2 SNET Long Term Incentive Plan as amended March 1, 1993 (Exhibit 10(iii)(A)2 to 1992 Form 10-K dated 3/23/93, File No. 1-9157). 18 (3) Exhibits (continued): Exhibit Number 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 Pension Benefit Plan as amended through January 1, 1998. 10(iii)(A)6 SNET Management Pension Plan as amended March 31, 1995. Amendments effective December 20, 1995 through April 1, 1996 (Exhibit 10(iii)(A)6 to 1995 Form 10-K dated 3/20/96, File No. 1-9157). Amendments effective April 1, 1996 through December 18, 1996 (Exhibit 10(iii)(A)6 to 1996 Form 10-K dated 3/20/97, File No. 1-9157). Amendments effective July 9, 1997 through January 1, 1998. 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). Amendment dated December 8, 1993 (Exhibit 10 (iii)(A)8 to 1993 Form 10-K dated 3/23/94, File No. 1-9157). 10(iii)(A)9 SNET Deferred Compensation Plan for Non-Employee Directors as amended January 1, 1993 (Exhibit 10(iii)(A)9 to 1992 Form 10-K dated 3/23/93, File No. 1-9157). 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). Amendment dated January 4, 1998. 10(iii)(A)12 SNET Retirement and Disability Plan for Non-Employee Directors as amended April 14, 1993 (Exhibit 10(iii)(A)12 to 1993 Form 10-K dated 3/23/94, File No. 1-9157). Amendment dated February 14, 1996 (Exhibit 10(iii)(A)12 to 1996 Form 10-K dated 3/20/97, File No. 1-9157). 10(iii)(A)13 SNET Non-Employee Director Stock Plan effective January 1, 1994 (Exhibit 4.4 to Registration No. 33- 51055 on Form S-8, File No. 1-9157). 10(iii)(A)14 SNET Executive Retirement Savings Plan as amended through January 1, 1998. 10(iii)(A)15 SNET 1995 Stock Incentive Plan (Exhibit 4.4 to Registration No. 33-64975, File No. 1-9157). Amendment dated January 4, 1998. 19 (3) Exhibits (continued): Exhibit Number 10(iii)(A)16 SNET Non-Employee Director Stock Plan effective June 1, 1996 (Exhibit 4.2 to Registration No. 333-05757 on Form S-8, File No. 1-9157). 10(iii)(A)17 SNET Stay Bonus Program effective January 4, 1998. 12 Computation of Ratio of Earnings to Fixed Charges. 13 Pages 6 through 34 of the registrant's combined 1997 Annual Report to Shareholders and Proxy Statement for the fiscal year ended December 31, 1997. 21 Subsidiaries of the Corporation. 23 Consent of Independent Accountants. 24a Powers of Attorney. 24b Board of Directors' Resolution. 27 Financial Data Schedule. 99a Annual Report on Form 11-K for the plan year ended December 31, 1997 for the SNET Management Retirement Savings Plan will be filed as an amendment prior to June 30, 1998. 99b Annual Report on Form 11-K for the plan year ended December 31, 1997 for the SNET Bargaining-Unit Retirement Savings Plan will be filed as an amendment prior to June 30, 1998. The Corporation will furnish, without charge, to a shareholder upon request a copy of the combined 1997 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 October 23, 1997, the Corporation and the Telephone Company filed, separately, reports on Form 8-K, dated October 23, 1997 announcing the Corporation's financial results for the third quarter of 1997. On January 5, 1998 and January 6, 1998, the Corporation and the Telephone Company respectively filed, separately, reports on Form 8-K, dated January 5, 1998, announcing the execution of an agreement with SBC Communications Inc., whereby the Corporation will become a wholly-owned subsidiary of SBC. On January 27, 1998, the Corporation and the Telephone Company filed, separately, reports on Form 8-K, dated January 27, 1998, announcing the Corporation's 1997 financial results. 20 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/ Donald R. Shassian Donald R. Shassian, Senior Vice President and Chief Financial Officer March 20, 1998 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: Daniel J. Miglio* Chairman, President, Chief Executive Officer and Director PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER: Donald R. Shassian Senior Vice President and By /s/ Donald R. Shassian Chief Financial Officer (Donald R. Shassian, as attorney- in-fact and on his own behalf) DIRECTORS: William F. Andrews* Richard H. Ayers* Robert L. Bennett* Barry M. Bloom* March 20, 1998 Frank J. Connor* William R. Fenoglio* Claire L. Gaudiani* Ira D. Hall* Burton G. Malkiel* Frank R. O'Keefe, Jr.* Joyce M. Roche* * by power of attorney 21 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders 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 combined 1997 Annual Report to Shareholders and Proxy Statement of Southern New England Telecommunications Corporation on page 15 therein. In connection with our audits of such financial statements, we have also audited the related financial statement schedule for each of the three years in the period ended December 31, 1997 listed in Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Hartford, Connecticut /s/ COOPERS & LYBRAND L.L.P. January 27, 1998 22 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Dollars in Millions) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at Balance beginning of Charged to Charged to at end Description period expense other accounts Deductions of period Allowance for Uncollectible Accounts Receivable: Year 1997 $27.4 $43.4 $11.3 (a) $49.6 (b) $32.5 Year 1996 34.2 42.6 5.1 (a) 54.5 (b) 27.4 Year 1995 29.8 23.1 3.6 (a) 22.3 (b) 34.2 Allowance for Uncollectible Direct-Financing Lease Notes Receivable: Year 1997 $11.0 $ - $ - $ - $11.0 Year 1996 9.7 1.8 - 0.5 (b) 11.0 Year 1995 8.4 1.4 - 0.1 (b) 9.7 Restructuring Charge: Year 1997 $31.5 $ - $ - $25.0 $ 6.5 Year 1996 77.0 - - 45.5 (c) 31.5 Year 1995 264.9 - - 187.9 (c) 77.0 (a) Includes amounts previously written off that were credited directly to this account when recovered and miscellaneous amounts. (b) Includes amounts written off as uncollectible. 1997 reflects the continuous collection difficulties as the competitive environment increases despite the Corporation's increased emphasis on collections. 1996 also includes fully reserved amounts written off of $17.8 as a result of a revised procedure to write-off uncollectible accounts receivable within a shorter time frame. (c) Includes non-cash net pension and postretirement settlement gain charged against the restructuring reserve of $65.1 in 1996 and curtailment losses of $102.2 in 1995. 23 EXHIBIT INDEX Exhibits identified in parentheses below, on file with the SEC, are incorporated herein by reference as exhibits hereto. Exhibit Number 2 Agreement and Plan of Merger dated January 4, 1998, between Southern New England Telecommunications Corporation, SBC Communications Inc. and SBC (CT), Inc. (Exhibit 2 to Form 8-K dated 1/5/98, File No. 1- 9157). 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 December 11, 1996 between Southern New England Telecommunications Corporation and State Street Bank and Trust Company, as Rights Agent (Exhibit 4 to Form 8-K dated 12/11/96, File No. 1-9157). Amendment No. 1 dated January 4, 1998 (Exhibit 4.2 to Form 8-K dated 1/5/98, File No. 1- 9157). 4b Stock Option Agreement dated January 4, 1998, between Southern New England Telecommunications Corporation, SBC Communications Inc. and SBC (CT) Inc. (Exhibit 4.1 to Form 8-K dated 1/5/98, File No. 1-9157). 4c Indenture dated December 13, 1993 between The Southern New England Telephone Company and Fleet National Bank of Connecticut, Trustee, issued in connection with the sale of $200,000,000 of 6 1/8% Medium-Term Notes, Series C, due December 15, 2003 and $245,000,000 of 7 1/4% Medium-Term Notes, Series C, due December 15, 2033 (Exhibit 4b to 1994 Form 10-K dated 3/10/95, File No. 1-9157). 4d Indenture dated July 10, 1991 between the registrant and Fleet National Bank of Connecticut, Trustee, issued in connection with the sale of $100,000,000 of 6 1/2% Medium-Term Notes, Series 2, due August 15, 2000, $200,000,000 of 7% Medium-Term Notes, Series 2, due August 15, 2005 and $100,000,000 of 6 1/2% Medium-Term Notes, Series 2, due February 15, 2002 (Exhibit 4c to 1995 Form 10-K dated 3/20/96, File No. 1-9157). 10(iii)(A)1 SNET Short Term Incentive Plan as amended February 8, 1995 (Exhibit 10(iii)(A)1 to 1994 Form 10-K dated 3/10/95, File No. 1-9157). 10(iii)(A)2 SNET Long Term Incentive Plan as amended March 1, 1993 (Exhibit 10(iii)(A)2 to 1992 Form 10-K dated 3/23/93, File No. 1-9157). 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 Pension Benefit Plan as amended through January 1, 1998. 10(iii)(A)6 SNET Management Pension Plan as amended March 31, 1995. Amendments effective December 20, 1995 through April 1, 1996 (Exhibit 10(iii)(A)6 to 1995 Form 10-K dated 3/20/96, File No. 1-9157). Amendments effective April 1, 1996 through December 18, 1996 (Exhibit 10(iii)(A)6 to 1996 Form 10-K dated 3/20/97, File No. 1-9157). Amendments effective July 9, 1997 through January 1, 1998. 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). Amendment dated December 8, 1993 (Exhibit 10 (iii)(A)8 to 1993 Form 10-K dated 3/23/94, File No. 1-9157). 10(iii)(A)9 SNET Deferred Compensation Plan for Non-Employee Directors as amended January 1, 1993 (Exhibit 10(iii)(A)9 to 1992 Form 10-K dated 3/23/93, File No. 1-9157). 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). Amendment dated January 4, 1998. 10(iii)(A)12 SNET Retirement and Disability Plan for Non-Employee Directors as amended April 14, 1993 (Exhibit 10(iii)(A)12 to 1993 Form 10-K dated 3/23/94, File No. 1-9157). Amendment dated February 14, 1996 (Exhibit 10(iii)(A)12 to 1996 Form 10-K dated 3/20/97, File No. 1-9157). 10(iii)(A)13 SNET Non-Employee Director Stock Plan effective January 1, 1994 (Exhibit 4.4 to Registration No. 33- 51055 on Form S-8, File No. 1-9157). 10(iii)(A)14 SNET Executive Retirement Savings Plan as amended through January 1, 1998. 10(iii)(A)15 SNET 1995 Stock Incentive Plan (Exhibit 4.4 to Registration No. 33-64975, File No. 1-9157). Amendment dated January 4, 1998. 10(iii)(A)16 SNET Non-Employee Director Stock Plan effective June 1, 1996 (Exhibit 4.2 to Registration No. 333-05757 on Form S-8, File No. 1-9157). 10(iii)(A)17 SNET Stay Bonus Program effective January 4, 1998. 12 Computation of Ratio of Earnings to Fixed Charges. 13 Pages 6 through 34 of the registrant's combined 1997 Annual Report to Shareholders and Proxy Statement for the fiscal year ended December 31, 1997. 21 Subsidiaries of the Corporation. 23 Consent of Independent Accountants. 24a Powers of Attorney. 24b Board of Directors' Resolution. 27 Financial Data Schedule. 99a Annual Report on Form 11-K for the plan year ended December 31, 1997 for the SNET Management Retirement Savings Plan will be filed as an amendment prior to June 30, 1998. 99b Annual Report on Form 11-K for the plan year ended December 31, 1997 for the SNET Bargaining-Unit Retirement Savings Plan will be filed as an amendment prior to June 30, 1998. EX-10.1 2 SNET PENSION BENEFIT PLAN With Amendments Effective Through January 1, 1998 January 19, 1998 TABLE OF CONTENTS ARTICLE A. SNET PENSION BENEFIT PLAN EXCESS BENEFIT PROGRAM SECTION 1. PURPOSE OF ARTICLE A OF THIS PLAN 2 SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE A OF THIS PLAN 3 SECTION 3. ADMINISTRATION OF ARTICLE A OF THIS PLAN 5 SECTION 4. EXCESS PENSION BENEFITS - BENEFIT LIMITATION 7 1. PARTICIPATION 7 2. AMOUNT AND METHOD OF PAYMENT 7 3. RELATIONSHIP TO OTHER PLANS 9 SECTION 5. EXCESS PENSION BENEFITS - COMPENSATION LIMITATION 10 1. PARTICIPATION 10 2. CASH BALANCE PLAN ACCOUNT 10 3. CBPA DISTRIBUTION OPTIONS 11 4. CBPA BENEFIT PAYABLE IN EVENT OF PRERETIREMENT DEATH 12 5. PRERETIREMENT DEATH BENEFIT 12 6. BENEFICIARY IN EVENT OF PRERETIREMENT DEATH 12 7. EXCESS DEATH BENEFIT 12 SECTION 6. GENERAL PROVISIONS 13 1. EFFECTIVE DATE 13 2. RIGHTS TO BENEFITS 13 3. ASSIGNMENT OR ALIENATION 13 4. BREAKS IN SERVICE 13 5. LEAVES OF ABSENCE 13 6. MULTIPLE PARTICIPATING COMPANY EMPLOYMENT 13 7. PAYMENT TO OTHERS 13 8. PLAN TERMINATION 14 9. SOURCE OF PAYMENTS 14 10. UNFUNDED STATUS 14 SECTION 7. CHANGE OF CONTROL 15 SECTION 8. PLAN MODIFICATION APPLICABLE TO ARTICLE A 18 ARTICLE B. SNET PENSION BENEFIT PLAN EXECUTIVE NON-QUALIFIED PENSION AND DEATH BENEFIT PROGRAM SECTION 1. PURPOSE OF ARTICLE B OF THIS PLAN 19 SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE B OF THIS PLAN 20 SECTION 3. ADMINISTRATION OF THIS ARTICLE B 23 SECTION 4. NON-QUALIFIED PENSION BENEFITS 25 1. PARTICIPATION 25 2. ELIGIBILITY 25 3. BENEFIT AMOUNTS 26 4. PAYMENTS TO EXECUTIVES 30 5. NO SURVIVING SPOUSE 30 6. POST-TERMINATION JOINT AND SURVIVOR ANNUITY 30 7. DEFERRAL OF PAYMENTS 31 8. TREATMENT DURING SUBSEQUENT EMPLOYMENT 31 9. TERMINATION OF NON-QUALIFIED PENSION BENEFIT PROGRAM 32 SECTION 5. DEATH BENEFITS 33 1. PARTICIPATION AND ADMINISTRATION 33 2. DEFINITION OF DEATH BENEFIT AMOUNT 33 3. PAYMENT OF DEATH BENEFITS 33 4. WAIVER OF BENEFIT 33 SECTION 6. POST-RETIREMENT LIFE INSURANCE SUPPLEMENT PROGRAM 34 1. DESCRIPTION 34 2. PARTICIPATION 34 3. BENEFICIARY 34 4. COVERAGE AMOUNTS 34 SECTION 7. POST-RETIREMENT SURVIVOR'S ANNUITY OPTION 36 1. DESCRIPTION 36 2. BENEFICIARY 36 3. ELECTION OF BENEFIT 36 4. BENEFIT AMOUNT 37 SECTION 8. GENERAL PROVISIONS 38 1. EFFECTIVE DATE 38 2. RIGHTS TO BENEFITS 38 3. ASSIGNMENT OR ALIENATION 38 4. BREAKS IN SERVICE 38 5. LEAVES OF ABSENCE 38 6. LUMP SUM PAYMENTS 38 7. MULTIPLE PARTICIPATING COMPANY EMPLOYMENT 39 8. PAYMENT TO OTHERS 39 9. PLAN TERMINATION 39 10. SOURCE OF PAYMENTS 39 11. UNFUNDED STATUS 40 SECTION 9. CHANGE OF CONTROL 41 SECTION 10. PLAN MODIFICATION 44 ARTICLE C. SNET MID-CAREER PENSION PLAN PROGRAM SECTION 1. PURPOSE OF ARTICLE C OF THIS PLAN 45 SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE C OF THIS PLAN 46 SECTION 3. ADMINISTRATION OF THIS ARTICLE C 47 SECTION 4. MID-CAREER PENSION BENEFITS 49 1. PARTICIPATION 49 2. MID-CAREER PENSION BENEFIT 49 3. TERMINATION OF NON-QUALIFIED PENSION BENEFIT 49 SECTION 5. GENERAL PROVISIONS 50 1. EFFECTIVE DATE 50 2. RIGHTS TO BENEFITS 50 3. ASSIGNMENT OR ALIENATION 50 4. SOURCE OF PAYMENTS 51 5. UNFUNDED STATUS 51 SECTION 6. CHANGE OF CONTROL 52 SECTION 7. PLAN MODIFICATION APPLICABLE TO ARTICLE C 55 SNET PENSION BENEFIT PLAN SECTION 1. PURPOSE The purpose of the SNET Pension Benefit Plan (the "Plan") is to provide for eligible management, bargaining unit and highly compensated employees of Southern New England Telecommunications Corporation (the "Corporation") (and its subsidiaries which have determined, with the consent of the Committee, to participate in this Plan), employer-provided benefits (i) for certain benefits not otherwise available under the SNET Management Pension Plan ("SNETMPP") by reason of the application of Section 401(a)(17) of the Internal Revenue Code ("Code"); and (ii) for certain benefits which would have been otherwise payable under the SNETMPP or the SNET Pension Plan ("SNETPP") but for the limitations imposed by Section 415 of the Code; and (iii) for certain non-qualified pension and death benefits for highly compensated employees. The Plan is intended to constitute an unfunded "excess benefit plan" as defined in Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to the extent it provides benefits that would be distributed under the SNET Management Pension Plan or the SNET Pension Plan but for the limitations of Section 415 of the Code, and an "unfunded plan of deferred compensation for a select group of management or highly compensated employees" for purposes of Title I of ERISA, to the extent it provides other benefits. This Plan shall consist of three components: (1) Article A which contains the excess benefit plan program; (2) Article B which contains the non-qualified pension and death benefit plan program; and (3) Article C which incorporates the non-qualified pension program provisions which were previously provided under the SNET Mid- Career Pension Plan. 1 ARTICLE A. SNET PENSION BENEFIT PLAN EXCESS BENEFIT PROGRAM SECTION 1. PURPOSE OF ARTICLE A OF THIS PLAN The purpose of this Article A of the Plan is to provide eligible management, bargaining unit and highly compensated employees of the Corporation (and its subsidiaries which have determined, with the consent of the Committee, to participate in this Plan), employer- provided benefits (i) for certain benefits not otherwise available under the SNETMPP by reason of the application of Section 401(a)(17) of the Internal Revenue Code ("Code"); and (ii) for certain benefits which would have been otherwise payable under the SNETMPP or the SNETPP but for the limitations imposed by Section 415 of the Code. 2 SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE A OF THIS PLAN 1. The term "ADEA" shall mean the Age Discrimination in Employment Act of 1967 as amended in 1978 and as it may be amended from time to time. 2. The term "Benefit Limitation" shall mean the maximum "annual benefit" payable to participants under the SNETMPP or the SNETPP in accordance with Section 415 of the Code, but after application of the Compensation Limitation, if any, under the SNETMPP or the SNETPP. 3. The words "Chairman of the Board", "President", and "Board of Directors" or "Board" shall mean the Chairman of the Board of Directors, President, and Board of Directors, respectively, of the Corporation. 4. The term "Change of Control" shall be defined as set forth in Section 7 of this Article A. 5. The term "Code" means the Internal Revenue Code of 1986, as amended from time to time. 6. The word "Committee" shall mean the Employees' Benefit Committee appointed by the Board of Directors to administer the Plan. 7. The word "Company" shall mean The Southern New England Telephone Company, a Connecticut corporation, or its successors. 8. The term "Compensation Limitation" shall mean the maximum amount of compensation which may be included in the SNETMPP under Section 401(a)(17) of the Code that may be taken into account in any Plan Year for benefit accrual purposes under the SNETMPP. 9. The word "Corporation" shall mean Southern New England Telecommunications Corporation, a Connecticut corporation, or its successors. 10. The term "Excess Pension Benefit" means the benefit, if any, described in Section 4 of this Article A which is payable to a Participant under the terms of the Plan. 11. The term "Participant" shall mean an individual who has satisfied the eligibility requirements of Paragraph 1 of Section 4 of this Article A and/or of Paragraph 1 of Section 5 of this Article A, for receipt of an excess pension benefit payable under the provisions of this Article A. 12. The term "Participating Company" shall mean the Corporation or any Subsidiary of the Corporation which shall have determined, with the concurrence of the Committee, to participate in the Plan. 3 13. The words "Pension Act" shall mean the Employee Retirement Income Security Act of 1974 (ERISA), as it may be amended from time to time. 14. The word "Plan" shall mean the SNET Pension Benefit Plan. 15. The term "SNETMPP" shall mean the SNET Management Pension Plan. 16. The term "SNETPP" shall mean the SNET Pension Plan. 17. The words "Subsidiary or Subsidiaries" shall mean any corporation, partnership or other entity of which at least 50% of the Voting Stock is owned directly or indirectly by the Corporation. 18. The words "Surviving Spouse" shall mean a spouse who is married to the Participant on the earlier of (a) the Participant's annuity starting date under the SNETMPP or SNETPP, whichever is applicable, or (b) the date of the Participant's death. 19. The expression "Term of Employment", except as expressly limited or stated elsewhere in the Plan, shall have the same meaning as that expression is used in the SNETMPP or the SNETPP. 20. The use in this Plan of personal pronouns of the masculine gender is intended to include both the masculine and feminine genders. 4 SECTION 3. ADMINISTRATION OF ARTICLE A OF THIS PLAN 1. The Corporation shall be the Sponsor of the Plan and the Plan Administrator of the Plan as those terms are defined in the Pension Act. The Committee shall have the administrative responsibilities set forth below. 2. (a) 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 the Plan, except for powers herein granted or provided to be granted to others. (b) The procedures for adoption of by-laws, and rules of procedure, for the employment of a Secretary and assistants, with authority with respect to claims of Participants, shall be the same as are set forth in the SNETMPP. (c) In accordance with the terms of the Plan, the Secretary of the Committee shall grant or deny claims for benefits under the Plan with respect to Participants and authorize disbursements according to the terms of this Plan. Adequate notice, pursuant to applicable law, shall be provided in writing to any Participant or beneficiary whose claim has been denied, setting forth the specific reasons for such denial and any other information required to be furnished under the Pension Act. 3. The review and appeal procedures for Participants whose claims have been denied shall be the same as those procedures set forth in the SNETMPP. 4. The Committee shall serve as the final review committee under the Plan, with the authority to determine conclusively for all parties any and all questions arising from administration of the Plan, and shall have sole and complete discretionary authority and control to manage the operation and administration of the Plan, including, but not limited to, the determination of all questions relating to eligibility for participation and benefits, interpretation of all Plan provisions, determination of the amount and kind of benefits payable to any Participant or Surviving Spouse, and the construction of disputed and doubtful terms. Such decisions by the Committee shall be conclusive and binding on all parties and not subject to further review. 5. The expenses of the Committee in administering the Plan shall be borne by the Participating Companies. 6. The Corporation, the Company 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 allocate responsibilities for the operation and administration of the 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 the Plan, and may employ persons to advise them with regard to any such responsibilities. 5 8. Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan. 6 SECTION 4. EXCESS PENSION BENEFITS - BENEFIT LIMITATION 1. Participation Participation in Section 4 of this Article A shall be limited to those individuals classified as a Regular or Provisional Regular Management or Bargaining Unit Employee on the SNET payroll system or their Surviving Spouse whose benefits under the SNETMPP or SNETPP are limited by reason of the application of the Benefit Limitation. 2. Amount and Method of Payment (a) Excess Pension Benefit. If the benefit payable to a Participant or a Surviving Spouse under the SNETMPP or the SNETPP is limited by reason of the application of the Benefit Limitation, an Excess Pension Benefit shall be distributed as provided under Section 4 of this Article A in favor of such Participant or Surviving Spouse. (b) Amount of Excess Pension Benefit. The amount, if any, of the Excess Pension Benefit payable to a Participant or a Surviving Spouse pursuant to Section 4 of this Article A shall be equal to the difference between (i) and (ii) where: (i) is the amount of the monthly pension benefit which would be provided to the Participant or Surviving Spouse under the SNETMPP or the SNETPP, without regard to the Benefit Limitation, based upon the SNETMPP or the SNETPP formula, as applicable, in effect as of the date of termination of employment or death; and (ii) is the amount of the monthly pension benefits actually payable to such Participant or Surviving Spouse under the SNETMPP or the SNETPP. The amount of the Excess Pension Benefit payable as a result of the application of the Benefit Limitation under the SNETMPP or the SNETPP shall be determined or redetermined, based upon the SNETMPP or the SNETPP formula, as applicable, in effect as of the date of termination of employment or death, (a) as of the date when benefits are to commence pursuant to Paragraph (c) of Section 4 of this Article A; (b) as of the effective date of any subsequent increases and/or decreases in the Benefit Limitation, and/or (c) as of the effective date of any cost of living increases in the monthly benefit payable to a Participant, prior to application of the Benefit Limitation, as a result of amendments to the SNETMPP and/or the SNETPP, whichever is applicable. (c) Payment of Pension Benefit. Subject to Section 7 of this Article A, Excess Pension Benefits, if any, payable under Section 4 of this Article A, (a) shall commence at the same time as the Participant's pension benefit payable under the SNETMPP or SNETPP and, (b) shall be distributed as follows: (i) for any Participant who terminated employment prior to January 1, 1997, for as long as and in the same form as the Participant's pension benefit under the SNETMPP or SNETPP, provided, however, that the Committee shall have the right to approve the Participant's election of the form of benefit payment; or (ii) for any Participant who terminated employment on or after January 1, 1997 and: (A) for distributions 7 effective prior to January 1, 1998, for as long as and in the same form as the Participant's pension benefit under the SNETMPP or SNETPP, provided, however, that the Committee shall have the right to approve the Participant's election of the form of benefit payment; or (B) for distributions effective on or after January 1, 1998, in a single lump sum payment, unless the Participant has elected at least one year prior to the commencement of payment of the Excess Pension Benefit, one of the following forms of payment: (i) a single life annuity, (ii) a 50% joint and survivor annuity, (iii) a lump sum certain, with or without a 50% survivor annuity, (iv) a combination 75% annuity, 25% lump sum, with or without a 50% survivor annuity or (v) a combination 50% annuity, 50% lump sum, with or without a 50% survivor annuity. (d) CBPA Benefit Payable in Event of Preretirement Death. If a Participant dies before the date as of which his or her vested CBPA benefit commences under the SNETMPP or the SNETPP, the vested CBPA payable under this Article A shall be distributed in a single lump sum payment to the Participant's Surviving Spouse (or if there is no Surviving Spouse, to the Participant's estate) after the death of the Participant, except as otherwise provided in Paragraph 2(e) of this Article A, Section 4. There shall be no benefit payable under Section 4 of this Article A upon the death of any non-vested Participant. (e) Beneficiary in Event of Preretirement Death . Effective May 22, 1996, a Participant, prior to termination of employment, may designate a beneficiary other than a Surviving Spouse or his estate to receive a single lump sum payment of his or her vested CBPA payable under this Article A in the event the Participant dies prior to termination of employment or prior to commencement of the payment of the vested CBPA payable under this Article A following his or her termination of employment. If there is no Beneficiary designated, the vested CBPA shall be distributed in accordance with Paragraph 2(d) of this Article A, Section 4 in a single lump sum payment. There shall be no benefit payable under Section 4 of this Article A upon the death of any non-vested Participant. (f) Determination of Pension Benefits. Payments under Section 4 of this Article A shall be calculated in accordance with the rules, procedures and assumptions utilized under the SNETMPP or the SNETPP, whichever is applicable. Whenever it is necessary to determine whether one benefit is less than, equal to, or larger than another, or to determine the equivalent actuarial value of any benefit, such determination shall be made at the Committee's discretion by the Corporation's enrolled actuary or by an independent actuary selected by the Committee, using mortality, interest and other assumptions normally used at the time by such actuary in determining actuarial equivalence under the SNETMPP or the SNETPP, whichever is applicable. (g) Treatment During Subsequent Employment. Employment with any Participating Company subsequent to retirement or termination of employment with entitlement to any type of benefit described heretofore shall not suspend the right of a former Participant receiving pension payments or a person otherwise entitled to receive a pension payment during the period he continues in such employment and the form of distribution of such pension payments shall not be changed as a result of such employment. 8 (h) Future Benefit Adjustments. If a Participant has commenced receiving a benefit under Article A of this Plan in the form of a joint and 50 percent survivor annuity and his or her surviving annuitant subsequently predeceases him or her, the Participant's Excess Pension Benefit under this Plan shall be calculated in accordance with Paragraph 2(b) of this Section 4 and thereafter distributed, prospectively, by restoring the original cost of the joint and 50 percent survivor annuity form of benefit under this Article A. Such adjustment shall be effective as of the first day of the first month following the death of the Participant's surviving annuitant. In the event that, following commencement of benefits to a Participant under the Plan, the SNETMPP or SNETPP benefit is subsequently increased, the Excess Pension Benefit to the Participant under this Plan shall be recalculated as soon as practicable after the SNETMPP or the SNETPP benefit is adjusted. 3. Relationship to Other Plans Benefits payable to a Participant under Section 4 of this Article A shall not duplicate benefits payable to such Participant from any other plan or arrangement of the Corporation or any Subsidiary. 9 SECTION 5. EXCESS PENSION BENEFITS - COMPENSATION LIMITATION 1. Participation Participation in Section 5 of this Article A shall be limited to those individuals (a) whose benefits under the SNETMPP are vested, under the terms and conditions of the SNETMPP; (b) who are considered to be within "a select group of management or highly compensated employees" for purposes of Title I of the Pension Act; and (c) whose annual compensation in any year exceeds the Compensation Limitation. 2. Cash Balance Plan Account (a) Effective Date Effective on or after January 1, 1996, each Participant under this Section 5 shall have a Cash Balance Plan Account (CBPA) established under this Plan. (b) Cash Balance Plan Account Opening Balance The balance in each Participant's account as of the effective date shall be calculated as is set forth in the SNETMPP, except that the calculation shall include only eligible compensation (as defined in the SNETMPP ) in excess of the maximum amount of compensation which may be included in the SNETMPP under Section 401(a)(17) of the Code. (c) Interest Credits Each Participant's CBPA will be credited with interest at the same time, at the same rate, and in the same manner as is set forth in the SNETMPP. (d) Annual Pay Related Credits On the last day of each year commencing December 31, 1996, each Participant's CBPA shall be credited with basic pay related credits at the same time, at the same rate and in the same manner as is set forth in the SNETMPP, provided, however, that such credit shall be applied only to eligible compensation, as defined in the SNETMPP, in excess of the maximum amount of compensation which may be included in the SNETMPP under Section 401(a)(17) of the Code. (e) Supplemental Pay Credits On the last day of each year, commencing December 31, 1996, each Participant's CBPA shall be credited with supplemental pay credits at the same time, at the same rate and in the same manner as is set forth in the SNETMPP, provided, however, that such supplemental pay credit shall be applied only to eligible compensation, as defined in 10 the SNETMPP, in excess of the maximum amount of compensation which may be included in the SNETMPP under Section 401(a)(17) of the Code. (f) Accounts for New Participants If an individual is hired on or after January 1, 1996, no CBPA shall be established on his behalf until a CBPA is established on his behalf in the SNETMPP. At such time, the basic pay related credits and supplemental pay credits shall be based on his eligible compensation, as defined in the SNETMPP, for the entire plan year in which a CBPA is established, in excess of the maximum amount of compensation which may be included in the SNETMPP under Section 401(a)(17) of the Code. (g) Determination of Pension Benefits. Payments under Section 5 of this Article A shall be calculated in accordance with the rules, procedures and assumptions utilized under the SNETMPP. Whenever it is necessary to determine whether one benefit is less than, equal to, or larger than another, or to determine the equivalent actuarial value of any benefit, such determination shall be made at the Committee's discretion by the Corporation's enrolled actuary or by an independent actuary selected by the Committee, using mortality, interest and other assumptions normally used at the time by such actuary in determining actuarial equivalence under the SNETMPP. (h) Relationship to Other Plans. Benefits payable to a Participant under Section 5 of this Article A shall not duplicate benefits payable to such Participant from any other plan or arrangement of the Corporation or any Subsidiary. 3. CBPA Distribution Options Subject to Section 7 of this Article A, the distribution of a Participant's CBPA, if any, payable under Section 5 of this Article A, (a) shall commence at the same time time as the pension benefit payable under the SNETMPP and (b) shall be distributed (b) shall be distributed as follows: (i) for any Participant who terminated employment prior to January 1, 1997, for as long as and in the same form as the Participant's pension benefit under the SNETMPP, provided, however, that the Committee shall have the right to approve the Participant's election of the form of benefit payment; or (ii) for any Participant who terminated employment on or after January 1, 1997 and: (A) for distributions effective prior to January 1, 1998, for as long as and in the same form as the Participant's pension benefit under the SNETMPP, provided, however, that the Committee shall have the right to approve the Participant's election of the form of benefit payment; or (B) for distributions effective on or after January 1, 1998, in a single lump sum payment, unless the Participant has elected at least one year prior to the commencement of payment of the Excess Pension Benefit, one of the following forms of payment (i) a single life annuity, (ii) a 50% joint and survivor annuity, (iii) a lump sum certain, with or without a 50% survivor annuity, (iv) a combination 75% annuity, 25% lump sum, with or without a 50% survivor annuity or (v) a combination 50% annuity, 50% lump sum, with or without a 50% survivor annuity. 11 4. CBPA Benefit Payable in Event of Preretirement Death If a Participant dies before the date as of which his or her vested CPBA benefit commences under the SNETMPP, the vested CBPA payable under this Article A shall be distributed in a single lump sum payment to the Participant's Surviving Spouse (or if there is no Surviving Spouse, to the Participant's estate), except as otherwise provided in Paragraph 5 of Section 5 of this Article A. There shall be no benefit payable under Section 5 of this Article A upon the death of any non-vested Participant. 5. Beneficiary in Event of Preretirement Death Effective May 22, 1996, a Participant, prior to termination of employment, may designate a beneficiary other than a Surviving Spouse or his estate, to receive a single lump sum payment of his or her vested CBPA payable under this Article A in the event the Participant dies prior to termination of employment or prior to commencement of the payment of the vested CBPA payable under this Article A following his or her termination of employment. If there is no Beneficiary designated, the the vested CBPA shall be distributed in accordance with Paragraph 4 of this Article A, Section 5 in a single lump sum payment. There shall be no benefit payable under Section 5 of this Article B upon the death of any non-vested Participant. 6. Excess Death Benefit (a) If the actual Active Employee Death Benefit or Retiree Death Benefit ("Death Benefit") payable to any person as a result of the death of a Participant under the terms of the SNETMPP is reduced or limited by reason of the Compensation Limitation, an Excess Death Benefit shall be distributed as provided in this Section 5 to the beneficiary otherwise entitled to receive the Death Benefit under the terms and conditions of the SNETMPP. (b) The amount, if any, of the Excess Death Benefit payable shall be equal to the difference between (A) and (B) where: (A) is the amount of the Death Benefit which would be provided to the beneficiary under the SNETMPP without regard to the Compensation Limitation under the SNETMPP in effect as of the date of death; and (B) is the amount of the Death Benefit actually payable to such beneficiary under the SNETMPP. (c) The Excess Death Benefit provided under this Plan (i) shall commence at the same time, (ii) shall be distributed for as long as, and (iii) shall be distributed in the same benefit form as the Committee or its delegate has determined with respect to the Death Benefit payable under the SNETMPP. 12 SECTION 6. GENERAL PROVISIONS OF ARTICLE A 1. Effective Date This Plan is effective with amendments through January 1, 1998. 2. Rights to Benefits Neither the action of the Board of Directors in establishing this Plan nor any action hereafter taken by the Board or the Committee shall be construed as giving to any employee a right to be retained in the service of any Participating Company or any right or claim to any benefit after discharge from the service of any Participating Company, unless the right to such benefit has accrued prior to such discharge. No employee shall have any right against any Participating Company to any benefit under the Plan other than the amount to which the employee has theretofore become entitled and which the Committee has directed be distributed to that employee under the Plan. Benefits previously awarded may be discontinued at any time at the sole discretion of the Corporation or any Participating Company in accordance with the terms of the Plan. 3. Assignment or Alienation Assignment or alienation of pensions or other benefits under this Plan will not be permitted or recognized except as otherwise required by law. 4. Breaks in Service For purposes of this Plan, a break in service shall be defined and treated in the same manner as is set forth in the SNETMPP. 5. Leaves of Absence For purposes of this Plan, a leave of absence shall be defined and administered in the same manner as is set forth in the SNETMPP. 6. Multiple Participating Company Employment If a Participant is also a Participant of one or more other Participating Companies, any benefit to which such Participant may become entitled under the Plan shall be computed on the basis of the total combined pay which he is receiving from all such companies. Any maximum or minimum amounts fixed by the Plan for benefits shall apply to the total amount payable by all companies and not to the portion payable to any Participating Company or Companies. 7. Payment to Others Benefits payable to any person to whom an amount is or was payable under the Plan who is unable to execute a proper receipt may be distributed to other person(s) in 13 accordance with the standards and procedures set forth in the SNETMPP or the SNETPP, as applicable. 8. Plan Termination The Board retains the right to terminate the Plan in whole or in part, and each Participating Company retains the right to withdraw from this Plan, at any time, for any reason, with or without notice. Unless the Participant provides prior written consent, however, said withdrawal or termination, as applicable, shall not affect the rights of any Participant or Surviving Spouse to any benefit under this Article A of the Plan to which such person may have previously become entitled as a result of the Participant's disability, death, termination of employment or a Change in Control which occurred prior to the effective date of the withdrawal or termination. 9. Source of Payments Benefits arising under this Plan and all costs, charges, and expenses relating thereto will be payable from SNET's general assets. SNET may, however, establish a trust to pay all or a portion of such benefits and related expenses, provided such trust does not cause the Plan to be "funded" within the meaning of ERISA. To the extent trust assets are available, they may be used to pay benefits arising under this Plan and all costs, charges, and expenses relating thereto. To the extent that the funds held in the trust, if any, are insufficient to pay such benefits, costs, charges and expenses, SNET shall pay such benefits, costs, charges, and expenses from its general assets. 10. Unfunded Status The Plan at all times shall be entirely unfunded for purposes of the Code and ERISA and no provision shall at any time be made with respect to segregating any assets of a Participating Company for payment of any benefits hereunder. Funds that may be invested through a trust described in Paragraph 9 of Section 6 of this Article A shall continue for all purposes to be part of the general assets of the Participating Company which invested the funds. The Plan constitutes a mere promise by SNET and the Participating Companies to make benefit payments, if any, in the future. No Participant, Surviving Spouse or any other person shall have any interest in any particular assets of a Participating Company by reason of the right to receive a benefit under the Plan and to the extent the Participant, Surviving Spouse or any other person acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of a Participating Company. 14 SECTION 7. CHANGE OF CONTROL Any provision of the Plan to the contrary notwithstanding, in the event of a Change of Control (as defined below), any benefit accrued as of and through the Change of Control, including, without limitation, by current Participants, former Participants or their annuitants or beneficiaries, including those currently receiving payments under the Plan, shall not be subject to forfeiture or suspension and shall be distributed in a single lump sum on the last day of the month following the month in which the Change of Control occurred, for those individuals currently receiving payments under Article A of the Plan, and on the last day of the month following the month in which occurs the event (e.g., termination of employment, disability or death) giving rise to the obligations of the Company or Participating Company to pay such benefit, for those individuals not currently receiving payments under Article A of the Plan. For this purpose, the accrued benefit shall be calculated based upon the provisions of the Plan in effect immediately prior to the Change of Control as if the event giving rise to the obligation of the Corporation or Participating Company to pay such benefit pursuant to the preceding sentence had occurred on the date of the Change of Control and shall not be adversely affected because of any subsequent events, including, without limitation, termination or amendment of the Plan or the SNETMPP or SNETPP, or lack of continued status. For purposes of this Section 7 of Article A, a Change of Control shall mean: (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: (1) 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, (2) any acquisition by the Corporation, (3) any acquisition by any employee benefit plan (or related trust) participated in by the Corporation or any corporation controlled by the Corporation or (4) 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 Paragraph (C) of this Section 7 of this Article A 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 December 12, 1990, constitute the Board (the Board as of the above date shall be hereinafter 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 7, that any individual who becomes a member of the Board subsequent to the above date whose election, or nomination for 15 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 provision) 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 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 form such Corporate Transaction and any Person beneficially owning, immediately prior to 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, (l) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then 16 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 of 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 for, 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. 17 SECTION 8. PLAN MODIFICATION APPLICABLE TO ARTICLE A The Board may from time to time make changes in the Plan. In addition, the Senior Vice President-Organization Development of the Corporation (or any successor to that officer's responsibilities), with the concurrence of the Senior Vice President and General Counsel of the Corporation (or any successor to that officer's responsibilities), shall be authorized to make minor or administrative changes to the Plan, as well as changes dictated by the requirements of federal or state statutes applicable to any Participating Company or authorized or made desirable by such statutes. Such changes shall not affect the rights of any Participant, Surviving Spouse or parent, without the Participant's consent, to any benefit under the Plan to which such person may have previously become entitled as a result of a disability, death, termination of employment or a Change in Control which occurred prior to the effective date of such change. 18 ARTICLE B. SNET PENSION BENEFIT PLAN EXECUTIVE NON-QUALIFIED PENSION AND DEATH BENEFIT PROGRAM SECTION 1. PURPOSE OF ARTICLE B OF THIS PLAN The purpose of this Article B of the Plan is to provide eligible management and highly compensated employees of the Corporation and its subsidiaries which have determined, with the consent of the Committee, to participate in this Plan, employer-provided benefits (i) for certain forms of compensation otherwise excluded under the SNETMPP accrued benefit formula; and (ii) for supplementary death benefit coverage, as set forth more fully herein, to Non- Grandfathered Executives of the Corporation who retire from service, or in the event of death after retirement, to their annuitants, dependent relatives or beneficiaries, as applicable. The benefits provided under this Article B were formerly provided under the SNET Executive Non-Qualified Pension Plan and Excess Benefit Plan. Benefits are payable to Participants who retire from service, or in the event of death after retirement, to their dependent relatives or in certain cases, to their annuitants. These pension and death benefits are predicated on the actual and/or Standard Awards under SNET's Short Term Incentive Plan and on benefit entitlements payable from the SNETMPP but for the limitations more fully described herein. 19 SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE B OF THIS PLAN 1. The term "Active Payroll" shall mean in the active employment of the Corporation or its Subsidiaries as determined in accordance with their normal practices and procedures. 2. The term "ADEA" shall mean the Age Discrimination in Employment Act of 1967 as amended in 1978 and as it may be amended from time to time. 3. The term "Annual Basic Pay" shall mean annual base salary rate, excluding (1) all differentials regarded as temporary or extra payments and (2) all cash payments and incentive awards and distributions made under the Bell System Senior Management Long Term Incentive Plan or the SNET Short Term Incentive Plan or the SNET Long Term Incentive Plan or any other similar plan, as determined by the Committee. 4. The words "Chairman of the Board", "President", and "Board of Directors" or "Board" shall mean the Chairman of the Board of Directors, President, and Board of Directors, respectively, of the Corporation. 5. The term "Change of Control" shall be defined as set forth in Section 9 of this Article B. 6. The term "Code" means the Internal Revenue Code of 1986, as amended from time to time. 7. The word "Committee" shall mean the Employees' Benefit Committee appointed by the Board of Directors to administer the Plan. 8. The word "Company" shall mean The Southern New England Telephone Company, a Connecticut corporation, or its successors. 9. The word "Corporation" shall mean Southern New England Telecommunications Corporation, a Connecticut corporation, or its successors. 10. The word "Executive" shall mean a management employee classified as a Regular Employee on the Active Payroll of any Participating Company on or after August 10, 1980 who has attained a level of or higher than Executive Salary Grade Level 2, or its equivalent, or who on or after January 1, 1985 has attained a level of or higher than Executive Salary Grade Level 1, or its equivalent. 11. The term "Grandfathered Executives" shall mean Executives who died prior to January 1, 1987, or retired prior to January 1, 1987 if they had attained age 55 on or before December 31, 1983. 12. The term "Mandatory Retirement Age" shall mean, in accordance with applicable law, (1) for those employees referred to in Section 12(c)(1) of the ADEA, age 65 or at such later time as may be permissible under such section of the ADEA and (2) for those 20 employees for whom age is a bona fide occupational qualification within the meaning of Section 4(f)(1) of the ADEA, at such time as may be applicable under the ADEA. 13. The term "Non-Grandfathered Executive" shall mean an Executive who is not a Grandfathered Executive and who was a Non- Grandfathered Executive on or before December 8, 1993. 14. The term "Participating Company" shall mean the Corporation or any Subsidiary of the Corporation which shall have determined, with the concurrence of the Committee, to participate in the Plan. 15. The words "Pension Act" shall mean the Employee Retirement Income Security Act of 1974 (ERISA), as it may be amended from time to time. 16. The term "SNETMPP" shall mean the SNET Management Pension Plan. 17. The word "Plan" shall mean the SNET Pension Benefit Plan. 18. The term "Position Rate" shall mean the mid-point of the Executive's salary grade level established periodically for each Executive's grade level. 19. The term "Short Term Incentive Award" shall mean that amount distributed annually to an Executive which constitutes a percentage of the Standard Award as determined pursuant to the SNET Short Term Incentive Plan. 20. The term "Standard Award" shall mean an amount determined annually under the SNET Short Term Incentive Plan. 21. The words "Subsidiary or Subsidiaries" shall mean any corporation, partnership or other entity of which at least 50% of the Voting Stock is owned directly or indirectly by the Corporation. 22. The words "Surviving Spouse" shall mean, except as otherwise provided, (a) for an Executive who retires prior to January 1, 1996 with a service or disability benefit payable under this Article B or who dies while an active employee prior to January 1, 1996, a spouse married to the Executive as of the termination of employment date; and (b) for an Executive who terminates employment prior to January 1, 1996 with a deferred benefit payable under this Article B, a spouse who has been married to the Executive throughout the one-year period ending on the earlier of (a) the Executive's annuity starting date under this Article B, or (b) the date of the Executive's death; provided, however, if the Executive marries within one year before the annuity starting date, and the Executive and the Executive's spouse in such marriage have been married for at least a one-year period ending on or before the date of the Executive's death, such Executive and such spouse shall be treated as having been married throughout the one-year period ending on the annuity starting date. 21 23. The expression "Term of Employment", except as expressly limited or stated elsewhere in the Plan, shall have the same meaning as that expression is used in the SNETMPP. 27. The use in this Plan of personal pronouns of the masculine gender is intended to include both the masculine and feminine genders. 22 SECTION 3. ADMINISTRATION OF THIS ARTICLE B 1. The Corporation shall be the Sponsor of the Plan and the Plan Administrator of the Plan as those terms are defined in the Pension Act. The Committee shall have the administrative responsibilities set forth below. 2. (a) 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 the Plan, except for powers herein granted or provided to be granted to others. (b) The procedures for adoption of by-laws, and rules of procedure, for the employment of a Secretary and assistants, with authority with respect to claims of Executives shall be the same as are set forth in the SNETMPP. (c) In accordance with the terms of the Plan, the Secretary of the Committee shall grant or deny claims for benefits under the Plan with respect to Executives and Participants and authorize disbursements according to the terms of this Plan. Adequate notice, pursuant to applicable law, shall be provided in writing to any Executive or beneficiary whose claim has been denied, setting forth the specific reasons for such denial and any other information required to be furnished under the Pension Act. 3. The review and appeal procedures for Executives whose claims have been denied shall be the same as those procedures set forth in the SNETMPP. 4. The Committee shall serve as the final review committee under the Plan, with the authority to determine conclusively for all parties any and all questions arising from administration of the Plan, and shall have sole and complete discretionary authority and control to manage the operation and administration of the Plan, including, but not limited to, the determination of all questions relating to eligibility for participation and benefits, interpretation of all Plan provisions, determination of the amount and kind of benefits payable to any Executive or Surviving Spouse, and the construction of disputed and doubtful terms. Such decisions by the Committee shall be conclusive and binding on all parties and not subject to further review. 5. The expenses of the Committee in administering the Plan shall be borne by the Participating Companies. 6. The Corporation, the Company 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 allocate responsibilities for the operation and administration of the 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 the Plan, and may employ persons to advise them with regard to any such responsibilities. 23 8. Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan. 24 SECTION 4. NON-QUALIFIED PENSION BENEFITS 1. Participation All persons who were Grandfathered Executives or Non- Grandfathered Executives on or before December 13, 1995 and who retired or terminated employment prior to January 1, 1996 ("Eligible Executives") are deemed participants in Section 4 of this Article B. 2. Eligibility (a) Service Benefit: An individual who is an Eligible Executive at the time of employment termination and (i) has received or is eligible to receive an award under the SNET Short Term Incentive Plan, and (ii) is eligible for a service pension pursuant to the terms of the SNETMPP, is eligible for a service benefit pursuant to this Plan, if the computation of a benefit amount pursuant to Paragraph 3 of this Section 4 of this Article B results in an amount payable to such Eligible Executive. (b) Deferred Benefit: Except as otherwise specified in Paragraph 8 of this Section 4 of this Article B, any individual who is an Eligible Executive at the time of employment termination and (i) has received or is eligible to receive an award under the SNET Short Term Incentive Plan, and (ii) is eligible for a deferred vested pension pursuant to the terms and conditions of the SNETMPP, is eligible for a deferred benefit pursuant to this Article B, if the computation of a benefit amount pursuant to Paragraph 3 of this Section 4 of this Article B results in an amount payable to such Eligible Executive. (c) Disability Benefit: An individual who, while an Eligible Executive, has become eligible for a disability pension pursuant to the terms of the SNETMPP shall be eligible for a disability benefit hereunder, if the computation of a benefit amount pursuant to Paragraph 3 of this Section 4 of this Article B results in an amount payable to such Eligible Executive. Should the disability pension be discontinued pursuant to the terms of the SNETMPP, the disability benefit hereunder shall be discontinued as well. (d) Normal Retirement Age: "Normal Retirement Age" is the age of sixty-five years. (e) Mandatory Retirement Age: Each Eligible Executive shall be retired from the Active Payroll or shall cease to be eligible for continued employment, as applicable, no later than the last day of the month in which such Executive attains the Mandatory Retirement Age. 25 3. Benefit Amounts (a) Computation of Benefit (i) Benefit Formula: Effective December 8, 1993, for all Eligible Executives in such executive position as of December 8, 1993, the monthly benefit shall equal the difference between A and B: Where: A = Adjusted career income as determined in Subparagraph 3(a)(ii) of this of this Section 4 of Article B multiplied by 1.6% and the result then divided by 12; and B = Adjusted career income as is set forth in the SNETMPP, except that it shall be determined solely on actual Short Term Incentive Awards granted for services performed after 1988, multiplied by 1.6% and the result then divided by 12; Effective December 13, 1995, for all Eligible Executives actively employed by SNET in such executive positions as of such date, A and B above shall be determined as of December 13, 1995 and shall not, in any year subsequent to 1995, be increased or decreased. Such frozen benefit determined under this Section 4, Paragraph 3(a)(i) of this Article B shall be considered with the accrued benefits calculated for each such Eligible Executive effective January 1, 1996 under the initial cash balance plan account provisions of the SNETMPP for purposes of ensuring that the total SNET pension benefit shall never be less than the amount to which each such Eligible Executive was previously entitled before application of any plan amendments adopted effective December 13, 1995; provided, however, that such frozen pension benefit will not be separately available under the provisions of this Article B. (ii) Adjusted Career Income: (1) The "adjusted career income" referred to in Subparagraph 3(a)(i), of each Executive who retires during the period January 1, 1991 to December 13, 1995, inclusive, shall equal the product of the Executive's average annual compensation earned for the highest five full performance years preceding such Executive's date of retirement and such Executive's Term of Employment as of the date of retirement. For purposes of this Paragraph 3(a)(ii)(1), the term "compensation" shall mean an Executive's earned actual Short Term Incentive Award which is not more than 50% of the Annual Basic Pay as of December 31 of each performance year in which it is earned. (2) The "adjusted career income", referred to in Subparagraph 3(a)(i), of each Executive who retires during the period beginning January 1, 1989 to December 31, 1990 shall equal the product of the Executive's average annual compensation earned for the five full performance years preceding such Executive's date of retirement and such 26 Executive's Term of Employment as of the date of retirement. For purposes of this Paragraph 3(a)(ii)(2), the term "compensation" shall mean an Executive's earned actual Short Term Incentive Award which is not more than 50% of the Position Rate as of December 31 of each performance year in which it is earned. (3) The "adjusted career income", referred to in Subparagraph 3(a)(i), of each Executive who retired during the period beginning January 1, 1985 to December 31, 1988, shall equal the sum of (A) the product of the Executive's average annual compensation earned for the period from January 1, 1979 to October 31, 1983, inclusive, and such Executive's Term of Employment as of December 31, 1983, plus (B) such Executive's earned compensation for all periods after December 31, 1983 which are included in his Term of Employment. For purposes of this paragraph 3(a)(ii)(3), the term "compensation" shall mean an Executive's earned actual Short Term Incentive Award which is not more than 50% of the Position Rate as of December 31 of each performance year in which it is earned. (4) The "adjusted career income", referred to in Subparagraph 3(a)(i), of each Executive who retired during the period beginning September 15, 1983 to December 31, 1984, inclusive, shall equal the sum of (A) the product of the Executive's average annual compensation earned for the period from April 1, 1978 to March 31, 1983, inclusive, and such Executive's Term of Employment as of March 31, 1983, plus (B) such Executive's earned compensation for all periods after March 31, 1983 which are included in his Term of Employment. For purposes of this Paragraph 3(a)(ii)(4), the term "compensation shall mean an Executive's earned actual Short Term Incentive Award which is not more than 50% of the Position Rate as of December 31 of each performance year in which it is earned. (5) The "adjusted career income", referred to in Subparagraph 3(a)(i), of each Executive who retired during the period beginning January 31, 1982 to September 14, 1983, inclusive, shall equal the sum of (A) the product of the Executive's average annual compensation earned for the period from October 1, 1976 to September 30, 1981, inclusive, and such Executive's Term of Employment as of September 30, 1981, plus (B) such Executive's earned compensation for all periods after September 30, 1981 which are included in his Term of Employment. For purposes of this Paragraph 3(a)(ii)(5), the term "compensation" shall mean an Executive's earned actual Short Term Incentive Award which is not more than 15% of the Position Rate as of December 31 of each performance year in which it is earned. (6) The "adjusted career income", referred to in Subparagraph 3(a)(i), of each Executive who retired during the period beginning August 10, 1980 to January 30, 1982, inclusive, shall equal the sum of (A) the product of the Executive's average annual compensation earned for the period from January 1, 1975 to December 31, 1979, inclusive, and such Executive's Term of Employment as of December 31, 1979, plus (B) such Executive's earned compensation or all periods after December 31, 1979 which are included in his Term of Employment. For purposes of this Paragraph 3(a)(ii)(6), the term "compensation" shall mean an Executive's earned actual Short Term Incentive Award which 27 is not more than 15% of the Position Rate as of December 31 of each performance year in which it is earned. (b) Year of Retirement Proration When determining the extent to which the 15% or 50% limitation, respectively, may apply to limit the pensionable portion of the Short Term Incentive Award, the Position Rate will be prorated by multiplying such Position Rate by a fraction, the numerator of which shall be the number of months worked (to the next full month) in the final year of employment and the denominator of which shall be twelve. (c) Early Retirement Discount The monthly service benefit allowance, determined in accordance with the provisions of this Paragraph 3, for each Eligible Executive who is granted a service benefit for reasons other than total disability as a result of sickness or injury, shall be reduced by one- half percent (0.5%) for each calendar month or part thereof by which his age at time of retirement is less than 55 years, except that each Executive retired with thirty (30) or more years of service shall receive a monthly benefit allowance reduced by one-quarter percent (0.25%) for each calendar month or part thereof by which such Executive's age at the time of retirement is less than 55 years. (d) Deferred Benefit Amount The monthly benefit allowance for each Executive who terminated employment on or before January 1, 1996 and who is eligible for a deferred benefit under the provisions of Paragraph 2(b) of this Section 4 shall be calculated exclusively in accordance with the provisions specified as applicable to those receiving a benefit under Paragraph 2(a) or 2(c) of this Section 4 effective as of the date such Executive leaves the service of a Participating Company other than for reasons of transfer to another Participating Company, or the date which is the last day of the month in which the 65th birthday occurs, whichever is earlier, and, in any case, as if such Executive had retired on such date and no recomputation of the benefit shall be made after such date or as a result of amendments made to this Plan subsequent to such date. An Executive who leaves the service of a Participating Company with eligibility for a deferred benefit in accordance with Paragraph 2(b) of this Section 4 but is not entitled to any other class of pension or benefit shall not be considered a retiree pursuant to the SNETMPP or a retired Executive. (e) Automatic Survivor Annuity In the event of the death of an Executive who (i) is eligible to participate in this Plan pursuant to Paragraph 1 of this Section 4 as of December 8, 1993 and (ii) is on the Active Payroll as of the time of his death on or before January 1, 1996 and (iii) is eligible for a deferred benefit under Paragraph 2(b) of this Section 4 at the time of his death or who is 28 eligible for a service benefit under Paragraph 2(a) of this Section 4 at the time of his death and (iv) who leaves a Surviving Spouse married to him at the time of his death, such Surviving Spouse shall receive a survivor annuity in the amount of 45% of the benefit which would have been payable had such Executive retired with a service benefit, regardless of his actual eligibility therefore, on the date of his death; provided, however, that if an Executive has less than 10 years of service (as defined under the SNETMPP) and is eligible for deferred benefit under Section 4, Paragraph 2(b) of this Article B as of his date of death, the present value (as determined under the SNETMPP) of the automatic survivor annuity provided under this Paragraph 3(e) shall be distributed to the Surviving Spouse in a single lump sum as of the last day of the month following the month in which the Executive has died. For purposes of calculating the automatic survivor annuity provided in this Paragraph 3(e), the early retirement discount in Paragraph 3(c) of this Section 4 of this Article B shall not apply. No annuity or lump sum under this Paragraph 3(e) shall be payable at the death of a pensioner or former employee or upon the death of an Executive who does not have a Surviving Spouse. (f) Service Beyond Normal Retirement Age Service after the last day of the month in which an Executive attains Normal Retirement Age shall be considered in the same manner as is set forth in the SNETMPP. (g) Special Increases Monthly service and disability benefit payments as determined under Paragraphs 3(a) and (c) of this Section 4 to retired Executives, and automatic survivor annuity payments to Surviving Spouses married to an Executive at the time of his death as determined under Paragraph 3(e) of this Section 4, shall be increased by the same percentage and pursuant to the same terms and conditions as are set forth in the SNETMPP for similar forms of benefits. (h) Minimum Benefit The monthly benefit of (i) each Executive eligible to participate in the Plan during the period December 8, 1993 to December 13, 1995, inclusive, and (ii) each Executive in such executive position as of December 8, 1993 to December 13, 1995, inclusive, to the extent this monthly benefit exceeds the benefit provided in Paragraph 3(a)(i) of this Section 4, shall equal one- twelfth of the excess, if any, of (A) over (B) below, where-- (A) is the product of (i) for an Executive with less than twenty-five years of service, two percent (2%) and Term of Employment (not exceeding forty percent) multiplied by Average Annual Basic Pay; or (ii) for an Executive with twenty-five or more years of service, the product of one and six-tenths percent (1.6%) and Term of Employment multiplied by Average Annual Basic Pay. For this purpose, Average Annual Basic Pay shall mean Annual Basic Pay for the 36 month period immediately preceding the date the Executive terminates from service; 29 (B) is the sum of: (1) the annual amount, if any, payable under Paragraph 3(a)(i) of this Article B in a single life annuity form to the Executive as of the termination of employment date; (2) the annual amount, if any, payable under Article C of this Plan, payable in a single life annuity form to the Executive as of the termination of employment date; and (3) the annual amount, if any, payable under the SNETMPP, payable in a single life annuity form to the Executive as of the termination of employment date. The monthly benefit provided in this Paragraph 3(h) shall be subject to the early retirement discount, if any, as determined under Paragraph 3(c) of Section 4 of this Article B. Effective December 31, 1995, eligibility for a determination of a monthly benefit as provided in this Paragraph 3(h) shall be eliminated for all Executives on the Active Payroll on or after such date. 4. Payments to Executives Subject to Paragraph 3(e) of this Section 4 and Sections 7 and 9 of this Article B, benefits to an Executive (a) shall commence at the same time, (b) shall be distributed for as long as and (c) shall be distributed in the same form as the Executive's pension benefit under the SNETMPP. Payments under this Section 4 shall be calculated in accordance with the rules, procedures and assumptions utilized under the SNETMPP, except as otherwise expressly provided in this Article B. 5. No Surviving Spouse If an Executive dies before the date as of which his or her benefit commences under Section 4 of this Article B and he or she does not have a Surviving Spouse on his or her date of death, no benefit otherwise payable under this Section 4 shall be distributed after the death of the Executive with respect to the Executive. 6. Post-Termination Joint and Survivor Annuity a) Eligibility. The Post-Termination Joint and Survivor Annuity option ("Joint and Survivor Annuity") provides a monthly benefit to a Surviving Spouse upon the death, after termination of employment for reasons other than retirement with a service or disability benefit, of a Non-Grandfathered Executive. The benefit is payable to the Surviving Spouse only if the Non-Grandfathered Executive leaves a Participating Company with eligibility for a deferred vested pension under the SNETMPP and this Article B on or after August 10, 1980. If there is no Surviving Spouse, or if the Non-Grandfathered Executive waived the provisions 30 under this Paragraph 6, no Joint and Survivor Annuity benefit will be paid under this Section 4. b) Election of Benefit. A Non-Grandfathered Executive shall be deemed to have elected to receive the Joint and Survivor Annuity option for all benefits under this Section 4 if the Non-Grandfathered Executive has a Surviving Spouse as of the date the Executive commences deferred vested pension benefits under the SNETMPP; provided, however, that a Non-Grandfathered Executive may make a one- time irrevocable election to waive this Joint and Survivor Annuity option with respect to payments which would otherwise be made to a Surviving Spouse following the death of the Executive. Such election shall be made within sixty (60) days of an employee becoming classified as an Executive or within sixty (60) days of adoption of this election procedure, whichever is later, and shall permit the Non- Grandfathered Executive to waive the Joint and Survivor Annuity regardless of his marital status at the time of election. A Non- Grandfathered Executive shall not otherwise be entitled to the Joint and Survivor Annuity option under this Plan. c) Benefit Amount. If the Joint and Survivor Annuity option is applicable as of the date a Non-Grandfathered Executive is entitled to commence deferred vested pension benefits under this Section 4, such deferred vested pension benefits payable to the Non- Grandfathered Executive shall be reduced to eighty-five percent (85%) of such amount; provided, however, if the Non-Grandfathered Executive elects to commence receipt of such pension payments prior to the Normal Retirement Age, the aforementioned reduction shall be consistent with the early retirement factors (with joint and survivor annuity election) under the SNETMPP. If the Non-Grandfathered Executive's Surviving Spouse predeceases the Non-Grandfathered Executive, the aforementioned percentage reduction shall not be restored. Subject to Section 9 of this Article B, the amount to be paid the Surviving Spouse for as long as such Surviving Spouse survives the Executive shall be computed as of the time of commencement of such Executive's deferred vested pension as an amount equal to fifty percent (50%) of the reduced pension payable to the Executive under Section 4 of this Article B. 7. Deferral of Payments If an Executive, who terminates employment on or after September 8, 1993, elects the Pension Deferral Option in accordance with the terms and conditions under the SNETMPP, benefit payments under Section 4 of this Article B shall commence simultaneously with the commencement of the service pension under the SNETMPP. If the Executive who elected the Pension Deferral Option should die prior to commencement of benefit payments under this Article B, the provisions of Section 4, Paragraph 3(e) of this Article B shall apply. 8. Treatment During Subsequent Employment Employment with any Participating Company subsequent to retirement or termination of employment with entitlement to any type of benefit described in this Section 4 shall not suspend the right of a former Participant receiving pension payments or a person otherwise entitled to receive a pension to payment payments during the period he continues in such 31 employment and the form of distribution of such pension payments shall not be changed as a result of such employment. 9. Termination of Non-Qualified Pension Benefit Program Effective December 13, 1995, the provisions of Section 4 of this Article B will no longer be effective on the date that the last benefit payment is made pursuant to this Section 4. 32 SECTION 5. DEATH BENEFITS 1. Participation and Administration Only Executives who were on the Active Payroll as of September 17, 1989 shall be eligible under Section 5 of this Article B to receive a death benefit in an amount described below in Paragraph 2 while an Executive and remaining on the Active Payroll. Only those Executives who were eligible for a service pension on or before September 17, 1989 will be eligible under Section 5 of this Article B to receive a death benefit during retirement in an amount described below in Paragraph 2. The death benefits described in this Section 5 provide for active employee and retiree death benefits in addition to, and subject to the same terms and conditions and administered in the same manner as the Death Benefit provisions within the SNETMPP, except as is herein specified. 2. Definition of Death Benefit Amount For purposes of death benefits under Section 5 of this Article B, the death benefit amount is defined as follows: (a) For an Executive who dies while on the Active Payroll or who retires on or after October 31, 1981, the death benefit amount shall be the lesser of (i) the Executive's Standard Award in effect as of the earlier of retirement or death; (ii) 50% of the Executive's Position Rate as of the earlier of retirement or death; (iii) the Executive's Standard Award in effect as of January 1, 1992; or (iv) 50% of the Executive's Position Rate on such date. (b) For an Executive who retired during the period from August 10, 1980 through October 30, 1981, inclusive, the death benefit amount shall be the lesser of the Executive's Standard Award in effect as of his retirement, or 15% of the Executive's Position Rate as of retirement. 3. Payment of Death Benefits Payment of death benefits under this Section 5 shall be made as of the last day of the month following the month in which the Executive's death occurred. 4. Waiver of Benefit If a Grandfathered Executive is deemed to have waived the death benefit for which he was eligible under the SNETMPP, he will be deemed to have irrevocably waived the death benefit pursuant to Section 5 of this Article B as well. Effective November 1, 1991, no Grandfathered Executive shall be permitted to waive the death benefit or revoke an existing waiver of such death benefit under Article B of this Plan. 33 SECTION 6. POST-RETIREMENT LIFE INSURANCE SUPPLEMENT PROGRAM 1. Description The Post-Retirement Life Insurance Supplement Program makes up for the post-age 65 reduction in the level of Company- provided Group Life Insurance for Non-Grandfathered Executives and for individuals who become Executives after December 8, 1993 ("Eligible Individuals"). In combination with the post-retirement Company- provided level of Group Life Insurance, it assures a total death benefit equal to the Annual Basic Pay at retirement rounded to the coverage amount at retirement, to the extent required by Paragraph 4 of this Section 6. 2. Participation All persons who retire as an Eligible Individual from a Participating Company with a service benefit or disability benefit as defined under Section 4 of this Article B are participants in this program. 3. Beneficiary An Eligible Individual may name any person or persons, his or her estate, any organization or a trust as beneficiary. Beneficiary designations need not be the same as under other coverages. Beneficiary designations can be changed any time by submitting a new form to the Corporation or its delegate. In the event of death, the Post-Retirement Life Insurance Supplement Program provides a benefit that is distributed in a lump sum to the beneficiary or beneficiaries; if there are no surviving beneficiaries, the benefit is distributed in a lump sum to the Eligible Individual's estate. Payments are made as of the last day of the month following the month in which the Eligible Individual's date of death occurred. 4. Coverage Amounts The Company-provided level of Group Life Insurance equals Annual Basic Pay at the time of retirement rounded to the next higher $1,000 for Eligible Individual's retiring prior to April 1, 1986, and, for Eligible Individual's retiring on or after April 1, 1986, Annual Basic Pay shall be determined for purposes of this Section 6 as of the September 1 of the year immediately preceding the year of the Eligible Individual's retirement, rounded to the next higher $10,000. This level of coverage shall remain in effect through age 65. At age 66 and on each of the next four anniversaries of that coverage, coverage under the Company-provided Group Life Insurance is reduced by 10% until, during the year in which age 70 is attained, it equals 50% of the Company-provided level of Group Life Insurance. To offset this reduction, the Post-Retirement Life Insurance Supplement Program provides a schedule of death benefit coverage equal to: 34 10% of final active Company-provided Group Life Insurance beginning at age 66 increased to 20% at age 67 30% at age 68 40% at age 69 to a maximum of 50% at age 70 -- which continues in effect until death. Nothing contained in this Section 6 shall require the Corporation or any Participating Company to purchase life insurance on the life or lives of any Eligible Individuals. Benefits payable under this Section 6 shall represent an obligation of the Corporation or Participating Company, if applicable, and shall not entitle an Eligible Individual to rights or payments under any life insurance policy. 35 SECTION 7. POST-RETIREMENT SURVIVOR'S ANNUITY OPTION 1. Description The Post-Retirement Survivor's Annuity Option provides a monthly benefit to the eligible beneficiary (spouse or parent) upon the death, after retirement, of a Non-Grandfathered Executive. The benefit is payable to the beneficiary only if the Non-Grandfathered Executive retires from a Participating Company with a service pension or disability pension under the SNETMPP on or after August 10, 1980 and is a Non-Grandfathered Executive on the Active Payroll on December 8, 1993 and retired prior to January 1, 1996. 2. Beneficiary The benefit is payable, in the order of priority shown, to the eligible beneficiary as follows: (a) the Surviving Spouse, if living with the Non- Grandfathered Executive at the time of death; otherwise to (b) a surviving parent. (If both parents survive, benefit will be distributed in equal shares to both.) If there is no Surviving Spouse or parent, or if the Non- Grandfathered Executive waived the provisions of this Section 7 and terminated employment prior to January 1, 1996, no benefit will be distributed under this Section 7. 3. Election of Benefit A Non-Grandfathered Executive who was on the Active Payroll on December 8, 1993 and who retired prior to January 1, 1996 shall be deemed to have elected to receive the Survivor Annuity option for all benefits payable under Section 4 of this Article B if the Non- Grandfathered Executive is married or has a surviving parent as of the date the Executive commences benefits under the SNETMPP; provided, however, that a Non-Grandfathered Executive may make a one- time irrevocable election to waive this Survivor Annuity option with respect to payments which would otherwise be made to a Surviving Spouse or parent following the death of the Executive. Such election shall be made within sixty (60) days of an Executive becoming eligible for a benefit under Section 4 of this Article B prior to December 13, 1995 or within sixty (60) days of adoption of this election procedure, whichever is later, and shall permit the Non- Grandfathered Executive to waive the Survivor Annuity regardless of his marital status or whether he has parents surviving at the time of election. A Non-Grandfathered Executive shall not otherwise be entitled to a Survivor's Annuity option under this Article B. 36 4. Benefit Amount If the Survivor's Annuity option is applicable as of the date a Non-Grandfathered Executive is entitled to commence benefits under Section 4 of this Article B, the amount of the pension otherwise payable under Section 4 of this Article B to the Non-Grandfathered Executive shall be reduced to ninety percent (90%) of such amount. Notwithstanding the foregoing, if the Non-Grandfathered Executive's spouse, if any, and parents predecease the Non-Grandfathered Executive, the aforementioned percentage shall be increased from ninety percent (90%) to one hundred percent (100%) as of the first day of the month following the month in which the last surviving parent or spouse has died. Subject to Section 9 of this Article B, the amount to be distributed the annuitant for as long as such annuitant survives the Executive shall be computed as of the time of retirement of such Executive as an amount equal to fifty percent (50%) of the reduced pension payable to the Executive under Section 4 of this Article B. 37 SECTION 8. GENERAL PROVISIONS 1. Effective Date This Plan is effective with amendments through January 1, 1998. 2. Rights to Benefits Neither the action of the Board of Directors in establishing this Plan nor any action hereafter taken by the Board or the Committee shall be construed as giving to any employee a right to be retained in the service of any Participating Company or any right or claim to any benefit after discharge from the service of any Participating Company, unless the right to such benefit has accrued prior to such discharge. No employee shall have any right to a service or deferred benefit unless he meets the conditions specified in Paragraph 2(a) or 2(b) of Section 4 of the Plan, respectively, nor any right against any Participating Company to any benefit under the Plan other than the amount to which the employee has theretofore become entitled and which the Committee has directed be distributed to that employee under the Plan. Benefits previously awarded may be discontinued at any time at the sole discretion of the Corporation or any Participating Company in accordance with the terms of the Plan. In addition to the prerequisites for a service benefit, a deferred benefit, a disability benefit, and/or a death benefit set forth herein, an individual, or his annuitants or beneficiaries, as applicable, shall only be eligible for a benefit if the individual is an Executive with respect to the respective benefits at the time of retirement, termination of employment or death. There shall be no eligibility for benefits in the case of an individual who was an Executive for any period during his Term of Employment, but who is not an Executive at the time of his retirement, termination of employment or death. 3. Assignment or Alienation Assignment or alienation of pensions or other benefits under this Plan will not be permitted or recognized except as otherwise required by law. 4. Breaks in Service For purposes of this Plan, a break in service shall be defined and treated in the same manner as is set forth in the SNETMPP. 5. Leaves of Absence For purposes of this Plan, a leave of absence shall be defined and administered in the same manner as is set forth in the SNETMPP. 6. Lump Sum Payments A lump sum payment or payments to applicable beneficiaries and annuitants of retired Executives (except Grandfathered Executives) who have retired as of January 1, 1987 or who were Executives as of January 1, 1987 and eligible to participate in this Plan pursuant 38 to Paragraph 1 of Section 4 as of December 8, 1993 will be reasonably estimated so that applicable beneficiaries and annuitants shall receive a tax differential payment equal to the difference between (a) the beneficiary's or annuitant's assumed Federal income tax liability from payment of the SNETMPP death benefit and payment of this Article B's survivor annuity and death benefits and (b) the beneficiary's or annuitant's assumed Federal income tax liability had such benefits been distributed under the SNET Executive Life Insurance Program. 7. Multiple Participating Company Employment If an Executive of the Corporation is also an Executive of one or more other Participating Companies, any benefit to which such Executive may become entitled under the Plan shall be computed on the basis of the total combined pay which he is receiving from all such companies. Any maximum or minimum amounts fixed by the Plan for benefits shall apply to the total amount payable by all companies and not to the portion payable to any Participating Company or Companies. 8. Payment to Others Benefits payable to any person to whom an amount is or was payable under the Plan who is unable to execute a proper receipt may be distributed to other person(s) in accordance with the standards and procedures set forth in the SNETMPP. 9. Plan Termination The Board retains the right to terminate the Plan in whole or in part, and each Participating Company retains the right to withdraw from this Plan, at any time, for any reason, with or without notice. Unless the Executive provides prior written consent, however, said withdrawal or termination, as applicable, shall not affect the rights of any Executive, Surviving Spouse or parent to any benefit under this Article B to which such person may have previously become entitled as a result of the Executive's disability, death, termination of employment or Change in Control which occurred prior to the effective date of the withdrawal or termination. 10. Source of Payments Benefits arising under this Plan and all costs, charges, and expenses relating thereto will be payable from SNET's general assets. SNET may, however, establish a trust to pay such benefits and related expenses, provided such trust does not cause the Plan to be "funded" within the meaning of ERISA. To the extent trust assets are available, they may be used to pay benefits arising under this Plan and all costs, charges, and expenses relating thereto. To the extent that the funds held in the trust, if any, are insufficient to pay such benefits, costs, charges and expenses, SNET shall pay such benefits, costs, charges, and expenses from its general assets. 39 11. Unfunded Status The Plan at all times shall be entirely unfunded for purposes of the Code and ERISA and no provision shall at any time be made with respect to segregating any assets of a Participating Company for payment of any benefits hereunder. Funds that may be invested through a trust described in Paragraph 10 of Section 8 of this Article B continue for all purposes to be part of the general assets of the Participating Company which invested the funds. The Plan constitutes a mere promise by SNET and the Participating Companies to make payments, if any, in the future. No Participant, Surviving Spouse or any other person shall have any interest in any particular assets of a Participating Company by reason of the right to receive a benefit under the Plan and to the extent the Participant, Surviving Spouse or any other person acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of a Participating Company. 40 SECTION 9. CHANGE OF CONTROL Any provision of the Plan to the contrary notwithstanding, in the event of a Change of Control (as defined below), any benefit accrued as of and through the Change of Control, including, without limitation, by current Executives, retired Executives or their annuitants or beneficiaries, including those currently receiving payments under the Plan, shall not be subject to forfeiture or suspension and shall be distributed in a single lump sum on the last day of the month following the month in which the Change of Control occurred, for those individuals currently receiving payments under Article B of the Plan, and on the last day of the month following the month in which occurs the event (e.g., termination of employment, disability or death) giving rise to the obligations of the Company or Participating Company to pay such benefit, for those individuals not currently receiving payments under Article B of the Plan. For this purpose, the accrued benefit shall be calculated based upon the provisions of the Plan in effect immediately prior to the Change of Control as if the event giving rise to the obligation of the Corporation or Participating Company to pay such benefit pursuant to the preceding sentence had occurred on the date of the Change of Control and shall not be adversely affected because of any subsequent events, including, without limitation, termination or amendment of the Plan or the SNETMPP, or lack of continued status; provided, however, that any early retirement discount pursuant to Paragraph 2(c) of Section 4 of this Article B as in effect immediately prior to the Change of Control shall be taken into account, if applicable, to reduce such accrued benefit only based on actual date of retirement. For purposes of this Section 9 of Article B, a Change of Control shall mean: (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: (1) 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, (2) any acquisition by the Corporation, (3) any acquisition by any employee benefit plan (or related trust) participated in by the Corporation or any corporation controlled by the Corporation or (4) 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 Paragraph (C) of this Section 9 of this Article B 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 December 12, 1990, constitute the Board (the Board as of the above date shall be hereinafter referred to as the 41 "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this Section 9 of Article B, 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 provision) 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 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 form such Corporate Transaction and any Person beneficially owning, immediately prior to 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 42 other disposition to a corporation, with respect to which following such sale or other disposition, (l) 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 of 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 for, 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. 43 SECTION 10. PLAN MODIFICATION APPLICABLE TO ARTICLE B The Board may from time to time make changes in the Plan. In addition, the Senior Vice President-Organization Development of the Corporation (or any successor to that officer's responsibilities), with the concurrence of the Senior Vice President and General Counsel of the Corporation (or any successor to that officer's responsibilities), shall be authorized to make minor or administrative changes to the Plan, as well as changes dictated by the requirements of federal or state statutes applicable to any Participating Company or authorized or made desirable by such statutes. Such changes shall not affect the rights of any Executive, Surviving Spouse or parent, without the Executive's consent, to any benefit under the Plan to which such person may have previously become entitled as a result of a disability, death, termination of employment or a Change in Control which occurred prior to the effective date of such change. 44 ARTICLE C. SNET MID-CAREER PENSION PLAN PROGRAM SECTION 1. PURPOSE OF ARTICLE C OF THIS PLAN The purpose of this Article C of the Plan is to provide eligible management and highly compensated employees of the Corporation and its subsidiaries which have determined, with the consent of the Committee, to participate in this Plan, employer-provided benefits for certain unfunded single life pension payments, as set forth more fully herein, to eligible employees of the Corporation. The benefits provided under this Article C were formerly provided under the SNET Mid-Career Pension Plan effective with amendments through November 1, 1991 ("Predecessor Plan"), which is incorporated by reference into this Article C except as otherwise provided in this Article C. 45 SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE C OF THIS PLAN The terms in this Article C shall have the same meaning as defined in the Predecessor Plan, except for the definition of Participant which shall be as follows. 1. The word "Participant" shall mean an individual hired or rehired prior to December 8, 1993 at age 35 or older at Fourth Level or above and terminated employment at Fifth Level or above, who, if hired or rehired prior to November 18, 1991, has completed five years of service at Fifth Level or above prior to the last day of the month in which he reaches age 65, or who, if hired or rehired on or after November 18, 1991 and prior to December 8, 1993, has completed at least five years of full-time service at Fifth Level or above prior to the last day of the month in which he reaches age 65, and whose entire term of employment after November 18, 1991 was classified as full-time. 46 SECTION 3. ADMINISTRATION OF THIS ARTICLE C The administration of this Article C shall be in accordance with the restated provisions set forth in this Section 3 of Article C. 1. The Corporation shall be the Sponsor of the Plan and the Plan Administrator of the Plan as those terms are defined in the Pension Act. The Committee shall have the administrative responsibilities set forth below. 2. (a) 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 the Plan, except for powers herein granted or provided to be granted to others. (b) The procedures for adoption of by-laws, and rules of procedure, for the employment of a Secretary and assistants, with authority with respect to claims of Executives shall be the same as are set forth in the SNETMPP. (c) In accordance with the terms of the Plan, the Secretary of the Committee shall grant or deny claims for benefits under the Plan with respect to Executives and Participants and authorize disbursements according to the terms of this Plan. Adequate notice, pursuant to applicable law, shall be provided in writing to any Executive or beneficiary whose claim has been denied, setting forth the specific reasons for such denial and any other information required to be furnished under the Pension Act. 3. The review and appeal procedures for Executives whose claims have been denied shall be the same as those procedures set forth in the SNETMPP. 4. The Committee shall serve as the final review committee under the Plan, with the authority to determine conclusively for all parties any and all questions arising from administration of the Plan, and shall have sole and complete discretionary authority and control to manage the operation and administration of the Plan, including, but not limited to, the determination of all questions relating to eligibility for participation and benefits, interpretation of all Plan provisions, determination of the amount and kind of benefits payable to any Executive or Surviving Spouse, and the construction of disputed and doubtful terms. Such decisions by the Committee shall be conclusive and binding on all parties and not subject to further review. 5. The expenses of the Committee in administering the Plan shall be borne by the Participating Companies. 6. The Corporation, the Company 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 allocate responsibilities for the operation and administration of the Plan consistent with the Plan's terms. The Corporation and other named fiduciaries may designate in writing other persons to carry out their respective 47 responsibilities under the 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 the Plan. 48 SECTION 4. MID-CAREER PENSION BENEFITS The benefits determined in this Section 4 shall be in accordance with the provisions of the Predecessor Plan, except as modified by the following provisions of this Section 4 of Article C. 1. Participation All persons who were eligible Participants on or before December 8, 1993 are deemed Participants in Section 4 of this Article C and the Predecessor Plan. 2. Mid-Career Pension Benefit Effective December 13, 1995, for all eligible Participants on the active payroll on such date, the monthly benefit provided under this Article C and the Predecessor Plan shall be determined as of December 13, 1995 and shall not, in any year subsequent to 1995, be increased or decreased. Such frozen benefit determined under this Section 4, Paragraph 2 of this Article C shall not be included with the accrued benefits calculated for each such Eligible Executive effective January 1, 1996 under the initial cash balance plan provisions of Section 4 of the SNETMPP; provided, however, that in the event that a comparison of pension benefit amounts calculated in accordance with the pension formula provisions, as in effect as of December 13, 1995, under Article V of the SNETMPP, Section 4, Paragraph 3(I) of Article B of this Plan, and the "Frozen Mid-career Pension Benefit calculated under this Section 4, Paragraph 2 of Article C (collectively referred to herein as the "12/13/95 Total Frozen SNET Pension Benefit Amount"), is higher than the monthly pension benefit determined under the initial opening cash balance plan provisions and the ongoing cash balance plan provisions effective on and after January 1, 1996 as set forth in Article V of the SNETMPP (referred to herein as the "1/1/96 SNETMPP Benefit"), each eligible Participant shall continue to be eligible to receive all or a portion of such Frozen Mid-career Pension Benefit calculated under this Section 4, Paragraph 2 of Article C to the extent such 12/13/95 Total Frozen SNET Pension Benefit Amount exceeds the 1/1/96 SNETMPP Benefit, until such time that the monthly benefit amount determined solely in accordance with the provisions of Article V of the SNETMPP as in effect on or after January 1, 1996 exceeds the 12/13/95 Total Frozen SNET Pension Benefit Amount described herein, at which time all eligibility for benefits payable under this Article C to such Participants shall cease. 3. Termination of Non-Qualified Pension Benefit The provisions of this Section 4 will no longer be effective on the date that the last benefit payment is made pursuant to this Section 4. 49 SECTION 5. GENERAL PROVISIONS The general provisions of benefits of this Article C shall be in accordance with the restated provisions set forth in this Section 5 of Article C. 1. Effective Date This Plan is effective with amendments through January 1, 1998. 2. Rights to Benefits Neither the action of the Board of Directors in establishing this Plan nor any action hereafter taken by the Board or the Committee shall be construed as giving to any employee a right to be retained in the service of any Participating Company or any right or claim to any benefit after discharge from the service of any Participating Company, unless the right to such benefit has accrued prior to such discharge. No employee shall have any right to a service or deferred benefit unless he meets the conditions specified in Section 4 of this Article C and the Predecessor Plan, respectively, nor any right against any Participating Company to any benefit under the Plan other than the amount to which the employee has theretofore become entitled and which the Committee has directed be distributed to that employee under the Plan. Benefits previously awarded may be discontinued at any time at the sole discretion of the Corporation or any Participating Company in accordance with the terms of the Plan. In addition to the prerequisites for a service benefit, a deferred benefit, a disability benefit, and/or a death benefit set forth herein, an individual shall only be eligible for a benefit if the individual is an Executive with respect to the respective benefits at the time of retirement, termination of employment or death. There shall be no eligibility for benefits in the case of an individual who was an Executive for any period during his Term of Employment, but who is not an Executive at the time of his retirement, termination of employment or death. 3. Assignment or Alienation Assignment or alienation of pensions or other benefits under this Plan will not be permitted or recognized except as otherwise required by law. 4. Plan Termination The Board retains the right to terminate the Plan in whole or in part, and each Participating Company retains the right to withdraw from this Plan, at any time, for any reason, with or without notice. Unless the Executive provides prior written consent, however, said withdrawal or termination, as applicable, shall not affect the rights of any Executive to any benefit under this Article C to which such person may have previously become entitled as a result of the Executive's disability, death, termination of employment or Change in Control which occurred prior to the effective date of the withdrawal or termination. 50 5. Source of Payments Benefits arising under this Plan and all costs, charges, and expenses relating thereto will be payable from SNET's general assets. SNET may, however, establish a trust to pay such benefits and related expenses, provided such trust does not cause the Plan to be "funded" within the meaning of ERISA. To the extent trust assets are available, they may be used to pay benefits arising under this Plan and all costs, charges, and expenses relating thereto. To the extent that the funds held in the trust, if any, are insufficient to pay such benefits, costs, charges and expenses, SNET shall pay such benefits, costs, charges, and expenses from its general assets. 6. Unfunded Status The Plan at all times shall be entirely unfunded for purposes of the Code and ERISA and no provision shall at any time be made with respect to segregating any assets of a Participating Company for payment of any benefits hereunder. Funds that may be invested through a trust described in Section 6 of this Article C continue for all purposes to be part of the general assets of the Participating Company which invested the funds. The Plan constitutes a mere promise by SNET and the Participating Companies to make payments, if any, in the future. No Participant, Surviving Spouse or any other person shall have any interest in any particular assets of a Participating Company by reason of the right to receive a benefit under the Plan and to the extent the Participant, Surviving Spouse or any other person acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of a Participating Company. 51 SECTION 6. CHANGE OF CONTROL The provisions of this Article C in the event of a Change of Control shall be in accordance with the restated provisions set forth in this Section 6 of Article C. Any provision of the Plan to the contrary notwithstanding, in the event of a Change of Control (as defined below), any benefit accrued as of and through the Change of Control, including, without limitation, by current Executives, retired Executives or their annuitants or beneficiaries, including those currently receiving payments under the Plan, shall not be subject to forfeiture or suspension and shall be distributed in a single lump sum on the last day of the month following the month in which the Change of Control occurred, for those individuals currently receiving payments under Article C of the Plan, and on the last day of the month following the month in which occurs the event (e.g., termination of employment, disability or death) giving rise to the obligations of the Company or Participating Company to pay such benefit, for those individuals not currently receiving payments under Article C of the Plan. For this purpose, the accrued benefit shall be calculated based upon the provisions of the Plan in effect immediately prior to the Change of Control as if the event giving rise to the obligation of the Corporation or Participating Company to pay such benefit pursuant to the preceding sentence had occurred on the date of the Change of Control and shall not be adversely affected because of any subsequent events, including, without limitation, termination or amendment of the Plan or the SNETMPP, or lack of continued status; provided, however, that any early retirement discount pursuant to Paragraph 2(c) of Section 4 of this Article C as in effect immediately prior to the Change of Control shall be taken into account, if applicable, to reduce such accrued benefit only based on actual date of retirement. For purposes of this Section 6 of Article C, a Change of Control shall mean: (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: (1) 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, (2) any acquisition by the Corporation, (3) any acquisition by any employee benefit plan (or related trust) participated in by the Corporation or any corporation controlled by the Corporation or (4) 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 Paragraph (C) of this Section 6 of this Article C are satisfied; or 52 (B) a change in the composition of the Board of Directors of the Corporation (the "Board") such that the individuals who, as of December 12, 1990, constitute the Board (the Board as of the above date shall be hereinafter 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 6 of Article C, 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 provision) 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 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 form such Corporate Transaction and any Person beneficially owning, immediately prior to 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 53 (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, (l) 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 of 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 for, 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. 54 SECTION 7. PLAN MODIFICATION APPLICABLE TO ARTICLE C The provisions for modification of this Article C shall be in accordance with the restated provisions set forth in this Section 7 of Article C. The Board may from time to time make changes in the Plan. In addition, the Senior Vice President-Organization Development of the Corporation (or any successor to that officer's responsibilities), with the concurrence of the Senior Vice President and General Counsel of the Corporation (or any successor to that officer's responsibilities), shall be authorized to make minor or administrative changes to the Plan, as well as changes dictated by the requirements of federal or state statutes applicable to any Participating Company or authorized or made desirable by such statutes. Such changes shall not affect the rights of any Executive, without the Executive's consent, to any benefit under the Plan to which such person may have previously become entitled as a result of a disability, death, termination of employment or a Change in Control which occurred prior to the effective date of such change. EX-10.2 3 SNET MANAGEMENT PENSION PLAN A summary of amendments to the SNET Management Pension Plan ("Plan") is as follows: Effective July 9, 1997: Springwich Cellular Limited Partnership shall be a Participating Company. Effective August 27, 1997: Southern New England Telecommunications Corporation is designated as the Plan Administrator as defined by ERISA Effective September 15, 1997: Removal of unnecessary or extraneous language, such as Trust provisions which are already in the Trust Agreement. Simplification of Plan Language to facilitate ease of participant understanding. Effective January 1, 1998: Reinstated Uraguay Round Agreements Act (GATT) provisions applicable to the determination of minimum and maximum pension distributions. Eliminated mortality rate assumptions applicable to the determination of maximum pension distributions. EX-10.3 4 SNET 1986 STOCK OPTION PLAN The Plan is amended as follows: (1) Adding the following sentence to the end of the first paragraph of Section 9(c): Notwithstanding the foregoing, no optionee shall be eligible to make an Election (or otherwise elect to surrender his Stock Compensation in exchange for a cash payment as contemplated by this Section 9(c)) with respect to any Change of Control transaction involving SBC Communications Inc. that is accounted for as a pooling of interests transaction. EX-10.4 5 SNET EXECUTIVE RETIREMENT SAVINGS PLAN With amendments through January 1, 1998 January 1998 TABLE OF CONTENTS SECTION 1. PURPOSE 1 SECTION 2. DEFINITIONS 1 SECTION 3. FUNDING 2 SECTION 4. ADMINISTRATION 3 SECTION 5. CLAIMS PROCEDURE 3 SECTION 6. MISCELLANEOUS 4 SECTION 7. PLAN TERMINATION 4 SECTION 8. SOURCE OF PAYMENTS 4 SECTION 9. UNFUNDED STATUS 5 SECTION 10. CHANGE OF CONTROL 5 SECTION 11. PLAN MODIFICATION 8 ARTICLE A. EXECUTIVE RETIREMENT SAVINGS PROGRAM SECTION 1. PURPOSE OF ARTICLE A OF THIS PLAN 9 SECTION 2. ADDITIONAL DEFINITIONS APPLICABLE UNDER ARTICLE A 9 SECTION 3. PARTICIPATION UNDER ARTICLE A 10 SECTION 4. RESTORATION ALLOCATION & INCENTIVE AWARD ALLOCATION 10 SECTION 5. PAYMENT OF EXECUTIVE RETIREMENT SAVINGS PLAN ACCOUNT 12 ARTICLE B. EMPLOYEE RETIREMENT SAVINGS PROGRAM SECTION 1. PURPOSE OF ARTICLE B OF THIS PLAN 13 SECTION 2. ADDITIONAL DEFINITIONS APPLICABLE UNDER ARTICLE B 13 ARTICLE B. EMPLOYEE RETIREMENT SAVINGS PROGRAM (CONTINUED) SECTION 3. PARTICIPATION UNDER ARTICLE B 14 SECTION 4. RESTORATION ALLOCATION 14 SECTION 5. PAYMENT OF EMPLOYEE RETIREMENT SAVINGS PLAN ACCOUNT 15 SNET EXECUTIVE RETIREMENT SAVINGS PLAN SECTION 1. PURPOSE The purpose of the SNET Executive Retirement Savings Plan (the "Plan") is to provide certain management and highly compensated employees of Southern New England Telecommunications Corporation (the "Corporation") (and its subsidiaries which have determined, with the consent of the Committee, to participate in this Plan), with certain contributions that would have been provided to them under the SNET Management Retirement Savings Plan (the "Savings Plan") if pensionable compensation were not subject to the limitation imposed by Section 401(a)(17) of the Code and, certain executives with an additional contribution based on the amount of Short Term Incentive Award deferred by them. The Plan is intended to constitute an "unfunded plan for deferred compensation for a select group of management or highly compensated employees for purposes of Title 1 of ERISA. The Plan shall consist of two components: (1) Article A which contains the program available for executive-level employees; and (2) Article B which contains the program available for management employees below the executive- level. SECTION 2. DEFINITIONS When used herein with initial capital letters, each of the following terms shall have the corresponding meaning set forth below unless a different meaning is plainly required by the context in which the term is used: "Beneficiary" shall have the meaning provided under Article A or Article B of this Plan, as applicable. 1 "Board" shall mean the Board of Directors of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Committee" shall mean the Employees' Benefit Committee under the SNET Management Retirement Savings Plan. "Company" shall mean The Southern New England Telephone Company and, where applicable, the Board, a committee thereof, or its authorized representatives. "Corporation" shall mean Southern New England Telecommunications Corporation. "Deferral Plan" shall mean the SNET Incentive Award Deferral Plan. "Employer" shall mean the Corporation and any other company (or portion thereof) which is a Participating Company in the Savings Plan. "ERISA" shall mean the Employee Retirement Income Security Act of 1974 as it may be amended from time to time. "Participant" shall mean an employee of an Employer who is eligible to participate in the Plan pursuant to Article A or Article B, as applicable. "Plan Year" shall mean the calendar year. "Salary" shall have the same meaning as provided in the Savings Plan but shall also include amounts disregarded pursuant to Section 401(a)(17) of the Code. "Savings Plan" shall mean the SNET Management Retirement Savings Plan. SECTION 3. FUNDING Amounts payable under this Plan shall be "unfunded," as that term is used in Sections 201(2), 301(a)(3), 401(a)(1) and 4021(a)(6) of ERISA with respect to unfunded plans maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees, and the Plan shall be administered in a manner that will ensure that amounts payable hereunder are unfunded and that Participants 2 will not be considered to have received a taxable economic benefit prior to the time at which amounts are actually payable hereunder. Accordingly, a Participant's Plan account shall be only a bookkeeping account, and no Employer shall be required to segregate or earmark any of its assets for the benefit of Participants or their spouses or other beneficiaries, with each such person having only a contractual right against the Employer for amounts payable hereunder. The rights and interest of a Participant under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by a Participant or any person claiming under or through a Participant, nor shall they be subject to the debts, contracts, liabilities or torts of a Participant or anyone else prior to payment. SECTION 4. ADMINISTRATION The Plan Administrator as that term is defined under ERISA is the Corporation and the Plan shall be operated under the direction of the Corporation or its agents. The calculation of all amounts payable under the Plan shall be performed by the Corporation or its agents, and such calculations and the Corporation's or its agent's decisions in all other matters involving the interpretation or application of the Plan shall be final and binding on all persons. SECTION 5. CLAIMS PROCEDURE All claims by a Participant, spouse or beneficiary for amounts payable under this Plan shall be determined under the claims procedure in effect under the Savings Plan applicable to such person on the date that such claims are submitted. The person or entity authorized to determine final claims appeals under the Savings Plan shall act for the Corporation for the purpose of such claims determination. 3 SECTION 6. MISCELLANEOUS 6.1 Plan Not an Employment Contract. Neither the adoption of the Plan by the Employer, nor any action of the Employer or the Committee under the Plan, nor participation in the Plan or failure to participate in the Plan by any person, shall be held or construed to confer upon any person any legal right to be continued as an employee of any Employer. All employees, regardless of whether they participate in the Plan, shall be subject to discharge to the same extent as they would have been if the Plan had never been adopted. 6.2 Headings. Headings are included in the Plan for convenience only and are not substantive provisions of the Plan. 6.3 Applicable Law. The interpretation of the provisions and the administration of the Plan shall be governed by the laws of the State of Connecticut without regard to principles of conflicts of laws, to the extent not preempted by federal law. SECTION 7. PLAN TERMINATION The Board retains the right to terminate the Plan in whole or in part, and each Participating Company retains the right to withdraw from this Plan, at any time, for any reason, with or without notice. Unless the Participant provides prior written consent, however, said withdrawal or termination, as applicable, shall not affect the rights of any Participant or Beneficiary to any benefit under the Plan to which such person may have previously become entitled prior to the effective date of the withdrawal or termination. SECTION 8. SOURCE OF PAYMENTS Benefits arising under this Plan and all costs, charges, and expenses relating thereto will be payable from SNET's general assets. SNET may, however, establish a trust to pay such benefits and related expenses, provided such trust does not cause the Plan to be 4 "funded" within the meaning of ERISA. To the extent trust assets are available, they may be used to pay benefits arising under this Plan and all costs, charges, and expenses relating thereto. To the extent that the funds held in the trust, if any, are insufficient to pay such benefits, costs, charges and expenses, SNET shall pay such benefits, costs, charges and expenses from its general assets. SECTION 9. UNFUNDED STATUS The Plan at all times shall be entirely unfunded for purposes of the Code and ERISA and no provision shall at any time be made with respect to segregating any assets of a Participating Company for payment of any benefits hereunder. Funds that may be invested through a trust described in Section VIII of the Plan shall continue for all purposes to be part of the general assets of the Participating Company which invested the funds. The Plan constitutes a mere promise by SNET and the Participating Companies to make benefit payments, if any, in the future. No Participant, Beneficiary or any other person shall have any interest in any particular assets of a Participating Company by reason of the right to receive a benefit under the Plan and to the extent the Participant, Beneficiary or any other person acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of a Participating Company. SECTION 10. CHANGE OF CONTROL Any provision of the Plan to the contrary notwithstanding, in the event of a Change of Control (as defined below), any benefit accrued as of the date of the Change of Control, shall not be subject to forfeiture and 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 for those Participants currently eligible to receive a distribution, other than a hardship distribution, under the Plan, and on the last day of the month following the month in which the event occurs (e.g., termination of 5 employment, disability or death) giving rise to the obligations of SNET or Participating Company to pay such benefit for those Participants not currently eligible to receive a distribution, other than a hardship distribution, under the Plan. For this purpose, the accrued benefit shall be calculated based upon the provisions of the Plan in effect immediately prior to the Change of Control and shall not be adversely affected because of any subsequent events, including, without limitation, termination or amendment of the Plan or the Savings Plan or the Deferral Plan, or lack of continued status. For purposes of this Section X, a Change of Control shall mean: (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: (1) 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, (2) any acquisition by the Corporation, (3) any acquisition by any employee benefit plan (or related trust) participated in by the Corporation or any corporation controlled by the Corporation or (4) 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 Paragraph (C) of this Section X 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 December 12, 1990, constitute the Board (the Board as of the above date shall be hereinafter 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 X, 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 member of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this provision) 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 6 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 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 form such Corporate Transaction and any Person beneficially owning, immediately prior to such Corporate Transaction, directly or indirectly, 20% or more of 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 of 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 for, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of 7 such corporation entitle 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. SECTION 11. PLAN MODIFICATION The Board may from time to time make changes in the Plan. In addition, the Senior Vice President-Organization Development of the Corporation (or any successor to that officer's responsibilities), with the concurrence of the Senior Vice President and General Counsel of the Corporation (or any successor to that officer's responsibilities), shall be authorized to make minor or administrative changes to the Plan, as well as changes dictated by the requirements of federal or state statutes applicable to any Participating Company or authorized or made desirable by such statutes. Such changes shall not affect the rights of any Participant, or Beneficiary, without the Participant's consent, to any benefit under the Plan to which such person may have previously become entitled under the terms of the Plan. 8 ARTICLE A. EXECUTIVE RETIREMENT SAVINGS PROGRAM SECTION 1. PURPOSE OF ARTICLE A OF THIS PLAN The purpose of this Article A, the Executive Retirement Savings Program, is to provide certain highly compensated employees with certain contributions that would have been provided to them under the SNET Management Retirement Savings Plan (the "Savings Plan") if pensionable compensation were not subject to the limitation imposed by Section 401(a)(17) of the Code and with an additional contribution based on the amount of Short Term Incentive Award deferred by them. SECTION 2. ADDITIONAL DEFINITIONS APPLICABLE UNDER ARTICLE A When used in this Article A with initial capital letters, each of the following terms shall have the corresponding meaning set forth below unless a different meaning is plainly required by the context in which the term is used: "Beneficiary" shall mean the person or persons entitled to receive distributions under the Deferral Plan, or if the Participant did not elect to participate in the Deferral Plan, the Savings Plan, upon or after the death of a Participant. "Executive Retirement Savings Plan Account" shall mean the account provided for in Section 4 of this Article A. "Hardship" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in financial hardship for such Participant if a distribution under the Plan were not permitted, as determined by the person or entity designated under the Deferral Plan to make such determination in their sole discretion. The 9 person or entity so designated may require the Participant to submit whatever documentation the person or entity deems appropriate to make such determination of Hardship. "Incentive Award Allocation" shall mean allocations to a Participant's Executive Retirement Savings Plan Account, based on the amount of Short Term Incentive Award that is deferred, as described in Section 3 of this Article A. "Savings Plan Restoration Allocation" shall mean allocations to a Participant's Executive Retirement Savings Plan Account, based on potential matching contributions to the Savings Plan, as described in Section 4 of this Article A. SECTION 3. PARTICIPATION UNDER ARTICLE A Effective January 1, 1994, each employee of an Employer who is eligible to participate in the Deferral Plan and whose compensation from the Employer exceeds the limitations of Section 401(a)(17) of the Code and whose matching contributions by an Employer under the Savings Plan are limited on account of such limitations shall be a Participant in the Plan as of April 1 of the Plan Year following a Plan Year in which such limitations occur, provided such executive is on the active payroll or an approved leave of absence as of that date. Each executive participating in the SNET Incentive Award Deferral Plan shall be a Participant in the Plan upon the granting of an award payment and the election of such Participant to defer receipt of such award under such Plan, provided such executive is on the active payroll or an approved leave of absence as of the date any such award is granted. SECTION 4. RESTORATION ALLOCATION AND INCENTIVE AWARD ALLOCATION 4.1 Benefits under this Plan shall consist of two components, one based on potential matching contributions and the other on deferred Short Term Incentive Awards. For each Participant who, for a Plan Year, has made pre-tax contributions to the Savings Plan in an amount equal to the limitation under Section 402(g) of the Code or the maximum pre-tax 10 contributions permitted under the terms of the Savings Plan, a Savings Plan Restoration Allocation shall be credited to the Participant's Executive Retirement Savings Plan Account for each Plan Year, as of the end of the Plan Year. The Savings Plan Restoration Allocation shall be the amount of additional matching contributions that would have been made by the Employer to the Savings Plan on behalf of the Participant had the limitations of Section 401(a)(17) of the Code not been applicable in calculating such matching contributions. In determining this amount, the amount of the Participant's deferral of their Short Term Incentive Award under the Deferral Plan shall be added to the amount contributed by the Participant to the Savings Plan to the extent that the Participant was foreclosed from contributing 6% of their salary to the Savings Plan due to the limits imposed under Section 402(g) of the Code. Such allocation shall be credited as of the first day of April of the Plan Year following the Plan Year for which such matching contributions would have been made to the Savings Plan but for the limitations of Sections 401(a)(17) and 402(g) of the Code. The second component shall consist of an Incentive Award Allocation to be made to the Participant's Executive Retirement Savings Plan Account equal to the amount that would have been made as a matching contribution to the Savings Plan had (i) the executive's deferred Short Term Incentive Award been contributed to the Savings Plan, (ii) the limitations of Section 401(a)(17) of the Code not been applicable, (iii) the definition of Salary under the Savings Plan been limited to the Participant's Short Term Incentive Award, and (iv) matching contributions pursuant to the ESOP portion of the Savings Plan not been made. Such allocation shall be credited when the Short Term Incentive Award is granted. In addition, the Secretary of the Committee with the advice of legal counsel, may provide for an additional amount to be credited to a Participant's Savings Plan Restoration Allocation account if the Secretary determines that the additional credit is appropriate, due to 11 the impact of administrative actions undertaken to insure compliance with applicable law, provided that the total of the amount credited by the Secretary hereunder shall not exceed 4% of the Participant's Salary for the Plan Year for which the credit is given. 4.2 Interest shall be credited on each Participant's Executive Retirement Savings Plan Account, in accordance with the interest crediting provisions of the Deferral Plan. SECTION 5. PAYMENT OF EXECUTIVE RETIREMENT SAVINGS PLAN ACCOUNT The amount credited to a Participant's Executive Retirement Savings Plan Account, to the extent vested, shall be paid to the Participant, or to the Participant's Beneficiary in the event of death, in accordance with the distribution provisions of the Deferral Plan when the Participant ceases to be employed by any Employer due to the Participant's retirement, termination of employment, death or a Change in Control. A Participant may also receive a distribution of his benefits under the Plan, while still employed by any Employer, in the case of a Hardship, to the extent of the amount necessary to meet such Hardship. A Participant shall be vested in the amounts credited to an Executive Retirement Savings Plan Account to the same extent as the Participant is vested in amounts attributable to Employer matching contributions to the Savings Plan. 12 ARTICLE B. EMPLOYEE RETIREMENT SAVINGS PROGRAM SECTION 1. PURPOSE OF ARTICLE B OF THIS PLAN The purpose of this Article B, the Employee Retirement Savings Program, is to provide certain highly compensated employees with certain contributions that would have been provided to them under the SNET Management Retirement Savings Plan (the "Savings Plan") if pensionable compensation were not subject to the limitation imposed by Section 401(a)(17) of the Code. SECTION 2. ADDITIONAL DEFINITIONS APPLICABLE UNDER ARTICLE B When used in this Article B with initial capital letters, each of the following terms shall have the corresponding meaning set forth below unless a different meaning is plainly required by the context in which the term is used: "Beneficiary" shall mean the person or persons entitled to receive distributions under the Savings Plan upon or after the death of a Participant. "Employee Retirement Savings Plan Account" shall mean the account provided for in Section 4 of this Article B. "Hardship" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in financial hardship for such Participant if a distribution under the Plan were not permitted, as determined by the person or entity designated under the Savings Plan to make such determination in their sole discretion. The person or entity so designated may require the Participant to submit whatever documentation the person or entity deems appropriate to make such determination of Hardship. 13 "Savings Plan Restoration Allocation" shall mean allocations to a Participant's Employee Retirement Savings Plan Account, based on potential matching contributions to the Savings Plan, as described in Section 4 of this Article B. SECTION 3. PARTICIPATION UNDER ARTICLE B Effective March 13, 1996, each employee of an Employer who is not eligible to participate in the Deferral Plan and whose compensation from the Employer exceeds the limitations of Section 401(a)(17) of the Code and whose matching contributions by an Employer under the Savings Plan are limited on account of such limitations shall be a participant in the Plan as of April 1 of the Plan Year following a Plan Year in which such limitations occur, provided such employee is on the active payroll or on an approved leave of absence as of that date. SECTION 4. RESTORATION ALLOCATION 4.1 For each Participant who, for a Plan Year, has made pre-tax contributions to the Savings Plan in an amount equal to the limitation under Section 402(g) of the Code or the maximum pre-tax contributions permitted under the terms of the Savings Plan, a Savings Plan Restoration Allocation shall be credited to the Participant's Employee Retirement Savings Plan Account for each Plan Year, as of the end of the Plan Year. The Savings Plan Restoration Allocation shall be the amount of additional matching contributions that would have been made by the Employer to the Savings Plan on behalf of the Participant had the limitations of Section 401(a)(17) of the Code not been applicable in calculating such matching contributions. Such allocation shall be credited as of the first day of April of the Plan Year following the Plan Year for which such matching contributions would have been made to the Savings Plan but for the limitations of Sections 401(a)(17) and 402(g) of the Code. 14 In addition, the Secretary of the Committee with the advice of legal counsel, may provide for an additional amount to be credited to a Participant's Savings Plan Restoration Allocation account if the Secretary determines that the additional credit is appropriate due to the impact of administrative actions undertaken to insure compliance with applicable law, provided that the total of the amount credited by the Secretary hereunder shall not exceed 4% of the Participant's Salary for the Plan Year for which the credit is given. 4.2 Interest shall be credited on each Participant's Employee Retirement Savings Plan Account, in accordance with the interest crediting provisions of the Deferral Plan. SECTION 5. PAYMENT OF EMPLOYEE RETIREMENT SAVINGS PLAN ACCOUNT The amount credited to a Participant's Employee Retirement Savings Plan Account, to the extent vested, shall be paid to the Participant, or to the Participant's Beneficiary in the event of death, as soon as administratively practicable following the month in which the Participant ceases to be employed by any Employer due to the Participant's retirement, termination of employment, death or a Change in Control. A Participant may also receive a distribution of his benefits under the Plan, while still employed by any Employer, in the case of a Hardship, to the extent of the amount necessary to meet such Hardship. A Participant shall be vested in the amounts credited to an Employee Retirement Savings Plan Account to the same extent as the Participant is vested in amounts attributable to Employer matching contributions to the Savings Plan. 15 EX-10.5 6 SNET 1995 STOCK INCENTIVE PLAN The Plan is amended as follows: (1) Adding the following sentence to the end of the first paragraph of Section 12: Notwithstanding the foregoing, no participant shall be eligible to make an Election (or otherwise elect to surrender his Stock Compensation in exchange for a cash payment as contemplated by this Section 12) with respect to any Change of Control transaction involving SBC Communications Inc. that is accounted for as a pooling of interests transaction. EX-10.6 7 SNET Stay Bonus Program 1. Purpose. It is essential that Southern New England Telecommunications Corporation ("SNET") be managed and operated efficiently and effectively during the transition period relating to SNET's acquisition by SBC Communications Inc. ("SBC"). It is natural for persons to be concerned about their careers and consider changes during times of uncertainty. To assure that SNET is able to retain employees needed to discharge its commitments to customers during the extended transition process, SNET has implemented the SNET Stay Bonus (the "Program"). 2. Effective Date. The Program shall be effective as of January 5, 1998 (the "Effective Date"). 3. Definitions. The following terms as used herein have the meanings set forth below: (a) "Base Salary" means an Eligible Employee's annual basic wage rate (or its full time equivalent for part time employees) in effect on the Payment Date. (b) "Bonus" means an Eligible Employee's target bonus opportunity in effect on the Payment Date or such higher bonus amount actually earned by an Eligible Employee as of the Payment Date. (c) "Eligible Employee" means each Salary Band 4 and Above Executive of SNET who is on the active payroll or on a leave of absence with a re-employment guarantee. "Eligible Employee" shall not include individuals who are at the Payment Date classified by SNET as independent contractors or "leased employees" as defined in Section 414(n) of the Internal Revenue Code of 1986, as amended. (d) "Merger Agreement" means the Agreement and Plan of Merger dated as of January 4, 1998 by and among Patriot, Silver and Silver Ventures, Inc. (e) "Payment Date" means the earlier of the Effective Time as defined in the Merger Agreement or the date of termination of the Merger Agreement. (f) "Stay Bonus" means the sum of an eligible employee's Base Salary and Bonus. 4. Benefits. The Company shall pay, in a cash lump sum net of any applicable withholding or employment taxes, the applicable Stay Bonus to each Eligible Employee who is employed by the Company on the Payment Date. An Eligible Employee who is not employed by the Company on the Payment Date shall not be entitled to receive the Stay Bonus that otherwise would be due. 5. Rights of Employees. The Program is for the benefit of each Eligible Employee and his or her heirs and representatives and shall be enforceable by them in accordance with its terms. The Program is not a contract of employment between the Company and the Eligible Employee and shall not be construed to create a right of an Eligible Employee to continued employment with the Company. 6. Amendment and Termination. SNET, through action of its Board of Directors, may amend, modify or terminate the Program for any or no reason. EX-12 8 EXHIBIT 12 1997 Form 10-K Southern New England Telecommunications Corporation Computation of Ratio of Earnings to Fixed Charges Dollars in Millions, For the Year Ended December 31, 1997 Income before income taxes $316.0 Add: Interest on indebtedness 89.0 Portion of rents representative of the interest factor 6.6 Earnings before fixed charges and income taxes (1) $411.6 Fixed charges Interest charges $ 93.6 Portion of rents representative of the interest factor 6.6 Fixed charges (2) $100.2 Ratio of earnings to fixed charges [(1) divided by (2)] 4.11 EX-13 9 [SNET LOGO] SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION 227 CHURCH STREET NEW HAVEN, CONNECTICUT 06510 -------------------- 1997 ANNUAL REPORT -------------------- WIRELINE WIRELESS INFORMATION AND ENTERTAINMENT TABLE OF CONTENTS FINANCIAL INFORMATION Financial Highlights 1 Business Highlights 2 Letter to Shareowners 3 Financial Commentary 6 Report of Management 15 Report of Independent Accountants 15 Consolidated Statements of Income (Loss) 16 Consolidated Balance Sheets 17 Consolidated Statements of Changes in Shareholders' Equity 18 Consolidated Statements of Cash Flows 19 Notes to Consolidated Financial Statements 20 Financial Data (Unaudited) 32 Statistical Data (Unaudited) 33 Investor Information 34 Other Information 35 NOTICE OF ANNUAL MEETING 37 PROXY STATEMENT Proxy Information 38 Beneficial Ownership of Common Stock 38 Election of Directors (Proposal 1) 39 Nominees for Election as Directors 39 Directors Continuing in Office 40 Compensation and Other Information Regarding Directors 41 Committees of the Board 41 Ratification of Appointment of Auditors (Proposal 2) 42 Shareholder Proposals 42 Other Matters to Come Before the Meeting 42 Report of Personnel and Board Affairs Committee of the Board of Directors on Executive Compensation 42 1997 Executive Compensation 43 CEO Compensation 43 Summary Compensation Table 44 Option/SAR Grants in the Last Fiscal Year 45 Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values 46 Pension Plan 46 Change-in-Control Agreements 47 Certain Transactions 47 Performance Graph 47 Financial Statements 47 WHO WE ARE SNET is a Connecticut-based company reaching beyond its traditional borders to offer wireline, wireless and information and entertainment services, including local, national and international calling; mobile communications; and publishing, information and advertising. The company is building I-SNET(SM), a statewide, information superhighway that brings to customers a full array of information, communications and entertainment services. In the latest J.D. Power national customer satisfaction survey, SNET was ranked the number-one, long-distance company in America among mainstream users. SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION FINANCIAL HIGHLIGHTS Dollars in Millions, Except as Noted 1997 1996 1995 - -------------------------------------------------------------------------------- OPERATING RESULTS Revenues and Sales $2,022.3 $1,941.9 $1,816.4 Annual Growth 4.1% 6.9% 5.7% Costs and Expenses(1) $1,245.7 $1,203.6 $1,121.6 Net Income (Loss)(2) $ 193.8 $ 192.8 $ (518.3) - -------------------------------------------------------------------------------- PER SHARE INFORMATION (DOLLARS) Basic Earnings Per Share Income Before Extraordinary Charge $ 2.99 $ 2.95 $ 2.60 Net Income (Loss)(2) $ 2.93 $ 2.95 $ (7.99) Diluted Earnings Per Share Income Before Extraordinary Charge $ 2.98 $ 2.94 $ 2.60 Net Income (Loss)(2) $ 2.92 $ 2.94 $ (7.99) Dividends Declared $ 1.76 $ 1.76 $ 1.76 Market Price (year-end) $ 50.313 $ 38.875 $ 39.750 - -------------------------------------------------------------------------------- AT YEAR-END Total Assets $2,770.9 $2,671.0 $2,724.2 Debt Ratio 69.2% 74.9% 80.0% Total Employees 9,743 9,441 9,070 - -------------------------------------------------------------------------------- STATISTICAL DATA Network Access Lines in Service thousands)(3) 2,286 2,163 2,073 Annual Growth(3) 5.7% 4.3% 3.2% Second Residential Network Access Lines in Service (thousands) 127 97 75 Annual Growth 30.9% 29.3% 25.0% Network Interstate Access Minutes of Use (millions) 8,291 7,906 7,298 Annual Growth 4.9% 8.3% 5.5% Interstate and International Toll Access Line Subscribers (thousands) 941 758 266 Annual Growth 24.1% 185.0% 127.4% Cellular Subscribers (thousands)(4) 457 392 323 Annual Growth(4) 16.6% 21.4% 94.6% - -------------------------------------------------------------------------------- OTHER DATA Operating Cash Flow(5) $ 776.6 $ 738.3 $ 694.8 Telephone Company Wireline Cost Per Access Line (dollars)(6) $ 312 $ 332 $ 320 Net Cash Provided by Operating Activities $ 616.0 $ 477.4 $ 442.6 Cash Expended for Capital Additions $ 472.4 $ 373.8 $ 357.4 Cash Dividends Paid $ 102.4 $ 100.2 $ 98.0 - -------------------------------------------------------------------------------- (1) Excludes depreciation and amortization. (2) 1997 includes a $6.4 before-tax extraordinary charge for the early extinguishment of debt that reduced net income by $3.7 and both basic and diluted earnings per share by $.06. 1995 includes a $1,202.6 before-tax extraordinary charge for the discontinuance of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," that reduced net income by $687.1 and basic and diluted earnings per share by $10.59. (3) Excluding the purchase of Woodbury Telephone Company ("Woodbury"), network access lines in service would have increased 4.7% to 2,265,000 in 1997. (4) Excluding the subscribers from the acquired cellular properties, cellular subscribers would have increased 51.1% to 251,000 subscribers in 1995. (5) Represents operating income before depreciation and amortization. Operating cash flow is not a generally accepted accounting principle measurement. Management provides this measurement for informational purposes only. (6) Excludes depreciation and amortization, property and other taxes, publishing and bad debt expenses. Also, excludes costs and access lines resulting from the purchase of Woodbury. SNET Annual Report 1 BUSINESS HIGHLIGHTS * On January 5, 1998, we announced a definitive agreement to merge with SBC Communications Inc. This $4.4 billion transaction will combine companies with complementary wireless businesses and strong local telephone company operations. * We earned $2.99 per share before an extraordinary charge, up 1.4% despite rising competition, added costs resulting from regulatory decisions and implementation expenses for the Year 2000. * J.D. Power and Associates rated SNET the number one long-distance company in America among mainstream users in a national survey. By year-end, we served 41% of the lines in the long-distance market in Connecticut. * Access lines company-wide rose 5.7%, an historical high, as people added second lines for fax machines and internet use, combined with strong business demand for centrex lines. * We received DPUC approval to formally split the company into separate wholesale and retail operations. In January 1998, our competitive local exchange carrier ("CLEC") opened for business. * Our historic launch of SNET americast, the company's cable-TV business, occurred on March 11 in Farmington, Connecticut. We have achieved very strong market share in a short period of time. SNET internet access market share also registered solid gains to become the second-largest provider in Connecticut. * We began converting to Time Division Multiple Access ("TDMA") digital wireless technology while continuing to improve financial performance. Our wireless operating margin was 28%, up from 15% in 1996. * We acquired Woodbury Telephone Company ("Woodbury") in July. The new relationship with SNET will enable Woodbury to build on its sophisticated fiber-optic and digital network capabilities to offer an expanded array of new products and services. 2 SNET Annual Report LETTER TO SHAREOWNERS To Our Shareowners: This was an extraordinary year at SNET with stellar market-share growth in key market segments, prestigious national and international recognition, wireless margins almost doubling from 15 percent to 28 percent, and the launch of an unprecedented restructure of the business. And we capped all this off with the announcement on January 5, 1998 of a planned merger with the world's most admired global telecommunications company, SBC Communications Inc. The merger will begin a new chapter in SNET's history. I am very enthusiastic about this merger. SBC is an ideal match that will maximize our significant local strengths and assure our future. That makes the merger good news for you as well as our customers and employees. It will put us in the best possible position to serve Connecticut's communications and information needs for the next century, enhancing our ability to deliver excellent customer service and an increasing array of exciting new products. The merger will give our company the scale and scope needed to compete successfully in a rapidly changing and consolidating industry. This tax-free stock merger will give you 1.7568 shares of SBC stock for every SNET share you own. That exchange ratio is adjusted for SBC's recently announced 2 for 1 stock split. Although the price will fluctuate until the merger is closed, this represented a 33 percent premium over the price of SNET stock on the Friday before we announced the agreement. This premium is already being reflected in our current stock price. When the merger is completed, you will hold stock in SBC, a company that has produced one of the best rates of total shareholder return in the industry, with a record of double-digit earnings growth and annual dividend increases. The first regulatory hurdle for the merger was cleared on February 21 when the Department of Justice allowed the deadline for seeking additional information about the merger to expire. In addition, we will need a green light from you, our shareholders, as well as the Federal Communications Commission (FCC), the Connecticut Department of Public Utility Control (DPUC), and other state PUCs. With these approvals, we anticipate completing the merger by year's end. [Picture of Chairman] Daniel J. Miglio Chairman and Chief Executive Officer SOLID FINANCIAL PERFORMANCE The events that highlighted 1997 are reflected in our performance. Earnings were very solid, considering increased competition and the impacts of some $47 million we had to absorb from new regulatory requirements and for expensive Year 2000 computer reprogramming. In 1997, we had an extraordinary after-tax charge in the first quarter of $0.06 per share to redeem debt. Income before the extraordinary charge was $198 million and basic earnings per share were $2.99, compared with last year's net income of $193 million or basic earnings per share of $2.95. Consolidated 1997 revenues and sales were up 4 percent to over $2 billion. Wireline revenues were boosted by a 40 percent increase in our interstate/international long-distance business and by a robust 5.7 percent increase in access lines. The Woodbury acquisition contributed about 21,000 lines or 1 percent of the increase. We also had higher revenues from vertical services like Caller ID, call blocking and missed-call dialing, as well as an increase in network-access revenues. In-state toll revenues declined 15 percent, reflecting the full annual impact of equal-access competition and competitive discounting. Wireless revenues were up 4 percent on a 17 percent increase in customers, largely offset by a decline in roaming rates. Information and entertainment revenues grew 3 SNET Annual Report 3 percent, reflecting our thriving internet access business and our introduction of cable-TV service. Consolidated operating and maintenance expenses for 1997 were up nearly 4 percent to $1,193 million. Wireline expenses rose nearly 6 percent to support the strong growth in our interstate/international long-distance business. Wireless expenses dropped 12 percent or $22 million as a result of our successful initiatives to reduce fraud and bad debt as well as to lower customer-acquisition costs. Information and entertainment expenses rose 34 percent or $25 million largely to support the rollout of SNET americast and also to help expand our internet access service. Depreciation and amortization expenses were up 7 percent for the year because of higher levels of property, plant and equipment. Interest expense was up slightly. MAJOR ACHIEVEMENTS Although the merger announcement created the biggest headlines, we scored big on many fronts. Superb market-share growth in the interstate/ international long-distance business against formidable national competitors led the way. We now serve 41 percent of the lines in the Connecticut market. Not surprisingly, in a J.D. Power national customer-satisfaction survey, we were rated the number-one long-distance company among mainstream users. And the bundling of internet access service with long-distance has proven to be a winning strategy. Internet revenues tripled and we closed 1997 with more than 85,000 customers. Nationwide, the growth of internet traffic has created bottlenecks for frustrated users. One reason for the success of our internet service has been SNET's ability to stay ahead of the explosive demand. We have done this by deploying a new overlay network to enhance reliability and service for our customers. This was also the year of our historic entry into the cable-TV business with SNET americast. We've been winning raves for our superior picture quality, top-notch customer service, creative programming and unique on-screen navigator. In the few months we've been in business, we've achieved excellent market share in the towns we serve. We've made major strides in our wireless business, significantly improving profit margins. We will continue on this road, by aggressively reducing costs and improving revenue per customer as we strive to reach and surpass industry norms. We have also begun deploying digital technology, which opens the door to truly advanced wireless communication. We plan to market our digital capabilities aggressively in 1998. Our wireline network organization won a major kudos in 1997 by gaining ISO 9002 certification for the provisioning and maintenance of digital special services and ISDN. The International Organization for Standardization, based in Geneva, Switzerland, publishes a set of operating standards that define excellence. Achieving the standard gives us a competitive edge because it means higher product quality, better customer service, faster response time and lower costs. We are now expanding this standard to other key areas of our wholesale business. We modernized and retrofitted our network statewide so we could offer broadly our popular new services like Caller ID with name. We're also expanding our asynchronous transfer mode (ATM) and frame-relay network to meet the increasing data demands of Connecticut customers. Part of our network reliability program includes having one of the most aggressive SONET ring deployment schedules in the country. SONET ring technology improves network reliability dramatically by providing an alternate route for calls if there is a problem. Today, we have 47 rings in place. In 1997, 99 percent of our central offices were connected with SONET rings and all will be connected this year. We are also expanding beyond traditional markets. Our new nationwide Teleservices group is a small but fast-growing segment of our business. It leverages our operators' unique people skills and SNET's call-handling technology to provide customer-service functions that we are marketing to other companies. I believe that Teleservices offer us significant new growth potential. In addition, we acquired Woodbury Telephone last year. Both SNET and Woodbury have served Connecticut customers since the 1870s, and we have both benefited from our cooperative working relationships during that time. The acquisition has formalized that relationship. REGULATORY DEVELOPMENTS Our corporate restructure into wholesale and retail will enable each unit to focus on its unique customers. It will allow our retail arm to compete on a level playing field and enable our wholesale business to maximize resale opportunities. We were able to move ahead with the approval of the DPUC. A Federal court has just ruled in our favor 4 SNET Annual Report over challenges to this restructure by two competitors. There could be appeals of this ruling and there are also court challenges on the state level. Meanwhile, our own CLEC is ramping up. It just opened for business, serving a small segment of our market, and it will lead our retail strategy. We will be operating with the old and the new retail structure until the DPUC determines that our wholesale operating support systems are available on a comparable basis to all CLECs, which is a requirement of the Federal Telecommunications Act. We are among those on the leading edge in fostering local competition through access to comparable systems. Achieving this is a significant undertaking involving millions of dollars and hundreds of people. New regulations regarding our restructure allow large business customers to take a "fresh look" at contracts for services like private line and frame-relay data transmission. And, beginning in January 1999, Connecticut consumers will undergo a balloting period where, if they have not already done so, they will have the opportunity to choose a CLEC for their local service. In a series of actions, the Eighth Circuit Court of Appeals (Eighth Circuit) agreed with SNET and others, overturning the pricing rules and certain provisions related to unbundled network elements that had been set by the FCC. The Supreme Court decided recently that it would review the Eighth Circuit's rulings, which still remain in effect. We don't anticipate a Supreme Court decision until 1999. SNET BRINGS A GREAT DEAL TO THE MERGER It was 120 years ago that SNET took the concept of a telephone exchange and created the very first one in the nation. Founding father, George Coy, put it together with hoop-skirt wire and brainpower. The thread linking the innovation of each of SNET's many "firsts" has been the hard work and commitment that employees have dedicated to this company throughout its proud history. That heritage has resulted in a very strong brand name and the broadest product line in the industry. We will bring a great deal to the merger. By joining the SBC family, SNET's future will be even brighter because the constraints of scale and scope will no longer exist. As part of SBC, we will gain a larger wireless footprint, more resources for marketing, product and technology development, greater purchasing power and global reach. As we begin to write a new chapter in our history, we are seizing the opportunities that change offers; but we intend to preserve the core values that have brought us so far: respect for employees, our most important assets; and honesty and integrity in all of our relationships. SNET's merger with SBC will only serve to bolster our commitment to support and enhance the quality of life in Connecticut and contribute to its economic development. Even as we grow and expand, our roots are firmly planted and our values are solidly in place. /s/ DAN MIGLIO - ------------------------------------ Daniel J. Miglio Chairman and Chief Executive Officer February 27, 1998 SNET Annual Report 5 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION FINANCIAL COMMENTARY (Dollars in Millions, Except Per Share Amounts) Southern New England Telecommunications Corporation ("Corporation") has business units in the following telecommunications product groups: wireline; wireless; and information and entertainment. Wireline includes telephone-related services, premium services and equipment sales. Wireless consists of cellular and paging services and cellular equipment sales; and information and entertainment includes publishing, internet and cable television services. Other activities, such as real estate and holding company operations, are included with eliminations and other sales. PLANNED MERGER On January 4, 1998, the Corporation's Board of Directors approved a definitive merger agreement with SBC Communications Inc. ("SBC"). The Board's deliberations focused on the complementary strengths and the possible advantages of a combination. The process leading to the Board's adoption of the merger began in late 1996 with a review of strategic goals in the context of rising costs (including non-recurring items such as Year 2000 costs) and a rapidly changing regulatory environment. As a result of this review, the Board concluded that the Corporation would need to substantially increase the scale and scope of its operations in order to continue to compete successfully and in a cost-effective manner in the increasingly competitive telecommunications industry, and to provide customers with the broad range of telecommunications products and services they would demand and to meet the goals of its shareholders. During 1997, management explored possibilities for various joint ventures and business alliances in specific product areas with a view toward increasing the scale and scope of operations. In the fall of 1997, management ultimately concluded that a combination with a major telecommunications company was the best alternative in order to achieve the Corporation's strategic and financial objectives. Management believes that the merger with SBC is in the best interest of shareholders because it offers them the opportunity of becoming investors in a company with global presence and a track record of success in growing long-term value for shareholders. In addition, the merger will likely strengthen the Corporation's ability to compete in the increasingly competitive telecommunications industry [see Note 2]. OPERATING RESULTS Income before extraordinary charge was $197.5, $192.8 and $168.8 in 1997, 1996 and 1995, respectively. The corresponding basic earnings per share for those years were $2.99, $2.95 and $2.60 while the corresponding diluted earnings per share amounts were $2.98, $2.94 and $2.60. The financial results are summarized as follows: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Income before extraordinary charge $197.5 $192.8 $ 168.8 Extraordinary charge, net of tax (3.7) -- (687.1) - -------------------------------------------------------------------------------- Net Income (Loss) $193.8 $192.8 $(518.3) - -------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share: Income before extraordinary charge $ 2.99 $ 2.95 $ 2.60 Extraordinary charge (.06) -- (10.59) - -------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share $ 2.93 $ 2.95 $ (7.99) - -------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share: Income before extraordinary charge $ 2.98 $ 2.94 $ 2.60 Extraordinary charge (.06) -- (10.59) - -------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share $ 2.92 $ 2.94 $ (7.99) - -------------------------------------------------------------------------------- Income before extraordinary charge increased $4.7 in 1997 primarily as a result of growth in revenues from interstate and international toll, network access and local service. The wireless margin rose to approximately 28% in 1997 from approximately 15% in 1996 due primarily to cost controls in the wireless area. Offsets include a decline in intrastate toll revenues, increases in expenses for the cable television offering, the Year 2000 compliance costs and revenue reductions and cost increases associated with the implementation of regulatory mandates. Income before extraordinary charge increased $24.0 in 1996 due primarily to strong revenues in interstate and international toll and wireless, offset partially by an increase in wireline expenses. On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term notes due 2031 by issuing short-term debt. The early extinguishment of debt resulted in an extraordinary charge of $3.7, net of related tax benefits of $2.7, or $.06 per share, for both basic and diluted earnings per share. As a result of this charge, net income for 1997 was $193.8, or $2.93 basic earnings per share and $2.92 diluted earnings per share. On February 4, 1997, the Corporation issued $100.0 of 6.50% medium-term notes due 2002. The issuance replaced a portion of short-term debt related to the cellular acquisitions in 1995. In 1995, the Corporation recorded a non-cash extraordinary charge of $1,202.6, $687.1 after-tax or 6 SNET Annual Report $10.59 per share, for both basic and diluted earnings per share, related to the discontinuance of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." This non-cash extraordinary charge consisted of the elimination of net regulatory assets and the recognition of depreciation reserve deficiencies. As a result of this charge, net loss for 1995 was $518.3, or $7.99 per share for both basic and diluted earnings per share. REVENUES AND SALES Revenues and sales increased $80.4, or 4.1%, in 1997 and $125.5, or 6.9%, in 1996. The components of revenues and sales by product group are summarized as follows: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Wireline: Local service $ 701.9 $ 673.7 $ 641.6 Network access 429.2 388.1 369.4 Intrastate toll 213.0 251.2 266.4 Interstate and international toll 142.1 101.2 42.1 Premium services and equipment sales 126.7 107.6 104.9 Other revenues 52.8 50.1 57.0 - -------------------------------------------------------------------------------- Total Wireline 1,665.7 1,571.9 1,481.4 - -------------------------------------------------------------------------------- Wireless: Cellular service 213.7 203.0 153.1 Cellular equipment sales 7.2 10.1 7.8 Paging 6.5 6.1 12.2 - -------------------------------------------------------------------------------- Total Wireless 227.4 219.2 173.1 - -------------------------------------------------------------------------------- Information And Entertainment 189.4 184.2 180.9 Eliminations And Other Sales (60.2) (33.4) (19.0) - -------------------------------------------------------------------------------- Total Revenues and Sales $ 2,022.3 $ 1,941.9 $ 1,816.4 - -------------------------------------------------------------------------------- Revenues increased due primarily to growth in interstate and international toll, local service and network access, offset partially by declines in intrastate toll due primarily to competition. WIRELINE Local service revenues, derived from providing local exchange, advanced calling features and local private line services, increased $28.2, or 4.2%, in 1997 and $32.1, or 5.0%, in 1996. Growth in 1997 and 1996 was primarily attributable to increases of 5.7% and 4.3%, respectively, in the number of access lines in service. Excluding the purchase of Woodbury Telephone Company ("Woodbury") [see Note 2], access lines would have increased 4.7%. The increases in access lines for both years included significant growth in Centrex business lines and second residential lines. Additionally, in 1997, local service revenues increased due to compensation received as part of the pay telephone reclassification and compensation provisions of the Federal Telecommunications Act of 1996 ("Act") [see Regulatory Matters--Federal]. Local service revenues also increased due to growth in vertical services. The increase in local service revenues for 1997 was tempered by a decrease in revenues recognized from wireless carriers (due to a decrease in the generic wireless tariff in accordance with the Act) and customer migration from flat-rate services to lower priced Centrex services. Management expects increased competition to negatively impact local service revenues as other telecommunications providers offer local service and as the Connecticut Department of Public Utility Control ("DPUC")-mandated balloting process commences, scheduled for early 1999 [see Competition]. Network access revenues represent charges assessed on interexchange carriers and end users for access to the local exchange network. 1997 network access revenues increased $41.1, or 10.6%, compared with an increase of $18.7, or 5.1%, in 1996. Interstate access revenues increased $24.6, or 6.8%, in 1997 due primarily to the effects of the reversal of proposed 1996 tariff changes and interconnection discount plans, and to growth in interstate minutes of use of 4.9% and an increase in access lines in service. Offsetting the impact of these items was a decrease in annual tariff rates in accordance with the Corporation's July 1997 Federal Communications Commission ("FCC") filing under price cap regulation [see Regulatory Matters--Federal]. Interstate access revenues in 1996 increased $10.2, or 2.9%, due primarily to an 8.3% growth in interstate minutes of use and an increase in access lines in service. Partially offsetting the impact of the increase in minutes of use was a decrease in rates due to proposed tariff changes and interconnection discount plans and reduced access tariff rates. In 1997 and 1996, intrastate access revenues increased $15.4 and $8.5, respectively, due primarily to an increase in intrastate minutes of use by competitive providers of intrastate long-distance service. Management expects continued increases in minutes of use as more competitors enter Connecticut's fully competitive marketplace. In 1997, intrastate toll revenues, which include primarily revenues from toll and WATS "800" services, decreased $38.2, or 15.2%, compared with a decrease of $15.2, or 5.7%, in 1996. The decrease in 1997 was due primarily to a 12.2% reduction in toll message volume, as well as reduced intrastate toll rates. Lower toll volume was due primarily to the highly competitive toll market as a result of a full year of intrastate equal access. The decrease in intrastate toll revenues in 1996 was due primarily to a decline in intrastate toll rates attributable to customer migration to several discount calling plans. Also contributing to the decrease was a reduction in toll message volume of approximately 1%. Competition and the offering of competitive discount calling plans will continue to place downward pressure on intrastate toll revenues. Interstate and international toll revenues increased $40.9 in 1997 and $59.1 in 1996. In both 1997 and 1996, the increase was a result of significant growth in the customer base. Long-distance access lines in service increased to 941,000 at the end of 1997 from 758,000 at the end of 1996. The growth was primarily a result of customer migration to the SNET All Distance(R) product SNET Annual Report 7 line which allows Connecticut customers to package and discount their entire long-distance calling in one plan. Premium services and equipment revenues increased $19.1, or 17.8%, in 1997 and $2.7, or 2.6%, in 1996. The 1997 increase was due primarily to revenues from special one-time projects with other competitive local exchange carriers ("CLECs") and an increase in revenues from the Corporation's Gateway and Prime Axxess product lines. These increases were partially offset by a decline in leased telephone set revenue. WIRELESS Cellular service revenues increased $10.7, or 5.3%, in 1997 and $49.9, or 32.6%, in 1996. The increases in 1997 and 1996 were due primarily to growth of 16.6% and 21.4%, respectively, in the subscriber base in response to competitive marketing and pricing strategies. The Corporation's focus in 1997 was on customer retention and increased bundled packages. Also contributing to the increase in 1996 was the impact from the first full year of revenues from the cellular acquisitions completed in July 1995 [see Note 2]. Paging revenues were relatively flat in 1997, compared with a decrease of $6.1 in 1996. The impact of the sale of paging network assets in June 1995 contributed to the 1996 reduction in sales. Wireless continues, as a reseller, to market paging services under the Page 2000r brand name. INFORMATION AND ENTERTAINMENT Information and entertainment revenues increased $5.2 in 1997 and $3.3 in 1996. The increase in 1997 was due primarily to growth in internet sales related to an increase in the customer base, from approximately 35,000 in 1996 to over 85,000 in 1997. Additionally, SNET americast, the Corporation's cable television offering, began operations in 1997. COSTS AND EXPENSES Total costs and expenses increased $65.1, or 4.2%, in 1997 and $92.1, or 6.3%, in 1996. Total costs and expenses are summarized as follows: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Operating costs $ 1,192.6 $ 1,149.0 $ 1,065.1 Depreciation and amortization 379.1 356.1 346.0 Taxes other than income 53.1 54.6 56.5 - -------------------------------------------------------------------------------- Total Costs and Expenses $ 1,624.8 $ 1,559.7 $ 1,467.6 - -------------------------------------------------------------------------------- Operating costs consist primarily of employee-related expenses, including wages and benefits. Cost of goods sold and general and administrative expenses, including marketing, represent the remaining portion of these expenses. Total operating costs increased $43.6, or 3.8%, in 1997, compared with an increase of $83.9, or 7.9%, in 1996. Operating costs increased to support growth in interstate and international toll and internet, and to deploy the cable television offering. Also contributing to the increase in operating costs were expenses to comply with regulatory mandates and to address Year 2000 compliance. These increases were offset by decreases in wireless expenses due to improved cost controls. The Year 2000 costs increased from approximately $2 in 1996 to approximately $14 in 1997. These costs will continue to be incurred over the next two to three years, with related expenses to be approximately $23 to $26 in 1998, with overall costs estimated to be $50 to $70. The Corporation has established a plan which addresses the business risks and systems exposures of Year 2000 compliance across business, communications, and technology systems and processes. The plan covers Year 2000 compliance related to systems, telephone equipment and infrastructure, vendors and suppliers, and internal company operations. The Corporation anticipates all business-critical systems will be converted and tested prior to the end of 1999, however, some work on other systems is anticipated to continue into 2000. Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued on March 4, 1998. This SOP requires the capitalization of certain costs of computer software developed or obtained for internal use and is effective for financial statements for fiscal years beginning after December 15, 1998. Management currently estimates that based on historical information, $20 to $40 of 1998 expenses would be capitalized and amortized over lives ranging from 3 to 15 years. WIRELINE Wireline operating costs increased $53.8, or 5.6%, in 1997 and $99.9, or 11.6%, in 1996. The increase in both years was due primarily to an increase in the direct costs of providing interstate and international toll services. Also contributing to the increase in 1997 were the costs incurred in connection with special one-time projects with other CLECs, costs related to compliance with regulatory mandates [see Regulatory Matters] and Year 2000 compliance. In addition to the increase in direct costs previously discussed, 1996 costs increased as a result of higher contract services, bad debts and marketing expenses. WIRELESS Wireless operating costs decreased $22.3, or 12.1%, in 1997 due primarily to reduced fraud levels as a result of improved preventive control measures. Also contributing to the decrease were lower customer acquisition costs due to the mix of internal sales channels and third party distributor payments and reduced bad debt expense. 1996 costs were relatively flat when compared to 1995. Costs from the first full year of the expanded 8 SNET Annual Report cellular area in 1996 were offset by lower customer acquisition costs and roaming fraud due to preventive control programs. INFORMATION AND ENTERTAINMENT Information and entertainment operating costs increased $24.8, or 33.6%, in 1997 compared with a decrease of $4.4, or 5.6%, in 1996. The 1997 increase was due primarily to costs associated with deploying SNET americast. Also contributing to the increase in expenses was the cost of providing internet services to a larger customer base. The decrease in 1996 expenses was due primarily to the discontinuance of a multimedia trial, offset partially by costs of providing internet service and development costs associated with the commercial deployment of the Corporation's cable television offering. Management expects information and entertainment operating costs to continue to increase in 1998 as the Corporation further deploys its cable television service and supports growth in internet service. DEPRECIATION AND AMORTIZATION In 1997, depreciation and amortization expense increased $23.0, or 6.5%, compared with an increase of $10.1, or 2.9%, in 1996. The increase for both years was due primarily to an increase in the average depreciable telecommunications property, plant and equipment. The amortization of assets acquired in the cellular acquisitions, primarily cellular licenses, also contributed to the 1996 increase. INTEREST EXPENSE For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Interest Expense $89.8 $88.7 $85.9 - ------------------------------------------------------------------------------- Interest expense increased $1.1, or 1.2%, in 1997 and $2.8, or 3.3%, in 1996. The 1997 increase was due primarily to a reduction in the amount of capitalized interest and the issuance of $100.0 of 6.50% medium-term notes in February 1997. Partially offsetting these increases were savings from the redemption of $80.0 of 8.70% medium-term notes, in February 1997 and the maturity of $20.0 of 7.61% notes, during the fourth quarter of 1996. The issuance of commercial paper and medium-term notes in connection with the cellular acquisitions was the primary contributor to the increase in 1996 [see Note 2]. The increase was partially offset by lower average interest rates and capitalized interest of $7.2 due to a change in the reporting of capitalized interest as a reduction of interest expense. OTHER INCOME, NET For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Other Income, net $8.3 $6.9 $15.5 - ------------------------------------------------------------------------------- Other income, net is comprised primarily of interest income, income from investments and gains or losses on the disposition of non-telephone property. The 1997 increase was due primarily to the absence of a loss recognized in 1996 associated with certain leasing transactions. The 1996 decrease was due primarily to the absence of income from the disposition of a real estate partnership in 1995, lower interest income and the change in the classification of capitalized interest from other income, net to interest expense. INCOME TAXES For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Income Taxes $118.5 $107.6 $109.6 - ------------------------------------------------------------------------------- The combined federal and state effective tax rate in 1997 was 37.5% compared with 35.8% in 1996 and 39.4% in 1995. The higher 1997 effective tax rate was due primarily to a lower level of state tax credits, which increased the effective tax rate, when compared to 1996. The recognition of a higher level of state tax credits lowered the effective tax rate in 1996 when compared with 1995. COMPETITION As a result of legislative and regulatory reform, the Corporation continues to experience an increasingly competitive environment. Competitors include companies that construct and operate their own communications systems and networks and/or companies that resell the telecommunications systems and networks of underlying carriers. In 1997, major interexchange carriers continued to intensify their marketing efforts to sell intrastate long-distance services since The Southern New England Telephone Company's ("Telephone Company's") full implementation of intrastate equal access. Since the introduction of intrastate long-distance toll competition, in excess of 230 telecommunications providers have received approval from the DPUC to offer intrastate long-distance services with an additional 70 filed and awaiting DPUC approval. The reduction in intrastate toll rates and the increasingly competitive intrastate toll market continue to place significant downward pressure on the Telephone Company's intrastate toll revenues. Thirty-five telecommunications providers have been granted approvals for local service and twelve additional applications are pending before the DPUC. These providers began offering local exchange service to business and residential customers throughout the state. There has been growth in local service competition in 1997 and continued growth is expected, particularly upon commencement of the DPUC-mandated balloting process [see Regulatory Matters--State], however, the financial impact cannot be predicted at this time. Based on existing state and federal regulations, SNET Annual Report 9 the Corporation expects that many competitors will resell the Telephone Company's network and that increased network access revenues will offset a significant portion of local service revenues lost to competition. Management supports bringing customers the benefits of competition and affording all competitors the opportunity to compete fairly under reduced regulation. The competitive environment also allows opportunities for the Corporation to continue to increase its provision of interstate, international long-distance and cable television services. To provide competitive toll products, the Corporation's wireline business led the industry in 1996 by introducing the option of one-second rating for all toll calls so customers only pay for the time they use. The Corporation also successfully promoted the one bill feature of SNET All Distance(R), a seamless toll service which provides discount calling plans that include intrastate, interstate and international calling. In 1998, the Corporation plans to add wireless service to its one bill. The migration of Connecticut customers to wireline's bundled calling plans resulted in significant growth for interstate and international long-distance services. In September 1996, the DPUC granted SNET Personal Vision, Inc. ("Personal Vision") an 11-year license to operate a cable television system that will serve the entire state of Connecticut. Personal Vision also became a partner in the americast joint venture, along with The Walt Disney Company and several large local exchange carriers. The partnership provides a full range of americast(TM) programming and marketing services. Personal Vision began deploying its cable service during the first quarter of 1997. The DPUC's decision granting the statewide franchise was appealed to state Superior Court by members of the cable industry. The Superior Court upheld the DPUC's decision and the cable industry has now appealed to the state Appellate Court. A decision is anticipated in 1998. The Corporation's ability to compete is dependent upon regulatory reform that will allow pricing flexibility to meet competition and provide a level playing field with similar regulation for similar services. In addition, the Corporation's restructure into wholesale and retail affiliates will provide additional flexibility to compete at the retail level (see Regulatory Matters--State). REGULATORY MATTERS The Telephone Company is regulated by the FCC and the DPUC. Historically, the FCC has regulated the Corporation's provision of interstate services, both at the wholesale (access service provided by the Telephone Company) and retail (long-distance toll charges provided by SNET America, Inc. ("SAI") as a non-dominant carrier) levels. Since the passage of the Federal Telecommunications Act ("Act") in 1996, the FCC has also been charged, by Congress, with the implementation of many of the provisions of the Act designed to foster local competition. The DPUC regulates the Telephone Company's provision of services within the state of Connecticut including local and in-state long-distance services. Since the passage of state legislation in 1994, regarding local competition, as well as the Act, the DPUC also regulates the provision of wholesale services within the state that are required for interconnection to the Telephone Company's network. A synopsis of key Federal and State regulatory decisions follows. Federal On February 8, 1996, Congress passed the Act which was designed to overhaul U.S. telecommunications policy by removing barriers to local competition. The FCC's First and Second Report and Order ("Order") implements the Act and contains numerous provisions regarding the interconnection of the Telephone Company's network with those of its competitors. The Order requires significant changes in the way business is conducted, how the network is designed and the systems that support it (including repair and service ordering). In addition, the Order requires fundamental changes in the development of the prices that the Telephone Company would charge competitors for purchasing regulated network products and services. This order, as well as the orders discussed below, could have a material adverse financial impact on the Telephone Company. Certain provisions in the Order have been appealed by various local telephone companies, including the Telephone Company, the National Association of Regulatory Utility Commissioners and individual state regulatory commissions. The Eighth Circuit Court of Appeals ("Eighth Circuit") issued a partial stay of the Order, delaying the effectiveness of the pricing provisions and the rule allowing competitors to "pick and choose" isolated terms out of negotiated interconnection agreements and struck down those key provisions and other terms under which potential competitors can lease pieces of the Telephone Company's network. The Eighth Circuit declared that the FCC had overstepped its authority and concluded that "the Act plainly grants the state commissions, not the FCC, the authority to determine the rates involved in the implementation of the local competition provisions of the Act." The Eighth Circuit's decision is a strong endorsement of Congress' intention that the states play a primary role in implementing local telecommunications competition. This decision should allow the Corporation to implement local competition on the course mapped out by the DPUC and the Connecticut state legislature. The Eighth Circuit also vacated a portion of the FCC's rules which required incumbent local exchange carriers ("ILECs") to provide combinations of network 10 SNET Annual Report elements that effectively recreated the end-to-end service at a significant discount to CLECs. The Eighth Circuit indicated that the Act requires ILECs to provide access to unbundled network elements, not access to platforms used by ILECs in which network elements are combined. The Eighth Circuit's decisions have now been appealed to the Supreme Court which has agreed to review the case in the fall 1998 session. A decision is expected in 1999. The FCC also released its Third Report and Order requiring ILECs, including the Telephone Company, to provide shared transport to new entrants as an unbundled network element at cost-based prices. Several companies, including the Telephone Company, have filed Petitions for Review, which will be heard by the Eighth Circuit. A decision in this matter is expected in 1998. In 1997, the FCC issued an order regarding Universal Service. The order revises the current universal service programs for low income customers and high cost areas and establishes new federal support for telecommunications services provided to schools, libraries and rural health care facilities. The federal universal service mechanisms are funded, beginning January 1, 1998, by an assessment on the end user revenues of all telecommunications service providers. Funding for the new federally supported services provided to schools, libraries and rural healthcare facilities will come from both interstate and intrastate end user revenues, while funding for the revised high cost support and low income support programs will be from interstate end user revenues. ILECs can recover their contributions to the federal universal service mechanisms through their interstate access charges. The Universal Service Order is on appeal in the Fifth Circuit Court. The Telephone Company has intervened in the appeal. The FCC has no timeline currently to resolve this issue and the Corporation cannot determine when it will be resolved. The FCC also issued an order regarding access charge reform which changes the way the Telephone Company recovers interstate access charges from interstate toll providers, including SAI. Specifically, the order establishes flat-rated per-call carrier access charges, rather than usage-based charges. This order establishes a prescriptive mechanism to ensure that interstate access charges will be driven toward the levels that competition would be expected to produce. Management expects this order to pressure earnings but is currently unable to quantify any such impact. The Access Reform Order is being appealed and is pending in the Eighth Circuit. The Telephone Company has intervened in the appeal. The FCC is also expected to release a Pricing Flexibility Order in 1998. This order will establish a market-based approach to pricing. Another major FCC order was its Price Cap Order revising its price cap plan for regulating ILECs. This order establishes a single productivity factor of 6.5% and eliminates the sharing requirements of the prior rules. This order is being appealed in the District of Columbia Circuit Court. On August 13, 1997, the Telephone Company filed a Petition for Waiver from the 6.5% productivity factor, requesting that the FCC establish a productivity factor of 5.3% for the Telephone Company. A decision is still pending. The Telephone Company filed its 1997 annual interstate access price cap revisions, in which the Telephone Company elected to use a 6.5% productivity factor, which took effect July 1, 1997. The FCC required all price cap ILECs, including the Telephone Company, to adjust their Price Cap Indices, effective July 1, 1997, to reflect the 6.5% productivity factor for both the 1996-1997 and 1997-1998 tariff years. The filing would decrease interstate network access rates by approximately $28 for the period July 1, 1997 to June 30, 1998. The Telephone Company expects that this decrease will be partially offset by increased demand. In addition, the FCC has released Reports and Orders on the Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Act. The orders, among other things, mandate that all ILECs, including the Telephone Company, unbundle payphone instruments, file tariffs on payphone service lines and make them available on a non-discriminatory basis to Payphone Service Providers ("PSPs"). Additionally, the orders establish mechanisms for the full and fair compensation to PSPs, including per-call compensation for subscriber "800" and access code calls from payphones. The Telephone Company has filed the necessary revisions to its interstate access charges with the FCC and has filed with the DPUC new retail and wholesale Pay Telephone Access Line Service offerings in accordance with the FCC's order. In December 1996, the FCC acted on an outstanding petition by the New England Public Communications Council, Inc. and preempted a prior DPUC decision which only authorized ILECs and CLECs to provide payphone service in Connecticut. On July 1, 1997, the District of Columbia Circuit Court rendered its decision in Illinois Public Telecommunications Association v. FCC remanding back to the FCC its decision setting the per-call compensation rate for subscriber "800" and access code calls. The FCC on August 5, 1997, established a pleading and comment cycle on these remanded issues. The FCC released a subsequent order setting the per-call compensation rate at $.284. Noting the need to revise its jurisdictional separations rules as a result of the increasingly competitive nature of the telecommunications industry, the FCC initiated on October 7, 1997, a rulemaking proceeding to begin separations reform. Jurisdictional separations SNET Annual Report 11 assigns telecommunications property costs, revenues, expenses, taxes and reserves to specific categories that are then allocated between the interstate and intrastate jurisdictions. Comprehensive reform in this area could result in changes to the structure of ILEC pricing. Management is currently unable to determine the impact any change would have on the Telephone Company. In accordance with the Act, the FCC requires ILECs, including the Telephone Company, to implement a long-term solution for portability of local telephone numbers. The Telephone Company is required to construct and operate a system that will permit end user customers to retain their telephone numbers when they elect a different carrier for local service. The system is to be operational by mid-1998 for a large percentage of the Telephone Company's access lines. The FCC, however, has not yet decided on a method to recover the substantial investment and operating costs relating to the number portability system. Local number portability expenditures were approximately $4 in 1997 and are estimated to be $19 in 1998. State Effective April 1, 1996, the DPUC replaced traditional rate of return regulation with alternative (price-based) regulation during the transition to full competition. Alternative regulation includes a five-year monitoring period on financial results and a price cap formula based on certain services categorized as non-competitive. In addition, basic local service rates for residence, business and coin may not be raised above current levels until January 1, 1998, at which time the price cap plan becomes effective for these services, unless they have been reclassified into the emerging-competitive or competitive categories. The impact of these changes on the Telephone Company's operating results will depend on the timing of classifying the various products and services from non-competitive into the emerging-competitive and competitive categories for pricing changes. On June 25, 1997, the DPUC issued a final decision allowing the Corporation to establish separate wholesale and retail affiliates. Under the decision, the new retail organization, a CLEC, will compete under the same regulations as all other retail telecommunications providers in the state. As such, the CLEC will not be subject to price cap regulations. The wholesale organization, an ILEC, will provide network services and functionality to retail providers, including the Corporation's new CLEC, on comparable terms. The ILEC will be treated as a public service company and will continue to be subject to alternative regulation. The directory publishing operations were incorporated into a separate subsidiary of the Corporation on January 1, 1998. As part of the decision, however, the DPUC mandated that Connecticut customers must choose their local exchange provider via a balloting process. Customers who do not choose a carrier will be assigned a CLEC based on the proportion of votes in a local service area. The specific details of the balloting process will be addressed in further technical discussions among the participants and the DPUC. The balloting process is scheduled to begin on January 4, 1999 and to be completed by May 1999. In order for the balloting process to commence, the ILEC must demonstrate that the systems offered to CLECs provide full technical and operational support as required by the Act. The DPUC will examine and critically evaluate the respective Operations Support System ("OSS") platforms offered to the CLECs. The DPUC's evaluation will establish a set of tests and standards that can be used to determine the suitability of the ILEC's OSS to support a competitive local exchange market and will determine if the interfaces proposed by the ILEC offer the comparability required under the provisions of the Act. A final decision is due on June 24, 1998. The DPUC's decision to allow the Corporation to establish separate wholesale and retail affiliates has been challenged by other parties in both state court and federal court. In an oral decision, the federal court has denied the other parties' motion for summary judgment and granted the Corporation's motion for summary judgment. A written decision is expected in the first quarter of 1998. A decision is also expected from the state court in 1998. On March 18, 1997, SAI filed an application with the DPUC to provide local and intrastate toll services throughout Connecticut. The DPUC issued a final decision granting approval on June 25, 1997. This grants SAI the authority to operate as a CLEC in the state of Connecticut and to provide competitive retail services to end user customers with the same regulatory and pricing flexibility as all other CLECs in the state. In compliance with the Act, the ILEC has filed with the DPUC numerous cost studies supporting its proposed wholesale (i.e., resale) and unbundled rates for interconnection services. On March 24, 1997, the DPUC issued a final decision setting a uniform 17.8% discount rate off the Telephone Company's current retail prices for telecommunications services sold to CLECs. On April 23, 1997, the DPUC issued a final decision addressing the proposal for allocation of Hybrid Fiber Coax ("HFC") network joint costs between broadband and telephony and the Telephone Company's costs and rates associated with unbundled loops, ports, multiplexing and inter-wire center transport. In this decision, the DPUC approved the Telephone Company's proposed 50/50 allocation of HFC network joint costs between broadband and telephony. In addition, the DPUC approved the cost studies based on Total Service Long Run Incremental Cost ("TSLRIC"). Subsequently, the 12 SNET Annual Report DPUC opened a new docket to determine appropriate TSLRIC-based rates for the remaining unbundled elements (non-loop) defined by the FCC. The cost allocation decision has been appealed by the cable television industry to state Superior Court. A decision is expected in 1998. On July 23, 1997, the DPUC approved the acquisition of Woodbury by the Corporation. The Corporation completed its purchase of Woodbury on July 30, 1997. EMPLOYEE RELATIONS In January 1998, under the current union contract, bargaining-unit employees received a general wage increase totaling 3.0%; made up of various forms and combinations of basic wage increases, one-time cash payments and/or Cash Balance Plan Account credits. The current labor agreement will expire on August 8, 1998. Management and the union expect to begin negotiations on a new labor agreement early in 1998. In 1995, a U.S. District Court decision was issued in favor of the Department of Labor against the Corporation and the Telephone Company. The decision held that the Corporation and the Telephone Company violated certain sections of the Fair Labor Standards Act and were liable for back wages and liquidating damages. The Corporation and the Telephone Company appealed the decision and on July 31, 1997, the Second Circuit Court of Appeals affirmed the U.S. District Court's decision. As required by the Court's decision, in October 1997, the Corporation and the Telephone Company paid back wages, liquidating damages and interest (from the date of the District Court's judgment) to the employees involved in this action. In 1995, the Telephone Company recorded a liability of $11.0 which was adequate to cover the cost of total damages for this matter. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES The Corporation generated cash flows from operations of $616.0 during 1997 compared with $477.4 during 1996 and $442.6 during 1995. Cash flows from operations increased in 1997 compared with 1996 due primarily to lower restructuring payments. In 1997, the consolidated balance sheet changed as a result of operating activities. The current portion of deferred taxes decreased due primarily to costs incurred in 1997 under the restructuring program. The decrease in other current assets is due primarily to a decrease in income taxes receivable resulting from certain state income tax credits being reflected in estimated income tax payments. In prior years, state tax law only allowed this credit upon the filing of the final annual income tax return. Accounts payable and accrued expenses increased due primarily to timing of cash payments. Cash outlays relating to the Corporation's restructuring charge, originally recorded in December 1993, totaled $15.0, $110.6 and $89.1 in 1997, 1996 and 1995, respectively. Costs incurred for employee separations of $5.0 in 1997, $20.0 in 1996 and $9.0 in 1995 included primarily payments for severance and related unemployment taxes and unused vacation. Incremental costs of $2.8 in 1997, $83.1 in 1996 and $74.2 in 1995 were incurred for executing numerous reengineering programs. In addition, exit and other costs were $7.2 in 1997, $7.5 in 1996 and $5.9 in 1995 and included expenses relating to the reduction of overall corporate space requirements. All cash expenditures were funded with cash flows from operations. In 1998, the Corporation expects to conclude its restructuring program with approximately $7 of costs related to its space consolidation program. INVESTING ACTIVITIES The primary use of corporate funds continued to be capital expenditures. Cash expended for capital additions was $472.4, $373.8 and $357.4 in 1997, 1996 and 1995, respectively. Capital additions for all years were funded entirely from cash flows from operations. The majority of these additions were for construction of the wireline network. Management anticipates that total capital expenditures for consolidated telecommunications plant will approximate $475 in 1998 and will be funded from cash flows from operations. Included in total capital expenditures in 1998 are estimated additions of $290 to the wireline network as compared with actual 1997 expenditures of approximately $307. These additions include expenditures primarily related to the modernization, growth and upgrading of wireline's central office switching and circuit equipment, to meet customer demand for new services. Additionally, to reduce maintenance costs and to meet access line growth, increased focus is being placed on replacing and supplementing the existing core network of twisted copper wire and fiber-optic and coaxial cable. On July 30, 1997, the Corporation completed its acquisition of Woodbury by issuing approximately 528,000 shares of the Corporation's treasury stock for the remaining 63.5% of Woodbury's common stock not formerly held by the Corporation. The total cost of completing the acquisition was $30.1, which includes the assumption of $9.0 in long-term debt. FINANCING ACTIVITIES In February 1997, the Corporation issued $100.0 of 6.50% medium-term notes due 2002. The issuance replaced a portion of short-term debt related to the cellular acquisitions discussed previously. With this issuance, the Corporation's unissued, unsecured debt securities registered with the Securities and Exchange Commission ("SEC") decreased to $125.0. SNET Annual Report 13 On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term notes due 2031 by issuing short-term debt. The Corporation sponsors a Dividend Reinvestment and Stock Purchase Plan ("DRISPP"). Effective July 1, 1997, the Corporation's policy of issuing new shares was modified to have its agent begin purchasing shares on the open market (when market conditions merit) to meet the needs of the DRISPP. Beginning with the January 15, 1998 dividend, the Corporation resumed issuance of new shares to meet the needs of the DRISPP. In September 1996, a total of $20.0 of 7.61% medium-term notes matured and were satisfied with the issuance of short-term debt. Dividends paid totaled $102.4, $100.2 and $98.0 in 1997, 1996 and 1995, respectively. The quarterly dividend rate of $.44 per share has remained unchanged for the past eight years, consistent with the corporate plan to reinvest in the business. ESOP In connection with the establishment of the Employee Stock Ownership Plan ("ESOP") in 1990, the Corporation loaned the ESOP $10.0 and guaranteed a $110.0 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. Debt service payments to the ESOP totaled $13.7, $13.5 and $13.3 in 1997, 1996 and 1995, respectively. The Corporation anticipates making equivalent cash payments during 1998. DEBT RATIO The Corporation's ratio of debt to total capitalization at year-end 1997 was 69.2% compared with 74.9% at year-end 1996 and 80.0% at year-end 1995. The ESOP represented 2.0% of the debt ratio at December 31, 1997 compared with 2.7% and 3.4% at December 31, 1996 and 1995, respectively. CAPITAL RESOURCES The Corporation maintains bank lines of credit to facilitate the issuance of commercial paper. As part of this credit facility, the Corporation has obtained contractual commitments to $170.0 in lines of credit provided by a syndicate of banks. The annual commitment fee is currently .045% on the lines of credit. As of December 31, 1997, the entire $170.0 was available. As of December 31, 1997, the Corporation and the Telephone Company had $125.0 and $95.0, respectively, of unissued, unsecured debt securities registered with the SEC. Additional notes may be sold in one or more issues from time to time as market conditions warrant. Management believes that the Corporation has sufficient internal and external resources to finance the anticipated requirements of business development. Capital additions and dividends are expected to be funded with cash from operations during 1998. The Corporation also has access to external resources including lines of credit and long-term shelf registration commitments. 14 SNET Annual Report SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION REPORT OF MANAGEMENT The Corporation's consolidated financial statements have been prepared in conformity with generally accepted accounting principles. 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 consolidated 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. The Audit Committee of the Board of Directors, which consists of six non-employee directors, meets periodically with the Corporation's financial management, Audit Services and independent accountants (Coopers & Lybrand L.L.P.) to review their work and the relationships between them in whatever depth considered necessary to fulfill the Audit Committee's responsibilities. Both Audit Services and the independent accountants meet privately with and have unrestricted access to the Audit Committee. /s/ DONALD R. SHASSIAN - ------------------------------ Donald R. Shassian Senior Vice President and Chief Financial Officer January 27, 1998 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Southern New England Telecommunications Corporation: We have audited the consolidated balance sheets of Southern New England Telecommunications Corporation as of December 31, 1997 and 1996, and the related consolidated statements of income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, the Corporation discontinued accounting for the operations of its telephone subsidiary in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," effective January 1, 1996. /s/ COOPERS & LYBRAND L.L.P. - ------------------------------------ Coopers & Lybrand L.L.P. Hartford, Connecticut January 27, 1998 SNET Annual Report 15 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (LOSS) Dollars in Millions, Except Per Share Amounts, For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- REVENUES AND SALES $ 2,022.3 $ 1,941.9 $ 1,816.4 - -------------------------------------------------------------------------------- COSTS AND EXPENSES Operating and maintenance 1,192.6 1,149.0 1,065.1 Depreciation and amortization 379.1 356.1 346.0 Taxes other than income 53.1 54.6 56.5 - -------------------------------------------------------------------------------- Total Costs and Expenses 1,624.8 1,559.7 1,467.6 - -------------------------------------------------------------------------------- OPERATING INCOME 397.5 382.2 348.8 Interest expense 89.8 88.7 85.9 Other income, net 8.3 6.9 15.5 - -------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 316.0 300.4 278.4 Income taxes 118.5 107.6 109.6 - -------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY CHARGE 197.5 192.8 168.8 Extraordinary charge, net of tax (3.7) -- (687.1) - -------------------------------------------------------------------------------- NET INCOME (LOSS) $ 193.8 $ 192.8 $ (518.3) - -------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS) Basic 66,156 65,437 64,871 Assuming Dilution 66,322 65,604 64,903 - -------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share Income before extraordinary charge $ 2.99 $ 2.95 $ 2.60 Extraordinary charge, net of tax (.06) -- (10.59) - -------------------------------------------------------------------------------- BASIC EARNINGS (LOSS) PER SHARE $ 2.93 $ 2.95 $ (7.99) - -------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share Income before extraordinary charge $ 2.98 $ 2.94 $ 2.60 Extraordinary charge, net of tax (.06) -- (10.59) - -------------------------------------------------------------------------------- DILUTED EARNINGS (LOSS) PER SHARE $ 2.92 $ 2.94 $ (7.99) - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 16 SNET Annual Report SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS Dollars in Millions, At December 31, 1997 1996 - -------------------------------------------------------------------------------- ASSETS Cash and temporary cash investments $ 12.3 $ 9.0 Accounts receivable, net of allowance for uncollectibles of $32.5 and $27.4, respectively 327.9 323.3 Materials, supplies and inventories 29.8 27.4 Prepaid publishing 35.9 35.2 Deferred income taxes 37.7 45.4 Other current assets 11.0 27.7 - -------------------------------------------------------------------------------- Total Current Assets 454.6 468.0 Property, plant and equipment, net 1,716.8 1,597.0 Intangible assets, net 394.7 400.3 Deferred income taxes 89.7 91.2 Leases and other assets 115.1 114.5 - -------------------------------------------------------------------------------- Total Assets $ 2,770.9 $ 2,671.0 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 266.8 $ 252.0 Short-term debt 186.3 215.2 Advance billings and customer deposits 64.4 60.9 Accrued compensated absences 33.3 31.9 Other current liabilities 106.8 107.0 - -------------------------------------------------------------------------------- Total Current Liabilities 657.6 667.0 Long-term debt 1,156.9 1,169.7 Accrued postretirement benefit obligation 267.0 288.9 Unamortized investment tax credits 14.0 15.5 Other liabilities and deferred credits 78.2 66.9 - -------------------------------------------------------------------------------- Total Liabilities 2,173.7 2,208.0 - -------------------------------------------------------------------------------- Common stock; $1.00 par value; 300,000,000 shares authorized; 68,896,854 and 68,407,669 issued, respectively 68.9 68.4 Proceeds in excess of par value 622.1 602.8 Retained earnings (deficit) 26.8 (55.7) Treasury stock; at cost, 2,230,586 and 2,758,512 shares, respectively (84.7) (104.7) Unearned compensation related to ESOP (35.9) (47.8) - -------------------------------------------------------------------------------- Total Shareholders' Equity 597.2 463.0 - -------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 2,770.9 $ 2,671.0 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. SNET Annual Report 17 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unearned Compen- Total Common Stock Issued Proceeds in Retained sation Share- Dollars in Millions, -------------------- Excess of Earnings Treasury Related holders' Except Per Share Amounts Number Par Value Par Value (Deficit) Stock to ESOP Equity - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT JANUARY 1, 1995 67,264,435 $ 67.3 $ 677.8 $ 381.8 $(104.7) $(69.3) $ 952.9 - ------------------------------------------------------------------------------------------------------------------------------------ Net loss (518.3) (518.3) Common stock issued, at market: Dividend reinvestment plan 466,498 .5 15.4 15.9 Savings and incentive plans 150,226 .1 4.7 4.8 Dividends declared ($1.76 per share) (114.2) (114.2) Reduction of ESOP debt 11.0 11.0 Tax benefit of dividends declared on unallocated shares held in ESOP 1.2 1.2 ESOP earned compensation accrual (.4) (.4) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1995 67,881,159 67.9 697.9 (249.5) (104.7) (58.7) 352.9 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 192.8 192.8 Common stock issued, at market: Dividend reinvestment plan 367,183 .4 14.3 14.7 Savings and incentive plans 159,327 .1 5.8 5.9 Dividends declared ($1.76 per share) (115.2) (115.2) Reduction of ESOP debt 12.1 12.1 Tax benefit of dividends declared on unallocated shares held in ESOP 1.0 1.0 ESOP earned compensation accrual (1.2) (1.2) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1996 68,407,669 68.4 602.8 (55.7) (104.7) (47.8) 463.0 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 193.8 193.8 Common stock issued, at market: Dividend reinvestment plan 190,928 .2 6.9 7.1 Savings and incentive plans 298,257 .3 10.9 11.2 Dividends declared ($1.76 per share) (116.5) (116.5) Reduction of ESOP debt 13.2 13.2 Acquisition of Woodbury Telephone 1.0 4.5 20.0 25.5 Tax benefit of dividends declared on unallocated shares held in ESOP .7 .7 ESOP earned compensation accrual (1.3) (1.3) Other .5 .5 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 68,896,854 $ 68.9 $ 622.1 $ 26.8 $(84.7) $(35.9) $597.2 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 18 SNET Annual Report SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in Millions, For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 193.8 $ 192.8 $ (518.3) Tax benefit of dividends on shares held in ESOP .7 1.0 1.2 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 379.1 356.1 346.0 Extraordinary charge, net of tax 3.7 -- 687.1 Provision for uncollectible accounts 43.4 44.4 25.9 Restructuring payments (15.0) (110.6) (89.1) Decrease in deferred income taxes 9.2 22.2 30.7 Decrease in investment tax credits (1.5) (2.1) (6.9) Changes in operating assets and liabilities, net (8.1) (30.3) (34.0) Other, net 10.7 3.9 -- - -------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 616.0 477.4 442.6 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Cash expended for capital additions (472.4) (373.8) (357.4) Purchase of cellular properties -- -- (455.6) Proceeds from asset sales 19.9 10.8 74.0 Other, net 7.6 16.6 16.5 - -------------------------------------------------------------------------------- Net Cash Used by Investing Activities (444.9) (346.4) (722.5) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from long-term debt 100.0 -- 300.0 Repayments of long-term debt (94.8) (34.9) (108.3) Cash dividends paid (102.4) (100.2) (98.0) Net (payments) proceeds of commercial paper (57.3) 2.0 192.9 Other, net (13.3) -- (2.3) - -------------------------------------------------------------------------------- Net Cash (Used) Provided by Financing Activities (167.8) (133.1) 284.3 - -------------------------------------------------------------------------------- Increase (Decrease) in Cash and Temporary Cash Investments 3.3 (2.1) 4.4 Cash and temporary cash investments at beginning of year 9.0 11.1 6.7 - -------------------------------------------------------------------------------- Cash and Temporary Cash Investments at End of Year $ 12.3 $ 9.0 $ 11.1 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. SNET Annual Report 19 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) NOTE 1: Summary of Significant Accounting Policies BASIS OF PRESENTATION The consolidated financial statements of Southern New England Telecommunications Corporation ("Corporation") have been prepared in conformity with generally accepted accounting principles ("GAAP"). Effective January 1, 1996, the Corporation's telephone operating subsidiary, The Southern New England Telephone Company ("Telephone Company"), discontinued using Statement of Financial Accounting Standard ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation" [see Note 3]. The consolidated financial statements include the accounts of the Corporation, all wholly-owned subsidiaries and partnerships in which the Corporation effectively has control. All significant intercompany transactions and accounts have been eliminated. The Corporation derives substantially all of its revenues from the telecommunications service industry by providing wireline, wireless and information and entertainment services, including local, national and international communications; network services; mobile communications; cable television and internet; and advertising. The Corporation's operations and customers are located primarily in Connecticut. In addition, its wireless operations cover Rhode Island and portions of Massachusetts. As appropriate, all periods presented have been reclassified to conform to the current year presentation. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for depreciation, taxes, employee benefits, allowance for uncollectible accounts receivable, restructuring reserves and contingencies, among others. CASH AND TEMPORARY CASH INVESTMENTS Cash and temporary cash investments include all highly liquid investments, with original maturities of three months or less. The Corporation records payments made by draft as accounts payable until the banks honoring the drafts have presented them for payment. At December 31, 1997 and 1996, accounts payable included drafts outstanding of $28.8 and $41.4, respectively. 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 sets, wireless equipment and telephone systems, are carried at the lower of weighted average cost or market value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation is calculated on telephone plant using either the equal life group straight-line depreciation method or the composite vintage group method. Property and equipment other than telephone plant is depreciated primarily using the straight-line method. Effective January 1, 1996, as a result of the discontinuance of SFAS No. 71, the Corporation is using estimated useful lives that are shorter than the economic lives historically prescribed by regulators. A comparison of average asset lives before and after the discontinuance of SFAS No. 71, for the most significantly affected categories of telephone plant, is as follows: Asset Category Before After - -------------------------------------------------------------------------------- Digital Switch 17 10.5 Digital Circuit 11.5 8.2 Conduit 55 55 Copper 22-26 10.5-16 Fiber 32-40 25 - -------------------------------------------------------------------------------- Under the composite group method, the cost of depreciable telephone plant sold or retired, net of removal costs and salvage (i.e., gains or losses), 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. All long-lived assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount may not be recoverable, and any necessary adjustment is made. Replacements, renewals and betterments that materially increase an asset's useful or remaining life are capitalized. Minor replacements and all repairs and maintenance are charged to expense. INTANGIBLE ASSETS Intangible assets consist primarily of cellular licenses, customer lists and goodwill resulting from the cellular acquisitions completed in 1995 and goodwill resulting from the Woodbury Telephone Company ("Woodbury") acquisition completed in 1997. The intangible assets are stated at cost and are being amortized using the straight-line method over periods ranging from 5 to 40 years. Accumulated amortization 20 SNET Annual Report was $44.8 and $27.6 as of December 31, 1997 and 1996, respectively. Intangible assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount may not be recoverable, and any necessary adjustment is made. LEASE NOTES RECEIVABLE Direct-financing and leveraged lease contracts are accounted for by recording 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 The Corporation accounts for its Employee Stock Ownership Plan ("ESOP") in accordance with Statement of Position ("SOP") 76-3, as amended. Accordingly, compensation expense is measured as the cost of shares allocated from the trust, plus the amount required to purchase any additional shares allocated to employee accounts, less a percentage of dividends received by the plan. Dividends on stock held by the ESOP are recorded as a reduction of retained earnings, and all ESOP shares are treated as outstanding for earnings per share calculations. Debt of the ESOP that has been guaranteed by the Corporation is recorded as long-term debt and as a reduction of shareholders' equity. As the ESOP repays the debt, a corresponding reduction in long-term debt and an increase in shareholders' equity is recorded. 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. CAPITALIZED INTEREST COST The Corporation accounts for capitalized interest in accordance with SFAS No. 34, "Capitalization of Interest Cost." Upon the discontinuance of SFAS No. 71, effective January 1, 1996, the Telephone Company reports capitalized interest as a cost of telephone plant and a reduction in interest expense, in accordance with SFAS No. 34. Prior to the discontinuance of SFAS No. 71, the Telephone Company included in its telephone plant accounts an imputed cost of debt and equity for funds used during the construction of telephone plant. ADVERTISING COSTS Costs for advertising products and services or corporate image are expensed as incurred. COMPUTER SOFTWARE COSTS The Corporation capitalizes initial operating systems for central office switching equipment. Right-to-use fees, additions, upgrades and modifications to operating software programs, all applications and computer software acquired or developed for internal use are expensed. SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued on March 4, 1998. This SOP requires the capitalization of certain costs of computer software developed or obtained for internal use and is effective for financial statements for fiscal years beginning after December 15, 1998. INCOME TAXES The Corporation files a consolidated federal income tax return and, where allowable, combined state income tax returns. The Corporation records income taxes under SFAS No. 109, "Accounting for Income Taxes." 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, the Corporation will recognize deferred tax assets if it is more likely than not that the related benefit will be realized. Investment tax credits realized in prior years by the Telephone Company are being amortized as a reduction to the provision for income taxes over the life of the related plant. EARNINGS PER SHARE Effective December 31, 1997, the Corporation adopted SFAS No. 128, "Earnings per Share." Under SFAS No. 128, "basic" earnings per share is computed by dividing income by the weighted average number of actual common shares outstanding during the period. In order to compute "diluted" earnings per share, the weighted average number of common shares is increased by the effect of all potential common shares outstanding during the period. As required by SFAS No. 128, all periods presented have been restated to conform to the provisions of the new standard. For the computation of diluted earnings per share, the weighted average number of common shares outstanding has been adjusted for the effects of the Corporation's stock options as follows: In Thousands, For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Weighted average shares outstanding 66,156 65,437 64,871 Stock options, net 166 167 32 - -------------------------------------------------------------------------------- Weighted average shares outstanding assuming dilution 66,322 65,604 64,903 - -------------------------------------------------------------------------------- Stock options of 218 in 1997, 156 in 1996 and 391 in 1995, were not assumed exercised because they were antidilutive in the periods presented. NOTE 2: MERGER, ACQUISITION AND SALE OF ASSETS On January 4, 1998, the Corporation and SBC Communications Inc. ("SBC") approved a definitive merger SNET Annual Report 21 agreement ("Agreement") whereby the Corporation will become a wholly-owned subsidiary of SBC. Under the original terms of the Agreement, each share of the Corporation's common stock was to be exchanged for 0.8784 shares of SBC common stock. On January 30, 1998, SBC announced a two-for-one stock split, which modified the exchange ratio to 1.7568. In addition, the Agreement does not require any changes to the Corporation's quarterly dividend prior to closing. The transaction is intended to be accounted for as a pooling-of-interests and as a tax-free reorganization under the applicable provisions of the Internal Revenue Code. The merger has been reviewed by the U.S. Department of Justice and must still be approved by the Corporation's shareholders, the Department of Public Utility Control ("DPUC") and the Federal Communications Commission ("FCC"). The Corporation is currently authorized to provide interexchange services in 46 states. For the majority of these states these authorizations have been utilized solely to provide calling card services to Connecticut-based customers traveling in the respective states. The Corporation does, however, provide long-distance service to a small number of customers in states where SBC is an Incumbent Local Exchange Carrier ("ILEC"). The Corporation may be required to modify or withdraw its interexchange authorizations in the states where SBC is an ILEC. In addition, authorizations may be required from a number of other states to allow the Corporation to transfer its existing long-distance authorizations to SBC. Once the necessary approvals are obtained, the merger is expected to close by December 31, 1998. On July 30, 1997, the Corporation completed its acquisition of Woodbury by issuing approximately 528,000 shares of the Corporation's treasury stock for the remaining 63.5% of Woodbury's common stock not formerly held by the Corporation. The total cost of completing the acquisition was $30.1, which includes the assumption of $9.0 in long-term debt. Woodbury provides local exchange telephone services, intrastate toll services and access to long-distance telephone services in a number of central Connecticut towns. The acquisition was accounted for under the purchase method and, accordingly, resulted in goodwill of $11.5 which is being amortized on a straight-line method over 15 years. Woodbury's results have been included in the consolidated financial statements since the date of acquisition. Had the acquisition taken place at the beginning of 1996, consolidated revenues and sales, income before extraordinary charge, net income and earnings per share would not have been materially different from the amounts reported for 1997 and 1996. In July 1995, the Corporation purchased from Bell Atlantic Corporation and Richmond Telephone Company, for approximately $456, certain cellular properties in Rhode Island and Massachusetts and an increased interest in Springwich Cellular Limited Partnership ("Springwich"). The acquisitions were accounted for under the purchase method and, accordingly, the operating results of the cellular properties and the increased interest in Springwich were included in the consolidated financial statements subsequent to the acquisition date. The excess of the purchase price over the estimated fair value of the net assets acquired, approximately $24, was assigned to goodwill and is being amortized on a straight-line method over 15 years. The cellular acquisitions were financed with approximately $456 of short-term debt. Short-term debt of approximately $300 was replaced with medium-term notes in the third quarter of 1995. NOTE 3: DISCONTINUANCE OF SFAS NO. 71 In the fourth quarter of 1995, the Telephone Company determined it was no longer eligible for application of SFAS No. 71, which specifies accounting standards required for public utilities and certain other regulated companies. Effective January 1, 1996, the Telephone Company began following accounting principles which are more appropriate for a competitive environment. This determination was made based on the significant changes in technology and the increase in telecommunications competition in Connecticut brought about by legislative and regulatory policy changes. This accounting change is for financial reporting purposes only and does not affect the Telephone Company's accounting and reporting for regulatory purposes. As a result of the discontinued use of SFAS No. 71, in accordance with the provisions of SFAS No. 101, "Accounting for the Discontinuance of Application of FASB Statement No. 71," the Corporation recorded a non-cash, extraordinary charge of $687.1, or $10.59 per share, for both basic and diluted earnings per share, net of applicable tax benefits of $515.5, in the fourth quarter of 1995. The following table is a summary of the extraordinary charge for 1995: Before-tax After-tax - -------------------------------------------------------------------------------- Adjustment to net telephone plant $ (1,178.0) $ (703.9) Elimination of net regulatory assets (24.6) (14.3) Tax-related net regulatory liabilities -- 20.1 Accelerated amortization of investment tax credits -- 11.0 - -------------------------------------------------------------------------------- Total Non-cash, Extraordinary Charge $ (1,202.6) $ (687.1) - -------------------------------------------------------------------------------- The adjustment of $1,178.0 to net telephone plant was necessary since estimated useful lives and depreciation methods historically prescribed by regulators did not reflect the rapid pace of technological development and differed significantly from those economic useful lives used by unregulated companies. Plant balances were adjusted by increasing the accumulated depreciation reserve. The increase to the accumulated depreciation reserve was determined by a discounted cash flow analysis which considered technological replacement and the estimated impact of 22 SNET Annual Report future competition. To support this analysis, a depreciation reserve study was also performed that identified, by asset categories, inadequate accumulated depreciation levels (i.e., deficiencies) that had developed over time. The discontinuance of SFAS No. 71 also required the Corporation to eliminate from its consolidated balance sheet the effects of any actions of regulators that had been recognized as assets and liabilities pursuant to SFAS No. 71, but would not have been recognized as assets and liabilities by unregulated companies. The elimination of net regulatory assets relates principally to vacation pay costs and gross earnings tax which were being amortized as they were recognized in the ratemaking process. Additionally, upon the discontinuance of SFAS No. 71, the tax-related regulatory assets and liabilities were eliminated and the related deferred tax balances were adjusted to reflect application of SFAS No. 109, consistent with other unregulated companies. As asset lives were shortened, the related investment tax credits associated with those assets were also adjusted for the shortened lives and the result ($11.0) was included in the extraordinary charge as a credit to income, net of associated deferred income taxes. NOTE 4: EMPLOYEE BENEFITS PENSION PLANS The Corporation sponsors several non-contributory, defined benefit pension plans: one for management employees and one for bargaining-unit employees; and one supplementary non-qualified, unfunded plan for all employees. The supplementary non-qualified plan provides a benefit equal to any pension amount above which would otherwise be payable under the defined benefit pension plans in the absence of Internal Revenue Code limitations. Prior to July 1, 1995, benefits for bargaining-unit employees were based on years of service and pay during 1987 to 1991 as well as a cash balance component. Prior to 1996, benefits for management employees were based on an adjusted career average pay plan. The bargaining-unit and management pension plans were converted to cash balance plans effective July 1, 1995 and January 1, 1996, respectively. Accordingly, pension benefits are determined as a single account balance and grow each year with pay and interest credits. Prior to the conversion to the cash balance plans, the benefits for the employees' supplementary plans were based on years of service and average eligible pay. Effective with the conversion to the cash balance plans, the benefits are based on pay and interest credits. A supplementary non-qualified, unfunded plan for non-employee directors was terminated in 1996 with pension benefits payable only to current and retired directors and with the amount of accrued pension benefits being frozen. 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 the pension cost for these plans in conformity with the Employee Retirement Income Security Act of 1974 using the aggregate cost method. For purposes of determining contributions, the assumed investment earnings rate on plan assets was 9.5% in 1997 and declines to 7.5% in 1999. Pension cost (income) for all plans, computed using the projected unit credit actuarial method, includes the following components: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost $ 21.9 $ 20.2 $ 22.1 Interest cost on projected benefit obligation 91.8 96.3 113.5 Amortizations and deferrals, net 225.9 65.8 249.6 Actual return on plan assets (338.7) (177.6) (393.3) - -------------------------------------------------------------------------------- Net Pension Cost (Income) Recorded to Expense .9 4.7 (8.1) - -------------------------------------------------------------------------------- Settlement gain -- (76.1) (76.0) Costs relating to special termination benefits -- -- 137.5 Curtailment loss -- 10.8 16.8 - -------------------------------------------------------------------------------- Net (Settlement Gain) Curtailment Loss -- (65.3) 78.3 - -------------------------------------------------------------------------------- Net Pension Cost (Income) $ .9 $ (60.6) $ 70.2 - -------------------------------------------------------------------------------- The 1997 decrease in net pension cost (income) recorded to expense was due to strong investment performance and a change in the discount rate. The 1996 net settlement gain and the 1995 net curtailment loss were associated with the severance programs and were recorded to the restructuring reserve in the respective years [see Note 6]. The 1996 increase was due primarily to lower returns on plan assets, reflecting a combination of a lower asset base and a generally weaker capital market return when compared with 1995. The following table sets forth the plans' funded status: At December 31, 1997 1996 - -------------------------------------------------------------------------------- Actuarial Present Value of Accumulated Benefit Obligation, including vested benefits of $1,336.9 and $1,253.3, respectively $ 1,348.6 $ 1,289.3 - -------------------------------------------------------------------------------- Plan assets at fair value $ 1,905.9 $ 1,690.3 Actuarial present value of projected benefit obligation (1,385.2) (1,337.3) - -------------------------------------------------------------------------------- Assets in Excess of Projected Benefit Obligation 520.7 353.0 Unrecognized prior service costs 116.2 129.2 Unrecognized transition asset (84.0) (98.4) Unrecognized net gain (570.0) (401.3) Adjustment required to recognize minimum liability (4.7) (3.2) - -------------------------------------------------------------------------------- Accrued Pension Cost $ (21.8) $ (20.7) - -------------------------------------------------------------------------------- SNET Annual Report 23 Assumptions used to calculate the plans' funded status: At December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Discount rate for projected benefit obligation 7.0% 7.5% 7.0% Expected rate of increase in future management compensation levels 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets 8.0% 8.0% 8.0% - -------------------------------------------------------------------------------- The Corporation periodically amends 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 and life insurance benefits for retired employees. Substantially all of the Corporation's employees may become eligible for these benefits if they meet certain age and service requirements. In addition, an employee's spouse and dependents may be eligible for health care benefits. Effective July 1, 1996, all bargaining-unit employees who retire after December 31, 1989 and all management employees who retire after December 31, 1991 may have to share with the Corporation the premium costs of postretirement health care benefits if these costs exceed certain limits. The Corporation funds trusts for postretirement health insurance benefits using Voluntary Employee Beneficiary Association. Plan assets consist primarily of investments in domestic corporate equity and government and corporate debt securities. The Corporation's postretirement benefit cost includes the following components: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost $ 4.1 $ 4.4 $ 4.4 Interest cost of accumulated benefit obligation 36.1 37.6 33.4 Amortizations and deferrals, net 41.2 19.8 21.0 Actual return on plan assets (56.4) (30.9) (31.5) - -------------------------------------------------------------------------------- Net Postretirement Benefit Cost Recorded to Expense 25.0 30.9 27.3 - -------------------------------------------------------------------------------- Costs relating to special termination benefits -- -- 11.0 Curtailment loss -- .2 12.9 - -------------------------------------------------------------------------------- Net Curtailment Loss -- .2 23.9 - -------------------------------------------------------------------------------- Net Postretirement Benefit Cost $ 25.0 $ 31.1 $ 51.2 - -------------------------------------------------------------------------------- The 1996 and 1995 net curtailment losses were associated with the severance programs and were recorded to the restructuring reserve in the respective years [see Note 6]. The following table sets forth the plans' funded status: At December 31, 1997 1996 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(423.9) $(458.6) Fully eligible active plan participants (27.4) (15.5) Other active plan participants (74.1) (66.3) - -------------------------------------------------------------------------------- Total Accumulated Postretirement Benefit Obligation (525.4) (540.4) Plan assets at fair value 292.8 229.4 - -------------------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (232.6) (311.0) Unrecognized net gain (65.6) (11.9) Unrecognized prior service cost 10.8 13.6 - -------------------------------------------------------------------------------- Accrued Postretirement Benefit Obligation $(287.4) $(309.3) - -------------------------------------------------------------------------------- Assumptions used to calculate the plans' funded status: At December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Discount rate for projected benefit obligation 7.0% 7.5% 7.0% Expected rate of increase in future compensation levels 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets: Management health trust 7.0% 7.0% 7.0% Bargaining-unit health trust 7.5% 7.5% 7.5% Retiree life insurance trust 7.5% 7.5% 7.5% - -------------------------------------------------------------------------------- The assumed health care cost trend rate used to measure the expected cost of these benefits for 1997 was 5.5% and declines to 4.5% by 2001. A one percentage point increase in the assumed health care cost trend rate would have increased the estimated aggregate service and interest cost components of the 1997 net postretirement benefit cost by approximately $2 and the accrued postretirement benefit obligation by approximately $21 as of December 31, 1997. SAVINGS AND STOCK OWNERSHIP PLANS The Corporation sponsors employee savings plans under section 401(k) of the Internal Revenue Code. The plans cover substantially all employees. As part of the savings plans, the Corporation has established an Employee Stock Ownership Plan ("ESOP"). The Corporation provides matching contributions based on qualified employee contributions through its ESOP plan. 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 and in February 1990, the ESOP borrowed an additional $110.0, which the Corporation guaranteed, through a third party. The proceeds of the $10.0 loan were used to acquire shares of the Corporation's common stock through open market purchases. The proceeds of the $110.0 loan were used to purchase shares of both unissued common stock and treasury stock from the Corporation. All shares purchased by the ESOP were originally pledged as collateral for its debt. The Corporation periodically makes cash payments to 24 SNET Annual Report the ESOP that, together with dividends received on shares held by the ESOP, are used to make interest and principal payments on both loans. As these payments are made, shares are released from collateral and made available for distribution to employees' accounts, based on the proportion of debt service paid in the year. ESOP expense and ESOP trust activity are as follows: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Compensation expense(1) $ 12.7 $ 11.0 $ 14.7 Interest expense incurred(1) 3.4 4.4 5.1 Interest income earned (.4) (.5) (.6) - -------------------------------------------------------------------------------- Total Expense $ 15.7 $ 14.9 $ 19.2 - -------------------------------------------------------------------------------- Dividends Used for Debt Service $ 4.6 $ 5.1 $ 5.3 Cash Contributions Used for Debt Service $ 13.7 $ 13.5 $ 13.3 - -------------------------------------------------------------------------------- (1) Net of applicable dividends used for debt service. ESOP shares outstanding are as follows: In Thousands, At December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Allocated shares 1,602.1 1,389.1 1,508.0 Unreleased shares 904.8 1,206.4 1,301.5 - -------------------------------------------------------------------------------- Total ESOP Shares 2,506.9 2,595.5 2,809.5 - -------------------------------------------------------------------------------- SEPARATION OFFERS In April 1995, the Corporation ratified a contract with the Connecticut Union of Telephone Workers, Inc. which included a voluntary early-out offer ("EOO"). The EOO provided enhanced pension benefits by adding six years to the age and to the length of service of employees for purposes of determining pension and postretirement health care benefits eligibility. The employees also had the option to select a pension distribution method (i.e., lump-sum, monthly pension or a combination of both) at the time of separation. The EOO was available to the bargaining-unit work force during July 1995 and approximately 2,700 employees, or 40.7% of the total bargaining-unit work force, accepted the offer and left the Corporation through June 1996. In addition, approximately 500 management employees accepted a severance plan with enhanced benefits during 1996. The 1996 net settlement gains and the 1995 net curtailment losses related to these separation offers were recorded to the restructuring reserve in the respective years [see Note 6]. NOTE 5: INCOME TAXES Income tax expense includes the following components: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- FEDERAL Current $ 84.1 $ 79.4 $ 62.4 Deferred 15.8 16.1 27.4 Investment tax credits, net (1.5) (2.1) (6.9) - -------------------------------------------------------------------------------- Total Federal 98.4 93.4 82.9 - -------------------------------------------------------------------------------- STATE Current 16.0 9.8 17.3 Deferred 4.1 4.4 9.4 - -------------------------------------------------------------------------------- Total State 20.1 14.2 26.7 - -------------------------------------------------------------------------------- Total Income Taxes $ 118.5 $ 107.6 $ 109.6 - -------------------------------------------------------------------------------- In April 1995, new Connecticut state income tax rates were enacted to accelerate the reduction of current rates. The 1997 Connecticut state income tax rate of 10.5% will gradually decrease to 7.5% in 2000. A reconciliation between income taxes and taxes computed by applying the statutory federal income tax rate to pre-tax income is as follows: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Statutory Federal Income Tax Rate 35.0% 35.0% 35.0% - -------------------------------------------------------------------------------- Federal income taxes at statutory rate $ 110.6 $ 105.1 $ 97.4 State income taxes, net of federal income tax effect 13.0 9.2 17.4 Depreciation of telephone plant construction cost previously deducted for tax purposes(1) -- -- 5.1 Amortization of investment tax credits(1) (1.5) (2.1) (6.9) Other differences, net (3.6) (4.6) (3.4) - -------------------------------------------------------------------------------- Income Taxes $ 118.5 $ 107.6 $ 109.6 - -------------------------------------------------------------------------------- Effective Tax Rate 37.5% 35.8% 39.4% - -------------------------------------------------------------------------------- (1) Telephone Company only. Consolidated deferred income tax assets (liabilities) are comprised of the following: At December 31, 1997 1996 - -------------------------------------------------------------------------------- Postretirement benefits other than pensions $ 120.1 $ 124.8 Software 24.7 13.9 Allowance for uncollectibles 15.0 11.9 Other 11.1 10.6 Compensated absences 9.3 13.1 Pension 7.8 9.2 Restructuring charge 2.8 12.8 Depreciation and amortization (31.1) (29.3) Leveraged leases (30.4) (28.3) Valuation allowance (1.9) (2.1) - -------------------------------------------------------------------------------- Deferred Income Taxes $ 127.4 $ 136.6 - -------------------------------------------------------------------------------- SNET Annual Report 25 VALUATION ALLOWANCE The 1997 decrease in the valuation allowance was due primarily to the reduction in state loss carryovers. The allowance will continue to be evaluated based on evidence of realization of all deferred tax assets. NOTE 6: RESTRUCTURING CHARGE In December 1993, the Corporation recorded a restructuring charge of $355.0, $204.2 after-tax or $3.21 for both basic and diluted earnings per share, to provide for a comprehensive restructuring program. The charge included: $170.0 for employee separation costs; $145.0 for process and systems reengineering; and $40.0 for exit and other costs. Costs incurred for employee separations included payments for severance, unused vacation and health care continuation, as well as non-cash net pension and postretirement settlement gains of $65.1 in 1996 and curtailment losses of $102.2 in 1995. Process and systems reengineering costs included incremental costs incurred in connection with the execution of numerous reengineering programs. Exit and other costs included expenses related to the reduction of overall corporate space requirements. A summary of costs incurred under the restructuring program is as follows: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Employee separation costs (gains) $ 5.0 $(45.1) $ 111.2 Process and systems reengineering 2.8 83.1 74.2 Exit and other costs 7.2 7.5 2.5 - -------------------------------------------------------------------------------- Total Costs Incurred $ 15.0 $ 45.5 $ 187.9 - -------------------------------------------------------------------------------- Total employee separations under the restructuring program approximated 4,300 employees utilizing the EOO and severance plans: 970 employees through the end of 1994; 2,195 employees in 1995; and 1,135 employees in 1996. Total employee separations were substantially offset by an increase in provisional employees to support greater demand for services and expanding businesses. The hiring of provisional employees also provides flexible work force levels as business needs change in the future. The Telephone Company has implemented network operations, customer service, repair and support programs and developed new processes to reduce the costs of business while improving quality and customer service. These new integrated processes have enabled the Telephone Company to increase its responsiveness to customer-specific needs and to eliminate certain labor-intensive interfaces between the existing systems. As of December 31, 1997, the restructuring reserve balance of $6.5 is adequate for the future residual costs, primarily 1998's exit costs relating to the delayed reduction of overall corporate space requirements. NOTE 7: SHORT-TERM DEBT Short-term debt, which includes commercial paper used to meet temporary cash needs and long-term debt maturing within one year, consists of the following: At December 31, 1997 1996 - -------------------------------------------------------------------------------- Commercial paper $ 144.6 $ 201.9 Current maturities of long-term debt 41.7 13.3 - -------------------------------------------------------------------------------- Total Short-term Debt $ 186.3 $ 215.2 - -------------------------------------------------------------------------------- Weighted Average Interest Rate on Commercial Paper at Year-End 5.9% 5.8% - -------------------------------------------------------------------------------- The Corporation maintained bank lines of credit to facilitate the issuance of commercial paper. As part of these credit facilities, the Corporation has obtained a contractual commitment to $170.0 in lines of credit provided by a syndicate of banks. At December 31, 1997, the entire line remained available. The annual commitment fee is currently .045% of the total lines of credit. NOTE 8: LONG-TERM DEBT The components of long-term debt are as follows: At December 31, Maturing 1997 1996 - -------------------------------------------------------------------------------- Unsecured notes: 6.13%-8.00% 1998-2007 $ 820.0 $ 720.0 7.25%-8.70% 2031-2033 245.0 325.0 Guaranteed ESOP: 9.35% 1997-2000 44.2 56.4 Debentures: 4.38% 2001 45.0 45.0 Mortgage notes: 9.00%-9.90% 1997-2007 25.5 17.2 Bank notes: 10.50% 1997-2009 23.9 24.4 - -------------------------------------------------------------------------------- Total Long-term Debt 1,203.6 1,188.0 Unamortized discount and premium, net (5.1) (5.1) Capital lease obligations .1 .1 Current maturities (41.7) (13.3) - -------------------------------------------------------------------------------- Long-term Debt $1,156.9 $1,169.7 - -------------------------------------------------------------------------------- Scheduled maturities of total long-term debt include $41.7 in 1998, $17.4 in 1999, $125.6 in 2000, $66.7 in 2001, $101.9 in 2002 and $850.3 thereafter. On February 4, 1997, the Corporation issued $100.0 of 6.50% medium-term notes due 2002. The issuance replaced a portion of short-term debt related to the cellular acquisitions in 1995. On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term notes due 2031, by issuing short-term debt. The early extinguishment of debt resulted in an extraordinary charge of $3.7, net of tax benefits of $2.7, or $.06 per share, for both basic and diluted earnings per share. At December 31, 1997, the Corporation and the Telephone Company had remaining securities, registered with the Securities and Exchange Commission, to issue up to $125.0 and $95.0, respectively, of medium-term unsecured notes through shelf registrations. 26 SNET Annual Report NOTE 9: COMMITMENTS AND CONTINGENCIES The Corporation has entered into both operating and capital leases for facilities and equipment used in its operations. Rental expense under operating leases was $19.8, $21.0 and $23.7 for 1997, 1996 and 1995, respectively. Future minimum rental commitments under third-party, noncancelable operating leases include $14.2 in 1998, $13.1 in 1999, $11.7 in 2000, $5.7 in 2001, $4.5 in 2002 and $10.5 thereafter, for a total of $59.7. Capital leases were not significant. The Corporation expects total capital expenditures of approximately $475 for additions to property, plant and equipment during 1998. In connection with the capital program, the Corporation has made certain commitments for the purchase of material and equipment. In 1995, a U.S. District Court decision was issued in favor of the Department of Labor against the Corporation and the Telephone Company. The decision held that the Corporation and the Telephone Company violated certain sections of the Fair Labor Standards Act and was liable for back wages and liquidating damages. The Corporation and the Telephone Company appealed the decision and on July 31, 1997, the Second Circuit Court of Appeals affirmed the U.S. District Court's decision. As required by the Court's decision, in October 1997, the Corporation and the Telephone Company paid back wages, liquidating damages and interest (from the date of the District Court's judgment) to the employees involved in this action. In 1995, the Telephone Company recorded a liability of $11.0 which was adequate to cover the cost of total damages for this matter. NOTE 10: FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it was 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 equity investments was estimated based on quoted market prices for those or similar investments. Debt The carrying amount of the Corporation's short-term debt approximates fair value because of the short maturity of those instruments. The fair value of long-term debt (excluding capital leases) was 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. The carrying amount and estimated fair value of the Corporation's financial instruments are as follows: At December 31, 1997 1996 - -------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - -------------------------------------------------------------------------------- Cash and Temporary Cash Investments $ 12.3 $ 12.3 $ 9.0 $ 9.0 Long-term Investments $ 2.9 $ 2.1 $ 4.1 $ 13.2 Debt $(1,343.1) $(1,371.5) $(1,384.8) $(1,381.0) - -------------------------------------------------------------------------------- CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Corporation to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. The Corporation places its temporary cash investments in short-term, high quality commercial paper which is rated at least A-1 by Standard and Poor's and P-1 by Moody's Investors Services, Inc. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers in the Corporation's customer base. NOTE 11: LEASE NOTES RECEIVABLE Lease notes receivable include, on an investment basis, a portfolio of leveraged and direct-financing leases. The gross investment in these leases has been recorded on the consolidated balance sheet in leases and other assets. Investments in leveraged leases are in a coal-fired, electric generating facility and other equipment. The investment in direct-financing leases are in a commercial aircraft and other equipment. The components of the lease notes receivable are as follows: At December 31, 1997 1996 - -------------------------------------------------------------------------------- Direct- Direct- Financing Leveraged Financing Leveraged Leases Leases Leases Leases - -------------------------------------------------------------------------------- Minimum rentals receivable $ 58.9 $ 24.5 $ 61.7 $ 25.4 Unearned income (24.1) (12.9) (26.9) (14.0) Estimated, unguaranteed residual value of leased assets 10.3 30.6 10.3 30.6 Initial direct costs .2 -- .2 -- Allowance for losses (11.0) -- (11.0) -- - -------------------------------------------------------------------------------- Lease Notes Receivable $ 34.3 42.2 $ 34.3 42.0 Deferred taxes arising from leveraged leases (30.4) (28.3) - -------------------------------------------------------------------------------- Net Investment in Leveraged Leases $ 11.8 $ 13.7 - -------------------------------------------------------------------------------- Future minimum receipts under third-party direct-financing leases include $5.4 in 1998, $4.8 in 1999, $3.1 in 2000, $3.8 in 2001, $3.8 in 2002 and $38.0 thereafter. SNET Annual Report 27 NOTE 12: SHAREHOLDERS' EQUITY 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. DIVIDENDS DECLARED The dividends for 1997 and 1995 were declared out of retained earnings, while the dividends for 1996 were declared out of proceeds in excess of par value. SHAREHOLDERS' RIGHTS PLAN On December 11, 1996, the Board of Directors approved the 1997 shareholders' rights plan ("Rights Plan") which became effective February 11, 1997 upon the expiration of the previous plan. Under the 1997 Rights Plan, each share of Common Stock has a purchase right that entitles the holder to purchase 1/100 of a preference share (equivalent of one share of Common Stock) at an exercise price of $180.00. 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 outstanding 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 Board also may exchange the rights generally at an exchange ratio of one share of Common Stock per 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, 2007. On January 4, 1998, the Board of Directors amended the Rights Plan to provide that the pending merger with SBC would not invoke the provisions of the plan. The Corporation sponsors a Dividend Reinvestment and Stock Purchase Plan ("DRISPP"). Effective July 1, 1997, the Corporation's policy of issuing new shares was modified to have its agent begin purchasing shares on the open market (when market conditions merit) to meet the needs of the DRISPP. Beginning with the January 15, 1998 dividend, the Corporation resumed issuance of new shares to meet the needs of the DRISPP. NOTE 13: STOCK-BASED COMPENSATION PLANS During 1997, the Corporation sponsored an employee stock option plan and a restricted stock plan for non-employee directors. In prior years, the Corporation also sponsored the SNET 1986 Stock Option Plan ("1986 Plan"). The 1986 Plan, which expired on June 30, 1996, provided stock options to certain key employees at the discretion of a committee of the Board of Directors ("Committee"). The SNET 1995 Stock Incentive Plan ("1995 Plan") is a stock-based compensation plan which enables the awarding of incentive compensation, including stock options, to all employees at the discretion of the Board of Directors or the Committee. Under both the 1986 Plan and the 1995 Plan, 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. All options are exercisable no earlier than one year after the date of grant, with most options vesting ratably over two or four years, and have a maximum life of ten years. Both the 1986 Plan and the 1995 Plan allow stock appreciation rights ("SARs") to be granted in tandem with the related stock option. No SARs have been granted since 1992 and the Corporation presently does not intend to grant additional SARs in the future. The Corporation has elected to continue following Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock-based compensation plans. Accordingly, no compensation cost has been recognized for the plans. Had the Corporation adopted the cost recognition method provided under SFAS No. 123, "Accounting for Stock-Based Compensation," net income (loss) and earnings (loss) per share would approximate the pro forma amounts below: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Net Income (Loss) $190.7 $189.4 $(518.9) Basic Earnings (Loss) Per Share $2.88 $2.90 $(8.00) Diluted Earnings (Loss) Per Share $2.87 $2.89 $(7.99) - -------------------------------------------------------------------------------- The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995. The Black-Scholes option pricing model was used to estimate the options' grant date fair value with the following assumptions: 20% volatility; risk free interest rate ranging from 5.8% to 6.7%; dividends of $1.76 per share per year; and an estimated period to exercise of three or five years. The weighted average fair value of options granted during the year was $6.79, $7.85 and $6.13 in 1997, 1996 and 1995, respectively. 28 SNET Annual Report Information with respect to plan activity is as follows: - -------------------------------------------------------------------------------- Options Shares Available Under Average for Grant Option SARs Price - -------------------------------------------------------------------------------- Balance at 1/1/95 785,300 861,725 162,700 $33.25 Approved for grant 4,600,000 -- -- -- Granted (2,535,950) 2,535,950 -- $37.59 SARs exercised -- (41,475) (41,475) $28.44 Options exercised -- (15,775) -- $30.86 Canceled 34,500 (34,500) -- $33.15 - --------------------------------------------------------------------- Balance at 12/31/95 2,883,850 3,305,925 121,225 $36.65 - --------------------------------------------------------------------- 1986 Plan unused (65,525) -- -- -- Granted (223,500) 223,500 -- $42.48 SARs exercised -- (66,975) (66,975) $32.60 Options exercised -- (53,625) -- $33.37 Canceled 364,725 (364,725) -- $38.04 - --------------------------------------------------------------------- Balance at 12/31/96 2,959,550 3,044,100 54,250 $37.05 - --------------------------------------------------------------------- 1986 Plan unused (64,950) -- -- -- Granted (868,500) 868,500 -- $36.98 SARs exercised -- (22,400) (22,400) $31.33 Options exercised -- (222,149) -- $35.64 Canceled 214,150 (214,150) -- $37.39 - --------------------------------------------------------------------- Balance at 12/31/97 2,240,250 3,453,901 31,850 $36.93 - -------------------------------------------------------------------------------- Options exercisable were 2,114,777, 1,334,388 and 403,850 at December 31, 1997, 1996 and 1995, respectively. The respective weighted average exercise prices were $37.37, $36.72 and $33.67. All outstanding SARs were exercisable at each year-end. All outstanding SARs as of January 4, 1998 were canceled. The following table summarizes information with regard to stock options outstanding and exercisable by ranges of exercise prices: Weighted Weighted Average Average Remaining Exercise Contractual At December 31, 1997 Shares Price Life - -------------------------------------------------------------------------------- Stock Options Outstanding: $24.69 to $36.94 1,737,901 $34.71 7.5 years $37.06 to $44.94 1,716,000 $39.19 8.2 years - -------------------------------------------------------- $24.69 to $44.94 3,453,901 $36.93 7.8 years - -------------------------------------------------------------------------------- Stock Options Exercisable: $24.69 to $36.94 730,151 $34.09 -- $37.06 to $44.94 1,384,626 $39.11 -- - -------------------------------------------------------- $24.69 to $44.94 2,114,777 $37.37 -- - -------------------------------------------------------------------------------- The 1994 SNET Non-Employee Director Stock Plan ("1994 Plan"), which was terminated upon ratification of the 1996 Non-Employee Director Stock Plan ("1996 Plan"), allowed each director to receive between 25% and 100% of their annual retainer in shares of Common Stock. The 1996 Plan, approved on May 8, 1996, provides each non-employee director with 300 shares of Common Stock in lieu of cash compensation. A director may also elect to receive up to 100% of his or her cash retainer in shares. All shares distributed have voting and dividend rights, and are subject to restrictions on transferability. Upon granting of the shares, compensation expense is recorded in the amount of the market value of the shares. A summary of restricted stock activity is as follows: At December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Shares available for grant, beginning of period 196,400 143,852 147,152 New shares approved for issuance -- 200,000 -- 1994 Plan unused -- (141,619) -- Shares granted (2,489) (5,833) (3,300) - -------------------------------------------------------------------------------- Shares Available for Grant, End of Period 193,911 196,400 143,852 - -------------------------------------------------------------------------------- Weighted Average Market Value of Stock on Grant Date $ 37.41 $ 41.21 $ 35.02 Compensation Expense Recorded for Restricted Stock Grants $ .1 $ .2 $ .1 - -------------------------------------------------------------------------------- SNET Annual Report 29 NOTE 14: SUPPLEMENTAL FINANCIAL INFORMATION SUPPLEMENTAL INCOME STATEMENT INFORMATION For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Advertising Expense $ 38.8 $ 42.1 $ 38.8 - -------------------------------------------------------------------------------- Depreciation and amortization: Depreciation $351.7 $331.1 $328.1 Amortization 27.4 25.0 17.9 - -------------------------------------------------------------------------------- Total Depreciation and Amortization $379.1 $356.1 $346.0 - -------------------------------------------------------------------------------- Taxes other than income: Property $ 48.1 $ 48.0 $ 43.7 Other 5.0 6.6 12.8 - -------------------------------------------------------------------------------- Total Taxes Other Than Income $ 53.1 $ 54.6 $ 56.5 - -------------------------------------------------------------------------------- Interest expense: Long-term debt $ 80.9 $ 83.0 $ 74.7 Short-term debt 10.1 10.0 8.5 Capitalized interest (4.6) (7.2) -- Other 3.4 2.9 2.7 - -------------------------------------------------------------------------------- Total Interest Expense $ 89.8 $ 88.7 $ 85.9 - -------------------------------------------------------------------------------- SUPPLEMENTAL BALANCE SHEET INFORMATION At December 31, 1997 1996 - -------------------------------------------------------------------------------- Materials, supplies and inventories: Materials and supplies $ 14.7 $ 14.3 Inventories 15.1 13.1 - -------------------------------------------------------------------------------- Total Materials, Supplies and Inventories $ 29.8 $ 27.4 - -------------------------------------------------------------------------------- Property, plant and equipment, at cost: Telephone plant: Land $ 16.5 $ 16.8 Buildings 398.4 386.4 Central office equipment 1,850.8 1,743.0 Outside plant facilities and equipment 1,798.4 1,732.4 Furniture and office equipment 255.5 310.0 Station equipment and connections 24.9 22.5 Plant under construction 85.5 98.0 Telecommunications property and equipment 487.0 398.2 - -------------------------------------------------------------------------------- Total Property, Plant and Equipment, at cost 4,917.0 4,707.3 Accumulated Depreciation (3,200.2) (3,110.3) - -------------------------------------------------------------------------------- Total Property, Plant and Equipment, net $ 1,716.8 $ 1,597.0 - -------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Interest Paid, net of amounts capitalized $ 88.3 $ 89.2 $ 79.7 - -------------------------------------------------------------------------------- Income Taxes Paid $ 78.8 $ 84.0 $ 87.8 - -------------------------------------------------------------------------------- Changes in operating assets and liabilities, net:(1) Increase in accounts receivable, net $(44.7) $(18.5) $(78.3) Increase in materials, supplies and inventories (1.8) (1.2) (.1) Increase (decrease) in accounts payable, accrued expenses and compensated absences 16.6 (18.2) 65.0 Changes in other assets and liabilities, net 21.8 7.6 (20.6) - -------------------------------------------------------------------------------- Changes in Operating Assets and Liabilities, net $ (8.1) $(30.3) $(34.0) - -------------------------------------------------------------------------------- (1) Reflects the Corporation's acquisition of Woodbury, on July 30, 1997, in a non-cash transaction [see Note 2]. NOTE 15: OPERATING CASH FLOW(1) (UNAUDITED) The following financial data on the Corporation's product groups is not required by generally accepted accounting principles and is provided for informational purposes only: For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Wireline(2) $ 607.2 $ 564.8 $ 569.0 Wireless(3) 61.1 31.3 (10.8) Information and Entertainment(4) 90.2 110.2 102.6 Other(5) 18.1 32.0 34.0 - -------------------------------------------------------------------------------- Total Operating Cash Flow $ 776.6 $ 738.3 $ 694.8 - -------------------------------------------------------------------------------- (1) Represents operating income before depreciation and amortization. Operating cash flow is not a generally accepted accounting principle measurement. (2) Includes Telephone Company's telecommunications operations, SNET Diversified Group, Inc., SNET America, Inc. and Woodbury Telephone Company. (3) Includes the wholesale and retail cellular operations, SNET Cellular, Inc. and SNET Mobility, Inc., net of cellular intercompany amounts and its paging operations. (4) Includes publishing, internet and cable television operations. (5) Includes SNET Real Estate, Inc. and holding company operations. 30 SNET Annual Report NOTE 16: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1st QTR 2nd QTR 3rd QTR 4th QTR Full Year - ------------------------------------------------------------------------------------------------------------------------------------ 1997 - ---- Revenues and Sales $482.7 $501.6 $509.7 $528.3 $2,022.3 Operating Income $ 96.4 $ 98.5 $ 99.2 $103.4 $ 397.5 Income before extraordinary charge $ 46.1 $ 50.0 $ 49.1 $ 52.3 $ 197.5 Extraordinary charge [see Note 8] (3.7) -- -- (3.7) - ------------------------------------------------------------------------------------------------------------------------------------ Net Income $ 42.4 $ 50.0 $ 49.1 $ 52.3 $ 193.8 - ------------------------------------------------------------------------------------------------------------------------------------ Basic Earnings Per Share: Income before extraordinary charge $ .70 $ .76 $ .74 $ .79 $ 2.99 Extraordinary charge (.06) -- -- -- (.06) - ------------------------------------------------------------------------------------------------------------------------------------ Basic Earnings Per Share $ .64 $ .76 $ .74 $ .79 $ 2.93 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted Earnings Per Share: Income before extraordinary charge $ .70 $ .76 $ .74 $ .78 $ 2.98 Extraordinary charge (.06) -- -- -- (.06) - ------------------------------------------------------------------------------------------------------------------------------------ Diluted Earnings Per Share $ .64 $ .76 $ .74 $ .78 $ 2.92 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 - ---- Revenues and Sales $474.0 $487.8 $488.2 $491.9 $1,941.9 Operating Income $102.1 $100.2 $ 90.5 $ 89.4 $ 382.2 Net Income $ 52.2 $ 50.5 $ 45.8 $ 44.3 $ 192.8 Basic Earnings Per Share $ .80 $ .77 $ .70 $ .68 $ 2.95 Diluted Earnings Per Share $ .80 $ .77 $ .70 $ .67 $ 2.94 - ----------------------------------------------------------------------------------------------------------------------------------- SNET Annual Report 31 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION FINANCIAL DATA (UNAUDITED)
Dollars in Millions, Except as Noted 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues and sales $ 2,022 $ 1,942 $ 1,816 $ 1,718 $ 1,655 Costs and expenses(1) $ 1,246 $ 1,204 $ 1,121 $ 1,015 $ 1,367 Interest expense $ 90 $ 89 $ 86 $ 75 $ 91 Income taxes $ 119 $ 108 $ 110 $ 122 $ (44) Income (loss) from continuing operations(2) $ 198 $ 193 $ 169 $ 178 $ (44) Net income (loss) $ 194 $ 193 $ (518) $ 178 $ (318) Basic earnings (loss) per share (dollars): From continuing operations(2) $ 2.99 $ 2.95 $ 2.60 $ 2.77 $ (.68) Net income (loss) $ 2.93 $ 2.95 $ (7.99) $ 2.77 $ (4.99) Diluted earnings (loss) per share (dollars): From continuing operations(2) $ 2.98 $ 2.94 $ 2.60 $ 2.77 $ (.68) Net income (loss) $ 2.92 $ 2.94 $ (7.99) $ 2.77 $ (4.99) Dividends declared per share (dollars) $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.76 Net cash provided by operating activities $ 616 $ 477 $ 443 $ 424 $ 481 Cash expended for capital additions $ 472 $ 374 $ 357 $ 283 $ 269 Depreciation and amortization $ 379 $ 356 $ 346 $ 329 $ 291 Property, plant and equipment, net $ 1,717 $ 1,597 $ 1,565 $ 2,712 $ 2,770 Total assets $ 2,771 $ 2,671 $ 2,724 $ 3,505 $ 3,762 Short-term debt $ 186 $ 215 $ 232 $ 40 $ 290 Long-term debt $ 1,157 $ 1,170 $ 1,182 $ 952 $ 984 Shareholders' equity $ 597 $ 463 $ 353 $ 953 $ 855 - ------------------------------------------------------------------------------------------------------------------------------------
Certain amounts have been restated to conform to the current year presentation. (1) Excludes depreciation and amortization. 1993 includes a charge of $355.0, $204.2 after-tax or $3.21 for both basic and diluted earnings per share, for restructuring. (2) 1997 excludes an extraordinary charge of $3.7 or $.06 for both basic and diluted earnings per share resulting from the early extinguishment of debt. 1995 excludes an extraordinary charge of $687.1, or $10.59 for both basic and diluted earnings per share, related to the discontinuance of SFAS No. 71. 1993 includes the after-tax restructuring charge and excludes discontinued operations of $10.3, or $.16 per share (basic and diluted), an extraordinary charge of $44.0, or $.69 per share (basic and diluted) and the cumulative effect of accounting changes of $220.2, or $3.46 per share (basic and diluted). 32 SNET Annual Report SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION STATISTICAL DATA (UNAUDITED)
Dollars in Millions, Except as Noted 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Network access lines in service (thousands)(1) 2,286 2,163 2,073 2,009 1,964 Annual growth(1) 5.7% 4.3% 3.2% 2.3% 1.4% Network interstate access minutes of use (millions) 8,291 7,906 7,298 6,917 6,522 Annual growth 4.9% 8.3% 5.5% 6.1% 4.7% Interstate and international toll access line subscribers (thousands) 941 758 266 117 10 Annual growth 24.1% 185.0% 127.4% -- -- Cellular subscribers (thousands)(2) 457 392 323 166 88 Annual growth 16.6% 21.4% 94.6% 88.6% 29.4% Operating cash flow(3) $ 777 $ 738 $ 695 $ 703 $ 288 Telephone Company wireline cost per access line (dollars)(4) $ 312 $ 332 $ 320 $ 340 $ 365 Return on average total capital 14.9% 15.9% --(5) 12.8% --(6) Return on average equity 36.3% 45.6% --(5) 19.4% --(6) Debt ratio(7) 69.2% 74.9% 80.0% 51.0% 59.9% Pre-tax interest coverage (times) 4.3 4.1 4.2 5.0 .1 Average total debt cost 6.5% 6.6% 6.9% 6.8% 7.7% Current ratio (times) .69 .70 .73 .88 .82 Average dividend yield 4.4% 4.4% 5.1% 5.4% 4.9% Payout ratio 60.1% 59.9% --(5) 63.5% --(6) Market price per share (dollars): High $51.500 $45.500 $40.250 $36.250 $38.375 Low $34.750 $36.000 $31.750 $28.250 $33.625 Book value per share (dollars) $ 8.96 $ 7.05 $ 5.42 $ 14.77 $ 13.38 Average market price per share (dollars) 39.96 $ 40.07 $ 34.47 $ 32.63 $ 35.70 Average book value per share (dollars) $ 8.08 $ 6.44 $ 15.14 $ 14.26 $ 17.69 Average price/earnings ratio (times) 14 14 --(5) 12 --(6) Average trading volume 153,200 105,028 91,797 59,437 79,086 Number of shareholders 48,720 50,917 53,332 55,693 57,352 Total employees 9,743 9,441 9,070 9,797 10,476 - ------------------------------------------------------------------------------------------------------------------------------------
Certain amounts have been restated to conform to the current year presentation. (1) Excluding the purchase of Woodbury Telephone Company ("Woodbury"), network access lines in service would have increased 4.7% to 2,265,000 in 1997. (2) Excluding the subscribers from the acquired cellular properties, cellular subscribers would have increased 51.1% to 251,000 subscribers in 1995. (3) Represents operating income before depreciation and amortization. Operating cash flow is not a generally accepted accounting principle measurement. Management provides this measurement for informational purposes only. Excluding the impact of the 1993 before-tax restructuring charge, operating cash flow would have been $643 in 1993. (4) Excludes depreciation and amortization, property and other taxes, publishing and bad debt expenses. Also, excludes costs and access lines acquired from the purchase of Woodbury. 1993 also excludes the before-tax restructuring charge. (5) Not presented for 1995 based upon a loss per share. A return on average total capital of 11.6%, a return on average equity of 17.2%, a payout ratio of 67.7% and an average price/earnings ratio of 13 were calculated excluding the loss per share impact of the extraordinary charge of $10.59. (6) Not presented for 1993 based upon a loss per share. A return on average total capital of 10.4%, a return on average equity of 12.3%, a payout ratio of 69.6% and an average price/earnings ratio of 14 were calculated excluding the loss per share impact of the restructuring charge of $3.21, discontinued operations of $.16, extraordinary charge of $.69 and the cumulative effect of accounting changes of $3.46. (7) Excluding the effect of the non-cash extraordinary charge related to the discontinuance of SFAS No. 71, the 1995 debt ratio would have been 57.6%. Excluding the combined effect of the charge related to SFAS No. 71 and the debt issued to acquire the cellular properties, the 1995 debt ratio would have been 48.0%. SNET Annual Report 33 SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION INVESTOR INFORMATION Corporate Information - -------------------------------------------------------------------------------- Executive Office: Stock Exchange Listings: Auditors: SNET New York Stock Exchange Coopers & Lybrand L.L.P. 227 Church Street Pacific Stock Exchange Independent Accountants New Haven, CT 06510 Symbol: SNG 100 Pearl Street (203) 771-5200 Hartford, CT 06103 Shareholder Information - -------------------------------------------------------------------------------- Annual Meeting of The Form 10-K may be For Shareholder Shareholders: obtained Information May 13, 1998, 11:30 a.m. by contacting the Transfer including quarterly Italian Center of Agent and Registrar: results, latest Stamford State Street Bank recorded news and 1620 Newfield Avenue and Trust Company information, call Stamford, CT 06905 P.O. Box 8200 1-800-SNG-6220 or visit Boston, MA 02266-8200 our Internet web site From anywhere in the at www.snet.com continental U.S.: 1-800-243-1110 Security Analysts and Dividend Reinvestment Portfolio Managers and Stock Purchase Plan - -------------------------------------------------------------------------------- Direct inquiries to: Mr. All owners of common Shareholders do not pay James A. Magrone stock are eligible for any brokerage or Director-Investor the plan, which allows administrative fees when Relations 227 Church participants to apply purchasing additional Street New Haven, CT dividends and/or optional shares through the plan. 06510 (203) 771-4662 cash payments toward You can obtain a increased investment in prospectus and enrollment the Corporation. forms by contacting State Street Bank and Trust Company, Plan Administrator. 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. Cash dividends of $.44 per share were declared for each quarter in 1997 and 1996. The number of holders of SNET stock at February 27, 1998 was 47,787.
Market Price - -------------------------------------------------------------------------------------------------------- 1997 1996 Quarter High Low Close Quarter High Low Close - -------------------------------------------------------------------------------------------------------- First $ 39.125 $ 34.750 $ 35.875 First $ 43.750 $ 37.500 $ 40.250 Second $ 42.375 $ 35.625 $ 38.875 Second $ 45.500 $ 40.500 $ 42.000 Third $ 41.500 $ 38.250 $ 40.875 Third $ 42.750 $ 36.750 $ 36.875 Fourth $ 51.500 $ 41.000 $ 50.313 Fourth $ 41.125 $ 36.000 $ 38.875
34 SNET Annual Report SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION OTHER INFORMATION Executive Officers of the Corporation - -------------------------------------------------------------------------------- Daniel J. Miglio Chairman and Chief Executive Officer Madelyn M. DeMatteo Senior Vice President--General Counsel and Secretary Karin D. Mayhew Senior Vice President--Organization Development Fred T. Page Senior Vice President--Network Services Ronald M. Serrano Senior Vice President--Communication, Information and Entertainment Group Donald R. Shassian Senior Vice President and Chief Financial Officer Representative Servicemarks and Trademarks - -------------------------------------------------------------------------------- SNET(R) is a registered We Go Beyond The Call(R), americast(TM) is a trademark and I-SNET is a SmartLink(R) and All trademark of the servicemark of Southern Distance(R) are americast partnership. New England registered trademarks of Telecommunications The Southern New England Corporation. Telephone Company. Page 2000r is a registered trademark of SNET Mobility, Inc. SNET Annual Report 35 EX-21 10 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 Mobility, Inc. Connecticut SNET Diversified Group, Inc. Connecticut SNET Real Estate, Inc. Connecticut SNET Credit, Inc. Connecticut SNET Personal Vision, Inc. Connecticut SNET Information Services, Inc. Connecticut The Woodbury Telephone Company Connecticut EX-23 11 Coopers Coopers & Lybrand L.L.P. & Lybrand a professional services firm CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference of our reports dated January 27, 1998, which include an explanatory paragraph related to the discontinuance of SFAS No. 71, "Accounting for Certain Types of Regulation", effective January 1, 1996, on our audits of the consolidated financial statements and financial statement schedule of Southern New England Telecommunications Corporation as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, 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. 33-59713 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. Registration Statement No. 33-64975 on Form S-8 relating to the SNET 1995 Stock Incentive Plan. Registration Statement No. 33-60133 on Form S-3 relating to the registration of $470 million of Debt Securities. Registration Statement No. 333-05757 on Form S-8 relating to the SNET 1996 Non-Employee Director Stock Plan. Registration Statement No. 333-45837 of SBC Comunications, Inc. on Form S-4 and the related Proxy Statement/Prospectus of Southern New England Telecommunications Corporation and SBC Communications, Inc. /s/ Coopers & Lybrand L.L.P. Hartford, Connecticut Coopers & Lybrand L.L.P. March 19, 1998 EX-24.1 12 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 Donald R. Shassian 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. - 2 - IN WITNESS WHEREOF each of the undersigned has executed this Power of Attorney this 11th day of March 1998. /s/ William F. Andrews /s/ Claire L. Gaudiani William F. Andrews, Director Claire L. Gaudiani, Director /s/ Richard H. Ayers /s/ Ira D. Hall Richard H. Ayers, Director Ira D. Hall, Director /s/ Robert L. Bennett /s/ Burton G. Malkiel Robert L. Bennett, Director Burton G. Malkiel, Director /s/ Barry M. Bloom /s/ Frank R. O'Keefe, Jr. Barry M. Bloom, Director Frank R. O'Keefe, Jr. Director /s/ Frank J. Connor /s/ Daniel J. Miglio Frank J. Connor, Director Daniel J. Miglio, Chairman, President, Chief Executive Officer and Director /s/ William R. Fenoglio William R. Fenoglio, Director /s/ Joyce M. Roche Joyce M. Roche, Director EX-24.2 13 C E R T I F I C A T E This is to certify that by unanimous consent of the Board of Directors of Southern New England Telecommunications Corporation dated March 11, 1998, 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 and the Chief Financial Officer 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, 1997, in substantially the form submitted, 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 other acts and to execute and deliver any other documents necessary or advisable in connection with the foregoing." This Consent has the same force and effect as a vote in favor of such action at a regular constituted meeting of the Board of Directors of the Company called for such purpose. Attest: /s/ Paula M. Anderson Paula M. Anderson Assistant Secretary New Haven, Connecticut March 19, 1998 EX-27 14
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1997 ANNUAL REPORT ON FORM 10-K OF SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 12,300 0 360,400 32,500 29,800 454,600 4,917,000 3,200,200 2,770,900 657,600 1,156,900 0 0 68,900 528,300 2,770,900 0 2,022,300 0 1,624,800 (8,300) 0 89,800 316,000 118,500 197,500 0 (3,700) 0 193,800 2.93 2.92
-----END PRIVACY-ENHANCED MESSAGE-----