SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1994.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS CORPORATION, MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION H(2).
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Form 10-Q - Part I The Southern New England Telephone Company
PART I - FINANCIAL INFORMATION
The Southern New England Telephone Company ("Telephone Company")
is a wholly owned telephone operating subsidiary of the Southern
New England Telecommunications Corporation ("Corporation") and
has its principal executive office at 227 Church Street, New
Haven, Connecticut 06510 (telephone number (203) 771-5200).
The condensed financial statements on the following pages have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments of a normal recurring nature
necessary for fair presentation for each period shown.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. Management believes
that the disclosures made are adequate to make the information
presented not misleading. Operating results for any interim
periods, or comparisons between interim periods, are not
necessarily indicative of the results that may be expected for
full fiscal years. It is suggested that these financial statements
be read in conjunction with the financial statements and notes
thereto included in the Telephone Company's 1993 Annual Report
on Form 10-K.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENT OF INCOME AND RETAINED EARNINGS
(Dollars in millions)
(Unaudited)
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
1994 1993 1994 1993
Revenues
Local service $ 156.0 $ 147.2 $ 462.3 $ 412.9
Intrastate toll 72.8 81.7 227.7 261.9
Network access 88.7 85.9 263.9 258.1
Publishing and other 50.0 48.4 153.6 144.1
Total Revenues 367.5 363.2 1,107.5 1,077.0
Costs and Expenses
Operating and maintenance 189.6 187.7 574.6 582.6
Depreciation and amortization 74.3 71.5 222.0 193.8
Taxes other than income 13.2 13.6 40.4 43.2
Total Costs and Expenses 277.1 272.8 837.0 819.6
Operating Income 90.4 90.4 270.5 257.4
Other expense, net 1.1 .2 1.4 -
Income Before Interest, Income
Taxes and Accounting Change 89.3 90.2 269.1 257.4
Interest 13.2 16.5 40.7 51.1
Income Before Income Taxes
and Accounting Change 76.1 73.7 228.4 206.3
Income Taxes 30.7 28.5 92.1 78.3
Income Before Accounting Change 45.4 45.2 136.3 128.0
Accounting change - - - (6.5)
Net Income $ 45.4 $ 45.2 $ 136.3 $ 121.5
Retained Earnings -
Beginning of period $ 613.1 $ 779.0 $ 572.2 $ 763.7
Net income 45.4 45.2 136.3 121.5
Dividends declared to parent (28.0) (27.0) (78.0) (88.0)
End of Period $ 630.5 $ 797.2 $ 630.5 $ 797.2
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEET
(Dollars in millions)
(Unaudited)
September 30, December 31,
1994 1993
ASSETS
Current Assets
Cash and temporary cash investments $ 58.5 $ 214.5
Accounts receivable, net of allowance
for uncollectibles of $22.5 and $20.4,
respectively 254.5 251.0
Prepaid publishing 38.2 40.5
Materials and supplies 6.1 8.0
Deferred income taxes, prepaid taxes and other 103.9 80.2
Total Current Assets 461.2 594.2
Telephone plant, at cost 4,082.8 4,039.8
Less: Accumulated depreciation and
amortization 1,565.6 1,429.2
Net Telephone Plant 2,517.2 2,610.6
Deferred charges and other assets 251.8 265.7
Total Assets $3,230.2 $3,470.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEET (continued)
(Dollars in millions)
(Unaudited)
September 30, December 31,
1994 1993
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 135.9 $ 192.7
Obligations maturing within one year - 240.0
Restructuring charge - current 132.9 103.0
Advance billings and customer deposits 44.3 41.0
Accrued compensated absences 30.2 33.9
Other current liabilities 94.7 70.4
Total Current Liabilities 438.0 681.0
Long-term obligations 746.3 746.1
Deferred income taxes 453.9 424.2
Restructuring charge - long-term 148.9 232.0
Unamortized investment tax credits 44.9 50.8
Other liabilities and deferred credits 236.6 233.1
Total Liabilities 2,068.6 2,367.2
Stockholder's Equity
Common stock; $12.50 par value;
30,428,596 shares issued and
30,385,900 outstanding at each
period end 380.4 380.4
Proceeds in excess of par value 152.1 152.1
Retained earnings 630.5 572.2
Less: Treasury stock (42,696 shares
at each period end) (1.4) (1.4)
Total Stockholder's Equity 1,161.6 1,103.3
Total Liabilities and Stockholder's Equity $3,230.2 $3,470.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
For the 9
Months Ended
September 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $136.3 $121.5
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 222.0 193.8
Cumulative effect of accounting change - 6.5
Effect of business restructuring (53.2) -
Change in operating assets and liabilities, net (4.3) (51.5)
Other, net 19.7 47.3
Net cash provided by operating activities 320.5 317.6
CASH FLOWS FROM INVESTING ACTIVITIES
Cash expended for capital additions (161.1) (171.4)
Other, net (3.3) .6
Net cash used by investing activities (164.4) (170.8)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (72.0) (78.2)
Net payments of short-term
borrowings from affiliate - (65.4)
Repayment of long-term borrowings (240.0) -
Other, net (.1) (.8)
Net cash used by financing activities (312.1) (144.4)
(Decrease) increase in cash and temporary cash
investments (156.0) 2.4
Cash and temporary cash investments at beginning
of period 214.5 6.4
Cash and temporary cash investments at end
of period $58.5 $ 8.8
Income taxes paid $86.0 $86.2
Interest paid $45.1 $64.5
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I The Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(a) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Changes - The Telephone Company implemented
Statement of Financial Accounting Standards ("SFAS") No. 106
"Employers' Accounting for Postretirement Benefits Other Than
Pensions", SFAS No. 112 "Employers' Accounting for
Postemployment Benefits" and SFAS No. 109 "Accounting for
Income Taxes" effective January 1, 1993. The cumulative
effect of the accounting change for SFAS No. 112 as of January
1, 1993 resulted in a one-time, non-cash charge which reduced
net income reported in the condensed statement of income by
$6.5 million. For SFAS No. 106, the Telephone Company elected
to amortize the transition obligation over the average
remaining service period, therefore a cumulative effect was
not recorded. In addition, a cumulative effect was not
recorded for the adoption of SFAS No. 109 in compliance with
the methods of adoption for regulated entities.
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Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of nine months ended September 30, 1994 vs. nine
months ended September 30, 1993
Revenues and Sales:
Local service revenues increased $49.4 million, or 12.0%, due
primarily to new rates implemented beginning on July 9, 1993
in accordance with the Telephone Company's 1993 general rate
award. The primary services affected by the increase in rates
were directory assistance, coin telephone and basic local
service. In accordance with the 1993 general rate award,
changes to rates for basic local service also went into effect
on July 9, 1994. Also contributing to the increase in local
service revenues was an increase in access lines in service
and an expansion of the local-calling service area in several
exchanges during September of 1993, which resulted in a shift
in revenue from intrastate toll to local service. Access
lines in service grew 2.1% from approximately 1,956,000 at
September 30, 1993 to approximately 1,997,000 at September 30,
1994. In addition, growth experienced in subscriptions to
premium services, such as Totalphone[SM] and SmartLink[SM]
contributed to the increase in local service revenues, as well
as increased Totalphone[SM] rates resulting from the 1993
general rate award.
Intrastate toll revenues, which include revenues from toll and
WATS services, decreased $34.2 million, or 13.1%. A portion
of this decrease was due to the shift of revenues to local
service caused by the expansion of the local-calling service
area in several exchanges as discussed above. Also
contributing to the decrease was a reduction in intrastate
toll rates, including several toll discount plans, which were
implemented in accordance with the 1993 general rate award, as
well as the increasingly competitive toll and WATS market.
Toll message volumes decreased 2.9% reflecting the impact of
the expansion of the local-calling service areas. In
addition, WATS revenues decreased $11.0 million, or 32.8%, due
primarily to lower WATS message volumes resulting from
customers migrating to lower priced services offered by the
Telephone Company and the impact competitive providers have
had on this market.
Network access revenues increased $5.8 million, or 2.2%, due
to an increase in interstate minutes of use of approximately
6.0%. Partially offsetting the increase in interstate minutes
of use were decreases in interstate tariff rates. These
decreases, effective July 2, 1993 and July 1, 1994, were in
accordance with the Telephone Company's annual Federal
Communications Commission ("FCC") filing under price cap
regulation for 1993 and 1994, respectively.
Publishing and other revenues increased $9.5 million, or 6.6%.
Publishing and other revenues include revenues from publishing
operations; billing and collections, and other non-access
services rendered on behalf of interexchange carriers; and
provision for uncollectible accounts receivable.
Miscellaneous revenues associated with the 1993 general rate
award and a decrease in the provision for uncollectible
accounts receivable for residence, business and directory
customers account for the majority of the variance.
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Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of nine months ended September 30, 1994 vs. nine
months ended September 30, 1993
Costs and Expenses:
Operating and maintenance expenses decreased $8.0 million, or
1.4%. Employee related costs decreased approximately $8.0
million primarily as a result of a decrease in the average
work force of 6.7% over the comparable 1993 period. This
decrease is primarily the result of the initial implementation
of the work force reduction phase of the restructuring program
announced in December 1993. As of September 30, 1994,
approximately 850 employees, representing 16.6% of the total
number of management employees and 5.3% of the total number
of bargaining-unit employees, had left the Telephone Company
as a result of this work force reduction plan. Partially
offsetting the decrease in average work force was a 3.0% wage
increase for bargaining-unit employees in accordance with the
Connecticut Union of Telephone Workers ("CUTW") 1992 contract
effective October 1993 and, to a lesser extent, an average
wage increase of approximately 4.0% for management employees
effective April 1994.
Depreciation and amortization expense increased $28.2 million,
or 14.6%. The increase in depreciation and amortization was
attributable primarily to revised depreciation rate schedules
for intrastate plant, as approved by the Connecticut
Department of Public Utility Control ("DPUC"). The increase
in depreciation expense relating to revised depreciation rates
for intrastate plant was approximately $20.0 million. An
increase in the average depreciable telephone plant, property
and equipment also contributed to the increase in depreciation
and amortization expense.
Interest Expense:
Interest expense decreased $10.4 million, or 20.4% due
primarily to interest savings from previous debt refinancings
and a decrease in average debt outstanding for the nine month
period.
Income Taxes:
The effective tax rate in 1994 was 40.3% as compared with
38.0% in 1993. For 1993, income taxes were reduced by an
adjustment relating to the amortization of investment tax
credits.
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Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Comparison of balances at September 30, 1994 vs. December 31,
1993
Cash and temporary cash investments:
Cash and temporary cash investments decreased $156.0 million
due primarily to the repayment of debt [see Liquidity and
Capital Resources] partially offset by timing of cash
requirements.
Obligations maturing within one year:
Obligations maturing within one year decreased $240.0 million
due primarily to the repayment of debt [see Liquidity and
Capital Resources].
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations of
$320.5 million during the nine months ended September 30, 1994 as
compared with $317.6 million during the nine months ended
September 30, 1993. The primary use of cash flows from
operations continued to be capital expenditures. The Telephone
Company believes that cash flows from operations will be
sufficient to fund all of its anticipated capital expenditures.
In January 1994, the proceeds of $200.0 million of Telephone
Company 6.125% unsecured notes issued in December 1993 were used
to redeem $200.0 million of 8.625% debentures called irrevocably
on December 14, 1993. In addition, $40.0 million of Telephone
Company notes, effectively tendered in December 1993, were
liquidated in January 1994.
As of September 30, 1994, total charges, pre-tax, relating to the
Telephone Company's restructuring plan announced in December 1993
amounted to approximately $53.0 million. Expenditures for
severance and other employee related payments associated with
work force reductions represented approximately $34.0 million of
the total charges. These charges included severance payments,
health care coverage, postemployment benefits as well as a $12.0
million non-cash charge for pension curtailment costs associated
with the work force reductions to date. Expenditures for direct
and incremental costs of analyzing and implementing reengineering
solutions to develop new processes and tools represented
approximately $19.0 million as of September 30, 1994. The
Telephone Company began implementing its restructuring program in
January 1994. All cash expenditures associated with the year to
date charges were funded from cash flows from operations. The
Telephone Company expects total 1994 cash expenditures related to
the restructuring program to range between $50 and $70 million,
pre-tax.
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Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Competition
On June 10, 1994, the U.S. Court of Appeals ("Court") overturned
a 1992 FCC decision requiring local exchange carriers ("LECs"),
including the Telephone Company, to provide expanded special
access (private line) interconnection to permit carriers and
others to terminate their own transmission facilities and
physically colocate in LEC central offices. In response to the
Court's action, the FCC, on July 14, 1994, directed the LECs to
provide expanded interconnection through virtual colocation, but
exempted LECs from this mandatory virtual colocation requirement
in central offices in which the LECs chose to provide physical
colocation. Prior to the Court's decision, the Telephone Company
had begun to allow physical colocation for applications received
from competitive access providers for special access
interconnection in selected central offices of the Telephone
Company. On September 1, 1994, the Telephone Company notified
the FCC that it intends to continue to offer interconnection on a
physical colocation basis.
Regulatory Matters
State Regulatory Matters
In accordance with the Telephone Company's 1993 general rate
award, changes to rates for basic local service went into effect
on July 9, 1994. Residence flat rates increased $.26 a month and
business rates decreased between $.69 and $1.23 a month depending
on the type of local service selected.
On June 30, 1994, the DPUC issued a final decision on the
Telephone Company's request to develop and provide electronic
information services, including electronic publishing services.
The DPUC's decision will allow the Telephone Company to offer
several new services, such as SNET Access, Consumer Tips, and
Electronic Yellow Pages through its SNET Publishing division, as
well as other information and multi-media services through SNET
Diversified Group, Inc., a subsidiary of the Corporation.
On May 26, 1994 the Governor of the State of Connecticut signed
into law (Public Act 94-83) legislation which provides a new
regulatory framework for Connecticut telecommunications. The law,
which resulted from recommendations submitted by a
telecommunications task force in February 1994 and which took
effect July 1, opens Connecticut telecommunication services to
full competition, including local phone service currently
provided primarily by the Telephone Company and encourages the
DPUC to adopt alternative forms of regulation for telephone
companies' "noncompetitive" and "emerging competitive" services.
As a result of the new legislation, the DPUC has opened a number
of dockets to address the implementation of Public Act 94-83,
including an initial docket to determine the appropriate vision
for the Connecticut telecommunications infrastructure. In
addition, subject to federal restraints, the law permits any
entity, including a telecommunications company, to apply to the
DPUC to offer competing cable TV service within existing
franchise areas and permits cable TV companies to seek
certification to compete with LECs within their franchise areas.
As of September 30, 1994, approximately 30 companies have been
authorized to compete for intrastate toll business.
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Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Regulatory Matters (continued)
State Regulatory Matters (continued)
The Corporation is not currently able to quantify the effect that
this legislation will have on its operations.
On September 19, 1994, the Telephone Company and the Corporation
petitioned the DPUC to lift a nine year old restriction on the
Corporation's total investment in unregulated businesses. The
current regulation restricts the Corporation from investing more
than 25% of its total assets in unregulated diversified
activities without the approval of the DPUC. The Corporation
believes that removal of this restriction will be consistent with
a new regulatory model for telecommunications in Connecticut.
On April 13, 1994, the DPUC approved a marketing arrangement
between the Telephone Company and SNET America, Inc. ("SNET
America"), a wholly owned subsidiary of the Corporation offering
long distance services. The marketing arrangement enables the
Telephone Company to sell SNET America's interstate and
international products and SNET America to sell the Telephone
Company's intrastate products and services. This arrangement
will enable the Telephone Company to satisfy its customer's
complete long distance calling needs with a single point of
contact through the SNET All Distance[SM] service offering.
As of September 30, 1994, the Telephone Company's intrastate rate
of return on common equity was below the 11.65% authorized by the
DPUC in the 1993 general rate award.
Federal Regulatory Matters
On April 1, 1994, the Telephone Company filed with the FCC its
1994 annual interstate access tariff under price cap regulation
for effect on July 1, 1994. The Telephone Company maintained its
selection of the 3.3% productivity factor and will be allowed to
earn up to a 12.25% interstate rate of return annually before any
sharing mechanism occurs. The filing, which was approved by the
FCC effective July 1, 1994, incorporated rate reductions which
could result, for the period July 1, 1994 to June 30, 1995, in
decreased annual interstate network access revenues of
approximately $7.0 million, to the extent the rate reductions are
not offset by increased demand.
On July 12, 1994, the Court reversed and remanded to the FCC a
ruling affecting the exogenous treatment of certain incremental
postretirement costs incurred by price cap carriers. The
Telephone Company's tariffs which took effect on July 2, 1993 and
were subject to FCC further investigation could be affected by
the Court's decision. The Telephone Company's tariffs which took
effect on July 1, 1994 could also be affected by the Court's
decision. The Telephone Company does not expect this decision to
have a material effect on its revenues.
As of September 30, 1994, the Telephone Company's interstate rate
of return was below the 12.25% authorized under price cap
regulation.
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Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Regulatory Matters (continued)
Effects of Regulatory Accounting
The Telephone Company currently gives accounting recognition to
the actions of regulators where appropriate, as prescribed by
SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." Under SFAS No. 71, the Telephone Company records
certain assets and liabilities because of actions of regulators.
More significantly, amounts charged to operations for
depreciation expense reflect estimated lives and methods
prescribed by regulators rather than those consisting of useful
and economic lives that might otherwise apply to unregulated
enterprises. In the event that the Telephone Company no longer
meets the criteria for following SFAS No. 71, the accounting
impact to the Company would be an extraordinary non-cash charge
to operations of a material amount. In light of the new
regulatory framework for Connecticut telecommunications (see
"State Regulatory Matters"), the Telephone Company has reviewed
the criteria set forth in SFAS No. 71 and has determined that the
continuing application of the regulatory accounting standard is
appropriate at this time.
Employee Relations
On August 17, 1994, the Corporation and the CUTW reached a
settlement that called for an "early-out option" for bargaining-
unit employees to be negotiated no later than March 31, 1995.
The terms and conditions of the "early-out option" have not been
determined yet, however, the Corporation does not expect the
offer to have a material impact on operations. Reengineering
efforts and reorganization schedules will impact the timing of
employees leaving the Corporation. This force reduction measure
is a part of the Corporation's overall strategy to reduce costs
in an effort to compete effectively.
Under the terms of the 1992 CUTW contract, a general wage
increase of 5.0% went into effect on October 2, 1994 for all
bargaining-unit employees. This is the third and final increase
of the 1992 contract; a 2.0% increase was effective in September
1992, and a 3.0% increase was effective in October 1993. The
1992 CUTW contract will expire on August 5, 1995.
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Form 10-Q - Part II The Southern New England Telephone Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the third
quarter of 1994.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On July 21, 1994, the Telephone Company filed a
report on Form 8-K, dated July 21, 1994 announcing
the Corporation's financial results for the second
quarter of 1994.
On October 26, 1994, the Telephone Company filed a
report on Form 8-K, dated October 26, 1994
announcing the Corporation's financial results for
the third quarter of 1994.
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Form 10-Q - Part II The Southern New England Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Southern New England Telephone Company
November 9, 1994
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller
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