Form 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
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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 1-1150
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
Incorporated under the laws of the State of New York
I.R.S. Employer Identification Number 04-1664340
125 High Street, Boston, Massachusetts 02110
Telephone Number (617) 743-9800
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF NYNEX 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 THE REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION H(2).
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_.
Amendment No. 2
The registrant hereby amends the following item of its Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1994, as set forth in the pages
attached hereto:
Part I - Item 2 "Management's Discussion and Analysis of Results of
Operations"
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following Management's Narrative Analysis of Results of Operations is
provided pursuant to General Instruction H(2) to Form 10-Q.
BUSINESS RESTRUCTURING
Second quarter 1994 results include approximately $54 million of pretax charges
($35 million after-tax) for pension enhancements for approximately 400
management employees who elected during the quarter to leave New England
Telephone and Telegraph Company (the "Company") under retirement incentives and
for the Company's allocation from Telesector Resources Group, Inc. ("Telesector
Resources") for its pension enhancements. A portion of the year-end 1993 accrual
for severance was utilized on a per employee basis, and the incremental costs of
both the Company's pension enhancements and the Company's allocation of
Telesector Resources' pension enhancements were recorded. The retirement
incentives are intended to provide a voluntary means to implement a portion of
the planned work force reductions of approximately 6,300 employees by the end of
1996. The components of the $54 million pretax charges are as follows: $14
million ($10 million after-tax) for pension enhancements, $10 million ($7
million after-tax) for associated postretirement medical benefits, $16 million
($10 million after-tax) for charges allocated to the Company from Telesector
Resources for pension enhancements and $14 million ($8 million after-tax) for
its associated postretirement medical benefits. Much of the cost of the
incentives will be funded by NYNEX's pension plans.
In February of 1994, the Board of Directors of NYNEX Corporation approved a
pension enhancement for eligible management employees who retire through
December 31, 1996. This enhancement will be offered at different times through
1996 according to local force requirements. An agreement has been reached with
the Communications Workers of America which extends the existing labor agreement
to August 1998 and provides a retirement incentive. On August 5, 1994, a similar
agreement with the International Brotherhood of Electrical Workers in New
England was tentatively reached, subject to ratification by the union
membership. (See COLLECTIVE BARGAINING AGREEMENTS below.)
The reserves established for severance will be transferred to the pension
liability on a per employee basis as a result of employees' leaving under the
pension enhancements as opposed to severance provisions, and the incremental
cost of the pension enhancements will be charged to expense as employees leave.
The retirement incentives credit employees with an additional six years towards
both their age and their length of service for the purpose of determining
pension eligibility and benefits. Postretirement medical costs will be increased
on a per employee basis, because these incentives resulted in more individuals
qualifying for lifetime medical coverage than under the severance plan, and will
be charged to expense as employees leave. Under the assumption that
nonmanagement employees will leave under the retirement incentive, the expected
utilization of nonmanagement severance reserves and the application of the
postretirement medical liability per year have been revised from the expected
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (Continued)
utilization as previously reported (see the Company's Annual Report on
Form 10-K/A, Amendment No. 1, for the year ended December 31, 1993) as follows:
(In millions)
Severance 1994 1995 1996 Total
--------- ------------------------------
Management $80 $11 $ 9 $100
Nonmanagement 14 42 45 101
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Total $94 $53 $54 $201
==============================
Medical 1994 1995 1996 Total
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Management $35 $ 4 $ 4 $ 43
Nonmanagement 24 61 66 151
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Total $59 $65 $70 $194
==============================
The restructuring reserve balance at June 30, 1994, which does not include the
liability recorded at year-end for postretirement medical benefits associated
with employees' leaving the Company under the business restructuring, was
approximately $336 million. In the first six months of 1994, the Company reduced
1993 restructuring reserves by approximately $90 million in the following
categories:
Severance:
Management $32
Nonmanagement -
---
Total Severance $32
Systems redesign:
Customer contact -
Customer provisioning -
Customer operations -
Customer support -
---
Total systems redesign -
Work center consolidation -
Branding 11
Relocation -
Training -
Re-engineering implementation -
--
Subtotal 43
Telesector Resources' allocated
reserves:
Severance 20
Postretirement medical benefits 15
Systems re-engineering 9
Re-engineering implementation 3
Work center consolidation -
---
Total allocated reserves 47
---
Total $90
===
The severance reduction amount is comprised of $29 million of severance reserves
transferred to the pension liability on a per employee basis as a result of
employees' leaving under the pension enhancements as opposed to severance
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (Continued)
provisions as previously accrued for, and $3 million utilized for other
retiree costs. The reduction in the reserve for branding includes approximately
$6 million to reflect a revised estimate of branding costs.
In addition, $17 million of reserves accrued in 1991 for severance costs related
to Telesector Resources was utilized for the Company's allocation of Telesector
Resources pension enhancements.
There were no significant cost savings as a result of business restructuring in
the first six months of 1994. Since most of the employees that left the Company
under terms of the enhanced pension offering left near the end of the period,
the expense savings associated with this force reduction have not yet been
realized.
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993
OPERATING REVENUES
Operating revenues increased $77.6 million, or 3.8%, over the same period last
year. The increase in total operating revenues is comprised of the following:
Increase (Decrease)
(In millions)
-------------
Local service $ 52.7
Long distance 4.3
Network access 10.3
Other 10.3
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$ 77.6
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Local service revenues are earned from the provision of local exchange, local
private line and local public network services. Local service revenues increased
$52.7 million due principally to increased customer demand of approximately $33
million, evidenced by growth in access lines and growth in sales of calling
features such as caller identification, call waiting and touch-tone services,
and to an increase of approximately $8 million in local service rates primarily
attributable to the implementation of the third transitional filing of a
restructuring of Massachusetts rates effective April 14, 1994. In addition,
there was a $5 million increase in local directory assistance revenues resulting
from the reversal of previously deferred revenues pursuant to a regulatory
agreement with the State of Massachusetts to offset expenses to enhance E911
systems, and a $6 million increase primarily due to the 1994 reversal of
revenues deferred in 1993 that were in excess of the required one-time credit to
customers' bills pursuant to the Rhode Island price regulation trial for 1993.
Long distance revenues are earned from the provision of services beyond the
local service area, but within the local access transport area ("LATA"), and
include public and private network switching. Long distance revenues increased
$4.3 million due principally to increased message toll service usage of
approximately $11 million, including the effect of severe weather, and a $5
million increase in long distance directory assistance revenues resulting from
the reversal of previously deferred revenues pursuant to a regulatory agreement
with the State of Massachusetts to offset expenses to enhance E911 systems.
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993
(Continued)
OPERATING REVENUES (Continued)
These increases were partially offset by decreases in long distance rates
of approximately $12 million primarily attributable to the implementation of the
third transitional filing of a restructuring of Massachusetts rates effective
April 14, 1994 and decreases in private line revenues and wide area
telecommunications service revenues due primarily to increased competition and
customer shifts to lower priced services offered by the Company.
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. Network access revenues increased
$10.3 million due principally to a $16 million increase in switched access
revenues partially offset by a $6 million decrease in special access revenues.
Switched access revenues increased due principally to a $30 million increase in
network demand offset by a net decrease of approximately $11 million primarily
attributable to interstate rate changes. Special access revenues decreased $6
million due principally to decreased demand of approximately $5 million
resulting from increased competition and customer shifts to lower priced
services offered by the Company and a $1 million decrease resulting from
interstate rate reductions.
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. Other revenues increased $10.3
million due principally to a $7 million increase in revenues related to the
directory licensing agreement with NYNEX Information Resources Company resulting
from higher estimated pretax earnings from the directories published pursuant to
the agreement and to a $4 million increase in revenues from inside wire related
charges and voice messaging services.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1994 increased $138.9
million, or 9.3%, over the same period last year. This increase in total
operating expenses is comprised of the following:
Increase (Decrease)
(In millions)
-------------
Depreciation and amortization $ 46.0
Taxes other than income taxes (4.8)
All other:
Business restructuring charges
recorded in 1994 54.3
Employee related costs (6.8)
Other operating expenses 50.2
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$138.9
======
Depreciation and amortization increased $46.0 million due principally to a $33
million increase due to revised intrastate depreciation rates in Massachusetts
effective July 1993 and a $15 million increase associated with increased plant
investment.
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993
(Continued)
OPERATING EXPENSES (Continued)
Taxes other than income taxes, which include gross receipts taxes, property
taxes and other non-income based taxes, decreased $4.8 million due principally
to an $8 million decrease in property taxes primarily attributable to a 1994
reversal of a 1993 accrual as a result of unasserted municipal assessments. This
decrease was partially offset by a $2 million increase in Massachusetts property
taxes due to increased tax rates and a $1 million increase in Rhode Island gross
receipts tax as a result of an increase in Rhode Island operating revenues.
Business restructuring charges recorded in the second quarter of 1994 consisted
of incremental costs related to pension enhancements (see Business Restructuring
above).
Employee related costs, which consist primarily of wages, payroll taxes and
employee benefits, decreased $6.8 million due principally to an $8 million net
decrease in wages and payroll taxes primarily attributable to reductions in the
Company's work force due to transfers of employees to Telesector Resources
associated with re-engineering the way service is delivered to customers,
including operating the Company and New York Telephone Company ("New York
Telephone") as a single enterprise (see Other operating expenses below) and to
the Company's force reduction program, partially offset by increases in salary
and wage rates. In addition, there was a $1 million increase in employee benefit
costs for active and retired employees due principally to increased medical
costs.
Other operating expenses, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $50.2
million. This increase was due principally to a $27 million net increase in
charges from affiliated companies primarily attributable to an increase in
contracted and centralized services and the transfer of employees from the
Company and NYNEX Corporate to Telesector Resources (see Employee related costs
above), a $15 million increase in right to use fees resulting from increased
software purchases and a $7 million increase resulting from capitalization in
1993 of certain 1992 engineering charges.
OTHER INCOME (EXPENSE) - NET
Other income (expense) - net increased $30.2 million over the same period last
year due principally to a $28 million increase resulting from completion in 1993
of the transition plan with New York Telephone to phase in the earnings impact
of the unified tariff access rate structure. In addition, there was a $3 million
increase due to higher expenses in the first six months of 1993 for the
interstate portion of call premiums and other charges associated with the
refinancing of long-term debt.
INTEREST EXPENSE
Interest expense decreased $7.4 million from the same period last year,
primarily due to a decrease in average interest rates resulting from long-term
debt refinancings in 1993.
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Form 10-Q/A Part I New England Telephone and Telegraph Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993
(Continued)
INCOME TAXES
Income taxes decreased $1.7 million from the same period last year. The decrease
was principally due to a decrease in pretax income partially offset by a $5
million increase associated with the enactment of the Revenue Reconciliation Act
of 1993 on August 10, 1993, which increased the statutory corporate federal
income tax rate from 34 percent to 35 percent retroactive to January 1, 1993.
FINANCING
At June 30, 1994, the Company had $500 million of unissued, unsecured debt
securities registered with the SEC.
COLLECTIVE BARGAINING AGREEMENTS
On March 24, 1994, an agreement was reached with the Communications Workers of
America to extend through August 8, 1998 the collective bargaining agreement
that was to expire on August 5, 1995. The agreement was ratified in May 1994. On
August 5, 1994, a similar agreement was tentatively reached with the
International Brotherhood of Electrical Workers, subject to ratification by the
union membership. Under the terms of the new agreements, there will be basic
wage increases of 10.5% during the life of the agreements. Wages will increase
4.0% on August 6, 1995, 3.5% on August 4, 1996 and 3.0% on August 3, 1997. In
1997 there may also be a cost-of-living adjustment. The agreements also provide
for retirement incentives, a commitment to no layoffs or loss of wages as a
result of Company-initiated "process change", an enhanced educational program
and incentives to improve service quality.
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Form 10-Q/A New England Telephone and Telegraph 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.
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
Gail Deegan
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Gail Deegan
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Chief Accounting Officer)
