FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(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, 1993
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 1-1150
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
I.R.S. Employer
A New York Corporation Identification No. 04-1664340
125 High Street, Boston, Massachusetts 02110
Telephone Number (617) 743-9800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
See attachment New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF NYNEX CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION J(2).
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/A or any
amendment to this Form 10-K/A. [ ]*
*Not applicable
DOCUMENTS INCORPORATED BY REFERENCE: None
Amendment No. 1
The registrant hereby amends the following items of its Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 as set forth in the pages
attached hereto:
Part II - Item 7 "Management's Discussion and Analysis of Results of
Operations"
Part II - Item 8 "Financial Statements and Supplementary Data"
Part IV - Item 14 "Exhibits, Financial Statement Schedules and Reports on
Form 8-K"
<PAGE>
Title of each class Attachment
DEBENTURES:
$45,000,000 Principal Amount of 38 Year 4 5/8% Debentures,
Due April 1, 1999
$50,000,000 Principal Amount of 40 Year 4 1/2% Debentures,
Due July 1, 2002
$60,000,000 Principal Amount of 40 Year 4 5/8% Debentures,
Due July 1, 2005
$100,000,000 Principal Amount of 39 Year 6 1/8% Debentures,
Due October 1, 2006
$200,000,000 Principal Amount of 35 Year 7 3/8% Debentures,
Due October 15, 2007
$125,000,000 Principal Amount of 40 Year 6 3/8% Debentures,
Due September 1, 2008
$350,000,000 Principal Amount of 40 Year 7 7/8% Debentures,
Due November 15, 2029
$100,000,000 Principal Amount of 40 Year 9% Debentures,
Due August 1, 2031
$100,000,000 Principal Amount of 30 Year 7 7/8% Debentures,
Due September 1, 2022
$250,000,000 Principal Amount of 30 Year 6 7/8% Debentures,
Due October 1, 2023
NOTES:
$100,000,000 Principal Amount of 10 Year 8 5/8% Notes,
Due August 1, 2001
$100,000,000 Principal Amount of 7 Year 6.15% Notes,
Due September 1, 1999
$175,000,000 Principal Amount of 5 Year 6 1/4% Notes,
Due December 15, 1997
$225,000,000 Principal Amount of 10 Year 6 1/4% Notes,
Due March 15, 2003
$100,000,000 Principal Amount of 7 Year 5 3/4% Notes,
Due May 1, 2000
$100,000,000 Principal Amount of 5 Year 5.05% Notes,
Due October 1, 1998
<PAGE>
ITEM 7. 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 J(2) to Form 10-K.
Business Restructuring
Externally, rapid changes in technology and regulation are opening New England
Telephone and Telegraph Company's (the "Company") markets to competitors (see
State and Federal Regulatory Matters). There are more communications
alternatives available to customers, and their expectations for better quality
and service at lower prices are rising. The Company is in a vulnerable position
at the present time, since competitors can serve parts of the Company's market
at lower costs. As a result, 1993 results include pretax charges of
approximately $619 million ($376 million after-tax) for business restructuring.
These charges resulted from a comprehensive analysis of operations and work
processes, resulting in a strategy to redesign them to improve efficiency and
customer service, to adjust quickly to accelerating change, to implement work
force reductions, and to produce cost savings necessary for the Company to
operate in an increasingly competitive environment. The charges taken in 1993
were not related to the restructure charges recorded in 1991.
Approximately $395 million of the charges ($240 million after-tax) is for
severance and postretirement medical costs for employees leaving the Company
through 1996. The Company expects to reduce its work force by approximately
6,300 employees by the end of 1996, consisting of 1,300 management employees and
5,000 employees covered under existing union agreements. The expected work force
reductions by year are as follows:
1994 1995 1996 Total
---------------------------
Management 1,000 200 100 1,300
Nonmanagement 1,700 1,700 1,600 5,000
---------------------------
Total 2,700 1,900 1,700 6,300
===========================
Approximately $201 million was recorded for employee severance payments,
including salary, payroll taxes, and outplacement costs to be paid under
provisions of the Company's force management plan for management employees and
terms of collective bargaining agreements for nonmanagement employees. The
expected severance costs associated with these work force reductions by year are
as follows:
(In millions) 1994 1995 1996 Total
----------------------------
Management $ 80 $ 11 $ 9 $100
Nonmanagement 51 38 12 101
---------------------------
Total $131 $ 49 $ 21 $201
============================
<PAGE>
Approximately $194 million was recorded for postretirement medical costs for
these employees, including $118 million for the expected increase in the
accumulated postretirement benefit obligation and $76 million for recognition of
the unrecognized transition obligation. The expected postretirement medical
costs associated with these work force reductions by year are as follows:
(In millions) 1994 1995 1996 Total
----------------------------
Management $ 35 $ 4 $ 4 $ 43
Nonmanagement 73 56 22 151
---------------------------
Total $108 $ 60 $ 26 $194
===========================
A pension enhancement to the NYNEX Corporation ("NYNEX") management pension plan
was announced in February 1994 in order to accomplish a portion of the
management work force reduction. Any additional costs related to the pension
enhancement will be recorded as employees choose to leave under the plan through
1996. If pension or other incentives were to be subsequently implemented in
order to accomplish a portion of the nonmanagement work force reduction, any
additional cost of the incentives would be recorded as employees leave the
Company. Force reductions will come in areas where redesigned processes can meet
customer service requirements with fewer people. The analysis of operations and
work processes resulted in recommendations for specific process and system
changes, and force reductions were identified as a result. Advances in
technology and streamlined processes are expected to make it possible for a
smaller work force to maintain the same size network. This, in turn, will enable
the Company to reduce expenses.
Approximately $83 million of the charges ($51 million after-tax) consists of
costs associated with re-engineering the way service is delivered to customers,
including operating the Company and New York Telephone Company ("New York
Telephone") (collectively, the "Telephone Companies") as a single enterprise
under the "NYNEX" brand. During the period 1994 through 1996, NYNEX intends to
decentralize the provision of residence and business customer service throughout
the region, create regional businesses to focus on unique markets, and
centralize numerous operations and support functions.
The following items were included in these charges:
(In millions) 1994 1995 1996 Total
----------------------------
Systems redesign $ 5 $ 8 $ - $ 13
Work center consolidation 3 10 1 14
Branding 19 - - 19
Relocation 8 7 - 15
Training 9 12 - 21
Re-engineering implementation - 1 - 1
---------------------------
Total $ 44 $38 $ 1 $83
============================
<PAGE>
Systems redesign is the cost of developing new systems, processes and procedures
to realize operational efficiencies and enable the Company to reduce work force
levels. Commencing in 1994, certain specific new systems development initiatives
were begun to implement process re-engineering initiatives. These projects
consist of radical changes in applications and systems supporting redesigned
business functions which are an integral part of the restructuring plan, and all
the costs associated with these projects are incremental to ongoing operations.
Only software purchases and external contractor expenses, which are normally
expensed in accordance with Company policy, were included in the restructuring
charges for the following business processes:
(In millions) 1994 1995 1996 Total
---------------------------
Customer contact $ - $ 3 $ - $ 3
Customer operations 5 5 - 10
---------------------------
Total $ 5 $ 8 $ - $13
===========================
Customer contact represents the direct interface with the customer to provide
sales, billing inquiry and repair service scheduling on the first contact,
eliminating the number of handoffs that presently exist. New processes will
allow customers to define the way they want to do business with the Company.
Customer operations focuses on network monitoring and surveillance, trouble
testing, dispatch control, and proactive repair with reliability as a critical
source of competitive advantage.
Work center consolidation costs are incremental costs associated with building
work teams in fewer locations by the end of 1996 to take advantage of lower
force levels and system efficiencies, including costs associated with lease
terminations from the date premises are vacated, moving property to new
locations and other consolidation costs. Branding includes the costs to develop
a single "NYNEX" brand identity associated with the restructured business
operations. Relocation is the cost to relocate employees as a result of work
center consolidations. These charges are required to move personnel to different
locations and include employee home sale and purchase expenses, moving expenses,
travel and lodging expenses, and other costs based on the Company's relocation
guidelines and the provisions of collective bargaining agreements. Training is
the cost for training nonmanagement employees on newly-designed,
cross-functional job positions and re-engineered systems created as part of the
restructuring plan. These charges include tuition, out of pocket course
development and administrative costs, facilities charges, and related travel and
lodging. This training reflects broadening of job skills that will permit one
employee to perform tasks formerly performed by several employees.
Re-engineering implementation represents the incremental cost to complete the
various re-engineering initiatives.
<PAGE>
Approximately $141 million of restructuring charges ($86 million after-tax) was
allocated to the Company from Telesector Resources Group, Inc. ("Telesector
Resources"), primarily related to its force reduction and re-engineering
programs. The following items were included in these charges:
1994* 1995 1996 Total
-------------------------------
(In millions)
Severance $ 21 $ 4 $ 2 $ 27
Postretirement medical benefits 16 2 1 19
Systems re-engineering 35 31 4 70
Re-engineering implementation 9 9 4 22
Work center consolidation -- 3 -- 3
-------------------------------
Subtotal 81 49 11 141
Remaining 1991 severance reserves 17 -- -- 17
-------------------------------
Total $ 98 $ 49 $ 11 $158
*1994 includes the severance amounts associated with the balance of the 1991
restructuring reserve at December 31, 1993.
Collective Bargaining Agreements
In October 1991, the Communications Workers of America and the International
Brotherhood of Electrical Workers ratified agreements with the Company to extend
until August 5, 1995 the collective bargaining agreements that were to have
expired on August 8, 1992.
State Regulatory Matters
Massachusetts In June 1990, the Massachusetts Department of Public Utilities
("MDPU") issued an order in Phase III of a proceeding that culminated a
five-year investigation into the Company's rates, costs and revenues. The order
calls for the gradual restructuring of local and long distance rates within the
state, with the objective of moving prices for services closer to the costs of
providing them. This is accomplished through an annual transitional filing of
new rates by the Company. At the time the rates are established, revenue
neutrality is maintained. The Company's first and second transitional filings
became effective on November 15, 1991 and January 15, 1993, respectively (see
Operating Revenues below). On January 13, 1994, the MDPU approved the third
transitional filing with minor modifications to become effective April 14, 1994.
Rhode Island In August 1992, the Rhode Island Public Utilities Commission
approved a Price Regulation Trial ("PRT") that provides the Company with
significantly increased pricing and earnings freedom through 1995 and calls for
specific investment and service-quality commitments by the Company. As a part of
the PRT, the Company makes an annual filing, with overall price increases capped
<PAGE>
by a formula indexing Rhode Island prices to the Gross National Product Price
Index, adjusted for productivity and exogenous factors. The PRT allows the
Company to continue moving the prices of its services closer to the costs of
providing them. The Company's most recent annual filing became effective January
15, 1994. The filing calls for an overall revenue reduction of approximately
$3.2 million for 1994, resulting from decreases in long distance revenues
partially offset by increases in local service revenues.
Federal Regulatory Matters
Effective January 1, 1991, the Federal Communications Commission ("FCC") adopted
incentive regulation in the form of price caps with respect to interstate
services provided by the Company. Price caps focus on local exchange carriers'
("LECs") prices rather than costs and set maximum limits on prices LECs can
charge for their services. These limits are subject to adjustment each year to
reflect inflation, a productivity factor and certain other cost changes. Under
FCC price cap regulation, the Company may earn a return on equity up to
approximately 15%. Above that level, earnings are subject to equal sharing with
ratepayers until they reach an effective cap on interstate return on equity of
approximately 18.7%.
In 1992, the Company and New York Telephone implemented a three-step transition
plan to unify their interstate access rates, with tariffs that became effective
in January, July and November 1992. These tariffs, including the effect of the
Company's annual price cap tariff filings, resulted in a decrease in the
Company's interstate access revenues of approximately $4 million during the
tariff period ending June 30, 1992, an increase of approximately $88 million
during the tariff period ending July 1, 1993 and will result in a decrease of
approximately $25 million during the tariff period ending June 30, 1994. As a
result of these filings, a net increase in access revenues of $33 million was
recorded in 1993. The Telephone Companies implemented a phase-in payment plan in
order to avoid sudden changes in each of the Telephone Company's earnings
resulting from the unified rate structure. A substantial portion of the increase
in the Company's access revenues during those tariff periods was offset by the
payment plan, which provided for transition payments to New York Telephone in
the amounts of $18 million in 1992 and $55 million in 1993 (see Other Income
(Expense) - Net).
In September 1992, the FCC adopted rules requiring certain LECs, including the
Company, to offer physical collocation to interexchange carriers for the
provision of special access services under terms and conditions similar to the
intrastate collocation arrangement already in existence in Massachusetts. The
Company filed Special Access Expanded Interconnection tariffs on February 16,
1993. The FCC issued an order on September 2, 1993, requiring certain LECs,
including the Company, to file Switched Transport Expanded Interconnection
tariffs. The Company filed its tariff on November 18, 1993. Although the FCC
<PAGE>
rejected requests by the LECs to impose contribution charges, the FCC granted
the LECs additional pricing flexibility to be effective after expanded
interconnection arrangements become available.
Operating Revenues
Operating revenues for the year ended December 31, 1993 increased $148.3
million, or 3.8%, over the same period last year. The increase in total
operating revenues is comprised of the following:
Increase (Decrease)
(Dollars in Millions)
Local service $ 90.4
Long distance (25.0)
Network access 71.1
Other 11.8
-----
$ 148.3
=======
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. Local service revenues increased
$90.4 million due principally to net increases of approximately $52 million in
local service rates resulting from the implementation of the second transitional
filing of a restructuring of Massachusetts rates on January 15, 1993 (see State
Regulatory Matters above) and increased customer demand evidenced by growth in
access lines.
Long distance revenues are earned from the provision of services beyond the
local service area, but within the local access and transport area ("LATA"), and
include public and private network switching. Long distance revenues decreased
$25.0 million due principally to decreases of approximately $51 million in long
distance rates resulting from the second transitional filing of a restructuring
of Massachusetts rates on January 15, 1993 (see State Regulatory Matters above)
and decreases in long distance 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. These decreases
were partially offset by increased toll usage.
Network access revenues, which are earned from the provision of exchange access
services primarily to interexchange carriers, increased $71.1 million due
principally to an increase in switched access revenues. Switched access revenues
increased approximately $83 million due primarily to a $49 million increase
resulting from increased network demand and a net increase of $31 million
resulting primarily from interstate rate changes. Special access revenues
decreased approximately $12 million due primarily to a $9 million decrease
resulting from decreased demand and a net $4 million decrease resulting from
interstate rate reductions. (See Federal Regulatory Matters above.)
<PAGE>
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. Other revenues increased $11.8
million due principally to an increase in rent revenues from Telesector
Resources for space in training centers owned and leased by the Company (see
Operating Expenses below).
Operating Expenses
Operating expenses increased $763.8 million, or 25.4%, over 1992. The increase
in total operating expenses is comprised of the following:
Increase (Decrease)
(Dollars in Millions)
Business restructuring charges
recorded in 1993 $ 619.3
Employee related costs 72.2
Other operating expenses 45.8
Taxes other than income taxes 21.7
Depreciation and amortization 4.8
----
$ 763.8
=====
Business restructuring charges recorded in the fourth quarter of 1993 consisted
of incremental costs associated with work force reductions, re-engineering, and
costs related to consolidation of work locations (see Business Restructuring
above).
Employee related costs, which consist primarily of wages, payroll taxes and
employee benefits, increased $72.2 million. The increase was principally due to
a $40 million increase in wages and payroll taxes, due principally to increases
in salaries and wage rates, including a 4.25% wage increase for nonmanagement
employees pursuant to the 1991 collective bargaining agreements, and to
additional labor costs in 1993 primarily attributable to severe winter weather
and marketing initiatives. In addition, there was a $32 million increase in
employee benefit costs for active and retired employees due primarily to
increased medical costs and a $10 million accrual for a supplemental executive
retirement plan. These increases were partially offset by decreases in the
Company's work force of 541 management employees due to force reduction plans in
1992 and transfers of approximately 250 management employees to Telesector
Resources in 1993 (see Other operating expenses below).
Other operating expenses, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $45.8
million. The increase was principally due to: a $42 million increase in charges
from affiliated companies primarily attributable to the transfer of the training
<PAGE>
functions previously performed by the Company to Telesector Resources (see
Operating Revenues and Employee related costs above); an $8 million increase
resulting from increased maintenance, repairs and utilities costs; a $6 million
increase in advertising and sales commission expenses due to increased promotion
of new products; and a $5 million increase due to the Company's contractual
share of a predivestiture American Telephone and Telegraph Company ("AT&T")
liability. These increases were partially offset by a $17 million decrease in
right-to-use fees resulting from a decrease in software purchases and a $13
million decrease resulting from capitalization in 1993 of certain 1993 and 1992
engineering charges.
Taxes other than income taxes, which include gross receipts taxes, property
taxes and other non-income based taxes, increased $21.7 million principally due
to a $19 million increase in property taxes primarily attributable to increased
tax rates and municipal assessments.
Depreciation and amortization increased $4.8 million due principally to: a $26
million increase associated with increased plant investment; a $25 million
increase due to represcribed interstate depreciation rates; and a $41 million
increase due to revised intrastate depreciation rates in Massachusetts, Rhode
Island and New Hampshire. These increases were partially offset by: a $62
million decrease due primarily to completion in 1992 of intrastate amortization
of electro-mechanical switching equipment in Massachusetts; a $4 million
decrease due to recognition in 1992 of expenses that were previously deferred in
accordance with a prior regulatory agreement in New Hampshire; a $6 million
decrease due to completion in 1992 of interstate amortization of the reserve
deficiency; an $11 million decrease in the amortization of the reserve
deficiency for analog electronic switching systems offices in Rhode Island; and
a $3 million decrease due to the completion in 1992 of amortization of customer
premises wiring.
Other Income (Expense) - Net
Other income (expense) - net decreased $59.5 million from the same period last
year principally due to $37 million resulting from higher payments made during
1993 to New York Telephone pursuant to the transition plan to phase-in the
earnings impact of the unified tariff access rate structure (see Federal
Regulatory Matters above), and $20 million for the interstate portion of call
premiums and other charges associated with the refinancing of long-term debt in
1993.
Interest Expense
Interest expense decreased $14.7 million from the same period last year
primarily due to a decrease in average interest rates resulting from long-term
debt refinancings in 1993 and a decrease in the average level of external debt.
<PAGE>
Income Taxes
Income taxes decreased $280.0 million from the same period last year principally
due to lower pretax income. The decrease includes $23 million from a one-time
benefit representing adjustments of prior year estimates of depreciation on
capitalized overheads and of the reversal of excess deferred taxes, using the
average rate assumption method, which had been deferred at a rate higher than
the current statutory rate. These decreases were partially offset by the
enactment of the Revenue Reconciliation Act of 1993, which increased the
statutory corporate federal income tax rate from 34 percent to 35 percent,
retroactive to January 1, 1993.
Adoption of Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits"
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" ("Statement No. 112"), in
the fourth quarter of 1993, retroactive to January 1, 1993. Statement No. 112
applies to postemployment benefits, including workers' compensation, disability
plans and disability pensions, provided to former or inactive employees, their
beneficiaries, and covered dependents after employment but before retirement.
Statement No. 112 changed the Company's method of accounting from recognizing
costs as benefits are paid to accruing the expected costs of providing these
benefits. The initial effect of adopting Statement No. 112 was reported as a
cumulative effect of a change in accounting principle and resulted in a
one-time, non-cash charge of $39.1 million ($25.0 million after-tax). In
subsequent years, the effect of Statement No. 112 is not expected to result in
periodic expense materially different from the expense recognized under the
prior method. The rate recovery of these costs in the intrastate jurisdictions
has not been determined.
Financing
In 1993, the Company took advantage of favorable interest rates and refinanced a
substantial amount of long-term debt. During 1993, the Company issued $425
million of Notes and $250 million of Debentures and used $666 million of the
proceeds from these issuances and short-term borrowings from NYNEX to redeem
$895 million of Debentures.
On October 15, 1993, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") for the issuance of up to $450
million in unsecured debt securities, which became effective on October 22,
1993. The Company has $500 million of unissued, unsecured debt securities
registered with the SEC.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Report of Management
Management of New England Telephone and Telegraph Company (the "Company") has
the responsibility for preparing the accompanying financial statements and for
their integrity and objectivity. The financial statements were prepared in
accordance with generally accepted accounting principles and, in management's
opinion, are fairly presented. The financial statements include amounts that are
based on management's best estimates and judgments. Management also prepared the
other information in this report and is responsible for its accuracy and
consistency with the financial statements.
The financial statements have been audited by Coopers & Lybrand, independent
accountants, whose appointment was approved by the Company's Board of Directors.
Management has made available to Coopers & Lybrand all of the Company's
financial records and related data, as well as the minutes of share owner's and
directors' meetings. Furthermore, management believes that all representations
made to Coopers & Lybrand during its audit were valid and appropriate.
Management of the Company has established and maintains an internal control
structure that is designed to provide reasonable assurance as to the integrity
and reliability of the financial statements, the protection of assets from
unauthorized use or disposition, and the prevention and detection of fraudulent
financial reporting. The concept of reasonable assurance recognizes that the
cost of the internal control structure should not exceed the benefits to be
derived. The internal control structure provides for appropriate division of
responsibility and is documented by written policies and procedures that are
communicated to employees with significant roles in the financial reporting
process. Management monitors the internal control structure for compliance,
considers recommendations for improvement from both the internal auditors and
Coopers & Lybrand and updates such policies and procedures as necessary.
Monitoring includes an internal auditing function to independently assess the
effectiveness of the internal controls and recommend possible improvements
thereto. Management believes that the internal control structure of the Company
is adequate to accomplish the objectives discussed herein.
The Audit Committee of the Board of Directors, which is comprised of directors
who are not employees, meets periodically with management, the internal auditors
and Coopers & Lybrand to review the manner in which they are performing their
responsibilities and to discuss matters relating to auditing, internal controls
and financial reporting. Both the internal auditors and Coopers & Lybrand
periodically meet privately with the Audit Committee and have access to the
Audit Committee at any time.
Management also recognizes its responsibility for conducting Company activities
under the highest standards of personal and corporate conduct. This respon-
sibility is accomplished by fostering a strong ethical climate as characterized
in the NYNEX Code of Business Conduct, which is publicized throughout the
Company. The Code of Conduct addresses, among other things, standards of
personal conduct, potential conflicts of interest, compliance with all domestic
and foreign laws, accountability for Company property and the confidentiality
of proprietary information.
Donald B. Reed
President and Chief Executive Officer
Gail Deegan
Vice President and Chief Financial Officer
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Share Owner and Board of Directors of
New England Telephone and Telegraph Company:
We have audited the financial statements and financial statement schedules
of New England Telephone and Telegraph Company listed in Item 14(a) (1) and (2)
of this Form 10-K/A Amendment No. 1. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New England Telephone and
Telegraph Company as of December 31, 1993 and 1992, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
As discussed in Notes A and D to the financial statements, the Company changed
its methods of accounting for income taxes, postretirement benefits other than
pensions, and postemployment benefits in 1993.
Coopers & Lybrand
Boston, Massachusetts
February 9, 1994
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
Dollars in Millions
<TABLE>
<CAPTION>
For the Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
OPERATING REVENUES
Local service $1,812.3 $1,721.9 $1,642.7
Long distance 758.0 783.0 812.3
Network access (Note (I)) 1,159.2 1,088.1 1,009.0
Other (Notes (I) and (J)) 340.7 328.9 341.7
------ ------ ------
Total operating revenues 4,070.2 3,921.9 3,805.7
------ ------ ------
OPERATING EXPENSES (Note (O))
Maintenance and support 1,202.9 1,053.8 1,204.0
Depreciation and amortization 832.7 827.9 775.3
Marketing and customer services 664.5 531.8 546.1
Taxes other than income taxes (Note (K)) 127.6 105.9 96.4
Provision for uncollectible revenues 49.3 52.0 57.4
Other 896.0 437.8 498.1
------ ------ ------
Total operating expenses 3,773.0 3,009.2 3,177.3
------ ------ ------
Operating income 297.2 912.7 628.4
Other income (expense) - net (55.0) 4.5 15.2
Interest expense (Notes (E) and (G)) 175.0 189.7 191.2
------ ------ ------
Earnings before Income taxes and
cumulative effect of change in
accounting principle 67.2 727.5 452.4
------ ------ ------
Income taxes
Federal (41.0) 194.4 105.0
State 1.9 46.5 30.9
------ ------ ------
Total income taxes (Note (C)) (39.1) 240.9 135.9
------ ------ ------
Earnings before cumulative effect
of change in accounting principle 106.3 486.6 316.5
Cumulative effect of change in accounting
for postemployment benefits, net of
taxes (Note (D)) (25.0) - -
------ ------ ------
NET INCOME $ 81.3 $ 486.6 $ 316.5
======= ======= =======
RETAINED EARNINGS
Beginning of year $1,262.0 $1,121.8 $1,197.9
Net income 81.3 486.6 316.5
Dividends declared (413.4) (346.4) (392.6)
-------- ------- -------
End of year $ 929.9 $1,262.0 $1,121.8
======= ======== ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
BALANCE SHEETS
Dollars in Millions
<TABLE>
<CAPTION>
December 31,
-----------------------
1993 1992
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 11.2 $ 12.7
Receivables
Affiliates (Notes (B) and (J)) 14.5 95.2
Trade and other (net of allowance of $51.7
and $40.6, respectively) (Note (I)) 718.0 722.6
Deferred income taxes (Note (C)) 120.6 37.3
Deferred charges (Note (C)) 99.5 105.0
Inventory 57.6 66.7
Prepaid expenses and other 69.6 39.9
--------- ---------
Total current assets 1,091.0 1,079.4
--------- ---------
Telephone plant
In service 11,420.7 11,562.9
Under construction 170.4 167.4
--------- ---------
11,591.1 11,730.3
Less: accumulated depreciation 5,013.9 5,198.6
--------- ---------
Telephone plant - net 6,577.2 6,531.7
--------- ---------
Deferred charges and other (Notes (C) and (D)) 602.8 723.5
--------- ---------
TOTAL ASSETS $ 8,271.0 $ 8,334.6
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
BALANCE SHEETS
Dollars in Millions
<TABLE>
<CAPTION>
December 31,
1993 1992
---- ----
<S> <C> <C>
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable
AT&T (Note (I)) $ 86.7 $ 87.6
Affiliates (Note (J)) 404.3 178.9
Compensated absences 78.9 74.6
Trade and other 422.1 349.0
Short-term debt (Note (G)) 158.5 174.9
Dividends payable 103.4 99.1
Taxes accrued 26.5 48.4
Advance billing and customers' deposits 18.2 19.1
Interest accrued 37.8 45.4
-------- --------
Total current liabilities 1,336.4 1,077.0
-------- --------
Long-term debt (Notes (E) and (F)) 2,164.0 2,210.5
Deferred income taxes (Note (C)) 841.7 919.7
Unamortized investment tax credits 115.4 143.8
Other long-term liabilities and deferred
credits (Notes (C) and (D)) 794.5 632.5
-------- --------
Total liabilities 5,252.0 4,983.5
-------- --------
Commitments and contingencies (Notes (H), (M)
and (N))
Share owner's equity:
Common stock - one share,
without par value 2,089.1 2,089.1
Retained earnings 929.9 1,262.0
-------- --------
Total share owner's equity 3,019.0 3,351.1
-------- --------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $8,271.0 $8,334.6
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF CASH FLOWS
Dollars in Millions
<TABLE>
<CAPTION>
For the Year Ended December 31,
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 81.3 $ 486.6 $ 316.5
------ ------- -------
Adjustments to reconcile Net Income to net cash provided by operating
activities:
Depreciation and amortization 832.7 827.9 775.3
Allowance for funds used during
construction - equity component (7.7) (6.1) (7.0)
Changes in operating assets and
liabilities:
Receivables 3.3 19.7 (7.2)
Inventory 9.1 (3.1) 22.1
Deferred income taxes (83.3) (37.3) -
Deferred charges 5.5 34.2 (27.9)
Prepaid expenses and other (29.7) (1.0) (30.7)
Accounts payable 301.9 (18.1) 40.1
Taxes accrued (21.9) (18.4) 1.2
Advance billing and
customers' deposits (0.9) 2.3 3.4
Interest accrued (7.6) (1.3) 8.1
Deferred income taxes and Unamortized
investment tax credits (106.4) 102.2 (103.7)
Other long-term liabilities and
deferred credits 162.0 (113.9) 201.0
Other-net 94.4 ( 45.0) (137.2)
------ ------- -------
Total adjustments 1,151.4 742.1 737.5
------ ------- -------
Net cash provided by operating
activities 1,232.7 1,228.7 l,054.0
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (819.0) (781.5) (751.1)
Advances to NYNEX 82.0 (82.0) -
------ ------- -------
Net cash used in investing activities (737.0) (863.5) (751.1)
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 159.4 (95.0) (156.1)
Dividends paid to NYNEX (409.2) (345.4) (387.5)
Issuance of long-term debt 669.5 372.4 196.9
Repayment of long-term debt and
capital leases (1.1) (246.5) (33.7)
Debt refinancings and call
premiums (915.8) (57.1) -
Equity infusion from NYNEX - - 75.0
------ ------- -------
Net cash used in financing activities (497.2) (371.6) (305.4)
------ ------- -------
Net decrease in Cash (1.5) (6.4) (2.5)
Cash at beginning of year 12.7 19.1 21.6
----- ----- -----
Cash at end of year $ 11.2 $ 12.7 $ 19.1
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(A) Accounting Policies
Basis of Presentation
New England Telephone and Telegraph Company (the "Company") is a wholly-owned
subsidiary of NYNEX Corporation ("NYNEX") and primarily provides exchange
telecommunications and exchange access services. The financial statements for
1992 and 1991 have been reclassified to conform to the current year's format.
The financial statements have been prepared in accordance with generally
accepted accounting principles, including the application of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("Statement No. 71"), to the effects of rate actions by the
Federal Communications Commission (the "FCC") and certain state regulatory
commissions for the Company. The rate actions of regulators can provide
reasonable assurance of the existence of an asset, reduce or eliminate the value
of an asset, impose a liability, or eliminate a previously imposed liability on
a regulated enterprise. The Company applies Statement No. 71 instead of any
conflicting provisions of accounting standards in other authoritative
pronouncements. The effects of Statement No. 71 are reflected in the financial
statements and material effects, where practicable to determine, are detailed in
this Note and the individual Notes to Financial Statements related to the
specific financial statement line items.
The major components of non-plant regulatory net assets (liabilities) at
December 31, 1993 and 1992 are as follows:
December 31,
Dollars in Millions 1993 1992
- --------------------------------------------------------------------------------
Compensated absences $ 57.4 $ 61.6
Deferred pension costs 131.4 131.4
Refinancing costs 78.0 61.5
Deferred taxes (3.5) (139.7)
Other 17.5 33.9
------ ------
Total $280.8 $148.7
====== ======
The Company has a 33 1/3% ownership interest in Telesector Resources Group, Inc.
("Telesector Resources") and shares voting rights equally with the other owner,
New York Telephone Company ("New York Telephone"). The Company uses the equity
method of accounting for its investment in Telesector Resources.
<PAGE>
Cash
The Company's cash management policy is to make funds available in banks when
checks are presented. At December 31, 1993 and 1992, the Company had recorded in
Accounts payable checks outstanding but not yet presented for payment of $49.7
and $100.5 million, respectively.
Inventory
Inventory, consisting of materials and supplies, is carried principally at
average cost.
Telephone Plant
Telephone plant is stated at its original cost.
When depreciable plant is disposed of, the carrying amount, salvage, and the
cost to remove such plant are charged to accumulated depreciation.
Depreciation rates used by the Company are prescribed by the FCC and by the
various state commissions (the "commissions") for interstate operations and for
intrastate operations, respectively. All rates are calculated on a straight-line
basis using the concept of "remaining life." The represcription process requires
the Company to perform a detailed study using actual and estimated factors to
develop future life expectancy of telephone plant investments, including
technological evolution, competition, asset utilization, modernization plans and
regulatory commitments. Both the Company and the commissions staffs submit
factors deemed appropriate to permit asset recovery. The commissions select the
one they believe to be the most appropriate from among these alternatives.
Utilizing these factors, new depreciation rates are set to enable the Company to
recover costs of plant additions as well as to permit the prospective recovery
of deficiencies in existing depreciation reserve balances as a result of shorter
asset lives to be utilized on a going forward basis. The represcription process
occurs on a triennial basis and includes the commissions and the Company. Once
new depreciation rates are set, the commissions may take rate actions to permit
the Company to recover costs if deemed necessary. In 1993, revised interstate
depreciation rates were approved by the FCC. Revised intrastate depreciation
rates were effective November 1, 1992 for Rhode Island, January 1, 1993 for New
Hampshire and July 1, 1993 for Massachusetts. The application of the interstate
and intrastate rates resulted in average effective composite rates of 7.3%, 7.4%
and 7.2% for 1993, 1992 and 1991, respectively.
The quantification of the difference between recorded depreciation and
depreciation that would have been recorded in accordance with generally accepted
accounting principles for an entity not subject to the provisions of Statement
No. 71 is not practicable at the present time.
Regulatory authorities in Maine, Massachusetts, New Hampshire and Rhode Island
allow the Company to capitalize interest, including an allowance on share
<PAGE>
owner's equity, as a cost of constructing certain telephone plant and as income,
included in Other income (expense) - net. Such income will be realized over the
service life of the plant as the resulting higher depreciation expense is
recovered through the rate-making process. In Vermont, telephone plant under
construction is included in the rate base, thereby eliminating the need for any
interest accrual mechanism. The FCC requires the same method as Vermont for
short-term telephone plant under construction, while long-term plant under
construction accrues interest under FCC procedures.
Computer Software Costs
The Company capitalizes initial right-to-use fees for central office switching
equipment, including initial operating system and initial application software
costs. For non-central office equipment, only the initial operating system
software is capitalized. Subsequent additions, modifications, or upgrades of
initial software programs, whether operating or application packages, are
expensed. This accounting treatment conforms to the rules set forth by the FCC.
Refinancing Charges
The Company defers the intrastate portion of call premiums and other charges
associated with the redemption of long-term debt and expenses the interstate
portion of these charges, as required by the state commissions and the FCC,
respectively. The deferred amounts are amortized over periods stipulated by the
state commissions. Prior to January 1, 1988, these charges were deferred and
amortized for both intrastate and interstate purposes.
Income Taxes
NYNEX and its subsidiaries, including the Company, file a consolidated Federal
income tax return. The Company's provision for federal income taxes currently
payable is allocated in accordance with its contribution to the consolidated
group's taxable income and tax credits.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement No. 109"), which
superseded Statement of Financial Accounting Standards No. 96, "Accounting for
Income Taxes." The effect of implementing Statement No. 109 on the Company's
financial position and results of operations was not significant. Statement No.
109 requires that deferred tax assets and liabilities be measured based on the
enacted tax rates that will be in effect in the years in which temporary
differences are expected to reverse. However, for the Company, the treatment of
excess deferred taxes resulting from the reduction of federal tax rates prior to
1993 is subject to federal income tax and regulatory rules.
<PAGE>
Deferred income tax provisions of the Company are based on amounts recognized
for rate-making purposes. The Company recognizes a deferred tax liability and
establishes a corresponding regulatory asset for tax benefits on temporary
differences previously flowed through to ratepayers. The major temporary
difference that gave rise to the net deferred tax liability is depreciation,
which for income tax purposes is determined based on accelerated methods and
shorter lives.
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation", requires the Company to reflect the additional
deferred income taxes as regulatory assets to the extent that they will be
recovered in the rate-making process. In accordance with the normalization
provisions under federal tax law, the Company reverses excess deferred taxes
relating to depreciation of regulated assets over the regulatory lives of those
assets. For other excess deferred taxes, the regulatory agencies generally allow
amortization of excess deferred taxes over the reversal period of the temporary
difference giving rise to the deferred taxes.
On August 10, 1993, the Revenue Reconciliation Act of 1993 was signed into law,
and the statutory corporate federal income tax rate increased to 35% from 34%,
retroactive to January 1, 1993. In accordance with Statement No. 109, the
Company adjusted its current and deferred income tax balances to reflect the tax
rate change. The Company reflected the additional deferred income taxes arising
from the tax rate increase primarily as increases to the regulatory asset and
decreases to the regulatory liability.
The Tax Reform Act of 1986 repealed the investment tax credit ("ITC"), effective
January 1, 1986. As required by tax law, ITC for the Company was deferred and is
amortized as a reduction to tax expense over the estimated service lives of the
related assets giving rise to the credits.
(B) Receivables - Affiliates
At December 31, 1992, the Company had advances to NYNEX of $82.0 million
included in Receivables-Affiliates which was principally due to the investment
by NYNEX of a portion of the proceeds from the long-term debt issued by the
Company on December 9, 1992. On January 19, 1993, these proceeds were used for
the redemption of $175 million of the Company's Thirty-Nine Year 8 5/8%
Debentures, due September 1, 2009 (see Note (G)).
<PAGE>
(C) Income Taxes
The components of income tax (benefit) expense are as follows:
Dollars in Millions 1993* 1992 1991
Federal:
Current $206.5 $230.6 $211.1
Deferred - net (219.0) (8.6) (75.5)
Deferred tax credits - net (28.5) (27.6) (30.6)
------ ------ ------
(41.0) 194.4 105.0
------ ------ ------
State:
Current 38.2 45.4 38.1
Deferred - net (36.3) 1.1 (7.2)
------ ---- -----
1.9 46.5 30.9
------ ---- -----
Total $(39.1) $240.9 $135.9
====== ====== ======
* Does not include the deferred tax benefit of $14.1 million associated with
the Cumulative effect of change in accounting for postemployment benefits.
In 1993, the total tax benefit includes $23.1 million representing a one-time
benefit from adjustments of prior year estimates of depreciation on capitalized
overheads and of the reversal of excess deferred taxes. The total deferred tax
benefit includes $187.7 million due to the Company's restructuring. Additional
1993 decreases resulted from the adoption of a new accounting standard related
to postretirement benefits (see Note D). The increase in 1992 deferred tax
expense was due principally to the partial reversal of temporary differences
associated with the Company's 1991 restructuring.
<PAGE>
A reconciliation between federal income tax expense computed at the statutory
rate and the Company's effective tax (benefit) expense is as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1993* 1992 1991
<S> <C> <C> <C>
Federal income tax expense
computed at statutory rate $ 23.5 $247.4 $153.8
a. Amortization of excess
deferred federal income
taxes due to the change
in the tax rates (39.0) (20.7) (25.4)
b. Amortization of investment
tax credits over the life
of the assets which gave
rise to the credits (28.5) (27.8) (31.8)
c. Depreciation of certain taxes and
payroll-related construction costs
capitalized for financial statement
purposes, but deducted for income
tax purposes in prior years 5.9 14.2 14.4
d. Allowance for funds used during
construction, which is excluded
from taxable income, net of
applicable depreciation (0.7) (1.1) 0.2
e. State income taxes,
net of federal tax benefit 1.2 30.7 20.4
f. Other differences (1.5) (1.8) 4.3
------ ------ ------
Income tax (benefit) expense $(39.1) $240.9 $135.9
====== ====== ======
</TABLE>
* Does not include the deferred tax benefit of $14.1 million associated with
the Cumulative effect of change in accounting for postemployment benefits.
Temporary differences for which deferred income taxes have not been provided by
the Company are represented principally by "c" above. Only taxes currently
payable on these temporary differences are recognized in the rate-making
process.
<PAGE>
The components of current and long-term deferred tax assets and liabilities at
December 31, 1993 are as follows:
Dollars In Millions Assets Liabilities
Deferred tax due to:
Depreciation and amortization $ - $ 1,014.9
Benefits 221.4 57.1
1993 restructuring charges 112.1 -
Unamortized investment tax credits 64.4 -
Other 32.3 79.3
----- -----
Total deferred taxes $430.2 1,151.3
-------
430.2
-------
Net deferred tax liabilities $ 721.1
=======
At December 31, 1993 and 1992 the Company recorded approximately $223.4 and
$223.7 million, respectively, in deferred taxes primarily representing the
cumulative amount of income taxes on temporary differences that were previously
flowed through to ratepayers. The Company recorded a corresponding regulatory
asset in deferred charges for these items, representing amounts that will be
recovered through the rate-making process. These deferrals have been increased
for the tax effect of future revenue requirements and will be amortized over the
lives of the related depreciable assets concurrently with their recovery in
rates.
The Company recorded a regulatory liability at December 31, 1993 and 1992 of
approximately $246.3 and $354.8 million, respectively, primarily representing
previously recorded excess deferred federal income taxes resulting from the
reduction of the statutory federal income tax rate and unamortized ITC, which is
recorded in Other long-term liabilities and deferred credits and Accounts
payable - Trade and other (see Note A). These liabilities have been increased
for the tax effect of future revenue requirements.
(D) Employee Benefits
Pensions
Substantially all of the Company's employees are covered by one of two NYNEX
noncontributory defined benefit pension plans (the "Plans"). Benefits for
management employees are based on a modified career average pay plan, while
benefits for nonmanagement employees are based on a nonpay-related plan.
Contributions are made, to the extent deductible under the provisions of the
Internal Revenue Code, to an irrevocable trust for the sole benefit of pension
plan participants.
Total Company pension (benefit)/cost for 1993, 1992 and 1991 was $(51.0), $2.2
and $(3.9) million, respectively, of which $1.5 and $(2.7) million were deferred
in 1992 and 1991, respectively, as a result of state regulatory decisions that
<PAGE>
required pension expense to be equivalent to amounts contributed to the Plans.
Deferral of pension cost was discontinued in 1993, and the Company has
implemented a plan to recover deferred pension costs through the rate-making
process (see Postretirement Benefits Other Than Pensions below). At December 31,
1993 and 1992, the Company had recorded $276.7 and $327.6 million, respectively,
in Other long-term liabilities and deferred credits representing the Company's
pension liability.
The assumptions used to determine the projected benefit obligation at December
31, 1993 and 1992 include a discount rate of 7.5% and 8.5%, respectively, and an
increase in future compensation levels of 4.5% in both years for management
employees and 4.0% in both years for nonmanagement employees. The expected
long-term rate of return on pension plan assets used to calculate pension
expense was 8.9% in 1993 and 1992 and 8.5% in 1991. Periodically, the Plans have
been amended to increase the level of plan benefits. The actuarial projections
included herein anticipate plan improvements in the future.
In 1992 and 1993, management employees who left the Company under the Force
Management Plan could elect to receive their pension benefit in a lump sum
distribution, or as a monthly annuity beginning when they left the Company. The
1992 reduction in the number of management employees and the lump sum option
were accounted for as a curtailment and a settlement, respectively, and reduced
pension costs by $13.0 million in 1992, of which $3.8 million was recognized as
a reduction to expense and $9.2 million was deferred. There was no reduction in
the number of management employees under the Force Management Plan in 1993.
In October 1991, NYNEX amended its nonmanagement pension plan to provide an
early retirement incentive, which increased the projected benefit obligation by
$113.4 million, of which $34.2 million was expensed and $79.2 million was
deferred. The expense associated with the nonmanagement early retirement
incentive was included in the charges for force reduction programs in the fourth
quarter of 1991.
Postretirement Benefits Other Than Pensions
The Company provides certain health care and life insurance benefits for retired
employees and their families. Substantially all of the Company's employees may
become eligible for these benefits if they reach pension eligibility while
working for the Company.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("Statement No. 106"). Statement No. 106 changed the practice of
accounting for postretirement benefits from recognizing costs as benefits are
paid to accruing the expected cost of providing these benefits during an
employee's working life. The Company is recognizing the transition obligation
for retired employees and the earned portion for active employees over a 20-year
period. The cost of health care benefits and group life insurance was determined
using the unit credit cost actuarial method. The net postretirement benefit cost
<PAGE>
for 1993 for the Company was $143.0 million. As a result of planned work force
reductions, the Company recorded an additional $193.9 million of postretirement
benefit cost in 1993 accounted for as a curtailment. Total costs of providing
benefits for retired employees and their families were $63.7 and $50.8 million
in 1992 and 1991, respectively.
The Company participates in the NYNEX benefit plans, and the structure of the
plans is such that certain disclosures required by Statement No. 106 cannot be
presented for the Company on an individual basis. A comparison of the actuarial
present value of the accumulated postretirement benefit obligation with the fair
value of plan assets, the components of the net postretirement benefit cost, and
the reconciliation of the funded status of the plans with the amount recorded on
the balance sheet are provided on a consolidated basis in the Proxy Statement
and Consolidated Financial Statements for the year ended December 31, 1993 filed
by NYNEX.
The actuarial assumptions used to determine the 1993 obligation for
postretirement benefit plans under Statement No. 106 include the following:
discount rate of 7.5%; weighted average expected long-term rate of return on
plan assets of 8.4%; weighted average salary growth rate of 4.2%; medical cost
trend rate of 14.3% grading down to 4.5% in 2008; and dental cost trend rate of
5.0% grading down to 3.0% in 2002.
With respect to interstate treatment, the FCC released an order in January 1993
stating that costs recognized under Statement No. 106 are not exogenous costs
and, therefore, did not warrant an upward rate adjustment under price caps at
that time. In the April 2, 1993 filing of interstate access tariffs under the
FCC's price cap rules, the Company and New York Telephone (collectively, the
"Telephone Companies") sought an exogenous cost increase of $12 million to
reflect the transition obligation for current retirees under Statement No. 106.
On June 23, 1993, the FCC's Common Carrier Bureau (the "Bureau") issued an order
allowing the proposed rates to go into effect July 2, 1993, subject to an
investigation and an accounting order. In its order, the Bureau designated
several issues for investigation, including the accounting treatment of
postretirement health care costs. Commencing July 2, 1993, the Company began
collecting these revenues, subject to possible refund pending resolution of the
Bureau's investigation.
With respect to intrastate treatment, the Company implemented an accounting plan
as previously discussed with the regulatory commissions in each of the states in
which it operates for regulatory accounting and rate-making treatment. The plan
provided for: (1) immediate adoption of both Statement No. 106 and Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions"
("Statement No. 87") on a revenue requirement neutral basis, (2) amortization of
existing deferred pension costs within a ten-year period and (3) discontinuance
of additional deferrals of Statement No. 106 and Statement No. 87 costs.
Approval of the plan is still pending in the State of Rhode Island.
<PAGE>
In 1991, NYNEX established two separate Voluntary Employees' Beneficiary
Association Trusts ("VEBA Trusts"), one for management and the other for
nonmanagement, to begin prefunding postretirement health care benefits. The
assets in the VEBA Trusts consist primarily of equity securities and fixed
income securities. In 1991 and 1992, NYNEX transferred a portion of excess
pensions assets, totaling $486 million, to health care benefit accounts, within
the pension plans and then contributed those assets to the VEBA Trusts.
Additional contributions to the VEBA Trusts are evaluated and determined by
NYNEX management.
Postemployment Benefits
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" ("Statement No. 112") in the
fourth quarter of 1993, retroactive to January 1, 1993. Statement No. 112
applies to postemployment benefits, including workers' compensation, disability
plans and disability pensions, provided to former or inactive employees, their
beneficiaries, and covered dependents after employment but before retirement.
Statement No. 112 changed the Company's method of accounting from recognizing
costs as benefits are paid to accruing the expected costs of providing these
benefits. The initial effect of adopting Statement No. 112 was reported as a
cumulative effect of a change in accounting principle and resulted in a
one-time, non-cash charge of $39.1 million ($25.0 million after-tax). In
subsequent years, the effect of Statement No. 112 is not expected to result in
periodic expense materially different from the expense recognized under the
prior method. The rate recovery of these costs in the intrastate jurisdictions
has not been determined.
<PAGE>
(E) Long-term Debt
Interest rates and maturities on long-term debt outstanding at December 31, 1993
and 1992 are as follows:
<TABLE>
<CAPTION>
Interest December 31,
Dollars in Millions Rates Maturities 1993 1992
<S> <C> <C> <C> <C> <C>
Debentures 4 1/2% - 8 1/5% 1999-2005 $ 155.0 $ 525.0
6 1/8% - 7 7/8% 2006-2022 525.0 525.0
7 7/8% - 9% 2023-2031 700.0 800.0
Notes 5 1/20% - 8 5/8% 1997-2003 800.0 375.0
Unamortized discount - net (18.8) (18.4)
-------- --------
2,161.2 2,206.6
Long-term capital lease
obligations 2.8 3.9
-------- --------
Total long-term debt $2,164.0 $2,210.5
======== ========
</TABLE>
In 1997 and 1998, $175 and $100 million, respectively, of the Notes will mature.
The Company's Debentures, except for its Forty Year 7 7/8% Debentures, due
November 15, 2029, and its Forty Year 9% Debentures, due August 1, 2031, are
callable five years after the issue date, upon thirty days' notice, at the
option of the Company. The Company's Forty Year 7 7/8% Debentures, due November
15, 2029, are repayable on November 15, 1996, in whole or in part, at the option
of the holder, and its Forty Year 9% Debentures, due August 1, 2031, are
callable ten years after issue date upon thirty days' notice by the Company.
At December 3l, l993, the Company had $500.0 million of unissued, unsecured debt
securities registered with the Securities and Exchange Commission.
(F) Fair Value of Financial Instruments
The estimated fair value of Long-term debt is based on quoted market prices.
Estimated fair values of financial instruments, where different than the
carrying amounts, are as follows:
Dollars in Millions At December 31,
1993 1992
Long-term debt
Carrying amount $2,161.2 $2,206.6
Fair value $2,252.7 $2,235.1
<PAGE>
(G) Short-term Debt
Short-term debt and related weighted average interest rates are as follows:
<TABLE>
<CAPTION>
Dollars in Millions Weighted average interest rates
December 31, December 31,
1993 1992 1991 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Advances from NYNEX. $159.4 $ - $ 94.9 3.37% 3.49% 4.77%
Current maturity of
Long-term debt - 175.0 200.0 - 8.63% 9.50%
Other (0.9) (0.1) 0.4 10.21% 11.05% 10.67%
----- ----- ----
Total short-term
debt $158.5 $174.9 $295.3
====== ====== ======
</TABLE>
On December 9, 1992, the Company issued $175 million of its Five Year 6 1/4%
Notes, due December 15, 1997. On January 19, 1993, the net proceeds of this
issue were used for the redemption of the Company's Thirty-Nine Year 8 5/8%
Debentures, due September 1, 2009, outstanding in the principal amount of $175
million, and classified as Short-term debt at December 31, 1992.
Dollars in Millions 1993 1992 1991 1993 1992 1991
Average amount of
advances from
NYNEX outstanding
during the year $127.7+ $ 21.8+ $183.3+ 3.26% 4.00% 6.27%
Maximum amount of
advances from
NYNEX payable at
any month end
during the year $311.7 $105.4 $351.1
# Computed by dividing the aggregate related interest expense by the average
daily face amount of advances.
+ Computed by dividing the sum of the aggregate principal amounts outstanding
each day during the year by the total number of calendar days in the year.
Interest expense on advances from NYNEX was $4.2, $0.9 and $11.5 million in
1993, 1992 and 1991, respectively.
<PAGE>
(H) Lease Commitments
The Company leases certain facilities and equipment used in its operations.
Rental expense was $68.5, $74.5 and $80.2 million for 1993, 1992 and 1991,
respectively. At December 31, 1993, the minimum lease commitments under
noncancelable operating and capital leases for the periods shown are as follows:
Dollars in Millions
Year Operating Capital
1994 $ 56.6 $1.5
1995 35.7 1.0
1996 31.0 0.9
1997 30.0 0.9
1998 29.2 0.9
Thereafter 307.8 1.4
------ ----
Total minimum lease payments $490.3 6.6
======
Less: executory costs 1.8
----
Net minimum lease payments 4.8
Less: interest 1.1
----
Present value of net minimum lease payments $3.7
====
(I) Transactions with American Telephone and Telegraph Company
In 1993, 1992 and 1991, American Telephone and Telegraph Company ("AT&T")
provided approximately 15%, 15% and 14%, respectively, of the Company's total
operating revenues, primarily Network access revenues and Other revenues from
billing and collection services performed under contract by the Company for
AT&T. In connection with such services, the Company purchases the related
receivables with recourse, up to a contractual limit.
(J) Transactions with Affiliates
The Company and other NYNEX subsidiaries receive corporate governance and
ownership services such as securities administration, investor relations,
certain tax support and human resources planning services from NYNEX. The costs
of these services are allocated to the Company and the other NYNEX subsidiaries
through intercompany billings. NYNEX performs a semi-annual study to identify on
whose behalf functions of corporate departments are being performed. Directly
charged costs apply exclusively to one subsidiary and are charged only to that
subsidiary. Directly attributable costs apply to more than one subsidiary and
are allocated based on usage, specific work plans, and relative size (composite
of employees and assets) of the applicable subsidiaries. Indirectly attributable
and unattributable costs for services performed on behalf of all subsidiaries
are allocated based on the relative size of the subsidiaries. For 1993, 1992 and
1991, the Company recorded allocated costs of $51.9, $48.5 and $63.2 million,
respectively, in connection with these services.
<PAGE>
Telesector Resources performs data processing and related services and materials
management services on a centralized basis on behalf of the Telephone Companies.
Prior to 1993, the costs of these services were allocated to the Company and New
York Telephone based on an annual study which identified on whose behalf
functions were being performed. Since 1993, costs are allocated based on
identification of detailed work functions that are approved and documented
within Telesector Resources' planning and budgeting process. Costs are directly
assigned, directly attributed or indirectly attributed based on the analysis of
the work function. In 1993, 1992 and 1991, the Company recorded charges from
Telesector Resources of $670.3, $590.3 and $619.9 million, respectively, for
data processing services and materials related charges, including both materials
management services (such as procurement support, warehousing and transportation
costs) and the Company's purchase of materials (including items charged to plant
accounts). The total materials related charges to the Company in 1993, 1992 and
1991 were approximately $255.4, $240.3 and $221.1 million, respectively. In
addition, in 1993, approximately $140.8 million of restructuring charges ($85.5
million after-tax) was allocated to the Company from Telesector Resources,
primarily related to its force reduction and re-engineering programs. Effective
in July 1991, arrangements were made for Telesector Resources to act as a
purchasing agent for the Company for directly shipped materials and supplies.
During 1993, 1992 and 1991, total agency purchases by Telesector Resources
amounted to $123.6, $120.6 and $32.4 million, respectively.
Telesector Resources owns a one-seventh interest in Bell Communications
Research, Inc. ("Bellcore"). Bellcore furnishes technical and support services
relating to exchange telecommunications and exchange access services, a portion
of which is research and development. For 1993, 1992 and 1991, the Company
recorded charges of $42.1, $42.7 and $41.8 million, respectively, for services
provided by Bellcore.
In 1992, the FCC permitted the Telephone Companies to unify their interstate
access rates. As a result of the unified rate structure, the Company experienced
an interstate rate increase and New York Telephone experienced an offsetting
interstate rate decrease. The Telephone Companies implemented a phase-in payment
plan in order to avoid sudden changes in each of the Telephone Company's
earnings resulting from the unified rate structure. In 1993 and 1992, the
Company made transition payments of $55 million and $18 million, respectively,
to New York Telephone.
The Company has an agreement with NYNEX Information Resources Company
("Information Resources") pursuant to which Information Resources pays a fee to
the Company for the use of the Company's name in soliciting directory
advertising and in publishing and distributing directories. For the years ended
December 31, 1993, 1992 and 1991, licensing fees, included in Other revenues,
amounted to $156.7, $159.0 and $165.5 million, respectively.
<PAGE>
(K) Taxes Other Than Income Taxes
Taxes other than income taxes consist of:
Dollars in Millions 1993 1992 1991
Property $ 98.6 $ 78.9 $ 69.7
Gross receipts 24.8 23.4 22.7
Other 4.2 3.6 4.0
---- ---- ----
Total $127.6 $105.9 $ 96.4
====== ====== ======
(L) Supplemental Cash Flow Information
The following information is provided in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows":
For the Years Ended
December 31,
Dollars in Millions 1993 1992 1991
Income tax payments $329.2 $283.9 $262.3
Interest payments $179.0 $187.0 $179.8
Noncash item excluded from the Statement
of Cash Flows related to the transfer of
ownership of real estate from NYNEX to
the Company $ - $ 24.2 $ -
(M) Revenues Subject to Possible Refund
Several state and federal regulatory matters may possibly require the refund of
a portion of the revenues collected in the current and prior periods. As of
December 31, 1993, the aggregate amount of such revenues that was estimated to
be subject to possible refund was approximately $8.2 million, plus related
interest. The outcome of each pending matter, as well as the time frame within
which each will be resolved, is not presently determinable.
(N) Litigation and Other Contingencies
Various other legal actions and regulatory proceedings are pending that may
affect the Company, including matters involving Racketeer Influenced and Corrupt
Organizations Act, antitrust, tort, contract and tax deficiency claims. While
counsel cannot give assurance as to the outcome of any of these matters, in the
opinion of management based upon the advice of counsel, the ultimate resolution
of these matters in future periods is not expected to have a material effect on
the Company's financial position or annual operating results but could have a
material effect on quarterly operating results.
<PAGE>
(O) Business Restructuring
In the fourth quarter of 1993, approximately $619 million of pretax business
restructuring charges was recorded, primarily related to efforts to redesign
operations and work force reductions. These charges included: $395 million for
severance and postretirement medical costs for employees leaving the Company
through 1996; $83 million for re-engineering service delivery; and $141 million
of restructuring charges allocated to the Company from Telesector Resources. The
restructuring charges were included in the Income Statements as follows:
Maintenance and support - $78 million; Marketing and customer services - $77
million; and Other expense - $464 million.
In the fourth quarter of 1991, approximately $193 million of pretax
organizational restructuring charges was recorded related to force reduction
programs. The restructuring charges were included in the Income Statements as
follows: Other revenues - $4 million; Maintenance and support - $94 million;
Marketing and customer services - $19 million; Other expense - $75 million; and
Other income (expense) - net - $1 million.
<PAGE>
SUPPLEMENTARY INFORMATION
Quarterly Financial Information (Unaudited)
All adjustments (consisting only of normal recurring accruals) necessary for a
fair statement of income for each period have been included in the following
table.
<TABLE>
<CAPTION>
Dollars in Millions
For the quarter ended,
March 31, June 30, September 30, December 31
<S> <C> <C> <C> <C>
1993
Operating revenues $1,010.1 $1,016.5 $1,027.0 $1,016.6
Operating income $ 275.9 $ 250.8 $ 240.5 $ (470.0)
Earnings before cumulative
effect of change in
accounting principle $ 140.2 $ 131.9 $ 114.7 $ (280.5)
Cumulative effect of change
in accounting for post
employment benefits, net
of taxes $ (25.3) $ - $ 0.3 $ -
Net income $ 114.9 $ 131.9 $ 115.0 $ (280.5)
1992
Operating revenues $ 957.2 $ 969.8 $1,001.2 $ 993.7
Operating income $ 218.5 $ 226.6 $ 237.5 $ 230.1
Net income $ 122.7 $ 115.4 $ 121.8 $ 126.7
</TABLE>
Results for the first quarter of 1993 include the adoption of Statement No. 112
(see Note (D) "Employee Benefits" for further discussion). Results for the third
quarter of 1993 reflect the effect of the increase in the statutory corporate
federal income tax rate (see Note (A) "Accounting Policies - Income Taxes" for
further discussion). Results for the fourth quarter of 1993 reflect the effects
of $619 million of pretax charges for business restructuring, including
re-engineering operations and force reductions, which were recorded in operating
expenses. The after-tax effect of these charges was a reduction in net income of
approximately $376 million. (See the section entitled "Business Restructuring"
included in Management's Discussion and Analysis of Results of Operations for
further discussion of these charges.)
<PAGE>
New England Telephone and Telegraph Company
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.
New England Telephone and Telegraph Company
By Gail Deegan
----------------------------------
Gail Deegan
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Chief Accounting Officer)
December 14, 1994
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Annual Report on Form 10-K/A.
(1) Financial Statements. The following report and financial
statements are contained in Item 8:
Report of Independent Accountants
Statements of Income and Retained Earnings for each of
the Three Years in the Period Ended December 31, 1993
Balance Sheets as of December 31, 1993 and 1992
Statements of Cash Flows for each of the Three Years in
the Period Ended December 31, 1993
Notes to Financial Statements
Supplementary Information
Quarterly Financial Information (Unaudited)
(2) Financial Statement Schedules. The following financial
statement schedules, in response to Item 14, were previously
filed on the Registrant's 1993 Form 10-K, dated
March 25, 1994 (File No. 1-1150):
V - Telephone Plant
VI - Accumulated Depreciation, Depletion, and Amortization
of Telephone Plant
VIII - Valuation and Qualifying Accounts
Financial statement 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 required or applicable.
<PAGE>
(3) Exhibits. Exhibits identified in parentheses below, on file with
the Securities and Exchange Commission ("SEC"), are
incorporated herein by reference as exhibits hereto.
Exhibit
Number
(3)a Restated Certificate of Incorporation of the Company dated
August 19, 1988 (Exhibit No. (19)ii to the Registrant's filing on
Form SE dated May 2, 1989, File No. 1-1150).
(3)b By-Laws of the Company as amended April 18, 1989 (Exhibit No. (3)b
to the Registrant's filing on Form SE, dated May 2, 1989, File No.
1-1150).
(4) No instrument which defines the rights of holders of long-term
debt of the Company is filed herewith pursuant to Regulation
S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
Company hereby agrees to furnish a copy of any such instrument
to the SEC upon request.
(10)(i)1 Reorganization and Divestiture Agreement among American Telephone
and Telegraph Company, NYNEX Corporation and Affiliates dated as
of November 1, 1983 (Exhibit No. (10)(i)1 to Form 10-K of NYNEX
Corporation for 1983, File No. 1-8608).
(10)(i)2 Shared Network Facilities Agreement among American Telephone and
Telegraph Company, AT&T Communications of New England, Inc. and
New England Telephone and Telegraph Company dated as of November
1, 1983 (Exhibit No. (10)(i)21 to Form 10-K of NYNEX
Corporation for 1983, File No. 1-8608).
(10)(i)3 Agreement Concerning Contingent Liabilities, Tax Matters and
Termination of Certain Agreements among American Telephone and
Telegraph Company, Bell System Operating Companies, Regional
Holding Companies and Affiliates dated as of November 1, 1983
(Exhibit No. (10)(i)8 to Form 10-K of NYNEX Corporation for 1983,
File No. 1-8608).
(10)(i)4 Post-Divestiture Shared Services Force Transfer Agreement between
American Telephone and Telegraph Company and New England Telephone
and Telegraph Company dated as of January 1, 1984 (Exhibit No.
(10)(i)39 to Form 10-K of NYNEX Corporation for 1983, File No.
1-8608).
<PAGE>
(10)(i)5 Agreement Concerning the Sharing of Contingent Liabilities dated
as of January 28, 1985 (Exhibit No. (19)(i)1 to Form 10-K of
NYNEX Corporation for 1984, File No. 1-8608).
(10)(ii)(B)1 Directory License Agreement between New England Telephone and
Telegraph Company and NYNEX Information Resources Company dated as
of January 1, 1991 (Exhibit No. (10)(ii)(B)4 to the Registrant's
filing on Form SE, dated March 26, 1991, File No. 1-1150).
10)(ii)(B)2 Service Agreement concerning provision by Telesector Resources
Group, Inc. to New England Telephone and Telegraph Company of
numerous services, including (i) purchasing, materials handling,
inspection, distribution, storage and similar services and (ii)
technical, regulatory, government relations, marketing operational
support and similar services, dated March 31, 1992 (Exhibit No.
(19)(i)1 to the Registrant's filing on Form SE, dated March 23,
1993, File No. 1-1150).
(12) Computation of Ratio of Earnings to Fixed Charges (Exhibit No.
(12) to the Registrant's 1993 Annual Report on Form 10-K,
dated March 25, 1994, File No. 1-1150).
(23) Consent of Independent Accountants.
(24) Powers of attorney (Exhibit No. (24) to the Registrant's 1993
Annual Report on Form 10-K, dated March 25, 1994, File No. 1-1150).
(b) Reports on Form 8-K.
The Company's Current Report on Form 8-K, date of report
November 15, 1993 and filed November 19, 1993, reporting on
Item 5.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the application of our report dated February 9, 1994, included in
the 1993 Annual Report on Form 10-K of New England Telephone and Telegraph
Company for the year ended December 31, 1993, to the amended notes to the
consolidated financial statements which are included in this amendment on Form
10-K/A.
Coopers & Lybrand, L.L.P.
New York, New York
December 14, 1994
