<PAGE>
FORM 10-K
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, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-1150
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
A New York I.R.S. Employer
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
Title of each class on 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 or any amendment to this
Form 10-K. [ ]*
*Not applicable
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
Attachment
Title of each class
-------------------
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
2
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TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Item Page
------ ----
<S> <C> <C>
1. Business (Abbreviated pursuant to General
Instruction J(2))......................................... 4
2. Properties................................................ 12
3. Legal Proceedings ........................................ 12
4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction J(2))
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters (Inapplicable)
6. Selected Financial Data .................................. 14
7. Management's Discussion and Analysis of Results
of Operations (Management's Narrative Analysis of
Results of Operations is provided pursuant to
General Instruction J(2))................................ 15
8. Financial Statements and Supplementary Data:
Report of Management..................................... 27
Report of Independent Accountants........................ 28
Statements:
Statements of Income and Retained Earnings for
each of the Three Years in the Period Ended
December 31, 1994...................................... 29
Balance Sheets as of December 31, 1994 and 1993 ........ 30
Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1994...... 32
Notes to Financial Statements........................... 33
Supplementary Information:
Quarterly Financial Information (Unaudited)............. 47
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 47
</TABLE>
PART III
(Omitted Pursuant to General Instruction J(2))
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and
Management
13. Certain Relationships and Related Transactions
PART IV
<TABLE>
<CAPTION>
<C> <S> <C>
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ............................................ 48
</TABLE>
3
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PART I
Item 1. BUSINESS
General
-------
New England Telephone and Telegraph Company (the "Company") was
incorporated in 1883 under the laws of the State of New York, has its principal
executive offices at 125 High Street, Boston, Massachusetts 02110 (telephone
number 617-743-9800) and is engaged primarily in providing telecommunications
services in Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. The
Company is a wholly-owned subsidiary of NYNEX Corporation ("NYNEX").
Telecommunications Services
---------------------------
The Company is engaged primarily in providing two types of
telecommunications services, exchange telecommunications and exchange access, in
Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.
Exchange telecommunications service is the transmission of
telecommunications among customers located within geographical areas (local
access and transport areas or "LATAs"). These LATAs are generally centered on a
city or other identifiable community of interest and, subject to certain
exceptions, each LATA marks an area within which a former Bell System local
exchange company ("LEC") operating within such territory may provide
telecommunications services (see "Operations Under the Modification of Final
Judgment" below). Exchange telecommunications service may include long distance
service as well as local service within LATAs. Examples of exchange
telecommunications services include switched local residential and business
services, long distance service, private line voice and data services, Wide Area
Telecommunications Service ("WATS") and Centrex services.
Exchange access service refers to the link provided by LECs between a
customer's premises and the transmission facilities of other telecommunications
carriers, generally interLATA carriers. Examples of exchange access services
include switched access and special access services.
Certain billing and collection services are performed by the Company for
other carriers, primarily AT&T Corp. ("AT&T"), and certain information providers
that elect to subscribe to these services rather than perform such services
themselves. Effective January 1, 1987, such billing and collection services
were detariffed on an interstate basis and are offered to interexchange carriers
under contract. In 1994, approximately 1% of operating revenues was derived
from such billing and collection services. In 1990, the Company and AT&T signed
a six-year contract extending the Company's role as an AT&T long distance
billing and collection agent. The agreement allows AT&T the flexibility of
gradually assuming certain administrative and billing functions performed by the
Company. The contract expires on December 31, 1995.
4
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There are six LATAs that comprise the area served by the Company and they
are referred to as follows: Eastern Massachusetts, Western Massachusetts,
Maine, New Hampshire, Rhode Island and Vermont.
The following table sets forth for the Company the approximate number of
network access lines in service at the end of each year:
<TABLE>
<CAPTION>
In Thousands
--------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Network Access Lines
in Service............... 6,101 5,906 5,721 5,604 5,544
</TABLE>
Sizable areas and many localities within the territories served by the
Company are served by nonaffiliated telephone companies that had approximately
215,000 network access lines in service in those territories on December 31,
1994. The Company does not furnish local service in the areas and localities
served by such companies.
For the year ending December 31, 1994, approximately 93% of the total
operating revenues of the Company was derived from telecommunications services,
of which one customer, AT&T, accounted for approximately 14%, primarily in
network access and other revenues. The remaining approximately 7% of total
operating revenues was from other sources, primarily licensing fees for
telephone directories and inside wire related charges.
Telesector Resources Group, Inc.
-------------------------------
Telesector Resources Group, Inc. ("Telesector Resources") is a wholly-owned
subsidiary of the Company and New York Telephone Company ("New York Telephone"),
also a wholly-owned subsidiary of NYNEX. In 1990, NYNEX Materiel Enterprises
Company was transferred from NYNEX to the Company and to New York Telephone
(collectively, the "Telephone Companies") and then merged into another jointly
owned subsidiary, NYNEX Service Company, which was renamed Telesector Resources.
The Company has a 33 1/3% ownership in Telesector Resources and shares voting
rights equally with the other owner, New York Telephone.
The Telephone Companies have consolidated all or part of many regional
service and support functions into Telesector Resources. Regional service
functions are interstate access services, operator services, public
communications, sales, market area services, corporate services, information
services, labor relations, engineering/construction and business planning.
Support functions are quality and process re-engineering, marketing, technology
and planning, public relations, legal and human resources. In addition,
Telesector Resources provides various procurement, procurement support and
materials management services to the Telephone Companies, on a nonexclusive
basis. These services include product evaluation, contracting, purchasing,
materials management and disposition, warehousing, transportation, and equipment
repair management. Under a reciprocal services agreement, the Company provides
certain administrative and other services for Telesector Resources.
5
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Each of the seven regional holding companies ("RHCs") formed in connection
with the AT&T divestiture owns an equal interest in Bell Communications
Research, Inc. ("Bellcore") (see "Operations Under the Modification of Final
Judgment" below). Bellcore furnishes to the LECs, including the Company, and
certain of their subsidiaries technical and support services (that include
research and development) relating to exchange telecommunications and exchange
access services that can be provided more efficiently on a centralized basis.
Bellcore serves as a central point of contact for coordinating the efforts of
NYNEX and the other RHCs in meeting the national security and emergency
preparedness requirements of the federal government.
Certain Affiliated Business Operations
--------------------------------------
NYNEX Information Resources Company
-----------------------------------
The Company has agreements with NYNEX Information Resources Company
("Information Resources"), a wholly-owned subsidiary of NYNEX, pursuant to which
Information Resources pays a fee to the Company for the right to produce,
publish and distribute alphabetical (White Pages) and classified (Yellow Pages)
directories for the Company.
Business Restructuring
----------------------
During 1994, the Company reached new agreements with the Communications
Workers of America ("CWA") and the International Brotherhood of Electrical
Workers ("IBEW") which provided for retirement incentives (see "Employee
Relations" below). The Company also announced retirement incentives for its
management employees. These incentives are intended to provide a voluntary
means to implement substantially all of the planned work force reductions of
approximately 6,300 employees by the end of 1996. Much of the cost will be
funded by the NYNEX pension plans. In 1994, the Company recorded $168.1 million
of pretax charges ($111.2 million after-tax) primarily for the incremental cost
of pension enhancements and associated postretirement medical costs for 1,580
employees who left the Company under the retirement incentives and for the
Company's allocation from Telesector Resources for its pension enhancements.
In 1993, the Company recorded $619 million in pretax charges ($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.
Capital Expenditures
--------------------
The Company meets the expanding needs for telecommunications services by
making capital expenditures to upgrade and extend the existing
telecommunications network, including new construction, optical fiber and
modernization. Capital expenditures (excluding the equity component of
allowance for funds used during construction and additions under capital
6
<PAGE>
leases) for 1990 through 1994 are set forth below:
<TABLE>
<CAPTION>
In Millions
------------------------------
<S> <C>
1994 . . . . . . . . . . $877
1993 . . . . . . . . . . $819
1992 . . . . . . . . . . $782
1991 . . . . . . . . . . $751
1990 . . . . . . . . . . $868
</TABLE>
Operations Under the Modification of Final Judgment
---------------------------------------------------
The operations of NYNEX and its subsidiaries in all industry segments are
subject to the requirements of a consent decree known as the "Modification of
Final Judgment" ("MFJ"). The MFJ arose out of an antitrust action brought by
the United States Department of Justice ("DOJ") against AT&T. In August 1982,
the United States District Court for the District of Columbia (the "MFJ Court")
approved the MFJ as in the public interest. In February 1983, the United States
Supreme Court affirmed the MFJ Court's action. Pursuant to the MFJ, AT&T
divested its 22 wholly-owned LECs, including the Telephone Companies,
distributed them to the RHCs, and distributed the stock of the RHCs to AT&T's
stockholders on January 1, 1984.
As initially approved, the MFJ restricted the RHCs, including NYNEX and its
subsidiaries, including the Company, to the provision of exchange
telecommunications service, exchange access and information access services, the
provision (but not manufacture) of customer premises equipment ("CPE") and the
publishing of printed directory advertising. Although some restrictions placed
on RHC operations have been removed or modified since entry of the MFJ, the RHCs
are still required to seek MFJ Court approval in order to provide interLATA
telecommunications services, to manufacture or provide telecommunications
products and to manufacture CPE. Also, the Company is still required to offer
to all interexchange carriers and information service providers exchange access
and information access, at certain locations, which are equal in quality, type
and price to that provided to AT&T and its affiliates ("Equal Access").
Included in capital expenditures for the period 1990 through 1993 are costs in
connection with the requirement to provide Equal Access (see "Capital
Expenditures" above).
MFJ Court approval to engage in any of the prohibited activities is
normally predicated upon a showing to the MFJ Court that there is no substantial
possibility that an RHC could use its monopoly power to impede competition in
the market it seeks to enter. The MFJ Court has established procedures for
dealing with requests by an RHC to enter new businesses. Such requests must
first be submitted to the DOJ for its review. After DOJ review, the RHC seeks
approval directly from the MFJ Court. The MFJ Court will consider the
recommendation of the DOJ in deciding whether a specific request should be
granted.
In July 1991, the MFJ Court lifted the MFJ restriction on the provision of
the content of information services by the RHCs and LECs, including NYNEX and
the Telephone Companies. In May 1993, the United States Court of Appeals for
the District of Columbia Circuit affirmed that decision. The Court of Appeals
decision allows the RHCs and LECs, including NYNEX and the Telephone
7
<PAGE>
Companies, to create and own the content of the information they transmit over
the telephone lines and to provide data processing services to customers. In
November 1993, the United States Supreme Court declined to review the Court of
Appeals decision.
Regulated Services
------------------
Intrastate communications services offered by the Company are under the
jurisdiction of state public utility commissions (see "State Regulatory Matters"
below), and interstate communications services are under the jurisdiction of the
Federal Communications Commission ("FCC") (see "Federal Regulatory Matters"
below). In addition, state and federal regulators review various transactions
between the Company and the other subsidiaries of NYNEX.
State Regulatory Matters
------------------------
Set forth below is a description of certain intrastate regulatory
proceedings with respect to changes in rates and revenues/1/.
-
The net annual intrastate revenue reduction ordered for the Company,
comprised of both reductions in rates and one-time credits to customers, was
approximately $13.5 million, $6.2 million and $9.0 million for 1994, 1993, and
1992, respectively.
Maine
-----
On May 10, 1994, the Maine Public Utilities Commission ("MPUC") commenced a
proceeding to explore alternatives to traditional rate of return regulation for
the Company. In an Order dated August 18, 1994, the MPUC consolidated this
proceeding with an earnings investigation commenced in response to a ratepayer
complaint. In testimony filed October 3, 1994, and amended January 13, 1995, the
Company maintained that it was not earning above its authorized rate of return
and identified a potential revenue requirement of approximately $12 million
under a traditional rate of return methodology. Accordingly, the Company argued
that current rates represent the appropriate starting point for any alternative
regulation plan. The MPUC Staff and the Office of the Public Advocate each filed
testimony on December 13, 1994 contesting the Company's analysis. The MPUC Staff
concluded that current rates produced nearly $40 million in overearnings, while
the Public Advocate estimated overearnings at $65 million. Both argued for a
revenue reduction prior to the initiation of any incentive regulation plan.
Hearings on this consolidated proceeding were held in February 1995, with a
decision expected from the MPUC in May 1995.
----------
/1/ The term "rates" is synonymous with prices. When changes in rates are
- referred to in the aggregate, the reference is to the aggregate effect of
individual price changes multiplied by the volumes of services, assuming no
change in volume as a result of the price changes. The term "revenues", on
the other hand, refers to the aggregate effect of prices multiplied by
volumes of service, with effect given to the change in volume as a result
of any price changes.
8
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Massachusetts
-------------
On January 6, 1995, the MDPU opened an investigation concerning intraLATA
and local exchange competition in Massachusetts. The MDPU indicated that among
the matters it intends to address are collocation, interconnection of networks,
intraLATA toll presubscription, telephone number assignment and portability and
universal service funding. The Company and other parties submitted their
comments on the scope of the proceeding in February 1995. Decisions in this
proceeding could have a significant impact on the Company's revenues.
Rhode Island
------------
On October 25, 1994, the RIPUC initiated a proceeding with respect to
competition. In an order dated February 26, 1995, the RIPUC stated that it will
consider numerous issues including intraLATA presubscription, telephone number
assignment and portability, interconnection of networks and collocation.
In a separate proceeding, the RIPUC considered proposals from the Rhode
Island Division of Public Utilities and Carriers and various interexchange
carriers with respect to the Company's intrastate access charges, including a
proposal to freeze the Company's annual carrier common line revenues based on
the most recent available amount. On November 18, 1994, the RIPUC decided to
take no action to alter rates or rate structure at this time.
Vermont
-------
In February 1995, the Company and other parties submitted to the Vermont
Public Service Board ("VPSB") their comments on the proposed order of procedure
in the VPSB's proceeding on competition. The proceeding will address issues
such as open network architecture, interconnection, unbundling, intraLATA toll
presubscription, telephone number assignment and portability and universal
service policy.
See also discussion of State Regulatory Matters in Part II, Management's
Discussion and Analysis of Results of Operations, which is incorporated herein
by reference.
Federal Regulatory Matters
--------------------------
Interstate Access Charges
-------------------------
Interstate access charges are tariff charges filed with the FCC that
compensate LECs, including the Company, for services that allow carriers and
other customers to originate and terminate interstate telecommunications traffic
on the LECs' local distribution networks. Such charges recover the LECs'
access-related costs allocated to the interstate jurisdiction ("Interstate
Costs") under the FCC's jurisdictional cost allocation rules.
With respect to the provision of access to the switched network, separate
charges are applied to end users ("End User Common Line Charges") and to
interexchange carriers ("switched access"). End User Common Line Charges
recover, through a fixed charge, a portion of the Interstate Costs of the line
connecting an end user's premises with the LEC's central office. The LECs
recover their remaining Interstate Costs through mileage and usage sensitive
charges to the interexchange carriers.
9
<PAGE>
In June 1994, the FCC completed a review of the performance of LECs during
the initial period of price cap regulation. The Telephone Companies filed
comments advocating price cap and access reform to keep pace with the
intensifying competitive environment. Among other things, the Telephone
Companies recommended increased pricing flexibility, elimination of sharing and
low end adjustment mechanisms, and reduction of the productivity factor. An FCC
decision is pending.
On March 3, 1995, the FCC released Orders to Show Cause to each of the
LECs, including the Telephone Companies, resulting from an audit of the costs
that the LECs reported to the National Exchange Carrier Association ("NECA") for
Common Line Pooling purposes for 1988 and the first quarter of 1989. The audit
report cites each of the LECs for alleged violations of the FCC's accounting
rules and reporting errors which, as to the Telephone Companies, were calculated
to total $37.8 million in respect of all interstate costs for the period. Some
of the alleged errors would have the effect of understating the Telephone
Companies' revenue requirement; the net effect, therefore, is an alleged revenue
requirement overstatement of $19.8 million. That estimate is considered
preliminary, however, because the auditors did not have sufficient information
for several items to reach final conclusions.
The Order requires the Telephone Companies to show cause why the FCC should
not (1) issue a Notice of Apparent Liability for Forfeiture for violations of
the FCC's accounting rules; (2) require the Telephone Companies to adjust their
price cap indexes; and (3) require the Telephone Companies to improve their
internal processes to bring them into compliance. The Telephone Companies must
respond to the Order by May 2, 1995.
On December 15, 1993, the Telephone Companies filed a petition with the FCC
for a waiver to implement the Universal Service Preservation Plan ("USPP") in
order to compete more effectively with alternative providers of local telephone
service. The USPP would reduce the Switched Access rate for multiline business
users in zones of high traffic density by approximately 40 percent and would
shift most of the revenues lost from this rate reduction to flat, per-line
charges applicable to all access lines. Overall annual access revenues would be
reduced by $25 million.
Other Federal Matters
---------------------
In August 1992, the FCC determined that the LECs may provide video dialtone
service, a common carrier platform for transporting and switching video
programming from programmers to subscribers, and that neither the LEC providing
video dialtone nor its programmer-customers require a local cable franchise.
On October 20, 1994, the FCC announced that it had adopted a decision
responding to petitions for reconsideration of its 1992 order establishing the
rules and regulatory framework governing telephone company provision of video
dialtone. The FCC generally affirmed its rules for video dialtone, with some
clarifications and modifications. The FCC affirmed the common carrier nature of
the video dialtone platform, indicated that the video dialtone platform will be
subject to dual federal/state regulation, stated that cost allocation issues
will be resolved in the tariff process and relaxed in certain respects its
telephone company/cable non-ownership affiliation rules.
10
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On February 7, 1995, the FCC adopted an order granting the Company
authorization to begin construction of advanced video dialtone network
facilities in portions of Massachusetts and Rhode Island. The facilities, which
are planned to pass 334,000 households in Massachusetts and 63,000 households in
Rhode Island, will be used to provide video dialtone service as an alternative
to cable service by early 1996.
See also discussion of Federal Regulatory Matters in Part II, Management's
Discussion and Analysis of Results of Operations, which is incorporated herein
by reference.
---------------------------------
The outcome of all refund matters as well as the time frame within which
each will be resolved, is not presently determinable. As of December 31, 1994,
the aggregate amount of revenues that was estimated to be subject to possible
refund from all regulatory proceedings was approximately $21.4 million, plus
related interest.
---------------------------------
Competition
-----------
Advances in technology, as well as regulatory and court decisions, are
expanding the types of communications products and services available in the
market, as well as the number of alternatives to the telecommunications services
provided by the Company. Various business alliances and other undertakings were
announced or consummated in the telecommunications industry in 1994 which
indicate an intensifying level of competition, especially with respect to the
operations of the Company. AT&T acquired, through a merger, McCaw Cellular
Communications Inc. ("McCaw"), which operates in a number of areas within
NYNEX's region in the Northeast. U S WEST Inc. ("U S WEST") holds a major
interest in Time Warner Entertainment Co. L.P., which includes Time Warner Cable
and has announced an agreement to acquire Cablevision Systems Corp.
("Cablevision"). Time Warner Cable has extensive operations in the Northeast.
Cablevision, which operates in Boston plans to construct a fiber-optic network
to deliver telecommunications and video services. MCI Communications Corp.
("MCI") plans to spend $2 billion to establish local fiber-optic networks in 20
major cities, including Boston offering a way to bypass the local exchange
carrier, including the Company, and connect directly to MCI's long-distance
network. MCI has acquired Digital Equipment Corporation's fiber optic network
in New England. In certain markets in New England, the Company faces
significant competition from alternative service providers with substantial
resources. The Company has allowed alternative service providers to place
transmission equipment in its central offices, under an arrangement known as
collocation. The Company also faces increasing competition in Centrex services,
long distance, WATS, billing and collection services, pay telephones, and
various other services.
Employee Relations
------------------
The Company had approximately 20,000 employees at December 31, 1994.
Approximately 13,700 employees are represented by unions. Of those so
represented, approximately 99% are represented by the IBEW and approximately 1%
by the CWA, both of which are affiliated with the AFL-CIO.
11
<PAGE>
In 1994, collective bargaining agreements between the Company, the CWA and
the IBEW were extended until August 8, 1998. These agreements were scheduled to
expire on August 5, 1995. Basic wages will increase approximately 14.5%,
including a 4.0% increase in August 1994, and a pension enhancement is provided
to encourage early retirement. Wages will increase 4.0%, 3.5% and 3.0% in
August 1995, 1996 and 1997, respectively. There may be a cost-of-living
adjustment in 1997, and employees may receive added compensation for meeting
service standards (in March 1996, 1997 and 1998) and for enrollment into a
managed care network (in 1996 and 1997).
For the CWA, the effective date of their agreements and the initial wage
increase was April 3, 1994.
The effective date of the agreement with the IBEW was August 5, 1994, and
the initial wage increase was effective on August 7, 1994.
Item 2. PROPERTIES
The properties of the Company do not lend themselves to simple description
by character and location of principal units.
At December 31, 1994, the gross book value of telephone plant was $12.1
billion, consisting principally of telephone plant and equipment (89%). Other
classifications include: land, land improvements and buildings (7%); furniture
and other equipment (3%); and plant under construction and other (1%).
Substantially all of the Company's central office equipment is located in
buildings owned by the Company situated on land that it owns. Many
administrative offices, garages and business offices are in rented quarters.
As part of the Company's 1993 restructuring associated with re-engineering
the way service is delivered to customers (see "Business Restructuring" above),
the Company intends to consolidate work centers by the end of 1996 to build
larger work teams in fewer locations.
Item 3. LEGAL PROCEEDINGS
Contingent Liabilities Agreement
--------------------------------
The Plan of Reorganization, which was approved by the MFJ Court in August
1983 in connection with the AT&T divestiture, provides for the recognition and
payment of liabilities that are attributable to predivestiture events (including
transactions to implement divestiture), but that do not become certain until
after divestiture. These contingent liabilities relate principally to
predivestiture litigation and other claims against AT&T, its affiliates and the
LECs with respect to the environment, rates, taxes, contracts and torts
(including business torts, such as alleged violations of the antitrust laws).
With respect to such liabilities, AT&T and the LECs will share the costs of
any judgment or other determination of liability entered by a court or
administrative agency against any of them, whether or not a given entity is a
party to the proceeding and regardless of whether an entity is dismissed from
the proceeding by virtue of settlement or otherwise. Other costs to be shared
would include the costs of defending the claim (including attorneys' fees and
12
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court costs) and the cost of interest or penalties with respect to any such
judgment or determination. With certain exceptions, responsibility for such
contingent liabilities will generally be divided among AT&T and the LECs on the
basis of their relative net investment as of the effective date of divestiture.
Under this general rule of allocation, the Company pays approximately 3.5% of
any judgment or determination of liability.
In January 1995, NYNEX and the other RHCs agreed to terminate the sharing
arrangement among the LECs with respect to predivestiture contingent liabilities
for certain matters. AT&T did not enter into the agreement and, accordingly,
the sharing arrangement remains in effect with respect to AT&T's predivestiture
liabilities and with respect to AT&T's share of LEC predivestiture liabilities.
Litigation
----------
On October 28, 1994, a lawsuit was filed in Vermont state court by a
ratepayer group seeking an additional refund by the Company, with respect to
1993 and 1994 revenues, of up to $54 million. The Company and other defendants
filed motions to dismiss the complaint, and on December 30, 1994, the Court
dismissed the lawsuit in its entirety.
In January 1990, Wegoland Ltd. and Howard Weiner filed an action in the
United States District Court for the Southern District of New York on behalf of
the telephone ratepayers of the Telephone Companies alleging violations of the
Racketeer Influenced and Corrupt Organizations Act and various state laws. A
substantially identical case was filed by Donna Roazen in March 1990. The
defendants in these cases were NYNEX, certain of its subsidiaries, including the
Company, and certain present and former officers of those companies. Plaintiffs
alleged that the Telephone Companies had been charged inflated prices in
transactions with their affiliates and that those prices were unlawfully
reflected in the Telephone Companies' regulated rates. In November 1992, the
District Court granted defendants' motions to dismiss these actions with
prejudice. The United States Court of Appeals for the Second Circuit affirmed
the dismissal on May 20, 1994. No further appeal was taken.
---------------------------------
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.
---------------------------------
On November 15, 1993, NYNEX and the Company filed suit in the United States
District Court for the District of Maine seeking an order declaring that section
533(b) of the Cable Communications Policy Act of 1984 is unconstitutional and
permanently enjoining the United States from enforcing section 533(b) against
NYNEX. Section 533(b) prohibits NYNEX from providing video programming to
subscribers in areas where the Telephone Companies provide service. On December
8, 1994, the court issued an opinion and order declaring that section 533(b) is
unconstitutional and stating that it will enjoin the enforcement of section
533(b) against NYNEX and its subsidiaries within the NYNEX service area. The
Department of Justice has appealed.
13
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Dollars in Millions 1994 1993 1992 1991 1990
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenues $4,202 $4,070 $3,922 $3,806 $3,732
Operating expenses $3,309 $3,773 $3,009 $3,177 $2,927
Interest expense $ 163 $ 175 $ 190 $ 191 $ 195
Earnings before cumulative
effect of change in accounting
principle $ 474 $ 106 $ 487 $ 317 $ 429
Cumulative effect of change in
accounting for postemployment
benefits, net of taxes $ - $ (25) $ - $ - $ -
Net income $ 474 $ 81 $ 487 $ 317 $ 429
Telephone plant - net $6,633 $6,577 $6,532 $6,503 $6,504
Total assets $8,281 $8,271 $8,335 $8,239 $8,078
Long-term debt $2,165 $2,164 $2,211 $2,113 $2,117
Share owner's equity $3,069 $3,019 $3,351 $3,187 $3,188
Capital expenditures+ $ 877 $ 819 $ 782 $ 751 $ 868
Return to equity 15.25% 2.38% 14.77% 9.70% 13.67%
Ratio of earnings to fixed
charges++ 5.00 1.34 4.39 3.08 3.84
Network access lines in
service (in thousands) 6,101 5,906 5,721 5,604 5,544
</TABLE>
The results for 1994 include $168 million of pretax charges ($111 million
after-tax) for pension enhancements for employees who elected to leave the
Company during the year under retirement incentives (see Management's
Discussion and Analysis of Results of Operations). The results for 1993
reflect the effects of pretax charges of $619 million ($376 million after-
tax) for business restructuring, primarily related to efforts to redesign
operations and incremental costs associated with work force reductions (see
Management's Discussion and Analysis of Results of Operations). The results
for 1991 reflect the effects of pretax charges of $193 million ($122 million
after-tax) for operational restructuring related to force reduction programs.
+ Excludes additions under capital lease obligations and the equity component
of allowance for funds used during construction.
++ For the purpose of this ratio: (i) earnings have been calculated by adding
Interest expense and the estimated interest portion of rentals to Earnings
before Income taxes and cumulative effect of change in accounting principle;
and (ii) fixed charges are comprised of Interest expense and the estimated
interest portion of rentals.
14
<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
----------------------
PURPOSE OF 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). As there are more communications
alternatives available to customers, and their expectations for better quality
and service at lower prices are rising, it is possible that competitors can
serve parts of the Company's market at lower costs. Business restructuring
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.
1993 RESTRUCTURING CHARGES
As a result of the planned business restructuring, 1993 results include pretax
charges of approximately $619 million ($376 million after-tax) comprised of $395
million in employee termination costs, $83 million of process re-engineering
charges, and $141 million for the Company's allocation of Telesector Resources
Group, Inc. ("Telesector Resources") business restructuring charges.
Employee Termination Costs: In 1993, approximately $201 million of pretax
charges was recorded for employee severance payments and approximately $194
million of pretax charges was recorded for postretirement medical costs (total
after-tax charges of $240 million) for the work force reductions. The severance
charges included 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. At
December 31, 1993, the expected work force reductions by year were as follows:
<TABLE>
<CAPTION>
1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
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
===== ===== ===== =====
</TABLE>
Process Re-engineering: Approximately $83 million of the 1993 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 Corporation ("NYNEX") intends to decentralize the
provision of residence and business customer service throughout the region,
create regional businesses to focus on unique markets,
15
<PAGE>
and centralize numerous operations and support functions. Included in this
amount are:
<TABLE>
<CAPTION>
(Dollars in Millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
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
===== ===== ===== ===
</TABLE>
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 facilitate implementation of process re-engineering
initiatives. These projects consist of radical changes in the applications and
systems supporting business functions. The redesign of these business functions
is an integral part of the restructuring plan, and all the costs associated with
these projects are incremental to ongoing operations. Specifically, only
software purchases and external contractor expenses, which are normally expensed
in accordance with Company policy, were included in the 1993 restructuring
charges for the following business processes:
<TABLE>
<CAPTION>
(Dollars in Millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Customer contact $ - $ 3 $ - $ 3
Customer operations 5 5 - 10
----- ----- ----- ---
Total $ 5 $ 8 $ - $13
===== ===== ===== ===
</TABLE>
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
establishing work teams in fewer locations to take advantage of lower force
levels and system efficiencies, such as lease termination costs 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 costs are
required to move personnel to different locations due to work center
consolidations 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 costs are for training nonmanagement employees on newly-designed,
cross-functional job positions and re-engineered systems created as part of the
restructuring plan and 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 costs are incremental costs to complete the various re-
engineering initiatives.
16
<PAGE>
Costs Allocated from Telesector Resources: Approximately $141 million of
restructuring charges ($86 million after-tax) was allocated to the Company from
Telesector Resources, primarily related to its force reduction and re-
engineering programs. The following items were included in these charges:
<TABLE>
<CAPTION>
1994 1995 1996 Total
------ ----- ----- -----
<S> <C> <C> <C> <C>
(Dollars in Millions)
Severance $ 38* $ 4 $ 2 $ 44
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
----- ----- ----- ----
Total $ 98 $ 49 $ 11 $158
===== ===== ===== ====
</TABLE>
* 1994 includes $17 million of severance amounts associated with the balance of
the 1991 restructuring reserve at December 31, 1993.
1994 ADDITIONAL CHARGES
During 1994, the Company reached new agreements with the Communications Workers
of America ("CWA") and the International Brotherhood of Electrical Workers
("IBEW") (see "Collective Bargaining Agreements" below) which provided for
retirement incentives. The Company also announced retirement incentives for its
management employees. The retirement incentives credit employees with an
additional six years toward both their age and their length of service for the
purpose of determining pension eligibility and benefits. The management and
nonmanagement 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. 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 1993 force reduction plan. Other
retiree costs include vacation buyout and outplacement costs.
The retirement incentives will be offered at different times through 1996
according to local force requirements and are expected to generate additional
charges over that period of time as employees elect to leave the business, under
retirement incentives rather than under the 1993 force reduction plan. Much of
the cost of the retirement incentives will be funded by NYNEX's pension plans.
In 1994, $168.1 million of pretax charges ($111.2 million after-tax) was
recorded, primarily for the incremental cost of retirement incentives for 1,580
employees who left the Company and for the Company's allocation from Telesector
Resources for its retirement incentives.
The components of the $168.1 million pretax charges are $84.4 million ($57.0
million after-tax) for pension enhancements, $47.6 million ($32.3 million after
tax) for associated postretirement medical costs and $36.1 million ($21.9
million after-tax) allocated to the Company from Telesector Resources for its
retirement incentives and related postretirement medical costs.
CURRENT STATUS OF BUSINESS RESTRUCTURING
Employee Reductions: Due to additional time required to negotiate with the CWA
and IBEW, the number of employees leaving the Company during 1994 was less
17
<PAGE>
than originally planned, reflecting a delay, but not a decrease, in the total
number of employees expected to leave. The actual number of work force
reductions in 1994 and the revised expectation for 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996 Total
------ ----- ----- -----
<S> <C> <C> <C> <C>
Management 885* 415 - 1,300
Nonmanagement 840 2,100 2,060 5,000
----- ----- ----- -----
Total 1,725 2,515 2,060 6,300
===== ===== ===== =====
</TABLE>
* Includes 145 management employees who transferred from the Company to
Telesector Resources and subsequently left in 1994 under the pension
enhancements.
Advances in technology and streamlined processes are expected to make it
possible for a smaller work force to maintain the same size network. As a
result, force reductions will continue 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. This, in
turn, will enable the Company to reduce expenses.
The reserves established for severance in 1993 have been, and will continue to
be, primarily transferred to the pension liability on a per employee basis as a
result of employees' leaving under the retirement incentives as opposed to
severance provisions of the 1993 force reduction plan. The severance reserves
utilized and the application of the postretirement medical liability established
in 1993 for those employees are detailed in the 1994 column below under
"Retirement Incentives." Assuming that employees will continue to leave under
the retirement incentives, the expected utilization of severance reserves and
the application of the postretirement medical liability established in 1993 have
been revised from the expectations previously reported under the 1993 force
reduction plan as follows:
<TABLE>
<CAPTION>
(Dollars In Millions) 1993 Force Reduction Plan Retirement Incentives *
-------------------------- ------------------------
1994 1995 1996 Total 1994** 1995 1996 Total
----- ----- ----- ----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Severance
---------
Management $ 80 $ 11 $ 9 $100 $ 70 $30 $ - $100
Nonmanagement 51 38 12 101 10 30 61 101
----- ----- ----- ---- ---- --- --- ----
Total $ 131 $ 49 $ 21 $201 $ 80 $60 $61 $201
===== ===== ===== ==== ==== === === ====
<CAPTION>
Postretirement Medical
----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management $ 35 $ 4 $ 4 $ 43 $ 31 $12 $ - $ 43
Nonmanagement 73 56 22 151 11 53 87 151
----- ----- ----- ---- ---- --- --- ----
Total $ 108 $ 60 $ 26 $194 $ 42 $65 $87 $194
===== ===== ===== ==== ==== === === ====
</TABLE>
* The revised expected utilization for severance reserves and the application
of the postretirement medical liability per year is based on 1994 actual
experience for the year and, therefore, updates the amounts disclosed during
1994 in the Quarterly Reports on Form 10-Q.
** The severance reduction amount is comprised of $62 million of severance
reserves transferred to the pension liability on a per employee basis and $6
million utilized for other retiree costs. In addition, the severance and
postretirement medical reductions include $12 million and $5 million,
respectively, which was transferred from the Company to Telesector Resources
to cover the severance and postretirement medical costs associated with
approximately 145 employees who transferred from the Company to Telesector
Resources and subsequently left in 1994 under the pension enhancements.
18
<PAGE>
Process Re-engineering: The actual 1994 utilization of reserves with revised
expected utilization for 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
(Dollars In Millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Systems redesign $ - $ 25 $ - $25
Work center consolidation 1 8 7 16
Branding 12 6 - 18
Relocation - 2 - 2
Training - 8 9 17
Re-engineering implementation - 4 1 5
----- ----- ----- ---
Total $ 13 $ 53 $ 17 $83
===== ===== ===== ===
</TABLE>
Systems redesign: During 1994, it was determined that systems redesign would
require a larger than anticipated upfront effort to fully integrate interfaces
between various systems to permit development of multi-tasking capabilities. A
higher degree of complexity and additional functionality required by real time,
interactive systems contributed to the increase. The actual utilization in 1994
and the revised expected utilization in 1995 and 1996 of the systems redesign
reserves are as follows:
<TABLE>
<CAPTION>
(Dollars In Millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Customer contact $ - $ 6 $ - $ 6
Customer operations - 19 - 19
----- ----- ----- ---
Total $ - $ 25 $ - $25
===== ===== ===== ===
</TABLE>
Work center consolidation was delayed in 1994 because of additional time
required to negotiate agreements with the CWA and the IBEW. Until agreements
were reached (see Collective Bargaining Agreements below), the movement of
employees could not begin. Branding will require additional time to complete.
The 1994 reduction in the reserve for branding includes approximately $6 million
to reflect a revised estimate of 1994 branding costs. Relocation of employees
has been significantly revised due to the increase in work centers and terms of
the union agreements. Training was delayed due to the timing of the union
agreements and the higher degree of complexity of the systems redesign; total
expected costs were decreased due to the planned use of more in-house training.
Re-engineering implementation cost more than expected because of an expanded
work effort for the initiatives and the related retention of outside
consultants.
Costs allocated from Telesector Resources: The actual 1994 utilization of
reserves with revised expected utilization for 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
(Dollars In Millions) 1994 1995 1996 Total
------ ----- ----- -----
<S> <C> <C> <C> <C>
Severance $ 44* $ - $ - $ 44
Postretirement medical costs 19 - - 19
Systems re-engineering 29 41 - 70
Re-engineering implementation 14 8 - 22
Work center consolidation - 2 1 3
----- ----- ----- ----
Total $ 106 $ 51 $ 1 $158
===== ===== ===== ====
</TABLE>
* 1994 includes $17 million of severance amounts associated with the balance of
the 1991 restructuring reserve at December 31, 1993.
19
<PAGE>
Cost Savings
During the third and fourth quarters of 1994, the Company began to realize
significant expense savings associated with force reductions. The Company
experienced a $22 million reduction in wages as a result of approximately 1,580
employees leaving primarily under retirement incentives. In addition, there was
a $16 million reduction in costs allocated from Telesector Resources as a result
of expense savings associated with its force reductions.
Collective Bargaining Agreements
--------------------------------
On March 24, 1994, an agreement was reached with the CWA 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. A similar agreement was
reached with and ratified by the IBEW in August 1994. Under the terms of the
new agreements, there will be basic wage increases of 10.5% during the life of
the agreements. The wage rates will increase 4.0%, 3.5%, and 3.0% in August
1995, 1996 and 1997, respectively. 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.
State Regulatory Matters
------------------------
Massachusetts On April 14, 1994, the Company filed comprehensive tariff
-------------
provisions with the Massachusetts Department of Public Utilities ("MDPU") as
part of an Alternative Regulatory Plan to govern the Company's Massachusetts
intrastate operations. The Company's filing proposes the following: (1)
regulation of the Company for a period of ten years from the date of MDPU
approval under a price framework; (2) pricing rules that limit the Company's
ability to increase both overall average prices and specific rate elements,
including a ceiling on the weighted average price of all tariffed services based
on a formula of inflation minus a productivity factor plus or minus exogenous
changes; (3) no earnings restriction; (4) a cap on the monthly rates for
residence services until August 2001; (5) an increase of $2.50 monthly in the
credit on exchange services for Lifeline customers; (6) investment commitments
for the public telecommunications network, including commencing the deployment
of a broadband network in Massachusetts; (7) quality of service commitments; (8)
rate reductions for switched access services; and (9) a new streamlined standard
of regulation governing the review of tariff filings. On May 24, 1994, the MDPU
ruled that the Company's filing would be treated as a petition for alternative
regulation and, consequently, the MDPU's review is not subject to the statutory
suspension period. Hearings concerning the Company's filing concluded in
November 1994, and final briefs were submitted in January 1995. A decision by
the MDPU is pending.
In June 1990, the 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, second
and third transitional filings became effective on November 15, 1991,
20
<PAGE>
January 15, 1993, and April 14, 1994, respectively (see Operating Revenues
below). On June 14, 1994, the MDPU granted the Company's motion to defer further
transitional filings pending the outcome of the alternative regulation
proceeding.
New Hampshire On June 30, 1994, the New Hampshire Public Utilities Commission
-------------
("NHPUC") approved the Company's proposed toll rate reduction targeted at small
and medium volume usage customers, effective August 5, 1994. The annual revenue
effect of the toll rate reduction is estimated to be approximately $7.1 million.
Effective with billing periods on and after June 15, 1994, the Company was
granted authority to impose a late payment charge on overdue residence and
business customer balances, with an annual revenue effect of $2.5 million. The
NHPUC previously approved, effective January 31, 1994, a Company-requested toll
rate reduction targeted at high and medium volume usage customers, with an
annual revenue effect of $3.5 million.
Rhode Island In August 1992, the Rhode Island Public Utilities Commission
------------
("RIPUC") 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 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 1993 filing, effective January 15, 1994,
resulted in 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. The Company's most recent annual filing became
effective January 15, 1995. The filing effects an overall revenue reduction of
approximately $445,000 for 1995 with numerous price adjustments. Under the PRT
the Company must apply a one-time credit to customers' bills of 50% of any
earnings between 12.25% and 19.25% return on equity and 100% of any earnings in
excess of 19.25% return on equity. On March 1, 1995, the Company filed with the
RIPUC a statement of its 1994 Rhode Island intrastate earnings, proposing no
1994 shared earnings credit.
Vermont On February 6, 1995, the Vermont Public Service Board ("VPSB"), on
-------
motions for reconsideration, amended its earlier order in the Company's Price
Regulation Plan proceeding to remove additional pricing restrictions and to
permit the Company to modify or exit the Price Regulation Plan during its term.
As with the VPSB's earlier order, the proposed changes would not restrict the
Company's earnings during the four-year term of the plan but would impose a
higher productivity factor and a narrow definition of exogenous costs in the
price regulation formula, and additional quality of service standards. On March
8, 1995, the Company notified the VPSB of its rejection of the VPSB's proposed
changes and that, accordingly, the Company would continue under rate of return
regulation.
In the related proceeding to examine the Company's level of earnings, on
February 6, 1995, the VPSB issued an order, on motions for reconsideration of
its October 5, 1994 order, recalculating certain aspects of the required annual
revenue reduction, the net effect of which remained approximately $15 million.
The reduction is retroactive to December 29, 1993, the date the VPSB opened the
proceeding. Among the adjustments ordered was a reversal of
21
<PAGE>
the VPSB's previous position on depreciation rates and the approval of
stipulated depreciation parameters, with the result that the adjustment
previously taken by the Company in response to the VPSB's October 5th order must
be reversed and reserves adjusted to conform with the February 6th order. In
1994, the Company reduced local operating revenues by approximately $15 million
for subsequent refunds to Vermont customers for the period from December 29,
1993 through December 31, 1994 (see Operating Revenues and Operating Expenses
below). A date for refunds to customers will be set once the VPSB completes
supplemental hearings on rate reduction design issues. On March 6, 1995, the
Company filed an appeal of certain portions of the VPSB's February 6 order with
the Vermont Supreme Court.
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 Telephone Companies implemented a plan to unify their interstate
access rates which, 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, a decrease of approximately $25 million during the tariff period
ending June 30, 1994 and will result in a decrease of approximately $0.3 million
during the tariff period ending June 30, 1995. The Telephone Companies
implemented a phase-in payment plan in 1992 and 1993 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. With
unification of interstate rates, the Telephone Companies report one unified
interstate rate of return to the FCC, which will be the basis for determining
any possible refund obligations due to overearnings as well as any need to
increase interstate rates due to underearnings under the price cap plan.
Tariff revisions were filed by the Telephone Companies with the FCC on September
1, 1994 and amended on December 19, 1994, to amend price cap indexes to reflect
additional exogenous costs resulting from the implementation of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("OPEB"). The filing as amended
reflected $42 million of costs already accrued, increased annual costs of $21
million and increased rates of $2.2 million. The filing follows a July 12, 1994
decision of the Court of Appeals overturning the FCC's prior order denying
exogenous treatment of additional OPEB costs. On December 29, 1994, the FCC's
Common Carrier Bureau (the "Bureau") issued an order allowing the proposed rates
to go into effect December 30, 1994, subject to an
22
<PAGE>
investigation and accounting order. Commencing December 30, 1994, the Telephone
Companies began collecting these revenues, subject to possible refund pending
resolution of the Bureau's investigation.
Following the FCC's adoption of physical collocation rules in September 1992 and
1993, the Company filed Special Access Expanded Interconnection tariffs in
February 1993 and Switched Transport Expanded Interconnection tariffs in
November 1993. On June 10, 1994, the United States Court of Appeals for the
District of Columbia Circuit overturned the FCC's physical collocation rules.
On July 25, 1994, the FCC adopted rules making physical collocation optional but
requiring virtual collocation where physical collocation is not offered. The
Company decided to continue offering physical collocation.
Operating Revenues
------------------
Operating revenues for the year ended December 31, 1994 increased $132.0
million, or 3.2%, over the same period last year. The increase in total
operating revenues is comprised of the following:
<TABLE>
<CAPTION>
Increase (Decrease)
(Dollars in Millions)
<S> <C>
Local service $ 84.9
Long distance (21.7)
Network access 51.7
Other 17.1
------
$132.0
======
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. Local service revenues
increased $84.9 million due principally to: (1) increased customer demand of
approximately $64 million, evidenced by growth in access lines and growth in
sales of calling features such as caller identification, call waiting and touch-
tone services, (2) a net increase of approximately $23 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, (3) a
$4 million increase in local directory assistance revenues resulting from the
recognition of previously deferred revenues pursuant to a regulatory agreement
with the State of Massachusetts to offset expenses to enhance E911 systems, (4)
a $9 million increase primarily due to the 1994 recognition 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 and (5) a $15
million decrease resulting from a deferral of revenues in 1994 for subsequent
refund to Vermont customers as required by an October 1994 VPSB order. (See
State Regulatory Matters above.)
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
$21.7 million due principally to: (1) a $25 million decrease in long distance
rates primarily attributable to the implementation of the third transitional
filing of a restructuring of Massachusetts rates effective April 14, 1994, (2)
an $8 million decrease resulting from reductions in New Hampshire long distance
rates, (3) a $5 million decrease due to reductions in Rhode Island long distance
rates attributable to the Price Regulation
23
<PAGE>
Trial, (4) a $4 million increase in long distance directory assistance revenues
resulting from the recognition of previously deferred revenues pursuant to a
regulatory agreement with the State of Massachusetts to offset expenses to
enhance E911 systems and (5) a net increase of approximately $12 million
resulting from increased message toll service usage partially offset by
decreases in private line revenues and wide area telecommunications revenues
primarily due to increased competition and customer shifts to lower priced
services offered by the Company. (See State Regulatory Matters above.)
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. Network access revenues increased
$51.7 million due principally to a $58 million increase in switched access
revenues partially offset by a $6 million decrease in special access revenues.
Switched access revenues increased as a result of a $68 million increase in
network demand and an $8 million increase due to revenue adjustments which
included $3 million for the 1994 recognition of revenues previously deferred for
postretirement medical costs. These increases were partially offset by a net
decrease of approximately $18 million primarily attributable to interstate rate
decreases. The decline in special access revenues was due principally to
decreased demand of approximately $3 million resulting from increased
competition and customer shifts to lower priced services offered by the Company
and a reduction in interstate rates of approximately $2 million. (See Federal
Regulatory Matters above.)
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. Other revenues increased $17.1
million due principally to an $11 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 $6 million increase in revenues from inside wire related
charges and voice messaging services.
Operating Expenses
------------------
Operating expenses decreased $463.5 million, or 12.3%, from 1993. The decrease
in total operating expenses is comprised of the following:
<TABLE>
<CAPTION>
Increase(Decrease)
(Dollars in Millions)
-------------------
<S> <C>
Depreciation and amortization $ 39.9
Taxes other than income taxes (20.5)
All other:
Business restructuring charges
recorded in 1994 168.6
Business restructuring charges
recorded in 1993 (619.3)
Employee related costs (36.5)
Other operating expenses 4.3
-------
$ (463.5)
========
</TABLE>
Depreciation and amortization increased $39.9 million due principally to a $33
million increase due to revised intrastate depreciation rates in Massachusetts
effective July 1993 and a $31 million increase associated with
24
<PAGE>
increased depreciable plant investment. These increases were partially offset by
the reversal of $15 million which represents an adjustment of prior year
estimates for cost of removal (net of salvage) for electromechanical switching
equipment in Massachusetts, Maine and Rhode Island and a decrease of $9 million
resulting from implementation of revised intrastate depreciation rates in
Vermont in September 1994 retroactive to January 1, 1994 (see State Regulatory
Matters above).
Taxes other than income taxes, which include gross receipts taxes, property
taxes and other non-income based taxes, decreased $20.5 million principally due
to the reversal in 1994 of a 1993 accrual of $9 million as a result of
unasserted municipal assessments and a $2 million net decrease in Massachusetts
property taxes.
Business restructuring charges recorded during 1994 consisted of incremental
costs related to pension enhancements (see Business Restructuring above).
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, decreased $36.5 million. The decrease was principally due to
a $19 million net decrease in benefit expenses primarily attributable to: (1) a
$29 million decrease attributable to the elimination of an assumed benefit
improvement and greater than anticipated return on pension assets, (2) a $10
million decrease resulting from an accrual in 1993 for a supplemental executive
retirement plan, (3) a $12 million increase resulting from the amortization of
deferred pension costs pursuant to an intrastate regulatory plan, (4) a $3
million net increase in medical costs primarily attributable to an $11 million
increase in medical costs for retirees principally due to the requirements of
the collective bargaining agreements and other medical plan amendments partially
offset by an $8 million decrease in medical costs for active employees due
principally to a reduction in the work force attributable to the Company's force
reduction program and the transfer of employees to Telesector Resources, and (5)
a $3 million increase in sickness disability costs. Wages and payroll taxes
decreased a net $18 million principally due to a reduction in the work force
attributable to the Company's force reduction program and the transfer of
approximately 400 employees to Telesector Resources as part of the single
enterprise organization partially offset by increases in salary and wage rates.
(see Other operating expenses below).
Other operating expenses, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $4.3
million. The increase was principally due to: (1) a $14 million net increase in
charges from affiliated companies primarily attributable to the increase in
Telesector Resources' contracted and centralized services, the transfer of
approximately 400 employees from the Company to Telesector Resources (see
Employee related costs above) and increases in salaries and wage rates,
partially offset by decreases due to Telesector Resources' force reduction
program, (2) a $7 million increase in right-to-use fees resulting from increased
software purchases, (3) a $7 million increase resulting from capitalization in
1993 of certain 1992
25
<PAGE>
engineering charges, (4) an $8 million increase in sales commissions due to
increased commission rates and promotion of new products, (5) a $7 million
increase in the Provision for uncollectible revenues and (6) a $4 million
increase in contract engineering due to an increase in generic switch
conversions and installation of software enhancements. These increases were
partially offset by: (1) a $13 million decrease in the loss associated with bad
debt expense realized pursuant to the provision of the billing and collection
contract primarily with AT&T Corp., (2) an $11 million decrease due to the
completion of equal access amortization in 1993, (3) an $8 million decrease
resulting from an adjustment of prior years' group medical costs (4) a $7
million decrease in advertising expense due to addition of advertising programs
in 1993 for new products including voice messaging and caller identification
services and (5) a $5 million decrease due to the Company's contractual share of
a predivestiture AT&T liability recorded in 1993.
Other Income (Expense) - Net
----------------------------
Other income (expense) - net increased $67.8 million over the same period last
year due principally to a $55 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 and to a $24 million increase due to
higher expense in 1993 for the interstate portion of call premiums and other
charges associated with the refinancing of long-term debt. These increases were
partially offset by a $12 million decrease due to interest received in 1993 on
refunds of Massachusetts taxes.
Interest Expense
----------------
Interest expense decreased $12.0 million from the same period last year
primarily due to a decrease in average interest rates resulting from long-term
debt refinancings in 1993.
Income Taxes
------------
Income taxes increased $307.3 million from the same period last year principally
due to an increase in taxable income and a lower level of excess deferred tax
reversals due primarily to a 1993 one-time benefit of $23 million 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.
Financing
---------
At December 31, 1994, the Company had $500 million of unissued, unsecured debt
securities registered with the Securities and Exchange Commission.
26
<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 L.L.P. ("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
responsibility 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.
Richard A. Jalkut
President and Chief Executive Officer
Mel Meskin
Vice President - Finance and Treasurer
27
<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 schedule of New
England Telephone and Telegraph Company listed in Item 14(a) (1) and (2) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents 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 L.L.P.
Boston, Massachusetts
February 8, 1995
28
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
Dollars In Millions
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES
------------------
Local service $1,897.2 $1,812.3 $1,721.9
Long distance 736.3 758.0 783.0
Network access (Note (J)) 1,210.9 1,159.2 1,088.1
Other (Notes (J) and (K)) 357.8 340.7 328.9
-------- -------- --------
Total operating revenues 4,202.2 4,070.2 3,921.9
-------- -------- --------
OPERATING EXPENSES (Note (P))
------------------
Maintenance and support 1,168.0 1,202.9 1,053.8
Depreciation and amortization 872.6 832.7 827.9
Marketing and customer services 564.3 664.5 531.8
Taxes other than income taxes (Note (L)) 107.1 127.6 105.9
Provision for uncollectible revenues 55.9 49.3 52.0
Other 541.6 896.0 437.8
-------- -------- --------
Total operating expenses 3,309.5 3,773.0 3,009.2
-------- -------- --------
Operating income 892.7 297.2 912.7
Other income (expense) - net 12.8 (55.0) 4.5
Interest expense 163.0 175.0 189.7
-------- -------- --------
Earnings before Income taxes and
cumulative effect of change in
accounting principle 742.5 67.2 727.5
-------- -------- --------
Income taxes
Federal 215.2 (41.0) 194.4
State 53.0 1.9 46.5
-------- -------- --------
Total income taxes (Note (C)) 268.2 (39.1) 240.9
-------- -------- --------
Earnings before cumulative effect
of change in accounting principle 474.3 106.3 486.6
Cumulative effect of change in accounting
for postemployment benefits, net of
taxes (Note (D)) - (25.0) -
-------- -------- --------
NET INCOME $ 474.3 $ 81.3 $ 486.6
======== ======== ========
RETAINED EARNINGS
-----------------
Beginning of year $ 929.9 $1,262.0 $1,121.8
Net income 474.3 81.3 486.6
Dividends declared (424.3) (413.4) (346.4)
-------- -------- --------
End of year $ 979.9 $ 929.9 $1,262.0
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
BALANCE SHEETS
--------------
Dollars In Millions
<TABLE>
<CAPTION>
December 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash $ 9.1 $ 11.2
Receivables
Affiliates (Note (K)) 18.8 14.5
Trade and other (net of allowance of $50.9
and $46.2, respectively) (Note (J)) 785.4 718.0
Deferred income taxes 109.9 120.6
Deferred charges (Note (C)) 82.6 99.5
Inventory 49.4 57.6
Prepaid expenses and other 18.2 69.6
-------- --------
Total current assets 1,073.4 1,091.0
-------- --------
Telephone plant - net (Note (E)) 6,632.9 6,577.2
Deferred charges and other (Notes (C) and (D)) 574.8 602.8
-------- --------
TOTAL ASSETS $8,281.1 $8,271.0
======== ========
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
BALANCE SHEETS
--------------
Dollars In Millions
<TABLE>
<CAPTION>
December 31,
------------------
1994 1993
-------- --------
LIABILITIES AND SHARE OWNER'S EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable
AT&T (Note (J)) $ 92.9 $ 86.7
Affiliates (Note (K)) 407.0 404.3
Compensated absences 86.6 78.9
Trade and other 468.8 422.1
Short-term debt (Note (H)) 53.8 158.5
Dividends payable 106.1 103.4
Taxes accrued 46.0 26.5
Advance billing and customers' deposits 20.1 18.2
Interest accrued 38.0 37.8
-------- --------
Total current liabilities 1,319.3 1,336.4
-------- --------
Long-term debt (Notes (F) and (G)) 2,165.4 2,164.0
Deferred income taxes 773.2 841.7
Unamortized investment tax credits 91.9 115.4
Other long-term liabilities and deferred
credits (Notes (C) and (D)) 862.3 794.5
-------- --------
Total liabilities 5,212.1 5,252.0
-------- --------
Commitments and contingencies (Notes (I), (N)
and (O))
Share owner's equity:
Common stock - one share,
without par value 2,089.1 2,089.1
Retained earnings 979.9 929.9
-------- --------
Total share owner's equity 3,069.0 3,019.0
-------- --------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $8,281.1 $8,271.0
======== ========
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF CASH FLOWS
------------------------
Dollars In Millions
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 474.3 $ 81.3 $ 486.6
-------- -------- -------
Adjustments to reconcile Net Income to net
cash provided by operating activities:
Depreciation and amortization 872.6 832.7 827.9
Allowance for funds used during
construction - equity component (9.0) (7.7) (6.1)
Changes in operating assets and
liabilities:
Receivables (71.7) 3.3 19.7
Inventory 8.2 9.1 (3.1)
Deferred income taxes 10.7 (83.3) (37.3)
Deferred charges 16.9 5.5 34.2
Prepaid expenses and other 51.4 (29.7) (1.0)
Accounts payable 63.3 301.9 (18.1)
Taxes accrued 19.5 (21.9) (18.4)
Advance billing and
customers' deposits 1.9 (0.9) 2.3
Interest accrued 0.2 (7.6) (1.3)
Deferred income taxes and Unamortized
investment tax credits (92.0) (106.4) 102.2
Other long-term liabilities and
deferred credits 67.8 162.0 (113.9)
Other-net (12.5) 94.4 (45.0)
-------- -------- -------
Total adjustments 927.3 1,151.4 742.1
-------- -------- -------
Net cash provided by operating
activities 1,401.6 1,232.7 l,228.7
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (876.9) (819.0) (781.5)
Advances to NYNEX - 82.0 (82.0)
-------- -------- -------
Net cash used in investing activities (876.9) (737.0) (863.5)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX (104.3) 159.4 (95.0)
Dividends paid to NYNEX (421.6) (409.2) (345.4)
Issuance of long-term debt - 669.5 372.4
Repayment of long-term debt and
capital leases (0.9) (1.1) (246.5)
Debt refinancings and call
premiums - (915.8) (57.1)
-------- -------- -------
Net cash used in financing activities (526.8) (497.2) (371.6)
-------- -------- -------
Net decrease in cash (2.1) (1.5) (6.4)
Cash at beginning of year 11.2 12.7 19.1
-------- -------- -------
Cash at end of year $ 9.1 $ 11.2 $ 12.7
======== ======== =======
</TABLE>
See accompanying notes to financial statements.
32
<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
1993 and 1992 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, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
December 31,
Dollars In Millions 1994 1993
------------------- ------ -------
<S> <C> <C>
Compensated absences $ 56.5 $ 57.4
Deferred pension costs 119.3 131.4
Refinancing costs 72.3 78.0
Deferred taxes 0.6 (3.5)
Other 12.1 17.5
------ ------
Total $260.8 $280.8
====== ======
</TABLE>
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") which is a wholly-owned
subsidiary of NYNEX. The Company uses the equity method of accounting for its
investment in Telesector Resources.
Cash
----
The Company's cash management policy is to make funds available in banks when
checks are presented. At December 31, 1994 and 1993, the Company had recorded
in Accounts payable - Trade and other checks outstanding but not presented for
payment of $69.4 and $33.0 million, respectively.
33
<PAGE>
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, July 1, 1993 for Massachusetts and January 1,
1994 for Vermont. The application of the interstate and intrastate rates
resulted in average effective composite rates of 7.5%, 7.3% and 7.4% for 1994,
1993 and 1992, 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 cannot be precisely estimated at this time, but is expected to be between
$1.0 and $1.5 billion.
Regulatory authorities in Maine, Massachusetts, New Hampshire and Rhode Island
allow the Company to capitalize interest, including an allowance on share
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.
34
<PAGE>
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.
Deferred income taxes are provided to reflect the effect of temporary
differences in the recognition of revenue and expenses for financial reporting
and income tax purposes.
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 in prior
years is subject to federal income tax and regulatory rules.
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 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 No. 71 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.
35
<PAGE>
For other excess deferred taxes, the commissions 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.
(C) Income Taxes
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Dollars In Millions 1994 1993* 1992
------------------- ------- -------- -------
<S> <C> <C> <C>
Federal:
Current $297.0 $ 206.5 $230.6
Deferred - net (58.3) (219.0) (8.6)
Deferred tax credits - net (23.5) (28.5) (27.6)
------ ------- ------
215.2 (41.0) 194.4
------ ------- ------
State:
Current 59.6 38.2 45.4
Deferred - net (6.6) (36.3) 1.1
------ ------- ------
53.0 1.9 46.5
------ ------- ------
Total $268.2 $ (39.1) $240.9
====== ======= ======
</TABLE>
* Does not include the deferred tax benefit of $14.1 million associated with the
Cumulative effect of change in accounting for postemployment benefits.
The increase in 1994 deferred tax expense was due principally to the partial
reversal of temporary differences associated with the Company's 1993
restructuring charges (see Note (P)).
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 charges (see
Note (P)). Additional 1993 decreases resulted from
36
<PAGE>
the adoption of a new accounting standard related to postretirement benefits
(see Note (D)).
A reconciliation between federal income tax expense (benefit) computed at the
statutory rate and the Company's effective tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
Dollars In Millions 1994 1993* 1992
------------------- ------- ------- -------
<S> <C> <C> <C>
Federal income tax expense
computed at statutory rate $259.9 23.5 $247.4
a. Amortization of excess
deferred federal income
taxes due to the change
in the tax rates (18.1) (39.0) (20.7)
b. Amortization of investment
tax credits over the life
of the assets which gave
rise to the credits (23.5) (28.5) (27.8)
c. Depreciation of certain taxes and
payroll-related construction costs
capitalized for financial statement
purposes, but deducted for income
tax purposes in prior years 7.4 5.9 14.2
d. Allowance for funds used during
construction, which is excluded
from taxable income, net of
applicable depreciation (0.1) (0.7) (1.1)
e. State income taxes,
net of federal tax benefit 34.5 1.2 30.7
f. Other items - net 8.1 (1.5) (1.8)
------ ------ ------
Income tax expense (benefit) $268.2 $(39.1) $240.9
====== ====== ======
</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.
37
<PAGE>
The components of current and long-term deferred tax assets and liabilities at
December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
Dollars In Millions 1994 1993
------------------- -------- --------
<S> <C> <C>
Deferred tax assets
Employee benefits $ 277.3 $ 221.4
Restructuring charges 72.6 112.1
Unamortized investment tax credits 53.5 64.4
Other 43.6 32.3
-------- --------
447.0 430.2
-------- --------
Deferred tax liabilities
Depreciation and amortization 978.0 1,014.9
Employee benefits 57.1 57.1
Other 75.3 79.3
-------- --------
1,110.4 1,151.3
-------- --------
Net deferred tax liabilities $ 663.4 $ 721.1
======== ========
</TABLE>
At December 31, 1994 and 1993, the Company recorded approximately $209.7 and
$223.4 million, respectively, in deferred taxes 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, 1994 and 1993 of
approximately $225.4 and $246.3 million, respectively, in Other long-term
liabilities and deferred credits and Accounts payable - Trade and other. A
substantial portion of the regulatory liability relates to the reduction in the
statutory federal income tax rate in 1986 and unamortized ITC. 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 pension (benefit)/cost for 1994, 1993 and 1992 was $(87.0), $(51.0) and
$2.2 million, respectively, of which $1.5 million was deferred in 1992 as a
result of state regulatory decisions that required pension expense to be
equivalent to amounts contributed to the Plans. Deferral of pension cost was
38
<PAGE>
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). The pension benefit for 1994 and 1993 includes the effect
of plan amendments and changes in actuarial assumptions for the discount rate
and future compensation levels. At December 31, 1994 and 1993, the Company had
recorded $335.4 and $276.7 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, 1994 and 1993 include a discount rate of 8.5% and 7.5%, 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 1994, 1993 and 1992. Periodically, the Plans have been
amended to increase the level of plan benefits. The actuarial projections
included herein anticipate plan improvements in the future.
As a result of planned work force reductions, the Company incurred additional
pension costs of $145.9 million, comprised of a charge for special termination
benefits of $215.9 million and a curtailment gain of $70.0 million, in 1994 due
to employees leaving under retirement incentives. These pension costs were
partially offset by 1993 severance reserves of $61.5 million which were
transferred to the pension liability.
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.
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 for 1994 and 1993 for the Company was $157.1 and $143.0 million,
respectively.
39
<PAGE>
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 Annual Report for
the year ended December 31, 1994 filed by NYNEX.
The actuarial assumptions used to determine the December 31, 1994 and 1993
obligations for postretirement benefit plans under Statement No. 106 include the
following: discount rate of 8.5% and 7.5%, respectively; weighted average
expected long-term rate of return on plan assets of 8.4% in both years; weighted
average salary growth rate of 4.2% in both years; medical cost trend rate of
12.6% grading down to 4.5% in 2008 and 14.3% grading down to 4.5% in 2008,
respectively; and dental cost trend rate of 4.5% grading down to 3.0% in 2002
and 5.0% grading down to 3.0% in 2002, respectively.
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. In 1994, under work force reduction retirement incentives, the
Company incurred additional postretirement benefit costs of $84.8 million,
comprised of a curtailment loss of $66.4 million and a charge for special
termination benefits of $18.4 million. These postretirement benefit costs were
partially offset by $37.2 million which was previously accrued for in 1993.
Total costs of providing benefits for retired employees and their families was
$63.7 million in 1992.
With respect to interstate treatment, on July 12, 1994, the U.S. Court of
Appeals for the District of Columbia Circuit overturned the FCC's January 1993
order denying exogenous treatment of additional costs recognized under Statement
No. 106. Tariff revisions were filed by the Company and New York Telephone
(collectively the "Telephone Companies") with the FCC on September 1, 1994, and
amended on December 19, 1994, to amend price cap indices to reflect additional
exogenous costs recognized under Statement No. 106. The filing as amended
reflected, for the Telephone Companies, $42 million of costs already accrued,
increased annual costs of $21 million and increased rates of $2.2 million. On
December 29, 1994, the FCC's Common Carrier Bureau (the "Bureau") issued an
order allowing the proposed rates to go into effect December 30, 1994, subject
to an investigation and an accounting order. Commencing December 30, 1994, the
Company began collecting these revenues, subject to possible refund pending
resolution of the Bureau's investigation.
With respect to intrastate treatment, in 1993, 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. In December 1994, the Company amortized $12.1 million of
deferred pension costs according to this accounting plan. Approval of the
40
<PAGE>
plan is still pending in the State of Rhode Island.
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. At December 31, 1992,
NYNEX had 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. No additional contributions were
made in 1993 and 1994. The assets in the VEBA Trusts consist primarily of
equity securities and fixed income securities. 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 1994, the
effect of Statement No. 112 did not result in periodic expense materially
different from the expense recognized under the prior method.
(E) Telephone Plant - Net
The components of Telephone plant-net are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
Dollars In Millions 1994 1993
------------------- --------- ---------
<S> <C> <C>
Buildings $ 817.0 $ 771.0
Telephone plant and equipment 10,682.2 10,241.8
Furniture and other equipment 65.4 64.4
Other 329.5 294.1
--------- ---------
Total depreciable property, plant and equipment 11,894.1 11,371.2
Less: accumulated depreciation 5,451.8 5,013.9
--------- ---------
6,442.3 6,357.3
Land 36.4 36.3
Plant under construction and other 154.2 183.6
--------- ---------
Total Telephone plant - net $ 6,632.9 $ 6,577.2
========= =========
</TABLE>
41
<PAGE>
(F) Long-term Debt
Interest rates and maturities on long-term debt outstanding are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
Dollars In Millions Interest Rates Maturities 1994 1993
------------------- ---------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Debentures 4 1/2% - 4 5/8% 1999-2005 $ 155.0 $ 155.0
6 1/8% - 7 7/8% 2006-2022 525.0 525.0
6 7/8% - 9% 2023-2031 700.0 700.0
Notes 5 1/20% - 8 5/8% 1997-2003 800.0 800.0
Unamortized discount - net (16.9) (18.8)
-------- --------
2,163.1 2,161.2
Long-term capital lease
obligations 2.3 2.8
-------- --------
Total long-term debt $2,165.4 $2,164.0
======== ========
</TABLE>
In 1997 and 1998, $175 and $100 million, respectively, of the Notes will mature.
In 1999, $100 million of the Notes and $45 million of the Debentures 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, l994, the Company had $500.0 million of unissued, unsecured debt
securities registered with the Securities and Exchange Commission.
(G) 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:
<TABLE>
<CAPTION>
December 31,
------------------
Dollars In Millions 1994 1993
------------------- -------- --------
<S> <C> <C>
Long-term debt
--------------
Carrying amount $2,163.1 $2,161.2
Fair value $1,987.4 $2,252.7
</TABLE>
42
<PAGE>
(H) Short-term Debt
Short-term debt and related weighted average interest rates are as follows:
<TABLE>
<CAPTION>
Weighted Average
Interest Rates
---------------- ---------------
Dollars In Millions December 31, December 31,
------------------- ---------------- ---------------
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Advances from NYNEX $ 55.1 $159.4 6.06% 3.37%
Other (1.3) (0.9) 10.18% 10.21%
------ ------
Total short-term debt $ 53.8 $158.5
====== ======
Dollars In Millions 1994 1993 1994 1993
------------------- ---- ---- ---- ----
Average amount of advances from
NYNEX outstanding during the year+ $135.2 $127.7 4.35%# 3.26%#
Maximum amount of advances from
NYNEX payable at
any month end during the year $234.9 $311.7
</TABLE>
# 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 $5.9, $4.2 and $0.9 million in 1994,
1993 and 1992, respectively.
(I) Lease Commitments
The Company leases certain facilities and equipment used in its operations.
Rental expense was $68.3, $68.5 and $74.5 million for 1994, 1993 and 1992,
respectively. At December 31, 1994, the minimum lease commitments under
noncancelable operating and capital leases for the periods shown are as follows:
<TABLE>
<CAPTION>
Dollars In Millions
-------------------
Year Operating Capital
---- --------- -------
<S> <C> <C>
1995 $ 52.7 $1.0
1996 36.6 0.9
1997 35.0 0.9
1998 33.3 0.9
1999 30.7 0.7
Thereafter 300.3 0.6
------ ----
Total minimum lease payments $488.6 5.0
======
Less: executory costs 1.5
----
Net minimum lease payments 3.5
Less: interest 0.8
----
Present value of net minimum lease payments $2.7
====
</TABLE>
43
<PAGE>
(J) Transactions with AT&T Corp.
In 1994, 1993 and 1992, AT&T Corp. ("AT&T") provided approximately 14%, 15% and
15%, 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.
(K) 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 1994, 1993 and 1992, the Company recorded allocated costs of
$21.2, $51.9 and $48.5 million, respectively, in connection with these services.
The reduction of allocated costs in 1994 is due to the transfer of approximately
540 employees from NYNEX to Telesector Resources associated with re-engineering
the way service is delivered to customers, including operating as a single
enterprise under the "NYNEX" brand.
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 Telephone
Companies 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 1994, 1993 and 1992, the Company recorded charges from Telesector
Resources of $718.0, $670.3 and $590.3 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 1994, 1993 and
1992 were approximately $242.7, $255.4 and $240.3 million, respectively.
Telesector Resources acts as a purchasing agent for the Company for directly
shipped materials and supplies. During 1994, 1993 and 1992, total agency
purchases by Telesector Resources amounted to $132.1, $123.6 and $120.6 million,
respectively. In addition, in 1994 and 1993, approximately $36.1 and $140.8
million, respectively, of restructuring charges ($21.9 and $85.5 million after-
tax) was allocated to the Company from Telesector Resources, primarily related
to its force reduction and re-engineering programs. The increase in overall
allocated costs in 1994 is due to the transfer of
44
<PAGE>
approximately 400, 540 and 565 employees from the Company, NYNEX and New York
Telephone, respectively, to Telesector Resources associated with re-engineering
the way service is delivered to customers, including operating as a single
enterprise under the "NYNEX" brand.
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 1994, 1993 and 1992, the Company
recorded charges of $39.8, $42.1 and $42.7 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 ("transition plan") in order to avoid sudden changes in
each of the Telephone Company's earnings resulting from the unified rate
structure. The transition plan was completed in 1993. 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, 1994, 1993 and 1992, licensing fees, included in Other revenues,
amounted to $167.8, $156.7 and $159.0 million, respectively.
(L) Taxes Other Than Income Taxes
Taxes other than income taxes consist of:
<TABLE>
<CAPTION>
Dollars In Millions 1994 1993 1992
------------------- ------ ------ ------
<S> <C> <C> <C>
Property $ 78.1 $ 98.6 $ 78.9
Gross receipts 25.5 24.8 23.4
Other 3.5 4.2 3.6
------ ------ ------
Total $107.1 $127.6 $105.9
====== ====== ======
</TABLE>
(M) Supplemental Cash Flow Information
The following information is provided in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows":
<TABLE>
<CAPTION>
For the Years Ended
December 31
----------------------------------
Dollars In Millions 1994 1993 1992
------------------- ---- ---- ----
<S> <C> <C> <C>
Income tax payments $279.1 $329.2 $283.9
Interest payments $160.9 $179.0 $187.0
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
</TABLE>
45
<PAGE>
(N) Revenues Subject to Possible Refund
Several regulatory matters, primarily involving the rates and charges for the
provision of certain interstate access and other related services, may possibly
require the refund of a portion of the revenues collected in the current and
prior periods. As of December 31, 1994, the aggregate amount of such revenues
that was estimated to be subject to possible refund was approximately $21.4
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.
(O) 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.
(P) Business Restructuring
In 1994, the Company recorded approximately $168 million of pretax charges
primarily for the cost of pension enhancements for approximately 1,580 employees
who elected to leave the Company under retirement incentives and for the
Company's allocation from Telesector Resources for its pension enhancements.
The components of the $168 million pretax charges are as follows: $84 million
for pension enhancements, $48 million for associated postretirement medical
benefits, $19 million for charges allocated to the Company from Telesector
Resources for its pension enhancements and $17 million for its associated
postretirement medical benefits. The 1994 restructuring charges of $168 million
were included in the Income Statements in Other operating expenses.
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.
46
<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>
For the quarter ended,
Dollars In Millions March 31, June 30, September 30, December 31
------------------- ---------- -------- ------------- -----------
1994
----
<S> <C> <C> <C> <C>
Operating revenues $1,052.7 $1,051.5 $1,047.4 $1,050.6
Operating income $ 263.7 $ 201.7 $ 274.2 $ 153.1
Net income $ 144.7 $ 105.4 $ 152.7 $ 71.5
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 (loss)before
cumulative effect of change
in accounting principle $ 140.2 $ 131.9 $ 114.7 $ (280.5)
Cumulative effect of change
in accounting for
postemployment benefits,
net of taxes $ (25.3) $ - $ 0.3 $ -
Net income (loss) $ 114.9 $ 131.9 $ 115.0 $ (280.5)
</TABLE>
Results for the second, third and fourth quarters of 1994 include $54.3, $6.7
and $107.1 million, respectively, of pretax charges for pension enhancements,
which were reflected in operating expenses. The after-tax effect of these
charges was $34.7, $4.5 and $72.0 million in the second, third and fourth
quarters, respectively. See the section entitled "Business Restructuring"
included in Management's Discussion and Analysis of Results of Operations and
Note (P) "Business Restructuring" for further discussion of these charges.
Results for the fourth quarter of 1994 include $23.9 million of pretax credits
to pension and medical expense associated with plan amendments and favorable
plan experience which was reflected in operating expenses. The after-tax effect
of these benefits was an increase in net income of $14.9 million, of which $3.7
million was applicable to the fourth quarter.
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 reflected
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 and Note (P), "Business Restructuring", for further discussion of
these charges.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During 1994 and 1993, the Company did not change its auditors.
47
<PAGE>
PART IV
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.
-----------------------------------------------------------
Pages in This
Annual Report On
Form 10-K
----------------
(1) Financial Statements filed as part of this
report are listed in the Table of Contents
on page 2 and contained in Item 8 herein.
(2) Financial Statement Schedule. The following
----------------------------
financial statement schedule of the Registrant
is included herein in response to Item 14:
II - Valuation and Qualifying Accounts... 51
Financial statement schedules other than that 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.
(3) Exhibits. Exhibits identified in parentheses below, on file
--------
with the 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)(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).
48
<PAGE>
Exhibit
Number
-------
(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.
(23) Consent of Independent Accountants.
(24) Powers of attorney.
(b) Reports on Form 8-K.
-------------------
The Company's Current Report on Form 8-K, date of report December 8, 1994
and filed December 22, 1994, reporting on Item 5.
49
<PAGE>
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 Mel Meskin
----------------------------
Mel Meskin, Vice President-
Finance and Treasurer
March 24, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer:
Richard. A. Jalkut* President and Chief Executive Officer
Principal Financial and
Accounting Officer:
Mel Meskin Vice President-Finance and Treasurer
Directors:
Lilyan H. Affinito*
Joseph A. Califano*
Arnold J. Eckelman*
Thomas F. Gilbane, Jr.*
Ronald A. Homer*
Alice Stone Ilchman*
Richard A. Jalkut*
John F. X. Mannion* *By Mel Meskin
-------------------
Jane E. Newman* (Mel Meskin, as attorney-in-fact,
Donald B. Reed* and on his own behalf as
Paul L. Snyder* Principal Financial and
Ira Stepanian* Accounting Officer)
Frank J. Tasco* March 24, 1995
50
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars In Millions)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ----------------------------------- ----------- ------------
ADDITIONS
-----------------------------------
Balance at Charged to Costs Charged to Balance at
Beginning of and Expenses Other Accounts Deductions End of
Description Period Period
------------ ---------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectibles
Year 1994................. 46.2 55.9 54.8 (a) 106.0 (b) 50.9
Year 1993................. 40.6 49.3 (c) 50.9 (a)(c) 94.6 (b) 46.2 (c)
Year 1992................. 24.4 52.0 63.3 (a) 99.1 (b) 40.6
Restructuring
Year 1994................. 286.9 - - 93.9 193.0
Year 1993................. 33.2 284.7 (c) - 31.0 286.9 (c)
Year 1992................. 106.7 - - 73.5 33.2
</TABLE>
(a) Includes amounts to establish a reserve for purchased accounts receivable.
(b) Amounts written off as uncollectible. Amounts previously written off are
credited directly to this account when recovered.
(c) Amounts for 1993 have been reclassified to conform to the current year's
format.
51
<PAGE>
Exhibit (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of New England Telephone and Telegraph Company on Forms S-3 (File Nos. 33-49533
and 33-50631) of our report dated February 8, 1995, on our audits of the
financial statements and financial statement schedule of New England Telephone
and Telegraph Company as of December 31, 1994 and 1993, and for each of the
three years in the period ended December 31, 1994, which report is included in
this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 24, 1995
<PAGE>
Exhibit (24)
New England Telephone
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, New England Telephone and Telegraph Company, a New York corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1994; and
WHEREAS, each of the undersigned is a Director or both an Officer and Director
of the Company;
NOW, THEREFORE, each of the undersigned hereby constitutes and appoints
Richard A. Jalkut, Melvin Meskin, and Morrison DeS. Webb, and each of them
severally, as attorneys for the undersigned and in the undersigned's name, place
and stead, and in each of the undersigned's offices and capacities as an Officer
or as both an Officer and a Director of the Company, to execute and file such
Annual Report, and thereafter to execute and file any amendment or amendments
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform all and every act and thing whatsoever requisite, necessary
and/or desirable to be done in and about the premises as fully, to all intents
and purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney this 15th day of March, 1995.
Lilyan H. Affinito John F. X. Mannion
----------------------------------- -------------------------------
Lilyan H. Affinito, Director John F. X. Mannion, Director
Joseph A. Califano, Jr. Jane E. Newman,
----------------------------------- -------------------------------
Joseph A. Califano, Jr., Director Jane E. Newman, Director
Arnold J. Eckelman Donald B. Reed
----------------------------------- -------------------------------
Arnold J. Eckelman, Executive V.P. Donald B. Reed, Director
Chief Operating Officer & Director
Thomas F. Gilbane Paul L. Snyder
----------------------------------- -------------------------------
Thomas F. Gilbane, Director Paul L. Snyder, Director
Ronald A. Homer Ira Stepanian
----------------------------------- -------------------------------
Ronald A. Homer, Director Ira Stepanian, Director
Alice Stone Ilchman Frank J. Tasco
----------------------------------- -------------------------------
Alice Stone Ilchman, Director Frank J. Tasco, Director
Richard A. Jalkut
-----------------------------------
Richard A. Jalkut, President
Chief Executive Officer & Director
State of New York)
County of New York) ss.:
On the 15th day of March, 1995, personally appeared before me each of the
Officers and Directors, each to me known to be the person described in and who
executed the foregoing instrument, and each such person duly acknowledged that
he or she executed and delivered the same for the purposes therein expressed.
ROBERT ERB
Notary Public, State of New York Robert Erb
---------------------
No. 31-4808105 Notary Public
Qualified in New York County
Commission Expires January 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 785
<ALLOWANCES> 51
<INVENTORY> 49
<CURRENT-ASSETS> 1,073
<PP&E> 12,085
<DEPRECIATION> 5,452
<TOTAL-ASSETS> 8,281
<CURRENT-LIABILITIES> 1,319
<BONDS> 2,165
<COMMON> 2,089
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,281
<SALES> 0
<TOTAL-REVENUES> 4,202
<CGS> 0
<TOTAL-COSTS> 3,310
<OTHER-EXPENSES> (13)
<LOSS-PROVISION> 56
<INTEREST-EXPENSE> 163
<INCOME-PRETAX> 743
<INCOME-TAX> 268
<INCOME-CONTINUING> 474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 474
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
