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, 1995
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
<PAGE>
TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business (Abbreviated pursuant to General
Instruction J(2)) 4
2. Properties. . . . . . . . . . . . . . . . . . . . . 11
3. Legal Proceedings . . . . . . . . . . . . . . . . . 11
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 . . . . . . . . . . . . . . 12
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)). . . . . . . . . . . . . 13
8. Financial Statements and Supplementary Data:
Report of Management . . . . . . . . . . . . . . . 22
Report of Independent Accountants. . . . . . . . . 23
Statements:
Statements of Income and Retained Earnings for
each of the Three Years in the Period Ended
December 31, 1995. . . . . . . . . . . . . . . . 24
Balance Sheets as of December 31, 1995 and 1994 . 25
Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1995 27
Notes to Financial Statements . . . . . . . . . . 28
Supplementary Information:
Quarterly Financial Information (Unaudited) . . . 43
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . 43
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
14. Exhibits, Financial Statement Schedule and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . 44
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
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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 provides telecommunications services in Maine, Massachusetts,
New Hampshire, Rhode Island and Vermont. The Company is a wholly-owned
subsidiary of NYNEX Corporation ("NYNEX").
Intrastate communications services are under the jurisdiction of state public
utility commissions (see State Regulatory below), and interstate communications
services are under the jurisdiction of the Federal Communications Commission
("FCC") (see Federal Regulatory below). In addition, state and federal
regulators review various transactions between NYNEX affiliates.
The operations of NYNEX and its subsidiaries have been subject to the
requirements of a consent decree known as the "Modification of Final Judgment"
("MFJ"), which arose out of an antitrust action brought by the United States
Department of Justice against AT&T Corp. ("AT&T"). Pursuant to the MFJ, AT&T
divested its 22 wholly-owned local exchange companies ("LECs"), including the
Company and New York Telephone Company ("New York Telephone"), a wholly-owned
subsidiary of NYNEX (collectively, the "Telephone Companies"), distributed them
to seven regional holding companies("RHCs"), and distributed the stock of the
RHCs to AT&T's stockholders on January 1, 1984.
The Telecommunications Act of 1996 (the "Act") provides that any conduct or
activity previously subject to the MFJ is now subject instead to the
restrictions and obligations imposed by the Act (see Competition below).
TELECOMMUNICATIONS SERVICES
The Company provides primarily 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 telephone companies operating within such territory
may provide telecommunications services. 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, private line voice and data services, Wide Area
Telecommunications Service, long distance and Centrex services.
Exchange access service refers to the link provided by LECs between a customer's
premises and the transmission facilities of other
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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
telecommunications companies, primarily AT&T, and certain information providers
that elect to subscribe to these services rather than perform such services
themselves. In 1995, approximately 1% of the Company's 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 now performed by
the Company. The Company and AT&T are reviewing a proposed extension of the
contract through December 31, 1996.
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:
In Thousands
---------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Network Access Lines
in Service. . . . . . . . 6,343 6,101 5,906 5,721 5,604
The territories served by the Company contain sizable areas and many localities
in which local service is provided by nonaffiliated telephone companies. On
December 31, 1995, these nonaffiliated companies had approximately 229,000
network access lines in service.
For the year ending December 31, 1995, 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.
CERTAIN AFFILIATED BUSINESS OPERATIONS
- --------------------------------------
TELESECTOR RESOURCES GROUP, INC.
Telesector Resources Group, Inc. ("Telesector Resources") is a wholly-owned
subsidiary of the Telephone Companies. 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 as part of the business
restructuring (see Business Restructuring below). 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, accounting, finance, data
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processing and related services, 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.
Each of the seven RHCs formed in connection with the AT&T divestiture owns an
equal interest in Bell Communications Research, Inc. ("Bellcore"), which is held
by Telesector Resources. 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. In 1995, it was announced
that the seven RHCs, including NYNEX, have decided to pursue the disposition of
Bellcore. A final decision regarding the disposition of their interests and the
structure of such a transaction will be subject to obtaining satisfactory
financial and other terms and necessary approvals.
NYNEX INFORMATION RESOURCES COMPANY
The Company has an agreement 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 use of the Company's
name in soliciting directory advertising and in publishing and distributing
directories. Beginning in 1991, Information Resources has made payments to the
Company under an arrangement that in effect remits to the Company Information
Resources' earnings related to publishing directories in Maine, Massachusetts,
New Hampshire, Rhode Island and Vermont in excess of a regulated return.
BUSINESS RESTRUCTURING
- ----------------------
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
savings necessary for the Company to operate in an increasingly competitive
environment (see Business Restructuring, Part II, Item 7).
EXTRAORDINARY ITEM
- ------------------
The Company discontinued the application of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("Statement No. 71") in the second quarter of 1995. As a result, the Company
recorded an extraordinary non-cash charge of approximately $627.8 million, net
of income taxes of $414.2 million (see Extraordinary Item, Part II, Item 7).
6
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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 exclude the equity component of allowance for funds used during
construction prior to the discontinuance of Statement No. 71, and additions
under capital leases. Capital expenditures for 1991 through 1995 are set forth
below:
In Millions
-----------------------------
1995 . . . . . . . . . . $886
1994 . . . . . . . . . . $877
1993 . . . . . . . . . . $819
1992 . . . . . . . . . . $782
1991 . . . . . . . . . . $751
STATE REGULATORY
- ----------------
MAINE
In May 1995, the Maine Public Utilities Commission ("MPUC") adopted a five-year
price cap plan for the Company, with the provision for a five-year extension
after review by the MPUC. Overall average prices and specific rate elements for
most services are limited by a price cap formula of inflation minus a
productivity factor plus or minus certain exogenous cost changes. There is no
restriction on the Company's earnings. The Company is to make its first annual
price cap filing on December 1, 1996. The MPUC also established a service
quality index with penalties in the form of customer rebates to apply if service
quality categories are missed. Penalties are subject to annual limits of $1
million per category and $10 million overall. In a related earnings
investigation, the MPUC ordered a one-time customer credit of $2.8 million and
ordered that the Company's revenues be reduced by $14.4 million annually.
Pursuant to that order, in January 1996, the MPUC approved, with certain
modifications, the Company's proposal to use up to $4 million of the reduction
to provide new services to Maine libraries and schools.
The May 1995 Orders of the MPUC were appealed to the Maine Supreme Judicial
Court. The appellants contended that the MPUC should have ordered greater rate
reductions by the Company and challenged the MPUC's authority to apply $4
million to the provision of services to libraries and schools. A decision was
issued by the Court on March 15, 1996, rejecting the appeal and affirming the
MPUC's Orders.
MASSACHUSETTS
See discussion of State Regulatory in Part II, Item 7, which is incorporated
herein by reference.
NEW HAMPSHIRE
In June 1995, the New Hampshire Public Utilities Commission approved the
Company's proposed toll rate reduction targeted at small and medium volume
7
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usage customers, effective July 1995. The annual revenue effect of the toll rate
reduction is estimated to be approximately $6.8 million.
RHODE ISLAND
In January 1996, the Company and the Rhode Island Division of Public Utilities
and Carriers filed with the Rhode Island Public Utilities Commission ("RIPUC") a
proposed five-year price regulation plan to succeed the price regulation trial
that expired in December 1995. The proposed plan provides for no restrictions on
the Company's earnings. Pricing rules would limit the Company's ability to
increase prices for most services based on a formula of inflation minus a
productivity offset, plus or minus exogenous changes. In addition, a quality of
service index is tied to the formula as an additional, one-time offset. The
Company's inability to meet the performance levels in any given month would
result in an increase in the offset by one-twenty fourth of one percent for
purposes of the next annual price cap filing. The proposed plan will be reviewed
by the RIPUC in hearings to be scheduled, with a decision expected in the second
quarter of 1996.
As part of the proposed plan, the Company has agreed to introduce a new
Statewide Calling Plan option for residence customers which would: allow
unlimited toll calling within the state for a flat price of $25 per month;
reduce local usage prices by $1 million; and continue the Internet trial for
schools and libraries begun under the previous price regulation trial, with
additional funding. The annual revenue effect of these three efforts is
estimated to be a reduction of approximately $4 million.
In June 1995, the RIPUC issued an initial order in the competition proceeding,
expressing an overall policy favoring local competition, asserting jurisdiction
over potential local competitors and requiring seamless interconnection of
networks. In December 1995, the RIPUC issued a revised schedule for testimony,
discovery, and hearings in the next phase of the proceeding, with a final order
proposed to be issued by July 1996. Among the issues being addressed in this
proceeding are interconnection of networks, unbundling, telephone number
portability, intraLATA toll presubscription, and universal service funding.
VERMONT
In September 1995, the Company filed a rate case seeking an annual increase in
rates of $12.2 million. In February 1996, the Vermont Public Service Board
("VPSB") approved a stipulation filed by the Company and the Vermont Department
of Public Service, which will result in an annual increase in rates of $7.5
million, effective March 1996. As a result of the VPSB's approval of the
stipulation, the Company intends to withdraw its appeal of the VPSB's orders in
the price regulation and earnings dockets.
In December 1995, a proposed decision was issued by the hearing officer in Phase
I of the VPSB's proceeding on competition, which would direct the Company to
unbundle certain elements of its network, allow further unbundling upon a
showing by the requesting party that unbundling is technically feasible and that
demand exists, and set pricing rules for wholesale and retail services and
interconnection. The VPSB is expected to rule on the proposed decision by April
1996. Phase II of the proceeding will address specific pricing and technical
questions with respect to local service and intraLATA
8
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toll competition, including intraLATA presubscription ("ILP") and
interconnection. A decision in Phase II is expected in late 1996.
FEDERAL REGULATORY
- ------------------
See discussion of Federal Regulatory in Part II, Item 7, which is incorporated
herein by reference.
PRICE CAP PLAN
Revised tariffs under the price cap rules reduced interstate access rates by
approximately $90 million in the 1993-1994 tariff period and $9.4 million in the
1994-1995 tariff period. In August 1995, the Telephone Companies implemented the
annual update to the price cap rates, which will result in a net reduction in
interstate access rates of approximately $75.0 million by June 1996. The annual
update included tariff revisions to recover approximately $21 million of
exogenous costs resulting from the implementation of Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." Collection of these revenues is subject to possible refund
pending resolution of the FCC's Common Carrier Bureau investigation.
In 1995, the FCC announced interim changes in the price cap rules, under which
each LEC will choose one of three productivity factor offsets to be used in
setting its price cap index. LECs adopting the highest productivity factor will
retain all interstate earnings. The two other options entail sharing of earnings
and will allow a maximum interstate return on investment of either 14.25% or
12.75%.
The FCC also determined that the 3.3% productivity factor adopted in 1991 and
used since then by most LECs, including the Telephone Companies, was
understated. Accordingly, the FCC required each such LEC to make up front
reductions to "reinitialize" its price cap index. The FCC also revised the
criteria for including exogenous cost changes and, as a result, each LEC will be
required to recalculate its price cap index on a prospective basis to exclude
cost increases due to changes in the accounting treatment of other
postemployment benefit expenses. Finally, the FCC gave the LECs additional
pricing flexibility in certain service categories.
OTHER FEDERAL
In December 1995, MFS Communications ("MFS") filed a petition with the FCC for a
declaratory ruling that LECs must provide central office collocation with
respect to all interstate access services, upon bona fide request. In its
petition, MFS cites the Telephone Companies for refusal to provide
interconnection to certain services in central offices where MFS is collocated.
The Telephone Companies filed comments in which they argued that the FCC's
current rules do not require expanded interconnection to the services described
in MFS' petition and that the relief sought by MFS would require the FCC to
issue a new rule.
In October 1995, the U.S. Court of Appeals for the District of Columbia Circuit
denied the Telephone Companies' petition for rehearing on its decision that the
FCC had understated the amount of damages to be paid in connection with
overearnings complaints for the periods 1987-1988 and 1989-1990.
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In February 1996, the Telephone Companies joined other parties in petitioning
the U.S. Supreme Court for review of the Court of Appeals decision. It is
probable that the Telephone Companies will be required to pay damages plus
interest, which were accrued in 1995. For the period 1987-1988, the amount for
New England Telephone is approximately $7.4 million.
In March 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 had the effect of understating the Telephone
Companies' revenue requirement; the net effect was 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 required 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 index; and (3) require
the Telephone Companies to improve their internal processes to bring them into
compliance. The Telephone Companies filed responses in May and September 1995,
demonstrating that forfeitures should not be imposed, that ratepayers were not
harmed by the alleged violations, and that internal processes have already been
improved.
COMPETITION
- -----------
Federal and state regulators have adopted policies favoring competition and have
initiated various proceedings to further those policies. Those policies will be
advanced by the enactment of the Telecommunications Act of 1996, which
immediately opens the Company's local telecommunications markets to full
competition. An increasing number of national and global companies with
substantial capital and marketing resources are expected to enter many of the
Company's local markets.
Most of the services that the Company provides in its local telecommunications
markets have been facing increasing competition for the past several years. The
Company has responded by obtaining increased pricing flexibility under incentive
regulation, introducing new services, and improving service quality. Increases
in 1995 Private Line/Special Access revenues, and the number of Centrex
"win-backs" from PBX vendors indicate the Company's ability to respond
effectively in its most competitive markets.
Competition for intraLATA toll revenues has intensified, beginning in 1994 with
the increased marketing of "dial-around" programs by interexchange carriers.
However, to date, the "retail" toll revenues the Company has lost to such
programs are being offset in part by increased revenues from wholesale access
charges. Future wholesale pricing is the subject of pending regulatory
proceedings.
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EMPLOYEE RELATIONS
- ------------------
The Company had approximately 18,100 employees at December 31, 1995.
Approximately 14,700 employees are represented by unions, of which approximately
88% are represented by the International Brotherhood of Electrical Workers
("IBEW") and approximately 12% by the Communications Workers of America ("CWA"),
both of which are affiliated with the AFL-CIO.
In 1994, agreements were ratified with the CWA and the IBEW to extend the
collective bargaining agreements through August 8, 1998. The wage rates
increased 4.0% in August 1994 and 1995 and will increase 3.5% and 3.0% in August
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 stock grant and other incentives
to improve service quality.
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, 1995, the gross book value of telephone plant was $12.5 billion,
consisting principally of telephone plant and equipment (88%). Other
classifications include: land, land improvements and buildings (7%); furniture
and other equipment (3%); and plant under construction and other (2%).
Substantially all of the Company's central office equipment is located in
buildings owned by the Company and is 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. At December 31, 1995, the majority of the planned
work centers were completed.
ITEM 3. LEGAL PROCEEDINGS.
There were no proceedings reportable under Item 3.
11
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PART II
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Dollars in Millions 1995 1994 1993 1992 1991
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $4,314 $4,202 $4,070 $3,922 $3,806
Operating expenses $3,353 $3,310 $3,773 $3,009 $3,177
Interest expense $ 154 $ 163 $ 175 $ 190 $ 191
Earnings before extraordinary item
and cumulative effect of change
in accounting principle $ 506 $ 474 $ 106 $ 487 $ 317
Extraordinary item for the
discontinuance of regulatory
accounting principles,
net of taxes $ (628) $ - $ - $ - $ -
Cumulative effect of change in
accounting for postemployment
benefits, net of taxes $ - $ - $ (25) $ - $ -
Net income (loss) $ (122) $ 474 $ 81 $ 487 $ 317
Telephone plant - net $5,862 $6,633 $6,577 $6,532 $6,503
Total assets $7,219 $8,281 $8,271 $8,335 $8,239
Long-term debt $1,822 $2,165 $2,164 $2,211 $2,113
Share owner's equity $2,504 $3,069 $3,019 $3,351 $3,187
Capital expenditures* $ 886 $ 877 $ 819 $ 782 $ 751
Return to equity (4.35)% 15.25% 2.38% 14.77% 9.70%
Network access lines in
service (in thousands) 6,343 6,101 5,906 5,721 5,604
</TABLE>
See Management's Discussion and Analysis of Results of Operations for the
effect of non-recurring items on 1995 results, and restructuring charges on
1995, 1994 and 1993 results of operations. Results of operations for 1991
include $193 million of pretax ($122 million after-tax) restructuring
charges.
* Excludes additions under capital lease obligations, and prior to the
discontinuance of regulatory accounting principles, the equity component of
allowance for funds used during construction.
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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
- ----------------------
New England Telephone and Telegraph Company's (the "Company") 1993 results
included pretax charges of approximately $619 million ($376 million after-tax)
for business restructuring. 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 savings
necessary for the Company to operate in an increasingly competitive environment.
The 1993 charges were comprised of: $395 million in employee termination costs
to reduce the work force by 6,300 employees by the end of 1996; $83 million of
process re-engineering charges, primarily for systems redesign and work center
consolidation; and $141 million for the Company's allocation of Telesector
Resources Group, Inc. ("Telesector Resources") business restructuring charges.
1995 AND 1994 ADDITIONAL CHARGES
During 1994, the Company announced retirement incentives to provide a voluntary
means of implementing substantially all of the planned work force reductions.
The retirement incentives were to be offered at different times through 1996
according to local force requirements and were expected to generate additional
charges over that period of time as employees elected to leave the business
through retirement incentives rather than through the severance provisions of
the 1993 force reduction plan. In 1995 and 1994, respectively, approximately
1,470 and 1,580 of the Company's employees accepted the incentive plan and
$174.5 million ($108.3 million after-tax) and $168.1 million ($111.2 million
after-tax), respectively, of incremental charges for the cost of retirement
incentives were recorded for employees who left the Company, and for the
Company's allocation from Telesector Resources for its retirement incentives.
The reserves established in 1993 for severance have been and will continue to be
transferred primarily to the pension liability on a per employee basis as a
result of employees' accepting the retirement incentives. Much of the cost of
the enhancements will be funded by NYNEX Corporation's ("NYNEX") pension plans.
The components of the additional pretax charges for 1995 were: $123.5 million
for pension enhancements, $14.7 million for postretirement medical costs, and
$36.3 million allocated to the Company from Telesector Resources for its
retirement incentives and postretirement medical costs. The components of the
additional pretax charges for 1994 were: $84.4 million for pension enhancements;
$47.6 million for postretirement medical costs; and $36.1 million allocated to
the Company from Telesector Resources for its retirement incentives and
postretirement medical costs.
EMPLOYEE REDUCTIONS
The 1993 employee termination costs of $395 million were comprised of $201
million for employee severance payments (including salary, payroll taxes, and
outplacement costs) and $194 million for postretirement medical costs (total
after-tax charges were $240 million). These costs were for planned
13
<PAGE>
work force reductions of 1,300 management employees and 5,000 nonmanagement
employees. At December 31, 1994, the actual number of employees who elected to
leave through retirement incentives in 1994 and the expectation for 1995 and
1996 were as follows:
1994 1995 1996 Total
------------------------------------------------
Management 885* 415 - 1,300
Nonmanagement 840 2,100 2,060 5,000
------------------------------------------------
Total 1,725 2,515 2,060 6,300
================================================
* Includes 145 management employees who transferred from the Company to
Telesector Resources and subsequently left in 1994 under the pension
enhancements.
CURRENT STATUS
During 1995, it became evident that the number of management employees leaving
under the retirement incentives would exceed the original estimate due to
additional management staff reduction efforts. It was also determined that, due
to volume of business growth, the expected reduction in the number of
nonmanagement employees would be less and would not be fully realized until
1998. The actual number of employees who elected to leave through retirement
incentives in 1995 were 600 management and 1,100 nonmanagement employees, which
include 180 management and 50 nonmanagement employees who transferred from the
Company to Telesector Resources and subsequently left under the pension
enhancements.
At the present time, the Company expects the total number of employees who will
elect to take the pension enhancements to be in the range of 5,500 to 5,900,
consisting of approximately 1,900 management and 3,600 to 4,000 nonmanagement
employees, depending on work volumes, needs of the business and timing of the
incentive offers.
The actual severance reserves utilized and the application of the postretirement
medical liability established in 1993 during 1994 and 1995 are shown below:
(Dollars In Millions) 1994 1995 Total
---------------------
Severance*#
-----------
Management $ 70 $30 $100
Nonmanagement 10 8 18
--------------------
Total $ 80 $38 $118
====================
Postretirement Medical#
-----------------------
Management $ 31 $12 $ 43
Nonmanagement 11 23 34
--------------------
Total $ 42 $35 $ 77
====================
* The severance utilization amounts in 1995 and 1994 are comprised of $22 and
$64 million, respectively, of severance reserves transferred to the pension
liability and $1 and $4 million, respectively, utilized for other retiree
costs.
# The severance and postretirement medical amounts above include $15 and $7
million, respectively, in 1995 and $12 and $5 million, respectively, in
1994, which was transferred to Telesector Resources for employees who
transferred from the Company to Telesector Resources and subsequently left
under the retirement incentives.
14
<PAGE>
Assuming that employees will continue to leave under the retirement incentives,
it is expected that the remaining $83 million of severance reserves will be
utilized and the remaining $117 million of the postretirement medical liability
will be applied in the years 1996 through 1998.
PROCESS RE-ENGINEERING
Approximately $83 million of the 1993 charges ($51 million after-tax) consists
of costs associated with re-engineering service delivery 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 is decentralizing the
provision of residence and business customer service throughout the region,
creating regional businesses to focus on unique markets, and centralizing
numerous operations and support functions. At December 31, 1994, the actual 1994
utilization of reserves for process re-engineering and the revised expected
utilization for 1995 and 1996 were as follows:
(Dollars In Millions) 1994 1995 1996 Total
-------------------------------------
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
====================================
SYSTEMS REDESIGN is the cost of developing new systems, processes and procedures
to facilitate implementation of process re-engineering initiatives in order to
realize operational efficiencies and enable the Company to reduce work force
levels. These projects consist of radical changes in the applications and
systems supporting business functions to be redesigned as part of the
restructuring plan. All of 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. The business
processes included in systems redesign are customer contact and customer
operations.
CUSTOMER CONTACT represents the direct interface with the customer to provide
sales, billing inquiry and repair service scheduling on the first contact.
CUSTOMER OPERATIONS focuses on network monitoring and surveillance, trouble
testing, dispatch control, and proactive repair, with reliability as a critical
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 moving costs, lease termination costs
(from the date premises are vacated), and other consolidation costs. BRANDING
includes the costs to develop a single "NYNEX" brand identity associated with
restructured business operations. RELOCATION costs are required to move
personnel to different locations due to work center consolidations and include
costs based on the Company's relocation guidelines and the provisions of
collective bargaining agreements. TRAINING costs are for training
15
<PAGE>
nonmanagement employees on newly-designed, cross-functional job positions and
re-engineered systems created as part of the restructuring plan, which will
permit one employee to perform tasks formerly performed by several employees,
and include tuition, out-of-pocket course development and administrative costs,
facilities charges, and related travel and lodging. RE-ENGINEERING
IMPLEMENTATION costs are incremental costs to complete re-engineering
initiatives.
CURRENT STATUS
At December 31, 1995, the actual 1994 and 1995 utilization of reserves and the
revised expectation for 1996 are as follows:
(Dollars In Millions) 1994 1995 1996 Total
-------------------------------------
Systems redesign $ - $42 $ 5 $47
Work center consolidation 1 6 5 12
Branding 12 2 - 14
Relocation - 1 1 2
Training - 4 4 8
Re-engineering implementation - - - -
--------------------------------------
Total $ 13 $55 $15 $83
=====================================
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 and permit development of multi-tasking capabilities. A
higher degree of complexity and additional functionality required by real-time,
interactive systems contributed to the increase. During 1995, systems estimates
increased due to the complexity and extensiveness of integration testing and
quality assurance processes.
The actual 1994 and 1995 utilization and the revised expected utilization in
1996 of the systems redesign reserves, by business process, are as follows:
(Dollars In Millions) 1994 1995 1996 Total
-------------------------------------
Customer contact $ - $ 30 $ 3 $ 33
Customer operations - 12 2 14
-------------------------------------
Total $ - $ 42 $ 5 $ 47
=====================================
WORK CENTER CONSOLIDATION was revised in 1994 for an increase in the number of
work centers from what was originally planned based on union agreements. The
revised estimate for 1996 is based on actual costs incurred to date and reflects
the completion of the majority of the planned work centers. RELOCATION of
employees was revised downward in 1994 due to the increase in the number of work
centers and terms of the union agreements. At the end of 1995, the majority of
the work centers are complete. TRAINING was delayed in 1994 due to the timing of
the union agreements and the higher degree of complexity of systems redesign;
total expected costs were decreased due to the planned use of more in-house
training. Training was accomplished in 1995 through in-house, on-the-job and
multi-media training. RE-ENGINEERING IMPLEMENTATION is winding down and will be
reported with the related projects in 1996.
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 actual utilization of reserves
in 1994 and 1995 and the expectation for 1996 are as follows:
(Dollars In Millions) 1994 1995 1996 Total
-------------------------------------
Severance $ 44* $ - $ - $ 44
Postretirement medical costs 19 - - 19
Systems re-engineering 29 41 - 70
Re-engineering implementation 14 8 - 22
Work center consolidation - 3 - 3
-------------------------------------
Total $106 $52 $ - $158
=====================================
* 1994 includes $17 million of severance amounts associated with the balance
of the 1991 restructuring reserve at December 31, 1993.
COST SAVINGS
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 3,000 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits of approximately $155 million. In addition, the
Company's share of the annualized average reduction in wages and benefits
attributable to employees of Telesector Resources leaving under retirement
incentives will be approximately $70 million. Partially offsetting these cost
savings will be the effects of wage and price inflation, growth in volume of
business and higher costs attributable to service improvements.
RESULTS OF OPERATIONS
- ---------------------
For the years ended December 31, 1995 and 1994, net (loss) income was $(122.3)
million and $474.3 million, respectively. Results for 1995 include: an after-tax
extraordinary charge of $627.8 million for the discontinuance of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("Statement No. 71"); an after-tax charge of $108.3 million
for pension enhancements for employees who elected to leave the Company under
retirement incentives and for the Company's allocation from Telesector Resources
for its pension enhancements; and non-recurring after-tax items of $9.9 million
for accruals related to various self-insurance programs, regulatory
contingencies and revised benefit charges. Results for 1994 included an
after-tax charge of $111.2 million for pension enhancements for employees who
elected to leave the Company under retirement incentives and for the Company's
allocation from Telesector Resources for its pension enhancements.
OPERATING REVENUES for 1995 were $4.3 billion, an increase of $111.6 million, or
2.7%, over 1994. Supporting the revenue growth was a 4.0% growth in access lines
and a 9.2% increase in access usage over 1994, partially offset by intrastate
and interstate rate reductions.
OPERATING EXPENSES for 1995 were $3.4 billion, an increase of $43.7 million, or
1.3%, over 1994. Included in this increase (and as described below) were pension
enhancement charges in 1995 and 1994, and non-recurring charges in 1995.
Adjusting for these items, operating expenses were $3.2 billion, an increase of
$20.9 million, or .7%, over 1994.
17
<PAGE>
OPERATING REVENUES
The increase in operating revenues is comprised of the following:
Increase (Decrease)
(In millions)
-------------
Local service $ 60.9
Long distance (42.0)
Network access 90.1
Other 2.6
------
$111.6
======
LOCAL SERVICE REVENUES are earned from the provision of local exchange, local
private line and local public network services. The increase was due principally
to: (1) a $67 million increase in demand driven by growth in access lines and
sales of calling features, (2) a $5 million increase resulting from the deferral
of revenues for a subsequent refund to Vermont customers, (3) a $5 million
decrease due to the 1994 reversal of previously deferred revenues in Rhode
Island, and (4) a $7 million rate reduction required by an order of the Maine
Public Utilities Commission.
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. The decrease was due principally
to $24 million in required rate reductions primarily attributable to the
Massachusetts rates restructuring, $7 million in price reductions in New
Hampshire, and a net $12 million decrease in demand for message toll and wide
area telecommunications services as a result of customer shifts to lower priced
services offered by the Company and increased competition. It should be noted
that certain competitive losses in long distance revenues are mostly offset by
increases in network access revenues.
NETWORK ACCESS REVENUES are earned from the provision of exchange access
services primarily to interexchange carriers. There was a $78 million increase
in switched access revenues primarily due to increased demand, partially offset
by a $10 million reduction in interstate rates. Special access revenues
increased $12 million primarily due to increased demand.
OTHER REVENUES are earned from the provision of products and services other than
Local service, Long distance and Network access. There was a $7 million increase
in voice messaging services revenues and a net $4 million increase in revenues
related to the directory licensing agreement with NYNEX Information Resources
Company, offset by a $10 million decrease in billing and collection revenues
pursuant to a contract with AT&T Corp. ("AT&T").
OPERATING EXPENSES
OPERATING EXPENSES for 1995 were $3.4 billion, an increase of $43.7 million, or
1.3%, over 1994. Included in this increase were pension enhancement charges of
$174.5 and $168.1 million in 1995 and 1994, respectively, and non-recurring
charges in 1995 of $16.4 million for various self-insurance programs, a court
decision on overearnings complaints for the period 1987-1988 and revised benefit
charges. These charges reflect events that occurred in
18
<PAGE>
1995 and additional information made available through revised estimates and
analyses completed during 1995. Adjusting for these items, operating expenses
were $3.2 billion, an increase of $20.9 million, or .7%, over 1994.
DEPRECIATION AND AMORTIZATION increased $32.2 million principally due to: (1) a
$19 million net increase due to growth in depreciable plant investment, (2) a
$17 million increase due to revised intrastate depreciation rates in Vermont,
(3) a $4 million increase in the amortization of central office equipment, (4) a
$4 million increase due to the discontinuance of regulatory accounting
principles (see Note B) and (5) an $8 million decrease primarily attributable to
revised non-regulated depreciation rates.
TAXES OTHER THAN INCOME, which include gross receipts taxes, property taxes and
other non-income based taxes, increased $21.8 million. The increase is primarily
due to a 1994 reversal of accrued property taxes as a result of unasserted
municipal assessments.
EMPLOYEE RELATED COSTS, which consist primarily of wages, payroll taxes, and
employee benefits, decreased $51.9 million. Wages and payroll taxes decreased
$58 million as a result of reductions in the Company's work force due to
transfers of employees to Telesector Resources associated with re-engineering
service delivery to customers (see OTHER OPERATING EXPENSES) and to the
Company's force reduction program, partially offset by salary and wage rate
increases. Benefit expenses increased $6 million. There was a $7 million
increase in pension expense attributable to changes in actuarial assumptions, a
$7 million increase in medical, dental, and vision expense and a $2 million
increase associated with revised charges for postemployment benefits (including
revised estimates associated with workers compensation accruals). These
increases were offset by a $9 million decrease resulting from the amortization
of deferred pension costs pursuant to an intrastate regulatory plan.
OTHER OPERATING EXPENSES, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $18.8
million. The increase was principally due to: (1) a $135 million increase in
charges from affiliated companies, primarily attributable to the transfer of
functions to Telesector Resources, which includes charges for advertising,
telemarketing and sales agent commissions, increases in Telesector Resources'
contracted and centralized services and salary and wage rates, and the transfer
of employees from the Company to Telesector Resources (see EMPLOYEE RELATED
COSTS), partially offset by decreases due to Telesector Resources' force
reduction program, (2) a $3 million increase in bad debt expense recognized
pursuant to provisions of the billing and collection contract with AT&T, (3) a
$99 million decrease in expenses primarily due to the transfer of functions to
Telesector Resources (see EMPLOYEE RELATED COSTS) and to the Company's force
reduction program and (4) an $11 million decrease in right to use fees resulting
from decreased software deployment.
INTEREST EXPENSE
INTEREST EXPENSE decreased $9.1 million, or 5.6%, due to lower levels of
advances from NYNEX, and the elimination of the amortization of the intrastate
portion of previously deferred refinancing costs in the second quarter of 1995
19
<PAGE>
as a result of the discontinuance of regulatory accounting principles (see Note
B).
INCOME TAXES
INCOME TAXES increased $44.3 million, or 16.5%, principally due to an increase
in pretax income, a decrease in amortization of investment tax credits, and the
elimination of excess deferred tax reversals as a result of the discontinuance
of regulatory accounting principles (see Note B).
EXTRAORDINARY ITEM
The discontinued application of Statement No. 71 required the Company, for
financial accounting purposes, to adjust the carrying amount of telephone plant
and equipment and to eliminate non-plant regulatory assets and liabilities from
the balance sheet. This change resulted in an after-tax charge of $627.8
million, consisting of $472.6 million to adjust telephone plant and equipment
and $155.2 million to write off non-plant regulatory assets and liabilities. The
Company now utilizes shorter asset lives for certain categories of telephone
plant and equipment than those previously approved by regulators (see Note B).
FINANCING
- ---------
At December 31, 1995, the Company had $500 million of unissued, unsecured debt
securities registered with the Securities and Exchange Commission.
COLLECTIVE BARGAINING AGREEMENTS
- --------------------------------
In May 1994, an agreement was ratified with the Communications Workers of
America to extend the collective bargaining agreement through August 8, 1998. A
similar agreement was reached with and ratified by the International Brotherhood
of Electrical Workers in August 1994. The wage rates increased 4.0% in August
1994 and 1995 and will increase 3.5% and 3.0% in August 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 stock grant and other incentives to improve service
quality.
REGULATORY ENVIRONMENT
- ----------------------
STATE REGULATORY
During 1995, the Company was able to replace rate of return regulation with
price regulation plans in Massachusetts and Maine. These state regulatory plans
eliminate the Company's obligation to share earnings with customers, allow the
Company greater flexibility to vary prices to meet competition, and impose
service quality performance measurements. In January 1996, the Company filed a
proposed price regulation plan with the Rhode Island Public Utilities
Commission.
INCENTIVE PLAN: In Massachusetts, the price regulation plan approved by the
Massachusetts Department of Public Utilities ("MDPU") governs the Company's
Massachusetts intrastate operations through August 2001. Certain residence
20
<PAGE>
exchange rates are capped, and pricing rules limit the Company's ability to
increase prices for most services. The MDPU also established a quality of
service index and ordered that the Company's inability to meet the performance
levels in any given month would result in a one-twelfth of one percent increase
in the productivity offset used in the annual price cap filing. The Company's
initial price plan tariff filing, which became effective in September 1995,
contains rate changes that will result in an annual revenue reduction of
approximately $38 million. The MDPU's Order has been appealed to the Supreme
Judicial Court of Massachusetts.
COMPETITION PROCEEDING: In 1995, hearings commenced in the MDPU's investigation
of intraLATA and local exchange competition in Massachusetts. The MDPU has
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.
FEDERAL REGULATORY
PRICE CAP PLAN: The Telephone Companies are subject to incentive regulation in
the form of price caps. Price cap limits are subject to adjustment each year to
reflect inflation, a productivity factor and certain other cost changes. In
1995, the Federal Communications Commission ("FCC") issued a Notice of Proposed
Rulemaking regarding the productivity factor used by local exchange carriers
("LECs") in the FCC price cap formula. The Proposed Rulemaking will consider
changes in the determination of the productivity factor, the recognition of
exogenous costs, the extent of carrier sharing, and the formula for calculating
the price cap index for certain services. The FCC expects to issue an order in
time for the final changes to be reflected in LECs' rates as of July 1996. The
FCC has also issued a Notice of Proposed Rulemaking to determine how the price
cap rules should be modified to accommodate increasing levels of competition.
The FCC asked for comments on a proposal by the Telephone Companies that
earnings sharing be reduced or eliminated as an LEC implements measures to
promote competition for local exchange services. The FCC has indicated that it
intends to establish a rulemaking proceeding in 1996 to consider reform of the
rules concerning the structure of access charges. This rulemaking proceeding
would consider changes that might be necessary as competition increases in the
local telephone market.
OTHER FEDERAL REGULATORY: In January 1996, the FCC issued a Notice of Proposed
Rulemaking addressing the charges made for interconnection between LECs and
wireless carriers. Currently, such charges are established by contracts under
the jurisdiction of the state regulatory commissions. The FCC requested comment
on its tentative conclusion to require, pending the completion of its Proposed
Rulemaking, reciprocal "bill-and-keep" compensation arrangements under which the
originating carrier would no longer pay the terminating carrier for access.
Adoption of the proposed procedure would have a negative effect on the revenues
of the LECs, including the Telephone Companies. The Telephone Companies plan to
participate actively in the proceeding.
During 1996, the FCC will conduct a number of rulemaking proceedings in order to
implement the Telecommunications Legislation enacted in February 1996.
In February 1996, the Company advised the FCC that it relinquished authorization
to construct advanced video dialtone network facilities in portions of
Massachusetts and Rhode Island.
21
<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, which require
Management to make estimates and assumptions that affect reported amounts.
Actual results could differ from those estimates. In Management's opinion, the
financial statements are fairly presented. 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
22
<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 (the "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 the Company as of December 31,
1995 and 1994, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, 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 Note B to the financial statements, in the second quarter of
1995, the Company discontinued accounting for its operations in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation." Additionally, as discussed in Note D to the
financial statements, in the fourth quarter of 1993, the Company adopted
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits", retroactive to January 1, 1993.
Coopers & Lybrand L.L.P.
New York, New York
February 5, 1996
23
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1995 1994 1993
---- ---- ----
OPERATING REVENUES
- ------------------
<S> <C> <C> <C>
Local service $1,958.1 $1,897.2 $1,812.3
Long distance 694.3 736.3 758.0
Network access 1,301.0 1,210.9 1,159.2
Other 360.4 357.8 340.7
-------- -------- --------
Total operating revenues 4,313.8 4,202.2 4,070.2
-------- -------- --------
OPERATING EXPENSES
- ------------------
Maintenance and support 1,114.5 1,168.0 1,202.9
Depreciation and amortization 904.8 872.6 832.7
Marketing and customer services 595.9 564.3 664.5
Taxes other than income 128.9 107.1 127.6
Provision for uncollectible revenues 55.1 55.9 49.3
Other 554.0 541.6 896.0
-------- -------- --------
Total operating expenses 3,353.2 3,309.5 3,773.0
-------- -------- --------
Operating income 960.6 892.7 297.2
Other income (expense) - net 11.3 12.8 (55.0)
Interest expense 153.9 163.0 175.0
-------- -------- --------
Earnings before income taxes,
extraordinary item and cumulative effect
of change in accounting principle 818.0 742.5 67.2
Income taxes 312.5 268.2 (39.1)
-------- -------- --------
Earnings before extraordinary item
and cumulative effect of change
in accounting principle 505.5 474.3 106.3
Extraordinary item for the discontinuance of
regulatory accounting principles,
net of taxes (Note B) (627.8) - -
Cumulative effect of change in
accounting for postemployment benefits,
net of taxes (Note D) - - (25.0)
-------- -------- --------
NET INCOME (LOSS) $ (122.3) $ 474.3 $ 81.3
======== ===-==== ========
RETAINED EARNINGS
- -----------------
Beginning of year $ 979.9 $ 929.9 $1,262.0
Net income (loss) (122.3) 474.3 81.3
Dividends (442.7) (424.3) (413.4)
-------- -------- --------
End of year $ 414.9 $ 979.9 $ 929.9
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
BALANCE SHEETS
--------------
DOLLARS IN MILLIONS
December 31,
----------------------
1995 1994
---- ----
ASSETS
- ------
Current assets:
Cash $ 8.4 $ 9.1
Receivables
Trade and other (net of allowance of $49.7
and $50.9, respectively) 890.0 785.4
Affiliates 27.1 18.8
Deferred charges 95.9 82.6
Deferred income taxes 106.2 109.9
Inventory 53.7 49.4
Prepaid expenses and other 36.1 18.2
--------- ---------
Total current assets 1,217.4 1,073.4
--------- ---------
Telephone plant - net 5,861.5 6,632.9
Deferred charges and other 139.9 574.8
--------- ---------
TOTAL ASSETS $ 7,218.8 $ 8,281.1
========= =========
See accompanying notes to financial statements.
25
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
BALANCE SHEETS
--------------
DOLLARS IN MILLIONS
December 31,
----------------------
1995 1994
---- ----
LIABILITIES AND SHARE OWNER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable
AT&T $ 96.5 $ 92.9
Affiliates 473.7 407.0
Compensated absences 80.2 86.6
Trade and other 431.3 468.8
Short-term debt 387.6 53.8
Dividends payable 110.7 106.1
Taxes accrued 27.7 46.0
Advance billing and customers' deposits 19.5 20.1
Interest accrued 38.1 38.0
-------- --------
Total current liabilities 1,665.3 1,319.3
-------- --------
Long-term debt 1,822.0 2,165.4
Deferred income taxes 345.5 773.2
Unamortized investment tax credits 67.9 91.9
Other long-term liabilities and deferred credits 814.1 862.3
-------- --------
Total liabilities 4,714.8 5,212.1
-------- --------
Commitments and contingencies (Notes H, I, J, M and N)
Share owner's equity:
Common stock - one share,
without par value (Note R) 1.0 2,089.1
Additional paid-in capital (Note R) 2,088.1 -
Retained earnings 414.9 979.9
-------- --------
Total share owner's equity 2,504.0 3,069.0
-------- --------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $7,218.8 $8,281.1
======== ========
See accompanying notes to financial statements.
26
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF CASH FLOWS
------------------------
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (122.3) $ 474.3 $ 81.3
-------- -------- --------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary item, net of taxes 627.8 - -
Depreciation and amortization 904.8 872.6 832.7
Deferred income taxes - net (37.9) (65.0) (255.3)
Deferred credits - net (11.6) (23.5) (28.5)
Changes in operating assets and liabilities:
Receivables (112.9) (71.7) 3.3
Deferred charges (13.3) 16.9 5.5
Deferred income taxes 110.4 10.7 (83.3)
Inventory (4.3) 8.2 9.1
Prepaid expenses and other (149.6) 51.4 (29.7)
Accounts payable 79.1 63.3 301.9
Taxes accrued (18.3) 19.5 (21.9)
Advance billing and customers' deposits (0.6) 1.9 (0.9)
Interest accrued 0.1 0.2 (7.6)
Other-net 90.4 42.8 426.1
-------- -------- --------
Total adjustments 1,464.1 927.3 1,151.4
-------- -------- --------
Net cash provided by operating activities 1,341.8 1,401.6 1,232.7
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (885.8) (876.9) (819.0)
Advances to NYNEX - - 82.0
-------- -------- --------
Net cash used in investing activities (885.8) (876.9) (737.0)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX (18.0) (104.3) 159.4
Dividends paid to NYNEX (438.2) (421.6) (409.2)
Issuance of long-term debt - - 669.5
Repayment of long-term debt and
capital leases (0.5) (0.9) (1.1)
Debt refinancings and call premiums - - (915.8)
-------- -------- --------
Net cash used in financing activities (456.7) (526.8) (497.2)
-------- -------- --------
Net decrease in cash (0.7) (2.1) (1.5)
Cash at beginning of year 9.1 11.2 12.7
-------- -------- --------
Cash at end of year $ 8.4 $ 9.1 $ 11.2
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
NOTES TO FINANCIAL STATEMENTS
A ACCOUNTING POLICIES
-------------------
NATURE OF OPERATIONS
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 in Maine, Massachusetts, New
Hampshire, Rhode Island and Vermont. Intrastate communications services are
regulated by various state public service commissions ("state commissions") and
interstate communications services are regulated by the Federal Communications
Commission ("FCC").
The communications and media industry continues to experience fundamental
changes at an ever-increasing pace. Telecommunications, information and
entertainment services are converging in the market, driven by technology and
released by landmark federal legislation that will remove historic regulatory
barriers. These changes are likely to have a significant effect on the future
financial performance of many companies in the industry. The Company cannot
predict the effect of such competition on its business.
NYNEX is implementing a major restructuring of its business, has entered into
domestic strategic alliances, and is expanding globally in select international
markets in order to respond to competition. In addition, NYNEX is pursuing
reforms in telecommunications policy at both the state and federal levels. In
February, the Telecommunications Act of 1996 was signed into law. This
legislation will lead to the development of competition in local and long
distance telephone service and cable television.
BASIS OF PRESENTATION
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.
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). GAAP requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The 1994 and 1993 financial statements have been reclassified to conform to the
current year's format.
In the second quarter of 1995, the Company discontinued using GAAP applicable to
regulated entities (see Note B).
28
<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 is charged to accumulated depreciation.
As a result of the implementation of Statement of Financial Accounting Standards
No. 101, "Regulated Enterprises - Accounting for the Discontinuation of
Application of FASB Statement No. 71" ("Statement No. 101"), in the second
quarter of 1995, the Company began recording depreciation expense using shorter
asset lives based on expectations as to the revenue-producing lives of the
assets (see Note B), calculated on a straight-line basis. Previously,
depreciation rates used by the Company were prescribed by the FCC and by the
state commissions for interstate operations and for intrastate operations,
respectively, and were calculated on a straight-line basis using the concept of
"remaining life."
CAPITALIZED INTEREST COST
As a result of the application of Statement No. 101, capitalized interest for
the Company is recorded as a cost of telephone plant and equipment and a
reduction of interest, in accordance with the provisions of Statement of
Financial Accounting Standards No. 34, "Capitalization of Interest Cost"
("Statement No. 34"). Previously, regulatory authorities allowed the Company to
capitalize interest, including an allowance on share owner's equity, as a cost
of constructing certain plant and as income, included in Other income (expense)
- - net. Such income was realized over the service life of the plant as the
resulting higher depreciation expense was recovered through the rate-making
process.
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.
REFINANCING CHARGES
As a result of the application of Statement No. 101, the Company no longer
defers call premiums and other charges associated with the redemption of
long-term debt, and previously deferred refinancing costs were eliminated (see
Note B). The intrastate portion of these costs had been deferred and amortized
over periods stipulated by the state commissions. The interstate portion had
been expensed as required by the FCC.
29
<PAGE>
INCOME TAXES
NYNEX and its subsidiaries, including the Company, file a consolidated Federal
income tax return. The Company's provision for federal income taxes currently
payable is allocated in accordance with its contribution to the consolidated
group's taxable income and tax credits.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement No. 109").
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.
For the Company, prior to the application of Statement No. 101, the treatment of
excess deferred taxes resulting from the reduction of tax rates in prior years
was subject to federal income tax and regulatory rules. Deferred income tax
provisions of the Company were based on amounts recognized for rate-making
purposes. The Company recognized a deferred tax liability and established 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 of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("Statement No. 71"), required the Company to reflect the additional deferred
income taxes as regulatory assets to the extent that they would be recovered in
the rate-making process. In accordance with the normalization provisions under
federal tax law, the Company reversed excess deferred taxes relating to
depreciation of regulated assets over the regulatory lives of those assets. For
other excess deferred taxes, the state commissions generally allowed
amortization of excess deferred taxes over the reversal period of the temporary
difference giving rise to the deferred taxes. As a result of the application of
Statement No. 101, income tax-related regulatory assets and liabilities were
eliminated (see Note B).
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 DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES
--------------------------------------------------
In the second quarter of 1995, the Company discontinued accounting for its
operations in accordance with the provisions of Statement No. 71. As a result,
the Company recorded an extraordinary non-cash charge of approximately $627.8
million, net of income taxes of $414.2 million.
The operations of the Company no longer met the criteria for application of
Statement No. 71 due to a number of factors including: significant changes in
regulation (achievement of price regulation rather than rate-of-return
regulation in Massachusetts and Maine, and ongoing efforts to achieve price
regulation in its remaining jurisdictions); an intensifying level of
competition; and the increasingly rapid pace of technological change. Under
Statement No. 71, the Company had accounted for the effects of rate actions by
federal and state regulatory commissions by establishing certain regulatory
30
<PAGE>
assets and liabilities, including the depreciation of its telephone plant and
equipment using asset lives approved by regulators and the deferral of certain
costs and obligations based on approvals received from regulators. The Company
had continually assessed its position and the recoverability of its
telecommunications assets with respect to Statement No. 71.
Telephone plant and equipment was adjusted through an increase in accumulated
depreciation, to reflect the difference between recorded depreciation and the
amount of depreciation that would have been recorded had the Company not been
subject to rate regulation. Gross plant was written off where fully depreciated,
and non-plant regulatory assets and liabilities were eliminated from the balance
sheet.
The after-tax extraordinary charge recorded consists of $472.6 million for the
adjustment to telephone plant and equipment and $155.2 million for the write-off
of non-plant regulatory assets and liabilities.
The net decrease of $790.1 million to telephone plant and equipment was
supported by a depreciation analysis, which identified inadequate depreciation
reserve levels which the Company believes resulted principally from the
cumulative under-depreciation of telephone plant and equipment as a result of
the regulatory process. An impairment analysis was performed that did not
identify any additional amounts not recoverable from future operations. ITC
amortization was accelerated as a result of the reduction in asset lives of the
associated telephone plant and equipment.
The major elements of the write-off of non-plant regulatory net assets were as
follows:
(In millions) Pretax After-tax
Compensated absences $ 53.0 $ 31.3
Deferred pension costs 116.7 67.6
Refinancing costs 70.9 46.4
Deferred taxes - 2.0
Other 11.3 7.9
------ ------
Total $251.9 $155.2
====== ======
With the adoption of Statement No. 101, the Company now uses estimated asset
lives for certain categories of telephone plant and equipment that are shorter
than those approved by regulators. These shorter asset lives result from the
Company's expectations as to the revenue-producing lives of the assets. A
comparison of average asset lives before and after the discontinuance of
31
<PAGE>
Statement No. 71 for the most significantly affected categories of telephone
plant and equipment is as follows:
Average lives (in years)
------------------------
Composite
Regulator-Approved Economic
Asset Lives Asset Lives
--------------------------------------------
Digital Switching 17 12
Circuit - Other 11 8
Aerial Metallic Cable 21 17
Underground Metallic Cable 25 15
Buried Metallic Cable 22 17
Fiber 30 20
The application of Statement No. 101 does not change the Company's accounting
and reporting for regulatory purposes.
C INCOME TAXES
------------
The components of income tax expense (benefit) are as follows:
- --------------------------------------------------------------------------------
Dollars In Millions 1995* 1994 1993**
- --------------------------------------------------------------------------------
Federal:
Current $305.7 $297.0 $206.5
Deferred - net (32.3) (58.3) (219.0)
Deferred tax credits - net (11.6) (23.5) (28.5)
------ ------ ------
261.8 215.2 (41.0)
------ ------ ------
State:
Current 56.3 59.7 38.2
Deferred - net (5.6) (6.7) (36.3)
------ ------ ------
50.7 53.0 1.9
------ ------ ------
Total $312.5 $268.2 $(39.1)
====== ====== ======
- --------------------------------------------------------------------------------
* Does not include the deferred tax benefit of $414.2 million associated with
the Extraordinary item for the discontinuance of regulatory accounting
principles.
** Does not include the deferred tax benefit of $14.1 million associated with
the Cumulative effect of change in accounting for postemployment benefits.
32
<PAGE>
A reconciliation between the federal income tax expense (benefit) computed at
the statutory rate and the Company's effective tax expense (benefit) is as
follows:
- --------------------------------------------------------------------------------
Dollars In Millions 1995 1994 1993
- --------------------------------------------------------------------------------
Federal income tax expense
computed at the statutory rate $286.3 $259.9 $ 23.5
a. Amortization of investment
tax credits (9.7) (23.5) (28.5)
b. Amortization of excess
deferred federal taxes due
to change in the tax rates (3.0) (18.1) (39.0)
c. Depreciation of certain taxes and
payroll-related construction costs
capitalized for financial statement
purposes, but deducted for income
tax purposes in prior years 2.1 7.4 5.9
d. Allowance for funds used during
construction, which is excluded
from taxable income, net of
applicable depreciation (0.2) (0.1) (0.7)
e. State income taxes,
net of federal tax benefit 32.9 34.5 1.2
f. Other items - net 4.1 8.1 (1.5)
------ ------ -----
Income tax expense (benefit) $312.5 $268.2 $(39.1)
====== ====== ======
- --------------------------------------------------------------------------------
Temporary differences for which deferred income taxes have not been provided by
the Company are represented principally by "c" above. Upon the discontinuance of
Statement No. 71 (see Note B), items "b" and "c" above have been eliminated.
33
<PAGE>
The components of current and non-current deferred tax assets and liabilities at
December 31, 1995 and 1994 are as follows:
- --------------------------------------------------------------------------------
Dollars In Millions 1995 1994
- --------------------------------------------------------------------------------
Deferred tax assets
Employee benefits $ 368.5 $ 277.3
Restructuring charges 54.5 72.6
Unamortized ITC 23.8 53.5
Other 25.8 43.6
-------- --------
472.6 447.0
-------- --------
Deferred tax liabilities
Depreciation and amortization 656.4 978.0
Employee benefits 48.9 57.1
Other 6.7 75.3
-------- --------
712.0 1,110.4
-------- --------
Net deferred tax liabilities $ 239.4 $ 663.4
======== ========
- --------------------------------------------------------------------------------
During 1995, income tax-related regulatory assets and liabilities were
eliminated as a result of the discontinued application of Statement No. 71 (see
Note B).
At December 31, 1994, the Company had recorded approximately $209.7 million in
deferred charges and deferred taxes representing the cumulative amount of income
taxes on temporary differences that were previously flowed through to
ratepayers. This deferral had been increased for the tax effect of future
revenue requirements and was amortized over the lives of the related depreciable
assets concurrently with their recovery in rates.
The Company had recorded a regulatory liability at December 31, 1994 of
approximately $225.4 million, in Other long-term liabilities and deferred
credits and in Accounts payable - Trade and other. A substantial portion of the
regulatory liability related to the 1986 reduction in the statutory federal
income tax rate and unamortized ITC. This liability had 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 for 1995, 1994 and 1993 was $78.9, $87.0 and $51.0
million, respectively. Deferral of pension cost was discontinued as of January
1, 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 1995, 1994 and 1993
34
<PAGE>
includes the effect of plan amendments and changes in actuarial assumptions for
the discount rate and future compensation levels. At December 31, 1995 and 1994,
the Company recorded approximately $403.0 and $335.4 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, 1995 and 1994 include a discount rate of 7.25% and 8.50%, respectively, and
an increase in future compensation levels of 4.1% and 4.5%, respectively, 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 1995, 1994 and 1993. The actuarial projections
included herein anticipate plan improvements for active employees in the future.
As a result of planned work force reductions primarily through retirement
incentives in 1995 and 1994, the Company incurred additional pension costs of
$143.0 and $145.9 million, respectively. In 1995, this cost was comprised of a
charge for special termination benefits of $182.3 million and a curtailment gain
of $39.3 million, partially offset by 1993 severance reserves of $21.7 million,
which were transferred to the pension liability. In 1994, this cost was
comprised of a charge for special termination benefits of $215.9 million and a
curtailment gain of $70.0 million, partially offset by 1993 severance reserves
of $61.5 million which were transferred to the pension liability.
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. The Company participates in the NYNEX benefit plans,
and the structure of the plans is such that certain disclosures required by
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("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 NYNEX's Annual Report
for the year ended December 31, 1995.
Effective January 1, 1993, the Company adopted Statement No. 106, which 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 1995, 1994 and 1993 for the Company was $153.4,
$157.1 and $143.0 million, respectively.
The actuarial assumptions used to determine the 1995 and 1994 obligation for
postretirement benefit plans under Statement No. 106 are as follows: discount
35
<PAGE>
rate of 7.25% and 8.50%, respectively; weighted average expected long-term rate
of return on plan assets of 8.4% in both years; weighted average salary growth
rate of 4.0% and 4.2%, respectively; medical cost trend rate of 11.6% and 12.6%
in 1995 and 1994, respectively, grading down to 4.5% in 2008; and dental cost
trend rate of 4.0% and 4.5% in 1995 and 1994, respectively, grading down to 3.0%
in 2002.
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 1995 and 1994, under work force reduction retirement incentives,
the Company incurred additional postretirement benefit costs of $42.5 and $84.8
million, respectively. In 1995, this cost was comprised of a curtailment loss of
$21.0 million and a charge for special termination benefits of $21.5 million,
partially offset by $27.8 million accrued for in 1993. In 1994, this cost was
comprised of a curtailment loss of $66.4 million and a charge for special
termination benefits of $18.4 million, partially offset by $37.2 million accrued
for in 1993.
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 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 1995, 1994 and
1993. The assets in the VEBA Trusts consist primarily of equity and fixed income
securities. Additional contributions to the VEBA Trusts are evaluated and
determined by NYNEX management.
REGULATORY TREATMENT
With respect to interstate treatment, in 1994 the FCC's 1993 order denying
exogenous treatment of additional costs recognized under Statement No. 106 was
overturned in the court. Tariff revisions were filed by the Company and New York
Telephone (collectively, the "Telephone Companies") with the FCC in 1994 to
amend price cap indices to reflect additional exogenous costs recognized under
Statement No. 106, including $42 million of costs already accrued, increased
annual costs of $21 million and increased rates of $2.2 million. Commencing
December 30, 1994, the Telephone Companies began collecting these revenues,
subject to possible refund pending resolution of the FCC Common Carrier Bureau's
investigation. The annual update to the price cap rates, effective August 1,
1995, included tariff revisions to recover approximately $21 million of
exogenous costs resulting from the implementation of Statement No. 106.
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 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,
amortization of existing deferred pension costs within a ten-year period, and
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.
36
<PAGE>
Upon the discontinuance of Statement No. 71, remaining deferred pension costs
were eliminated (see Note B).
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 1993.
E TELEPHONE PLANT - NET
---------------------
The components of Telephone plant - net are as follows:
December 31,
- --------------------------------------------------------------------------------
Dollars In Millions 1995 1994
- --------------------------------------------------------------------------------
Buildings $ 855.7 $ 817.0
Telephone plant and equipment 11,058.3 10,682.2
Furniture and other equipment 61.5 65.4
Other 334.8 329.5
--------- ---------
Total depreciable telephone plant 12,310.3 11,894.1
Less: accumulated depreciation 6,681.9 5,451.8
--------- ---------
5,628.4 6,442.3
Land 36.6 36.4
Plant under construction and other 196.5 154.2
--------- ---------
Total Telephone plant - net $ 5,861.5 $ 6,632.9
========= =========
- --------------------------------------------------------------------------------
The discontinued application of Statement No. 71 resulted in a net decrease to
telephone plant and equipment of $790.1 million, primarily through an increase
in accumulated depreciation (see Note B).
37
<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 1995 1994
- --------------------------------------------------------------------------------------------
<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 350.0 700.0
Notes 5 1/20% - 8 5/8% 1997-2003 800.0 800.0
Unamortized discount - net (9.8) (16.9)
-------- --------
1,820.2 2,163.1
Long-term capital lease obligations 1.8 2.3
-------- --------
Total Long-term debt $1,822.0 $2,165.4
======== ========
- --------------------------------------------------------------------------------------------
</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 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 9% Debentures, due August 1,
2031, are callable ten years after the issue date, upon thirty days' notice by
the Company.
At December 3l, l995, the Company had $500 million of unissued, unsecured debt
securities registered with the Securities and Exchange Commission.
G SHORT-TERM DEBT
---------------
Short-term debt and related weighted average interest rates are as follows:
- --------------------------------------------------------------------------------
Weighted Average
Interest Rates
- --------------------------------------------------------------------------------
Dollars In Millions December 31, December 31,
- --------------------------------------------------------------------------------
1995 1994 1995 1994
Advances from NYNEX $ 37.1 $55.1 5.93% 6.06%
Debt maturing within one year 350.0 -
Other 0.5 (1.3)
------ -----
Total Short-term debt $387.6 $53.8
====== =====
- --------------------------------------------------------------------------------
$350.0 million of the Company's Debentures are repayable on November 15, 1996,
in whole or in part, at the option of the holder, and as such are classified as
Short-term debt at December 31, 1995.
Interest expense on advances from NYNEX was $1.1, $5.9 and $4.2 million in 1995,
1994 and 1993, respectively.
38
<PAGE>
H FINANCIAL COMMITMENTS
---------------------
In December 1995, Telesector Resources entered into purchase agreements with
various suppliers to purchase, on behalf of the Telephone Companies, equipment
and software to upgrade the network. The purchase agreements are over five years
with a commitment of approximately $550 million.
I LEASE COMMITMENTS
-----------------
The Company leases certain facilities and equipment used in its operations.
Rental expense was $52.9, $68.3 and $68.5 million for 1995, 1994 and 1993,
respectively. At December 31, 1995, the minimum lease commitments under
noncancelable leases for the periods shown are as follows:
- --------------------------------------------------------------------------------
Dollars In Millions
- --------------------------------------------------------------------------------
Year Operating Capital
- --------------------------------------------------------------------------------
1996 $ 52.5 $0.9
1997 38.0 0.9
1998 36.2 0.9
1999 33.6 0.7
2000 32.0 0.6
Thereafter 278.3 0.1
------ ----
Total minimum lease payments $470.6 4.1
======
Less: executory costs 1.2
----
Net minimum lease payments 2.9
Less: interest 0.6
----
Present value of net minimum lease payments $2.3
====
- --------------------------------------------------------------------------------
J TRANSACTIONS WITH AT&T CORP.
----------------------------
In 1995, 1994 and 1993, AT&T Corp. ("AT&T") provided approximately 14%, 14% 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, legal and accounting 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.
39
<PAGE>
For 1995, 1994 and 1993, the Company recorded allocated costs of $20.1, $21.2
and $51.9 million, respectively, in connection with these services. The Company
also participates in compensation plans utilizing NYNEX stock.
Telesector Resources performs marketing, accounting, finance, 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 1995, 1994 and 1993, the Company
recorded charges from Telesector Resources of $664.5, $718.0 and $670.3 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 1995, 1994 and 1993 were approximately $226.9, $242.7 and
$255.4 million, respectively. Telesector Resources acts as a purchasing agent
for the Company for directly shipped materials and supplies. During 1995, 1994
and 1993, total agency purchases by Telesector Resources amounted to $50.6,
$132.1 and $123.6 million, respectively. In addition, in 1995, 1994 and 1993,
approximately $36.3, $36.1 and $140.8 million, respectively, of restructuring
charges ($22.1, $21.9 and $85.5 million after-tax) were allocated to the Company
from Telesector Resources, primarily related to its force reduction and
re-engineering programs. In 1995, the Company, New York Telephone and NYNEX
transferred approximately 930, 1,200 and 170 employees, 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 1995, 1994 and 1993, the Company
recorded charges of $30.7, $39.8 and $42.1 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. In 1993,
the Company made transition payments of $55 million to New York Telephone. The
transition plan was completed in 1993.
The Company has an agreement with NYNEX Information Resources Company ("NIRC")
pursuant to which NIRC 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 1995, 1994 and 1993, licensing fees, included in Other
revenues, amounted to $171.3, $167.8 and $156.7 million, respectively.
40
<PAGE>
Since 1991, NIRC has made payments to the Company of all of NIRC's earnings
related to publishing directories in Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont, in excess of a regulated return.
L TAXES OTHER THAN INCOME
-----------------------
Taxes other than income consist of:
- --------------------------------------------------------------------------------
Dollars In Millions 1995 1994 1993
- --------------------------------------------------------------------------------
Property $ 96.6 $ 78.1 $ 98.6
Gross receipts 21.7 25.5 24.8
Other 10.6 3.5 4.2
------ ------ ------
Total $128.9 $107.1 $127.6
====== ====== ======
- --------------------------------------------------------------------------------
M REVENUES SUBJECT TO POSSIBLE REFUND
-----------------------------------
Several state and federal 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, 1995, the aggregate amount
of such revenues that was estimated to be subject to possible refund was
approximately $31.8 million, plus related interest. The outcome of each pending
matter, as well as the time frame within which each will be resolved, is not
presently determinable.
N LITIGATION AND OTHER CONTINGENCIES
----------------------------------
Various legal actions and regulatory proceedings are pending that may affect the
Company. 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.
O SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
The following information is provided in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows":
For the Years Ended
December 31,
- --------------------------------------------------------------------------------
Dollars in Millions 1995 1994 1993
- --------------------------------------------------------------------------------
Income tax payments $379.6 $279.1 $329.2
Interest payments $157.1 $160.9 $179.0
- --------------------------------------------------------------------------------
41
<PAGE>
P FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1995 and 1994. Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," defines fair value as the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
a forced liquidation or sale.
- --------------------------------------------------------------------------------
Dollars in Millions December 31,
- --------------------------------------------------------------------------------
1995 1994
---- ----
Long-term debt
- --------------
Carrying amount $1,820.2 $2,163.1
Fair value $1,861.2 $1,987.4
- --------------------------------------------------------------------------------
Q BUSINESS RESTRUCTURING
----------------------
In 1995 and 1994, $174.5 and $168.1 million, respectively, of pretax pension
enhancement charges were recorded. These charges were included in the Statements
of Income in Other 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; $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 Statements of Income as follows: Maintenance and support - $78 million;
Marketing and customer services - $77 million; and Other expense - $464 million.
R SHARE OWNER'S EQUITY
--------------------
Pursuant to the resolutions of the Board of Directors of the Company, adopted on
June 21, 1995, the Common stock of the Company was reduced by approximately $2.1
billion and such amount was reallocated to Additional paid-in capital.
42
<PAGE>
SUPPLEMENTARY INFORMATION
Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
For the quarter ended
Dollars In Millions March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------------
1995
- ----
<S> <C> <C> <C> <C>
Operating revenues $1,053.6 $1,074.5 $1,088.3 $1,097.4
Operating income $ 239.7 $ 237.1 $ 275.3 $ 208.5
Earnings before
extraordinary item $ 124.0 $ 123.7 $ 145.6 $ 112.2
Extraordinary item for
the discontinuance of
regulatory accounting
principles, net of taxes $ - $ (627.8) $ - $ -
Net income (loss) $ 124.0 $ (504.1) $ 145.6 $ 112.2
1994
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
- ---------------------------------------------------------------------------------------------
</TABLE>
Results for the first, second, third and fourth quarters of 1995 include $31.2,
$40.3, $23.0 and $80.0 million, respectively, of pretax charges for pension
enhancements, which were reflected in operating expenses. The after-tax effect
of these charges was $20.9, $25.1, $14.0 and $48.3 million, respectively.
Results for the second quarter of 1995 include the effects of the discontinuance
of regulatory accounting principles, recorded as an extraordinary item (see Note
B). Results for the second and third quarters of 1995 include $9.0 million ($5.4
million after-tax) and $7.4 million ($4.5 million after-tax), respectively, for
various non-recurring charges which were reflected in operating expenses.
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, respectively.
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. The total pretax effect was included in operating expenses. The
after-tax effect of these credits was an increase in net income of $14.9
million, of which $3.7 million was applicable to the fourth quarter.
For further discussion of these items, see Management's Discussion and Analysis
of Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During 1995 and 1994, the Company did not change its auditors.
43
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE 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 3 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... 49
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 on file with the Securities and Exchange
--------
Commission ("SEC"), as identified in parentheses below, are
incorporated herein by reference as exhibits hereto.
Exhibit
Number
- ------
(3)a Restated Certificate of Incorporation of New England Telephone
and Telegraph Company (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 the 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).
44
<PAGE>
(10)(ii)(B)2 Service Agreement concerning provision by Telesector Resources
Group, Inc. to the Company of numerous services, including (i)
purchasing, materials handling, inspection, distribution,
storage and similar services and (ii) technical, regulatory,
government relations, marketing, operational support and
similar services, dated March 31, 1992 (Exhibit No. (19)(i)1
to the Registrant's filing on Form SE dated March 23, 1993,
File No. 1-1150).
(12) Computation of Ratio of Earnings to Fixed Charges.
(23) Consent of Independent Accountants.
(24) Powers of attorney.
(b) Reports on Form 8-K.
--------------------
45
<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 /s/Mel Meskin
----------------------------------------
Mel Meskin
Vice President-Finance and
Treasurer
March 21, 1996
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 Officer:
Mel Meskin
Vice President-Finance and Treasurer
Principal Accounting Officer:
John W. Diercksen*
Controller
A Majority Of Directors:
Lilyan H. Affinito* *By /s/Mel Meskin
Joseph A. Califano, Jr.* ---------------------------------
Arnold J. Eckelman* (Mel Meskin, as attorney-in-fact,
Thomas F. Gilbane, Jr.* and on his own behalf as
Ronald A. Homer* Principal Financial Officer)
Alice Stone Ilchman* March 21, 1996
Richard A. Jalkut*
John F. X. Mannion*
Jane E. Newman*
Paul L. Snyder*
Ira Stepanian*
Frank J. Tasco*
46
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at ------------------------ Balance at
Beginning of Charged to Costs Charged to End of
Description Period and Expenses Other Accounts Deductions Period
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for Uncollectibles
<S> <C> <C> <C> <C> <C>
Year 1995 . . . . . . . 50.9 55.1 57.1 (a) 113.4 (b) 49.7
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)
Restructuring
Year 1995 . . . . . . . 193.0 - - 94.4 98.6
Year 1994 . . . . . . . 286.9 - - 93.9 193.0
Year 1993 . . . . . . . 33.2 284.7 (c) - 31.0 286.9 (c)
</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.
47
Exhibit 12
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions)
<TABLE>
<CAPTION>
Year
1995 1994 1993 1992 1991
Earnings
<S> <C> <C> <C> <C> <C>
Earnings before Interest Expense,
Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $659.4 $637.3 $281.3 $676.3 $507.7
Federal, State and Local Income Taxes 312.5 268.2 (39.1) 240.9 135.9
Estimated Interest Portion of Rental Expense* 28.0 28.3 27.8 30.2 30.7
------ ------ ------ ------ ------
Total Earnings* $999.9 $933.8 $270.0 $947.4 $674.3
====== ====== ====== ====== ======
Fixed Charges
Total Interest Deductions $153.9 $163.0 $175.0 $189.7 $191.2
Estimated Interest Portion of Rental Expense* 28.0 28.3 27.8 30.2 30.7
------ ------ ------ ------ ------
Total Fixed Charges* $181.9 $191.3 $202.8 $219.9 $221.9
====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges 5.50 4.80 1.33 4.31 3.04
====== ====== ====== ====== ======
</TABLE>
* Restated to conform to current year's presentation.
48
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 5, 1996, on our audits of the financial
statements and financial statement schedule of New England Telephone and
Telegraph Company as of December 31, 1995 and 1994, and for each of the three
years in the period ended December 31, 1995, which report is included in this
Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
New York, New York
March 21, 1996
49
Exhibit (24)
New England Telephone and Telegraph Company
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 Exchange Act of
1934, as amended, an Annual Report on Form 10-K for the fiscal year ended
December 31, 1995; 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, Mel Meskin, and John W. Diercksen, 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 a Director, 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 day of March, 1996.
/s/Richard A. Jalkut
- -----------------------------------
Richard A. Jalkut, President
Chief Executive Officer & Director
/s/Lilyan H. Affinito
- -----------------------------------
Lilyan H. Affinito, Director
/s/Joseph A. Califano, Jr.
- -----------------------------------
Joseph A. Califano, Jr., Director
/s/Arnold J. Eckelman
- -----------------------------------
Arnold J. Eckelman, Director
/s/Thomas F. Gilbane, Jr.
- -----------------------------------
Thomas F. Gilbane, Jr., Director
/s/Mel Meskin
- -----------------------------------
Mel Meskin, Vice President-Finance
and Treasurer
/s/Ronald A. Homer
- -----------------------------------
Ronald A. Homer, Director
/s/Alice Stone Ilchman
- -----------------------------------
Alice Stone Ilchman, Director
/s/John F. X. Mannion
- -----------------------------------
John F. X. Mannion, Director
/s/Jane E. Newman
- -----------------------------------
Jane E. Newman, Director
/s/John W. Diercksen
- -----------------------------------
John W. Diercksen, Controller
- -----------------------------------
Donald B. Reed, Director
/s/Paul L. Snyder
- -----------------------------------
Paul L. Snyder, Director
/s/Ira Stepanian
- -----------------------------------
Ira Stepanian, Director
/s/Frank J. Tasco
- -----------------------------------
Frank J. Tasco, Director
State of New York )
County of New York ) ss.:
On the day of March, 1996, 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 W. Erb
-----------------------------------
Notary Public
Robert Erb
Notary Public, State of New York
No. 31-4808105
Qualified in New York County
Commission Expires January 31, 1997
50
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 27
<ALLOWANCES> 50
<INVENTORY> 54
<CURRENT-ASSETS> 1217
<PP&E> 12543
<DEPRECIATION> 6682
<TOTAL-ASSETS> 7219
<CURRENT-LIABILITIES> 1665
<BONDS> 1822
0
0
<COMMON> 1
<OTHER-SE> 2504
<TOTAL-LIABILITY-AND-EQUITY> 7219
<SALES> 0
<TOTAL-REVENUES> 4314
<CGS> 0
<TOTAL-COSTS> 3353
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 55
<INTEREST-EXPENSE> 154
<INCOME-PRETAX> 818
<INCOME-TAX> 313
<INCOME-CONTINUING> 506
<DISCONTINUED> 0
<EXTRAORDINARY> (628)
<CHANGES> 0
<NET-INCOME> (122)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
