<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
<TABLE>
<S> <C>
Date of Report: December 5, 1997
Exact name of registrant
as specified in its charter: NEW ENGLAND TELEPHONE AND
TELEGRAPH COMPANY
Commission File Number: 1-1150
State of Incorporation: New York
I.R.S. Employer Identification No.: 04-1664340
Address of principal
executive offices: 125 High Street
Boston, Massachusetts
Zip Code 02110
Registrant's telephone number,
including area code: (617) 743-9800
Former name or former address,
if changed since last report: Not applicable
</TABLE>
<PAGE>
Item 5. Other Events
------------
New England Telephone and Telegraph Company (the Company) is a wholly owned
subsidiary of NYNEX Corporation (NYNEX). On August 14, 1997, Bell Atlantic
Corporation (Bell Atlantic) and NYNEX completed a merger of equals under a
definitive merger agreement entered into on April 21, 1996 and amended on July
2, 1996. Under the terms of the amended agreement, NYNEX became a wholly owned
subsidiary of Bell Atlantic. The merger was accounted for as a pooling of
interests.
The Company is engaged in the business of providing telecommunications services
in Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. Since January
1, 1984, the Company has been a wholly owned subsidiary of NYNEX, one of the
seven regional holding companies formed by American Telephone and Telegraph
Company (AT&T) in connection with the court-ordered divestiture (the
Divestiture) by AT&T of certain portions of its 22 wholly owned operating
telephone companies. Prior to the Divestiture on January 1, 1984, the Company
was an associated company of the Bell System and a wholly owned subsidiary of
AT&T.
As a result of the merger of NYNEX and Bell Atlantic on August 14, 1997, the
Company became an indirect wholly owned subsidiary of Bell Atlantic. Bell
Atlantic, another of the original seven holding companies formed by AT&T in
connection with the Divestiture, is a diversified telecommunications company
operating in the region stretching from Maine to Virginia. In addition to its
operating telephone subsidiaries, Bell Atlantic provides domestic wireless
service in 25 states and has international wireless and other telecommunications
company investments.
The Company is filing the following financial statements and supplement to
Management's Discussion and Analysis of Results of Operations which include
certain reclassifications in presentation and certain retroactive adjustments to
conform accounting methodologies as a result of the merger (see Note U of the
notes to financial statements).
<TABLE>
<CAPTION>
Page Number
<S> <C>
Report of Independent Accountants 2
Supplement to Management's Discussion and Analysis
of Results of Operations 3
Statements of Income and Reinvested Earnings for the
years ended December 31, 1996, 1995, and 1994 4
Balance Sheets at December 31, 1996 and 1995 5-6
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 7
Notes to Financial Statements 8-20
Statements of Income and Reinvested Earnings (unaudited) for
three months ended March 31, 1997 and 1996 21
Statements of Income and Reinvested Earnings (unaudited) for
the three and six months ended June 30, 1997 and 1996 22
Balance Sheets (unaudited) at March 31, 1997 and June 30, 1997 23-24
Statements of Cash Flows (unaudited) for the three months ended
March 31, 1997 and 1996, and six months ended June 30, 1997 and 1996 25
Notes to Financial Statements (unaudited) 26
</TABLE>
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Share Owner and Board of Directors of
New England Telephone and Telegraph Company:
We have audited the accompanying balance sheets of New England Telephone and
Telegraph Company ("the Company") as of December 31, 1996 and 1995, and the
related statements of income and reinvested earnings and cash flows for each of
the three years in the period ended December 31, 1996. The financial statements
give retroactive effect to the merger of Bell Atlantic Corporation and NYNEX
Corporation (the Company's parent company) on August 14, 1997, which has been
accounted for as a pooling-of-interests, as described in Note U to the financial
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note C to the financial statements, during the first quarter of
1996, the Company changed its method of recognizing directory publishing
revenues and production expenses effective January 1, 1996. Additionally, 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."
Coopers & Lybrand L.L.P.
New York, New York
February 7, 1997, except as to the information presented in Note U, for which
the date is August 14, 1997
2
<PAGE>
New England Telephone and Telegraph Company
Supplement to Management's Discussion and Analysis of Results of Operations
- ---------------------------------------------------------------------------
This supplement should be used in conjunction with Item 7, Management's
Discussion and Analysis of Results of Operations, filed in New England Telephone
and Telegraph Company's (the Company) 1996 Annual Report on Form 10-K.
The Company is a wholly owned subsidiary of NYNEX Corporation (NYNEX). On August
14, 1997, Bell Atlantic Corporation (Bell Atlantic) and NYNEX completed a merger
of equals under a definitive merger agreement entered into on April 21, 1996 and
amended on July 2, 1996. Under the terms of the amended agreement, NYNEX became
a wholly owned subsidiary of Bell Atlantic. The merger has been accounted for as
a pooling of interests.
The financial statements of the Company have been restated for certain
reclassifications in presentation and certain retroactive adjustments to conform
the accounting methodologies of Bell Atlantic and NYNEX as a result of the
merger (see Note U of the Notes to Financial Statements). The conforming
adjustments are primarily for the immediate recognition of the transition
benefit obligation for postretirement benefits other than pensions in accordance
with Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" as if the merger had occurred
as of the beginning of the earliest period presented. In its historical
financial statements, the Company had amortized the transition benefit
obligation over a twenty year period. The tables below present the conforming
adjustments and reclassifications recorded in the income statement for each of
the three years in the period ended December 31, 1996.
<TABLE>
<CAPTION>
(Dollars in Millions) Historical Conforming Conforming Restated
For the year ended December 31, 1996 Adjustments Reclassifications 1996
- ------------------------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $4,547.0 $ $ .1 $4,547.1
Operating expenses 3,339.9 (24.6) 17.0 3,332.3
---------------------------------------------------------------------
Operating income 1,207.1 24.6 (16.9) 1,214.8
Other income and (expense) - net (7.3) 16.9 9.6
Interest expense 142.1 142.1
Income taxes 403.2 9.6 412.8
---------------------------------------------------------------------
Income from continuing operations 654.5 15.0 - 669.5
Cumulative effect of change in accounting principle
Directory publishing income, net of tax 55.2 55.2
----------------------------------------------------------------------
Net income $ 709.7 $ 15.0 $ - $724.7
======================================================================
<CAPTION>
Historical Conforming Conforming Restated
For the year ended December 31, 1995 Adjustments Reclassifications 1995
- ------------------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $4,313.8 $ $ $4,313.8
Operating expenses 3,353.2 (19.4) 11.8 3,345.6
-------------------------------------------------------------------
Operating income 960.6 19.4 (11.8) 968.2
Other income and (expense) - net 11.3 11.8 23.1
Interest expense 153.9 153.9
Income taxes 312.5 7.5 320.0
---------------------------------------------------------------------
Income from continuing operations 505.5 11.9 - 517.4
Extraordinary item
Discontinuance of regulatory accounting
principles, net of tax (627.8) (627.8)
-----------------------------------------------------------------------
Net income (loss) $(122.3) $ 11.9 $ - $ (110.4)
======================================================================
<CAPTION>
Historical Conforming Conforming Restated
For the year ended December 31, 1994 Adjustments Reclassifications 1994
- ------------------------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $4,202.2 $ $ $4,202.2
Operating expenses 3,309.5 (18.8) 13.3 3,304.0
---------------------------------------------------------------------
Operating income 892.7 18.8 (13.3) 898.2
Other income and (expense) - net 12.8 13.3 26.1
Interest expense 163.0 163.0
Income taxes 268.2 7.3 275.5
---------------------------------------------------------------------
Net income $ 474.3 $ 11.5 $ - $485.8
====================================================================
</TABLE>
3
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Dollars in Millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES (including $240.5, $219.1,
and $208.0 from affiliates) ............................ $4,547.1 $4,313.8 $4,202.2
----------- ---------- ---------
OPERATING EXPENSES
Employee costs, including benefits and taxes .......... 1,087.4 1,158.0 1,204.0
Depreciation and amortization ......................... 912.8 903.9 872.0
Taxes other than income ............................... 132.4 128.9 107.1
Other (including $754.7, $736.6,
and $598.5 to affiliates) ........................ 1,199.7 1,154.8 1,120.9
----------- ---------- ---------
3,332.3 3,345.6 3,304.0
----------- ---------- ---------
OPERATING INCOME ........................................... 1,214.8 968.2 898.2
OTHER INCOME, NET (including $9.6, $12.2,
and $11.9 from affiliate).............................. 9.6 23.1 26.1
INTEREST EXPENSE (including $3.4, $1.1,
and $5.9 to affiliate) ................................ 142.1 153.9 163.0
----------- ---------- ---------
Income Before Provision for Income Taxes, Extraordinary
Item, and Cumulative Effect of Change in
Accounting Principle................................ 1,082.3 837.4 761.3
PROVISION FOR INCOME TAXES ................................. 412.8 320.0 275.5
----------- ---------- ---------
Income Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle .............. 669.5 517.4 485.8
EXTRAORDINARY ITEM
Discontinuation of Regulatory Accounting
Principles, Net of Tax ............................. --- (627.8) ---
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax ...................... 55.2 --- ---
----------- ---------- ---------
NET INCOME (LOSS)........................................... $ 724.7 $ (110.4) $ 485.8
=========== ========== =========
REINVESTED EARNINGS
At beginning of period ................................ $ .1 $ 491.7 $ 430.2
Add: net income (loss)................................ 724.7 (110.4) 485.8
other........................................ --- 61.5 ---
----------- ---------- ---------
724.8 442.8 916.0
Deduct: dividends .................................... 466.9 442.7 424.3
----------- ---------- ---------
At end of period ...................................... $ 257.9 $ .1 $ 491.7
=========== ========== =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
New England Telephone and Telegraph Company
BALANCE SHEETS
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash .................................................................. $ 14.2 $ 8.4
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $47.4 and $49.7 ................................. 912.7 884.0
Affiliates .......................................................... 98.0 28.9
Material and supplies ................................................. 99.5 53.7
Prepaid expenses ...................................................... 52.0 31.4
Deferred income taxes ................................................. 52.6 106.2
Other ................................................................. 73.9 86.3
-------------- --------------
1,302.9 1,198.9
-------------- --------------
PLANT, PROPERTY AND EQUIPMENT ......................................... 12,720.8 12,495.6
Less accumulated depreciation ......................................... 6,884.8 6,665.5
-------------- --------------
5,836.0 5,830.1
-------------- --------------
OTHER ASSETS .......................................................... 176.5 150.8
-------------- --------------
TOTAL ASSETS .......................................................... $ 7,315.4 $ 7,179.8
============== ==============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
New England Telephone and Telegraph Company
BALANCE SHEETS
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate ........................................... $ --- $ 37.1
Other ............................................................... 175.7 350.5
Accounts payable and accrued liabilities:
Affiliates .......................................................... 544.1 645.4
Other ............................................................... 549.0 535.7
Other liabilities ..................................................... 105.6 140.4
------------- ------------
1,374.4 1,709.1
------------- ------------
LONG-TERM DEBT ........................................................ 1,996.4 1,822.0
------------- ------------
EMPLOYEE BENEFIT OBLIGATIONS .......................................... 1,562.3 1,461.1
------------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ................................................. 5.6 42.3
Unamortized investment tax credits .................................... 59.0 67.9
Other ................................................................. 32.2 49.7
------------- ------------
96.8 159.9
------------- ------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value ............................. 1.0 1.0
Additional paid-in capital............................................. 2,026.6 2,026.6
Reinvested earnings ................................................... 257.9 .1
------------- ------------
2,285.5 2,027.7
------------- ------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.......................... $ 7,315.4 $ 7,179.8
============= ============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF CASH FLOWS
(Dollars in Millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................................... $ 724.7 $ (110.4) $ 485.8
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.................................... 912.8 903.9 872.0
Extraordinary items, net of tax.................................. --- 627.8 ---
Cumulative effect of change in accounting
principle, net of tax......................................... (55.2) --- ---
Other items, net................................................. 13.2 11.3 (19.9)
Changes in certain assets and liabilities:
Accounts receivable........................................... 33.8 (113.2) (72.2)
Material and supplies......................................... (45.8) (4.2) 8.1
Other assets.................................................. (5.6) (41.5) 79.3
Accounts payable and accrued liabilities...................... (82.2) 115.0 46.5
Deferred income taxes, net.................................... (47.1) (30.4) (57.6)
Unamortized investment tax credits............................ (8.8) (11.6) (23.5)
Employee benefit obligations.................................. 101.2 131.0 167.1
Other liabilities............................................. (52.3) (163.9) (61.5)
------------ ------------ ----------
Net cash provided by operating activities.............................. 1,488.7 1,313.8 1,424.1
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment ............................ (905.9) (885.8) (876.9)
Net change in note receivable from affiliate........................... (39.9) --- ---
Other, net............................................................. (26.2) (38.4) (23.7)
------------ ------------ ----------
Net cash used in investing activities ................................. (972.0) (924.2) (900.6)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in note payable to affiliate................................ (37.1) (18.0) (104.3)
Principal repayments of borrowings and capital lease obligations ...... (.5) (.5) (.9)
Dividends paid ........................................................ (460.8) (438.2) (421.6)
Net change in outstanding checks drawn
on controlled disbursement accounts .............................. (12.5) 66.4 1.2
------------ ------------ ----------
Net cash used in financing activities ................................. (510.9) (390.3) (525.6)
------------ ------------ ----------
NET CHANGE IN CASH .................................................... 5.8 (.7) (2.1)
CASH, BEGINNING OF YEAR................................................ 8.4 9.1 11.2
------------ ------------ ----------
CASH, END OF YEAR...................................................... $ 14.2 $ 8.4 $ 9.1
============ ============ ==========
</TABLE>
See accompanying notes to financial statements.
7
<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 the release of landmark federal legislation that has removed historic
regulatory barriers and increased competition. 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, entering
into domestic strategic alliances and 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 1996, 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, cable television, and information and entertainment
services.
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.
These financial statements include certain reclassifications in
presentation and certain retroactive adjustments to conform accounting
methodologies as a result of the merger of Bell Atlantic Corporation ("Bell
Atlantic") and NYNEX (see Note U). 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. Due to the uncertainty
inherent in making estimates, actual results could differ from those estimates.
In the first quarter of 1996, NYNEX Information Resources Company
("Information Resources"), a wholly owned subsidiary of NYNEX, changed the
recognition of its directory publishing revenue and production expenses from the
"amortized" method to the "point of publication" method. The initial effect of
the change to the point of publication method is reported as a cumulative effect
of a change in accounting principle (see Note C).
In the second quarter of 1995, the Company discontinued using GAAP
applicable to regulated entities (see Note B).
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.
8
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
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 using the concept of
"remaining life." 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.
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.
Income Taxes
NYNEX and its subsidiaries, including the Company, file a consolidated
Federal income tax return. The Company's provision for federal income taxes
currently payable is allocated in accordance with its contribution to the
consolidated group's taxable income and tax credits.
Deferred tax assets and liabilities are 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 was 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.
9
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
Anticipated Effects of Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" and No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125"
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
("Statement No. 125"). Subsequently, in December 1996, the FASB issued an
amendment to Statement No. 125, Statement of Financial Accounting Standards No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" ("Statement No. 127"). NYNEX is required to adopt Statement No. 125 for
transactions occurring after December 31, 1996; however, Statement No. 127
defers certain provisions of Statement No. 125 until after December 31, 1997.
Statement No. 125 establishes the criteria to evaluate whether a transfer of
financial assets should be accounted for as a pledge of collateral in a secured
borrowing or as a sale. It also provides guidance on the recognition and
measurement of servicing assets and liabilities and on the extinguishments of
liabilities. Statement No. 127 defers the specific provisions of Statement No.
125 which address secured borrowings and collateral as well as the accounting
for transfers of financial assets for repurchase agreements, dollar roll,
securities lending, and similar transactions.
Management is currently evaluating the financial impact of these
accounting standards; the effect of Statement No. 125 and Statement No. 127 on
the Company's results of operations and financial position has not yet been
determined.
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
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.
10
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
The major elements of the 1995 write-off of non-plant regulatory net
assets were as follows:
<TABLE>
<CAPTION>
(In Millions) Pretax After-tax
------------- ------ ---------
<S> <C> <C>
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
====== ======
</TABLE>
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 Statement No. 71 for the most significantly affected categories of telephone
plant and equipment is as follows:
<TABLE>
<CAPTION>
Composite
Regulator-Approved Economic
Average lives (in years) Asset Lives Asset Lives
------------------------ ------------------------- -----------
<S> <C> <C>
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
</TABLE>
The application of Statement No. 101 does not change the Company's
accounting and reporting for regulatory purposes.
C CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1996, Information Resources changed the
recognition of its directory publishing income from the "amortized" method to
the "point of publication" method. Under the point of publication method,
revenues and production expenses are recognized when the directories are
published rather than over the lives of the directories (generally one year) as
was the case under the amortized method. NYNEX and the Company believe the
change to the point of publication method is preferable because it is the method
that is generally followed by publishing companies and reflects more precisely
the operations of the business. The Company's portion of the initial effect of
the change to the point of publication method was reported as a cumulative
effect of a change in accounting principle which resulted in a one-time,
non-cash gain of $91.7 million ($55.2 million after-tax) in the first quarter of
1996. The application of the point of publication method for the year ended 1996
did not have a material effect on operating results, and would not have been
material had it been applied in 1995.
11
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
D INCOME TAXES
<TABLE>
<CAPTION>
The components of income tax expense are as follows:
Years Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996* 1995** 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $398.1 $305.7 $297.0
Deferred - net (44.9) (25.9) (52.1)
Deferred tax credits - net (8.8) (11.6) (23.5)
------- ------- -------
344.4 268.2 221.4
------- ------- -------
State:
Current 70.6 56.3 59.7
Deferred - net (2.2) (4.5) (5.6)
------- ------- -------
68.4 51.8 54.1
------- ------- -------
Total $412.8 $320.0 $275.5
======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Does not include the deferred tax expense of $36.6 million associated with
the Cumulative effect of change in accounting for directory publishing income.
** Does not include the deferred tax benefit of $414.2 million associated with
the Extraordinary item for the discontinuance of regulatory accounting
principles.
A reconciliation between the federal income tax expense computed at the
statutory rate and the Company's effective tax expense is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense computed at the
statutory rate $378.8 $293.0 $266.4
a. Amortization of investment tax credits (8.8) (9.7) (23.5)
b. Amortization of excess deferred federal
taxes due to change in the tax rates --- (3.0) (18.1)
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
d. Allowance for funds used during
construction, which is excluded from
taxable income, net of applicable
depreciation --- (.2) (.1)
e. State income taxes, net of federal tax
benefit 44.7 33.8 35.2
f. Other items - net (1.9) 4.0 8.2
-------- --------- --------
Income tax expense $412.8 $320.0 $275.5
======== ========= ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
12
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
The components of current and non-current deferred tax assets and liabilities at
December 31, 1996 and 1995 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Employee benefits $ 685.2 $660.6
Restructuring charges 36.1 54.5
Unamortized ITC 20.7 23.8
Other 45.9 27.8
------ ------
787.9 766.7
------ ------
Deferred tax liabilities
Depreciation and amortization 615.9 647.1
Employee benefits 48.9 48.9
Other 47.7 6.7
------ ------
712.5 702.7
------ ------
Net deferred tax assets $ 75.4 $ 64.0
====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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).
E 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 associates (employees previously referred to as nonmanagement) 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 1996, 1995 and 1994 was $68.4, $78.9 and
$87.0 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 1996, 1995 and 1994 includes the
effect of plan amendments and changes in actuarial assumptions for the discount
rate and future compensation levels. At December 31, 1996 and 1995, the Company
recorded approximately $19.1 and $403.0 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, 1996 and 1995 include a discount rate of 7.75% and 7.25%,
respectively, and an increase in future compensation levels in both years of
4.1% for management employees, and 4.0% for associates. The expected long-term
rate of return on pension plan assets used to calculate pension expense was 8.9%
in 1996, 1995 and 1994. 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 1996, 1995 and 1994, the Company incurred additional
pension costs of $135.9, $143.0 and $145.9 million, respectively, partially
offset by the 1993 severance reserves which were transferred to the pension
liability. In 1996, this cost was comprised of a charge for special termination
benefits of $185.0 million and a curtailment gain of $49.1 million, partially
offset by 1993 severance reserves of $31.3 million. 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. 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.
13
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
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. Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," ("Statement No. 106") requires a comparison of the actuarial present
value of projected postretirement benefit obligations with the fair value of
plan assets, the disclosure of the components of net periodic postretirement
benefit costs, a reconciliation of the funded status of the plan with amounts
recorded on the balance sheets and the effect of a one-percentage-point increase
in the assumed health care cost trend rates for each future year on net periodic
postretirement benefit cost and the accumulated postretirement benefit
obligation. The Company participates in multi-employer plans and therefore, such
disclosures are not presented for the Company because the structure of the plans
does not provide for the determination of the information on an individual
participating company basis.
As a result of the merger of Bell Atlantic and NYNEX, the Company recorded
conforming adjustments for the immediate recognition of the transition benefit
obligation as if the merger had occurred as of the beginning of the earliest
period presented. In its historical financial statements, the Company amortized
the transition benefit obligation over a twenty 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 1996, 1995 and 1994 for the Company was $109.1, $128.4 and $131.5 million,
respectively. The postretirement benefit cost for 1996 includes pretax credits
to medical expense of $31.5 million for plan amendments primarily intended to
reduce company costs under managed care options.
The actuarial assumptions used to determine the 1996 and 1995 obligation
for postretirement benefit plans under Statement No. 106 are as follows:
discount rate of 7.75% and 7.25%, 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% in both years; medical cost trend rate of 10.6% and
11.5% in 1996 and 1995, respectively, grading down to 4.5% in 2008; and dental
cost trend rate of 3.5% and 4.0% in 1996 and 1995, respectively, grading down to
3.0% in 2002.
As a result of work force reductions, the Company recorded an additional
$150.5 million of postretirement benefit cost in 1993 accounted for as a
curtailment. In 1996, 1995 and 1994 under work force reduction retirement
incentives, the Company incurred additional postretirement benefit costs of
$68.1, $33.6 and $75.6 million, respectively. In 1996, this cost was comprised
of a curtailment loss of $49.6 million and a charge for special termination
benefits of $18.5 million, partially offset by $44.3 million accrued for in
1993. In 1995, this cost was comprised of a curtailment loss of $12.1 million
and a charge for special termination benefits of $21.5 million, partially offset
by $15.0 million accrued for in 1993. In 1994, this cost was comprised of a
curtailment loss of $57.2 million and a charge for special termination benefits
of $18.4 million, partially offset by $21.0 million accrued for in 1993.
NYNEX established two separate Voluntary Employees' Beneficiary Association
Trusts ("VEBA Trusts"), one for management and the other for associates, 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. An amount equal to the
transferred asset was then contributed to the VEBA Trusts. No additional
contributions were made in 1996, 1995 and 1994. 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. In
November 1996, NYNEX filed tariff revisions to reduce its interstate access
charges by $21 million because it had completed the recovery of exogenous costs
resulting from the implementation of Statement No. 106. With respect to
intrastate treatment, the Company eliminated remaining deferred pension costs
upon the discontinuance of Statement No. 71.
14
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
F STOCK OPTIONS
NYNEX has stock option plans for key management employees under which
options to purchase NYNEX common stock are granted at a price equal to or
greater than the market price of the stock at the date of grant. The 1990 Stock
Option Plan, which expired on December 31, 1994, permitted the grant of options
through December 1994 to purchase up to four million shares. In January 1995,
NYNEX established the 1995 Stock Option Plan, that permits the grant of options
no later than December 31, 1999 to purchase up to 20 million shares of common
stock. One-third of the options could be exercised one year from the grant date,
with another one-third exercisable two years from the grant date, and the
remaining one-third exercisable three years from the grant date. These options
expire ten years from the grant date.
Both the 1990 and the 1995 Stock Option Plans for key management employees
allow for the granting of stock appreciation rights ("SARs") in tandem with
options granted. Upon exercise of a SAR, the holder may receive shares of common
stock or cash equal to the excess of the market price of the common stock at the
exercise date over the option price. SARs may be exercised in lieu of the
underlying option only when those options become exercisable. There are no
outstanding SARS as of December 31, 1995 and 1996.
Effective March 31, 1992, NYNEX established stock option plans for
associates and for management employees other than those eligible to participate
in the 1990 and 1995 Stock Option Plans ("Take Stock in NYNEX"). Employees were
granted options, with the number of options varying according to employee level,
to purchase a fixed number of shares of NYNEX common stock at the market price
of the stock on the grant date. Fifty percent of the options could be exercised
one year from the grant date, with the remaining fifty percent exercisable two
years from the grant date. These options expire ten years from the grant date.
In October 1994 and January 1996, employees were granted additional options
under these plans.
NYNEX has adopted the disclosure-only provisions of Statement No. 123,
"Accounting for Stock-Based Compensation" ("Statement No. 123"), but applies
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plans. Pro forma
results, assuming NYNEX had elected to recognize compensation costs for the 1995
Stock Option Plan and the Take Stock in NYNEX plans based on the fair value at
the grant dates for awards under those plans, consistent with the method
prescribed by Statement No. 123 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------
1996 1995
---------------------- ----------------------
(In Millions) Pro forma As Reported Pro forma As Reported
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income (Loss) $717.1 $724.7 $(110.9) $(110.4)
- --------------------------------------------------------------------------------
</TABLE>
The fair value of NYNEX stock options used to compute net income is the
estimated present value at the grant date using the Black Scholes option-pricing
model with the following weighted average assumptions for 1996 and 1995:
Dividend yield of 4.66% for 1996 and 6.50% for 1995; expected volatility of
15.3% for 1996 and 1995; a risk free interest rate of 5.42% for 1996 and 7.63%
for 1995 and an expected holding period of five years for both 1996 and 1995.
15
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
G TELEPHONE PLANT - NET
<TABLE>
<CAPTION>
The components of Telephone plant - net are as follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Buildings $ 875.0 $ 855.7
Telephone plant and equipment 11,192.0 11,030.1
Furniture and other equipment 33.9 41.9
Other 359.3 340.8
--------- ---------
Total depreciable telephone plant 12,460.2 12,268.5
Less: accumulated depreciation 6,884.8 6,665.5
--------- ---------
5,575.4 5,603.0
Land 36.7 36.6
Plant under construction and other 223.9 190.5
--------- ---------
Total Telephone plant - net $ 5,836.0 $ 5,830.1
========= =========
- --------------------------------------------------------------------------------
</TABLE>
The discontinued application of Statement No. 71 resulted in a net decrease
to telephone plant and equipment of $790.1 million in 1995, primarily through an
increase in accumulated depreciation (see Note B).
H LONG-TERM DEBT
<TABLE>
<CAPTION>
Interest rates and maturities on long-term debt outstanding are as follows:
- --------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------
(In Millions) Interest Rates Maturities 1996 1995
- --------------------------------------------------------------------------------------------------------
<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 699.0 350.0
Notes 5-1/20% - 8-5/8% 1998-2003 625.0 800.0
Unamortized discount - net (8.9) (9.8)
--------- ---------
1,995.1 1,820.2
Long-term capital lease obligations 1.3 1.8
--------- ---------
Total Long-term debt $ 1,996.4 $ 1,822.0
========= =========
- --------------------------------------------------------------------------------------------------------
</TABLE>
In 1998, $100 million 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, 1996, the Company had $500 million of unissued, unsecured
debt securities registered with the Securities and Exchange Commission.
16
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
I DEBT MATURING WITHIN ONE YEAR
<TABLE>
<CAPTION>
Debt maturing within one year and related weighted average interest rates are as follows:
- -----------------------------------------------------------------------------------------------------------------
Weighted Average
Interest Rates
- -----------------------------------------------------------------------------------------------------------------
(In Millions) December 31, December 31,
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Note payable to affiliate $ - $ 37.1 5.43% 5.93%
Long-term debt maturing within one year 175.0 350.0
Other .7 .5
------- -------
Total debt maturing within one year $ 175.7 $ 387.6
======= =======
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
$175.0 million of the Company's long term Notes due, on December 15, 1997,
has been reclassified from Long-term debt at December 31, 1996.
$350.0 million of the Company's Debentures were repayable on November 15,
1996, in whole or in part, at the option of the holder, and as such were
classified as Short-term debt at December 31, 1995. Bond holders redeemed $1.0
million of the Debentures in November 1996 and the remainder was reclassified to
Long-term debt.
Interest expense on advances from NYNEX was $3.4, $1.1 and $5.9 million in
1996, 1995 and 1994, respectively.
J 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 have a
term of five years with a commitment of approximately $550 million, of which
approximately $450 million remains at December 31, 1996.
In October 1996, the Telephone Companies entered into contracts with a
supplier for the deployment of digital loop fiber transport equipment for
approximately one million new fiber-optic lines. The contracts are for a fifteen
year plan with a total price not to exceed $170 million. As of December 31,
1996, no purchases had been made under these contracts.
K LEASE COMMITMENTS
The Company leases certain facilities and equipment used in its operations.
Rental expense was $82.3, $84.0 and $84.8 million for 1996, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
At December 31, 1996, the minimum lease commitments under noncancelable leases for the periods shown are as follows:
- ------------------------------------------------------------------------------------------------------------------------
(In Millions) Operating Capital
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 50.9 $ .9
1998 36.3 .9
1999 33.7 .7
2000 32.1 .6
2001 31.8 --
Thereafter 246.5 --
------- -----
Total minimum lease payments $ 431.3 3.1
=======
Less: executory costs 1.0
-----
Net minimum lease payments 2.1
Less: interest .3
-----
Present value of net minimum lease payments $ 1.8
=====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
L TRANSACTIONS WITH AT&T CORP.
In 1996, 1995 and 1994, AT&T Corp. ("AT&T") provided approximately 13%, 14%
and 14%, respectively, of the Company's total operating revenues, primarily
Network access revenues and Other revenues from billing and collection services
performed under contract by the Company for AT&T. In connection with such
services, the Company purchases the related receivables with recourse, up to a
contractual limit.
M 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. For 1996, 1995 and 1994, the Company recorded allocated
costs of $20.3, $20.1 and $21.2 million, respectively, in connection with these
services. The Company also participates in compensation plans utilizing NYNEX
stock.
Telesector Resources performs marketing, legal and 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 1996, 1995
and 1994, the Company recorded charges from Telesector Resources of $710.9,
$657.8 and $712.5 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 1996, 1995 and 1994 were
approximately $253.6, $226.9 and $242.7 million, respectively. Telesector
Resources acts as a purchasing agent for the Company for directly shipped
materials and supplies. During 1996, 1995 and 1994, total agency purchases by
Telesector Resources amounted to $46.1, $50.6 and $132.1 million, respectively.
In addition, in 1996, 1995 and 1994, approximately $8.9, $32.5 and $35.4
million, respectively, of restructuring charges were allocated to the Company
from Telesector Resources, primarily related to its force reduction and re-
engineering programs. In 1996, the Company, New York Telephone and NYNEX
transferred approximately 330, 430 and 30 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.
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 1996, 1995 and 1994, the Company
recorded charges of $22.9, $30.7 and $39.8 million, respectively, for services
provided by Bellcore.
In November 1996, NYNEX and the other regional holding companies signed
definitive agreements to sell Bellcore to Science Applications International
Corporation. The sale of Bellcore was completed in November 1997. The Company
expects to record a small gain as a result of this sale.
The Company has an agreement with Information Resources pursuant to which
Information Resources pays a fee to the Company for the use of the Company's
name in soliciting directory advertising and in publishing and distributing
directories. For 1996, 1995 and 1994, licensing fees, included in Other
revenues, amounted to $190.9, $171.3 and $167.8 million, respectively. Since
1991, Information Resources has made payments to the Company of all of
Information Resource's earnings related to publishing directories in Maine,
Massachusetts, New Hampshire, Rhode Island and Vermont, in excess of a regulated
return.
18
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
N TAXES OTHER THAN INCOME
<TABLE>
<CAPTION>
Taxes other than income consist of:
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property $ 99.9 $ 96.6 $ 78.1
Gross receipts 23.0 21.7 25.5
Other 9.5 10.6 3.5
------- ------- -------
Total $ 132.4 $ 128.9 $ 107.1
======= ======= =======
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
O REVENUES SUBJECT TO POSSIBLE REFUND
Several federal regulatory matters may possibly require the Company to
refund of a portion of the revenues collected in the current and prior periods.
As of December 31, 1996, the aggregate amount of such revenues that was
estimated to be subject to possible refund was approximately $35 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.
P LITIGATION AND OTHER CONTINGENCIES
Various legal actions and regulatory proceedings are pending to which the
Company is a party. The Company has established reserves for liabilities in
connection with regulatory and legal matters which it currently deems to be
probable and estimable. The Company does not expect that the ultimate resolution
of these matters in future periods will have a material effect on the Company's
financial position, but it could have a material effect on results of
operations.
Q SUPPLEMENTAL CASH FLOW INFORMATION
The following information is provided in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows":
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax payments $ 412.8 $ 379.6 $ 279.1
Interest payments * $ 152.1 $ 157.1 $ 160.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Amounts shown are net of capitalized interest of $12.5, $10.8 and $14.6
million in 1996, 1995 and 1994, respectively.
19
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
R FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1996 and 1995. 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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(In Millions) December 31,
- ---------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Long-term debt:
Carrying amount $ 1,995.1 $ 1,820.2
Fair value $ 2,000.1 $ 1,861.2
- ---------------------------------------------------------------------------------------
</TABLE>
S BUSINESS RESTRUCTURING
In 1996, 1995 and 1994, $133.2, $174.6 and $174.4 million, respectively, of
pretax retirement incentive charges were recorded. These charges were included
in other operating expenses in the Statements of Income. These charges included
amounts allocated to the Company from Telesector Resources (see Note M).
T SHAREOWNER'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. In 1995, $61.5 million was reallocated from Additional Paid-in Capital
to Reinvested Earnings to cover dividend payments.
U SUBSEQUENT EVENT - BELL ATLANTIC - NYNEX MERGER
On August 14, 1997, Bell Atlantic and NYNEX completed a merger of equals
under a definitive merger agreement entered into on April 21, 1996 and amended
on July 2, 1996. The stockholders of each company approved the merger at special
meetings held in November 1996. Under the terms of the amended agreement, NYNEX
became a wholly owned subsidiary of Bell Atlantic. The merger has been accounted
for as a pooling of interests.
As a result of conforming the accounting methodologies of Bell Atlantic and
NYNEX, the Company decreased Reinvested Earnings by a net $499.7 million
primarily for the immediate recognition of the transition benefit obligation for
postretirement benefits other than pensions in accordance with Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" as if the merger had occurred as of
the beginning of the earliest period presented. In its historical financial
statements, the Company had amortized the transition benefit obligation over a
twenty year period. As a result of the conforming adjustments, net income
increased by $15.0, $11.9 and $11.5 million for years ended December 31, 1996,
1995, and 1994, respectively.
20
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING REVENUES (including $66.1 and $82.3 from affiliates).............. $ 1,159.2 $ 1,133.4
--------- ---------
OPERATING EXPENSES
Employee costs, including benefits and taxes .......................... 349.6 316.7
Depreciation and amortization.......................................... 218.3 233.6
Taxes other than income................................................ 36.4 35.0
Other (including $228.6 and $197.1 to affiliates)...................... 340.4 310.9
--------- ---------
944.7 896.2
--------- ---------
OPERATING INCOME............................................................ 214.5 237.2
OTHER INCOME, NET (including $2.3 and $2.8 from affiliates)................ 2.2 2.8
INTEREST EXPENSE (including $0 and $.6 to affiliates)....................... 34.9 35.8
--------- ---------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle ................... 181.8 204.2
PROVISION FOR INCOME TAXES ................................................. 70.3 78.5
--------- ---------
Income Before Cumulative Effect of Change
in Accounting Principle ............................................... 111.5 125.7
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax ...................................... --- 55.2
--------- ---------
NET INCOME.................................................................. $ 111.5 $ 180.9
========= =========
REINVESTED EARNINGS
At beginning of period ................................................ $ 257.9 $ .1
Add: net income....................................................... 111.5 180.9
Deduct: dividends...................................................... (187.4) (116.6)
--------- ---------
At end of period ...................................................... $ 182.0 $ 64.4
========= =========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ----------------------
1997 1996 1997 1996
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $60.2, $45.8,
$126.3 and $128.1 from affiliates)..................... $ 1,167.7 $ 1,113.8 $ 2,326.9 $ 2,247.2
--------- --------- --------- ---------
OPERATING EXPENSES
Employee costs, including benefits and taxes .......... 248.5 253.0 598.1 569.7
Depreciation and amortization.......................... 222.8 240.4 441.1 474.0
Taxes other than income................................ 35.9 34.5 72.3 69.5
Other (including $207.2, $204.4, $435.8 and
$401.5 to affiliates)............................... 328.7 310.3 669.1 621.2
--------- --------- --------- ---------
835.9 838.2 1,780.6 1,734.4
--------- --------- --------- ---------
OPERATING INCOME............................................ 331.8 275.6 546.3 512.8
OTHER INCOME, NET (including $3.2, $2.7, $5.5 and
$5.5 from affiliates)................................... 13.7 2.7 15.9 5.5
INTEREST EXPENSE (including $.3, $1.0, $.3 and
$1.6 to affiliates)..................................... 34.7 35.2 69.6 71.0
--------- --------- --------- ---------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle ... 310.8 243.1 492.6 447.3
PROVISION FOR INCOME TAXES ................................. 120.6 93.9 190.9 172.4
--------- --------- --------- ---------
Income Before Cumulative Effect of Change
in Accounting Principle ............................... 190.2 149.2 301.7 274.9
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax ...................... --- --- --- 55.2
--------- --------- --------- ---------
NET INCOME.................................................. $ 190.2 $ 149.2 $ 301.7 $ 330.1
========= ========= ========= =========
REINVESTED EARNINGS
At beginning of period ................................ $ 182.0 64.4 $ 257.9 $ .1
Add: net income....................................... 190.2 149.2 301.7 330.1
Deduct: dividends...................................... (187.4) (116.7) (374.8) (233.3)
--------- --------- --------- ---------
At end of period ...................................... $ 184.8 $ 96.9 $ 184.8 $ 96.9
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
New England Telephone and Telegraph Company
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
--------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash .................................................................. $ 15.6 $ 17.0
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $57.0 and $54.3............................ 894.7 884.6
Affiliates ....................................................... 152.1 246.0
Material and supplies ................................................. 113.6 94.3
Prepaid expenses ...................................................... 75.8 63.0
Deferred income taxes ................................................. 34.0 41.4
Other ................................................................. 99.5 93.9
------------ ------------
1,385.3 1,440.2
------------ ------------
PLANT, PROPERTY AND EQUIPMENT ......................................... 13,036.6 12,879.2
Less accumulated depreciation ......................................... 7,189.8 7,048.0
------------ ------------
5,846.8 5,831.2
------------ ------------
OTHER ASSETS .......................................................... 214.8 221.0
------------ ------------
TOTAL ASSETS .......................................................... $ 7,446.9 $ 7,492.4
============ ============
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
New England Telephone and Telegraph Company
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate..................................... $ -- $ --
Other ........................................................ 175.9 175.8
Accounts payable and accrued liabilities:
Affiliates ................................................... 748.8 743.1
Other ........................................................ 460.4 512.8
Other liabilities ................................................. 74.4 67.5
---------- -----------
1,459.5 1,499.2
---------- -----------
LONG-TERM DEBT.................................................... 1,996.5 1,996.4
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS ..................................... 1,689.3 1,695.7
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ............................................ -- --
Unamortized investment tax credits ............................... 55.4 57.2
Other ............................................................ 33.8 34.3
---------- ----------
89.2 91.5
---------- ----------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value....................... 1.0 1.0
Additional paid in capital ....................................... 2,026.6 2,026.6
Reinvested earnings .............................................. 184.8 182.0
---------- ----------
2,212.4 2,209.6
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT .................... $ 7,446.9 $ 7,492.4
========== ==========
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
For the six months ended For the three months ended
------------------------ --------------------------
June 30, June 30, March 31, March 31,
1997 1996 1997 1996
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... $ 764.6 $ 563.1 $ 449.0 $ 494.6
---------- ---------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment ................... (441.3) (410.5) (197.9) (294.2)
Net change in note receivable from affiliate.................. 2.2 -- (93.4) --
Other, net ................................................... 13.2 (13.1) (4.9) (7.7)
---------- ---------- -------- --------
Net cash used in investing activities ........................ (425.9) (423.6) (296.2) (301.9)
---------- ---------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and
capital lease obligations ............................... (.2) (.2) (.1) (.1)
Net change in note payable to affiliate ...................... -- 128.4 -- (35.3)
Dividends paid ............................................... (304.1) (227.4) (116.7) (110.7)
Net change in outstanding checks drawn
on controlled disbursement accounts ..................... (33.0) (42.2) (33.2) (42.7)
---------- ---------- -------- --------
Net cash used in financing activities ........................ (337.3) (141.4) (150.0) (188.8)
---------- ---------- -------- --------
NET CHANGE IN CASH ........................................... 1.4 (1.9) 2.8 3.9
CASH, BEGINNING OF PERIOD .................................... 14.2 8.4 14.2 8.4
---------- ---------- -------- --------
CASH, END OF PERIOD .......................................... $ 15.6 $ 6.5 $ 17.0 $ 12.3
========== ========== ======== ========
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
based upon Securities and Exchange Commission rules that permit reduced
disclosure for interim periods. These financial statements include certain
reclassifications in presentation and certain retroactive adjustments to conform
accounting methodologies as a result of the merger of Bell Atlantic Corporation
and NYNEX Corporation on August 14, 1997. These financial statements reflect all
adjustments (consisting of only normal recurring adjustments) which are
necessary for a fair presentation of results of operations and financial
position for the interim periods shown. The results for the interim periods are
not necessarily indicative of results for the full year. For a more complete
discussion of significant accounting policies and retroactive adjustments, and
certain other information, refer to the financial statements for the year ended
December 31, 1996 included in this report.
2. Litigation and Other Contingencies
Various legal actions and regulatory proceedings are pending to which the
Company is a party. The Company has established reserves for liabilities in
connection with regulatory and legal matters which it currently deems to be
probable and estimable. The Company does not expect that the ultimate resolution
of these matters in future periods will have a material effect on the Company's
financial position, but it could have a material effect on results of
operations.
26
<PAGE>
New England Telephone and Telegraph Company
Item 7. Financial Statements and Exhibits
---------------------------------
(c) Exhibits.
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
27
<PAGE>
New England Telephone and Telegraph Company
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEW ENGLAND TELEPHONE AND
TELEGRAPH COMPANY
By: /s/ Edwin F. Hall
-------------------------
Edwin F. Hall
Controller
Date: December 5, 1997
28
<PAGE>
Exhibit 12
New England Telephone and Telegraph Company
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Years Ended December 31,
Months Ended ------------------------------------------------------------
Sept. 30, 1997 1996* 1995* 1994* 1993* 1992*
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income before provision for income taxes,
extraordinary item, and cumulative effect
of changes in accounting principles.......... $ 687.3 $1,082.3 $ 837.4 $ 761.3 $ 129.0 $ 727.5
Interest expense, including interest on
capital lease obligations.................... 104.0 142.1 153.9 163.0 175.0 189.7
Portion of rent expense representative of the
interest factor.............................. 20.6 27.9 28.4 28.7 28.1 30.3
-------- -------- -------- -------- -------- --------
Earnings, as adjusted.......................... $ 811.9 $1,252.3 $1,019.7 $ 953.0 $ 332.1 $ 947.5
======== ======== ======== ======== ======== ========
Fixed charges:
Interest expense, including interest on
capital lease obligations.................... $ 104.0 $ 142.1 $ 153.9 $ 163.0 $ 175.0 $ 189.7
Portion of rent expense representative of
the interest factor.......................... 20.6 27.9 28.4 28.7 28.1 30.3
Interest capitalized on construction........... 9.6 12.5 -- -- -- --
-------- -------- -------- -------- -------- --------
Fixed Charges.................................. $ 134.2 $ 182.5 $ 182.3 $ 191.7 $ 203.1 $ 220.0
======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges............. 6.05 6.86 5.59 4.97 1.64 4.31
======== ======== ======== ======== ======== ========
</TABLE>
For the purpose of this ratio: (i) earnings have been calculated by adding
interest expense and the estimated interest portion of rentals to income before
the provision for income taxes, extraordinary item and cumulative effect of
change in accounting principle; and (ii) fixed charges are comprised of interest
expense, the estimated interest portion of rentals and interest capitalized on
construction.
* Revised to reflect certain reclassifications in presentation and certain
retroactive adjustments to conform the accounting methodologies of Bell Atlantic
and NYNEX as a result of the merger.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
New England Telephone and Telegraph Company on Form S-3 (File Nos. 33-49533 and
33-50631) of our report dated February 7, 1997, except as to the information
presented in Note U, for which the date is August 14, 1997, on our audits of
the financial statements of New England Telephone and Telegraph Company as of
December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995, and
1994, which report is included in this Current Report on Form 8-K.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
December 5, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE BALANCE SHEET
AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 960
<ALLOWANCES> 47
<INVENTORY> 100
<CURRENT-ASSETS> 1,303
<PP&E> 12,721
<DEPRECIATION> 6,885
<TOTAL-ASSETS> 7,315
<CURRENT-LIABILITIES> 1,374
<BONDS> 1,996
0
0
<COMMON> 1
<OTHER-SE> 2,285
<TOTAL-LIABILITY-AND-EQUITY> 7,315
<SALES> 0
<TOTAL-REVENUES> 4,547
<CGS> 0
<TOTAL-COSTS> 3,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> 1,082
<INCOME-TAX> 412
<INCOME-CONTINUING> 670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 55
<NET-INCOME> 725
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
