FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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(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, 1996
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
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New England Telephone and Telegraph Company
I.R.S. Employer
A New York Corporation Identification No. 04-1664340
125 High Street, Boston, Massachusetts 02110
Telephone Number (617) 743-9800
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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. [ ]*
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* Not applicable
DOCUMENTS INCORPORATED BY REFERENCE:
None.
<PAGE>
Attachment
Title of each class
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<TABLE>
<CAPTION>
DEBENTURES:
<C> <C>
$ 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
</TABLE>
<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
Item Page
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<S> <C>
1. Business (Abbreviated pursuant to General Instruction J(2)) ............................... 1
2. Properties ................................................................................ 7
3. Legal Proceedings ......................................................................... 7
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 ................................................................... 8
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)) ...... 9
8. Financial Statements and Supplementary Data:
Report of Management ..................................................................... 17
Report of Independent Accountants ........................................................ 18
Statements:
Statements of Income and Retained Earnings for each of the Three Years in the Period
Ended December 31, 1996 ................................................................ 19
Balance Sheets as of December 31, 1996 and 1995 ......................................... 20
Statements of Cash Flows for each of the Three Years in the Period Ended
December 31, 1996 ...................................................................... 22
Notes to Financial Statements ........................................................... 23
Supplementary Information:
Quarterly Financial Information (Unaudited) ............................................. 36
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 36
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 ............................ 37
</TABLE>
<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 Regulatory Environment - State below), and interstate
communications services are under the jurisdiction of the Federal Communications
Commission ("FCC") (see Regulatory Environment - Federal below). In addition,
state and federal regulators review various transactions between NYNEX
affiliates.
Prior to the enactment of the Telecommunications Act of 1996 (the "Act"), the
operations of NYNEX and its subsidiaries were 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 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
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 the LEC operating therein may provide
telecommunications services. Exchange telecommunications service may include
local and long distance service within a LATA. 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 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 1996, less than 1% of the Company's operating revenues was
derived from such billing and collection services. In 1996, the Company and AT&T
signed a contract extending the Company's role as an AT&T long distance billing
and collection agent through December 31, 1997. The agreement allows AT&T the
flexibility of gradually assuming certain administrative and billing functions
now performed by the Company.
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.
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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
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Network Access Lines
in Service ......... 6,617 6,343 6,101 5,906 5,721
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, 1996, these nonaffiliated companies had approximately 225,000
network access lines in service.
For the year ending December 31, 1996, approximately 91% of the total operating
revenues of the Company was derived from telecommunications services, of which
one customer, AT&T, accounted for approximately 13%, primarily in network access
and other revenues. The remaining approximately 9% 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 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.
The RHCs own equal interests in Bell Communications Research, Inc. ("Bellcore").
NYNEX's interest is held by Telesector Resources. Bellcore furnishes to the
LECs, and certain of their subsidiaries, technical and support services relating
to exchange telecommunications and exchange access services, a portion of which
is research and development. Bellcore has also served 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 November 1996, the RHCs signed definitive agreements to sell
Bellcore to Science Applications International Corporation ("SAIC"). In
addition, agreements were put in place to provide for continued services from
SAIC for existing and new systems and for RHC rights to use Bellcore-owned
intellectual property. Closing is expected to occur in the second half of 1997,
pending regulatory approval in various jurisdictions across the country.
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
- ----------------------
See Business Restructuring in Part II Item 7.
2
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Extraordinary Item
- ------------------
See Extraordinary Item in Part II, Item 7.
Capital Expenditures
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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 of Financial Accounting
Standard No. 71, "Accounting for the Effects of Certain Types of Regulation"
(see Extraordinary Item, Part II, Item 7), and additions under capital leases.
Capital expenditures for 1992 through 1996 are set forth below:
(In Millions)
------------------------
1996 ...... $906
1995 ...... $886
1994 ...... $877
1993 ...... $819
1992 ...... $782
Regulatory Environment
- ----------------------
In addition to the discussion below, please see Regulatory Environment in Part
II, Item 7.
Proposed Merger
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In response to regulatory filings made by NYNEX in July, state regulatory
commissions in Maine and Vermont indicated that they have authority to approve
the proposed merger between NYNEX and Bell Atlantic Corporation ("Bell
Atlantic") and initiated proceedings. The New Hampshire Public Utilities
Commission ("NHPUC") also initiated proceedings to review the Merger. The
Massachusetts Department of Public Utilities ("MDPU") concluded its proceedings
to review the Merger within the context of its general supervisory authority
over telephone operations within the Commonwealth, finding that NYNEX had
satisfied the MDPU-prescribed notification process. The Rhode Island Public
Utilities Commission ("RIPUC") has stated that it does not intend to take any
action purporting to approve or disapprove the Merger. The commissions in Maine,
New Hampshire and Vermont have issued orders approving the Merger.
In addition, NYNEX and Bell Atlantic have filed applications with the FCC
seeking approval of the transfer of control of certain FCC licenses and
authorizations held by their telephone companies.
NYNEX is unable to predict when all necessary regulatory action will be
completed.
Telecommunications Act of 1996
- ------------------------------
In December, the FCC commenced a proceeding on Access Reform to review its
system of interstate access charges. This proceeding, which the FCC is
implementing to ensure that the charges are compatible with interconnection and
universal service actions stemming from the Act, will likely result in a
fundamental restructuring of interstate switched access. The FCC's Notice
requests comment on all aspects of access charges and details two approaches for
adjusting access charges to better reflect their economic cost. Under the
"Market Based Approach to Access Reform," the FCC would rely on potential and
actual competition to drive prices toward economic cost. In the alternative
"Prescriptive Approach to Access Reform," the FCC would specify the nature and
timing of price changes, using strict regulatory, rather than market-based,
mechanisms. Comments were filed in January and reply comments in early February.
A decision is anticipated by May 1997.
The Federal/State Joint Board established under the Act has issued its
recommendations for implementing the universal service provisions of the Act.
The Joint Board's decision outlined the telecommunications services that
3
<PAGE>
would be supported by the universal service fund and recommended that the FCC
adopt a proxy costing model, based on forward-looking costs, to develop the
amount of support to be given to carriers in high cost areas. The Joint Board
also recommended that carriers contribute to the universal service fund based on
their gross telecommunications revenues net of payments to other carriers.
Assessments in that manner would reduce the share to be paid by interexchange
carriers such as AT&T and MCI Corporation and increase the contribution by the
incumbent LECs such as the Telephone Companies. The Joint Board made no
recommendations, deferring to the FCC, on the size of the universal service fund
or on how carriers will recover payments made to the fund. With regard to
universal service for schools and libraries, including Internet access, the
Joint Board recommended a fund of no more than $2.25 billion, to be used to
provide discounts ranging from 20 to 90 percent. Under the Act, the FCC has
until early May 1997 to issue its final decision implementing the Joint Board's
recommendations.
The proceedings on interconnection, access reform and universal service, taken
together, will determine the regulatory framework for competitive local exchange
markets as required by the Act. While the outcome of these proceedings cannot be
predicted, they are likely to have a significant impact on the Telephone
Companies' future rate structures, rate levels and revenues.
In December, the FCC issued orders establishing the operational and accounting
safeguards to be applied when an RHC's affiliates conduct certain activities or
offer certain services permitted under the Act, including manufacturing,
interLATA information services and interLATA telecommunications services. The
FCC concluded that an RHC's affiliate may share non-operations related services,
such as marketing, data processing, administrative and corporate governance
services, with the RHC and its local exchange and service companies. In
addition, once the competitive checklist is met, the RHC's local exchange and
long distance affiliates may jointly market each other's services on an equal
footing with competitors. The local exchange company will continue to be
required to inform its new customers of their right to select any interLATA
carrier and to take their order for the selected carrier. With respect to
accounting safeguards, the FCC decided to rely, to a large extent, upon its
existing nonregulated cost accounting and affiliate transactions rules. The
RHC's long distance affiliate will be considered a nonregulated affiliate with
respect to its dealings with the RHC's local exchange and other affiliates.
In June, the FCC adopted rules that will contribute towards the development of
competition in the local exchange market by allowing customers to retain their
telephone numbers when switching local service providers. The FCC's rules
implement the number portability obligations imposed on local exchange carriers
by the Act. Local exchange carriers are to begin implementing number portability
in the 100 largest metropolitan areas by October 1997, with completion by the
end of 1998. Starting in 1999, number portability outside of those areas must be
provided within six months after receiving a specific request from a
telecommunications carrier. The FCC has a pending proceeding on cost recovery
for meeting these requirements.
In December, the Maine Public Utilities Commission ("MPUC") initiated an
investigation into NYNEX's plans for obtaining approval from the FCC under
Section 271 of the Act to provide in-region long distance services in Maine. The
MPUC intends to examine the issues surrounding NYNEX's entry into interLATA
services as a means of discharging its obligation under the Act to advise the
FCC of NYNEX's compliance with the competitive checklist provisions of Section
271. In February, NYNEX submitted its Initial Status Report advising the MPUC of
NYNEX's intent to achieve Section 271 approval by September. The MPUC has not
yet issued a procedural schedule for the Investigation.
State
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Maine
In May 1995, the 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
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.
The Company made its first annual price cap filing in December, lowering rates,
primarily in intrastate toll, by approximately $7 million.
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The MPUC has also initiated a rulemaking with a view towards revising Maine's
system of intrastate access charges, similar to the FCC's proceeding on
interstate access reform (see Regulatory Environment - Federal). A decision by
the MPUC is expected by late summer.
Massachusetts
In May 1995, the MDPU approved a price regulation plan to govern the Company's
Massachusetts intrastate operations through August 2001, with no restriction on
earnings. Certain residence exchange rates are capped. Pricing rules limit the
Company's ability to increase prices for most services, including a ceiling on
the weighted average price of all tariffed services based on a formula of
inflation minus a productivity factor plus or minus certain exogenous changes.
The MDPU also established a quality of service index and tied service quality to
the level of the productivity factor. The Company's inability to meet the
performance levels in any given month would result in an increase in the
productivity offset by one-twelfth of one percent for purposes of the annual
price cap filing.
The Company's annual price cap filing became effective in October and will
produce an overall decrease in the Company's annual intrastate revenues of
approximately $29.6 million. The revenue reduction includes a $16.3 million
decrease in revenues from residential customers, a $15.4 million decrease in
revenues from business customers, a $7.4 million decrease in revenues from
access services, and a $9.3 million increase in certain miscellaneous revenues.
New Hampshire
In August, the NHPUC issued an order approving intraLATA presubscription ("ILP")
and the method of implementation. The Company has elected, and the NHPUC has
approved, an ILP implementation date of June 2, 1997. Implementation shall
include all switches serving customers in the state. The costs of implementing
ILP are to be recovered over a two year period from all intraLATA toll carriers,
including the Company, on a minutes of use basis.
Rhode Island
In June, the RIPUC approved an incentive regulation plan (the "Plan") that had
been proposed by the Company and the Rhode Island Division of Public Utilities
and Carriers. The Plan has no set term or expiration, although there are
opportunities for annual review by the RIPUC, and there is no earnings cap or
sharing mechanism. The Company will thus be able to operate in Rhode Island with
increased earnings, pricing, operational, and depreciation flexibility.
Other features of the Plan include: more stringent service quality requirements,
including a financial penalty, with a maximum annual rebate of $1.25 million;
and no increase in residence or business basic exchange rates through 1999.
Further hearings in the RIPUC's competition proceeding are scheduled to be
completed in August, and a decision is expected in November.
Vermont
In May, the VPSB issued its final Order in Phase I of its proceeding on
competition. The Order closely follows the provisions of the Act and requires
the Company to "unbundle" certain elements of its network, set pricing rules for
wholesale and retail services and adopted a presumption in favor of a
"bill-and-keep" compensation arrangement for local exchange carrier
interconnection.
In June, the Company filed a request for reconsideration of, among other issues,
the VPSB's Order regarding "bill-and-keep." New England Telephone argued that a
"bill-and-keep" compensation arrangement for interconnection violated the Act by
negating the Company's right to mutual and reciprocal compensation for use of
its network. The VPSB reaffirmed its preference for "bill-and-keep," but stated
that reciprocal compensation would be adopted upon a showing that traffic flows
between networks are not in balance and that economic harm has resulted.
The Company has reached stipulations on several issues addressed in the VPSB's
final Order in Phase I of the proceeding on competition, including a cost study
methodology. Phase II of the proceeding began in February, 1997 and will address
specific pricing, cost study and technical questions with respect to local and
intraLATA toll
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competition, including ILP. The VPSB also has opened a separate docket to
investigate service quality, privacy and other consumer protection issues, which
will create benchmark standards for all competitors in dealing with retail
customers. Finally, the VPSB has opened a docket to consider issues related to
NYNEX's entry into the in-region long distance market in Vermont.
Federal
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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. The price cap formula
adjusts the limits on access price levels upward for inflation, downward for
productivity, and up or down for certain exogenous cost beyond the carrier's
control.
In March 1996, the U. S. Court of Appeals for the District of Columbia Circuit
denied petitions filed by the Telephone Companies and several other LECs for
review of a 1995 FCC decision that had required each LEC to (a) "reinitialize"
its price cap index to reflect a higher productivity factor, and (b) 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.
Competition
- -----------
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. Sustained
increases over the past two years in 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 with the increased
marketing of dial-around programs by interexchange carriers. To date, the retail
toll revenues the Company has lost are being offset in part by increased
revenues from wholesale access charges and increased total intraLATA usage.
In the highly competitive interstate access market, the Company in 1996 filed a
petition for a waiver from the FCC to de-average switched access rates in the
Boston metropolitan area and introduce a new fixed monthly charge paid directly
by interexchange carriers. This waiver, if granted, will enable the Company to
charge prices that more accurately reflect the market conditions in its most
competitive area.
Employee Relations
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The Company had approximately 18,100 employees at December 31, 1996.
Approximately 14,400 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%, 4.0% and 3.5% in August 1994, 1995 and 1996, respectively, and
will increase 3.0% in August 1997. In 1997, there may also be a cost-of-living
adjustment. The agreements also provide for retirement incentives, a commitment
to no layoffs or loss of wages as a result of company-initiated "process
change", an enhanced educational program, and stock grant and other incentives
to improve service quality.
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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, 1996, the gross book value of telephone plant was $12.8 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.
7
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PART II
Item 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Operating revenues $4,547 $4,314 $4,202 $4,070 $3,922
Operating expenses $3,340 $3,353 $3,310 $3,773 $3,009
Interest expense $ 142 $ 154 $ 163 $ 175 $ 190
Earnings before extraordinary item and
cumulative effect of change in accounting
principle $ 655 $ 506 $ 474 $ 106 $ 487
Extraordinary item for the discontinuance of
regulatory accounting principles, net of
taxes $ -- $ (628) $ -- $ -- $ --
Cumulative effect of change in accounting for
directory publishing income, net of taxes $ 55 $ -- $ -- $ -- $ --
Cumulative effect of change in accounting for
postemployment benefits, net of taxes $ -- $ -- $ -- $ (25) $ --
Net income (loss) $ 710 $ (122) $ 474 $ 81 $ 487
Telephone plant - net $5,874 $5,862 $6,633 $6,577 $6,532
Total assets $7,389 $7,219 $8,281 $8,271 $8,335
Long-term debt $1,996 $1,822 $2,165 $2,164 $2,211
Share owner's equity $2,747 $2,504 $3,069 $3,019 $3,351
Capital expenditures* $ 906 $ 886 $ 877 $ 819 $ 782
Return to equity 26.73% (4.35)% 15.25% 2.38% 14.77%
Ratio of earnings to fixed charges 7.24 5.50 4.88 1.33 4.31
Network access lines in service (in thousands) 6,617 6,343 6,101 5,906 5,721
</TABLE>
See Management's Discussion and Analysis of Results of Operations for the
effect of certain items on 1996 and 1995 results, and restructuring charges on
1996, 1995, 1994 and 1993 results of operations.
* 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.
Results of Operations
- ---------------------
Net income for New England Telephone and Telegraph Company (the "Company") for
the year ended December 31, 1996 was $709.7 million. Net loss for the same
period of 1995 was $(122.3) million.
Net income for the year ended December 31, 1996 includes an after-tax gain of
$55.2 million for the cumulative effect of a change in accounting for directory
publishing income (see Note C). Net income for the year ended December 31, 1996
also includes after-tax charges of $80.4 million for retirement incentives (see
Business Restructuring) and after-tax charges of $4.3 million for accruals
related to various self-insurance programs. Net income for the same period of
1995 included an extraordinary, after-tax charge of $627.8 million for the
discontinuance of regulatory accounting principles, after-tax charges of $108.3
million for retirement incentives, and after-tax charges of $9.9 million for
accruals related to various self-insurance programs and revised benefit charges.
Excluding the above items, net income for the year ended December 31, 1996 would
have been $739.2 million, an improvement of $115.5 million, or 18.5%, over
adjusted net income for the same period of 1995.
Operating Revenues
- ------------------
Operating revenues for the year ended December 31, 1996 were $4.5 billion, an
improvement of $233.2 million, or 5.4%, over the same period of 1995.
The $233.2 million improvement in operating revenues includes the following
categories:
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. The $120.6 million, or 6.2%,
improvement results from the net of (i) an increase of $140 million primarily
from increased demand, driven by growth in access lines and sales of calling
features, and a $6 million increase in revenues pursuant to a Vermont Public
Service Board order, and (ii) $25 million in rate reductions primarily in
Massachusetts pursuant to the price regulation plan.
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 $11.1 million, or 1.6%,
decrease results from the net of (i) an increase of $7 million primarily in
demand, which consists of a $17 million increase in message toll services
partially offset by a $10 million decrease in operator, public and WATS
services, and (ii) $18 million in rate reductions in Maine, Massachusetts and
New Hampshire. Certain decreases, primarily due to intraLATA presubscription,
are being partially offset by increases in Network access revenues.
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. The $84.6 million, or 6.5%,
improvement results from (i) a net $56 million improvement in switched access
revenues due to a $90 million increase primarily due to increased demand,
including the previously mentioned partial offset to decreases in Long distance
revenues, partially offset by a $27 million reduction in interstate rates and a
$7 million reduction in intrastate rates primarily in Massachusetts, and (ii) a
$29 million increase in special access revenues 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. The $39.1 million, or 10.8%,
improvement results primarily from (i) a $20 million increase in directory
revenues from the directory licensing agreement with NYNEX Information Resources
Company ("Information Resources") consisting of $14 million in retirement
incentive costs recorded during 1995 and $6 million attributable to growth in
the business, and (ii) a $16 million increase in revenues from increased demand
for voice messaging and other enhanced calling features.
9
<PAGE>
Operating Expenses
- ------------------
Operating expenses for the year ended December 31, 1996 were $3.3 billion, a
decrease of $13.3 million, or 0.4%, from the same period of 1995.
Included in operating expenses for the year ended December 31, 1996 were charges
of $132.2 million for retirement incentives (see Business Restructuring) and a
charge of $7.0 million for various self-insurance programs. Included in
operating expenses for the same period of 1995 were charges of $174.5 million
for retirement incentives, charges of $9.0 million related to various
self-insurance programs and revised benefit costs, and charges of $7.4 million
resulting from a court decision on overearnings complaints.
Excluding the items discussed above, operating expenses would have increased
$38.4 million, or 1.2%, over adjusted operating expenses for 1995.
The $38.4 million increase in adjusted operating expenses includes the following
categories:
Depreciation and amortization increased $13.4 million, or 1.5%, over 1995,
resulting primarily from the net of (i) a $25 million increase due to growth in
depreciable plant investment, and (ii) a $6 million decrease attributable to the
discontinuance of regulatory accounting principles in 1995 and a decrease of $7
million attributable to revised estimates of future net salvage value and
remaining useful lives.
Taxes other than income, which include gross receipts taxes, property taxes and
other non-income based taxes, increased $3.5 million, or 2.7%, over 1995,
primarily due to an increase of $3 million in municipal tax rates for real
estate in Massachusetts and Rhode Island and an increase of $1 million in the
gross receipts tax in Rhode Island.
Employee related costs, which consist primarily of wages, payroll taxes, and
employee benefits, decreased $15.3 million from 1995, resulting from the net of
(i) a $6 million increase in wages as a result of increased overtime associated
with re-engineering service delivery to customers, and (ii) a $21 million
decrease in benefit expenses attributable to decreases in medical and dental
costs, in addition to decreases in pension expense due to changes in actuarial
assumptions and revised charges for postemployment benefits.
Other operating expenses, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $36.8
million over 1995 resulting primarily from the net of (i) an $18 million
increase in charges from affiliated companies, primarily attributable to
increases in Telesector Resources Group, Inc's. ("Telesector Resources")
contracted and centralized services due to process re-engineering costs not
accrued for in the 1993 business restructuring reserves and costs to implement
the competitive checklist provisions of the Telecommunications Act of 1996 (the
"Act") (see Regulatory Environment - Federal), and the transfer of employees
from the Company to Telesector Resources, partially offset by decreases due to
Telesector Resources' force reduction program, a $7 million increase in the
provision for uncollectibles and a $21 million increase in miscellaneous
expenses primarily related to contracted services needed to satisfy increased
volume and service improvement, and (ii) a $5 million decrease in right to use
fees resulting from modified software deployment schedules and a $2 million
decrease in fixed rate uncollectible losses from billing and collection services
performed under contract by the Company for AT&T Corp. ("AT&T").
Other income (expense) - net
- ----------------------------
Other income (expense) - net decreased $18.6 million from 1995 primarily due to
a change in the recording of capitalized interest expense (in 1996, capitalized
interest expense was recorded as a reduction to Interest expense).
Interest expense
- ----------------
Interest expense decreased $11.8 million, or 7.7%, from 1995 primarily due to a
change in the recording of capitalized interest expense (see Other income
(expense) - net).
Income taxes
- ------------
Income taxes increased $90.7 million, or 29.0%, over 1995, principally due to an
increase in pretax income in addition to a decrease in the amortization of
investment tax credits.
10
<PAGE>
Extraordinary item
- ------------------
In the second quarter of 1995, the discontinuance of regulatory accounting
principles required the Company, for financial accounting purposes, to adjust
telephone plant and equipment and to eliminate non-plant regulatory assets and
liabilities from the balance sheet. This change resulted in an after-tax
extraordinary charge of $627.8 million, consisting of $472.6 million to adjust
the carrying amount of telephone plant and equipment and $155.2 million to write
off non-plant regulatory assets and liabilities.
Cumulative effect of change in accounting principles
- ----------------------------------------------------
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 Corporation ("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.
Effects of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation"
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement No. 123"), effective for fiscal years beginning after December 15,
1995. NYNEX elected the disclosure-only provisions which require pro forma
amounts to be disclosed as if NYNEX had elected to recognize compensation costs
consistent with the method prescribed by Statement No. 123 (See Note F).
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 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.
Business Restructuring
- ----------------------
The Company's 1993 results included pretax charges of approximately $619 million
($376 million after-tax) for business restructuring. Business restructuring
resulted from a comprehensive analysis of the Company's operations and work
processes, resulting in a strategy to redesign them to improve efficiency and
customer service, to adjust
11
<PAGE>
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 pretax charges were comprised of: $395 million for severance and
postretirement medical costs to reduce the work force by 6,300 employees by the
end of 1996; $83 million for process re-engineering costs, primarily for systems
redesign, and work center consolidation; and $141 million for the Company's
allocated portion of Telesector Resources business restructuring charges.
Work Force Reductions: Additional Charges
During 1994, the Company announced retirement incentives to provide a voluntary
means of implementing substantially all of the work force reductions planned in
1993. The retirement incentives were to be offered at different times through
1996 depending on local force requirements and were expected to incur 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.
During 1995, it became evident that the number of management employees leaving
under the retirement incentives would exceed the original estimate. It was also
determined that, as a result of volume of business growth, the expected
reduction in the number of associates (previously referred to as nonmanagement
employees) would be less than anticipated and would not be fully achieved until
1998. In July 1996, the Company extended the period for offering retirement
incentives to management employees to mid-1997 to better coordinate force sizing
with process re-engineering implementation and service improvement initiatives.
In late February 1997, the Company decided that the management retirement
incentive plan will end in March 1997 when all managers will have received the
offer at least once over the life of the plan.
At the present time, the Company expects the total number of employees (which
exclude Telesector Resources) who will elect to take the retirement incentives
to be in the range of 5,300 to 5,700, consisting of approximately 1,700
management and 3,600 to 4,000 associates, depending on work volumes, needs of
the business and timing of the retirement incentive offers.
The actual number of employees who elected to leave under retirement incentives
in 1994, 1995 and 1996 are as follows:
1994 1995 1996 Total
----- ----- ----- ------
Management 740 420 290 1,450
Associates 820 1,050 1,050 2,920
----- ----- ----- ------
Total 1,560 1,470 1,340 4,370
===== ===== ===== ======
The actual additional charges for retirement incentives in 1996 and 1995 are as
follows:
1996 1995
------ ------
(In Millions) Pretax After-Tax Pretax After-Tax
------- ----------- ------ ---------
Pension enhancements $122.2 $74.4 $153.3 $ 94.7
Postretirement medical costs 10.0 6.0 21.2 13.6
------ ----- ------ ------
Total* $132.2 $80.4 $174.5 $108.3
====== ===== ====== ======
* For the year ended December 31, 1996 and 1995, $15.5 million and $29.8
million, respectively, ($9.4 million and $18.1 million, respectively,
after-tax) were allocated to the Company from Telesector Resources for its
pension enhancements and $(0.6) million and $6.4 million, respectively,
($(3.7) million and $3.9 million, respectively, after-tax) were allocated from
Telesector Resources for its associated postretirement medical costs.
12
<PAGE>
The severance reserves established in 1993 have been and will continue to be
transferred to the pension liability on a per employee basis as employees accept
the retirement incentives. The postretirement medical liability established in
1993 had been and will continue to be applied to retired employees on a per
employee basis as employees accept the retirement incentives. Most of the cost
of the retirement incentives is funded by NYNEX's pension plans.
Work Force Reductions: Reserve Utilization
The 1993 charges for work force reductions of $395 million ($240 million
after-tax) were comprised of $201 million for employee severance payments
(including salary, payroll taxes and outplacement costs) and $194 million for
postretirement medical costs. These costs were for planned work force reductions
of 1,300 management employees and 5,000 associates.
The actual utilization of the 1993 severance reserves and the application of the
1993 postretirement medical liability in 1994, 1995 and 1996 are shown below:
Total
(In Millions) 1994 1995 1996 Total Remaining
------------------------------------------------
Severance $80 $38 $43 $161 $40
Postretirement medical costs $42 $35 $65 $142 $52
The severance and postretirement medical amounts above include allocations
of $11 and $15 million, respectively, in 1996, $15 and $7 million,
respectively, in 1995 and $12 and $5 million, respectively, in 1994, which
were transferred to Telesector Resources for employees who left Telesector
Resources under the retirement incentives (145,230 and 250 employees in 1994,
1995 and 1996, respectively).
Assuming that employees will continue to leave under the retirement incentives,
it is expected that the remaining $40 million of severance reserves will be
utilized and the remaining $52 million of the postretirement medical liability
will be applied in 1997 and 1998, as associates leave under the retirement
incentives. The reserves for management employees were completely utilized
during 1996.
Process Re-engineering Costs
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 has been
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. The process
re-engineering costs are incurred in connection with systems redesign, work
center consolidation, branding, relocation, training and process re-engineering
implementation. Process re-engineering costs which were not included in the 1993
charges have been expensed as incurred (see Operating expenses).
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. These costs include 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 costs
incurred to move personnel to different locations resulting from work center
consolidations. These costs are
13
<PAGE>
computed in accordance with the Company's relocation guidelines and the
provisions of collective bargaining agreements. Training costs are for training
associates 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.
Process Re-engineering: Reserve Utilization
At December 31, 1993, the process re-engineering costs were estimated for
systems redesign, work center consolidation, branding, relocation, training and
re-engineering implementation. At December 31, 1996, the actual utilization of
the reserves for process re-engineering costs are as follows:
(In Millions) 1994 1995 1996 Total
-----------------------------------
Systems redesign $ - $42 $12 $54
Work center consolidation 1 6 - 7
Branding 12 2 - 14
Relocation - 1 - 1
Training - 4 3 7
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.
This higher degree of complexity and additional functionality required by
real-time, interactive systems caused a delay in the implementation of the
systems redesign. It was realized at this time that utilization of the process
re-engineering reserves for systems redesign would be higher than originally
estimated. During 1995, process re-engineering reserves were utilized for
increased efforts due to the complexity and extensiveness of integration testing
and quality assurance processes. During 1996, it was determined that although
certain systems redesign goals had been accomplished, other goals would not be
completed until mid-1997.
The actual utilization of the systems redesign reserves, by business process,
are as follows:
(In Millions) 1994 1995 1996 Total
--------------------------------------
Customer contact $ -- $30 $ 5 $35
Customer operations -- 12 7 19
--------------------------------------
Total $ -- $42 $12 $54
======================================
The reserve utilization for work center consolidation was lower than the
estimate due to an increase in the number of work centers from what was
originally planned based on union agreements, the majority of which were
completed in 1995. The reserve utilization for relocation of employees was lower
than the estimate due to the increase in the number of work centers and terms of
the union agreements resulting in less than anticipated employee relocations.
Training was delayed in 1994 due to the timing of the union agreements and the
higher degree of complexity of systems redesign. The utilization of reserves for
training costs were reduced due to the predominant use of in-house, on-the-job
and multi-media training. Reserve utilization for re-engineering implementation
was combined with the related projects (i.e., systems redesign) and therefore
did not require separate identification.
14
<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
Telesector Resources' work force reduction and re-engineering programs. The
actual utilization of these reserves are as follows:
(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
As of December 31, 1996, approximately 4,400 employees have accepted the
retirement incentives. Without the effect of the offsets noted below, this would
equate to an average reduction in wages and benefits, on an annualized basis, of
approximately $218 million. In addition, the Company's share of the annualized
average reduction in wages and benefits attributable to the 3,500 employees of
Telesector Resources leaving under retirement incentives would be approximately
$85 million.
The wage and benefit savings described above, have been, through December 31,
1996, and will continue to be, substantially offset by increased wage and
benefit, and nonwage expenses attributable to the effects of wage and price
inflation, the hiring of employees primarily to handle significantly increased
volumes of business and to improve service, and investments in new marketing and
service delivery initiatives.
Financing
- ---------
At December 31, 1996, the Company had $500 million of unissued, unsecured debt
securities registered with the Securities and Exchange Commission.
Collective Bargaining Agreements
- --------------------------------
In 1994, a series of collective bargaining agreements were reached with the
Communications Workers of America and the International Brotherhood of
Electrical Workers that extended through August 8, 1998. The wage rates
increased 4.0%, 4.0% and 3.5% in August 1994, 1995 and 1996, respectively, and
will increase 3.0% in August 1997. In 1997, there may also be a cost-of-living
adjustment. The agreements also provide for retirement incentives, a commitment
to no layoffs or loss of wages as a result of company-initiated "process
change", an enhanced educational program, and stock grant and other incentives
to improve service quality.
REGULATORY ENVIRONMENT
- ----------------------
Telecommunications Act of 1996
The Act granted the regional holding companies ("RHCs") immediate relief for the
provision of "out-of-region" services, that is, interLATA or international
telecommunications services originating outside of the RHC's home region. In
order to provide "in-region" services, the RHC must obtain Federal
Communications Commission ("FCC") approval under Section 271 of the Act, which
requires compliance with a competitive checklist and the provision of
interconnection to a facilities-based competitor for business and residential
service. If such
15
<PAGE>
interconnection is not requested, the RHC must have a state-approved Statement
of Terms and Conditions under which it will be provided.
In August, the FCC issued an Order setting forth the terms and conditions for
interconnection. The Order establishes comprehensive technical rules, and sets
national cost and pricing standards. The Order also sets "default" or "proxy"
rates for interconnection and related functions, which state regulatory
commissions may use until the FCC-mandated cost studies have been completed. The
proposed default rates and resale discount result in rates that in many cases
are significantly less than the negotiated rates contained in the Telephone
Companies' various interconnection agreements pending before the state
regulatory commissions and the Telephone Companies' costs. The Order also
permits a carrier to select individual provisions from any other interconnection
agreement the local exchange company has negotiated.
In October, the U. S. Court of Appeals for the 8th Circuit issued a stay of the
Order, with respect to the pricing rules and the selective contract provision,
pending completion of appeals by state regulatory commissions, local exchange
carriers such as NYNEX, and other parties. A decision is expected by April 1997.
The Telephone Companies are actively engaged in the negotiation of
interconnection agreements with various competitive local exchange carriers and
wireless carriers under the Act, including those terms of the FCC's Order not
subject to stay. State-specific agreements have been reached with a number of
carriers. Arbitration proceedings were commenced where the Telephone Companies
and the affected carrier were unable to reach agreement. Under the time frame
prescribed by the Act, interconnection agreements in each of the states in which
the Telephone Companies operate were to have been arbitrated and approved by
January 1997, with AT&T and MCI Corporation, and by February 1997 with Sprint
Corporation. No agreements have been reached, and negotiations are on-going.
The FCC has initiated proceedings under the Act to address universal service
obligations and a fundamental restructuring of access charges. As part of the
access reform proceeding, the FCC will address, on remand from the U. S. Court
of Appeals, the "residual interconnection charge" ("RIC") imposed on all
interexchange carriers for local transport access services beginning in 1992.
The Court directed the FCC to implement a cost-based alternative to the RIC, or
explain why a departure from cost-based pricing is necessary. The RIC accounts
for approximately $600 million of NYNEX's annual revenues.
The proceedings on interconnection, access reform and universal service, taken
together, will determine the regulatory framework for competitive local exchange
markets as required by the Act. While the outcome of these proceedings cannot be
predicted, they are likely to have a significant impact on the Telephone
Companies' future rate structures, rate levels and revenues.
State Regulatory
The Company has been able to replace rate of return regulation with price
regulation plans in Massachusetts, Maine and Rhode Island, which represent
approximately 84% of their access lines, collectively. 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.
16
<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 audits 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
John Diercksen
Acting Vice President - Finance and Treasurer
17
<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,
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. 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 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
18
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES
- ------------------
Local service $2,078.7 $1,958.1 $1,897.2
Long distance 683.2 694.3 736.3
Network access 1,385.6 1,301.0 1,210.9
Other 399.5 360.4 357.8
-------- -------- --------
Total operating revenues 4,547.0 4,313.8 4,202.2
-------- -------- --------
OPERATING EXPENSES
- ------------------
Maintenance and support 1,150.0 1,114.5 1,168.0
Depreciation and amortization 918.2 904.8 872.6
Marketing and customer services 598.6 595.9 564.3
Taxes other than income 132.4 128.9 107.1
Provision for uncollectible revenues 61.9 55.1 55.9
Other 478.8 554.0 541.6
-------- -------- --------
Total operating expenses 3,339.9 3,353.2 3,309.5
-------- -------- --------
Operating income 1,207.1 960.6 892.7
Other income (expense) - net (7.3) 11.3 12.8
Interest expense 142.1 153.9 163.0
-------- -------- --------
Earnings before income taxes, extraordinary item and cumulative
effect of change in accounting principle 1,057.7 818.0 742.5
Income taxes 403.2 312.5 268.2
-------- -------- --------
Earnings before extraordinary item and cumulative effect of change in
accounting principle 654.5 505.5 474.3
Extraordinary item for the discontinuance of regulatory accounting
principles, net of taxes (Note B) -- (627.8) --
Cumulative effect of change in accounting for directory publishing
income, net of taxes (Note C) 55.2 -- --
-------- -------- --------
NET INCOME (LOSS) $ 709.7 $ (122.3) $ 474.3
======== ======== ========
RETAINED EARNINGS
- -----------------
Beginning of year $ 414.9 $ 979.9 $ 929.9
Net income (loss) 709.7 (122.3) 474.3
Dividends (466.8) (442.7) (424.3)
-------- -------- --------
End of year $ 657.8 $ 414.9 $ 979.9
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
BALANCE SHEETS
--------------
(In Millions)
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 14.2 $ 8.4
Receivables
Trade and other (net of allowance of $47.4 and $49.7, respectively) 958.7 890.0
Affiliates 113.7 27.1
Deferred charges 83.5 95.9
Deferred income taxes 52.6 106.2
Inventory 99.5 53.7
Prepaid expenses and other 55.8 36.1
-------- --------
Total current assets 1,378.0 1,217.4
Telephone plant - net 5,873.9 5,861.5
Long-term investments, deferred charges and other 137.2 139.9
-------- --------
TOTAL ASSETS $7,389.1 $7,218.8
======== ========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
BALANCE SHEETS
--------------
(In Millions)
December 31,
-------------------
1996 1995
-------- --------
LIABILITIES AND SHARE OWNER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable
AT&T $ 66.6 $ 96.5
Affiliates 432.3 473.7
Trade and Other 395.0 431.3
Compensated absences 82.7 80.2
Short-term debt 175.7 387.6
Dividends payable 116.7 110.7
Taxes accrued 73.2 27.7
Advance billing and customers' deposits 18.2 19.5
Interest accrued 38.1 38.1
-------- --------
Total current liabilities 1,398.5 1,665.3
-------- --------
Long-term debt 1,996.4 1,822.0
Deferred income taxes 271.0 345.5
Unamortized investment tax credits 59.0 67.9
Other long-term liabilities and deferred credits 917.3 814.1
-------- --------
Total liabilities 4,642.2 4,714.8
-------- --------
Commitments and contingencies (Notes I, J, K and O)
Share owner's equity:
Common stock - one share, without par value (Note T) 1.0 1.0
Additional paid-in capital (Note T) 2,088.1 2,088.1
Retained earnings 657.8 414.9
-------- --------
Total share owner's equity 2,746.9 2,504.0
-------- --------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $7,389.1 $7,218.8
======== ========
See accompanying notes to financial statements.
21
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
STATEMENTS OF CASH FLOWS
(In Millions)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 709.7 $ (122.3) $ 474.3
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item, net of taxes -- 627.8 --
Depreciation and amortization 918.2 904.8 872.6
Deferred income taxes - net (56.7) (37.9) (65.0)
Deferred credits - net (8.8) (11.6) (23.5)
Changes in operating assets and liabilities:
Receivables (155.3) (112.9) (71.7)
Deferred charges 12.4 (13.3) 16.9
Deferred income taxes 53.6 110.4 10.7
Inventory (45.8) (4.3) 8.2
Prepaid expenses and other (19.7) (149.6) 51.4
Accounts payable (105.1) 79.1 63.3
Taxes accrued 45.5 (18.3) 19.5
Advance billing and customers' deposits (1.3) (0.6) 1.9
Interest accrued 0.0 0.1 0.2
Other - net 63.4 90.4 42.8
-------- -------- --------
Total adjustments 700.4 1,464.1 927.3
-------- -------- --------
Net cash provided by operating activities 1,410.1 1,341.8 1,401.6
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (905.9) (885.8) (876.9)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX (37.1) (18.0) (104.3)
Dividends paid to NYNEX (460.8) (438.2) (421.6)
Repayment of long-term debt and capital leases (0.5) (0.5) (0.9)
-------- -------- --------
Net cash used in financing activities (498.4) (456.7) (526.8)
-------- -------- --------
Net increase (decrease) in cash 5.8 (0.7) (2.1)
Cash at beginning of year 8.4 9.1 11.2
-------- -------- --------
Cash at end of year $ 14.2 $ 8.4 $ 9.1
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
22
<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 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, is entering 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 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.
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. The 1995 and 1994
financial statements have been reclassified to conform to the current year's
format.
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.
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"),
23
<PAGE>
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.
24
<PAGE>
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.
25
<PAGE>
The major elements of the 1995 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
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 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.
26
<PAGE>
D Income Taxes
------------
The components of income tax expense are as follows:
- --------------------------------------------------------------------------------
(In Millions) 1996* 1995** 1994
- --------------------------------------------------------------------------------
Federal:
Current $398.1 $305.7 $297.0
Deferred - net (53.1) (32.3) (58.3)
Deferred tax credits - net (8.8) (11.6) (23.5)
------ ------ ------
336.2 261.8 215.2
------ ------ ------
State:
Current 70.6 56.3 59.7
Deferred - net (3.6) (5.6) (6.7)
------ ------ ------
67.0 50.7 53.0
------ ------ ------
Total $403.2 $312.5 $268.2
====== ====== ======
- --------------------------------------------------------------------------------
* 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:
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Federal income tax expense computed at the
statutory rate $370.2 $286.3 $259.9
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 - (0.2) (0.1)
e. State income taxes, net of federal tax
benefit 43.5 32.9 34.5
f. Other items - net (1.7) 4.1 8.1
----- ----- ------
Income tax expense $403.2 $312.5 $268.2
====== ====== ======
- --------------------------------------------------------------------------------
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.
27
<PAGE>
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
- --------------------------------------------------------------------------------
Deferred tax assets
Employee benefits $404.9 $368.5
Restructuring charges 36.1 54.5
Unamortized ITC 20.7 23.8
Other 43.9 25.8
------ ------
505.6 472.6
------ ------
Deferred tax liabilities
Depreciation and amortization 627.4 656.4
Employee benefits 48.9 48.9
Other 47.7 6.7
------ ------
724.0 712.0
------ ------
Net deferred tax liabilities $218.4 $239.4
====== ======
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).
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.
28
<PAGE>
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
on Form 10-K for the years ended December 31, 1996 and 1995.
The postretirement benefit cost for 1996 includes pretax credits to medical
expense of $27.4 million for plan amendments primarily intended to reduce
company costs under managed care options.
The Company recognizes 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 1996, 1995 and 1994
for the Company was $137.0, $153.4 and $157.1 million, respectively.
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 $193.9
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 $73.2, $42.5 and
$84.8 million, respectively. In 1996, this cost was comprised of a curtailment
loss of $54.6 million and a charge for special termination benefits of $18.5
million, partially offset by $51.1 million accrued for in 1993. 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 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 and then contributed those assets
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.
29
<PAGE>
With respect to intrastate treatment, the Company eliminated remaining deferred
pension costs upon the discontinuance of Statement No. 71.
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:
- --------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(In Millions) Pro forma As Reported Pro forma As Reported
- ------------------- ------------ -------------- ------------ -------------
Net Income (Loss) $702.1 $709.7 $(122.8) $(122.3)
- --------------------------------------------------------------------------------
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.
30
<PAGE>
G Telephone Plant - Net
---------------------
The components of Telephone plant - net are as follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Buildings $ 875.0 $ 855.7
Telephone plant and equipment 11,231.7 11,058.3
Furniture and other equipment 53.9 61.5
Other 359.3 340.8
-------- --------
Total depreciable telephone plant 12,519.9 12,316.3
Less: accumulated depreciation 6,906.6 6,681.9
-------- --------
5,613.3 5,634.4
Land 36.7 36.6
Plant under construction and other 223.9 190.5
-------- --------
Total Telephone plant - net $5,873.9 $5,861.5
======== ========
- --------------------------------------------------------------------------------
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
--------------
Interest rates and maturities on long-term debt outstanding are as follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
(In Millions) Interest Rates Maturities 1996 1995
- ---------------------------- ----------------- ------------ --------- ---------
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
======== ========
- --------------------------------------------------------------------------------
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, l996, the Company had $500 million of unissued, unsecured debt
securities registered with the Securities and Exchange Commission.
31
<PAGE>
I Short-Term Debt
---------------
Short-term debt and related weighted average interest rates are as follows:
- --------------------------------------------------------------------------------
Weighted Average
Interest Rates
- --------------------------------------------------------------------------------
(In Millions) December 31, December 31,
- --------------------------------------------------------------------------------
1996 1995 1996 1995
Advances from NYNEX $ -- $ 37.1 5.43% 5.93%
Debt maturing within one year 175.0 350.0
Other 0.7 0.5
------ ------
Total Short-term debt $175.7 $387.6
====== ======
- --------------------------------------------------------------------------------
$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.
At December 31, 1996, the minimum lease commitments under noncancelable leases
for the periods shown are as follows:
- --------------------------------------------------------------------------------
(In Millions) Operating Capital
- --------------------------------------------------------------------------------
1997 $ 50.9 $0.9
1998 36.3 0.9
1999 33.7 0.7
2000 32.1 0.6
2001 31.8 0.0
Thereafter 246.5 0.0
------ ----
Total minimum lease payments $431.1 3.1
======
Less: executory costs 1.0
----
Net minimum lease payments 2.1
Less: interest 0.3
----
Present value of net minimum lease payments $1.8
====
- --------------------------------------------------------------------------------
32
<PAGE>
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 $715.6,
$664.5 and $718.0 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 $9.5, $36.3 and $36.1
million, respectively, of restructuring charges ($5.7, $21.1 and $21.9 million
after-tax) 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. Closing is expected to occur in the second half of 1997, pending
regulatory approval in various jurisdictions across the country.
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,
33
<PAGE>
$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.
N Taxes other than Income
-----------------------
Taxes other than income consist of:
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
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
====== ====== ======
- --------------------------------------------------------------------------------
O 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, 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 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 opinion 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 but could have a material
effect on operating results.
Q 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,
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Income tax payments $412.8 $379.6 $279.1
Interest payments * $152.1 $157.1 $160.9
- --------------------------------------------------------------------------------
* Amounts shown are net of capitalized interest of $12.5, $10.8 and $14.6
million in 1996, 1995 and 1994, respectively.
34
<PAGE>
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.
- --------------------------------------------------------------------------------
(In Millions) December 31,
- --------------------------------------------------------------------------------
1996 1995
---- ----
Long-term debt:
Carrying amount $1,995.1 $1,820.2
Fair value $2,000.1 $1,861.2
- --------------------------------------------------------------------------------
S Business Restructuring
----------------------
In 1996, 1995 and 1994, $132.2, $174.5 and $168.1 million, respectively, of
pretax retirement incentive charges were recorded. These charges were included
in the Statements of Income in Other expenses.
T 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.
U Proposed Merger
---------------
On April 22, 1996, NYNEX and Bell Atlantic Corporation ("Bell Atlantic")
announced a proposed merger of equals pursuant to a definitive merger agreement
(the "Merger"), dated April 21, 1996 that provided for the formation of a new
company to be named Bell Atlantic Corporation. On July 2, 1996, NYNEX and Bell
Atlantic executed an amendment to the agreement effecting a technical change in
the transaction structure of the Merger. As amended, the agreement provides that
a newly formed subsidiary of Bell Atlantic will merge with and into NYNEX,
thereby making NYNEX a wholly owned subsidiary of Bell Atlantic. There is no
change in the fundamental elements of the proposed Merger. Each NYNEX
shareholder will receive 0.768 shares of Bell Atlantic common stock in exchange
for one share of NYNEX common stock. The purpose of the amendment to the Merger
agreement is to expedite the regulatory approval process by eliminating the need
to obtain congressional approval of the Merger under a 1913 District of Columbia
"anti-merger" law. The state regulatory commissions in NYNEX's region have
approved or have not sought jurisdiction over the Merger. In addition, NYNEX and
Bell Atlantic have filed applications with the FCC seeking approval of the
transfer of control of certain FCC licenses and authorizations held by their
telephone subsidiaries. The Merger is expected to qualify as a pooling of
interests for accounting purposes. At special meetings held in November 1996,
the shareholders of both companies voted to approve the Merger. The completion
of the Merger is subject to a number of conditions, including certain regulatory
approvals and receipt of opinions that the Merger will be tax free, except, in
the case of NYNEX shareholders, for tax payable because of cash received for a
fractional share and the payment by NYNEX of certain transfer taxes on behalf of
its shareholders. NYNEX is unable to predict when it will be able to complete
the Merger.
35
<PAGE>
Supplementary Information
Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the quarter ended
(In Millions) March 31, June 30, September 30, December 31,
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
- ----
Operating revenues $1,133.4 $1,113.8 $1,178.4 $1,121.4
Operating income $ 233.4 $ 274.0 $ 373.1 $ 326.6
Earnings before cumulative effect of
change in accounting for directory
publishing income $ 121.3 $ 145.8 $ 206.0 $ 181.4
Cumulative effect of change in
accounting for directory publishing
income, net of taxes $ 55.2 $ -- $ -- $ --
Net income $ 176.5 $ 145.8 $ 206.0 $ 181.4
1995
- ----
Operating revenues $1,053.6 $1,074.5 $1,088.3 $1,097.4
Operating income $ 239.7 $ 237.1 $ 275.3 $ 208.5
Net income (loss) $ 124.0 $ (504.1) $ 145.6 $ 112.2
- ------------------------------------------------------------------------------------------------
</TABLE>
Results for the first, second, third and fourth quarters of 1996 include $77.5,
$14.7, $6.3 and $33.6 million, respectively, of pretax charges for retirement
incentives, which were reflected in operating expenses. The after-tax effect of
these charges was $47.2, $9.0, $3.9 and $20.4 million, respectively.
Results for the first quarter of 1996 include the effects of the change in
accounting for directory publishing income, recorded as a cumulative effect of a
change in accounting principle (see Note C), and $7.0 million ($4.3 million
after-tax) for various insurance charges which were reflected in operating
expenses. Results for the third and fourth quarters of 1996 include $4.8 and
$22.6 million, respectively, of pretax credits to medical expense associated
with plan amendments. Results for the third and fourth quarters of 1996 also
include $4.7 and $2.2 million, respectively, of pretax credits to depreciation
expense associated with revised estimates of future net salvage value.
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 retirement
incentives, 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
certain items to meet various self-insurance and revised benefit costs which
were reflected in operating expenses.
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.
There were no events reportable under Item 9.
36
<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.
-----------------------------------------------------------
<TABLE>
<CAPTION>
Page(s) in This
Annual Report On
Form 10-K
------------------
<S> <C>
(1) Financial Statements filed as part of this report are listed in the
Table of Contents 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 39
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 required or applicable.
(3) Exhibits. Exhibits on file with the Securities and Exchange Commission
("SEC"), as identified parentheses below, are incorporated herein by
reference as exhibits hereto.
</TABLE>
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).
(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.
-------------------
37
<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 John W. Diercksen
-----------------------------------------
John W. Diercksen
Acting Vice President-Finance and
Treasurer
March 27, 1997
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:
John W. Diercksen
Acting Vice President-Finance and Treasurer
Principal Accounting Officer:
John W. Diercksen*
Controller
A Majority of Directors:
Lilyan H. Affinito* *By: John W. Diercksen
Joseph A. Califano, Jr.* ----------------------------------------
A. J. Eckelman* (John W. Diercksen, as attorney-in-
Thomas F. Gilbane, Jr.* fact, and on his own behalf as
Ronald A. Homer* Principal Financial Officer and
Alice Stone Ilchman* Principal Accounting Officer)
Richard A. Jalkut* March 27, 1997
Jane E. Newman*
Donald B. Reed*
Paul L. Snyder*
Ira Stepanian*
Frank J. Tasco*
38
<PAGE>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------------------
Additions
------------------------------
Balance at Charged to Balance at
Beginning of Costs and Charged to End of
Description Period Expenses Other Accounts Deductions Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectibles
Year 1996 .................... $ 49.7 $62.0 $106.3 (a) $170.6 (b) $ 47.4
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
Restructuring
Year 1996 .................... $ 98.6 $ -- $ -- $ 58.1 $ 40.5
Year 1995 .................... $193.0 $ -- $ -- $ 94.4 $ 98.6
Year 1994 .................... $286.9 $ -- $ -- $ 93.9 $193.0
</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.
Exhibit (12)
<TABLE>
<CAPTION>
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions) (Unaudited)
For The Year Ended December 31,
1996 1995 1994 1993 1992
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings
Earnings before Interest Expense,
Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 796.6 $659.4 $637.3 $281.3 $676.3
Federal, State and Local Income Taxes 403.2 312.5 268.2 (39.1) 240.9
Estimated Interest Portion of Rental Expense 27.4 28.0 28.3 27.8 30.2
-------- ------ ------ ------ ------
Total Earnings $1,227.2 $999.9 $933.8 $270.0 $947.4
======== ====== ====== ====== ======
Fixed Charges
Total Interest Deductions $ 142.1 $153.9 $163.0 $175.0 $189.7
Estimated Interest Portion of Rental Expense 27.4 28.0 28.3 27.8 30.2
-------- ------ ------ ------ ------
Total Fixed Charges $ 169.5 $181.9 $191.3 $202.8 $219.9
======== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges 7.24 5.50 4.88 1.33 4.31
======== ====== ====== ====== ======
</TABLE>
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, on our audits of the financial
statements and financial statement schedule 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 Annual
Report on Form 10-K.
Coopers & Lybrand L.L.P.
New York, New York
March 25, 1997
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, 1996; and
WHEREAS, each of the undersigned is a Director, an Officer, or both an Officer
and Director of the Company;
NOW, THEREFORE, each of the undersigned hereby constitues and appoints Richard
A. Jalkut 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, and 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 19th day of March, 1997.
<TABLE>
<CAPTION>
<S> <C>
/s/ Richard A. Jalkut /s/ J W Diercksen
- ------------------------------------ ---------------------------------
Richard A. Jalkut, President and John W. Diercksen, Vice President-Finance
Chief Executive Officer and Director and Treasurer (Acting) and Controller
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Lilyan H. Affinito /s/ Ronald A. Homer /s/ Donald B. Reed
- ------------------------------------ --------------------------------- --------------------------------
Lilyan H. Affinito, Director Ronald A. Homer, Director Donald B. Reed, Director
/s/ Joseph A. Califano, Jr. /s/ Alice Stone Ilchman /s/ Paul L. Synder
- ----------------------------------- --------------------------------- --------------------------------
Joseph A. Califano, Jr., Director Alice Stone Ilchman, Director Paul L. Synder, Director
/s/ A J Eckelman /s/ Ira Stepanian
- ---------------------------------- --------------------------------- --------------------------------
Arnold J. Eckelman, Director John F.X. Mannion, Director Ira Stepanian, Director
/s/ T F Gilbane, Jr. /s/ Jane E. Newman /s/ Frank J. Tasco
- ---------------------------------- --------------------------------- --------------------------------
Thomas F. Gilbane, Jr., Director Jane E. Newman, Director Frank J. Tasco, Director
</TABLE>
State of New York )
County of New York ) ss.:
On the 19th day of March, 1997, 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.
/s/ Robert W. Erb
-----------------------------
Robert Erb
Notary Public, State of New York
No. 31-4808105
Qualified in New York County
Commission Expires January 31, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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