<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark one) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-1150
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
A New York Corporation I.R.S. Employer Identification No. 04-1664340
125 High Street, Boston, Massachusetts 02110
Telephone Number (617) 743-9800
-------------------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(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
----- -----
<PAGE>
New England Telephone and Telegraph Company
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $51.8, $57.0,
$137.6 and $119.4 from affiliates)......................... $1,203.1 $1,167.7 $2,407.2 $2,326.9
-------- -------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes............... 252.3 248.5 711.7 598.1
Depreciation and amortization.............................. 231.6 222.8 459.7 441.1
Taxes other than income.................................... 35.4 35.9 71.3 72.3
Other (including $183.4, $211.4,
$347.7 and $442.5 to affiliates)..................... 338.9 328.7 645.6 669.1
-------- -------- -------- --------
858.2 835.9 1,888.3 1,780.6
-------- -------- -------- --------
OPERATING INCOME................................................ 344.9 331.8 518.9 546.3
OTHER INCOME, NET (including $5.5, $3.2,
$8.6 and $5.5 from affiliates)............................. 7.2 13.7 11.0 15.9
INTEREST EXPENSE (including $2.2, $.3,
$3.7 and $.3 to affiliate)................................. 46.0 34.7 82.3 69.6
-------- -------- -------- --------
Income Before Provision for Income Taxes........................ 306.1 310.8 447.6 492.6
PROVISION FOR INCOME TAXES...................................... 117.2 120.6 170.8 190.9
-------- -------- -------- --------
NET INCOME...................................................... $ 188.9 $ 190.2 $ 276.8 $ 301.7
======== ======== ======== ========
REINVESTED EARNINGS
At beginning of period..................................... $ --- $ 182.0 $ 251.6 $ 257.9
Add: net income........................................... 188.9 190.2 276.8 301.7
-------- -------- -------- --------
188.9 372.2 528.4 559.6
Deduct: dividends......................................... 164.4 187.4 503.9 374.8
-------- -------- -------- --------
At end of period........................................... $ 24.5 $ 184.8 $ 24.5 $ 184.8
======== ======== ======== ========
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
New England Telephone and Telegraph Company
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
June 30, December 31,
1998 1997
----------- ------------
CURRENT ASSETS
Cash......................................... $ 16.0 $ 19.3
Short-term investments....................... 70.0 131.6
Notes receivable from affiliate.............. 151.1 ---
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $57.7 and $53.7.. 971.5 933.4
Affiliates.............................. 158.1 129.8
Material and supplies........................ 126.8 113.4
Prepaid expenses............................. 42.8 130.6
Deferred income taxes........................ 18.3 26.0
Other........................................ 156.7 67.2
--------- ---------
1,711.3 1,551.3
--------- ---------
PLANT, PROPERTY AND EQUIPMENT................ 13,758.0 13,380.7
Less accumulated depreciation................ 7,797.9 7,476.2
--------- ---------
5,960.1 5,904.5
--------- ---------
OTHER ASSETS................................. 271.6 202.7
--------- ---------
TOTAL ASSETS................................. $ 7,943.0 $ 7,658.5
========= =========
See Notes to Condensed Financial Statements.
2
<PAGE>
New England Telephone and Telegraph Company
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
June 30, December 31,
1998 1997
---------- ------------
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate.................... $ 299.9 $ 246.2
Other........................................ 146.1 101.1
Accounts payable and accrued liabilities:
Affiliates................................... 836.8 572.4
Other........................................ 601.8 575.8
Advance billings and customer deposits......... 27.6 19.1
-------- --------
1,912.2 1,514.6
-------- --------
LONG-TERM DEBT................................. 2,031.9 2,077.4
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS................... 1,903.4 1,704.6
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credits............. 50.0 52.7
Other.......................................... 5.8 30.0
-------- --------
55.8 82.7
-------- --------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value...... 1.0 1.0
Additional paid-in capital..................... 2,014.2 2,026.6
Reinvested earnings............................ 24.5 251.6
-------- --------
2,039.7 2,279.2
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $7,943.0 $7,658.5
======== ========
See Notes to Condensed Financial Statements.
3
<PAGE>
New England Telephone and Telegraph Company
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
Six months ended
June 30,
---------------------
1998 1997
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ $ 915.3 $ 764.6
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments................. 61.6 ---
Additions to plant, property and equipment........... (503.9) (441.3)
Net change in note receivable from affiliate......... (151.1) 13.2
Other, net........................................... (13.7) 2.2
-------- --------
Net cash used in investing activities................ (607.1) (425.9)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations.... (.3) (.2)
Net change in note payable to affiliate.............. 53.7 ---
Dividends paid....................................... (339.5) (304.1)
Distributions of additional paid-in capital.......... (12.4) ---
Net change in outstanding checks drawn
on controlled disbursement accounts................ (13.0) (33.0)
-------- --------
Net cash used in financing activities................ (311.5) (337.3)
-------- --------
NET CHANGE IN CASH................................... (3.3) 1.4
CASH, BEGINNING OF PERIOD............................ 19.3 14.2
-------- --------
CASH, END OF PERIOD.................................. $ 16.0 $ 15.6
======== ========
See Notes to Condensed Financial Statements.
4
<PAGE>
New England Telephone and Telegraph Company
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
New England Telephone and Telegraph Company (the Company) is a wholly owned
subsidiary of NYNEX Corporation (NYNEX), which is a wholly owned subsidiary of
Bell Atlantic Corporation (Bell Atlantic). The accompanying unaudited condensed
financial statements have been prepared based upon Securities and Exchange
Commission rules that permit reduced disclosure for interim periods. These
financial statements reflect all adjustments which are necessary for a fair
presentation of results of operations and financial position for the interim
periods shown including normal recurring accruals. The results for the interim
periods are not necessarily indicative of results for the full year. For a more
complete discussion of significant accounting policies and certain other
information, refer to the financial statements included in the Company's 1997
Form 10-K.
The Company has reclassified certain amounts from prior year's data to
conform with the 1998 presentation.
2. Shareowner's Investment
Additional
Common Paid-in Reinvested
(Dollars in Millions) Stock Capital Earnings
------------------------------- -------- ---------- ----------
Balance at December 31, 1997.......... $ 1.0 $2,026.6 $ 251.6
Net income............................ 276.8
Distributions of additional paid-in
capital to NYNEX.................... 12.4
Dividends paid to NYNEX............... 503.9
------- -------- -------
Balance at June 30, 1998.............. $ 1.0 $2,014.2 $ 24.5
======= ======== =======
On June 23, 1998, the Company declared a dividend in the amount of $164.4
million. The dividend was paid to NYNEX on August 3, 1998.
3. Financial Instruments
In February 1998, an interest rate swap agreement was transferred to the
Company from an affiliate. This interest rate swap agreement has a notional
value of $175.0 million and is scheduled to mature in 2002. The interest rate
swap agreement requires the Company to make payments based on a variable rate
(5.8% at June 30, 1998) and receive payments based on a fixed rate (6.3% at June
30, 1998). The notional amount is used only to calculate interest payments to
be exchanged and is not actually paid or received, nor is it a measure of the
Company's potential gains or losses from market risks. The notional amount does
not represent the Company's exposure in the event of nonperformance by a
counterparty or its future cash requirements.
This interest rate swap agreement qualifies as a hedge and is accounted for
under the accrual method. An instrument qualifies as a hedge if it effectively
modifies and/or hedges the interest rate characteristics of the underlying fixed
or variable rate debt. Under the accrual method, no amounts are recognized on
the Company's balance sheets related to the principal balances. The interest
differential to be paid or received, which is accrued as interest rates change,
is recognized as an adjustment to Interest Expense over the life of the
agreement. These interest accruals are recorded in Current Assets and Current
Liabilities on the Company's balance sheets. If the Company terminates an
agreement, the gain or loss is recorded as an adjustment to the basis of the
underlying liability and amortized over the remaining original life of the
agreement. If the underlying liability matures or is extinguished and the
related derivative is not terminated, that derivative would no longer qualify
for accrual accounting and would then be accounted for at fair value, with
changes in that value included in income.
The Company does not give or receive collateral on its interest rate swap
agreement due to its credit rating and that of its counterparty. While the
Company may be exposed to credit losses due to the nonperformance of its
counterparty, the Company considers the risk remote and does not expect the
settlement of this transaction to have a material effect on its results of
operations or financial condition.
5
<PAGE>
New England Telephone and Telegraph Company
4. Debt
The Company established a contractual agreement in the second quarter of
1998 with an affiliated company, Bell Atlantic Network Funding Corporation
(BANFC), for the provision of short-term financing and cash management services.
BANFC issues commercial paper and obtains bank loans to fund the working capital
requirements of Bell Atlantic's network services subsidiaries, including the
Company, and invests funds in temporary investments on their behalf. At June 30,
1998, the Company had $500.0 million of an unused line of credit with BANFC.
5. Revenues Subject to Possible Refund
Several federal regulatory matters may possibly require the Company to
refund a portion of the revenues collected in the current and prior periods. As
of June 30, 1998, the aggregate amount of revenues estimated to be subject to
possible refund was approximately $39 million for the Company. The outcome of
each pending matter, as well as the time frame within which each will be
resolved, is not presently determinable.
6. Litigation and Other Contingencies
Various legal actions and regulatory proceedings are pending to which the
Company is a party. The Company has established reserves for liabilities in
connection with regulatory and legal matters which it currently deems to be
probable and estimable. The Company does not expect that the ultimate
resolution of these matters in future periods will have a material effect on the
Company's financial position, but it could have a material effect on results of
operations.
7. Recent Accounting Pronouncements
Costs of Computer Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," (SOP 98-1). SOP 98-1 provides, among
other things, guidance for determining whether computer software is for internal
use and when the cost related to such software should be expensed as incurred or
capitalized and amortized. SOP 98-1 is required to be adopted no later than
January 1, 1999.
The Company currently capitalizes initial right-to-use fees for central
office switching equipment, including initial operating system and initial
application software costs. For noncentral 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 as incurred. The Company is currently evaluating the
provisions of SOP 98-1 and has not yet quantified the effect at this time. The
adoption of SOP 98-1 is expected to result in an increase in earnings in the
year of adoption due to the prospective capitalization of costs which were
previously expensed.
Derivatives and Hedging Activities
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. This statement
requires that all derivatives are measured at fair value and recognized as
either assets or liabilities on the Company's balance sheet. Changes in the fair
values of the derivative instruments will be recognized in either earnings or
comprehensive income, depending on the designated use and effectiveness of the
instruments. The Company must adopt SFAS No. 133 no later than January 1, 2000.
The Company is currently evaluating the provisions of SFAS No. 133 and has not
yet determined what the impact of adopting this statement will be on its future
results of operations or financial condition.
6
<PAGE>
New England Telephone and Telegraph Company
8. Proposed Bell Atlantic - GTE Merger
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
It is expected that the merger will qualify as a "pooling of interests,"
which means for accounting and financial reporting purposes the companies will
be treated as if they had always been combined. The completion of the merger is
subject to a number of conditions, including certain regulatory approvals,
receipt of opinions that the merger will be tax free, and the approval of the
shareholders of both Bell Atlantic and GTE. The companies expect to close the
merger in the second half of 1999.
7
<PAGE>
New England Telephone and Telegraph Company
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income of $276.8 million for the six month period
ended June 30, 1998, compared to net income of $301.7 million for the same
period in 1997.
The Company incurred pre-tax costs associated with its retirement incentive
program totaling $246.3 million for the six month period ended June 30, 1998,
compared to $181.9 million for the same period in 1997.
The retirement incentive costs for 1998 and 1997 include amounts charged to
the Company by Telesector Resources Group, Inc. (Telesector Resources), an
affiliate, for an allocated portion of the employees who left Telesector
Resources under the retirement incentive program. In 1998, the retirement
incentive costs allocated to the Company by Telesector Resources were $6.8
million, compared to $51.0 million in 1997. For additional information about
the Company's retirement incentive program, see "Retirement Incentives" on page
11.
These and other items affecting the comparison of the Company's results of
operations for the six month periods ended June 30, 1998 and 1997 are discussed
in the following sections. This Management's Discussion and Analysis should
also be read in conjunction with the Company's 1997 Annual Report on Form 10-K.
OPERATING REVENUE STATISTICS
- ----------------------------
1998 1997 % Change
- --------------------------------------------------------------------------------
At June 30
- ----------
Access Lines in Service (in thousands)*
Residence............................. 4,574 4,440 3.0%
Business.............................. 2,325 2,182 6.6
Public................................ 80 81 (1.2)
------ ------
6,979 6,703 4.1
====== ======
Six Month Period Ended June 30
- ------------------------------
Access Minutes of Use (in millions)...... 13,945 12,868 8.4
====== ======
* 1997 reflects a restatement of access lines in service to include Primary Rate
ISDN (Integrated Services Digital Network) channels to conform with the 1998
presentation.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Six Month Period Ended June 30 1998 1997
- --------------------------------------------------------------------------------
Local services............................. $1,110.2 $1,071.4
Network access services.................... 731.8 710.6
Long distance services..................... 320.1 337.3
Ancillary services......................... 114.9 93.5
Directory and information services......... 130.2 114.1
-------- --------
Total...................................... $2,407.2 $2,326.9
======== ========
8
<PAGE>
New England Telephone and Telegraph Company
LOCAL SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $38.8 3.6%
- --------------------------------------------------------------------------------
Local services revenues are earned by the Company from the provision of local
exchange, local private line, public telephone (pay phone) and value-added
services. Value-added services are a family of services which expand the
utilization of the network. These services include products such as Caller ID,
Call Waiting and Return Call.
Higher usage of the Company's network facilities was the primary reason for
the increase in local services revenues in the first half of 1998. This growth
was generated by an increase in access lines in service of 4.1% from June 30,
1997. Access line growth reflects primarily higher demand for Centrex services
and an increase in additional residential lines. Higher revenues from private
line and switched data services also contributed to the revenue growth in 1998.
The Company also recognized higher revenues from value-added services due to
higher customer demand and usage. Revenue growth was partially offset by the
impact of price reductions on certain local services.
NETWORK ACCESS SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $21.2 3.0%
- --------------------------------------------------------------------------------
Network access services revenues are earned from carriers for their use of
the Company's local exchange facilities in providing usage services to their
customers. In addition, end-user subscribers pay flat rate access fees to
connect to the Company's network.
Network access services revenues grew in the first half of 1998 primarily as
a result of higher customer demand as reflected by growth in access minutes of
use of 8.4% over the same period in 1997. Volume growth was boosted by the
expansion of the business market, particularly for high-capacity services.
Demand for special access services grew as Internet service providers and other
high-capacity users increased their utilization of the Company's network.
Growth in access revenues also reflects higher network usage by alternative
providers of intraLATA toll services. In addition, higher end-user revenues
attributable to an increase in access lines in service contributed to revenue
growth in 1998. This volume-related growth was partially offset by net price
reductions mandated by federal and state price cap plans.
Effective July 1, 1998, the Company implemented price decreases of
approximately $49 million on an annual basis for interstate services, in
connection with the Federal Communications Commission's (FCC) Price Cap Plan.
The rates included in this 1998 filing will be in effect through June 1999. The
July 1, 1998 rates include amounts necessary to recover the Company's
contribution to the FCC's new universal service fund. The FCC has created a
multi-billion dollar interstate fund to link schools and libraries to the
Internet and to subsidize low-income consumers and rural health care providers.
Under the FCC's rules, all providers of interstate telecommunications services
must contribute to the fund. The Company's contributions to the universal
service fund are included in Other Operating Expenses.
9
<PAGE>
New England Telephone and Telegraph Company
LONG DISTANCE SERVICES REVENUES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(17.2) (5.1)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made outside
a customer's local calling area, but within the same service area of the Company
(intraLATA toll). Other long distance services that the Company provides
include 800 services and Wide Area Telephone Service (WATS).
Long distance services revenues declined in the first half of 1998 primarily
as a result of price reductions for long distance services implemented as part
of the Company's response to competition. Competition for intraLATA toll
services increased due to the introduction of presubscription in several of the
Company's jurisdictions during the second half of 1997. Presubscription permits
customers to use an alternative provider of their choice for intraLATA toll
calls without dialing a special access code when placing a call. The adverse
impact on revenues as a result of presubscription was partially mitigated by
increased network access services revenues for usage of the Company's network
by these alternative providers.
These decreases were partially offset by the recognition of revenues received
from other local exchange carriers for intraLATA toll services provided to their
customers by the Company, beginning in 1998. These revenues had previously been
recorded net of charges paid to the local exchange carriers.
ANCILLARY SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $21.4 22.9%
- --------------------------------------------------------------------------------
The Company provides ancillary services which include billing and collection
services provided to long distance carriers and affiliates, customer premises
equipment (CPE) services, facilities rental services for affiliates and
nonaffiliates, sales of software to nonaffiliates, usage of separately priced
(unbundled) components of its network and voice messaging services.
Ancillary services revenues increased in the first six months of 1998 due to
a combination of higher revenues received from local exchange carriers for usage
of unbundled components of the Company's network, revenue growth from increased
market penetration for voice messaging services, principally Home Voice Mail,
and sales of software to nonaffiliates. Increased demand by long distance
carriers and affiliates for billing and collection services also contributed to
the growth in ancillary services revenues.
DIRECTORY AND INFORMATION SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $16.1 14.1%
- --------------------------------------------------------------------------------
Directory and information services revenues consist of payments from an
affiliate, Bell Atlantic Yellow Pages Company (Yellow Pages), for earnings
related to publishing directories in Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont based on a regulated rate of return and fees paid by Yellow
Pages for the use of the Company's name in soliciting directory advertising and
in publishing and distributing directories.
The increase in directory and information services revenues in the first six
months of 1998 was principally due to increased payments from Yellow Pages.
Yellow Pages' earnings related to publishing directories were positively
impacted by lower retirement incentive costs and a reduction in other operating
expenses, resulting in the increase in payments to the Company.
10
<PAGE>
New England Telephone and Telegraph Company
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Six Month Period Ended June 30 1998 1997
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes..... $ 711.7 $ 598.1
Depreciation and amortization.................... 459.7 441.1
Taxes other than income.......................... 71.3 72.3
Other operating expenses......................... 645.6 669.1
-------- --------
Total............................................ $1,888.3 $1,780.6
======== ========
EMPLOYEE COSTS
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $113.6 19.0%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by the Company. Similar costs
incurred by employees of Telesector Resources, who provide centralized services
on a contractual basis, are allocated to the Company and are included in Other
Operating Expenses.
Employee costs increased in the first six months of 1998 primarily as a
result of additional costs incurred in connection with the Company's retirement
incentive program. (For a further discussion of retirement incentives, see
below). The rise in employee costs was also attributable to higher overtime pay
due to the unusually severe winter storms in the first quarter of 1998 and
annual salary and wage increases for management and associate employees.
These increases were offset, in part, by the effect of lower work force
levels and by lower pension and benefit costs. The reduction in pension and
benefit costs was caused by a number of factors, including changes in actuarial
assumptions, favorable pension plan investment returns, lower than expected
medical claims and plan amendments including the conversion of a pension plan to
a cash balance plan. Effective January 1, 1998, Bell Atlantic established common
pension and savings plan benefit provisions for all management employees. As a
result, all NYNEX Corporation (NYNEX) management employees, including management
employees of the Company, receive the same benefit levels as previously given
under Bell Atlantic management benefit plans. This change included the
conversion of the NYNEX management pension plan to a cash balance plan.
Associate employee wages and pension and other benefits are determined under
contracts with unions representing associate employees of the Company. On August
11, 1998, the Company and the Communications Workers of America (CWA) reached a
tentative agreement on a new 2-year contract. The contract provides for wage
increases of up to 3.8 percent effective August 9, 1998, and up to 4 percent
effective August 8, 1999. Pensions will increase by 20 percent. In addition,
certain union-represented employees will receive a $500 cash payment in
September 1998 and an additional $400 cash payment in August 1999, and employees
in certain bargaining units will receive lump sum payments of $700 each in 2000
and 2001 if customer care performance standards are achieved. The new contract
also includes revised terms of the retirement incentive program, other benefit
improvements and certain employment security provisions.
On August 12, 1998, the Company concluded a tentative agreement on a new
2-year contract with the International Brotherhood of Electrical Workers (IBEW).
The IBEW contract provides for wage increases of up to 3.8 percent effective
August 9, 1998, and up to 4 percent effective August 8, 1999. The contract also
includes cash payments, improved pension and other benefits and certain
employment security provisions.
The labor agreements with the CWA and IBEW are subject to ratification by the
union membership, which is expected within the next 30 days.
Retirement Incentives
The Company had previously disclosed that it expected the total number of
employees who would elect to leave under the program through August 1998 would
be in the range of 7,000 to 7,400 employees. The total number of employees
includes the Company's allocated portion of employees of Telesector Resources.
11
<PAGE>
New England Telephone and Telegraph Company
In the first half of 1998, the Company recognized a pre-tax charge of
approximately $246 million as a result of 1,720 associate employees electing to
leave the Company under the retirement incentive program. Since the inception
of the retirement incentive program in 1993, the Company has incurred additional
costs totaling approximately $923 million (pre-tax) as of June 30, 1998. As of
the first half 1998, the number of employees who have left the business under
the retirement incentive program totaled 9,102, consisting of 3,145 management
and 5,957 associate employees.
The retirement incentive program covering management employees ended on March
31, 1997 and the program covering associate employees, which was scheduled to
end on August 8, 1998, was revised under the terms of the tentative agreements
described above. Under the revised retirement incentive program, eligible
associate employees are being offered an opportunity to elect, during a 30-day
period in August-September 1998, to retire on one of several alternate dates in
the last four months 1998 and calendar year 1999. The election to retire under
the program will be irrevocable, except in the event of extraordinary personal
circumstances. After the end of the election period, Bell Atlantic will tabulate
the acceptances and announce the additional costs to be incurred as a charge
later this year. The number of applicants, and the resulting additional cost for
the revised incentive program cannot be confidently estimated in advance,
particularly because the tentative agreements provide for improvements to the
terms of the ongoing pension plan which could incent employees to defer
retirement and continue their employment beyond the year 1999. Specifically, a
15 percent pension formula increase applies to retirements after July 1, 2000,
and, any of the eligible associates who remain employed through at least January
1, 2001, will be entitled to select either the same pension that they would have
received under the revised retirement incentive program, or their pension under
the ongoing plan.
DEPRECIATION AND AMORTIZATION
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $18.6 4.2%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first six months of
1998 over the same period in 1997 principally as a result of growth in
depreciable telephone plant. This expense increase was partially offset by the
effect of lower rates of depreciation and amortization.
TAXES OTHER THAN INCOME
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(1.0) (1.4)%
- --------------------------------------------------------------------------------
Taxes other than income consist of taxes for gross receipts, property,
capital stock and business licenses.
The decrease in taxes other than income was primarily due to lower gross
receipts taxes resulting from a reduction in the tax rate, lower estimates for
property taxes and the impact of the elimination of the federal superfund tax in
1997. These decreases were substantially offset by the settlement of a sales
and use tax audit in Massachusetts in February 1998.
OTHER OPERATING EXPENSES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(23.5) (3.5)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from Telesector Resources, rent, network software
costs, the provision for uncollectible accounts receivable, and other costs.
The decrease in other operating expenses was largely attributable to lower
centralized services expenses allocated from Telesector Resources and lower
network software purchases. The decline in centralized services expenses was
due, in part, to a reduction in Telesector Resources' allocated portion of
retirement incentive costs. The decline in centralized services expenses was
partially offset by transition and integration costs allocated to the Company in
connection with the merger of Bell Atlantic and NYNEX. These decreases were
partially offset by higher interconnection charges for terminating calls on the
networks of competitive local exchange and other carriers and by the Company's
contribution to the federal universal service fund, as described earlier.
12
<PAGE>
New England Telephone and Telegraph Company
OTHER INCOME, NET
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(4.9) (30.8)%
- --------------------------------------------------------------------------------
The decrease in other income, net, was attributable to the effect of a gain
recognized on the disposition of certain property in May 1997. This decrease
was offset, in part, by additional interest income resulting from the purchase
of short-term investments in December 1997 to pre-fund a trust for the payment
of certain employee benefits and from a note receivable with an affiliate. An
increase in the income recognized from Telesector Resources under the equity
method also offset the decrease in other income, net.
INTEREST EXPENSE
1998-1997 Increase
- --------------------------------------------------------------------------------
Six Months $12.7 18.2%
- --------------------------------------------------------------------------------
The increase in interest expense in the first six months of 1998 was
primarily due to the recognition of interest expense in connection with the
settlement of tax-related matters. Higher levels of average advances from NYNEX
also generated additional interest cost in the first six months of 1998.
EFFECTIVE INCOME TAX
Six Months Ended June 30
- --------------------------------------------------------------------------------
1998 38.2%
- --------------------------------------------------------------------------------
1997 38.8%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. The Company's
effective income tax rate was lower in the first six months of 1998 principally
due to higher tax credits recorded in 1998.
FINANCIAL CONDITION
- -------------------
The Company uses the net cash generated from operations and from external
financing to fund capital expenditures for network expansion and modernization,
and to pay dividends. While current liabilities exceeded current assets at both
June 30, 1998 and 1997, the Company's sources of funds, primarily from
operations and, to the extent necessary, from readily available financing
arrangements with affiliates, are sufficient to meet ongoing operating
requirements. Management expects that presently foreseeable capital requirements
will continue to be financed primarily through internally generated funds.
Additional long-term debt may be needed to fund development activities or to
maintain the Company's capital structure to ensure financial flexibility.
At June 30, 1998, the Company had $500.0 million of an unused line of credit
with an affiliate, Bell Atlantic Network Funding Corporation. In addition, the
Company had $325.0 million remaining under a shelf registration statement filed
with the Securities and Exchange Commission for the issuance of unsecured debt
securities.
The Company's debt ratio was 54.8% as of June 30, 1998, compared to 49.5% as
of June 30, 1997 and 51.5% as of December 31, 1997.
On June 23, 1998, the Company declared a dividend in the amount of $164.4
million. The dividend was paid to NYNEX on August 3, 1998.
13
<PAGE>
New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the
quarter ended June 30, 1998.
14
<PAGE>
New England Telephone and Telegraph Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
Date: August 13, 1998 By /s/ Edwin F. Hall
------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 12, 1998.
15
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND THE BALANCE SHEET
AT JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<PERIOD-TYPE> 6-MOS
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<PERIOD-END> JUN-30-1998
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