<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-K
--------------------------------------
(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, 1997
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, MA 02110
Telephone Number (617) 743-9800
-----------------------------
Securities registered pursuant to Section 12(b) of the Act: See attached
Schedule A.
Securities registered pursuant to Section 12(g) of the Act: None.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION I(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
SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- --------------------------------- ---------------------
Thirty-eight year 4 5/8% Debentures, due April 1, 1999 New York Stock
Exchange
Forty year 4 1/2% Debentures, due July 1, 2002 "
Forty year 4 5/8% Debentures, due July 1, 2005 "
Thirty-nine year 6 1/8% Debentures, due October 1, 2006 "
Thirty-five year 7 3/8% Debentures, due October 15, 2007 "
Forty year 6 3/8% Debentures, due September 1, 2008 "
Thirty year 7 7/8% Debentures, due September 1, 2022 "
Thirty year 6 7/8% Debentures, due October 1, 2023 "
Forty year 7 7/8% Debentures, due November 15, 2029 "
Forty year 9% Debentures, due August 1, 2031 "
Five year 5.05% Notes, due October 1, 1998 "
Seven year 6.15% Notes, due September 1, 1999 "
Seven year 5 3/4% Notes, due May 1, 2000 "
Ten year 8 5/8% Notes, due August 1, 2001 "
Ten year 6 1/4% Notes, due March 15, 2003 "
Fifteen year 6.30% Notes, due December 16, 2012 "
<PAGE>
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I
1. Business
(Abbreviated pursuant to General Instruction I(2).)................ 1
2. Properties......................................................... 7
3. Legal Proceedings.................................................. 7
4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction I(2).).................... 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 8
6. Selected Financial Data
(Omitted pursuant to General Instruction I(2).).................... 8
7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction I(2).)................ 9
7A. Quantitative and Qualitative Disclosures About Market Risk......... 16
8. Financial Statements and Supplementary Data........................ 17
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 17
PART III
(Omitted pursuant to General Instruction I(2).):
10. Directors and Executive Officers of the Registrant................. 17
11. Executive Compensation............................................. 17
12. Security Ownership of Certain Beneficial Owners and Management..... 17
13. Certain Relationships and Related Transactions..................... 17
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 17
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 20, 1998.
<PAGE>
New England Telephone and Telegraph Company
PART I
Item 1. Business
GENERAL
New England Telephone and Telegraph Company (the "Company") is incorporated
under the laws of the State of New York and has its principal offices at 125
High Street, Boston, Massachusetts 02110 (telephone number 617-743-9800). The
Company is a wholly owned subsidiary of NYNEX Corporation ("NYNEX"), which is a
wholly owned subsidiary of Bell Atlantic Corporation (Bell Atlantic).
The Company presently serves a territory consisting of six Local Access and
Transport Areas ("LATAs") in Maine, Massachusetts, New Hampshire, Rhode Island
and Vermont. The LATAs are generally centered on a city or based on some other
identifiable common geography and, with certain limited exceptions, each LATA
marks the boundary within which the Company has been permitted by the
"Modification of Final Judgment" ("MFJ") to provide telephone service.
The Company currently provides two basic types of telecommunications
services. First, the Company transports telecommunications traffic between
subscribers located within the same LATA ("intraLATA service"), including both
local and long distance services. Local service includes the provision of local
exchange ("dial-tone"), local private line and public telephone services
(including dial-tone service for pay telephones owned by the Company and by
other pay telephone providers). Among other local services provided are Centrex
(telephone subsidiary central office-based switched telephone service enabling
the subscriber to make both intercom and outside calls) and a variety of special
and custom calling services. Long distance service includes message toll
service (calling service beyond the local calling area) within LATA boundaries,
and intraLATA Wide Area Toll Service (WATS) and 800 services (volume discount
offerings for customers with highly concentrated demand). Second, the Company
provides exchange access service, which links a subscriber's telephone or other
equipment to the transmission facilities of interexchange carriers which, in
turn, provide telecommunications service between LATAs ("interLATA service") to
their customers. The Company also provides exchange access service to
interexchange carriers which provide intrastate intraLATA toll service.
BELL ATLANTIC - NYNEX MERGER
On August 14, 1997, Bell Atlantic and NYNEX consummated a merger whereby
NYNEX became a subsidiary of Bell Atlantic and NYNEX shareowners received 0.768
of a share of Bell Atlantic common stock for each share of NYNEX common stock
owned. Bell Atlantic owns nine subsidiaries which provide domestic
telecommunications services (collectively, the "telephone subsidiaries").
In 1997, the Company recognized merger-related costs of approximately $71
million, consisting of $6 million of direct incremental costs and $51 million
for employee severance costs and $14 million for transition and integration
costs. These costs include approximately $35 million representing the Company's
allocated share of merger-related costs from Telesector Resources Group, Inc.,
an affiliate which provides centralized services on a contract basis.
TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act of 1996 (the "Act") became effective on February
8, 1996. Prior to the enactment of the Act, the operations of Bell Atlantic and
its subsidiaries were subject to the requirements of the MFJ, a consent decree
that arose out of an antitrust action brought by the United States Department of
Justice ("DOJ") against AT&T Corp. ("AT&T") and the Bell Operating Companies
("BOCs"), including the telephone subsidiaries. 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.
In general, the Act includes provisions that open local exchange markets to
competition and permit BOCs, or their affiliates, such as Bell Atlantic, to
engage in manufacturing and to provide services between LATAs. Under the Act,
the ability of Bell Atlantic to engage in businesses previously prohibited by
the MFJ is largely dependent on satisfying certain conditions contained in the
Act and regulations to be promulgated thereunder.
1
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New England Telephone and Telegraph Company
The Act takes a two-fold approach to the rules governing competition in the
interLATA market. First, Bell Atlantic is permitted to apply for state approval
to offer interLATA services originating in states outside of the geographic
region in which the telephone subsidiaries operate as local exchange carriers.
Second, each of the telephone subsidiaries must demonstrate to the Federal
Communications Commission ("FCC") that it has satisfied certain requirements in
order for Bell Atlantic to be permitted to offer interLATA services for calls
originating within the geographic region in which the telephone subsidiary
operates as a local exchange carrier. Among the requirements with which a
telephone subsidiary must comply is a 14-point "competitive checklist," which
includes steps the telephone subsidiaries must take which will help competitors
offer local services through resale of the telephone subsidiaries' service,
purchase of unbundled network elements from the telephone subsidiaries, or
through the competitors' own networks. Bell Atlantic must also demonstrate to
the FCC that its entry into the interLATA market would be in the public
interest.
In December 1997, a U.S. District Court found that the line-of-business
restrictions in the Act, including the requirement that BOCs alone comply with a
competitive checklist before being allowed to provide long distance, are
unconstitutional because they apply only to the BOCs. Bell Atlantic was allowed
to join the case prior to the court's decision. The court has granted a stay of
its decision pending appeals by the DOJ and other parties.
The FCC is required to conduct a number of rulemakings to implement the Act.
See "FCC Regulation and Interstate Rates" and "Competition - Local Exchange
Services."
OPERATIONS
Bell Atlantic has organized certain telecommunications group functions into
business units operating across the telephone subsidiaries. The business units
focus on specific market segments. The telephone subsidiaries, including the
Company, remain responsible within their respective service areas for the
provision of telephone services, financial performance and regulatory matters.
The Consumer Services business unit markets communications services to
residential customers.
The Wholesale Services business unit markets (i) switched and special access
to the telephone subsidiaries' local exchange networks, and (ii) billing and
collection services, including recording, rating, bill processing and bill
rendering. The principal customers are interexchange carriers; AT&T is the
largest single customer. Other customers include business customers and
government agencies with their own special access network connections, wireless
companies and other local exchange carriers which resell network connections to
their own customers.
The General Business Services business unit markets communications and
information services to small and medium-sized businesses.
The Large Business Services business unit markets communications and
information services to large businesses. These services include voice
switching/processing services (e.g., dedicated private lines, custom Centrex,
call management and voice messaging), end-user networking (e.g., credit and
debit card transactions, and personal computer-based conferencing, including
data and video), internetworking (establishing links between the geographically
disparate networks of two or more companies or within the same company), network
integration (integrating multiple geographically disparate networks into one
system), network optimization (disaster avoidance, 911 service, intelligent
vehicle highway systems), video services (distance learning, telemedicine,
videoconferencing) and interactive multimedia applications services.
The Public and Operator Services business unit markets pay telephone and
operator services to meet consumer needs for accessing public networks and
locating and identifying network subscribers, and to provide calling assistance
and arrange billing alternatives (e.g., calling card, collect and third party
calls).
The Federal Systems business unit markets communications and information
technology and services to departments, agencies and offices of the executive,
judicial and legislative branches of the federal government.
2
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New England Telephone and Telegraph Company
The Network Group manages the technologies, services and systems platforms
required by the business units and the telephone subsidiaries to meet the needs
of their customers, including switching, feature development and on-premises
installation and maintenance services.
The Information Services Group publishes directories for the Company. The
Company has an agreement with Bell Atlantic Yellow Pages Company ("Yellow
Pages"), a wholly owned subsidiary of Bell Atlantic, pursuant to which Yellow
Pages pays a fee to the Company for the use of the Company's name in soliciting
directory advertising and in publishing and distributing directories. Yellow
Pages has given the Company notice of its intention to terminate the agreement,
effective January 1, 1999.
FCC Regulation and Interstate Rates
The telephone subsidiaries, including the Company, are subject to the
jurisdiction of the FCC with respect to interstate services and certain related
matters. In 1997, the FCC adopted orders to reform the interstate access charge
system, to modify its price cap system and to implement the "universal service"
requirements of the Act.
Access Charges
Interstate access charges are the rates long distance carriers pay for use
and availability of the telephone subsidiaries' facilities for the origination
and termination of interstate service. The FCC's order adopted changes to the
access tariff structures in order to permit the telephone subsidiaries' to
recover a greater portion of their interstate costs through rates that reflect
the manner in which those costs are incurred. The FCC required a phased
restructuring of access charges, beginning in January 1998, so that the
telephone subsidiaries' nonusage-sensitive costs will be recovered from long
distance carriers and end-users through flat rate charges, and usage-sensitive
costs will be recovered from long distance carriers through usage-based rates.
In addition, the FCC will require establishment of different levels of usage-
based charges for originating and for terminating interstate traffic.
A portion of the telephone subsidiaries' interstate costs are also recovered
through flat monthly charges to subscribers ("subscriber line charges"). Under
the FCC's order, subscriber line charges for primary residential and single line
businesses will remain unchanged initially, but such charges for additional
residential lines and multi-line businesses will rise.
The FCC has begun an investigation of the tariffs filed by the telephone
subsidiaries and other local exchange carriers to implement this new rate
structure.
Price Caps
The FCC also adopted modifications to its price cap rules which affect access
rate levels. Under those rules, each year the Company's price cap index is
adjusted downward by a fixed percentage intended to reflect increases in
productivity ("Productivity Factor") and adjusted upward by an allowance for
inflation (the GDP-PI). In the prior year, the Company's Productivity Factor
was 5.3%. The FCC created a single Productivity Factor of 6.5% for all price
cap companies, eliminated requirements to share a portion of future interstate
earnings and required that rates be set as if the higher Productivity Factor had
been in effect since July 1996. Any local exchange company that earns an
interstate rate of return below 10.25% in a calendar year will be permitted to
increase its interstate rates in the following year. The FCC also ordered
elimination of recovery for amortized costs associated with the implementation
of equal access to all long distance carriers and removal of certain general
overhead costs that it concluded were associated with other detariffed services.
The FCC is expected to adopt an order in 1998 to address the conditions under
which the FCC would relax or remove existing access rate structure requirements
and price cap restrictions as increased local market competition develops.
Universal Service
The FCC also adopted rules implementing the "universal service" provision of
the Act, which was designed to ensure that a basket of designated services is
widely available and affordable to all customers, including low-income customers
and customers in areas that are expensive to serve. The FCC's universal service
support in 1998 will approximate
3
<PAGE>
New England Telephone and Telegraph Company
$1.5 billion for high-cost areas. The support amount thereafter cannot yet be
determined. The FCC, in conjunction with the Federal-State Joint Board on
Universal Service, will adopt a methodology for determining high-cost areas for
nonrural carriers, and the proper amount of federal universal service support
for high-cost areas. A new federal high-cost universal service support mechanism
will become effective in 1999.
The FCC also adopted rules to implement the Act's requirements to provide
discounted telecommunications services to schools and libraries and to ensure
that not-for-profit rural health care providers have access to such services at
rates comparable to those charged their urban counterparts. All
telecommunications carriers must contribute funding for these universal service
programs. The federal universal service funding needs as of January 1, 1998
require each of the telephone subsidiaries to contribute approximately 2% of its
interstate retail revenues for high-cost and low income subsidies. Each of the
telephone subsidiaries will also be contributing a portion of its total retail
revenues for schools, libraries and not-for-profit health care. The telephone
subsidiaries will recover these contributions through interstate charges to long
distance carriers and end-users.
State Regulation of Rates and Services
The communications services of the Company are subject to regulation by the
state regulatory commissions of Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont with respect to intrastate rates and services and certain
other matters.
Maine
In 1995, the Maine Public Utilities Commission ("MPUC") adopted a five-year
price cap plan for the Company, with the provision for a five-year extension
after review by the MPUC. Overall average prices and specific rate elements for
most services are limited by a price cap formula of inflation minus a
productivity factor plus or minus certain exogenous cost changes. There is no
restriction on the Company's earnings. The MPUC also established a service
quality index with penalties in the form of customer rebates to apply if service
quality categories are missed.
Massachusetts
In 1995, the Massachusetts Department of Public Utilities ("MDPU") approved a
price regulation plan for the Company 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.
New Hampshire
The Company's operations are subject to rate of return regulation.
Rhode Island
In 1996, the Rhode Island Public Utilities Commission ("RIPUC") approved an
incentive regulation plan for the Company. 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. Other features of the plan
include: more stringent service quality requirements, including a financial
penalty, and no increase in residence or business basic exchange rates through
1999.
Vermont
The Company's operations are subject to rate of return regulation.
4
<PAGE>
New England Telephone and Telegraph Company
Competition
Legislative changes, including provisions of the Act discussed above under
"Telecommunications Act of 1996," regulatory changes and new technology are
continuing to expand the types of available communications services and
equipment and the number of competitors offering such services. The Company
anticipates that these industry changes, together with the rapid growth,
enormous size and global scope of these markets, will attract new entrants and
encourage existing competitors to broaden their offerings. Current and potential
competitors in telecommunication services include long distance companies, other
local telephone companies, cable companies, wireless service providers, foreign
telecommunications providers, electric utilities, Internet service providers and
other companies that offer network services. Many of these companies have a
strong market presence, brand recognition and existing customer relationships,
all of which contribute to intensifying competition and may affect the Company's
future revenue growth.
Local Exchange Services
The ability to offer local exchange services has historically been subject to
regulation by state regulatory commissions. Applications from competitors to
provide and resell local exchange services have been approved in every
jurisdiction in which the Company operates.
One of the purposes of the Act was to ensure, and accelerate, the emergence
of competition in local exchange markets. Toward this end, the Act requires
most existing local exchange carriers (incumbent local exchange carriers, or
"ILECs"), including the Company, to permit potential competitors (competitive
local exchange carriers, or "CLECs") to (i) purchase service from the ILEC for
resale to CLEC customers, (ii) purchase unbundled network elements from the
ILEC, and/or (iii) interconnect its network with the ILEC's network. The Act
provides for arbitration by the state public utility commission if an ILEC and a
CLEC are unable to reach agreement on the terms of the arrangement sought by the
CLEC.
In 1997, a U.S. Court of Appeals found that the FCC unlawfully attempted to
preempt state authority in implementing key provisions of the Act and that
several provisions of the FCC's rules are inconsistent with the statutory
requirements. In particular, it affirmed that the states have exclusive
jurisdiction over the pricing of local interconnection and resale arrangements,
that the FCC cannot lawfully allow competitors to "pick and choose" isolated
terms out of negotiated interconnection agreements, that the FCC cannot require
incumbent local exchange carriers to provide competitors a pre-assembled network
platform at network element prices or to combine unbundled network elements for
competitors. The U.S. Supreme Court has agreed to hear appeals by the DOJ and
other parties of that decision.
Negotiations between the Company and various CLECs, and arbitrations before
the various state regulatory commissions, have continued. As of March 1, 1998,
the Company had entered into 87 approved agreements with CLECs.
Under the various agreements and arbitrations discussed above, the Company is
generally required to sell its services to CLECs at discounts ranging from
approximately 17% to 29% from the prices the Company charges its retail
customers.
IntraLATA Toll Services
IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call. The state regulatory
commissions permit other carriers to offer intraLATA toll services within each
state. Until the implementation of "presubscription," intraLATA toll calls were
completed by the Company unless the customer dialed a code to access a competing
carrier. Presubscription changes this dialing method and enables customers to
make these toll calls using another carrier without having to dial an access
code. The Act generally prohibits, with certain exceptions, a state from
requiring presubscription until the earlier of such time as the BOC is
authorized to provide long distance services originating in the state or three
years from the effective date of the Act. The Company implemented
presubscription in 1997 in the states of Maine, New Hampshire, Rhode Island and
Vermont. The Company expects to implement presubscription in Massachusetts
coincident with Bell Atlantic's offering of long distance services in
Massachusetts, or as ordered by the MDPU in accordance with the Act.
5
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New England Telephone and Telegraph Company
Alternative Access
A substantial portion of the Company's revenues from business and government
customers is derived from a relatively small number of large, multiple-line
subscribers.
The Company faces competition from alternative communications systems,
constructed by large end-users, interexchange carriers and alternative access
vendors, which are capable of originating and/or terminating calls without the
use of the Company's plant. The ability of such alternative access providers to
compete with the Company has been enhanced by the FCC's orders requiring the
Company to offer virtual collocated interconnection for special and switched
access services.
Other potential sources of competition include cable television systems,
shared tenant services and other non-carrier systems which are capable of
bypassing the Company's local plant, either partially or completely, through
substitution of special access for switched access or through concentration of
telecommunications traffic on fewer of the Company's lines.
Wireless Services
Wireless services also constitute potential sources of competition to the
Company. Wireless portable telephone services employ digital technology, allow
customers to make and receive telephone calls from any location using small
handsets, and can also be used for data transmission.
Public Telephone Services
The Company faces increasing competition in the provision of pay telephone
services from other providers. In addition, the growth of wireless
communications negatively impacts usage of public telephones.
Operator Services
Alternative operator services providers have entered into competition with
the Company's operator services product line.
EMPLOYEES
As of December 31, 1997, the Company had approximately 18,500 employees.
6
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New England Telephone and Telegraph Company
Item 2. Properties
GENERAL
The principal properties of the Company do not lend themselves to simple
description by character and location. The Company's investment in plant,
property and equipment consisted of the following at December 31:
1997 1996
------ ------
Central office equipment............................... 41% 41%
Cable, wiring and conduit.............................. 40 40
Land and buildings..................................... 7 7
Other equipment........................................ 10 10
Other.................................................. 2 2
--- ---
100% 100%
=== ===
"Central office equipment" consists of switching equipment, transmission
equipment and related facilities. "Cable, wiring and conduit" consists
primarily of aerial cable, underground cable, conduit and wiring. "Land and
buildings" consists of land owned in fee and improvements thereto, principally
central office buildings. "Other equipment" consists of public telephone
instruments and telephone equipment, poles, furniture, office equipment, and
vehicles and other work equipment. "Other" property consists primarily of plant
under construction, capital leases and leasehold improvements.
The Company's customers are served by electronic switching systems that
provide a wide variety of services. The Company's network is in a transition
from an analog to a digital network, which provides the capabilities to furnish
advanced data transmission and information management services. At December 31,
1997, approximately 98% of the access lines were served by digital capability.
CAPITAL EXPENDITURES
The Company has been making and expects to continue to make significant
capital expenditures to meet the demand for communications services and to
further improve such services. Capital expenditures were approximately $957
million in 1997, $906 million in 1996 and $886 million in 1995. Capital
expenditures exclude additions under capital leases and the equity component of
allowance for funds used during construction prior to the discontinuance of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation." The total investment in plant, property and
equipment was approximately $13.4 billion at December 31, 1997, $12.7 billion at
December 31, 1996 and $12.5 billion at December 31, 1995, in each case after
giving effect to retirements, but before deducting accumulated depreciation at
such date.
Item 3. Legal Proceedings
There were no proceedings reportable under Item 3.
Item 4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction I(2).)
7
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New England Telephone and Telegraph Company
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Not applicable.
Item 6. Selected Financial Data
(Omitted pursuant to General Instruction I(2).)
8
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New England Telephone and Telegraph Company
Item 7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction I(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements listed in the index set forth on page F-1.
The communications services of the Company are subject to regulation by the
state regulatory commissions of Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont with respect to intrastate rates and services and certain
other matters. For a further discussion of the Company and its regulatory
plans, see Item 1 - "Description of Business."
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income of $555.9 million in 1997, compared to net
income of $724.7 million in 1996.
Bell Atlantic - NYNEX Merger
On August 14, 1997, Bell Atlantic Corporation (Bell Atlantic) and NYNEX
Corporation (NYNEX) completed a merger of equals under a definitive merger
agreement entered into on April 21, 1996 and amended on July 2, 1996. The
stockholders of each company approved the merger at special meetings held in
November 1996. Under the terms of the amended agreement, NYNEX became a wholly
owned subsidiary of Bell Atlantic. The merger has been accounted for as a
pooling of interests.
As a result of conforming the accounting methodologies of Bell Atlantic and
NYNEX, the Company has reduced Reinvested Earnings as of December 31, 1994 by a
net $488.2 million primarily for the immediate recognition of the transition
benefit obligation for postretirement benefits other than pensions in accordance
with Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" as if the merger had occurred
as of the beginning of the earliest period presented. In its historical
financial statements, the Company had amortized the transition benefit
obligation over a twenty-year period. The net reduction in Reinvested Earnings
also includes amounts reallocated from Additional Paid-in Capital to cover
dividend payments (see Note 9 to the financial statements).
Merger-Related Costs
Results of operations for 1997 include merger-related pre-tax costs totaling
approximately $71 million consisting of $6 million for direct incremental costs,
$51 million for employee severance costs, and $14 million for transition and
integration costs. These costs include approximately $35 million representing
the Company's allocated share of merger-related costs from Telesector Resources
Group, Inc. (Telesector Resources), an affiliate which provides centralized
services on a contract basis. Costs allocated from Telesector Resources are
included in Other Operating Expenses.
Direct incremental costs consist of expenses associated with compensation
arrangements related to completing the merger transaction. Employee severance
costs represent the Company's proportionate share of benefit costs for the
separation by the end of 1999 of management employees who are entitled to
benefits under pre-existing Bell Atlantic separation pay plans. Transition and
integration costs consist of the Company's proportionate share of costs
associated with integrating the operations of Bell Atlantic and NYNEX.
Other Charges and Special Items
In 1997, the Company recorded pre-tax charges of approximately $60 million in
connection with consolidating operations and combining organizations and for
special items arising in the period. These charges include approximately $5
million representing the Company's allocated share of charges from Telesector
Resources.
The Company also incurred costs associated with its retirement incentive
program totaling $202.0 million in 1997, compared to $132.2 million in 1996.
9
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New England Telephone and Telegraph Company
The retirement incentive costs for 1997 and 1996 include amounts charged to
the Company by Telesector Resources for an allocated portion of the employees
who left Telesector Resources under the retirement incentive program. In 1997,
the retirement incentive costs allocated to the Company by Telesector Resources
were $54.5 million, compared to $9.5 million in 1996.
Cumulative Effect of Change in Accounting - Directory Publishing
The Company has an agreement with Bell Atlantic Yellow Pages Company (Yellow
Pages) pursuant to which Yellow Pages pays a fee to the Company for use of the
Company's name in soliciting directory advertising and in publishing and
distributing directories. Effective January 1, 1996, Yellow Pages changed its
method of accounting for directory publishing revenues and expenses from the
amortized method to the point-of-publication method. Under the point-of-
publication method, revenues and expenses are recognized when the directories
are published rather than over the lives of the directories, as under the
amortized method. The Company recorded an after-tax increase in income of $55.2
million in the first quarter of 1996, representing its portion of the cumulative
effect of this accounting change.
- --------------------------------------------------------------------------------
These and other items affecting the comparison of the Company's results of
operations between 1997 and 1996 are discussed in the following sections.
OPERATING REVENUE STATISTICS
- ----------------------------
1997 1996 % Change
- --------------------------------------------------------------------------------
At Year-End
- -----------
Access Lines in Service (in thousands)
Residence.................................. 4,493 4,365 2.9%
Business................................... 2,315 2,163 7.0
Public..................................... 69 71 (2.8)
----- -----
6,877 6,599 4.2
===== =====
For the Year
- ------------
Access Minutes of Use (in millions).......... 26,408 24,550 7.6
====== ======
OPERATING REVENUES
- ------------------
(Dollars in Millions)
For the Years Ended December 31 1997 1996 % Change
- --------------------------------------------------------------------------------
Local services................................. $2,164.3 $2,078.7 4.1%
Network access services........................ 1,362.4 1,385.5 (1.7)
Long distance services......................... 657.1 683.2 (3.8)
Ancillary services............................. 201.0 176.6 13.8
Directory and information services............. 180.9 223.1 (18.9)
-------- --------
Total.......................................... $4,565.7 $4,547.1 .4
======== ========
10
<PAGE>
New England Telephone and Telegraph Company
LOCAL SERVICES REVENUES
Increase
- --------------------------------------------------------------------------------
1997 - 1996 $85.6 4.1%
- --------------------------------------------------------------------------------
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 1997. This growth was generated by
an increase in access lines in service of 4.2% in 1997. Access line growth
primarily reflects higher demand for Centrex services. Higher public telephone
services revenues as a result of rate increases and higher revenues from private
line and switched data services also contributed to the revenue growth in 1997.
Revenue growth during 1997 was boosted by increased revenues from value-added
services. This increase was principally the result of higher customer demand
and usage.
Revenue increases were partially offset by the effects of rate reductions and
a service rebate paid to customers in August 1997.
For a discussion of the Telecommunications Act of 1996 and its impact on the
local exchange market, see Item 1 - "Description of Business, Telecommunications
Act of 1996" and "Description of Business, Operations - Competition - Local
Exchange Services."
NETWORK ACCESS SERVICES REVENUES
(Decrease)
- --------------------------------------------------------------------------------
1997 - 1996 $(23.1) (1.7)%
- --------------------------------------------------------------------------------
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, and from end-user subscribers. Switched access revenues are derived
from fixed and usage-based charges paid by carriers for access to the Company's
network. Special access revenues arise from access charges paid by carriers and
end-users who have private networks. End-user access revenues are earned from
the Company's customers who pay for access to the network.
Network access services revenues decreased in 1997 principally due to the
effect of price reductions as mandated by federal and state price cap plans.
The Federal Communications Commission (FCC) regulates the rates that the Company
charges long distance carriers and end-user subscribers for interstate access
services. Bell Atlantic is required to file new access rates with the FCC each
year under the rules of its Interim Price Cap Plan. The Company implemented
required price decreases for interstate access services totaling approximately
$35 million on an annual basis for the period July 1996 through June 1997.
Effective July 1, 1997, the Company implemented annual price decreases on
interstate access services of approximately $77 million. The rates included in
the 1997 filing will be in effect through June 1998. In addition, effective
January 1, 1998, the Company adjusted its annual rates by approximately $40
million to recover contributions that it will owe to the new universal service
fund. These revenues will be entirely offset by the contribution amount, which
will be recorded in Other Operating Expenses.
Rates for intrastate access services are regulated by the various state
regulatory commissions in which the Company does business. The Company
implemented rate reductions for intrastate access services in connection with
price cap and incentive plans in certain state jurisdictions.
Revenues were also affected by reductions of approximately $32 million in
1997 for contingencies associated with regulatory matters.
11
<PAGE>
New England Telephone and Telegraph Company
The decreases in network access services revenues were partially offset by
higher customer demand as reflected by growth in access minutes of use of 7.6%
in 1997. Volume growth was boosted by the expansion of the business market,
particularly for high capacity services. Higher end-user revenues, attributable
to an increase in access lines in service, also offset the decrease in network
access services revenue in 1997.
For a further discussion of FCC rulemakings concerning access charges, price
caps and universal service, see Item 1 - "Description of Business, Operations -
FCC Regulation and Interstate Rates."
LONG DISTANCE SERVICES REVENUES
(Decrease)
- --------------------------------------------------------------------------------
1997 - 1996 $(26.1) (3.8)%
- --------------------------------------------------------------------------------
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 include 800 services and Wide
Area Telephone Service (WATS).
Company-initiated price reductions and increased competition for intraLATA
toll, WATS and private line services both contributed substantially to the
reduction in long distance services revenues in 1997. The Company has
implemented price reductions on certain long distance services as part of its
response to competition. Competition for intraLATA toll services decreased
revenues to a greater degree in 1997 as a result of the introduction of
presubscription in several states. Revenue reductions from presubscription were
partially offset by increased access revenues for usage of the Company's network
from alternative providers of intraLATA toll services. Higher calling volumes
generated by an increase in access lines in service also mitigated revenue
decreases.
For a further discussion of presubscription, see Item 1 -"Description of
Business, Operations - Competition - IntraLATA Toll Services."
ANCILLARY SERVICES REVENUES
Increase
- --------------------------------------------------------------------------------
1997 - 1996 $24.4 13.8%
- --------------------------------------------------------------------------------
The Company provides ancillary services which include billing and collection
services for long distance carriers and affiliates, customer premises equipment
(CPE) services, facilities rental services for affiliates and nonaffiliates,
voice messaging, ISDN and other high bandwidth services.
Ancillary services revenues increased in 1997 principally as a result of
higher demand for CPE services and higher facilities rental revenues. Higher
demand for voice messaging services, principally Home Voice Mail, and the
introduction of customer late payment fees also contributed to the growth in
ancillary services revenues in 1997.
DIRECTORY AND INFORMATION SERVICES REVENUES
(Decrease)
- --------------------------------------------------------------------------------
1997 - 1996 $(42.2) (18.9)%
- --------------------------------------------------------------------------------
Directory and information services revenues consist of payments from an
affiliate, Yellow Pages, for earnings related to publishing directories in
Maine, Massachusetts, New Hampshire, Rhode Island and Vermont in excess of a
regulated 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.
12
<PAGE>
New England Telephone and Telegraph Company
The decrease in directory and information services revenues in 1997 was
principally due to reduced payments from Yellow Pages due to the effects of
merger-related costs, retirement incentive costs and other charges incurred by
Yellow Pages related to publishing directories.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
For the Years Ended December 31 1997 1996 % Change
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes.. $1,121.6 $1,087.4 3.1%
Depreciation and amortization................. 905.9 912.8 (.8)
Taxes other than income....................... 133.3 132.4 .7
Other operating expenses...................... 1,393.5 1,199.7 16.2
-------- --------
Total......................................... $3,554.3 $3,332.3 6.7
======== ========
EMPLOYEE COSTS
Increase
- --------------------------------------------------------------------------------
1997 - 1996 $34.2 3.1%
- --------------------------------------------------------------------------------
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 contract basis, are allocated to the Company and are included in Other
Operating Expenses.
Employee costs increased principally as a result of merger-related costs
recorded in the third quarter of 1997. The Company recognized approximately $32
million in benefit costs for the separation by the end of 1999 of management
employees who are entitled to benefits under pre-existing Bell Atlantic
separation pay plans. The Company also recorded approximately $1 million for
direct incremental merger-related costs associated with compensation
arrangements. Merger-related costs associated with employees of Telesector
Resources were allocated to the Company and are included in Other Operating
Expenses.
Employee costs were also higher as a result of annual salary and wage
increases, the effect of increased work force levels principally attributable to
higher business volumes, and additional costs associated with the Company's
retirement incentive program. Costs associated with Telesector Resources'
retirement incentive program were allocated to the Company and are included in
Other Operating Expenses. For a further discussion of retirement incentives,
see below.
These expense increases were partially offset by a reduction in benefit costs
caused by a number of factors, including changes in actuarial assumptions,
favorable returns on plan assets, lower than expected medical claims and plan
amendments, including the conversion of a pension plan to a cash balance plan.
Lower overtime pay and a decline in the level of employee costs incurred for
repair and maintenance activity also reduced employee costs in 1997. This
decline was due to the impact of severe weather experienced in the first quarter
of 1996 which caused a higher level of costs to be expensed during that period.
Retirement Incentives
The Company had previously disclosed that it expected the total number of
employees who would elect to leave under the current retirement incentive
program through its completion in 1998 to be in the range of 7,000 to 7,400,
consisting of approximately 3,400 management and 3,600 to 4,000 associate
employees. The total number of employees includes the Company's allocated
portion of employees of Telesector Resources. The Company had accrued
approximately $440.6 million of pre-tax charges in 1993 for severance and
postretirement medical benefits under a force reduction plan.
13
<PAGE>
New England Telephone and Telegraph Company
As of December 31, 1997, 7,382 employees (3,145 management and 4,237
associates) had elected to leave under the program, and additional charges of
$676.9 million ($422.8 million after-tax) had been recorded in connection with
the retirement incentive program. The management portion of the program was
completed as of March 31, 1997.
Based on the experience of employee take rates under the program and
management's most recent assessment of work volume and productivity trends, Bell
Atlantic is currently considering and discussing with the unions possible
changes in the program for associate employees. Bell Atlantic now expects that,
if the program is fully implemented, the total number of employees electing to
leave under the program, and the associated additional charges, would be
substantially greater than previously estimated.
As of December 31, 1997, the remaining reserves associated with the 1993
restructuring plan were approximately $5 million for employee severance and $7
million for postretirement medical benefits. See Note 11 to the financial
statements for additional information on retirement incentives.
DEPRECIATION AND AMORTIZATION
(Decrease)
- --------------------------------------------------------------------------------
1997 - 1996 $(6.9) (.8)%
- --------------------------------------------------------------------------------
Depreciation and amortization decreased in 1997 principally due to the effect
of lower rates of depreciation and amortization. This decrease was
substantially offset by growth in depreciable telephone plant and the recording
of approximately $6 million for special items related to fixed assets in the
third quarter of 1997.
TAXES OTHER THAN INCOME
Increase
- --------------------------------------------------------------------------------
1997 - 1996 $ .9 .7%
- --------------------------------------------------------------------------------
Taxes other than income consist principally of taxes for gross receipts,
property, capital stock and business licenses.
The increase in taxes other than income was primarily due to higher estimates
for property taxes, partially offset by lower gross receipts tax resulting from
a reduction in the tax base.
OTHER OPERATING EXPENSES
Increase
- --------------------------------------------------------------------------------
1997 - 1996 $193.8 16.2%
- --------------------------------------------------------------------------------
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 increase in other operating expenses was largely attributable to higher
interconnection charges for terminating calls on the networks of competitive
local exchange carriers, higher costs resulting from increased network software
upgrades, and higher centralized services expenses allocated from Telesector
Resources. The rise in centralized services expenses was primarily due to
retirement incentive costs, merger-related costs and other special items. Also
contributing to the increase in other operating expenses were transition and
integration costs, charges for regulatory contingencies, and other miscellaneous
expense items incurred by the Company in 1997.
14
<PAGE>
New England Telephone and Telegraph Company
OTHER INCOME, NET
Increase
- --------------------------------------------------------------------------------
1997 - 1996 $16.0 166.7%
- --------------------------------------------------------------------------------
The change in other income, net, was primarily attributable to a gain on the
sale of property in the second quarter of 1997 and an increase in the income
recorded from Telesector Resources under the equity method. Income recorded
from Telesector Resources included an after-tax gain on the sale of Bell
Communications Research, Inc. in 1997 (see Note 15 to the financial statements).
INTEREST EXPENSE
(Decrease)
- --------------------------------------------------------------------------------
1997 - 1996 $(3.2) (2.3)%
- --------------------------------------------------------------------------------
Interest expense decreased principally due to the effect of lower levels of
average short-term debt and higher capitalized interest costs resulting from
higher levels of telephone plant under construction.
See Note 7 to the financial statements for additional information about the
Company's debt.
EFFECTIVE INCOME TAX RATES
For the Years Ended December 31
- --------------------------------------------------------------------------------
1997 38.1%
- --------------------------------------------------------------------------------
1996 38.1%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before provision for income taxes, extraordinary item and
cumulative effect of change in accounting principle. The Company's effective
income tax rate was unchanged from 1996.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is provided in Note 12 to the financial
statements.
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 pay dividends. While current liabilities exceeded current assets at
December 31, 1996, the Company's sources of funds, primarily from operations and
to the extent necessary from readily available financing arrangements with an
affiliate, 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 additional development activities or to maintain the
Company's capital structure to ensure financial flexibility.
The Company obtains its short-term financing through advances from NYNEX. 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 51.5% at December 31, 1997, compared to 48.7% at
December 31, 1996.
On February 2, 1998, the Company declared and paid a dividend in the amount
of $187.4 million to NYNEX.
15
<PAGE>
New England Telephone and Telegraph Company
OTHER MATTERS
- -------------
Year "2000" Systems Modifications
Bell Atlantic has initiated a comprehensive program to evaluate and address
the impact of the year 2000 on its operations. This program includes steps to
(a) identify each item or element that will require date code remediation, (b)
establish a plan for remediation or replacement, (c) implement the fix, (d) test
the remediated product and (e) provide management with assurance of a seamless
transition to the year 2000. The identification and planning phases are
substantially complete and remediation and testing are in process. Bell Atlantic
expects to complete the major portion of its internal date remediation activity
in 1998.
For the years 1998 through 1999, Bell Atlantic expects to incur total pre-tax
costs of approximately $200 million to $300 million associated with both
internal and external staffing resources for the necessary planning, remediation
and testing and other expenses to prepare its systems for the year 2000.
However, a portion of these costs will not be incremental, but rather will
represent the redeployment of existing information technology resources.
Estimated expenses include (a) anticipated license fees for replacement software
that will generally provide increased functionality as well as year 2000
compliance, and (b) direct remediation costs to provide priority to year 2000
compliance during the next two years. The cost of planning and initial
remediation incurred through 1997 has not been significant. Certain other
costs, which will be capitalized, represent ongoing investment in systems
upgrades, the timing of which is being accelerated in order to facilitate year
2000 compliance.
Bell Atlantic expects to complete this effort on a timely basis without
disruption to its customers or operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk in the normal course of its
business. The majority of the Company's debt is fixed rate debt. Derivatives
such as interest rate swap agreements have not been employed by the Company.
The Company's short-term borrowings from an affiliate expose its earnings to
changes in short-term interest rates since the interest rate charged on such
borrowings is typically fixed for less than one month. As of December 31, 1997,
the fair value of the Company's long-term debt was approximately $2,246 million.
The aggregate hypothetical fair value of this long-term debt assuming a 100-
basis-point upward parallel shift in the yield curve is estimated to be $2,118
million. The aggregate hypothetical fair value of this long-term debt assuming
a 100-basis-point downward parallel shift in the yield curve is estimated to be
$2,373 million. The fair value of the Company's short-term borrowings from an
affiliate is not significantly affected by changes in market interest rates.
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 requires the Company to make payments based on a
variable rate and receive payments based on a fixed rate. The notional amount of
this agreement is used only to calculate contractual payments to be exchanged
and is not a measure of the Company's credit risk or its future cash
requirements. The Company's objective in managing interest rate risk is to
maintain a mix of fixed and variable rate debt that will lower its overall
borrowing costs within reasonable risk parameters. It is the Company's policy to
enter into interest rate swap agreements only to the extent necessary to achieve
the desired objectives of management in limiting the Company's exposure to
interest rate risk. The Company does not expect that its results of operations
or liquidity will be materially affected by these risk management activities.
16
<PAGE>
New England Telephone and Telegraph Company
Item 8. Financial Statements and Supplementary Data
The information required by this Item is set forth on Pages F-1
through F-22.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of Registrant
(Omitted pursuant to General Instruction I(2).)
Item 11. Executive Compensation
(Omitted pursuant to General Instruction I(2).)
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Omitted pursuant to General Instruction I(2).)
Item 13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction I(2).)
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedule appearing on Page F-1.
(2) Financial Statement Schedules
See Index to Financial Statements and Financial Statement
Schedule appearing on Page F-1.
17
<PAGE>
New England Telephone and Telegraph Company
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(3) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission (SEC), are incorporated
herein by reference as exhibits hereto.
3a Restated Certificate of Incorporation of New England Telephone
and Telegraph 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).
3b By-Laws of the registrant, 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 registrant is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, the registrant hereby agrees to furnish a copy of
any such instrument to the SEC upon request.
10a Directory License Agreement between the registrant and NYNEX
Information Resources, 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).
10b Service agreement concerning provision by Telesector Resources
Group, Inc. to the registrant of numerous services, including
(i) purchasing, materials handling, inspection, distribution,
storage and similar services and (ii) technical, regulatory,
government relations, marketing operational support and
similar services, dated March 31, 1992 (Exhibit No. 19(i)1 to
the registrant's filing on Form SE dated March 23, 1993, File
No. 1-1150).
23 Consent of Independent Accountants.
24 Powers of Attorney.
27.1 Financial Data Schedule - 1997.
27.2 Restated Financial Data Schedule - 1995.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated December 5,
1997, reporting certain financial information restated as a result of
the merger of NYNEX and Bell Atlantic on August 14, 1997. This report
included Statements of Income and Reinvested Earnings and Statements
of Cash Flows for the years ended December 31, 1996, 1995 and 1994;
Balance Sheets at December 31, 1996 and 1995; Statements of Income and
Reinvested Earnings (unaudited) for the three months ended March 31,
1997 and 1996, and the three and six months ended June 30, 1997 and
1996; Balance sheets (unaudited) at March 31, 1997 and June 30, 1997;
and Statements of Cash Flows (unaudited) for the three months ended
March 31, 1997 and 1996, and six months ended June 30, 1997 and 1996.
18
<PAGE>
New England Telephone and Telegraph Company
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
New England Telephone and Telegraph Company
By /s/ Edwin F. Hall
----------------------------
Edwin F. Hall
Controller
March 25, 1998
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.
<TABLE>
<CAPTION>
Principal Executive Officer:
<S> <C> <C>
+++++
Ivan G. Seidenberg President and +
Chief Executive Officer +
+
+
Principal Financial Officer: +
+
Doreen A. Toben Chief Financial Officer +
+
+
Principal Accounting Officer: + By /s/ Edwin F. Hall
+ ---------------------
+ Edwin F. Hall
Edwin F. Hall Controller + (individually and as
+ attorney-in-fact)
+ March 25, 1998
Directors: +
+
Richard L. Carrion +
Lodewijk J.R. de Vink +
Stanley P. Goldstein +
Helene L. Kaplan +
Elizabeth T. Kennan +
John F. Maypole +
Joseph Neubauer +
Hugh B. Price +
Ivan G. Seidenberg +
Walter V. Shipley +
John R. Stafford +
+++++
</TABLE>
19
<PAGE>
New England Telephone and Telegraph Company
Index to Financial Statements and Financial Statement Schedule
Page
----
Report of Independent Accountants......................................... F-2
Statements of Income and Reinvested Earnings
For the years ended December 31, 1997, 1996 and 1995................. F-3
Balance Sheets - December 31, 1997 and 1996............................... F-4
Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995................. F-6
Notes to Financial Statements............................................. F-7
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1997, 1996 and 1995................. F-22
Financial statement schedules other than that listed above have been omitted
because such schedules are not required or applicable.
F-1
<PAGE>
New England Telephone and Telegraph Company
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowner 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 as listed in the index on page F-1 of
this Form 10-K. The financial statements give retroactive effect to the merger
of Bell Atlantic Corporation and NYNEX Corporation (the Company's parent
company) on August 14, 1997, which has been accounted for as a pooling of
interests, as described in Note 2 to the financial statements. The financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New England Telephone and
Telegraph Company as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 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 4 to the financial statements, in 1996, the Company changed
its method of accounting for directory publishing revenues and expenses. Also,
as discussed in Notes 1 and 3 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."
/s/ COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
February 9, 1998
F-2
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF INCOME AND REINVESTED EARNINGS
For the Years Ended December 31
(Dollars in Millions)
1997 1996 1995
-------- -------- --------
OPERATING REVENUES (including $181.8,
$218.9, and $195.6 from affiliates).. $4,565.7 $4,547.1 $4,313.8
-------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits
and taxes........................... 1,121.6 1,087.4 1,158.0
Depreciation and amortization........ 905.9 912.8 903.9
Taxes other than income.............. 133.3 132.4 128.9
Other (including $848.0, $757.9,
and $739.9 to affiliates)........... 1,393.5 1,199.7 1,154.8
-------- -------- --------
3,554.3 3,332.3 3,345.6
-------- -------- --------
OPERATING INCOME....................... 1,011.4 1,214.8 968.2
OTHER INCOME, NET (including $19.8,
$9.6, and $12.2 from affiliates)..... 25.6 9.6 23.1
INTEREST EXPENSE (including $1.6, $3.4,
and $1.1 to affiliate)............... 138.9 142.1 153.9
-------- -------- --------
Income Before Provision for Income
Taxes, Extraordinary Item, and
Cumulative Effect of Change in
Accounting Principle................. 898.1 1,082.3 837.4
PROVISION FOR INCOME TAXES............. 342.2 412.8 320.0
-------- -------- --------
Income Before Extraordinary Item and
Cumulative Effect of Change in
Accounting Principle................. 555.9 669.5 517.4
EXTRAORDINARY ITEM
Discontinuation of Regulatory
Accounting Principles, Net of Tax.... --- --- (627.8)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax..... --- 55.2 ---
-------- -------- --------
NET INCOME (LOSS)...................... $ 555.9 $ 724.7 $ (110.4)
======== ======== ========
REINVESTED EARNINGS
At beginning of period............... $ 257.9 $ .1 $ 491.7
Add: net income (loss)............... 555.9 724.7 (110.4)
other........................... --- --- 61.5
-------- -------- --------
813.8 724.8 442.8
Deduct: dividends.................... 562.2 466.9 442.7
-------- -------- --------
At end of period..................... $ 251.6 $ 257.9 $ .1
======== ======== ========
See Notes to Financial Statements.
F-3
<PAGE>
New England Telephone and Telegraph Company
BALANCE SHEETS
(Dollars in Millions)
ASSETS
------
December 31
--------------------
1997 1996
--------- ---------
CURRENT ASSETS
Cash...................................................... $ 19.3 $ 14.2
Short-term investments.................................... 131.6 ---
Note receivable from affiliate............................ --- 39.9
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $53.7 and $53.6..................... 933.4 912.7
Affiliates.............................................. 129.8 58.1
Material and supplies..................................... 113.4 99.5
Prepaid expenses.......................................... 130.6 52.0
Deferred income taxes..................................... 26.0 52.6
Other..................................................... 67.2 73.9
--------- ---------
1,551.3 1,302.9
--------- ---------
PLANT, PROPERTY AND EQUIPMENT............................. 13,380.7 12,720.8
Less accumulated depreciation............................. 7,476.2 6,884.8
--------- ---------
5,904.5 5,836.0
--------- ---------
OTHER ASSETS.............................................. 202.7 176.5
--------- ---------
TOTAL ASSETS.............................................. $ 7,658.5 $ 7,315.4
========= =========
See Notes to Financial Statements.
F-4
<PAGE>
New England Telephone and Telegraph Company
BALANCE SHEETS
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
December 31
--------------------
1997 1996
--------- ---------
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate.................... $ 246.2 $ ---
Other........................................ 101.1 175.7
Accounts payable and accrued liabilities:
Affiliates................................... 572.4 549.0
Other........................................ 575.8 631.5
Advance billings and customer deposits......... 19.1 18.2
-------- --------
1,514.6 1,374.4
-------- --------
LONG-TERM DEBT................................. 2,077.4 1,996.4
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS................... 1,704.6 1,562.3
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.......................... --- 5.6
Unamortized investment tax credits............. 52.7 59.0
Other.......................................... 30.0 32.2
-------- --------
82.7 96.8
-------- --------
COMMITMENTS (Notes 6 and 14)
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value...... 1.0 1.0
Additional paid-in capital..................... 2,026.6 2,026.6
Reinvested earnings............................ 251.6 257.9
-------- --------
2,279.2 2,285.5
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $7,658.5 $7,315.4
======== ========
See Notes to Financial Statements.
F-5
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF CASH FLOWS
For the Years Ended December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................... $ 555.9 $ 724.7 $ (110.4)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.... 905.9 912.8 903.9
Extraordinary item, net of tax... --- --- 627.8
Cumulative effect of change in
accounting principle, net of
tax............................. --- (55.2) ---
Equity income in affiliate....... (18.0) (9.2) (11.1)
Dividends received from equity
affiliate....................... 8.3 10.3 8.3
Deferred income taxes, net....... (4.4) (47.1) (30.4)
Investment tax credits........... (6.3) (8.8) (11.6)
Other items, net................. (4.8) 13.2 11.3
Changes in certain assets and
liabilities:
Accounts receivable........... (82.7) 32.7 (110.4)
Material and supplies......... (13.9) (45.8) (4.2)
Other assets.................. (72.3) (5.6) (41.5)
Accounts payable and accrued
liabilities.................. 109.6 (82.2) 115.0
Employee benefit obligations.. 142.3 101.2 131.0
Other liabilities............. (1.3) (52.3) (163.9)
--------- -------- --------
Net cash provided by operating
activities............................ 1,518.3 1,488.7 1,313.8
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments.... (131.6) --- ---
Additions to plant, property and
equipment............................. (957.2) (905.9) (885.8)
Net change in note receivable from
affiliate............................. 39.9 (39.9) ---
Other, net............................. (11.6) (26.2) (38.4)
--------- -------- --------
Net cash used in investing activities.. (1,060.5) (972.0) (924.2)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings............... 181.1 --- ---
Principal repayments of borrowings and
capital lease obligations............. (175.5) (.5) (.5)
Net change in note payable to affiliate 246.2 (37.1) (18.0)
Dividends paid......................... (678.9) (460.8) (438.2)
Net change in outstanding checks drawn
on controlled disbursement
accounts......................... (25.6) (12.5) 66.4
--------- -------- --------
Net cash used in financing activities.. (452.7) (510.9) (390.3)
--------- -------- --------
NET CHANGE IN CASH..................... 5.1 5.8 (.7)
CASH, BEGINNING OF YEAR................ 14.2 8.4 9.1
--------- -------- --------
CASH, END OF YEAR...................... $ 19.3 $ 14.2 $ 8.4
========= ======== ========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
New England Telephone and Telegraph Company
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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 Company operates in a single
industry segment - communications and related services. The Company provides
two basic types of telecommunications services in a territory consisting of six
Local Access and Transport Areas (LATAs) in Maine, Massachusetts, New Hampshire,
Rhode Island and Vermont. First, the Company transports telecommunications
traffic between subscribers located within the same LATA (intraLATA service),
including both local and long distance services. Local service includes the
provision of local exchange, local private line and public telephone services.
Long distance service includes message toll service and intraLATA Wide Area Toll
Service/800 services. Second, the Company provides exchange access service,
which links a subscriber's telephone equipment to the facilities of an
interexchange carrier which, in turn, provides interLATA telecommunications
service to their customers. The Company also provides exchange access service
to carriers which provide intrastate intraLATA long distance telecommunications
service. Other services provided by the Company include customer premises
wiring and maintenance and billing and collection services.
The telecommunications industry is undergoing substantial changes as a result
of the Telecommunications Act of 1996, other public policy changes and
technological advances. These changes are likely to bring increased competitive
pressures, but will also open new markets to Bell Atlantic, such as long
distance services within its geographic region, upon completion of certain
requirements of the Telecommunications Act.
Basis of Presentation
On August 14, 1997, Bell Atlantic and NYNEX completed a merger, which was
accounted for as a pooling of interests. The financial statements include
certain reclassifications in presentation and certain retroactive adjustments to
conform accounting methodologies as a result of the merger (see Note 2).
The Company prepares its financial statements in accordance with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the reported amounts or certain disclosures. Actual
results could differ from those estimates.
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.
In 1995, the Company discontinued accounting for its operations under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation" (see Note 3).
Revenue Recognition
The Company recognizes revenues when services are rendered based on usage of
its local exchange network and facilities.
Maintenance and Repairs
The Company charges the cost of maintenance and repairs, including the cost
of replacing minor items not constituting substantial betterments, to Operating
Expenses.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90
days or less when purchased to be cash equivalents, except cash equivalents held
as short-term investments. Cash equivalents are stated at cost, which
approximates market value.
F-7
<PAGE>
New England Telephone and Telegraph Company
Short-term Investments
Short-term investments consist of cash equivalents held in trust to pay for
certain employee benefits. Short-term investments are stated at cost, which
approximates market value.
Material and Supplies
New and reusable materials are carried in inventory, principally at average
original cost, except that specific costs are used in the case of large
individual items.
Plant and Depreciation
The Company states plant, property, and equipment at cost. Depreciation
expense is principally based on the composite group remaining life method and
straight-line composite rates. This method provides for the recognition of the
cost of the remaining net investment in telephone plant, less anticipated net
salvage value, over the remaining asset lives. This method requires the periodic
revision of depreciation rates.
In connection with the discontinued application of SFAS No. 71, for financial
reporting purposes, the Company no longer uses asset lives set by regulators.
As a result, the Company began using shorter estimated asset lives for certain
categories of plant and equipment. The asset lives used by the Company are
presented in the following table:
Average Lives (in years)
-------------------------------------------------------
Buildings.............................. 20 - 60
Central office equipment............... 5 - 12
Cable, wiring and conduit.............. 8 - 55
Other equipment........................ 5 - 40
When depreciable plant is replaced or retired, the carrying amount of such
plant is deducted from the respective accounts and charged to accumulated
depreciation. Gains or losses on disposition are amortized with the remaining
net investment in telephone plant.
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 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.
Capitalization of Interest Costs
The Company capitalizes interest associated with the acquisition or
construction of plant assets. Capitalized interest is reported as a cost of
plant and a reduction in interest cost. Before the discontinued application of
SFAS No. 71, the Company recorded an allowance for funds used during
construction, which included both interest and equity return components, as a
cost of plant and an item of other income.
Income Taxes
Bell Atlantic and its domestic 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. For periods prior
to the merger, NYNEX filed its own consolidated federal income tax return.
The Company uses the deferral method of accounting for investment tax credits
earned prior to repeal of investment tax credits by the Tax Reform Act of 1986.
The Company also defers certain transitional credits earned after the repeal.
These credits are being amortized as a reduction to the Provision for Income
Taxes over the estimated service lives of the related assets.
F-8
<PAGE>
New England Telephone and Telegraph Company
Advertising Costs
Advertising costs are expensed as incurred.
Stock-Based Compensation
The Company participates in stock-based compensation plans sponsored by Bell
Atlantic. Bell Atlantic accounts for stock-based employee compensation plans
under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Effective January 1, 1996,
Bell Atlantic adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (see Note 10).
2. BELL ATLANTIC - NYNEX MERGER
On August 14, 1997, Bell Atlantic and NYNEX completed a merger of equals
under a definitive merger agreement entered into on April 21, 1996 and amended
on July 2, 1996. The stockholders of each company approved the merger at
special meetings held in November 1996. Under the terms of the amended
agreement, NYNEX became a wholly owned subsidiary of Bell Atlantic. The merger
has been accounted for as a pooling of interests.
As a result of conforming the accounting methodologies of Bell Atlantic and
NYNEX, the Company has reduced Reinvested Earnings as of December 31, 1994 by a
net $488.2 million primarily for the immediate recognition of the transition
benefit obligation for postretirement benefits other than pensions in accordance
with Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" as if the merger had occurred
as of the beginning of the earliest period presented. In its historical
financial statements, the Company had amortized the transition benefit
obligation over a twenty-year period. The net reduction in Reinvested Earnings
also includes amounts reallocated from Additional Paid-in Capital to cover
dividend payments.
Merger-Related Costs
Results of operations for 1997 include merger-related pre-tax costs of
approximately $6 million for direct incremental costs and $51 million for
employee severance costs. These costs include approximately $24 million
representing the Company's allocated share of merger-related costs from
Telesector Resources, an affiliate which provides centralized services on a
contract basis. Costs allocated from Telesector Resources are included in Other
Operating Expenses.
Direct incremental costs consist of expenses associated with compensation
arrangements related to completing the merger transaction. Employee severance
costs, as recorded under SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," represent the Company's proportionate share of benefit costs for the
separation by the end of 1999 of management employees who are entitled to
benefits under pre-existing Bell Atlantic separation pay plans.
3. DISCONTINUATION OF REGULATORY ACCOUNTING PRINCIPLES
In June 1995, the Company discontinued the use of regulatory accounting
principles under SFAS No. 71. As a result, the Company recorded a noncash,
extraordinary charge of $627.8 million, which is net of an income tax benefit
of $414.2 million.
The extraordinary charge consisted principally of adjustments to telephone
plant and equipment through an increase to accumulated depreciation of $480.6
million 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. Investment tax credit amortization of $8.0 million was
accelerated as a result of the reduction in asset lives of the associated
telephone plant and equipment. The Company also eliminated nonplant regulatory
assets and liabilities of $155.2 million, principally related to deferred debt
refinancing, vacation pay and pension costs, which were being amortized as they
were recognized in the ratemaking process.
F-9
<PAGE>
New England Telephone and Telegraph Company
4. CHANGE IN ACCOUNTING PRINCIPLE - DIRECTORY PUBLISHING
The Company has an agreement with Bell Atlantic Yellow Pages Company (Yellow
Pages) pursuant to which Yellow Pages pays a fee to the Company for use of the
Company's name in soliciting directory advertising and in publishing and
distributing directories. Effective January 1, 1996, Yellow Pages changed the
recognition of its directory publishing revenues and expenses from the amortized
method to the point-of-publication method. Under the point-of-publication
method, revenues and expenses are recognized when the directories are published
rather than over the lives of the directories, as under the amortized method.
Yellow Pages believes the point-of-publication method is preferable because it
is the method generally followed by publishing companies.
The Company recorded a one-time, noncash gain of $91.7 million ($55.2 million
after-tax) as a cumulative effect of a change in accounting principle in the
first quarter of 1996, representing its portion of the cumulative effect of this
accounting change. 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.
5. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment, which is stated at cost, is summarized as
follows at December 31:
1997 1996
--------- ---------
(Dollars in Millions)
Land............................................ $ 36.1 $ 36.7
Buildings....................................... 885.8 875.0
Central office equipment........................ 5,462.9 5,131.5
Cable, wiring and conduit....................... 5,279.7 5,064.8
Other equipment................................. 1,404.4 1,316.3
Other........................................... 81.6 76.7
Construction-in-progress........................ 230.2 219.8
--------- ---------
13,380.7 12,720.8
Accumulated depreciation........................ (7,476.2) (6,884.8)
--------- ---------
Total........................................... $ 5,904.5 $ 5,836.0
========= =========
F-10
<PAGE>
New England Telephone and Telegraph Company
6. LEASES
The Company leases certain facilities and equipment for use in its operations
under both capital and operating leases. Plant, property and equipment included
capital leases of $6.0 million and $6.0 million, and related accumulated
amortization of $4.1 million and $3.8 million at December 31, 1997 and 1996,
respectively. The Company incurred no initial capital lease obligations in 1997,
1996 and 1995.
Total rent expense amounted to $84.8 million in 1997, $83.6 million in 1996
and $85.1 million in 1995.
At December 31, 1997, the aggregate minimum rental commitments under
noncancelable leases for the periods shown are as follows:
Years Capital Leases Operating Leases
----- -------------- ----------------
(Dollars in Millions)
1998...................................... $ .9 $ 48.0
1999...................................... .7 33.7
2000...................................... .5 32.1
2001...................................... .1 31.8
2002...................................... -- 30.6
Thereafter................................ -- 215.9
------ ------
Total minimum rental commitments.......... 2.2 $392.1
======
Less interest and executory costs......... .9
------
Present value of minimum
lease payments........................... 1.3
Less current installments................. .5
------
Long-term obligation at
December 31, 1997........................ $ .8
======
7. DEBT
Debt Maturing Within One Year
1997 1996
------ ------
(Dollars in Millions)
Note payable to affiliate (NYNEX)......... $246.2 $ ---
Long-term debt maturing within one year... 101.1 175.7
------ ------
Total debt maturing within one year....... $347.3 $175.7
====== ======
Weighted average interest rate for note
payable outstanding at year-end.......... 5.7% 5.4%
====== ======
The Company has an agreement with NYNEX for the provision of short-term
financing and cash management services.
F-11
<PAGE>
New England Telephone and Telegraph Company
Long-Term Debt
Long-term debt consists of debentures and notes issued by the Company.
Interest rates and maturities of the amounts outstanding are as follows at
December 31:
1997 1996
---------- ----------
(Dollars in Millions)
Debentures:
Thirty-eight year 4 5/8%, due 1999........ $ 45.0 $ 45.0
Forty year 4 1/2%, due 2002............... 50.0 50.0
Forty year 4 5/8%, due 2005............... 60.0 60.0
Thirty-nine year 6 1/8%, due 2006......... 100.0 100.0
Thirty-five year 7 3/8%, due 2007......... 200.0 200.0
Forty year 6 3/8%, due 2008............... 125.0 125.0
Thirty year 7 7/8%, due 2022.............. 100.0 100.0
Thirty year 6 7/8%, due 2023.............. 250.0 250.0
Forty year 7 7/8%, due 2029............... 349.0 349.0
Forty year 9%, due 2031................... 100.0 100.0
Notes:
Five year 6 1/4%, due 1997................ --- 175.0
Five year 5.05%, due 1998................. 100.0 100.0
Seven year 6.15%, due 1999................ 100.0 100.0
Seven year 5 3/4%, due 2000............... 100.0 100.0
Ten year 8 5/8%, due 2001................. 100.0 100.0
Ten year 6 1/4%, due 2003................. 225.0 225.0
Fifteen year 6.30%, due 2012.............. 175.0 ---
-------- --------
2,179.0 2,179.0
Unamortized discount and premium, net..... (1.8) (8.7)
Capital lease obligations - average rate
10.0% and 10.1%...................... 1.3 1.8
-------- --------
Total long-term debt, including current
maturities............................... 2,178.5 2,172.1
Less maturing within one year............. 101.1 175.7
-------- --------
Total long-term debt...................... $2,077.4 $1,996.4
======== ========
Long-term debt outstanding at December 31, 1997 includes $580.0 million that
is callable by the Company. The call prices range from 101.18% to 100.0% of
face value, depending upon the remaining term to maturity of the issue. In
addition, $175.0 million of long-term debt, bearing interest at 6.30%, will
become redeemable only on December 16, 2002, at the option of the holders. The
redemption price will be 100.0% of face value plus accrued interest.
At December 3l, l997, the Company had $325.0 million of unissued, unsecured
debt securities registered with the Securities and Exchange Commission.
8. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of short-term investments and trade receivables.
Concentrations of credit risk with respect to trade receivables other than
those from AT&T are limited due to the large number of customers. For the years
ended December 31, 1997, 1996 and 1995, revenues generated from services
provided to AT&T (primarily network access and billing and collection) were
$545.1 million, $579.4 million and $591.6 million, respectively.
F-12
<PAGE>
New England Telephone and Telegraph Company
Fair Value of Financial Instruments
The table below provides additional information about the Company's material
financial instruments at December 31, 1997:
Financial Instrument Valuation Method
-----------------------------------------------------------------------------
Note payable to affiliate (NYNEX) Carrying amounts
and short-term investments
Debt (excluding capital leases) Market quotes for similar terms
and maturities or future cash flows
discounted at current rates
1997 1996
-------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ---------- -------- --------
(Dollars in Millions)
Debt.................... $2,423.4 $2,492.5 $2,170.3 $2,175.9
9. SHAREOWNER'S INVESTMENT
Additional
Common Paid-in Reinvested
(Dollars in Millions) Stock Capital Earnings
--------------------- ------- ---------- -----------
Balance at December 31,
1994, as reported...... $ 2,089.1 $ $ 979.9
Adjustment for
conforming accounting
methodologies......... (488.2)
--------- -------- -------
Balance at December 31,
1994, as restated...... 2,089.1 491.7
Net loss................ (110.4)
Transfer of stated
capital to additional
paid-in capital....... (2,088.1) 2,088.1
Transfer of additional
paid-in capital to
reinvested earnings... (61.5) 61.5
Dividends paid to NYNEX. (442.7)
--------- -------- -------
Balance at December 31,
1995................... 1.0 2,026.6 .1
Net income.............. 724.7
Dividends paid to NYNEX. (466.9)
--------- -------- -------
Balance at December 31,
1996................... 1.0 2,026.6 257.9
Net income.............. 555.9
Dividends paid to NYNEX. (562.2)
--------- -------- -------
Balance at December 31,
1997................... $ 1.0 $2,026.6 $ 251.6
========= ======== ========
As a result of conforming the accounting methodologies of Bell Atlantic and
NYNEX, the Company has reduced Reinvested Earnings as of December 31, 1994 by a
net $488.2 million primarily for the immediate recognition of the transition
benefit obligation for postretirement benefits other than pensions in accordance
with SFAS No. 106 as if the merger had occurred as of the beginning of the
earliest period presented.
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 $2,088.1
million and such amount was reallocated to Additional Paid-in Capital. In 1995,
$61.5 million was reallocated from Additional Paid-in Capital to Reinvested
Earnings to cover dividend payments.
F-13
<PAGE>
New England Telephone and Telegraph Company
10. STOCK INCENTIVE PLANS
The Company participates in stock-based compensation plans sponsored by Bell
Atlantic. Bell Atlantic applies APB Opinion No. 25 and related interpretations
in accounting for the plans. Effective January 1, 1996, Bell Atlantic adopted
the disclosure-only provisions of SFAS No. 123. If Bell Atlantic had elected to
recognize compensation expense based on the fair value at the grant dates for
1995 and subsequent awards consistent with the provisions of SFAS No. 123, the
Company's pro forma net income (loss) for the years ended December 31, 1997,
1996 and 1995 would have been $546.4 million, $717.1 million and $(110.9)
million, respectively, compared to as reported net income (loss) of $555.9
million, $724.7 million and $(110.4) million for the corresponding years. These
results may not be representative of the effects on pro forma net income for
future years.
The pro forma net income amounts were determined using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
1997 1996 1995
------ ------ ------
Dividend yield........................... 4.86% 4.66% 6.50%
Expected volatility...................... 14.87% 15.30% 15.30%
Risk-free interest rate.................. 6.35% 5.42% 7.63%
Expected lives (in years)................ 5 5 5
The weighted average value of options granted was $8.60 per option during
1997, $5.51 per option during 1996 and $3.92 per option during 1995.
The NYNEX stock options outstanding and exercisable at the date of the
merger were converted to Bell Atlantic stock options using the exchange ratio of
0.768 Bell Atlantic common stock to one share of NYNEX common stock.
11. EMPLOYEE BENEFITS
In 1997, following the completion of the merger, Bell Atlantic continued to
maintain separate benefit plans for employees of the former NYNEX companies,
including those employees of the Company. The assets of the Bell Atlantic and
NYNEX pension and savings plans have been commingled in a master trust. The
actuarial assumptions used are based on financial market interest rates, past
experience, and management's best estimate of future benefit changes and
economic conditions. Changes in these assumptions may impact future benefit
costs and obligations.
Effective January 1, 1998, Bell Atlantic established common pension and
savings plans benefit provisions for all management employees. As a result,
continuing management employees of the Company will receive the same benefit
levels as previously given under Bell Atlantic management plans. Pension and
other postretirement benefits for associate employees are subject to collective
bargaining agreements, and no changes were bargained in 1997. Modifications in
associate benefits have been bargained from time to time, and Bell Atlantic may
also periodically amend the benefits in the management plans. Substantive
commitments for future amendments are reflected in the pension costs and benefit
obligations.
The structure of Bell Atlantic's benefit plans does not provide for the
determination of certain disclosures required by SFAS No. 87, "Employers'
Accounting for Pensions" and SFAS No. 106. The required information is provided
on a consolidated basis in Bell Atlantic's Annual Report on Form 10-K for the
year ended December 31, 1997, which shows combined results and weighted-average
assumptions. The Company's benefit costs and obligations for 1997, 1996 and 1995
were based on the historic benefit plans and actuarial assumptions as shown in
the tables below.
Pension Plans
Bell Atlantic sponsors noncontributory defined benefit pension plans
covering substantially all of its management and associate employees. Benefits
for associate employees are determined by a flat dollar amount per year of
service according to job classification. Effective December 31, 1997, the plan
covering management employees was converted to a cash balance plan with benefits
determined by compensation credits related to age and service and interest
credits based
F-14
<PAGE>
New England Telephone and Telegraph Company
on individual account balances. The management pension benefit for prior years
was based on a stated percentage of adjusted career average earnings.
Under the cash balance plan, each management employee's opening account
balance was determined by converting the accrued pension benefit as of December
31, 1997 to a lump-sum amount based on the prior plan's provisions. The lump-
sum value was then multiplied by a transition factor based on age and service to
arrive at the opening balance.
Bell Atlantic's objective in funding the plans is to accumulate funds at a
relatively stable level over participants' working lives so that benefits are
fully funded at retirement. Plan assets consist principally of investments in
domestic and foreign corporate equity securities, U.S. and foreign government
and corporate debt securities, and real estate.
Pension cost was $46.7 million, $36.2 million and $42.4 million for the years
ended December 31, 1997, 1996 and 1995, respectively. The change in pension
cost from year to year was caused by a number of variables, including changes in
actuarial assumptions (see table below), favorable returns on plan assets and
plan amendments. The Company recognized net retirement incentive costs, which
are included in pension cost, of $120.9 million in 1997, $104.6 million in 1996
and $121.3 million in 1995 as a result of work force reductions. The costs were
comprised of special termination benefits charges of $190.0 million in 1997,
$185.0 million in 1996 and $182.3 million in 1995. These amounts were partially
offset by curtailment gains of $36.0 million in 1997, $49.1 million in 1996 and
$39.3 million in 1995 and by severance reserves of $33.1 million in 1997, $31.3
million in 1996 and $21.7 million in 1995. The severance reserves were
established in 1993 and transferred to the pension liability as employees
accepted the retirement incentive offer.
The significant assumptions used for the pension measurements were as follows
at December 31:
1997 1996 1995
----- ----- -----
Discount rate.................................... 7.25% 7.75% 7.25%
Rate of future increases in compensation levels
Management - through 2000....................... 3.00 3.00 3.00
Management - thereafter......................... 4.50 4.50 4.50
Associate....................................... 4.00 4.00 4.00
The expected long-term rate of return on plan assets was 8.90% for 1997, 1996
and 1995.
Postretirement Benefits Other Than Pensions
Bell Atlantic's postretirement health and life insurance benefit plans cover
substantially all of the Company's management and associate employees.
Postretirement health benefit costs are based on comprehensive medical and
dental plan provisions. Postretirement life insurance costs are based on annual
basic pay at retirement.
Bell Atlantic funds the postretirement health and life insurance benefits of
current and future retirees. Plan assets consist principally of investments in
domestic and foreign corporate equity securities, and U.S. Government and
corporate debt securities.
As a result of the merger of Bell Atlantic and NYNEX, the Company recorded
conforming adjustments for the immediate recognition of the transition benefit
obligation as if the merger had occurred as of the beginning of the earliest
period presented. In its historical financial statements, the Company amortized
the transition obligation over a twenty-year period.
Postretirement benefit cost was $117.3 million, $126.1 million and $147.0
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
change in postretirement benefit cost from year to year was caused by a number
of variables, including changes in actuarial assumptions (see table below),
changes in plan provisions, favorable medical claims experience and favorable
returns on plan assets. The Company recognized net retirement incentive costs,
which are included in the postretirement benefit cost, of $26.6 million in 1997,
$17.0 million in 1996 and $18.6 million in 1995 as a result of work force
reductions. The costs were comprised of special termination benefits charges of
$23.6 million in 1997, $18.5 million in 1996 and $21.5 million in 1995 and
curtailment losses of $55.0 million in 1997, $49.6 million in 1996 and $12.1
million in 1995. These amounts were partially offset by postretirement medical
F-15
<PAGE>
New England Telephone and Telegraph Company
benefit reserves of $52.0 million in 1997, $51.1 million in 1996 and $15.0
million in 1995. The postretirement medical reserves were established in 1993
and transferred to the postretirement benefit liability as employees accepted
the retirement incentive offer.
Assumptions used in the actuarial computations for postretirement benefits
are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Discount rate.................................... 7.25% 7.75% 7.25%
Rate of future increases in compensation levels
Management - through 2000....................... 3.00 3.00 3.00
Management - thereafter......................... 4.50 4.50 4.50
Associate....................................... 4.00 4.00 4.00
Medical cost trend rate:
Year ending..................................... 6.50 10.60 11.60
Ultimate (year 2001 for 1997, 2008 for 1996
and 1995)................................... 5.00 4.50 4.50
Dental cost trend rate:
Year ending..................................... 3.50 3.50 4.00
Ultimate (year 2002)............................ 3.00 3.00 3.00
</TABLE>
The expected long-term rate of return on plan assets was 8.40% for 1997, 1996
and 1995.
Retirement Incentives
In 1993, the Company announced a restructuring plan which included an accrual
of $440.6 million (pre-tax) for severance and postretirement medical benefits
under a force reduction plan, of which $45.6 million was the Company's allocated
portion of Telesector Resources' cost for its force reduction plan. Beginning
in 1994, retirement incentives have been offered as a voluntary means of
implementing substantially all of the work force reductions planned in 1993.
Since the inception of the retirement incentive program, additional costs
totaled $676.9 million (pre-tax) as of December 31, 1997. These costs include
amounts associated with employees paid directly by the Company and the Company's
allocated portion of amounts associated with employees of Telesector Resources.
Costs associated with employees of the Company are comprised of $147.5 million
in 1997, $122.7 million in 1996, $138.3 million in 1995 and $132.0 million in
1994 and are reported in Employee Costs. Costs associated with the Company's
allocated portion of costs are comprised of $54.5 million in 1997, $9.5 million
in 1996, $36.3 million in 1995 and $36.1 million in 1994 and are reported in
Other Operating Expenses. The costs associated with employees paid by the
Company include the pension and postretirement benefit amounts discussed above,
as well as vacation pay costs and other items. As described above, the
retirement incentive costs have been reduced by severance and postretirement
medical benefits reserves established in 1993 and transferred to the pension and
postretirement benefits liabilities as employees accepted the retirement offer.
As of December 31, 1997, the remaining reserves associated with the 1993
restructuring plan were approximately $5 million for employee severance and $7
million for postretirement medical benefits.
As of December 31, 1997, employees who have left the business under the
retirement incentive program totaled 7,382, consisting of 3,145 management
employees and 4,237 associate employees (including 1,507 management employees
and 184 associate employees of Telesector Resources). The retirement incentive
program covering management employees ended on March 31, 1997 and the program
covering associate employees is scheduled to end in August 1998.
Savings Plans and Employee Stock Ownership Plans
Substantially all of the Company's employees are eligible to participate in
savings plans maintained by Bell Atlantic to provide opportunities for eligible
employees to save for retirement on a tax-deferred basis and encourage employees
to acquire and maintain an equity interest in Bell Atlantic. Under these plans,
a certain percentage of eligible employee contributions are matched with shares
of Bell Atlantic common stock. At the date of the merger, NYNEX common stock
outstanding was converted to Bell Atlantic shares using an exchange ratio of
0.768 of a share of Bell Atlantic common
F-16
<PAGE>
New England Telephone and Telegraph Company
stock to one share of NYNEX common stock. The Company matches a portion of
employee contributions through a leveraged employee stock ownership plan (ESOP)
maintained by Bell Atlantic. Bell Atlantic recognizes leveraged ESOP cost based
on the shares allocated method for the leveraged ESOP trust that held securities
after December 15, 1989. The Company recognizes ESOP cost based on its matching
obligation attributable to participating Company employees. The Company recorded
ESOP costs of $6.4 million, $6.6 million and $6.6 million in 1997, 1996 and
1995, respectively. In addition to the ESOP, Bell Atlantic maintains savings
plans for certain employees of the Company. The Company recorded compensation
expense associated with these savings plans of $20.1 million, $20.4 million and
$19.3 million in 1997, 1996 and 1995, respectively.
12. INCOME TAXES
The components of income tax expense are as follows:
Years Ended December 31
------------------------
1997 1996 1995*
------ ------ ------
(Dollars in Millions)
Current:
Federal.................................... $301.1 $398.1 $305.7
State and local............................ 51.8 70.6 56.3
------ ------ ------
Total...................................... 352.9 468.7 362.0
------ ------ ------
Deferred:
Federal.................................... (2.9) (44.9) (25.9)
State and local............................ (1.5) (2.2) (4.5)
------ ------ ------
Total...................................... (4.4) (47.1) (30.4)
------ ------ ------
348.5 421.6 331.6
Investment tax credits.......................... (6.3) (8.8) (11.6)
------ ------ ------
Total income tax expense........................ $342.2 $412.8 $320.0
====== ====== ======
* Does not include the effect of investment tax credit amortization that was
accelerated in connection with the discontinued application of SFAS No. 71.
The provision for income taxes varies from the amount computed by applying
the statutory federal income tax rate to income before provision for income
taxes. The difference is attributable to the following factors:
Years Ended December 31
--------------------------
1997 1996 1995
-------- ------- -------
Statutory federal income tax rate............... 35.0% 35.0% 35.0%
Investment tax credits.......................... (.5) (.5) (.8)
State income taxes, net of federal tax benefits. 3.6 4.1 4.0
Other, net...................................... -- (.5) --
---- ---- ----
Effective income tax rate....................... 38.1% 38.1% 38.2%
==== ==== ====
F-17
<PAGE>
New England Telephone and Telegraph Company
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax
liabilities (assets) were as follows at December 31:
1997 1996
------- -------
(Dollars in Millions)
Deferred tax assets:
Employee benefits............................. $(700.5) $(672.4)
Investment tax credits........................ (18.5) (20.7)
Other......................................... (68.7) (45.9)
------- -------
(787.7) (739.0)
------- -------
Deferred tax liabilities:
Depreciation.................................. 638.4 615.9
Other......................................... 69.3 47.7
------- -------
707.7 663.6
------- -------
Net deferred tax (asset)........................... $ (80.0) $ (75.4)
======= =======
Deferred tax assets include approximately $462 million and $456 million at
December 31, 1997 and 1996, respectively, related to postretirement benefit
costs recognized under SFAS No. 106. This deferred tax asset will gradually be
realized over the estimated lives of current retirees and employees.
13. ADDITIONAL FINANCIAL INFORMATION
December 31
----------------------
1997 1996
-------- --------
(Dollars in Millions)
BALANCE SHEETS:
Accounts payable and accrued liabilities:
Accounts payable - affiliates.................... $ 572.4 $ 549.0
Accounts payable - other......................... 410.8 412.9
Accrued expenses................................. 26.0 16.3
Accrued vacation pay............................. 88.4 82.7
Accrued taxes.................................... 12.5 81.5
Interest payable - other......................... 38.1 38.1
-------- --------
$1,148.2 $1,180.5
======== ========
Years Ended December 31
------------------------
1997 1996 1995
------ ------ ------
(Dollars in Millions)
STATEMENTS OF CASH FLOWS:
Cash paid during the year for:
Income taxes, net of amounts refunded............ $475.8 $412.8 $379.6
Interest, net of amounts capitalized............. 137.2 152.1 157.1
STATEMENTS OF INCOME AND
REINVESTED EARNINGS:
Interest expense incurred,
net of amounts capitalized....................... 138.9 142.1 153.9
Capitalized interest............................... 13.0 12.5 ---
Advertising expense................................ 31.0 28.9 42.6
Interest paid during the year includes $1.6 million in 1997, $3.4 million in
1996 and $1.1 million in 1995 related to short-term financing services provided
by NYNEX (see Note 7).
F-18
<PAGE>
New England Telephone and Telegraph Company
Advertising expense recorded by the Company in 1997, 1996 and 1995 was
allocated to the Company by Telesector Resources.
At December 31, 1997 and 1996, $40.5 million and $66.1 million,
respectively, of bank overdrafts were classified as accounts payable.
14. COMMITMENTS AND 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.
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 December 31, 1997, the aggregate amount of such revenues that was estimated
to be subject to possible refund was approximately $41 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.
15. TRANSACTIONS WITH AFFILIATES
The financial statements include transactions with Telesector Resources,
NYNEX, and various other affiliates.
The Company has contractual arrangements with Telesector Resources and
NYNEX for the provision of various centralized services. Telesector Resources
principally provides network related services which generally benefit only the
operating telephone subsidiaries. These services include marketing, legal and
accounting, finance, data processing, and materials management for various
network operations. Costs may be either directly assigned to one subsidiary or
allocated to more than one subsidiary based on identification of detailed work
functions. The Company was also allocated a portion of Telesector Resources'
retirement incentive program costs.
NYNEX principally provides overhead and support services which generally
benefit the operating telephone companies as well as other subsidiaries. These
services include corporate governance and staff support in finance, external
affairs, legal and corporate secretary, media relations, employee
communications, corporate advertising, human resources, and treasury. Costs may
be either directly assigned to one subsidiary or allocated to more than one
subsidiary based on work studies performed to identify on whose behalf services
are being performed. Certain costs which are performed on behalf of all
subsidiaries are allocated to those subsidiaries based on their relative size.
The Company receives technical and support services from Bell
Communications Research, Inc. (Bellcore), another affiliated company owned
jointly by the regional holding companies. The costs of these services are
billed separately through Telesector Resources to the Company. In November 1996,
Bell Atlantic and other Bellcore owners entered into an agreement to sell their
jointly owned investment in Bellcore. The transaction was completed in November
1997. The Company recognized an after-tax gain of approximately $7 million, net
of reserves. The Company continues to contract with Bellcore for technical and
support services.
The Company recognizes interest expense/income in connection with borrowing
arrangements with NYNEX to provide short-term financing services to the Company
(see Note 7).
Operating revenues include fees earned from Yellow Pages for the use of the
Company's name in soliciting directory advertising and in publishing and
distributing directories. These revenues are earned pursuant to an agreement
whereby Yellow Pages must pay all of its earnings related to directory
publishing in Massachusetts, Vermont, New Hampshire, Rhode Island and Maine
which are in excess of a regulated rate of return. Yellow Pages has given the
Company notice of its intention to terminate the agreement, effective January 1,
1999. Other operating revenues and expenses include miscellaneous items of
income and expense resulting from transactions with other affiliates, primarily
rental of facilities and equipment.
F-19
<PAGE>
New England Telephone and Telegraph Company
The Company records income under the equity method of accounting from its
investment in Telesector Resources. The Company also paid cash dividends to its
parent company, NYNEX.
Transactions with affiliates are summarized as follows:
Years Ended December 31
---------------------------------
1997 1996 1995
------- ------ ------
(Dollars in Millions)
Operating revenues:
Yellow Pages directory revenues........ $147.1 $190.7 $171.3
Other revenue from affiliates.......... 34.7 28.2 24.3
------ ------ ------
181.8 218.9 195.6
------ ------ ------
Operating expenses:
Telesector Resources................... 810.7 710.7 684.0
NYNEX.................................. 15.9 20.6 21.4
Bellcore............................... 16.1 22.9 30.7
Other.................................. 5.3 3.7 3.8
------ ------ ------
848.0 757.9 739.9
------ ------ ------
Other income:
Telesector Resources - equity income... 18.0 9.2 11.1
NYNEX - interest income................ 1.8 .4 1.1
------ ------ ------
19.8 9.6 12.2
------ ------ ------
Interest expense to NYNEX................ 1.6 3.4 1.1
Dividends to NYNEX....................... 562.2 466.9 442.7
Outstanding balances with affiliates are reported on the balance sheets at
December 31, 1997 and 1996 as Note Receivable from Affiliate, Accounts
Receivable - Affiliates, Note Payable to Affiliate, and Accounts Payable and
Accrued Liabilities - Affiliates.
On February 2, 1998, the Company declared and paid a dividend in the amount
of $187.4 million to NYNEX.
F-20
<PAGE>
New England Telephone and Telegraph Company
16. QUARTERLY FINANCIAL INFORMATION (unaudited)
Income Before
Cumulative
Effect of
Change
Operating Operating in Accounting Net
Quarter Ended Revenues Income Principle Income
- ------------- --------- --------- -------------- ------
(Dollars in Millions)
1997:
March 31.................. $1,159.2 $ 214.5 $111.5 $111.5
June 30................... 1,167.7 331.8 190.2 190.2
September 30*............. 1,140.3 227.1 121.5 121.5
December 31............... 1,098.5 238.0 132.7 132.7
-------- -------- ------ ------
Total..................... $4,565.7 $1,011.4 $555.9 $555.9
======== ======== ====== ======
1996:
March 31.................. $1,133.4 $ 237.2 $125.7 $180.9
June 30................... 1,113.8 275.6 149.2 149.2
September 30.............. 1,178.5 375.4 210.5 210.5
December 31............... 1,121.4 326.6 184.1 184.1
-------- -------- ------ ------
Total..................... $4,547.1 $1,214.8 $669.5 $724.7
======== ======== ====== ======
*Results of operations for the third quarter of 1997 include merger-related
costs (see Note 2).
F-21
<PAGE>
New England Telephone and Telegraph Company
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in Millions)
<TABLE>
<CAPTION>
Additions
--------------------
Charged
Balance at Charged to Other Balance
Beginning to Accounts Deductions at End
Description of Period Expenses Note(a) Note (b) of Period
- ----------- ---------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible
Accounts Receivable:
Year 1997............... $ 53.6 $69.0 $ 78.8 $147.7 $ 53.7
Year 1996............... $ 55.9 $62.0 $106.3 $170.6 $ 53.6
Year 1995............... $ 57.1 $55.1 $ 57.1 $113.4 $ 55.9
Restructuring Reserves:
Year 1997............... $ 92.5 $ --- $ --- $ 80.1 $ 12.4
Year 1996............... $215.5 $ --- $ --- $123.0 $ 92.5
Year 1995............... $344.6 $ --- $ --- $129.1 $215.5
</TABLE>
- ---------------------
(a) (i) Amounts previously written off which were credited directly to this
account when recovered; and (ii) accruals charged to accounts payable for
anticipated uncollectible charges on purchases of accounts receivable from
others which were billed by the Company.
(b) Amounts written off as uncollectible or transferred to other accounts or
utilized.
F-22
<PAGE>
EXHIBITS
FILED WITH ANNUAL REPORT FORM 10-K
UNDER THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
New England Telephone and Telegraph Company
COMMISSION FILE NUMBER 1-1150
<PAGE>
Form 10-K for 1997
File No. 1-1150
Page 1 of 1
EXHIBITS
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission (SEC), are incorporated herein by reference as exhibits
hereto.
(3) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission (SEC), are incorporated herein
by reference as exhibits hereto.
3a Restated Certificate of Incorporation of New England Telephone
and Telegraph 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).
3b By-Laws of the registrant, 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 registrant is filed herewith pursuant to Regulation
S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such instrument
to the SEC upon request.
10a Directory License Agreement between the registrant and NYNEX
Information Resources, 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).
10b Service agreement concerning provision by Telesector Resources
Group, Inc. to the registrant of numerous services, including (i)
purchasing, materials handling, inspection, distribution, storage
and similar services and (ii) technical, regulatory, government
relations, marketing operational support and similar services,
dated March 31, 1992 (Exhibit No. 19(i)1 to the registrant's
filing on Form SE dated March 23, 1993, File No. 1-1150).
23 Consent of Independent Accountants.
24 Powers of Attorney.
27.1 Financial Data Schedule - 1997.
27.2 Restated Financial Data Schedule - 1995.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
New England Telephone and Telegraph Company on Form S-3 (File No. 33-49533) and
Form S-3 (File No. 33-50631) of our report dated February 9, 1998, on our audits
of the financial statements and financial statement schedule of the Company as
of December 31, 1997 and December 31, 1996, and for each of the three years in
the period ended December 31, 1997, which report is included in this Annual
Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
March 25, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of March, 1998.
/s/ Richard L. Carrion
-------------------------------
Richard L. Carrion
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 20th day of March, 1998.
/s/ Lodewijk J.R. de Vink
-------------------------------
Lodewijk J.R. de Vink
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of March, 1998.
/s/ Stanley P. Goldstein
-------------------------------
Stanley P. Goldstein
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of March, 1998.
/s/ Helene L. Kaplan
-------------------------------
Helene L. Kaplan
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of March, 1998.
/s/ Elizabeth T. Kennan
-------------------------------
Elizabeth T. Kennan
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of March, 1998.
/s/ John F. Maypole
-------------------------------
John F. Maypole
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 20th day of March, 1998.
/s/ Joseph Neubauer
-------------------------------
Joseph Neubauer
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of March, 1998.
/s/ Hugh B. Price
-------------------------------
Hugh B. Price
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 20th day of March, 1998.
/s/ Ivan G. Seidenberg
-------------------------------
Ivan G. Seidenberg
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 20th day of March, 1998.
/s/ Walter V. Shipley
-------------------------------
Walter V. Shipley
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1998.
/s/ John R. Stafford
-------------------------------
John R. Stafford
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
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, 1997;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg,
Doreen A. Toben and Edwin F. Hall as attorney for the undersigned for the
purpose of executing and filing such Annual Report and any amendment or
amendments or other necessary documents, hereby giving to each said attorney
full authority to perform all acts necessary thereto as fully as the undersigned
could do if personally present, and hereby ratifying all that said attorney may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of March, 1998.
/s/ Doreen A. Toben
-------------------------------
Doreen A. Toben
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE BALANCE SHEET
AT DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 151
<SECURITIES> 0
<RECEIVABLES> 987
<ALLOWANCES> 54
<INVENTORY> 113
<CURRENT-ASSETS> 1,551
<PP&E> 13,381
<DEPRECIATION> 7,476
<TOTAL-ASSETS> 7,659
<CURRENT-LIABILITIES> 1,515
<BONDS> 2,077
0
0
<COMMON> 1
<OTHER-SE> 2,278
<TOTAL-LIABILITY-AND-EQUITY> 7,659
<SALES> 0
<TOTAL-REVENUES> 4,566
<CGS> 0
<TOTAL-COSTS> 3,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> 898
<INCOME-TAX> 342
<INCOME-CONTINUING> 556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 556
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE BALANCE SHEET
AT DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 940<F1>
<ALLOWANCES> 56<F1>
<INVENTORY> 54
<CURRENT-ASSETS> 1,199<F1>
<PP&E> 12,496<F1>
<DEPRECIATION> 6,666<F1>
<TOTAL-ASSETS> 7,180<F1>
<CURRENT-LIABILITIES> 1,709<F1>
<BONDS> 1,822
0
0
<COMMON> 1
<OTHER-SE> 2,027<F1>
<TOTAL-LIABILITY-AND-EQUITY> 7,180<F1>
<SALES> 0
<TOTAL-REVENUES> 4,314
<CGS> 0
<TOTAL-COSTS> 3,346<F1>
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 154
<INCOME-PRETAX> 838<F1>
<INCOME-TAX> 320<F1>
<INCOME-CONTINUING> 518<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> (628)
<CHANGES> 0
<NET-INCOME> (110)<F1>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>RESTATED AS A RESULT OF THE MERGER OF BELL ATLANTIC CORPORATION AND NYNEX
CORPORATION COMPLETED ON AUGUST 14, 1997 AND ACCOUNTED FOR AS A POOLING OF
INTERESTS.
</FN>
</TABLE>
