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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------
FORM 10-K
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(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1150
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
A New York Corporation I.R.S. Employer Identification No. 04-1664340
185 Franklin Street, Boston, MA 02110
Telephone Number (617) 743-9800
Former address, if changed since last report: 125 High Street, Boston, MA 02110
---------------------------
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
--- ---
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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 "
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 "
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New England Telephone and Telegraph Company
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I
1. Business
(Abbreviated pursuant to General Instruction I(2).) ................. 1
2. Properties .......................................................... 6
3. Legal Proceedings ................................................... 6
4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction I(2).) ..................... 6
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................... 7
6. Selected Financial Data
(Omitted pursuant to General Instruction I(2).) ..................... 7
7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction I(2).) ................. 8
7A. Quantitative and Qualitative Disclosures About Market Risk .......... 19
8. Financial Statements and Supplementary Data ......................... 20
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................. 20
PART III
(Omitted pursuant to General Instruction I(2).):
10. Directors and Executive Officers of the Registrant .................. 20
11. Executive Compensation .............................................. 20
12. Security Ownership of Certain Beneficial Owners and Management ...... 20
13. Certain Relationships and Related Transactions ...................... 20
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .... 20
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 29, 1999.
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New England Telephone and Telegraph Company
PART I
Item 1. Business
GENERAL
New England Telephone and Telegraph Company is incorporated under the laws
of the State of New York. Our principal offices are located at 185 Franklin
Street, Boston, Massachusetts 02110 (telephone number 617-743-9800). We are a
wholly owned subsidiary of NYNEX Corporation (NYNEX), which is a wholly owned
subsidiary of Bell Atlantic Corporation (Bell Atlantic).
We presently serve a territory consisting of six Local Access and Transport
Areas (LATAs) in Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.
These 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 we have been permitted by the "Modification of Final
Judgment" (MFJ) to provide telephone service.
We currently provide two basic types of telecommunications services. First,
we transport 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 us and by other pay telephone providers). Among other local
services provided are Centrex (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, we
provide exchange access service, which links a subscriber's telephone or other
equipment to the transmission facilities of interexchange carriers which, in
turn, provide interLATA telecommunications service to their customers. We also
provide exchange access service to interexchange carriers which provide
intrastate intraLATA long distance telecommunications service, as well as local
exchange access to competitive local exchange carriers for calls within a LATA.
PROPOSED BELL ATLANTIC-GTE MERGER
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger. We will continue to be a wholly owned indirect subsidiary of Bell
Atlantic.
The completion of the merger is subject to a number of conditions,
including certain regulatory approvals, receipt of opinions that the merger will
be tax-free, and the approval of the shareholders of both Bell Atlantic and GTE.
OPERATIONS
We are one of nine operating telephone companies owned by Bell Atlantic.
Bell Atlantic has organized certain telecommunications group functions into
business units operating across the telephone subsidiaries. The business units
focus on specific market segments. Each of the operating telephone subsidiaries,
including us, remains responsible within its respective service area for the
provision of telephone services, financial performance and regulatory matters.
We have one reportable segment, which comprises four strategic business units.
The Consumer unit markets communications services to residential customers,
as well as operator services.
The General Business unit markets communications and information services
to small and medium-sized businesses as well as pay telephone services.
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New England Telephone and Telegraph Company
The Enterprise Business unit markets communications and information
technology and services to large businesses and to departments, agencies and
offices of the executive, judicial and legislative branches of the federal and
state governments. 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 optimization (disaster avoidance,
911 service, intelligent vehicle highway systems), video services (distance
learning, telemedicine, videoconferencing) and interactive multimedia
applications services.
The Network Services 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.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (the 1996 Act) became effective on
February 8, 1996, and replaced the MFJ, a consent decree that arose out of an
antitrust action brought by the United States Department of Justice against
AT&T. In general, the 1996 Act includes provisions that open local exchange
markets to competition and permit Bell Operating Companies, including ours, to
engage in manufacturing and to provide long distance service under certain
conditions.
The 1996 Act permits us to offer in-region long distance services (that is,
services originating in the states where we operate as a local exchange
carrier), once we have demonstrated to the Federal Communications Commission
(FCC) that we have satisfied certain requirements. The requirements include a
14-point "competitive checklist" of steps which we must take to help competitors
offer local services through resale, through purchase of unbundled network
elements, or through their own networks. We must also demonstrate to the FCC
that our entry into the in-region long distance market would be in the public
interest.
A U.S. Court of Appeals rejected a constitutional challenge to these
provisions, and the Supreme Court recently declined to review that decision.
During the period that the case was pending, we continued to work through the
regulatory process at both the state and federal levels in order to be in a
position to demonstrate compliance with the challenged provisions.
The U. S. Supreme Court recently reversed a U.S. Court of Appeals decision
that had invalidated certain aspects of the FCC rules implementing provisions of
the 1996 Act. In particular, the Supreme Court reinstated the FCC's authority to
adopt rules governing the methodology to be used by state commissions in setting
prices for local interconnection and resale arrangements, and reinstated rules
that allow competitors to choose individual terms out of negotiated
interconnection agreements and that prohibit incumbent local telephone companies
from separating network elements that already are combined in the incumbent's
own network.
The U. S. Supreme Court also decided that the FCC had applied the wrong
standard in determining what elements of their networks incumbent local
telephone companies are obligated to make available to competitors on an
unbundled basis. Among other things, the FCC failed to account for the fact that
some elements are available from other sources. As a result of the decision, the
FCC must conduct a new proceeding to apply the correct standard. Pending that
proceeding, we have informally agreed to continue offering the FCC's previously
specified list of unbundled elements. In addition, a challenge to the
substantive merits of the FCC's pricing rules remains pending in the U.S. Court
of Appeals.
FCC Regulation and Interstate Rates
We are subject to the jurisdiction of the FCC with respect to interstate
services and certain related matters. In 1998, the FCC continued to implement
reforms to the interstate access charge system and to implement the "universal
service" and other requirements of the 1996 Act.
Access Charges
Interstate access charges are the rates long distance carriers pay for use
and availability of our facilities for the origination and termination of
interstate service. The FCC required a phased restructuring of access charges,
which began in January 1998, so that our non-usage-sensitive costs will be
recovered from long distance carriers and end-users through
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New England Telephone and Telegraph Company
flat rate charges, and usage-sensitive costs will be recovered from long
distance carriers through usage-based rates. In addition, the FCC has required
that different levels of usage-based charges for originating and for terminating
interstate traffic be established.
Price Caps
Under the FCC price cap rules that apply to interstate access rates, each
year our price cap index is adjusted downward by a fixed percentage intended to
reflect increases in productivity (the productivity factor) and adjusted upward
by an allowance for inflation (the GDP-PI). The current productivity factor is
6.5 percent. These changes will be reflected in tariff changes that will be
filed to take effect on July 1, 1999.
In October 1998, the FCC initiated a proceeding with respect to its price
cap rules to determine whether a change in the current productivity factor is
warranted, whether to continue its "market based" approach of allowing market
forces (supplemented by its price cap rules) to determine access charge levels,
and whether to afford additional pricing flexibility for access services. In
addition, Bell Atlantic has petitioned the FCC to remove our special access
services from price cap regulation on the grounds that customers of these
services have competitive alternatives available, and a challenge to the FCC
order establishing the 6.5 percent productivity factor is pending in the U.S.
Court of Appeals. We are unable to predict the results of these further
proceedings.
Universal Service
The FCC has adopted rules implementing the "universal service" provision of
the 1996 Act. As of January 1, 1999, the rules require us to contribute
approximately 2% of our interstate retail revenues for high-cost and low-income
subsidies. We are also required to contribute a portion of our total retail
revenues for schools, libraries and not-for-profit health care. We will recover
these contributions through interstate charges to long distance carriers and
end-users.
A new federal high-cost universal service support mechanism for non-rural
carriers and an increase in the funding level for schools and libraries are
expected to become effective in 1999. The FCC currently is considering, in
conjunction with a recommendation from a joint board of federal and state
regulators, a number of issues that could affect the size of the universal
service fund for high cost areas and the amount of universal service costs that
are assessed against us for recovery.
Reciprocal Compensation
We have been required by certain of our state regulators to pay "reciprocal
compensation" to competitive local exchange and other carriers to terminate
calls on their networks, including a large volume of one-way traffic from our
customers to internet service providers that are their customers. On February
26, 1999, the FCC confirmed that such traffic is interstate and interexchange in
nature and not subject to the reciprocal compensation requirements of the 1996
Act. Because the previous state regulatory decisions were based upon a view that
internet access calls are "local" rather than interstate and interexchange in
nature, we have asked our Massachusetts regulators to revisit their prior
interpretations.
State Regulation of Rates and Services
The state regulatory commissions of Maine, Massachusetts, New Hampshire,
Rhode Island and Vermont regulate our communications services with respect to
intrastate rates and services and certain other matters.
Maine
In 1995, the Maine Public Utilities Commission (MPUC) approved a five-year
price cap plan for us, 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 our
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.
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New England Telephone and Telegraph Company
Massachusetts
In 1995, the Massachusetts Department of Public Utilities (MDPU) approved a
price regulation plan for us through August 2001, with no restriction on
earnings. Certain residence exchange rates are capped. Pricing rules limit our
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. In
addition, our service quality performance levels in any given month could result
in an increase in the productivity offset by one-twelfth of one percent for
purposes of the annual price cap filing.
New Hampshire
Our 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 us. 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
Our operations are subject to rate of return regulation, but an incentive
plan has been filed with the Vermont Public Service Board which would eliminate
regulation of our earnings.
Competition
Legislative changes, including provisions of the 1996 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. We anticipate
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 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 our future revenue growth.
Local Exchange Services
State regulatory commissions have historically regulated the ability to
offer local exchange services. Applications from competitors to provide and
resell local exchange services have been approved in every jurisdiction in which
we operate.
One of the purposes of the 1996 Act was to ensure, and accelerate, the
emergence of competition in local exchange markets. Toward this end, the 1996
Act requires most existing local exchange carriers (incumbent local exchange
carriers, or ILECs), including us, to permit potential competitors (competitive
local exchange carriers, or CLECs) to
. purchase service from the ILEC for resale to CLEC customers
. purchase unbundled network elements from the ILEC, and/or
. interconnect the CLEC network with the ILEC's network.
The 1996 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.
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New England Telephone and Telegraph Company
Our negotiations with various CLECs, and arbitrations before our various
state regulators, have continued. As of January 31, 1999, we had entered into
249 agreements with CLECs of which 216 had been approved by the state
regulators.
We expect that these agreements, and the 1996 Act, will continue to lead to
substantially increased competition in our local exchange market in 1999 and
subsequent years. We believe that this competition will be both on a facilities
basis and in the form of resale by CLECs of our service. Under the various
agreements and arbitrations discussed above, we are generally required to sell
our services to CLECs at discounts ranging from approximately 17% to 29% from
the prices we charge our 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. State regulatory
commissions rather than federal authorities generally regulate these services.
Until the implementation of "presubscription," we completed intraLATA toll
calls 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. We
implemented presubscription in Maine, New Hampshire, Rhode Island and Vermont by
December 1997. We expect to offer presubscription in Massachusetts in April
1999.
Alternative Access
A substantial portion of our revenues from business and government
customers is derived from a relatively small number of large, multiple-line
subscribers.
We face 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 our
plant. The FCC's orders requiring us to offer virtual collocated interconnection
for special and switched access services have enhanced the ability of such
alternative access providers to compete with us.
Other potential sources of competition include cable television systems,
shared tenant services and other non-carrier systems which are capable of
bypassing our local plant, either partially or completely, through substitution
of special access for switched access or through concentration of
telecommunications traffic on fewer of our lines.
Wireless Services
Wireless services also constitute potential sources of competition to our
wireline telecommunications services, especially as wireless carriers continue
to lower their prices to end users. Wireless portable telephone services employ
analog and digital technology that allows customers to make and receive
telephone calls from any location using small handsets, and can also be used for
data transmission.
Public Telephone Services
We face increasing competition in the provision of pay telephone services
from other providers. In addition, the growth of wireless communications
decreases usage of public telephones.
Operator Services
Alternative operator services providers have entered into competition with
our operator services product line.
EMPLOYEES
As of December 31, 1998, we had approximately 18,000 employees.
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New England Telephone and Telegraph Company
Item 2. Properties
GENERAL
Our principal properties do not lend themselves to simple description by
character and location. Our investment in plant, property and equipment
consisted of the following at December 31:
1998 1997
----- -----
Outside communications plant ......................... 44% 44%
Central office equipment ............................. 42 41
Land and buildings ................................... 7 7
Furniture, vehicles and other work equipment ......... 5 6
Other ................................................ 2 2
--- ---
100% 100%
=== ===
"Outside communications plant" consists primarily of aerial cable,
underground cable, conduit and wiring, and telephone poles. "Central office
equipment" consists of switching equipment, transmission equipment and related
facilities. "Land and buildings" consists of land and land improvements, and
principally central office buildings. "Furniture, vehicles and other work
equipment" consists of public telephone instruments and telephone equipment,
furniture, office equipment, motor vehicles and other work equipment. "Other"
property consists primarily of plant under construction, capital leases and
leasehold improvements.
Our customers are served by electronic switching systems that provide a
wide variety of services. As of December 31, 1998, our network has been fully
transitioned from an analog to a digital network, which provides the
capabilities to furnish advanced data transmission and information management
services.
CAPITAL EXPENDITURES
We have been making and expect to continue to make significant capital
expenditures to meet the demand for communications services and to further
improve such services. Capital expenditures were approximately $1,032 million in
1998, $957 million in 1997 and $906 million in 1996. Capital expenditures
exclude additions under capital leases. Our total investment in plant, property
and equipment was approximately $14.1 billion at December 31, 1998, $13.4
billion at December 31, 1997 and $12.7 billion at December 31, 1996, including
the effect of retirements, but before deducting accumulated depreciation.
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).)
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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).)
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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 we provide 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 our regulatory plans,
see Item 1 - "Description of Business."
RESULTS OF OPERATIONS
- ---------------------
We reported net income of $633.7 million in 1998, compared to net income of
$555.9 million in 1997.
Our results for 1998 and 1997 were affected by the following special items.
The special charges in both years include our allocated share of charges from
Telesector Resources Group, Inc. (Telesector Resources).
The following table shows how special items are reflected in our statements
of income for each year:
Years ended December 31 1998 1997
- --------------------------------------------------------------------------------
(Dollars in Millions)
Operating Revenues
Regulatory contingencies .................... $ --- $ 32.0
------ ------
Employee Costs
Retirement incentive costs .................. $272.0 $148.0
Merger direct incremental costs ............. --- 1.0
Merger severance costs ...................... --- 32.0
Merger transition costs ..................... 1.0 ---
Depreciation and Amortization
Fixed asset-related ......................... --- 6.0
Other Operating Expenses
Merger transition costs ..................... 7.0 3.0
Legal contingencies
and other special items ................ --- 17.0
Allocated retirement incentive costs ........ 23.0 54.0
Allocated merger direct incremental,
severance and transition costs .......... 27.0 35.0
Allocated other special items ............... --- 5.0
------ ------
$330.0 $301.0
------ ------
What follows is a further explanation of the nature and timing of these
special items.
Merger-Related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax costs totaling $35 million in 1998 and $71
million in 1997.
In 1998, merger-related charges of $35 million were for transition and
integration costs. In 1997, merger-related charges consisted of $14 million for
transition and integration costs, $6 million for direct incremental costs and
$51 million for employee severance costs.
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New England Telephone and Telegraph Company
Transition and integration costs consist of our proportionate share of
costs associated with integrating the operations of Bell Atlantic and NYNEX,
such as systems modifications costs and advertising and branding costs.
Transition and integration costs are expensed as incurred. 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 our
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. During 1997 and 1998, 26 and 95 management
employees were separated with severance benefits.
Retirement Incentive Costs
In 1993, we recorded costs totaling $440.6 million (pre-tax) for severance
and postretirement medical benefits in connection with an involuntary force
reduction plan. Beginning in 1994, retirement incentives have been offered under
a voluntary program as a means of implementing substantially all of the work
force reductions planned in 1993.
Since the inception of the plan, we have recorded additional costs of
$971.8 million (pre-tax) through December 31, 1998. These additional costs and
the corresponding number of employees accepting the retirement incentive offer
for each year ended December 31 are as follows:
(Dollars in Millions)
--------------------------------------------------------------
Year Amount Employees
1994 $168.1 2,241
1995 174.5 1,862
1996 132.2 1,582
1997 202.0 1,697
1998 295.0 2,008
--------------------------------------
$971.8 9,390
======================================
The additional costs are comprised of special termination pension and
postretirement benefit amounts, as well as employee costs for other items. These
costs have been reduced by severance and postretirement medical benefit reserves
established in 1993 and transferred to the pension and postretirement benefit
liabilities as employees accepted the retirement incentive offer. The remaining
severance and postretirement medical reserve balances totaled $12.4 million at
December 31, 1997 and were fully utilized at December 31, 1998. The retirement
incentive program covering management employees ended on March 31, 1997 and the
program covering associate employees was completed in September 1998. You can
find additional information on retirement incentive costs in Note 10 to the
financial statements.
Other Charges and Special Items
During 1997, we recorded other charges and special items totaling
approximately $60 million in connection with consolidating operations and
combining organizations and for special items arising during the year. These
charges were comprised of the following significant items.
Regulatory and Legal Contingencies and Other Special Items
In 1997, we also recorded reductions to operating revenues and charges to
operating expenses totaling approximately $60 million (pre-tax), which consisted
of the following:
. Revenue reductions consisted of approximately $32 million for federal
regulatory matters. These matters relate to specific issues that are
currently under investigation by federal regulatory commissions. We
believe that it is probable that the ultimate resolution of these
pending matters will result in refunds to our customers.
. Charges to operating expenses totaled approximately $28 million,
including $1 million for a legal contingency. This contingency was
accounted for under the rules of SFAS No. 5 "Accounting for
Contingencies." These charges also included approximately $6 million
for special items related to fixed assets and $21 million for other
post-merger initiatives.
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New England Telephone and Telegraph Company
These and other items affecting the comparison of our results of operations
for the years ended December 31, 1998 and 1997 are discussed in the following
sections.
Segmental Results of Operations
We have one reportable segment, which provides domestic wireline
telecommunications services. You may find additional information about segment
reporting in Note 15 to the financial statements.
OPERATING REVENUE STATISTICS
- ----------------------------
1998 1997 % Change
- -------------------------------------------------------------------------------
At Year-End
- -----------
Access Lines in Service (in thousands)*
Residence ................................... 4,611 4,498 2.5%
Business .................................... 2,452 2,249 9.0
Public ...................................... 80 80 ---
------ ------
7,143 6,827 4.6
====== ======
For the Year
- ------------
Access Minutes of Use (in millions)............ 28,467 26,408 7.8
====== ======
* 1997 reflects a restatement of access lines in service to include Primary Rate
ISDN (Integrated Services Digital Network) channels and other changes to conform
with the 1998 presentation.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
For the Years Ended December 31 1998 1997
- --------------------------------------------------------------------------------
Local services .............................. $2,261.0 $2,164.3
Network access services ..................... 1,448.5 1,362.4
Long distance services ...................... 630.4 657.1
Ancillary services........................... 245.5 201.0
Directory and information services .......... 219.1 180.9
-------- --------
Total ....................................... $4,804.5 $4,565.7
======== ========
LOCAL SERVICES REVENUES
Increase
- --------------------------------------------------------------------------------
1998 - 1997 $96.7 4.5%
- --------------------------------------------------------------------------------
Local services revenues are earned by us 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.
Growth in local services revenues in 1998 was primarily due to higher usage
of our network facilities. This growth was generated, in part, by an increase in
access lines in service of 4.6% in 1998. Access line growth primarily reflects
higher demand for Centrex services and an increase in additional residential
lines. Higher revenues from private line and switched data services also
contributed to the revenue growth in 1998.
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New England Telephone and Telegraph Company
Our local services revenues were also boosted by increased customer demand
and usage of our value-added services and the implementation of new charges to
carriers resulting from pay phone deregulation in April 1997. These revenue
increases were partially offset by price reductions on certain local services.
NETWORK ACCESS SERVICES REVENUES
Increase
- --------------------------------------------------------------------------------
1998 - 1997 $86.1 6.3%
- --------------------------------------------------------------------------------
Network access services revenues are earned from end-user subscribers and
long distance and other competing carriers who use our local exchange facilities
to provide usage services to their customers. Switched access revenues are
derived from fixed and usage-based charges paid by carriers for access to our
local network. Special access revenues originate from carriers and end-users
that buy dedicated local exchange capacity to support their private networks.
End-user access revenues are earned from our customers and resellers who
purchase retail dial-tone services.
Our network access services revenue growth in 1998 was mainly attributable
to higher customer demand, as reflected by growth in access minutes of use of
7.8% in 1998. Volume growth also reflects continuing expansion of the business
market, particularly for high-capacity services. In 1998, we saw an increasing
demand for special access services as a result of greater utilization of our
network by Internet service providers and other high-capacity users. Higher
network usage by alternative providers of intraLATA toll services and higher
end-user revenues attributable to an increase in access lines in service also
contributed to revenue growth in 1998. Volume-related growth was partially
offset by net price reductions mandated by federal and state price cap plans.
The Federal Communications Commission (FCC) regulates the rates that we
charge long distance carriers and end-user subscribers for interstate access
services. We are required to file new access rates with the FCC each year, under
the rules of the Price Cap Plan. We implemented price decreases for interstate
access services of approximately $77 million on an annual basis for the period
July 1997 through June 1998.
In July 1998, we implemented price decreases of approximately $51 million
on an annual basis. The rates include amounts necessary to recover our
contribution to the FCC's universal service fund. The FCC has created a
multi-billion dollar interstate fund to link schools and libraries to the
Internet and to subsidize low-income consumers and rural health care providers.
Under the FCC's rules, all providers of interstate telecommunications services
must contribute to the fund. Our contributions to the universal service fund are
included in Other Operating Expenses. In January 1999, rates were further
reduced by approximately $18 million on an annual basis to reflect lower
required contributions to the FCC's universal service fund. The rates included
in the July 1998 and January 1999 filings will be in effect through June 1999.
Revenue growth in 1998 also reflects the effect of special charges recorded
in 1997 for contingencies associated with regulatory matters.
LONG DISTANCE SERVICES REVENUES
(Decrease)
- --------------------------------------------------------------------------------
1998 - 1997 $(26.7) (4.1)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made
outside a customer's local calling area, but within our service area (intraLATA
toll). Other long distance services that we provide include 800 services and
Wide Area Telephone Service (WATS).
Long distance services revenues declined in 1998 primarily as a result of
price reductions for certain long distance services. The introduction of
presubscription in several of our jurisdictions during the second half of 1997
also contributed to the decline in long distance services revenues.
Presubscription permits customers to use an alternative provider of their choice
for intraLATA toll calls without dialing a special access code when placing a
call. The adverse impact on long distance services revenues as a result of
presubscription was partially mitigated by increased network access services
11
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New England Telephone and Telegraph Company
revenues for usage of our network by these alternative providers. Long distance
revenues were also lower as a result of our implementation of customer win-back
and retention initiatives that included toll calling discount packages and
product bundling offers.
These decreases were partially offset by the recognition of revenues
received from other local exchange carriers for intraLATA toll services we
provided to their customers, beginning in 1998. These revenues had previously
been recorded net of charges paid to the local exchange carriers. Higher calling
volumes generated by an increase in access lines in service also offset the
decreases in long distance services revenues.
ANCILLARY SERVICES REVENUES
Increase
- --------------------------------------------------------------------------------
1998 - 1997 $44.5 22.1%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, usage of separately priced (unbundled) components of our network,
voice messaging, customer premises equipment (CPE) and wiring and maintenance
services, and sales of software to nonaffiliates.
Ancillary services revenues increased in 1998 due to a combination of
increased demand by long distance carriers and affiliates for billing and
collection services, higher revenues received from local exchange carriers for
usage of unbundled components of our network and sales of software to
nonaffiliates. Revenue growth from increased demand for voice messaging services
and higher residential customer late payment charges also contributed to the
growth in ancillary services revenues.
DIRECTORY AND INFORMATION SERVICES REVENUES
Increase
- --------------------------------------------------------------------------------
1998 - 1997 $38.2 21.1%
- --------------------------------------------------------------------------------
Directory and information services revenues consist of payments from an
affiliate, Bell Atlantic Yellow Pages Company (Yellow Pages), for earnings
related to publishing directories in Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont based on a regulated rate of return. We also earn fees from
Yellow Pages for the use of our name in soliciting directory advertising and in
publishing and distributing directories. Other directory and information
services revenues include fees for nonpublication of telephone numbers and
multiple white page listings.
The increase in directory and information services revenues in 1998 was
principally due to increased payments from Yellow Pages. Yellow Pages' earnings
related to publishing directories were higher in 1998 due to lower retirement
incentive costs and a reduction in other operating expenses. See "Other Matters"
for a discussion of the termination of our agreement with Yellow Pages.
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New England Telephone and Telegraph Company
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
For the Years Ended December 31 1998 1997
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes ...... $1,209.7 $1,121.6
Depreciation and amortization ..................... 935.9 905.9
Other operating expenses .......................... 1,510.8 1,526.8
--------- ---------
Total ............................................. $3,656.4 $3,554.3
======== ========
EMPLOYEE COSTS
Increase
- --------------------------------------------------------------------------------
1998 - 1997 $88.1 7.9%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of Telesector Resources, Bell Atlantic Network Services, Inc. (NSI)
and NYNEX, who provide centralized services on a contract basis, are allocated
to us and are included in Other Operating Expenses.
Employee costs increased in 1998 primarily as a result of higher retirement
incentive costs, as described earlier, as well as additional costs associated
with the settlement of labor contracts. The rise in employee costs was also
attributable to higher overtime pay due to unusually severe storms in the first
half of 1998 and annual salary and wage increases for management and associate
employees. In 1998, we executed new contracts with the unions representing
associate employees. The new contracts provide for wage and pension increases
and other benefit improvements as described below under labor contract
settlements.
These increases were partially offset by the effect of severance and direct
incremental merger-related costs recorded in the third quarter of 1997, as
described earlier. The increases in employee costs were further offset by the
effect of lower work force levels and by lower pension and benefit costs. A
number of factors contributed to the reduction in pension and benefit costs,
including favorable pension plan investment returns, lower than expected retiree
medical claims and plan amendments including the conversion of a pension plan to
a cash balance plan. Effective January 1, 1998, Bell Atlantic established common
pension and savings plan benefit provisions for all management employees. As a
result, all former NYNEX management employees, including our management
employees, receive the same benefit levels as previously given under Bell
Atlantic management benefit plans. This change included the conversion of the
NYNEX management pension plan to a cash balance plan.
Labor Contract Settlements
The wages, pension and other benefits for our associate employees are
negotiated with unions. During 1998, we entered into new 2-year contracts with
the Communications Workers of America (CWA) and the International Brotherhood of
Electrical Workers (IBEW). These contracts, which expire in August 2000, provide
for wage increases of up to 3.8 percent effective August 9, 1998, and up to 4
percent effective August 8, 1999. Over the course of this two-year contract
period, pensions will increase by 20 percent. The contracts also include cash
payments, working condition improvements, and continuation of certain employment
security provisions.
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New England Telephone and Telegraph Company
DEPRECIATION AND AMORTIZATION
Increase
- --------------------------------------------------------------------------------
1998 - 1997 $30.0 3.3%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in 1998 principally as a
result of growth in depreciable telephone plant and changes in the mix of plant
assets. This expense increase was partially offset by the effect of lower rates
of depreciation and amortization. The effect of the recording of charges for
special items related to fixed assets in the third quarter of 1997, as described
earlier, also offset the increase in expense.
OTHER OPERATING EXPENSES
(Decrease)
- --------------------------------------------------------------------------------
1998 - 1997 $(16.0) (1.0)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from Telesector Resources, NYNEX and NSI, rent,
network software costs, operating taxes other than income, the provision for
uncollectible accounts receivable, and other costs.
The decrease in other operating expenses was largely attributable to lower
combined centralized services expenses allocated from Telesector Resources,
NYNEX and NSI. The decline in centralized services expenses was primarily due to
a reduction in costs for the performance of certain centralized services and a
reduction in the allocated portion of retirement incentive costs. Partially
offsetting this decline were additional Year 2000 readiness costs and higher
transition and integration costs in connection with the merger of Bell Atlantic
and NYNEX.
Other operating expenses were further reduced by the effect of
merger-related costs and other special items recorded in the third quarter of
1997, as described earlier. Other items contributing to the decrease in other
operating expenses, but to a lesser extent, were lower network software
purchases and contract services. The reduction in contract services was due, in
part, to the disposition of Bell Atlantic's ownership interest in Bell
Communications Research Inc. (Bellcore) in November 1997.
These decreases were substantially offset by higher interconnection
(reciprocal compensation) payments to competitive local exchange and other
carriers to terminate calls on their networks. For more information on
reciprocal compensation, see Item 1 -"Description of Business, Operations - FCC
Regulation and Interstate Rates - Reciprocal Compensation." The recognition of
additional costs in 1998 as a result of our contribution to the federal
universal service fund, as described earlier, also offset the decreases in other
operating expenses, but to a lesser extent.
OTHER INCOME, NET
Increase
- --------------------------------------------------------------------------------
1998 - 1997 $7.7 30.1%
- --------------------------------------------------------------------------------
The increase in other income, net, was attributable to the resolution of a
regulatory matter related to the sale of Bellcore, an increase in interest
income from a note receivable with an affiliate and additional interest income
resulting from the purchase of short-term investments in December 1997 to
pre-fund a trust for the payment of certain employee benefits. These increases
were partially offset by the effect of a gain recognized on the disposition of
certain property in May 1997 and by lower income from Telesector Resources
recognized under the equity method of accounting primarily resulting from an
after-tax gain recognized on the sale of Bellcore in 1997.
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New England Telephone and Telegraph Company
INTEREST EXPENSE
Increase
- --------------------------------------------------------------------------------
1998 - 1997 $14.8 10.7%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
The increase in interest expense in 1998 was primarily due to the
recognition of interest expense in connection with the settlement of tax-related
matters. Higher levels of average advances from affiliates also generated
additional interest cost in 1998. These increases were partially offset by lower
costs resulting from a reduction in long-term debt.
See Note 6 to the financial statements for additional information about our
debt.
EFFECTIVE INCOME TAX RATES
For the Years Ended December 31
- --------------------------------------------------------------------------------
1998 38.3%
- --------------------------------------------------------------------------------
1997 38.1%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before provision for income taxes and cumulative effect of
change in accounting principle. Our effective income tax rate was higher
principally due the effect of non-recurring state income tax benefits in 1997
offset by the effect of non-recurring federal income tax benefits in 1998.
A reconciliation of the statutory federal income tax rate to our effective
income tax rate for each period is provided in Note 11 to the financial
statements.
FINANCIAL CONDITION
- -------------------
We use 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,
1998, our 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 our capital
structure to ensure financial flexibility.
We obtain our short-term financing through advances from NYNEX and a line
of credit with Bell Atlantic Network Funding Corporation (BANFC). As of December
31, 1998, we had $432.9 million available under our line of credit with BANFC,
and $67.1 million in borrowings outstanding. We also had $305.4 million
outstanding with NYNEX at December 31, 1998. In addition, we had $325.0 million
remaining under a shelf registration statement filed with the Securities and
Exchange Commission for the issuance of unsecured debt securities. Our debt
securities continue to be accorded high ratings by primary rating agencies.
Subsequent to the announcement of the Bell Atlantic - GTE merger, rating
agencies have maintained current credit ratings, but have placed our ratings
under review for potential downgrade.
Our debt ratio was 54.2% at December 31, 1998, compared to 51.5% at
December 31, 1997.
On February 1, 1999, we paid a dividend in the amount of $164.4 million to
NYNEX.
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New England Telephone and Telegraph Company
OTHER MATTERS
- -------------
Year "2000" Update
Bell Atlantic has a comprehensive program to evaluate and address the
impact of the Year 2000 date transition on its subsidiaries' operations,
including our operations. This program includes steps to:
. inventory and assess for Year 2000 compliance our equipment, software
and systems;
. determine whether to remediate, replace or retire noncompliant items,
and establish a plan to accomplish these steps;
. remediate, replace or retire the items;
. test the items, where required; and
. provide management with reporting and issues management to support a
seamless transition to the Year 2000.
State of Readiness
For Bell Atlantic's operating telephone subsidiaries, centralized services
entities and general corporate operations, the program focuses on the
following project groups: Network Elements, Applications and Support
Systems, and Information Technology Infrastructure. At this time, Bell
Atlantic has virtually completed the inventory, assessment and detailed
planning phases for these projects. Remediation/replacement/retirement and
testing activities are well underway. Bell Atlantic plans to fix, replace
or retire those items that were not Year 2000 compliant and that require
action to avoid service impact. Bell Atlantic's goal for these operations
is to have its network and other mission critical systems Year 2000
compliant (including testing) by June 30, 1999. Bell Atlantic is on
schedule to achieve this goal for substantially all of its network and
other mission critical systems. What follows is a more detailed breakdown
of Bell Atlantic's efforts to date.
. Network Elements
Approximately 350 different types of network elements (such as central
office switches) appear in over one hundred thousand instances. When
combined in various ways and using network application systems, these
elements are the building blocks of customer services and networked
information transmission of all kinds. Bell Atlantic originally assessed
approximately 70% of these element types, representing over 90% of all
deployed network elements, as Year 2000 compliant. Late in 1998, through
additional testing and verification, it determined that certain network
elements, originally represented as having no Year 2000-related service
impact, in fact were likely to cause service issues unless remediated. As a
result, Bell Atlantic had an increase in the overall number of network
elements requiring repair. Notwithstanding the additional work effort, as
of February 1999, Bell Atlantic had repaired or replaced approximately 50%
of the deployed network elements requiring remediation, and certification
testing/evaluation is well underway. Bell Atlantic also has made
substantial progress on the remaining network elements. Although Bell
Atlantic is generally on track to achieve its June 30, 1999 goal for
network elements, it is possible that the timeframe for compliance of a
small number of network elements may extend into July or August, without
any impact on customer service or its operations.
. Application and Support Systems
Bell Atlantic has approximately 1,200 applications and systems that
support: (i) the administration and maintenance of its network and customer
service functions (network information systems); (ii) customer care and
billing functions; and (iii) human resources, finance and general corporate
functions. Bell Atlantic originally assessed approximately 48% of these
application systems as either compliant or to be retired. As of February
1999, Bell Atlantic successfully completed certification testing/evaluation
of approximately 70% of all application systems. Bell Atlantic also has
made substantial progress on the remaining application systems. Although
Bell Atlantic is generally on track to achieve its June 30, 1999 goal for
applications and support systems, it is possible that the timeframe for
compliance of a small number of applications and support systems may extend
into July or August, without any impact on customer service or its
operations.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
and related network components and software products that comprise Bell
Atlantic's information technology (IT) infrastructure. Of the approximately
1,350 unique types of elements in the inventory for the IT infrastructure,
Bell Atlantic originally assessed
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New England Telephone and Telegraph Company
approximately 73% as compliant or to be retired. As of February 1999, Bell
Atlantic has successfully completed certification testing/evaluation of
approximately 90% of all element types. Bell Atlantic has made substantial
progress on the remaining items and is on track to achieve its June 30,
1999 goal.
Bell Atlantic's Year 2000 program also includes a project to review and
remediate affected systems (including those with embedded technology) within its
buildings and other facilities, a project to assure Year 2000 compliance across
all of its internal business processes, and other specific projects directed
towards insuring it meets its Year 2000 objectives.
Third Party Issues
. Vendors
In general, Bell Atlantic's product vendors have made available either
Year 2000-compliant versions of their offerings or new compliant
products as replacements of discontinued offerings. In some cases, the
compliance "status" of the product in question is based on
vendor-provided information, which remains subject to Bell Atlantic
testing and verification activities. In several instances, vendors
have not met original delivery schedules, resulting in delayed testing
and deployment. At this time, Bell Atlantic does not anticipate that
such delays will have a material impact on its ability to achieve Year
2000 compliance within its desired timeframes.
Bell Atlantic is continuing Year 2000-related discussions with
utilities and similar services providers. In general, information
requests to such services providers have yielded less meaningful
information than inquiries to its product vendors, and Bell Atlantic
does not yet have sufficient information to determine whether key
utilities and similar service providers will successfully complete the
Year 2000 transition. However, Bell Atlantic is now beginning to
engage in more productive discussions with large utilities servicing
its facilities and it is hopeful that these discussions will provide
additional assurance of Year 2000 compliance for those entities. At
the present time, Bell Atlantic remains unable to determine the Year
2000 readiness of most key utilities and similar service providers or
the likelihood that those providers will successfully complete the
Year 2000 transition. Bell Atlantic intends to monitor critical
service provider activities, as appropriate, through the completion of
their respective remediation projects.
. Customers
Bell Atlantic's customers remain keenly interested in the progress of
its Year 2000 efforts, and it anticipates increased demand for
information, including detailed testing data and company-specific
responses. Bell Atlantic is providing limited warranties of Year 2000
compliance for certain new telecommunications services and other
offerings, but it does not expect any resulting warranty costs to be
material.
. Interconnecting Carriers
Bell Atlantic's network operations interconnect with domestic and
international networks of other carriers. If one of these
interconnecting carriers should fail or suffer adverse impact from a
Year 2000 problem, Bell Atlantic's customers could experience
impairment of service.
Costs
From the inception of Bell Atlantic's Year 2000 project through December
31, 1998, and based on the cost tracking methods it has historically applied to
this project, Bell Atlantic has incurred total pre-tax expenses of approximately
$122 million ($97 million of which was incurred in 1998), and it has made
capital expenditures of approximately $80 million (all of which was made in
1998).
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New England Telephone and Telegraph Company
For 1999, Bell Atlantic expects to incur total pre-tax expenses for its
Year 2000 project of approximately $100 million to $200 million and total
capital expenditures of $125 million to $175 million.
Bell Atlantic has investments in various joint ventures and other
interests. At this time, Bell Atlantic does not anticipate that the impact of
any Year 2000 remediation costs that they incur will be material to its results
of operations.
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of Bell Atlantic's normal business functions
or operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition; however, it considers such a
likelihood remote. Due to the uncertainty inherent in other Year 2000 issues
that are ultimately beyond Bell Atlantic's control, including, for example, the
final Year 2000 readiness of its suppliers, customers, interconnecting carriers,
and joint venture and investment interests, it is unable to determine at this
time the likelihood of a material impact on its results of operations, liquidity
or financial condition, due to such Year 2000 issues. However, Bell Atlantic is
taking appropriate prudent measures to mitigate that risk. Bell Atlantic
anticipates that, in the event of any material interruptions or failures of its
service resulting from actual or perceived Year 2000 problems within or beyond
our control, it could be subject to third party claims.
Contingency Plans
As a public telecommunications carrier, Bell Atlantic has had considerable
experience successfully dealing with natural disasters and other events
requiring contingency planning and execution. As part of Bell Atlantic's efforts
to develop appropriate Year 2000 contingency plans, it is reviewing its existing
Emergency Preparedness and Disaster Recovery plans for any necessary
modifications.
Bell Atlantic has developed, where appropriate, contingency plans for
addressing delays in remediation activities. For example, delay in the
installation of a new Year 2000 compliant system could require remediation of
the existing system. It is also developing a corporate Year 2000 contingency
plan to ensure that core business functions and key support processes are in
place for uninterrupted processing and service, in the event of external (e.g.
power, public transportation, water), internal or supply chain failures (i.e.
critical dependencies on another entity for information, data or services). Bell
Atlantic anticipates that an initial draft of its corporate contingency plan
will be ready by the end of the first quarter of 1999.
- --------------------------------------------------------------------------------
Termination of Agreement with Yellow Pages
Operating revenues include payments from Yellow Pages for earnings related
to publishing directories in Maine, Massachusetts, New Hampshire, Rhode Island
and Vermont based on a regulated rate of return. We also earn fees from Yellow
Pages for the use of our name in soliciting directory advertising and in
publishing and distributing directories. These revenues, which are all earned
under an agreement with Yellow Pages, ended effective January 1, 1999 for all
states except Maine. Yellow Pages has given us notice of its intention to
terminate the entire agreement, including the payments related to Maine,
effective December 31, 1999. Payments received under this agreement related to
all states except Maine totaled $170.0 million in 1998, $136.2 million in 1997
and $176.5 million in 1996. As a result, past operating results are no longer
indicative of future operating results. We will continue to recognize revenues
from nonpublication of telephone numbers and multiple white page listings, as
well as revenues from Yellow Pages related to the directory business in Maine.
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New England Telephone and Telegraph Company
Recent Accounting Pronouncements
Costs of Computer Software
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides,
among other things, guidance for determining whether computer software is for
internal use and when the cost related to such software should be expensed as
incurred or capitalized and amortized. SOP 98-1 is required to be applied
prospectively and will be adopted effective January 1, 1999. Bell Atlantic
estimates that the implementation of SOP 98-1 will result in a net after-tax
benefit of $200 million to $250 million in 1999 results of operations due to the
prospective capitalization of costs which were previously expensed as incurred.
We anticipate that costs for maintenance and training, as well as the cost of
software that does not add functionality to the existing system will continue to
be expensed as incurred.
Costs of Start-Up Activities
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities." SOP No. 98-5, which will be adopted effective January 1,
1999, requires that costs of start-up activities including pre-operating, pre-
opening and other organizational costs be expensed as incurred. In addition, at
the time of adoption the unamortized balance of any previously deferred start-up
costs must be expensed. The adoption of SOP 98-5 will have no material effect on
our results of operations or financial condition in 1999 because we have not
historically capitalized start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivatives be measured at fair value and recognized as either
assets or liabilities on our balance sheet. Changes in the fair values of the
derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments. We
must adopt SFAS No. 133 no later than January 1, 2000. We are currently
evaluating the provisions of SFAS No. 133 and have not yet determined what the
impact of adopting this statement will be on our future results of operations or
financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk in the normal course of our business.
We employ risk management strategies including the use of interest rate swap
agreements to manage this exposure. We do not hold derivatives for trading
purposes. Our objective in managing interest rate risk is to maintain a mix of
fixed and variable rate debt that will lower our overall borrowing costs within
reasonable risk parameters. Our short-term borrowings from an affiliate expose
our earnings to changes in short-term interest rates since the interest rate
charged on such borrowings is typically fixed for less than one month. The
interest rate swap agreements are used to convert a portion of our debt
portfolio from a variable rate to a fixed rate.
The following table summarizes the fair values of our long-term debt and
interest rate derivatives as of December 31, 1998 and 1997. The table also
provides a sensitivity analysis of the estimated fair values of these financial
instruments assuming 100-basis-point upward and downward parallel shifts in the
yield curve. The sensitivity analysis did not include the fair values of our
short-term borrowings from an affiliate since they are not significantly
affected by changes in market interest rates.
(Dollars in Millions)
December 31,
------------------------------
1998 1997
------------------------------
Fair value of long-term debt and interest rate
derivatives $2,231.5 $2,246.3
Fair value assuming a +100-basis-point shift 2,106.7 2,117.9
Fair value assuming a -100-basis-point shift 2,357.4 2,373.3
The primary reason for the decrease in 1998 was the redemption of a $125
million debenture, offset by the effect of changes in market interest rates.
It is our policy to enter into interest rate swap agreements only to the
extent necessary to achieve the desired objectives of management in limiting our
exposure to interest rate risk. We do not hedge all of our interest rate risk
exposures in a manner that would completely eliminate the impact of changes in
interest rates on our net income. We do not expect that our results of
operations or liquidity will be materially affected by these risk management
activities.
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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-25.
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.
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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 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed during the quarter
ended December 31, 1998.
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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
Chief Financial Officer and Controller
March 29, 1999
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>
Principal Executive Officer:
<S> <C> <C>
+++++
Ivan G. Seidenberg President and +
Chief Executive Officer +
+
+
Principal Financial Officer: +
+
Edwin F. Hall Chief Financial Officer +
and Controller + By /s/ Edwin F. Hall
+ ---------------------
Directors: + Edwin F. Hall
+ (individually and as
Richard L. Carrion + attorney-in-fact)
Lodewijk J.R. de Vink + March 29, 1999
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>
22
<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
For the years ended December 31, 1998, 1997 and 1996 ............. F-3
Balance Sheets - December 31, 1998 and 1997............................ F-4
Statements of Shareowner's Investment
For the years ended December 31, 1998, 1997 and 1996.............. F-6
Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996 ............. F-7
Notes to Financial Statements ......................................... F-8
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1998, 1997 and 1996.............. F-25
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 Board of Directors and Shareowner of New England Telephone and Telegraph
Company:
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of New England
Telephone and Telegraph Company at December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the financial statements, in 1996, the Company changed
its method of accounting for directory publishing revenues and expenses.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 9, 1999
F-2
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF INCOME
For the Years Ended December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES (including $233.9,
$192.6, and $230.4 from affiliates) ............. $ 4,804.5 $ 4,565.7 $ 4,547.1
--------- --------- ---------
OPERATING EXPENSES
Employee costs, including benefits and taxes ... 1,209.7 1,121.6 1,087.4
Depreciation and amortization .................. 935.9 905.9 912.8
Other (including $756.1, $857.2,
and $763.9 to affiliates) ................. 1,510.8 1,526.8 1,332.1
--------- --------- ---------
3,656.4 3,554.3 3,332.3
--------- --------- ---------
OPERATING INCOME .................................... 1,148.1 1,011.4 1,214.8
OTHER INCOME, NET (including $22.8, $19.8,
and $9.6 from affiliates) ...................... 33.3 25.6 9.6
INTEREST EXPENSE (including $10.2, $1.6,
and $3.4 to affiliates) ........................ 153.7 138.9 142.1
--------- --------- ---------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting
Principle ...................................... 1,027.7 898.1 1,082.3
PROVISION FOR INCOME TAXES .......................... 394.0 342.2 412.8
--------- --------- ---------
Income Before Cumulative Effect of Change in
Accounting Principle ........................... 633.7 555.9 669.5
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, net of tax ............... --- --- 55.2
--------- --------- ---------
NET INCOME .......................................... $ 633.7 $ 555.9 $ 724.7
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
New England Telephone and Telegraph Company
BALANCE SHEETS
(Dollars in Millions)
ASSETS
------
December 31
---------------------------
1998 1997
---------- ----------
CURRENT ASSETS
Cash ............................................ $ 11.1 $ 19.3
Short-term investments .......................... 159.0 131.6
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $60.1 and $53.7 ....... 972.9 933.4
Affiliates .................................. 162.5 129.8
Material and supplies ........................... 117.6 113.4
Prepaid expenses ................................ 35.2 130.6
Deferred income taxes ........................... --- 26.0
Other ........................................... 70.2 67.2
---------- ----------
1,528.5 1,551.3
---------- ----------
PLANT, PROPERTY AND EQUIPMENT ................... 14,136.9 13,380.7
Less accumulated depreciation ................... 8,092.2 7,476.2
---------- ----------
6,044.7 5,904.5
---------- ----------
OTHER ASSETS .................................... 351.5 202.7
---------- ----------
TOTAL ASSETS .................................... $ 7,924.7 $ 7,658.5
========== ==========
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
-------------------------
1998 1997
---------- ----------
CURRENT LIABILITIES
Debt maturing within one year:
Notes payable to affiliates .................... $ 372.5 $ 246.2
Other .......................................... 145.4 101.1
Accounts payable and accrued liabilities:
Affiliates ..................................... 822.3 572.4
Other .......................................... 610.9 575.8
Other liabilities .................................. 46.9 19.1
---------- ----------
1,998.0 1,514.6
---------- ----------
LONG-TERM DEBT ..................................... 1,932.1 2,077.4
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS ....................... 1,873.0 1,704.6
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credits ................. 47.3 52.7
Other .............................................. 4.8 30.0
---------- ----------
52.1 82.7
---------- ----------
COMMITMENTS (Notes 5 and 13)
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value .......... 1.0 1.0
Additional paid-in capital ......................... 2,014.2 2,026.6
Reinvested earnings ................................ 55.2 251.6
Accumulated other comprehensive loss ............... (.9) ---
---------- ----------
2,069.5 2,279.2
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT ...... $ 7,924.7 $ 7,658.5
========== ==========
See Notes to Financial Statements.
F-5
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF CHANGES IN SHAREOWNER'S INVESTMENT
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year .............................. $ 1.0 $ 1.0 $ 1.0
--------- --------- ---------
Balance at end of year .................................... 1.0 1.0 1.0
========= ========= =========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year .............................. 2,026.6 2,026.6 2,026.6
Distributions of additional paid-in capital to NYNEX ...... (12.4) --- ---
--------- --------- ---------
Balance at end of year .................................... 2,014.2 2,026.6 2,026.6
========= ========= =========
REINVESTED EARNINGS
Balance at beginning of year .............................. 251.6 257.9 .1
Net income ................................................ 633.7 555.9 724.7
Dividends declared ........................................ (832.7) (562.2) (466.9)
Other ..................................................... 2.6 --- ---
--------- --------- ---------
Balance at end of year .................................... 55.2 251.6 257.9
========= ========= =========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year .............................. --- --- ---
Minimum pension liability adjustment ...................... (.9) --- ---
--------- --------- ---------
Balance at end of year .................................... (.9) --- ---
========= ========= =========
TOTAL SHAREOWNER'S INVESTMENT .................................. $2,069.5 $2,279.2 $2,285.5
======== ======== ========
COMPREHENSIVE INCOME
Net income ................................................ $ 633.7 $ 555.9 $ 724.7
Minimum pension liability adjustment ...................... (.9) --- ---
--------- --------- ---------
$ 632.8 $ 555.9 $ 724.7
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
New England Telephone and Telegraph Company
STATEMENTS OF CASH FLOWS
For the Years Ended December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 633.7 $ 555.9 $ 724.7
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................... 935.9 905.9 912.8
Cumulative effect of change in accounting
principle, net of tax ........................ --- --- (55.2)
Equity income in affiliate ....................... (15.7) (18.0) (9.2)
Dividends received from equity affiliate ......... 21.4 8.3 10.3
Deferred income taxes, net ....................... (42.5) (4.4) (47.1)
Investment tax credits ........................... (5.4) (6.3) (8.8)
Other items, net ................................. (.6) (4.8) 13.2
Changes in certain assets and liabilities:
Accounts receivable .......................... (72.2) (82.7) 32.7
Material and supplies ........................ (9.4) (13.9) (45.8)
Other assets ................................. (12.1) (72.3) (5.6)
Accounts payable and accrued liabilities ..... 161.1 109.6 (82.2)
Employee benefit obligations ................. 165.8 142.3 101.2
Other liabilities ............................ (13.7) (1.3) (52.3)
---------- ---------- ----------
Net cash provided by operating activities ................ 1,746.3 1,518.3 1,488.7
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments ...................... (198.0) (131.6) ---
Proceeds from sale of short-term investments ............. 170.6 --- ---
Additions to plant, property and equipment ............... (1,031.6) (957.2) (905.9)
Net change in note receivable from affiliate ............. --- 39.9 (39.9)
Other, net ............................................... (39.3) (11.6) (26.2)
---------- ---------- ----------
Net cash used in investing activities .................... (1,098.3) (1,060.5) (972.0)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings ................................. --- 181.1 ---
Principal repayments of borrowings and capital lease
obligations ............................................ (100.5) (175.5) (.5)
Net change in notes payable to affiliates ................ 126.3 246.2 (37.1)
Dividends paid ........................................... (668.3) (678.9) (460.8)
Distributions of additional paid-in capital .............. (12.4) --- ---
Net change in outstanding checks drawn
on controlled disbursement accounts ................. (1.3) (25.6) (12.5)
---------- ---------- ----------
Net cash used in financing activities .................... (656.2) (452.7) (510.9)
---------- ---------- ----------
NET CHANGE IN CASH ....................................... (8.2) 5.1 5.8
CASH, BEGINNING OF YEAR .................................. 19.3 14.2 8.4
---------- ---------- ----------
CASH, END OF YEAR ........................................ $ 11.1 $ 19.3 $ 14.2
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-7
<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 is a wholly owned subsidiary of
NYNEX Corporation (NYNEX), which is a wholly owned subsidiary of Bell Atlantic
Corporation (Bell Atlantic). We presently serve a territory consisting of six
Local Access and Transport Areas (LATAs) in Maine, Massachusetts, New Hampshire,
Rhode Island and Vermont. We have one reportable segment which provides domestic
wireline telecommunications services. We currently provide two basic types of
telecommunications services. First, we transport telecommunications traffic
between subscribers located within the same LATA (intraLATA service), including
both local and long distance services. Local service includes voice and data
transport, enhanced and custom calling features, directory assistance, private
lines and public telephones. Long distance service includes message toll service
within LATA boundaries and intraLATA Wide Area Toll Service/800 services.
Second, we provide 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. We also provide exchange access service to
interexchange carriers which provide intrastate intraLATA long distance
telecommunications service, as well as local exchange access to competitive
local exchange carriers for calls within a LATA. Other services we provide
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 of 1996.
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).
We prepare our financial statements under 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.
We have a 33-1/3% ownership interest in Telesector Resources Group, Inc.
(Telesector Resources) and share voting rights equally with the other owner, New
York Telephone Company (New York Telephone), which is a wholly owned subsidiary
of NYNEX. We use the equity method of accounting for our investment in
Telesector Resources.
Revenue Recognition
We recognize revenues when services are rendered based on usage of our
local exchange network and facilities.
Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, to Operating
Expenses.
Cash and Cash Equivalents
We consider 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-8
<PAGE>
New England Telephone and Telegraph Company
Short-term Investments
Our 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
We include in inventory new and reusable materials which are stated
principally at average original cost, except that specific costs are used in the
case of large individual items.
Plant and Depreciation
We state 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. We used the following asset lives:
Average Lives (in years)
--------------------------------------------------------------------------
Buildings .......................................... 20 - 60
Central office equipment ........................... 5 - 12
Outside communications plant ....................... 8 - 55
Furniture, vehicles and other equipment ............ 5 - 15
When we replace or retire depreciable telephone plant, we deduct the
carrying amount of such plant from the respective accounts and charge
accumulated depreciation. Gains or losses on disposition are amortized with the
remaining net investment in telephone plant.
Computer Software Costs
We capitalize 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
We capitalize 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.
Interest Rate Swap Agreements
We periodically enter into interest rate swap agreements to manage our
exposure to fluctuations in interest rates. Interest rate swap agreements that
qualify as hedges are accounted for under the accrual method. An instrument
qualifies as a hedge if it effectively modifies and/or hedges the interest rate
characteristics of the underlying fixed or variable rate debt. Under the accrual
method, no amounts are recognized on our balance sheets related to the principal
balances. The interest differential to be paid or received, which is accrued as
interest rates change, is recognized as an adjustment to Interest Expense over
the life of the agreement. These interest accruals are recorded in Current
Assets and Current Liabilities on our balance sheets. If we terminate this
agreement, the gain or loss is recorded as an adjustment to the basis of the
underlying liability and amortized over the remaining original life of the
agreement. If the underlying liability matures or is extinguished and the
related derivative is not terminated, that derivative would no longer qualify
for accrual accounting. In this case, the derivative is accounted for at fair
value, and changes in the value are recorded in income.
F-9
<PAGE>
New England Telephone and Telegraph Company
Income Taxes
Bell Atlantic and its domestic subsidiaries, including us, file a
consolidated federal income tax return.
The consolidated amount of current and deferred tax expense is allocated by
applying the provisions of Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes" to each subsidiary as if it were a
separate taxpayer. For periods prior to the Bell Atlantic - NYNEX merger, NYNEX
filed its own consolidated federal income tax return.
We use the deferral method of accounting for investment tax credits earned
prior to repeal of investment tax credits by the Tax Reform Act of 1986. We also
defer certain transitional credits earned after the repeal. We amortize these
credits over the estimated service lives of the related assets as a reduction to
the Provision for Income Taxes.
Advertising Costs
We expense advertising costs as they are incurred.
Stock-Based Compensation
We participate 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 and follows the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
Change in Accounting Principle - Directory Publishing
We have an agreement with Bell Atlantic Yellow Pages Company (Yellow Pages)
under which Yellow Pages pays a fee to us for use of our 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. We 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 our 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.
Adoption of New Accounting Standards
In 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income" (see
Note 8), SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (see Note 15) and SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (see Note 10). Prior year amounts
have been provided or restated, as required. These standards require new
disclosures only and do not impact our results of operations or financial
position.
Recent Accounting Pronouncements
Costs of Computer Software
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides,
among other things, guidance for determining whether computer software is for
internal use and when the cost related to such software should be expensed as
incurred or capitalized and amortized. SOP 98-1 is required to be applied
prospectively and will be adopted effective January 1, 1999. Bell Atlantic
estimates that the implementation of SOP 98-1 will result in a net after-tax
benefit of $200 million to $250 million in 1999 results of operations due to the
prospective capitalization of costs which were previously expensed as incurred.
We anticipate that costs for maintenance and training, as well as the cost of
software that does not add functionality to the existing system will continue to
be expensed as incurred.
F-10
<PAGE>
New England Telephone and Telegraph Company
Costs of Start-Up Activities
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities." SOP No. 98-5, which will be adopted effective January 1,
1999, requires that costs of start-up activities including pre-operating, pre-
opening and other organizational costs be expensed as incurred. In addition, at
the time of adoption the unamortized balance of any previously deferred start-up
costs must be expensed. The adoption of SOP 98-5 will have no material effect on
our results of operations or financial condition in 1999 because we have not
historically capitalized start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivatives be measured at fair value and recognized as either
assets or liabilities on our balance sheet. Changes in the fair values of the
derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments. We
must adopt SFAS No. 133 no later than January 1, 2000. We are currently
evaluating the provisions of SFAS No. 133 and have not yet determined what the
impact of adopting this statement will be on our future results of operations or
financial condition.
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. Under the terms of the amended agreement, NYNEX became a wholly
owned subsidiary of Bell Atlantic. The merger qualified as a tax-free
reorganization and has been accounted for as a pooling of interests. Under this
method of accounting, the companies are treated as if they had always been
combined for accounting and financial reporting purposes.
As a result of conforming the accounting methodologies of Bell Atlantic and
NYNEX, we 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 our historical financial
statements, we 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
In the third quarter of 1997, we recorded 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 our 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 our 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. During 1997 and 1998, 26 and 95
management employees were separated with severance benefits. Accrued
postemployment benefit liabilities are included in our balance sheets as a
component of Employee Benefit Obligations.
F-11
<PAGE>
New England Telephone and Telegraph Company
Other Initiatives
During 1997, we recorded other charges and special items totaling
approximately $60 million in connection with consolidating operations and
combining organizations and for special items arising during the year. These
charges were comprised of the following significant items.
Regulatory and Legal Contingencies and Other Special Items
In 1997, we also recorded reductions to operating revenues and charges to
operating expenses totaling approximately $60 million (pre-tax). Of this amount,
approximately $5 million represents our proportionate share of special items
from Telesector Resources. These items consisted of the following:
. Revenue reductions consisted of approximately $32 million for federal
regulatory matters. These matters relate to specific issues that are
currently under investigation by federal regulatory commissions. We
believe that it is probable that the ultimate resolution of these
pending matters will result in refunds to our customers.
. Charges to operating expenses totaled approximately $28 million,
including $1 million for legal contingencies. These contingencies were
accounted for under the rules of SFAS No. 5 "Accounting for
Contingencies." These charges also included approximately $6 million
for special items related to fixed assets and $21 million for other
post-merger initiatives.
The following table provides a reconciliation of the liabilities associated
with merger-related costs and other charges and special items at December 31,
1998 and 1997.
<TABLE>
<CAPTION>
Charged to 1997 1998
Beginning Expense or End of End of
(Dollars in Millions) of Year Revenue Deductions Adjustments Year Deductions Adjustments Year
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merger-Related
Direct incremental costs ....... $ --- $ 1.0 $ (1.0)a $--- $ --- $ --- $--- $---
Severance obligation ........... --- 31.9 --- 2.0 33.9 (1.5)a 4.7 37.1
Other Initiatives
Regulatory and legal
contingencies and other
special items ............. --- 55.6 (11.7)b --- 43.9 (15.1)c (1.1) 27.7
--------------------------------------------------------------------------------------------
$ --- $88.5 $(12.7) $2.0 $77.8 $(16.6) $ 3.6 $64.8
============================================================================================
</TABLE>
. Adjustments refer to deductions to the liability that reduced expense, or
additions to the liability that increased expense resulting from changes in
circumstances or experience in implementing the planned activities.
. Deductions refer to the utilization of the liability through payments,
asset write-offs, or refunds to customers.
a - primarily comprised of cash payments
b - primarily comprised of asset write-offs
c - comprised of refunds to customers of $8.4 million and asset
write-offs of $6.7 million
3. BELL ATLANTIC - GTE MERGER
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
It is expected that the merger will qualify as a pooling of interests. The
completion of the merger is subject to a number of conditions, including certain
regulatory approvals, receipt of opinions that the merger will be tax-free, and
the approval of the shareholders of both Bell Atlantic and GTE.
F-12
<PAGE>
New England Telephone and Telegraph Company
4. PLANT, PROPERTY AND EQUIPMENT
The following table displays the details of plant, property and equipment,
which is stated at cost:
December 31
------------------------
1998 1997
---------- ----------
(Dollars in Millions)
Land .......................................... $ 35.9 $ 36.1
Buildings ..................................... 900.9 885.8
Central office equipment ...................... 5,898.8 5,462.9
Outside communications plant .................. 6,187.4 5,939.3
Furniture, vehicles and other work equipment... 778.8 744.8
Other ......................................... 84.4 81.6
Construction-in-progress ...................... 250.7 230.2
---------- ----------
14,136.9 13,380.7
Accumulated depreciation ...................... (8,092.2) (7,476.2)
---------- ----------
Total ......................................... $ 6,044.7 $ 5,904.5
========== ==========
5. LEASES
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. Total rent expense amounted to $84.1 million
in 1998, $84.8 million in 1997 and $83.6 million in 1996. We incurred no initial
capital lease obligations in 1998, 1997 and 1996.
Capital lease amounts included in plant, property and equipment are as
follows:
December 31
------------------------
1998 1997
---- ----
(Dollars in Millions)
Capital leases ......................... $6.0 $6.0
Accumulated amortization................ (4.3) (4.1)
---- ----
Total................................... $1.7 $1.9
==== ====
This table displays the aggregate minimum rental commitments under
noncancelable leases for the periods shown at December 31, 1998:
Years Capital Leases Operating Leases
----- -------------- ----------------
(Dollars in Millions)
1999 ................................... $ .7 $ 42.7
2000 ................................... .5 32.1
2001 ................................... .1 31.8
2002 ................................... -- 30.6
2003.................................... -- 28.8
Thereafter ............................. -- 187.1
---- ------
Total minimum rental commitments ....... 1.3 $353.1
======
Less interest and executory costs ...... .5
----
Present value of minimum
lease payments .................... .8
Less current installments .............. .4
----
Long-term obligation at
December 31, 1998 ................. $ .4
====
F-13
<PAGE>
New England Telephone and Telegraph Company
6. DEBT
Debt Maturing Within One Year
Debt maturing within one year consists of the following at December 31:
1998 1997
------ ------
(Dollars in Millions)
Note payable to affiliate (NYNEX) ............... $305.4 $246.2
Note payable to affiliate (BANFC) ............... 67.1 ---
Long-term debt maturing within one year ......... 145.4 101.1
------ ------
Total debt maturing within one year ............. $517.9 $347.3
====== ======
Weighted average interest rate for note payable
outstanding at year-end .................... 4.9% 5.7%
====== ======
We have an agreement with NYNEX for the provision of short-term financing
and cash management services. Beginning in 1998, we also have a contractual
agreement with another affiliated company, Bell Atlantic Network Funding
Corporation (BANFC), for the provision of short-term financing and cash
management services. BANFC issues commercial paper and obtains bank loans to
fund the working capital requirements of Bell Atlantic's network services
subsidiaries, including us, and invests funds in temporary investments on their
behalf. At December 31, 1998, we had $432.9 million of an unused line of credit
with BANFC.
Long-Term Debt
Long-term debt consists of debentures and notes that we have issued.
Interest rates and maturities of the amounts outstanding are as follows at
December 31:
<TABLE>
<CAPTION>
Description Interest Rate Maturity 1998 1997
----------------------------------------------------------------------------------------------- ------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Thirty-eight year debenture ........................... 4 5/8% 1999 $ 45.0 $ 45.0
Forty year debenture .................................. 4 1/2 2002 50.0 50.0
Forty year debenture .................................. 4 5/8 2005 60.0 60.0
Thirty-nine year debenture ............................ 6 1/8 2006 100.0 100.0
Thirty-five year debenture ............................ 7 3/8 2007 200.0 200.0
Forty year debenture .................................. 6 3/8 2008 125.0 125.0
Thirty year debenture ................................. 7 7/8 2022 100.0 100.0
Thirty year debenture ................................. 6 7/8 2023 250.0 250.0
Forty year debenture .................................. 7 7/8 2029 349.0 349.0
Forty year debenture .................................. 9 2031 100.0 100.0
Five year note payable ................................ 5.05 1998 --- 100.0
Seven year note payable ............................... 6.15 1999 100.0 100.0
Seven year note payable ............................... 5 3/4 2000 100.0 100.0
Ten year note payable ................................. 8 5/8 2001 100.0 100.0
Ten year note payable ................................. 6 1/4 2003 225.0 225.0
Fifteen year note payable ............................. 6.30 2012 175.0 175.0
-------- --------
2,079.0 2,179.0
Unamortized discount and premium, net ........................................ (2.3) (1.8)
Capital lease obligations - average rate 9.7% and 10.1% ...................... .8 1.3
-------- --------
Total long-term debt, including current maturities ........................... 2,077.5 2,178.5
Less maturing within one year ................................................ 145.4 101.1
-------- --------
Total long-term debt ......................................................... $1,932.1 $2,077.4
======== ========
</TABLE>
Our debentures outstanding at December 31, 1998 include $580.0 million that
is callable. The call prices range from 100.94% to 100.0% of face value,
depending upon the remaining term to maturity of the issue. In addition, $175.0
million of our 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.
F-14
<PAGE>
New England Telephone and Telegraph Company
7. FINANCIAL INSTRUMENTS
Interest Rate Swap Agreement
In February 1998, an interest rate swap agreement was transferred to us by
an affiliate. We use this interest rate swap agreement to adjust the interest
rate profile of our debt portfolio and allow it to achieve a targeted mix of
floating and fixed rate debt. This interest rate swap agreement has not
significantly affected our relative proportion of variable and fixed interest
expense.
The following table provides additional information about our interest rate
swap agreement. The notional amounts shown below are used to calculate interest
payments to be exchanged. These amounts are not actually paid or received, nor
are they a measure of our potential gains or losses from market risks. They do
not represent our exposure in the event of nonperformance by a counterparty or
its future cash requirements.
<TABLE>
<CAPTION>
(Dollars in Millions)
- -----------------------------------------------------------------------------------------------------
Weighted Average Rate
Notional ------------------------
Pay Fixed: Amount Maturities Receive Pay
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31,
1998.................................... $175.0 2002 6.3% 5.3%
1997.................................... --- --- --- ---
</TABLE>
Concentrations of Credit Risk
Financial instruments that subject us 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. We generated
revenues from services provided to AT&T (primarily network access and billing
and collection) of $496.5 million in 1998, $545.1 million in 1997 and $579.4
million in 1996.
The counterparty to the interest rate swap agreement is a major financial
institution. This financial institution has been accorded high ratings by
primary rating agencies. We limit the dollar amount of contracts entered into
with any one financial institution and monitor the credit ratings of these
counterparties. We generally do not give or receive collateral on an interest
rate swap agreement due to our credit rating and those of our counterparties.
While we may be exposed to credit losses due to the nonperformance of our
counterparties, we consider the risk remote and do not expect the settlement of
these transactions to have a material effect on our results of operations or
financial condition.
Fair Value of Financial Instruments
The table below provides additional information about our material
financial instruments at December 31:
<TABLE>
<CAPTION>
Financial Instrument Valuation Method
------------------------------------------------------------------------------------------------
Notes payable to affiliates (NYNEX and Carrying amounts
BANFC) and short-term investments
Debt (excluding capital leases) Market quotes for similar
terms and maturities or future
cash flows discounted at
current rates
Interest rate swap agreement Gain or loss to terminate
agreement
1998 1997
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------- ------------------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Debt ..................................... $2,449.2 $2,597.9 $2,423.4 $2,492.5
Interest rate swap agreement ............. --- 6.1 --- ---
</TABLE>
F-15
<PAGE>
New England Telephone and Telegraph Company
8. COMPREHENSIVE INCOME
Effective January 1, 1998, we adopted SFAS No. 130, "Reporting
Comprehensive Income." The new rules establish standards for the reporting of
comprehensive income and its components in financial statements. Comprehensive
income consists of net income and other gains and losses affecting shareowner's
investment that, under generally accepted accounting principles, are excluded
from net income. The adoption of SFAS No. 130 did not affect our statement of
income, but did affect the presentation of our balance sheet. We also have
included a statement of shareowner's investment as part of our basic financial
statements.
The change in other comprehensive loss, net of an income tax benefit, is as
follows:
<TABLE>
<CAPTION>
Years ended December 31
1998 1997 1996
----------- ------------ ------------
(Dollars in Millions)
<S> <C> <C> <C>
Other comprehensive loss:
Minimum pension liability adjustment (net of
income tax benefit of $.6)............................ $ (.9) $ --- $ ---
----------- ------------ ------------
$ (.9) $ --- $ ---
=========== ============ ============
</TABLE>
Accumulated other comprehensive loss is comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31
1998 1997
----------- ------------
Accumulated other comprehensive loss:
Minimum pension liability adjustment ................... $ (.9) $ ---
----------- ------------
$ (.9) $ ---
=========== ============
</TABLE>
9. STOCK INCENTIVE PLANS
We participate in stock-based compensation plans sponsored by Bell
Atlantic. Bell Atlantic applies APB Opinion No. 25 and related interpretations
in accounting for the plans and has 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 1996 and subsequent awards
consistent with the provisions of SFAS No. 123, our net income would have been
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(Dollars in Millions)
<S> <C> <C> <C>
Net income - As reported ............................... $633.7 $555.9 $724.7
- Pro forma ................................. 626.3 546.4 717.1
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Dividend yield .............................................. 4.59% 4.86% 4.66%
Expected volatility ......................................... 18.63% 14.87% 15.30%
Risk-free interest rate ..................................... 5.55% 6.35% 5.42%
Expected lives (in years) ................................... 5 5 5
</TABLE>
The weighted average value of options granted was $6.47 per option during
1998, $4.30 per option during 1997 and $2.76 per option during 1996.
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.
F-16
<PAGE>
New England Telephone and Telegraph Company
10. EMPLOYEE BENEFITS
We participate in the Bell Atlantic benefit plans. Bell Atlantic maintains
noncontributory defined benefit pension plans for substantially all management
and associate employees, as well as postretirement healthcare and life insurance
plans for our retirees and their dependents. Bell Atlantic also sponsors savings
plans to provide opportunities for eligible employees to save for retirement on
a tax-deferred basis and to encourage employees to acquire and maintain an
equity interest in Bell Atlantic.
In 1997, following the completion of the merger with NYNEX, the assets of
the Bell Atlantic and NYNEX pension and savings plans were commingled in a
master trust, and effective January 1, 1998, Bell Atlantic established common
pension and savings plan benefit provisions for all management employees.
The Financial Accounting Standards Board issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," (SFAS No. 132) in
February 1998. This new standard does not change the measurement or recognition
of costs for pensions or other postretirement plans. It standardizes disclosures
and eliminates those that are no longer useful. The structure of Bell Atlantic's
benefit plans does not provide for the separate determination of certain
disclosures required by SFAS No. 132 for our company. 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, 1998. What follows are our benefit costs
and obligations for 1998, 1997 and 1996. The disclosures in 1997 and 1996
reflect the historic benefit plans and actuarial assumptions in effect during
those years, as shown in the tables below.
Pension and Other Postretirement Benefits
Substantive commitments for future plan amendments are reflected in the
pension costs and benefit obligations. Pension and other postretirement benefits
for our associate employees are subject to collective bargaining agreements.
Modifications in associate benefits have been bargained from time to time, and
Bell Atlantic may also periodically amend the benefits in the management plans.
As a result of the merger of Bell Atlantic and NYNEX, we recorded
conforming adjustments for the immediate recognition of the postretirement
transition benefit obligation as if the merger had occurred as of the beginning
of the earliest period presented. In our historical financial statements prior
to the merger, we amortized the transition obligation over a twenty-year period.
The following table summarizes our benefit costs for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in Millions)
Pension Healthcare and Life
-------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net periodic (income) benefit cost $(87.7) $(74.2) $(68.4) $74.2 $90.7 $109.1
-------------------------------------------------------------------------------
Special termination benefits 217.6 190.0 185.0 24.8 23.6 18.5
Curtailment (gain)loss (including recognition of
prior service cost) (23.5) (36.0) (49.1) 59.6 45.4 49.6
Release of severance and postretirement medical
reserves (5.3) (33.1) (31.3) (7.1) (42.4) (51.1)
-------------------------------------------------------------------------------
Retirement incentive cost, net 188.8 120.9 104.6 77.3 26.6 17.0
-------------------------------------------------------------------------------
Total benefit cost $101.1 $46.7 $36.2 $151.5 $117.3 $126.1
-------------------------------------------------------------------------------
</TABLE>
Above table does not include costs allocated from Telesector Resources. See
"Retirement Incentives" section for additional information.
F-17
<PAGE>
New England Telephone and Telegraph Company
Amounts recognized on the balance sheets consist of:
<TABLE>
<CAPTION>
At December 31,
(Dollars in Millions)
Pension Healthcare and Life
-------------------------------- -----------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee benefit obligations $(663.1) $(550.5) $(1,152.7) $(1,085.6)
Other assets 1.1 --- --- ---
Accumulated other comprehensive loss 1.5 --- --- ---
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The changes in benefit obligations from year to year were caused by a
number of factors, including changes in actuarial assumptions (see Assumptions),
plan amendments and special termination benefits.
Assumptions
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. The weighted-average assumptions used in determining
expense and benefit obligations are as follows:
<TABLE>
<CAPTION>
Pension Healthcare and Life
--------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate at end of year 7.00% 7.25% 7.75% 7.00% 7.25% 7.75%
Long-term rate of return on plan assets for the year 8.90 8.90 8.90 8.90 8.40 8.40
Rate of future increases in compensation at end of year 4.00 4.00 4.00 4.00 4.00 4.00
Medical cost trend rate at end of year 6.00 6.50 10.60
Ultimate (year 2001 for 1998 and 1997,
year 2008 for 1996) 5.00 5.00 4.50
Dental cost trend rate at end of year 3.50 3.50 3.50
Ultimate (year 2002) 3.00 3.00 3.00
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Retirement Incentives
In 1993, we announced a restructuring plan which included an accrual of
approximately $440.6 million (pre-tax) for severance and postretirement medical
benefits under a force reduction plan, of which $45.6 million was our 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, we recorded
additional costs totaling approximately $971.8 million (pre-tax) through
December 31, 1998. The retirement incentive costs include amounts charged to us
by Telesector Resources for an allocated portion of the employees who left
Telesector Resources under the retirement incentive program. The Company's
allocated portion of Telesector Resources' costs are $23.5 million in 1998,
$54.5 million in 1997, $9.5 million in 1996, $36.3 million in 1995 and $36.1
million in 1994. As of December 31, 1998, employees who have left the business
under the retirement incentive program totaled 9,390, consisting of 3,145
management and 6,245 associate employees (including 1,507 management and 332
associate employees of Telesector Resources). These additional costs and the
corresponding number of employees accepting the retirement incentive offer for
each year are as follows:
(Dollars in Millions)
Year Amount Employees
-----------------------------------------------------------------
1994 $168.1 2,241
1995 174.5 1,862
1996 132.2 1,582
1997 202.0 1,697
1998 295.0 2,008
------------------------------------------
$971.8 9,390
------------------------------------------
F-18
<PAGE>
New England Telephone and Telegraph Company
The retirement incentive costs paid for our employees are included in
Employee Costs and the allocated costs from Telesector Resources are included in
Other Operating Expenses on our statements of income. The accrued liability
related to our employees is a component of the Employee Benefit Obligations and
the accrued liability related to our allocated portion of Telesector Resources'
employees is a component of Accounts payable and accrued liabilities -
Affiliates recorded on our consolidated balance sheets. The additional costs are
comprised of special termination pension and postretirement benefit amounts, as
well as employee costs for other items. These costs have been reduced by
severance and postretirement medical benefit reserves established in 1993 and
transferred to the pension and postretirement benefit liabilities as employees
accepted the retirement incentive offer. The retirement incentive program
covering management employees ended on March 31, 1997 and the program covering
associate employees was completed in September 1998.
The following table provides the amounts transferred from the 1993 reserve
balance to pension and postretirement benefits (OPEB) liabilities:
(Dollars in Millions)
Years Severance OPEB Total
-------------------------------------------------------------------
1994 $106.1 $61.3 $167.4
1995 38.6 34.7 73.3
1996 42.5 64.9 107.4
1997 35.2 44.9 80.1
1998 5.3 7.1 12.4
-------------------------------------------------------------------
$227.7 $212.9 $440.6
-----------------------------------------------------------
The remaining severance and postretirement medical reserves balances associated
with the 1993 restructuring plan were as follows at December 31, 1997 and 1998:
(Dollars in Millions)
1997 1998
-----------------------------------------------------------------
Beginning of year $92.5 $12.4
Utilization (80.1) (12.4)
End of year $12.4 $ 0
Savings Plans and Employee Stock Ownership Plans
Substantially all of our employees are eligible to participate in savings
plans maintained by Bell Atlantic. Bell Atlantic maintains a leveraged employee
stock ownership plan (ESOP) for its management employees of the former NYNEX
companies. Under this plan, 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 stock
to one share of NYNEX common stock. Bell Atlantic recognizes leveraged ESOP cost
based on the shares allocated method for this leveraged ESOP that held shares
after December 31, 1989. We recognize ESOP cost based on our matching obligation
attributable to our participating employees. We recorded ESOP costs of $8.5
million in 1998, $6.4 million in 1997 and $6.6 million in 1996. In addition to
the ESOP, Bell Atlantic maintains savings plans for our associate employees.
Compensation expense associated with these savings plans was $19.0 million in
1998, $20.1 million in 1997 and $20.4 million in 1996.
F-19
<PAGE>
New England Telephone and Telegraph Company
11. INCOME TAXES
The components of income tax expense are presented in the following table:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------
1998 1997 1996
------ ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Current:
Federal ................................................ $369.1 $301.1 $398.1
State and local ........................................ 72.8 51.8 70.6
------ ------ ------
441.9 352.9 468.7
------ ------ ------
Deferred:
Federal ................................................ (34.3) (2.9) (44.9)
State and local ........................................ (8.2) (1.5) (2.2)
------ ------ ------
(42.5) (4.4) (47.1)
------ ------ ------
399.4 348.5 421.6
Investment tax credits ...................................... (5.4) (6.3) (8.8)
------ ------ ------
Total income tax expense .................................... $394.0 $342.2 $412.8
====== ====== ======
</TABLE>
The following table shows the principal reasons for the difference between
the effective income tax rate and the statutory federal income tax rate:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate ........................... 35.0% 35.0% 35.0%
Investment tax credits ...................................... (.4) (.5) (.5)
State income taxes, net of federal tax benefits ............. 4.1 3.6 4.1
Other, net .................................................. (.4) -- (.5)
---- ---- ----
Effective income tax rate ................................... 38.3% 38.1% 38.1%
==== ==== ====
</TABLE>
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax
liabilities (assets) are shown in the following table:
<TABLE>
<CAPTION>
December 31
---------------------------
1998 1997
------- --------
(Dollars in Millions)
Deferred tax assets:
<S> <C> <C>
Employee benefits ...................................... $(757.3) $(700.5)
Investment tax credits ................................. (19.6) (18.5)
Other .................................................. (107.2) (68.7)
------- --------
(884.1) (787.7)
------- --------
Deferred tax liabilities:
Depreciation ........................................... 748.1 638.4
Other .................................................. 11.3 69.3
------- --------
759.4 707.7
------- --------
Net deferred tax (asset) .................................... $(124.7) $ (80.0)
======= ========
</TABLE>
Deferred tax assets include approximately $490 million at December 31, 1998
and $462 million at December 31, 1997, 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.
F-20
<PAGE>
New England Telephone and Telegraph Company
12. ADDITIONAL FINANCIAL INFORMATION
The tables below provide additional financial information related to our
financial statements:
<TABLE>
<CAPTION>
December 31
------------------------------
1998 1997
---------- ----------
(Dollars in Millions)
<S> <C> <C>
BALANCE SHEETS:
Accounts payable and accrued liabilities:
Accounts payable - affiliates .......................... $ 821.8 $ 572.4
Accounts payable - other ............................... 428.1 410.8
Accrued vacation pay ................................... 91.3 88.4
Accrued expenses ....................................... 25.6 26.0
Accrued taxes .......................................... 30.7 12.5
Interest payable - other ............................... 35.2 38.1
Interest payable - affiliate............................ .5 ---
---------- ----------
$ 1,433.2 $ 1,148.2
========== ==========
Other current liabilities:
Advance billings and customer deposits ................. $ 30.4 $ 19.1
Deferred income taxes .................................. 16.5 ---
---------- ----------
$ 46.9 $ 19.1
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Millions)
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS:
Cash paid during the year for:
Income taxes, net of amounts refunded .................. $362.5 $475.8 $412.8
Interest, net of amounts capitalized ................... 156.7 137.2 152.1
STATEMENTS OF INCOME:
Interest expense incurred,
net of amounts capitalized ............................. 153.7 138.9 142.1
Capitalized interest ........................................ 13.8 13.0 12.5
Advertising expense ......................................... 24.1 31.0 28.9
</TABLE>
Interest paid during the year includes $9.2 million in 1998, $1.6 million
in 1997 and $3.4 million in 1996 related to short-term financing services
provided by NYNEX (see Note 6).
Advertising expense includes $23.4 million, $31.0 million and $28.9 million
in 1998, 1997 and 1996 allocated to us by Telesector Resources. Advertising
expense also includes $.7 million in 1998 allocated to us by Bell Atlantic
Network Services, Inc.
At December 31, 1998 and 1997, $39.2 million and $40.5 million of bank
overdrafts were classified as accounts payable.
13. COMMITMENTS AND CONTINGENCIES
Various legal actions and regulatory proceedings are pending to which we
are a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters which we currently deem to be probable and
estimable. We do not expect that the ultimate resolution of pending regulatory
and legal matters in future periods will have a material effect on our financial
condition, but it could have a material effect on our results of operations.
F-21
<PAGE>
New England Telephone and Telegraph Company
Several federal regulatory matters may possibly require us to refund a
portion of the revenues collected in the current and prior periods. As of
December 31, 1998, the aggregate amount of such revenues that was estimated to
be subject to possible refund was approximately $39 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.
14. TRANSACTIONS WITH AFFILIATES
Our financial statements include transactions with Telesector Resources,
NYNEX, Bell Atlantic Network Services, Inc. (NSI), Bell Atlantic Network Funding
Corporation (BANFC) and various other affiliates.
We have contractual arrangements with Telesector Resources, NSI and NYNEX
for the provision of various centralized services. Telesector Resources
principally provides network related services which generally benefit only the
operating telephone subsidiaries, including us. 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. We were also allocated a portion of
Telesector Resources retirement incentive program costs (see Note 10).
NSI services are divided into two broad categories. The first category is
comprised of network related services which generally benefit only Bell
Atlantic's operating telephone subsidiaries. These services include marketing,
sales, legal, accounting, finance, data processing, materials management,
procurement, labor relations, and staff support for various network operations.
The second category is comprised of overhead and support services which
generally benefit all subsidiaries of Bell Atlantic. Such services include
corporate governance, corporate finance, external affairs, legal, 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 functional reviews of the work performed.
NYNEX principally provided overhead and support services which generally
benefit the operating telephone companies as well as other subsidiaries. These
services include corporate governance, corporate finance, external affairs,
legal, 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. The costs of certain
functions which are performed on behalf of all subsidiaries are allocated to
those subsidiaries based on their relative size. On January 1, 1999, all NYNEX
employees and their associated functions were transferred to NSI, Telesector
Resources and Bell Atlantic.
We receive technical and support services from Bell Communications
Research, Inc. (Bellcore), a company previously owned jointly by the regional
holding companies. In 1997, Bell Atlantic and the other Bellcore owners sold
their jointly owned investment in Bellcore. We continue to contract with
Bellcore for technical and support services. The costs of these services were
billed to us separately through Telesector Resources until July 1998 and are now
billed through NSI.
We recognize interest expense/income in connection with contractual
arrangements with NYNEX and BANFC to provide short-term financing, investing and
cash management services to us (see Note 6).
Operating revenues include payments from Yellow Pages for earnings related
to publishing directories in Maine, Massachusetts, New Hampshire, Rhode Island
and Vermont based on a regulated rate of return. We also earn fees from Yellow
Pages for the use of our name in soliciting directory advertising and in
publishing and distributing directories. These revenues, which are all earned
under an agreement with Yellow Pages, ended effective January 1, 1999 for all
states except Maine. Yellow Pages has given us notice of its intention to
terminate the entire agreement, including the payments related to Maine,
effective December 31, 1999. Payments received under this agreement related to
all states except Maine totaled $170.0 million in 1998, $136.2 million in 1997
and $176.5 million in 1996. Other operating revenues and expenses include
miscellaneous items of income and expense resulting from transactions with other
affiliates, primarily rental of facilities and equipment.
We record income under the equity method of accounting from our investment
in Telesector Resources. We also paid cash dividends and a cash distribution
from additional paid-in capital to our parent company, NYNEX.
F-22
<PAGE>
New England Telephone and Telegraph Company
Transactions with affiliates are summarized as follows:
Years Ended December 31
-----------------------
1998 1997 1996
------ ------ ------
(Dollars in Millions)
Operating revenues:
Yellow Pages directory revenues ............ $185.6 $147.1 $190.7
Other revenue from affiliates .............. 48.3 45.5 39.7
------ ------ ------
233.9 192.6 230.4
------ ------ ------
Operating expenses:
Telesector Resources ....................... 657.4 819.8 716.7
NSI ........................................ 84.7 --- ---
NYNEX ...................................... 11.1 16.1 20.6
Bellcore ................................... --- 16.1 22.9
Other ...................................... 2.9 5.2 3.7
------ ------ ------
756.1 857.2 763.9
------ ------ ------
Other income:
Telesector Resources - equity income......... 15.7 18.0 9.2
NYNEX - interest income...................... .8 1.8 .4
BANFC - interest income ..................... 6.3 --- ---
------ ------ ------
22.8 19.8 9.6
------ ------ ------
Interest expense to NYNEX ....................... 9.7 1.6 3.4
Interest expense to BANFC ....................... .5 --- ---
------ ------ ------
10.2 1.6 3.4
------ ------ ------
Dividends to NYNEX .............................. 832.7 562.2 466.9
Distributions of additional paid-in capital
to NYNEX ................................... 12.4 --- ---
Dividends received from Telesector Resources..... 21.4 8.3 10.3
Outstanding balances with affiliates are reported on the balance sheets at
December 31, 1998 and 1997 as Accounts Receivable - Affiliates, Notes Payable to
Affiliates, and Accounts Payable and Accrued Liabilities - Affiliates.
On February 1, 1999, we paid a dividend in the amount of $164.4 million to
NYNEX.
15. SEGMENT INFORMATION
We have adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards for the way
companies must determine and report information about operating segments in
their annual and interim reports.
We have one reportable segment, which provides domestic wireline
telecommunications services. Specifically, we provide local telephone services
including voice and data transport, enhanced and custom calling features,
network access, directory assistance, private lines and public telephones. In
addition, we provide customer premises equipment distribution and billing and
collection services. We have four strategic business units (consumer,
enterprise, general and network services) supporting our operations that have
been aggregated into one reportable segment.
F-23
<PAGE>
New England Telephone and Telegraph Company
16. QUARTERLY FINANCIAL INFORMATION (unaudited)
Operating Operating Net
Quarter Ended Revenues Income Income
- ------------- --------- --------- ------
(Dollars in Millions)
1998:
March 31 ....................... $1,204.1 $ 174.0 $ 87.9
June 30 ........................ 1,203.1 344.9 188.9
September 30 ................... 1,222.5 300.9 170.4
December 31 .................... 1,174.8 328.3 186.5
-------- -------- ------
Total .......................... $4,804.5 $1,148.1 $633.7
======== ======== ======
1997:
March 31 ....................... $1,159.2 $ 214.5 $111.5
June 30 ........................ 1,167.7 331.8 190.2
September 30* .................. 1,140.3 227.1 121.5
December 31 .................... 1,098.5 238.0 132.7
-------- -------- ------
Total .......................... $4,565.7 $1,011.4 $555.9
======== ======== ======
*Results of operations for the third quarter of 1997 include costs incurred
in connection with consolidating operations and combining the
organizations of Bell Atlantic and NYNEX and for other special items
arising during the quarter, as well as charges associated with the
completion of the merger (see Note 2).
F-24
<PAGE>
New England Telephone and Telegraph Company
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997 and 1996
(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 1998 ............ $ 53.7 $ 69.5 $ 86.2 $ 149.3 $ 60.1
Year 1997 ............ $ 53.6 $ 69.0 $ 78.8 $ 147.7 $ 53.7
Year 1996 ............ $ 55.9 $ 62.0 $ 106.3 $ 170.6 $ 53.6
Restructuring Reserves:
Year 1998 ............ $ 12.4 $ --- $ --- $ 12.4 $ ---
Year 1997 ............ $ 92.5 $ --- $ --- $ 80.1 $ 12.4
Year 1996 ............ $ 215.5 $ --- $ --- $ 123.0 $ 92.5
</TABLE>
- -------------------------------
(a) (1) Allowance for Uncollectible Accounts Receivable includes amounts
previously written off which were credited directly to this account when
recovered, and (2) accruals charged to accounts payable for anticipated
uncollectible charges on purchases of accounts receivable from others which
we billed.
(b) Amounts written off as uncollectible or transferred to other accounts or
utilized.
F-25
<PAGE>
EXHIBITS
FILED WITH ANNUAL REPORT FORM 10-K
UNDER THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
New England Telephone and Telegraph Company
COMMISSION FILE NUMBER 1-1150
<PAGE>
Form 10-K for 1998
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 Financial Data Schedule.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement 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, 1999, on our audits
of the financial statements and financial statement schedule of the Company as
of December 31, 1998 and December 31, 1997, and for each of the three years in
the period ended December 31, 1998, which report is included in this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 29, 1999
<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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints 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
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
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, 1999.
/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, 1998;
NOW, THEREFORE, the undersigned hereby appoints Ivan G. Seidenberg 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 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, 1999.
/s/ Edwin F. Hall
----------------------------
Edwin F. Hall
<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, 1998 AND THE BALANCE SHEET
AT DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 170
<SECURITIES> 0
<RECEIVABLES> 1,033
<ALLOWANCES> 60
<INVENTORY> 118
<CURRENT-ASSETS> 1,529
<PP&E> 14,137
<DEPRECIATION> 8,092
<TOTAL-ASSETS> 7,925
<CURRENT-LIABILITIES> 1,998
<BONDS> 1,932
0
0
<COMMON> 1
<OTHER-SE> 2,069
<TOTAL-LIABILITY-AND-EQUITY> 7,925
<SALES> 0
<TOTAL-REVENUES> 4,805
<CGS> 0
<TOTAL-COSTS> 3,656
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154
<INCOME-PRETAX> 1,028
<INCOME-TAX> 394
<INCOME-CONTINUING> 634
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 634
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
