<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,1999
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, Massachusetts 02110
Telephone Number (617) 743-9800
_________________________
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
New England Telephone and Telegraph Company
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $18.5,
$65.7, $58.7 and $203.3 from affiliates) $1,155.6 $1,222.5 $3,455.4 $3,629.7
-----------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 254.7 278.3 699.4 990.0
Depreciation and amortization 249.6 235.4 735.4 695.1
Other (including $186.9, $212.4,
$538.5 and $560.1 to affiliates) 395.7 407.9 1,124.6 1,124.8
-----------------------------------------
900.0 921.6 2,559.4 2,809.9
-----------------------------------------
OPERATING INCOME 255.6 300.9 896.0 819.8
OTHER INCOME, NET (including $5.6,
$6.3, $16.9 and $14.9 from affiliates) 6.0 12.1 20.0 23.1
INTEREST EXPENSE (including $4.9,
$3.0, $9.6 and $6.7 to affiliates) 35.5 36.2 103.8 118.5
-----------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 226.1 276.8 812.2 724.4
PROVISION FOR INCOME TAXES 87.1 106.4 313.0 277.2
-----------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 139.0 170.4 499.2 447.2
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax --- --- (3.7) ---
-----------------------------------------
NET INCOME $ 139.0 $ 170.4 $ 495.5 $ 447.2
=========================================
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
New England Telephone and Telegraph Company
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ --- $ 11.1
Short-term investments --- 159.0
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $66.8 and $60.1 966.1 972.9
Affiliates 132.9 162.5
Material and supplies 77.4 117.6
Prepaid expenses 125.2 35.2
Other 65.1 70.2
---------------------------------------------
1,366.7 1,528.5
---------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 14,836.7 14,136.9
Less accumulated depreciation 8,636.3 8,092.2
---------------------------------------------
6,200.4 6,044.7
---------------------------------------------
OTHER ASSETS 232.0 351.5
---------------------------------------------
TOTAL ASSETS $ 7,799.1 $ 7,924.7
=============================================
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
New England Telephone and Telegraph Company
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliates $ 544.3 $ 372.5
Other 100.3 145.4
Accounts payable and accrued liabilities:
Affiliates 836.9 822.3
Other 694.6 610.9
Other liabilities 50.4 46.9
------------------------------------------------
2,226.5 1,998.0
------------------------------------------------
LONG-TERM DEBT 1,805.9 1,932.1
------------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 1,801.0 1,873.0
------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credits 43.5 47.3
Other 21.7 4.8
------------------------------------------------
65.2 52.1
------------------------------------------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value 1.0 1.0
Additional paid-in capital 1,900.4 2,014.2
Reinvested earnings --- 55.2
Accumulated other comprehensive loss (.9) (.9)
------------------------------------------------
1,900.5 2,069.5
------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $7,799.1 $7,924.7
================================================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
New England Telephone and Telegraph Company
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $1,292.6 $1,465.2
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 159.0 118.6
Additions to plant, property and equipment (802.5) (771.0)
Net change in note receivable from affiliate --- (136.8)
Other, net (27.1) (22.4)
-------------------------------------------
Net cash used in investing activities (670.6) (811.6)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 198.4 ---
Principal repayments of borrowings and capital lease obligations (145.3) (.4)
Early extinguishment of debt (225.0) ---
Net change in note payable to affiliates 171.8 (9.9)
Dividends paid (576.1) (503.9)
Distribution of additional paid-in capital (34.3) (12.4)
Net change in outstanding checks drawn
on controlled disbursement accounts (22.6) (14.2)
-------------------------------------------
Net cash used in financing activities (633.1) (540.8)
-------------------------------------------
NET CHANGE IN CASH (11.1) 112.8
CASH, BEGINNING OF PERIOD 11.1 19.3
-------------------------------------------
CASH, END OF PERIOD $ --- $ 132.1
===========================================
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
New England Telephone and Telegraph Company
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
New England Telephone and Telegraph Company is a wholly owned subsidiary of
NYNEX Corporation (NYNEX), which is a wholly owned subsidiary of Bell Atlantic
Corporation (Bell Atlantic). The accompanying unaudited condensed financial
statements have been prepared based upon Securities and Exchange Commission
rules that permit reduced disclosure for interim periods. These financial
statements reflect all adjustments that are necessary for a fair presentation of
results of operations and financial position for the interim periods shown
including normal recurring accruals. The results for the interim periods are
not necessarily indicative of results for the full year. For a more complete
discussion of significant accounting policies and certain other information, you
should refer to the financial statements included in our Annual Report on Form
10-K for the year ended December 31, 1998.
We have reclassified certain amounts from the prior year's data to conform
to the 1999 presentation.
2. Dividend
On September 28, 1999, we declared a dividend in the amount of $223.0
million. Of this amount, $143.5 million was declared from Reinvested Earnings
and $79.5 million was declared from Additional Paid-in Capital. The dividend
was paid to NYNEX on November 1, 1999.
3. Debt
In April 1999, we issued $200.0 million of 5.875% notes, due on April 15,
2009. The proceeds from the issuance were used to redeem $200.0 million of
7.375% notes due on October 15, 2007. We recorded an extraordinary loss of $1.5
million (net of an income tax benefit of $.9 million) related to this
redemption. We also repurchased $25.0 million of 9% debentures, due on August
1, 2031, in the second quarter of 1999 and recorded an extraordinary loss on
this transaction of $2.2 million (net of an income tax benefit of $1.4 million).
4. New Accounting Standards
Costs of Computer Software
Effective January 1, 1999, we adopted Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under SOP No. 98-1, we capitalize the cost of internal-use
software which has a useful life in excess of one year. Subsequent additions,
modifications or upgrades to internal-use software are capitalized only to the
extent that they allow the software to perform a task it previously did not
perform. Software maintenance and training costs are expensed in the period in
which they are incurred. Also, we capitalize interest associated with the
development of internal-use software. The effect of adopting SOP No. 98-1 for
Bell Atlantic was an increase in net income of approximately $175 million for
the nine months ended September 30, 1999.
Costs of Start-Up Activities
Effective January 1, 1999, we adopted SOP No. 98-5, "Reporting on the Costs
of Start-up Activities." Under this accounting standard, we expense costs of
start-up activities as incurred, including pre-operating, pre-opening and other
organizational costs. The adoption of SOP No. 98-5 did not have a material
effect on our results of operations or financial condition because we have not
historically capitalized start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year.
5
<PAGE>
New England Telephone and Telegraph Company
Under the amended pronouncement, we must adopt SFAS No. 133 no later than
January 1, 2001. We are currently evaluating the provisions of SFAS No. 133. The
impact of adoption will be determined by several factors, including the specific
hedging instruments in place and their relationships to hedged items, as well as
market conditions at the date of adoption. We have not estimated the effect of
adoption as we believe that such a determination will not be meaningful until
closer to the adoption date.
5. Shareowner's Investment
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Reinvested Comprehensive
(Dollars in Millions) Stock Capital Earnings Loss
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $1.0 $2,014.2 $ 55.2 $(.9)
Net income 495.5
Dividends declared to NYNEX (555.2)
Distributions of additional paid-in capital
declared to NYNEX (113.8)
Other 4.5
-------------------------------------------------
Balance at September 30, 1999 $1.0 $1,900.4 $ --- $(.9)
=================================================
</TABLE>
Net income and comprehensive income were the same for the nine months ended
September 30, 1999 and 1998.
6. Litigation and Other 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 that 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.
Several federal regulatory matters may possibly require us to refund a
portion of the revenues collected in the current and prior periods. The outcome
of each pending matter, as well as the time frame within which each matter will
be resolved, is not presently determinable.
7. Proposed Bell Atlantic - GTE Merger
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
It is expected that the merger will qualify as a pooling of interests, which
means that for accounting and financial reporting purposes the companies will be
treated as if they had always been combined. At annual meetings held in May
1999, the shareholders of each company approved the merger. The completion of
the merger is subject to a number of conditions, including certain regulatory
approvals and receipt of opinions that the merger will be tax-free.
Bell Atlantic and GTE are working diligently to complete the merger and are
targeting completion of the merger around the end of the first quarter of 2000.
However, the companies must obtain the approval of a variety of state and
federal regulatory agencies and, given the inherent uncertainties of the
regulatory process, the closing of the merger may be delayed.
6
<PAGE>
New England Telephone and Telegraph Company
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
We reported net income of $495.5 million for the nine months ended September
30, 1999, compared to net income of $447.2 million for the same period in 1998.
Our results for 1999 and 1998 were affected by special items. The special
items in both periods include our allocated share of charges from Telesector
Resources Group, Inc. (Telesector Resources). In 1999, the special items also
include our allocated share of charges from Bell Atlantic Network Services, Inc.
(NSI).
The following table shows how special items are reflected in our condensed
statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Millions)
Nine Months Ended September 30 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee Costs
Retirement incentive costs $ --- $271.5
Merger transition costs .1 .7
Other Operating Expenses
Merger transition costs .2 5.9
Allocated retirement incentive costs --- 23.5
Allocated merger transition costs 13.4 15.1
------------------------------------
$13.7 $316.7
====================================
</TABLE>
Retirement Incentives
In the first nine months of 1998, we recorded retirement incentive costs of
$295.0 million (pre-tax) as a result of 2,008 associate employees electing to
leave the company under a voluntary retirement program. The costs were
comprised of special termination pension and postretirement benefit amounts, as
well as employee costs for other items. These costs were 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 voluntary retirement program covering associate
employees was completed in September 1998. The severance and postretirement
medical reserve balances were fully utilized at December 31, 1998.
Merger-related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax transition and integration costs of $13.7
million in the first nine months of 1999 and $21.7 million in the first nine
months of 1998.
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.
Termination of Agreement with Yellow Pages
In 1998, our operating revenues included payments from Bell Atlantic Yellow
Pages (Yellow Pages) for earnings related to its directory activities in Maine,
Massachusetts, New Hampshire, Rhode Island and Vermont based on a regulated rate
of return. We also earned 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 payments related to
7
<PAGE>
New England Telephone and Telegraph Company
Maine, effective December 31, 1999. Payments received under the agreement
related to all states except Maine totaled $153.5 million in the nine months
ended September 30, 1998. As a result, past operating results are no longer
indicative of future operating results. In 1999, 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.
OPERATING REVENUE STATISTICS
- ----------------------------
<TABLE>
<CAPTION>
1999 1998 % Change
- -----------------------------------------------------------------------------------------------------------------------------------
At September 30
- ---------------
<S> <C> <C> <C>
Access Lines in Service (in thousands)*
Residence 4,678 4,588 2.0%
Business 2,524 2,421 4.3
Public 79 80 (1.3)
---------------------------------------
7,281 7,089 2.7
=======================================
Nine Months Ended September 30
- ------------------------------
Access Minutes of Use (in millions) 22,293 21,192 5.2
=======================================
*1998 reflects a restatement of access lines in service.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
<CAPTION>
Nine Months Ended September 30 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Local services $1,729.1 $1,681.7
Network access services 1,056.2 1,090.5
Long distance services 440.8 481.2
Ancillary services 229.3 376.3
------------------------------------------
Total $3,455.4 $3,629.7
==========================================
</TABLE>
LOCAL SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $47.4 2.8%
- --------------------------------------------------------------------------------
Local services revenues are earned 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 that expand the utilization of the
network. These services include products such as Caller ID, Call Waiting and
Return Call.
Local services revenues increased in 1999 primarily due to higher usage of
our network facilities. Revenue growth was generated, in part, by an increase in
access lines in service of 2.7% from September 30, 1998. Access line growth
primarily reflects higher demand for Centrex services and an increase in
additional residential lines.
Local services revenue growth in 1999 also reflects strong customer demand
and usage of our data transport and digital services. Revenues from our value-
added services were boosted in 1999 by marketing and promotional campaigns
offering new service packages.
These increases in local services revenues were partially offset by a
reduction in revenues resulting from the resale of access lines and the
provision of unbundled network elements to competitive local exchange carriers.
The nine months ended September 30, 1999 also included an accrual for a required
rebate to customers in Massachusetts under our price cap plan. This accrual
also reduced our long distance services revenues.
8
<PAGE>
New England Telephone and Telegraph Company
NETWORK ACCESS SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(34.3) (3.1)%
- --------------------------------------------------------------------------------
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 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 from resellers who purchase
dial-tone services.
Network access services revenues declined in 1999 due to 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. In July 1999, we implemented
interstate price decreases of approximately $98 million on an annual basis in
connection with the FCC's Price Cap Plan. These rates will be in effect through
June 2000. Interstate price decreases were approximately $51 million on an
annual basis for the period July 1998 through June 1999. The rates also include
amounts necessary to recover our contributions to the FCC's universal service
fund and are subject to change every quarter due to potential increases or
decreases in our contribution to the universal service fund. Our contribution
to the universal service fund is included in Other Operating Expenses. See
"Other Matters - FCC Regulation and Interstate Rates - Universal Service" for
additional information on universal service.
These revenue decreases were partially offset by higher customer demand, as
reflected by growth in access minutes of use of 5.2% from the same period in
1998. Volume growth also reflects a continuing expansion of the business
market, particularly for high-capacity services. In 1999, demand for special
access services increased, reflecting a greater utilization of our network.
Higher network usage by alternative providers of intraLATA toll services and
higher end-user revenues attributable to an increase in access lines in service
further contributed to revenue growth this year.
In addition, revenues for 1999 include amounts received from customers for
the recovery of local number portability (LNP) costs. LNP allows customers to
change local exchange carriers while maintaining their existing telephone
numbers. In December 1998, the FCC issued an order permitting us to recover
costs incurred for LNP in the form of monthly end-user charges for a five-year
period beginning in February 1999. LNP charges contributed approximately $8
million to network access services revenues for the nine-month period ended
September 30, 1999.
LONG DISTANCE SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(40.4) (8.4)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made to
points 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).
The decline in long distance services revenues was principally caused by the
competitive effects of presubscription for intraLATA toll services and price
reductions on long distance services as required by state price cap plans.
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. Presubscription began in Massachusetts in April 1999 and in all our other
states in 1997. In response to presubscription, we have implemented customer
win-back and retention initiatives that include toll calling discount packages
and product bundling offers. In the nine month period of 1999, we also recorded
an accrual for a required rebate to customers as described in local services
revenues. These revenue reductions were partially offset by higher calling
volumes.
9
<PAGE>
New England Telephone and Telegraph Company
ANCILLARY SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(147.0) (39.1)%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation for competitive local exchange carriers, usage of
separately priced (unbundled) components of our network by competitive local
exchange carriers, voice messaging, customer premises equipment (CPE) and wiring
and maintenance services, sales of software to nonaffiliates and certain
directory services.
As described earlier, Yellow Pages terminated its payments to us for all
states except Maine, effective January 1, 1999. As a result, we no longer earn
revenues associated with Yellow Pages directory business in Massachusetts, New
Hampshire, Rhode Island and Vermont. Beginning January 1, 1999, our ancillary
services revenues include directory services revenues earned primarily from fees
paid by customers for nonpublication of telephone numbers and multiple white
page listings, as well as revenues from Yellow Pages related to the directory
business in Maine.
The decrease in ancillary services revenues in 1999 was principally due to
the effect of the termination of payments from Yellow Pages related to its
directory activities in Massachusetts, New Hampshire, Rhode Island and Vermont.
Lower software sales in 1999 also contributed to the decline in ancillary
services revenues.
These revenue reductions were partially offset by higher revenues generated
from increased demand for billing and collection services and higher payments in
1999 from competitive local exchange carriers for interconnection of their
networks with our network. We also recognized higher revenues from our CPE
services provided to government customers in 1999.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes $ 699.4 $ 990.0
Depreciation and amortization 735.4 695.1
Other operating expenses 1,124.6 1,124.8
-------------------------------
Total $2,559.4 $2,809.9
===============================
</TABLE>
EMPLOYEE COSTS
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(290.6) (29.4)%
- --------------------------------------------------------------------------------
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, NSI and NYNEX, who provide centralized
services on a contract basis, are allocated to us and are included in Other
Operating Expenses.
Employee costs decreased in the first nine months of 1999 primarily as a
result of the completion of the retirement incentive program covering associate
employees in 1998, as discussed in the Results of Operations section. A
reduction in associate overtime pay also contributed to the decrease in employee
costs, but to a lesser extent.
These cost reductions were offset, in part, by annual salary and wage
increases for management and associate employees.
10
<PAGE>
New England Telephone and Telegraph Company
DEPRECIATION AND AMORTIZATION
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $40.3 5.8%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first nine months of
1999 over the same period in 1998 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The
adoption of Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" also contributed to
the increase in depreciation and amortization expense in the first nine months
of 1999, but to a lesser extent. Under this new accounting standard, computer
software developed or obtained for internal use is capitalized and amortized.
Previously, we expensed most of these software purchases as incurred. For
additional information on SOP No. 98-1, see Note 4 to the condensed financial
statements. These expense increases were partially offset by the effect of
lower rates of depreciation.
OTHER OPERATING EXPENSES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(.2) ---%
- --------------------------------------------------------------------------------
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 in the first nine months of 1999 was
largely attributable to the effect of adopting SOP No. 98-1 and lower
centralized services expenses, primarily due to the effect of the completion of
the retirement incentive program for associate employees of Telesector Resources
in 1998. Lower rent expense also contributed to the decrease in other operating
expenses, but to a lesser extent.
The decreases in other operating expenses were substantially offset by higher
interconnection payments to competitive local exchange and other carriers to
terminate calls on their networks (reciprocal compensation). For additional
information on reciprocal compensation refer to "Other Matters -
Telecommunications Act of 1996 - Reciprocal Compensation."
OTHER INCOME, NET
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(3.1) (13.4)%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to lower interest income
associated with a note receivable from an affiliate and our short-term
investments. Other income, net, was also impacted by the effect of an accrual
reversal in 1998 associated with a regulatory matter. These decreases were
partially offset by an increase in the income recognized from Telesector
Resources under the equity method.
INTEREST EXPENSE
1999-1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(14.7) (12.4)%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense decreased in the first nine months of 1999 over the same
period in 1998 principally due to the effect of recording additional interest
costs in 1998 in connection with the settlement of tax-related matters. The
effect of refinancing long-term debt with short-term debt at more favorable
interest rates also contributed to the decrease in interest expense.
11
<PAGE>
New England Telephone and Telegraph Company
EFFECTIVE INCOME TAX
Nine Months Ended September 30
- --------------------------------------------------------------------------------
1999 38.5%
- --------------------------------------------------------------------------------
1998 38.3%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes and extraordinary
item. Our effective income tax rate was higher in the first nine months of 1999
principally due to income tax credits recorded in 1998.
EXTRAORDINARY ITEM
- ------------------
In the first nine months of 1999, we recorded an extraordinary charge
associated with the early extinguishments of long-term debt. This charge
reduced net income by a total of $3.7 million (net of income tax benefits
totaling $2.3 million). You may find additional information about this
extraordinary charge in Note 3 to the condensed 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 both September
30, 1999 and 1998 and December 31, 1998, our sources of funds, primarily from
operations and, to the extent necessary, from readily available financing
arrangements with affiliates, are sufficient to meet ongoing operating
requirements. Management expects that presently foreseeable capital
requirements will continue to be financed primarily through internally generated
funds. Additional long-term debt may be needed to fund development activities
or to maintain our capital structure to ensure financial flexibility.
We obtain our short-term financing through advances from Bell Atlantic
Administrative Services, Inc. (BAAS) and a line of credit with Bell Atlantic
Network Funding Corporation (BANFC). As of September 30, 1999, we had $299.3
million available under our line of credit with BANFC, and $200.7 million in
borrowings outstanding. We also had $343.6 million outstanding with BAAS at
September 30, 1999. In addition, we had $125.0 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 56.3% at September 30, 1999, compared to 54.1% at
September 30, 1998 and 54.2% at December 31, 1998.
On September 28, 1999, we declared a dividend in the amount of $223.0
million. Of this amount, $143.5 million was declared from Reinvested Earnings
and $79.5 million was declared from Additional Paid-in Capital. The dividend
was paid to NYNEX on November 1, 1999.
OTHER MATTERS
- -------------
FCC Regulation and Interstate Rates
Price Caps
In May 1999, the U.S. Court of Appeals reversed the FCC's establishment of a
6.5% productivity factor in calculating the annual price cap index applied to
our interstate access rates. The court directed the FCC to reconsider and
explain the methods used in selecting the productivity factor. The court
granted the FCC a stay of its order, however, until April 1, 2000. As a result,
our annual price cap filing effective July 1, 1999 includes the effects of the
FCC's 6.5% productivity factor (see Operating Revenues - Network Access
Services).
12
<PAGE>
New England Telephone and Telegraph Company
Universal Service
On July 30, 1999, the U.S. Court of Appeals reversed certain aspects of the
FCC's universal service order. The universal service fund includes a multi-
billion dollar interstate fund to link schools and libraries to the Internet and
to subsidize low income consumers and rural healthcare providers. Previously,
under the FCC's rules, all providers of interstate telecommunications services
had to contribute to the schools and libraries fund based on their total
interstate and intrastate retail revenues. The court reversed the decision to
include intrastate revenues as part of the basis for assessing contributions to
that fund. As a result of this decision, our contributions to the universal
service fund will be reduced by approximately $26 million annually beginning on
November 1, 1999, and our interstate access rates will be reduced accordingly.
Telecommunications Act of 1996
Unbundling of Network Elements
The FCC recently announced its decision setting forth new unbundling
requirements. The FCC had previously identified seven elements that had to be
provided to competitors on an unbundled basis. With respect to those seven
elements, the FCC concluded that incumbent local exchange carriers, such as us,
do not have to provide unbundled switching (or combinations of elements that
include switching, such as the so-called unbundled element "platform") under
certain circumstances to business customers with four or more lines in certain
offices in the top 50 Metropolitan Statistical Areas (MSAs). It also held that
incumbents do not have to provide unbundled access to their directory assistance
or operator services. The remaining elements on the FCC's original list still
must be provided.
With respect to new elements, the FCC concluded that new equipment to provide
advanced services such as ADSL does not have to be unbundled. On the other
hand, the FCC concluded that incumbents must provide dark fiber as an unbundled
element, and that sub-loop unbundling should be provided. Finally, the FCC
ruled that combinations of loops and transport, known as enhanced extended loops
or "EELs," must be made available under certain circumstances, but left to a
further rulemaking certain issues relating to the use of EELs to substitute for
special access services.
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 an increasing volume of one-way traffic from
our customers to internet service providers that are their customers. In
February 1999, the FCC confirmed that such traffic is largely interstate but
concluded that it would not interfere with state regulatory decisions requiring
payment of reciprocal compensation for such traffic and that carriers are bound
by their existing interconnection agreements. The FCC tentatively concluded
that future compensation arrangements for calls to Internet service providers
should be negotiated by carriers and arbitrated, if necessary, before the state
commissions under the terms of the Telecommunications Act of 1996 (1996 Act).
The FCC has initiated a proceeding to consider, alternatively, the adoption of
federal rules to govern future inter-carrier compensation arrangements for this
traffic. We have asked the U.S. Court of Appeals to review the FCC's decision
that state commissions may require payment of reciprocal compensation for this
traffic. We are also seeking review of prior state regulatory commission
decisions. The Massachusetts Department of Telecommunications and Energy
modified its earlier decision, resulting in a reduction of our reciprocal
compensation obligation. The Rhode Island Public Utilities Commission has issued
a decision requiring us to continue to pay reciprocal compensation on Internet-
bound traffic.
Recent Accounting Pronouncement - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year.
Under the amended pronouncement, we must adopt SFAS No. 133 no later than
January 1, 2001. We are currently evaluating the provisions of SFAS No. 133. The
impact of adoption will be determined by several factors, including the specific
hedging instruments in place and their relationships to hedged items, as well as
market conditions at the date of adoption. We have not estimated the effect of
adoption as we believe that such a determination will not be meaningful until
closer to the adoption date.
13
<PAGE>
New England Telephone and Telegraph Company
Year "2000" Update
Bell Atlantic is now in the final stages of its program to evaluate and
address the impact of the Year 2000 date transition on its subsidiaries'
operations, including our operations. This program has included 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 has focused on the
following project groups: Network Elements, Applications and Support Systems,
and Information Technology Infrastructure. Bell Atlantic's goal for these
operations was to have its network and other mission critical systems Year
2000 compliant (including testing) by June 30, 1999 and it substantially met
this goal. 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. As of November 1, 1999, Bell Atlantic has completed the
required repair/replacement for virtually all network elements requiring
remediation.
. Application and Support Systems
Bell Atlantic has approximately 1,200 application 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 and support systems as either compliant or to be retired. As of
November 1, 1999, Bell Atlantic has successfully completed the required
repair/replacement of virtually all mission critical application and support
systems.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
related network components, and software products 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 approximately 73% as compliant or to be retired.
As previously reported, Bell Atlantic has successfully completed
remediation/replacement of all mission critical elements earlier this year.
Bell Atlantic's project to remediate/replace or retire mission critical
systems supporting buildings and other facilities used by its operating
telephone subsidiaries, such as HVAC, access control and alarm systems, is
now complete and its efforts to remediate/replace or retire any other Bell
Atlantic mission critical system used by those subsidiaries is virtually
complete. Remediation/replacement or retirement of non-mission critical
systems, where applicable, and supplemental testing and
verification/correction activities, for both mission critical and non-mission
critical systems, are likely to continue throughout the balance of 1999.
14
<PAGE>
New England Telephone and Telegraph Company
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. The compliance status of a given
product is typically determined using multiple sources of information,
including Bell Atlantic's own internal testing and analysis. However, in some
instances certification is based on detailed test results or similar
information provided by the product vendor and analysis by Bell Atlantic or
contractors specializing in this type of review. Bell Atlantic is also
continuing Year 2000-related discussions with utilities and similar services
providers. Although Bell Atlantic has received assurances and other
information suggesting that substantially all of its primary services
providers have completed or are well along in their respective Year 2000
projects, Bell Atlantic does not usually have sufficient access to or control
over the providers' systems and equipment to undertake verification efforts
as to such systems and equipment, and as a general matter, it would be
impractical to do so. Bell Atlantic has also participated in
interoperability testing of various mission critical network elements,
purchased from a number of vendors, through the Telco Year 2000 Forum, an
industry group comprised of leading local telecommunications services
companies. Bell Atlantic intends to monitor critical service provider
activities, as appropriate, through the remainder of 1999.
. 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
carrier networks should fail or suffer adverse impact from a Year 2000
problem, Bell Atlantic's customers could experience impairment of service.
Bell Atlantic has participated in various internetworking testing efforts, as
a member of the Association for Telecommunications Industry Solutions (ATIS),
the Cellular Telecommunications Industry Association (CTIA) and the
International Telecommunications Union (ITU). Bell Atlantic intends to
monitor the activities of the primary interconnecting carriers through the
remainder of 1999.
Costs
From the inception of Bell Atlantic's Year 2000 project through September 30,
1999, and based on the cost tracking methods it has historically applied to this
project, Bell Atlantic has incurred total pre-tax expenses of approximately $211
million, and it has made capital expenditures of approximately $153 million.
For 1999, Bell Atlantic expects total pre-tax expenses for its Year 2000 project
not to exceed $125 million (approximately $89 million has been incurred through
September 30, 1999) and total capital expenditures not to exceed $100 million
(approximately $73 million has been made through September 30, 1999). Bell
Atlantic anticipates that the balance of the costs incurred for 1999 will be
primarily attributable to additional testing and verification/correction,
rollover transition management, contingency planning and repair/replacement of
non-mission critical systems. These cost estimates should not be used as the
sole gauge of progress on its Year 2000 project or as an indication of its Year
2000 readiness.
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
development 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 material interruption or failure of its
service resulting from an actual or perceived Year 2000 problem within or beyond
its control, it could be subject to third party claims.
15
<PAGE>
New England Telephone and Telegraph Company
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. Bell Atlantic's Year 2000
contingency plans are built upon its existing Emergency Preparedness and
Disaster Recovery plans.
Bell Atlantic will continue to fine-tune and test its corporate Year 2000
contingency plans to help ensure that core business functions and key support
processes will continue to function without material disruption, 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's individual business unit contingency plans for Year
2000 are being integrated and coordinated under an enterprise wide command and
control structure.
16
<PAGE>
New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 1999:
17
<PAGE>
New England Telephone and Telegraph Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY
Date: November 10, 1999 By /s/ Edwin F. Hall
------------------------------------------
Edwin F. Hall
Chief Financial Officer and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 5, 1999.
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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THE CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
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