<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 March 31, 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
March 31,
------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES
(including $15.7 and $85.8 from affiliates) $1,156.5 $1,204.1
------------------------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 225.1 459.4
Depreciation and amortization 240.5 228.1
Other (including $164.4 and $164.3 to affiliates) 363.6 342.6
------------------------------------------------------
829.2 1,030.1
------------------------------------------------------
OPERATING INCOME 327.3 174.0
OTHER INCOME, NET
(including $4.6 and $3.1 from affiliates) 6.3 3.8
INTEREST EXPENSE
(including $2.5 and $1.5 to affiliates) 34.9 36.3
------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 298.7 141.5
PROVISION FOR INCOME TAXES 115.6 53.6
------------------------------------------------------
NET INCOME $ 183.1 $ 87.9
======================================================
</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>
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 74.7 $ 11.1
Short-term investments 106.0 159.0
Note receivable from affiliate 184.4 ---
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $62.3 and $60.1 948.6 972.9
Affiliates 41.8 162.5
Material and supplies 113.1 117.6
Prepaid expenses 28.0 35.2
Other 53.1 70.2
--------------------------------------------------
1,549.7 1,528.5
--------------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 14,407.9 14,136.9
Less accumulated depreciation 8,288.2 8,092.2
--------------------------------------------------
6,119.7 6,044.7
--------------------------------------------------
OTHER ASSETS 275.1 351.5
--------------------------------------------------
TOTAL ASSETS $ 7,944.5 $ 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>
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 275.4 $ 372.5
Other 145.3 145.4
Accounts payable and accrued liabilities:
Affiliates 964.8 822.3
Other 650.2 610.9
Other liabilities 48.2 46.9
-------------------------------------------------
2,083.9 1,998.0
-------------------------------------------------
LONG-TERM DEBT 1,931.8 1,932.1
-------------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 1,847.3 1,873.0
-------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credits 46.0 47.3
Other 5.9 4.8
-------------------------------------------------
51.9 52.1
-------------------------------------------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value 1.0 1.0
Additional paid-in capital 2,014.2 2,014.2
Reinvested earnings 15.3 55.2
Accumulated other comprehensive loss (.9) (.9)
-------------------------------------------------
2,029.6 2,069.5
-------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $7,944.5 $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>
Three Months Ended
March 31,
-------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 727.0 $ 549.5
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 53.0 4.8
Additions to plant, property and equipment (252.6) (213.4)
Net change in note receivable from affiliate (184.4) ---
Other, net (3.3) (6.9)
-------------------------------------------------
Net cash used in investing activities (387.3) (215.5)
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations (.1) (.1)
Net change in note payable to affiliate (97.1) (122.4)
Dividends paid (164.4) (187.5)
Net change in outstanding checks drawn
on controlled disbursement accounts (14.5) (13.1)
-------------------------------------------------
Net cash used in financing activities (276.1) (323.1)
-------------------------------------------------
NET CHANGE IN CASH 63.6 10.9
CASH, BEGINNING OF PERIOD 11.1 19.3
-------------------------------------------------
CASH, END OF PERIOD $ 74.7 $ 30.2
=================================================
</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 1998 Annual Report on
Form 10-K.
We have reclassified certain amounts from prior year's data to conform to
the 1999 presentation.
2. Dividend
On March 23, 1999, we declared a dividend in the amount of $223.0 million.
The dividend was paid to NYNEX on May 3, 1999.
3. Debt
In April 1999, we issued $200 million of 5.875% notes, due on April 15, 2029.
The proceeds from the issuance will be used to redeem $200 million of 7.375%
notes due on October 15, 2007. We will record a loss of approximately $1
million related to this redemption in the second quarter of 1999.
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. Such costs sometimes
include payroll-related costs for internally developed software. 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 currently
does not perform. Software maintenance and training costs are expensed in the
period in which they are incurred. Also, we now capitalize interest associated
with the development of internal-use software.
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.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board 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. 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.
5
<PAGE>
New England Telephone and Telegraph Company
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 183.1
Dividend declared to NYNEX (223.0)
------------------------------------------------
Balance at March 31, 1999 $1.0 $2,014.2 $ 15.3 $(.9)
================================================
</TABLE>
Net income and comprehensive income were the same for the three months ended
March 31, 1999 and 1998.
6. 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 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. 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. Special meetings to vote on the
merger will be held on May 18, 1999 for GTE shareholders and on May 19, 1999 for
Bell Atlantic shareholders.
Bell Atlantic and GTE are working diligently to complete the merger by the
end of 1999. However, the companies must obtain the approval of a variety of
state and federal regulatory agencies and, accordingly, the merger may close in
the first half of 2000.
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 $183.1 million for the three month period ended
March 31, 1999, compared to net income of $87.9 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 item also
includes our allocated share of charges from Network Services, Inc.
The following table shows how special items are reflected in our condensed
statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Millions)
Three Months Ended March 31 1999 1998
- ------------------------------------------------------------------------------------------------------------
Employee Costs
<S> <C> <C>
Retirement incentive costs $ --- $223.2
Merger transition costs --- .4
Other Operating Expenses
Merger transition costs --- .4
Allocated retirement incentive costs --- 5.5
Allocated merger transition costs 3.0 .7
--------------------------------------
$ 3.0 $230.2
======================================
</TABLE>
Retirement Incentives
In the first quarter of 1998, we recorded costs of $228.7 million as a result
of 1,629 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
retirement incentive program covering management employees ended in March 1997
and the 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 $3.0
million in the first quarter of 1999 and $1.5 million in the first quarter 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 Maine, effective
December 31, 1999. Payments received under the agreement related to all states
except Maine totaled $68.3
7
<PAGE>
New England Telephone and Telegraph Company
million in the three months ended March 31, 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
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At March 31
- -----------
Access Lines in Service (in thousands)*
Residence 4,650 4,521 2.9%
Business 2,473 2,344 5.5
Public 79 80 (1.3)
-------------------------------
7,202 6,945 3.7
===============================
Three Months Ended March 31
- ---------------------------
Access Minutes of Use (in millions) 7,261 6,849 6.0
===============================
</TABLE>
*1998 reflects a restatement of access lines in service.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended March 31 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Local services $ 568.3 $ 543.2
Network access services 361.4 361.2
Long distance services 152.3 163.8
Ancillary services 74.5 135.9
--------------------------------
Total $1,156.5 $1,204.1
================================
</TABLE>
LOCAL SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $25.1 4.6%
- --------------------------------------------------------------------------------
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.
Growth in local services revenues in the first quarter of 1999 was primarily
due to higher usage of our network facilities. This growth was generated by an
increase in access lines in service of 3.7% from March 31, 1998. Access line
growth primarily reflects higher demand for Centrex services and an increase in
additional residential lines.
Local services revenue growth in the first quarter of 1999 also reflects
strong customer demand and usage of our data transport and digital services.
Revenues from our value-added services were boosted in the first quarter by
marketing and promotional campaigns offering new service packages.
8
<PAGE>
New England Telephone and Telegraph Company
NETWORK ACCESS SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $.2 .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 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 from resellers who
purchase dial-tone services.
Network access services revenue growth in the first quarter of 1999 was
mainly attributable to higher customer demand, as reflected by growth in access
minutes of use of 6.0% from the first quarter of 1998. Volume growth also
reflects a continuing expansion of the business market, particularly for high-
capacity services. In the first three months of 1999, demand for special access
services was higher, reflecting a 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 the first quarter of 1999.
Volume-related growth was substantially offset by net price reductions
mandated by federal and state price cap incentive 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.
In July 1998, we implemented interstate price decreases of approximately $51
million on an annual basis. These rates included 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 customers 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. Our rates are subject to change every
quarter due to potential increases or decreases in our contribution to the
universal service fund. Changes in the required contributions to that fund
increased rates by approximately $4 million on an annual basis in October 1998.
Rates were reduced by approximately $18 million on an annual basis in January
1999 and by approximately $1 million annually in April 1999 to reflect, among
other things, lower required contributions to the fund. These rates will be in
effect through June 1999.
LONG DISTANCE SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(11.5) (7.0)%
- --------------------------------------------------------------------------------
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 due to the competitive
effects of presubscription for intraLATA toll services and price reductions on
long distance services as required by state price cap plans. Presubscription,
which permits customers to use an alternative provider of their choice for
intraLATA toll calls without dialing a special access code when placing a call,
was introduced in all states except Massachusetts in 1997. Presubscription began
in Massachusetts in April 1999. In response to presubscription, we have
implemented customer win-back and retention initiatives that include toll
calling discount packages and product bundling offers. The adverse impact on
long distance revenues as a result of presubscription was partially mitigated by
increased network access services revenues for usage of our network by these
alternative providers. Lower amounts received from local exchange carriers for
settlements related to usage of our toll services also contributed to the
decline in long distance revenues. These revenue reductions were partially
offset by additional revenues generated from higher calling volumes.
9
<PAGE>
New England Telephone and Telegraph Company
ANCILLARY SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(61.4) (45.2)%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation and 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.
This decline in ancillary services revenues was partially offset by a
combination of increased demand by long distance carriers and affiliates for
billing and collection services and higher payments received from competitive
local exchange carriers for interconnection of their network with our network
and for the purchase of unbundled network elements, as provided for by the
Telecommunications Act of 1996 (1996 Act). Revenue growth from increased market
penetration for voice messaging services also contributed to the increase in
ancillary services revenues.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended March 31 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes $225.1 $ 459.4
Depreciation and amortization 240.5 228.1
Other operating expenses 363.6 342.6
---------------------------------------
Total $829.2 $1,030.1
=======================================
</TABLE>
EMPLOYEE COSTS
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(234.3) (51.0)%
- --------------------------------------------------------------------------------
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 decreased in the first quarter of 1999 as a result of the
completion of the retirement incentive program covering associate employees as
discussed in the Results of Operations section. Other items contributing to the
decrease in employee costs, but to a lesser extent, were lower associate
overtime pay and lower work force levels.
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
- --------------------------------------------------------------------------------
First Quarter $12.4 5.4%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first quarter of 1999
over the same period in 1998 principally as a result of growth in depreciable
telephone plant. 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 quarter of 1999, but to a lesser extent. Under this new
accounting standard, computer software developed or obtained for internal use is
now 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 and amortization.
OTHER OPERATING EXPENSES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $21.0 6.1%
- --------------------------------------------------------------------------------
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 increase in other operating expenses in the first quarter of 1999 was
largely attributable to higher interconnection (reciprocal compensation)
payments to competitive local exchange and other carriers to terminate calls on
their networks. 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. The FCC also has initiated a
proceeding to consider adopting rules governing inter-carrier compensation for
this traffic in the future.
Higher combined centralized services expenses allocated from Telesector
Resources, NYNEX and NSI also contributed to the increase in other operating
expenses. The rise in centralized services expenses was primarily due to higher
costs for the performance of certain centralized services and additional Year
2000 readiness costs. These costs were partially offset by lower employee costs
due to the effect of the completion of the retirement incentive program for
associate employees at Telesector Resources.
The increases in other operating expenses were partially offset by lower
costs for contract services and rent, as well as the effect of the adoption of
SOP No. 98-1.
OTHER INCOME, NET
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $2.5 65.8%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to an increase in the
income recognized from Telesector Resources under the equity method. Other
income, net, was also impacted by the effect of an accrual in the first quarter
of 1998 associated with a regulatory matter related to the sale of Telesector
Resources' ownership interest in Bell Communications Research, Inc. in 1997.
Additional interest income principally from our short-term investments also
contributed to the increase in other income, net in 1999.
11
<PAGE>
New England Telephone and Telegraph Company
INTEREST EXPENSE
1999-1998 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(1.4) (3.9)%
- --------------------------------------------------------------------------------
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 quarter of 1999 over the same period
in 1998 principally as a result of a reduction in long-term debt and higher
capitalized interest costs resulting from higher levels of average telephone
plant under construction. These decreases were partially offset by additional
costs resulting from higher levels of average borrowings from an affiliate.
EFFECTIVE INCOME TAX
Three Months Ended March 31
- --------------------------------------------------------------------------------
1999 38.7%
- --------------------------------------------------------------------------------
1998 37.9%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. Our effective
income tax rate was higher in the first quarter of 1999 principally due to
income tax credits recorded in 1998.
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 March 31,
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 NYNEX and a line of
credit with Bell Atlantic Network Funding Corporation (BANFC). As of March 31,
1999, we had $500.0 million available under our line of credit with BANFC and no
borrowings outstanding. We had $275.4 million outstanding with NYNEX at March
31, 1999. 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 53.7% at March 31, 1999, compared to 53.3% at March 31,
1998 and 54.2% at December 31, 1998.
On March 23, 1999, we declared a dividend in the amount of $223.0 million.
The dividend was paid to NYNEX on May 3, 1999.
12
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New England Telephone and Telegraph Company
OTHER MATTERS
- -------------
Recent Accounting Pronouncement - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board 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. 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.
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, 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 March 31, 1999, Bell
Atlantic had repaired or replaced approximately 60% 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 March 31,
1999, Bell Atlantic has successfully completed certification
testing/evaluation of approximately 73% 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
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New England Telephone and Telegraph Company
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,
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 of March 31, 1999, Bell Atlantic has successfully completed certification
testing/evaluation of approximately 95% of all mission critical 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 March 31,
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 $138
million, and it has made capital expenditures of approximately $89 million. For
1999, Bell Atlantic expects to incur total pre-tax expenses for its Year 2000
project of approximately $75 million to $150 million (approximately $16 million
of which was incurred through March 31, 1999) and total capital expenditures of
$75 million to $125 million (approximately $9 million of which was incurred
through March 31, 1999).
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New England Telephone and Telegraph Company
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 has prepared an initial draft of its corporate Year 2000
contingency plan and it is continuing to refine and enhance that plan.
15
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New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the
quarter ended March 31, 1999.
16
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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: May 12, 1999 By /s/ Edwin F. Hall
---------------------------------------
Edwin F. Hall
Chief Financial Officer and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 6, 1999.
17
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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CONDENSED BALANCE SHEET AT MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
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