<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, 2000
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
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
(Dollars in Millions) (Unaudited) 2000 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES
(including $27.3 and $15.7 from affiliates) $1,168.9 $1,156.5
-----------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 227.2 225.1
Depreciation and amortization 252.0 240.5
Other (including $175.3 and $164.4 to affiliates) 383.9 363.6
-----------------------------
863.1 829.2
-----------------------------
OPERATING INCOME 305.8 327.3
OTHER INCOME, NET
(including $4.1 and $4.6 from affiliates) 5.9 6.3
INTEREST EXPENSE
(including $11.4 and $2.5 to affiliates) 40.3 34.9
-----------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 271.4 298.7
PROVISION FOR INCOME TAXES 105.1 115.6
-----------------------------
NET INCOME $ 166.3 $ 183.1
=============================
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
New England Telephone and Telegraph Company
CONDENSED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in Millions) (Unaudited) 2000 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ --- $ 2.5
Short-term investments 111.3 166.9
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $72.4 and $68.0 988.9 977.9
Affiliates 141.1 145.4
Material and supplies 70.1 70.5
Prepaid expenses 46.3 53.2
Deferred income taxes 20.0 20.0
Other 53.6 50.1
----------------------------------
1,431.3 1,486.5
----------------------------------
PLANT, PROPERTY AND EQUIPMENT 15,170.9 14,964.9
Less accumulated depreciation 8,913.1 8,716.2
----------------------------------
6,257.8 6,248.7
----------------------------------
DEFERRED INCOME TAXES --- 16.2
----------------------------------
OTHER ASSETS 245.2 199.6
----------------------------------
TOTAL ASSETS $ 7,934.3 $ 7,951.0
==================================
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
New England Telephone and Telegraph Company
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in Millions) (Unaudited) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliates $ 778.4 $ 721.1
Other 100.3 100.3
Accounts payable and accrued liabilities:
Affiliates 723.4 912.2
Other 763.5 696.4
Other liabilities 40.8 40.5
---------------------------------
2,406.4 2,470.5
---------------------------------
LONG-TERM DEBT 1,805.5 1,805.7
---------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 1,695.8 1,750.1
---------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 27.4 .6
Unamortized investment tax credits 41.0 42.2
Other 41.2 51.9
---------------------------------
109.6 94.7
---------------------------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value 1.0 1.0
Additional paid-in capital 1,599.4 1,678.7
Reinvested earnings 318.2 151.9
Accumulated other comprehensive loss (1.6) (1.6)
---------------------------------
1,917.0 1,830.0
---------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $7,934.3 $7,951.0
=================================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
New England Telephone and Telegraph Company
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
(Dollars in Millions) (Unaudited) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 423.7 $ 727.0
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 55.6 53.0
Capital expenditures (303.0) (252.6)
Net change in note receivable from affiliate --- (184.4)
Other, net (5.0) (3.3)
------------------------------
Net cash used in investing activities (252.4) (387.3)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations (.1) (.1)
Net change in note payable to affiliates 57.3 (97.1)
Dividends paid (223.0) (164.4)
Net change in outstanding checks drawn on controlled
disbursement accounts (8.0) (14.5)
------------------------------
Net cash used in financing activities (173.8) (276.1)
------------------------------
NET CHANGE IN CASH (2.5) 63.6
CASH, BEGINNING OF PERIOD 2.5 11.1
------------------------------
CASH, END OF PERIOD $ --- $ 74.7
==============================
</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 (SEC) 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 1999
Annual Report on Form 10-K.
2. Dividend
On March 28, 2000, we declared a dividend in the amount of $79.3 million
from Additional Paid-in Capital. The dividend was paid to NYNEX on May 1, 2000.
3. Recent Accounting Pronouncements
FASB Accounting Standard - 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. We must adopt SFAS No. 133 no later than January 1, 2001.
On March 3, 2000, the FASB issued a Proposed SFAS "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which would amend SFAS
No. 133. The proposed amendments address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized foreign-currency-
denominated debt instruments, and intercompany derivatives.
We are currently evaluating the provisions of SFAS No. 133 and the
proposed amendments. 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.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." Interpretation No. 44 was
issued in order to clarify certain issues arising from Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," which was
previously issued in October 1972. Interpretation No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur either after
December 15, 1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
We do not expect that Interpretation No. 44 will have a material impact on
our results of operations or financial position.
5
<PAGE>
New England Telephone and Telegraph Company
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which currently must be adopted
by June 30, 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria from when revenue is generally realized and
earned, and also requires the deferral of incremental direct selling costs. We
are currently assessing the impact of SAB No. 101 on our results of operations
and financial position.
4. Shareowner's Investment
<TABLE>
<CAPTION>
Common Additional Reinvested Accumulated Other
(Dollars in Millions) Stock Paid-in Capital Earnings Comprehensive Loss
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $1.0 $1,678.7 $151.9 $(1.6)
Net income 166.3
Distribution of additional paid-in capital
declared to NYNEX (79.3)
-----------------------------------------------------------
Balance at March 31, 2000 $1.0 $1,599.4 $318.2 $(1.6)
===========================================================
</TABLE>
Net income and comprehensive income were the same for the three months
ended March 31, 2000 and 1999.
5. 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.
6. 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 (all of which have been obtained except that of the Federal
Communications Commission) and receipt of opinions that the merger will be tax-
free.
The companies are targeting completion of the merger in the second quarter
of 2000. In April 2000, Bell Atlantic announced that the combined company will
be called Verizon Communications.
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 $166.3 million for the three month period ended
March 31, 2000, compared to net income of $183.1 million for the same period in
1999.
Our results for 1999 were affected by special items. The special items
were comprised of our allocated share of charges from Telesector Resources
Group, Inc. (Telesector Resources) and our allocated share of charges from Bell
Atlantic Network Services, Inc. (NSI).
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. These costs were recorded in Other
Operating Expenses.
Transition and integration costs consisted 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 were expensed as incurred.
Termination of Agreement with Yellow Pages
In 1999, our operating revenues included payments from Bell Atlantic
Yellow Pages (Yellow Pages) for earnings related to its directory activities in
Maine 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. As of December 31, 1999, Yellow Pages gave notice
of its intention to terminate the payments relating to the Maine directory
business, such termination to be effective upon receipt of regulatory approval.
Payments received under the agreement relating to the Maine directory business
totaled $5.3 million in the three months ended March 31, 2000 and $3.4 million
in the three months ended March 31, 1999. As a result, past operating results
are no longer indicative of future operating results.
OPERATING REVENUE STATISTICS
- ----------------------------
<TABLE>
<CAPTION>
2000 1999 % Change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At March 31,
Access Lines in Service (in thousands)*
Residence 4,705 4,650 1.2%
Business 2,536 2,446 3.7
Public 78 78 ---
-----------------------
7,319 7,174 2.0
=======================
Three Months Ended March 31,
Access Minutes of Use (in millions) 7,869 7,261 8.4
=======================
</TABLE>
* 1999 reflects a restatement of access lines in service
7
<PAGE>
New England Telephone and Telegraph Company
OPERATING REVENUES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Local services $ 583.4 $ 568.3
Network access services 359.7 361.4
Long distance services 135.0 152.3
Ancillary services 90.8 74.5
--------------------------------
Total $1,168.9 $1,156.5
================================
</TABLE>
LOCAL SERVICES
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $15.1 2.7%
- --------------------------------------------------------------------------------
Local service 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 service revenues increased in the first quarter of 2000 primarily
due to higher usage of our network facilities. Revenue growth was generated, in
part, by an increase in access lines in service of 2.0% from March 31, 1999 and
higher business message volumes. Local service revenue growth in the first
quarter of 2000 also reflects higher customer demand and usage of our national
directory assistance services, as well as our data transport and digital
services.
Growth in local service revenues was partially offset by price reductions
on certain local exchange services.
NETWORK ACCESS SERVICES
2000 - 1999 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(1.7) (.5%)
- --------------------------------------------------------------------------------
Network access revenues are earned from end-user subscribers and from 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 revenues declined in the first quarter of 2000 due to price
reductions associated with federal and state price cap filings and other
regulatory decisions. 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. The rates included in our July 1999 filing will be in effect through
June 2000. Interstate price decreases were $51 million on an annual basis for
the period July 1998 through June 1999. The rates include amounts necessary to
recover our contribution to the FCC's universal service fund which are subject
to adjustment every quarter due to potential increases or decreases in our
contribution to the fund. Our contributions to the universal service fund are
included in Other Operating Expenses. As a result of a U.S. Court of Appeals
decision last year, our contributions to the universal service fund were reduced
by approximately $26 million annually beginning November 1, 1999, and our
interstate access rates were reduced accordingly because we will no longer have
to recover these contributions in our rates.
These revenue decreases were substantially offset by higher customer
demand, as reflected by growth in access minutes of use of 8.4% from the same
period in 1999. Volume growth also reflects a continuing expansion of the
business market, particularly for high capacity data services. In the first
quarter of 2000, demand for special access services increased, reflecting a
greater
8
<PAGE>
New England Telephone and Telegraph Company
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, network access services revenues included higher revenues
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 March 1999.
LONG DISTANCE SERVICES
2000 - 1999 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(17.3) (11.4)%
- --------------------------------------------------------------------------------
Long distance revenues are earned primarily from calls made to points
outside a customer's local calling area, but within our service area (intraLATA
toll). IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call. These services are
regulated by state regulatory commissions, except where they cross state lines.
Other long distance services that we provide include 800 services and Wide Area
Telephone Service (WATS).
The decline in long distance revenues in the first quarter of 2000 was
principally caused by the competitive effects of presubscription, which enables
customers to make intraLATA toll calls using a competing carrier without having
to dial an access code, and price reductions on long distance services as
required by state price cap plans. The negative effect of presubscription on
long distance revenues was partially mitigated by increased network access
services for usage of our network by alternative service providers. In response
to presubscription, we have implemented customer win-back and retention
initiatives that include toll calling discount packages and product bundling
offers. These revenue reductions were partially offset by additional revenue
generated by higher calling volumes.
ANCILLARY SERVICES
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $16.3 21.9%
- --------------------------------------------------------------------------------
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. Ancillary services revenues also include directory services
revenues earned primarily from fees paid by customers for nonpublication of
telephone numbers and multiple white page listings, as well as payments from an
affiliate, Bell Atlantic Yellow Pages Company (Yellow Pages), for earnings
related to its directory activities in Maine based on a regulated rate of
return.
Ancillary services revenues increased in the first quarter of 2000 due to
higher demand for CPE services. Higher facilities rental revenues received from
affiliates and higher revenues from our billing and collection services also
contributed to the increase in ancillary services revenues.
9
<PAGE>
New England Telephone and Telegraph Company
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
<S> <C> <C>
2000 1999
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes $227.2 $225.1
Depreciation and amortization 252.0 240.5
Other operating expenses 383.9 363.6
-----------------------------
Total $863.1 $829.2
=============================
</TABLE>
EMPLOYEE COSTS
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $2.1 .9%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of Telesector Resources, NSI and NYNEX, who provide centralized
services on a contract basis, are allocated to us and are included in Other
Operating Expenses.
Employee costs increased in the first quarter of 2000 primarily as a
result of higher work force levels, annual salary and wage increases for
management and associate employees and higher overtime payments.
These increases were substantially offset by lower pension and benefit
costs. The decline in pension and benefit costs was due to favorable pension
plan investment returns and changes in actuarial assumptions. These factors were
partially offset by changes in certain plan provisions, including a previously
reported amendment to our management cash balance plan and a special lump sum
pension payment to management and associate retirees.
DEPRECIATION AND AMORTIZATION
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $11.5 4.8%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first quarter of
2000 over the same period in 1999 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The growth
in telephone plant was largely attributable to increased capital expenditures
for software and hardware to support the expansion of our network. These factors
were partially offset by the effect of lower rates of depreciation and
amortization.
OTHER OPERATING EXPENSES
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $20.3 5.6%
- --------------------------------------------------------------------------------
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 2000 was
largely attributable to higher interconnection and related costs associated with
reciprocal compensation arrangements with competitive local exchange and other
carriers to terminate calls on their networks. Higher combined centralized
services expenses allocated from Telesector Resources, NYNEX and NSI also
contributed to the increase in other operating expenses.
These increases were offset, in part, by lower costs for uncollectible
accounts receivable associated with our billing and collection services.
10
<PAGE>
New England Telephone and Telegraph Company
OTHER INCOME, NET
2000 - 1999 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(.4) (6.3)%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to a decrease in the
income recognized from Telesector Resources under the equity method, and lower
interest income associated from a note receivable from an affiliate.
INTEREST EXPENSE
2000-1999 Increase
- --------------------------------------------------------------------------------
First Quarter $5.4 15.5%
- --------------------------------------------------------------------------------
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 increased in the first quarter of 2000 over the same
period in 1999 primarily due to higher levels of average short-term debt with an
affiliate and higher interest rates associated with this debt. These factors
were partially offset by the effect of refinancing long-term debt at a more
favorable interest rate in the second quarter of 1999.
EFFECTIVE INCOME TAX
Three Months Ended March 31,
- --------------------------------------------------------------------------------
2000 38.7%
- --------------------------------------------------------------------------------
1999 38.7%
- --------------------------------------------------------------------------------
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 unchanged from the first quarter of 1999.
FINANCIAL CONDITION
- -------------------
We use the net cash generated from operations and from external financing
to fund capital expenditures for network expansion and modernization, and to pay
dividends. While current liabilities exceeded current assets at both March 31,
2000 and 1999 and December 31, 1999, 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
Administration Services, Inc. (BAAS) and a line of credit with Bell Atlantic
Network Funding Corporation (BANFC). As of March 31, 2000, we had no funds
available under our line of credit with BANFC and $745.8 million in borrowings
outstanding. We also had $32.6 million outstanding with BAAS at March 31, 2000.
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. After the announcement of the
Bell Atlantic - GTE merger, the rating agencies placed our ratings under review
for potential downgrade.
Our debt ratio was 58.3% at March 31, 2000, compared to 53.7% at March 31,
1999 and 58.9% at December 31, 1999.
On March 28, 2000, we declared a dividend in the amount of $79.3 million
from Additional Paid-in Capital. The dividend was paid to NYNEX on May 1, 2000.
11
<PAGE>
New England Telephone and Telegraph Company
OTHER MATTERS
- -------------
FCC Regulation and Interstate Rates
Price Caps
As previously reported, in May 1999, the U. S. Court of Appeals reversed
the FCC order that adopted the current 6.5% productivity factor applied to
interstate access rates, but granted the FCC a stay of its order until April 1,
2000. The Court has further extended the stay until June 30, 2000 to allow the
FCC time to consider an industry proposal to further restructure access rates.
Recent Accounting Pronouncements
FASB Accounting Standard - 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. We must adopt SFAS No. 133 no later than January 1, 2001.
On March 3, 2000, the FASB issued a Proposed SFAS "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which would amend SFAS
No. 133. The proposed amendments address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized foreign-currency-
denominated debt instruments, and intercompany derivatives.
We are currently evaluating the provisions of SFAS No. 133 and the
proposed amendments. 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.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." Interpretation No. 44 was
issued in order to clarify certain issues arising from Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," which was
previously issued in October 1972. Interpretation No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur either after
December 15, 1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
We do not expect that Interpretation No. 44 will have a material impact on
our results of operations or financial position.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which currently must be adopted by June 30, 2000. SAB No. 101
provides additional guidance on revenue recognition, as well as criteria from
when revenue is generally realized and earned, and also requires the deferral of
incremental direct selling costs. We are currently assessing the impact of SAB
No. 101 on our results of operations and financial position.
12
<PAGE>
New England Telephone and Telegraph Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the
quarter ended March 31, 2000.
13
<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: May 12, 2000 By /s/ Edwin F. Hall
--------------------------------------------
Edwin F. Hall
Chief Financial Officer and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 10, 2000.
14
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND THE
CONDENSED BALANCE SHEET AT MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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0
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