Form 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
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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 1-3435
NEW YORK TELEPHONE COMPANY
Incorporated under the laws of the State of New York
I.R.S. Employer Identification Number 13-5275510
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF NYNEX 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 THE 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 _____.
AMENDMENT No. 1
The registrant hereby amends the following item of its Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994, as set forth in the
pages attached hereto:
Part I - Item 2 "Management's Discussion and Analysis of Results of Operations"
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following Management's Narrative Analysis of Results of Operations is
provided pursuant to General Instruction H(2) to Form 10-Q.
STATE REGULATORY MATTERS
As previously reported (see the Company's Annual Report on Form 10-K for the
year ended December 31, 1993), on February 4, 1993, the New York State Public
Service Commission ("NYSPSC") issued an order with respect to the Second and
Third Stages, permitting the Company to retain 1993 earnings above a return on
equity of 11.7% and up to 12.7%, depending on its attainment of specified
service quality criteria, with earnings above 12.7% return on equity to be held
for the ratepayers' benefit. The Company has submitted a report to the NYSPSC
showing 1993 earnings below 11.7%. The NYSPSC is currently reviewing the
Company's submission.
On September 26, 1994, the Company, the New York State Department of Public
Service staff and 15 other parties filed a proposed Regulatory Plan (the "Plan")
for approval by the NYSPSC. The Plan would modify the manner in which the
Company is regulated by the NYSPSC over the next seven years. The Plan was
developed by the parties in the third phase of the incentive regulation
proceeding that the NYSPSC instituted in 1992. As previously reported (see the
Company's Annual Report on Form 10-K for the year ended December 31, 1993 and
Quarterly Report on Form 10-Q for the period ended June 30, 1994), in the first
phase of the proceeding, the NYSPSC ordered the Company's rates to be reduced by
$170 million annually, effective January 1, 1994. The NYSPSC also ordered that
an additional $153 million in revenues be "set aside" for short-term service
incentive plans and a longer term plan for performance-based earnings incentives
and network improvements to be determined in the second phase.
The Plan is a performance-based plan that, if approved by the NYSPSC, will
operate as follows:
(1) The new framework will replace the traditional way the Company's operations
have been regulated in New York - a method based on limited earnings - with
incentives to invest in new technologies and improve service. Rate of
return will no longer be the focus of regulation. The Plan will cap, at
current rates, the prices for such "basic" services as residence and
business exchange access, residence and business local calling and LifeLine
service. In addition, by the end of the seven-year term of the Plan, the
Company's prices will have been decreased by an amount that would produce a
$425 million reduction in annual revenue based on current volumes of
business. This reduction will be accomplished primarily by reducing the
average prices of toll and carrier access services. The first price
reduction, estimated at $100 million in annual revenue, will be effective
January 1, 1995. During its term, the Plan allows certain prices to be
adjusted to take into account inflation in excess of 4 percent annually or
costs associated with government mandates and other "exogenous" events.
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
STATE REGULATORY MATTERS (Continued)
(2) The Company will commit to maintain and improve its service quality over
the term of the Plan, with rebates to customers if it fails to meet the
specified service quality standards. If the Company does not meet specified
service quality criteria, the Plan will terminate at the end of five years.
(3) The Plan will encourage the Company to achieve substantial productivity
gains over the term of the Plan. The NYSPSC may terminate the Plan at the
end of five years unless the Company's prices, as measured by an index, are
at least 4.5 percentage points lower than a price index of national
telecommunications companies.
(4) The Plan includes competitive enhancements, including a specific schedule
to provide IntraLATA Presubscription ("ILP") by 1996. ILP will give a
customer the option of designating, in advance, a carrier that would carry
the customer's intraLATA toll calls without the necessity of dialing extra
digits. The Plan will require the Company to pay ILP implementation costs.
(5) Approximately $122 million of the $153 million "set aside" ordered by the
NYSPSC in the first phase of the incentive regulation proceeding will be
released to the Company in exchange for the various commitments the Company
has made under the Plan. $31 million of the $153 million has already been
dedicated to a service improvement plan that is being implemented in 1994.
It is expected that the Plan will be reviewed by the NYSPSC by the end of 1994.
The NYSPSC will also review the Company's performance under a service quality
plan for 1994, which was agreed to in the first phase of the incentive
regulation proceeding.
FEDERAL REGULATORY MATTERS
On July 1, 1994, the Company implemented the fourth annual update to the price
cap rates. These tariffs will result in a net reduction in the Company's annual
interstate access rates of approximately $9.1 million during the tariff period
from July 1, 1994 to June 30, 1995.
BUSINESS RESTRUCTURING
Approximately $418 million of pretax charges ($272 million after-tax) were
recorded in the second and third quarters of 1994 for pension enhancements for
approximately 700 management and 2,000 nonmanagement employees who elected
during the second and third quarters to leave the Company under retirement
incentives and for the Company's allocation from Telesector Resources Group,
Inc. ("TRG") for its pension enhancements. A portion of the year-end 1993
accrual for severance was utilized on a per employee basis, and the incremental
costs of both the Company's pension
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (Continued)
enhancements and the Company's allocation of TRG's pension enhancements were
recorded. The retirement incentives are intended to provide a voluntary means to
implement a portion of the planned work force reductions of approximately 9,000
employees by the end of 1996. The components of the $418 million pretax charges
are as follows: $245 million ($160 million after-tax) for pension enhancements,
$119 million ($77 million after-tax) for associated postretirement medical
benefits, $29 million ($19 million after-tax) for charges allocated to the
Company from TRG for its pension enhancements and $25 million ($16 million
after-tax) for charges allocated to the Company from TRG for its associated
postretirement medical benefits. Much of the cost of the incentives will be
funded by NYNEX's pension plans.
The pension enhancement to the NYNEX management pension plan was announced in
February 1994 and will be offered at different times through 1996 according to
local force requirements. The Company's agreements with the Communications
Workers of America ("CWA") and with the International Brotherhood of Electrical
Workers ("IBEW") in New York, which extend the existing labor agreements to
August 1998, provide a retirement incentive (see COLLECTIVE BARGAINING
AGREEMENTS below).
The reserves established for severance will be transferred to the pension
liability on a per employee basis as a result of employees' leaving under the
pension enhancements as opposed to severance provisions, and the incremental
cost of the pension enhancements will be charged to expense as employees leave.
The retirement incentives credit employees with an additional six years toward
both their age and their length of service for the purpose of determining
pension eligibility and benefits. Postretirement medical costs will be increased
on a per employee basis, because these incentives resulted in more individuals
qualifying for lifetime medical coverage than under the severance plan, and will
be charged to expense as employees leave. Under the assumption that
nonmanagement employees will leave under the retirement incentive, the expected
utilization of nonmanagement severance reserves and the application of the
postretirement medical liability per year have been revised from the expected
utilization as previously reported (see the Company's Annual Report on Form
10-K/A, Amendment No. 1, for the year ended December 31, 1993) as follows:
(In Millions)
Severance 1994 1995 1996 Total
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Management $17 $ 61 $ 56 $134
Nonmanagement 19 54 80 153
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Total $36 $115 $136 $287
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Medical 1994 1995 1996 Total
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Management $ 7 $ 24 $ 22 $ 53
Nonmanagement 32 77 108 217
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Total $39 $101 $130 $270
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (Continued)
The restructuring reserve balance at September 30, 1994, which does not include
the liability recorded at year-end for postretirement medical benefits
associated with employees leaving the Company under the business restructuring,
was approximately $497 million. In the first nine months of 1994, the Company
reduced 1993 restructuring reserves by approximately $225 million in the
following categories:
Severance:
Management $80
Nonmanagement 17
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Total severance $97
Systems redesign:
Customer contact -
Customer provisioning -
Customer operations -
Customer support -
--
Total systems redesign -
Work center consolidation -
Branding 14
Relocation -
Training -
Re-engineering implementation -
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Subtotal 111
TRG allocated reserves:
Severance 43
Postretirement medical benefits 31
Systems re-engineering 38
Re-engineering implementation 2
Work center consolidation -
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Total allocated 114
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Total $225
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The severance reduction amount is comprised of $75 million of severance reserves
transferred to the pension liability on a per employee basis as a result of
employees' leaving under the pension enhancements as opposed to severance
provisions as previously accrued for, $8 million utilized for other retiree
costs, and $14 million transferred from the Company to TRG to cover severance
costs associated with employees who transferred from the Company to TRG and
subsequently left under the pension enhancements.
Additionally, $26 million of reserves accrued in 1991 for severance costs
related to TRG was utilized for the Company's allocation of TRG's pension
enhancements.
During the third quarter of 1994, the Company began to realize significant
expense savings associated with force reductions. For the first nine months of
1994, the
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (Continued)
Company experienced a $32 million reduction in wages as well as a $15 million
reduction in costs allocated from TRG as a result of expense savings associated
with its force reductions.
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994 decreased $94.6
million, or 1.6%, from the same period last year. This decrease in total
operating revenues is comprised of the following:
Increase (Decrease)
(In millions)
Local service $ 43.2
Long distance (19.7)
Network access 13.4
Other (131.5)
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$(94.6)
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Local service revenues are earned from the provision of local exchange, local
private line and local public network services. The increase in Local service
revenues was primarily due to a net $139 million increase attributable to
increased demand as evidenced by growth in access lines, growth in sales of
calling features, such as call waiting, remote call forwarding and touch-tone
services, and higher usage associated with the severe winter storms. In
addition, there was a $5 million increase due to a 1993 reduction in revenues
associated with the reversal of a 1990 deferral of private line revenues. These
increases were partially offset by a $101 million revenue reduction pursuant to
an NYSPSC order (see STATE REGULATORY MATTERS above).
Long distance revenues are earned from the provision of services beyond the
local service area, but within the local access and transport area ("LATA"), and
include public and private network switching. The decrease in Long distance
revenues was primarily attributable to a $10 million revenue reduction pursuant
to an NYSPSC order (see STATE REGULATORY MATTERS above) and a decrease in demand
for private line and wide area telecommunications services as a result of
increased competition and customer shifts to lower priced services offered by
the Company, partially offset by increased demand for message toll service.
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. Switched access revenues are
charges to telecommunications carriers for access to the Company's local
exchange facilities. Switched access revenues increased a net $25 million
principally due to increased usage, partially offset by a reduction in
interstate rates, which included the phase-out of the equal access cost recovery
charge, and by a $9 million revenue reduction pursuant to an NYSPSC order (see
STATE REGULATORY MATTERS above).
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993 (Continued)
OPERATING REVENUES (Continued)
Special access revenues are charges for dedicated lines that connect terminal
locations of interexchange carriers and end users. Special access revenues
decreased $12 million primarily due to a reduction in interstate rates,
increased competition and customer shifts to lower priced Company services.
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. The decrease in Other revenues
was due principally to a $115 million reduction in revenues as ordered by the
NYSPSC representing the first, second and third quarter deferrals of the $153
million designated by the Company as an incentive to improve service quality
(see STATE REGULATORY MATTERS above), a $24 million decrease in revenues
attributable to the 1993 reversal of previously recorded reductions in revenues
in connection with the phase-out of ad valorem taxes on central office
equipment, and a $12 million decrease due to the cessation of imputed revenues
for procurement costs. Partially offsetting these decreases was a $10 million
increase due to the 1993 reversal of a 1992 deferral of revenues for concession
service, and a $6 million increase in revenues related to the directory
licensing agreement with NYNEX Information Resources Company resulting from
higher estimated pretax earnings from the directories published pursuant to the
agreement.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1994 increased $512.7
million, or 10.8%, over the same period last year. This increase in total
operating expenses is comprised of the following:
Increase (Decrease)
(In millions)
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Depreciation and amortization $ 36.2
Taxes other than income taxes (29.4)
All other:
Business restructuring charges 418.2
Employee related 48.4
Other 39.3
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$512.7
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Depreciation and amortization increased principally due to a $36 million
increase associated with increased plant investment.
Taxes other than income taxes decreased principally due to a $23 million
decrease in property taxes resulting from lower assessments of property value
and an $11 million decrease primarily attributable to a decrease in the
surcharge rate from 15% to 12.5%. These decreases were partially offset by a $3
million increase in New York State capital stock tax.
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993 (Continued)
Business restructuring charges recorded in the second and third quarter of 1994
consisted of incremental costs related to pension enhancements (see BUSINESS
RESTRUCTURING above).
Employee related costs consist primarily of wages, payroll taxes, and employee
benefits. Wages and payroll taxes increased a net $48 million principally due to
increases in salary and wage rates and additional labor costs due to initiatives
to improve service quality, partially offset by reductions in the Company's work
force attributable to the Company's force reduction program and the transfer of
employees to TRG associated with re-engineering the way service is delivered to
customers, including operating the Company and New England Telephone and
Telegraph Company ("New England Telephone") as a single enterprise under the
"NYNEX" brand (see Other operating expenses below). Benefit expenses increased
$2 million primarily due to higher costs of providing medical coverage for
active and retired employees.
Other operating expenses consist primarily of contracted and centralized
services, rent and other general and administrative costs. The increase in other
operating expenses was due principally to a $51 million net increase in
contracted and centralized services, including an increase from affiliated
companies resulting from the transfer of employees from the Company to TRG (see
Employee related costs above) and an increase in sales agent commissions, an $18
million increase in bad debt expense recognized pursuant to provisions of the
billing and collection contract with AT&T Corp. and a $14 million increase in
the Provision for uncollectibles. Partially offsetting these increases were a
$22 million decrease due to the completion of equal access amortization in 1993,
a $9 million decrease attributable to the reversal in 1993 of deferred inside
wire expense recorded in 1991 and 1992 and a $6 million decrease in right-to-use
fees due to lower purchases of software.
OTHER INCOME - NET
Other income - net for the nine months ended September 30, 1994 decreased $38.3
million from the same period last year, due principally to a $41 million
decrease resulting from the completion in 1993 of the transition plan with New
England Telephone to phase in the earnings impact of the unified tariff access
rate structure. This decrease was partially offset by an increase due to higher
expenses in the first nine months of 1993 for the interstate portion of call
premiums and other charges associated with the refinancing of long-term debt.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 1994 decreased $32.7
million from the same period last year, primarily due to lower average interest
rates resulting from long-term debt refinancings during 1993 and higher expenses
in the first nine months of 1993 for interest on customer overbillings.
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF 1993 (Continued)
INCOME TAXES
Income taxes for the nine months ended September 30, 1994 decreased $200.9
million from the same period last year, principally due to a decrease in taxable
income.
FINANCING
At September 30, 1994, the Company had $250 million of unissued, unsecured debt
securities registered with the SEC.
Pursuant to the indentures for certain of its debentures, the Company has
covenanted that it will not issue additional funded debt securities ranking
equally with or prior to such debentures unless it has maintained an earnings
coverage of 1.75 for interest charges for a period of any 12 consecutive months
out of the 15 month period prior to the date of the proposed issuance. As a
result of the 1993 business restructuring charges and the 1994 pension
enhancements, the Company does not currently meet the earnings coverage
requirement.
COLLECTIVE BARGAINING AGREEMENTS
On March 24, 1994, an agreement was reached with the CWA and Local 2213 of the
IBEW in New York to extend through August 8, 1998 the collective bargaining
agreements that were to expire on August 5, 1995. The agreements were ratified
in May 1994. Under the terms of the new agreements, there will be basic wage
increases of 10.5% during the life of the agreements. Wages will increase 4.0%
on August 6, 1995, 3.5% on August 4, 1996 and 3.0% on August 3, 1997. In 1997
there may also be a cost-of-living adjustment. The agreements also provide for
retirement incentives, a commitment to no layoffs or loss of wages as a result
of Company-initiated "process change", an enhanced educational program and
incentives to improve service quality.
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<PAGE>
Form 10-Q/A New York Telephone 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 York Telephone Company
Mel Meskin
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Mel Meskin
Vice President - Finance and Treasurer
(Principal Financial and Chief Accounting
Officer)
December 13, 1994
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