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)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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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. 2
The registrant hereby amends the following item of its Quarterly Report on
Form 10-Q for the quarterly period ended June 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), in the first phase of the incentive regulation
proceeding, the New York State Public Service Commission ("NYSPSC") issued
Orders on December 24, 1993 and January 28, 1994 for a reduction in the
Company's rates of $170 million annually, effective January 1, 1994, and
required that an additional $153 million of current revenues be made
available "for the ultimate benefit of customers and the Company's
competitive position through earnings incentives for short-term service
improvements and a longer term plan for performance-based earning incentives
and network improvements." That incentive regulatory plan is currently being
pursued in the second phase of the proceeding. The $170 million rate
reduction was intended to reduce intrastate revenues by approximately
$141 million annually. As ordered by the NYSPSC, the Company has designated
$31 million of the $153 million as an incentive to improve overall service
quality in the Brooklyn-Queens-Bronx service area.
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 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.
BUSINESS RESTRUCTURING
Second quarter 1994 results include approximately $395 million of pretax charges
($257 million after-tax) for pension enhancements for approximately 500
management and 1,900 nonmanagement employees who elected during the quarter 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
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 $395 million pretax charges
are as follows: $230 million ($150 million after-tax) for pension enhancements,
$116 million ($75 million after-tax) for associated postretirement medical
benefits, $26 million ($17 million after-tax) for charges allocated to the
Company from TRG for its pension enhancements and $23 million ($15 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.
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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 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 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
--------- ---- ---- ---- -----
Management $17 $ 61 $ 56 $134
Nonmanagement 19 54 80 153
---- -- -- ---
Total $36 $115 $136 $287
=== ==== ==== ====
Medical 1994 1995 1996 Total
------- ---- ---- ---- -----
Management $ 7 $ 24 $ 22 $ 53
Nonmanagement 32 77 108 217
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Total $39 $101 $130 $270
=== ==== ==== ====
The restructuring reserve balance at June 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 $573 million. In the first six months of
1994, the Company
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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)
reduced 1993 restructuring reserves by approximately $148 million in the
following categories:
Severance:
Management $47
Nonmanagement 15
--
Total severance $62
Systems redesign:
Customer contact -
Customer provisioning -
Customer operations -
Customer support -
--
Total systems redesign -
Work center consolidation -
Branding 12
Relocation -
Training -
Re-engineering implementation -
---
Subtotal 74
TRG allocated reserves:
Severance 31
Postretirement medical benefits 24
Systems re-engineering 17
Re-engineering implementation 2
Work center consolidation -
--
Total allocated 74
----
Total $148
====
The severance reduction amount is comprised of $54 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, and $8 million utilized for
other retiree costs.
In addition $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.
There were no significant cost savings as a result of business restructuring
in the first six months of 1994. Since most of the employees that left the
Company under the terms of the enhanced pension offering left in late June,
the expense savings associated with this force reduction have not yet been
realized.
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993
OPERATING REVENUES
Operating revenues for the six months ended June 30, 1994 decreased
$73.3 million, or 1.9%, from the same period last year. This decrease in
total operating revenues is comprised of the following:
Increase (Decrease)
(In millions)
Local service. . . . . . . . . $ 33.7
Long distance. . . . . . . . . (14.6)
Network access . . . . . . . . 4.5
Other. . . . . . . . . . . . . (96.9)
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$(73.3)
======
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 $95 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 $67 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 $7 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.
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 $17 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 $6 million revenue reduction pursuant to an NYSPSC
order (see STATE REGULATORY MATTERS above). 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.
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Form 10-Q/A Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993 (Continued)
OPERATING REVENUES (Continued)
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 $77 million reduction in revenues as
ordered by the NYSPSC representing the first and second quarter deferrals of
the $153 million (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 $7 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.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1994 increased
$476.5 million, or 15.0%, over the same period last year. This increase in
total operating expenses is comprised of the following:
Increase (Decrease)
(In millions)
-----------
Depreciation and amortization. . . . $ 21.8
Taxes other than income taxes. . . . (23.4)
All other:
Business restructuring charges . . 394.9
Employee related . . . . . . . . . 37.1
Other. . . . . . . . . . . . . . . 46.1
------
$476.5
======
Depreciation and amortization increased principally due to a $25 million
increase in plant investment.
Taxes other than income taxes decreased principally due to a $28 million
decrease in property taxes resulting from lower assessments of property
value, partially offset by a $2 million increase in New York State capital
stock tax.
Business restructuring charges recorded in the second quarter consisted of
incremental costs related to pension enhancements (see BUSINESS RESTRUCTURING
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 SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993 (Continued)
OPERATING EXPENSES (Continued)
Employee related costs consist primarily of wages, payroll taxes, and
employee benefits. Wages and payroll taxes increased a net $32 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 $8 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 $42 million net increase in
charges from affiliated companies due to an increase in contracted and
centralized services and the transfer of employees from the Company and NYNEX
Corporate to TRG (see Employee related costs above), a $23 million increase
in bad debt expense recognized pursuant to provisions of the billing and
collection contract with AT&T, and a $15 million increase in the Provision
for uncollectibles. Partially offsetting these increases were a $12 million
decrease in right-to-use fees due to lower purchases of software, a
$14 million decrease due to the completion of equal access amortization in
1993 and a $9 million decrease attributable to the reversal in 1993 of
deferred inside wire expense recorded in 1991 and 1992.
OTHER INCOME - NET
Other income - net for the six months ended June 30, 1994 decreased
$31.2 million from the same period last year due principally to a $28 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 six 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 six months ended June 30, 1994 decreased
$26.6 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 six 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 SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993 (Continued)
INCOME TAXES
Income taxes for the six months ended June 30, 1994 decreased $175.0 million
from the same period last year, principally due to a $180 million decrease as
a result of a decrease in taxable income, partially offset by a $5 million
increase in tax expense associated with the enactment of the Revenue
Reconciliation Act of 1993 on August 10, 1993, which increased the statutory
corporate federal income tax rate from 34 percent to 35 percent retroactive
to January 1, 1993.
FINANCING
At June 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 Communications Workers
of America and Local 2213 of the International Brotherhood of Electrical
Workers ("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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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
--------------------------
Mel Meskin
Vice President - Finance and Treasurer
(Principal Financial and Chief Accounting
Officer)
December 13, 1994
