<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
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 1-3435
NEW YORK TELEPHONE COMPANY
A New York Corporation I.R.S. Employer
Identification No. 13-5275510
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -----------------------------
See attached New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF NYNEX CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b) OF FORM 10-K AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION J(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 ......
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]*
*Not applicable
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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Attachment
Title of each class
-------------------
REFUNDING MORTGAGE BONDS:
$ 55,000,000 3 3/8% Refunding Mortgage Bonds Series I
Due April 1, 1996
$ 60,000,000 4 5/8% Refunding Mortgage Bonds Series L
Due October 1, 1997
$ 60,000,000 4 5/8% Refunding Mortgage Bonds Series M
Due January 1, 2002
$ 70,000,000 4 1/4% Refunding Mortgage Bonds Series N
Due January 1, 2000
$130,000,000 4 5/8% Refunding Mortgage Bonds Series O
Due January 1, 2004
$100,000,000 4 7/8% Refunding Mortgage Bonds Series P
Due January 1, 2006
$ 75,000,000 6% Refunding Mortgage Bonds Series Q
Due September 1, 2007
$150,000,000 7 1/2% Refunding Mortgage Bonds Series R
Due March 1, 2009
$200,000,000 7 3/4% Refunding Mortgage Bonds Series T
Due December 15, 2006
$200,000,000 7 3/8% Refunding Mortgage Bonds Series V
Due December 15, 2011
DEBENTURES:
$200,000,000 Principal Amount of 40 Year 7 7/8% Debentures,
Due June 15, 2017
$150,000,000 Principal Amount of 21 Year 8 5/8% Debentures,
Due November 15, 2010
$200,000,000 Principal Amount of 40 Year 9 3/8% Debentures,
Due July 15, 2031
$100,000,000 Principal Amount of 30 Year 7 5/8% Debentures,
Due Feb. 1, 2023
$200,000,000 Principal Amount of 12 Year 6 1/2% Debentures,
Due March 1, 2005
$100,000,000 Principal Amount of 20 Year 7% Debentures,
Due May 1, 2013
$100,000,000 Principal Amount of 20 Year 7% Debentures,
Due June 15, 2013
$250,000,000 Principal Amount of 32 Year 7% Debentures,
Due August 15, 2025
$250,000,000 Principal Amount of 30 Year 6.70% Debentures,
Due November 1, 2023
$200,000,000 Principal Amount of 40 Year 7% Debentures,
Due December 1, 2033
$450,000,000 Principal Amount of 30 Year 7 1/4% Debentures,
Due February 15, 2024
NOTES:
$100,000,000 Principal Amount of 5 Year 5 1/4% Notes,
Due September 1, 1998
$200,000,000 Principal Amount of 10 Year 5 7/8% Notes,
Due September 1, 2003
$150,000,000 Principal Amount of 10 Year 5 5/8% Notes,
Due November 1, 2003
$150,000,000 Principal Amount of 10 Year 6 1/4% Notes,
Due February 15, 2004
2
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TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Item Page
---- ----
<C> <S> <C>
1. Business (Abbreviated pursuant to General
Instruction J(2)).................................. 4
2. Properties......................................... 11
3. Legal Proceedings.................................. 12
4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction J(2))
</TABLE>
PART II
<TABLE>
<CAPTION>
<C> <S> <C>
5. Market for Registrant's Common Equity and Related
Stockholder Matters (Inapplicable)
6. Selected Financial Data........................................ 14
7. Management's Discussion and Analysis of Results
of Operations (Management's Narrative Analysis
of Results of Operations is provided pursuant to
General Instruction J(2))...................................... 15
8. Consolidated Financial Statements and Supplementary Data:
Report of Management......................................... 26
Report of Independent Accountants............................ 28
Statements:
Consolidated Statements of Income and Retained
Earnings for each of the Three Years in the Period
Ended December 31, 1994................................... 29
Consolidated Balance Sheets as of December 31, 1994
and 1993.................................................. 30
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1994......... 32
Notes to Consolidated Financial Statements.................. 33
Supplementary Information:
Quarterly Financial Information (Unaudited)................. 48
9. Charges in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 49
</TABLE>
PART III
(Omitted pursuant to General Instruction J(2))
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
PART IV
<TABLE>
<CAPTION>
<C> <S> <C>
14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K ............................................. 50
</TABLE>
3
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PART I
Item 1. BUSINESS
General
-------
New York Telephone Company (the "Company"), which was incorporated in 1896
under the laws of the State of New York, has its principal executive offices at
1095 Avenue of the Americas, New York, New York 10036 (telephone number
212-395-2121) and is engaged primarily in providing telecommunications services
in a large portion of New York and a small portion of Connecticut (Greenwich and
Byram only). The Company is a wholly-owned subsidiary of NYNEX Corporation
("NYNEX").
Empire City Subway Company (Limited) ("Empire"), a wholly-owned subsidiary
of the Company, is primarily in the business of leasing underground conduit in
Manhattan and the Bronx, primarily to companies in the telecommunications
business. Approximately 93% of Empire's 1994 revenues was derived from the
Company.
Telecommunications Services
---------------------------
The Company is engaged primarily in providing two types of
telecommunications services, exchange telecommunications and exchange access, in
New York State and a small portion of Connecticut.
Exchange telecommunications service is the transmission of
telecommunications among customers located within geographical areas (local
access and transport areas or "LATAs"). These LATAs are generally centered on a
city or other identifiable community of interest and, subject to certain
exceptions, each LATA marks an area within which a former Bell System local
exchange company ("LEC") operating within such territory may provide
telecommunications services (See "Operations Under the Modification of Final
Judgment" below). Exchange telecommunications service may include long distance
service as well as local service within LATAs. Examples of exchange
telecommunications services include switched local residential and business
services, long distance service, private line voice and data services, Wide Area
Telecommunications Service ("WATS") and Centrex services.
Exchange access service refers to the link provided by LECs between a
customer's premises and the transmission facilities of other telecommunications
carriers, generally interLATA carriers. Examples of exchange access services
include switched access and special access services.
Certain billing and collection services are performed by the Company for
other carriers, primarily AT&T Corp. ("AT&T"), and certain information providers
that elect to subscribe to these services rather than perform such services
themselves. Effective January 1, 1987, such billing and collection services
were detariffed on an interstate basis and are offered to interexchange carriers
under contract. In addition, many components of intrastate billing and
collection services have been detariffed pursuant to orders of the New York
State Public Service Commission ("NYSPSC"). The NYSPSC has determined that
other components of intrastate billing and collection services shall remain
under tariff. In 1994, approximately 1% of the Company's operating revenues was
derived from billing and collection services.
4
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The Company is currently providing billing and collection services to AT&T
pursuant to a six-year contract signed in 1990, extending the Company's role as
an AT&T long distance billing and collection agent. The agreement allows AT&T
the flexibility of gradually assuming certain administrative and billing
functions performed by the Company. The contract expires on December 31, 1995.
There are six LATAs that comprise the area served by the Company and they
are referred to as follows: the New York City Metropolitan Area (which includes
Westchester, Rockland, Putnam, Nassau and Suffolk Counties in New York and
Greenwich and Byram in Connecticut), Poughkeepsie, Albany-Glens Falls,
Syracuse-Utica, Buffalo and Binghamton-Elmira. Although the Company is generally
prohibited by the Modification of Final Judgment from providing interLATA
service, it is permitted to and does provide interLATA service in certain areas,
including service between New York City and northern New Jersey (see "Operations
Under the Modification of Final Judgment" below).
The following table sets forth for the Company the approximate number of
network access lines in service at the end of each year:
<TABLE>
<CAPTION>
In Thousands
--------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Network Access Lines
in Service*. . . . . . . 10,477 10,135 9,897 9,735 9,658
</TABLE>
* Network access lines in service have been restated for retroactive adjustments
to the in-service base. This restatement was not material and had no impact
on revenues.
Sizable areas and many localities within New York are served by nonaffiliated
telephone companies that had approximately 1,203,086 network access lines in
service in those territories on December 31, 1994. The Company does not furnish
local service in the areas and localities served by such companies. Rochester,
Jamestown, Middletown, Webster and Henrietta are the only cities with a
population of more than 25,000 within New York that are served by such
nonaffiliated companies.
For the year ending December 31, 1994, approximately 96% of the total
operating revenues of the Company was derived from telecommunications services,
of which one customer, AT&T, accounted for approximately 18%, primarily in
network access and other revenues. The remaining approximately 4% of total
operating revenues was from other sources, primarily inside wire related charges
and licensing fees for telephone directories.
Telesector Resources Group, Inc
-------------------------------
Telesector Resources Group, Inc. ("Telesector Resources") is a wholly-owned
subsidiary of the Company and New England Telephone and Telegraph Company ("New
England Telephone"), also a wholly-owned subsidiary of NYNEX. In 1990, NYNEX
Materiel Enterprises Company was transferred from NYNEX to the Company and to
New England Telephone (collectively, the "Telephone Companies") and then merged
into another jointly owned subsidiary, NYNEX Service Company, which was renamed
Telesector Resources. The Company has a 66 2/3% ownership in Telesector
Resources and shares voting rights equally with the other owner, New England
Telephone.
5
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The Telephone Companies have consolidated all or part of many regional service
and support functions into Telesector Resources. Regional service functions are
interstate access services, operator services, public communications, sales,
market area services, corporate services, information services, labor relations,
engineering/construction and business planning. Support functions are quality
and process re-engineering, marketing, technology and planning, public
relations, legal and human resources. In addition, Telesector Resources provides
various procurement, procurement support and materials management services to
the Telephone Companies, on a nonexclusive basis. These services include product
evaluation, contracting, purchasing, materials management and disposition,
warehousing, transportation, and equipment repair management. Under a reciprocal
services agreement, the Company provides certain administrative and other
services for Telesector Resources.
Each of the seven regional holding companies ("RHCs") formed in connection
with the AT&T divestiture owns an equal interest in Bell Communications
Research, Inc. ("Bellcore") (see "Operations Under the Modification of Final
Judgment" below). Bellcore furnishes to the LECs, including the Company, and
certain of their subsidiaries, technical and support services (that include
research and development) relating to exchange telecommunications and exchange
access services that can be provided more efficiently on a centralized basis.
Bellcore serves as a central point of contact for coordinating the efforts of
NYNEX and the other RHCs in meeting the national security and emergency
preparedness requirements of the federal government.
Certain Affiliated Business Operations
--------------------------------------
NYNEX Information Resources Company
-----------------------------------
The Company has an agreement with NYNEX Information Resources Company
("Information Resources"), a wholly-owned subsidiary of NYNEX, pursuant to which
Information Resources pays a fee to the Company for the use of the Company's
name in soliciting directory advertising and in publishing and distributing
directories. In April 1986, the NYSPSC issued an order which disapproved the
directory publishing agreement between the Company and Information Resources.
The Company appealed this order and in October 1988, the New York State Court of
Appeals ruled that the NYSPSC had the authority to disapprove the directory
publishing agreement.
The Company subsequently submitted a proposal to the NYSPSC for compliance
with its decision. Beginning in January 1991, Information Resources has made
payments to the Company under an arrangement that in effect remits to the
Company its earnings related to publishing directories in New York in excess of
a regulated return. In April 1992, the NYSPSC instituted a proceeding to
investigate the directory publishing operations of the Company and its NYNEX
affiliates. In December 1993, an administrative law judge of the NYSPSC issued
a recommended decision that the Company's proposal not be accepted and that the
Company, instead, assume the directory publishing function itself and/or
negotiate a modified agreement with Information Resources. On January 27, 1994,
the parties to the proceeding submitted their final briefs to the NYSPSC, which
will review the administrative law judge's recommendation and issue a final
order.
6
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Business Restructuring
----------------------
During 1994, the Company reached new agreements with the Communications
Workers of America ("CWA") and the International Brotherhood of Electrical
Workers ("IBEW") which provided for retirement incentives (see "Employee
Relations" below). The Company also announced retirement incentives for its
management employees. These incentives are intended to provide a voluntary
means to implement substantially all of the planned work force reductions of
approximately 9,000 employees by the end of 1996. Much of the cost will be
funded by the NYNEX pension plans. In 1994, the Company recorded $523.4 million
of pretax charges ($340.2 million after-tax) primarily for the incremental cost
of pension enhancements and associated postretirement medical costs for 3,700
employees who left the Company under the retirement incentives and for the
Company's allocation from Telesector Resources for its pension enhancements.
In 1993, the Company recorded $992 million in pretax charges ($645 million
after-tax) for business restructuring. These charges resulted from a
comprehensive analysis of operations and work processes, resulting in a strategy
to redesign them to improve efficiency and customer service, to adjust quickly
to accelerating change, to implement work force reductions, and to produce cost
savings necessary for the Company to operate in an increasingly competitive
environment.
Capital Expenditures
--------------------
The Company meets the expanding needs for telecommunications services by
making capital expenditures to upgrade and extend the existing
telecommunications network, including new construction, optical fiber and
modernization. Capital expenditures (excluding the equity component of allowance
for funds used during construction and additions under capital leases) for 1990
through 1994 are set forth below:
<TABLE>
<CAPTION>
In Millions
--------------------------
<S> <C>
1994. . . . . . . . $1,330
1993. . . . . . . . $1,342
1992. . . . . . . . $1,221
1991. . . . . . . . $1,354
1990 . . . . . . $1,251
</TABLE>
Operations Under the Modification of Final Judgment
---------------------------------------------------
The operations of NYNEX and its subsidiaries in all industry segments are
subject to the requirements of a consent decree known as the "Modification of
Final Judgment" ("MFJ"). The MFJ arose out of an antitrust action brought by
the United States Department of Justice ("DOJ") against AT&T. In August 1982,
the United States District Court for the District of Columbia (the "MFJ Court")
approved the MFJ as in the public interest. In February 1983, the United States
Supreme Court affirmed the MFJ Court's action. Pursuant to the MFJ, AT&T
divested its 22 wholly-owned LECs, including the Telephone Companies,
distributed them to the RHCs, and distributed the stock of the RHCs to AT&T's
stockholders on January 1, 1984.
7
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As initially approved, the MFJ restricted the RHCs, including NYNEX and its
subsidiaries, including the Company, to the provision of exchange
telecommunications service, exchange access and information access services, the
provision (but not manufacture) of customer premises equipment ("CPE") and the
publishing of printed directory advertising. Although some restrictions placed
on RHC operations have been removed or modified since entry of the MFJ, the RHCs
are still required to seek MFJ Court approval in order to provide interLATA
telecommunications services, to manufacture or provide telecommunications
products and to manufacture CPE. Also, the Company is still required to offer
to all interexchange carriers and information service providers exchange access
and information access, at certain locations, which are equal in quality, type
and price to that provided to AT&T and its affiliates ("Equal Access").
Included in capital expenditures for the period 1990 through 1993 are costs in
connection with the requirement to provide Equal Access (see "Capital
Expenditures" above).
MFJ Court approval to engage in any of the prohibited activities is
normally predicated upon a showing to the MFJ Court that there is no substantial
possibility that an RHC could use its monopoly power to impede competition in
the market it seeks to enter. The MFJ Court has established procedures for
dealing with requests by an RHC to enter new businesses. Such requests must
first be submitted to the DOJ for its review. After DOJ review, the RHC seeks
approval directly from the MFJ Court. The MFJ Court will consider the
recommendation of the DOJ in deciding whether a specific request should be
granted.
In July 1991, the MFJ Court lifted the MFJ restriction on the provision of
the content of information services by the RHCs and LECs, including NYNEX and
the Telephone Companies. In May 1993, the United States Court of Appeals for
the District of Columbia Circuit affirmed that decision. The Court of Appeals
decision allows the RHCs and LECs, including NYNEX and the Telephone Companies,
to create and own the content of the information they transmit over the
telephone lines and to provide data processing services to customers. In
November 1993, the United States Supreme Court declined to review the Court of
Appeals decision.
Regulated Services
------------------
Intrastate communications services offered by the Company are under the
jurisdiction of state public utility commissions (see "State Regulatory Matters"
below), and interstate communications services are under the jurisdiction of the
Federal Communications Commission ("FCC") (see "Federal Regulatory Matters"
below). In addition, state and federal regulators review various transactions
between the Company and the other subsidiaries of NYNEX.
State Regulatory Matters
------------------------
The NYSPSC has instituted a proceeding to consider the terms that should
govern local exchange competition in New York State. (Competition for local
exchange services has been authorized under interim regulations pending the
development of final regulations.) Among the matters being considered in this
proceeding are interconnection between competing local exchange providers,
regulation of new entrants, and the possibility of creating a "universal service
fund." Decisions in this proceeding could have a significant impact on the
Company's revenues.
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See discussion of State Regulatory Matters in Part II, Management's
Discussion and Analysis of Results of Operations, which is incorporated herein
by reference.
Federal Regulatory Matters
--------------------------
Interstate Access Charges
-------------------------
Interstate access charges are tariff charges filed with the FCC that
compensate LECs, including the Company, for services that allow carriers and
other customers to originate and terminate interstate telecommunications traffic
on the LECs' local distribution networks. Such charges recover the LECs'
access-related costs allocated to the interstate jurisdiction ("Interstate
Costs") under the FCC's jurisdictional cost allocation rules.
With respect to the provision of access to the switched network, separate
charges are applied to end users ("End User Common Line Charges") and to
interexchange carriers ("switched access"). End User Common Line Charges
recover, through a fixed charge, a portion of the Interstate Costs of the line
connecting an end user's premises with the LEC's central office. The LECs
recover their remaining Interstate Costs through mileage and usage sensitive
charges to the interexchange carriers.
In June 1994, the FCC completed a review of the performance of LECs during
the initial period of price cap regulation. The Telephone Companies filed
comments advocating price cap and access reform to keep pace with the
intensifying competitive environment. Among other things, the Telephone
Companies recommended increased pricing flexibility, elimination of sharing and
low end adjustment mechanisms, and reduction of the productivity factor. An FCC
decision is pending.
On March 3, 1995, the FCC released Orders to Show Cause to each of the LECs,
including the Telephone Companies, resulting from an audit of the costs that the
LECs reported to the National Exchange Carrier Association ("NECA") for Common
Line Pooling purposes for 1988 and the first quarter of 1989. The audit report
cites each of the LECs for alleged violations of the FCC's accounting rules and
reporting errors which, as to the Telephone Companies, were calculated to total
$37.8 million in respect of all interstate costs for the period. Some of the
alleged errors would have the effect of understating the Telephone Companies'
revenue requirement; the net effect, therefore, is an alleged revenue
requirement overstatement of $19.8 million. That estimate is considered
preliminary, however, because the auditors did not have sufficient information
for several items to reach final conclusions.
The Order requires the Telephone Companies to show cause why the FCC should
not (1) issue a Notice of Apparent Liability for Forfeiture for violations of
the FCC's accounting rules; (2) require the Telephone Companies to adjust their
price cap indexes; and (3) require the Telephone Companies to improve their
internal processes to bring them into compliance. The Telephone Companies must
respond to the Order by May 2, 1995.
On December 15, 1993, the Telephone Companies filed a petition with the FCC
for a waiver to implement the Universal Service Preservation Plan ("USPP") in
order to compete more effectively with alternative providers of local telephone
service. The USPP would reduce the Switched Access rate for multiline business
users in zones of high traffic density by approximately 40 percent and would
shift most of the revenues lost from this rate reduction
9
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to flat, per-line charges applicable to all access lines. Overall annual access
revenues would be reduced by $25 million.
Other Federal Matters
---------------------
In August 1992, the FCC determined that the LECs may provide video dialtone
service, a common carrier platform for transporting and switching video
programming from programmers to subscribers, and that neither the LEC providing
video dialtone nor its programmer-customers require a local cable franchise. In
June 1993, the FCC granted the Company's request for permission to conduct a
trial of video dialtone service in New York City. The trial commenced in
January 1994.
On October 20, 1994, the FCC announced that it had adopted a decision
responding to petitions for reconsideration of its 1992 order establishing the
rules and regulatory framework governing telephone company provision of video
dialtone. The FCC generally affirmed its rules for video dialtone, with some
clarifications and modifications. The FCC affirmed the common carrier nature of
the video dialtone platform, indicated that the video dialtone platform will be
subject to dual federal/state regulation, stated that cost allocation issues
will be resolved in the tariff process and relaxed in certain respects its
telephone company/cable non-ownership affiliation rules.
See also discussion of Federal Regulatory Matters in Part II, Management's
Discussion and Analysis of Results of Operations, which is incorporated herein
by reference.
-----------------------------------
The outcome of all refund matters as well as the time frame within which
each will be resolved, is not presently determinable. As of December 31, 1994,
the aggregate amount of revenues that was estimated to be subject to possible
refund from all regulatory proceedings was approximately $266.6 million, plus
related interest.
-----------------------------------
Competition
-----------
Advances in technology, as well as regulatory and court decisions, are
expanding the types of communications products and services available in the
market, as well as the number of alternatives to the telecommunications services
provided by the Company. Various business alliances and other undertakings were
announced or consummated in the telecommunications industry in 1994 which
indicate an intensifying level of competition, especially with respect to the
operations of the Company. AT&T acquired, through a merger, McCaw Cellular
Communications Inc. ("McCaw"), which operates in a number of areas within
NYNEX's region in the Northeast. U S WEST Inc. ("U S WEST") holds a major
interest in Time Warner Entertainment Co. L.P., which includes Time Warner Cable
and has announced an agreement to acquire Cablevision Systems Corp.
("Cablevision"). Time Warner Cable has extensive operations in the Northeast,
including New York City, and has announced its plans to offer a full range of
local access telecommunications services to New York City businesses by mid-
1995. Cablevision, which operates in Long Island and Westchester County, plans
to construct a fiber-optic network to deliver telecommunications and video
services. MCI Communications Corp. ("MCI") plans to spend $2 billion to
establish local fiber-optic networks in 20 major
10
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cities, including New York, offering a way to bypass the local exchange carrier,
including the Company, and connect directly to MCI's long-distance network. In
certain markets in New York City, the Company faces significant competition from
alternative service providers with substantial resources. The NYSPSC has
authorized 28 companies to provide competitive local exchange services in the
state of New York. Three companies have begun local exchange operations in
direct competition with the Company, which has implemented interim
interconnection agreements with local exchange competitors. The Company has
allowed alternative service providers to place transmission equipment in its
central offices, under an arrangement known as collocation. The Company also
faces increasing competition in Centrex services, long distance, WATS, billing
and collection services, pay telephones, and various other services.
Employee Relations
------------------
The Company and its subsidiary had approximately 36,000 employees at December
31, 1994. Approximately 30,900 employees are represented by unions. Of those
so represented, approximately 97% are represented by the CWA and approximately
3% by the IBEW, both of which are affiliated with the AFL-CIO.
In 1994, collective bargaining agreements between the Company, the CWA and the
IBEW were extended until August 8, 1998. These agreements were scheduled to
expire on August 5, 1995. Basic wages will increase approximately 14.5%,
including a 4.0% increase in August 1994, and a pension enhancement is provided
to encourage early retirement. Wages will increase 4.0%, 3.5% and 3.0% in
August 1995, 1996 and 1997, respectively. The first step was effective on April
3, 1994 and was comprised of dollar increases to the maximum rates for specified
wage schedules. There may be a cost-of-living adjustment in 1997, and employees
may receive added compensation for meeting service standards (in March 1996,
1997 and 1998) and for enrollment into a managed care network (in 1996 and
1997).
Item 2. PROPERTIES
The properties of the Company do not lend themselves to simple description
by character and location of principal units.
At December 31, 1994, the gross book value of telephone plant was $20.1
billion, consisting principally of telephone plant and equipment (87%). Other
classifications include: land, land improvements and buildings (9%); furniture
and other equipment (1%); and plant under construction and other (3%).
Substantially all of the Company's central office equipment is located in
buildings owned by the Company and situated on land that it owns. Many
administrative offices, garages and business offices are in rented quarters.
As part of the Company's 1993 restructuring associated with re-engineering
the way service is delivered to customers (see "Business Restructuring" above),
the Company intends to consolidate work centers by the end of 1996 to build
larger work teams in fewer locations.
Substantially all of the Company's assets are subject to lien under the
Company's Refunding Mortgage indenture. At December 31, 1994, the principal
amount of Refunding Mortgage bonds outstanding was $1.1 billion.
11
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Item 3. LEGAL PROCEEDINGS
Contingent Liabilities Agreement
--------------------------------
The Plan of Reorganization, which was approved by the MFJ Court in August
1983 in connection with the AT&T divestiture, provides for the recognition and
payment of liabilities that are attributable to predivestiture events (including
transactions to implement divestiture), but that do not become certain until
after divestiture. These contingent liabilities relate principally to
predivestiture litigation and other claims against AT&T, its affiliates and the
LECs with respect to the environment, rates, taxes, contracts and torts
(including business torts, such as alleged violations of the antitrust laws).
With respect to such liabilities, AT&T and the LECs will share the costs of
any judgment or other determination of liability entered by a court or
administrative agency against any of them, whether or not a given entity is a
party to the proceeding and regardless of whether an entity is dismissed from
the proceeding by virtue of settlement or otherwise. Other costs to be shared
would include the costs of defending the claim (including attorneys' fees and
court costs) and the cost of interest or penalties with respect to any such
judgment or determination. With certain exceptions, responsibility for such
contingent liabilities will generally be divided among AT&T and the LECs on the
basis of their relative net investment as of the effective date of divestiture.
Under this general rule of allocation, the Company pays approximately 7.4% of
any judgment or determination of liability.
In January 1995, NYNEX and the other RHCs agreed to terminate the sharing
arrangement among the LECs with respect to predivestiture contingent liabilities
for certain matters. AT&T did not enter into the agreement and, accordingly,
the sharing arrangement remains in effect with respect to AT&T's predivestiture
liabilities and with respect to AT&T's share of LEC predivestiture liabilities.
Antitrust Actions
-----------------
In May 1990, Discon Incorporated filed an action in the United States
District Court for the Western District of New York alleging, among other
things, violations of the Racketeer Influenced and Corrupt Organizations Act
("RICO") and the federal antitrust laws. The defendants include NYNEX, the
Company, NYNEX Materiel Enterprises Company and others. Plaintiff's allegations
relate to, among other things, the removal of equipment from the Company's
central offices. In June 1992, the District Court dismissed the original
complaint in this case. Discon then filed an amended complaint. A motion to
dismiss is pending before the District Court.
In October 1990, North American Industries Inc. filed a third party
complaint against the Company alleging, among other things, violations of the
federal antitrust laws relating to the provision of facilities for pay telephone
services. The case is pending in the United States District Court for the
Southern District of New York. In 1992, three similar suits were filed in the
same court.
12
<PAGE>
Other Litigation
----------------
In January 1990, Wegoland Ltd. and Howard Weiner filed an action in the
United States District Court for the Southern District of New York on behalf of
the telephone ratepayers of the Telephone Companies alleging violations of RICO
and various state laws. A substantially identical case was filed by Donna
Roazen in March 1990. The defendants in these cases were NYNEX, certain of its
subsidiaries, including the Company, and certain present and former officers of
those companies. Plaintiffs alleged that the Telephone Companies had been
charged inflated prices in transactions with their affiliates and that those
prices were unlawfully reflected in the Telephone Companies' regulated rates.
In November 1992, the District Court granted defendants' motions to dismiss
these actions with prejudice. The U. S. Court of Appeals for the Second Circuit
affirmed the dismissal on May 20, 1994. No further appeal was taken.
In April 1990, Scott J. Rafferty filed a lawsuit against the Company and
others. The lawsuit, filed in the United States District Court for the Southern
District of New York, alleged violations of the RICO and state common law
relating to, among other things, the termination of Mr. Rafferty's employment
with Telco Research Corporation, then a subsidiary of NYNEX Information
Solutions Group, Inc. In July 1991, the Court issued an order dismissing some
of the plaintiff's claims and staying the remainder pending dismissal. On
November 12, 1993, the Court dismissed the remainder of Mr. Rafferty's claims
and issued a final judgment in favor of the defendants. On February 15, 1995,
the U.S. Court of Appeals for the Second Circuit affirmed the dismissal.
Fifty-four actions, of which approximately seven remain, were brought in
New York State Supreme Court, New York County, against the Company, Empire and
others arising out of a power failure in a predominantly commercial section of
New York City in August 1983. The actions are predicated on broad and general
claims of negligence in excavating and/or installing underground equipment.
Several of these cases involve multiple plaintiffs.
-----------------------------------
While counsel cannot give assurance as to the outcome of any of these
matters, in the opinion of Management based upon the advice of counsel, the
ultimate resolution of these matters in future periods is not expected to have a
material effect on the Company's financial position or annual operating results
but could have a material effect on quarterly operating results.
-----------------------------------
In November 1993, NYNEX and New England Telephone filed suit in the United
States District Court for the District of Maine seeking an order declaring that
section 533(b) of the Cable Communications Policy Act of 1984 is
unconstitutional and permanently enjoining the United States from enforcing
section 533(b) against NYNEX. Section 533(b) prohibits NYNEX from providing
video programming to subscribers in areas where the Telephone Companies provide
service. On December 8, 1994, the court issued an opinion and order declaring
that Section 533(b) is unconstitutional and stating that it will enjoin the
enforcement of Section 533(b) against NYNEX and its subsidiaries within the
NYNEX service area. The Department of Justice has appealed.
13
<PAGE>
PART II
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Dollars in Millions 1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 7,737 $ 7,847 $ 7,746 $ 7,697 $ 7,486
Operating expenses $ 6,958 $ 7,505 $ 6,259 $ 6,651 $ 6,151
Interest expense $ 314 $ 349 $ 363 $ 375 $ 357
Earnings before cumulative effect
of change in accounting principle $ 345 $ 82 $ 856 $ 536 $ 738
Cumulative effect of change in
accounting for postemployment
benefits, net of taxes $ - $ (89) $ - $ - $ -
Net income (loss) $ 345 $ (8) $ 856 $ 536 $ 738
Telephone plant - net $12,023 $12,116 $12,134 $12,232 $12,126
Total assets $15,296 $15,435 $15,603 $15,864 $15,329
Long-term debt $ 3,972 $ 3,972 $ 3,984 $ 3,956 $ 4,059
Share owner's equity $ 4,805 $ 5,185 $ 5,916 $ 5,659 $ 5,727
Capital expenditures* $ 1,330 $ 1,342 $ 1,221 $ 1,354 $ 1,251
Return to equity 6.81% (0.13)% 14.66% 9.17% 12.99%
Ratio of earnings to fixed charges + 2.40 1.04 3.98 2.68 3.52
Network access lines
in service (in thousands)++ 10,477 10,135 9,897 9,735 9,658
</TABLE>
The results for 1994 include $523 million of pretax charges ($340 million
after-tax) for pension enhancements for employees who elected to leave the
Company during the year under retirement incentives (see Management's
Discussion and Analysis of Results of Operations). The results for 1993
reflect the effects of pretax charges of $992 million ($645 million after-tax)
for business restructuring, primarily related to efforts to redesign
operations and incremental costs associated with work force reductions (see
Management's Discussion and Analysis of Results of Operations). The results
for 1991 reflect the effects of pretax charges of $317 million ($209 million
after-tax) for operational restructuring related to force reduction programs.
* Excludes additions under capital lease obligations and the equity component
of allowance for funds used during construction.
+ For the purpose of this ratio: (i) earnings have been calculated by adding
Interest expense and the estimated interest portion of rentals to Earnings
before Income taxes and cumulative effect of change in accounting principle;
and (ii) fixed charges are comprised of Interest expense and the estimated
interest portion of rentals.
++ Network access lines in service have been restated for retroactive
adjustments to the in-service base. This restatement was not material and had
no impact on revenues.
14
<PAGE>
Item 7. 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 J(2) to Form 10-K.
BUSINESS RESTRUCTURING
----------------------
PURPOSE OF RESTRUCTURING
Externally, rapid changes in technology and regulation are opening New York
Telephone Company's (the "Company") markets to competitors (see STATE REGULATORY
MATTERS and FEDERAL REGULATORY MATTERS). As there are more communications
alternatives available to customers, and their expectations for better quality
and service at lower prices are rising, it is possible that competitors can
serve parts of the Company's market at lower costs. Business restructuring
resulted from a comprehensive analysis of operations and work processes,
resulting in a strategy to redesign them to improve efficiency and customer
service, to adjust quickly to accelerating change, to implement work force
reductions, and to produce cost savings necessary for the Company to operate in
an increasingly competitive environment.
1993 RESTRUCTURING CHARGES
As a result of the planned business restructuring, 1993 results include pretax
charges of approximately $992 million ($645 million after-tax) comprised of $557
million in employee termination costs, $208 million of process re-engineering
charges and $227 million for the Company's allocation of Telesector Resources
Group Inc. ("Telesector Resources") business restructuring charges.
EMPLOYEE TERMINATION COSTS: In 1993, approximately $287 million of pretax
charges was recorded for employee severance payments and approximately $270
million of pretax charges was recorded for postretirement medical costs for the
workforce reductions (total after-tax charges of $362 million). The severance
charges included salary, payroll taxes, and outplacement costs to be paid under
provisions of the Company's force management plan for management employees and
terms of collective bargaining agreements for nonmanagement employees. At
December 31, 1993, the expected work force reductions by year were as follows:
<TABLE>
<CAPTION>
1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Management 200 700 600 1,500
Nonmanagement 2,300 2,600 2,600 7,500
----- ----- ----- -----
Total 2,500 3,300 3,200 9,000
===== ===== ===== =====
</TABLE>
PROCESS REENGINEERING: Approximately $208 million of the 1993 charges ($135
million after-tax) consists of costs 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")
(collectively, the "Telephone Companies") as a single enterprise under the
"NYNEX" brand. During the period 1994 through 1996, NYNEX Corporation ("NYNEX")
intends to decentralize the provision of residence and business customer service
throughout the region, create regional businesses to focus on unique markets,
and centralize numerous operations and support functions.
15
<PAGE>
Included in this amount are:
<TABLE>
<CAPTION>
(Dollars In Millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Systems redesign $ 8 $ 14 $ - $ 22
Work center consolidation 3 88 1 92
Branding 28 - - 28
Relocation 9 15 1 25
Training 17 22 - 39
Re-engineering implementation 2 - - 2
----- ----- ----- ----
Total $ 67 $ 139 $ 2 $208
===== ===== ===== ====
</TABLE>
Systems redesign is the cost of developing new systems, processes and procedures
to realize operational efficiencies and enable the Company to reduce work force
levels. Commencing in 1994, certain specific new systems development
initiatives were begun to facilitate implementation of process re-engineering
initiatives. These projects consist of radical changes in the applications and
systems supporting business functions. The redesign of these business functions
is an integral part of the restructuring plan, and all the costs associated with
these projects are incremental to ongoing operations. Specifically, only
software purchases and external contractor expenses, which are normally expensed
in accordance with Company policy, were included in the 1993 restructuring
charges for the following business processes:
<TABLE>
<CAPTION>
(Dollars In Millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Customer contact $ 1 $ 8 $- $ 9
Customer operations 7 6 - 13
----- ----- ----- ---
Total $ 8 $ 14 $- $22
===== ===== ===== ===
</TABLE>
Customer contact represents the direct interface with the customer to provide
sales, billing inquiry and repair service scheduling on the first contact,
eliminating the number of handoffs that presently exist. New processes will
allow customers to define the way they want to do business with the Company.
Customer operations focuses on network monitoring and surveillance, trouble
testing, dispatch control, and proactive repair with reliability as a critical
source of competitive advantage.
Work center consolidation costs are incremental costs associated with
establishing work teams in fewer locations by the end of 1996 to take advantage
of lower force levels and system efficiencies, such as lease termination costs
from the date premises are vacated, moving property to new locations and other
consolidation costs. Branding includes the costs to develop a single "NYNEX"
brand identity associated with the restructured business operations. Relocation
costs are required to move personnel to different locations due to work center
consolidations and include employee home sale and purchase expenses, moving
expenses, travel and lodging expenses, and other costs based on the Company's
relocation guidelines and the provisions of collective bargaining agreements.
Training costs are for training nonmanagement employees on newly designed,
cross-functional job positions and re-engineered systems created as part of the
restructuring plan and include tuition, out of pocket course development and
administrative costs, facilities charges, and related travel and lodging. This
training reflects broadening of job skills that will permit one employee to
perform tasks formerly performed by several employees. Re-engineering
implementation costs are the incremental costs to complete the various
re-engineering initiatives.
16
<PAGE>
COSTS ALLOCATED FROM TELESECTOR RESOURCES: Approximately $227 million of
restructuring charges ($148 million after-tax) was allocated to the Company from
Telesector Resources primarily related to its force reduction and re-engineering
programs. The following items were included in these charges:
<TABLE>
<CAPTION>
(Dollars In Millions) 1994 1995 1996 Total
------ ----- ----- -----
<S> <C> <C> <C> <C>
Severance $ 61* $ 7 $ 3 $ 71
Postretirement medical benefits 26 4 1 31
Systems re-engineering 57 50 6 113
Re-engineering implementation 14 14 7 35
Work center consolidation 1 4 - 5
----- ----- ----- ----
Total $ 159 $ 79 $ 17 $255
===== ===== ===== ====
</TABLE>
*1994 includes $28 million of severance amounts associated with the balance of
the 1991 restructuring reserve at December 31, 1993.
1994 ADDITIONAL CHARGES
During 1994 the Company reached new agreements with the Communications Workers
of America ("CWA") and the International Brotherhood of Electrical Workers
("IBEW") (see "Collective Bargaining Agreements" below) which provided for
retirement incentives. The Company also announced retirement incentives for its
management employees. 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. The management and
nonmanagement 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. 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 1993 force reduction
plan. Other retiree costs include vacation buyout and outplacement costs.
The retirement incentives will be offered at different times through 1996
according to local force requirements and are expected to generate additional
charges over that period of time as employees elect to leave the business under
retirement incentives. Much of the cost of the retirement incentives will be
funded by the NYNEX pension plans. In 1994, $523.4 million of pretax charges
($340.2 million after-tax) was recorded, primarily for the incremental cost of
retirement incentives for 3,700 employees who left the Company and for the
Company's allocation from Telesector Resources for its retirement incentives.
The components of the $523.4 million pretax charges are: $309.7 million ($201.3
million after-tax)for pension enhancements, $156.3 million ($101.6 million
after-tax) for associated postretirement medical costs and $57.4 million ($37.3
million after-tax) allocated to the Company from Telesector Resources for its
retirement incentives and related postretirement medical costs.
CURRENT STATUS OF BUSINESS RESTRUCTURING
Employee Reductions: Due to acceleration of certain staff group reductions, the
number of employees leaving the Company under the retirement incentives during
1994 was higher than originally planned, reflecting an acceleration, but not an
increase, in the total number of employees expected to leave. The actual number
of work force reductions in 1994 and the revised expectation for
17
<PAGE>
<TABLE>
<CAPTION>
1995 and 1996 are as follows:
1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Management 1,100 400 - 1,500
Nonmanagement 2,600 3,500 1,400 7,500
----- ----- ----- -----
Total 3,700 3,900 1,400 9,000
===== ===== ===== =====
</TABLE>
Advances in technology and streamlined processes are expected to make it
possible for a smaller work force to maintain the same size network. As a
result, force reductions will continue in areas where redesigned processes can
meet customer service requirements with fewer people. The analysis of
operations and work processes resulted in recommendations for specific process
and system changes, and force reductions were identified as a result. This, in
turn, will enable the Company to reduce expenses.
The reserves established for severance in 1993 have been, and will continue to
be, primarily transferred to the pension liability on a per employee basis as a
result of employees' leaving under the retirement incentives as opposed to
severance provisions of the 1993 force reduction plan. The severance reserves
utilized and the application of the postretirement medical liability established
in 1993 for those employees are detailed in the 1994 column below under
"Retirement Incentives". Assuming that employees will continue to leave under
the retirement incentives, the expected utilization of severance reserves and
the application of the postretirement medical liability established in 1993 have
been revised from the expectations previously reported under the 1993 force
reduction plan as follows:
<TABLE>
<CAPTION>
(Dollars In Millions) 1993 FORCE REDUCTION PLAN RETIREMENT INCENTIVES *
-------------------------- --------------------------
1994 1995 1996 Total 1994** 1995 1996 Total
----- ----- ----- ----- ------- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SEVERANCE
---------
Management $ 17 $ 61 $ 56 $134 $ 113 $ 21 $ - $134
Nonmanagement 71 61 21 153 22 89 42 153
----- ----- ----- ---- ------- ---- --- ----
Total $ 88 $ 122 $ 77 $287 $ 135 $110 $42 $287
===== ===== ===== ==== ======= ==== === ====
<CAPTION>
POSTRETIREMENT MEDICAL
----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management $ 7 $ 24 $ 22 $ 53 $ 46 $ 7 $ - $ 53
Nonmanagement 96 85 36 217 36 123 58 217
----- ----- ----- ---- ------- ---- --- ----
Total $ 103 $ 109 $ 58 $270 $ 82 $130 $58 $270
===== ===== ===== ==== ======= ==== === ====
</TABLE>
* The revised expected utilization for t he severance reserves and for the
application of the postretirement medical liability per year is based on
1994 actual experience for the year and, therefore, updates the amounts
disclosed during 1994 in the Quarterly Reports on Form 10-Q.
** The severance reduction amount is comprised of $107 million of severance
reserves transferred to the pension liability on a per employee basis, and $8
million utilized for other retiree costs. In addition, the severance and
postretirement medical reductions include $20 million and $8 million,
respectively, which was transferred from the Company to Telesector Resources
to cover the severance and postretirement medical costs associated with
approximately 217 employees who transferred from the Company to Telesector
Resources and subsequently left in 1994 under the pension enhancements.
18
<PAGE>
Process Re-engineering: The actual 1994 utilization of reserves and the revised
expected utilization for 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
(Dollars In Millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Systems redesign $ - $ 37 $ - $ 37
Work center consolidation 10 67 28 105
Branding 15 10 - 25
Relocation - 3 - 3
Training - 13 19 32
Re-engineering implementation 1 5 - 6
----- ----- ----- ----
Total $ 26 $ 135 $ 47 $208
===== ===== ===== ====
</TABLE>
Systems redesign: During 1994, it was determined that systems redesign would
require a larger than anticipated upfront effort to fully integrate interfaces
between various systems to permit development of multi-tasking capabilities. A
higher degree of complexity and additional functionality required by real time,
interactive systems contributed to the increase. The actual utilization in 1994
and the revised expected utilization in 1995 and 1996 of the systems redesign
reserves are as follows:
<TABLE>
<CAPTION>
(Dollars In Millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Customer contact $- $ 21 $- $21
Customer operations - 16 - 16
----- ----- ----- ---
Total $- $ 37 $- $37
===== ===== ===== ===
</TABLE>
Work center consolidation has been revised and expected costs have increased
slightly due to an increase in the number of work centers from what was
originally planned based on the union agreements. Branding will require
additional time to complete. Relocation of employees has been significantly
revised due to the increase in work centers and terms of the union agreements.
Training was delayed due to the timing of the union agreements and the higher
degree of complexity of the systems redesign, total expected costs were
decreased due to the planned use of more in-house training. Re-engineering
implementation cost more than expected because of an expanded work effort for
the initiatives and the related retention of outside consultants.
Costs allocated from Telesector Resources: The actual 1994 utilization of
reserves with revised expected utilization for 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
(Dollars In Millions) 1994 1995 1996 Total
------ ----- ----- -----
<S> <C> <C> <C> <C>
Severance $ 71* $ - $ - $ 71
Postretirement medical
benefits 31 - - 31
Systems re-engineering 45 65 - 110
Re-engineering implementation 21 11 6 38
Work center consolidation - 3 2 5
----- ----- ----- ----
Total $ 168 $ 79 $ 8 $255
===== ===== ===== ====
</TABLE>
* 1994 utilization includes $28 million of reserves accrued in 1991 for
severance costs allocated to the Company for Telesector Resources pension
enhancements.
Cost Savings
During 1994, the Company began to realize significant expense savings
associated with force reductions. The Company experienced a $63 million
reduction in wages as well as a $26 million reduction in costs allocated from
Telesector Resources as a result of employees' leaving primarily under
retirement incentives.
19
<PAGE>
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. Wage rates will increase
4.0%, 3.5% and 3.0% in August 1995, 1996 and 1997, respectively. 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.
STATE REGULATORY MATTERS
------------------------
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 New York State Public Service Commission ("NYSPSC") that
would modify the manner in which the Company is regulated by the NYSPSC over the
next five to seven years. The Plan was developed by the parties in the third
phase of the incentive regulation proceeding that the NYSPSC instituted in 1992.
In the initial 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 proceeding.
The Plan is a performance-based plan that, if approved by the NYSPSC, will
operate as follows:
(1) The new framework replaces 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, depending on whether the Plan remains in effect for
five or seven years, the Company's prices will have been decreased by an
amount that would produce a $375 or $425 million reduction, respectively, 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 in 1995. During its term, the Plan allows
certain prices to be adjusted to take into account an inflation index in
excess of four percent annually or costs associated with government mandates
and other defined "exogenous" events.
(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 encourages the Company to achieve substantial productivity gains
over the term of the Plan. The NYSPSC may terminate the Plan at the end
20
<PAGE>
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 requires the Company to pay ILP implementation costs.
(5) Approximately $122 million of the $153 million 1994 "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 was implemented in 1994.
On March 14, 1995, NYSPSC administrative law judges issued a recommended
decision that gave a positive evaluation of the Plan's concept and suggested
that, with some modifications in the service and pricing provisions, the Plan
"can provide a sound regulatory regime." It is expected that the NYSPSC will
issue a decision on the Plan during the second quarter of 1995.
In the first phase of the incentive regulation proceeding, the Company and the
NYSPSC agreed to a service quality plan for 1994 ("Service Plan"). In the
Service Plan, the Company committed to achieve certain measurable levels of
customer service, or, failing to achieve those levels, accept a penalty, the
amount of which would be determined by the achieved service performance levels.
Based on the service performance results through December 31, 1994, it is
probable that the Company will incur a penalty. The precise amount of the
penalty obligation cannot be determined pending further NYSPSC action regarding
the waiver of certain service results for the period in question, but it is
estimated that the penalty will be in the range of $40 to $50 million. The
Service Plan is silent as to how the Company must satisfy any penalty. The
ultimate resolution as to the disposition of the Service Plan penalty obligation
through an additional capital investment to improve infrastructure, a refund to
ratepayers, or other means will be made by the NYSPSC in the future. The NYSPSC
may allow all interested parties the opportunity to state their positions.
On February 4, 1993, the NYSPSC issued an order with respect to the Second and
Third Stages of the Company's 1990 General Rate Case, permitting the Company to
retain 1993 earnings above a return on equity of 11.7% and up to 12.7% if it met
specified service-quality criteria, with earnings above 12.7% to be held for the
ratepayers' benefit. The Company has submitted a report to the NYSPSC showing
1993 earnings below 11.7%. The NYSPSC staff is currently reviewing the
Company's submission.
As an outgrowth of the Company's 1990 general rate case, in November 1990, the
NYSPSC commenced a proceeding to review the financial effects on ratepayers of
the transactions in the years 1984 through 1990 between the Company and other
NYNEX affiliates. In March 1991, the NYSPSC authorized a $250 million increase
in the Company's rates, effective January 1, 1991, of which $47.5 million
annually remains subject to refund pending resolution of certain affiliate
transactions issues. The NYSPSC selected an independent consulting firm to
perform an audit of such transactions. The consultant commenced the
21
<PAGE>
audit in November 1991 and is expected to complete the audit and submit a final
report detailing its findings and recommendations in 1995. The NYSPSC may hold
hearings on the consultant's audit report.
FEDERAL REGULATORY MATTERS
--------------------------
Effective January 1, 1991, the Federal Communications Commission ("FCC") adopted
incentive regulation in the form of price caps with respect to interstate
services provided by the Company. Price caps focus on local exchange carriers'
("LECs") prices rather than costs and set maximum limits on prices LECs can
charge for their services. These limits are subject to adjustment each year to
reflect inflation, a productivity factor and certain other cost changes. Under
FCC price cap regulation, the Company may earn a return on equity of up to
approximately 15%. Above that level, earnings are subject to equal sharing with
ratepayers, until they reach an effective cap on interstate return on equity of
approximately 18.7%.
In 1992, the Telephone Companies implemented a plan to unify their interstate
access rates which, including the effect of the Company's annual price cap
tariff filings, resulted in a decrease in the Company's interstate access
revenues of approximately $10 million during the tariff period ending June 30,
1992, a decrease of approximately $80 million during the tariff period ending
July 1, 1993, a decrease of approximately $55 million during the tariff period
ending June 30, 1994 and will result in a decrease of approximately $9.2 million
during the tariff period ending June 30, 1995. The Telephone Companies
implemented a phase-in payment plan in order to avoid sudden changes in each of
the Telephone Company's earnings resulting from the unified rate structure. A
substantial portion of the decrease in the Company's access revenues during
those tariff periods was offset by the payment plan. With unification of
interstate rates, the Telephone Companies report one unified interstate rate of
return to the FCC, which will be the basis for determining any possible refund
obligations due to overearnings as well as any need to increase interstate rates
due to underearnings under the price cap plan.
Tariff revisions were filed by the Telephone Companies with the FCC on September
1, 1994 and amended on December 19, 1994, to amend price cap indexes to reflect
additional exogenous costs resulting from the implementation of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("OPEB"). The filing as amended
reflected $42 million of costs already accrued, increased annual costs of $21
million and increased rates of $2.2 million. The filing follows a July 12, 1994
decision of the Court of Appeals overturning the FCC's prior order denying
exogenous treatment of additional OPEB costs. On December 29, 1994, the FCC's
Common Carrier Bureau (the "Bureau") issued an order allowing the proposed rates
to go into effect December 30, 1994, subject to an investigation and accounting
order. Commencing December 30, 1994, the Telephone Companies began collecting
these revenues, subject to possible refund pending resolution of the Bureau's
investigation.
Following the FCC's adoption of physical collocation rules in September 1992,
and 1993, the Company filed Special Access Expanded Interconnection tariffs in
February 1993 and Switched Transport Expanded Interconnection tariffs in
November 1993. Pursuant to provisions of the FCC rules that permit additional
pricing flexibility when physical collocation for switched access reaches a
threshold penetration level, on January 24, 1994, the Company filed volume and
term discount tariffs, which became effective May 24, 1994, for switched
transport in certain areas of New York. On June 10, 1994, the United States
22
<PAGE>
Court of Appeals for the District of Columbia Circuit overturned the FCC's
physical collocation rules. On July 25, 1994, the FCC adopted rules making
physical collocation optional but requiring virtual collocation where physical
collocation is not offered. The Company decided to continue offering physical
collocation.
OPERATING REVENUES
------------------
Operating revenues for the year ended December 31, 1994 decreased $110.4
million, or 1.4%, from the same period last year. This decrease in total
operating revenues is comprised of the following:
<TABLE>
<CAPTION>
Increase (Decrease)
(Dollars in Millions)
-------------------
<S> <C>
Local service $ 47.4
Long distance (31.7)
Network access 15.6
Other (141.7)
------
$(110.4)
======
</TABLE>
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 $176 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 $135 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 due to a $13 million revenue reduction pursuant to an
NYSPSC order (see STATE REGULATORY MATTERS above), a $12 million decrease
attributable to the shift in interstate toll revenues from long distance to
network access (see Network access revenues below), and a $6 million decrease
due to decreased 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 $36 million
principally due to increased usage, a $12 million increase due to the shift of
interstate toll revenues from long distance to network access (see Long distance
revenues above), and a $9 million increase due to the recognition of revenues
previously deferred for other postretirement medical costs (see FEDERAL
REGULATORY MATTERS above). These increases were partially offset by a $44
million reduction in interstate rates, which included the phase-out of the equal
access cost recovery charge, and a $12 million revenue reduction pursuant to an
NYSPSC order (see STATE REGULATORY MATTERS above). Special access revenues are
charges for dedicated lines that connect terminal
23
<PAGE>
locations of interexchange carriers and end users. Special access revenues
decreased $20 million primarily due to an $8 million 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 $153 million reduction in revenues as ordered by the
NYSPSC (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 $14 million decrease due to the 1994 cessation of imputed
revenues for procurement costs. Partially offsetting these decreases were a $22
million increase due to the imputation of revenue associated with the enactment
of the Revenue Reconciliation Act of 1993, a $15 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 and a $10 million increase due to the 1993
reversal of a 1992 deferral of revenues for concession service.
OPERATING EXPENSES
------------------
Operating expenses for the year ended December 31, 1994 decreased $546.6
million, or 7.3%, from the same period last year. This decrease in total
operating expenses is comprised of the following:
<TABLE>
<CAPTION>
Increase (Decrease)
(Dollars in Millions)
-------------------
<S> <C>
Depreciation and amortization $ 47.7
Taxes other than income taxes (28.9)
All other:
Business Restructuring charges
recorded in 1994 523.4
Business Restructuring charges
recorded in 1993 (991.8)
Employee related (86.8)
Other (10.2)
------
$(546.6)
======
</TABLE>
Depreciation and amortization increased principally due to increased depreciable
plant investment.
Taxes other than income taxes decreased from the same period last year due
principally to a $26 million decrease in property taxes resulting from lower
assessments of property value and a $9 million decrease in revenue taxes
primarily attributable to a decrease in the surcharge rate from 15% to 12.5%.
These decreases were partially offset by a $4 million increase in New York State
capital stock tax.
Business restructuring charges recorded in 1994 consisted of incremental costs
related to pension enhancements. Business restructuring charges recorded in the
fourth quarter of 1993 consisted of costs related to consolidation of work
locations, re-engineering, and incremental costs associated with work force
reductions. (See BUSINESS RESTRUCTURING above.)
Employee related costs consist primarily of wages, payroll taxes, and employee
24
<PAGE>
benefits. Benefit expenses decreased a net $120 million primarily due to the
NYSPSC-ordered recognition in 1993 of $75 million of deferred pension costs, a
$61 million decrease attributable to the elimination of an assumed benefit
improvement and greater than anticipated return on pension assets, an $18
million decrease due to a 1993 accrual for a supplemental executive retirement
plan, and a $17 million decrease as a result of the 1994 deferral of
postemployment benefits as ordered by the NYSPSC, which will be amortized over
five years. These decreases were partially offset by a $39 million increase
attributable to the amortization of deferred pension costs pursuant to an NYSPSC
approved plan and a net $14 million increase in medical costs, primarily
attributable to a $20 million increase in medical costs for retirees principally
due to the requirements of the collective bargaining agreements and other
medical plan amendments partially offset by a $6 million decrease in medical
costs for active employees due principally to a reduction in the work force
attributable to the Company's force reduction program and the transfer of
employees to Telesector Resources. Wages and payroll taxes increased a net $33
million principally due to increases in salary and wage rates, and additional
labor costs due to initiatives to improve service quality and to service
increased demand partially offset by reductions in the work force attributable
to the Company's force reduction program and the transfer of employees to
Telesector Resources as part of the single enterprise reorganization (see Other
operating expenses below).
Other operating expenses consist primarily of contracted and centralized
services, rent and other general and administrative costs. The decrease in
other operating expenses was due principally to a $32 million decrease due to
the completion of equal access amortization in 1993, a $16 million decrease in
rental expense attributable to the Company's work center consolidation efforts,
a $9 million decrease in intrastate access expense due to a $5 million reduction
in expense under the terms of the plan and a $4 million reduction as a result of
an accrual reduction for overestimations of the Company's obligation to the
independent telephone companies in the pool, a $9 million decrease attributable
to the recognition in 1993 of inside wire expense deferred in 1991 and 1992, a
$9 million decrease due to the Company's contractual share of a predivestiture
AT&T liability recorded in 1993, and a $4 million decrease in advertising
expense. Partially offsetting these decreases were a $42 million net increase
in contracted and centralized services due to: an increase in charges from
affiliated companies primarily attributable to the increase in Telesector
Resources' contracted and centralized services and the transfer of employees
from the Company to Telesector Resources (see Employee related costs above), a
$26 million increase in bad debt expense recognized pursuant to provisions of
the billing and collection contract, primarily with AT&T, and a $10 million
increase in sales agent commissions due to increased commission rates and
promotion of new products.
OTHER INCOME - NET
------------------
Other income - net for the year ended December 31, 1994 increased $1.2 million
over the same period last year. This increase was due to higher expenses in
1993 for the interstate portion of call premiums and other charges associated
with the refinancings of long-term debt. This increase was partially offset by
a 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.
25
<PAGE>
INTEREST EXPENSE
----------------
Interest expense for the year ended December 31, 1994 decreased $34.2 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
1993 for customer overbillings, partially offset by an increase in interest on
advances from NYNEX primarily due to a higher advance balance and by rising
short-term interest rates.
INCOME TAXES
------------
Income taxes for the year ended December 31, 1994 increased $208.2 million over
the same period last year, principally due to an increase in taxable income and
a $28 million increase attributable to the imputation of revenues as a result of
the enactment of the Revenue Reconciliation Act of 1993
(see OPERATING REVENUES above).
FINANCING
---------
On February 28, 1994, the Company issued $450 million of its Thirty Year 7 1/4%
Debentures, due February 15, 2024, and $150 million of its Ten Year 6 1/4%
Notes, due February 15, 2004. The net proceeds were used to repay short-term
advances from NYNEX. At December 31, 1994, the Company had $250 million of
unissued, unsecured debt securities registered with the Securities and Exchange
Commission.
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 and 1994 business restructuring charges (see BUSINESS
RESTRUCTURING), beginning in March 1994, the Company did not meet the earnings
coverage requirement. As of December 31, 1994, the Company meets the earnings
coverage requirement.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS
Report of Management
--------------------
Management of New York Telephone Company and its subsidiary (the "Company") has
the responsibility for preparing the accompanying consolidated financial
statements and for their integrity and objectivity. The consolidated financial
statements were prepared in accordance with generally accepted accounting
principles and, in Management's opinion, are fairly presented. The consolidated
financial statements include amounts that are based on Management's best
estimates and judgments. Management also prepared the other information in this
report and is responsible for its accuracy and consistency with the consolidated
financial statements.
The consolidated financial statements have been audited by Coopers & Lybrand
L.L.P. ("Coopers & Lybrand"), independent accountants, whose appointment was
approved by the Company's Board of Directors. Management has made available to
Coopers & Lybrand all of the Company's financial records and related data, as
well as the minutes of the shareowner's and directors' meetings. Furthermore,
Management believes that all representations made to Coopers & Lybrand during
its audit were valid and appropriate.
26
<PAGE>
Management of the Company has established and maintains an internal control
structure that is designed to provide reasonable assurance as to the integrity
and reliability of the consolidated financial statements, the protection of
assets from unauthorized use or disposition, and the prevention and detection of
fraudulent financial reporting. The concept of reasonable assurance recognizes
that the cost of the internal control structure should not exceed the benefits
to be derived. The internal control structure provides for appropriate division
of responsibility and is documented by written policies and procedures that are
communicated to employees with significant roles in the financial reporting
process. Management monitors the internal control structure for compliance,
considers recommendations for improvement from both the internal auditors and
Coopers & Lybrand, and updates such policies and procedures as necessary.
Monitoring includes an internal auditing function to independently assess the
effectiveness of the internal controls and recommend possible improvements
thereto. Management believes that the internal control structure of the Company
is adequate to accomplish the objectives discussed herein.
The Audit Committee of the Board of Directors, which is comprised of directors
who are not employees, meets periodically with Management, the internal auditors
and Coopers & Lybrand to review the manner in which they are performing their
responsibilities and to discuss matters relating to auditing, internal controls
and financial reporting. Both the internal auditors and Coopers & Lybrand
periodically meet privately with the Audit Committee and have access to the
Audit Committee at any time.
Management also recognizes its responsibility for conducting Company activities
under the highest standards of personal and corporate conduct. This
responsibility is accomplished by fostering a strong ethical climate as
characterized in the NYNEX Code of Business Conduct, which is publicized
throughout the Company. The Code of Conduct addresses, among other things,
standards of personal conduct, potential conflicts of interest, compliance with
all domestic and foreign laws, accountability for Company property and the
confidentiality of proprietary information.
R. A. Jalkut
President and Chief Executive Officer
Mel Meskin
Vice President-Finance & Treasurer
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Share Owner and Board of Directors of
New York Telephone Company:
We have audited the consolidated financial statements and the consolidated
financial statement schedule of New York Telephone Company and Subsidiary listed
in Item 14(a)(1) and (2) of this Form 10-K. These consolidated financial
statements and consolidated financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
York Telephone Company and Subsidiary as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. In addition, in our opinion, the consolidated
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
As discussed in Notes A and C to the consolidated financial statements, the
Company changed its methods of accounting for income taxes, postretirement
benefits other than pensions, and postemployment benefits in 1993.
Coopers & Lybrand L.L.P.
New York, New York
February 8, 1995
28
<PAGE>
NEW YORK TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
-------------------------------------------------------
Dollars in Millions
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1994 1993 1992
<S> <C> <C> <C>
OPERATING REVENUES
------------------
Local service $4,743.3 $4,695.9 $4,618.9
Long distance 348.1 379.8 334.4
Network access (Note (H)) 2,245.7 2,230.1 2,270.0
Other (Notes (H) and (I)) 399.5 541.2 523.1
-------- -------- --------
Total operating revenues 7,736.6 7,847.0 7,746.4
-------- -------- --------
OPERATING EXPENSES (Note (O))
------------------
Maintenance and support 2,448.7 2,527.6 2,184.8
Depreciation and amortization 1,486.5 1,438.8 1,411.0
Marketing and customer services 979.1 1,140.7 930.3
Taxes other than income taxes
(Note (J)) 789.6 818.5 869.9
Provision for uncollectibles 79.9 77.8 75.8
Other 1,174.2 1,501.2 786.9
-------- -------- --------
Total operating expenses 6,958.0 7,504.6 6,258.7
-------- -------- --------
Operating income 778.6 342.4 1,487.7
Other income - net 21.2 20.0 74.4
Interest expense 314.4 348.6 362.9
-------- -------- --------
Earnings before Income taxes and
cumulative effect of change in
accounting principle 485.4 13.8 1,199.2
Income taxes (Note (B)) 140.4 (67.8) 342.8
-------- -------- --------
Earnings before cumulative effect of
change in accounting principle 345.0 81.6 856.4
Cumulative effect of change in
accounting for postemployment
benefits, net of taxes (Note (C)) - (89.3) -
-------- -------- --------
NET INCOME (LOSS) $ 345.0 $ (7.7) $ 856.4
======== ======== ========
RETAINED EARNINGS
-----------------
Beginning of year $1,082.0 $1,813.6 $1,556.7
Net income (loss) 345.0 (7.7) 856.4
Dividends (724.8) (723.9) (599.5)
-------- -------- --------
End of year $ 702.2 $1,082.0 $1,813.6
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
NEW YORK TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
---------------------------
Dollars in Millions
<TABLE>
<CAPTION>
December 31,
--------------------
1994 1993
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary cash investments $ 23.1 $ 7.5
Receivables
Trade (net of allowance of $133.6 and
$134.8, respectively) (Note (H)) 1,441.4 1,368.4
Affiliates (Note (I)) 24.7 30.9
Other 18.3 28.2
Deferred charges (Notes (B) and (C)) 39.0 55.5
Deferred income taxes 105.1 99.4
Inventory 73.5 72.4
Prepaid expenses and other 57.2 102.9
--------- ---------
Total current assets 1,782.3 1,765.2
--------- ---------
Telephone plant - at cost (Note (D)) 20,129.6 19,696.5
Less: accumulated depreciation 8,106.9 7,580.5
--------- ---------
Telephone plant - net 12,022.7 12,116.0
--------- ---------
Deferred charges and other (Notes (B) and (C)) 1,491.2 1,554.2
--------- ---------
Total Assets $15,296.2 $15,435.4
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
NEW YORK TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
---------------------------
Dollars in Millions
<TABLE>
<CAPTION>
December 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
LIABILITIES AND SHARE OWNER'S EQUITY
------------------------------------
Current liabilities:
Accounts payable
AT&T (Note (H)) $ 218.5 $ 216.8
Affiliates (Note (I)) 671.6 662.5
Compensated absences 155.1 154.4
Payroll 38.2 50.2
Trade and other (Note (O)) 913.0 660.8
Short-term debt (Note (F)) 294.2 255.7
Dividends payable 181.2 181.0
Taxes accrued 72.9 48.3
Advance billing and customers' deposits 178.3 187.2
Interest accrued 74.7 58.2
--------- ---------
Total current liabilities 2,797.7 2,475.1
--------- ---------
Long-term debt (Notes (E) and (N)) 3,972.4 3,972.1
Deferred income taxes 1,611.3 1,826.9
Unamortized investment tax credits 212.5 244.9
Other long-term liabilities and deferred credits
(Notes (B), (C), and (O)) 1,896.9 1,731.2
--------- ---------
Total long-term liabilities 7,693.1 7,775.1
--------- ---------
Total Liabilities 10,490.8 10,250.2
--------- ---------
Commitments and contingencies (Notes (G), (H), (K)
and (L))
Share owner's equity:
Common stock - one share,
without par value 4,103.2 4,103.2
Retained earnings 702.2 1,082.0
--------- ---------
Total Share Owner's Equity 4,805.4 5,185.2
--------- ---------
Total Liabilities and Share Owner's Equity $15,296.2 $15,435.4
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
NEW YORK TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Dollars in Millions
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 345.0 $ (7.7) $ 856.4
--------- --------- ---------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 1,486.5 1,438.8 1,411.0
Allowance for funds used during
construction - equity component (20.0) (23.1) (24.6)
Changes in operating assets
and liabilities:
Receivables (56.9) (12.4) 52.8
Current Deferred charges, Inventory
and Prepaid expenses and other 61.1 39.8 78.1
Deferred income taxes (5.7) (193.9) (40.0)
Accounts payable, Taxes accrued,
Advance billing and customers'
deposits and Interest accrued 283.9 217.9 (258.1)
Deferred income taxes and Unamortized
investment tax credits (248.0) (56.7) 4.0
Other long-term liabilities and
deferred credits 165.7 508.1 (118.3)
Other - net 21.3 235.0 (28.7)
--------- --------- ---------
Total adjustments 1,687.9 2,153.5 1,076.2
--------- --------- ---------
Net cash provided by operating activities 2,032.9 2,145.8 1,932.6
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,329.9) (1,342.4) (1,220.6)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX (550.5) 485.0 263.7
Dividends paid to NYNEX (724.6) (717.9) (600.8)
Issuance of long-term debt 593.5 1,622.1 -
Repayment of long-term debt and
capital leases (5.8) (5.3) (304.8)
Debt refinancings and call premiums - (2,204.5) (66.1)
--------- --------- ---------
Net cash used in financing activities (687.4) (820.6) (708.0)
--------- --------- ---------
Net increase (decrease)in Cash and
temporary cash investments 15.6 (17.2) 4.0
Cash and temporary cash investments at
beginning of year 7.5 24.7 20.7
--------- --------- ---------
Cash and temporary cash investments at
end of year $ 23.1 $ 7.5 $ 24.7
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
NEW YORK TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(A) Accounting Policies
Basis Of Presentation
---------------------
The consolidated financial statements include the accounts of New York Telephone
Company and its wholly-owned subsidiary, Empire City Subway Company (Limited)
(jointly referred to as the "Company"). For financial statement purposes all
significant intercompany transactions have been eliminated. The Company is a
wholly-owned subsidiary of NYNEX Corporation ("NYNEX") and primarily provides
exchange telecommunications and exchange access services. The 1993 and 1992
consolidated financial statements have been reclassified to conform to the
current year's format.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, including the application of Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" ("Statement No. 71"), to the effects of rate
actions by the Federal Communications Commission (the "FCC") and the New York
State Public Service Commission ("NYSPSC"). The rate actions of regulators can
provide reasonable assurance of the existence of an asset, reduce or eliminate
the value of an asset, impose a liability, or eliminate a previously imposed
liability on a regulated enterprise. The Company applies Statement No. 71
instead of any conflicting provisions of accounting standards in other
authoritative pronouncements. The effects of Statement No. 71 are reflected in
the consolidated financial statements and material effects, where practicable to
determine, are detailed in this Note and the individual Notes to Consolidated
Financial Statements related to the specific financial statement line items.
The major components of non-plant regulatory net assets at December 31, 1994 and
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
December 31,
Dollars in Millions 1994 1993
------------------- ------ ------
<S> <C> <C>
Compensated absences $127.4 $129.0
Deferred pension costs 278.1 317.0
Refinancing costs 203.6 208.5
Deferred taxes 87.3 41.5
Other 144.7 155.4
------ ------
Total $841.1 $851.4
====== ======
</TABLE>
The Company has a 66 2/3% ownership interest in Telesector Resources Group, Inc.
("Telesector Resources") and shares voting rights equally with the other owner,
New England Telephone and Telegraph Company ("New England Telephone"), which is
a wholly-owned subsidiary of NYNEX. The Company uses the equity method of
accounting for its investment in Telesector Resources.
33
<PAGE>
Cash and Temporary Cash Investments
-----------------------------------
The Company's cash management policy is to make funds available in banks when
checks are presented. At December 31, 1994 and 1993, the Company had recorded
in Accounts payable-Trade and Other checks outstanding but not yet presented for
payment of $75.5 and $95.4 million, respectively.
Inventory
---------
Inventory, consisting of materials and supplies, is carried principally at
average cost.
Telephone Plant
---------------
Telephone plant is stated at its original cost.
When depreciable plant is disposed of, the carrying amount, salvage, and the
cost to remove such plant are charged to accumulated depreciation.
Depreciation rates used by the Company are prescribed by the FCC and by the
NYSPSC (the "commissions") for interstate operations and intrastate operations,
respectively. All rates are calculated on a straight-line basis using the
concept of "remaining life." The represcription process requires the Company to
perform a detailed study using actual and estimated factors to develop future
life expectancy of telephone plant investments, including technological
evolution, competition, asset utilization, modernization plans and regulatory
commitments. Both the Company and the commissions' staffs submit factors deemed
appropriate to permit asset recovery. The commissions select the one they
believe to be the most appropriate from among these alternatives. Utilizing
these factors, new depreciation rates are set to enable the Company to recover
costs of plant additions as well as to permit the prospective recovery of
deficiencies in existing depreciation reserve balances as a result of shorter
asset lives to be utilized on a going forward basis. The represcription process
occurs on a triennial basis and includes the commissions and the Company. Once
new depreciation rates are set, the commissions may take rate actions to permit
the Company to recover costs if deemed necessary. In 1992, the FCC prescribed
new depreciation rates for interstate operations, and in 1991, the NYSPSC
adopted new depreciation rates for intrastate operations. The application of
the interstate and intrastate rates resulted in average effective composite
rates of 7.7%, 7.6% and 7.8% for 1994, 1993 and 1992, respectively.
The quantification of the difference between recorded depreciation and
depreciation that would have been recorded in accordance with generally accepted
accounting principles for an entity not subject to the provisions of Statement
No. 71 cannot be precisely estimated at this time, but is expected to be between
$2.5 and $3.5 billion.
The NYSPSC allows the Company to capitalize interest, including an allowance on
share owner's equity, as a cost of constructing certain telephone plant,
included in Telephone Plant Under Construction, and as income, included in
Other income - net. Such income will be realized over the service life of the
plant as the resulting higher depreciation expense is recovered through the
rate-making process. The FCC requires the same treatment as the NYSPSC for
34
<PAGE>
long-term plant under construction, while short-term plant under construction is
included in the rate base, thereby eliminating the need for any interest accrual
mechanism.
Computer Software Costs
-----------------------
The Company capitalizes initial right-to-use fees for central office switching
equipment, including initial operating system and initial application software
costs. For non-central office equipment, only the initial operating system
software is capitalized. Subsequent additions, modifications, or upgrades of
initial software programs, whether operating or application packages, are
expensed. This accounting treatment conforms to the rules set forth by the
FCC.
Compensated Absences
--------------------
Effective January 1, 1988, the Uniform System of Accounts Rewrite ("USOAR")
required the Company to change its accounting for compensated absences to record
expenses in the year in which the liability is incurred. Previously, the
Company recorded the current year's liability for compensated absences with a
corresponding deferred charge and recorded the expense when paid. As a result
of implementation of the USOAR, the deferred charge as of December 31, 1987 is
being recovered over a ten-year period for interstate purposes. In its order in
the first phase of the incentive regulatory proceeding, the NYSPSC adopted
recognition of compensated absences. Management believes these costs will be
recovered through the rate-making process.
Refinancing Charges
-------------------
The Company defers the intrastate portion of call premiums and other charges
associated with the redemption of long-term debt and expenses the interstate
portion of these charges, as required by the NYSPSC and the FCC, respectively.
The deferred amounts are amortized over periods stipulated by the NYSPSC. Prior
to January 1, 1988, these charges were deferred and amortized for both
intrastate and interstate purposes.
Income Taxes
------------
NYNEX and its subsidiaries, including the Company, file a consolidated Federal
income tax return. The Company's provision for federal income taxes currently
payable is allocated in accordance with its contribution to the consolidated
group's taxable income and tax credits.
Deferred income taxes are provided to reflect the effect of temporary
differences in the recognition of revenue and expenses for financial reporting
and income tax purposes.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement No. 109"), which
superseded Statement of Financial Accounting Standards No. 96, "Accounting for
Income Taxes." The effect of implementing Statement No. 109 on the Company's
financial position and results of operations was not significant. Statement No.
109 requires that deferred tax assets and liabilities be measured based on the
enacted tax rates that will be in effect
35
<PAGE>
in the years in which temporary differences are expected to reverse. However,
for the Company, the treatment of excess deferred taxes resulting from the
reduction of tax rates in prior years is subject to federal income tax and
regulatory rules.
Deferred income tax provisions of the Company are based upon amounts recognized
for rate-making purposes. The Company recognizes a deferred tax liability and
establishes a corresponding regulatory asset for tax benefits previously flowed
through to ratepayers. The major temporary difference that gave rise to the net
deferred tax liability is depreciation, which for income tax purposes is
determined based on accelerated methods and shorter lives.
Statement No. 71 requires the Company to reflect the additional deferred income
taxes as regulatory assets to the extent that they will be recovered in the
rate-making process. In accordance with the normalization provisions under
federal tax law, the Company reverses excess deferred taxes relating to
depreciation of regulated assets over the regulatory lives of those assets. For
other excess deferred taxes, the commissions generally allow amortization of
excess deferred taxes over the reversal period of the temporary difference
giving rise to the deferred taxes.
On August 10, 1993, the Revenue Reconciliation Act of 1993 was signed into law,
and the statutory corporate federal income tax rate increased to 35% from 34%,
retroactive to January 1, 1993. In accordance with Statement No. 109, the
Company adjusted its current and deferred income tax balances to reflect the tax
rate change. The Company reflected the additional deferred income taxes arising
from the tax rate increase primarily as increases to the regulatory asset and
decreases to the regulatory liability.
The Tax Reform Act of 1986 repealed the investment tax credit ("ITC"), effective
January 1, 1986. As required by tax law, ITC for the Company was deferred and
is amortized as a reduction to tax expense over the estimated service lives of
the related assets giving rise to the credits.
(B) Income Taxes
The components of Income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1994 1993* 1992
------------------- -------- -------- --------
<S> <C> <C> <C>
Federal:
Current $ 435.9 $ 352.5 $478.2
Deferred - net (268.0) (388.3) (97.3)
Deferred tax credits - net (32.4) (37.4) (42.3)
State and local 4.9 5.4 4.2
------- ------- ------
Total $ 140.4 $ (67.8) $342.8
======= ======= ======
</TABLE>
* Does not include the deferred tax benefit of $48.1 million associated with
the Cumulative effect of change in accounting for postemployment benefits.
36
<PAGE>
A reconciliation between the federal income tax expense (benefit) computed at
the statutory rate and the Company's effective tax expense (benefit) is as
follows:
<TABLE>
<CAPTION>
1994 1993* 1992
------ ------ ------
<S> <C> <C> <C>
Federal income tax expense
computed at statutory rate $169.9 $ 4.8 $407.7
a. Amortization of excess deferred
federal income taxes due to
change in the tax rates (29.9) (38.7) (42.2)
b. Amortization of investment tax
credits over the life of the assets
which gave rise to the credits (32.4) (37.4) (42.3)
c. Depreciation of certain taxes and
payroll-related construction costs
capitalized for financial statement
purposes, but deducted for income
tax purposes in prior years 13.1 14.8 22.2
d. Federal income tax return
adjustment for the difference
between the accrued and actual
tax expense (0.4) (5.7) (0.5)
e. Allowance for funds used during
construction, which is excluded
from taxable income, net of
applicable depreciation 6.7 6.6 2.0
f. Other items-net 13.4 (12.2) (4.1)
------ ------ ------
Income tax expense (benefit) $140.4 $(67.8) $342.8
====== ====== ======
</TABLE>
* Does not include the deferred tax benefit of $48.1 million associated with
the Cumulative effect of change in accounting for postemployment benefits.
Instead of a state income tax, the Company is subject to a gross receipts tax
that is not included above (see Note J). Temporary differences for which
deferred income taxes have not been provided by the Company are represented
principally by "c" above. Only taxes currently payable on these temporary
differences are recognized in the rate-making process.
37
<PAGE>
The components of current and long-term deferred tax assets and liabilities at
December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1994 1993
------------------- -------- --------
<S> <C> <C>
Deferred tax assets
Restructuring charges $ 122.9 $ 179.6
Employee benefits 454.3 362.6
Unamortized investment tax credits 114.7 132.7
Other 166.9 131.4
-------- --------
858.8 806.3
-------- --------
Deferred tax liabilities
Depreciation and amortization 2,062.0 2,152.8
Other 303.0 381.0
-------- --------
2,365.0 2,533.8
-------- --------
Net deferred tax liabilities $1,506.2 $1,727.5
======== ========
</TABLE>
At December 31, 1994 and 1993, the Company recorded approximately $421.5 and
$450.3 million, respectively, in deferred taxes representing the cumulative
amount of income taxes on temporary differences that were previously flowed
through to ratepayers. The Company recorded a corresponding regulatory asset in
deferred charges for these items, representing amounts that will be recovered
through the rate-making process. These deferrals have been increased for the
tax effect of future revenue requirements and will be amortized over the lives
of the related depreciable assets concurrently with their recovery in rates.
The Company recorded a regulatory liability at December 31, 1994 and 1993 of
approximately $293.2 and $383.6 million, respectively, in Other long-term
liabilities and deferred credits and in Accounts payable - Trade and other. A
substantial portion of the regulatory liability relates to the reduction in the
statutory federal income tax rate in 1986 and unamortized ITC. These
liabilities have been increased for the tax effect of future revenue
requirements.
(C) Employee Benefits
Pensions
--------
Substantially all of the Company's employees are covered by one of two NYNEX
noncontributory defined benefit pension plans (the "Plans"). Benefits for
management employees are based on a modified career average pay plan while
benefits for nonmanagement employees are based on a nonpay-related plan.
Contributions are made, to the extent deductible under the provisions of the
Internal Revenue Code, to an irrevocable trust for the sole benefit of pension
plan participants.
Total pension (benefit) cost for 1994, 1993 and 1992 was $(165.8), $(99.0) and
$1.8 million, respectively, of which $(6.6) was deferred in 1992 as a result of
state regulatory decisions that required pension expense to be equivalent to
amounts contributed to the Plans. Deferral of pension cost was discontinued in
1993, and the Company has implemented a plan to recover deferred pension costs
through the rate-making process (see Postretirement
38
<PAGE>
Benefits Other Than Pensions below). The pension benefit for 1994 and 1993
includes the effect of plan amendments and changes in actuarial assumptions for
the discount rate and future compensation levels. At December 31, 1994 and 1993,
the Company recorded approximately $941.4 and $696.1 million, respectively, in
Other long-term liabilities and deferred credits representing the Company's
pension liability.
The assumptions used to determine the projected benefit obligation at December
31, 1994 and 1993 include a discount rate of 8.5% and 7.5%, respectively, and an
increase in future compensation levels of 4.5% in both years for management
employees and 4.0% in both years for nonmanagement employees. The expected
long-term rate of return on pension plan assets used to calculate pension
expense was 8.9% in 1994, 1993, and 1992. Periodically, the Plans have been
amended to increase the level of plan benefits. The actuarial projections
included herein anticipate plan improvements in the future.
As a result of planned work force reductions, in 1994 the Company incurred
additional pension costs of $412.2 million, comprised of a charge for special
termination benefits of $551.6 million and a curtailment gain of $139.4 million,
due to employees leaving under retirement incentives. These pension costs were
partially offset by 1993 severance reserves of $114.1 million which were
transferred to the pension liability.
In 1992, NYNEX amended its management pension plan to provide early retirement
incentives, which increased the projected benefit obligation by $6.6 million, of
which $1.7 million was expensed and $4.9 million was deferred. In addition,
management employees who left the Company in 1992 and 1993 under the Force
Management Plan could elect to receive their pension benefit in a lump sum
distribution, or as a monthly annuity beginning when they left the Company. The
1992 reduction in the number of management employees and the lump sum option
were accounted for as a curtailment and a settlement, respectively, and reduced
pension costs by $31.3 million in 1992, of which $8.1 million was recognized as
a reduction to expense and $23.2 million was deferred. The impact of the 1993
reduction in employees and the lump sum option was not significant.
Postretirement Benefits Other Than Pensions
-------------------------------------------
The Company provides certain health care and life insurance benefits for retired
employees and their families. Substantially all of the Company's employees may
become eligible for these benefits if they reach pension eligibility while
working for the Company.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("Statement No. 106"). Statement No. 106 changed the practice of
accounting for postretirement benefits from recognizing costs as benefits are
paid to accruing the expected cost of providing these benefits during an
employee's working life. The Company is recognizing the transition obligation
for retired employees and the earned portion for active employees over a 20-year
period. The cost of health care benefits and group life insurance was determined
using the unit credit cost actuarial method. The net postretirement benefit cost
for 1994 and 1993 for
39
<PAGE>
the Company was $299 and $278 million, respectively.
The actuarial assumptions used to determine the December 31, 1994 and 1993
obligation for postretirement benefit plans under Statement No. 106 include the
following: discount rate of 8.5 % and 7.5%, respectively; weighted average
expected long-term rate of return on plan assets of 8.4%, in both years;
weighted average salary growth rate of 4.2%, in both years; medical cost trend
rate of 12.6% grading down to 4.5% in 2008, and 14.3% grading down to 4.5% in
2008, respectively; and dental cost trend rate of 4.5% grading down to 3.0% in
2002, and 5.0% grading down to 3.0% in 2002, respectively.
As a result of planned work force reductions, the Company recorded an additional
$270.5 million of postretirement benefit cost in 1993 accounted for as a
curtailment. In 1994, under work force reduction retirement incentives, the
Company incurred additional postretirement benefit costs of $230.7 million,
comprised of a curtailment loss of $172.9 million and a charge for special
termination benefits of $57.8 million. These postretirement benefit costs were
partially offset by $74.4 million which was previously accrued for in 1993.
Total costs of providing benefits for retired employees and their families was
$119.6 million in 1992.
The Company participates in the NYNEX benefit plans, and the structure of the
plans is such that certain disclosures required by Statement No. 106 cannot be
presented for the Company on an individual basis. A comparison of the actuarial
present value of the accumulated postretirement benefit obligation with the fair
value of plan assets, the components of the net postretirement benefit cost, and
the reconciliation of the funded status of the plans with the amount recorded on
the balance sheet are provided on a consolidated basis in the Annual Report for
the year ended December 31, 1994 filed by NYNEX.
With respect to interstate treatment, on July 12, 1994, the U.S. Court of
Appeals for the District of Columbia Circuit overturned the FCC's January 1993
order denying exogenous treatment of additional costs recognized under
Statement No. 106. Tariff revisions were filed by the Telephone Companies with
the FCC on September 1, 1994, and amended on December 19, 1994, to amend price
cap indexes to reflect additional exogenous costs recognized under Statement No.
106. The filing as amended reflected, for the Telephone Companies, $42 million
of costs already accrued, increased annual costs of $21 million and increased
rates of $2.2 million. On December 29, 1994, the FCC's Common Carrier Bureau
("the Bureau") issued an order allowing the proposed rates to go into effect
December 30, 1994, subject to investigation and an accounting order. Commencing
December 30, 1994, the Company began collecting these revenues subject to
possible refund pending resolution of the Bureau's investigation.
With respect to intrastate treatment, in January 1994 the NYSPSC approved the
Company's plan for regulatory accounting and rate-making treatment allowing the
adoption of both Statement No. 106 and Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions" ("Statement No. 87"), on
a revenue requirement neutral basis, providing for the amortization of existing
deferred pension costs within a ten-year period, except that the NYSPSC required
the Company to write-off $75 million of previously deferred
40
<PAGE>
pension costs in 1993, and eliminating the need for additional deferrals of
Statement No. 106 and Statement No. 87 costs. In December 1994, the Company
amortized $39 million of deferred pension costs according to this accounting
plan.
NYNEX established two separate Voluntary Employees' Beneficiary Association
Trusts ("VEBA Trusts"), one for management and the other for nonmanagement, to
begin prefunding postretirement health care benefits. At December 31, 1992,
NYNEX had transferred excess pension assets, totaling $486 million, to health
care benefit accounts within the pension plans and then contributed those assets
to the VEBA Trusts. No additional contributions were made in 1994 and 1993.
The assets in the VEBA Trusts consist primarily of securities and fixed income
securities. Additional contributions to the VEBA Trusts are evaluated and
determined by NYNEX management.
Postemployment Benefits
-----------------------
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" ("Statement No. 112"), in
the fourth quarter of 1993, retroactive to January 1, 1993. Statement No. 112
applies to postemployment benefits, including workers' compensation, disability
plans and disability pensions, provided to former or inactive employees, their
beneficiaries, and covered dependents after employment but before retirement.
Statement No. 112 changed the Company's method of accounting from recognizing
costs as benefits are paid to accruing the expected costs of providing these
benefits. The initial effect of adopting Statement No. 112 was reported as a
cumulative effect of a change in accounting principle and resulted in a one-
time, non-cash charge of $137.4 million ($89.3 million after-tax). In 1994, the
effect of Statement No. 112 did not result in periodic expense materially
different from the expense recognized under the prior method. During 1994 the
Company deferred $17 million for postemployment benefits as ordered by the
NYSPSC to be amortized over five years.
(D) Telephone Plant - Net
The components of telephone plant-net are as follow:
<TABLE>
<CAPTION>
December 31,
Dollars in Millions 1994 1993
------------------- --------- ---------
<S> <C> <C>
Buildings $ 1,699.4 $ 1,622.1
Telephone plant and equipment 17,597.2 17,236.9
Furniture and other equipment 129.2 121.8
Other 117.7 119.3
--------- ---------
Total depreciable property, plant
and equipment 19,543.5 19,100.1
Less: accumulated depreciation 8,106.9 7,580.5
--------- ---------
11,436.6 11,519.6
Land 71.2 71.0
Plant under construction and other 514.9 525.4
--------- ---------
Total Telephone plant-net $12,022.7 $12,116.0
========= =========
</TABLE>
41
<PAGE>
(E) Long-term Debt
Interest rates and maturities on long-term debt outstanding are as follows:
<TABLE>
<CAPTION>
December 31,
Dollars in Millions Interest Rates Maturities 1994 1993
------------------- --------------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Refunding Mortgage Bonds 3 3/8 % - 7 3/4% 1996-2006 $ 675.0 $ 675.0
6 % - 7 1/2% 2007-2011 425.0 425.0
Debentures 6 1/2 % - 8 5/8% 2005-2017 750.0 750.0
6 7/10% - 9 3/8% 2023-2033 1,450.0 1,000.0
Notes 5 1/4 % - 8 1/5% 1998-2008 642.0 492.0
Other - 588.6
Unamortized discount - net (30.2) (26.0)
-------- --------
3,911.8 3,904.6
Long-term capital lease obligations 60.6 67.5
-------- --------
Total Long-term debt $3,972.4 $3,972.1
======== ========
</TABLE>
In 1996 and 1997, $55.0 and $60.0 million, respectively, of the Refunding
Mortgage Bonds will mature. In 1998, $100 million of the Notes will mature.
The Company's Refunding Mortgage Bonds are callable upon thirty days' notice, at
the option of the Company, five years after the issue date. The Company's
Forty-Year 9 3/8% Debentures due July 15, 2031, Thirty Year 7 5/8% Debentures
due February 1, 2023, Thirty-Two Year 7% Debentures due August 15, 2025 and
Thirty year 7 1/4% Debentures due February 15, 2024 are callable upon thirty
days' notice, at the option of the Company, ten years after the issue date. The
Company's Thirty Year 6.7% Debentures due November 1, 2023 and Forty Year 7%
Debentures due December 1, 2033 are callable upon thirty days' notice, at the
option of the Company, twenty years after the issue date. The Company's Twelve
Year 6 1/2% Debentures due March 1, 2005, Twenty Year 7% Debentures due May 1,
2013 and Twenty Year 7% Debentures due June 15, 2013 are not callable.
Substantially all of the Company's assets are subject to lien under the
Company's Refunding Mortgage Bond indenture.
On February 28, 1994, the Company issued $450 million of its Thirty Year 7 1/4%
Debentures, due February 15, 2024, and $150 million of its Ten Year 6 1/4%
Notes, due February 15, 2004. The net proceeds were used to repay short-term
advances from NYNEX and, accordingly, $588.6 million of Short-term debt was
classified as Long-term debt at December 31, 1993 and is presented in "Other" in
the table above (see Note F).
At December 31, 1994 the Company had $250 million of unissued, unsecured debt
securities registered with the Securities and Exchange Commission.
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.
42
<PAGE>
As a result of the 1993 and 1994 business restructuring charges (see Note O),
beginning in March 1994, the Company did not meet the earnings coverage
requirement. As of December 31, 1994, the Company meets the earnings coverage
requirement.
(F) Short-term Debt
Short-term debt and related weighted average interest rates were as follows:
<TABLE>
<CAPTION>
Weighted Average
Dollars in Millions Interest Rates
------------------- -------- ---------------
December 31, December 31,
1994 1993 1994 1993
-------- ------ --------- -------------
<S> <C> <C> <C> <C>
Advances from NYNEX $ 289.1 $251.0 4.06% 3.86%
Other 5.1 4.7
-------- ------
Total Short-term debt** $ 294.2 $255.7
-------- ------
Dollars in Millions 1994 1993 1994 1993
-------- ------ -------- ------------
Average amount of
advances from NYNEX
outstanding during
the year # $ 413.2 $164.6 4.43%+ 3.16%+
Maximum amount of
advances from
NYNEX payable at
any month end
during the year $1,029.6 $839.6
-------- ------
</TABLE>
** At December 31, 1993, $588.6 million of Short-term debt was classified as
Long-term debt because of its repayment by long-term borrowings.
# Computed by dividing the sum of the aggregate principal amounts outstanding
each day during the year by the total number of calendar days in the year.
+ Computed by dividing the aggregate related interest expense by the average
daily face amount of advances.
Interest expense on advances from NYNEX was $16.8, $6.4 and $3.4 million for
1994, 1993 and 1992, respectively.
43
<PAGE>
(G) Lease Commitments
The Company leases certain facilities and equipment used in its operations.
Rent expense was $94.7, $108.8 and $116.6 million for 1994, 1993 and 1992,
respectively. At December 31, 1994, the minimum lease commitments under
noncancelable operating and capital leases for the periods shown are as follows:
<TABLE>
<CAPTION>
Dollars in Millions
-------------------
Year Operating Capital
---- --------- -------
<S> <C> <C>
1995 $ 30.0 $ 16.2
1996 27.0 14.9
1997 23.5 11.1
1998 20.8 10.8
1999 18.5 10.8
Thereafter 50.1 392.3
------ ------
Total minimum lease payments $169.9 456.1
======
Less: executory costs 11.9
------
Net minimum lease payments 444.2
Less: interest 377.1
------
Present value of net minimum lease payments $ 67.1
======
</TABLE>
In addition, the Company has agreed to guarantee up to $4.7 million of lease
commitments on behalf of Telesector Resources through 1995.
(H) Transactions with AT&T Corp.
For the years 1994, 1993 and 1992, AT&T Corp. ("AT&T") provided approximately
18%, 19% and 20%, respectively, of the Company's total operating revenues,
primarily Network access revenues and Other revenues from billing and collection
services performed under contract by the Company for AT&T. In connection with
such services, the Company purchases the related receivables with recourse, up
to a contractual limit.
(I) Transactions with Affiliates
The Company and other NYNEX subsidiaries receive corporate governance and
ownership services such as securities administration, investor relations,
certain tax support and human resources planning services from NYNEX. The costs
of these services are allocated to the Company and the other NYNEX subsidiaries
through intercompany billings. NYNEX performs a semi-annual study to identify
on whose behalf functions of corporate departments are being performed.
Directly charged costs apply exclusively to one subsidiary and are charged only
to that subsidiary. Directly attributable costs apply to more than one
subsidiary and are allocated based on usage, specific work plans, and relative
size (composite of employees and assets) of the applicable subsidiaries.
Indirectly attributable and unattributable costs for services performed on
behalf of all subsidiaries are allocated based on the relative size of the
subsidiaries. For 1994, 1993 and 1992, the Company recorded allocated costs of
$17.9, $138.9, and $92.4 million, respectively, in connection with these
services. The reduction of allocated costs in 1994 is due to the transfer of
approximately 540 employees from NYNEX to Telesector
44
<PAGE>
Resources associated with re-engineering the way service is delivered to
customers, including operating as a single enterprise under the "NYNEX" brand.
Telesector Resources performs data processing and related services and materials
management services on a centralized basis on behalf of the Company and New
England Telephone. Prior to 1993, the costs of these services were allocated to
the Company and New England Telephone based on an annual study which identified
on whose behalf functions were being performed. Since 1993, costs are allocated
based on identification of detailed work functions that are approved and
documented within Telesector Resources' planning and budgeting process. Costs
are directly assigned, directly attributed or indirectly attributed based on the
analysis of the work function. In 1994, 1993 and 1992, the Company recorded
charges from Telesector Resources of $889.6 million, $802.9 million and $969.2
million, respectively, for data processing services and material related
charges, including both materials management services (such as procurement
support, warehousing and transportation costs) and the Company's purchase of
materials (including items charged to plant accounts). The total materials
related charges to the Company in 1994, 1993 and 1992 were approximately $313.6,
$352.2 and $367.5 million, respectively. Telesector Resources acts as a
purchasing agent for the Company for directly shipped materials and supplies.
During 1994, 1993 and 1992, total agency purchases by Telesector Resources
amounted to $155.4, $148.9 and $133.6 million, respectively. In addition, in
1994 and 1993, approximately $57.4 million and $227.3 million, respectively of
restructuring charges ($37.3 and $147.7 million after-tax) was allocated to the
Company from Telesector Resources, primarily related to its force reduction and
re-engineering programs. The increase in overall allocated costs in 1994 is due
to the transfer of approximately 565, 540 and 400 employees from the Company,
NYNEX, New England Telephone, respectively, to Telesector Resources associated
with re-engineering the way service is delivered to customers, including
operating as a single enterprise under the "NYNEX" brand.
Telesector Resources owns a one-seventh interest in Bell Communications
Research, Inc. ("Bellcore"). Bellcore furnishes technical and support services
relating to exchange telecommunications and exchange access services, a portion
of which is research and development. For 1994, 1993 and 1992, the Company
recorded charges of $69.3, $77.3 and $88.0 million, respectively, for services
provided by Bellcore.
In 1992, the FCC permitted the Telephone Companies to unify their interstate
access rates. As a result of the unified rate structure, the Company
experienced an interstate rate decrease and New England Telephone experienced an
offsetting interstate rate increase. The Telephone Companies implemented a
phase-in payment plan ("transition plan") in order to avoid sudden changes in
each of the Telephone Company's earnings resulting from the unified rate
structure. In 1993 and 1992, the Company received transition payments of $55
million and $18 million, respectively, from New England Telephone. The
transition plan was completed in 1993.
The Company has an agreement with NYNEX Information Resources Company ("NIRC")
pursuant to which NIRC pays a fee to the Company for the use of the Company's
name in soliciting directory advertising and in publishing and distributing
directories. For the years ended December 31, 1994, 1993 and 1992, licensing
fees, included in Other revenues, amounted to $142.4, $129.4
45
<PAGE>
and $134.7 million, respectively. In April 1986, the NYSPSC issued an order
which disapproved the directory publishing agreement between the Company and
NIRC. The Company has submitted a proposal to the NYSPSC for compliance with its
decision. Beginning in January 1991, NIRC has made payments to the Company of
all of its earnings related to publishing directories in New York in excess of a
regulated return. In April 1992, the NYSPSC instituted a proceeding to
investigate the directory publishing operations of the Company and its NYNEX
affiliates. In December 1993, an administrative law judge of the NYSPSC issued a
recommended decision urging that the Company's proposal not be accepted and that
the Company, instead, assume the directory publishing function itself and/or
negotiate a modified agreement with NIRC. On January 27, 1994, the parties to
the proceeding submitted their final briefs to the NYSPSC, which will review the
administrative law judge's recommendation and issue a final order.
(J) Taxes Other Than Income Taxes
Taxes other than income taxes consist of:
<TABLE>
<CAPTION>
Dollars in Millions 1994 1993 1992
------------------- ------- ------- -------
<S> <C> <C> <C>
Gross receipts $450.5 $461.5 $457.4
Property 274.9 299.0 355.4
Other 64.2 58.0 57.1
------ ------ ------
Total $789.6 $818.5 $869.9
====== ====== ======
</TABLE>
(K) Revenues Subject to Possible Refund
Several state and federal regulatory matters, including affiliate transactions
issues in the Company's 1990 intrastate rate case ($190.0 million), service
issues in the Company's incentive regulation proceeding ($50.0 million) and
other matters ($26.6 million), may possibly require the refund of a portion of
the revenues collected in the current and prior periods. As of December 31,
1994, the aggregate amount of such revenues that was estimated to be subject to
possible refund was approximately $266.6 million, plus related interest. The
outcome of each pending matter, as well as the time frame within which each will
be resolved, is not presently determinable.
(L) Litigation and Other Contingencies
It is probable that local tax claims aggregating approximately $220 million in
tax and $152 million in associated interest will be asserted against the Company
for the period 1984 through 1994. The claims relate to the taxability of the
Company's interstate and intrastate network access revenues. The current status
is that these matters have been identified as possible audit adjustments by the
taxing authority, and the Company is presenting its arguments against those
adjustments. While the Company's counsel cannot give assurance as to the
outcome, counsel believes that the Company has strong legal positions in these
matters.
Various other legal actions and regulatory proceedings are pending that may
affect the Company, including matters involving Racketeer Influenced and Corrupt
Organizations Act, antitrust, tort, contract and tax deficiency claims.
46
<PAGE>
While counsel cannot give assurance as to the outcome of any of these matters,
in the opinion of Management based on the advice of counsel, the ultimate
resolution of these matters in future periods is not expected to have a material
effect on the Company's financial position but could have a material effect on
annual operating results.
(M) Supplemental Cash Flow Information
The following information is provided in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows":
<TABLE>
<CAPTION>
December 31,
Dollars in Millions 1994 1993 1992
------------------- ------ ------ ------
<S> <C> <C> <C>
Income tax payments $355.4 $507.7 $408.4
Interest payments $272.3 $303.9 $348.8
Short-term debt classified as
Long-term debt (see Note E) $ - $588.6 $ 97.7
</TABLE>
(N) Fair Value of Financial Instruments
The estimated fair value of Long-term debt is based on quoted market prices or
discounted future cash flows. Estimated fair values of financial instruments,
where different than the carrying amounts, are as follows:
<TABLE>
<CAPTION>
Dollars in Millions December 31,
------------------- ------------
1994 1993
---- ----
<S> <C> <C>
Long-term debt
---------------------
Carrying amount $3,911.8 $3,904.6
Fair value $3,409.0 $3,968.1
</TABLE>
(O) Business Restructuring
In 1994, $523.4 million of pretax pension enhancement charges were recorded.
These charges are a portion of additional charges to be recorded for pension
enhancements as employees leave the Company through 1996 under retirement
incentives. The pension enhancement charges were included in the Consolidated
Statements of Income in Other expenses.
In the fourth quarter of 1993, approximately $992 million of pretax business
restructuring charges were recorded, primarily related to efforts to redesign
operations and work force reductions. These charges included: $557 million for
severance and postretirement medical costs for employees leaving the Company
through 1996; $208 million for re-engineering service delivery; and $227 million
of restructuring charges allocated to the Company from Telesector Resources.
The 1993 restructuring charges were included in the Consolidated Statements of
Income as follows: Maintenance and support - $198 million; Marketing and
customer services - $129 million; and Other expenses - $664 million.
47
<PAGE>
SUPPLEMENTARY INFORMATION
Quarterly Financial Information (Unaudited)
All adjustments (consisting only of normal recurring accruals) necessary for a
fair consolidated statement of income for each period have been included in the
following table.
<TABLE>
<CAPTION>
For the quarter ended
----------------------
Dollars in Millions March 31, June 30, September 30, December 31,
------------------- --------- -------- ------------- ------------
1994
----
<S> <C> <C> <C> <C>
Operating revenues $1,919.5 $1,915.3 $1,928.7 $1,973.1
Operating income $ 305.8 $ (116.1) $ 293.5 $ 295.4
Net income (loss) $ 162.2 $ (111.9) $ 153.6 $ 141.1
<CAPTION>
1993
----
<S> <C> <C> <C> <C>
Operating revenues $1,945.9 $1,962.2 $1,950.0 $1,988.9
Operating income $ 355.2 $ 384.3 $ 351.0 $ (748.1)
Earnings (loss)
before cumulative
effect of change in
accounting principle $ 205.3 $ 224.4 $ 186.2 $ (534.3)
Cumulative effect of
change in accounting
for postemployment
benefits, net of
taxes $ (90.8) $ - $ 1.5 $ -
Net income (loss) $ 114.5 $ 224.4 $ 187.7 $ (534.3)
</TABLE>
Results for the second, third and fourth quarters of 1994 include $394.9, $23.3,
and $105.2 million, respectively, of pretax charges for pension enhancements,
which were reflected in operating expenses. The after-tax effect of these
charges was $256.7, $15.1, and $68.4 million in the second, third and fourth
quarters, respectively. See the section entitled "Business Restructuring"
included in Management's Discussion and Analysis of Results of Operations and
Note O, "Business Restructuring", for further discussion of these charges.
Results for the fourth quarter of 1994 include $24.7 million of pretax credits
for pension and medical expense associated with favorable plan experience. The
total pretax effect was included in operating expenses. The after-tax effect of
these credits was an increase in net income of $16.1 million, of which $4.0
million was applicable to the fourth quarter.
Results for the first quarter of 1993 include the adoption of Statement No. 112
(see Note C, "Employee Benefits", for further discussion). Results for the
third quarter of 1993 reflect the effect of the increase in the statutory
corporate federal income tax rate (see Note A, "Accounting Policies - Income
Taxes", for further discussion). Results for the fourth quarter of 1993 reflect
the effect of $992 million of pretax charges for business restructuring,
including re-engineering operations and force reductions, which
48
<PAGE>
were reflected in operating expenses. The after-tax effect of these charges was
a reduction in net income of approximately $645 million. See the section
entitled "Business Restructuring" included in Management's Discussion and
Analysis of Results of Operations and Note O, "Business Restructuring", for
further discussion of these charges.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During 1994 and 1993, the Company did not change its auditors.
49
<PAGE>
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Documents filed as part of this Annual Report on Form 10-K.
----------------------------------------------------------
Page(s) in this
Annual Report
on Form 10-K
----------------
(1) Consolidated Financial Statements filed as
part of this report are listed in the Table
of Contents on page 2 and contained in Item 8
herein.
(2) Consolidated Financial Statement Schedule.
-----------------------------------------
The following consolidated financial statement
schedule of the Registrant is included herein
in response to Item 14:
II - Valuation and Qualifying Accounts ....... 53
Consolidated financial statement schedules other than that listed
above have been omitted because the required information is contained
in the consolidated financial statements and notes thereto or because
such schedules are not required or applicable.
(3) Exhibits. Exhibits on file with the Securities
--------
and Exchange Commission ("SEC"), identified in parentheses
below, are incorporated herein by reference as
exhibits hereto.
Exhibit
Number
------
(3)a Certificate of Incorporation of the Company as amended and restated
December 2, 1987 (Exhibit No. (3)a to the Registrant's filing on
Form SE dated March 24, 1988, File No. 1-3435).
(3)b By-laws of the Company as amended April 22, 1987 (Exhibit No. (3)b
to the Registrant's filing on Form SE dated March 24, 1988, File No.
1-3435).
(4) No instrument which defines the rights of holders of long-term debt
of the Company and its subsidiary is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, the Company hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
50
<PAGE>
Exhibit
Number
------
(10)(ii)B Service Agreement concerning provision by Telesector Resources
Group, Inc. to New York Telephone Company of numerous services,
including (i) purchasing, materials handling, inspection,
distribution, storage and similar services and (ii) technical,
regulatory, government relations, marketing operational support and
similar services, dated March 31, 1992. (Exhibit No. (19)(i)1 to
the Registrant's filing on Form SE, dated March 23, 1993, File No.
1-3435).
(23) Consent of Independent Accountants.
(24) Powers of attorney.
(b) Reports on Form 8-K.
-------------------
The Company's Current Report on Form 8-K, date of report September
26, 1994 and filed October 4, 1994, reporting on Item 5.
The Company's Current Report on Form 8-K, date of report December 8,
1994 and filed December 22, 1994, reporting on Item 5.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By Mel Meskin
-------------------
Mel Meskin
Vice President - Finance
and Treasurer
March 24, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer:
Richard. A. Jalkut* President and Chief Executive Officer
Principal Financial
and Accounting Officer:
Mel Meskin Vice President-Finance and Treasurer
Directors:
Lilyan H. Affinito*
Joseph A. Califano, Jr.*
Arnold J. Eckelman*
Thomas F. Gilbane, Jr.*
Ronald A. Homer*
Alice Stone Ilchman*
Richard A. Jalkut*
John F. X. Mannion*
Jane E. Newman*
Donald B. Reed*
Paul L. Snyder* *By Mel Meskin
----------------
Ira Stepanian*
Frank J. Tasco* (Mel Meskin, as attorney-in-
fact, and on his own behalf as
Principal Financial and
Accounting Officer)
March 24, 1995
52
<PAGE>
SCHEDULE II
NEW YORK TELEPHONE COMPANY AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ --------------- ----------- ----------
Balance at ADDITIONS Balance at
---------------
Description Beginning of Charged to Costs Charged to Deductions End of
Period and Expenses Other Accounts Period
------------ ---------------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectibles
Year 1994................. 134.8 79.9 145.3 (a) 226.4 (b) 133.6
Year 1993................. 128.3 77.8 78.1 (a) 149.4 (b) 134.8
Year 1992................. 117.9 75.8 101.6 (a) 167.0 (b) 128.3
</TABLE>
Organizational Restructuring
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year 1994................. 494.0 - - 160.0 334.0
Year 1993................. 32.9 494.0 (c) - 32.9 494.0 (c)
Year 1992................. 219.6 - - 186.7 32.9
</TABLE>
------------------------------
(a) Includes amounts to establish a reserve for purchased accounts receivable.
(b) Amounts written-off as uncollectible. Amounts previously written-off are
credited directly to this account when recovered.
(c) Amounts for 1993 have been reclassified to conform to the current year's
format.
53
<PAGE>
Exhibit (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
New York Telephone Company on Form S-3 (File No. 33-50615) of our report dated
February 8, 1995, on our audits of the consolidated financial statements and
consolidated financial statement schedule of New York Telephone Company as of
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
New York, New York
March 24, 1995
<PAGE>
Exhibit (24)
New York Telephone
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, New York Telephone, a New York corporation (hereinafter referred to
as the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Act of 1934, as amended, an Annual Report
on Form 10-K for the fiscal year ended December 31, 1994; and
WHEREAS, each of the undersigned is a Director or both an Officer and Director
of the Company;
NOW, THEREFORE, each of the undersigned hereby constitutes and appoints
Richard A. Jalkut, Melvin Meskin, and Morrison DeS. Webb, and each of them
severally, as attorneys for the undersigned and in the undersigned's name, place
and stead, and in each of the undersigned's offices and capacities as an Officer
or as both an Officer and a Director of the Company, to execute and file such
Annual Report, and thereafter to execute and file any amendment or amendments
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform all and every act and thing whatsoever requisite, necessary
and/or desirable to be done in and about the premises as fully, to all intents
and purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney this 15th day of March, 1995.
Lilyan H. Affinito John F. X. Mannion
--------------------------------- ----------------------------
Lilyan H. Affinito, Director John F. X. Mannion, Director
Joseph A. Califano, Jr. Jane E. Newman,
--------------------------------- ----------------------------
Joseph A. Califano, Jr., Director Jane E. Newman, Director
Arnold J. Eckelman Donald B. Reed
--------------------------------- ----------------------------
Arnold J. Eckelman, Executive V.P. Donald B. Reed, Director
Chief Operating Officer & Director
Thomas F. Gilbane Paul L. Snyder
--------------------------------- ----------------------------
Thomas F. Gilbane, Director Paul L. Snyder, Director
Ronald A. Homer Ira Stepanian
--------------------------------- ----------------------------
Ronald A. Homer, Director Ira Stepanian, Director
Alice Stone Ilchman Frank J. Tasco
--------------------------------- ----------------------------
Alice Stone Ilchman, Director Frank J. Tasco, Director
Richard A. Jalkut
---------------------------------
Richard A. Jalkut, President
Chief Executive Officer & Director
State of New York)
County of New York) ss.:
On the 15th day of March, 1995, personally appeared before me each of the
Officers and Directors, each to me known to be the person described in and who
executed the foregoing instrument, and each such person duly acknowledged that
he or she executed and delivered the same for the purposes therein expressed.
ROBERT ERB
Notary Public, State of New York Robert Erb
---------------------
No. 31-4808105 Notary Public
Qualified in New York County
Commission Expires January 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 1,441
<ALLOWANCES> 134
<INVENTORY> 74
<CURRENT-ASSETS> 1,782
<PP&E> 20,130
<DEPRECIATION> 8,107
<TOTAL-ASSETS> 15,296
<CURRENT-LIABILITIES> 2,798
<BONDS> 3,972
<COMMON> 4,103
0
0
<OTHER-SE> 702
<TOTAL-LIABILITY-AND-EQUITY> 15,296
<SALES> 0
<TOTAL-REVENUES> 7,737
<CGS> 0
<TOTAL-COSTS> 6,958
<OTHER-EXPENSES> (21)
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 314
<INCOME-PRETAX> 485
<INCOME-TAX> 140
<INCOME-CONTINUING> 345
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 345
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
