Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
- ---
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- ---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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
Incorporated under the laws of the State of New York
I.R.S. Employer Identification Number 13-5275510
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF NYNEX CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ___ .
---
<PAGE>
Form 10-Q Part I New York Telephone Company
PART I - FINANCIAL INFORMATION
------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
-------------------------------------------------------
(In millions) (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
For the Period Ended September 30, 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service $ 1,205.2 $1,188.0 $ 3,600.8 $3,545.5
Long distance 85.5 90.1 255.0 263.4
Network access 531.9 557.3 1,683.5 1,677.0
Other 146.0 93.3 367.4 277.6
--------- -------- -------- --------
Total operating revenues 1,968.6 1,928.7 5,906.7 5,763.5
--------- -------- -------- --------
OPERATING EXPENSES
Maintenance and support 615.6 633.3 1,820.4 1,863.3
Depreciation and amortization 341.3 374.3 1,048.7 1,113.0
Marketing and customer services 270.5 247.7 760.5 743.5
Taxes other than income taxes 155.3 187.6 539.8 587.3
Provision for uncollectibles 25.3 16.5 80.4 60.2
Other 251.2 175.8 915.9 913.0
--------- -------- -------- --------
Total operating expenses 1,659.2 1,635.2 5,165.7 5,280.3
--------- -------- -------- --------
Operating income 309.4 293.5 741.0 483.2
Other income (expense) - net 13.0 9.7 24.3 17.8
Interest expense 83.1 82.7 251.0 234.0
--------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary item 239.3 220.5 514.3 267.0
Income taxes 76.1 66.9 160.1 63.1
--------- -------- -------- --------
Earnings (loss) before
extraordinary item 163.2 153.6 354.2 203.9
Extraordinary item for the
discontinuance of regulatory
accounting principles,
net of taxes (Note (b)) -- -- (2,291.6) --
--------- -------- --------- ------
NET INCOME (LOSS) $ 163.2 $ 153.6 $(1,937.4) $ 203.9
========= ======== ========= ========
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Beginning of period $(1,578.9) $ 769.9 $ 702.2 $1,082.0
Net income (loss) 163.2 153.6 (1,937.4) 203.9
Dividends (Note (h)) -- (181.2) (180.5) (543.6)
--------- -------- --------- --------
End of period $(1,415.7) $ 742.3 $(1,415.7) $ 742.3
========= ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Form 10-Q Part I New York Telephone Company
CONSOLIDATED BALANCE SHEETS
---------------------------
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and temporary cash investments $ 27.8 $ 23.1
Receivables (net of allowance of $153.7
and $133.6, respectively) 1,564.0 1,484.4
Deferred charges 55.6 39.0
Deferred income taxes 116.4 105.1
Inventory 72.0 73.5
Prepaid expenses and other 106.5 57.2
--------- ---------
Total current assets 1,942.3 1,782.3
--------- ---------
Telephone plant - at cost 19,876.8 20,129.6
Less: accumulated depreciation 10,785.1 8,106.9
--------- ---------
9,091.7 12,022.7
--------- ---------
Deferred charges and other 322.8 1,491.2
--------- ---------
Total Assets $11,356.8 $15,296.2
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable
Affiliates $ 755.4 $ 671.6
Trade and other 1,232.8 1,324.8
Short-term debt 391.9 294.2
Dividends payable - 181.2
Taxes accrued 34.8 72.9
Advance billing and customers' deposits 176.1 178.3
Interest accrued 64.9 74.7
--------- ---------
Total current liabilities 2,655.9 2,797.7
--------- ---------
Long-term debt 3,913.5 3,972.4
Deferred income taxes 173.5 1,611.3
Unamortized investment tax credits 138.7 212.5
Other long-term liabilities and deferred
credits 1,968.2 1,896.9
--------- ---------
Total liabilities 8,849.8 10,490.8
--------- ---------
Commitments and contingencies (Notes (e),(f)
and (i))
Share owner's equity:
Common stock - one share, without par
value (Note (h)) 1.0 4,103.2
Additional paid-in capital (Note (h)) 3,921.7 -
Retained earnings (Accumulated deficit) (1,415.7) 702.2
--------- ---------
Total share owner's equity 2,507.0 4,805.4
--------- ---------
Total Liabilities and Share Owner's Equity $11,356.8 $15,296.2
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Form 10-Q Part I New York Telephone Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In millions) (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(1,937.4) $ 203.9
--------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary item, net of taxes 2,291.6 --
Depreciation and amortization 1,048.7 1,113.0
Change in operating assets and liabilities:
Receivables (79.6) (46.0)
Current Deferred charges, Current
Deferred income taxes, Inventory and
Prepaid expenses and other (24.5) 54.1
Accounts payable, Taxes accrued,
Advance billing and customers' deposits
and Interest accrued 49.7 (221.1)
Deferred income taxes and Unamortized
investment tax credits (295.0) (341.4)
Other long-term liabilities and
deferred credits 341.9 523.7
Other - net 2.1 (23.5)
--------- --------
Total adjustments 3,334.9 1,058.8
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,397.5 1,262.7
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (888.0) (915.7)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 42.2 (373.6)
Dividends paid to NYNEX (542.2) (543.4)
Issuance of long-term debt - 593.5
Repayment of long-term debt and capital leases (4.8) (4.3)
--------- --------
NET CASH USED IN FINANCING ACTIVITIES (504.8) (327.8)
--------- --------
Net increase in Cash and
temporary cash investments 4.7 19.2
Cash and temporary cash investments at
beginning of period 23.1 7.5
--------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 27.8 $ 26.7
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
(a) BASIS OF PRESENTATION - The consolidated financial statements have been
prepared by New York Telephone Company (the "Company"), a wholly owned
subsidiary of NYNEX Corporation ("NYNEX"), pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC") and, in the opinion of
Management, include all adjustments necessary for a fair presentation of the
financial information for each period shown. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Management believes that the
disclosures made are adequate to make the information presented not misleading.
Certain information in the consolidated financial statements for 1994 has been
reclassified to conform to the current year's presentation. The results for
interim periods are not necessarily indicative of the results for the full year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1994 Annual Report on Form 10-K and the current year's previously issued
Quarterly Reports on Form 10-Q. In the second quarter of 1995, the Company
discontinued using generally accepted accounting principles applicable to
regulated entities (see Note (b)).
(b) DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES - In the second quarter
of 1995, the Company discontinued accounting for its operations in accordance
with the provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("Statement No.
71"). As a result, the Company recorded an extraordinary non-cash charge of $2.3
billion, net of income taxes of $1.2 billion.
The operations of the Company no longer met the criteria for application of
Statement No. 71 due to a number of factors including: significant changes in
regulation, including the achievement of price regulation rather than
rate-of-return regulation in New York, an intensifying level of competition, and
the increasingly rapid pace of technological change. Under Statement No. 71, the
Company had accounted for the effects of rate actions by federal and state
regulatory commissions by establishing certain regulatory assets and
liabilities, including the depreciation of its telephone plant and equipment
using asset lives approved by regulators and the deferral of certain costs and
obligations based on approvals received from regulators. The Company had
continually assessed its position and the recoverability of its
telecommunications assets with respect to Statement No. 71.
As a result of the discontinuance of Statement No. 71, the Company has
implemented Statement of Financial Accounting Standards No. 101, "Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No. 71" ("Statement No. 101"). The Company has adjusted its telephone
plant and equipment through an increase in accumulated depreciation, to reflect
the difference between recorded depreciation and the amount of
5
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
(Unaudited)
depreciation that would have been recorded had the Company not been subject to
rate regulation. As a result of the increase in accumulated depreciation, gross
plant was written off where fully depreciated. Non-plant regulatory assets and
liabilities were eliminated from the balance sheet.
The after-tax extraordinary charge recorded consists of $1.8 billion for the
adjustment to telephone plant and equipment and $0.5 billion for the write-off
of non-plant regulatory assets and liabilities.
The net adjustment to telephone plant and equipment was a decrease of $2.8
billion ($1.8 billion after-tax). This decrease was supported by a depreciation
analysis, which identified inadequate depreciation reserve levels which the
Company believes resulted principally from the cumulative under-depreciation of
telephone plant and equipment as a result of the regulatory process. An
impairment analysis was performed and did not identify any additional amounts
not recoverable from future operations. Investment tax credits ("ITCs") are
deferred and amortized over the estimated service lives of the related telephone
plant and equipment. ITC amortization was accelerated as a result of the
reduction in asset lives of the associated telephone plant and equipment.
The major components of non-plant regulatory net assets which were written off
as a result of the discontinued application of Statement No. 71 are as follows:
<TABLE>
<CAPTION>
(In millions) Pretax After-tax
<S> <C> <C>
Compensated absences $ 120.2 $ 78.1
Deferred pension costs 264.4 171.9
Refinancing costs 184.7 120.1
Deferred taxes - 53.7
Other 119.5 77.7
------- ------
Total $ 688.8 $ 501.5
======= =======
</TABLE>
Upon the adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the effects of required adjustments to deferred
tax balances were deferred on the balance sheet as regulatory assets and
liabilities. These deferrals were amortized during the period in which the
related deferred taxes were recognized in the ratemaking process. During the
second quarter of 1995, tax-related regulatory net assets of $53.7 million were
eliminated.
Upon adoption of Statement No. 101, the Company began using estimated asset
lives for certain categories of telephone plant and equipment that are shorter
than those approved by regulators. The shorter asset lives result from the
Company's expectations as to the revenue-producing lives of the assets. A
comparison of average asset lives before and after the discontinuance of
6
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
(Unaudited)
Statement No. 71, for the most significantly affected categories of telephone
plant and equipment, is as follows:
<TABLE>
<CAPTION>
Average lives (in years)
Composite
Regulator-Approved Economic
Asset Lives Asset Lives
----------------------------------------
<S> <C> <C>
Digital Switching 16 12
Circuit - Other 10 8
Aerial Metallic Cable 20 17
Underground Metallic Cable 25 15
Buried Metallic Cable 25 17
Fiber 25 20
</TABLE>
As a result of the discontinued application of Statement No. 71, regulatory
accounting principles no longer apply to the operations of the Company for
financial accounting and reporting purposes. The Company no longer recognizes
regulatory assets and liabilities and the related amortization. The application
of Statement No. 101 does not change the Company's accounting and reporting for
regulatory purposes.
(c) CASH AND TEMPORARY CASH INVESTMENTS - The Company's cash management policy
is to make funds available in banks when checks are presented. At September 30,
1995, the Company had recorded in Accounts payable checks outstanding but not
yet presented for payment of $58.6 million.
(d) ADOPTION OF FINANCIAL ACCOUNTING STANDARDS - Effective January 1, 1995, the
Company adopted Statement of Financial Accounting Standards No. 116, "Accounting
for Contributions Received and Contributions Made" ("Statement No. 116"). The
effect of implementing Statement No. 116 on the Company's results of operations
and financial position was insignificant.
(e) REVENUES SUBJECT TO POSSIBLE REFUND - Several state and federal regulatory
matters, including affiliate transactions issues in the Company's 1990
intrastate rate case ($176.3 million), may possibly require the refund of a
portion of the revenues collected in the current and prior periods. As of
September 30, 1995, the aggregate amount of such revenues that was estimated to
be subject to possible refund was approximately $210.9 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.
(f) LITIGATION AND OTHER CONTINGENCIES - It is probable that local tax claims
aggregating approximately $235 million in tax and $180 million in associated
interest will be asserted against the Company for the period 1984 through the
third quarter of 1995. The claims relate to the taxability of the Company's
interstate and intrastate network access revenues. The current
7
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------
(Unaudited)
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.
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
operating results.
(g) SUPPLEMENTAL INFORMATION - The following information is provided in
accordance with Statement of Financial Accounting Standards No. 95, "Statement
of Cash Flows":
<TABLE>
<CAPTION>
For the
Nine Months Ended
September 30,
1995 1994
-----------------
(In millions)
<S> <C> <C>
Income tax payments $378.2 $270.0
Interest payments $230.9 $208.1
</TABLE>
(h) SHARE OWNER'S EQUITY - Pursuant to the resolutions of the Board of Directors
of the Company, adopted on June 21, 1995, the Common stock of the Company was
reduced by approximately $4.1 billion and such amount was reallocated to
Additional paid-in capital. The second quarter 1995 dividend of $180.5 million
was declared from Additional paid-in capital.
(i) FINANCIAL COMMITMENTS - As of September 30, 1995, the Company had deferred
$166 million of revenues under the approved regulatory plan (see State
Regulatory Matters) associated with commitments for fair competition, universal
service, service quality and infrastructure improvements, as well as for the
1994 service penalty obligation. These revenues will be released as commitments
are met under the plan.
8
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
The following Management's Narrative Analysis of Results of Operations is
provided pursuant to General Instruction H(2) to Form 10-Q.
FIRST NINE MONTHS OF 1995 AS COMPARED TO FIRST NINE MONTHS OF 1994
- ------------------------------------------------------------------
Results of Operations
- ---------------------
For the nine months ended September 30, 1995 and 1994, net (loss) income was
($1.9) billion and $203.9 million, respectively. Results for the first nine
months of 1995 include an after-tax extraordinary charge of $2.3 billion for the
discontinuance of Statement No. 71. Results also include an after-tax charge of
$106.5 million for pension enhancements for approximately 480 management and 475
nonmanagement employees who elected to leave the Company under retirement
incentives and for the Company's allocation from Telesector Resources Group,
Inc. ("Telesector Resources") for its pension enhancements, and non-recurring
after-tax items of $160.6 million for accruals related to various self-insurance
programs, regulatory contingencies, operating tax provisions, and revised
benefit charges. Results for the first nine months of 1994 included an after-tax
charge of $271.8 million for pension enhancements for approximately 700
management and 2,000 nonmanagement employees who elected to leave the Company
under retirement incentives and for the Company's allocation from Telesector
Resources for its pension enhancements.
Operating revenues increased $143.2 million, or 2.5%, over the first nine months
of 1994. Excluding a $40.6 million change in the third quarter of 1995 in the
presentation of gross receipts tax collected by the Company on behalf of
interexchange carriers and a non-recurring item of $10.1 million in the third
quarter of 1995 resulting from a court decision on overearnings complaints,
operating revenues increased $193.9 million, or 3.4%. This increase was
principally due to growth in access lines, switched access usage and sales of
calling features, and a $32.5 million net increase from the release of revenues
previously set aside pursuant to an order by the New York State Public Service
Commission ("NYSPSC")(see State Regulatory Matters).
Operating expenses decreased $114.6 million, or 2.2%, from the first nine
months of 1994. Excluding pretax pension enhancement charges in 1995 and 1994
of $163.8 million and $418.1 million respectively, non-recurring charges of
$232.0 million in 1995, and a $40.6 million change in the third quarter of 1995
in the presentation of gross receipts tax collected by the Company on behalf of
interexchange carriers, operating expenses decreased $51.7 million, or 1.1%,
from the first nine months of 1994, as force reductions and process
re-engineering continued.
9
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Operating Revenues
- ------------------
Operating revenues for the nine months ended September 30, 1995 increased $143.2
million, or 2.5%, over the same period last year. This increase is comprised of
the following:
<TABLE>
<CAPTION>
Increase (Decrease)
(In millions)
------------------
<S> <C>
Local service $ 55.3
Long distance (8.4)
Network access 6.5
Other 89.8
------
$143.2
======
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. Increased demand of $70 million,
driven by growth in access lines and sales of calling features, was partially
offset by a $10 million decrease attributable to potential customer billing
claims, and a $6 million decrease in rates attributable to an NYSPSC order
approving a proposed Regulatory Plan (the "Plan") effective September 1, 1995
(see State Regulatory Matters).
Long distance revenues are earned from the provision of services beyond the
local service area, but within the local access and transport area, and include
public and private network switching. Demand for private line and wide area
telecommunications services decreased as a result of customer shifts to lower
priced services offered by the Company and increased competition. However,
certain competitive losses in long distance revenues were mostly offset by
increases in network access revenues.
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. Excluding decreases in the third
quarter of 1995 of $41 million attributable to a change in the presentation of
gross receipts tax collected by the Company on behalf of interexchange carriers
(see Operating Expenses) and $10 million resulting from a court decision on
overearnings complaints for the periods 1987-88 and 1989-90 (see Federal
Regulatory Matters), network access revenues increased $57.2 million, or 3.4%.
Special access revenues increased $12 million primarily due to increased demand.
Switched access revenues increased a net $45 million. There was a $63 million
increase in demand offset by a $15 million reduction in interstate rates and a
$2 million reduction in intrastate rates attributable to an NYSPSC order (see
State Regulatory Matters).
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. Approximately $32.5 million of
revenues that would previously have been "set aside" were recognized by the
Company in the second quarter of 1995 as a result of an NYSPSC order approving
the Plan. In addition, there was an increase of $38 million in the third quarter
of 1995 due to the cessation of "setting aside" revenues in the second quarter
of 1995. The Company had deferred
10
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
$38 million per quarter since the first quarter of 1994. Approximately $166
million of revenues "set aside" ($122 million in 1994, $38 million in the first
quarter of 1995, and $6 million in the second quarter of 1995) remain deferred
and will be released as the Company's commitments are met under the Plan. If the
Company is unable to meet certain of these commitments, the NYSPSC has
stipulated in its order that the Company will be subject to financial penalties.
There was also a $5 million increase from revenues earned under a service
improvement plan implemented in 1994. An additional $27 million of revenues "set
aside" under the service improvement plan will continue to be deferred (see
State Regulatory Matters). There was also an increase of $27 million due to the
elimination of the deferral of intrastate revenues as a result of the
discontinuance of regulatory accounting principles (see Note (b)). These
increases were partially offset by a $17 million decrease in billing and
collection revenues under the contract with AT&T Corp. ("AT&T").
Operating Expenses
- ------------------
Operating expenses for the nine months ended September 30, 1995 decreased $114.6
million, or 2.2%, from the same period last year. This decrease is comprised of
the following:
<TABLE>
<CAPTION>
Increase (Decrease)
(In millions)
--------------------
<S> <C>
Depreciation and amortization $(64.3)
Taxes other than income taxes (47.5)
All other:
Business Restructuring charges (254.3)
Employee related (19.1)
Other 270.6
-------
$(114.6)
=======
</TABLE>
Excluding pretax pension enhancement charges of $163.8 million and $418.1
million in 1995 and 1994, respectively, non-recurring charges of $232.0 million
in 1995, and a $40.6 million change in the presentation of gross receipts tax
(see Network access revenues), operating expenses decreased $51.7 million, or
1.1%, from the first nine months of 1994.
Depreciation and amortization decreased principally due to: (1) a $54 million
net decrease due to an adjustment of plant balances partially offset by the
effect of shorter asset lives as a result of the discontinuance of regulatory
accounting principles (see Note (b)), (2) a $30 million decrease due to a change
in interstate depreciation rates, and (3) a $32 million increase resulting from
represcribed intrastate depreciation rates.
11
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Taxes other than income taxes decreased $47.5 million. Included in this decrease
are a $40.6 million change in the third quarter of 1995 in the presentation of
gross receipts tax collected by the Company on behalf of interexchange carriers.
There was also an $8 million decrease in property taxes resulting from lower
assessments of property value.
Business restructuring charges consist of incremental costs related to pension
enhancements. Pretax charges for the nine months ended September 30, 1995
decreased $254.3 million from the same period last year. During the first nine
months of 1995, $163.8 million of pretax charges ($106.5 million after-tax) was
recorded for approximately 480 management and 475 nonmanagement employees who
elected during the first nine months of 1995 to leave under retirement
incentives and for the Company's allocation from Telesector Resources. The
components of the pretax charges are as follows: $101.4 million ($65.9 million
after-tax) for pension enhancements, $11.5 million ($7.5 million after-tax) for
associated postretirement medical benefits, $43.8 million ($28.5 million
after-tax) for charges allocated to the Company from Telesector Resources for
its pension enhancements and $7.1 million ($4.6 million after-tax) for its
associated postretirement medical benefits. During the first nine months of
1994, $418.1 million of pretax charges ($271.8 million after-tax) was recorded
for approximately 700 management and 2,000 nonmanagement employees who elected
during the first nine months of 1994 to leave under retirement incentives and
for the Company's allocation from Telesector Resources. The components of the
pretax charges are as follows: $245.5 million ($159.6 million after-tax) for
pension enhancements, $119.3 million ($77.5 million after-tax) for associated
postretirement medical benefits, $28.6 million ($18.6 million after-tax) for
charges allocated to the Company from Telesector Resources for its pension
enhancements and $24.7 million ($16.1 million after-tax) for its associated
postretirement medical benefits. Much of the cost of the enhancements will be
funded by NYNEX's pension plans.
Employee related costs consist primarily of wages, payroll taxes, and employee
benefits. Wages and payroll taxes decreased $43 million principally due to
reductions in the Company's work force attributable to the Company's force
reduction program and the transfers of employees to Telesector Resources
associated with re-engineering service delivery to customers (see Other
operating expenses), partially offset by salary and wage rate increases. Benefit
expenses increased $24 million. Included in this increase are non-recurring
items associated with revised charges for postemployment benefits (a $31 million
increase) and for non-qualified pension plans (a $2 million increase). There was
also a $14 million increase resulting from the amortization of deferred pension
costs pursuant to an intrastate regulatory plan and a $26 million decrease in
pension expense attributable to changes in actuarial assumptions.
Other operating expenses consist primarily of contracted and centralized
services, rent and other general and administrative costs. There were $199
million of non-recurring charges resulting from accruals related to various
self-insurance programs, regulatory contingencies and operating tax provisions.
These charges reflect events that occurred during the second
12
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
and third quarters of the year and additional information made available through
revised estimates and analyses completed during the second and third quarters.
There was a $137 million increase in charges from affiliated companies,
primarily attributable to the transfer of functions to Telesector Resources,
which includes charges for advertising, telemarketing and sales agent
commissions, increases in Telesector Resources' contracted and centralized
services and salary and wage rates, and the transfer of employees from the
Company to Telesector Resources (see Employee related costs). In addition, there
was a $20 million increase in the provision for uncollectibles. These increases
were partially offset by a $79 million decrease in expenses primarily due to the
transfer of functions to Telesector Resources (see Employee related costs) and
to the Company's force reduction program. Other income - net
- ------------------
Other income - net increased $6.5 million, or 36.5%, principally due to the
Company's share of interest income on a federal income tax refund to AT&T for
the tax years 1981-1983, and the elimination of the amortization of the
intrastate portion of previously deferred refinancing costs in the second
quarter of 1995 as a result of the discontinuance of regulatory accounting
principles (see Note (b)).
Interest expense
- ----------------
Interest expense increased $17.0 million, or 7.3%, over the same period last
year. This increase was due principally to a $7 million increase in interest on
funded debt as a result of the issuance of $600 million of long-term debt in
February 1994, a $5 million non-recurring charge for interest incurred in
connection with a court decision on overearnings complaints for the periods
1987-1988 and 1989-1990 (see Federal Regulatory Matters), a $4 million increase
due to interest on the revenue set aside as ordered by the NYSPSC (see State
Regulatory Matters) and higher short-term interest rates.
Income Taxes
- ------------
Income taxes increased $97.0 million over the same period last year,
attributable to an increase in taxable income, a decrease in amortization of
investment tax credits, and the elimination of excess deferred tax reversals as
a result of the discontinuance of regulatory accounting principles (see Note
(b)).
Extraordinary item
- ------------------
The discontinued application of Statement No. 71 required the Company, for
financial accounting purposes, to adjust telephone plant and equipment and to
eliminate non-plant regulatory assets and liabilities from the balance sheet.
This change resulted in an after-tax charge of $2.3 billion, consisting of $1.8
billion to adjust the carrying amount of telephone plant and equipment
13
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
and $0.5 billion to write-off non-plant regulatory assets and liabilities. As a
result of the discontinuance of regulatory accounting principles, the Company
utilized shorter asset lives for certain categories of telephone plant and
equipment than those approved by regulators. (See Note (b) for additional
information on the discontinuance of regulatory accounting principles.)
Current Status of Business Restructuring
- ----------------------------------------
Reserve Utilization in 1995
- ---------------------------
The restructuring reserve balance at September 30, 1995, which does not include
the liability recorded at year-end for postretirement medical benefits
associated with employees' leaving the Company under the business restructuring,
was approximately $278 million. During the first nine months of 1995, the
Company utilized 1993 restructuring reserves of approximately $145 million in
the following categories:
<TABLE>
<S> <C> <C> <C>
Severance:
Management $10
Nonmanagement 4
Transferred to Telesector Resources 9
---
Total Severance $ 23
Process Re-engineering:
Systems redesign:
Customer contact 11
Customer provisioning 5
Customer operations 16
Customer support 5
---
Total systems redesign $ 37
Work center consolidation -
Branding 3
Relocation -
Training -
Re-engineering implementation -
---
Subtotal 40
Telesector Resources allocated reserves:
Systems re-engineering 66
Re-engineering implementation 16
Work center consolidation -
---
Total allocated 82
---
Total process re-engineering 122
----
Total $145
====
</TABLE>
The severance reduction amount is comprised of severance reserves transferred to
the pension liability on a per employee basis as a result of employees' leaving
under the pension enhancements as opposed to severance provisions as previously
accrued. $9 million was transferred from the Company to Telesector Resources
associated with employees who transferred from the
14
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Company to Telesector Resources and subsequently left under the pension
enhancements. $18 million of process re-engineering costs was transferred from
the Company to Telesector Resources for costs incurred by Telesector Resources
on behalf of the Company for the following business processes: (1) $6 million
for customer contact, (2) $3 million for customer provisioning, (3) $7 million
for customer operations, and (4) $2 million for customer support.
Cost Savings
- ------------
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 4,600 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits attributable to employees' leaving under
retirement incentives of approximately $230 million. In addition, the Company's
share of the annualized average reduction in wages and benefits attributable to
Telesector Resources' employees' leaving under retirement incentives will be
approximately $100 million. Partially offsetting these cost savings will be the
effects of wage and price inflation, growth in volume of business and higher
costs attributable to service improvements.
Financing
- ---------
At September 30, 1995, the Company had $250 million of unissued, unsecured debt
securities registered with the SEC.
State Regulatory Matters
- ------------------------
On August 16, 1995, the NYSPSC issued an order reaffirming its approval of the
Plan. On August 23, 1995, the Company filed its compliance tariffs under the
Plan. The tariffs became effective on a temporary basis as of September 1, 1995
and will remain temporary pending the NYSPSC Staff's review of parties' comments
and the completion of the Staff's investigation of whether the tariffs comply
with the Plan. Several parties have filed petitions for reconsideration of the
NYSPSC's final order approving the Plan. The Company has filed responses to
those petitions.
On September 19, 1995, the NYSPSC issued an order concerning the Company's
performance under the 1994 service quality plan. The NYSPSC determined that,
given the 1994 service performance results, the Company must refund $50 million
to ratepayers, which was accrued by the Company in the second quarter of 1995
(see Note (i)).
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
15
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
certain affiliate transactions issues. The NYSPSC selected an independent
consulting firm to perform an investigation of such transactions. On September
13, 1995, the consultant submitted to the NYSPSC a final report detailing its
findings and recommendations. On September 20, 1995, an administrative law judge
of the NYSPSC issued a procedural ruling for future hearings and directed that
the NYSPSC Staff and other parties must file any evidence they wish to submit by
January 26, 1996. The Company will have the opportunity to respond at a
subsequent date to be determined.
Federal Regulatory Matters
- --------------------------
On August 1, 1995, the U.S. Court of Appeals for the District of Columbia
Circuit found that decisions of the Federal Communications Commission ("FCC")
had understated the amount of damages to be paid by the Company and New England
Telephone and Telegraph Company (collectively, the "Telephone Companies") in
connection with overearnings complaints for the period 1987-1988 and by the
Company for the period 1989-1990. On October 4, 1995, the Court denied the
Telephone Companies' petitions for rehearing. It is probable that, as a result
of the Court's decisions, the Company will be required to pay damages plus
interest in the amounts of approximately $5.4 million and $9.7 million for the
periods 1987-1988 and 1989-1990, respectively (see Network access revenues).
16
<PAGE>
Form 10-Q Part II New York Telephone Company
PART II - OTHER INFORMATION
Item 5. Other Information
- ------- -----------------
State Regulatory Matters
------------------------
On September 27, 1995, the New York State Public Service
Commission ("NYSPSC") issued an order resolving certain issues in
its Competition II proceeding which is to consider the terms that
should govern local exchange competition in New York State. The
NYSPSC directed New York Telephone Company (the "Company") to list
customers of competitive local exchange carriers ("LECs") in its
White Pages directories at no charge. However, the Company is free
to negotiate with those carriers arrangements under which the
Company would deliver the White Pages directories to the
competitive carriers' customers for a fee. The NYSPSC also
established a reciprocal compensation scheme for the payment of
access rates when the Company and competitive LECs terminate
traffic on each other's networks. Generally, the Company and the
competitive carrier will pay each other the same rate when
providing the same or equivalent functions. The NYSPSC also
determined that the Company must, upon request, provide services
to interconnect two competitive LECs that are collocated in the
Company's central offices. Finally, the NYSPSC directed
competitive LECs to provide intraLATA presubscription.
Federal Regulatory Matters
--------------------------
Price caps
----------
On September 27, 1995, the Federal Communications Commission
("FCC") issued a Notice of Proposed Rulemaking in the Price Cap
proceeding, regarding the productivity factor used by LECs,
including the Company, in the FCC price cap formula. The FCC price
cap formula adjusts the limits on access price levels ("price cap
index") upward for inflation, downward for productivity
improvement and up or down for exogenous costs. Depending on the
productivity factor selected by the LEC, earnings above certain
levels are shared with ratepayers. The Proposed Rulemaking will
consider changes in the determination of the productivity factor,
the recognition of exogenous costs, the extent of carrier sharing,
and the formula for calculating the price cap index for certain
services. The FCC has requested comments by November 27, 1995 and
replies by December 27, 1995. The FCC has indicated that it
intends to issue an order in time for the final changes to be
reflected in LECs' rates as of July 1, 1996.
On September 20, 1995, the FCC issued a Notice of Proposed
Rulemaking to determine how the price cap rules should be modified
to accommodate increasing levels of competition. The FCC intends
to consider whether to allow greater flexibility to lower prices,
17
<PAGE>
Form 10-Q Part II New York Telephone Company
PART II - OTHER INFORMATION
---------------------------
adopting procedures to allow a more rapid introduction of new
services, and establishing criteria that can be used in assessing
whether LECs warrant streamlined or non-dominant treatment for
certain services when they face substantial competition in a
geographic area. The FCC asked for comments on a proposal by the
Company and New England Telephone and Telegraph Company
(collectively, the "Telephone Companies") that earnings sharing be
reduced or eliminated as an LEC implements measures to promote
competition for local exchange services.
Other Federal Regulatory Matters
--------------------------------
On September 11, 1995, the Telephone Companies filed a further
response to the FCC's March 3, 1995 Order to Show Cause in
connection with an audit of costs reported by the LECs to the
National Exchange Carrier Association (see the Company's Annual
Report on Form 10-K for the year ended December 31, 1994). In that
response the Telephone Companies argued that no forfeitures or
price cap reductions should be imposed and that their internal
processes are in compliance with the FCC's rules.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits.
- --- ---------
Exhibit
-------
Number
------
(27) Financial Data Schedule
(b) Reports on Form 8-K.
- --- --------------------
The Company's Current Report on Form 8-K, date of report July 3,
1995 and filed July 10, 1995, reporting on Item 5.
The Company's Current Report on Form 8-K, date of report August 2,
1995 and filed August 2, 1995, reporting on Item 5.
18
<PAGE>
Form 10-Q New York Telephone Company
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
New York Telephone Company
/s/ Mel Meskin
----------------------------------------
Mel Meskin
Vice President - Finance and Treasurer
(Principal Financial and Chief Accounting
Officer)
November 9, 1995
19
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Sep-30-1995
<CASH> 28
<SECURITIES> 0
<RECEIVABLES> 1,564
<ALLOWANCES> 154
<INVENTORY> 72
<CURRENT-ASSETS> 1,942
<PP&E> 19,877
<DEPRECIATION> 10,785
<TOTAL-ASSETS> 11,357
<CURRENT-LIABILITIES> 2,656
<BONDS> 3,914
<COMMON> 1
0
0
<OTHER-SE> 2,506
<TOTAL-LIABILITY-AND-EQUITY> 11,357
<SALES> 0
<TOTAL-REVENUES> 5,907
<CGS> 0
<TOTAL-COSTS> 5,166
<OTHER-EXPENSES> (24)
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 251
<INCOME-PRETAX> 514
<INCOME-TAX> 160
<INCOME-CONTINUING> 354
<DISCONTINUED> 0
<EXTRAORDINARY> (2,292)
<CHANGES> 0
<NET-INCOME> (1,937)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
