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 June 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
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions) (Unaudited)
<CAPTION>
Three Months Six Months
For the Period Ended June 30, 1995 1994 1995 1994
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service $ 1,203.5 $1,189.3 $ 2,395.6 $2,357.5
Long distance 83.3 85.0 169.5 173.3
Network access 584.0 552.1 1,151.6 1,119.7
Other 137.6 88.9 221.4 184.3
Total operating revenues 2,008.4 1,915.3 3,938.1 3,834.8
OPERATING EXPENSES
Maintenance and support 605.2 602.0 1,204.8 1,230.0
Depreciation and amortization 349.3 371.5 707.4 738.7
Marketing and customer
services 258.7 246.1 490.0 495.8
Taxes other than income taxes 184.1 199.7 384.5 399.7
Provision for uncollectibles 33.3 22.5 55.1 43.7
Other 452.7 589.6 664.7 737.2
Total operating expenses 1,883.3 2,031.4 3,506.5 3,645.1
Operating income 125.1 (116.1) 431.6 189.7
Other income - net 7.1 4.8 11.3 8.1
Interest expense 84.0 76.6 167.9 151.3
Earnings (loss) before income taxes
and extraordinary item 48.2 (187.9) 275.0 46.5
Income taxes 11.8 (76.0) 84.0 (3.8)
Earnings (loss) before extraordinary
item 36.4 (111.9) 191.0 50.3
Extraordinary item for the
discontinuance of regulatory
accounting principles,
net of taxes (Note (b)) (2,291.6) - (2,291.6) -
NET INCOME (LOSS) $(2,255.2) $ (111.9) $(2,100.6) $ 50.3
Retained Earnings (Accumulated Deficit)
Beginning of period $ 676.3 $1,062.9 $ 702.2 $1,082.0
Net income (loss) (2,255.2) (111.9) (2,100.6) 50.3
Dividends (Note (h)) - (181.1) (180.5) ( 362.4)
End of period $(1,578.9) $ 769.9 $(1,578.9) $ 769.9
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Form 10-Q Part I New York Telephone Company
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In millions)
<CAPTION>
June 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 37.2 $ 23.1
Receivables (net of allowance of
$144.6 and $133.6, respectively) 1,568.2 1,484.4
Deferred charges 69.8 39.0
Deferred income taxes 52.0 105.1
Inventory 87.8 73.5
Prepaid expenses and other 86.5 57.2
Total current assets 1,901.5 1,782.3
Telephone plant - at cost 19,736.1 20,129.6
Less: accumulated depreciation 10,627.6 8,106.9
9,108.5 12,022.7
Deferred charges and other 300.9 1,491.2
Total Assets $11,310.9 $15,296.2
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable $ 1,885.2 $ 1,996.4
Short-term debt 492.8 294.2
Dividends payable 180.5 181.2
Taxes accrued 69.8 72.9
Advance billing and customers' deposits 178.9 178.3
Interest accrued 66.9 74.7
Total current liabilities 2,874.1 2,797.7
Long-term debt 3,969.8 3,972.4
Deferred income taxes 120.4 1,611.3
Unamortized investment tax credits 146.9 212.5
Other long-term liabilities and deferred
credits 1,855.9 1,896.9
Total liabilities 8,967.1 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)(1,578.9) 702.2
Total share owner's equity 2,343.8 4,805.4
Total Liabilities and Share Owner's
Equity $11,310.9 $15,296.2
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Form 10-Q Part I New York Telephone Company
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
<CAPTION>
For the Six Months Ended June 30, 1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $(2,100.6) $ 50.3
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary item, net of taxes 2,291.6 -
Depreciation and amortization 707.4 738.7
Change in operating assets and liabilities:
Receivables (83.8) (21.2)
Current Deferred charges, Current
deferred income taxes, Inventory and
Prepaid expenses and other (34.2) 90.3
Accounts payable, Taxes accrued,
Advance billing and customers' deposits
and Interest accrued (121.5) (133.9)
Deferred income taxes and Unamortized
investment tax credits (260.3) (282.1)
Other long-term liabilities and
deferred credits 325.7 464.9
Other - net 26.5 (25.4)
Total adjustments 2,851.4 831.3
Net cash provided by operating
activities 750.8 881.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (570.2) (582.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 198.3 (493.7)
Dividends paid to NYNEX (361.7) (362.2)
Issuance of long-term debt - 593.5
Repayment of long-term debt and capital
leases (3.1) (2.8)
Net cash used in financing activities (166.5) (265.2)
Net increase in Cash and
temporary cash investments 14.1 33.7
Cash and temporary cash investments at
beginning of period 23.1 7.5
Cash and temporary cash investments at
end of period $ 37.2 $ 41.2
See accompanying notes to consolidated financial statements.
</TABLE>
<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 Report 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
<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.
<TABLE>
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:
<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
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
<TABLE>
Statement No. 71, for the most significantly affected categories
of telephone plant and equipment, is as follows:
<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 June 30, 1995, the Company had
recorded in Accounts payable checks outstanding but not yet
presented for payment of $1.4 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
($164.5 million), may possibly require the refund of a portion
of the revenues collected in the current and prior periods. As
of June 30, 1995, the aggregate amount of such revenues that was
estimated to be subject to possible refund was approximately
$198.8 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 $230 million in tax
and $170 million in associated interest will be asserted against
the Company for the period 1984 through the second quarter of
1995. The claims relate to the taxability of the Company's
interstate and intrastate network access revenues. The current
<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.
<TABLE>
(g) SUPPLEMENTAL INFORMATION - The following information is
provided in accordance with Statement of Financial Accounting
Standards No. 95, "Statement of Cash Flows":
<CAPTION>
For the
Six Months Ended
June 30,
1995 1994
(In millions)
<S> <C> <C>
Income tax payments $141.8 $166.6
Interest payments $148.6 $125.9
</TABLE>
(h) REALLOCATION OF 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 June 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 a service penalty obligation. These revenues
will be released as commitments are met under the plan.
(j) SUBSEQUENT EVENT - On August 1, 1995, the U.S. Court of Appeals for
the District of Columbia Circuit found that decisions of the Federal
Communications Commission had understated the amount of damages to be paid
by the Company in connection with overearnings complaints for the periods
1987-1988 and 1989-1990. The Company intends to petition the Court for
rehearing.
It is probable, however, that, as a result of the Court's decisions, the
Company will be required to refund revenues plus interest. For the period
1987-1988, the refund is approximately $5.4 million. For 1989-1990, the
refund is approximately $9.7 million.
<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 SIX MONTHS OF 1995 AS COMPARED TO THE FIRST SIX MONTHS OF
1994
Results of Operations
For the six months ended June 30, 1995 and 1994, net income
(loss) was $(2.1) billion and $50.3 million, respectively.
Results for the first six 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
$96.9 million for pension enhancements for approximately 310
management and 350 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 charges of $105.3 million for accruals related to
various self-insurance programs, regulatory contingencies,
operating tax provisions and revised benefit charges.
Results for the first six months of 1994 included an after-tax
charge of $256.7 million for pension enhancements for
approximately 500 management and 1,900 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 $103.3 million, or 2.7%, over the
first six months of 1994 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 $138.6 million, or 3.8%, from the
first six months of 1994. Excluding pretax pension enhancement
charges of $149.1 million and $394.9 million in 1995 and 1994,
respectively, and non-recurring charges of $162.0 million in 1995,
operating expenses decreased $54.8 million, or 1.7%, from the first
six months of 1994, as force reductions and process re-engineering
continued.
Operating Revenues
<TABLE>
Operating revenues for the six months ended June 30, 1995
increased $103.3 million, or 2.7%, over the same period last
year. This increase is comprised of the following:
<CAPTION>
Increase (Decrease)
(In millions)
<S> <C>
Local service $ 38.1
Long distance (3.8)
Network access 31.9
Other 37.1
$103.3
</TABLE>
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Local service revenues are earned from the provision of local
exchange, local private line and local public network services.
A net $48 million increase due to increased demand, 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.
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 increased
competition and customer shifts to lower priced services offered
by the Company.
Network access revenues are earned from the provision of
exchange access services primarily to interexchange carriers.
Switched access revenues increased a net $25 million due to a
$37 million increase resulting primarily from increased demand,
partially offset by a $10 million reduction in interstate rates.
Special access revenues increased $7 million primarily due to
increased demand. Certain competitive losses in long distance
revenues are being mostly offset by increases in network access
revenues.
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 a proposed Regulatory Plan ("Plan"). The Company had
deferred $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 $4.5 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). In addition, there
was an increase of $13 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 $12 million decrease in
billing and collection revenues pursuant to the contract with
AT&T Corp. ("AT&T") and a net $5 million decrease in revenues
related to the directory licensing agreement with NYNEX
Information Resources Company ("Information Resources"), as a
result of Information Resources' pension enhancement costs
recorded during the first six months of 1995 lowering their
pretax earnings.
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Operating Expenses
<TABLE>
Operating expenses for the six months ended June 30, 1995
decreased $138.6 million, or 3.8%, from the same period last
year. This decrease is comprised of the following:
<CAPTION>
Increase (Decrease)
(In millions)
<S> <C>
Depreciation and amortization $(31.3)
Taxes other than income taxes (15.2)
All other:
Business restructuring charges (245.8)
Employee related (4.9)
Other 158.6
$(138.6)
</TABLE>
Depreciation and amortization decreased principally due to:
(1) a $63 million decrease due to a change in interstate
depreciation rates, (2) a $22 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)) and
(3) a $61 million increase resulting from represcribed
intrastate depreciation rates.
Taxes other than income taxes decreased principally due to a
$10 million decrease in gross receipts taxes as a result of
higher accruals in the first half of 1994 and a $3 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 six
months ended June 30, 1995 decreased $245.8 million from the
same period last year. During the first six months of 1995,
$149.1 million of pretax charges ($96.9 million after-tax) was
recorded for approximately 310 management and 350 nonmanagement
employees who elected during the first six 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: $73.3 million ($47.6 million
after-tax) for pension enhancements, $25.7 million
($16.7 million after-tax) for associated postretirement
medical benefits, $33.9 million ($22.1 million after-tax) for
charges allocated to the Company from Telesector Resources for
its pension enhancements and $16.2 million ($10.5 million after-
tax) for its associated postretirement medical benefits. During
the first six months of 1994, $394.9 million of pretax charges
($256.7 million after-tax) was recorded for approximately 500
management and 1,900 nonmanagement employees who elected during
the first six months of 1994 to leave under retirement
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
incentives and for the Company's allocation from Telesector
Resources. The components of the pretax charges are as follows:
$230.4 million ($149.8 million after-tax) for pension
enhancements, $116.0 million ($75.4 million after-tax) for
associated postretirement medical benefits, $25.8 million
($16.8 million after-tax) for charges allocated to the Company
from Telesector Resources for its pension enhancements and
$22.7 million ($14.7 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
$31 million principally due to reductions in the Company's work
force attributable to the Company's force reduction program and
transfers of employees to Telesector Resources associated with
re-engineering the way service is delivered to customers
(see Other operating expenses), partially offset by salary and
wage rate increases. Benefit expenses increased $26 million due
to a $31 million increase related to revised charges for
postemployment benefits, an $11 million increase resulting from
the amortization of deferred pension costs pursuant to an
intrastate regulatory plan and a $3 million revised benefit
charge for non-qualified pension plans. These increases were
partially offset by an $18 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. The increase was due principally to $129 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 this
quarter and additional information made available through revised
estimates and analyses completed during the second quarter. There
was a $61 million increase in charges from affiliated companies,
primarily attributable to 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 an
$11 million increase in the provision for uncollectibles. These
increases were partially offset by a $55 million decrease in
expenses 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 $3.2 million, or 39.5%, principally
due to 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)).
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Interest expense
Interest expense increased $16.6 million, or 11.0%, 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 $6 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 $87.8 million over the same period last
year, attributable to an increase in pretax 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
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 June 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 $326 million. During the first six months of
1995, the Company utilized 1993 restructuring reserves of
approximately $97 million in the following categories:
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
[CAPTION]
<TABLE>
<S> <C> <C> <C>
Severance
Management $10
Nonmanagement 3
Total Severance $13
Severance transferred to Telesector Resources 8
Process Re-engineering:
Systems redesign:
Customer contact -
Customer provisioning -
Customer operations 4
Customer support -
Total systems redesign $ 4
Work center consolidation (1)
Branding 2
Relocation -
Training -
Re-engineering implementation -
Subtotal 5
Telesector Resources allocated reserves:
Systems re-engineering 59
Re-engineering implementation 12
Work center consolidation -
Total allocated 71
Total process re-engineering 76
Total $97
</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 for. $8 million was transferred from the Company to
Telesector Resources to cover severance costs associated with
employees who transferred from the Company to Telesector
Resources and subsequently left under the pension enhancements.
Cost Savings
During the first six months of 1995, the Company experienced a
reduction in wages of approximately $79 million as well as a
$36 million reduction in costs allocated from Telesector
Resources as a result of employees' leaving under retirement
incentives.
Financing
At June 30, 1995, the Company had $250 million of unissued,
unsecured debt securities registered with the SEC.
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
State Regulatory Matters
On August 1, 1995, the NYSPSC approved the Plan, as modified by
the NYSPSC in an order dated June 16, 1995, that will change the
manner in which the Company is regulated by the NYSPSC over the
next five to seven years. The Plan is a performance-based plan
that will replace rate of return regulation with a form of price
regulation and incentives to improve service. There will be no
restriction on the Company's earnings. 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, and will reduce average prices of
toll and intraLATA carrier access services. During its term, the
Plan will allow certain prices to be adjusted to take into
account an inflation index in excess of four percent annually and
costs associated with government mandates and other defined
"exogenous" events. 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 an aggregate
reduction of $1.1 billion or $1.9 billion, respectively, in
revenues based on current volumes of business.
The NYSPSC's modifications to the Plan include: (a) more
stringent rebate provisions and some minor changes in service
quality targets; (b) greater reductions in the Company's average
prices for intraLATA carrier access services in years three
through five of the Plan; (c) an accelerated schedule for the
provision of intraLATA presubscription; (d) an opportunity for
the Company to earn the remaining $26.5 million of the
$31 million in revenues "set aside" in 1994 and based on a
service improvement plan; and (e) a change to the effective
date of the Plan from January 1, 1995 to September 1, 1995.
Revenues previously "set aside" were released to the Company
in exchange for the extensive commitments the Company accepts
under the Plan, which relate to fair competition, universal
service, service quality and infrastructure improvements. After
accounting for the effects of those commitments as well as the
Company's 1994 service penalty obligation, $32.5 million in such
revenues was recognized in the second quarter of 1995. As
commitments are met, additional revenues previously "set aside"
will be released (see Other revenues).
<PAGE>
Form 10-Q Part II New York Telephone Company
PART II - OTHER INFORMATION
Item 5. Other Information
Federal Regulatory Matters
Price caps
New York Telephone Company (the "Company") and New
England Telephone and Telegraph Company (collectively,
the "Telephone Companies") filed tariffs in May 1995 to
implement the fifth annual update to the price cap rates,
including the adjustments ordered by the Federal
Communications Commission ("FCC") on March 30, 1995, in
its interim changes to the price cap rules for local
exchange carriers. The tariffs, which became effective
on August 1, 1995, will reduce the Telephone Companies'
interstate access rates by approximately $75.1 million
for the tariff period ending June 30, 1996.
Other Federal Regulatory Matters
The fifth annual update to the price cap rates included
tariff revisions to recover approximately $21 million of
exogenous costs resulting from the implementation of
Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other
Than Pensions". Collection of these revenues is subject
to possible refund pending resolution of the FCC's Common
Carrier Bureau investigation (see the Company's Annual
Report on Form 10-K for the year ended December 31,
1994).
The Company implemented the Universal Service
Preservation Plan ("USPP") rate structure, approved by
the FCC on May 4, 1995, in tariff filings that became
effective on August 1, 1995. It is anticipated that the
initial rate changes made pursuant to the USPP will not
reduce overall access revenues.
On July 14, 1995, the Company concluded its trial of
video dialtone service in New York City. The trial had
commenced in January 1994.
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
June 1, 1995 and filed June 8, 1995, reporting on Item 5.
<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
John Diercksen
John Diercksen
Controller
August 8, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000071689
<NAME> NEW YORK TELEPHONE COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
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<SECURITIES> 0
<RECEIVABLES> 1,568
<ALLOWANCES> 145
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<COMMON> 1
0
0
<OTHER-SE> 2,343
<TOTAL-LIABILITY-AND-EQUITY> 11,311
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