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, 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
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 attachment 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
<PAGE>
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
<PAGE>
TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business (Abbreviated pursuant to General
Instruction J(2)) ........................................ 4
2. Properties ................................................ 10
3. Legal Proceedings ......................................... 10
4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction J(2))
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters (Inapplicable)
6. Selected Financial Data ................................... 11
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)) ................................ 12
8. Consolidated Financial Statements and Supplementary Data:
Report of Management ..................................... 23
Report of Independent Accountants ........................ 24
Statements:
Consolidated Statements of Income and Retained Earnings
(Accumulated Deficit) for each of the Three Years
in the Period Ended December 31, 1995................... 25
Consolidated Balance Sheets as of December 31, 1995
and 1994 ............................................... 26
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1995 ...... 28
Notes to Consolidated Financial Statements .............. 29
Supplementary Information:
Quarterly Financial Information (Unaudited) ............ 45
9. Charges in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................... 46
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
14. Exhibits, Consolidated Financial Statement Schedule and
Reports on Form 8-K ....................................... 47
<PAGE>
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 provides telecommunications services in 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 92% of Empire's 1995 revenues was generated from the
Company.
Intrastate communications services are under the jurisdiction of state public
utility commissions (see State Regulatory below), and interstate communications
services are under the jurisdiction of the Federal Communications Commission
("FCC") (see Federal Regulatory below). In addition, state and federal
regulators review various transactions between NYNEX affiliates.
The operations of NYNEX and its subsidiaries have been subject to the
requirements of a consent decree known as the "Modification of Final Judgment"
("MFJ"), which arose out of an antitrust action brought by the United States
Department of Justice against AT&T Corp. ("AT&T"). Pursuant to the MFJ, AT&T
divested its 22 wholly-owned local exchange companies ("LECs"), including the
Company and New England Telephone and Telegraph Company ("New England
Telephone"), a wholly-owned subsidiary of NYNEX (collectively, the "Telephone
Companies"), distributed them to seven regional holding companies ("RHCs"), and
distributed the stock of the RHCs to AT&T's stockholders on January 1, 1984.
The Telecommunications Act of 1996 (the "Act") provides that any conduct or
activity previously subject to the MFJ is now subject instead to the
restrictions and obligations imposed by the Act (see Competition below).
TELECOMMUNICATIONS SERVICES
The Company provides primarily 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 telephone companies operating within such territory
may provide telecommunications services. 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, private line voice
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and data services, Wide Area Telecommunications Service, long distance 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
telecommunications companies, primarily AT&T, and certain information providers
that elect to subscribe to these services rather than perform such services
themselves. In 1995, approximately 1% of the Company's operating revenues was
derived from billing and collection services. In 1990, the Company and AT&T
signed a six-year contract 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 now performed by
the Company. The Company and AT&T are reviewing a proposed extension of the
contract through December 31, 1996.
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.
The following table sets forth for the Company the approximate number of network
access lines in service at the end of each year:
In Thousands
--------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Network Access Lines
in Service. . . . . . . 10,795 10,477 10,135 9,897 9,735
The territories served by the Company contain sizable areas and many localities
in which local service is provided by nonaffiliated telephone companies.
Rochester, Jamestown, Middletown, Webster and Henrietta, New York are the only
cities with a population of more than 25,000 within the Telephone Companies'
general operating area that are served by such nonaffiliated companies. On
December 31, 1995, these nonaffiliated companies had approximately 1,183,000
network access lines in service.
For the year ending December 31, 1995, approximately 94% of the total operating
revenues of the Company was derived from telecommunications services, of which
one customer, AT&T, accounted for approximately 17%, primarily in network access
and other revenues. The remaining approximately 6% of total operating revenues
was from other sources, primarily licensing fees for telephone directories and
inside wire related charges.
CERTAIN AFFILIATED BUSINESS OPERATIONS
- --------------------------------------
TELESECTOR RESOURCES GROUP, INC
Telesector Resources Group, Inc. ("Telesector Resources") is a wholly-owned
subsidiary of the Telephone Companies. The Company has a 66 2/3% ownership in
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Telesector Resources and shares voting rights equally with the other owner, New
England Telephone.
The Telephone Companies have consolidated all or part of many regional service
and support functions into Telesector Resources as part of the business
restructuring (see Business Restructuring below). 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, accounting, finance, data processing and
related services, 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 RHCs formed in connection with the AT&T divestiture owns an
equal interest in Bell Communications Research, Inc. ("Bellcore"), which is held
by Telesector Resources. 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. In 1995, it was announced
that the seven RHC's, including NYNEX, have decided to pursue the disposition of
Bellcore. A final decision regarding the disposition of their interests and the
structure of such a transaction will be subject to obtaining satisfactory
financial and other terms and necessary approvals.
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. Since 1986, the Company and the New York State Public Service
Commission ("NYSPSC") have been negotiating the terms of this agreement.
Beginning in January 1991, Information Resources has made payments to the
Company under an arrangement that in effect remits to the Company Information
Resources' 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. In January 1994, the
parties to the proceeding submitted their final briefs to the
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NYSPSC, which is to review the administrative law judge's recommendation and
issue a final order. A final order has not been issued.
BUSINESS RESTRUCTURING
- ----------------------
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
savings necessary for the Company to operate in an increasingly competitive
environment (see Business Restructuring, Part II, Item 7).
EXTRAORDINARY ITEM
- ------------------
The Company discontinued the application of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("Statement No. 71") in the second quarter of 1995. As a result, the Company
recorded an extraordinary non-cash charge of approximately $627.8 million, net
of income taxes of $414.2 million (see Extraordinary Item, Part II, Item 7).
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 exclude the equity component of allowance for funds used during
construction prior to the discontinuance of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(see Extraordinary Item, Part II, Item 7), and additions under capital leases.
Capital expenditures for 1991 through 1995 are set forth below:
In Millions
--------------------------
1995. . . . . . . . $1,436
1994. . . . . . . . $1,330
1993. . . . . . . . $1,342
1992. . . . . . . . $1,221
1991. . . . . . . . $1,354
STATE REGULATORY
- ----------------
See discussion of State Regulatory in Part II, Item 7, which is incorporated
herein by reference.
NEW YORK
In December 1995, MCI Telecommunications Corporation ("MCI") commenced a
proceeding in the New York Supreme Court challenging the NYSPSC's reciprocal
compensation scheme for interconnection between carriers. The Company intervened
in the proceeding and filed an answer to MCI's petition in January 1996.
7
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Pursuant to a 1993 NYSPSC order, the Company may retain a portion of 1993
earnings above an 11.7% return on equity, depending on its attainment of
specified service quality criteria, with earnings above 12.7% return on equity
to be held for the ratepayers' benefit. The Company has submitted a report to
the NYSPSC showing 1993 earnings below 11.7%.
FEDERAL REGULATORY
- ------------------
See discussion of Federal Regulatory in Part II, Item 7, which is incorporated
herein by reference.
PRICE CAP PLAN
Revised tariffs under the price cap rules reduced interstate access rates by
approximately $90 million in the 1993-1994 tariff period and $9.4 million in the
1994-1995 tariff period. In August 1995, the Telephone Companies implemented the
annual update to the price cap rates, which will result in a net reduction in
interstate access rates of approximately $75.0 million by June 1996. The annual
update 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.
In 1995, the FCC announced interim changes in the price cap rules, under which
each LEC will choose one of three productivity factor offsets to be used in
setting its price cap index. LECs adopting the highest productivity factor will
retain all interstate earnings. The two other options entail sharing of earnings
and will allow a maximum interstate return on investment of either 14.25% or
12.75%.
The FCC also determined that the 3.3% productivity factor adopted in 1991 and
used since then by most LECs, including the Telephone Companies, was
understated. Accordingly, the FCC required each such LEC to make up front
reductions to "reinitialize" its price cap index. The FCC also revised the
criteria for including exogenous cost changes and, as a result, each LEC will be
required to recalculate its price cap index on a prospective basis to exclude
cost increases due to changes in the accounting treatment of other
postemployment benefit expenses. Finally, the FCC gave the LECs additional
pricing flexibility in certain service categories.
OTHER FEDERAL
In December 1995, MFS Communications ("MFS") filed a petition with the FCC for a
declaratory ruling that LECs must provide central office collocation with
respect to all interstate access services, upon bona fide request. In its
petition, MFS cites the Telephone Companies for refusal to provide
interconnection to certain services in central offices where MFS is collocated.
The Telephone Companies filed comments in which they argued that the FCC's
current rules do not require expanded interconnection to the services described
in MFS' petition and that the relief sought by MFS would require the FCC to
issue a new rule.
In October 1995, the U.S. Court of Appeals for the District of Columbia Circuit
denied the Telephone Companies' petition for rehearing on its decision
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that the FCC had understated the amount of damages to be paid in connection with
overearnings complaints for the periods 1987-1988 and 1989-1990. In February
1996, the Telephone Companies joined other parties in petitioning the U.S.
Supreme Court for review of the Court of Appeals decision. It is probable that
the Telephone Companies will be required to pay damages plus interest, which
were accrued in 1995. For the period 1987-1988, the amount for New York
Telephone is approximately $5.4 million. For the period 1989-1990, New York
Telephone will be required to pay approximately $9.7 million.
In March 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 had the effect of understating the Telephone
Companies' revenue requirement; the net effect was 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 required 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 index; and (3) require
the Telephone Companies to improve their internal processes to bring them into
compliance. The Telephone Companies filed responses in May and September 1995,
demonstrating that forfeitures should not be imposed, that ratepayers were not
harmed by the alleged violations, and that internal processes have already been
improved.
COMPETITION
- -----------
Federal and state regulators have adopted policies favoring competition and have
initiated various proceedings to further those policies. Those policies will be
advanced by the enactment of the Telecommunications Act of 1996, which
immediately opens the Company's local telecommunications markets to full
competition. An increasing number of national and global companies with
substantial capital and marketing resources are expected to enter many of the
Company's local markets.
Most of the services that the Company provides in its local telecommunications
markets have been facing increasing competition for the past several years. The
Company has responded by obtaining increased pricing flexibility under incentive
regulation, introducing new services, and improving service quality. Increases
in 1995 Private Line/Special Access revenues, and the number of Centrex
"win-backs" from PBX vendors indicate the Company's ability to respond
effectively in its most competitive markets.
Competition for intraLATA toll revenues has intensified, beginning in 1994 with
the increased marketing of "dial-around" programs by interexchange carriers.
However, to date, the "retail" toll revenues the Company has lost to such
programs are being offset in part by increased revenues from wholesale access
charges. IntraLATA presubscription ("ILP") began in New York in late
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1995 and was completed in February 1996. Future wholesale pricing is the subject
of pending regulatory proceedings.
In the highly competitive interstate access market, the Company received a
waiver from the FCC in 1995, to de-average switched access rates in the
metropolitan New York LATA and introduce a new fixed monthly charge paid
directly by interexchange carriers. This has enabled the Company to charge
prices that more accurately reflect the market conditions in its most
competitive area.
EMPLOYEE RELATIONS
- ------------------
The Company and its subsidiary had approximately 34,100 employees at December
31, 1995. Approximately 30,900 employees are represented by unions, of which
approximately 97% are represented by the Communications Workers of America
("CWA") and approximately 3% by the International Brotherhood of Electrical
Workers ("IBEW"), both of which are affiliated with the AFL-CIO.
In 1994, agreements were ratified with the CWA and the IBEW to extend the
collective bargaining agreements through August 8, 1998. The wage rates
increased 4.0% in August 1994 and 1995 and will increase 3.5% and 3.0% in August
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 stock grant and other incentives
to improve service quality.
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, 1995, the gross book value of telephone plant was $20.2 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 is 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. At December 31, 1995, the majority of the planned
work centers were completed.
Substantially all of the Company's assets are subject to lien under the
Company's Refunding Mortgage indenture. At December 31, 1995, the principal
amount of Refunding Mortgage bonds outstanding was $1.1 billion.
ITEM 3. LEGAL PROCEEDINGS.
There were no proceedings reportable under Item 3.
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PART II
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Dollars in Millions 1995 1994 1993 1992 1991
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 7,937 $ 7,737 $ 7,847 $ 7,746 $ 7,697
Operating expenses $ 6,932 $ 6,958 $ 7,505 $ 6,259 $ 6,651
Interest expense $ 307 $ 314 $ 349 $ 363 $ 375
Earnings before extraordinary item
and cumulative effect of change
in accounting principle $ 501 $ 345 $ 82 $ 856 $ 536
Extraordinary item for the
discontinuance of regulatory
accounting principles,
net of taxes $(2,292) $ - $ - $ - $ -
Cumulative effect of change in
accounting for postemployment
benefits, net of taxes $ - $ - $ (89) $ - $ -
Net income (loss) $(1,791) $ 345 $ (8) $ 856 $ 536
Telephone plant - net $ 9,306 $12,023 $12,116 $12,134 $12,232
Total assets $11,569 $15,296 $15,435 $15,603 $15,864
Long-term debt $ 3,913 $ 3,972 $ 3,972 $ 3,984 $ 3,956
Share owner's equity $ 2,473 $ 4,805 $ 5,185 $ 5,916 $ 5,659
Capital expenditures* $ 1,436 $ 1,330 $ 1,342 $ 1,221 $ 1,354
Return to equity (50.09)% 6.81% (0.13)% 14.66% 9.17%
Network access lines
in service (in thousands) 10,795 10,477 10,135 9,897 9,735
</TABLE>
See Management's Discussion and Analysis of Results of Operations for the
effect of non-recurring items on 1995 results, and restructuring charges on
1995, 1994 and 1993 results of operations. Results of operations for 1991
include $317 million of pretax ($209 million after-tax) restructuring
charges.
* Excludes additions under capital lease obligations, and prior to the
discontinuance of regulatory accounting principles, the equity component of
allowance for funds used during construction.
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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
- ----------------------
New York Telephone Company's (the "Company") 1993 results included pretax
charges of approximately $992 million ($645 million after-tax) for business
restructuring. 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 savings necessary for
the Company to operate in an increasingly competitive environment.
The 1993 charges were comprised of: $557 million in employee termination costs
to reduce the work force by approximately 9,000 employees by the end of 1996;
$208 million of process re-engineering charges, primarily for systems redesign
and work center consolidation; and $227 million for the Company's allocation of
Telesector Resources Group, Inc. ("Telesector Resources") business restructuring
charges.
1995 AND 1994 ADDITIONAL CHARGES
During 1994, the Company announced retirement incentives to provide a voluntary
means of implementing substantially all of the planned work force reductions.
The retirement incentives were to be offered at different times through 1996
according to local force requirements and were expected to generate additional
charges over that period of time as employees elected to leave the business
through retirement incentives rather than through the severance provisions of
the 1993 force reduction plan. In 1995 and 1994, respectively, approximately
1,900 and 3,700 of the Company's employees accepted the incentive plan and
$304.1 million ($197.6 million after-tax) and $523.4 million ($340.2 million
after-tax), respectively, of incremental charges for the cost of retirement
incentives were recorded for employees who left the Company, and for the
Company's allocation from Telesector Resources for its retirement incentives.
The reserves established in 1993 for severance have been and will continue to be
transferred primarily to the pension liability on a per employee basis as a
result of employees' accepting the retirement incentives. Much of the cost of
the enhancements will be funded by NYNEX Corporation's ("NYNEX") pension plans.
The components of the additional pretax charges for 1995 were: $190.6 million
for pension enhancements, $31.0 million for postretirement medical costs, and
$82.5 million allocated to the Company from Telesector Resources for its
retirement incentives and postretirement medical costs. The components of the
additional pretax charges for 1994 were: $309.7 million for pension
enhancements; $156.3 million for postretirement medical costs; and $57.4 million
allocated to the Company from Telesector Resources for its retirement incentives
and postretirement medical costs.
EMPLOYEE REDUCTIONS
The 1993 employee termination costs of $557 million were comprised of $287
million for employee severance payments (including salary, payroll taxes, and
outplacement costs) and $270 million for postretirement medical costs
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(total after-tax charges were $362 million). These costs were for planned work
force reductions of 1,500 management employees and 7,500 nonmanagement
employees. At December 31, 1994, the actual number of employees who elected to
leave through retirement incentives in 1994 and the expectation for 1995 and
1996 were as follows:
1994 1995 1996 Total
------------------------------------------------
Management 1,300* 200 - 1,500
Nonmanagement 2,600 3,500 1,400 7,500
------------------------------------------------
Total 3,900 3,700 1,400 9,000
================================================
* Includes 217 management employees who transferred from the Company to
Telesector Resources and subsequently left in 1994 under the pension
enhancements.
CURRENT STATUS
During 1995, it became evident that the number of management employees leaving
under the retirement incentives would exceed the original estimate due to
additional management staff reduction efforts. It was also determined that, due
to volume of business growth, the expected reduction in the number of
nonmanagement employees would be less and would not be fully realized until
1998. The actual number of employees who elected to leave through retirement
incentives in 1995 were 810 management and 1,250 nonmanagement employees, which
include 80 management and 70 nonmanagement employees who transferred from the
Company to Telesector Resources and subsequently left under the pension
enhancements.
At the present time, the Company expects the total number of employees who will
elect to take the pension enhancements to be in the range of 9,000 to 9,600,
consisting of approximately 2,700 management and 6,300 to 6,900 nonmanagement
employees, depending on work volumes, needs of the business, and timing of the
incentive offers.
The actual severance reserves utilized and the application of the postretirement
medical liability established in 1993 during 1994 and 1995 are shown below:
(Dollars In Millions) 1994 1995 Total
-------------------------
Severance*#
-----------
Management $113 $21 $134
Nonmanagement 22 20 42
------------------------
Total $135 $41 $176
========================
Postretirement Medical#
-----------------------
Management $ 46 $ 7 $ 53
Nonmanagement 36 29 65
------------------------
Total $ 82 $36 $118
========================
* The severance utilization amounts in 1995 and 1994 are comprised of $32 and
$107 million, respectively, of severance reserves transferred to the
pension liability and $1 and $8 million, respectively, utilized for other
retiree costs.
# The severance and postretirement medical amounts above include $8 and $4
million, respectively, in 1995 and $20 and $8 million, respectively, in
1994 which was transferred to Telesector Resources for employees who
transferred from the Company to Telesector Resources and subsequently left
under the retirement incentives.
13
<PAGE>
Assuming that employees will continue to leave under the retirement incentives,
it is expected that the remaining $111 million of severance reserves will be
utilized and the remaining $152 million of the postretirement medical liability
will be applied in the years 1996 through 1998.
PROCESS RE-ENGINEERING
Approximately $208 million of the 1993 charges ($135 million after-tax) consists
of costs associated with re-engineering service delivery 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
is decentralizing the provision of residence and business customer service
throughout the region, creating regional businesses to focus on unique markets,
and centralizing numerous operations and support functions. At December 31,
1994, the actual 1994 utilization of reserves for process re-engineering and the
revised expected utilization for 1995 and 1996 were as follows:
(Dollars In Millions) 1994 1995 1996 Total
---------------------------------------------
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
=============================================
SYSTEMS REDESIGN is the cost of developing new systems, processes and procedures
to facilitate implementation of process re-engineering initiatives in order to
realize operational efficiencies and enable the Company to reduce work force
levels. These projects consist of radical changes in the applications and
systems supporting business functions to be redesigned as part of the
restructuring plan. All of 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. The business
processes included in systems redesign are customer contact and customer
operations.
CUSTOMER CONTACT represents the direct interface with the customer to provide
sales, billing inquiry and repair service scheduling on the first contact.
CUSTOMER OPERATIONS focuses on network monitoring and surveillance, trouble
testing, dispatch control, and proactive repair, with reliability as a critical
competitive advantage.
WORK CENTER CONSOLIDATION costs are incremental costs associated with
establishing work teams in fewer locations to take advantage of lower force
levels and system efficiencies, such as moving costs, lease termination costs
(from the date premises are vacated), and other consolidation costs. BRANDING
includes the costs to develop a single "NYNEX" brand identity associated with
restructured business operations. RELOCATION costs are required to move
personnel to different locations due to work center consolidations and include
costs based on the Company's relocation guidelines and the provisions of
collective bargaining agreements. TRAINING costs are for training
14
<PAGE>
nonmanagement employees on newly-designed, cross-functional job positions and
re-engineered systems created as part of the restructuring plan, which will
permit one employee to perform tasks formerly performed by several employees,
and include tuition, out-of-pocket course development and administrative costs,
facilities charges, and related travel and lodging. RE-ENGINEERING
IMPLEMENTATION costs are incremental costs to complete re-engineering
initiatives.
CURRENT STATUS
At December 31, 1995, the actual 1994 and 1995 utilization of reserves and
revised expectation for 1996 are as follows:
(Dollars In Millions) 1994 1995 1996 Total
---------------------------------------------
Systems redesign $ - $ 68 $46 $114
Work center consolidation 10 35 17 62
Branding 15 4 1 20
Relocation - - 1 1
Training - 2 8 10
Re-engineering implementation 1 - - 1
---------------------------------------------
Total $26 $109 $73 $208
=============================================
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 and permit development of multi-tasking capabilities. A
higher degree of complexity and additional functionality required by real-time,
interactive systems contributed to the increase. During 1995, systems estimates
increased due to the complexity and extensiveness of integration testing and
quality assurance processes.
The actual 1994 and 1995 utilization and the revised expected utilization in
1996 of the systems redesign reserves, by business process, are as follows:
(Dollars In Millions) 1994 1995 1996 Total
---------------------------------------------
Customer contact $ - $49 $23 $ 72
Customer operations - 19 23 42
---------------------------------------------
Total $ - $68 $46 $114
=============================================
WORK CENTER CONSOLIDATION was revised in 1994 for an increase in the number of
work centers from what was originally planned based on union agreements. The
revised estimate for 1996 is based on actual costs incurred to date and reflects
the completion of the majority of the planned work centers. RELOCATION of
employees was revised downward in 1994 due to the increase in the number of work
centers and terms of the union agreements. At the end of 1995, the majority of
the work centers are complete. TRAINING was delayed in 1994 due to the timing of
the union agreements and the higher degree of complexity of systems redesign;
total expected costs were decreased due to the planned use of more in-house
training. Training was accomplished in 1995 through in-house, on-the-job, and
multi-media training. RE-ENGINEERING IMPLEMENTATION is winding down and will be
reported with the related projects in 1996.
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
15
<PAGE>
its force reduction and re-engineering programs. The actual utilization of
reserves in 1994 and 1995 and the expectation for 1996 are as follows:
(Dollars In Millions) 1994 1995 1996 Total
---------------------------------------------
Severance $ 71* $ - $ - $ 71
Postretirement medical costs 31 - - 31
Systems re-engineering 45 68 5 118
Re-engineering implementation 21 14 - 35
---------------------------------------------
Total $168 $82 $ 5 $255
=============================================
* 1994 includes $28 million of severance amounts associated with the balance
of the 1991 restructuring reserve at December 31, 1993.
COST SAVINGS
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 5,600 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits of approximately $280 million. In addition, the
Company's share of the annualized average reduction in wages and benefits
attributable to employees of Telesector Resources leaving under retirement
incentives will be approximately $110 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.
RESULTS OF OPERATIONS
- ---------------------
For the years ended December 31, 1995 and 1994, net (loss) income was $(1.8)
billion and $345.0 million, respectively. Results for 1995 include: an after-tax
extraordinary charge of $2.3 billion for the discontinuance of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("Statement No. 71"); an after-tax charge of $197.6 million
for pension enhancements for employees who elected to leave the Company under
retirement incentives and for the Company's allocation from 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 1994 included an after-tax charge of $340.2 million for pension enhancements
for 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 for 1995 were $7.9 billion, an increase of $200.5 million, or
2.6%, over 1994. Adjusting for a change in presentation in 1995 of gross
receipts tax, operating revenues increased 3.3% to $8.0 billion. Supporting the
revenue growth was a 3.0% growth in access lines and an 8.3% increase in access
usage over last year.
OPERATING EXPENSES for 1995 were $6.9 billion, a decrease of $25.7 million, or
.4%, from 1994. Included in this decrease (and as described below) were: pension
enhancement charges in 1995 and 1994; non-recurring charges in 1995; and a
change in presentation in 1995 of gross receipts tax. Adjusting for these items,
operating expenses were $6.4 billion, an increase of $1.7 million over 1994.
16
<PAGE>
OPERATING REVENUES
The increase in operating revenues is comprised of the following:
(In millions)
-------------
Local service $ 51.2
Long distance -
Network access 21.3
Other 128.0
------
$200.5
======
LOCAL SERVICE REVENUES are earned from the provision of local exchange, local
private line and local public network services. Increased demand of $97 million,
driven by growth in access lines and sales of calling features, was partially
offset by a $28 million decrease in rates attributable to an order by the New
York State Public Service Commission ("NYSPSC") approving a performance-based
regulatory plan (the "Plan") (see STATE REGULATORY) and an $8 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. Long distance revenues did not change
significantly in 1995. It should be noted that certain competitive losses in
long distance revenues are mostly offset by increases in network access
revenues.
NETWORK ACCESS REVENUES are earned from the provision of exchange access
services primarily to interexchange carriers. Network access revenues increased
$76.5 million, or 3.4%, in 1995 excluding a $55.2 million decrease attributable
to a change in the presentation of gross receipts tax collected by the Company
on behalf of interexchange carriers. (In the third quarter of 1995, as a result
of a change in tax law, the Company was no longer required to pay gross receipts
tax to New York State on interstate access revenues. Prior to this change, these
taxes were collected from interexchange carriers and remitted to the tax
authority and were included in both operating revenues and operating expenses)
(see OPERATING EXPENSES). Special access revenues increased $18 million
primarily due to increased demand and an increase in interstate rates. Switched
access revenues increased a net $58 million due to a $92 million increase in
demand, partially offset by a $25 million reduction in interstate rates and a $7
million reduction in intrastate rates attributable to an NYSPSC order (see STATE
REGULATORY).
OTHER REVENUES are earned from the provision of products and services other than
Local service, Long distance and Network access. The increase in other revenues
is due to the following: (1) $109.2 million due to the cessation of "setting
aside" revenues in the second quarter of 1995 as a result of an NYSPSC order
approving the Plan, (2) $10 million due to the elimination of the deferral of
intrastate revenues as a result of the discontinuance of regulatory accounting
principles (see Note B), (3) $5 million from revenues earned under a service
improvement plan implemented in 1994, (4) $5 million recognized in connection
with intraLATA presubscription ("ILP") commitments that were met in 1995, and
(5) $6 million related to the directory licensing agreement with NYNEX
Information Resources Company. These increases were
17
<PAGE>
partially offset by a $12 million decrease in billing and collection revenues
pursuant to a contract with AT&T Corp. ("AT&T").
With respect to (1) above, future quarters will no longer reflect the setting
aside of revenues of $38 million per quarter experienced in 1994 and early 1995.
At December 31, 1995, $188 million of revenues remains deferred ($161 million
pursuant to the Plan and $27 million pursuant to the service improvement plan)
and will be recognized as commitments are met or obligations are satisfied (see
STATE REGULATORY).
OPERATING EXPENSES
OPERATING EXPENSES for 1995 were $6.9 billion, a decrease of $25.7 million, or
.4%, from 1994. Included in this decrease were pension enhancement charges of
$304.1 and $523.4 million in 1995 and 1994, respectively, and non-recurring
charges in 1995 of $247.1 million for various self-insurance programs, a court
decision on overearnings complaints for the periods 1987-1988 and 1989-1990,
operating tax provisions and revised benefit charges. These charges reflect
events that occurred in 1995 and additional information made available through
revised estimates and analyses completed during 1995. In addition, there was a
$55.2 million change in presentation in 1995 of gross receipts tax collected by
the Company on behalf of interexchange carriers (see NETWORK ACCESS REVENUES).
Adjusting for these items, operating expenses were $6.4 billion, an increase of
$1.7 million over 1994.
DEPRECIATION AND AMORTIZATION decreased $92.8 million principally due to: (1)
$41 million due to the termination of amortization authorized by the NYSPSC, (2)
$39 million due to an adjustment of plant balances as a result of the
discontinuance of regulatory accounting principles (see Note B), (3) $15 million
related to increased retirement of analog switching equipment partially offset
by higher depreciation rates and fixed asset growth in other categories of
plant, and (4) a net $2 million increase attributable to represcribed intrastate
depreciation rates and a change in interstate depreciation rates in 1995 prior
to the adoption of Statement of Financial Accounting Standards No. 101,
"Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71" ("Statement No. 101").
TAXES OTHER THAN INCOME, which include gross receipts taxes, property taxes and
other non-income based taxes, decreased $5.6 million. The decrease is
principally due to a decrease in property taxes resulting from lower assessments
of property value, partially offset by gross receipts taxes (primarily from a
tax settlement).
EMPLOYEE RELATED COSTS, which consist primarily of wages, payroll taxes, and
employee benefits, decreased $58.4 million. Wages and payroll taxes decreased
$28 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 decreased $31 million. There was a $34
million decrease associated with revised charges for postemployment benefits
(including revised estimates associated with workers compensation accruals) and
a $23 million decrease resulting from the amortization of
18
<PAGE>
deferred pension costs pursuant to an intrastate regulatory plan. These
decreases were offset by an $18 million increase as a result of the 1994
deferral of postemployment benefits as ordered by the NYSPSC, a $7 million
increase in pension expense attributable to changes in actuarial assumptions,
and a $2 million increase attributable to revised charges for non-qualified
pension plans.
OTHER OPERATING EXPENSES, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $158.5
million. There was a $247 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 $29 million increase in the provision for uncollectibles. These increases
were partially offset by a $96 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, and a $16 million decrease in
right-to-use fees resulting from decreased software deployment.
OTHER INCOME - NET
OTHER INCOME - NET increased $8.2 million, or 38.7%, due primarily 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 decreased $7.6 million, or 2.4%, from the same period last
year. This decrease was due to the reversal in 1995 of $14 million of previously
recorded interest on the revenue set aside as ordered by the NYSPSC (see STATE
REGULATORY), partially offset by an increase in interest on funded debt as a
result of the issuance of $600 million of long-term debt in February 1994.
INCOME TAXES
INCOME TAXES increased $86.5 million, 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 the carrying amount of telephone plant
and equipment and to eliminate non-plant regulatory assets and liabilities from
the balance sheet. This change resulted in an after-tax
19
<PAGE>
charge of $2.3 billion, consisting of $1.8 billion to adjust telephone plant and
equipment and $0.5 billion to write off non-plant regulatory assets and
liabilities. The Company now utilizes shorter asset lives for certain categories
of telephone plant and equipment than those previously approved by regulators
(see Note B).
FINANCING
At December 31, 1995, the Company had $250 million of unissued, unsecured debt
securities registered with the Securities and Exchange Commission.
COLLECTIVE BARGAINING AGREEMENTS
- --------------------------------
In May 1994, agreements were ratified with the Communications Workers of America
and the International Brotherhood of Electrical Workers in New York to extend
the collective bargaining agreements through August 8, 1998. The wage rates
increased 4.0% in August 1994 and 1995 and will increase 3.5% and 3.0% in August
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 stock grant and other incentives
to improve service quality.
REGULATORY ENVIRONMENT
- ----------------------
STATE REGULATORY
During 1995 the Company was able to replace rate of return regulation with a
price regulation plan in New York. This state regulatory plan eliminates the
Company's obligation to share earnings with customers, allows the Company
greater flexibility to vary prices to meet competition, and imposes service
quality performance measurements.
INCENTIVE PLAN: In 1995, the NYSPSC approved with modifications a Plan that
changes the manner in which the Company will be regulated by the NYSPSC over the
next five to seven years. Prices are capped at current rates for "basic"
services such as residence and business exchange access, residence and business
local calling and LifeLine service, and price reduction commitments are
established for a number of services, including toll and intraLATA carrier
access services. Certain prices may be adjusted annually based on an inflation
index and costs associated with NYSPSC 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, based on
current volumes of business, would produce an aggregate revenue reduction over
the term of the plan of $1.1 billion at the end of five years, or $1.9 billion
at the end of seven years.
The Plan also establishes service quality targets with stringent rebate
provisions if the Company is unable to meet some or all of the targets, and sets
an accelerated schedule for the provision of ILP. The Company's compliance
tariffs under the Plan became effective on a temporary basis as of September 1,
1995, and will remain temporary pending the NYSPSC Staff's review and
investigation.
20
<PAGE>
The NYSPSC has rejected various petitions that had been filed for
reconsideration of the order approving the Plan and indicated that it had
approved a Staff plan for monitoring the Company's compliance. In late 1995, MCI
Telecommunications Corporation ("MCI") commenced a proceeding in the New York
Supreme Court seeking to overturn the NYSPSC's orders with respect to the Plan.
MCI challenges the lack of an earnings cap and asserts that the Company's rates
should be further reduced annually by the amount of the $153 million set-aside.
COMPETITION II PROCEEDING: In 1995, the NYSPSC issued an order resolving certain
issues in its proceeding on local exchange competition in New York State. The
Company must provide White Pages directory listings at no charge to customers of
competitive local exchange carriers ("CLECs"), but may negotiate fees with CLECs
for delivery of the directories to their customers. The NYSPSC also established
a reciprocal compensation scheme for the payment of access rates when the
Company and CLECs terminate traffic on each other's networks. In general, the
NYSPSC's plan permits "full-service, facilities-based" local exchange carriers
to pay a lower rate than other carriers will be required to pay. The NYSPSC also
determined that the Company must, upon request, provide services to interconnect
CLECs that are collocated in the Company's central offices.
The NYSPSC also directed the Company to file tariffs to remove restrictions on
the resale of residential services, effective February 1996, or to show cause
why such restrictions should not be removed. In January 1996, following the
Company's show-cause response requesting more time for implementation, the
NYSPSC issued an order requiring implementation, with respect to both
residential and business services, in October 1996.
The NYSPSC has issued orders resolving various procedural and operational issues
related to ILP. The NYSPSC approved the Company's proposal to implement ILP for
analog central offices as those switches are replaced by digital equipment. By
the end of February 1996, the Company had implemented ILP in all of its digital
switching systems.
OTHER: In 1991, the NYSPSC authorized a $250 million increase in the Company's
rates, of which $47.5 million annually remains subject to refund pending
resolution of certain issues related to the Company's transactions with other
NYNEX affiliates in 1984-1990. In 1995, the NYSPSC's independent consultant
concluded its final report detailing findings and recommendations, and an NYSPSC
administrative law judge issued a procedural ruling for future hearings and the
filing of evidence. In January 1996, the Company filed notice with the NYSPSC of
its intention to open settlement discussions in this case and requested an
extension of the date for the filing of testimony.
FEDERAL REGULATORY
PRICE CAP PLAN: The Telephone Companies are subject to incentive regulation in
the form of price caps. Price cap limits are subject to adjustment each year to
reflect inflation, a productivity factor and certain other cost changes. In
1995, the Federal Communications Commission ("FCC") issued a Notice of Proposed
Rulemaking regarding the productivity factor used by local exchange carriers
("LECs") in the FCC price cap formula. The Proposed Rulemaking will consider
changes in the determination of the productivity factor, the recognition of
exogenous costs, the extent of carrier sharing,
21
<PAGE>
and the formula for calculating the price cap index for certain services. The
FCC expects to issue an order in time for the final changes to be reflected in
LECs' rates as of July 1996. The FCC has also issued a Notice of Proposed
Rulemaking to determine how the price cap rules should be modified to
accommodate increasing levels of competition. The FCC asked for comments on a
proposal by the Telephone Companies that earnings sharing be reduced or
eliminated as an LEC implements measures to promote competition for local
exchange services. The FCC has indicated that it intends to establish a
rulemaking proceeding in 1996 to consider reform of the rules concerning the
structure of access charges. This rulemaking proceeding would consider changes
that might be necessary as competition increases in the local telephone market.
OTHER FEDERAL Regulatory: In January 1996, the FCC issued a Notice of Proposed
Rulemaking addressing the charges made for interconnection between LECs and
wireless carriers. Currently, such charges are established by contracts under
the jurisdiction of the state regulatory commissions. The FCC requested comment
on its tentative conclusion to require, pending the completion of its Proposed
Rulemaking, reciprocal "bill-and-keep" compensation arrangements under which the
originating carrier would no longer pay the terminating carrier for access.
Adoption of the proposed procedure would have a negative effect on the revenues
of the LECs, including the Telephone Companies. The Telephone Companies plan to
participate actively in the proceeding.
During 1996, the FCC will conduct a number of rulemaking proceedings in order to
implement the Telecommunications Legislation enacted in February 1996.
22
<PAGE>
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, which require Management to make estimates and assumptions that
affect reported amounts. Actual results could differ from those estimates. In
Management's opinion, the consolidated financial statements are fairly
presented. 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 share owner's and directors' meetings. Furthermore,
Management believes that all representations made to Coopers & Lybrand during
its audit were valid and appropriate.
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.
Richard A. Jalkut
President and Chief Executive Officer
Mel Meskin
Vice President-Finance and Treasurer
23
<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 (the
"Company") 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 the
Company as of December 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, 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 Note B to the consolidated financial statements, in the second
quarter of 1995, the Company discontinued accounting for its operations in
accordance with Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation". Additionally, as discussed in
Note D to the consolidated financial statements, in the fourth quarter of 1993,
the Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits", retroactive to January 1,
1993.
Coopers & Lybrand L.L.P.
New York, New York
February 5, 1996
24
<PAGE>
<TABLE>
<CAPTION>
NEW YORK TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
-----------------------------------------------------------------------------
DOLLARS IN MILLIONS
For the Year Ended December 31,
---------------------------------------------
1995 1994 1993
---- ---- ----
OPERATING REVENUES
- ------------------
<S> <C> <C> <C>
Local service $ 4,794.5 $4,743.3 $4,695.9
Long distance 348.1 348.1 379.8
Network access 2,267.0 2,245.7 2,230.1
Other 527.5 399.5 541.2
--------- -------- --------
Total operating revenues 7,937.1 7,736.6 7,847.0
--------- -------- --------
OPERATING EXPENSES
- ------------------
Maintenance and support 2,431.2 2,448.7 2,527.6
Depreciation and amortization 1,393.7 1,486.5 1,438.8
Marketing and customer services 1,054.2 979.1 1,140.7
Taxes other than income 798.8 789.6 818.5
Provision for uncollectible revenues 109.2 79.9 77.8
Other 1,145.2 1,174.2 1,501.2
--------- -------- --------
Total operating expenses 6,932.3 6,958.0 7,504.6
--------- -------- --------
Operating income 1,004.8 778.6 342.4
Other income (expense) - net 29.4 21.2 20.0
Interest expense 306.8 314.4 348.6
--------- -------- --------
Earnings before income taxes,
extraordinary item and cumulative effect
of change in accounting principle 727.4 485.4 13.8
Income taxes 226.9 140.4 (67.8)
--------- -------- --------
Earnings before extraordinary item
and cumulative effect of change
in accounting principle 500.5 345.0 81.6
Extraordinary item for the discontinuance of
regulatory accounting principles,
net of taxes (Note B) (2,291.6) - -
Cumulative effect of change in
accounting for postemployment benefits,
net of taxes (Note D) - - (89.3)
--------- -------- --------
NET INCOME (LOSS) $(1,791.1) $ 345.0 $ (7.7)
========= ======== ========
RETAINED EARNINGS (ACCUMULATED DEFICIT)
- ---------------------------------------
Beginning of year $ 702.2 $1,082.0 $1,813.6
Net income (loss) (1,791.1) 345.0 (7.7)
Dividends (Note R) (180.5) (724.8) (723.9)
--------- -------- --------
End of year $(1,269.4) $ 702.2 $1,082.0
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
NEW YORK TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
---------------------------
DOLLARS IN MILLIONS
December 31,
-------------------------------
1995 1994
---- ----
ASSETS
- ------
Current assets:
Cash $ 39.9 $ 23.1
Receivables
Trade (net of allowance of $154.7 and
$133.6, respectively) 1,584.9 1,441.4
Affiliates 45.5 24.7
Other 29.2 18.3
Deferred charges 52.5 39.0
Deferred income taxes 44.1 105.1
Inventory 62.8 73.5
Prepaid expenses and other 82.4 57.2
--------- ---------
Total current assets 1,941.3 1,782.3
--------- ---------
Telephone plant - net 9,305.8 12,022.7
Deferred charges and other 321.8 1,491.2
--------- ---------
TOTAL ASSETS $11,568.9 $15,296.2
========= =========
See accompanying notes to consolidated financial statements.
26
<PAGE>
NEW YORK TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
---------------------------
DOLLARS IN MILLIONS
December 31,
--------------------------
1995 1994
---- ----
LIABILITIES AND SHARE OWNER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable
AT&T $ 203.6 $ 218.5
Affiliates 840.6 671.6
Compensated absences 151.7 155.1
Trade and other 908.1 951.2
Short-term debt 367.0 294.2
Dividends payable 180.5 181.2
Taxes accrued 29.8 72.9
Advance billing and customers' deposits 173.8 178.3
Interest accrued 67.2 74.7
--------- ---------
Total current liabilities 2,922.3 2,797.7
--------- ---------
Long-term debt 3,913.3 3,972.4
Deferred income taxes 102.1 1,611.3
Unamortized investment tax credits 130.9 212.5
Other long-term liabilities and deferred credits 2,027.5 1,896.9
--------- ----------
Total liabilities 9,096.1 10,490.8
--------- ---------
Commitments and contingencies (Notes H, I, J, M and N)
Share owner's equity:
Common stock - one share,
without par value (Note R) 1.0 4,103.2
Additional paid-in capital (Note R) 3,741.2 -
Retained earnings/(Accumulated deficit) (1,269.4) 702.2
--------- ---------
Total share owner's equity 2,472.8 4,805.4
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $11,568.9 $15,296.2
========= =========
See accompanying notes to consolidated financial statements.
27
<PAGE>
NEW YORK TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(1,791.1) $ 345.0 $ (7.7)
--------- --------- ---------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary item, net of taxes 2,291.6 - -
Depreciation and amortization 1,393.7 1,486.5 1,438.8
Deferred income taxes - net (174.2) (268.0) (388.3)
Deferred credits - net (29.5) (32.4) (37.4)
Changes in operating assets
and liabilities:
Receivables (175.2) (56.9) (12.4)
Deferred charges (21.7) 16.5 66.4
Deferred income taxes 120.4 (5.7) (193.9)
Inventory 10.7 (1.1) 10.2
Prepaid expenses and other (25.2) 45.7 (36.8)
Accounts payable 215.6 251.7 344.4
Taxes accrued (43.1) 24.6 (122.0)
Advance billing and customers' deposits (4.5) (8.9) 7.8
Interest accrued (7.5) 16.5 (12.3)
Other - net 223.6 219.4 1,089.0
--------- --------- ---------
Total adjustments 3,774.7 1,687.9 2,153.5
--------- --------- ---------
Net cash provided by operating activities 1,983.6 2,032.9 2,145.8
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,436.4) (1,329.9) (1,342.4)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 18.3 (550.5) 485.0
Dividends paid to NYNEX (542.2) (724.6) (717.9)
Issuance of long-term debt - 593.5 1,622.1
Repayment of long-term debt and
capital leases (6.5) (5.8) (5.3)
Debt refinancings and call premiums - - (2,204.5)
--------- --------- ----------
Net cash used in financing activities (530.4) (687.4) (820.6)
--------- --------- ---------
Net increase (decrease) in Cash 16.8 15.6 (17.2)
Cash at beginning of year 23.1 7.5 24.7
--------- --------- ---------
Cash at end of year $ 39.9 $ 23.1 $ 7.5
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
NEW YORK TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A ACCOUNTING POLICIES
-------------------
NATURE OF OPERATIONS
New York Telephone Company and its wholly-owned subsidiary, Empire City Subway
Company (Limited) (jointly referred to as the "Company"), primarily provide
exchange telecommunications and exchange access services in substantially all of
New York and a small portion of Connecticut. The Company is a wholly-owned
subsidiary of NYNEX Corporation ("NYNEX"). Intrastate communications services
are regulated by state public service commissions ("state commissions"), and
interstate communications services are regulated by the Federal Communications
Commission ("FCC").
The communications and media industry continues to experience fundamental
changes at an ever-increasing pace. Telecommunications, information and
entertainment services are converging in the market, driven by technology and
released by landmark federal legislation that will remove historic regulatory
barriers. These changes are likely to have a significant effect on the future
financial performance of many companies in the industry. The Company cannot
predict the effect of such competition on its business.
NYNEX is implementing a major restructuring of its business, has entered into
domestic strategic alliances, and is expanding globally in select international
markets in order to respond to competition. In addition, NYNEX is pursuing
reforms in telecommunications policy at both the state and federal levels. In
February, the Telecommunications Act of 1996 was signed into law. This
legislation will lead to the development of competition in local and long
distance telephone service and cable television.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiary. 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.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"). GAAP requires Management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The 1994 and 1993 consolidated financial statements have been reclassified to
conform to the current year's format.
In the second quarter of 1995, the Company discontinued using GAAP applicable to
regulated entities (see Note B).
29
<PAGE>
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 is charged to accumulated depreciation.
As a result of the implementation of Statement of Financial Accounting Standards
No. 101, "Regulated Enterprises-Accounting for the Discontinuation of
Application of FASB Statement No. 71" ("Statement No. 101"), in the second
quarter of 1995, the Company began recording depreciation expense using shorter
asset lives based on expectations as to the revenue-producing lives of the
assets (see Note B), calculated on a straight-line basis. Previously,
depreciation rates used by the Company were prescribed by the FCC and by the
state commissions for interstate operations and for intrastate operations,
respectively, and were calculated on a straight-line basis using the concept of
"remaining life".
CAPITALIZED INTEREST COST
As a result of the application of Statement No. 101, capitalized interest for
the Company is recorded as a cost of telephone plant and equipment and a
reduction of interest, in accordance with the provisions of Statement of
Financial Accounting Standards No. 34, "Capitalization of Interest Cost"
("Statement No. 34"). Previously, regulatory authorities allowed the Company to
capitalize interest, including an allowance on share owner's equity, as a cost
of constructing certain plant and as income, included in Other income (expense)
- - net. Such income was realized over the service life of the plant as the
resulting higher depreciation expense was recovered through the rate-making
process.
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.
REFINANCING CHARGES
As a result of the application of Statement No. 101, the Company no longer
defers call premiums and other charges associated with the redemption of
long-term debt, and previously deferred refinancing costs were eliminated (see
Note B). The intrastate portion of these costs had been deferred and amortized
over periods stipulated by the state commissions. The interstate portion had
been expensed as required by the FCC.
30
<PAGE>
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.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement No. 109").
Statement No. 109 requires that deferred tax assets and liabilities be measured
based on the enacted tax rates that will be in effect in the years in which
temporary differences are expected to reverse.
For the Company, prior to the application of Statement No. 101, the treatment of
excess deferred taxes resulting from the reduction of tax rates in prior years
was subject to federal income tax and regulatory rules. Deferred income tax
provisions of the Company were based on amounts recognized for rate-making
purposes. The Company recognized a deferred tax liability and established 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 of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("Statement No. 71"), required the Company to reflect the additional deferred
income taxes as regulatory assets to the extent that they would be recovered in
the rate-making process. In accordance with the normalization provisions under
federal tax law, the Company reversed excess deferred taxes relating to
depreciation of regulated assets over the regulatory lives of those assets. For
other excess deferred taxes, the state commissions generally allowed
amortization of excess deferred taxes over the reversal period of the temporary
difference giving rise to the deferred taxes. As a result of the application of
Statement No. 101, income tax-related regulatory assets and liabilities were
eliminated (see Note B).
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 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 No. 71. As a result,
the Company recorded an extraordinary non-cash charge of approximately $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 (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
31
<PAGE>
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.
Telephone plant and equipment was adjusted through an increase in accumulated
depreciation, to reflect the difference between recorded depreciation and the
amount of depreciation that would have been recorded had the Company not been
subject to rate regulation. Gross plant was written off where fully depreciated,
and 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 decrease of $2.8 billion to telephone plant and equipment 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 that did not identify
any additional amounts not recoverable from future operations. ITC amortization
was accelerated as a result of the reduction in asset lives of the associated
telephone plant and equipment.
The major elements of the write-off of non-plant regulatory net assets were as
follows:
(In millions) Pretax After-tax
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
======= =======
With the adoption of Statement No. 101, the Company now uses estimated asset
lives for certain categories of telephone plant and equipment that are shorter
than those approved by regulators. These 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
32
<PAGE>
Statement No. 71 for the most significantly affected categories of telephone
plant and equipment is as follows:
Average lives (in years)
------------------------
Composite
Regulator-Approved Economic
Asset Lives Asset Lives
-----------------------------------
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
The application of Statement No. 101 does not change the Company's accounting
and reporting for regulatory purposes.
C INCOME TAXES
------------
The components of Income tax expense (benefit) are as follows:
- --------------------------------------------------------------------------------
Dollars in Millions 1995* 1994 1993**
- --------------------------------------------------------------------------------
Federal:
Current $426.6 $435.9 $352.5
Deferred - net (174.2) (268.0) (388.3)
Deferred tax credits - net (29.5) (32.4) (37.4)
------ ------ ------
222.9 135.5 (73.2)
State and local 4.0 4.9 5.4
------ ------ ------
Total $226.9 $140.4 $(67.8)
====== ====== ======
- --------------------------------------------------------------------------------
* Does not include the deferred tax benefit of $1.2 billion associated with
the Extraordinary item for the discontinuance of regulatory accounting
principles.
** Does not include the deferred tax benefit of $48.1 million associated
with the Cumulative effect of change in accounting for postemployment
benefits.
33
<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:
- --------------------------------------------------------------------------------
Dollars In Millions 1995 1994 1993
- --------------------------------------------------------------------------------
Federal income tax expense
computed at the statutory rate $254.6 $169.9 $ 4.8
a. Amortization of investment tax
credits (21.5) (32.4) (37.4)
b. Amortization of excess deferred
federal taxes due to
change in the tax rates (5.2) (29.9) (38.7)
c. Depreciation of certain taxes and
payroll-related construction costs
capitalized for financial statement
purposes, but deducted for income
tax purposes in prior years 2.9 13.1 14.8
d. Federal income tax return
adjustment for the difference
between the accrued and actual
tax expense .2 (0.4) (5.7)
e. Allowance for funds used during
construction, which is excluded
from taxable income, net of
applicable depreciation 8.9 6.7 6.6
f. Other items - net (13.0) 13.4 (12.2)
------ ------ ------
Income tax expense (benefit) $226.9 $140.4 $(67.8)
====== ====== ======
- --------------------------------------------------------------------------------
Not included above are gross receipts taxes the Company is subject to in lieu of
a state income tax. Temporary differences for which deferred income taxes have
not been provided by the Company are represented principally by "c" above. Upon
the discontinuance of Statement No. 71 (see Note B), items "b" and "c" above
have been eliminated.
34
<PAGE>
The components of current and non-current deferred tax assets and liabilities at
December 31, 1995 and 1994 are as follows:
- --------------------------------------------------------------------------------
Dollars in Millions 1995 1994
- ------------------------------------------------------------------------------
Deferred tax assets
Employee benefits $ 663.7 $ 454.3
Restructuring charges 107.2 122.9
Unamortized ITC 44.3 114.7
Other 245.0 166.9
-------- --------
1,060.2 858.8
-------- --------
Deferred tax liabilities
Depreciation and amortization 966.1 2,062.0
Employee benefits 88.3 83.2
Other 63.8 219.8
-------- --------
1,118.2 2,365.0
-------- --------
Net deferred tax liabilities $ 58.0 $1,506.2
======== ========
- --------------------------------------------------------------------------------
During 1995, income tax-related regulatory assets and liabilities were
eliminated as a result of the discontinued application of Statement No. 71 (see
Note B).
At December 31, 1994, the Company had recorded approximately $421.5 million in
deferred charges and deferred taxes representing the cumulative amount of income
taxes on temporary differences that were previously flowed through to
ratepayers. This deferral had been increased for the tax effect of future
revenue requirements and was amortized over the lives of the related depreciable
assets concurrently with their recovery in rates.
The Company had recorded a regulatory liability at December 31, 1994 of
approximately $293.2 million, in Other long-term liabilities and deferred
credits and in Accounts payable - Trade and other. A substantial portion of the
regulatory liability related to the 1986 reduction in the statutory federal
income tax rate and unamortized ITC. This liability had been increased for the
tax effect of future revenue requirements.
D 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 for 1995, 1994 and 1993 was $152.4, $165.8 and $99.0
million, respectively. Deferral of pension cost was discontinued as of January
1, 1993, and the Company had implemented a plan to recover deferred pension
costs through the rate-making process (see Postretirement Benefits Other Than
Pensions below). The pension benefit for 1995, 1994 and 1993 includes the effect
of plan amendments and changes in actuarial
35
<PAGE>
assumptions for the discount rate and future compensation levels. At December
31, 1995 and 1994, the Company recorded approximately $1.0 billion and $941.4
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, 1995 and 1994 include a discount rate of 7.25% and 8.50%, respectively, and
an increase in future compensation levels of 4.1% and 4.5%, respectively, 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 1995, 1994 and 1993. The actuarial projections
included herein anticipate plan improvements for active employees in the future.
As a result of planned work force reductions primarily through retirement
incentives in 1995 and 1994, the Company incurred additional pension costs of
$214.0 and $412.2 million, respectively. In 1995, this cost was comprised of a
charge for special termination benefits of $290.2 million and a curtailment gain
of $76.2 million, partially offset by 1993 severance reserves of $31.9 million
which were transferred to the pension liability. In 1994, this cost was
comprised of a charge for special termination benefits of $551.6 million and a
curtailment gain of $139.4 million, partially offset by 1993 severance reserves
of $106.7 million which were transferred to the pension liability.
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. The Company participates in the NYNEX benefit plans,
and the structure of the plans is such that certain disclosures required by
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("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 NYNEX's Annual Report
for the year ended December 31, 1995.
Effective January 1, 1993, the Company adopted Statement No. 106, which 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 1995, 1994 and 1993 for the Company was $295.7,
$299.1 and $278.4 million, respectively.
The actuarial assumptions used to determine the 1995 and 1994 obligation for
postretirement benefit plans under Statement No. 106 are as follows: discount
rate of 7.25% and 8.50%, respectively; weighted average expected long-term
36
<PAGE>
rate of return on plan assets of 8.4% in both years; weighted average salary
growth rate of 4.0% and 4.2%, respectively; medical cost trend rate of 11.6% and
12.6% in 1995 and 1994, respectively, grading down to 4.5% in 2008; and dental
cost trend rate of 4.0% and 4.5% in 1995 and 1994, respectively, grading down to
3.0% in 2002.
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 1995 and 1994, under work force reduction retirement incentives,
the Company incurred additional postretirement benefit costs of $65.2 and $230.7
million, respectively. In 1995, this cost was comprised of a curtailment loss of
$37.4 million and a charge for special termination benefits of $27.8 million,
partially offset by $32.2 million accrued for in 1993. In 1994, this cost was
comprised of a curtailment loss of $172.9 million and a charge for special
termination benefits of $57.8 million, partially offset by $74.4 million accrued
for in 1993.
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 1995, 1994 and
1993. The assets in the VEBA Trusts consist primarily of equity and fixed income
securities. Additional contributions to the VEBA Trusts are evaluated and
determined by NYNEX management.
REGULATORY TREATMENT
With respect to interstate treatment, in 1994 the FCC's 1993 order denying
exogenous treatment of additional costs recognized under Statement No. 106 was
overturned in the court. Tariff revisions were filed by the Company and New
England Telephone (collectively, the "Telephone Companies") with the FCC in 1994
to amend price cap indices to reflect additional exogenous costs recognized
under Statement No. 106, including $42 million of costs already accrued,
increased annual costs of $21 million and increased rates of $2.2 million.
Commencing December 30, 1994, the Telephone Companies began collecting these
revenues, subject to possible refund pending resolution of the FCC Common
Carrier Bureau's investigation. The annual update to the price cap rates,
effective August 1, 1995, included tariff revisions to recover approximately $21
million of exogenous costs resulting from the implementation of Statement No.
106.
With respect to intrastate treatment, in January 1994 the NYSPSC approved the
Company's plan for regulatory accounting and rate-making treatment. The NYSPSC
allowed 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, and eliminating the
need for additional deferrals of Statement No. 106 and Statement No. 87 costs.
The NYSPSC required the Company to write-off $75 million of previously deferred
pension costs in 1993. In December 1994, the Company amortized $39 million of
deferred pension costs according to this accounting plan. Upon the
discontinuance of Statement No. 71, remaining deferred pension costs were
eliminated (see Note B).
37
<PAGE>
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 1993.
E TELEPHONE PLANT - NET
---------------------
The components of telephone plant - net are as follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
Dollars in Millions 1995 1994
- --------------------------------------------------------------------------------
Buildings $ 1,835.9 $ 1,699.4
Telephone plant and equipment 17,475.1 17,597.2
Furniture and other equipment 137.7 129.2
Other 117.5 117.7
--------- ---------
Total depreciable telephone plant 19,566.2 19,543.5
Less: accumulated depreciation 10,847.8 8,106.9
--------- ---------
8,718.4 11,436.6
Land 71.2 71.2
Plant under construction and other 516.2 514.9
--------- ---------
Total Telephone plant - net $ 9,305.8 $12,022.7
========= =========
- --------------------------------------------------------------------------------
The discontinued application of Statement No. 71 resulted in a net decrease to
telephone plant and equipment of $2.8 billion, primarily through an increase in
accumulated depreciation (see Note B).
F 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 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Refunding Mortgage Bonds 3 3/8 % - 7 3/4% 1997-2006 $ 620.0 $ 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 1,450.0
Notes 5 1/4 % - 8 1/5% 1998-2008 642.0 642.0
Unamortized discount - net (28.3) (30.2)
-------- --------
3,858.7 3,911.8
Long-term capital lease obligations 54.6 60.6
-------- --------
Total Long-term debt $3,913.3 $3,972.4
======== ========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
In 1997, $60.0 million of the Refunding Mortgage Bonds will mature. In 1998,
$100 million of the Notes will mature.
The Company's Refunding Mortgage Bonds and the Company's Forty Year 7 7/8%
Debentures due June 15, 2017 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, Twenty
Year 7% Debentures due June 15, 2013 and Twenty-One Year 8 5/8% Debentures due
November 15, 2010 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.
At December 31, 1995, 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 (excluding extraordinary items) 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 Note Q), beginning in March 1994, the Company did not
meet the earnings coverage requirement. As of December 31, 1994 and 1995, the
Company met the earnings coverage requirement.
G SHORT-TERM DEBT
---------------
<TABLE>
<CAPTION>
Short-term debt and related weighted average interest rates are as follows:
- -------------------------------------------------------------------------------------------------------
Weighted Average
Interest Rates
- -------------------------------------------------------------------------------------------------------
December 31, December 31,
<S> <C> <C> <C> <C>
Dollars in Millions 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------
Advances from NYNEX $ 307.4 $ 289.1 5.93% 4.06%
Current portion of
long-term debt 55.0 -
Other 4.6 5.1
-------- --------
Total Short-term debt $ 367.0 $ 294.2
======== ========
- -------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on advances from NYNEX was $17.0, $16.8 and $6.4 million in
1995, 1994 and 1993, respectively.
39
<PAGE>
H FINANCIAL COMMITMENTS
---------------------
As of December 31, 1995, the Company had deferred $188 million of revenues ($161
million under a NYSPSC-approved regulatory plan associated with commitments for
fair competition, universal service, service quality and infrastructure
improvements, and $27 million for a 1994 service improvement plan obligation).
These revenues will be recognized as commitments are met or obligations are
satisfied under the plans. If the Company is unable to meet certain of these
commitments, the NYSPSC has the authority to require the Company to refund these
revenues to customers.
In December 1995, Telesector Resources entered into purchase agreements with
various suppliers to purchase, on behalf of the Telephone Companies, equipment
and software to upgrade the network. The purchase agreements are over five years
with a commitment of approximately $550 million.
I LEASE COMMITMENTS
-----------------
The Company leases certain facilities and equipment used in its operations.
Rental expense was $90.6, $94.7, and $108.8 million for 1995, 1994 and 1993,
respectively. At December 31, 1995, the minimum lease commitments under
noncancelable leases for the periods shown are as follows:
- --------------------------------------------------------------------------------
Dollars in Millions
- --------------------------------------------------------------------------------
Operating Capital
- --------------------------------------------------------------------------------
1996 $ 26.5 $ 14.9
1997 23.1 11.1
1998 19.6 10.8
1999 16.9 10.8
2000 12.4 10.7
Thereafter 34.5 381.6
------ ------
Total minimum lease payments $133.0 439.9
======
Less: executory costs 10.2
------
Net minimum lease payments 429.7
Less: interest 369.1
------
Present value of net minimum lease payments $ 60.6
======
- --------------------------------------------------------------------------------
J TRANSACTIONS WITH AT&T CORP.
----------------------------
In 1995, 1994 and 1993, AT&T Corp. ("AT&T") provided approximately 17%, 18% and
19%, 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.
K TRANSACTIONS WITH AFFILIATES
----------------------------
The Company and other NYNEX subsidiaries receive corporate governance and
ownership services such as securities administration, investor relations,
certain tax, legal and accounting 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.
40
<PAGE>
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 1995, 1994 and
1993, the Company recorded allocated costs of $31.6, $17.9 and $138.9 million,
respectively, in connection with these services. The Company also participates
in compensation plans utilizing NYNEX stock.
Telesector Resources performs marketing, accounting, finance, data processing
and related services and materials management services on a centralized basis on
behalf of the Telephone Companies. Prior to 1993, the costs of these services
were allocated to the Telephone Companies 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 1995, 1994 and 1993, the Company
recorded charges from Telesector Resources of $1.1 billion, $889.6 million and
$802.9 million, respectively, for data processing services and materials-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 1995, 1994 and 1993 were
approximately $320.1, $313.6 and $352.2 million, respectively. Telesector
Resources acts as a purchasing agent for the Company for directly shipped
materials and supplies. During 1995, 1994 and 1993, total agency purchases by
Telesector Resources amounted to $76.2, $155.4 and $148.9 million, respectively.
In addition, in 1995, 1994 and 1993, approximately $82.5, $57.4 and $227.3
million, respectively of restructuring charges ($53.7, $37.3 and $147.7 million
after-tax) were allocated to the Company from Telesector Resources, primarily
related to its force reduction and re-engineering programs. In 1995, the
Company, New England Telephone and NYNEX transferred approximately 1,200, 930
and 170 employees, 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 1995, 1994 and 1993, the Company
recorded charges of $54.7, $69.3 and $77.3 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
41
<PAGE>
structure. In 1993, the Company received transition payments of $55 million 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 1995, 1994 and 1993, licensing fees, included in Other
revenues, amounted to $151.7, $142.4 and $129.4 million, respectively. Since
1991, NIRC has made payments to the Company of all of NIRC's earnings related to
publishing directories in New York in excess of a regulated return. In 1992, the
NYSPSC instituted a proceeding to investigate the directory publishing
operations of the Company and its NYNEX affiliates. In 1993, an administrative
law judge of the NYSPSC issued a recommended decision urging the Company to
assume the directory publishing function itself and/or negotiate a modified
agreement with NIRC. In 1994, the parties to the proceeding submitted briefs to
the NYSPSC.A final order has not been issued.
L TAXES OTHER THAN INCOME
-----------------------
Taxes other than income consist of:
- --------------------------------------------------------------------------------
Dollars in Millions 1995 1994 1993
- --------------------------------------------------------------------------------
Gross receipts $ 472.5 $ 450.5 $ 461.5
Property 263.2 274.9 299.0
Other 63.1 64.2 58.0
------- ------- -------
Total $ 798.8 $ 789.6 $ 818.5
======= ======= =======
- --------------------------------------------------------------------------------
M REVENUES SUBJECT TO POSSIBLE REFUND
-----------------------------------
Several state and federal regulatory matters, including affiliate transaction
issues in the Company's 1990 intrastate rate case ($188.0 million), may possibly
require the refund of a portion of the revenues collected in the current and
prior periods. As of December 31, 1995, the aggregate amount of such revenues
that was estimated to be subject to possible refund was approximately $228.9
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.
N LITIGATION AND OTHER CONTINGENCIES
----------------------------------
Various legal actions and regulatory proceedings are pending that may affect the
Company. 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.
42
<PAGE>
O SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
The following information is provided in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows":
- --------------------------------------------------------------------------------
December 31,
Dollars in Millions 1995 1994 1993
- --------------------------------------------------------------------------------
Income tax payments $481.5 $355.4 $507.7
Interest payments $293.5 $272.3 $303.9
Short-term debt classified as
Long-term debt $ - $ - $588.6
- --------------------------------------------------------------------------------
P FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1995 and 1994. Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," defines fair value as the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
a forced liquidation or sale.
- --------------------------------------------------------------------------------
December 31,
Dollars in Millions 1995 1994
- --------------------------------------------------------------------------------
Long-term debt
Carrying amount $3,858.7 $3,911.8
Fair value $3,972.5 $3,409.0
- --------------------------------------------------------------------------------
Q BUSINESS RESTRUCTURING
----------------------
In 1995 and 1994, $304.1 and $523.4 million, respectively, of pretax pension
enhancement charges were recorded. These 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 was recorded, primarily related to efforts to redesign
operations and work force reductions. These charges included: $557 million for
severance and postretirement medical costs; $208 million for re-engineering
service delivery; and $227 million of restructuring charges allocated to the
Company from Telesector Resources. The 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 expense -
$665 million.
43
<PAGE>
R 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 and fourth quarter 1995 dividends of $180.5 million per quarter were
declared from Additional paid-in capital. There were no dividends declared in
the third quarter of 1995.
44
<PAGE>
SUPPLEMENTARY INFORMATION
Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
For the quarter ended
Dollars in Millions March 31, June 30, September 30, December 31,
- ------------------------------------------------------------------------------------------------------------
1995
- ----
<S> <C> <C> <C> <C>
Operating revenues $1,929.7 $ 2,008.4 $1,968.6 $2,030.4
Operating income $ 306.5 $ 125.1 $ 309.4 $ 263.8
Earnings before
extraordinary item $ 154.6 $ 36.4 $ 163.2 $ 146.3
Extraordinary item for
the discontinuance
of regulatory
accounting principles,
net of taxes $ - $(2,291.6) $ - $ -
Net income (loss) $ 154.6 $(2,255.2) $ 163.2 $ 146.3
- ------------------------------------------------------------------------------------------------------------
1994
- ----
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
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Results for the first, second, third and fourth quarters of 1995 include $33.8,
$115.2, $14.7 and $140.4 million, respectively, of pretax charges for pension
enhancements, which were reflected in operating expenses. The after-tax effect
of these charges was $22.0, $74.9, $9.5 and $91.2 million, respectively.
Results for the second quarter of 1995 include the effects of the discontinuance
of regulatory accounting principles, recorded as an extraordinary item (see Note
B); and $162.0 million ($105.3 million after-tax) of special charges to meet
various tax, benefit and legal obligations and contingencies, which was included
in operating expenses. Results for the third quarter of 1995 include $85.1
million ($55.3 million after-tax) of special charges to meet tax and legal
obligations and contingencies, which was included in operating expenses. Results
for the fourth quarter of 1995 include a net $33.4 million of pretax credits in
operating expenses ($22.0 million after-tax) primarily due to revised estimates
associated with benefit accruals, and a $13.7 million ($8.9 million after-tax)
reduction in Interest expense on the revenue set aside as ordered by the NYSPSC,
partially offset by a $15.0 million ($9.7 million after-tax) charge in operating
expenses for a gross receipts tax settlement.
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, respectively.
In the third quarter of 1995, there was a change in the presentation of gross
receipts taxes that were collected from customers. In the first two quarters of
1995, these taxes were included in operating revenues and expenses. In the
45
<PAGE>
last two quarters, as a result of a tax law change, these taxes were no longer
required to be collected.
Results for the fourth quarter of 1994 include $24.7 million of pretax credits
to pension and medical expense associated with plan amendments and 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.
For further discussion of these items, see Management's Discussion and Analysis
of Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During 1995 and 1994, the Company did not change its auditors.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE 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 3 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 ....... 50
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 New York Telephone Company
(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.
47
<PAGE>
Exhibit
Number
- -------
(10)(ii)B Service Agreement concerning provision by Telesector Resources
Group, Inc. to the 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).
(12) Computation of Ratio of Earnings to Fixed Charges.
(23) Consent of Independent Accountants.
(24) Powers of attorney.
(b) Reports on Form 8-K.
--------------------
48
<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 /s/Mel Meskin
---------------------------------
Mel Meskin
Vice President-Finance and
Treasurer
March 21, 1996
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 Officer:
Mel Meskin
Vice President-Finance and Treasurer
Principal Accounting Officer:
John W. Diercksen*
Controller
A Majority of Directors:
Lilyan H. Affinito* *By /s/Mel Meskin
Joseph A. Califano, Jr.* --------------------------------
Arnold J. Eckelman* (Mel Meskin, as attorney-in-fact,
Thomas F. Gilbane, Jr.* and on his own behalf as
Ronald A. Homer* Principal Financial Officer)
Alice Stone Ilchman* March 21, 1996
Richard A. Jalkut*
John F. X. Mannion*
Jane E. Newman*
Paul L. Snyder*
Ira Stepanian*
Frank J. Tasco*
49
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
NEW YORK TELEPHONE COMPANY AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Additions Balance at
--------------------------------
Beginning of Charged to Costs Charged to End of
Description Period and Expenses Other Accounts Deductions Period
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for Uncollectibles
<S> <C> <C> <C> <C> <C>
Year 1995 . . . . . . . . . 133.6 109.2 180.7 (a) 268.8 (b) 154.7
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
Restructuring
Year 1995 . . . . . . . . . 334.0 - - 149.4 184.6
Year 1994 . . . . . . . . . 494.0 - - 160.0 334.0
Year 1993 . . . . . . . . . 32.9 494.0 (c) - 32.9 494.0 (c)
</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.
50
<TABLE>
<CAPTION>
Exhibit 12
NEW YORK TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS)
Year
1995 1994 1993 1992 1991
Earnings
<S> <C> <C> <C> <C> <C>
Earnings before Interest Expense,
Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 807.3 $659.4 $430.2 $1,219.3 $ 911.0
Federal, State and Local Income Taxes 226.9 140.4 (67.8) 342.8 157.2
Estimated Interest Portion of Rental Expense* 30.2 31.6 36.3 38.9 37.9
-------- ------ ------ -------- --------
Total Earnings* $1,064.4 $831.4 $398.7 $1,601.0 $1,106.1
======== ====== ====== ======== ========
Fixed Charges
Total Interest Deductions $ 306.8 $314.4 $348.6 $ 362.9 $ 375.1
Estimated Interest Portion of Rental Expense* 30.2 31.6 36.3 38.9 37.9
-------- ------ ------ -------- --------
Total Fixed Charges* $ 337.0 $346.0 $384.9 $ 401.8 $ 413.0
======== ====== ====== ======== ========
Ratio of Earnings to Fixed Charges 3.16 2.40 1.04 3.98 2.68
======== ====== ====== ======== ========
</TABLE>
* Restated to conform to current year's presentation.
51
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 5, 1996, on our audits of the consolidated financial statements and
consolidated financial statement schedule of New York Telephone Company as of
December 31, 1995 and 1994, and for each of the three years in the period ended
December 31, 1995, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
New York, New York
March 21, 1996
52
Exhibit (24)
New York Telephone Company
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, New York Telephone Company, 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 Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1995; 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, Mel Meskin, and John W. Diercksen, 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 a Director, 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 day 20th of March, 1996.
/s/Richard A. Jalkut
- -----------------------------------
Richard A. Jalkut, President
Chief Executive Officer & Director
/s/Lilyan H. Affinito
- -----------------------------------
Lilyan H. Affinito, Director
/s/Joseph A. Califano, Jr.
- -----------------------------------
Joseph A. Califano, Jr., Director
/s/Arnold J. Eckelman
- -----------------------------------
Arnold J. Eckelman, Director
/s/Thomas F. Gilbane, Jr.
- -----------------------------------
Thomas F. Gilbane, Jr., Director
/s/Mel Meskin
- -----------------------------------
Mel Meskin, Vice President-Finance
and Treasurer
/s/Ronald A. Homer
- -----------------------------------
Ronald A. Homer, Director
/s/Alice Stone Ilchman
- -----------------------------------
Alice Stone Ilchman, Director
/s/John F. X. Mannion
- -----------------------------------
John F. X. Mannion, Director
/s/Jane E. Newman
- -----------------------------------
Jane E. Newman, Director
/s/John W. Diercksen
- -----------------------------------
John W. Diercksen, Controller
- -----------------------------------
Donald B. Reed, Director
/s/Paul L. Snyder
- -----------------------------------
Paul L. Snyder, Director
/s/Ira Stepanian
- -----------------------------------
Ira Stepanian, Director
/s/Frank J. Tasco
- -----------------------------------
Frank J. Tasco, Director
State of New York )
County of New York ) ss.:
On the 20th day of March, 1996, 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 W. Erb
-----------------------------------------
Notary Public
Robert Erb
Notary Public, State of New York
No. 31-4808105
Qualified in New York County
Commission Expires January 31, 1997
53
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 40
<SECURITIES> 0
<RECEIVABLES> 1,660
<ALLOWANCES> 155
<INVENTORY> 63
<CURRENT-ASSETS> 1,941
<PP&E> 20,154
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0
0
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<EXTRAORDINARY> (2,292)
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</TABLE>
