Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
- ---
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- ---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
- --- For the transition period from ___ to ___
Commission File Number 1-3435
NEW YORK TELEPHONE COMPANY
Incorporated under the laws of the State of New York
I.R.S. Employer Identification Number 13-5275510
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF NYNEX CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ___.
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<PAGE>
Form 10-Q Part I New York Telephone Company
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(In Millions) (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
For the Period Ended September 30, 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service $1,175.0 $ 1,205.2 $3,506.4 $ 3,600.8
Long distance 102.6 85.5 300.0 255.0
Network access 588.4 542.0 1,690.6 1,693.6
Other 146.9 146.0 503.1 367.4
-------- -------- -------- --------
Total operating revenues 2,012.9 1,978.7 6,000.1 5,916.8
-------- --------- -------- ---------
OPERATING EXPENSES
Maintenance and support 666.3 615.6 1,936.8 1,820.4
Depreciation and amortization 324.7 341.3 1,013.4 1,048.7
Marketing and customer services 276.2 270.5 819.5 760.5
Taxes other than income 175.0 155.3 502.7 539.8
Provision for uncollectible revenues 26.5 25.3 76.9 80.4
Other 155.8 266.3 627.5 931.0
-------- -------- -------- --------
Total operating expenses 1,624.5 1,674.3 4,976.8 5,180.8
-------- --------- -------- ---------
Operating income 388.4 304.4 1,023.3 736.0
Other income (expense) - net (5.0) 13.0 (6.3) 24.3
Interest expense 72.8 78.1 215.1 246.0
-------- ------- ------- ---------
Earnings before income taxes,
extraordinary item and
cumulative effect of change
in accounting principle 310.6 239.3 801.9 514.3
Income taxes 105.2 76.1 267.4 160.1
-------- ------- -------- ---------
Earnings before extraordinary item
and cumulative effect of change
in accounting principle 205.4 163.2 534.5 354.2
Extraordinary item for the
discontinuance of regulatory
accounting principles, net
of taxes - - - (2,291.6)
Cumulative effect of change in
accounting for directory publishing
income, net of taxes (Note B) - - 55.7 -
-------- --------- -------- -------
NET INCOME (LOSS) $ 205.4 $ 163.2 $ 590.2 $(1,937.4)
======== ======= ======== =========
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Beginning of period $ (884.6) $(1,578.9) $(1,269.4) $ 702.2
Net income (loss) 205.4 163.2 590.2 (1,937.4)
Dividends declared (Note G) - - - (180.5)
-------- --------- --------- -------
End of period $ (679.2) $(1,415.7) $ (679.2) $(1,415.7)
======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Form 10-Q Part I New York Telephone Company
CONSOLIDATED BALANCE SHEETS
(In Millions) (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash $ 31.4 $ 39.9
Receivables
Trade and other (net of allowance of $165.9 and
$154.7, respectively) 1,559.4 1,614.1
Affiliates 108.9 45.5
Deferred charges 63.3 52.5
Deferred income taxes 0.8 44.1
Inventory 86.7 62.8
Prepaid expenses and other 130.2 82.4
--------- -------
Total current assets 1,980.7 1,941.3
--------- ---------
Telephone plant - at cost 20,733.9 20,153.6
Less: accumulated depreciation 11,575.8 10,847.8
--------- ---------
9,158.1 9,305.8
--------- ---------
Long-term investment, deferred charges and other 316.2 321.8
--------- ---------
TOTAL ASSETS $11,455.0 $11,568.9
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable
Affiliates $ 666.5 $ 840.6
Other 945.8 1,263.4
Short-term debt 796.6 367.0
Dividends payable - 180.5
Taxes accrued 72.4 29.8
Deferred income taxes 42.1 -
Advance billing and customers' deposits 171.0 173.8
Interest accrued 64.9 67.2
--------- ---------
Total current liabilities 2,759.3 2,922.3
--------- ---------
Long-term debt 3,912.8 3,913.3
Deferred income taxes 2.7 102.1
Unamortized investment tax credits 113.3 130.9
Other long-term liabilities and deferred credits 1,987.1 2,027.5
--------- ---------
Total liabilities 8,775.2 9,096.1
--------- ---------
Commitments and contingencies (Notes C, D and E)
Share owner's equity:
Common stock - one share, without par value (Note G) 1.0 1.0
Additional paid-in capital (Note G) 3,358.0 3,741.2
Retained earnings/(Accumulated deficit) (679.2) (1,269.4)
--------- ---------
Total share owner's equity 2,679.8 2,472.8
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $11,455.0 $11,568.9
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Form 10-Q Part I New York Telephone Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions) (Unaudited)
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30,
1996 1995
------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 590.2 $(1,937.4)
------- ----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary item - net of taxes - 2,291.6
Depreciation and amortization 1,013.4 1,048.7
Deferred income taxes - net (42.9) (164.6)
Deferred credits - net (17.6) (21.7)
Change in operating assets and liabilities:
Receivables (8.7) (79.6)
Deferred charges (10.8) (24.8)
Deferred income tax asset 43.3 59.4
Inventory (23.9) 1.5
Prepaid expenses and other (47.8) (60.6)
Accounts payable (491.7) 99.8
Taxes accrued 42.6 (38.1)
Deferred income tax liability 42.1 -
Advance billing and customers' deposits (2.8) (2.2)
Interest accrued (2.3) (9.8)
Other - net (127.0) 235.3
------- ---------
Total adjustments 365.9 3,334.9
------ ---------
Net cash provided by operating activities 956.1 1,397.5
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (828.6) (888.0)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 488.0 42.2
Dividends paid to NYNEX (563.7) (542.2)
Repayment of long-term debt and capital leases (60.3) (4.8)
------ --------
Net cash used in financing activities (136.0) (504.8)
------- ---------
Net (decrease) increase in Cash (8.5) 4.7
Cash at beginning of period 39.9 23.1
----- --------
Cash at end of period $ 31.4 $ 27.8
====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A Basis of Presentation
The consolidated financial statements have been prepared by New York Telephone
Company (the "Company"), a wholly owned subsidiary of NYNEX Corporation
("NYNEX"), pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC") and, in the opinion of Management, include all
adjustments necessary for a fair presentation of the financial information for
each period shown. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such SEC rules and regulations. Management believes that the disclosures made
are adequate to make the information presented not misleading. Certain
information in the consolidated financial statements for 1995 has been
reclassified to conform to the current year's presentation. The results for
interim periods are not necessarily indicative of the results for the full year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1995 Annual Report on Form 10-K and the current year's previously issued
Quarterly Reports on Form 10-Q. In the second quarter of 1995, the Company
discontinued using generally accepted accounting principles applicable to
regulated entities as disclosed in the Company's 1995 Annual Report on Form
10-K. The discontinued application of regulatory accounting principles does not
change the Company's accounting and reporting for regulatory purposes.
B Change in Accounting Principle
Effective January 1, 1996, NYNEX Information Resources Company ("Information
Resources"), a wholly owned subsidiary of NYNEX, changed the recognition of its
directory publishing revenue and production expenses from the "amortized" method
to the "point of publication" method. Under the point of publication method,
revenues and product expenses will be recognized when the directories are
published rather than over the lives of the directories (generally one year) as
was the case under the amortized method. NYNEX and the Company believe the
change to the point of publication method is preferable because it is the method
that is generally followed by publishing companies and reflects more precisely
the operations of the business. Pursuant to the directory licensing agreement
between Information Resources and the Company, the Company's portion of the
initial effect of the change to the point of publication method is reported as a
cumulative effect of a change in accounting principle which resulted in a
one-time, non-cash gain of $95.4 million ($55.7 million after-tax) in the first
quarter of 1996. The impact of applying the point of publication method during
the first nine months of 1996 resulted in a $6.9 million increase to net income.
5
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pro forma results, assuming the point of publication method had been applied
during the first nine months of 1995, are as follows:
Nine Months Ended
September 30, 1995
(In millions)
Pro forma As Reported
Net Loss $(1,934.1) $(1,937.4)
C Financial Commitments
As of December 31, 1995, the Company had deferred $188 million of revenues ($161
million under a New York State Public Service Commission ("NYSPSC") approved
regulatory plan associated with commitments for fair competition, universal
service, service quality and infrastructure improvements, and $27 million for a
service improvement plan obligation). These deferred 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 rebate these revenues to customers. During
the first nine months of 1996, $43 million of the deferred revenues were
recognized in connection with intraLATA presubscription ("ILP") and other
commitments that were met in 1996 and $50 million of the deferred revenues were
utilized for rebates issued to customers for not meeting service commitments in
prior periods. As of September 30, 1996, $95 million of revenues remained
deferred.
The Incentive Plan approved by the NYSPSC in 1995 (as disclosed in NYNEX's 1995
Annual Report) establishes service quality targets with stringent rebate
provisions if the Company is unable to meet some or all of the targets. In
November, the NYSPSC announced its decision that, based on service performance
results for Plan Year 1, which ended August 31, 1996, the Company will be
required to issue rebates to customers in the aggregate amount of at least $62
million, approximately $14 million of which has been already issued and $32
million of which has already been accrued. The NYSPSC staff is reviewing the
Company's claims of miscalculation of certain service performance data related
to approximately $10 million in additional rebates.
D Revenues Subject To Possible Refund
Several state and federal regulatory matters may possibly require the Company to
refund a portion of the revenues collected in the current and prior periods. As
of September 30, 1996, the aggregate amount of such revenues that was estimated
to be subject to possible refund was approximately $319 million, plus related
interest, of which approximately $273 million is attributable to affiliate
transaction issues in the Company's 1990 intrastate rate case. In July of 1996,
the Company filed with the NYSPSC a joint stipulation and settlement agreement
on behalf of the Company, the NYSPSC staff, the New York State Consumer
Protection Board and the New York State Department of Law. The agreement
provides for a refund of $83 million by the Company, with no other
6
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
revenues subject to refund, and resolves all pending issues, as well as certain
portions of the proceeding instituted in 1992 to review the Company's Directory
License Agreement with Information Resources. The agreement is subject to
approval by the NYSPSC. The outcome of each pending matter, as well as the time
frame within which each will be resolved, is not presently determinable.
E 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 upon the advice of counsel, the
ultimate resolution of these matters in future periods is not expected to have a
material effect on the Company's financial position but could have a material
effect on operating results.
F Supplemental Cash Flow Information
The following information is provided in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows":
For the
Nine Months Ended
September 30,
1996 1995
(In millions)
Income tax payments $262.8 $378.2
Interest payments $233.4 $230.9
G 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.
All subsequent dividends have been declared from Additional paid-in capital.
H NYNEX and Bell Atlantic Corporation Merger
On July 2, 1996, NYNEX and Bell Atlantic Corporation ("Bell Atlantic") executed
an amendment to their definitive merger (the "Merger") agreement, effecting a
technical change in the transaction structure of the Merger of equals announced
on April 22, 1996. As amended, the agreement provides that a newly formed
subsidiary of Bell Atlantic will merge with and into NYNEX, thereby making NYNEX
a wholly owned subsidiary of Bell Atlantic. There is no change in the
fundamental elements of the proposed Merger. The exchange ratio for shares is
restated to reflect the difference in the transaction. Each NYNEX shareholder
will receive 0.768 shares of Bell Atlantic common stock in
7
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
exchange for one share of NYNEX common stock. The purpose of the amendment to
the merger agreement is to expedite the regulatory approval process by
eliminating the need to obtain congressional approval of the Merger under a 1913
District of Columbia "anti-merger" law. The Merger, which is expected to qualify
as a pooling of interests for accounting purposes, is subject to a number of
conditions, including regulatory approvals, the approval of the shareholders of
both NYNEX and Bell Atlantic and receipt of opinions that the merger will be tax
free, except in the case of NYNEX shareholders, for tax payable because of cash
received for a fractional share and the payment by NYNEX of certain transfer
taxes on behalf of its shareholders. The transaction is expected to close by
April 1997. A Special Meeting of Share Owners of NYNEX was held on November 6,
1996. At the meeting NYNEX announced preliminary voting results, indicating that
proxies representing approximately 76 percent of the outstanding shares had been
returned, of which 96.4 percent voted to approve the Merger.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following Management's Narrative Analysis of Results of Operations is
provided pursuant to General Instruction H(2) to Form 10-Q.
Results of Operations
Net income for the nine months ended September 30, 1996 was $590.2 million. Net
loss for the same period of 1995 was $(1.9) billion.
Net income for the first nine months of 1996 includes an after-tax gain of $55.7
million for the cumulative effect of a change in accounting for directory
publishing income (see Note B). Net income for the first nine months of 1996
also includes after-tax charges of $93.6 million for accruals related to various
legal, regulatory and other obligations and contingencies, and self-insurance
programs. In addition, there was an after-tax charge of $42.8 million for
pension enhancements. Net income for the same period of 1995 included an
extraordinary, after-tax charge of $2.3 billion for the discontinuance of
regulatory accounting principles, after-tax charges of $160.6 million for
accruals related to various self-insurance programs, regulatory obligations and
contingencies, revised benefit charges and operating tax provisions, and an
after-tax charge of $106.5 million for pension enhancements.
Excluding the above items, net income for the first nine months of 1996 would
have been $670.9 million, an improvement of $49.7 million, or 8.0%, over
adjusted net income for the same period of 1995.
8
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating Revenues
Operating revenues for the nine months ended September 30, 1996 were $6.0
billion, an improvement of $83.3 million, or 1.4%, over the same period of 1995.
Included in the operating revenues for the first nine months of 1996 were
charges of $55.0 million related to customer claims, which was subsequently
revised to $41.0 million as a result of favorable negotiations with
interexchange carriers, and a $14.0 million refund ordered by the NYSPSC
pertaining to intrastate gross receipts tax collected by the Company on behalf
of interexchange carriers. Included in operating revenues for the same period of
1995 was $10.5 million of intrastate revenues collected on behalf of the
taxing authority from interexchange carriers associated with the state gross
receipts tax. (The Company is no longer required to collect gross receipts tax
from interexchange carriers and to remit to the taxing authority.)
Excluding the items discussed above, operating revenues would have improved
$148.8 million, or 2.5%, over adjusted operating revenues for the first nine
months of 1995.
The $148.8 million improvement in adjusted operating revenues includes the
following categories:
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. The $69.9 million, or 1.9%,
decrease from the first nine months of 1995 results from the net of (i) a $56
million increase resulting primarily from increased demand, driven by growth in
access lines and sales of calling features, and (ii) a $62 million decrease in
rates attributable to an order by the NYSPSC approving a performance-based
regulatory plan (the "Plan") (see Regulatory Environment-State), a decrease of
$50 million resulting from the reclassification of the reduction of revenues,
due to obligations pursuant to a service improvement plan implemented in 1994,
from Other revenues to Local service revenues (see Other revenues), and a $14
million decrease due to service rebates to customers in 1996 pursuant to the
Plan. Certain decreases, primarily due to customer selection of competing
carriers as a result of ILP, are being partially offset by increases in Network
access revenues, the effects of which are expected to continue. Certain
substantial increases due to marketing-based competitive responses, primarily
Optional Calling Plans ("OCPs"), are included in long distance revenues.
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. The $45.0 million, or 17.6%, improvement
results primarily from the net of (i) a $54 million increase primarily due to
increased demand for in message toll service, resulting from the previously
mentioned OCPs, and (ii) a $9 million decrease in message toll service rates.
9
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. The $38.0 million, or 2.2%,
improvement results primarily from the net of (i) an $80 million improvement in
switched access revenues and a $21 million improvement in special access
revenue, both primarily due to increased demand, including the previously
mentioned shift from Local and Long distance revenues, and (ii) a $48 million
reduction in interstate rates and a $15 million reduction in intrastate rates
attributable to an NYSPSC order (see Regulatory Environment-State).
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. The $135.7 million, or 36.9%,
improvement results primarily from the net of (i) a $50 million increase
resulting from the reclassification of the reduction of revenues from
Other revenues to Local service revenues (see Local service revenues), a net $44
million increase due to the 1995 cessation of "setting aside" revenues and the
recognition of previously "set aside" revenues as a result of an NYSPSC order
approving the Plan effective the second quarter of 1995, the recognition of $43
million previously deferred revenues in connection with ILP and other Plan
commitments that were met in 1996, a $17 million increase in directory revenues
from the directory licensing agreement with Information Resources primarily
attributable to a change in accounting principle (see Cumulative Effect of
Change in Accounting Principle), and a $9 million increase due to the
elimination of the deferral of intrastate revenues as a result of the
discontinuance of regulatory accounting principles, and (ii) a $30 million
decrease due to the reduction of revenues for anticipated service rebate
obligations under the Plan (see Regulatory Environment-State).
Operating Expenses
Operating expenses for the nine months ended September 30, 1996 were $5.0
billion, a decrease of $204.0 million, or 3.9%, from the same period of 1995.
Included in the first nine months of 1996 were pension enhancements of $65.9
million (see components below), charges of $103.0 million related to various
legal and regulatory contingencies and self-insurance programs, and a $14.0
million intrastate gross receipts tax refund (see Operating Revenues). Included
in the operating expenses for the same period of 1995 were pension enhancements
of $163.8 million, charges of $232.0 million related to various self-insurance
programs, regulatory contingencies, revised benefit charges and operating tax
provisions, $15.1 million resulting from a court decision on overearnings
complaints, and $10.5 million of gross receipts tax collected and remitted to
the taxing authority (see Operating Revenues).
Excluding the items discussed above, operating expenses would have increased
$62.5 million, or 1.3%, over adjusted operating expenses for the first nine
months of 1995.
10
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The $62.5 million increase in adjusted operating expenses includes the following
categories:
Depreciation and amortization decreased $35.3 million, or 3.4%, from the first
nine months of 1995 resulting from the net of (i) a $26 million increase due to
growth in depreciable plant investment, and (ii) decreases of $40 million
attributable to revised estimates of future net salvage value and remaining
useful lives, and $22 million attributable to the discontinuance of regulatory
accounting principles in 1995.
Taxes other than income, which include gross receipts taxes, property taxes and
other non-income based taxes, decreased $12.6 million, or 2.4%, from the first
nine months of 1995 primarily due to a $6 million decrease in gross receipts
taxes attributable to a change in New York State legislation, and a $6 million
decrease attributable to lower dividends in 1995.
Employee related costs, which consist primarily of wages, payroll taxes, and
employee benefits, increased $51.8 million over the first nine months of 1995
resulting from the net of (i) a $75 million increase in wages primarily due to
additional labor costs attributable to initiatives to improve service quality,
partially offset by reductions work force attributable to the force reduction
program and the transfer of employees to Telesector Resources associated with
re-engineering service delivery to customers (see Other operating expenses), and
(ii) a $26 million decrease in benefit expenses primarily due to the
amortization of deferred pension costs pursuant to an NYSPSC approved plan in
1995.
Other operating expenses, which consist primarily of contracted and centralized
services, rent and other general and administrative costs, increased $58.6
million over the first nine months of 1995 resulting primarily from the net of
(i) a $65 million increase in charges from affiliated companies, primarily
attributable to increases in Telesector Resources' contracted and centralized
services due to process re-engineering costs not accrued for in 1993 business
restructuring reserves and costs to implement the competitive checklist
provisions of the Telecommunications Act of 1996 (the "Act") (see Regulatory
Environment - Federal), a $17 million increase primarily due to lower
capitalization of expenses as a result of the discontinuance of regulatory
accounting principles, and a $14 million increase in contracted and centralized
services primarily due to the outsourcing of motor vehicle fleet maintenance,
and (ii) a $10 million decrease in billing and collection fixed rate
uncollectible losses pursuant to the contract with AT&T Corp., a $9 million
decrease in right to use fees resulting from modified deployment schedules, an
$8 million decrease in materials primarily attributable to favorable purchase
pricing, and an $8 million decrease in land and buildings rent expense.
11
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The components of the pension enhancement charges for the first nine months of
1996 and 1995 are as follows:
For the Nine months Ended
September 30,
(In millions) 1996* 1995*
---- ----
Pretax After-Tax Pretax After-Tax
Pension enhancement charges $67.1 $43.6 $145.2 $94.4
Postretirement medical costs (1.2) (0.8) 18.6 12.1
----- ----- ------ ------
$65.9 $42.8 $163.8 $106.5
===== ===== ====== ======
* 1996 - 350 management and 260 nonmanagement employees
1995 - 480 management and 475 nonmanagement employees
For the first nine months of 1996 and 1995, $20.1 million and $43.8
million, respectively ($13.1 million and $28.5 million, respectively,
after-tax) were allocated to the Company from Telesector Resources for
its pension enhancements and ($2.6) million and $7.1 million,
respectively (($1.7) million and $4.6 million, respectively, after-tax)
were allocated from Telesector Resources for its associated
postretirement medical benefits.
Much of the cost of the enhancements is funded by NYNEX's pension plans.
Other income (expense) - net
Other income (expense) - net decreased $30.6 million from the first nine months
of 1995 primarily due to decreases of $21 million attributable to a change in
the recording of capitalized interest expense (in 1996, capitalized interest
expense is recorded as a reduction to Interest expense), $5 million attributable
to higher interest cost associated with short-term borrowings, and $3 million
attributable to increased charitable contributions.
Interest expense
Interest expense decreased $30.9 million, or 12.6%, from the first nine months
of 1995 primarily due to a change in the recording of capitalized interest
expense (see Other income (expense) - net), and a decrease resulting from the
reversal of interest charges on the revenue set aside as required by the NYSPSC
in 1995 (see Regulatory Environment-State).
Income taxes
Income taxes increased $107.3 million, primarily due to an increase in pretax
income and the elimination of excess deferred tax reversals as a result of the
discontinuance of regulatory accounting principles.
Extraordinary Item
In the second quarter of 1995, the discontinuance of regulatory accounting
principles required the Company, for financial accounting purposes, to adjust
telephone plant and equipment and to eliminate non-plant regulatory assets and
12
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
liabilities from the balance sheet. This change resulted in an after-tax
extraordinary charge of $2.3 billion, consisting of $1.8 billion to adjust the
carrying amount of telephone plant and equipment and $0.5 billion to write off
non-plant regulatory assets and liabilities.
Cumulative effect of change in accounting principle
Effective January 1, 1996, Information Resources changed the recognition of its
directory publishing revenue and production expenses from the "amortized" method
to the "point of publication" method. Under the point of publication method,
revenues and product expenses will be recognized when the directories are
published rather than over the lives of the directories (generally one year) as
was the case under the amortized method. NYNEX and the Company believe the
change to the point of publication method is preferable because it is the method
that is generally followed by publishing companies and reflects more precisely
the operations of the business. Pursuant to the directory licensing agreement
between Information Resources and the Company, the Company's portion of the
initial effect of the change to the point of publication method is reported as a
cumulative effect of a change in accounting principle which resulted in a
one-time, non-cash gain of $95.4 million ($55.7 million after-tax) in the first
quarter of 1996. The impact of applying the point of publication method during
the first nine months of 1996 resulted in a $6.9 million increase to net income.
Pro forma results, assuming the point of publication method had been applied
during the first nine months of 1995, are as follows:
Nine Months Ended
September 30, 1995
(In millions)
Pro forma As Reported
Net Loss $(1,934.1) $(1,937.4)
While the application of the point of publication method is not expected to have
a material impact on total 1996 and pro forma 1995 results, the impact of the
change is likely to materially effect the results of certain quarters due to the
nature of the change.
Current Status of Retirement Incentives
In July 1996, the Company extended the period for offering retirement incentives
to management employees to mid-1997 to better coordinate force sizing with
process re-engineering implementation and service improvement initiatives. It
was determined in 1995 that, due to volume of business growth, the expected
reduction in the number of nonmanagement employees would not be fully realized
until 1998. At the present time, the Company expects the total number of
employees who will elect to take the retirement incentives to be in the range of
9,800 to 10,400 consisting of approximately 3,500 management and 6,300 to 6,900
nonmanagement employees depending on work
13
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
volumes, needs of the business and timing of the incentive offers. The increase
of an estimated 800 additional management employees expected to leave the
Company under the retirement incentives results from higher than anticipated
acceptances of the retirement incentives.
Current Status of Business Restructuring
As a result of the Company's most recent experience and projections of remaining
costs and work effort for process re-engineering initiatives, systems
development costs are expected to exceed earlier projections by $18 million,
while work center consolidation and training costs are expected to be lower than
originally planned by approximately $14 million and $4 million, respectively.
Reserve Utilization in 1996
The restructuring reserve balance at September 30, 1996, which does not include
the liability for postretirement medical benefits associated with employees'
leaving the Company under the business restructuring, was approximately $93
million. Summarized below are the components of $97 million of reserves utilized
during the first nine months of 1996:
(In millions)
Severance $ 39
Process Re-engineering:
Systems redesign:
Customer contact $28
Customer operations 21
Total systems redesign $ 49
Work center consolidation 1
Branding -
Relocation -
Training 3
Re-engineering implementation -
---
Subtotal 53
Telesector Resources allocated reserves:
Systems re-engineering 5
Re-engineering implementation -
Work center consolidation -
---
Total allocated 5
---
Total process re-engineering 58
Total $ 97
====
The severance reduction amount is primarily severance reserves transferred to
the pension liability on a per employee basis as a result of employees' leaving
under the pension enhancements as opposed to severance provisions as previously
accrued. $14 million of severance reserves was transferred from the Company to
Telesector Resources associated with employees who transferred from the Company
to Telesector Resources and subsequently left under the pension enhancements.
14
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Cost Savings
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 6,200 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits of approximately $314 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 $130 million. A portion of these cost savings
will be offset by the effects of wage and price inflation, growth in volume of
business and higher costs attributable to service improvements.
Financing
At September 30, 1996, the Company had $250 million of unissued, unsecured debt
securities registered with the SEC.
On April 1, 1996, $55 million of the Company's 3.375%, Series I Refunding
Mortgage Bonds matured. The Company repaid this debt with short term borrowings
from NYNEX.
Regulatory Environment
In response to regulatory filings made by NYNEX in July, the Connecticut
Department of Public Utilities Commission and the NYSPSC have indicated that
they have the authority to approve the Merger and have initiated proceedings.
Evidentiary hearings were held in Connecticut in August and September, and are
scheduled in New York in December.
The governing legal standard varies from state to state, but generally requires
a showing that the Merger is consistent with the public interest. As part of
that standard, these state regulatory commissions may look at the impact of the
Merger on competition, rates, and service quality as well as the impact on the
customers and employees of the Company.
In addition, NYNEX and Bell Atlantic have filed applications with the Federal
Communications Commission ("FCC") seeking approval of the transfer of control of
certain FCC licenses and authorizations held by the Company and New England
Telephone and Telegraph Company (collectively "the Telephone Companies").
NYNEX expects that all necessary regulatory action will be completed by early
1997.
15
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
State
Competition Proceedings: In July, evidentiary hearings concluded on issues
related to the Company's permanent rates for resold services and unbundled links
(the network plant connecting the customer to the central office) and ports (the
connection in the central office). However, in light of the FCC's
Interconnection Order (see Regulatory Environment-Federal - Telecommunications
Act of 1996), an NYSPSC Administrative Law Judge reopened the hearing record to
allow the Company and other parties to submit supplemental cost studies and
supporting testimony with respect to links and other unbundled network elements
identified in the FCC's Order. Cost studies and supporting testimony for a
number of elements were filed in September; additional cost studies will be
filed by year-end. A second round of hearings began in October. The Company's
interim resale rates, reflecting discounts of 11% for business services to be
resold and 17% for residence services to be resold, remain in effect, subject to
a retroactive "true-up" once permanent rates are set. Interim link rates are
also in effect.
Incentive Plan: The Plan approved by the NYSPSC in 1995 (as disclosed in NYNEX's
1995 Annual Report) establishes service quality targets with stringent rebate
provisions if the Company is unable to meet some or all of the targets. In
November the NYSPSC announced its decision that, based on service performance
results for Plan Year 1, which ended August 31, 1996, the Company will be
required to issue rebates to customers in the aggregate amount of at least $62
million, approximately $14 million of which has already been issued and $32
million of which has already been accrued. The NYSPSC staff is reviewing the
Company's claims of miscalculation of certain service performance data related
to approximately $10 million in additional rebates.
Federal
Telecommunications Act of 1996: The Telephone Companies are actively engaged in
the negotiation of interconnection agreements with various competitive local
exchange carriers ("CLECs") under the terms of the Act. Agreements are
state-specific and have been reached with nine individual CLECs. Each agreement
must be reviewed by the appropriate state regulatory commission and approved or
disapproved within 90 days of filing.
Arbitration proceedings have been commenced in every state to resolve the terms
of interconnection where the Telephone Companies and the affected CLEC have been
unable to reach an agreement for interconnection. The principal issues involve
the wholesale pricing of services offered by the Telephone Companies for resale,
as well as the prices for unbundled network elements and for the transport and
termination of local traffic.
In August, the FCC issued its First Report and Order setting forth the terms and
conditions under which local exchange companies such as the Telephone Companies
are required to provide their services and facilities for use by competitors in
the provision of telecommunications services as required by the Act. The Order
establishes comprehensive technical rules and sets national
16
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
cost and pricing standards for interconnection, transport and termination of
local traffic, the provision of unbundled network elements and resale services.
The Order also sets "default" or "proxy" rates for these functions, which state
regulatory commissions may use until the FCC-mandated cost studies have been
completed. The proposed default rates and resale discount result in rates that
are significantly less than the interim rates approved by the NYSPSC in the
Competition proceedings (see Regulatory Environment-State), the negotiated rates
contained in the Telephone Companies' various interconnection agreements pending
before the NYSPSC and other state regulatory commissions and the Telephone
Companies' costs. The Order provides further that, in negotiating an
interconnection agreement with a local exchange company, a CLEC may select
individual provisions from any other interconnection agreement the local
exchange company has negotiated. The Order requires that state regulatory
commissions reconsider any approved or arbitrated interconnection agreements in
light of the requirements of the Order.
In September, state regulatory commissions, local exchange carriers such as
NYNEX, and other parties filed appeals with U. S. Courts of Appeals to overturn
portions of the FCC's Order. The U. S. Court of Appeals for the 8th Circuit
issued a temporary stay of the Order, and all appeals have now been consolidated
with the Court. In October, the Court ordered that, pending completion of the
appeal, the stay will be continued with respect to the pricing rules and the
selective contract provision. The Court is expected to hear oral arguments on
the appeals in January. In the meantime, the FCC and several other parties,
including AT&T Corp. ("AT&T") and MCI Corp. ("MCI"), have petitioned the U. S.
Supreme Court to vacate the stay. In its petition the FCC stated that the "stay
draws into question not just the timing of competition in the local markets, but
also the timing of full entry by Bell operating companies into the long distance
market." In late October the petitions were denied by Justice Thomas. The FCC
and other petitioners have resubmitted their petitions to other Justices of the
Supreme Court.
NYNEX expects that the interconnection negotiation and arbitration process will
continue before the various state regulatory commissions, utilizing the FCC
interconnection rules that remain in effect, but with each commission
determining the appropriate pricing rules for its jurisdiction, as provided by
the Act. Arbitrated issues must be completed within nine months of the CLEC's
initial request to negotiate interconnection, with state approval of the
arbitrated agreement one month thereafter. Thus, interconnection agreements with
AT&T and MCI, in New York and Connecticut, must be arbitrated and approved by
January 1997, and with Sprint Corp. by February 1997.
The Order is the first of three FCC rulemakings that, taken together, will
determine the regulatory framework for competitive local exchange markets as
required by the Act. The FCC has previously indicated that the remaining
rulemakings, which will address universal service reform and access charge
reform, are scheduled to be completed by May 1997. While the outcome of these
proceedings cannot be predicted, they are likely to have a significant impact on
the Company's future rate structures, rate levels and revenues.
17
<PAGE>
Form 10-Q Part II New York Telephone Company
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
No Report on Form 8-K was filed by the registrant during the
quarter for which this report is filed.
18
<PAGE>
Form 10-Q New York Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
New York Telephone Company
J. W. Diercksen
-------------------------------------------
J. W. Diercksen
Acting Vice President-Finance and Treasurer
(Principal Financial and Accounting Officer)
November 8, 1996
19
<PAGE>
Exhibit (12)
NEW YORK TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions) (Unaudited)
<TABLE>
<CAPTION>
For the
Nine months
Ended
September 30, For the Year Ended December 31,
1996 1995 1994 1993 1992 1991
---- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings
Earnings before Interest Expense,
Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $1,017.0 $ 807.3 $659.4 $430.2 $1,219.3 $ 911.0
Federal, State and Local Income Taxes 267.4 226.9 140.4 (67.8) 342.8 157.2
Estimated Interest Portion of Rental Expense 22.4 30.2 31.6 36.3 38.9 37.9
------- -------- ------ ------ -------- --------
Total Earnings $1,306.8 $1,064.4 $831.4 $398.7 $1,601.0 $1,106.1
======== ======== ====== ====== ======== ========
Fixed Charges
Total Interest Deductions $215.1 $ 306.8 $314.4 $348.6 $ 362.9 $ 375.1
Estimated Interest Portion of Rental Expense 22.4 30.2 31.6 36.3 38.9 37.9
------- -------- ------ ------ -------- --------
Total Fixed Charges $ 237.5 $ 337.0 $346.0 $384.9 $ 401.8 $ 413.0
======= ======== ====== ====== ======== ========
Ratio of Earnings to Fixed Charges 5.50 3.16 2.40 1.04 3.98 2.68
======= ======== ====== ====== ======== ========
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Sep-30-1996
<CASH> 31
<SECURITIES> 0
<RECEIVABLES> 1,834
<ALLOWANCES> 166
<INVENTORY> 87
<CURRENT-ASSETS> 1,981
<PP&E> 20,734
<DEPRECIATION> 11,576
<TOTAL-ASSETS> 11,455
<CURRENT-LIABILITIES> 2,759
<BONDS> 3,913
0
0
<COMMON> 1
<OTHER-SE> 2,680
<TOTAL-LIABILITY-AND-EQUITY> 11,455
<SALES> 0
<TOTAL-REVENUES> 6,000
<CGS> 0
<TOTAL-COSTS> 4,977
<OTHER-EXPENSES> (6)
<LOSS-PROVISION> 77
<INTEREST-EXPENSE> 215
<INCOME-PRETAX> 802
<INCOME-TAX> 267
<INCOME-CONTINUING> 535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 56
<NET-INCOME> 590
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
