Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- ---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 .
- -
<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 Six Months
For the Period Ended June 30, 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service $1,161.5 $ 1,203.5 $2,331.4 $ 2,395.6
Long distance 93.9 83.3 197.4 169.5
Network access 575.4 584.0 1,102.2 1,151.6
Other 238.6 137.6 356.2 221.4
-------- -------- ------ --------
Total operating revenues 2,069.4 2,008.4 3,987.2 3,938.1
-------- --------- -------- --------
OPERATING EXPENSES
Maintenance and support 646.3 605.2 1,270.5 1,204.8
Depreciation and amortization 339.6 349.3 688.7 707.4
Marketing and customer services 269.6 258.7 543.3 490.0
Taxes other than income 171.9 184.1 327.7 384.5
Provision for uncollectible revenues 23.5 33.3 50.4 55.1
Other 199.0 452.7 471.7 664.7
-------- -------- ------ --------
Total operating expenses 1,649.9 1,883.3 3,352.3 3,506.5
-------- --------- -------- ---------
Operating income 419.5 125.1 634.9 431.6
Other income (expense) - net 0.3 7.1 (1.3) 11.3
Interest expense 72.2 84.0 142.3 167.9
-------- ------- ------ ---------
Earnings before income taxes,
extraordinary item and
cumulative effect of change
in accounting principle 347.6 48.2 491.3 275.0
Income taxes 117.1 11.8 162.2 84.0
-------- --------- -------- --------
Earnings before extraordinary item
and cumulative effect of change
in accounting principle 230.5 36.4 329.1 191.0
Extraordinary item for the
discontinuance of regulatory
accounting principles, net
of taxes - (2,291.6) - (2,291.6)
Cumulative effect of change in
accounting for directory publishing
income, net of taxes (Note B) - - 55.7 -
-------- --------- -------- --------
NET INCOME (LOSS) $ 230.5 $(2,255.2) $ 384.8 $(2,100.6)
======== ========= ======== =========
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Beginning of period $(1,115.1) $ 676.3 $(1,269.4) $ 702.2
Net income 230.5 (2,255.2) 384.8 (2,100.6)
Dividends declared (Note G) - - - (180.5)
--------- --------- -------- -------
End of period $ (884.6) $(1,578.9) $ (884.6) $(1,578.9)
======== ========= ======== =========
</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>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 24.5 $ 39.9
Receivables
Trade and other (net of allowance of $163.6 and
$154.7, respectively) 1,563.9 1,614.1
Affiliates 135.6 45.5
Deferred charges 77.2 52.5
Deferred income taxes 0.8 44.1
Inventory 67.9 62.8
Prepaid expenses and other 121.4 82.4
--------- -------
Total current assets 1,991.3 1,941.3
--------- ---------
Telephone plant - at cost 20,559.9 20,153.6
Less: accumulated depreciation 11,438.6 10,847.8
--------- ---------
9,121.3 9,305.8
--------- ---------
Deferred income taxes 6.8 -
Deferred charges and other 321.1 321.8
--------- ---------
TOTAL ASSETS $11,440.5 $11,568.9
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable
Affiliates $ 711.0 $ 840.6
Other 1,050.1 1,263.4
Short-term debt 643.1 367.0
Dividends payable 191.6 180.5
Taxes accrued 68.2 29.8
Deferred income taxes 16.5 -
Advance billing and customers' deposits 170.8 173.8
Interest accrued 65.2 67.2
--------- ---------
Total current liabilities 2,916.5 2,922.3
--------- ---------
Long-term debt 3,913.0 3,913.3
Deferred income taxes 15.3 102.1
Unamortized investment tax credits 119.2 130.9
Other long-term liabilities and deferred credits 2,002.1 2,027.5
--------- ---------
Total liabilities 8,966.1 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) (884.6) (1,269.4)
--------- ---------
Total share owner's equity 2,474.4 2,472.8
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $11,440.5 $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 Six Months Ended
June 30,
1996 1995
----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 384.8 $(2,100.6)
------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary item - net of taxes - 2,291.6
Depreciation and amortization 688.7 707.4
Deferred income taxes - net (62.5) (153.2)
Deferred credits - net (11.7) (13.5)
Change in operating assets and liabilities:
Receivables (39.9) (83.8)
Deferred charges (24.7) (43.7)
Deferred income taxes - current 43.3 53.1
Inventory (5.1) (14.3)
Prepaid expenses and other (39.0) (29.3)
Deferred income taxes - non-current (6.8) -
Accounts payable (342.9) (111.2)
Taxes accrued 38.4 (3.1)
Deferred income tax liability 16.5 -
Advance billing and customers' deposits (3.0) 0.6
Interest accrued (2.0) (7.8)
Other - net (63.4) 258.6
------- ---------
Total adjustments 185.9 2,851.4
------- ---------
Net cash provided by operating activities 570.7 750.8
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (488.8) (570.2)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 333.3 198.3
Dividends paid to NYNEX (372.1) (361.7)
Repayment of long-term debt and capital leases (58.5) (3.1)
------ --------
Net cash used in financing activities (97.3) (166.5)
------- ---------
Net (decrease) increase in Cash (15.4) 14.1
Cash at beginning of period 39.9 23.1
----- --------
Cash at end of period $ 24.5 $ 37.2
====== =========
</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 Report 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
with 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 six months of 1996 resulted in an $11.7 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 six months of 1995, are as follows:
Six Months Ended
June 30, 1995
(In millions)
Pro forma As Reported
--------- -----------
Net Loss $(2,091.7) $(2,100.6)
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 the customers.
During the first six months of 1996, $20 million of the deferred revenues was
recognized in connection with intraLATA presubscription ("ILP") commitments that
were met in 1996 and $51 million of the deferred revenues was utilized primarily
for rebates issued to customers for not meeting service commitments in prior
periods. As of June 30, 1996, $117 million of revenues remained deferred.
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 June 30, 1996, the aggregate amount of such revenues that was estimated to be
subject to possible refund was approximately $307 million, plus related
interest, of which approximately $261 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 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,
6
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
Six Months Ended
June 30,
1996 1995
----------------
(In millions)
Income tax payments $176.6 $141.8
Interest payments $147.7 $148.6
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 Subsequent Event
On July 2, 1996, NYNEX and Bell Atlantic Corporation ("Bell Atlantic") executed
an amendment to their definitive 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 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.
7
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The following Management's Narrative Analysis of Results of Operations is
provided pursuant to General Instruction H(2) to Form 10-Q.
Results of Operations
Net income for the six months ended June 30, 1996 was $384.8 million. Net loss
for the same period of 1995 was $(2.1) billion.
Net income for the first six 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 six months of 1996 also
includes after-tax charges of $102.7 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 $35.4 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 $105.3 million for
accruals related to various self-insurance programs, regulatory contingencies,
revised benefit charges and operating tax provisions, and an after-tax charge of
$96.9 million for pension enhancements.
Excluding the above items, net income for the first six months of 1996 would
have been $467.2 million, an improvement of $74.0 million, or 18.8%, over
adjusted net income for the same period of 1995.
Operating Revenues
Operating revenues for the six months ended June 30, 1996 were $4.0 billion, an
improvement of $49.1 million, or 1.2%, over the same period of 1995.
Included in the operating revenues for the first six months of 1996 was a
special charge of $55.0 million related to customer claims 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 the
operating revenues for the same period of 1995 were $34.2 million ($7.0 million
intrastate and $27.2 million interstate) of revenues from interexchange carriers
associated with gross receipts tax collected on behalf of the taxing authority.
(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
$152.3 million, or 3.9%, over adjusted operating revenues for the first six
months of 1995.
8
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The $152.3 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 $43.2 million, or 1.8%,
decrease from the first six months of 1995 results from the net of (i) an
increase of $49 million primarily attributable to increased demand, driven by
growth in access lines and sales of calling features, and (ii) decreases 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 $42 million
in rates attributable to an order by the NYSPSC approving a performance-based
regulatory plan (the "Plan") (see Regulatory Environment-State). Certain
decreases in local service revenues, resulting from competition, are being
partially offset by increases in network access 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 $27.9 million, or 16.5%, improvement
over the first six months of 1995 results primarily from the net of (i) a $43
million increase in message toll service usage, and (ii) decreases of $7 million
in message toll service rates and $4 million in toll private line usage.
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. The $32.8 million, or 2.9%,
improvement over the first six months of 1995 results from the net of (i) a $60
million improvement in switched access revenues and an $11 million improvement
in special access revenue both primarily attributable to demand, including the
previously mentioned shift from local service revenues and (ii) a $27 million
reduction in interstate rates and an $11 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 $134.8 million, or 60.9%,
improvement over the first six months of 1995 results 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), (ii) a net $44 million increase due to the cessation of "setting
aside" revenues in the second quarter of 1995 and the 1995 recognition of
previously "set aside" revenues as a result of an NYSPSC order approving the
Plan effective the second quarter of 1995, (iii) increases of $35 million 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), $20 million recognized in
connection with ILP commitments that were met in 1996, $9 million due to the
elimination of the deferral of intrastate revenues
9
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
as a result of the discontinuance of regulatory accounting principles, and $4
million in voice messaging services revenue, and (iv) a $26 million decrease due
to an accrual for anticipated service obligations under a service improvement
plan implemented in 1995 (see Regulatory Environment-State).
Operating Expenses
Operating expenses for the six months ended June 30, 1996 were $3.4 billion, a
decrease of $154.2 million, or 4.4%, from the same period of 1995.
Included in the first six months of 1996 were pension enhancements of $54.5
million (see components below), a $14.0 million intrastate gross receipts tax
refund (see Operating Revenues) and special charges of $103.0 million for
accruals related to various legal and regulatory contingencies and
self-insurance programs. Included in the operating expenses for the same period
of 1995 were pension enhancements of $149.1 million, $34.2 million of gross
receipts tax collected and remitted to the taxing authority (see Operating
Revenues), and charges of $162.0 million for accruals related to various
self-insurance programs, regulatory contingencies, revised benefit charges and
operating tax provisions.
Excluding the items discussed above, operating expenses would have increased
$47.6 million, or 1.5%, over adjusted operating expenses for the first six
months of 1995.
The $47.6 million increase in adjusted operating expenses includes the following
categories:
Depreciation and amortization decreased $18.7 million, or 2.6%, from the first
six months of 1995 resulting from the net of (i) an $18 million increase due to
growth in depreciable plant investment, and (ii) decreases of $28 million
attributable to the discontinuance of regulatory accounting principles in 1995
and $12 million attributable to revised estimates of net salvage value.
Taxes other than income, which include gross receipts taxes, property taxes and
other non-income based taxes, decreased $8.6 million, or 2.5%, from the first
six months of 1995 primarily due to a $4 million decrease in gross receipts
taxes attributable to a change in New York State legislation, a $3 million
decrease attributable to lower dividends in 1995, and a $2 million decrease
attributable to lower assessments of property values.
Employee related costs, which consist primarily of wages, payroll taxes, and
employee benefits, increased $37.0 million over the first six months of 1995
resulting from the net of (i) a $44 million increase in wages primarily due to
additional labor costs attributable to initiatives to improve service quality,
and wage rate increases partially offset by 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), and (ii) a $7 million
10
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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 $35.9
million over the first six months of 1995 resulting from the net of (i) a $55
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 to implement the competitive checklist provisions of the
Telecommunications Act of 1996 (see Regulatory Environment - Federal), the
transfer of employees from the Company to Telesector Resources, partially offset
by decreases due to Telesector Resources' force reduction program, and an $11
million increase in plant and overhead loadings primarily due to lower
capitalization of network support charges resulting from decreased Bell
Communications Research, Inc. charges and the discontinuance of non-productive
work time capitalization related to the discontinuance of regulatory accounting
principles, and (ii) a $10 million decrease in right to use fees resulting from
decreased software deployment, an $8 million decrease in billing and collection
revenues pursuant to the contract with AT&T Corporation, a $5 million decrease
in the provision for uncollectible revenue, and a $4 million decrease in rent
expense primarily attributable to work center consolidations and lease
terminations associated with the Company's re-engineering program.
The components of the pension enhancement charges for the first six months of
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
(In millions) 1996* 1995*
---- ----
Pretax After-Tax Pretax After-Tax
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Pension enhancement charges $56.0 $36.4 $107.2 $69.7
Postretirement medical costs (1.5) (1.0) 41.9 27.2
----- ----- ------ -----
$54.5 $35.4 $149.1 $96.9
===== ===== ====== =====
</TABLE>
* 1996 - 300 management and 175 nonmanagement employees
1995 - 310 management and 350 nonmanagement employees
For the first six months of 1996 and 1995, $17.4 million and $33.9
million, respectively ($11.3 million and $22.1 million, respectively,
after-tax) were allocated to the Company from Telesector Resources for
its pension enhancements and ($1.9) million and $16.2 million,
respectively (($1.2) million and $10.5 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 $12.6 million from the first six months
of 1995 primarily due to a change in the recording of capitalized interest
expense associated with the discontinuance of regulatory accounting principles
11
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(in 1996, capitalized interest expense is recorded as a reduction to Interest
expense).
Interest expense
Interest expense decreased $25.6 million, or 15.2%, from the first six months of
1995 primarily due to a change in the recording of capitalized interest expense
associated with the discontinuance of regulatory accounting principles (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 $78.2 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.
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
with 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 six months of 1996 resulted in an $11.7 million increase to net
income.
Pro forma results, assuming the point of publication method had been applied
during the first six months of 1995, are as follows:
Six Months Ended
June 30, 1995
(In millions)
Pro forma As Reported
--------- -----------
Net Loss $(2,091.7) $(2,100.6)
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 quarterly results due to the nature of
the change.
12
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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 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 the
remaining costs and work effort involved in process re-engineering initiatives,
systems development costs are expected to exceed original projections by $18
million for the remainder of 1996, while work center consolidation and training
costs are expected to be lower than originally projected by $14 million and $4
million, respectively.
Reserve Utilization in 1996
The restructuring reserve balance at June 30, 1996, which does not include the
liability for postretirement medical benefits associated with employees' leaving
the Company under the business restructuring, was approximately $107 million.
Summarized below are the components of $83 million of reserves utilized during
the first six months of 1996:
Severance $ 32
Process Re-engineering:
Systems redesign:
Customer contact $26
Customer operations 17
Total systems redesign $ 43
Work center consolidation 1
Branding -
Relocation -
Training 2
Re-engineering implementation -
---
Subtotal 46
Telesector Resources allocated reserves:
Systems re-engineering 5
Re-engineering implementation -
Work center consolidation -
---
Total allocated 5
---
Total process re-engineering 51
----
Total $ 83
====
13
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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. $6 million 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.
Cost Savings
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 6,100 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits of approximately $307 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 $127 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 June 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
State
On July 3, 1996, NYNEX and Bell Atlantic filed information on their proposed
merger with regulators in the District of Columbia and the thirteen states in
which their respective local telephone companies provide service. The filings
seek the level of review mandated by the applicable provisions of the states'
public service laws and seek formal regulatory approval where required. In
addition, a joint filing was made with the Federal Communications Commission
("FCC") on the same date.
Competition II Proceeding: In May the New York State Public Service Commission
issued an Order addressing four major areas that the NYSPSC views as necessary
to establish a fair and open competitive market:
1. Universal Service: The NYSPSC defined the services considered essential for
access to and use of the public network and stated that any carrier wishing to
withdraw basic service offerings will be subject to exit requirements that will
be formalized in the next phase of the proceeding. A further collaborative phase
will be established to develop and recommend
14
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
mechanics for funding programs such as lifeline, emergency services, and
telecommunications relay service. The merits of further access charge reductions
will also be considered in the next phase.
2. Level Playing Field: By November all local exchange carriers must file
reports describing the steps they have taken to support mutual billing, billing
date exchange and other areas of joint cooperation. The NYSPSC stated that it
expects that telephone companies will re-engineer their processes for
provisioning, preparing and maintaining collocation space to assure that the
terms are reasonable and costs are as low as possible. All local exchange
carriers have been directed to charge prices for intraLATA usage which meet
appropriate imputation standards. In a further phase of the proceeding the
NYSPSC will consider the benefits and potential terms, condition, and pricing of
providing directory information to third parties.
3. Transition Regulation: In general, non-dominant carriers will only be
required to file financial data based on Generally Accepted Accounting
Principles. Dominant carriers will continue to be subject to existing pricing
rules. All local exchange carriers, including new entrants, must meet the
NYSPSC's requirements with respect to lifeline, customer fair practices, open
network architecture and non-discrimination.
4. Service Quality and Monitoring: The NYSPSC determined that service quality
reporting should vary by company size, and performance history, but that all
companies will be expected to provide service consistent with performance
standards. The NYSPSC intends to initiate a review of all of its service quality
standards. The NYSPSC will also institute a formal rulemaking to monitor
competition.
In July the Company filed its proposed resale tariff setting forth the terms and
conditions on which it proposes to offer services to resellers. Other parties
are expected to file detailed comments on this tariff, and the NYSPSC is
expected to rule on any disputed tariff issues prior to the October 1st
effective date of the tariff.
In July the NYSPSC issued a ruling on the interim rates the Company must offer
for links (the network plant connecting the customer to the central office),
ports (the connection in the central office) and services offered for resale.
The NYSPSC established temporary discounts of 11% from the Company's retail
rates for business services offered for resale and discounts of 17% from the
Company's retail rates for residence services offered for resale. Certain
services are excluded from the interim discounts. The Company's current link
rate was reduced and the lower rate was made temporary, subject to "true-up"
once a permanent rate is set. Hearings on permanent rates began in July, and an
NYSPSC decision is expected before the Company's resale tariffs take effect in
October 1996.
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
15
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
NYNEX affiliates in 1984-1990. In July, 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 revenues subject to refund, 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.
Federal
Telecommunications Act of 1996: On August 1, 1996, the FCC announced that it had
adopted rules to begin implementing the local competition provisions of the
Telecommunications Act of 1996 (the "1996 Act"). The rules address, among other
matters, local exchange carrier interconnection, unbundling of network elements
and provision of local exchange services for resale. Theses rules may impact the
competitive checklist requirements for NYNEX's entry into the in-region long
distance business. The effect of the rules on NYNEX's business plans cannot be
assessed until the text of the rules is released by the FCC.
In July, the FCC issued interim rules that grant "nondominant carrier" status
for a Regional Holding Company's ("RHC") affiliate when it offers long distance
services outside of its home region. The rules impose certain minimum
safeguards: the affiliate may not own network facilities jointly with the
parent, must maintain separate books, and must pay tariffed rates for services
from the parent. The FCC rejected the proposals of long distance competitors
that sought to bar the RHCs and their affiliates from certain operating
efficiencies, such as the common use of employees and premises, and that sought
to impose regulatory accounting requirements on the affiliate. In view of the
proposed mergers between NYNEX and Bell Atlantic and between SBC Communications
and Pacific Telesis Group, the FCC decided that nondominant status will not
automatically apply to an RHC affiliate providing long distance service in a
state where the RHC's prospective merger partner provides local exchange
service. The RHC may seek such status by a waiver request. The FCC has commenced
a separate rulemaking proceeding to determine whether the minimum safeguards
imposed on nondominant carriers should be continued or may be eliminated.
In July the FCC granted NYNEX authority to provide international long distance
service outside of its home region. NYNEX was afforded nondominant carrier
status, subject to the FCC's interim rules.
Nondominant carriers enjoy substantial regulatory freedom, including freedom
from detailed price cap regulation and flexibility to make tariff changes on one
day's notice (compared with two weeks for dominant carriers) without cost
support and with a presumption of lawfulness. The FCC's Order will greatly
facilitate NYNEX's timely provision of out-of-region interstate and
international long distance services.
16
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
In July the FCC also commenced separate rulemaking proceedings to determine the
safeguards to be applied to the affiliate of an RHC or other local exchange
carrier when it offers certain services, including long distance services within
its home region, manufacturing and information services, electronic publishing,
alarm monitoring and telemessaging services.
In June, the FCC issued an Order adopting regulations to implement the open
video systems ("OVS") provisions of the 1996 Act to provide opportunities for
the distribution of video programming other than through cable systems. In its
Order, the FCC adopted a streamlined process for entry, including reasonable
presumptions for determining whether rates are just and reasonable. In addition,
the FCC adopted capacity allocation rules that provide flexibility for OVS
operators, such as NYNEX, while guaranteeing unrelated programmers access to
customers. The FCC also adopted rules implementing Congressional intent to limit
the role of local franchise authorities in the oversight of OVS. Many parties,
including NYNEX, have sought reconsideration of aspects of the Order.
Reconsideration petitions must be decided and final rules put in place by early
August.
In June the FCC adopted rules that will contribute towards the development of
competition in the local exchange market by allowing customers to retain their
telephone numbers when switching local service providers. The FCC's rules
implement the number portability obligations imposed on local exchange carriers
by the Telecommunications Act of 1996. Local exchange carriers are to begin
implementing number portability in the 100 largest metropolitan areas by October
1997, with completion by the end of 1998. Number portability outside of those
areas must be provided within six months after receiving a specific request from
a telecommunications carrier. The FCC has proposed a further inquiry into cost
recovery for meeting these requirements.
Price Caps: In June, the FCC approved the Telephone Subsidiaries Annual Access
Tariff Filing for the tariff period July 1996 to June 1997. In that filing the
NYNEX telephone companies elected to use the highest productivity factor in
their price cap formula, allowing them to retain all interstate earnings without
sharing. (The price cap formula adjusts the limits on access price levels upward
for inflation, downward for productivity, and up or down for certain "exogenous"
costs beyond the carrier's control.) The FCC also approved the NYNEX telephone
companies' petition to elect the same "no-sharing" productivity factor
retroactively to January 1, 1996, which will require them to make an additional
$20 million permanent reduction in access price levels.
Other Federal Regulatory Matters: In July the U.S. Court of Appeals for the
District of Columbia Circuit granted petitions for review of the 1992-94 FCC
orders that changed the rate structure for interstate Local Transport access
services (transport between local telephone company central offices and
interexchange carrier premises). The FCC orders established a mix of flat
monthly rates and per-minute rates for Local Transport services and, to ease the
impact of this restructure on small interexchange carriers, placed some of the
costs for per-minute transport in a "residual interconnection charge",
17
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
("RIC") imposed on all interexchange carriers. The FCC described this as an
interim rate structure to allow a transition to cost-based rates. However, the
Court found that the FCC had made no apparent progress since 1992 in developing
cost-based rates. While the Court did not reverse the FCC orders, it remanded
the case with the instruction that the FCC must implement cost-based rates for
transport services and a cost-based alternative to the RIC, or give a reasoned
explanation why a departure from cost-based pricing is necessary. The FCC may
deal with this case as part of the access reform proceeding that it intends to
initiate in the near future. The RIC accounts for approximately $600 million of
NYNEX's annual revenues.
18
<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.
19
<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)
August 7, 1996
20
Exhibit (12)
NEW YORK TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions)
<TABLE>
<CAPTION>
For the
Six Months
Ended
June 30, For the Year Ended December 31,
1996 1995 1994 1993 1992 1991
---- --------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Earnings
Earnings before Interest Expense,
Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $471.4 $ 807.3 $659.4 $430.2 $1,219.3 $ 911.0
Federal, State and Local Income Taxes 162.2 226.9 140.4 (67.8) 342.8 157.2
Estimated Interest Portion of Rental Expense 14.7 30.2 31.6 36.3 38.9 37.9
------ -------- ------ ------ -------- --------
Total Earnings $648.3 $1,064.4 $831.4 $398.7 $1,601.0 $1,106.1
====== ======== ====== ====== ======== ========
Fixed Charges
Total Interest Deductions $142.3 $ 306.8 $314.4 $348.6 $ 362.9 $ 375.1
Estimated Interest Portion of Rental Expense 14.7 30.2 31.6 36.3 38.9 37.9
------ -------- ------ ------ -------- --------
Total Fixed Charges $157.0 $ 337.0 $346.0 $384.9 $ 401.8 $ 413.0
====== ======== ====== ====== ======== ========
Ratio of Earnings to Fixed Charges 4.13 3.16 2.40 1.04 3.98 2.68
====== ======== ===== ====== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Jun-30-1996
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 1,863
<ALLOWANCES> 164
<INVENTORY> 68
<CURRENT-ASSETS> 1,991
<PP&E> 20,560
<DEPRECIATION> 11,439
<TOTAL-ASSETS> 11,441
<CURRENT-LIABILITIES> 2,917
<BONDS> 3,913
0
0
<COMMON> 1
<OTHER-SE> 2,473
<TOTAL-LIABILITY-AND-EQUITY> 11,441
<SALES> 0
<TOTAL-REVENUES> 3,987
<CGS> 0
<TOTAL-COSTS> 3,352
<OTHER-EXPENSES> (1)
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> 491
<INCOME-TAX> 162
<INCOME-CONTINUING> 329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 56
<NET-INCOME> 385
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
