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 March 31, 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)
For The Three Months Ended
March 31,
1996 1995
OPERATING REVENUES ---------------------------
Local service $ 1,169.9 $1,192.1
Long distance 103.5 86.2
Network access 526.8 567.6
Other 117.6 83.8
--------- -----
Total operating revenues 1,917.8 1,929.7
--------- --------
OPERATING EXPENSES
Maintenance and support 624.2 599.6
Depreciation and amortization 349.1 358.1
Marketing and customer services 273.7 231.3
Taxes other than income 155.8 200.4
Provision for uncollectible revenues 26.9 21.8
Other 272.7 212.0
--------- ------
Total operating expenses 1,702.4 1,623.2
--------- --------
Operating income 215.4 306.5
Other income (expense) - net (1.6) 4.2
Interest expense 70.1 83.9
--------- -----
Earnings before income taxes and cumulative
effect of change in accounting principle 143.7 226.8
Income taxes 45.1 72.2
--------- -----
Earnings before cumulative effect of change
in accounting principle 98.6 154.6
Cumulative effect of change in accounting for
directory publishing income, net of taxes (Note B) 55.7 -
----- --
NET INCOME $ 154.3 $ 154.6
========= =======
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Beginning of period $(1,269.4) $ 702.2
Net income 154.3 154.6
Dividends declared (Note G) - (180.5)
--------- -------
End of period $(1,115.1) $ 676.3
========= ========
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In Millions) (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 46.0 $ 39.9
Receivables
Trade and other (net of allowance of $158.8 and
$154.7, respectively) 1,536.3 1,614.1
Affiliates 124.3 45.5
Deferred charges 59.6 52.5
Deferred income taxes .8 44.1
Inventory 60.4 62.8
Prepaid expenses and other 150.9 82.4
--------- -------
Total current assets 1,978.3 1,941.3
--------- ---------
Telephone plant - at cost 20,320.4 20,153.6
Less: accumulated depreciation 11,153.5 10,847.8
--------- ---------
9,166.9 9,305.8
--------- ---------
Deferred charges and other 318.8 321.8
--------- ---------
TOTAL ASSETS $11,464.0 $11,568.9
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Accounts payable
Affiliates $ 830.7 $ 840.6
Other 1,154.0 1,263.4
Short-term debt 363.2 367.0
Dividends payable 191.6 180.5
Taxes accrued 114.0 29.8
Deferred income taxes 10.8 -
Advance billing and customers' deposits 172.5 173.8
Interest accrued 64.5 67.2
--------- ---------
Total current liabilities 2,901.3 2,922.3
--------- ---------
Long-term debt 3,913.2 3,913.3
Deferred income taxes 52.9 102.1
Unamortized investment tax credits 125.1 130.9
Other long-term liabilities and deferred credits 2,036.0 2,027.5
--------- ---------
Total liabilities 9,028.5 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) 3,549.6 3,741.2
Retained earnings/(Accumulated deficit) (1,115.1) (1,269.4)
--------- ---------
Total share owner's equity 2,435.5 2,472.8
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $11,464.0 $11,568.9
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions) (Unaudited)
For The Three Months Ended
March 31,
1996 1995
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 154.3 $ 154.6
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 349.1 358.1
Deferred income taxes - net (23.7) (49.3)
Deferred credits - net (5.8) (6.7)
Change in operating assets and liabilities:
Receivables (1.0) (27.1)
Deferred charges (7.1) (20.9)
Deferred income taxes 43.3 76.2
Inventory 2.4 (27.1)
Prepaid expenses and other (68.5) (49.8)
Accounts payable (119.3) (193.1)
Taxes Accrued 84.2 59.6
Deferred income tax liability 10.8 -
Advance billing and customers' deposits (1.3) 1.5
Interest accrued (2.7) (9.5)
Other - net (77.3) 85.6
------- ------
Total adjustments 183.1 197.5
------- ------
Net cash provided by operating activities 337.4 352.1
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (201.4) (277.1)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 52.3 111.9
Dividends paid to NYNEX (180.5) (181.2)
Repayment of long-term debt and capital leases (1.7) (1.5)
----- -----
Net cash used in financing activities (129.9) (70.8)
------- -------
Net increase in Cash 6.1 4.2
Cash at beginning of period 39.9 23.1
----- -----
Cash at end of period $ 46.0 $ 27.3
====== ======
See accompanying notes to consolidated financial statements.
<PAGE>
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 incorporated by reference in
the Company's 1995 Annual Report on Form 10-K.
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 believes 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 quarter of 1996 resulted in an $11.6 million decrease to net income.
Pro forma results, assuming the point of publication method had been applied
during the first quarter of 1995, are as follows:
Three Months Ended
March 31, 1995
(In millions)
Pro forma As Reported
--------- -----------
Net Income $143.9 $154.6
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
C Financial Commitments
As of March 31, 1996, the Company had deferred $168 million of revenues ($141
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 refund these revenues to the customers.
During the first quarter of 1996 $20 million was recognized in connection with
intraLATA presubscription ("ILP") commitments that were met in 1996.
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 March 31, 1996, the aggregate amount of such revenues that was estimated to
be subject to possible refund was approximately $241.8 million, plus related
interest, of which approximately $200.0 million is attributable to affiliate
transaction issues in the Company's 1990 intrastate rate case. 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 annual 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
Three Months Ended
March 31,
1996 1995
(In millions)
Income tax (refunds) payments ($16.4) $46.9
Interest payments $82.2 $83.2
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The first
quarter 1996 dividend of $191.6 million was declared from Additional paid-in
capital.
H Subsequent Event
On April 22, 1996, NYNEX and Bell Atlantic Corporation ("Bell Atlantic")
announced a proposed merger of equals pursuant to a definitive merger agreement
dated April 21, 1996 that provides for the formation of a new company to be
named Bell Atlantic Corporation. Under the terms of the agreement, NYNEX
shareholders will receive one share in the new company for each NYNEX share
owned and Bell Atlantic shareholders will receive 1.302 shares in the new
company for each Bell Atlantic share owned. 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, receipt of opinions that
the merger will be tax free, and the approval of the shareholders of both NYNEX
and Bell Atlantic. The transaction is expected to close within twelve months.
7
<PAGE>
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 first quarter of 1996 was $154.3. Net income for the first
quarter of 1995 was $154.6 million.
Net income for the first quarter of 1996 includes a 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 quarter of 1996 also includes charges of
$117.8 million for certain special charges, various self-insurance programs,
legal, regulatory and other obligations and contingencies, and for pension
enhancements. Net income for the first quarter of 1995 included a charge of
$22.0 million for pension enhancements.
Excluding the above items, net income for the first quarter of 1996 would have
been $216.4 million, an improvement of $39.8 million, or 22.5%, over adjusted
net income for the first quarter of 1995.
Operating Revenues
Operating revenues for the first quarter of 1996 were $1.9 billion, a decrease
of $11.9 million, or .6%, from the first quarter of 1995.
Included in the operating revenues for the first quarter of 1996 were special
charges 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 first quarter of 1995 were $16.8 million ($3.5 million
intrastate and $13.3 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
$73.9 million, or 3.9%, over adjusted operating revenues for the first quarter
of 1995.
The adjusted operating revenue improvement of $73.9 million includes the
following categories:
Local service revenues are earned from the provision of local exchange, local
private line and local public network services. The $4.7 million, or .4%,
decrease results from the net of (i) an $18 million increase primarily
attributable to increased demand, driven by growth in access lines and sales of
calling features, and (ii) a $19 million decrease in rates attributable to an
order by the NYSPSC approving a performance-based regulatory plan (the "Plan")
(see State Regulatory).
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Long distance revenues are earned from the provision of services beyond the
local service area, but within the local access and transport area, and
include public and private network switching. Long distance revenues improved
$17.3 million, or 20.1%, primarily due to an increase in message toll service
usage.
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. Network access revenues improved
$27.5 million, or 5.0%, in the first quarter of 1996. The $27.5 million
improvement results from the net of (i) a $42 million improvement in switched
access revenues primarily due to increased demand, and a $4 million improvement
in special access revenue, and (ii) a $13 million reduction in interstate rates
and a $5 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 $33.8 million, or 40.3%,
improvement results from the net of (i) a $38 million increase due to the
cessation of "setting aside" revenues in the second quarter of 1995 as a result
of an NYSPSC order approving the Plan, $20 million recognized in connection with
ILP commitments that were met in 1996, 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 $20 million
decrease due to a reduction in directory revenues from the directory licensing
agreement with Information Resources primarily attributable to a change in
accounting principle and pension enhancement costs recorded in the first quarter
of 1995, and a $17 million decrease due to an accrual for anticipated service
obligations under the service plan (see Regulatory Environment-State).
Operating Expenses
Operating expenses for the first quarter of 1996 were $1.7 billion, an increase
of $79.2 million, or 4.9%, over the first quarter of 1995.
Included in the first quarter of 1996 were pension enhancement charges of $23.3
million (see components below), a $14 million intrastate gross receipts tax
refund (see Operating Revenues above) and special charges of $103.0 million
related to various self-insurance programs and legal and regulatory
contingencies. Included in the operating expenses for the first quarter of 1995
were pension enhancement charges of $33.8 million and $16.8 million of gross
receipts tax collected and remitted to the taxing authority (see Operating
Revenues above.).
Excluding the items discussed above, operating expenses would have increased
$17.5 million, or 1.1%, over adjusted operating expenses for the first quarter
of 1995.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Depreciation and amortization decreased $9.0 million, resulting from the net of
(i) a $15 million increase due to growth in depreciable plant investment, and
(ii) a $25 million decrease attributable to lower depreciation rates and
increased retirement of switching equipment as a result of 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 $13.8 million from the first quarter of
1995 primarily due to lower assessments of property values.
Employee related costs, which consist primarily of wages, payroll taxes, and
employee benefits, increased $14.2 million resulting from the net of (i) a $14
million decrease in benefit expenses principally due to the amortization of
deferred pension costs pursuant to an NYSPSC approved plan in 1995, and (ii) a
$28 million increase in wages and payroll taxes principally due to additional
labor costs attributable to initiatives to improve service quality and severe
weather conditions in 1996, 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).
Other operating expenses, consist primarily of contracted and centralized
services, rent and other general and administrative costs. Other operating
expenses increased $26.1 million resulting from the net of (i) a $31 million
increase in charges from affiliated companies, primarily attributable to
increases in Telesector Resources' contracted and centralized services and the
transfer of employees from the Company to Telesector Resources, partially offset
by decreases due to Telesector Resources' force reduction program (ii) a $5
million increase in the provision for uncollectible revenue, and (iii) a $10
million decrease in right to use fees resulting from decreased software
deployment.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The components of the pension enhancement charges for the first quarter of 1996
and 1995 are as follows:
For the Three Months Ended
March 31,
(In millions) 1996* 1995*
---- ----
Pretax After-Tax Pretax After-Tax
------ --------- ------ ---------
Pension enhancement charges $22.7 $14.8 $29.4 $19.1
Postretirement medical costs .6 .4 4.4 2.9
----- ----- ----- -----
$23.3 $15.2 $33.8 $22.0
===== ===== ===== =====
* 1996 - 100 management and 25 nonmanagement employees
1995 - 120 management and 150 nonmanagement employees
For the first three months of 1996 and 1995, $8.3 million and $6.2
million, respectively ($5.4 million and $4.0 million, respectively,
after-tax) were allocated to the Company from Telesector Resources for its
pension enhancements and ($.4) million and $2.8 million, respectively
(($.3) million and $1.9 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 $5.8 million from the same period last
year. This decrease was principally due to the reclassification of capitalized
interest to Interest expense associated with the discontinuance of regulatory
accounting principles.
Interest expense
Interest expense decreased $13.8 million, or 16.4%, from the same period last
year, due primarily to the aforementioned reclassification of capitalized
interest from Other income (expense) - net and a decrease resulting from
interest charges on the revenue set aside as ordered by the NYSPSC in 1995 (see
Regulatory Environment-State).
Income taxes
Income taxes decreased $27.1 million, primarily due to a decrease in pretax
income, partially offset by a decrease in the amortization of investment tax
credits 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
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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 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 quarter of 1996 resulted in a $11.6 million decrease to net income.
Pro forma results, assuming the point of publication method had been applied
during the first quarter of 1995, are as follows:
Three Months Ended
March 31, 1995
(In millions)
Pro forma As Reported
--------- -----------
Net Income $143.9 $154.6
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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Current Status of Business Restructuring
Reserve Utilization in 1996
The restructuring reserve balance at March 31, 1996, which does not include the
liability for postretirement medical benefits associated with employees' leaving
the Company under the business restructuring, was approximately $154 million.
Summarized below are the components of $36 million of reserves utilized during
the first quarter of 1996:
Severance $ 11
Process Re-engineering:
Systems redesign:
Customer contact $ 9
Customer operations 9
--
Total systems redesign $ 18
Work center consolidation 1
Branding -
Relocation -
Training 1
Re-engineering implementation -
---
Subtotal 20
Telesector Resources allocated reserves:
Systems re-engineering $ 5
Re-engineering implementation -
Work center consolidation -
---
Total allocated 5
---
Total process re-engineering 25
---
Total $ 36
====
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. $5 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 5,700 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits of approximately $290 million. In
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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 $118 million. Partially offsetting
these cost savings will be the effects of wage and price inflation, growth in
volume of business and higher costs attributable to service improvements.
Financing
At March 31, 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. Proceeds necessary to repay these borrowings were raised
through the issuance of commercial paper.
Regulatory Environment
State Regulatory
Incentive plan: The Plan approved by the NYSPSC in 1995 establishes service
quality targets with stringent rebate provisions if the Company is unable to
meet some or all of the targets. Based on the service performance results
through March 31, 1996, it is probable that the Company will be required to
issue rebates to customers (see Other revenues). A reasonable estimate of the
amount or range of any annual rebate cannot be made, pending NYSPSC action
regarding the waiver of certain service results for the period in question and
pending service performance results for the balance of Plan Year 1, which ends
August 31, 1996.
Competition II Proceeding: In response to an NYSPSC request for comments, in
April 1996, Sprint Corporation ("Sprint") filed comments objecting to the
Company's implementation of ILP and seeking the imposition of sanctions or
penalties on the Company. The Company has submitted a response opposing Sprint's
contentions.
In December 1995, MCI Telecommunications Corporation ("MCI") commenced a
proceeding in the New York Supreme Court challenging the NYSPSC reciprocal
compensation scheme for interconnection between carriers. MCI, the NYSPSC and
the Company have entered into a stipulation that removes the case from the
court's active calendar. The NYSPSC has agreed to address the effect, if any, of
the Telecommunications Act of 1996 upon the challenged rate structure.
In the NYSPSC's proceeding examining the terms and conditions for resale of
Company services, to be effective in October 1996, the NYSPSC is also
considering issues with respect to the unbundling of network elements, as
prescribed by the Telecommunications Act of 1996 ("1996 Act").
The Company has filed with the NYSPSC a proposal to accelerate the
implementation of ILP in analog central offices, for completion by October 1996.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Federal Regulatory
Telecommunications Act of 1996: During 1996, the Federal Communications
Commission ("FCC") will conduct a number of rulemaking proceedings in order to
implement the 1996 Act. In March 1996, the FCC issued Notices of Proposed
Rulemaking to implement the Universal Service provisions and the Open Video
System provisions of the 1996 Act. In April 1996, the FCC issued a Notice of
Proposed Rulemaking to implement the interconnection obligations imposed on
Local Exchange Carriers ("LECs") by the 1996 Act.
Price Cap Plan: The FCC expects to issue an order in the latter part of 1996 in
its Proposed Rulemaking regarding the productivity factor used by LECs in the
FCC price cap formula. The Proposed Rulemaking will consider changes in the
determination of the productivity factor, the recognition of exogenous costs,
the extent of carrier sharing, and the formula for calculating the price cap
index for certain services.
In March 1996, the U. S. Court of Appeals for the District of Columbia Circuit
denied petitions filed by the Company and New England Telephone and Telegraph
Company (collectively, the "Telephone Companies") and several other LECs for
review of the FCC decision that had required each LEC to (a) "reinitialize" its
price cap index to reflect a higher productivity factor, and (b) recalculate its
price cap index on a prospective basis to exclude cost increases due to changes
in the accounting treatment of other postemployment benefit expenses.
Other Federal Regulatory: In January 1996, the FCC issued a Notice of Proposed
Rulemaking addressing the charges made for interconnection between LECs and
wireless carriers. Currently, such charges are established by contracts under
the jurisdiction of the state regulatory commissions, some of which are also
reflected in state tariffs. The FCC requested comment on its tentative
conclusion to require, pending the conclusion of its Proposed Rulemaking,
reciprocal "bill-and-keep" compensation arrangements under which the originating
carrier would no longer pay the terminating carrier for access. Adoption of the
proposed procedure would have a negative effect on the revenues of the LECs,
including the Telephone Companies. The Telephone Companies have filed comments
opposing the imposition of "bill-and-keep" arrangements, but supporting
reciprocal payments. Reciprocal payment arrangements have been in place in New
York since September 1995.
15
<PAGE>
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
(18) Letter regarding Change in Accounting Principle
(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.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
New York Telephone Company
/s/ Mel Meskin
------------------------------------
Mel Meskin
Vice President - Finance and Treasurer
(Principal Financial and Accounting
Officer)
May 10, 1996
17
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<CAPTION>
Exhibit (12)
NEW YORK TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions)
For the
Three Months
Ended
March 31, 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 $168.7 $ 807.3 $659.4 $430.2 $1,219.3 $ 911.0
Federal, State and Local Income Taxes 45.1 226.9 140.4 (67.8) 342.8 157.2
Estimated Interest Portion of Rental Expense 7.4 30.2 31.6 36.3 38.9 37.9
------ -------- ------ ------ -------- --------
Total Earnings $221.2 $1,064.4 $831.4 $398.7 $1,601.0 $1,106.1
====== ======== ====== ====== ======== ========
Fixed Charges
Total Interest Deductions $ 70.1 $ 306.8 $314.4 $348.6 $ 362.9 $ 375.1
Estimated Interest Portion of Rental Expense 7.4 30.2 31.6 36.3 38.9 37.9
------ -------- ------ ------ -------- --------
Total Fixed Charges $ 77.5 $ 337.0 $346.0 $384.9 $ 401.8 $ 413.0
====== ======== ====== ====== ======== ========
Ratio of Earnings to Fixed Charges 2.85 3.16 2.40 1.04 3.98 2.68
====== ======== ====== ====== ======== ========
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Exhibit (18)
May 8, 1996
New York Telephone Company
1095 Avenue of the Americas
New York, New York 10036
We are providing this letter to you for inclusion as an exhibit to your Form
10-Q filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in accounting from the
"amortization" revenue recognition method to the "point of publication" method
contained in the New York Telephone Company's Form 10-Q for the quarter ended
March 31, 1996. Based on our reading of the data and discussions with Company
officials of the business judgment and business planning factors relating to the
change, we believe management's justification is reasonable. Accordingly, in
reliance on management's determination regarding elements of business judgment
and business planning, we concur that the newly adopted accounting principle
described above is preferable in New York Telephone Company's circumstances to
the method previously applied.
We have not audited any of the financial statements of New York Telephone
Company as of any date or for any period subsequent to December 31, 1995, nor
have we audited the application of the accounting change in accounting principle
disclosed in Form 10-Q of New York Telephone Company for the three months ended
March 31, 1996; accordingly, our comments are subject to revision on completion
of an audit of the financial statements that include the accounting change.
Coopers & Lybrand L.L.P.
- ------------------------
Coopers & Lybrand L.L.P.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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