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, 1997
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,
1997 1996
--------------------------
OPERATING REVENUES
- ------------------
Local service $1,106.2 $ 1,169.9
Long distance 65.4 103.5
Network access 589.7 526.8
Other 152.1 117.6
-------- ---------
Total operating revenues 1,913.4 1,917.8
-------- ---------
OPERATING EXPENSES
- ------------------
Maintenance and support 643.8 624.2
Depreciation and amortization 329.3 349.1
Marketing and customer services 279.0 273.7
Taxes other than income 175.4 155.8
Provision for uncollectible revenues 26.8 26.9
Other 183.7 272.7
-------- ---------
Total operating expenses 1,638.0 1,702.4
-------- ---------
Operating income 275.4 215.4
Other income (expense) - net (5.9) (1.6)
Interest expense 106.9 70.1
-------- ---------
Earnings before income taxes and cumulative
effect of change in accounting principle 162.6 143.7
Income taxes 54.7 45.1
-------- ---------
Earnings before cumulative effect of change
in accounting principle 107.9 98.6
Cumulative effect of change in accounting for
directory publishing income, net of taxes (Note B) -- 55.7
-------- ---------
NET INCOME $ 107.9 $ 154.3
======== =========
RETAINED EARNINGS (ACCUMULATED DEFICIT)
- ---------------------------------------
Beginning of period $ (439.4) $(1,269.4)
Net income 107.9 154.3
Dividends declared (Note G) -- --
-------- ---------
End of period $ (331.5) $(1,115.1)
======== =========
See accompanying notes to consolidated financial statements.
2
<PAGE>
Form 10-Q Part I New York Telephone Company
CONSOLIDATED BALANCE SHEETS
---------------------------
(In Millions) (Unaudited)
March 31, December 31,
1997 1996
--------- ------------
ASSETS
- ------
Current assets:
Cash $ 42.8 $ 22.8
Receivables
Trade and other (net of allowance of $154.0 and
$162.3, respectively) 1,509.6 1,561.0
Affiliates 89.5 124.6
Deferred charges 95.7 70.6
Deferred income taxes 0.4 0.8
Inventory 129.3 110.8
Prepaid expenses and other 167.9 98.3
--------- ---------
Total current assets 2,035.2 1,988.9
--------- ---------
Telephone plant - at cost 21,132.5 20,861.2
Less: accumulated depreciation 11,799.1 11,515.4
--------- ---------
9,333.4 9,345.8
--------- ---------
Long-term investment, deferred charges and other 326.3 327.5
--------- ---------
TOTAL ASSETS $11,694.9 $11,662.2
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable
Affiliates $ 785.1 $ 657.4
Other 913.6 1,175.5
Short-term debt 841.8 629.6
Dividends payable 243.7 191.6
Taxes accrued 59.1 62.4
Deferred income taxes 82.5 83.5
Advance billing and customers' deposits 179.9 180.8
Interest accrued 63.7 64.3
--------- ---------
Total current liabilities 3,169.4 3,045.1
--------- ---------
Long-term debt 3,810.5 3,852.6
Deferred income taxes 39.4 17.4
Unamortized investment tax credits 102.5 106.7
Other long-term liabilities and deferred credits 1,980.9 1,912.4
--------- ---------
Total liabilities 9,102.7 8,934.2
--------- ---------
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) 2,922.7 3,166.4
Retained earnings/(Accumulated deficit) (331.5) (439.4)
--------- ---------
Total share owner's equity 2,592.2 2,728.0
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $11,694.9 $11,662.2
========= =========
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)
For The Three Months Ended
March 31,
1997 1996
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $107.9 $154.3
------ ------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 329.3 349.1
Deferred income taxes - net 25.0 (23.7)
Deferred credits - net (4.2) (5.8)
Change in operating assets and liabilities:
Receivables 86.5 (1.0)
Deferred charges (25.1) (7.1)
Deferred income taxes 0.4 43.3
Inventory (18.5) 2.4
Prepaid expenses and other (69.6) (68.5)
Accounts payable (134.2) (119.3)
Taxes Accrued (3.3) 84.2
Deferred income tax liability (1.0) 10.8
Advance billing and customers' deposits (0.9) (1.3)
Interest accrued (0.6) (2.7)
Other - net 32.4 (77.3)
------ ------
Total adjustments 216.2 183.1
------ ------
Net cash provided by operating activities 324.1 337.4
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (282.1) (201.4)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 212.2 52.3
Dividends paid to NYNEX (191.6) (180.5)
Repayment of long-term debt and capital leases (42.6) (1.7)
------ ------
Net cash used in financing activities (22.0) (129.9)
------ ------
Net increase in Cash 20.0 6.1
Cash at beginning of period 22.8 39.9
------ ------
Cash at end of period $ 42.8 $ 46.0
====== ======
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 ("GAAP") have been condensed or omitted
pursuant to such SEC rules and regulations. GAAP requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Due to the uncertainty inherent in making
estimates, actual results could differ from those estimates. Certain information
in the consolidated financial statements for 1996 has been reclassified to
conform to the current period's presentation. The results for interim periods
are not necessarily indicative of the results for the entire year. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1996 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 income from the "amortized" method to the "point of
publication" method. Under the point of publication method, revenues and
production expenses are 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 was 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 was 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 application of the point of publication method did not have
a material effect on operating results for the year ended December 31, 1996.
5
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
C Financial Commitments
---------------------
As of December 31, 1996, the Company had deferred $68 million of revenues under
the plan approved by the New York State Public Service Commission ("NYSPSC") in
1995 associated with commitments for fair competition, universal service,
service quality and infrastructure improvements (the "Incentive Plan"), and $27
million for a 1994 service improvement plan obligation. The deferred revenues
will be recognized as commitments are met or obligations are satisfied under the
plans. If the Company is unable to meet certain commitments, the NYSPSC has the
authority to require the Company to rebate the deferred revenues to customers.
As of March 31, 1997, $68 million of the deferred revenues in connection with
the Incentive Plan remained deferred. In February 1997, the NYSPSC determined
that the Company had not met all of the targets established in the 1994 service
improvement plan and directed the Company to rebate to customers $12 million,
plus related interest of $5 million, of the $27 million set aside revenues. As
of March 31, 1997, the remaining $10 million of the deferred revenues was
recognized.
The Incentive Plan establishes service quality targets with stringent rebate
provisions if the Company is unable to meet some or all of the targets. The
Company accrued $62 million of revenues based on service performance results for
Plan Year 1, $16 million of which had been rebated to customers in 1996, and $46
million of which remained accrued at December 31, 1996. During the first quarter
of 1997, an additional $10 million in rebates was ordered and accrued as a
result of the NYSPSC's denial of the Company's claim of miscalculation of
certain service performance data, and $44 million was rebated to customers. As
of March 31, 1997, $12 million of revenues remained accrued.
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 December 31, 1996, the aggregate amount of such revenues that was estimated
to be subject to possible refund was approximately $284 million, plus related
interest. In the first quarter of 1997, the NYSPSC approved a settlement
agreement with respect to affiliate transaction issues resulting from the
Company's 1990 intrastate rate case. Pursuant to that agreement the Company will
refund $87 million to customers. (The Company accrued charges for the refund in
1995 and 1996). The settlement resolved all pending issues related to affiliate
transactions. As of March 31, 1997, the aggregate amount of revenues estimated
to be subject to possible refund was approximately $48 million for the Company,
and approximately $7 million for the Company and New England Telephone and
Telegraph Company ("New England Telephone") together in connection with one
other proceeding, plus related interest. The outcome of each pending matter, as
well as the time frame within which each will be resolved, is not presently
determinable.
6
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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 opinion 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
Three Months Ended
March 31,
1997 1996
------------------
(In millions)
Income tax payments (refunds) 16.8 ($16.4)
Interest payments* $87.7 $82.2
* Amounts shown are net of capitalized interest of $5.6 and $6.9 million in
1997 and 1996, respectively.
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 Proposed Merger
---------------
On April 22, 1996, NYNEX and Bell Atlantic Corporation ("Bell Atlantic")
announced a proposed merger of equals pursuant to a definitive merger agreement
(the "Merger"), dated April 21, 1996 that provided for the formation of a new
company to be named Bell Atlantic Corporation. On July 2, 1996, NYNEX and Bell
Atlantic executed an amendment to the agreement effecting a technical change in
the transaction structure of the Merger. 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. 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
7
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
process by eliminating the need to obtain congressional approval of the Merger
under a 1913 District of Columbia "anti-merger" law. At special meetings held in
November 1996, the shareholders of both companies voted to approve the Merger.
The state regulatory commissions in NYNEX's region have approved or have not
sought jurisdiction over the Merger. Effective March 21, 1997, the NYSPSC issued
an order approving the Merger, subject to certain conditions, which were
accepted by NYNEX and Bell Atlantic on March 31, 1997. On April 24, 1997, the
United States Department of Justice announced that its Antitrust Division had
closed its investigation of the proposed Merger, having concluded that the
Merger does not violate the antitrust laws. 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
their telephone subsidiaries. The completion of the Merger is subject to a
number of conditions, including certain regulatory approvals 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 Merger is expected to qualify as a pooling of interests for
accounting purposes. NYNEX expects to be able to complete the Merger in the
second quarter of 1997.
8
<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 first quarter of 1997 was $107.9 million. Net income for the
first quarter of 1996 was $154.3 million.
Net income for the first quarter of 1997 includes after-tax charges of $117.8
million for retirement incentives (see Retirement Incentives), and an after-tax
net benefit of $18.1 million resulting primarily from the resolution of various
regulatory contingencies (see Operating Revenues and Operating Expenses). Net
income for the first quarter of 1996 included a gain of $55.7 million for the
cumulative effect of a change in accounting for directory publishing income (see
Note B), after-tax charges of $102.7 million for accruals related to various
self-insurance programs, legal, regulatory and other obligations and
contingencies, and after-tax charges of $15.2 million for retirement incentives.
Excluding the above items, net income for the first quarter of 1997 would have
been $207.6 million, a decrease of $8.9 million, or 4.1%, from adjusted net
income for the first quarter of 1996.
Operating Revenues
- ------------------
Operating revenues for the first quarter of 1997 were $1.9 billion, a decrease
of $4.4 million, or 0.2%, from the first quarter of 1996.
Included in operating revenues for the first quarter of 1997 was an $83.0
million reduction for refunds to customers in connection with the resolution of
various regulatory contingencies which were recorded in Other operating expenses
in prior periods (see Operating Expenses). Included in the operating revenues
for the first quarter of 1996 were 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.
Excluding the items discussed above, operating revenues would have improved $9.6
million, or 0.5%, over adjusted operating revenues for the first quarter of
1996.
The $9.6 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. Local service revenues improved
$5.3 million, or 0.4%, over the first quarter of 1996 primarily due to the net
of (i) a $32 million increase attributable to revenues earned from Optional
Calling Plans ("OCPs") which were recorded in Long distance revenues
9
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
in the first quarter of 1996, (see Long distance revenues), of which $9 million
is attributable to increased demand, and (ii) a $12 million reduction for
rebates to customers as ordered under the 1994 service improvement plan (see
Note C), a $10 million reduction for service rebates issued pursuant to a
performance-based regulatory plan (the "Incentive Plan") (see Note C), and a $3
million decrease in rates attributable to an order by the NYSPSC in 1995
approving the Incentive Plan. Certain decreases, primarily due to customer
selection of competing carriers as a result of intraLATA presubscription
("ILP"), 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 ("LATA"), and
include public and private network switching. Long distance revenues decreased
$38.1 million, or 36.8%, from the first quarter of 1996 primarily due to a $23
million decrease attributable to revenues earned from OCPs which were recorded
in Long distance revenues in the first quarter of 1996 and are currently
recorded in Local service revenues (see Local service revenues), and a $15
million decrease primarily due to decreased demand.
Network access revenues are earned from the provision of exchange access
services primarily to interexchange carriers. Network access revenues improved
$7.9 million, or 1.4%, over the first quarter of 1996 resulting primarily from
the net of (i) a $17 million improvement in special access revenues and a $15
million improvement in switched access revenues, both primarily due to increased
demand, including the previously mentioned partial offset of decreases in Local
service revenues, and (ii) an $18 million reduction in interstate rates and a $5
million reduction in intrastate rates attributable to an NYSPSC order issued in
1995.
Other revenues are earned from the provision of products and services other than
Local service, Long distance and Network access. The $35.1 million, or 29.8%,
improvement results primarily from the net of (i) a $27 million increase
resulting from the reversal of the reduction of Other revenues recorded in a
prior period for service rebate obligations pursuant to the 1994 service
improvement plan (see Local revenues), a $17 million increase resulting from the
reduction of revenues in 1996 for service rebate obligations under the Incentive
Plan, and a net $8 million increase in directory revenues from the directory
licensing agreement with Information Resources consisting of a $14 million
increase attributable to business growth, partially offset by a $6 million
increase in retirement incentive costs, and (ii) a $20 million decrease
attributable to the recognition in 1996 of previously deferred revenues in
connection with ILP commitments that were met.
10
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Operating Expenses
- ------------------
Operating expenses for the first quarter of 1997 were $1.6 billion, a decrease
of $64.4 million, or 3.8%, from the first quarter of 1996.
Included in the operating expenses for the first quarter of 1997 were charges of
$181.2 million for retirement incentives (see Retirement Incentives) and a net
$138.6 million decrease in expenses resulting primarily from the resolution of
various regulatory contingencies ($83 million of which is currently reflected as
a reduction of revenues (see Operating Revenues), and $4 million of which is
currently reflected as interest expense (see Interest Expense)), and the
reclassification of charges accrued in a prior period for tax issues to Interest
expense (see Interest Expense). Included in the operating expenses for the first
quarter of 1996 were charges of $23.3 million for retirement incentives, a $14.0
million intrastate gross receipts tax refund (see Operating Revenues) and
charges of $103.0 million for various self-insurance programs, legal and
regulatory contingencies.
Excluding the items discussed above, operating expenses would have increased
$5.3 million, or 0.3%, over adjusted operating expenses for the first quarter of
1996.
The $5.3 million increase in adjusted operating expenses includes the following
categories:
Depreciation and amortization decreased $22.4 million, or 6.4%, from the first
quarter of 1996 resulting from the net of (i) a $17 million increase due to
growth in depreciable plant investment, and (ii) a $39 million decrease
attributable to revised estimates of future net salvage value and remaining
useful lives in the second, third and fourth quarters of 1996, and technical
updates to depreciation rates in 1997.
Taxes other than income, which include gross receipts taxes, property taxes and
other non-income based taxes, decreased $3.2 million, or 1.9%, from the first
quarter of 1996 resulting primarily from the net of (i) a $2 million increase
attributable to an increase in property tax rates, and (ii) a $5 million
decrease in gross receipts taxes attributable to a change in New York State
legislation.
Employee related costs, which consist primarily of wages, payroll taxes, and
employee benefits, increased $3.5 million over the first quarter of 1996
primarily due to additional labor costs incurred in connection with initiatives
to improve service quality.
Other operating expenses, consist primarily of contracted and centralized
services, rent and other general and administrative costs. Other operating
expenses increased $27.4 million over the first quarter of 1996 resulting from a
$15 million increase in charges from Telesector Resources Group, Inc.
("Telesector Resources") for data processing services and materials management,
a $7 million increase in right to use fees due to increased
11
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
deployment of buyouts for software upgrades, a $7 million increase in motor
vehicle lease expense attributable to service related expansion of motor vehicle
fleet, a $5 million increase in charges from other local exchange carriers, and
(ii) a $7 million decrease in plant and overhead loadings resulting primarily
from lower overtime incurred due to favorable weather conditions.
Other income (expense) - net
- ----------------------------
Other income (expense) - net increased $4.3 million over the first quarter of
1996 primarily due to a decrease in income earned from Telesector Resources.
Interest expense
- ----------------
Interest expense increased $36.8 million over the first quarter of 1996.
Interest expense for the first quarter of 1997 includes charges of $27.6 million
resulting from the resolution of various regulatory contingencies and tax
issues. Excluding these charges, adjusted interest expense for the first quarter
of 1997 would have been $79.3 million, an increase of $9.2 million, or 13.1%,
over interest expense for the first quarter of 1996.
The $9.2 million increase in adjusted interest expense results primarily from a
$5 million increase due to the higher level of advances from NYNEX in 1997, and
a $5 million increase attributable to the settlement of obligations pursuant to
a service improvement plan implemented in 1994.
Income taxes
- ------------
Income taxes increased $9.6 million, or 21.3%, over the first quarter of 1996
primarily due to an increase in pretax income and other tax adjustments.
Retirement Incentives
- ---------------------
The number of employees who elected to leave under retirement incentives in the
first quarter of 1997 and 1996 are as follows:
1997 1996
---- ----
Management 750 100
Associates 20 25
---- ----
Total 770 125
==== ====
12
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
The components of the charges for retirement incentives in first quarter of 1997
and 1996 are as follows:
For the Three Months Ended
March 31,
(In millions) 1997 1996
- ------------- ---- ----
Pretax After-Tax Pretax After-Tax
------ --------- ------ ---------
Pension enhancement charges $126.7 $ 82.4 $22.7 $14.8
Postretirement medical costs 54.5 35.4 0.6 0.4
------ ------ ----- -----
$181.2 $117.8 $23.3 $15.2
====== ====== ===== =====
Included in the charges above for the first three months of 1997 and 1996, are
amounts charged to the Company by Telesector Resources for an allocated portion
of the employees who left Telesector Resources under the retirement incentives;
$56.6 million and $8.3 million, respectively ($36.8 million and $5.4 million,
respectively, after-tax) for pension enhancements and $22.5 million and $(0.4)
million, respectively ($14.6 million and $(0.3) million, respectively,
after-tax) for postretirement medical costs. The total number of employees who
left Telesector Resources under the retirement incentives in the first quarter
of 1997 and 1996 were 845 and 180, respectively, of which 520 and 110,
respectively, were allocated to the Company for determining the Company's
portion of Telesector Resources charges for retirement incentives. Most of the
cost of the retirement incentives is funded by NYNEX's pension plans.
The severance reserves established in 1993 have been and will continue to be
transferred to the pension liability on a per employee basis as employees accept
the retirement incentives. The postretirement medical liability established in
1993 has been and will continue to be applied to retired employees on a per
employee basis as employees accept the retirement incentives. The reserves for
management employees were completely utilized during 1996.
During the first quarter of 1996, severance reserves of $1 million were
transferred to the pension liability and $1 million of postretirement medical
liability was applied on a per employee basis as a result of associates leaving
under the retirement incentives. $1 million of severance reserves and $2 million
of postretirement medical liability were transferred from the Company to
Telesector Resources during the first quarter of 1997 for the allocated number
of Telesector Resources associates who left under the retirement incentives. At
March 31, 1997, $65 million of severance reserves and $88 million of unapplied
postretirement medical liability remained.
Cumulative effect of change in accounting principle
- ---------------------------------------------------
Effective January 1, 1996, Information Resources, a wholly owned subsidiary of
NYNEX, changed the recognition of its directory publishing income from the
"amortized" method to the "point of publication" method. Under the point of
publication method, revenues and production expenses are 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
13
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
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 was 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 application of the point of
publication method did not have a material effect on operating results for the
year ended December 31, 1996.
Financing
- ---------
At March 31, 1997, the Company had $250 million of unissued, unsecured debt
securities registered with the SEC. On March 5, 1997, the Company redeemed its
$42 million 8.20% Thirty Year Private Placement Notes, due July 1, 2008.
Regulatory Environment
- ----------------------
Telecommunications Act of 1996
On May 7, 1997, the FCC adopted orders to reform the interstate access charge
system, to modify its price cap system and to implement the "universal service"
requirements of the Telecommunications Act of 1996 (the "Act"). NYNEX is unable
to assess fully the potential impact of these new rules until the FCC releases
the full text of its access reform and price cap orders later in May. Based on
the information currently available, however, NYNEX does not believe that these
proceedings will result in a material adverse impact on results of operations or
financial condition.
Access Charges
Access charges are the rates long distance carriers pay for use and availability
of the telephone subsidiaries' facilities for the origination and termination of
interstate interLATA service. On May 7, 1997, the FCC adopted changes to the
tariff structures it has prescribed for such charges in order to permit the
Telephone Companies to recover their costs through rates which reflect the
manner in which those costs are incurred. As of January 1, 1998, the FCC will
require, in general, that interstate costs of the Telephone Companies which do
not vary based on usage be recovered from long distance carriers through flat
rate charges, and those interstate costs that do vary based on usage be
recovered from interexchange carriers through usage based rates. In addition,
the FCC will require establishment of separate usage based charges for
originating and for terminating interstate interLATA traffic.
A portion of the Telephone Companies' interstate costs are also recovered
through flat monthly charges to subscribers ("subscriber line charges"). Under
the FCC's order, subscriber line charges for primary residential and single line
businesses will remain unchanged, but such charges for additional residential
lines and multi-line businesses will rise.
The restructuring of access charges in January 1998 is expected to be revenue
neutral to NYNEX's Telephone Companies.
The FCC is expected to adopt an order later this year that would address the
conditions under which the FCC would relax or remove existing access rate
structure requirements and price cap restrictions as increased local market
competition develops. NYNEX is unable to predict the results of this further
proceeding.
Price Caps
The FCC also adopted modifications to its price cap rules that will affect
access rate levels. Under the current price cap rules effective through June 30,
1997, NYNEX's price cap index is adjusted by an inflation index (GDP-PI) less a
fixed percentage, either 4.0%, 4.7% or 5.3% as NYNEX may elect, which is
intended to reflect increases in productivity ("Productivity Factor"). For the
current period ending June 30, 1997, NYNEX has chosen the 5.3% Productivity
Factor.
The FCC has adopted new rules, effective July 1, 1997, that will create a single
Productivity Factor for all price cap companies of 6.5%, with no requirements to
share a portion of future interstate earnings, and will set rates as if the
higher factor had been in effect since July 1996. Any local exchange company
that earns a rate of return on its interstate services of less than 10.25% in
any calendar year will be permitted to increase its interstate rates in the
following year. The FCC also ordered elimination of recovery for amortized costs
associated with reconfiguration of the Telephone Companies' networks to provide
equal access to facilities for all long distance carriers.
Universal Service
The FCC also adopted rules designed to preserve "universal service" by ensuring
that local exchange service remains reasonably available to all residential
customers, including low-income customers and customers in areas that are
expensive to serve. The FCC will maintain existing levels of universal service
support for such high cost areas pending completion of further FCC proceedings.
By the end of 1997, the FCC, in conjunction with the Federal-State Joint Board
on Universal Service, will determine whether to increase the size of this
federal universal service fund for high cost areas, and how to assess the
appropriate level of federal financial support required to continue to ensure
affordable local telephone service. Any new high cost universal service support
mechanism will become effective January 1, 1999.
The FCC also adopted rules to implement the Act's requirements to provide
discounted telecommunications services to schools and libraries, beginning
January 1, 1998, and to ensure that not-for-profit rural health care providers
have access to such services at rates comparable to those charged their urban
counterparts.
All telecommunications carriers will be required to contribute funding for these
universal service programs. The federal universal service funding needs as of
January 1, 1998 will require each carrier to contribute approximately 1 to 2% of
its revenues. NYNEX, however, will be permitted to recover its universal service
contributions through higher interstate charges to long distance carriers and
end users.
Other
NYNEX has submitted to the NYSPSC for its approval a proposed Statement of Terms
and Conditions for interconnection pursuant to Section 271. NYNEX has also
submitted to the NYSPSC for its review a draft of NYNEX's Section 271
application to the FCC. These matters are pending before the NYSPSC. NYNEX
expects to file its Section 271 application with the FCC later this year. Under
Section 271, the FCC must approve or deny the application within 90 days of
filing.
State Regulatory
- ----------------
The NYSPSC has opened a general proceeding to review the level of intrastate
access rates in New York. Hearings are scheduled in June.
In May 1997, the Company filed a tariff in compliance with the NYSPSC's order
setting rates for an initial group of unbundled network elements. One party
14
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
has petitioned for reconsideration of the order, and other parties have been
granted additional time to file such petitions.
Evidentiary hearings were held in April concerning costs and rates for a second
group of unbundled network elements (including operator services) and related
"cost onsets". These hearings addressed, among other issues, recovery of the
expenditures that have been made and that continue to be made by the Company to
provide its competitors with electronic access to its operations support
systems. A decision is expected sometime this summer.
15
<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.
16
<PAGE>
Form 10-Q New York Telephone Company
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
New York Telephone Company
John W. Diercksen
---------------------------------------------
John W. Diercksen
Acting Vice President - Finance and Treasurer
(Principal Financial and Accounting Officer)
May 12, 1997
17
Exhibit (12)
NEW YORK TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions) (Unaudited)
<TABLE>
<CAPTION>
For the
Three Months
Ended
March 31, For the Year Ended December 31,
1997 1996 1995 1994 1993 1992
------ ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings
Earnings before Interest Expense,
Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $214.8 $1,062.8 $ 807.3 $659.4 $430.2 $1,219.3
Federal, State and Local Income Taxes 54.7 381.6 226.9 140.4 (67.8) 342.8
Estimated Interest Portion of Rental Expense 8.8 30.2 30.2 31.6 36.3 38.9
------ -------- -------- ------ ------ --------
Total Earnings $278.3 $1,474.6 $1,064.4 $831.4 $398.7 $1,601.0
====== ======== ======== ====== ====== ========
Fixed Charges
Total Interest Deductions $106.9 $ 288.5 $ 306.8 $314.4 $348.6 $ 362.9
Estimated Interest Portion of Rental Expense 8.8 30.2 30.2 31.6 36.3 38.9
------ -------- -------- ------ ------ --------
Total Fixed Charges $115.7 $ 318.7 $ 337.0 $346.0 $384.9 $ 401.8
====== ======== ======== ====== ====== ========
Ratio of Earnings to Fixed Charges 2.41 4.63 3.16 2.40 1.04 3.98
====== ======== ======== ====== ====== ========
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Mar-31-1997
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 1,753
<ALLOWANCES> 154
<INVENTORY> 129
<CURRENT-ASSETS> 2,035
<PP&E> 21,133
<DEPRECIATION> 11,799
<TOTAL-ASSETS> 11,695
<CURRENT-LIABILITIES> 3,169
<BONDS> 3,811
0
0
<COMMON> 1
<OTHER-SE> 2,591
<TOTAL-LIABILITY-AND-EQUITY> 11,695
<SALES> 0
<TOTAL-REVENUES> 1,913
<CGS> 0
<TOTAL-COSTS> 1,638
<OTHER-EXPENSES> (6)
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> 163
<INCOME-TAX> 55
<INCOME-CONTINUING> 108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
