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, 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)
<TABLE>
<CAPTION>
Three Months Six Months
For the Period Ended June 30, 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
- ------------------
Local service $1,247.6 $ 1,161.5 $2,353.8 $ 2,331.4
Long distance 65.0 93.9 130.4 197.4
Network access 590.6 575.4 1,180.3 1,102.2
Other 191.9 238.6 344.0 356.2
-------- --------- -------- ---------
Total operating revenues 2,095.1 2,069.4 4,008.5 3,987.2
-------- --------- -------- ---------
OPERATING EXPENSES
- ------------------
Maintenance and support 696.2 646.3 1,340.0 1,270.5
Depreciation and amortization 311.5 339.6 640.8 688.7
Marketing and customer services 298.6 269.6 577.6 543.3
Taxes other than income 173.0 171.9 348.4 327.7
Provision for uncollectible revenues 27.8 23.5 54.6 50.4
Other 168.5 199.0 352.2 471.7
-------- --------- -------- ---------
Total operating expenses 1,675.6 1,649.9 3,313.6 3,352.3
-------- --------- -------- ---------
Operating income 419.5 419.5 694.9 634.9
Other income (expense) - net (2.9) 0.3 (8.8) (1.3)
Interest expense 68.6 72.2 175.5 142.3
-------- --------- -------- ---------
Earnings before income taxes and
cumulative effect of change
in accounting principle 348.0 347.6 510.6 491.3
Income taxes 118.5 117.1 173.2 162.2
-------- -------- -------- ---------
Earnings before cumulative effect of
change in accounting principle 229.5 230.5 337.4 329.1
Cumulative effect of change in
accounting for directory publishing
income, net of taxes (Note B) - - - 55.7
-------- --------- -------- ---------
NET INCOME $ 229.5 $ 230.5 $ 337.4 $ 384.8
======== ========= ======== =========
RETAINED EARNINGS (ACCUMULATED DEFICIT)
- --------------------------------------
Beginning of period $ (331.5) $(1,115.1) $ (439.4) $(1,269.4)
Net income 229.5 230.5 337.4 384.8
Dividends declared (Note G) - - - -
-------- --------- -------- ---------
End of period $ (102.0) $ (884.6) $ (102.0) $ (884.6)
======== ========= ======== =========
</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)
June 30, December 31,
1997 1996
---------- ------------
ASSETS
- ------
Current assets:
Cash $ 21.6 $ 22.8
Receivables
Trade and other (net of allowance
of $158.5 and $162.3, respectively) 1,531.2 1,561.0
Affiliates 139.7 124.6
Deferred charges 65.2 70.6
Deferred income taxes 0.4 0.8
Inventory 149.3 110.8
Prepaid expenses and other 120.6 98.3
--------- ---------
Total current assets 2,028.0 1,988.9
--------- ---------
Telephone plant - at cost 21,457.3 20,861.2
Less: accumulated depreciation 12,027.2 11,515.4
--------- ---------
9,430.1 9,345.8
--------- ---------
Long-term investment, deferred charges and other 323.3 327.5
--------- ---------
TOTAL ASSETS $11,781.4 $11,662.2
========= =========
LIABILITIES AND SHARE OWNER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable
Affiliates $ 802.4 $ 657.4
Other 922.7 1,175.5
Short-term debt 849.6 629.6
Dividends payable 243.7 191.6
Taxes accrued 110.4 62.4
Deferred income taxes 80.8 83.5
Advance billing and customers' deposits 171.4 180.8
Interest accrued 74.5 64.3
--------- ---------
Total current liabilities 3,255.5 3,045.1
--------- ---------
Long-term debt 3,810.4 3,852.6
Deferred income taxes 53.4 17.4
Unamortized investment tax credits 98.2 106.7
Other long-term liabilities and deferred credits 1,985.9 1,912.4
--------- ---------
Total liabilities 9,203.4 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) 2,679.0 3,166.4
Retained earnings/(Accumulated deficit) (102.0) (439.4)
--------- ---------
Total share owner's equity 2,578.0 2,728.0
--------- ---------
TOTAL LIABILITIES AND SHARE OWNER'S EQUITY $11,781.4 $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 Six Months Ended
June 30,
1997 1996
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 337.4 $ 384.8
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 640.8 688.7
Deferred income taxes - net 37.1 (62.5)
Deferred credits - net (8.5) (11.7)
Change in operating assets and liabilities:
Receivables 14.7 (39.9)
Deferred charges 5.4 (24.7)
Deferred income taxes - current 0.4 43.3
Inventory (38.5) (5.1)
Prepaid expenses and other (22.3) (39.0)
Deferred income taxes - non-current - (6.8)
Accounts payable (107.8) (342.9)
Taxes accrued 48.0 38.4
Deferred income tax liability (2.7) 16.5
Advance billing and customers' deposits (9.4) (3.0)
Interest accrued 10.2 (2.0)
Other - net (0.8) (63.4)
------- -------
Total adjustments 566.6 185.9
------- -------
Net cash provided by operating activities 904.0 570.7
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (646.6) (488.8)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from NYNEX 220.0 333.3
Dividends paid to NYNEX (435.3) (372.1)
Repayment of long-term debt and capital leases (43.3) (58.5)
------- -------
Net cash used in financing activities (258.6) (97.3)
------- -------
Net (decrease) in Cash (1.2) (15.4)
Cash at beginning of period 22.8 39.9
------- -------
Cash at end of period $ 21.6 $ 24.5
======= =======
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 and the current year's previously issued
Quarterly Report on Form 10-Q.
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.
In the second quarter of 1997, $5 million of the deferred revenues was
recognized in connection with Incentive Plan commitments that were met and $63
million of the deferred revenues 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. In the first quarter of 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 $45 million was rebated to customers. As
of June 30, 1997, $11 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 $89 million (including interest) 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 June 30, 1997, the aggregate
amount of revenues estimated to be subject to possible refund was approximately
$53 million plus related interest. The outcome of each pending matter, as well
as the time frame within which each will be resolved, is not presently
determinable.
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
Six Months Ended
June 30,
1997 1996
----------------------
(In millions)
Income tax payments $61.0 $176.6
Interest payments* $156.7 $147.7
* Amounts shown are net of capitalized interest of $10.6 and $11.6 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
---------------
NYNEX and Bell Atlantic Corporation ("Bell Atlantic") announced a proposed
merger of equals under a definitive merger agreement (the "Merger"), entered
into on April 21, 1996 and amended on July 2, 1996. Under the terms of the
amended agreement, NYNEX will become a subsidiary of Bell Atlantic. NYNEX
stockholders will receive 0.768 of a share of Bell Atlantic common stock for
each share of NYNEX common stock that they own. Bell Atlantic stockholders will
continue to own their existing shares after the Merger.
The Merger is expected to qualify as a "pooling of interests," which means that,
for accounting and financial reporting purposes, the companies will be treated
as if they had always been combined. At special meetings held in November 1996,
stockholders of both companies approved the Merger. The completion of the Merger
is subject to the Federal Communications
7
<PAGE>
Form 10-Q Part I New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
Commission's ("FCC") approval, which is expected to be received shortly.
After the closing of the Merger, Bell Atlantic will file, as part of a Current
Report on Form 8-K, unaudited pro forma combined condensed financial statements
which give effect to the Merger using the pooling-of-interests method of
accounting.
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 six months of 1997 was $337.4 million. Net income for
the same period of 1996 was $384.8 million.
Net income for the first six months of 1997 includes after-tax charges of $139.5
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 same period of 1996 included an after-tax 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 $35.4 million for retirement incentives.
Excluding the above items, net income for the first six months of 1997 would
have been $458.8 million, a decrease of $8.4 million, or 1.8%, from adjusted net
income for the same period of 1996.
Operating Revenues
- ------------------
Operating revenues for the first six months of 1997 were $4.0 billion, an
increase of $21.3 million, or 0.5%, from the same period of 1996.
Included in operating revenues for the first six months of 1997 was an $83
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 same period of 1996 were charges of $55 million related to customer
claims and a $14 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
$35.3 million, or 0.9%, over adjusted operating revenues for the first six
months of 1996.
The $35.3 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. Local service revenues improved
$91.4 million, or 3.9%, over the first six months of 1996 primarily due to the
net of (i) a $66 million increase attributable to revenues earned from Optional
Calling Plans ("OCPs") which were recorded in Long distance
9
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
revenues in the first six months of 1996, (see Long distance revenues), $25
million of which is attributable to increased demand, a $50 million increase
resulting from rebates issued in 1996 under the 1994 service improvement plan,
and (ii) a $12 million reduction for rebates under the 1994 service improvement
plan (see Note C), a $10 million reduction for service rebates issued under the
Incentive Plan (see Note C), and a $7 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
$67.0 million, or 33.9%, from the first six months of 1996 due to a $41 million
decrease attributable to revenues earned from OCPs which were recorded in Long
distance revenues in the first six months of 1996 and are currently recorded in
Local service revenues (see Local service revenues), and a $26 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
$23.1 million, or 2.0%, over the first six months of 1996 resulting primarily
from the net of (i) a $32 million improvement in special access revenues and a
$45 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) a $43 million reduction in interstate rates
and an $11 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. Other revenues decreased $12.2
million, or 3.4%, from the first six months of 1996 resulting 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
under the 1994 service improvement plan (see Local revenues), a $21 million
increase attributable to a decrease in the reduction of revenues for service
rebate obligations under the Incentive Plan resulting from significantly
improved service, a $5 million increase attributable to the recognition of
previously deferred revenues in connection with commitments met under the
Incentive Plan, a $3 million increase in voice messaging services revenue, and a
$3 million increase in directory revenues from the directory licensing agreement
with Information Resources, and (ii) a $50 million decrease resulting from the
reclassification in 1996 of the reduction of revenues, for service rebate
obligations under the 1994 service improvement plan, from Other revenues to
Local service revenues, a $20 million decrease attributable to the recognition
in 1996 of previously deferred revenues in connection with ILP commitments that
were met, and a $4 million reduction in billing and collection revenues.
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 six months of 1997 were $3.3 billion, a
decrease of $38.7 million, or 1.2%, from the same period of 1996.
Included in the operating expenses for the first six months of 1997 were charges
of $214.6 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 same
period of 1996 were charges of $54.5 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
$28.8 million, or 0.9%, over adjusted operating expenses for the first six
months of 1996.
The $28.8 million increase in adjusted operating expenses includes the following
categories:
Depreciation and amortization decreased $50.5 million, or 7.3%, from the first
six months of 1996 resulting primarily from the net of (i) a $12 million
increase due to growth in depreciable plant investment, and (ii) a $59 million
decrease attributable to revised estimates of future net salvage value and
remaining useful lives during 1996, and technical updates to depreciation rates
and reserve balances in 1997.
Taxes other than income, which include gross receipts taxes, property taxes and
other non-income based taxes, decreased $2.1 million, or 0.6%, from the first
six months of 1996 resulting primarily from the net of (i) a $2 million increase
attributable to an increase in property tax rates, and (ii) a $4 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 $20.6 million over the first six months of 1996
primarily due to additional labor costs incurred in connection with initiatives
to improve service quality.
11
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
Other operating expenses, consist primarily of contracted and centralized
services, rent and other general and administrative costs. Other operating
expenses increased $60.8 million over the first six months of 1996 resulting
primarily from a $19 million increase in right to use fees due to increased
software upgrades, a $14 million increase in charges from Telesector Resources
Group, Inc. ("Telesector Resources") for data processing services and materials
management, a $13 million increase in intrastate access charges from other local
exchange carriers, and a $12 million increase in motor vehicle lease expense
attributable to service related expansion of motor vehicle fleet.
Other income (expense) - net
- ----------------------------
Other income (expense) - net increased $7.5 million over the first six months of
1996 primarily due to certain merger-related costs.
Interest expense
- ----------------
Interest expense increased $33.2 million, or 23.3% over the first six months of
1996. Interest expense for the first six months 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
six months of 1997 would have been $147.9 million, an increase of $5.6 million,
or 3.9%, over interest expense for the same period of 1996.
The $5.6 million increase in adjusted interest expense results primarily from an
increase in the level of advances from NYNEX.
Income taxes
- ------------
Income taxes increased $11.0 million, or 6.8%, over the first six months of 1996
primarily due to an increase in pretax income.
Retirement Incentives
- ---------------------
The number of employees who elected to leave under retirement incentives in the
first six months of 1997 and 1996 are as follows:
1997 1996
----- ----
Management 740 300
Associates 390 175
----- ----
Total 1,130 475
===== ====
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 six months of
1997 and 1996 are as follows:
(In millions) 1997 1996
---- ----
Pretax After-Tax Pretax After-Tax
------ --------- ------- --------
Pension enhancement charges $158.7 $103.2 $56.0 $36.4
Postretirement medical costs 55.9 36.3 (1.5) (1.0)
------ ------ ----- -----
$214.6 $139.5 $54.5 $35.4
====== ====== ===== =====
Included in the charges above for the first six 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;
$59.6 million and $17.4 million, respectively ($38.7 million and $11.3 million,
respectively, after-tax) for pension enhancements and $22.4 million and $(1.9)
million, respectively ($14.6 million and $(1.2) million, respectively,
after-tax) for postretirement medical costs. The total number of employees who
left Telesector Resources under the retirement incentives in the first six
months of 1997 and 1996 were 860 and 405, respectively, of which 530 and 250,
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 six months of 1997, severance reserves of $12.0 million were
transferred to the pension liability and $16.3 million of postretirement medical
liability was applied on a per employee basis as a result of associates leaving
under the retirement incentives. $1.6 million of severance reserves and $2.1
million of postretirement medical liability were transferred from the Company to
Telesector Resources during the first six months of 1997 for the allocated
number of Telesector Resources associates who left under the retirement
incentives. At June 30, 1997, $54 million of severance reserves and $72 million
of unapplied postretirement medical liability remained.
13
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
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 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
- ---------
On March 5, 1997, the Company redeemed its $42 million 8.20% Thirty Year Private
Placement Notes, due July 1, 2008. At June 30, 1997, the Company had $250
million of unissued, unsecured debt securities registered with the SEC.
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"). While there are
additional decisions pending on Universal Service and Access Reform, based on
the decisions to date, 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 Company and New England Telephone & Telegraph Company's (together, the
"Telephone Companies") 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
14
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
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 had 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.
On June 30, 1997, NYNEX made its Annual Access Tariff Filing of Interstate
Rates, which became effective on July 1, 1997. The rates included in the filing
resulted in annual price decreases totaling approximately $198.7 million, of
which $4.4 million is a result of one-time adjustments which will only be in
effect until July 1998. The FCC is conducting an investigation that could result
in further rate reductions.
15
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
The FCC is expected to adopt an order later this year to 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.
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 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. In July, the NYSPSC identified "shortcomings of the
record" and advised that NYNEX will be given an opportunity to supplement the
record as to those issues. Work is underway to prepare an appropriate
supplement. 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
- ----------------
In May, the NSYPSC issued an Order to Show Cause, noting that the Company's
Personalized Rate Plan, a flat-rated toll calling plan for residential
customers, was continuing to fail the "price floor" test under the Plan. The
16
<PAGE>
Form 10-Q Part I New York Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
test establishes a minimum price for the Company's toll and toll-like services,
based on the rates it charges other carriers for access. The Order required the
Company to show cause why switched carrier access rates should not be reduced in
order to lower the price floor below the average revenue level under the
Personalized Rate Plan. The NSYPSC also solicited comments on a proposal to
require retroactive adjustments of carrier access charges if the Company failed
the applicable price floor tests for the upstate or downstate toll categories
(rather than merely for individual services within those categories). In its
comments, the Company argued that adjustments under the price floor test should
be addressed through adoption of the access rate restructuring proposed by the
Company in the NYSPSC's access charge proceeding. The Company also argued that
it should have the flexibility to address future price floor "failures" either
through access rate changes or through toll rate changes, and that retroactive
access charge reductions should be required. In July, the NYSPSC ordered the
Company to lower its access charges to meet the price floor test. It is
estimated that the first year annual revenue reduction will be approximately $15
million.
In July, the Appellate Division of the New York Supreme Court dismissed MCI
Corporation's ("MCI") lawsuit seeking to overturn the Incentive Plan adopted by
the NYSPSC in 1995. MCI had challenged the lack of an earnings cap and had
asserted that the Company's rates should be further reduced annually by the
amount of the $153 million set-aside.
17
<PAGE>
Form 10-Q Part II New York Telephone Company
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
Exhibit
Number
------
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No Report on Form 8-K was filed by the registrant during the quarter
for which this report is filed.
18
<PAGE>
Form 10-Q New York Telephone Company
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
New York Telephone Company
John W. Diercksen
----------------------------------------------
John W. Diercksen
Acting Vice President - Finance and Treasurer
(Principal Financial and Accounting Officer)
August 6, 1997
19
Exhibit (12)
NEW YORK TELEPHONE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions) (Unaudited)
<TABLE>
<CAPTION>
For the
Six Months
Ended
June 30, 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 $512.9 $1,062.8 $ 807.3 $659.4 $430.2 $1,219.3
Federal, State and Local Income Taxes 173.2 381.6 226.9 140.4 (67.8) 342.8
Estimated Interest Portion of Rental Expense 17.2 30.2 30.2 31.63 36.3 38.9
------ -------- -------- ------ ------ --------
Total Earnings $703.3 $1,474.6 $1,064.4 $831.4 $398.7 $1,601.0
====== ======== ======== ====== ====== ========
Fixed Charges
Total Interest Deductions $175.5 $ 288.5 $ 306.8 $314.4 $348.6 $ 362.9
Estimated Interest Portion of Rental Expense 17.2 30.2 30.2 31.6 36.3 38.9
------ -------- -------- ------ ------ --------
Total Fixed Charges $192.7 $ 318.7 $ 337.0 $346.0 $384.9 $ 401.8
====== ======== ======== ====== ====== ========
Ratio of Earnings to Fixed Charges 3.65 4.63 3.16 2.40 1.04 3.98
====== ======== ======== ====== ====== ========
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 22
<SECURITIES> 0
<RECEIVABLES> 1,829
<ALLOWANCES> 159
<INVENTORY> 149
<CURRENT-ASSETS> 2,028
<PP&E> 21,457
<DEPRECIATION> 12,027
<TOTAL-ASSETS> 11,781
<CURRENT-LIABILITIES> 3,256
<BONDS> 3,810
0
0
<COMMON> 1
<OTHER-SE> 2,577
<TOTAL-LIABILITY-AND-EQUITY> 11,781
<SALES> 0
<TOTAL-REVENUES> 4,009
<CGS> 0
<TOTAL-COSTS> 3,314
<OTHER-EXPENSES> (9)
<LOSS-PROVISION> 55
<INTEREST-EXPENSE> 176
<INCOME-PRETAX> 511
<INCOME-TAX> 173
<INCOME-CONTINUING> 337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 337
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
