<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
<TABLE>
<S> <C>
Date of Report: January 12, 1998
Exact name of registrant
as specified in its charter: NEW YORK TELEPHONE COMPANY
Commission File Number: 1-3435
State of Incorporation: New York
I.R.S. Employer Identification No.: 13-5275510
Address of principal
executive offices: 1095 Avenue of the Americas
New York, New York
Zip Code 10036
Registrant's telephone number,
including area code: (212) 395-2121
Former name or former address,
if changed since last report: Not applicable
</TABLE>
<PAGE>
Item 5. Other Events
------------
New York Telephone Company (the Company) is a wholly owned subsidiary of NYNEX
Corporation (NYNEX). On August 14, 1997, Bell Atlantic Corporation (Bell
Atlantic) and NYNEX completed a merger of equals under a definitive merger
agreement entered into on April 21, 1996 and amended on July 2, 1996. Under the
terms of the amended agreement, NYNEX became a wholly owned subsidiary of Bell
Atlantic. The merger was accounted for as a pooling of interests.
The Company is engaged in the business of providing telecommunications services
in New York and a small portion of Connecticut (Greenwich and Byram only). Since
January 1, 1984, the Company has been a wholly owned subsidiary of NYNEX, one of
the seven regional holding companies formed by American Telephone and Telegraph
Company (AT&T) in connection with the court-ordered divestiture (the
Divestiture) by AT&T of certain portions of its 22 wholly owned operating
telephone companies. Prior to the Divestiture on January 1, 1984, the Company
was an associated company of the Bell System and a wholly owned subsidiary of
AT&T.
As a result of the merger of NYNEX and Bell Atlantic on August 14, 1997, the
Company became an indirect wholly owned subsidiary of Bell Atlantic. Bell
Atlantic, another of the original seven holding companies formed by AT&T in
connection with the Divestiture, is a diversified telecommunications company
operating in the region stretching from Maine to Virginia. In addition to its
operating telephone subsidiaries, Bell Atlantic provides domestic wireless
service in 25 states and has international wireless and other telecommunications
company investments.
The Company is filing the following financial statements and supplement to
Management's Discussion and Analysis of Results of Operations which include
certain reclassifications in presentation and certain retroactive adjustments to
conform accounting methodologies as a result of the merger (see Note U of the
Notes to Consolidated Financial Statements).
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Accountants 2
Supplement to Management's Discussion and Analysis
of Results of Operations 3
Consolidated Statements of Income and Reinvested Earnings (Accumulated Deficit)
for the years ended December 31, 1996, 1995, and 1994 4
Consolidated Balance Sheets at December 31, 1996 and 1995 5-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 7
Consolidated Notes to Financial Statements 8-21
Consolidated Statements of Income and Reinvested Earnings (Accumulated Deficit) (unaudited)
for three months ended March 31, 1997 and 1996 22
Consolidated Statements of Income and Reinvested Earnings (Accumulated Deficit) (unaudited)
for the three and six months ended June 30, 1997 and 1996 23
Consolidated Balance Sheets (unaudited) at March 31, 1997 and June 30, 1997 24-25
Consolidated Statements of Cash Flows (unaudited) for the three months ended
March 31, 1997 and 1996, and six months ended June 30, 1997 and 1996 26
Consolidated Notes to Financial Statements (unaudited) 27
</TABLE>
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Share Owner and Board of Directors of
New York Telephone Company:
We have audited the accompanying consolidated balance sheets of New York
Telephone Company and Subsidiary ("the Company") as of December 31, 1996 and
1995, and the related consolidated statements of income and reinvested earnings
(accumulated deficit) and cash flows for each of the three years in the period
ended December 31, 1996. The consolidated financial statements give retroactive
effect to the merger of Bell Atlantic Corporation and NYNEX Corporation (the
Company's parent company) on August 14, 1997, which has been accounted for as a
pooling-of-interests, as described in Note U to the consolidated financial
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
As discussed in Note C to the consolidated financial statements, during the
first quarter of 1996, the Company changed its method of recognizing directory
publishing revenues and production expenses effective January 1, 1996.
Additionally, as discussed in Note B to the consolidated financial statements,
in the second quarter of 1995, the Company discontinued accounting for its
operations in accordance with Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation."
Coopers & Lybrand L.L.P.
New York, New York
February 7, 1997, except as to the information presented in Note U, for which
the date is August 14, 1997
2
<PAGE>
New York Telephone Company
Supplement to Management's Discussion & Analysis of Results of Operations
- -------------------------------------------------------------------------
This supplement should be used in conjunction with Item 7, Management's
Discussion and Analysis of Results of Operations, filed in New York Telephone
Company's (the Company) 1996 Annual Report on Form 10-K.
The Company is a wholly owned subsidiary of NYNEX Corporation (NYNEX). On August
14, 1997, Bell Atlantic Corporation (Bell Atlantic) and NYNEX completed a merger
of equals under a definitive merger agreement entered into on April 21, 1996 and
amended on July 2, 1996. Under the terms of the amended agreement, NYNEX became
a wholly owned subsidiary of Bell Atlantic. The merger has been accounted for as
a pooling of interests.
The financial statements of the Company have been restated for certain
reclassifications in presentation and certain retroactive adjustments to conform
the accounting methodologies of Bell Atlantic and NYNEX as a result of the
merger (See Note U of the Notes to Consolidated Financial Statements). The
conforming adjustments are primarily for the immediate recognition of the
transition benefit obligation for postretirement benefits other than pensions in
accordance with Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" as if the merger had
occurred as of the beginning of the earliest period presented. In its historical
financial statements, the Company had amortized the transition benefit
obligation over a twenty year period. The tables below present the conforming
adjustments and reclassifications recorded in the income statement for each of
the three years in the period ended December 31, 1996.
<TABLE>
<CAPTION>
(Dollars In Millions) Historical Conforming Conforming Restated
For the year ended December 31, 1996 Adjustments Reclassifications 1996
- ------------------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 8,022.3 $ -- $ .3 $ 8,022.6
Operating expenses 6,573.0 (59.7) 28.9 6,542.2
----------------------------------------------------------------------
Operating income 1,449.3 59.7 (28.6) 1,480.4
Other income and (expense) - net (4.9) 28.6 23.7
Interest expense 288.5 288.5
Income taxes 381.6 20.9 402.5
----------------------------------------------------------------------
Income from continuing operations 774.3 38.8 -- 813.1
Cumulative effect of change in accounting principle
Directory publishing income, net of tax 55.7 55.7
----------------------------------------------------------------------
Net income $ 830.0 $ 38.8 $ -- $ 868.8
======================================================================
<CAPTION>
Historical Conforming Conforming Restated
For the year ended December 31, 1995 Adjustments Reclassifications 1995
- ------------------------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 7,937.1 $ -- $ -- $ 7,937.1
Operating expenses 6,932.3 (42.6) 19.1 6,908.8
----------------------------------------------------------------------
Operating income 1,004.8 42.6 (19.1) 1,028.3
Other income and (expense) - net 29.4 19.1 48.5
Interest expense 306.8 306.8
Income taxes 226.9 14.9 241.8
----------------------------------------------------------------------
Income from continuing operations 500.5 27.7 -- 528.2
Extraordinary item
Discontinuance of regulatory accounting
principles, net of tax (2,291.6) (2,291.6)
----------------------------------------------------------------------
Net loss $(1,791.1) $ 27.7 $ -- $(1,763.4)
======================================================================
<CAPTION>
Historical Conforming Conforming Restated
For the year ended December 31, 1994 Adjustments Reclassifications 1994
- ------------------------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 7,736.6 $ -- $ -- $ 7,736.6
Operating expenses 6,958.0 (30.0) 21.2 6,949.2
----------------------------------------------------------------------
Operating income 778.6 30.0 (21.2) 787.4
Other income and (expense) - net 21.2 21.2 42.4
Interest expense 314.4 314.4
Income taxes 140.4 10.5 150.9
----------------------------------------------------------------------
Net income $ 345.0 $ 19.5 $ -- $ 364.5
======================================================================
</TABLE>
3
<PAGE>
New York Telephone Company
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (ACCUMULATED DEFICIT)
(Dollars in Millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES (including $226.6, $221.1,
and $187.0 from affiliates) ........................... $ 8,022.6 $ 7,937.1 $ 7,736.6
----------- ---------- ---------
OPERATING EXPENSES
Employee costs, including benefits and taxes .......... 2,242.0 2,431.0 2,688.6
Depreciation and amortization ......................... 1,326.2 1,392.5 1,485.6
Taxes other than income ............................... 668.4 798.8 789.6
Other (including $1,273.5, $1,260.4,
and $994.0 to affiliates) ........................ 2,305.6 2,286.5 1,985.4
----------- ---------- ---------
6,542.2 6,908.8 6,949.2
----------- ---------- ---------
OPERATING INCOME ........................................... 1,480.4 1,028.3 787.4
OTHER INCOME, NET (including $18.8, $22.0,
and $23.0 from affiliate).............................. 23.7 48.5 42.4
INTEREST EXPENSE (including $25.2, $16.8,
and $16.6 to affiliate) ............................... 288.5 306.8 314.4
----------- ---------- ---------
Income Before Provision for Income Taxes, Extraordinary
Item, and Cumulative Effect of Change in
Accounting Principle................................ 1,215.6 770.0 515.4
PROVISION FOR INCOME TAXES ................................. 402.5 241.8 150.9
----------- ---------- ---------
Income Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle .............. 813.1 528.2 364.5
EXTRAORDINARY ITEM
Discontinuation of Regulatory Accounting
Principles, Net of Tax ............................. --- (2,291.6) ---
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax ...................... 55.7 --- ---
----------- ---------- ---------
NET INCOME (LOSS)........................................... $ 868.8 $ (1,763.4) $ 364.5
=========== ========== =========
REINVESTED EARNINGS (ACCUMULATED DEFICIT)
At beginning of period ................................ $ (1,763.3) $ .1 $ 56.3
Add: net income (loss)................................ 868.8 (1,763.4) 364.5
other........................................ --- 180.5 304.1
----------- ---------- ---------
(894.5) (1,582.8) 724.9
Deduct: dividends .................................... --- 180.5 724.8
----------- ---------- ---------
At end of period ...................................... $ (894.5) $ (1,763.3) $ .1
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
New York Telephone Company
CONSOLIDATED BALANCE SHEETS
(Dollars In Millions)
ASSETS
------
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash .................................................................. $ 22.8 $ 39.9
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $162.3 and $154.7 ............................... 1,560.1 1,610.4
Affiliates .......................................................... 27.8 46.5
Material and supplies ................................................. 110.8 62.8
Prepaid expenses ...................................................... 93.6 70.2
Deferred income taxes ................................................. .8 44.1
Other ................................................................. 74.8 60.5
------------ -----------
1,890.7 1,934.4
------------ -----------
PLANT, PROPERTY AND EQUIPMENT ......................................... 20,764.7 20,069.7
Less accumulated depreciation ......................................... 11,472.3 10,813.6
------------ -----------
9,292.4 9,256.1
------------ -----------
OTHER ASSETS .......................................................... 832.2 747.5
------------ -----------
TOTAL ASSETS .......................................................... $ 12,015.3 $ 11,938.0
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
New York Telephone Company
CONSOLIDATED BALANCE SHEETS
(Dollars In Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
December 31,
1996 1995
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate ........................................... $ 568.4 $ 307.4
Other ............................................................... 61.2 59.6
Accounts payable and accrued liabilities:
Affiliates .......................................................... 848.9 1,120.1
Other ............................................................... 1,176.6 1,220.1
Other liabilities ..................................................... 362.8 293.8
--------- ---------
3,017.9 3,001.0
--------- ---------
LONG-TERM DEBT ........................................................ 3,852.6 3,913.3
--------- ---------
EMPLOYEE BENEFIT OBLIGATIONS .......................................... 3,058.2 3,089.5
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ................................................. 16.4 1.2
Unamortized investment tax credits .................................... 106.8 130.9
Other ................................................................. 175.1 307.8
--------- ---------
298.3 439.9
--------- ---------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value ............................. 1.0 1.0
Additional paid-in capital............................................. 2,681.8 3,256.6
Accumulated deficit ................................................... (894.5) (1,763.3)
--------- ---------
1,788.3 1,494.3
--------- ---------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.......................... $12,015.3 $11,938.0
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
New York Telephone Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................... $ 868.8 $ (1,763.4) $ 364.5
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.................................. 1,326.2 1,392.5 1,485.6
Extraordinary item, net of tax................................. --- 2,291.6 ---
Cumulative effect of change in accounting
principle, net of tax....................................... (55.7) --- ---
Other items, net............................................... (10.3) 20.7 (17.7)
Changes in certain assets and liabilities:
Accounts receivable......................................... 164.4 (174.3) (52.8)
Material and supplies....................................... (48.0) 10.7 (1.1)
Other assets................................................ (43.4) 52.9 220.7
Accounts payable and accrued liabilities.................... (257.8) 288.9 (20.7)
Deferred income taxes, net.................................. 31.6 (159.3) (257.4)
Unamortized investment tax credits.......................... (24.1) (29.5) (32.4)
Employee benefit obligations................................ (31.3) 184.8 481.8
Other liabilities........................................... (147.2) (154.7) (92.0)
------------ ------------ ----------
Net cash provided by operating activities............................ 1,773.2 1,960.9 2,078.5
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment .......................... (1,308.1) (1,436.4) (1,329.9)
Other, net........................................................... (42.3) (46.8) (33.5)
------------ ------------ ----------
Net cash used in investing activities ............................... (1,350.4) (1,483.2) (1,363.4)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in note payable to affiliate.............................. 261.0 18.3 (550.5)
Issuance of long term debt........................................... --- --- 593.5
Principal repayments of borrowings and capital lease obligations .... (61.0) (6.5) (5.8)
Dividends paid ...................................................... (563.7) (542.2) (724.6)
Net change in outstanding checks drawn
on controlled disbursement accounts ............................ (76.2) 69.5 (12.1)
------------ ------------ ----------
Net cash used in financing activities ............................... (439.9) (460.9) (699.5)
------------ ------------ ----------
NET CHANGE IN CASH .................................................. (17.1) 16.8 15.6
CASH, BEGINNING OF YEAR.............................................. 39.9 23.1 7.5
------------ ------------ ----------
CASH, END OF YEAR.................................................... $ 22.8 $ 39.9 $ 23.1
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A ACCOUNTING POLICIES
Nature of Operations
New York Telephone Company and its wholly-owned subsidiary, Empire City
Subway Company (Limited) (jointly referred to as the "Company"), primarily
provide exchange telecommunications and exchange access services in
substantially all of New York and a small portion of Connecticut. The Company is
a wholly-owned subsidiary of NYNEX Corporation ("NYNEX"). Intrastate
communications services are regulated by state public service commissions
("state commissions"), and interstate communications services are regulated by
the Federal Communications Commission ("FCC").
The communications and media industry continues to experience
fundamental changes at an ever-increasing pace. Telecommunications, information
and entertainment services are converging in the market, driven by technology
and the release of landmark federal legislation that has removed historic
regulatory barriers and increased competition. These changes are likely to have
a significant effect on the future financial performance of many companies in
the industry. The Company cannot predict the effect of such competition on its
business.
NYNEX is implementing a major restructuring of its business, is
entering into domestic strategic alliances and is expanding globally in select
international markets in order to respond to competition. In addition, NYNEX is
pursuing reforms in telecommunications policy at both the state and federal
levels. In February 1996, the Telecommunications Act of 1996 was signed into
law. This legislation will lead to the development of competition in local and
long distance telephone service, cable television, and information and
entertainment services.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiary. The Company has a 66-2/3% ownership interest in
Telesector Resources Group, Inc. ("Telesector Resources") and shares voting
rights equally with the other owner, New England Telephone and Telegraph Company
("New England Telephone"), which is a wholly-owned subsidiary of NYNEX. The
Company uses the equity method of accounting for its investment in Telesector
Resources.
These consolidated financial statements include certain
reclassifications in presentation and certain retroactive adjustments to conform
accounting methodologies as a result of the merger of Bell Atlantic Corporation
("Bell Atlantic") and NYNEX (see Note U). The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
("GAAP"). 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.
In the first quarter of 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. The initial effect of
the change to the point of publication method is reported as a cumulative effect
of a change in accounting principle (see Note C).
In the second quarter of 1995, the Company discontinued using GAAP
applicable to regulated entities (see Note B).
8
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory
Inventory, consisting of materials and supplies, is carried principally
at average cost.
Telephone Plant
Telephone plant is stated at its original cost. When depreciable plant
is disposed of, the carrying amount is charged to accumulated depreciation.
As a result of the implementation of Statement of Financial Accounting
Standards No. 101, "Regulated Enterprises - Accounting for the Discontinuation
of Application of FASB Statement No. 71" ("Statement No. 101"), in the second
quarter of 1995, the Company began recording depreciation expense using shorter
asset lives based on expectations as to the revenue-producing lives of the
assets (see Note B), calculated on a straight-line basis using the concept of
"remaining life." Previously, depreciation rates used by the Company were
prescribed by the FCC and by the state commissions for interstate operations and
for intrastate operations, respectively.
Capitalized Interest Cost
As a result of the application of Statement No. 101, capitalized
interest for the Company is recorded as a cost of telephone plant and equipment
and a reduction of interest, in accordance with the provisions of Statement of
Financial Accounting Standards No. 34, "Capitalization of Interest Cost"
("Statement No. 34"). Previously, regulatory authorities allowed the Company to
capitalize interest, including an allowance on share owner's equity, as a cost
of constructing certain plant and as income, included in Other income (expense)
- - net. Such income was realized over the service life of the plant as the
resulting higher depreciation expense was recovered through the rate-making
process.
Computer Software Costs
The Company capitalizes initial right-to-use fees for central office
switching equipment, including initial operating system and initial application
software costs. For non-central office equipment, only the initial operating
system software is capitalized. Subsequent additions, modifications, or upgrades
of initial software programs, whether operating or application packages, are
expensed.
Refinancing Charges
As a result of the application of Statement No. 101, the Company no
longer defers call premiums and other charges associated with the redemption of
long-term debt, and previously deferred refinancing costs were eliminated (see
Note B). The intrastate portion of these costs had been deferred and amortized
over periods stipulated by the state commissions. The interstate portion had
been expensed as required by the FCC.
Income Taxes
NYNEX and its subsidiaries, including the Company, file a consolidated
Federal income tax return. The Company's provision for federal income taxes
currently payable is allocated in accordance with its contribution to the
consolidated group's taxable income and tax credits.
Deferred tax assets and liabilities are measured based on the enacted
tax rates that will be in effect in the years in which temporary differences are
expected to reverse.
For the Company, prior to the application of Statement No. 101, the
treatment of excess deferred taxes resulting from the reduction of tax rates in
prior years was subject to federal income tax and regulatory rules. Deferred
income tax provisions of the Company were based on amounts recognized for
rate-making purposes. The Company recognized a deferred tax liability and
established
9
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a corresponding regulatory asset for tax benefits previously flowed through to
ratepayers. The major temporary difference that gave rise to the net deferred
tax liability was depreciation, which for income tax purposes is determined
based on accelerated methods and shorter lives. Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" ("Statement No. 71"), required the Company to reflect the additional
deferred income taxes as regulatory assets to the extent that they would be
recovered in the rate-making process. In accordance with the normalization
provisions under federal tax law, the Company reversed excess deferred taxes
relating to depreciation of regulated assets over the regulatory lives of those
assets. For other excess deferred taxes, the state commissions generally allowed
amortization of excess deferred taxes over the reversal period of the temporary
difference giving rise to the deferred taxes. As a result of the application of
Statement No. 101, income tax-related regulatory assets and liabilities were
eliminated (see Note B).
The Tax Reform Act of 1986 repealed the investment tax credit ("ITC"),
effective January 1, 1986. As required by tax law, ITC for the Company was
deferred and is amortized as a reduction to tax expense over the estimated
service lives of the related assets giving rise to the credits.
Anticipated Effects of Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" and No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125"
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
("Statement No. 125"). Subsequently, in December 1996, the FASB issued an
amendment to Statement No. 125, Statement of Financial Accounting Standards No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" ("Statement No. 127"). NYNEX is required to adopt Statement No. 125 for
transactions occurring after December 31, 1996, however Statement No. 127 defers
certain provisions of Statement No. 125 until after December 31, 1997. Statement
No. 125 establishes the criteria to evaluate whether a transfer of financial
assets should be accounted for as a pledge of collateral in a secured borrowing
or as a sale. It also provides guidance on the recognition and measurement of
servicing assets and liabilities and on the extinguishments of liabilities.
Statement No. 127 defers the specific provisions of Statement No. 125 which
address secured borrowings and collateral as well as the accounting for
transfers of financial assets for repurchase agreements, dollar roll, securities
lending, and similar transactions.
Management is currently evaluating the financial impact of these
accounting standards; the effect of Statement No. 125 and Statement No. 127 on
the Company's results of operations and financial position has not yet been
determined.
B DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES
In the second quarter of 1995, the Company discontinued accounting for
its operations in accordance with the provisions of Statement No. 71. As a
result, the Company recorded an extraordinary non-cash charge of approximately
$2.3 billion, net of income taxes of $1.2 billion.
The operations of the Company no longer met the criteria for
application of Statement No. 71 due to a number of factors including:
significant changes in regulation (achievement of price regulation rather than
rate-of-return regulation in New York); an intensifying level of competition;
and the increasingly rapid pace of technological change. Under Statement No. 71,
the Company had accounted for the effects of rate actions by federal and state
regulatory commissions by establishing certain regulatory assets and
liabilities, including the depreciation of its telephone plant and equipment
using asset lives approved by regulators and the deferral of certain costs and
obligations based on approvals received from regulators. The Company had
continually assessed its position and the recoverability of its
telecommunications assets with respect to Statement No. 71.
Telephone plant and equipment was adjusted through an increase in
accumulated depreciation, to reflect the difference between recorded
depreciation and the amount of depreciation that would have been recorded had
the Company not been subject to rate regulation. Gross plant was written off
where fully depreciated, and non-plant regulatory assets and liabilities were
eliminated from the balance sheet.
10
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The after-tax extraordinary charge recorded consists of $1.8 billion
for the adjustment to telephone plant and equipment and $0.5 billion for the
write-off of non-plant regulatory assets and liabilities.
The net decrease of $2.8 billion to telephone plant and equipment was
supported by a depreciation analysis, which identified inadequate depreciation
reserve levels which the Company believes resulted principally from the
cumulative under-depreciation of telephone plant and equipment as a result of
the regulatory process. An impairment analysis was performed that did not
identify any additional amounts not recoverable from future operations. ITC
amortization was accelerated as a result of the reduction in asset lives of the
associated telephone plant and equipment.
The major elements of the 1995 write-off of non-plant regulatory net
assets were as follows:
<TABLE>
<CAPTION>
(In Millions) Pretax After-tax
------------- ------ ---------
<S> <C> <C>
Compensated absences $ 120.2 $ 78.1
Deferred pension costs 264.4 171.9
Refinancing costs 184.7 120.1
Deferred taxes --- 53.7
Other 119.5 77.7
------- -------
Total $ 688.8 $ 501.5
======= =======
</TABLE>
With the adoption of Statement No. 101, the Company now uses estimated
asset lives for certain categories of telephone plant and equipment that are
shorter than those approved by regulators. These shorter asset lives result from
the Company's expectations as to the revenue-producing lives of the assets.
A comparison of average asset lives before and after the discontinuance
of Statement No. 71 for the most significantly affected categories of telephone
plant and equipment is as follows:
<TABLE>
<CAPTION>
Composite
Regulator-Approved Economic
Average lives (in years) Asset Lives Asset Lives
------------------------ ------------------ -----------
<S> <C> <C>
Digital Switching 16 12
Circuit - Other 10 8
Aerial Metallic Cable 20 17
Underground Metallic Cable 25 15
Buried Metallic Cable 25 17
Fiber 25 20
</TABLE>
The application of Statement No. 101 does not change the Company's
accounting and reporting for regulatory purposes.
C CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1996, Information Resources 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. 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 for the year ended 1996
did not have a material effect on operating results, and would not have been
material had it been applied in 1995.
11
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D Income Taxes
<TABLE>
<CAPTION>
The components of income tax expense are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996* 1995** 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $390.4 $426.6 $435.9
Deferred-net 31.0 (159.2) (257.5)
Deferred tax credits-net (24.2) (29.5) (32.4)
------- ------- --------
397.2 237.9 146.0
State and local 5.3 3.9 4.9
------- ------- --------
Total $402.5 $241.8 $150.9
======= ======= ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Does not include the deferred tax expense of $33.4 million associated
with the Cumulative effect of change in accounting for directory publishing
income.
** Does not include the deferred tax benefit of $1.2 billion associated with
the Extraordinary item for the discontinuance of regulatory accounting
principles.
A reconciliation between the federal income tax expense computed at the
statutory rate and the Company's effective tax expense is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense computed at the
statutory rate $425.5 $269.5 $180.4
a. Amortization of investment tax credits (15.8) (21.5) (32.4)
b. Amortization of excess deferred federal
taxes due to change in the tax rates --- (5.2) (29.9)
c. Depreciation of certain taxes and payroll-
related construction costs capitalized for
financial statement purposes, but
deducted for income tax purposes in
prior years --- 2.9 13.1
d. Federal income tax return adjustment for
the difference between the accrued and
actual tax expense (5.8) .2 (.4)
e. Allowance for funds used during
construction, which is excluded from
taxable income, net of applicable
depreciation --- 8.9 6.7
f. Other items-net (1.4) (13.0) 13.4
------ ------ ------
Income tax expense $402.5 $241.8 $150.9
====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Not included above are gross receipts taxes the Company is subject to
in lieu of a state income tax. Temporary differences for which deferred income
taxes have not been provided by the Company are represented principally by "c"
above. Upon the discontinuance of Statement No. 71 (see Note B), items "b" and
"c" above have been eliminated.
12
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
The components of current and non-current deferred tax assets and liabilities at
December 31, 1996 and 1995 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Employee benefits $1,199.0 $1,176.6
Restructuring charges 46.3 107.2
Unamortized ITC 35.9 44.3
Other 350.1 258.8
-------- --------
1,631.3 1,586.9
-------- --------
Deferred tax liabilities
Depreciation and amortization 971.9 966.1
Employee benefits 88.3 88.3
Other 165.3 63.8
-------- --------
1,225.5 1,118.2
-------- --------
Net deferred tax assets $ 405.8 $ 468.7
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1995, income tax-related regulatory assets and liabilities were
eliminated as a result of the discontinued application of Statement No. 71 (see
Note B).
E EMPLOYEE BENEFITS
Pensions
Substantially all of the Company's employees are covered by one of two
NYNEX noncontributory defined benefit pension plans (the "Plans"). Benefits for
management employees are based on a modified career average pay plan while
benefits for associates (employees previously referred to as nonmanagement) are
based on a nonpay-related plan. Contributions are made, to the extent deductible
under the provisions of the Internal Revenue Code, to an irrevocable trust for
the sole benefit of pension plan participants.
Total pension benefit for 1996, 1995 and 1994 was $132.7, $152.4 and
$165.8 million, respectively. Deferral of pension cost was discontinued as of
January 1, 1993, and the Company had implemented a plan to recover deferred
pension costs through the rate-making process (see Postretirement Benefits Other
Than Pensions below). The pension benefit for 1996, 1995 and 1994 includes the
effect of plan amendments and changes in actuarial assumptions for the discount
rate and future compensation levels. At December 31, 1996 and 1995, the Company
recorded approximately $958.3 million and $1.0 billion, respectively, in Other
long-term liabilities and deferred credits representing the Company's pension
liability.
The assumptions used to determine the projected benefit obligation at
December 31, 1996 and 1995 include a discount rate of 7.75% and 7.25%,
respectively, and an increase in future compensation levels in both years of
4.1% for management employees, and 4.0% for associates. The expected long-term
rate of return on pension plan assets used to calculate pension expense was 8.9%
in 1996, 1995 and 1994. The actuarial projections included herein anticipate
plan improvements for active employees in the future.
As a result of planned work force reductions primarily through
retirement incentives in 1996, 1995 and 1994, the Company incurred additional
pension costs of $93.6, $214.0 and $412.2 million, respectively, partially
offset by the 1993 severance reserves which were transferred to the pension
liability. In 1996, this cost was comprised of a charge for special termination
benefits of $144.1 million and a curtailment gain of $31.5 million, partially
offset by 1993 severance reserves of $26.0 million. In 1995, this cost was
comprised of a charge for special termination benefits of $290.2 million and a
curtailment gain of $76.2 million, partially offset by 1993 severance reserves
of $31.9 million. In 1994, this cost was comprised of a charge for special
termination benefits of $551.6 million and a curtailment gain of $139.4 million,
partially offset by 1993 severance reserves of $106.7 million.
13
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Postretirement Benefits Other Than Pensions
The Company provides certain health care and life insurance benefits
for retired employees and their families. Substantially all of the Company's
employees may become eligible for these benefits if they reach pension
eligibility while working for the Company. Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("Statement No. 106"), requires a comparison of the actuarial present
value of projected postretirement benefit obligations with the fair value of
plan assets, the disclosure of the components of net periodic postretirement
benefit costs, a reconciliation of the funded status of the plan with amounts
recorded on the balance sheets and the effect of a one-percentage-point increase
in the assumed health care cost trend rates for each future year on net periodic
postretirement benefit cost and the accumulated postretirement benefit
obligation. The Company participates in multi-employee plans and therefore, such
disclosures are not presented for the Company because the structure of the plans
does not provide for the determination of the information on an individual
participating company basis.
As a result of the merger of Bell Atlantic and NYNEX, the Company
recorded conforming adjustments for the immediate recognition of the transition
benefit obligation as if the merger had occurred as of the beginning of the
earliest period presented. In its historical financial statements, the Company
amortized the transition obligation over a twenty year period.
The cost of health care benefits and group life insurance was
determined using the unit credit cost actuarial method. The net postretirement
benefit cost for 1996, 1995 and 1994 for the Company was $210.2, $246.8 and
$249.5 million, respectively. The postretirement benefit costs for 1996 includes
pretax credits to medical expense of $49.4 million for plan amendments primarily
intended to reduce company costs under managed care options.
The actuarial assumptions used to determine the 1996 and 1995
obligation for postretirement benefit plans under Statement No. 106 are as
follows: discount rate of 7.75% and 7.25%, respectively; weighted average
expected long-term rate of return on plan assets of 8.4% in both years; weighted
average salary growth rate of 4.0% in both years; medical cost trend rate of
10.6% and 11.5% in 1996 and 1995, respectively, grading down to 4.5% in 2008;
and dental cost trend rate of 3.5% and 4.0% in 1996 and 1995, respectively,
grading down to 3.0% in 2002.
As a result of work force reductions, the Company recorded an
additional $208.8 million of postretirement benefit cost in 1993 accounted for
as a curtailment. In 1996, 1995 and 1994 under work force reduction retirement
incentives, the Company incurred additional postretirement benefit costs of
$38.6, $52.4 and $212.5 million, respectively. In 1996, this cost was comprised
of a curtailment loss of $25.0 million and a charge for special termination
benefits of $11.7 million, partially offset by $31.7 million accrued for in
1993. In 1995, this cost was comprised of a curtailment loss of $24.6 million
and a charge for special termination benefits of $27.8 million, partially offset
by $19.3 million accrued for in 1993. In 1994, this cost was comprised of a
curtailment loss of $154.7 million and a charge for special termination benefits
of $57.8 million, partially offset by $37.5 million accrued for in 1993.
NYNEX established two separate Voluntary Employees' Beneficiary
Association Trusts ("VEBA Trusts"), one for management and the other for
associates, to begin prefunding postretirement health care benefits. At December
31, 1992, NYNEX had transferred excess pension assets, totaling $486 million, to
health care benefit accounts within the pension plans. An amount equal to the
transferred asset was then contributed to the VEBA Trusts. No additional
contributions were made in 1996, 1995 and 1994. The assets in the VEBA Trusts
consist primarily of equity and fixed income securities. Additional
contributions to the VEBA Trusts are evaluated and determined by NYNEX
management.
Regulatory Treatment
With respect to interstate treatment, in 1994 the FCC's 1993 order
denying exogenous treatment of additional costs recognized under Statement No.
106 was overturned in the court. Tariff revisions were filed by the Company and
New England Telephone (collectively, the "Telephone Companies") with the FCC in
1994 to amend price cap indices to reflect additional exogenous costs recognized
under Statement No. 106, including $42 million of costs already accrued,
increased annual costs of $21 million and increased rates of $2.2 million.
Commencing December 30, 1994, the Telephone Companies began collecting these
revenues, subject to possible refund pending resolution of the FCC Common
Carrier Bureau's investigation. The annual update to the price cap rates,
effective August 1, 1995, included tariff revisions to recover approximately $21
million of exogenous costs resulting from the implementation of Statement
No. 106. In November 1996, NYNEX filed tariff revisions to reduce its interstate
access charges by $21 million because it had completed the recovery of exogenous
costs resulting from the implementation of Statement No. 106. With respect to
intrastate treatment, the Company eliminated remaining deferred pension costs
upon the discontinuance of Statement No. 71.
14
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F STOCK OPTIONS
NYNEX has stock option plans for key management employees under which
options to purchase NYNEX common stock are granted at a price equal to or
greater than the market price of the stock at the date of grant. The 1990 Stock
Option Plan, which expired on December 31, 1994, permitted the grant of options
through December 1994 to purchase up to four million shares. In January 1995,
NYNEX established the 1995 Stock Option Plan, that permits the grant of options
no later than December 31, 1999 to purchase up to 20 million shares of common
stock. One-third of the options could be exercised one year from the grant date,
with another one-third exercisable two years from the grant date, and the
remaining one-third exercisable three years from the grant date. These options
expire ten years from the grant date.
Both the 1990 and the 1995 Stock Option Plans for key management employees
allow for the granting of stock appreciation rights ("SARs") in tandem with
options granted. Upon exercise of a SAR, the holder may receive shares of common
stock or cash equal to the excess of the market price of the common stock at the
exercise date over the option price. SARs may be exercised in lieu of the
underlying option only when those options become exercisable. There are no
outstanding SARs as of December 31, 1995 and 1996.
Effective March 31, 1992, NYNEX established stock option plans for
associates and for management employees other than those eligible to participate
in the 1990 and 1995 Stock Option Plans ("Take Stock In NYNEX"). Employees were
granted options, with the number of options varying according to employee level,
to purchase a fixed number of shares of NYNEX common stock at the market price
of the stock on the grant date. Fifty percent of the options could be exercised
one year from the grant date, with the remaining fifty percent exercisable two
years from the grant date. These options expire ten years from the grant date.
In October 1994 and January 1996, employees were granted additional options
under these plans.
NYNEX has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement No. 123"), but applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Pro forma results, assuming NYNEX had elected to
recognize compensation costs for the 1995 Stock Option Plan and the Take Stock
in NYNEX plans based on the fair value at the grant dates for awards under those
plans, consistent with the method prescribed by Statement No. 123 are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------
1996 1995
---------------------- ----------------------
(In Millions) Pro forma As Reported Pro forma As Reported
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income (Loss) $855.4 $868.8 $(1,764.1) $(1,763.4)
- ---------------------------------------------------------------------------------------
</TABLE>
The fair value of NYNEX stock options used to compute net income is the
estimated present value at the grant date using the Black Scholes option-pricing
model with the following weighted average assumptions for 1996 and 1995:
Dividend yield of 4.66% for 1996 and 6.50% for 1995; expected volatility of
15.3% for 1996 and 1995; a risk free interest rate of 5.42% for 1996 and 7.63%
for 1995 and an expected holding period of five years for both 1996 and 1995.
15
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G TELEPHONE PLANT - NET
<TABLE>
<CAPTION>
The components of Telephone plant - net are as follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Buildings $ 1,878.0 $ 1,835.9
Telephone plant and equipment 18,163.2 17,398.4
Furniture and other equipment 143.3 130.5
Other 113.6 117.5
--------- ---------
Total depreciable telephone plant 20,298.1 19,482.3
Less: accumulated depreciation 11,472.3 10,813.6
--------- ---------
8,825.8 8,668.7
Land 70.7 71.2
Plant under construction and other 395.9 516.2
--------- ---------
Total Telephone plant-net $ 9,292.4 $ 9,256.1
========= =========
- --------------------------------------------------------------------------------
</TABLE>
The discontinued application of Statement No. 71 resulted in a net decrease
to telephone plant and equipment of $2.8 billion in 1995, primarily through an
increase in accumulated depreciation (see Note B).
H LONG-TERM DEBT
<TABLE>
<CAPTION>
Interest rates and maturities on long-term debt outstanding are as follows:
- --------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------
(In Millions) Interest Rates Maturities 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Refunding Mortgage Bonds 4-1/4% - 7-3/4% 2000-2006 $ 560.0 $ 620.0
6 % - 7-1/2% 2007-2011 425.0 425.0
Debentures 6-1/2% - 8-5/8% 2005-2017 750.0 750.0
6-7/10% - 9-3/8% 2023-2033 1,450.0 1,450.0
Notes 5-1/4 % - 8-1/5% 1998-2008 642.0 642.0
Unamortized discount-net (26.4) (28.3)
--------- ---------
3,800.6 3,858.7
Long-term capital lease obligations 52.0 54.6
--------- ---------
Total Long-term debt $ 3,852.6 $ 3,913.3
========= =========
- --------------------------------------------------------------------------------------------------------
</TABLE>
In February 1997, the Company decided to redeem its $42 million 8.20%
Thirty Year Private Placement Notes, due July 1, 2008; the Notes were redeemed
on March 5, 1997.
In 1998, $100 million of the Notes will mature.
The Company's Refunding Mortgage Bonds and the Company's Forty Year 7-7/8%
Debentures due June 15, 2017 are callable upon thirty days notice, at the option
of the Company, five years after the issue date. The Company's Forty Year 9-3/8%
Debentures due July 15, 2031, Thirty Year 7-5/8% Debentures due February 1,
2023, Thirty-Two Year 7% Debentures due August 15, 2025 and Thirty Year 7-1/4%
Debentures due February 15, 2024 are callable upon thirty days notice, at the
option of the Company, ten years after the issue date. The Company's Thirty Year
6.7% Debentures due November 1, 2023 and Forty Year 7% Debentures due December
1, 2033 are callable upon thirty days notice, at the option of the Company,
twenty years after the issue date. The Company's Twelve Year 6-1/2% Debentures
due March 1, 2005, Twenty Year 7% Debentures due May 1, 2013, Twenty Year 7%
Debentures due June 15, 2013 and Twenty-One Year 8-5/8% Debentures due November
15, 2010 are not callable.
Substantially all of the Company's assets are subject to lien under the
Company's Refunding Mortgage Bond indenture.
At December 31, 1996, the Company had $250 million of unissued, unsecured
debt securities registered with the Securities and Exchange Commission.
16
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I DEBT MATURING WITHIN ONE YEAR
<TABLE>
<CAPTION>
Debt maturing within one year and related weighted average interest rates are as follows:
- -----------------------------------------------------------------------------------------------------------------
Weighted Average
Interest Rates
- -----------------------------------------------------------------------------------------------------------------
(In Millions) December 31, December 31,
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Note payable to affiliate $ 568.4 $ 307.4 5.44% 5.93%
Long-term debt maturing within one year 60.0 55.0
Other 1.2 4.6
------- -------
Total Debt maturing within one year $ 629.6 $ 367.0
======= =======
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
$60.0 million of the Company's Refunding Mortgage Bonds, due on October 1,
1997, has been reclassified from long-term debt at December 31, 1996.
Interest expense on advances from NYNEX was $25.2, $17.0 and $16.8 million
in 1996, 1995 and 1994, respectively.
J FINANCIAL COMMITMENTS
As of December 31, 1995, the Company had deferred $188 million of revenues
($161 million under the plan approved by the 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). These 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 customers. During 1996, $43
million of the deferred revenues were recognized in connection with intraLATA
presubscription ("ILP") and other commitments that were met in 1996, and $50
million of the deferred revenues were utilized for rebates issued to customers
for not meeting service commitments in prior periods. As of December 31, 1996,
$95 million of 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 refund to customers
$13 million, plus interest of approximately $4 million, of the $27 million set
aside revenues.
The Incentive Plan establishes service quality targets with stringent
rebate provisions if the Company is unable to meet some or all of the targets.
In November 1996, the NYSPSC announced its decision that, based on service
performance results for Plan Year 1, which ended August 31, 1996, the Company
would be required to issue rebates to customers in the aggregate amount of at
least $62 million. During 1996, the Company accrued $62 million of revenues. As
of December 31, 1996, $16 million in rebates have been issued and $46 million
remained accrued. In mid-February 1997, the NYSPSC denied the Company's claim of
miscalculation of certain service performance data and ordered that additional
rebates of $10 million be rebated to customers.
In December 1995, Telesector Resources entered into purchase agreements
with various suppliers to purchase, on behalf of the Telephone Companies,
equipment and software to upgrade the network. The purchase agreements have a
term of five years with a commitment of approximately $550 million, of which
approximately $450 million remains at December 31, 1996.
In October 1996, the Telephone Companies entered into contracts with a
supplier for the deployment of digital loop fiber transport equipment for
approximately one million new fiber-optic lines. The contracts are for a fifteen
year plan with a total price not to exceed $170 million. As of December 31,
1996, no purchases had been made under these contracts.
17
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K LEASE COMMITMENTS
The Company leases certain facilities and equipment used in its
operations. Rental expense was $90.5, $90.6 and $94.7 million for 1996, 1995 and
1994, respectively.
<TABLE>
<CAPTION>
At December 31, 1996, the minimum lease commitments under noncancelable leases for the periods shown are as follows:
- ------------------------------------------------------------------------------------------------------------------------
(In Millions) Operating Capital
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 24.6 $ 11.1
1998 22.6 10.8
1999 20.0 10.8
2000 15.3 10.7
2001 13.4 10.6
Thereafter 32.1 371.1
------- ------
Total minimum lease payments $ 128.0 425.1
=======
Less: executory costs 8.5
------
Net minimum lease payments 416.6
Less: interest 361.9
------
Present value of net minimum lease payments $ 54.7
======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
L TRANSACTIONS WITH AT&T CORP.
In 1996, 1995 and 1994, AT&T Corp. ("AT&T") provided approximately 10%, 11%
and 11%, respectively, of the Company's total operating revenues, primarily
Network access revenues and Other revenues from billing and collection services
performed under contract by the Company for AT&T. In connection with such
services, the Company purchases the related receivables with recourse, up to a
contractual limit.
M TRANSACTIONS WITH AFFILIATES
The Company and other NYNEX subsidiaries receive corporate governance and
ownership services such as securities administration, investor relations,
certain tax, legal and accounting support, and human resources planning services
from NYNEX. The costs of these services are allocated to the Company and the
other NYNEX subsidiaries through intercompany billings. NYNEX performs a semi-
annual study to identify on whose behalf functions of corporate departments are
being performed. Directly charged costs apply exclusively to one subsidiary and
are charged only to that subsidiary. Directly attributable costs apply to more
than one subsidiary and are allocated based on usage, specific work plans, and
relative size (composite of employees and assets) of the applicable
subsidiaries. Indirectly attributable and unattributable costs for services
performed on behalf of all subsidiaries are allocated based on the relative size
of the subsidiaries. For 1996, 1995 and 1994, the Company recorded allocated
costs of $33.4, $31.6 and $17.9 million, respectively, in connection with these
services. The Company also participates in compensation plans utilizing NYNEX
stock.
Telesector Resources performs marketing, legal and accounting, finance,
data processing and related services and materials management services on a
centralized basis on behalf of the Telephone Companies. Prior to 1993, the costs
of these services were allocated to the Telephone Companies based on an annual
study which identified on whose behalf functions were being performed. Since
1993, costs are allocated based on identification of detailed work functions
that are approved and documented within Telesector Resources' planning and
budgeting process. Costs are directly assigned, directly attributed or
indirectly attributed based on the analysis of the work function. In 1996, 1995
and 1994, the Company recorded charges from Telesector Resources of $1.2
billion, $1.1 billion and $880.8 million, respectively, for data processing
services and materials-related charges, including both materials management
services (such as procurement support, warehousing and transportation costs) and
the Company's purchase of materials (including items charged to plant accounts).
The total materials-related charges to the Company in 1996, 1995 and 1994 were
approximately $314.9, $320.1 and
18
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$313.6 million, respectively. Telesector Resources acts as a purchasing agent
for the Company for directly shipped materials and supplies. During 1996, 1995
and 1994, total agency purchases by Telesector Resources amounted to $66.0,
$76.2 and $155.4 million, respectively. In addition, in 1996, 1995 and 1994,
approximately $13.5, $76.5 and $56.3 million, respectively, of restructuring
charges were allocated to the Company from Telesector Resources, primarily
related to its force reduction and re-engineering programs. In 1996, the
Company, New England Telephone and NYNEX transferred approximately 430, 330 and
30 employees, respectively, to Telesector Resources associated with
re-engineering the way service is delivered to customers, including operating as
a single enterprise under the "NYNEX" brand. In 1995, the Company, New England
Telephone and NYNEX transferred approximately 1,200, 930, and 170 employees,
respectively, to Telesector Resources associated with re-engineering the way
service is delivered to customers, including operating as a single enterprise
under the "NYNEX" brand.
Telesector Resources owns a one-seventh interest in Bell Communications
Research, Inc. ("Bellcore"). Bellcore furnishes technical and support services
relating to exchange telecommunications and exchange access services, a portion
of which is research and development. For 1996, 1995 and 1994, the Company
recorded charges of $40.4, $54.7 and $69.3 million, respectively, for services
provided by Bellcore.
In November 1996, NYNEX and the other regional holding companies signed
definitive agreements to sell Bellcore to Science Applications International
Corporation. The sale of Bellcore was completed in November 1997. The Company
expects to record a small gain as a result of this sale.
The Company has an agreement with Information Resources pursuant to which
Information Resources pays a fee to the Company for the use of the Company's
name in soliciting directory advertising and in publishing and distributing
directories. For 1996, 1995 and 1994, licensing fees, included in Other
revenues, amounted to $170.9, $152.8 and $146.4 million, respectively. Since
1991, Information Resources has made payments to the Company of all of
Information Resources' earnings related to publishing directories in New York in
excess of a regulated return. In 1992, the NYSPSC instituted a proceeding to
investigate the directory publishing operations of the Company and its NYNEX
affiliates ("1992 proceeding"). In 1993, an administrative law judge of the
NYSPSC issued a recommended decision urging the Company to assume the directory
publishing function itself and/or negotiate a modified agreement with
Information Resources. In February 1997, the NYSPSC approved a settlement
agreement resolving all pending issues in the NYSPSC's retrospective
investigation of the Company's transactions with affiliates (see Note O), as
well as certain portions of the 1992 proceeding. Under the settlement as
approved by the NYSPSC, Information Resources will transfer its subscriber
listings database and the management of the database to a regulated subsidiary
of NYNEX which, in turn, must provide access to all directory publishers on the
same terms. Pending review of the NYSPSC's order when issued, the Company is
unable to determine the disposition or status of the 1992 proceeding.
N TAXES OTHER THAN INCOME
<TABLE>
<CAPTION>
Taxes other than income consist of:
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross receipts $ 356.7 $ 472.8 $ 450.7
Property 264.1 262.9 274.9
Other 47.6 63.1 64.0
------- ------- -------
Total $ 668.4 $ 798.8 $ 789.6
======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O REVENUES SUBJECT TO POSSIBLE REFUND
Several state and federal regulatory matters may possibly require the
refund of 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, of which approximately $239 million was attributable to
affiliate transaction issues in the Company's 1990 intrastate rate case. In
February 1997, the NYSPSC approved the settlement agreement in that case, which
had been submitted in July 1996 by the Company, the NYSPSC Staff, the Consumer
Protection Board and the Department of Law. The settlement resolves all pending
issues related to affiliate transactions. Under the settlement as approved by
the NYSPSC, the Company will refund $87 million, which includes $4 million in
interest for 1996. The Company accrued a charge for the refund in 1995 and 1996.
The outcome of each other pending matter, as well as the time frame within which
each will be resolved, is not presently determinable.
P LITIGATION AND OTHER CONTINGENCIES
Various legal actions and regulatory proceedings are pending to which
the Company is a party. The Company has established reserves for liabilities in
connection with regulatory and legal matters which it currently deems to be
probable and estimable. The Company does not expect that the ultimate resolution
of these matters in future periods will have a material effect on the Company's
financial position, but could have a material effect on results of operations.
Q SUPPLEMENTAL CASH FLOW INFORMATION
The following information is provided in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows":
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax payments $338.4 $481.5 $355.4
Interest payments * $299.9 $293.5 $272.3
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Amounts shown are net of capitalized interest of $22.4, $26.5 and $32.8
million in 1996, 1995 and 1994, respectively.
R FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of
the Company's financial instruments at December 31, 1996 and 1995. Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," defines fair value as the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
a forced liquidation or sale.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(In Millions) December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Long-term debt:
Carrying amount $3,800.6 $3,858.7
Fair value $3,724.8 $3,972.5
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S BUSINESS RESTRUCTURING
In 1996, 1995 and 1994, $86.3, $298.2 and $541.0 million, respectively,
of pretax retirement incentive charges were recorded. These charges were
included in other operating expenses in the Consolidated Statements of Income.
These charges included amounts allocated to the Company from Telesector
Resources (see Note M).
20
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
T SHAREOWNER'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.
U SUBSEQUENT EVENT - BELL ATLANTIC - NYNEX MERGER
On August 14, 1997, Bell Atlantic and NYNEX completed a merger of equals
under a definitive merger agreement entered into on April 21, 1996 and amended
on July 2, 1996. The stockholders of each company approved the merger at special
meetings held in November 1996. Under the terms of the amended agreement, NYNEX
became a wholly owned subsidiary of Bell Atlantic. The merger has been accounted
for as a pooling of interests. NYNEX stockholders received 0.768 of a share of
Bell Atlantic common stock for each share of NYNEX common stock. In addition,
options previously issued under the NYNEX stock option plans have been converted
into options under the Bell Atlantic stock option plans.
As a result of conforming the accounting methodologies of Bell Atlantic
and NYNEX, the Company decreased Reinvested Earnings by a net $1,025.7 million
primarily for the immediate recognition of the transition benefit obligation for
postretirement benefits other than pensions in accordance with Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" as if the merger had occurred as of
the beginning of the earliest period presented. Additionally, as a result of the
decrease in Reinvested Earnings caused by conforming the accounting
methodologies, $304.1 million in 1994 and $180.5 million in 1995 (prior to June
21, 1995 -- see Note T) was transferred out of Additional Paid-in Capital to pay
dividends. In its historical financial statements, the Company had amortized the
transition benefit obligation over a twenty year period. As a result of the
conforming accounting adjustments, the Company's net income increased by $38.8
million and $19.5 million for the years ended December 31, 1996 and 1994, and
net loss decreased by $27.7 million for the year ended December 31, 1995.
21
<PAGE>
New York Telephone Company
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1997 1996
----------- ---------
<S> <C> <C>
OPERATING REVENUES (including $43.6 and $21.0 from affiliates).............. $ 1,913.4 $ 1,917.8
--------- ---------
OPERATING EXPENSES
Employee costs, including benefits and taxes .......................... 634.7 562.2
Depreciation and amortization.......................................... 325.7 346.1
Taxes other than income................................................ 175.4 155.8
Other (including $393.6 and $312.2 to affiliates)...................... 485.4 631.1
--------- ---------
1,621.2 1,695.2
--------- ---------
OPERATING INCOME............................................................ 292.2 222.6
OTHER INCOME, NET (including $2.9 and $5.5 from affiliates).............. 1.8 6.0
INTEREST EXPENSE (including $9.5 and $4.5 to affiliates).................... 106.9 70.1
--------- ---------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle ................... 187.1 158.5
PROVISION FOR INCOME TAXES ................................................. 63.4 50.3
--------- ---------
Income Before Cumulative Effect of Change
in Accounting Principle ............................................... 123.7 108.2
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax ...................................... --- 55.7
--------- ---------
NET INCOME.................................................................. $ 123.7 $ 163.9
========= =========
REINVESTED EARNINGS (ACCUMULATED DEFICIT)
At beginning of period ................................................ $ (894.5) $(1,763.3)
Add: net income....................................................... 123.7 163.9
Deduct: dividends...................................................... --- ---
--------- ---------
At end of period ...................................................... $ (770.8) $(1,599.4)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
New York Telephone Company
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- ------------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $85.8, $102.6,
$129.4 and $123.6 from affiliates)..................... $ 2,095.1 $ 2,069.5 $ 4,008.5 $ 3,987.3
--------- --------- --------- ---------
OPERATING EXPENSES
Employee costs, including benefits and taxes .......... 587.0 562.7 1,221.7 1,124.9
Depreciation and amortization.......................... 309.4 337.6 635.1 683.7
Taxes other than income................................ 173.0 171.9 348.4 327.7
Other (including $344.2, $340.2, $737.8 and
$652.4 to affiliates)............................... 599.1 569.8 1,084.5 1,200.9
--------- --------- --------- ---------
1,668.5 1,642.0 3,289.7 3,337.2
--------- --------- --------- ---------
OPERATING INCOME............................................ 426.6 427.5 718.8 650.1
OTHER INCOME, NET (including $5.5, $5.5, $8.4 and
$11.0 from affiliates).................................. 5.4 5.2 7.2 11.2
INTEREST EXPENSE (including $9.9, $5.3, $19.4 and
$9.8 to affiliates)..................................... 68.6 72.2 175.5 142.3
--------- --------- --------- ---------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle ... 363.4 360.5 550.5 519.0
PROVISION FOR INCOME TAXES ................................. 123.8 121.5 187.2 171.8
--------- --------- --------- ---------
Income Before Cumulative Effect of Change
in Accounting Principle ............................... 239.6 239.0 363.3 347.2
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax ...................... --- --- --- 55.7
--------- --------- --------- ---------
NET INCOME.................................................. $ 239.6 $ 239.0 $ 363.3 $ 402.9
========= ========= ========= =========
REINVESTED EARNINGS (ACCUMULATED DEFICIT)
At beginning of period ................................ $ (770.8) (1,599.4) $ (894.5) $(1,763.3)
Add: net income....................................... 239.6 239.0 363.3 402.9
Deduct: dividends...................................... --- --- --- ---
--------- --------- --------- ---------
At end of period ...................................... $ (531.2) $(1,360.4) $ (531.2) $(1,360.4)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
New York Telephone Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash ................................................................ $ 21.6 $ 42.8
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $163.1 and $158.6........................ 1,530.5 1,509.1
Affiliates ..................................................... 131.6 76.0
Material and supplies ............................................... 149.3 129.3
Prepaid expenses .................................................... 115.3 165.1
Deferred income taxes ............................................... .4 .4
Other ............................................................... 68.1 101.5
----------- -----------
2,016.8 2,024.2
----------- -----------
PLANT, PROPERTY AND EQUIPMENT ....................................... 21,354.7 21,033.0
Less accumulated depreciation ....................................... 11,978.4 11,752.4
----------- -----------
9,376.3 9,280.6
----------- -----------
OTHER ASSETS ........................................................ 778.7 801.2
----------- -----------
TOTAL ASSETS ........................................................ $ 12,171.8 $ 12,106.0
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
New York Telephone Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate................................... $ 788.4 $ 780.6
Other ...................................................... 61.2 61.2
Accounts payable and accrued liabilities:
Affiliates ................................................. 1,125.4 1,110.8
Other ...................................................... 924.8 831.5
Other liabilities ............................................... 406.1 452.8
---------- ----------
3,305.9 3,236.9
---------- ----------
LONG-TERM DEBT................................................... 3,810.4 3,810.5
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS .................................... 3,133.3 3,119.4
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ........................................... 16.9 17.2
Unamortized investment tax credits .............................. 98.3 102.5
Other ........................................................... 142.8 151.2
---------- ----------
258.0 270.9
---------- ----------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value...................... 1.0 1.0
Additional paid in capital ...................................... 2,194.4 2,438.1
Accumulated deficit ............................................. (531.2) (770.8)
---------- ----------
1,664.2 1,668.3
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT ................... $ 12,171.8 $ 12,106.0
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
New York Telephone Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
For the six months ended For the three months ended
------------------------ --------------------------
June 30, June 30, March 31, March 31,
1997 1996 1997 1996
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... $ 960.0 $ 674.0 $ 374.1 $ 465.2
--------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment ................... (646.6) (488.8) (282.1) (201.4)
Other, net ................................................... (22.8) (20.1) (8.6) (12.7)
--------- -------- -------- ---------
Net cash used in investing activities ........................ (669.4) (508.9) (290.7) (214.1)
--------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and
capital lease obligations ............................... (43.3) (58.5) (42.6) (1.7)
Net change in note payable to affiliate ...................... 220.0 333.3 212.2 52.3
Dividends paid ............................................... (435.3) (372.1) (191.6) (180.5)
Net change in outstanding checks drawn
on controlled disbursement accounts ..................... (33.2) (83.2) (41.4) (115.1)
--------- -------- -------- ---------
Net cash used in financing activities ........................ (291.8) (180.5) (63.4) (245.0)
--------- -------- -------- ---------
NET CHANGE IN CASH ........................................... (1.2) (15.4) 20.0 6.1
CASH, BEGINNING OF PERIOD .................................... 22.8 39.9 22.8 39.9
--------- -------- -------- ---------
CASH, END OF PERIOD .......................................... $ 21.6 $ 24.5 $ 42.8 $ 46.0
========= ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
based upon Securities and Exchange Commission rules that permit reduced
disclosure for interim periods. These financial statements include certain
reclassifications in presentation and certain retroactive adjustments to conform
accounting methodologies as a result of the merger of Bell Atlantic Corporation
and NYNEX Corporation on August 14, 1997. These financial statements reflect all
adjustments (consisting of only normal recurring adjustments) which are
necessary for a fair presentation of results of operations and financial
position for the interim periods shown. The results for the interim periods are
not necessarily indicative of results for the full year. For a more complete
discussion of significant accounting policies and retroactive adjustments, and
certain other information, refer to the financial statements for the year ended
December 31, 1996 included in this report.
2. Litigation and Other Contingencies
Various legal actions and regulatory proceedings are pending to which the
Company is a party. The Company has established reserves for liabilities in
connection with regulatory and legal matters which it currently deems to be
probable and estimable. The Company does not expect that the ultimate resolution
of these matters in future periods will have a material effect on the Company's
financial position, but it could have a material effect on results of
operations.
27
<PAGE>
New York Telephone Company
Item 7. Financial Statements and Exhibits
---------------------------------
(c) Exhibits.
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
28
<PAGE>
New York Telephone Company
SIGNATURE
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 hereunto duly authorized.
NEW YORK TELEPHONE COMPANY
By: /s/ Edwin F. Hall
--------------------------
Edwin F. Hall
Controller
Date: January 12, 1998
29
<PAGE>
Exhibit 12
New York Telephone Company
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Years Ended December 31,
Months Ended ----------------------------------------------------------
Sept. 30, 1997 1996* 1995* 1994* 1993* 1992*
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income before provision for income taxes,
extraordinary item, and cumulative effect
of changes in accounting principles.......... $ 441.9 $1,215.6 $ 770.0 $ 515.4 $ 120.2 $ 1,199.2
Interest expense, including interest on
capital lease obligations.................... 252.7 288.5 306.8 314.4 348.6 362.9
Portion of rent expense representative of the
interest factor.............................. 26.8 31.5 32.2 33.3 37.6 40.3
-------- -------- -------- -------- -------- ----------
Earnings, as adjusted.......................... $ 721.4 $1,535.6 $1,109.0 $ 863.1 $ 506.4 $ 1,602.4
======== ======== ======== ======== ======== ==========
Fixed charges:
Interest expense, including interest on
capital lease obligations.................... $ 252.7 $ 288.5 $ 306.8 $ 314.4 $ 348.6 $ 362.9
Portion of rent expense representative of
the interest factor.......................... 26.8 31.5 32.2 33.3 37.6 40.3
Interest capitalized on construction........... 16.5 22.4 -- -- -- --
-------- -------- -------- -------- -------- ----------
Fixed Charges.................................. $ 296.0 $ 342.4 $ 339.0 $ 347.7 $ 386.2 $ 403.2
======== ======== ======== ======== ======== ==========
Ratio of Earnings to Fixed Charges............. 2.44 4.48 3.27 2.48 1.31 3.97
======== ======== ======== ======== ======== ==========
</TABLE>
For the purpose of this ratio: (i) earnings have been calculated by adding
interest expense and the estimated interest portion of rentals to income before
the provision for income taxes, extraordinary item and cumulative effect of
change in accounting principle; and (ii) fixed charges are comprised of interest
expense, the estimated interest portion of rentals and interest capitalized on
construction.
* Revised to reflect certain reclassifications in presentation and certain
retroactive adjustments to conform the accounting methodologies of Bell Atlantic
and NYNEX as a result of the merger.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
New York Telephone Company on Form S-3 (File No. 33-50615) of our report dated
February 7, 1997, except as to the information presented in Note U, for which
the date is August 14, 1997, on our audits of the consolidated financial
statements of New York Telephone Company as of December 31, 1996 and 1995, and
for the years ended December 31, 1996, 1995, and 1994, which report is included
in this Current Report on Form 8-K.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
January 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 1,722
<ALLOWANCES> 162
<INVENTORY> 111
<CURRENT-ASSETS> 1,891
<PP&E> 20,764
<DEPRECIATION> 11,472
<TOTAL-ASSETS> 12,015
<CURRENT-LIABILITIES> 3,018
<BONDS> 3,853
0
0
<COMMON> 1
<OTHER-SE> 1,787
<TOTAL-LIABILITY-AND-EQUITY> 12,015
<SALES> 0
<TOTAL-REVENUES> 8,023
<CGS> 0
<TOTAL-COSTS> 6,542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289
<INCOME-PRETAX> 1,216
<INCOME-TAX> 403
<INCOME-CONTINUING> 813
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 56
<NET-INCOME> 869
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
