<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(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, 1998
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
A New York Corporation I.R.S. Employer Identification No. 13 - 5275510
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
---------------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC 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 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>
New York Telephone Company
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $125.8, $106.4,
$162.1 and $143.0 from affiliates)................... $2,151.9 $2,095.1 $4,163.7 $4,008.5
-------- -------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes......... 570.3 587.0 1,110.9 1,221.7
Depreciation and amortization........................ 351.1 309.4 697.9 635.1
Taxes other than income.............................. 181.9 173.0 357.4 348.4
Other (including $321.2, $350.4,
$629.4 and $747.3 to affiliates)................... 584.5 599.1 1,152.8 1,084.5
-------- -------- -------- --------
1,687.8 1,668.5 3,319.0 3,289.7
-------- -------- -------- --------
OPERATING INCOME....................................... 464.1 426.6 844.7 718.8
OTHER INCOME, NET (including $5.5, $5.5,
$11.3 and $8.4 from affiliates)................... 8.9 5.4 14.1 7.2
INTEREST EXPENSE (including $7.5, $9.9,
$21.3 and $19.4 to affiliate)........................ 109.1 68.6 189.5 175.5
-------- -------- -------- --------
Income Before Provision for Income Taxes
and Extraordinary Item.............................. 363.9 363.4 669.3 550.5
PROVISION FOR INCOME TAXES............................. 119.9 123.8 223.3 187.2
-------- -------- -------- --------
Income Before Extraordinary Item....................... 244.0 239.6 446.0 363.3
Extraordinary Item
Early extinguishment of debt, net of tax............ (6.0) --- (7.5) ---
-------- -------- -------- --------
NET INCOME............................................. $ 238.0 $ 239.6 $ 438.5 $ 363.3
======== ======== ======== ========
ACCUMULATED DEFICIT
At beginning of period............................... $ (264.1) $ (770.8) $ (464.6) $ (894.5)
Add: net income..................................... 238.0 239.6 438.5 363.3
-------- -------- -------- --------
At end of period..................................... $ (26.1) $ (531.2) $ (26.1) $ (531.2)
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
New York Telephone Company
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash........................................... $ 68.0 $ 44.3
Short-term investments......................... 155.5 310.9
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $188.2 and $184.9........ 1,531.5 1,542.6
Affiliates................................... 168.1 114.5
Material and supplies.......................... 144.7 139.3
Prepaid expenses............................... 102.6 234.2
Deferred income taxes.......................... --- .4
Other.......................................... 90.4 75.9
--------- ---------
2,260.8 2,462.1
--------- ---------
PLANT, PROPERTY AND EQUIPMENT.................. 21,969.1 21,442.5
Less accumulated depreciation.................. 12,436.8 11,967.5
--------- ---------
9,532.3 9,475.0
--------- ---------
OTHER ASSETS................................... 842.8 710.9
--------- ---------
TOTAL ASSETS................................... $12,635.9 $12,648.0
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
New York Telephone Company
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate.................... $ 1,004.2 $ 1,451.4
Other........................................ 100.5 100.7
Accounts payable and accrued liabilities:
Affiliates................................... 1,147.1 915.9
Other........................................ 1,320.5 1,075.5
Other liabilities.............................. 252.0 243.7
--------- ---------
3,824.3 3,787.2
--------- ---------
LONG-TERM DEBT................................. 3,757.4 3,710.0
--------- ---------
EMPLOYEE BENEFIT OBLIGATIONS................... 3,109.3 3,171.6
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.......................... 14.5 17.3
Unamortized investment tax credits............. 88.5 93.6
Other.......................................... 119.1 137.5
--------- ---------
222.1 248.4
--------- ---------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value.... 1.0 1.0
Additional paid-in capital..................... 1,747.9 2,194.4
Accumulated deficit............................ (26.1) (464.6)
--------- ---------
1,722.8 1,730.8
--------- ---------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $12,635.9 $12,648.0
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
New York Telephone Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
Six months ended
June 30,
------------------------
1998 1997
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......... $ 1,358.3 $ 964.8
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments............... 155.4 ---
Additions to plant, property and equipment......... (726.7) (651.4)
Other, net......................................... (28.0) (22.8)
---------- ----------
Net cash used in investing activities.............. (599.3) (674.2)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings........................... 597.0 ---
Early extinguishment of debt....................... (550.0) ---
Principal repayments of borrowings and capital
lease obligations................................. (1.3) (43.3)
Net change in note payable to affiliate............ (447.2) 220.0
Distributions of additional paid-in capital........ (345.1) (435.3)
Net change in outstanding checks drawn
on controlled disbursement accounts.............. 11.3 (33.2)
---------- ----------
Net cash used in financing activities.............. (735.3) (291.8)
---------- ----------
NET CHANGE IN CASH................................. 23.7 (1.2)
CASH, BEGINNING OF PERIOD.......................... 44.3 22.8
---------- ----------
CASH, END OF PERIOD................................ $ 68.0 $ 21.6
========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
New York Telephone Company
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
New York Telephone Company and its wholly owned subsidiary, Empire City
Subway Company (Limited) (jointly referred to as the Company) are wholly owned
subsidiaries of NYNEX Corporation (NYNEX), which is a wholly owned subsidiary of
Bell Atlantic Corporation (Bell Atlantic). The accompanying unaudited condensed
consolidated financial statements have been prepared based upon Securities and
Exchange Commission rules that permit reduced disclosure for interim periods.
These financial statements reflect all adjustments which are necessary for a
fair presentation of results of operations and financial position for the
interim periods shown including normal recurring accruals. 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 certain
other information, refer to the financial statements included in the Company's
1997 Form 10-K.
The Company has reclassified certain amounts from prior year's data to
conform with the 1998 presentation.
2. Debt
In the first half of 1998, the Company recorded extraordinary charges
associated with early extinguishments of long-term debt. In January 1998, the
Company issued $250.0 million of 6.125% debentures due on January 15, 2010. The
proceeds of this issuance were used in February 1998 to redeem $200.0 million of
7.75% refunding mortgage bonds due in 2006.
In April 1998, the Company issued $250.0 million of 6.0% debentures due on
April 15, 2008 and $100.0 million of 6.5% debentures due on April 15, 2028. The
proceeds of these issuances were used in May 1998 to redeem $200.0 million of
7.875% debentures due in 2017 and $150.0 million of 7.5% refunding mortgage
bonds due in 2009. In total, these redemptions resulted in extraordinary
charges that reduced net income by $7.5 million (net of an income tax benefit of
$4.0 million).
3. Shareowner's Investment
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
(Dollars in Millions) Stock Capital Deficit
-------------------------------------------------------------- ------ ---------- -----------
<S> <C> <C> <C>
Balance at December 31, 1997.................................. $ 1.0 $2,194.4 $ (464.6)
Net income.................................................... 438.5
Distributions of additional paid-in capital to
NYNEX..................................................... 446.5
------ -------- -----------
Balance at June 30, 1998...................................... $ 1.0 $1,747.9 $ (26.1)
====== ======== ===========
</TABLE>
On June 23, 1998, the Company declared a dividend in the amount of $101.4
million from Additional Paid-in Capital. The dividend was paid to NYNEX on
August 3, 1998.
4. Financial Commitments
As of June 30, 1998, the Company had approximately $51 million of revenues
remaining deferred under a 1995 plan approved by the New York State Public
Service Commission (NYSPSC) associated with commitments for fair competition,
universal service, service quality and infrastructure improvements (the
Incentive Plan). 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.
The Incentive Plan also established annual service quality targets with
stringent rebate provisions if the Company is unable to meet some or all of the
targets. The Company accrued a liability of approximately $62 million of
revenues in 1996 based on service performance results for 1996 (Plan Year 1),
which ended August 31, 1996. The Company has rebated all of these amounts to
customers except for $1 million, which remained accrued at June 30, 1998. In
connection with service performance results for 1997 (Plan Year 2), which ended
on August 31, 1997, the Company accrued a liability of approximately $6 million.
The Company
5
<PAGE>
New York Telephone Company
has also accrued a liability of approximately $14 million related to service
performance results for 1998 (Plan Year 3), which runs through August 31, 1998.
None of the amounts accrued for Plan Year 3 have been rebated to customers.
5. Revenues Subject To Possible Refund
Several federal regulatory matters may possibly require the Company to refund
a portion of the revenues collected in the current and prior periods. As of
June 30, 1998, the aggregate amount of revenues estimated to be subject to
possible refund was approximately $55 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. 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.
7. Recent Accounting Pronouncement
Costs of Computer Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," (SOP 98-1). SOP 98-1 provides, among
other things, guidance for determining whether computer software is for internal
use and when the cost related to such software should be expensed as incurred or
capitalized and amortized. SOP 98-1 is required to be adopted no later than
January 1, 1999.
The Company currently capitalizes initial right-to-use fees for central
office switching equipment, including initial operating system and initial
application software costs. For noncentral 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 as incurred. The Company is currently evaluating the
provisions of SOP 98-1 and has not yet quantified the effect at this time. The
adoption of SOP 98-1 is expected to result in an increase in earnings in the
year of adoption due to the prospective capitalization of costs which were
previously expensed.
8. Proposed Bell Atlantic - GTE Merger
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
It is expected that the merger will qualify as a "pooling of interests,"
which means for accounting and financial reporting purposes the companies will
be treated as if they had always been combined. The completion of the merger is
subject to a number of conditions, including certain regulatory approvals,
receipt of opinions that the merger will be tax free, and the approval of the
shareholders of both Bell Atlantic and GTE. The companies expect to close the
merger in the second half of 1999.
6
<PAGE>
New York Telephone Company
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income of $438.5 million for the six month period
ended June 30, 1998, compared to net income of $363.3 million for the same
period in 1997.
In the first half of 1998, the Company recorded extraordinary charges
associated with the early extinguishments of long-term debt. These charges
reduced net income by $7.5 million (net of an income tax benefit of $4.0
million) (see Note 2 to the condensed consolidated financial statements).
The Company incurred pre-tax costs associated with its retirement incentive
program totaling $27.0 million for the six month period ended June 30, 1998,
compared to $214.6 million for the same period in 1997.
The retirement incentive costs for 1998 and 1997 include amounts charged to
the Company by Telesector Resources Group, Inc. (Telesector Resources), an
affiliate, for an allocated portion of the employees who left Telesector
Resources under the retirement incentive program. In 1998, the retirement
incentive costs allocated to the Company by Telesector Resources were $6.2
million, compared to $82.0 million in 1997. For additional information about
the Company's retirement incentive program, see "Retirement Incentives" on page
11.
These and other items affecting the comparison of the Company's results of
operations for the six month periods ended June 30, 1998 and 1997 are discussed
in the following sections. This Management's Discussion and Analysis should
also be read in conjunction with the Company's 1997 Annual Report on Form 10-K.
OPERATING REVENUE STATISTICS
- ----------------------------
1998 1997 % Change
- --------------------------------------------------------------------------------
At June 30
- ----------
Access Lines in Service (in thousands)*
Residence............................. 7,418 7,235 2.5%
Business.............................. 4,083 3,851 6.0
Public................................ 166 165 .6
------ ------
11,667 11,251 3.7
====== ======
Six Month Period Ended June 30,
- -------------------------------
Access Minutes of Use (in millions)...... 22,884 21,804 5.0
====== ======
* 1997 reflects a restatement of access lines in service to include Primary Rate
ISDN (Integrated Services Digital Network) channels to conform with the 1998
presentation.
7
<PAGE>
New York Telephone Company
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Six Month Period Ended June 30 1998 1997
- --------------------------------------------------------------------------------
Local services...................... $2,512.9 $2,353.8
Network access services............. 1,191.8 1,180.3
Long distance services.............. 119.1 130.4
Ancillary services.................. 201.1 217.5
Directory and information services.. 138.8 126.5
-------- --------
Total............................... $4,163.7 $4,008.5
======== ========
LOCAL SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $159.1 6.8%
- --------------------------------------------------------------------------------
Local services revenues are earned by the Company from the provision of local
exchange, local private line, public telephone (pay phone) and value-added
services. Value-added services are a family of services which expand the
utilization of the network. These services include products such as Caller ID,
Call Waiting and Return Call.
The increase in local services revenues was principally due to a prior year
refund to customers of approximately $83 million resulting from the settlement
of a regulatory issue. The revenue impact of this refund was offset entirely by
a corresponding increase in Other Operating Expenses due to the prior year
reversal of an accrual. The Company also paid service rebates to customers
totaling $22 million in the first quarter of 1997, which negatively affected
local services revenues in that period. The revenue impact of these rebates was
offset entirely by the reversal of a prior year accrual, which was recorded in
Ancillary Services Revenues.
Higher usage of the Company's network facilities also contributed to the
increase in local services revenues in the first six months of 1998. This
growth was generated by an increase in access lines in service of 3.7% from June
30, 1997. Access line growth reflects primarily higher demand for Centrex
services and an increase in additional residential lines. The Company also
recognized higher revenues from value-added services due to higher customer
demand and usage. Revenue growth was partially offset by the elimination of
business Touch-Tone service charges in September 1997.
NETWORK ACCESS SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $11.5 1.0%
- --------------------------------------------------------------------------------
Network access services revenues are earned from carriers for their use of
the Company's local exchange facilities in providing usage services to their
customers. In addition, end-user subscribers pay flat rate access fees to
connect to the Company's network.
Network access services revenues grew in the first half of 1998 primarily as
a result of higher customer demand as reflected by growth in access minutes of
use of 5.0% over the same period in 1997. Volume growth was boosted by the
expansion of the business market, particularly for high-capacity services.
Demand for special access services grew as Internet service providers and other
high-capacity users increased their utilization of the Company's network.
Growth in access revenues also reflects higher network usage by alternative
providers of intraLATA toll services. In addition, higher end-user revenues
attributable to an increase in access lines in service contributed to revenue
growth in 1998. This volume-related growth was substantially offset by net
price reductions mandated by federal and state price cap and incentive plans.
Effective July 1, 1998, the Company implemented price decreases of
approximately $76 million on an annual basis for interstate services, in
connection with the Federal Communications Commission's (FCC) Price Cap Plan.
The rates included in
8
<PAGE>
New York Telephone Company
this 1998 filing will be in effect through June 1999. The July 1, 1998 rates
include amounts necessary to recover the Company's contribution to the FCC's new
universal service fund. The FCC has created a multi-billion dollar interstate
fund to link schools and libraries to the Internet and to subsidize low-income
consumers and rural health care providers. Under the FCC's rules, all providers
of interstate telecommunications services must contribute to the fund. The
Company's contributions to the universal service fund are included in Other
Operating Expenses.
In April 1998, the New York State Public Service Commission ordered the
Company to reduce access charges on intrastate calls by $94.2 million annually,
beginning in the third quarter of 1998. This reduction is, in part, an
acceleration of access revenue reductions expected under the New York
Performance Regulation Plan and, in addition, will be partially offset by
increased revenues from the federal universal service fund.
LONG DISTANCE SERVICES REVENUES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(11.3) (8.7)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made outside
a customer's local calling area, but within the same service area of the Company
(intraLATA toll). Other long distance services that the Company provides
include 800 services, Wide Area Telephone Service (WATS), and corridor services
(between LATAs in New York City and northern New Jersey).
Long distance services revenues declined in the first half of 1998
principally due to increased competition for intraLATA toll services.
Competition for intraLATA toll services continued to increase due to the effects
of presubscription, which was introduced in 1996. Presubscription permits
customers to use an alternative provider of their choice for intraLATA toll
calls without dialing a special access code when placing a call. The adverse
impact on revenues as a result of presubscription was partially mitigated by
increased network access services revenues for usage of the Company's network
by these alternative providers.
ANCILLARY SERVICES REVENUES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(16.4) (7.5)%
- --------------------------------------------------------------------------------
The Company provides ancillary services which include billing and collection
services provided to long distance carriers and affiliates, customer premises
equipment (CPE) services, facilities rental services for affiliates and
nonaffiliates, sales of software to nonaffiliates, usage of separately priced
(unbundled) components of its network, and voice messaging services. Amounts
recognized in connection with obligations and commitments for regulatory
matters, if any, are also included in this revenue category.
Ancillary services revenues decreased in 1998 primarily due to the effect of
prior year reversals of accruals for service rebate obligations.
This decrease in ancillary services revenues was partially offset by a
combination of higher revenues received from local exchange carriers for the
usage of unbundled components of the Company's network, sales of software to
nonaffiliates and higher revenues related to increased demand by long distance
carriers for billing and collection services.
9
<PAGE>
New York Telephone Company
DIRECTORY AND INFORMATION SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $12.3 9.7%
- --------------------------------------------------------------------------------
Directory and information services revenues consist of payments from an
affiliate, Bell Atlantic Yellow Pages Company (Yellow Pages), for earnings
related to publishing directories in New York based on a regulated rate of
return and fees paid by Yellow Pages for the use of the Company's name in
soliciting directory advertising and in publishing and distributing directories.
The increase in directory and information services revenues in the first half
of 1998 was principally due to higher payments from Yellow Pages. Yellow Pages'
earnings related to publishing directories were positively impacted by lower
retirement incentive costs and a reduction in other operating expenses,
resulting in the increase in payments to the Company.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Six Month Period Ended June 30 1998 1997
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes.. $1,110.9 $1,221.7
Depreciation and amortization................. 697.9 635.1
Taxes other than income....................... 357.4 348.4
Other operating expenses...................... 1,152.8 1,084.5
-------- --------
Total......................................... $3,319.0 $3,289.7
======== ========
EMPLOYEE COSTS
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(110.8) (9.1)%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by the Company. Similar costs
incurred by employees of Telesector Resources, who provide centralized services
on a contractual basis, are allocated to the Company and are included in Other
Operating Expenses.
Employee costs were lower in the first six months of 1998 principally as a
result of a decline in costs incurred in connection with the Company's
retirement incentive program. (For a further discussion of retirement
incentives, see below.) The Company also incurred lower pension and benefit
costs in 1998 because of a number of factors, including changes in actuarial
assumptions, favorable pension plan investment returns, lower than expected
medical claims and plan amendments including the conversion of a pension plan to
a cash balance plan. Effective January 1, 1998, Bell Atlantic established common
pension and savings plan benefit provisions for all management employees. As a
result, all NYNEX Corporation (NYNEX) management employees, including management
employees of the Company, receive the same benefit levels as previously given
under Bell Atlantic management benefit plans. This change included the
conversion of the NYNEX management pension plan to a cash balance plan.
Pension and benefit cost reductions were partially offset by annual salary
and wage increases for management and associate employees and by higher overtime
pay attributable to the unusually severe winter storms in the first quarter of
1998.
Associate employee wages and pension and other benefits are determined under
contracts with unions representing associate employees of the Company. On August
11, 1998, the Company and the Communications Workers of America (CWA) reached a
tentative agreement on a new 2-year contract. The contract provides for wage
increases of up to 3.8 percent effective August 9, 1998 and up to 4 percent
effective August 8, 1999. Pensions will increase by 20 percent. In addition,
certain union-represented employees will receive a $500 cash payment in
September 1998 and an additional $400 cash payment in August 1999, and employees
in certain bargaining units will receive lump sum payments of $700 each in 2000
and 2001 if customer care performance standards are achieved. The new contract
also includes revised terms of the retirement incentive program, other benefit
improvements and certain employment security provisions.
10
<PAGE>
New York Telephone Company
On August 12, 1998, the Company concluded a tentative agreement on a new
2-year contract with the International Brotherhood of Electrical Workers (IBEW).
The IBEW contract provides for wage increases of up to 3.8 percent effective
August 9, 1998, and up to 4 percent effective August 8, 1999. The contract also
includes cash payments, improved pension and other benefits and certain
employment security provisions.
The labor agreements with the CWA and IBEW are subject to ratification by the
union membership, which is expected within the next 30 days.
Retirement Incentives
The Company had previously disclosed that it expected the total number of
employees who would elect to leave under the program through August 1998 would
be in the range of 11,800 to 12,400 employees. The total number of employees
includes the Company's allocated portion of employees of Telesector Resources.
In the first half of 1998, the Company recognized a pre-tax charge of
approximately $27 million as a result of 346 associate employees electing to
leave the Company under the retirement incentive program. Since the inception
of the retirement incentive program in 1993, the Company has incurred additional
costs totaling approximately $1,205 million (pre-tax) as of June 30, 1998. As of
the first half 1998, the number of employees who have left the business under
the retirement incentive program totaled 11,308, consisting of 5,475 management
and 5,833 associate employees.
The retirement incentive program covering management employees ended on March
31, 1997 and the program covering associate employees, which was scheduled to
end on August 8, 1998, was revised under the terms of the tentative agreements
described above. Under the revised retirement incentive program, eligible
associate employees are being offered an opportunity to elect, during a 30-day
period in August-September 1998, to retire on one of several alternate dates in
the last four months of 1998 and calendar year 1999. The election to retire
under the program will be irrevocable, except in the event of extraordinary
personal circumstances. After the end of the election period, Bell Atlantic will
tabulate the acceptances and announce the additional costs to be incurred as a
charge later this year. The number of applicants, and the resulting additional
cost, for the revised incentive program cannot be confidently estimated in
advance, particularly because the tentative agreements provide for improvements
to the terms of the ongoing pension plan which could incent employees to defer
retirement and continue their employment beyond the year 1999. Specifically, a
15 percent pension formula increase applies to retirements after July 1, 2000,
and, any of the eligible associates who remain employed through at least January
1, 2001, will be entitled to select either the same pension that they would have
received under the revised retirement incentive program, or their pension under
the ongoing plan.
DEPRECIATION AND AMORTIZATION
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $62.8 9.9%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first six months of
1998 over the same period in 1997 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The effect
of higher rates of depreciation and amortization and the effect of a reserve
adjustment recorded in 1997 also contributed to the increase in expense.
TAXES OTHER THAN INCOME
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $9.0 2.6%
- --------------------------------------------------------------------------------
Taxes other than income consist of taxes for gross receipts, property,
capital stock and business licenses.
The increase in taxes other than income was primarily attributable to higher
gross receipts taxes resulting from an increase in the revenue tax base. Also
contributing to the increase, but to a lesser degree, were higher property and
capital stock taxes. These increases were partially offset by the effect of the
settlement of a New York state sales tax audit in the first quarter of 1997,
which had been accrued for in Other Operating Expenses.
11
<PAGE>
New York Telephone Company
OTHER OPERATING EXPENSES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $68.3 6.3%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from Telesector Resources, rent, network software
costs, the provision for uncollectible accounts receivable, and other costs.
The increase in other operating expenses was largely attributable to the
prior year reversal of accruals associated with the resolution of certain
regulatory and tax contingencies. The actual settlements of these matters in
1997 were recorded in Local Service Revenues, Taxes Other Than Income and
Interest Expense. The Company also recognized additional costs in the first six
months of 1998 as a result of its contribution to the federal universal service
fund, as described earlier. Also contributing to the increase, but to a lesser
extent, was higher interconnection charges for terminating calls on the networks
of competitive local exchange and other carriers.
These increases were partially offset by lower rent expense, lower network
software purchases and lower centralized services expenses allocated from
Telesector Resources. The decline in centralized services expenses was
primarily due to a reduction in Telesector Resources' allocated portion of
retirement incentive costs. The decline in centralized services expenses was
partially offset by transition and integration costs allocated to the Company in
connection with the merger of Bell Atlantic and NYNEX.
OTHER INCOME, NET
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $6.9 95.8%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to additional interest
income primarily resulting from the purchase of short-term investments in
December 1997 to pre-fund a trust for the payment of certain employee benefits.
INTEREST EXPENSE
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Six Months $14.0 8.0%
- --------------------------------------------------------------------------------
The increase in interest expense in the first six months of 1998 was
primarily due to the recognition of interest expense in connection with the
settlement of tax-related matters. Higher levels of average advances from NYNEX
also generated additional interest cost in the first six months of 1998. These
increases were partially offset by the effect of the settlements of a New York
state sales tax audit and various regulatory issues recorded in the first
quarter of 1997.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30
- --------------------------------------------------------------------------------
1998 33.4%
- --------------------------------------------------------------------------------
1997 34.0%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes and extraordinary
item. The Company's effective income tax rate was lower in the first six months
of 1998 principally as a result of adjustments to deferred income tax balances
resulting from a change in the New York State income tax rate and higher tax
credits recorded in 1998.
12
<PAGE>
New York Telephone Company
FINANCIAL CONDITION
- -------------------
The Company uses the net cash generated from operations and from external
financing to fund capital expenditures for network expansion and modernization,
and to pay dividends. While current liabilities exceeded current assets at both
June 30, 1998 and 1997 and December 31, 1997, the Company's sources of funds,
primarily from operations and, to the extent necessary, from readily available
financing arrangements with an affiliate, are sufficient to meet ongoing
operating requirements. Management expects that presently foreseeable capital
requirements will continue to be financed primarily through internally generated
funds. Additional long-term debt may be needed to fund development activities or
to maintain the Company's capital structure to ensure financial flexibility.
At June 30, 1998, the Company had $400.0 million remaining under a shelf
registration statement filed with the Securities and Exchange Commission for the
issuance of unsecured debt securities.
The Company's debt ratio was 73.8% as of June 30, 1998, compared to 73.7% as
of June 30, 1997 and 75.2% as of December 31, 1997.
On June 23, 1998, the Company declared a dividend in the amount of $101.4
million from Additional Paid-in Capital. The dividend was paid to NYNEX on
August 3, 1998.
13
<PAGE>
New York Telephone Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) Report on Form 8-K filed during the quarter ended June 30, 1998:
The Company filed a Current Report on Form 8-K, dated April 7,
1998, reporting on Item 7 (Financial Statements and Exhibits) in
connection with the sale of debt securities.
14
<PAGE>
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
Date: August 13, 1998 By /s/ Edwin F. Hall
-------------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 12, 1998.
15
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-TYPE> 6-MOS
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