<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 September 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 Nine months ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $6.6, $10.2,
$168.7 and $153.2 from affiliates) .................. $2,025.9 $1,942.2 $6,189.6 $5,950.7
-------- -------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes ........ 1,244.6 625.2 2,355.5 1,846.9
Depreciation and amortization ....................... 357.6 471.9 1,055.5 1,107.0
Taxes other than income ............................. 188.2 167.9 545.6 516.3
Other (including $375.3, $353.7
$1,004.7 and $1,101.0 to affiliates) ........... 641.4 711.6 1,794.2 1,796.1
-------- -------- -------- --------
2,431.8 1,976.6 5,750.8 5,266.3
-------- -------- -------- --------
OPERATING INCOME (LOSS) .................................. (405.9) (34.4) 438.8 684.4
OTHER INCOME, NET (including $7.5, $3.8,
$18.8 and $12.2 from affiliates) .................... 9.2 3.0 23.3 10.2
INTEREST EXPENSE (including $12.0, $12.4,
$33.3 and $31.8 to affiliate) ....................... 78.4 77.2 267.9 252.7
-------- -------- -------- --------
Income (Loss) Before Provision for Income Taxes
and Extraordinary Item .............................. (475.1) (108.6) 194.2 441.9
PROVISION FOR INCOME TAXES ............................... (168.9) (42.4) 54.4 144.8
-------- -------- -------- --------
Income (Loss) Before Extraordinary Item .................. (306.2) (66.2) 139.8 297.1
Extraordinary Item
Early extinguishment of debt, net of tax ............ -- -- (7.5) --
-------- -------- -------- --------
NET INCOME (LOSS) ....................................... $ (306.2) $ (66.2) $ 132.3 $ 297.1
======== ======== ======== ========
ACCUMULATED DEFICIT
At beginning of period .............................. $ (26.1) $ (531.2) $ (464.6) $ (894.5)
Add: net income .................................... (306.2) (66.2) 132.3 297.1
-------- -------- -------- --------
At end of period .................................... $ (332.3) $ (597.4) $ (332.3) $ (597.4)
======== ======== ======== ========
</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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash .............................................. $ 80.4 $ 44.3
Short-term investments ............................ 26.0 310.9
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $177.9 and $184.9 ........ 1,530.6 1,542.6
Affiliates ................................... 97.3 114.5
Material and supplies ............................. 149.9 139.3
Prepaid expenses .................................. 73.5 234.2
Deferred income taxes ............................. .4 .4
Other ............................................. 84.7 75.9
--------- ---------
2,042.8 2,462.1
--------- ---------
PLANT, PROPERTY AND EQUIPMENT ..................... 22,392.8 21,442.5
Less accumulated depreciation ..................... 12,686.0 11,967.5
--------- ---------
9,706.8 9,475.0
--------- ---------
OTHER ASSETS ...................................... 1,148.5 710.9
--------- ---------
TOTAL ASSETS ...................................... $12,898.1 $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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate ........................................ $ 1,169.1 $ 1,451.4
Other ............................................................ .5 100.7
Accounts payable and accrued liabilities:
Affiliates ....................................................... 1,163.6 915.9
Other ............................................................ 1,257.9 1,075.5
Other liabilities ..................................................... 264.3 243.7
--------- ---------
3,855.4 3,787.2
--------- ---------
LONG-TERM DEBT ........................................................ 3,757.2 3,710.0
--------- ---------
EMPLOYEE BENEFIT OBLIGATIONS .......................................... 3,747.4 3,171.6
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ................................................. 18.6 17.3
Unamortized investment tax credits .................................... 85.9 93.6
Other ................................................................. 118.4 137.5
--------- ---------
222.9 248.4
--------- ---------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value ........................... 1.0 1.0
Additional paid-in capital ............................................ 1,646.5 2,194.4
Accumulated deficit ................................................... (332.3) (464.6)
--------- ---------
1,315.2 1,730.8
--------- ---------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT ......................... $12,898.1 $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)
Nine months ended
September 30,
-------------------------
1998 1997
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... $ 1,818.1 $ 1,364.9
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments .............. 284.9 --
Additions to plant, property and equipment ........ (1,249.0) (1,090.2)
Other, net ........................................ (42.5) (40.2)
---------- ----------
Net cash used in investing activities ............. (1,006.6) (1,130.4)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings .......................... 597.0 --
Early extinguishment of debt ...................... (550.0) --
Principal repayments of borrowings and capital
lease obligations ................................ (102.0) (44.0)
Net change in note payable to affiliate ........... (282.3) 574.9
Distributions of additional paid-in capital ....... (446.5) (679.0)
Net change in outstanding checks drawn
on controlled disbursement accounts ............. 8.4 (19.8)
---------- ----------
Net cash used in financing activities ............. (775.4) (167.9)
---------- ----------
NET CHANGE IN CASH ................................ 36.1 66.6
CASH, BEGINNING OF PERIOD ......................... 44.3 22.8
---------- ----------
CASH, END OF PERIOD ............................... $ 80.4 $ 89.4
========== ==========
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 nine months of 1998, the Company recorded an extraordinary
charge that reduced net income by $7.5 million (net of an income tax benefit of
$4.0 million) associated with early extinguishments of long-term debt. These
extinguishments, and several issuances of debt, occurred at various times
throughout the nine month period. 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.
The Company established a contractual agreement in the third quarter of 1998
with an affiliated company, Bell Atlantic Network Funding Corporation (BANFC),
for the provision of short-term financing and cash management services. BANFC
issues commercial paper and obtains bank loans to fund the working capital
requirements of Bell Atlantic's network services subsidiaries, including the
Company, and invests funds in temporary investments on their behalf. The total
line of credit established was $50.0 million and at September 30, 1998, the
Company had $34.9 million of an unused line of credit with BANFC.
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 ................................................... 132.3
Distributions of additional paid-in capital to
NYNEX .................................................... 547.9
-------- -------- --------
Balance at September 30, 1998 ................................ $ 1.0 $1,646.5 $ (332.3)
======== ======== ========
</TABLE>
On September 22, 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 November 2, 1998.
5
<PAGE>
New York Telephone Company
4. Financial Commitments
As of September 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 Incentive Plan. 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 September 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, all of which has been rebated to customers. The Company accrued a
liability of approximately $14 million related to service performance results
for 1998 (Plan Year 3), which ended on August 31, 1998. In the third quarter of
1998, the Company rebated $2 million of this amount to customers and reversed
the remaining liability of $12 million. Also in the third quarter of 1998, the
Company accrued $3 million related to service performance results for Plan Year
4, which runs through August 31, 1999.
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
September 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. Retirement Incentives
In 1993, the Company recorded costs totaling $630.9 million (pre-tax) for
severance and postretirement medical benefits in connection with a force
reduction plan. Since 1994, the Company has recorded additional costs of
$1,882.4 million (pre-tax) under a related retirement incentive program through
September 30, 1998. These costs reflect 16,117 total employees who have left or
have elected to leave the business under the program, consisting of 5,475
management and 10,642 associate employees. These totals include the Company's
allocated portion of costs associated with employees of Telesector Resources
Group, Inc. (Telesector Resources).
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 August 1998 contract
agreement with union-represented (associate) employees. Under the revised
retirement incentive program, eligible associate employees were 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.
Through this revised retirement incentive program, approximately 4,800
employees have irrevocably accepted the August 1998 offer and will voluntarily
leave the business in stages by the end of 1999. As a result, the Company
recorded a pre-tax charge of $677.3 million in the third quarter of 1998 and
$704.3 million through the first nine months of 1998. These charges include the
Company's allocated portion of costs associated with employees of Telesector
Resources. This retirement offer completes the retirement incentive program for
associate employees.
As of September 30, 1998, the employee severance and postretirement medical
reserves associated with the 1993 restructuring plan were fully utilized.
7. 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.
6
<PAGE>
New York Telephone Company
8. 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 applied prospectively and
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. Bell Atlantic estimates that the
implementation of SOP 98-1 will result in a net after-tax benefit of $200
million to $250 million to its consolidated results of operations in 1999 due to
the prospective capitalization of costs which were previously expensed as
incurred. The estimated impact on the results of operations of the Company in
1999 has not yet been determined.
9. 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.
7
<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 $132.3 million for the nine month period
ended September 30, 1998, compared to net income of $297.1 million for the same
period in 1997.
In the first nine months of 1998, the Company recorded an extraordinary
charge associated with the early extinguishments of long-term debt which 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's results for 1998 and 1997 were affected by the following
special items. The special charges in both years include the Company's allocated
share of charges from Telesector Resources Group, Inc. (Telesector Resources).
. In 1998, the Company recorded pre-tax charges totaling approximately $740
million, consisting of $704 million for costs associated with its
retirement incentive program and $36 million for transition and
integration costs related to the merger of Bell Atlantic and NYNEX
Corporation (NYNEX).
. In 1997, the Company recorded pre-tax charges totaling approximately $572
million in connection with the completion of the merger of Bell Atlantic
and NYNEX in August 1997, its retirement incentive program and other
special items arising during the period. These charges included:
approximately $102 million for merger-related costs (consisting of $88
million for employee severance costs, $11 million for direct incremental
costs and $3 million for transition and integration costs); $137 million
for the write-down of obsolete fixed assets; $63 million for
contingencies associated with various regulatory and legal matters; $10
million for the cost of consolidating certain redundant real estate
properties; and $41 million for other miscellaneous expense items. Costs
associated with the Company's retirement incentive program totaled $219
million. For additional information about the Company's retirement
incentive program, see "Retirement Incentives."
Transition and integration costs consist of the Company's proportionate share
of costs associated with integrating the operations of Bell Atlantic and NYNEX.
Direct incremental costs consist of expenses associated with compensation
arrangements related to completing the merger transaction. Employee severance
costs, as recorded under SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," represent the Company's proportionate share of benefit costs for the
separation by the end of 1999 of management employees who are entitled to
benefits under pre-existing Bell Atlantic separation pay plans.
These and other items affecting the comparison of the Company's results of
operations for the nine month periods ended September 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.
8
<PAGE>
New York Telephone Company
OPERATING REVENUE STATISTICS
1998 1997 % Change
- --------------------------------------------------------------------------------
At September 30
- ---------------
Access Lines in Service (in thousands)*
Residence ............................ 7,465 7,265 2.8%
Business ............................. 4,125 3,891 6.0
Public ............................... 166 165 .6
------ ------
11,756 11,321 3.8
====== ======
Nine Month Period Ended September 30
- ------------------------------------
Access Minutes of Use (in millions)...... 34,597 32,874 5.2
====== ======
* 1997 reflects a restatement of access lines in service to include Primary Rate
ISDN (Integrated Services Digital Network) channels and other changes to conform
with the 1998 presentation.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Nine Month Period Ended September 30 1998 1997
- --------------------------------------------------------------------------------
Local services ....................... $3,794.3 $3,598.6
Network access services .............. 1,754.1 1,714.9
Long distance services ............... 180.7 194.9
Ancillary services ................... 327.2 314.3
Directory and information services ... 133.3 128.0
-------- --------
Total ................................ $6,189.6 $5,950.7
======== ========
LOCAL SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $195.7 5.4%
- --------------------------------------------------------------------------------
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 attributable to a prior year
refund to customers of approximately $83 million resulting from the settlement
of a regulatory issue. The increase in revenues was offset entirely by a
corresponding increase in Other Operating Expenses due to the effect of a 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 nine months of 1998. This
growth was generated, in part, by an increase in access lines in service of 3.8%
over the same period in 1997, and higher residence message volumes. Access line
growth primarily reflects higher demand for Centrex services and an increase in
additional residential lines.
The Company also recognized higher revenues from public telephone and value-
added services. Value added services grew principally due to higher customer
demand and usage, while the implementation of new charges to carriers resulting
from pay phone deregulation in April 1997 was the principal reason for the
improvement in public telephone services revenues. Revenue growth was partially
offset by the elimination of Touch-Tone service charges in September 1997.
9
<PAGE>
New York Telephone Company
NETWORK ACCESS SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $39.2 2.3%
- --------------------------------------------------------------------------------
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 nine months of 1998
primarily as a result of higher customer demand, reflected by growth in access
minutes of use of 5.2% 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. Higher network usage by alternative providers of intraLATA toll
services and higher end-user revenues attributable to an increase in access
lines in service also contributed to revenue growth in 1998. Volume-related
growth was partially offset by net price reductions mandated by federal and
state price cap and incentive plans.
In July 1998, the Company implemented price decreases of approximately $78
million on an annual basis for interstate services, in connection with the
Federal Communications Commission's (FCC) Price Cap Plan, compared to price
decreases of approximately $122 million under the Company's July 1997 filing.
The rates included in the 1998 filing will be in effect through June 1999. The
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.
Beginning in the third quarter of 1998, access charges on intrastate toll
calls in New York were reduced by $94.2 million annually due to a New York State
Public Service Commission order. The 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.
Revenue growth in 1998 also reflects the effect of special charges recorded
in 1997 for contingencies associated with regulatory matters.
LONG DISTANCE SERVICES REVENUES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(14.2) (7.3)%
- --------------------------------------------------------------------------------
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 nine months of 1998
principally due to increased competition for intraLATA toll services including
competitive pricing and customer selection of alternative providers of intraLATA
toll services. Presubscription, which was introduced in 1996, 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 long
distance services 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. Higher calling volumes
generated by an increase in access lines in service partially offset the
decrease in long distance services revenues.
10
<PAGE>
New York Telephone Company
ANCILLARY SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $12.9 4.1%
- --------------------------------------------------------------------------------
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 increased in the first nine months of 1998 due to
a combination of increased demand by long distance carriers and affiliates for
billing and collection services, increased revenues resulting from sales of
software to nonaffiliates and higher revenues received from local exchange
carriers for usage of unbundled components of the Company's network. In
addition, higher facilities rental revenues from affiliates and increased market
penetration for voice messaging services, principally Home Voice Mail also
contributed to the growth in ancillary services revenues.
The nine month period was negatively affected by the net effect of reversing
prior year accruals for service rebate obligations.
DIRECTORY AND INFORMATION SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $5.3 4.1%
- --------------------------------------------------------------------------------
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.
Other directory and information services revenues include fees for
nonpublication of telephone numbers and multiple white page listings.
The increase in directory and information services revenues in the first nine
months of 1998 was principally due to increased payments from Yellow Pages.
Yellow Pages' earnings related to publishing directories were higher in 1998 due
to lower retirement incentive costs and a reduction in other operating expenses.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Nine Month Period Ended September 30 1998 1997
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes .. $2,355.5 $1,846.9
Depreciation and amortization ................. 1,055.5 1,107.0
Taxes other than income ....................... 545.6 516.3
Other operating expenses ...................... 1,794.2 1,796.1
-------- --------
Total ......................................... $5,750.8 $5,266.3
======== ========
11
<PAGE>
New York Telephone Company
EMPLOYEE COSTS
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $508.6 27.5%
- --------------------------------------------------------------------------------
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 and Bell Atlantic Network Services
Inc. (NSI), who provide centralized services on a contractual basis, are
allocated to the Company and are included in Other Operating Expenses.
Employee costs increased in the first nine months of 1998 primarily as a
result of higher retirement incentive costs, as well as additional costs
associated with the labor contract settlement. (For a further discussion of
retirement incentives and labor contracts, see below). The rise in employee
costs was also attributable to 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.
These increases were partially offset by the effect of severance and direct
incremental merger-related costs recorded in the third quarter of 1997. The
increases in employee costs were further offset by the effect of lower work
force levels and by lower pension and benefit costs. The reduction in pension
and benefit costs was caused by a number of factors, including favorable pension
plan investment returns, lower than expected retiree 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 former
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.
Labor Contract Settlement
Associate employee wages, and pension and other benefits are determined under
contracts with unions representing associate employees of the Company.
In September 1998, the Communications Workers of America (CWA) ratified 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
received a $500 cash payment in September 1998 and will receive an additional
$400 cash payment in August 1999. Employees in certain bargaining units will
also 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.
In September 1998, the International Brotherhood of Electrical Workers (IBEW)
ratified a new 2-year contract. 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, similar to the CWA
contract described above.
Retirement Incentives
In 1993, the Company recorded costs totaling $630.9 million (pre-tax) for
severance and postretirement medical benefits in connection with a force
reduction plan. Since 1994, the Company has recorded additional costs of
$1,882.4 million (pre-tax) under a related retirement incentive program through
September 30, 1998. These costs reflect 16,117 total employees who have left or
have elected to leave the business under the program, consisting of 5,475
management and 10,642 associate employees. These totals include the Company's
allocated portion of costs associated with employees of Telesector Resources.
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 August 1998 contract
12
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New York Telephone Company
described above. Under the revised retirement incentive program, eligible CWA
associate employees were 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 is irrevocable, except in the event of extraordinary personal
circumstances. The contract also provides for improvements to the terms of the
ongoing pension plan, including a 15 percent pension formula increase which
applies to retirements after July 1, 2000. In addition, any of the eligible
associates who remain employed through at least January 1, 2001, will be
entitled to the greater of the pension that they would have received under the
revised retirement incentive program, or their pension under the ongoing plan as
of the actual retirement date.
Through this revised retirement incentive program, approximately 4,800
employees have irrevocably accepted the August 1998 offer and will voluntarily
leave the business in stages by the end of 1999. As a result, the Company
recorded a pre-tax charge of $677.3 million in the third quarter of 1998 and
$704.3 million through the first nine months of 1998. These charges include the
Company's allocated portion of costs associated with employees of Telesector
Resources. This retirement offer completes the retirement incentive program for
associate employees.
As of September 30, 1998, the employee severance and postretirement medical
reserves associated with the 1993 restructuring plan were fully utilized.
DEPRECIATION AND AMORTIZATION
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(51.5) (4.7)%
- --------------------------------------------------------------------------------
Depreciation and amortization expense decreased in the first nine months of
1998 over the same period in 1997 principally as a result of the recording of a
write-down of obsolete fixed assets in the third quarter of 1997. This decrease
was partially offset by additional expense resulting from growth in depreciable
telephone plant and changes in the mix of plant assets. The effect of higher
rates of depreciation and amortization also offset the decrease in expense.
TAXES OTHER THAN INCOME
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $29.3 5.7%
- --------------------------------------------------------------------------------
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
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.
OTHER OPERATING EXPENSES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(1.9) (.1)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from Telesector Resources and NSI, rent, network
software costs, the provision for uncollectible accounts receivable, and other
costs.
The decrease in other operating expenses was largely attributable to lower
combined centralized services expenses allocated from Telesector Resources and
NSI. The decline in centralized services expenses was primarily due to a
reduction in the allocated portion of retirement incentive costs and a reduction
in costs for the performance of certain centralized services. These reductions
were partially offset by transition and integration costs allocated to the
Company in connection with the merger of Bell Atlantic and NYNEX.
13
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New York Telephone Company
Other operating expenses were further reduced by the effect of merger-related
costs and other special items recorded in the third quarter of 1997. These
charges were comprised of costs to consolidate certain redundant real estate
properties, charges for regulatory and legal contingencies, the Company's
allocated share of employee severance costs, direct incremental and transition
merger-related costs, and other miscellaneous expense items, as described
earlier. Also contributing to the decrease in other operating expenses, but to a
lesser extent, were lower costs associated with network software purchases and
lower contract services and rent expense.
These decreases were substantially offset by 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 Services Revenues, Taxes Other Than Income and Interest Expense. The
Company's contribution to the federal universal service fund described earlier,
and higher interconnection charges for terminating calls on the networks of
competitive local exchange and other carriers further offset the decrease in
other operating expenses.
OTHER INCOME, NET
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $13.1 128.4%
- --------------------------------------------------------------------------------
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
and an increase in the income from Telesector Resources recognized under the
equity method of accounting.
INTEREST EXPENSE
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $15.2 6.0%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
The increase in interest expense in the first nine months of 1998 was
primarily due to the recognition of interest expense in connection with the
settlement of tax-related matters and certain regulatory issues in 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
Nine Months Ended September 30
- --------------------------------------------------------------------------------
1998 28.0%
- --------------------------------------------------------------------------------
1997 32.8%
- --------------------------------------------------------------------------------
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 nine 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.
14
<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
September 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 September 30, 1998, the Company had $34.9 million of an unused line of
credit with an affiliate, Bell Atlantic Network Funding Corporation (BANFC) and
$15.1 million of available borrowings outstanding with BANFC. The Company also
had $1,154.0 million of borrowings outstanding with NYNEX. At September 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 78.9% as of September 30, 1998, compared to
75.8% as of September 30, 1997 and 75.2% as of December 31, 1997.
On September 22, 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 November 2, 1998.
15
<PAGE>
New York Telephone Company
OTHER MATTERS
- -------------
Year "2000" Update
Bell Atlantic's comprehensive program to evaluate and address the impact of
the Year 2000 date transition on its operations, including those of the Company,
includes steps to (a) inventory and assess for Year 2000 compliance its
equipment, software and systems, (b) determine which items will be remediated,
replaced or retired, and establish a plan to accomplish these steps, (c)
remediate, replace or retire the items, (d) test the items, where required, and
(e) provide management with reporting and issues management to support a
seamless transition to the Year 2000.
State of Readiness
For Bell Atlantic's operating telephone subsidiaries, centralized services
entities and general corporate operations, the program focuses on the following
project groups: Network Elements, Application Systems, and Information
Technology Infrastructure. As of September 30, 1998, the inventory, assessment
and detailed planning phases for these projects have been completed or virtually
completed, and remediation/replacement/retirement and testing activities are
well underway. The inventory items that were not assessed as Year 2000 compliant
and that require action to avoid service impact are to be fixed, replaced, or
retired. Bell Atlantic's goal for these operations is to have its network and
any other mission critical systems Year 2000 compliant (including testing) by
June 30, 1999. Below is a more detailed breakdown of the efforts to date:
Network Elements - Approximately 350 different types of network elements
----------------
(such as central office switches) appearing in over one hundred thousand
instances. When combined in various ways and using network application
systems, these elements are the building blocks of customer services and
networked information transmission of all kinds. Approximately 70% of these
element types, representing over 90% of all deployed network elements, were
originally assessed as Year 2000 compliant. Of the deployed network
elements requiring remediation, approximately 38% have been repaired or
replaced as of September 30, 1998 and certification testing/evaluation is
well underway. Bell Atlantic has also made substantial progress on the
remaining network elements and is on track to make its June 30, 1999
objectives in this area.
Application Systems - Approximately 1,200 application systems supporting:
-------------------
(i) network and customer service provisioning, network and service
administration and maintenance, (ii) customer care and billing functions,
and (iii) human resources, finance and general corporate functions.
Approximately 48% of these application systems were originally assessed
compliant or to be retired. As of September 30, 1998, approximately 45% of
all application systems have successfully completed certification
testing/evaluation or have been retired. Bell Atlantic has made substantial
progress on the remaining application systems and is on track to make its
June 30, 1999 objectives in this area.
Information Technology Infrastructure - Approximately 40 mainframe, 1,000
-------------------------------------
mid-range, and 90,000 personal computers, and related network components
and software products that compose the corporation's information technology
(IT) infrastructure. There are approximately 1,350 unique types of elements
in the inventory for the IT infrastructure, of which approximately 73% were
originally assessed as compliant or to be retired. As of September 30 1998,
approximately 49% of all element types have successfully completed
certification testing/evaluation or have been retired. Bell Atlantic has
made substantial progress on the remaining items and is on track to make
its June 30, 1999 objective in this area.
For Bell Atlantic's other controlled or majority-owned subsidiaries,
including Bell Atlantic Mobile (BAM) and its Information Services Group (ISG)
companies, the inventory, assessment and planning efforts are substantially
complete, and remediation/replacement/retirement and testing activities are in
progress. BAM, ISG, and, in general, all of the other controlled or
majority-owned subsidiaries are on track to have their mission critical systems
compliant by the end of June 1999.
Bell Atlantic's Year 2000 program also includes a project to review and
remediate affected systems (including those with embedded technology) within its
buildings and other facilities, a project to assure Year 2000 compliance across
all of its internal business processes, and other specific projects directed
towards insuring it meets its Year 2000 objectives.
16
<PAGE>
New York Telephone Company
Third Party Issues
Vendor Issues
-------------
In general, Bell Atlantic's product vendors have made available either Year
2000-compliant versions of their offerings or new compliant products as
replacements of discontinued offerings. In most cases, the compliance "status"
of the product in question is based on vendor-provided information, which
remains subject to Bell Atlantic's testing and verification activities. In
several instances, vendors have not met original delivery schedules, resulting
in delayed testing and deployment. At this time, Bell Atlantic does not
anticipate that such delays will have a material impact on its ability to
achieve Year 2000 compliance within its desired timeframes. Bell Atlantic is
continuing Year 2000-related discussions with utilities and similar services
providers. In general, information requests to such service providers have
yielded less meaningful information than inquiries to its product vendors. As a
result, Bell Atlantic cannot yet determine the Year 2000 readiness of most key
utilities and similar services providers or the likelihood that those providers
will successfully complete the Year 2000 transition. Bell Atlantic intends to
monitor critical service provider activities, as appropriate, through the
completion of their respective remediation projects.
Some of Bell Atlantic's vendors continue to express concerns about
providing information on the status of the Year 2000 compliance efforts for
their products or services, citing factors such as liability concerns,
logistical complexity and possible adverse customer relations. Although known
gaps in Bell Atlantic's information gathering efforts are relatively small in
comparison to the voluminous data already received, some of the information
still required relates to important items, such as test plans and detailed
results. Bell Atlantic will continue to pursue all appropriate measures with its
vendors in order to resolve information sharing issues, and anticipates that the
recently enacted Year 2000 Information and Readiness Disclosure Act will have a
positive impact on information sharing by its vendors.
Customer Issues
---------------
Bell Atlantic's customers remain keenly interested in the progress of its
Year 2000 efforts, and it anticipates increased demand for information,
including detailed testing data and company-specific responses. Bell Atlantic is
providing limited warranties of Year 2000 compliance for certain new
telecommunications services and other offerings, but it does not expect any
resulting warranty costs to be material.
Interconnecting Carriers
------------------------
Bell Atlantic's network operations interconnect with domestic and
international networks of other carriers. If one of these interconnecting
carriers should fail or suffer adverse impact from a Year 2000 problem, Bell
Atlantic's customers could experience impairment of service.
Costs
From the inception of Bell Atlantic's Year 2000 project through September
30, 1998, and based on the cost tracking methods it has historically applied,
Bell Atlantic has incurred total pre-tax expenses of approximately $95 million
($70 million of which was incurred in the nine months ended September 30, 1998),
and it has made capital expenditures of approximately $80 million (all of which
was made in the nine months ended September 30, 1998).
For the years 1998 and 1999, Bell Atlantic expects to incur total pre-tax
expenses for its Year 2000 project of approximately $200 million to $300 million
and total capital expenditures of $200 million to $250 million.
Bell Atlantic has investments in various joint ventures and other
interests. At this time, Bell Atlantic does not anticipate that the impact of
any Year 2000 remediation costs that they incur will be material to its results
of operations.
17
<PAGE>
New York Telephone Company
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of Bell Atlantic's normal business functions
or operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition; however, it considers such a
likelihood remote. Due to the uncertainty inherent in other Year 2000 issues
that are ultimately beyond Bell Atlantic's control, including, for example, the
final Year 2000 readiness of its suppliers, customers, interconnecting carriers,
and joint venture and investment interests, it is unable to determine at this
time the likelihood of a material impact on its results of operations, liquidity
or financial condition, due to such Year 2000 issues. However, Bell Atlantic is
taking appropriate prudent measures to mitigate that risk. Bell Atlantic
anticipates that, in the event of any material interruptions or failures of its
service resulting from actual or perceived Year 2000 problems within or beyond
its control, it could be subject to third party claims.
Contingency Plans
As a public telecommunications carrier, Bell Atlantic has had considerable
experience successfully dealing with natural disasters and other events
requiring contingency planning and execution. As part of Bell Atlantic's efforts
to develop appropriate Year 2000 contingency plans, it is reviewing its existing
Emergency Preparedness and Disaster Recovery plans for any necessary
modifications.
Bell Atlantic has developed, where appropriate, contingency plans for
addressing delays in remediation activities. For example, delay in the
installation of a new Year 2000 compliant system could require remediation of
the existing system. It is also developing a corporate Year 2000 contingency
plan to ensure that core business functions and key support processes are in
place for uninterrupted processing and service, in the event of external (e.g.
power, public transportation, water), internal or supply chain failures (i.e.
critical dependencies on another entity for information, data or services). Bell
Atlantic anticipates that an initial draft of its corporate contingency plan
will be ready in the first quarter of 1999.
18
<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) There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 1998.
19
<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: November 10, 1998 By /s/ Edwin F. Hall
-------------------------------
Edwin F. Hall
Chief Financial Officer
and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 4, 1998.
20
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