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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 March 31, 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
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New York Telephone Company
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Part I - Financial Information
- ------------------------------------
Item 1. Financial Statements
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Unaudited)
(Dollars in Millions)
Three months ended
March 31,
----------------------
1998 1997
---------- ----------
OPERATING REVENUES
(including $33.4 and $34.3 from affiliates)........... $2,011.8 $1,913.4
-------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes.......... 540.6 634.7
Depreciation and amortization......................... 346.8 325.7
Taxes other than income............................... 175.5 175.4
Other (including $308.2 and $396.9 to affiliates)..... 568.3 485.4
-------- --------
1,631.2 1,621.2
-------- --------
OPERATING INCOME........................................ 380.6 292.2
OTHER INCOME, NET
(including $5.8 and $2.9 from affiliates)............. 5.2 1.8
INTEREST EXPENSE
(including $13.8 and $9.5 to affiliate)............... 80.4 106.9
-------- --------
Income Before Provision for Income Taxes and
Extraordinary Item.................................... 305.4 187.1
PROVISION FOR INCOME TAXES.............................. 103.4 63.4
-------- --------
Income Before Extraordinary Item........................ 202.0 123.7
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax.............. (1.5) ---
-------- --------
NET INCOME.............................................. $ 200.5 $ 123.7
======== ========
ACCUMULATED DEFICIT
At beginning of period................................ $ (464.6) $ (894.5)
Add: net income...................................... 200.5 123.7
-------- --------
At end of period...................................... $ (264.1) $ (770.8)
======== ========
See Notes to Condensed Consolidated Financial Statements.
1
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New York Telephone Company
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
- ------------------------------------
Assets
- ------------------------------------
March 31, December 31,
1998 1997
--------- ------------
CURRENT ASSETS
Cash........................................... $ 64.1 $ 44.3
Short-term investments......................... 288.2 310.9
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $186.9 and $184.9........ 1,527.6 1,542.6
Affiliates................................... 98.4 114.5
Material and supplies.......................... 147.4 139.3
Prepaid expenses............................... 178.1 234.2
Deferred income taxes.......................... .4 .4
Other.......................................... 76.3 75.9
--------- ---------
2,380.5 2,462.1
--------- ---------
PLANT, PROPERTY AND EQUIPMENT.................. 21,667.2 21,442.5
Less accumulated depreciation.................. 12,190.8 11,967.5
--------- ---------
9,476.4 9,475.0
--------- ---------
OTHER ASSETS................................... 709.3 710.9
--------- ---------
TOTAL ASSETS................................... $12,566.2 $12,648.0
========= =========
See Notes to Condensed Consolidated Financial Statements.
2
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New York Telephone Company
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
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Liabilities and Shareowner's Investment
- -----------------------------------------------
March 31, December 31,
1998 1997
---------- ------------
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate.................... $ 1,312.3 $ 1,451.4
Other........................................ 100.6 100.7
Accounts payable and accrued liabilities:
Affiliates................................... 1,104.8 915.9
Other........................................ 1,107.9 1,075.5
Other liabilities.............................. 247.4 243.7
--------- ---------
3,873.0 3,787.2
--------- ---------
LONG-TERM DEBT................................. 3,759.3 3,710.0
--------- ---------
EMPLOYEE BENEFIT OBLIGATIONS................... 3,128.0 3,171.6
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.......................... 17.2 17.3
Unamortized investment tax credits............. 91.0 93.6
Other.......................................... 111.5 137.5
--------- ---------
219.7 248.4
--------- ---------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value.... 1.0 1.0
Additional paid-in capital..................... 1,849.3 2,194.4
Accumulated deficit............................ (264.1) (464.6)
--------- ---------
1,586.2 1,730.8
--------- ---------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $12,566.2 $12,648.0
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
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New York Telephone Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
Three months ended
March 31,
--------------------
1998 1997
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. $ 675.8 $ 376.8
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments.................. 25.7 ---
Additions to plant, property and equipment............ (332.6) (284.8)
Other, net............................................ (14.4) (8.6)
--------- ---------
Net cash used in investing activities................. (321.3) (293.4)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings.............................. 250.0 ---
Early extinguishment of debt.......................... (200.0) ---
Principal repayments of borrowings and capital lease
obligations......................................... (.6) (42.6)
Net change in note payable to affiliate............... (139.1) 212.2
Distributions of additional paid-in capital........... (243.7) (191.6)
Net change in outstanding checks drawn
on controlled disbursement accounts................. (1.3) (41.4)
--------- ---------
Net cash used in financing activities................. (334.7) (63.4)
--------- ---------
NET CHANGE IN CASH.................................... 19.8 20.0
CASH, BEGINNING OF PERIOD............................. 44.3 22.8
--------- ---------
CASH, END OF PERIOD................................... $ 64.1 $ 42.8
========= =========
See Notes to Condensed Consolidated Financial Statements.
4
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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. Dividend
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On March 24, 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 April
15, 1998.
3. Debt
- --------------------------------------------------------------------------------
In the first quarter of 1998, the Company recorded an extraordinary charge
associated with the early extinguishment of long-term debt. This charge reduced
net income by $1.5 million (net of an income tax benefit of $.8 million).
On April 7, 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 this issuance will be 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 connection with these redemptions, the Company will record
an after-tax extraordinary charge of $6.0 million in the second quarter of 1998.
4. Financial Commitments
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As of March 31, 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. 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 has rebated all of these
amounts to customers except for $1 million, which remained accrued at March 31,
1998. The Company has also accrued a liability of approximately $12 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 state and federal regulatory matters may possibly require the Company to
refund a portion of the revenues collected in the current and prior periods. As
of March 31, 1998, the aggregate amount of revenues estimated to be subject to
possible refund was approximately $59 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.
5
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New York Telephone Company
6. Litigation and Other Contingencies
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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
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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). The Company is required to
adopt SOP 98-1 effective January 1, 1999, although earlier adoption is
permitted. 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. The
Company is currently evaluating the provisions of SOP 98-1 and has not yet
determined what the impact of adopting this statement will be on its future
results of operations or financial position.
6
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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 $200.5 million for the three month
period ended March 31, 1998, compared to net income of $123.7 million for the
same period in 1997.
In the first quarter of 1998, the Company recorded an extraordinary charge
associated with the early extinguishment of long-term debt. This charge reduced
net income by $1.5 million (net of an income tax benefit of $.8 million).
The Company incurred pre-tax costs associated with its retirement incentive
program totaling $11.0 million for the three month period ended March 31, 1998,
compared to $181.2 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 $4.5
million, compared to $79.1 million in 1997. For additional information about
the Company's retirement incentive program, see "Retirement Incentives" on page
10.
These and other items affecting the comparison of the Company's results of
operations for the three month periods ended March 31, 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 March 31
- -----------
Access Lines in Service (in thousands)*
Residence............................. 7,390 7,210 2.5%
Business.............................. 4,007 3,800 5.4
Public................................ 165 164 .6
------ ------
11,562 11,174 3.5
====== ======
Three Month Period Ended March 31
- ---------------------------------
Access Minutes of Use (in millions)...... 11,247 10,711 5.0
====== ======
* 1997 reflects a restatement of access lines in service to include Primary Rate
ISDN (Integrated Services Digital Network) channels.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Three Month Period Ended March 31 1998 1997
- --------------------------------------------------------------------------------
Local services...................... $1,232.4 $1,106.2
Network access services............. 595.3 589.7
Long distance services.............. 60.4 65.4
Ancillary services.................. 97.7 122.5
Directory and information services.. 26.0 29.6
-------- --------
Total............................... $2,011.8 $1,913.4
======== ========
7
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New York Telephone Company
LOCAL SERVICES REVENUES
1998-1997 Increase
- --------------------------------------------------------------------------------
First Quarter $126.2 11.4%
- --------------------------------------------------------------------------------
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 principally due to the
settlement of a regulatory issue which resulted in the payment of approximately
$83 million of refunds to customers in the first quarter of 1997. The revenue
impact of this refund was offset entirely by the reversal of a prior year
accrual, which was recorded in Other Operating Expenses. The Company also paid
service rebates to customers totaling $22 million in the first quarter of 1997,
which also negatively impacted 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 quarter of 1998. This growth
was generated by an increase in access lines in service of 3.5% from March 31,
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 public telephone services
principally as a result of price increases for usage of the Company's pay
phones. Growth in revenues from value-added services resulting from higher
customer demand and usage was substantially offset by the elimination of
business Touch-Tone service charges in September 1997.
NETWORK ACCESS SERVICES REVENUES
1998-1997 Increase
- --------------------------------------------------------------------------------
First Quarter $5.6 .9%
- --------------------------------------------------------------------------------
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 quarter of 1998
primarily as a result of higher customer demand as reflected by growth in access
minutes of use of 5.0% from March 31, 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 the
first quarter of 1998.
Volume-related growth was substantially offset by net price reductions
mandated by federal and state price cap plans. Price decreases of approximately
$122 million annually were implemented under the Federal Communications
Commission's (FCC) Interim Price Cap Plan, effective July 1, 1997. An
additional price reduction of $20.6 million was implemented in December 1997,
following the resolution of certain issues previously under review by the FCC.
The rates included in the 1997 filings will be in effect through June 1998. In
addition, effective January 1, 1998, the Company increased its annual rates to
recover contributions that it owes to the new universal service fund. These
revenues are being entirely offset by the universal service fund contribution
amount, which is included in Other Operating Expenses. Under an FCC order, all
providers of telecommunications services must contribute to a universal service
fund. The new rules create a multi-billion dollar interstate fund for linking
schools and libraries to the Internet and subsidizing low-income consumers and
rural health care providers. Finally, the Company increased certain end-user
subscriber line rates, effective January 1, 1998, as ordered by the FCC.
8
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New York Telephone Company
LONG DISTANCE SERVICES REVENUES
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(5.0) (7.6)%
- --------------------------------------------------------------------------------
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 quarter of 1998 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 from these alternative providers.
ANCILLARY SERVICES REVENUES
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(24.8) (20.2)%
- --------------------------------------------------------------------------------
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, 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 the first quarter of 1998
primarily due to the effect of the prior year reversals of accruals for service
rebate obligations. These service rebate obligations had been accrued for in
prior periods.
The decrease in ancillary services revenues was partially offset by higher
revenues from the rental and resale of usage of the Company's network to other
local exchange carriers and higher revenues related to increased demand by long
distance carriers for billing and collection services.
DIRECTORY AND INFORMATION SERVICES REVENUES
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(3.6) (12.2)%
- --------------------------------------------------------------------------------
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 decrease in directory and information services revenues in the first
quarter of 1998 was principally due to lower payments from Yellow Pages. These
payments decreased due to the effects of an increase in the provision for
uncollectible accounts receivable and higher levels of other operating expenses
on Yellow Pages' earnings related to publishing directories in New York. These
expense increases were partially offset by the effect of lower retirement
incentive costs on Yellow Pages' earnings in the first quarter of 1998.
9
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New York Telephone Company
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Three Month Period Ended March 31 1998 1997
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes...... $ 540.6 $ 634.7
Depreciation and amortization..................... 346.8 325.7
Taxes other than income........................... 175.5 175.4
Other operating expenses.......................... 568.3 485.4
-------- --------
Total............................................. $1,631.2 $1,621.2
======== ========
EMPLOYEE COSTS
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(94.1) (14.8)%
- --------------------------------------------------------------------------------
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 contract basis, are allocated to the Company and are included in Other
Operating Expenses.
Employee costs were lower in the first three 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 the first quarter of 1998 because of a number of factors, including
changes in actuarial assumptions, favorable pension plan asset 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, continuing 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 experienced in the first
quarter of 1998.
Associate employee wages and pension and other employee benefits are
determined under contracts ratified by the Communications Workers of America
(CWA) and the International Brotherhood of Electrical Workers (IBEW), the unions
representing associate employees of the Company. Contracts with the CWA and the
IBEW will expire in August 1998.
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 quarter of 1998, the Company recognized a pre-tax charge of
approximately $11 million as a result of 102 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 $1,189 million (pre-tax) as of March 31, 1998. As
of the first quarter 1998, the number of employees who have left the business
under the retirement incentive program totaled 11,064, consisting of 5,475
management and 5,589 associate employees. The program covering the management
employees ended on March 31, 1997 and the program covering the associate
employees is scheduled to end in August 1998.
Based on the experience of employee take rates under the program and
management's recent assessment of work volume and productivity trends, Bell
Atlantic is currently considering and discussing with the unions possible
changes in the program for associate employees. Bell Atlantic now expects that,
if the current program is fully implemented, the total number of employees
electing to leave under the program, and the associated additional charges,
would be substantially greater than previously estimated.
10
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New York Telephone Company
DEPRECIATION AND AMORTIZATION
1998-1997 Increase
- --------------------------------------------------------------------------------
First Quarter $21.1 6.5%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first quarter 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 also contributed to the
increase in expense.
TAXES OTHER THAN INCOME
1998-1997 Increase
- --------------------------------------------------------------------------------
First Quarter $.1 .1%
- --------------------------------------------------------------------------------
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 almost entirely 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 Increase
- --------------------------------------------------------------------------------
First Quarter $82.9 17.1%
- --------------------------------------------------------------------------------
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
quarter of 1998 as a result of its contribution to the federal universal service
fund, as described earlier. Other items contributing to the increase, but to a
lesser extent, were higher interconnection charges for terminating calls on the
networks of competitive local exchange and other carriers and higher costs for
contract services and materials due, in part, to the unusually severe winter
storms experienced in the first quarter of 1998.
These increases were partially offset by 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.
OTHER INCOME, NET
1998-1997 Increase
- --------------------------------------------------------------------------------
First Quarter $3.4 188.9%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to an increase in the
income recognized from Telesector Resources under the equity method. 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 also contributed to the increase in other income, net.
11
<PAGE>
New York Telephone Company
INTEREST EXPENSE
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(26.5) (24.8)%
- --------------------------------------------------------------------------------
Interest expense decreased in the first quarter of 1998 principally due to
the effect of the settlements of a New York state sales tax audit and various
regulatory issues recorded in the first quarter of 1997. These decreases were
partially offset by additional expense resulting from higher levels of average
advances from NYNEX.
EFFECTIVE INCOME TAX RATES
Three Months Ended March 31
- --------------------------------------------------------------------------------
1998 33.9%
- --------------------------------------------------------------------------------
1997 33.9%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. The Company's
effective income tax rate was unchanged from the first quarter of 1997.
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 pay dividends. While current liabilities exceeded current assets at both
March 31, 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 March 31, 1998, the Company had $750.0 million remaining under a shelf
registration statement filed with the Securities and Exchange Commission for the
issuance of unsecured debt securities. On April 7, 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 this issuance will be
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 issuance of
the debt securities reduced the amount available under the Company's shelf
registration statement to $400.0 million.
The Company's debt ratio was 76.5% as of March 31, 1998, compared to 73.6%
as of March 31, 1997 and 75.2% as of December 31, 1997.
On March 24, 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 April
15, 1998.
12
<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) Reports on Form 8-K filed during the quarter ended March 31,
1998:
The Company filed a Current Report on Form 8-K, dated January
12, 1998, reporting certain financial information restated as a
result of the merger of NYNEX and Bell Atlantic on August 14,
1997. This report included Consolidated Statements of Income
and Reinvested Earnings (Accumulated Deficit) and Consolidated
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994; Consolidated Balance Sheets at December 31, 1996
and 1995; Consolidated Statements of Income and Reinvested
Earnings (Accumulated Deficit) (unaudited) for the three months
ended March 31, 1997 and 1996, and the three and six months
ended June 30, 1997 and 1996; Consolidated Balance Sheets
(unaudited) at March 31, 1997 and June 30, 1997; and
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 1997 and 1996, and six months ended June
30, 1997 and 1996.
The Company filed a Current Report on Form 8-K, dated January
13, 1998, reporting on Item 7 (Financial Statements and
Exhibits) in connection with the sale of debt securities.
13
<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: May 11, 1998 By /s/ Edwin F. Hall
---------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 5, 1998.
14
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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THE CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 AND IS QUALIFIED IN ITS
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