<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 March 31, 1999
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
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES
(including $37.8 and $36.3 from affiliates) $2,047.6 $2,011.8
-------------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 564.9 540.6
Depreciation and amortization 370.7 346.8
Other (including $290.6 and $308.2 to affiliates) 697.2 743.8
-------------------------------------------
1,632.8 1,631.2
-------------------------------------------
OPERATING INCOME 414.8 380.6
OTHER INCOME, NET
(including $9.1 and $5.8 from affiliates) 12.2 5.2
INTEREST EXPENSE
(including $17.8 and $13.8 to affiliates) 82.0 80.4
-------------------------------------------
Income before provision for income taxes
and extraordinary item 345.0 305.4
PROVISION FOR INCOME TAXES 117.5 103.4
-------------------------------------------
Income before extraordinary item 227.5 202.0
Extraordinary Item
Early extinguishment of debt, net of tax --- (1.5)
-------------------------------------------
NET INCOME $ 227.5 $ 200.5
===========================================
</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>
March 31, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 62.5 $ 50.4
Short-term investments 233.2 349.9
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $153.3 and $169.2 1,496.0 1,534.4
Affiliates 138.0 146.8
Material and supplies 158.0 148.6
Prepaid expenses 94.5 103.1
Deferred income taxes 2.1 .4
Other 83.9 80.5
-----------------------------------------------
2,268.2 2,414.1
-----------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 22,994.9 22,632.9
Less accumulated depreciation 12,985.0 12,748.6
-----------------------------------------------
10,009.9 9,884.3
-----------------------------------------------
OTHER ASSETS 920.3 973.6
-----------------------------------------------
TOTAL ASSETS $13,198.4 $13,272.0
===============================================
</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>
March 31, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliates $ 1,275.3 $ 1,586.6
Other 72.8 2.7
Accounts payable and accrued liabilities:
Affiliates 1,274.4 1,195.8
Other 1,166.1 1,125.3
Other liabilities 297.8 283.0
----------------------------------------------
4,086.4 4,193.4
----------------------------------------------
LONG-TERM DEBT 3,684.9 3,755.0
----------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 3,640.5 3,689.6
----------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 14.0 13.8
Unamortized investment tax credits 81.1 83.3
Other 139.0 149.9
----------------------------------------------
234.1 247.0
----------------------------------------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value 1.0 1.0
Additional paid-in capital 1,483.1 1,545.1
Reinvested earnings/(accumulated deficit) 70.4 (157.1)
Accumulated other comprehensive loss (2.0) (2.0)
----------------------------------------------
1,552.5 1,387.0
----------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $13,198.4 $13,272.0
==============================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
New York Telephone Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 748.8 $ 675.8
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 116.7 25.7
Additions to plant, property and equipment (395.3) (332.6)
Other, net (28.2) (14.4)
-----------------------------------------
Net cash used in investing activities (306.8) (321.3)
-----------------------------------------
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) (.6)
Net change in note payable to affiliate (311.3) (139.1)
Distributions of additional paid-in capital (101.4) (243.7)
Net change in outstanding checks drawn
on controlled disbursement accounts (16.6) (1.3)
-----------------------------------------
Net cash used in financing activities (429.9) (334.7)
-----------------------------------------
NET CHANGE IN CASH 12.1 19.8
CASH, BEGINNING OF PERIOD 50.4 44.3
-----------------------------------------
CASH, END OF PERIOD $ 62.5 $ 64.1
=========================================
</TABLE>
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) 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 that 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, you
should refer to the financial statements included in our 1998 Annual Report on
Form 10-K.
We have reclassified certain amounts from prior year's data to conform to
the 1999 presentation.
2. Dividend
On March 23, 1999, we declared a dividend in the amount of $62.0 million
from Additional Paid-in-Capital. The dividend was paid to NYNEX on May 3, 1999.
3. Debt
In the first quarter of 1998, we 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).
In January 1998, we 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 and to pay
down short-term debt.
4. New Accounting Standards
Costs of Computer Software
Effective January 1, 1999, we adopted Statement of Position (SOP) No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under SOP No. 98-1, we capitalize the cost of internal-use
software which has a useful life in excess of one year. Such costs sometimes
include payroll-related costs for internally developed software. Subsequent
additions, modifications or upgrades to internal-use software are capitalized
only to the extent that they allow the software to perform a task it currently
does not perform. Software maintenance and training costs are expensed in the
period in which they are incurred. Also, we now capitalize interest associated
with the development of internal-use software.
Costs of Start-Up Activities
Effective January 1, 1999, we adopted SOP No. 98-5, "Reporting on the
Costs of Start-up Activities." Under this accounting standard, we expense costs
of start-up activities as incurred, including pre-operating, pre-opening and
other organizational costs.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. We must
adopt SFAS No. 133 no later than January 1, 2000. The adoption of SFAS No. 133
will have no material effect on our results of operations or financial condition
because we currently do not enter into the use of derivative instruments or
participate in hedging activities.
5
<PAGE>
New York Telephone Company
5. Shareowner's Investment
<TABLE>
<CAPTION>
Reinvested Accumulated
Additional Earnings/ Other
Common Paid-in (Accumulated Comprehensive
(Dollars in Millions) Stock Capital Deficit) Loss
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $1.0 $1,545.1 $(157.1) $(2.0)
Net income 227.5
Distributions of additional paid-in capital to NYNEX (62.0)
-------------------------------------------------------------------------
Balance at March 31, 1999 $1.0 $1,483.1 $ 70.4 $(2.0)
=========================================================================
</TABLE>
Net income and comprehensive income were the same for the three months
ended March 31, 1999 and 1998.
6. Commitments and Contingencies
Various legal actions and regulatory proceedings are pending to which we
are a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters that we currently deem to be probable and
estimable. We do not expect that the ultimate resolution of pending regulatory
and legal matters in future periods will have a material effect on our financial
condition, but could have a material effect on our results of operations.
We deferred revenues under a plan approved by the New York State Public
Service Commission (NYSPSC) in 1995 associated with commitments for fair
competition, universal service, service quality and infrastructure improvements
(the Incentive Plan), and also deferred revenues for a 1994 service improvement
plan obligation. These deferred revenues are included in Accounts Payable and
Accrued Liabilities and Deferred Credits and Other Liabilities - Other on our
condensed consolidated balance sheet. We are permitted to recognize these
deferred revenues as commitments are met or obligations are satisfied under the
plans. If we are unable to meet certain commitments, the NYSPSC has the
authority to require us to rebate the deferred revenues to customers. A summary
of the deferred revenues related to the plans is shown below:
(Dollars in Millions)
- ---------------------------------------------------------------------
Balance at December 31, 1998 $ 48.8
Amounts recognized as revenues (2.0)
----------------
Balance at March 31, 1999 $ 46.8
================
The Incentive Plan also established annual service quality targets with
stringent rebate provisions if we are unable to meet some or all of the targets.
Each year, our performance results are reviewed and a determination is made
regarding the requirement for rebates to our customers. If targets are met, any
liabilities are reversed and recognized in revenues. Each year is defined as a
plan year, with Plan Year 1 being the year ended August 31, 1996 and continuing
through Plan Year 4, which is the year ended August 31, 1999. The amounts below
represent the cumulative totals for Plan Years 1 to 4. This liability has been
included in Accounts Payable and Accrued Liabilities and Deferred Credits and
Other Liabilities - Other on our consolidated balance sheet. A summary of the
liabilities related to this portion of the Incentive Plan is shown below:
(Dollars in Millions)
- ----------------------------------------------------------------------
Balance at December 31, 1998 $ 11.9
Additional amounts accrued 4.0
Amounts utilized for rebates (1.9)
----------------
Balance at March 31, 1999 $ 14.0
================
Of the remaining liability balance at March 31, 1999, $12.5 million is
related to Plan Year 4 and $1.5 million is related to Plan Year 1.
6
<PAGE>
New York Telephone Company
Several state and federal regulatory matters may require us to refund a
portion of the revenues collected in the current and prior periods. The outcome
of each pending matter, as well as the time frame within which each matter will
be resolved, is not presently determinable.
7. 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 that 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. Special meetings to
vote on the merger will be held on May 18, 1999 for GTE shareholders and on May
19, 1999 for Bell Atlantic shareholders.
Bell Atlantic and GTE are working diligently to complete the merger by the
end of 1999. However, the companies must obtain the approval of a variety of
state and federal regulatory agencies and, accordingly, the merger may close in
the first half of 2000.
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 Consolidated
Financial Statements and Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
We reported net income of $227.5 million for the three month period ended
March 31, 1999, compared to net income of $200.5 million for the same period in
1998.
Our results for 1999 and 1998 were affected by special items. The special
items in both periods include our allocated share of charges from Telesector
Resources Group, Inc. (Telesector Resources). In 1999, the special items also
include our allocated share of charges from Network Services, Inc.
The following table shows how special items are reflected in our condensed
consolidated statements of income for each period:
(Dollars in Millions)
Three Months Ended March 31 1999 1998
- --------------------------------------------------------------------------------
Employee Costs
Retirement incentive costs $--- $ 6.5
Merger transition costs .3 1.1
Other Operating Expenses
Merger transition costs .2 .9
Allocated retirement incentive costs --- 4.5
Allocated merger transition costs 5.2 1.3
-----------------------------------
$5.7 $14.3
===================================
Retirement Incentives
In the first quarter of 1998, we recorded costs of $11.0 million as a
result of 102 associate employees electing to leave the company under a
voluntary retirement program. The costs were comprised of special termination
pension and postretirement benefit amounts, as well as employee costs for other
items. These costs were reduced by severance and postretirement medical benefit
reserves established in 1993 and transferred to the pension and postretirement
benefit liabilities as employees accepted the retirement incentive offer. The
retirement incentive program covering management employees ended in March 1997
and the program covering associate employees was completed in September 1998.
The severance and postretirement medical reserve balances were fully utilized at
December 31, 1998.
Merger-related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax transition and integration costs of $5.7
million in the first quarter of 1999 and $3.3 million in the first quarter of
1998.
Transition and integration costs consist of our proportionate share of
costs associated with integrating the operations of Bell Atlantic and NYNEX,
such as systems modifications costs and advertising and branding costs.
Transition and integration costs are expensed as incurred.
8
<PAGE>
New York Telephone Company
OPERATING REVENUE STATISTICS
- ----------------------------
<TABLE>
<CAPTION>
1999 1998 % Change
- --------------------------------------------------------------------------------------------------
At March 31
- -----------
<S> <C> <C> <C>
Access Lines in Service (in thousands)*
Residence 7,563 7,384 2.4%
Business 4,203 4,055 3.6
Public 159 165 (3.6)
----------------------------------
11,925 11,604 2.8
==================================
Three Months Ended March 31
- ---------------------------
Access Minutes of Use (in millions) 11,679 11,247 3.8
==================================
</TABLE>
*1998 reflects a restatement of access lines in service.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Three Months Ended March 31 1999 1998
- -------------------------------------------------------------------------------
Local services $1,283.4 $1,232.4
Network access services 564.3 595.3
Long distance services 62.0 60.4
Ancillary services 137.9 123.7
----------------------------------
Total $2,047.6 $2,011.8
==================================
LOCAL SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $51.0 4.1%
- --------------------------------------------------------------------------------
Local services revenues are earned 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 that expand the utilization of
the network. These services include products such as Caller ID, Call Waiting and
Return Call.
Growth in local services revenues in the first quarter of 1999 was
primarily due to higher usage of our network facilities. This growth was
generated by an increase in access lines in service of 2.8% from March 31, 1998.
Access line growth primarily reflects higher demand for Centrex services and an
increase in additional residential lines. Strong growth in residence and
business message volumes also contributed to the growth in local services
revenues.
Revenues from our value-added services were boosted in the first quarter
by marketing and promotional campaigns offering new service packages.
9
<PAGE>
New York Telephone Company
NETWORK ACCESS SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(31.0) (5.2)%
- --------------------------------------------------------------------------------
Network access services revenues are earned from end-user subscribers and
long distance and other competing carriers who use our local exchange facilities
to provide usage services to their customers. Switched access revenues are
derived from fixed and usage-based charges paid by carriers for access to our
local network. Special access revenues originate from carriers and end-users
that buy dedicated local exchange capacity to support their private networks.
End-user access revenues are earned from our customers and from resellers who
purchase dial-tone services.
Network access services revenue declined in the first quarter of 1999
principally due to net price reductions mandated by federal and state price cap
plans. The Federal Communications Commission (FCC) regulates the rates that we
charge long distance carriers and end-user subscribers for interstate access
services. We are required to file new access rates with the FCC each year under
the rules of the Price Cap Plan.
In July 1998, we implemented interstate price decreases of approximately
$78 million on an annual basis. These rates included amounts necessary to
recover our contribution to the FCC's 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 customers and rural health care
providers. Under the FCC's rules, all providers of interstate telecommunications
services must contribute to the fund. Our contributions to the universal service
fund are included in Other Operating Expenses. Our rates are subject to change
every quarter due to potential increases or decreases in our contribution to the
universal service fund. Changes in the required contributions to that fund
increased rates by approximately $6 million on an annual basis in October 1998.
Rates were reduced by approximately $28 million on an annual basis in January
1999 and by approximately $1 million annually in April 1999 to reflect, among
other things, lower required contributions to the fund. These rates will be in
effect through June 1999.
Beginning in the third quarter of 1998, intrastate access charges in New
York were reduced by approximately $94 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
attributable to the federal universal service fund.
These revenue decreases were partially offset by higher customer demand,
as reflected by growth in access minutes of use of 3.8% from the first quarter
of 1998. Volume growth also reflects a continuing expansion of the business
market, particularly for high-capacity services. In the first three months of
1999, demand for special access services was higher, reflecting a greater
utilization of our network by Internet service providers and other high-capacity
users. 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 the first quarter of 1999.
LONG DISTANCE SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $1.6 2.6%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made to
points outside a customer's local calling area, but within our service area
(intraLATA toll). Other long distance services that we provide include 800
services, Wide Area Telephone Service (WATS), private line services and corridor
services (between LATAs in New York City and northern New Jersey).
The growth in long distance services revenues was generated by higher
calling volumes resulting, in part, from customer win-back initiatives. Strong
growth in private line services also contributed to the increase in long
distance services revenues.
The growth in long distance services revenues was partially offset by
lower rates included in toll calling discount packages and product bundling
offers.
10
<PAGE>
New York Telephone Company
ANCILLARY SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $14.2 11.5%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections
for long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation and usage of separately priced (unbundled) components
of our network by competitive local exchange carriers, voice messaging, customer
premises equipment (CPE) and wiring and maintenance services, and sales of
software to nonaffiliates. Amounts recognized in connection with obligations and
commitments for regulatory matters, if any, are also included in this revenue
category. Ancillary services revenues also include payments from an affiliate,
Bell Atlantic Yellow Pages Company (Yellow Pages), for earnings related to its
directory activities in New York based on a regulated rate of return. We also
earn fees from Yellow Pages for the use of our name in soliciting directory
advertising and in publishing and distributing directories. Other revenues
include fees paid by customers for nonpublication of telephone numbers and
multiple white page listings.
Ancillary services revenues were higher in the first quarter of 1999 due
to a combination of increased demand by long distance carriers and affiliates
for billing and collection services, increased CPE services provided to
government agencies and higher payments received from competitive local exchange
carriers for interconnection of their network with our network and for the
purchase of unbundled network elements, as provided for by the
Telecommunications Act of 1996 (1996 Act).
The growth in ancillary services revenues was also positively impacted in
1999 by higher payments received from Yellow Pages.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Three Months Ended March 31 1999 1998
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes $ 564.9 $ 540.6
Depreciation and amortization 370.7 346.8
Other operating expenses 697.2 743.8
------------------------------
Total $1,632.8 $1,631.2
==============================
EMPLOYEE COSTS
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $24.3 4.5%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of Telesector Resources, Bell Atlantic Network Services, Inc. (NSI)
and NYNEX, who provide centralized services on a contract basis, are allocated
to us and are included in Other Operating Expenses.
Employee costs increased in the first quarter of 1999 primarily due to
annual salary and wage increases for management and associate employees and
higher pension and benefits costs. A number of factors contributed to the rise
in pension and benefit costs, including higher savings plan contributions,
increased health cares costs caused by inflation, and benefit plan improvements
provided for under new contracts with associate employees. These factors were
partially offset by favorable pension plan investment returns and changes in
plan provisions and actuarial assumptions. Also contributing to the increase in
employee costs, but to a lesser extent, was higher associate overtime pay.
These cost increases were partially offset by lower work force levels and
by the effect of the completion of the retirement incentive program covering
associate employees, as discussed in the Results of Operations section.
11
<PAGE>
New York Telephone Company
DEPRECIATION AND AMORTIZATION
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $23.9 6.9%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first quarter of
1999 over the same period in 1998 principally as a result of growth in
depreciable telephone plant. The adoption of Statement of Position (SOP) No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" also contributed to the increase in depreciation and amortization
expense in the first quarter of 1999, but to a lesser extent. Under this new
accounting standard, computer software developed or obtained for internal use is
now capitalized and amortized. Previously, we expensed most of these software
purchases as incurred. For additional information on SOP No. 98-1, see Note 4 to
the condensed consolidated financial statements.
These increases were partially offset by the effect of lower rates of
depreciation and amortization.
OTHER OPERATING EXPENSES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(46.6) (6.3)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including
centralized services expenses allocated from Telesector Resources, NYNEX and
NSI, rent, network software costs, operating taxes other than income, the
provision for uncollectible accounts receivable, and other costs.
The decrease in other operating expenses in the first quarter of 1999 was
largely attributable to lower contract services costs and the reversal of an
accrual associated with the settlement of a New York state sales and use tax
audit. Also contributing to the decrease in other operating expenses was the
adoption of SOP No. 98-1 and lower combined centralized services expenses
allocated from Telesector Resources, NYNEX and NSI. The decrease in centralized
services expenses was primarily due to the effect of the completion of the
retirement incentive program for associate employees at Telesector Resources.
The decreases in other operating expenses were partially offset by higher
interconnection (reciprocal compensation) payments to competitive local exchange
and other carriers to terminate calls on their networks. We have been required
by our state regulators to pay "reciprocal compensation" to competitive local
exchange and other carriers to terminate calls on their networks, including a
large volume of one-way traffic from our customers to internet service providers
that are their customers. On February 26, 1999, the FCC confirmed that such
traffic is interstate and interexchange in nature and not subject to the
reciprocal compensation requirements of the 1996 Act. Because the previous state
regulatory decisions were based upon a view that internet access calls are
"local" rather than interstate and interexchange in nature, we asked the New
York regulators to revisit their prior interpretations. The New York State
Public Service Commission has decided to conduct an expedited proceeding to
determine the appropriate compensation for Internet and other one-way traffic.
The FCC also has initiated a proceeding to consider adopting rules governing
inter-carrier compensation for this traffic in the future.
OTHER INCOME, NET
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $7.0 134.6%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to an increase in the
income recognized from Telesector Resources under the equity method. Other
income, net was also impacted by the effect of an accrual in the first quarter
of 1998 associated with a regulatory matter related to the sale of Telesector
Resources' ownership interest in Bell Communications Research, Inc. in 1997.
Additional interest income from our short-term investments and from a note
receivable with an affiliate also contributed to the increase in other income,
net.
12
<PAGE>
New York Telephone Company
INTEREST EXPENSE
1999 - 1998 Increase
- --------------------------------------------------------------------------------
First Quarter $1.6 2.0%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense increased in the first quarter of 1999 principally due to
higher levels of average borrowings from an affiliate and the effect of the
settlement of a New York state sales and use tax audit recorded in the first
quarter of 1999. These decreases were partially offset by the effect of
refinancing long-term debt at more favorable interest rates and by higher
capitalized interest costs resulting from higher levels of average telephone
plant under construction.
EFFECTIVE INCOME TAX RATES
Three Months Ended March 31
- --------------------------------------------------------------------------------
1999 34.1%
- --------------------------------------------------------------------------------
1998 33.9%
- --------------------------------------------------------------------------------
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. Our effective income tax rate was higher in the first quarter of 1999 due
to income tax credits recorded in 1998.
FINANCIAL CONDITION
- -------------------
We use 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,
1999 and 1998 and December 31, 1998, our sources of funds, primarily from
operations and, to the extent necessary, from readily available financing
arrangements with affiliates, 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 our capital structure to ensure financial flexibility.
We obtain our short-term financing through advances from NYNEX and a line
of credit with Bell Atlantic Network Funding Corporation (BANFC). As of March
31, 1999, we had $42.3 million available under our line of credit with BANFC,
and $7.7 million in borrowings outstanding. We also had $1,267.6 million
outstanding with NYNEX at March 31, 1999. In addition, we had $400.0 million
remaining under a shelf registration statement filed with the Securities and
Exchange Commission (SEC) for the issuance of unsecured debt securities. Our
debt securities continue to be accorded high ratings by primary rating agencies.
Subsequent to the announcement of the Bell Atlantic - GTE merger, rating
agencies have maintained current credit ratings, but have placed our ratings
under review for potential downgrade.
Our debt ratio was 76.4% at March 31, 1999, compared to 76.5% at March 31,
1998 and 79.4% at December 31, 1998.
On March 23, 1999, we declared a dividend in the amount of $62.0 million
from Additional Paid-in-Capital. The dividend was paid to NYNEX on May 3, 1999.
13
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New York Telephone Company
OTHER MATTERS
- -------------
Recent Accounting Pronouncement - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of the derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. We must
adopt SFAS No. 133 no later than January 1, 2000. The adoption of SFAS No. 133
will have no material effect on our results of operations or financial condition
because we currently do not enter into the use of derivative instruments or
participate in hedging activities.
Year "2000" Update
Bell Atlantic has a comprehensive program to evaluate and address the
impact of the Year 2000 date transition on its subsidiaries' operations,
including our operations. This program includes steps to:
. inventory and assess for Year 2000 compliance our equipment, software
and systems;
. determine whether to remediate, replace or retire noncompliant items,
and establish a plan to accomplish these steps;
. remediate, replace or retire the items;
. test the items, where required; and
. 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, Applications and Support
Systems, and Information Technology Infrastructure. At this time, Bell
Atlantic has virtually completed the inventory, assessment and detailed
planning phases for these projects. Remediation/replacement/retirement and
testing activities are well underway. Bell Atlantic plans to fix, replace
or retire those items that were not Year 2000 compliant and that require
action to avoid service impact. Bell Atlantic's goal for these operations
is to have its network and other mission critical systems Year 2000
compliant (including testing) by June 30, 1999. Bell Atlantic is on
schedule to achieve this goal for substantially all of its network and
other mission critical systems. What follows is a more detailed breakdown
of Bell Atlantic's efforts to date.
. Network Elements
Approximately 350 different types of network elements (such as central
office switches) appear 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. Bell Atlantic originally assessed
approximately 70% of these element types, representing over 90% of all
deployed network elements, as Year 2000 compliant. Late in 1998, through
additional testing and verification, it determined that certain network
elements, originally represented as having no Year 2000-related service
impact, were likely to cause service issues unless remediated. As a result,
Bell Atlantic had an increase in the overall number of network elements
requiring repair. Notwithstanding the additional work effort, as of March
31, 1999, Bell Atlantic had repaired or replaced approximately 60% of the
deployed network elements requiring remediation, and certification
testing/evaluation is well underway. Bell Atlantic also has made
substantial progress on the remaining network elements. Although Bell
Atlantic is generally on track to achieve its June 30, 1999 goal for
network elements, it is possible that the timeframe for compliance of a
small number of network elements may extend into July or August, without
any impact on customer service or its operations.
. Application and Support Systems
Bell Atlantic has approximately 1,200 applications and systems that
support: (i) the administration and maintenance of its network and customer
service functions (network information systems); (ii) customer care and
billing functions; and (iii) human resources, finance and general corporate
functions. Bell Atlantic originally assessed approximately 48% of these
application systems as either compliant or to be retired. As of March 31,
1999, Bell Atlantic has successfully completed certification
testing/evaluation of approximately 73% of all application systems. Bell
Atlantic also has made substantial progress on the remaining application
systems. Although Bell Atlantic is generally on track to achieve its
June 30, 1999 goal for applications and support systems, it is possible
that the timeframe for compliance of a small
14
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New York Telephone Company
number of applications and support systems may extend into July or August,
without any impact on customer service or its operations.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
related network components and software products comprise Bell Atlantic's
information technology (IT) infrastructure. Of the approximately 1,350
unique types of elements in the inventory for the IT infrastructure, Bell
Atlantic originally assessed approximately 73% as compliant or to be
retired. As of March 31, 1999, Bell Atlantic has successfully completed
certification testing/evaluation of approximately 95% of all mission
critical element types. Bell Atlantic has made substantial progress on the
remaining items and is on track to achieve its June 30, 1999 goal.
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.
Third Party Issues
. Vendors
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 some cases, the
compliance "status" of the product in question is based on vendor-
provided information, which remains subject to Bell Atlantic 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, and Bell Atlantic
does not yet have sufficient information to determine whether key
utilities and similar service providers will successfully complete the
Year 2000 transition. However, Bell Atlantic is now beginning to
engage in more productive discussions with large utilities servicing
its facilities and it is hopeful that these discussions will provide
additional assurance of Year 2000 compliance for those entities. At
the present time, Bell Atlantic remains unable to determine the Year
2000 readiness of most key utilities and similar service 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.
. Customers
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 March 31,
1999, and based on the cost tracking methods it has historically applied to this
project, Bell Atlantic has incurred total pre-tax expenses of approximately $138
million, and it has made capital expenditures of approximately $89 million. For
1999, Bell Atlantic expects to incur total pre-tax expenses for its Year 2000
project of approximately $75 million to $150 million (approximately $16 million
of which was incurred through March 31, 1999) and total capital expenditures of
$75 million to $125 million (approximately $9 million of which was incurred
through March 31, 1999).
15
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New York Telephone Company
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.
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
our 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 has prepared an initial draft of its corporate Year 2000 contingency
plan and it is continuing to refine and enhance that plan.
16
<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 March 31, 1999.
17
<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 12, 1999 By /s/ Edwin F. Hall
--------------------------------------------
Edwin F. Hall
Chief Financial Officer and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 6, 1999.
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH
31, 1999 AND THE CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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