<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, 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 Nine Months Ended
September 30, September 30,
----------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $48.0,
$6.6, $220.8 and $168.7 from affiliates) $2,097.9 $2,025.9 $6,303.8 $6,189.6
----------------------------------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 581.4 1,244.6 1,677.3 2,355.5
Depreciation and amortization 386.5 357.6 1,135.2 1,055.5
Other (including $335.9, $375.3,
$968.8 and $1,004.7 to affiliates) 828.0 829.6 2,284.7 2,339.8
----------------------------------------------------------------
1,795.9 2,431.8 5,097.2 5,750.8
----------------------------------------------------------------
OPERATING INCOME (LOSS) 302.0 (405.9) 1,206.6 438.8
OTHER INCOME, NET (including $10.8,
$7.5, $31.0 and $18.8 from affiliates) 52.4 9.2 78.0 23.3
INTEREST EXPENSE (including $13.5,
$12.0, $47.8 and $33.3 to affiliates) 73.2 78.4 233.5 267.9
----------------------------------------------------------------
INCOME(LOSS) BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 281.2 (475.1) 1,051.1 194.2
PROVISION FOR INCOME TAXES 94.1 (168.9) 355.5 54.4
----------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 187.1 (306.2) 695.6 139.8
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax --- --- (2.7) (7.5)
----------------------------------------------------------------
NET INCOME (LOSS) $ 187.1 $ (306.2) $ 692.9 $ 132.3
================================================================
</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,
1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ --- $ 50.4
Short-term investments --- 349.9
Note receivable from affiliate 15.2 ---
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $144.0 and $169.2 1,615.2 1,534.4
Affiliates 137.9 146.8
Material and supplies 108.0 148.6
Prepaid expenses 97.7 103.1
Deferred income taxes .4 .4
Other 81.3 80.5
----------------------------------------------
2,055.7 2,414.1
----------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 23,898.6 22,632.9
Less accumulated depreciation 13,604.8 12,748.6
----------------------------------------------
10,293.8 9,884.3
----------------------------------------------
OTHER ASSETS 903.8 973.6
----------------------------------------------
TOTAL ASSETS $13,253.3 $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>
September 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliates $ 1,249.2 $ 1,586.6
Other 72.8 2.7
Accounts payable and accrued liabilities:
Affiliates 1,104.6 1,195.8
Other 1,187.0 1,125.3
Other liabilities 325.2 283.0
---------------------------------------------
3,938.8 4,193.4
---------------------------------------------
LONG-TERM DEBT 3,617.0 3,755.0
---------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 3,548.1 3,689.6
---------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 4.4 13.8
Unamortized investment tax credits 76.6 83.3
Other 167.6 149.9
---------------------------------------------
248.6 247.0
---------------------------------------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value 1.0 1.0
Additional paid-in capital 1,359.1 1,545.1
Reinvested earnings/(accumulated deficit) 542.7 (157.1)
Accumulated other comprehensive loss (2.0) (2.0)
---------------------------------------------
1,900.8 1,387.0
---------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $13,253.3 $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>
Nine Months Ended
September 30,
----------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $1,712.8 $1,818.1
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 349.9 284.9
Additions to plant, property and equipment (1,543.7) (1,249.0)
Net change in note receivable from affiliate (15.2) ---
Other, net 76.0 (42.5)
-----------------------------------------
Net cash used in investing activities (1,133.0) (1,006.6)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings --- 597.0
Early extinguishment of debt (32.1) (550.0)
Principal repayments of borrowings and capital lease obligations (37.6) (102.0)
Net change in note payable to affiliates (337.4) (282.3)
Distributions of additional paid-in capital (225.4) (446.5)
Net change in outstanding checks drawn
on controlled disbursement accounts 2.3 8.4
-----------------------------------------
Net cash used in financing activities (630.2) (775.4)
-----------------------------------------
NET CHANGE IN CASH (50.4) 36.1
CASH, BEGINNING OF PERIOD 50.4 44.3
-----------------------------------------
CASH, END OF PERIOD $ --- $ 80.4
=========================================
</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 Annual Report on Form
10-K for the year ended December 31, 1998.
We have reclassified certain amounts from the prior year's data to conform
to the 1999 presentation.
2. Dividend
On September 28, 1999, we declared a dividend in the amount of $62.0
million from Additional Paid-in-Capital. The dividend was paid to NYNEX on
November 1, 1999.
3. Debt
In the second quarter of 1999, we repurchased $32.1 million of 9.375%
debentures, due July 15, 2031. We recorded an extraordinary loss related to this
transaction of $2.7 million (net of an income tax benefit of $1.5 million).
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. 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 previously did not
perform. Software maintenance and training costs are expensed in the period in
which they are incurred. Also, we capitalize interest associated with the
development of internal-use software. The effect of adopting SOP No. 98-1 for
Bell Atlantic was an increase in net income of approximately $175 million for
the nine months ended September 30, 1999.
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. The adoption of SOP No. 98-5 did not have a material
effect on our results of operations or financial condition because we have not
historically capitalized start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) 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. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year.
Under the amended pronouncement, we must adopt SFAS No. 133 no later than
January 1, 2001. 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 692.9
Distributions of additional paid-in capital to NYNEX (186.0)
Other 6.9
------------------------------------------------------------------------
Balance at September 30, 1999 $1.0 $1,359.1 $ 542.7 $ (2.0)
========================================================================
</TABLE>
Net income and comprehensive income were the same for the nine months
ended September 30, 1999 and 1998.
6. Litigation and Other 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 in 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 September 30, 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 5, which is the year ended August 31, 2000. The amounts below
represent the cumulative totals for Plan Years 1 to 5. This liability has been
included in Accounts Payable and Accrued Liabilities and Deferred Credits and
Other Liabilities - Other in 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 13.3
Amounts utilized for rebates (8.0)
-----------------
Balance at September 30, 1999 $ 17.2
=================
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.
6
<PAGE>
New York Telephone Company
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. At annual meetings held in
May 1999, the shareholders of each company approved the merger. The completion
of the merger is subject to a number of conditions, including certain regulatory
approvals and receipt of opinions that the merger will be tax-free.
Bell Atlantic and GTE are working diligently to complete the merger and
are targeting completion of the merger around the end of the first quarter of
2000. However, the companies must obtain the approval of a variety of state and
federal regulatory agencies and, given the inherent uncertainties of the
regulatory process, the closing of the merger may be delayed.
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 $692.9 million for the nine months ended
September 30, 1999, compared to net income of $132.3 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 Bell Atlantic Network Services, Inc.
(NSI).
The following table shows how special items are reflected in our condensed
consolidated statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Millions)
Nine Months Ended September 30 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee Costs
Retirement incentive costs $ --- $ 671.2
Merger transition costs 3.0 1.1
Other Operating Expenses
Merger transition costs 2.4 7.1
Allocated retirement incentive costs --- 33.1
Allocated merger transition costs 23.8 28.1
----------------------------------------
$ 29.2 $ 740.6
========================================
</TABLE>
Retirement Incentives
In the first nine months of 1998, we recorded retirement incentive costs of
$704.3 million (pre-tax) as a result of 5,155 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 voluntary retirement 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 $29.2
million in the first nine months of 1999 and $36.3 million in the first nine
months 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 September 30
- ---------------
<S> <C> <C> <C>
Access Lines in Service (in thousands)*
Residence 7,671 7,475 2.6%
Business 4,288 4,146 3.4
Public 165 166 (.6)
-------------------------------------
12,124 11,787 2.9
=====================================
Nine Months Ended September 30
- ------------------------------
Access Minutes of Use (in millions) 35,537 34,597 2.7
=====================================
</TABLE>
*1998 reflects a restatement of access lines in service.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Local services $3,916.3 $3,794.3
Network access services 1,717.5 1,754.1
Long distance services 181.4 180.7
Ancillary services 488.6 460.5
----------------------------------------------
Total $6,303.8 $6,189.6
==============================================
</TABLE>
LOCAL SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $122.0 3.2%
- --------------------------------------------------------------------------------
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.
Local services revenues increased in 1999 primarily due to higher usage of
our network facilities. Revenue growth was generated, in part, by an increase in
access lines in service of 2.9% from September 30, 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 increase in local services revenues.
Revenues from our value-added services were boosted in 1999 by marketing
and promotional campaigns offering new service packages. The introduction of
national directory assistance services in 1999 also contributed to revenue
growth.
These increases in local services revenues were partially offset by a
reduction in revenues resulting from the resale of access lines and the
provision of unbundled network elements to competitive local exchange carriers.
A decline in revenues from our pay phone services due to the increasing
popularity of wireless communications further offset revenue growth.
9
<PAGE>
New York Telephone Company
NETWORK ACCESS SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(36.6) (2.1)%
- --------------------------------------------------------------------------------
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 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 revenues declined in 1999 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. In July 1999, we
implemented interstate price decreases of approximately $123 million on an
annual basis in connection with the FCC's Price Cap Plan. These rates will be in
effect through June 2000. Interstate price decreases were approximately $78
million on an annual basis for the period July 1998 through June 1999. The rates
include amounts necessary to recover our contributions to the FCC's universal
service fund and are subject to change every quarter due to potential increases
or decreases in our contribution to the universal service fund. Our contribution
to the universal service fund is included in Other Operating Expenses. See
"Other Matters - FCC Regulation and Interstate Rates - Universal Service" for
additional information on universal service.
The New York State Public Service Commission (NYSPSC) regulates us with
respect to certain intrastate rates and services and certain other matters.
Beginning in the third quarter of 1998, intrastate access charges in New York
were reduced by approximately $94 million annually due to a NYSPSC order.
These revenue decreases were partially offset by higher customer demand,
as reflected by growth in access minutes of use of 2.7% from the same period in
1998. Volume growth also reflects a continuing expansion of the business market,
particularly for high-capacity services. In 1999, demand for special access
services increased, reflecting a greater utilization of our 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 further
contributed to revenue growth this year.
In addition, revenues in 1999 include amounts received from customers for
the recovery of local number portability (LNP) costs. LNP allows customers to
change local exchange carriers while maintaining their existing telephone
numbers. In December 1998, the FCC issued an order permitting us to recover
costs incurred for LNP in the form of monthly end-user charges for a five-year
period beginning in February 1999. LNP charges contributed approximately $19
million to network access services revenues for the nine-month period ended
September 30, 1999.
LONG DISTANCE SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $.7 .4%
- --------------------------------------------------------------------------------
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 increase in long distance services revenues in 1999 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.
Lower rates included in toll calling discount packages and product
bundling offers substantially offset the growth in long distance services
revenues. These toll calling discount packages and product bundling offers were
implemented in response to
10
<PAGE>
New York Telephone Company
presubscription for intraLATA toll services. 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.
ANCILLARY SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $28.1 6.1%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections
for long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation for competitive local exchange carriers, 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 revenues from Yellow
Pages for the use of our name in soliciting directory advertising and in
publishing and distributing directories and from customers for nonpublication of
telephone numbers and multiple white page listings.
Ancillary services revenues were higher in 1999 due to higher payments
received from Yellow Pages for earnings related to its directory activities. In
addition, increased demand 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 networks with
our network and for the purchase of unbundled network elements contributed to
the increase in ancillary services revenues.
This growth in ancillary services revenues was partially offset by a
decrease in software sales and the effect of prior year reversals of service
rebate obligations.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes $1,677.3 $2,355.5
Depreciation and amortization 1,135.2 1,055.5
Other operating expenses 2,284.7 2,339.8
------------------------------------------
Total $5,097.2 $5,750.8
==========================================
</TABLE>
EMPLOYEE COSTS
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(678.2) (28.8)%
- --------------------------------------------------------------------------------
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, NSI and NYNEX, who provide centralized
services on a contract basis, are allocated to us and are included in Other
Operating Expenses.
Employee costs decreased in the first nine months of 1999 primarily as a
result of the completion of the retirement incentive program covering associate
employees in 1998, as discussed in the Results of Operations section. The effect
of lower work force levels also contributed to the decrease in employee costs,
but to a lesser extent.
These cost decreases were partially offset by annual salary and wage
increases for management and associate employees and increased associate
overtime pay due to severe rainstorms in the third quarter of 1999.
11
<PAGE>
New York Telephone Company
DEPRECIATION AND AMORTIZATION
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $79.7 7.6%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first nine months
of 1999 over the same period in 1998 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. 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 nine months of
1999, but to a lesser extent. Under this new accounting standard, computer
software developed or obtained for internal use is 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 expense increases were partially offset by the
effect of lower rates of depreciation.
OTHER OPERATING EXPENSES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(55.1) (2.4)%
- --------------------------------------------------------------------------------
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 nine months of 1999
was largely attributable to lower centralized services expenses, primarily due
to the effect of the completion of the retirement incentive program for
associated employees of Telesector Resources in 1998. Other items contributing
to the decrease in other operating expenses were the effect of adopting SOP No.
98-1, lower costs for contract services and the reduction of an accrual
associated with the settlement of a state regulatory matter.
The decreases in other operating expenses were partially offset by higher
interconnection payments to competitive local exchange and other carriers to
terminate calls on their networks (reciprocal compensation). For additional
information on reciprocal compensation refer to "Other Matters -
Telecommunications Act of 1996 - Reciprocal Compensation."
OTHER INCOME, NET
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $54.7 234.8%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to a gain recognized on
the disposition of property in August 1999. Higher income recognized from
Telesector Resources under the equity method also contributed to the increase in
other income, net, but to a lesser extent.
INTEREST EXPENSE
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(34.4) (12.8)%
- --------------------------------------------------------------------------------
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 decreased in the first nine months of 1999 principally
due to the effect of recording additional interest costs in 1998 in connection
with the settlement of tax-related matters and certain regulatory issues. The
effect of refinancing long-term
12
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New York Telephone Company
debt at more favorable interest rates also contributed to the decrease in
interest expense, but to a lesser extent. These decreases were partially offset
by higher interest costs generated by higher levels of average borrowings from
an affiliate.
EFFECTIVE INCOME TAX RATES
Nine Months Ended September 30
- --------------------------------------------------------------------------------
1999 33.8%
- --------------------------------------------------------------------------------
1998 28.0%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes and extraordinary
item. Our effective income tax rate was higher in the first nine months of 1999
due to the effects of adjustments to deferred income tax balances resulting from
a change in the New York State income tax rate and income tax credits recorded
in 1998.
EXTRAORDINARY ITEM
In the first nine months of 1999, we recorded an extraordinary charge
associated with the early extinguishment of long-term debt. This charge reduced
net income by $2.7 million (net of an income tax benefit of $1.5 million). You
may find additional information about this extraordinary charge in Note 3 to the
condensed financial statements.
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 September
30, 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 Bell Atlantic
Administrative Services, Inc. (BAAS) and a line of credit with Bell Atlantic
Network Funding Corporation (BANFC). As of September 30, 1999, we had $50.0
million available under our line of credit with BANFC and no borrowings
outstanding. We had $1,249.2 million outstanding with BAAS at September 30,
1999. In addition, we had $400.0 million remaining under a shelf registration
statement filed with the Securities and Exchange Commission 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 72.2% at September 30, 1999, compared to 78.9% at
September 30, 1998 and 79.4% at December 31, 1998.
On September 28, 1999, we declared a dividend in the amount of $62.0
million from Additional Paid-in-Capital. The dividend was paid to NYNEX on
November 1, 1999.
13
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New York Telephone Company
OTHER MATTERS
- -------------
FCC Regulation and Interstate Rates
Price Caps
In May 1999, the U.S. Court of Appeals reversed the FCC's establishment of
a 6.5% productivity factor in calculating the annual price cap index applied to
our interstate access rates. The court directed the FCC to reconsider and
explain the methods used in selecting the productivity factor. The court granted
the FCC a stay of its order, however, until April 1, 2000. As a result, our
annual price cap filing effective July 1, 1999 includes the effects of the FCC's
6.5% productivity factor (see Operating Revenues - Network Access Services).
The FCC has adopted rules for special access services that provide for
added pricing flexibility and ultimately the removal of services from price
regulation when certain competitive thresholds are met. The order also allows
certain services, including those included in the interexchange basket of
services, to be removed from price regulation immediately. In response, we have
filed to remove services in the interexchange basket from regulation, effective
October 22, 1999. This will remove services with approximately $12 million in
annual revenues from price regulation and from the operation of the productivity
offset which otherwise would require annual price reductions.
Universal Service
On July 30, 1999, the U.S. Court of Appeals reversed certain aspects of
the FCC's universal service order. The universal service fund includes a
multi-billion dollar interstate fund to link schools and libraries to the
Internet and to subsidize low income consumers and rural healthcare providers.
Previously, under the FCC's rules, all providers of interstate
telecommunications services had to contribute to the schools and libraries fund
based on their total interstate and intrastate retail revenues. The court
reversed the decision to include intrastate revenues as part of the basis for
assessing contributions to that fund. As a result of this decision, our
contributions to the universal service fund will be reduced by approximately $37
million annually beginning on November 1, 1999, and our interstate access rates
will be reduced accordingly.
Telecommunications Act of 1996
In-region Long Distance
On September 29, 1999, we filed our application with the FCC for permission
to enter the in-region long distance market. This filing followed nearly two
years of proceedings before the NYSPSC demonstrating that we have satisfied the
14-point "checklist" required under the Telecommunications Act of 1996 (1996
Act) for entry into the in-region long distance market. The filing also followed
an extensive seven-month third-party test of our operations support systems
(OSS) conducted by KPMG Peat Marwick under the direction of the NYSPSC. On
October 19, 1999, the Chairman of the NYSPSC filed a statement fully supporting
our application. On November 1, 1999, the Department of Justice filed its
evaluation on our application. The Department of Justice stated that we had
completed most of the actions necessary to achieve long distance relief, but
that it had two areas of concern which "can be solved in a short time." We
expect the FCC to render a decision on our application before year-end.
Unbundling of Network Elements
The FCC recently announced its decision setting forth new unbundling
requirements. The FCC had previously identified seven elements that had to be
provided to competitors on an unbundled basis. With respect to those seven
elements, the FCC concluded that incumbent local exchange carriers, such as us,
do not have to provide unbundled switching (or combinations of elements that
include switching, such as the so-called unbundled element "platform") under
certain circumstances to business customers with four or more lines in certain
offices in the top 50 Metropolitan Statistical Areas (MSAs). It also held that
incumbents do not have to provide unbundled access to their directory assistance
or operator services. The remaining elements on the FCC's original list still
must be provided.
With respect to new elements, the FCC concluded that new equipment to
provide advanced services such as ADSL does not have to be unbundled. On the
other hand, the FCC concluded that incumbents must provide dark fiber as an
unbundled element, and that sub-loop unbundling should be provided. Finally, the
FCC ruled that combinations of loops and transport, known as enhanced extended
loops or "EELs," must be made available under certain circumstances, but left to
a further rulemaking certain issues relating to the use of EELs to substitute
for special access services.
14
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New York Telephone Company
Reciprocal Compensation
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 an increasing volume of one-way traffic from
our customers to Internet service providers that are their customers. In
February 1999, the FCC confirmed that such traffic is largely interstate but
concluded that it would not interfere with state regulatory decisions requiring
payment of reciprocal compensation for such traffic and that carriers are bound
by their existing interconnection agreements. The FCC tentatively concluded that
future compensation arrangements for calls to Internet service providers should
be negotiated by carriers and arbitrated, if necessary, before the state
commissions under the terms of the 1996 Act. The FCC has initiated a proceeding
to consider, alternatively, the adoption of federal rules to govern future
inter-carrier compensation arrangements for this traffic. We have asked the U.S.
Court of Appeals to review the FCC's decision that state commissions may require
payment of reciprocal compensation for this traffic. The NYSPSC issued a
decision deciding that high volume, convergent traffic (which includes Internet-
bound traffic) has different cost characteristics and should be compensated at
the lower, end-office rate. The NYSPSC determined that traffic in excess of a
3:1 ratio is presumed to be high volume, convergent traffic, although this
presumption can be rebutted.
Recent Accounting Pronouncement - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) 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. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year.
Under the amended pronouncement, we must adopt SFAS No. 133 no later than
January 1, 2001. 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 is now in the final stages of its program to evaluate and
address the impact of the Year 2000 date transition on its subsidiaries'
operations, including our operations. This program has included 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 has focused on the
following project groups: Network Elements, Applications and Support
Systems, and Information Technology Infrastructure. Bell Atlantic's goal
for these operations was to have its network and other mission critical
systems Year 2000 compliant (including testing) by June 30, 1999 and it
substantially met this goal. 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. As of November 1, 1999,
Bell Atlantic has completed the required repair/replacement for virtually
all network elements requiring remediation.
15
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New York Telephone Company
. Application and Support Systems
Bell Atlantic has approximately 1,200 application 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 and support systems as either compliant or to be retired. As of
November 1, 1999, Bell Atlantic has successfully completed the required
repair/replacement of virtually all mission critical application and
support systems.
. 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 previously reported, Bell Atlantic has successfully completed
remediation/replacement of all mission critical elements earlier this year.
Bell Atlantic's project to remediate/replace or retire mission critical
systems supporting buildings and other facilities used by its operating
telephone subsidiaries, such as HVAC, access control and alarm systems, is
now complete and its efforts to remediate/replace or retire any other Bell
Atlantic mission critical system used by those subsidiaries is virtually
complete. Remediation/replacement or retirement of non-mission critical
systems, where applicable, and supplemental testing and
verification/correction activities, for both mission critical and non-
mission critical systems, are likely to continue throughout the balance of
1999.
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. The compliance status of a given
product is typically determined using multiple sources of information,
including Bell Atlantic's own internal testing and analysis. However, in
some instances certification is based on detailed test results or similar
information provided by the product vendor and analysis by Bell Atlantic or
contractors specializing in this type of review. Bell Atlantic is also
continuing Year 2000-related discussions with utilities and similar
services providers. Although Bell Atlantic has received assurances and
other information suggesting that substantially all of its primary services
providers have completed or are well along in their respective Year 2000
projects, Bell Atlantic does not usually have sufficient access to or
control over the providers' systems and equipment to undertake verification
efforts as to such systems and equipment, and as a general matter, it would
be impractical to do so. Bell Atlantic has also participated in
interoperability testing of various mission critical network elements,
purchased from a number of vendors, through the Telco Year 2000 Forum, an
industry group comprised of leading local telecommunications services
companies. Bell Atlantic intends to monitor critical service provider
activities, as appropriate, through the remainder of 1999.
. 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
carrier networks should fail or suffer adverse impact from a Year 2000
problem, Bell Atlantic's customers could experience impairment of service.
Bell Atlantic has participated in various internetworking testing efforts,
as a member of the Association for Telecommunications Industry Solutions
(ATIS), the Cellular Telecommunications Industry Association (CTIA) and the
International Telecommunications Union (ITU). Bell Atlantic intends to
monitor the activities of the primary interconnecting carriers through the
remainder of 1999.
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New York Telephone Company
Costs
From the inception of Bell Atlantic's Year 2000 project through September
30, 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
$211 million, and it has made capital expenditures of approximately $153
million. For 1999, Bell Atlantic expects total pre-tax expenses for its Year
2000 project not to exceed $125 million (approximately $89 million has been
incurred through September 30, 1999) and total capital expenditures not to
exceed $100 million (approximately $73 million has been made through September
30, 1999). Bell Atlantic anticipates that the balance of the costs incurred for
1999 will be primarily attributable to additional testing and
verification/correction, rollover transition management, contingency planning
and repair/replacement of non-mission critical systems. These cost estimates
should not be used as the sole gauge of progress on its Year 2000 project or as
an indication of its Year 2000 readiness.
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
development 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 material interruption or failure of its
service resulting from an actual or perceived Year 2000 problem 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. Bell Atlantic's Year 2000
contingency plans are built upon its existing Emergency Preparedness and
Disaster Recovery plans.
Bell Atlantic will continue to fine-tune and test its corporate Year 2000
contingency plans to help ensure that core business functions and key support
processes will continue to function without material disruption, 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's individual business unit contingency plans for Year
2000 are being integrated and coordinated under an enterprise wide command and
control structure.
17
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New York Telephone Company
PART II - OTHER INFORMATION
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, 1999.
18
<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, 1999 By /s/Edwin F. Hall
----------------------------------------
Edwin F. Hall
Chief Financial Officer
and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 5, 1999.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND THE CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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