<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 Six Months Ended
June 30, June 30,
---------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
(including $ 127.0,$125.8,$172.8 and $162.1 from affiliates) $ 2,158.3 $ 2,151.9 $4,205.9 $ 4,163.7
---------------------------------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 531.0 570.3 1,095.9 1,110.9
Depreciation and amortization 378.0 351.1 748.7 697.9
Other (including $ 342.3, $321.2, $632.9 and $629.4 to affiliates) 759.5 766.4 1,456.7 1,510.2
---------------------------------------------------------------
1,668.5 1,687.8 3,301.3 3,319.0
---------------------------------------------------------------
OPERATING INCOME 489.8 464.1 904.6 844.7
OTHER INCOME, NET
(including $ 11.1, $5.5, $20.2 and $11.3 from affiliates) 13.4 8.9 25.6 14.1
INTEREST EXPENSE
(including $16.5, $7.5, $34.3 and $21.3 to affiliates) 78.3 109.1 160.3 189.5
---------------------------------------------------------------
Income before provision for income taxes
and extraordinary item 424.9 363.9 769.9 669.3
PROVISION FOR INCOME TAXES 143.9 119.9 261.4 223.3
---------------------------------------------------------------
Income before extraordinary item 281.0 244.0 508.5 446.0
Extraordinary Item
Early extinguishment of debt, net of tax (2.7) (6.0) (2.7) (7.5)
---------------------------------------------------------------
NET INCOME $ 278.3 $ 238.0 $ 505.8 $ 438.5
================================================================
</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>
June 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 17.9 $ 50.4
Short-term investments 116.6 349.9
Note receivable from affiliate 53.6 ---
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $146.4 and $169.2 1,515.2 1,534.4
Affiliates 194.3 146.8
Material and supplies 123.6 148.6
Prepaid expenses 69.0 103.1
Deferred income taxes 2.1 .4
Other 86.0 80.5
----------------------------------------
2,178.3 2,414.1
----------------------------------------
PLANT, PROPERTY AND EQUIPMENT 23,418.1 22,632.9
Less accumulated depreciation 13,271.3 12,748.6
----------------------------------------
10,146.8 9,884.3
----------------------------------------
OTHER ASSETS 906.0 973.6
----------------------------------------
TOTAL ASSETS $13,231.1 $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>
June 30, December 31,
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliates $ 1,146.9 $ 1,586.6
Other 72.8 2.7
Accounts payable and accrued liabilities:
Affiliates 1,252.0 1,195.8
Other 1,171.2 1,125.3
Other liabilities 308.0 283.0
-------------------------------------
3,950.9 4,193.4
-------------------------------------
LONG-TERM DEBT 3,652.6 3,755.0
-------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 3,617.7 3,689.6
-------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 14.2 13.8
Unamortized investment tax credits 78.9 83.3
Other 148.0 149.9
-------------------------------------
241.1 247.0
-------------------------------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value 1.0 1.0
Additional paid-in capital 1,421.1 1,545.1
Reinvested earnings/(accumulated deficit) 348.7 (157.1)
Accumulated other comprehensive loss (2.0) (2.0)
-------------------------------------
1,768.8 1,387.0
-------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $13,231.1 $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>
Six Months Ended
June 30,
---------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $1,366.9 $1,358.3
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 233.3 155.4
Additions to plant, property and equipment (888.9) (726.7)
Net change in note receivable from affiliate (53.6) ---
Other, net (46.5) (28.0)
---------------------------------------
Net cash used in investing activities (755.7) (599.3)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings --- 597.0
Early extinguishment of debt (32.1) (550.0)
Principal repayments of capital lease obligations (1.3) (1.3)
Net change in note payable to affiliate (439.7) (447.2)
Distributions of additional paid-in capital (163.4) (345.1)
Net change in outstanding checks drawn
on controlled disbursement accounts (7.2) 11.3
---------------------------------------
Net cash used in financing activities (643.7) (735.3)
---------------------------------------
NET CHANGE IN CASH (32.5) 23.7
CASH, BEGINNING OF PERIOD 50.4 44.3
---------------------------------------
CASH, END OF PERIOD $ 17.9 $ 68.0
=======================================
</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 June 22, 1999, we declared a dividend in the amount of $62.0 million
from Additional Paid-in-Capital. The dividend was paid to NYNEX on August 2,
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 now 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 $115 million for
the six months ended June 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 505.8
Distributions of additional paid-in capital to NYNEX (124.0)
----------------------------------------------------------------------
Balance at June 30, 1999 $1.0 $1,421.1 $ 348.7 $(2.0)
======================================================================
</TABLE>
Net income and comprehensive income were the same for the six months ended
June 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 June 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 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 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 8.0
Amounts utilized for rebates (4.9)
-----------------
Balance at June 30, 1999 $ 15.0
=================
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 at the
earliest practicable date. 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 $505.8 million for the six months ended June 30,
1999, compared to net income of $438.5 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 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:
(Dollars in Millions)
Six Months Ended June 30 1999 1998
- --------------------------------------------------------------------------------
Employee Costs
Retirement incentive costs $ --- $20.8
Merger transition costs 2.6 2.2
Other Operating Expenses
Merger transition costs 2.1 6.1
Allocated retirement incentive costs --- 6.2
Allocated merger transition costs 13.3 11.1
---------------------------------
$18.0 $46.4
=================================
Retirement Incentives
In the first six months of 1998, we recorded costs of $27.0 million as a
result of 346 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 $18.0
million in the first six months of 1999 and $19.4 million in the first six
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
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At June 30
Access Lines in Service (in thousands)*
Residence 7,638 7,422 2.9%
Business 4,243 4,097 3.6
Public 166 166 ---
-----------------------------
12,047 11,685 3.1
=============================
Six Months Ended June 30
- ------------------------
Access Minutes of Use (in millions) 23,670 22,884 3.4
=============================
</TABLE>
*1998 reflects a restatement of access lines in service.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Six Months Ended June 30 1999 1998
- ---------------------------------------------------------------------------
Local services $2,595.6 $2,512.9
Network access services 1,148.7 1,191.8
Long distance services 119.3 119.1
Ancillary services 342.3 339.9
-------------------------------
Total $4,205.9 $4,163.7
===============================
LOCAL SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Six Months $82.7 3.3%
- --------------------------------------------------------------------------------
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 1999 was primarily due to higher
usage of our network facilities. This growth was generated, in part, by an
increase in access lines in service of 3.1% from June 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 growth in local services revenues.
Revenues from our value-added services were boosted in 1999 by marketing
and promotional campaigns offering new service packages. Growth in local
services revenues was partially offset by the resale of access lines and the
provision of unbundled network elements to competitive local exchange carriers.
9
<PAGE>
New York Telephone Company
NETWORK ACCESS SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(43.1) (3.6)%
- --------------------------------------------------------------------------------
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 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 under the rules of the
Price Cap Plan.
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. The
rate changes include amounts necessary to recover our contributions to the FCC's
universal service fund, which are included in Other Operating Expenses. 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 universal service fund. Contributions to the
schools and libraries fund have been assessed based on total interstate and
intrastate retail revenues. As described in Other Matters - FCC Regulation and
Interstate Rates - Universal Service, the U.S. Court of Appeals recently
reversed the decision to include intrastate revenues in the calculation of
contributions to the schools and libraries fund. It also reversed the decision
to require local telephone companies to recover their universal service
contributions through access charges rather than charges to their end-user
customers. Our rates are subject to change every quarter due to potential
increases or decreases in our contribution to the universal service fund. The
July 1999 rate changes include an annual increase of approximately $24 million
in the required contributions to this fund. 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. These rates were
reduced by approximately $28 million on an annual basis for the period January
1999 through June 1999 to reflect, among other things, lower required
contributions to the fund.
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 (NYSPSC) 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 3.4% 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 also
contributed to revenue growth in 1999.
LONG DISTANCE SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Six Months $.2 .2%
- --------------------------------------------------------------------------------
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.
10
<PAGE>
New York Telephone Company
The growth in long distance services revenues was substantially offset by
lower rates included in toll calling discount packages and product bundling
offers. These toll calling discount packages and product bundling offers were
implemented in response to 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
- --------------------------------------------------------------------------------
Six Months $2.4 .7%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections
for long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation by 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 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 network with our network and for
the purchase of unbundled network elements.
This growth was substantially offset by lower payments received from
Yellow Pages, a reduction in facilities rental revenues from affiliates and a
decrease in software sales.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Six Months Ended June 30 1999 1998
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes $1,095.9 $1,110.9
Depreciation and amortization 748.7 697.9
Other operating expenses 1,456.7 1,510.2
--------------------------------
Total $3,301.3 $3,319.0
================================
EMPLOYEE COSTS
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(15.0) (1.4)%
- --------------------------------------------------------------------------------
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 six months of 1999 primarily due to
the effects of lower work force levels and the completion of the retirement
incentive program covering associate employees. For additional information on
our retirement incentive program refer to Results of Operations - Retirement
Incentives.
These cost decreases were substantially offset by annual salary and wage
increases for management and associate employees and higher associate overtime
pay.
11
<PAGE>
New York Telephone Company
DEPRECIATION AND AMORTIZATION
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Six Months $50.8 7.3%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first six 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 six months 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 expense increases were partially offset
by the effect of lower rates of depreciation.
OTHER OPERATING EXPENSES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(53.5) (3.5)%
- --------------------------------------------------------------------------------
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 six months of 1999
was largely attributable to 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. Lower taxes other than income and lower
centralized services expenses also contributed to the decrease in other
operating expenses.
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). 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 Telecommunications Act of 1996 (1996 Act).
The FCC has initiated a proceeding to consider, alternatively, the adoption of
federal rules to govern future inter-carrier compensation 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 has decided to conduct an expedited proceeding to determine the
appropriate compensation for Internet and other one-way traffic. The NYSPSC is
expected to issue a favorable decision shortly.
OTHER INCOME, NET
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Six Months $11.5 81.6%
- --------------------------------------------------------------------------------
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. Additional interest income from a
note receivable with an affiliate also contributed to the increase in other
income, net.
12
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New York Telephone Company
INTEREST EXPENSE
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(29.2) (15.4)%
- --------------------------------------------------------------------------------
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 six months of 1999 principally due
to the recognition of additional interest costs in connection with the
settlement of tax-related matters in 1998. The effect of refinancing long-term
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
Six Months Ended June 30
- --------------------------------------------------------------------------------
1999 34.0%
- --------------------------------------------------------------------------------
1998 33.4%
- --------------------------------------------------------------------------------
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 six 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 six 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 these extraordinary charges 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 June 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 NYNEX and a line
of credit with Bell Atlantic Network Funding Corporation (BANFC). As of June 30,
1999, we had $50.0 million available under our line of credit with BANFC and no
borrowings outstanding. We had $1,146.9 million outstanding with NYNEX at June
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 73.4% at June 30, 1999, compared to 73.8% at June 30,
1998 and 79.4% at December 31, 1998.
On June 22, 1999, we declared a dividend in the amount of $62.0 million
from Additional Paid-in-Capital. The dividend was paid to NYNEX on August 2,
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).
Universal Service
On July 30, 1999, the U.S. Court of Appeals reversed certain aspects of
the FCC's universal service order. While the court generally upheld the FCC's
rules creating a fund to support service to schools and libraries, it reversed
that portion of the rules that included intrastate revenues as part of the basis
for assessing contributions to that fund. The court also reversed the portion of
the FCC's order that required local telephone companies to recover their
universal service contributions generally through increases to their interstate
access revenues, rather than through charges directly to their end-user
customers.
Telecommunications Act of 1996 - In-region Long Distance
In April 1999, we made a filing with the NYSPSC demonstrating that we have
satisfied the 14-point "checklist" required under the 1996 Act for entry into
the in-region long distance market. The filing 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. In June and July 1999, the NYSPSC
conducted technical conferences to complete its review of our OSS and our
compliance with the other items of the checklist. Following oral argument before
the Chairman of the NYSPSC, we expect to file an application with the FCC for
permission to enter the in-region long distance market.
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. 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.
14
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New York Telephone Company
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. 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
has 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 July 31, 1999,
Bell Atlantic has completed the repair/replacement for approximately 99%
of deployed network elements requiring remediation. Bell Atlantic's plan
is to remediate/replace or where applicable retire, the remaining elements
prior to August 31, 1999, with the following exceptions: two element
types which are planned for remediation/replacement in September, and a
single switch in New York which, under an agreement with the New York
Public Service Commission, is scheduled to be retired later this year.
. 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 July 31, 1999, Bell Atlantic has successfully completed
repair/replacement of more than 99% of all mission critical application
and support systems. The remaining systems are scheduled for
remediation/replacement or retirement prior to August 31, 1999, with the
exception of certain accounting subsystems scheduled for replacement in
October 1999.
. 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 July 31, 1999, Bell Atlantic has
successfully completed remediation/replacement of all mission critical
elements.
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 are virtually complete, with
only a small number of such systems still requiring attention. Work on these few
miscellaneous systems is expected to be completed by the end of September.
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.
15
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New York Telephone Company
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 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 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 completion of their respective remediation projects.
Costs
From the inception of Bell Atlantic's Year 2000 project through June
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 $180 million, and it has made capital expenditures of
approximately $116 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 $58 million of which was incurred through June
30, 1999) and total capital expenditures of $75 million to $125 million
(approximately $36 million of which was incurred through June 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 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 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 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.
16
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New York Telephone Company
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
<PAGE>
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 June 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: August 11, 1999 By /s/ Edwin F. Hall
-------------------------------------------
Edwin F. Hall
Chief Financial Officer and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 6, 1999.
19
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTH ENDED JUNE 30, 1999
AND THE CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 AND IS QUALIFIED
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