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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-K
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(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-3435
NEW YORK TELEPHONE COMPANY
A New York Corporation I.R.S. Employer Identification No. 13-5275510
1095 Avenue of the Americas, New York, NY 10036
Telephone Number (212) 395-2121
---------------------------
Securities registered pursuant to Section 12(b) of the Act: See attached
Schedule A.
Securities registered pursuant to Section 12(g) of the Act: None.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION I(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
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New York Telephone Company
SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------- ---------------------
4 1/4% Refunding Mortgage Bonds, Series N, New York Stock
due January 1, 2000 Exchange
4 5/8% Refunding Mortgage Bonds, Series M,
due January 1, 2002 "
4 5/8% Refunding Mortgage Bonds, Series O,
due January 1, 2004 "
4 7/8% Refunding Mortgage Bonds, Series P,
due January 1, 2006 "
6% Refunding Mortgage Bonds, Series Q,
due September 1, 2007 "
7 3/8% Refunding Mortgage Bonds, Series V,
due December 15, 2011 "
Twelve year 6 1/2% Debentures, due March 1, 2005 "
Twelve year 6 1/8% Debentures, due January 15, 2010 "
Twenty-one Year 8 5/8% Debentures, due November 15, 2010 "
Twenty year 7% Debentures, due May 1, 2013 "
Twenty year 7% Debentures, due June 15, 2013 "
Thirty year 7 5/8% Debentures, due February 1, 2023 "
Thirty year 6.70% Debentures, due November 1, 2023 "
Thirty year 7 1/4% Debentures, due February 15, 2024 "
Thirty-two year 7% Debentures, due August 15, 2025 "
Forty year 9 3/8% Debentures, due July 15, 2031 "
Forty year 7% Debentures, due December 1, 2033 "
Ten year 5 7/8% Notes, due September 1, 2003 "
Ten year 5 5/8% Notes, due November 1, 2003 "
Ten year 6 1/4% Notes, due February 15, 2004 "
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New York Telephone Company
TABLE OF CONTENTS
Item No. Page
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PART I
1. Business
(Abbreviated pursuant to General Instruction I(2).).. 1
2. Properties............................................ 6
3. Legal Proceedings..................................... 6
4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction I(2).)...... 6
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................... 7
6. Selected Financial Data
(Omitted pursuant to General Instruction I(2).)............... 7
7. Management's Discussion and Analysis of Results of
Operations
(Abbreviated pursuant to General Instruction I(2).)........... 8
7A. Quantitative and Qualitative Disclosures About
Market Risk................................................... 19
8. Financial Statements and Supplementary Data.................... 20
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 20
PART III
(Omitted pursuant to General Instruction I(2).):
10. Directors and Executive Officers of the Registrant.............. 20
11. Executive Compensation.......................................... 20
12. Security Ownership of Certain Beneficial Owners and Management.. 20
13. Certain Relationships and Related Transactions.................. 20
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................... 20
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 29, 1999.
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New York Telephone Company
PART I
Item 1. Business
GENERAL
New York Telephone Company is incorporated under the laws of the State of New
York. Our principal offices are located at 1095 Avenue of the Americas, New
York, New York 10036 (telephone number 212-395-2121). We are a wholly owned
subsidiary of NYNEX Corporation (NYNEX), which is a wholly owned subsidiary of
Bell Atlantic Corporation (Bell Atlantic).
Our wholly-owned subsidiary, Empire City Subway Company (Limited) is
primarily in the business of leasing underground conduit in Manhattan and the
Bronx, principally to us, but also to other companies in the telecommunications
business.
We presently serve a territory consisting of six Local Access and Transport
Areas (LATAs) in New York, as well as a small portion of Connecticut (Greenwich
and Byram only). These LATAs are generally centered on a city or based on some
other identifiable common geography and, with certain limited exceptions, each
LATA marks the boundary within which we have been permitted by the "Modification
of Final Judgment" (MFJ) to provide telephone service.
We currently provide two basic types of telecommunications services. First,
we transport telecommunications traffic between subscribers located within the
same LATA (intraLATA service), including both local and long distance services.
Local service includes the provision of local exchange (dial-tone), local
private line and public telephone services (including dial-tone service for pay
telephones owned by us and by other pay telephone providers). Among other local
services provided are Centrex (central office-based switched telephone service
enabling the subscriber to make both intercom and outside calls) and a variety
of special and custom calling services. Long distance service includes message
toll service (calling service beyond the local calling area) within LATA
boundaries, and intraLATA Wide Area Toll Service (WATS) and 800 services (volume
discount offerings for customers with highly concentrated demand). We also earn
long distance revenue from the provision of telecommunications service between
LATAs (interLATA service) in the corridor between the cities (and certain
surrounding counties) of New York, New York and Newark, New Jersey. Second, we
provide exchange access service, which links a subscriber's telephone or other
equipment to the transmission facilities of interexchange carriers which, in
turn, provide interLATA telecommunications service to their customers. We also
provide exchange access service to interexchange carriers which provide
intrastate intraLATA long distance telecommunications service, as well as local
exchange access to competitive local exchange carriers for calls within a LATA.
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. We will continue to be a wholly owned indirect subsidiary of Bell
Atlantic.
The completion of the merger is subject to a number of conditions, including
certain regulatory approvals, receipt of opinions that the merger will be tax-
free, and the approval of the shareholders of both Bell Atlantic and GTE.
OPERATIONS
We are one of nine operating telephone companies owned by Bell Atlantic.
Bell Atlantic has organized certain telecommunications group functions into
business units operating across the telephone subsidiaries. The business units
focus on specific market segments. Each of the operating telephone
subsidiaries, including us, remains responsible within its respective service
area for the provision of telephone services, financial performance and
regulatory matters. We have one reportable segment, which comprises four
strategic business units.
The Consumer unit markets communications services to residential customers,
as well as operator services.
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New York Telephone Company
The General Business unit markets communications and information services to
small and medium-sized businesses as well as pay telephone services.
The Enterprise Business unit markets communications and information
technology and services to large businesses and to departments, agencies and
offices of the executive, judicial and legislative branches of the federal and
state governments. These services include voice switching/processing services
(e.g., dedicated private lines, custom Centrex, call management and voice
messaging), end-user networking (e.g., credit and debit card transactions, and
personal computer-based conferencing, including data and video), internetworking
(establishing links between the geographically disparate networks of two or more
companies or within the same company), network optimization (disaster avoidance,
911 service, intelligent vehicle highway systems), video services (distance
learning, telemedicine, videoconferencing) and interactive multimedia
applications services.
The Network Services unit markets (i) switched and special access to the
telephone subsidiaries' local exchange networks, and (ii) billing and collection
services, including recording, rating, bill processing and bill rendering.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (the 1996 Act) became effective on
February 8, 1996, and replaced the MFJ, a consent decree that arose out of an
antitrust action brought by the United States Department of Justice against
AT&T. In general, the 1996 Act includes provisions that open local exchange
markets to competition and permit Bell Operating Companies, including ours, to
engage in manufacturing and to provide long distance service under certain
conditions.
The 1996 Act permits us to offer in-region long distance services (that is,
services originating in the states where we operate as a local exchange
carrier), once we have demonstrated to the Federal Communications Commission
(FCC) that we have satisfied certain requirements. The requirements include a
14-point "competitive checklist" of steps which we must take to help competitors
offer local services through resale, through purchase of unbundled network
elements, or through their own networks. We must also demonstrate to the FCC
that our entry into the in-region long distance market would be in the public
interest.
A U.S. Court of Appeals rejected a constitutional challenge to these
provisions, and the Supreme Court recently declined to review that decision.
During the period that the case was pending, we continued to work through the
regulatory process at both the state and federal levels in order to be in a
position to demonstrate compliance with the challenged provisions.
The U. S. Supreme Court recently reversed a U.S. Court of Appeals decision
that had invalidated certain aspects of the FCC rules implementing provisions of
the 1996 Act. In particular, the Supreme Court reinstated the FCC's authority
to adopt rules governing the methodology to be used by state commissions in
setting prices for local interconnection and resale arrangements, and reinstated
rules that allow competitors to choose individual terms out of negotiated
interconnection agreements and that prohibit incumbent local telephone companies
from separating network elements that already are combined in the incumbent's
own network.
The U. S. Supreme Court also decided that the FCC had applied the wrong
standard in determining what elements of their networks incumbent local
telephone companies are obligated to make available to competitors on an
unbundled basis. Among other things, the FCC failed to account for the fact
that some elements are available from other sources. As a result of the
decision, the FCC must conduct a new proceeding to apply the correct standard.
Pending that proceeding, we have informally agreed to continue offering the
FCC's previously specified list of unbundled elements. In addition, a challenge
to the substantive merits of the FCC's pricing rules remains pending in the U.S.
Court of Appeals.
In April 1998, we filed with the NYSPSC a statement setting forth additional
commitments that we will make to the FCC in connection with our anticipated
application for permission to enter the in-region long distance market in New
York. Those commitments include terms under which we will offer combinations of
unbundled network elements and an unbundled network element platform (UNE-P) to
competitors wishing to provide basic local and ISDN-BRI service to business or
residential customers. We will offer UNE-P for basic local and ISDN-BRI service
throughout our New York operating area, but UNE-P will not be available to
competitors for other services or for service to business customers in those
parts of New York City where there is a defined level of local competition from
two or more competitive local exchange carriers. Our commitment to offer UNE-P
will be for four years in New York City and other major urban areas
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New York Telephone Company
and for six years in the rest of the state. We believe that the terms of these
commitments generally are consistent with the recent Supreme Court decision.
We expect to file in the second quarter of 1999 an application with the FCC
for permission to enter the in-region long distance market in New York. We hope
to begin offering this service in the third quarter of 1999.
FCC Regulation and Interstate Rates
We are subject to the jurisdiction of the FCC with respect to interstate
services and certain related matters. In 1998, the FCC continued to implement
reforms to the interstate access charge system and to implement the "universal
service" and other requirements of the 1996 Act.
Access Charges
Interstate access charges are the rates long distance carriers pay for use
and availability of our facilities for the origination and termination of
interstate service. The FCC required a phased restructuring of access charges,
which began in January 1998, so that our non-usage-sensitive costs will be
recovered from long distance carriers and end-users through flat rate charges,
and usage-sensitive costs will be recovered from long distance carriers through
usage-based rates. In addition, the FCC has required that different levels of
usage-based charges for originating and for terminating interstate traffic be
established.
Price Caps
Under the FCC price cap rules that apply to interstate access rates, each
year our price cap index is adjusted downward by a fixed percentage intended to
reflect increases in productivity (the productivity factor) and adjusted upward
by an allowance for inflation (the GDP-PI). The current productivity factor is
6.5 percent. These changes will be reflected in tariff changes that will be
filed to take effect on July 1, 1999.
In October 1998, the FCC initiated a proceeding with respect to its price cap
rules to determine whether a change in the current productivity factor is
warranted, whether to continue its "market based" approach of allowing market
forces (supplemented by its price cap rules) to determine access charge levels,
and whether to afford additional pricing flexibility for access services. In
addition, Bell Atlantic has petitioned the FCC to remove our special access
services from price cap regulation on the grounds that customers of these
services have competitive alternatives available, and a challenge to the FCC
order establishing the 6.5 percent productivity factor is pending in the U.S.
Court of Appeals. We are unable to predict the results of these further
proceedings.
Universal Service
The FCC has adopted rules implementing the "universal service" provision of
the 1996 Act. As of January 1, 1999, the rules require us to contribute
approximately 2% of our interstate retail revenues for high-cost and low-income
subsidies. We are also required to contribute a portion of our total retail
revenues for schools, libraries and not-for-profit health care. We will recover
these contributions through interstate charges to long distance carriers and
end-users.
A new federal high-cost universal service support mechanism for non-rural
carriers and an increase in the funding level for schools and libraries are
expected to become effective in 1999. The FCC currently is considering, in
conjunction with a recommendation from a joint board of federal and state
regulators, a number of issues that could affect the size of the universal
service fund for high cost areas and the amount of universal service costs that
are assessed against us for recovery.
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 a large volume of one-way traffic from our
customers to internet service providers that are their customers. On February
26, 1999, the FCC confirmed that such traffic is interstate and interexchange in
nature and not subject to the reciprocal compensation requirements of the 1996
Act. Because the previous state regulatory decisions were based upon a view
that internet access calls are "local" rather than interstate and interexchange
in nature, we have asked the New York regulators to revisit their prior
interpretations.
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New York Telephone Company
State Regulation of Rates and Services
The NYSPSC and the Connecticut Department of Public Utility Control (CDPUC)
regulate our communications services with respect to intrastate rates and
services and certain other matters in New York and Connecticut, respectively.
The NYSPSC has regulated us under the Performance Incentive Plan since 1995.
The plan is performance-based, replacing rate of return regulation with a form
of price regulation and incentives to improve service, and does not restrict our
earnings. The plan
. caps prices at current rates for "basic" services such as residence and
business exchange access, residence and business local calling and
LifeLine service;
. establishes price reduction commitments for a number of services,
including toll and intraLATA carrier access services;
. adjusts prices annually based on certain costs associated with state
commission mandates and other defined "exogenous" events; and
. establishes service quality targets with stringent rebate provisions if we
are unable to meet some or all of the targets.
Our operations in Connecticut are subject to rate of return regulation, but
an incentive regulation plan which could eliminate regulation of our earnings
has been filed with the CDPUC.
Competition
Legislative changes, including provisions of the 1996 Act discussed above
under "Telecommunications Act of 1996," regulatory changes and new technology
are continuing to expand the types of available communications services and
equipment and the number of competitors offering such services. We anticipate
that these industry changes, together with the rapid growth, enormous size and
global scope of these markets, will attract new entrants and encourage existing
competitors to broaden their offerings. Current and potential competitors in
telecommunication services include long distance companies, other local
telephone companies, cable companies, wireless service providers, foreign
telecommunications providers, electric utilities and other companies that offer
network services. Many of these companies have a strong market presence, brand
recognition and existing customer relationships, all of which contribute to
intensifying competition and may affect our future revenue growth.
Local Exchange Services
State regulatory commissions have historically regulated the ability to offer
local exchange services. The NYSPSC has approved applications from competitors
to provide and resell local exchange services.
One of the purposes of the 1996 Act was to ensure, and accelerate, the
emergence of competition in local exchange markets. Toward this end, the 1996
Act requires most existing local exchange carriers (incumbent local exchange
carriers, or ILECs), including us, to permit potential competitors (competitive
local exchange carriers, or CLECs) to
. purchase service from the ILEC for resale to CLEC customers
. purchase unbundled network elements from the ILEC, and/or
. interconnect the CLEC network with the ILEC's network.
The 1996 Act provides for arbitration by the state public utility commission
if an ILEC and a CLEC are unable to reach agreement on the terms of the
arrangement sought by the CLEC.
Our negotiations with various CLECs, and arbitrations before the NYSPSC and
the CDPUC have continued. As of January 31, 1999, we had entered into 78
agreements with CLECs of which 68 had been approved by the state regulators.
We expect that these agreements, and the 1996 Act, will continue to lead to
substantially increased competition in our local exchange market in 1999 and
subsequent years. We believe that this competition will be both on a facilities
basis and in the form of resale by CLECs of our service. Under the various
agreements and arbitrations discussed above, we are generally required to sell
our services to CLECs at discounts ranging from approximately 19% to 22% from
the prices we charge our retail customers.
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New York Telephone Company
IntraLATA Toll Services
IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call. State regulatory
commissions rather than federal authorities generally regulate these services.
The NYSPSC permits other carriers to offer intraLATA toll services within the
state.
Until the implementation of "presubscription," we completed intraLATA toll
calls unless the customer dialed a code to access a competing carrier.
Presubscription changes this dialing method and enables customers to make these
toll calls using another carrier without having to dial an access code. We
fully completed implementation of presubscription in September of 1996.
Alternative Access
A substantial portion of our revenues from business and government customers
is derived from a relatively small number of large, multiple-line subscribers.
We face competition from alternative communications systems, constructed by
large end-users, interexchange carriers and alternative access vendors, which
are capable of originating and/or terminating calls without the use of our
plant. The FCC's orders requiring us to offer virtual collocated
interconnection for special and switched access services have enhanced the
ability of such alternative access providers to compete with us.
Other potential sources of competition include cable television systems,
shared tenant services and other non-carrier systems which are capable of
bypassing our local plant, either partially or completely, through substitution
of special access for switched access or through concentration of
telecommunications traffic on fewer of our lines.
Wireless Services
Wireless services also constitute potential sources of competition to our
wireline telecommunications services, especially as wireless carriers continue
to lower their prices to end users. Wireless portable telephone services employ
analog and digital technology that allows customers to make and receive
telephone calls from any location using small handsets, and can also be used for
data transmission.
Public Telephone Services
We face increasing competition in the provision of pay telephone services
from other providers. In addition, the growth of wireless communications
decreases usage of public telephones.
Operator Services
Alternative operator services providers have entered into competition with
our operator services product line.
EMPLOYEES
As of December 31, 1998, we had approximately 37,600 employees.
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New York Telephone Company
Item 2. Properties
GENERAL
Our principal properties do not lend themselves to simple description by
character and location. Our investment in plant, property and equipment
consisted of the following at December 31:
1998 1997
----- -----
Outside communications plant.................. 41% 40%
Central office equipment...................... 40 41
Land and buildings............................ 9 9
Furniture, vehicles and other work equipment.. 6 6
Other......................................... 4 4
---- ----
100% 100%
==== ====
"Outside communications plant" consists primarily of aerial cable,
underground cable, conduit and wiring, and telephone poles. "Central office
equipment" consists of switching equipment, transmission equipment and related
facilities. "Land and buildings" consists of land and land improvements, and
principally central office buildings. "Furniture, vehicles and other work
equipment" consists of public telephone instruments and telephone equipment,
furniture, office equipment, motor vehicles and other work equipment. "Other"
property consists primarily of plant under construction, capital leases and
leasehold improvements.
Our customers are served by electronic switching systems that provide a wide
variety of services. As of December 31, 1998, our network has been fully
transitioned from an analog to a digital network, which provides the
capabilities to furnish advanced data transmission and information management
services.
Substantially all of our assets are subject to lien under our refunding
mortgage bond indenture.
CAPITAL EXPENDITURES
We have been making and expect to continue to make significant capital
expenditures to meet the demand for communications services and to further
improve such services. Capital expenditures were approximately $1.7 billion in
1998, $1.5 billion in 1997 and $1.3 billion in 1996. Capital expenditures
exclude additions under capital leases. Our total investment in plant, property
and equipment was approximately $22.6 billion at December 31, 1998, $21.4
billion at December 31, 1997 and $20.8 billion at December 31, 1996, including
the effect of retirements, but before deducting accumulated depreciation.
Item 3. Legal Proceedings
There were no proceedings reportable under Item 3.
Item 4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction I(2).)
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New York Telephone Company
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Not applicable.
Item 6. Selected Financial Data
(Omitted pursuant to General Instruction I(2).)
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New York Telephone Company
Item 7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction I(2).)
This discussion should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements listed in the index
set forth on page F-1.
The communications services we provide are subject to regulation by the New
York State Public Service Commission (NYSPSC) and the Connecticut Department of
Public Utility Control with respect to intrastate rates and services and certain
other matters. For a further discussion of the company and our regulatory plan,
see Item 1 - "Description of Business."
RESULTS OF OPERATIONS
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We reported net income of $307.5 million in 1998, compared to net income of
$430.0 million in 1997.
Our results for 1998 and 1997 were affected by the following special items.
The special charges in both years include our allocated share of charges from
Telesector Resources Group, Inc. (Telesector Resources).
The following table shows how special items are reflected in our statements
of income for each year:
Years ended December 31 1998 1997
- ------------------------------------------------------------------------------
(Dollars in Millions)
Operating Revenues
Regulatory contingencies.............. $ --- $ 50.0
------ ------
Employee Costs
Retirement incentive costs............ $671.0 $176.0
Merger direct incremental costs....... --- 2.0
Merger severance costs................ --- 58.0
Merger transition costs............... 3.0 ---
Depreciation and Amortization
Write-down of assets.................. --- 137.0
Other Operating Expenses
Merger transition costs............... 8.0 5.0
Real estate consolidation............. --- 10.0
Legal contingencies and
other special items.............. --- 68.0
Allocated retirement incentive costs.. 33.0 87.0
Allocated merger direct incremental,
severance and transition costs.... 50.0 59.0
Allocated other special items......... --- 8.0
------ ------
$765.0 $610.0
------ ------
What follows is a further explanation of the nature and timing of these
special items.
Merger-related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax costs totaling $61 million in 1998 and $124
million in 1997.
In 1998, merger-related charges of $61 million were for transition and
integration costs. In 1997, merger-related charges consisted of $25 million for
transition and integration costs, $11 million for direct incremental costs and
$88 million for employee severance costs.
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New York Telephone Company
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. Direct incremental costs consist of
expenses associated with compensation arrangements related to completing the
merger transaction. Employee severance costs, as recorded under SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," represent our proportionate
share of benefit costs for the separation by the end of 1999 of management
employees who are entitled to benefits under pre-existing Bell Atlantic
separation pay plans. During 1997 and 1998, 42 and 140 management employees
were separated with severance benefits.
Retirement Incentives
In 1993, we recorded costs totaling $630.9 million (pre-tax) for severance
and postretirement medical benefits in connection with an involuntary force
reduction plan. Beginning in 1994, retirement incentives have been offered
under a voluntary program as a means of implementing substantially all of the
work force reductions planned in 1993.
Since the inception of the plan, we have recorded additional costs of
$1,882.4 million (pre-tax) through December 31, 1998. These additional costs
and the corresponding number of employees accepting the retirement incentive
offer for each year ended December 31 are as follows:
(Dollars in Millions)
-------------------------------------------------------------
Year Amount Employees
1994 $ 523.4 4,802
1995 304.0 2,551
1996 87.8 1,295
1997 262.9 2,314
1998 704.3 5,155
---------------------------------
$1,882.4 16,117
---------------------------------
The additional costs are comprised of special termination pension and
postretirement benefit amounts, as well as employee costs for other items.
These costs have been 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
remaining severance and postretirement medical reserve balances totaled $80.6
million at December 31, 1997 and were fully utilized at December 31, 1998. The
retirement incentive program covering management employees ended on March 31,
1997 and the program covering associate employees was completed in September
1998. You can find additional information on retirement incentive costs in Note
10 to the consolidated financial statements.
Other Charges and Special Items
During 1997, we recorded other charges and special items totaling
approximately $273 million in connection with consolidating operations and
combining organizations and for special items arising during the year. These
charges were comprised of the following significant items.
Write-down of Assets and Real Estate Consolidation
In the third quarter of 1997, we recorded pre-tax charges of approximately
$147 million for the write-down of obsolete or impaired fixed assets and for the
cost of consolidating redundant real estate properties. As part of the merger
integration planning, a review was conducted of the carrying values of long-
lived assets. This review included estimating remaining useful lives and cash
flows and identifying assets to be abandoned. In the case of impaired assets,
we analyzed cash flows related to those assets to determine the amount of the
impairment. As a result of these reviews, we recorded a charge of approximately
$112 million for the write-off of assets and $25 million for the impairment of
other assets. These assets primarily included copper wire to provide
telecommunications service and duplicate voice mail platforms. None of these
assets are being held for disposal. At December 31, 1998, the impaired assets
had no remaining carrying value.
In connection with the merger integration efforts, Bell Atlantic consolidated
real estate to achieve a reduction in the total square footage of building space
that it utilizes. We recorded a charge of approximately $10 million in the
third quarter of 1997 related to this initiative.
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New York Telephone Company
Regulatory and Legal Contingencies and Other Special Items
In 1997, we also recorded reductions to operating revenues and charges to
operating expenses totaling approximately $126 million (pre-tax), which
consisted of the following:
. Revenue reductions consisted of approximately $50 million for federal
regulatory matters. These matters relate to specific issues that are
currently under investigation by federal regulatory commissions. We
believe that it is probable that the ultimate resolution of these pending
matters will result in refunds to our customers.
. Charges to operating expenses totaled approximately $76 million, including
$35 million for legal contingencies. These contingencies were accounted
for under the rules of SFAS No. 5 "Accounting for Contingencies." These
charges also included approximately $41 million for other post-merger
initiatives.
These and other items affecting the comparison of our results of operations
for the years ended December 31, 1998 and 1997 are discussed in the following
sections.
Segmental Results of Operations
We have one reportable segment, which provides domestic wireline
telecommunications services. You may find additional information about segment
reporting in Note 15 to the financial statements.
OPERATING REVENUE STATISTICS
- ----------------------------
1998 1997 % Change
- ---------------------------------------------------------------------
At Year-End
- -----------
Access Lines in Service (in thousands)*
Residence.............................. 7,495 7,326 2.3%
Business............................... 4,171 3,959 5.4
Public................................. 166 164 1.2
------ ------
11,832 11,449 3.3
====== ======
For the Year
- ------------
Access Minutes of Use (in millions)...... 46,371 44,268 4.8
====== ======
* 1997 reflects a restatement of access lines in service to include Primary Rate
ISDN (Integrated Services Digital Network) channels and other changes to conform
with the 1998 presentation.
OPERATING REVENUES
- ------------------------------------
(Dollars in Millions)
For the Years Ended December 31 1998 1997
- ---------------------------------------------------------------------
Local services...................... $5,075.7 $4,833.6
Network access services............. 2,322.4 2,255.3
Long distance services.............. 236.7 256.8
Ancillary services.................. 434.2 408.7
Directory and information services.. 200.9 202.9
-------- --------
Total............................... $8,269.9 $7,957.3
======== ========
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New York Telephone Company
LOCAL SERVICES REVENUES
Increase
- ---------------------------------------------------------------------------
1998 - 1997 $242.1 5.0%
- ---------------------------------------------------------------------------
Local services revenues are earned by us from the provision of local
exchange, local private line, public telephone (pay phone) and value-added
services. Value-added services are a family of services which expand the
utilization of the network. These services include products such as Caller ID,
Call Waiting and Return Call.
The increase in local services revenues resulted from several factors.
First, our revenues in 1998 as compared to 1997 were positively affected by
prior year refunds to customers. These refunds included approximately $83
million resulting from the settlement of a regulatory issue in 1997. This
revenue increase was offset entirely by a corresponding increase in Other
Operating Expenses due to the effect of a prior year reversal of an accrual. We
also paid service rebates to customers totaling approximately $22 million in the
first quarter of 1997. The revenue impact of these rebates was offset entirely
by the reversal of a prior year accrual, which was recorded in Ancillary
Services Revenues.
Second, we also had growth in our local services revenues in 1998 primarily
due to higher usage of our network facilities. This growth was generated, in
part, by an increase in access lines in service of 3.3% in 1998, and higher
residence message volumes. Access line growth primarily reflects higher demand
for Centrex services and an increase in additional residential lines.
Finally, our local services revenues were boosted by increased customer
demand and usage of our value-added services and the implementation of new
charges to carriers resulting from pay phone deregulation in April 1997.
Revenue growth was partially offset by the elimination of Touch-Tone service
charges in September 1997.
NETWORK ACCESS SERVICES REVENUES
Increase
- ---------------------------------------------------------------------------
1998 - 1997 $67.1 3.0%
- ---------------------------------------------------------------------------
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 resellers who
purchase retail dial-tone services.
Our network access services revenue growth in 1998 was mainly attributable to
higher customer demand, as reflected by growth in access minutes of use of 4.8%
in 1998. Volume growth also reflects continuing expansion of the business
market, particularly for high-capacity services. In 1998, we saw an increasing
demand for special access services as a result of 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 1998. Volume-related
growth was partially offset by 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. We implemented price decreases for
interstate access services of approximately $122 million on an annual basis for
the period July 1997 through June 1998.
In July 1998, we implemented price decreases of approximately $78 million on
an annual basis. The rates include amounts necessary to recover our contribution
to the FCC's universal service fund. The FCC has created a multi-billion dollar
interstate fund to link schools and libraries to the Internet and to subsidize
low-income consumers and rural health care providers. Under the FCC's rules,
all providers of interstate telecommunications services must contribute to the
fund. Our contributions to the universal service fund are included in Other
Operating Expenses. In January 1999, rates were
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New York Telephone Company
further reduced by approximately $28 million on an annual basis to reflect lower
required contributions to the FCC's universal service fund. The rates included
in the July 1998 and January 1999 filings will be in effect through June 1999.
Beginning in the third quarter of 1998, access charges on intrastate toll
calls in New York were reduced by approximately $94 million annually due to a
New York State Public Service Commission order. The reduction is, in part, an
acceleration of access revenue reductions expected under the New York
Performance Regulation Plan and, in addition, will be partially offset by
increased revenues from the federal universal service fund.
Revenue growth in 1998 also reflects the effect of special charges recorded
in 1997 for contingencies associated with regulatory matters.
LONG DISTANCE SERVICES REVENUES
(Decrease)
- ---------------------------------------------------------------------------
1998 - 1997 $(20.1) (7.8)%
- ---------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made 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), and corridor services (between LATAs in New York City
and northern New Jersey).
The decline in long distance services revenues in 1998 was caused by two
factors. First, presubscription for intraLATA toll, which we implemented in
1996, continues to negatively affect our long distance services revenues.
Presubscription permits customers to use an alternative provider of their choice
for intraLATA toll calls without dialing a special access code when placing a
call. The adverse impact on long distance services revenues as a result of
presubscription was partially mitigated by increased network access services
revenues for usage of our network by these alternative providers. Second, we
implemented customer win-back and retention initiatives that included toll
calling discount packages and product bundling offers. These revenue reductions
were partially offset by higher calling volumes generated by an increase in
access lines in service.
ANCILLARY SERVICES REVENUES
Increase
- ---------------------------------------------------------------------------
1998 - 1997 $25.5 6.2%
- ---------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, usage of separately priced (unbundled) components of our network,
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.
Revenues from ancillary services grew in 1998 due to a combination of
increased demand by long distance carriers and affiliates for billing and
collection services, increased revenues resulting from sales of software to
nonaffiliates and higher revenues received from local exchange carriers for
usage of unbundled components of our network. In addition, higher facilities
rental revenues from affiliates and increased demand for voice messaging
services also contributed to the growth in ancillary services revenues.
Our ancillary services revenues in both years were also impacted by the
effects of reversing prior year accruals for service rebate obligations and
accruing amounts for the current year. On a net basis, these accruals and
reversals negatively affected ancillary revenues in 1998 as compared to 1997 by
approximately $22 million.
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New York Telephone Company
DIRECTORY AND INFORMATION SERVICES REVENUES
(Decrease)
- ---------------------------------------------------------------------------
1998 - 1997 $(2.0) (1.0)%
- ---------------------------------------------------------------------------
Directory and information services revenues consist of payments from an
affiliate, Bell Atlantic Yellow Pages Company (Yellow Pages), for earnings
related to publishing directories in New York based on a regulated rate of
return. We also earn fees from Yellow Pages for the use of our name in
soliciting directory advertising and in publishing and distributing directories.
Other directory and information services revenues include fees for
nonpublication of telephone numbers and multiple white page listings.
The decrease in directory and information services revenues in 1998 was
principally due to reduced payments from Yellow Pages. Yellow Pages' earnings
related to publishing directories were slightly lower in 1998 due to a decrease
in operating revenues, partially offset by lower retirement incentive costs and
lower operating expenses.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
For the Years Ended December 31 1998 1997
- ---------------------------------------------------------------------------
Employee costs, including benefits and taxes.. $2,908.7 $2,435.6
Depreciation and amortization................. 1,418.6 1,446.0
Other operating expenses...................... 3,175.0 3,122.6
-------- --------
Total......................................... $7,502.3 $7,004.2
======== ========
EMPLOYEE COSTS
Increase
- ---------------------------------------------------------------------------
1998 - 1997 $473.1 19.4%
- ---------------------------------------------------------------------------
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, Bell Atlantic Network Services, Inc. (NSI)
and NYNEX, who provide centralized services on a contractual basis, are
allocated to us and are included in Other Operating Expenses.
Employee costs increased in 1998 primarily as a result of higher retirement
incentive costs, as described earlier, as well as additional costs associated
with the settlement of labor contracts. The rise in employee costs was also
attributable to annual salary and wage increases for management and associate
employees and higher overtime pay attributable to unusually severe storms in the
first half of 1998. In 1998, we executed new contracts with the unions
representing associate employees. The new contracts provide for wage and
pension increases and other benefit improvements as described below under labor
contract settlements.
These increases were partially offset by the effect of severance and direct
incremental merger-related costs recorded in the third quarter of 1997, as
described earlier. The increases in employee costs were further offset by the
effect of lower work force levels and by lower pension and benefit costs. A
number of factors contributed to the reduction in pension and benefit costs,
including favorable pension plan investment returns, lower than expected retiree
medical claims and plan amendments including the conversion of a pension plan to
a cash balance plan. Effective January 1, 1998, Bell Atlantic established
common pension and savings plan benefit provisions for all management employees.
As a result, all former NYNEX management employees, including our management
employees, receive the same benefit levels as previously given under Bell
Atlantic management benefit plans. This change included the conversion of the
NYNEX management pension plan to a cash balance plan.
13
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New York Telephone Company
Labor Contract Settlements
The wages, pension and other benefits for our associate employees are
negotiated with unions. During 1998, we entered into new 2-year contracts with
the Communications Workers of America (CWA) and the International Brotherhood of
Electrical Workers (IBEW). These contracts, which expire in August 2000,
provide for wage increases of up to 3.8 percent effective August 9, 1998, and up
to 4 percent effective August 8, 1999. Over the course of this two-year contract
period, pensions will increase by 20 percent. The contracts also include cash
payments, working condition improvements, and continuation of certain employment
security provisions.
DEPRECIATION AND AMORTIZATION
(Decrease)
- ---------------------------------------------------------------------------
1998 - 1997 $(27.4) (1.9)%
- ---------------------------------------------------------------------------
Depreciation and amortization expense decreased in 1998 principally as a
result of the recording of a write-down of obsolete fixed assets in the third
quarter of 1997, as described earlier. This decrease was partially offset by
additional expense resulting from growth in depreciable telephone plant and
changes in the mix of plant assets. The effect of higher rates of depreciation
and amortization also offset the decrease in expense.
OTHER OPERATING EXPENSES
Increase
- ---------------------------------------------------------------------------
1998 - 1997 $52.4 1.7%
- ---------------------------------------------------------------------------
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 increase in other operating expenses was largely attributable to the
prior year reversal of accruals associated with the resolution of certain
regulatory and tax contingencies. The actual settlements of these matters in
1997 were recorded in Local Services Revenues and Interest Expense. We also
recognized additional costs in 1998 as a result of our contribution to the
federal universal service fund, as described earlier, and as a result of higher
interconnection (reciprocal compensation) payments to competitive local exchange
and other carriers to terminate calls on their networks. For more information on
reciprocal compensation , see Item 1 "Description of Business, Operations - FCC
Regulation and Interstate Rates Reciprocal Compensation."
These increases were substantially offset by the effect of merger-related
costs and other special items recorded in the third quarter of 1997, as
described earlier. Lower costs for network software purchases and lower
combined centralized services expenses allocated from Telesector Resources and
NSI further reduced the increases in other operating expenses. The decline in
centralized services expenses was primarily due to a reduction in the allocated
portion of retirement incentive costs and a reduction in costs for the
performance of certain centralized services. Partially offsetting this decline
were additional Year 2000 readiness costs and higher transition and integration
costs in connection with the merger of Bell Atlantic and NYNEX. Lower costs for
contract services also offset the increases in other operating expenses, but to
a lesser extent. The reduction in contract services was due, in part, to the
disposition of Bell Atlantic's ownership interest in Bell Communications
Research Inc. (Bellcore) in November 1997.
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New York Telephone Company
OTHER INCOME, NET
Increase
- ---------------------------------------------------------------------------
1998 - 1997 $18.5 111.4%
- ---------------------------------------------------------------------------
The change in other income, net, was attributable to additional interest
income primarily resulting from the purchase of short-term investments in
December 1997 to pre-fund a trust for the payment of certain employee benefits
and an accrual in 1997 associated with a regulatory matter related to the sale
of Bellcore. These increases were partially offset by lower income from
Telesector Resources recognized under the equity method of accounting primarily
resulting from an after-tax gain recognized on the sale of Bellcore in 1997.
INTEREST EXPENSE
Increase
- ---------------------------------------------------------------------------
1998 - 1997 $11.7 3.5%
- ---------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
The increase in interest expense in 1998 was primarily due to the recognition
of interest expense in connection with the settlement of tax-related matters and
certain regulatory issues in 1998. These increases were partially offset by the
effect of the settlements of a New York state sales tax audit and various
regulatory issues recorded in the first quarter of 1997. The increases in
interest expense were further offset, but to a lesser extent, by lower expense
resulting from refinancing long-term debt at more favorable interest rates.
See Note 6 to the consolidated financial statements for additional
information about our debt.
EFFECTIVE INCOME TAX RATES
For the Years Ended December 31
- ---------------------------------------------------------------------------
1998 31.4%
- ---------------------------------------------------------------------------
1997 32.6%
- ---------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before provision for income taxes, extraordinary item and
cumulative effect of change in accounting principle. Our effective income tax
rate was lower in 1998 principally due to non-recurring income tax benefits and
adjustments to deferred income tax balances resulting from a change in the New
York State income tax rate.
A reconciliation of the statutory federal income tax rate to our effective
income tax rate for each period is provided in Note 11 to the consolidated
financial statements.
EXTRAORDINARY ITEM
During 1998, we recorded extraordinary charges that reduced net income by
$7.5 million (net of an income tax benefit of $4.0 million) associated with
early extinguishments of long-term debt. These extinguishments, and subsequent
issuances of debt, consisted of the following:
. In January 1998, we issued $250.0 million of 6.125% debentures due on
January 15, 2010. The proceeds of this issuance were used in February 1998
to redeem $200.0 million of 7.75% refunding mortgage bonds due in 2006.
. In April 1998, we issued $250.0 million of 6.0% debentures due on April
15, 2008 and $100.0 million of 6.5% debentures due on April 15, 2028. The
proceeds of these issuances were used in May 1998 to redeem $200.0 million
of 7.875% debentures due in 2017 and $150.0 million of 7.5% refunding
mortgage bonds due in 2009.
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New York Telephone Company
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 December 31,
1998 and 1997, our sources of funds, primarily from operations and, to the
extent necessary, from readily available financing arrangements with an
affiliate, are sufficient to meet ongoing operating requirements. Management
expects that presently foreseeable capital requirements will continue to be
financed primarily through internally generated funds. Additional long-term debt
may be needed to fund additional 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 December
31, 1998, we had $49.7 million available under our line of credit with BANFC,
and $.3 million in borrowings outstanding. We also had $1,583.3 million
outstanding with NYNEX at December 31, 1998. In addition, we had $400.0 million
remaining under a shelf registration statement filed with the Securities and
Exchange Commission (SEC) for the issuance of unsecured debt securities. Our
debt securities continue to be accorded high ratings by primary rating agencies.
Subsequent to the announcement of the Bell Atlantic - GTE merger, rating
agencies have maintained current credit ratings, but have placed our ratings
under review for potential downgrade.
Our debt ratio was 79.4% at December 31, 1998, compared to 75.2% at December
31, 1997.
On February 1, 1999, we paid a dividend from Additional Paid-in-Capital in
the amount of $101.4 million to NYNEX.
OTHER MATTERS
- -------------
Year "2000" Update
Bell Atlantic has a comprehensive program to evaluate and address the impact
of the Year 2000 date transition on its subsidiaries' operations, including our
operations. This program includes steps to:
. inventory and assess for Year 2000 compliance our equipment, software and
systems;
. determine whether to remediate, replace or retire noncompliant items, and
establish a plan to accomplish these steps;
. remediate, replace or retire the items;
. test the items, where required; and
. provide management with reporting and issues management to support a
seamless transition to the Year 2000.
State of Readiness
For Bell Atlantic's operating telephone subsidiaries, centralized services
entities and general corporate operations, the program focuses on the
following project groups: Network Elements, Applications and Support Systems,
and Information Technology Infrastructure. At this time, Bell Atlantic has
virtually completed the inventory, assessment and detailed planning phases
for these projects. Remediation/replacement/retirement and testing activities
are well underway. Bell Atlantic plans to fix, replace or retire those items
that were not Year 2000 compliant and that require action to avoid service
impact. Bell Atlantic's goal for these operations is to have its network and
other mission critical systems Year 2000 compliant (including testing) by
June 30, 1999. Bell Atlantic is on schedule to achieve this goal for
substantially all of its network and other mission critical systems. What
follows is a more detailed breakdown of Bell Atlantic's efforts to date.
. Network Elements
Approximately 350 different types of network elements (such as central office
switches) appear in over one hundred thousand instances. When combined in
various ways and using network application systems, these elements are the
building blocks of customer services and networked information transmission
of all kinds. Bell Atlantic originally assessed approximately 70% of these
element types, representing over 90% of all deployed network elements, as
Year 2000 compliant. Late in 1998, through additional testing and
verification, it determined that certain network
16
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New York Telephone Company
elements, originally represented as having no Year 2000-related service
impact, in fact were likely to cause service issues unless remediated. As a
result, Bell Atlantic had an increase in the overall number of network
elements requiring repair. Notwithstanding the additional work effort, as of
February 1999, Bell Atlantic had repaired or replaced approximately 50% of
the deployed network elements requiring remediation, and certification
testing/evaluation is well underway. Bell Atlantic also has made substantial
progress on the remaining network elements. Although Bell Atlantic is
generally on track to achieve its June 30, 1999 goal for network elements, it
is possible that the timeframe for compliance of a small number of network
elements may extend into July or August, without any impact on customer
service or its operations.
. Application and Support Systems
Bell Atlantic has approximately 1,200 applications and systems that support:
(i) the administration and maintenance of its network and customer service
functions (network information systems); (ii) customer care and billing
functions; and (iii) human resources, finance and general corporate
functions. Bell Atlantic originally assessed approximately 48% of these
application systems as either compliant or to be retired. As of February
1999, Bell Atlantic successfully completed certification testing/evaluation
of approximately 70% of all application systems. Bell Atlantic also has made
substantial progress on the remaining application systems. Although Bell
Atlantic is generally on track to achieve its June 30, 1999 goal for
applications and support systems, it is possible that the timeframe for
compliance of a small number of applications and support systems may extend
into July or August, without any impact on customer service or its
operations.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
and related network components and software products that 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 February 1999, Bell Atlantic has successfully completed
certification testing/evaluation of approximately 90% of all element types.
Bell Atlantic has made substantial progress on the remaining items and is on
track to achieve its June 30, 1999 goal.
Bell Atlantic's Year 2000 program also includes a project to review and
remediate affected systems (including those with embedded technology) within its
buildings and other facilities, a project to assure Year 2000 compliance across
all of its internal business processes, and other specific projects directed
towards insuring it meets its Year 2000 objectives.
Third Party Issues
. Vendors
In general, Bell Atlantic's product vendors have made available either
Year 2000-compliant versions of their offerings or new compliant products
as replacements of discontinued offerings. In some cases, the compliance
"status" of the product in question is based on vendor-provided
information, which remains subject to Bell Atlantic testing and
verification activities. In several instances, vendors have not met
original delivery schedules, resulting in delayed testing and deployment.
At this time, Bell Atlantic does not anticipate that such delays will have
a material impact on its ability to achieve Year 2000 compliance within
its desired timeframes.
Bell Atlantic is continuing Year 2000-related discussions with utilities
and similar services providers. In general, information requests to such
services providers have yielded less meaningful information than inquiries
to its product vendors, and Bell Atlantic does not yet have sufficient
information to determine whether key utilities and similar service
providers will successfully complete the Year 2000 transition. However,
Bell Atlantic is now beginning to engage in more productive discussions
with large utilities servicing its facilities and it is hopeful that these
discussions will provide additional assurance of Year 2000 compliance for
those entities. At the present time, Bell Atlantic remains unable to
determine the Year 2000 readiness of most key utilities and similar
service providers or the likelihood that those providers will successfully
complete the Year 2000 transition. Bell
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New York Telephone Company
Atlantic intends to monitor critical service provider activities, as
appropriate, through the completion of their respective remediation
projects.
. Customers
Bell Atlantic's customers remain keenly interested in the progress of its
Year 2000 efforts, and it anticipates increased demand for information,
including detailed testing data and company-specific responses. Bell
Atlantic is providing limited warranties of Year 2000 compliance for
certain new telecommunications services and other offerings, but it does
not expect any resulting warranty costs to be material.
. Interconnecting Carriers
Bell Atlantic's network operations interconnect with domestic and
international networks of other carriers. If one of these interconnecting
carriers should fail or suffer adverse impact from a Year 2000 problem,
Bell Atlantic's customers could experience impairment of service.
Costs
From the inception of Bell Atlantic's Year 2000 project through December 31,
1998, and based on the cost tracking methods it has historically applied to this
project, Bell Atlantic has incurred total pre-tax expenses of approximately $122
million ($97 million of which was incurred in 1998), and it has made capital
expenditures of approximately $80 million (all of which was made in 1998).
For 1999, Bell Atlantic expects to incur total pre-tax expenses for its Year
2000 project of approximately $100 million to $200 million and total capital
expenditures of $125 million to $175 million.
Bell Atlantic has investments in various joint ventures and other interests.
At this time, Bell Atlantic does not anticipate that the impact of any Year 2000
remediation costs that they incur will be material to its results of operations.
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of Bell Atlantic's normal business functions
or operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition; however, it considers such a
likelihood remote. Due to the uncertainty inherent in other Year 2000 issues
that are ultimately beyond Bell Atlantic's control, including, for example, the
final Year 2000 readiness of its suppliers, customers, interconnecting carriers,
and joint venture and investment interests, it is unable to determine at this
time the likelihood of a material impact on its results of operations, liquidity
or financial condition, due to such Year 2000 issues. However, Bell Atlantic is
taking appropriate prudent measures to mitigate that risk. Bell Atlantic
anticipates that, in the event of any material interruptions or failures of its
service resulting from actual or perceived Year 2000 problems within or beyond
our control, it could be subject to third party claims.
Contingency Plans
As a public telecommunications carrier, Bell Atlantic has had considerable
experience successfully dealing with natural disasters and other events
requiring contingency planning and execution. As part of Bell Atlantic's
efforts to develop appropriate Year 2000 contingency plans, it is reviewing its
existing Emergency Preparedness and Disaster Recovery plans for any necessary
modifications.
Bell Atlantic has developed, where appropriate, contingency plans for
addressing delays in remediation activities. For example, delay in the
installation of a new Year 2000 compliant system could require remediation of
the existing system. It is also developing a corporate Year 2000 contingency
plan to ensure that core business functions and key support processes are in
place for uninterrupted processing and service, in the event of external (e.g.
power, public transportation, water), internal or supply chain failures (i.e.
critical dependencies on another entity for information, data or services).
Bell Atlantic anticipates that an initial draft of its corporate contingency
plan will be ready by the end of the first quarter of 1999.
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New York Telephone Company
Recent Accounting Pronouncements
Costs of Computer Software
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides,
among other things, guidance for determining whether computer software is for
internal use and when the cost related to such software should be expensed as
incurred or capitalized and amortized. SOP 98-1 is required to be applied
prospectively and will be adopted effective January 1, 1999. Bell Atlantic
estimates that the implementation of SOP 98-1 will result in a net after-tax
benefit of $200 million to $250 million in 1999 results of operations due to the
prospective capitalization of costs which were previously expensed as incurred.
We anticipate that costs for maintenance and training, as well as the cost of
software that does not add functionality to the existing system will continue to
be expensed as incurred.
Costs of Start-Up Activities
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities." SOP No. 98-5, which will be adopted effective January 1,
1999, requires that costs of start-up activities including pre-operating, pre-
opening and other organizational costs be expensed as incurred. In addition, at
the time of adoption the unamortized balance of any previously deferred start-up
costs must be expensed. The adoption of SOP 98-5 will have no material effect on
our results of operations or financial condition in 1999 because we have not
historically capitalized start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivatives be measured at fair value and recognized as either
assets or liabilities on our balance sheet. Changes in the fair values of the
derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments. We
must adopt SFAS No. 133 no later than January 1, 2000. The adoption of SFAS No.
133 will have no material effect on our results of operations or financial
condition because we currently do not enter into the use of derivative
instruments and hedging activities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk in the normal course of our business.
The majority of our debt is fixed rate debt and we do not use derivatives such
as interest rate swap agreements. Our short-term borrowings from an affiliate
expose our earnings to changes in short-term interest rates since the interest
rate charged on such borrowings is typically fixed for less than one month.
The following table summarizes the fair values of our long-term debt as of
December 31, 1998 and 1997. The table also provides a sensitivity analysis of
the estimated fair values of these financial instruments assuming 100-basis-
point upward and downward parallel shifts in the yield curve. The sensitivity
analysis did not include the fair values of our short-term borrowings from an
affiliate since they are not significantly affected by changes in market
interest rates.
(Dollars in Millions)
December 31,
---------------------
1998 1997
---------- ---------
Fair value of long-term debt $3,963.3 $3,809.0
Fair value assuming a +100-basis-point shift 3,698.1 3,597.4
Fair value assuming a -100-basis-point shift 4,232.0 4,057.6
The primary reason for the increase in 1998 was the overall decrease in
market interest rates during 1998.
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New York Telephone Company
Item 8. Financial Statements and Supplementary Data
The information required by this Item is set forth on Pages F-1 through
F-26.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of Registrant
(Omitted pursuant to General Instruction I(2).)
Item 11. Executive Compensation
(Omitted pursuant to General Instruction I(2).)
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Omitted pursuant to General Instruction I(2).)
Item 13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction I(2).)
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedule appearing on Page F-1.
(2) Financial Statement Schedules
See Index to Financial Statements and Financial Statement
Schedule appearing on Page F-1.
20
<PAGE>
New York Telephone Company
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(3) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission (SEC), are incorporated
herein by reference as exhibits hereto.
3a Certificate of Incorporation of New York Telephone Company, as
amended and restated December 2, 1987 (Exhibit No. 3(a) to the
registrant's filing on Form SE dated March 24, 1988, File No.
1-3435).
3b By-Laws of the registrant, as amended April 22, 1987 (Exhibit
No. 3(b) to the registrant's filing on Form SE dated March 24,
1988, File No. 1-3435).
4 No instrument which defines the rights of holders of long-term
debt of the registrant and its subsidiary is filed herewith
pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant
to this regulation, the registrant hereby agrees to furnish a
copy of any such instrument to the SEC upon request.
10(ii)(B) Service agreement concerning provision by Telesector Resources
Group, Inc. to the registrant of numerous services, including
(i) purchasing, materials handling, inspection, distribution,
storage and similar services and (ii) technical, regulatory,
government relations, marketing operational support and
similar services, dated March 31, 1992 (Exhibit No. 19(I)1 to
the registrant's filing on Form SE dated March 23, 1993, File
No. 1-3435).
23 Consent of Independent Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed during the quarter
ended December 31, 1998.
21
<PAGE>
New York Telephone Company
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Edwin F. Hall
-----------------------------------
Edwin F. Hall
Chief Financial Officer and
Controller
March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer:
Ivan G. Seidenberg President and
Chief Executive Officer
Principal Financial Officer:
Edwin F. Hall Chief Financial Officer
and Controller By /s/ Edwin F. Hall
-----------------
Edwin F. Hall
Directors: (individually
and as
attorney-
in-fact)
Richard L. Carrion March 29, 1999
Lodewijk J.R. de Vink
Stanley P. Goldstein
Helene L. Kaplan
Elizabeth T. Kennan
John F. Maypole
Joseph Neubauer
Hugh B. Price
Ivan G. Seidenberg
Walter V. Shipley
John R. Stafford
22
<PAGE>
New York Telephone Company
Index to Financial Statements and Financial Statement Schedule
Page
----
Report of Independent Accountants................................. F-2
Consolidated Statements of Income
For the years ended December 31, 1998, 1997 and 1996......... F-3
Consolidated Balance Sheets - December 31, 1998 and 1997.......... F-4
Consolidated Statements of Shareowner's Investment
For the years ended December 31, 1998, 1997 and 1996......... F-6
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996......... F-7
Notes to Consolidated Financial Statements........................ F-8
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1998, 1997 and 1996......... F-26
Financial statement schedules other than that listed above have been omitted
because such schedules are not required or applicable.
F-1
<PAGE>
New York Telephone Company
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowner of New York Telephone Company:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of New
York Telephone Company and subsidiary at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, in 1996, the
Company changed its method of accounting for directory publishing revenues and
expenses.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 9, 1999
F-2
<PAGE>
New York Telephone Company
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES (including $247.3, $235.3,
and $250.0 from affiliates)................... $8,269.9 $7,957.3 $8,022.6
-------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes.. 2,908.7 2,435.6 2,242.0
Depreciation and amortization................. 1,418.6 1,446.0 1,326.2
Other (including $1,355.4, $1,443.1,
and $1,288.6 to affiliates).............. 3,175.0 3,122.6 2,974.0
-------- -------- --------
7,502.3 7,004.2 6,542.2
-------- -------- --------
OPERATING INCOME................................... 767.6 953.1 1,480.4
OTHER INCOME, NET (including $31.6, $36.5,
and $18.8 from affiliates).................... 35.1 16.6 23.7
INTEREST EXPENSE (including $48.4, $46.2,
and $25.2 to affiliates)...................... 343.8 332.1 288.5
-------- -------- --------
Income Before Provision for Income Taxes,
Extraordinary Item, and Cumulative Effect
Of Change in Accounting Principle.......... 458.9 637.6 1,215.6
PROVISION FOR INCOME TAXES......................... 143.9 207.6 402.5
-------- -------- --------
Income Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle...... 315.0 430.0 813.1
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax...... (7.5) --- ---
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory publishing, net of tax.............. --- --- 55.7
-------- -------- --------
NET INCOME......................................... $ 307.5 $ 430.0 $ 868.8
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
New York Telephone Company
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
December 31
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash......................................... $ 50.4 $ 44.3
Short-term investments....................... 349.9 310.9
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $169.2 and $184.9.. 1,534.4 1,542.6
Affiliates............................... 146.8 114.5
Material and supplies........................ 148.6 139.3
Prepaid expenses............................. 103.1 234.2
Deferred income taxes........................ .4 .4
Other........................................ 80.5 75.9
--------- ---------
2,414.1 2,462.1
--------- ---------
PLANT, PROPERTY AND EQUIPMENT................ 22,632.9 21,442.5
Less accumulated depreciation................ 12,748.6 11,967.5
--------- ---------
9,884.3 9,475.0
--------- ---------
OTHER ASSETS................................. 973.6 710.9
--------- ---------
TOTAL ASSETS................................. $13,272.0 $12,648.0
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
New York Telephone Company
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Notes payable to affiliates................ $ 1,586.6 $ 1,451.4
Other...................................... 2.7 100.7
Accounts payable and accrued liabilities:
Affiliates................................. 1,195.8 915.9
Other...................................... 1,125.3 1,075.5
Other liabilities.............................. 283.0 243.7
--------- ---------
4,193.4 3,787.2
--------- ---------
LONG-TERM DEBT................................. 3,755.0 3,710.0
--------- ---------
EMPLOYEE BENEFIT OBLIGATIONS................... 3,689.6 3,171.6
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.......................... 13.8 17.3
Unamortized investment tax credits............. 83.3 93.6
Other.......................................... 149.9 137.5
--------- ---------
247.0 248.4
--------- ---------
COMMITMENTS (Notes 5 and 13)
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value...... 1.0 1.0
Additional paid-in capital..................... 1,545.1 2,194.4
Accumulated deficit............................ (157.1) (464.6)
Accumulated other comprehensive loss........... (2.0) ---
--------- ---------
1,387.0 1,730.8
--------- ---------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $13,272.0 $12,648.0
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
New York Telephone Company
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNER'S INVESTMENT
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year.......................... $ 1.0 $ 1.0 $ 1.0
-------- -------- ---------
Balance at end of year................................ 1.0 1.0 1.0
======== ======== =========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year.......................... 2,194.4 2,681.8 3,256.6
Distributions of additional paid-in capital to NYNEX.. (649.3) (487.4) (574.8)
-------- -------- ---------
Balance at end of year................................ 1,545.1 2,194.4 2,681.8
======== ======== =========
ACCUMULATED DEFICIT
Balance at beginning of year.......................... (464.6) (894.5) (1,763.3)
Net income............................................ 307.5 430.0 868.8
Other................................................. --- (.1) ---
-------- -------- ---------
Balance at end of year................................ (157.1) (464.6) (894.5)
======== ======== =========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year.......................... --- --- ---
Minimum pension liability adjustment.................. (2.0) --- ---
-------- -------- ---------
Balance at end of year................................ (2.0) --- ---
======== ======== =========
TOTAL SHAREOWNER'S INVESTMENT.............................. $1,387.0 $1,730.8 $ 1,788.3
======== ======== =========
COMPREHENSIVE INCOME
Net income............................................ $ 307.5 $ 430.0 $ 868.8
Minimum pension liability adjustment.................. (2.0) --- ---
-------- -------- ---------
$ 305.5 $ 430.0 $ 868.8
======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
New York Telephone Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................ $ 307.5 $ 430.0 $ 868.8
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............................ 1,418.6 1,446.0 1,326.2
Extraordinary item, net of tax........................... 7.5 --- ---
Cumulative effect of change in accounting
principle, net of tax................................ --- --- (55.7)
Equity in income of affiliate............................ (31.4) (36.0) (18.4)
Dividends received from equity affiliate................. 42.9 16.5 20.6
Deferred income taxes, net............................... (164.1) 96.1 31.6
Investment tax credits................................... (10.3) (13.1) (24.1)
Other items, net......................................... (8.4) (40.5) (10.3)
Changes in certain assets and liabilities:
Accounts receivable.................................. (24.1) (49.7) 162.2
Material and supplies................................ (9.3) (28.5) (48.0)
Other assets......................................... (5.7) (128.2) (43.4)
Accounts payable and accrued liabilities............. 267.7 87.6 (257.8)
Employee benefit obligations......................... 512.7 113.4 (31.3)
Other liabilities.................................... 16.7 (42.4) (147.2)
--------- --------- ---------
Net cash provided by operating activities......................... 2,320.3 1,851.2 1,773.2
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments............................... (427.9) (310.9) ---
Proceeds from sale of short-term investments...................... 388.9 --- ---
Additions to plant, property and equipment........................ (1,749.1) (1,529.4) (1,308.1)
Other, net........................................................ (78.7) (57.3) (42.3)
--------- --------- ---------
Net cash used in investing activities............................. (1,866.8) (1,897.6) (1,350.4)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings.......................................... 597.0 --- ---
Early extinguishment of debt...................................... (550.0) --- ---
Principal repayments of borrowings and capital lease obligations.. (102.6) (104.6) (61.0)
Net change in notes payable to affiliates......................... 135.2 883.0 261.0
Distributions of additional paid-in capital....................... (547.9) (679.0) (563.7)
Net change in outstanding checks drawn
on controlled disbursement accounts.......................... 20.9 (31.5) (76.2)
--------- --------- ---------
Net cash (used in)/provided by financing activities............... (447.4) 67.9 (439.9)
--------- --------- ---------
NET CHANGE IN CASH................................................ 6.1 21.5 (17.1)
CASH, BEGINNING OF YEAR........................................... 44.3 22.8 39.9
--------- --------- ---------
CASH, END OF YEAR................................................. $ 50.4 $ 44.3 $ 22.8
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
New York Telephone Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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). We presently serve a territory consisting of six Local Access and
Transport Areas (LATAs) in New York, as well as a small portion of Connecticut.
We have one reportable segment which provides domestic wireline
telecommunications services. We currently provide two basic types of
telecommunications services. First, we transport telecommunications traffic
between subscribers located within the same LATA (intraLATA service), including
both local and long distance services. Local service includes voice and data
transport, enhanced and custom calling features, directory assistance, private
lines and public telephones. Long distance service includes message toll service
within LATA boundaries and intraLATA Wide Area Toll Service/800 services. We
also earn long distance revenue from the provision of telecommunications service
between LATAs (interLATA service) in the corridor between New York City and
northern New Jersey. Second, we provide exchange access service, which links a
subscriber's telephone or other equipment to the transmission facilities of
interexchange carriers which, in turn, provide interLATA telecommunications
service to their customers. We also provide exchange access service to
interexchange carriers which provide intrastate intraLATA long distance
telecommunications service, as well as local exchange access to competitive
local exchange carriers for calls within a LATA. Other services we provide
include customer premises wiring and maintenance and billing and collection
services.
The telecommunications industry is undergoing substantial changes as a result
of the Telecommunications Act of 1996, other public policy changes and
technological advances. These changes are likely to bring increased competitive
pressures, but will also open new markets to Bell Atlantic, such as long
distance services within its geographic region, upon completion of certain
requirements of the Telecommunications Act of 1996.
Basis of Presentation
On August 14, 1997, Bell Atlantic and NYNEX completed a merger, which was
accounted for as a pooling of interests. The financial statements include
certain reclassifications in presentation and certain retroactive adjustments to
conform accounting methodologies as a result of the merger (see Note 2).
We prepare our financial statements under generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts or certain disclosures. Actual results could differ
from those estimates.
The consolidated financial statements include the accounts of New York
Telephone Company and its subsidiary. We have a 66-2/3% ownership interest in
Telesector Resources Group, Inc. (Telesector Resources) and share voting rights
equally with the other owner, New England Telephone and Telegraph Company (New
England Telephone), which is a wholly owned subsidiary of NYNEX. We use the
equity method of accounting for our investment in Telesector Resources.
Revenue Recognition
We recognize revenues when services are rendered based on usage of our local
exchange network and facilities.
Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, to Operating
Expenses.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or less
when purchased to be cash equivalents, except cash equivalents held as short-
term investments. Cash equivalents are stated at cost, which approximates
market value.
F-8
<PAGE>
New York Telephone Company
Short-term Investments
Our short-term investments consist of cash equivalents held in trust to pay
for certain employee benefits. Short-term investments are stated at cost, which
approximates market value.
Material and Supplies
We include in inventory new and reusable materials which are stated
principally at average original cost, except that specific costs are used in the
case of large individual items.
Plant and Depreciation
We state plant, property, and equipment at cost. Depreciation expense is
principally based on the composite group remaining life method and straight-line
composite rates. This method provides for the recognition of the cost of the
remaining net investment in telephone plant, less anticipated net salvage value,
over the remaining asset lives. This method requires the periodic revision of
depreciation rates. We used the following asset lives:
Average Lives (in years)
----------------------------------------------------------------------
Buildings................................ 20-60
Central office equipment................. 5-12
Outside communications plant............. 8-65
Furniture, vehicles and other equipment.. 5-15
When we replace or retire depreciable telephone plant, we deduct the carrying
amount of such plant from the respective accounts and charge accumulated
depreciation. Gains or losses on disposition are amortized with the remaining
net investment in telephone plant.
Computer Software Costs
We capitalize initial right-to-use fees for central office switching
equipment, including initial operating system and initial application software
costs. For noncentral office equipment, only the initial operating system
software is capitalized. Subsequent additions, modifications, or upgrades of
initial software programs, whether operating or application packages, are
expensed as incurred.
Capitalization of Interest Costs
We capitalize interest associated with the acquisition or construction of
plant assets. Capitalized interest is reported as a cost of plant and a
reduction in interest cost.
Income Taxes
Bell Atlantic and its domestic subsidiaries, including us, file a
consolidated federal income tax return.
The consolidated amount of current and deferred tax expense is allocated by
applying the provisions of Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes" to each subsidiary as if it were a
separate taxpayer. For periods prior to the Bell Atlantic - NYNEX merger, NYNEX
filed its own consolidated federal income tax return.
We use the deferral method of accounting for investment tax credits earned
prior to the repeal of investment tax credits by the Tax Reform Act of 1986. We
also defer certain transitional credits earned after the repeal. We amortize
these credits over the estimated service lives of the related assets as a
reduction to the Provision for Income Taxes.
Advertising Costs
We expense advertising costs as they are incurred.
F-9
<PAGE>
New York Telephone Company
Stock-Based Compensation
We participate in stock-based compensation plans sponsored by Bell Atlantic.
Bell Atlantic accounts for stock-based employee compensation plans under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations and follows the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Change in Accounting Principle -- Directory Publishing
We have an agreement with Bell Atlantic Yellow Pages Company (Yellow Pages)
under which Yellow Pages pays a fee to us for use of our name in soliciting
directory advertising and in publishing and distributing directories. Effective
January 1, 1996, Yellow Pages changed its method of accounting for directory
publishing revenues and expenses from the amortized method to the point-of-
publication method. Under the point-of-publication method, revenues and
expenses are recognized when the directories are published rather than over the
lives of the directories, as under the amortized method. Yellow Pages believes
the point-of-publication method is preferable because it is the method generally
followed by publishing companies. We recorded a one-time, noncash gain of
$95.4 million ($55.7 million after-tax) as a cumulative effect of a change in
accounting principle in the first quarter of 1996, representing our portion of
the cumulative effect of this accounting change. The application of the point-
of-publication method for the year ended 1996 did not have a material effect on
operating results.
Adoption of New Accounting Standards
In 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income" (see Note
8), SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (see Note 15) and SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (see Note 10). Prior year amounts
have been provided or restated, as required. These standards require new
disclosures only and do not impact our results of operations or financial
position.
Recent Accounting Pronouncements
Costs of Computer Software
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides,
among other things, guidance for determining whether computer software is for
internal use and when the cost related to such software should be expensed as
incurred or capitalized and amortized. SOP 98-1 is required to be applied
prospectively and will be adopted effective January 1, 1999. Bell Atlantic
estimates that the implementation of SOP 98-1 will result in a net after-tax
benefit of $200 million to $250 million in 1999 results of operations due to the
prospective capitalization of costs which were previously expensed as incurred.
We anticipate that costs for maintenance and training, as well as the cost of
software that does not add functionality to the existing system will continue to
be expensed as incurred.
Costs of Start-Up Activities
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities." SOP No. 98-5, which will be adopted effective January 1,
1999, requires that costs of start-up activities including pre-operating, pre-
opening and other organizational costs be expensed as incurred. In addition, at
the time of adoption the unamortized balance of any previously deferred start-up
costs must be expensed. The adoption of SOP 98-5 will have no material effect on
our results of operations or financial condition in 1999 because we have not
historically capitalized start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivatives be measured at fair value and recognized as either
assets or liabilities on our balance sheet. Changes in the fair values of the
derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments. We
must adopt SFAS No. 133 no later than January 1, 2000. The adoption of SFAS No.
133 will have no material effect on our results of operations or financial
condition because we currently do not enter into the use of derivative
instruments and hedging activities.
F-10
<PAGE>
New York Telephone Company
2. BELL ATLANTIC - NYNEX MERGER
On August 14, 1997, Bell Atlantic and NYNEX completed a merger of equals
under a definitive merger agreement entered into on April 21, 1996 and amended
on July 2, 1996. Under the terms of the amended agreement, NYNEX became a
wholly owned subsidiary of Bell Atlantic. The merger qualified as a tax-free
reorganization and has been accounted for as a pooling of interests. Under this
method of accounting, the companies are treated as if they had always been
combined for accounting and financial reporting purposes.
As a result of conforming the accounting methodologies of Bell Atlantic and
NYNEX, we reduced Reinvested Earnings as of December 31, 1994 by a net $1,006.2
million primarily for the immediate recognition of the transition benefit
obligation for postretirement benefits other than pensions in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS No. 106) as if the merger had
occurred as of the beginning of the earliest period presented. In our
historical financial statements, we had amortized the transition benefit
obligation over a twenty year period. The net reduction in Reinvested Earnings
also includes amounts reallocated from Additional Paid-in Capital to cover
dividend payments.
Merger-Related Costs
In third quarter of 1997, we recorded merger-related pre-tax costs of
approximately $11 million for direct incremental costs and $88 million for
employee severance costs. These costs include approximately $39 million
representing our allocated share of merger-related costs from Telesector
Resources, an affiliate which provides centralized services on a contract basis.
Costs allocated from Telesector Resources are included in Other Operating
Expenses.
Direct incremental costs consist of expenses associated with compensation
arrangements related to completing the merger transaction. Employee severance
costs, as recorded under SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," represent our proportionate share of benefit costs for the separation
by the end of 1999 of management employees who are entitled to benefits under
pre-existing Bell Atlantic separation pay plans. During 1997 and 1998, 42 and
140 management employees were separated with severance benefits. Accrued
postemployment benefit liabilities are included in our balance sheets as a
component of Employee Benefit Obligations.
Other Initiatives
During 1997, we recorded other charges and special items totaling
approximately $273 million in connection with consolidating operations and
combining organizations and for special items arising during the year. These
charges were comprised of the following significant items.
Write-down of Assets and Real Estate Consolidation
In the third quarter of 1997, we recorded pre-tax charges of approximately
$147 million for the write-down of obsolete or impaired fixed assets and for the
cost of consolidating redundant real estate properties. As part of the merger
integration planning, a review was conducted of the carrying values of long-
lived assets. This review included estimating remaining useful lives and cash
flows and identifying assets to be abandoned. In the case of impaired assets,
we analyzed cash flows related to those assets to determine the amount of the
impairment. As a result of these reviews, we recorded a charge of approximately
$112 million for the write-off of assets and $25 million for the impairment of
other assets. These assets primarily included copper wire to provide
telecommunications service and duplicate voice mail platforms. None of these
assets are being held for disposal. At December 31, 1998, the impaired assets
had no remaining carrying value.
In connection with the merger integration efforts, Bell Atlantic consolidated
real estate to achieve a reduction in the total square footage of building space
that it utilizes. We recorded a charge of approximately $10 million in the
third quarter of 1997 related to this initiative.
F-11
<PAGE>
New York Telephone Company
Regulatory and Legal Contingencies and Other Special Items
In 1997, we also recorded reductions to operating revenues and charges to
operating expenses totaling approximately $126 million (pre-tax). Of this
amount, approximately $8 million represents our proportionate share of special
items from Telesector Resources. These items consisted of the following:
. Revenue reductions consisted of approximately $50 million for federal
regulatory matters. These matters relate to specific issues that are
currently under investigation by federal regulatory commissions. We believe
that it is probable that the ultimate resolution of these pending matters
will result in refunds to our customers.
. Charges to operating expenses totaled approximately $76 million, including
$35 million for legal contingencies. These contingencies were accounted for
under the rules of SFAS No. 5 "Accounting for Contingencies." These charges
also included approximately $41 million for other post-merger initiatives.
The following table provides a reconciliation of the liabilities associated
with merger-related costs and other charges and special items at December 31,
1998 and 1997.
<TABLE>
<CAPTION>
Charged to 1997 1998
Beginning Expense or End of End of
(Dollars in Millions) of Year Revenue Deductions Adjustments Year Deductions Adjustments Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merger-Related
Direct incremental costs........ $ --- $ 1.6 $ (1.6)a $ --- $ --- $ --- $ --- $ ---
Severance obligation............ --- 57.4 --- 3.0 60.4 (1.7)a 9.2 67.9
Other Initiatives
Write-down of fixed assets and
real estate consolidation... --- 146.8 (136.9)b --- 9.9 --- --- 9.9
Regulatory and legal
contingencies and other
special items.............. --- 118.7 (24.3)b --- 94.4 (17.7)c (3.0) 73.7
-------------------------------------------------------------------------------------------
$ --- $324.5 $(162.8) 3.0 $164.7 $(19.4) $ 6.2 $151.5
===========================================================================================
</TABLE>
. Adjustments refer to deductions to the liability that reduced expense, or
additions to the liability that increased expense resulting from changes in
circumstances or experience in implementing the planned activities.
. Deductions refer to the utilization of the liability through payments, asset
write-offs, or refunds to customers.
a -- primarily comprised of cash payments
b -- primarily comprised of asset write-offs
c -- primarily comprised of refunds to customers
3. 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. The
completion of the merger is subject to a number of conditions, including certain
regulatory approvals, receipt of opinions that the merger will be tax-free, and
the approval of the shareholders of both Bell Atlantic and GTE.
F-12
<PAGE>
New York Telephone Company
4. PLANT, PROPERTY AND EQUIPMENT
The following table displays the details of plant, property and equipment,
which is stated at cost:
December 31
------------------------
1998 1997
----------- -----------
(Dollars in Millions)
Land.......................................... $ 71.8 $ 70.9
Buildings..................................... 2,044.5 1,959.6
Central office equipment...................... 9,142.4 8,762.6
Outside communications plant.................. 9,184.8 8,617.9
Furniture, vehicles and other work equipment.. 1,387.9 1,282.2
Other......................................... 418.9 395.7
Construction-in-progress...................... 382.6 353.6
---------- ----------
22,632.9 21,442.5
Accumulated depreciation...................... (12,748.6) (11,967.5)
---------- ----------
Total......................................... $ 9,884.3 $ 9,475.0
========== ==========
5. LEASES
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. Total rent expense amounted to $88.8 million
in 1998, $106.1 million in 1997 and $94.6 million in 1996. We incurred no
initial capital lease obligations in 1998, 1997 and 1996.
Capital lease amounts included in plant, property and equipment are as
follows:
December 31
-----------------------
1998 1997
----------- ----------
(Dollars in Millions)
Capital leases............ $112.2 $112.8
Accumulated amortization.. (56.1) (53.0)
------ ------
Total..................... $ 56.1 $ 59.8
====== ======
This table displays the aggregate minimum rental commitments under
noncancelable leases for the periods shown at December 31, 1998.
Years Capital Leases Operating Leases
- ----- --------------- -----------------
(Dollars in Millions)
1999.................................. $ 11.7 $ 27.6
2000.................................. 11.6 23.0
2001.................................. 11.5 20.5
2002.................................. 7.4 13.6
2003.................................. 6.9 11.8
Thereafter............................ 419.1 59.6
-------- --------
Total minimum rental commitments...... 468.2 $ 156.1
========
Less interest and executory costs..... 418.8
--------
Present value of minimum
lease payments....................... 49.4
Less current installments............. 2.7
--------
Long-term obligation at
December 31, 1998.................... $ 46.7
========
F-13
<PAGE>
New York Telephone Company
6. DEBT
Debt Maturing Within One Year
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
(Dollars in Millions)
Note payable to affiliate (NYNEX)................ $1,586.3 $1,451.4
Note payable to affiliate (BANFC)................ .3 ---
Long-term debt maturing within one year.......... 2.7 100.7
-------- --------
Total debt maturing within one year.............. $1,589.3 $1,552.1
======== ========
Weighted average interest rate for note payable
outstanding at year-end......................... 4.9% 5.7%
======== ========
</TABLE>
We have an agreement with NYNEX for the provision of short-term financing and
cash management services. Beginning in 1998, we also have a contractual
agreement with another affiliated company, Bell Atlantic Network Funding
Corporation (BANFC), for the provision of short-term financing and cash
management services. BANFC issues commercial paper and obtains bank loans to
fund the working capital requirements of Bell Atlantic's network services
subsidiaries, including us, and invests funds in temporary investments on their
behalf. At December 31, 1998, we had $49.7 million of an unused line of credit
with BANFC.
Long-Term Debt
Long-term debt consists of debentures, refunding mortgage bonds and notes
that we have issued. Interest rates and maturities of the amounts outstanding
are as follows at December 31:
<TABLE>
<CAPTION>
Description Interest Rate Maturity 1998 1997
-------------------------------------------------------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Twelve year debenture............................................. 6 1/2% 2005 $ 200.0 $ 200.0
Ten year debenture................................................ 6 2008 250.0 ---
Twelve year debenture............................................. 6 1/8 2010 250.0 ---
Twenty-one year debenture......................................... 8 5/8 2010 150.0 150.0
Twenty year debenture............................................. 7 2013 100.0 100.0
Twenty year debenture............................................. 7 2013 100.0 100.0
Forty year debenture.............................................. 7 7/8 2017 --- 200.0
Thirty year debenture............................................. 7 5/8 2023 100.0 100.0
Thirty year debenture............................................. 6.70 2023 250.0 250.0
Thirty year debenture............................................. 7 1/4 2024 450.0 450.0
Thirty-two year debenture......................................... 7 2025 250.0 250.0
Thirty year debenture............................................. 6 1/2 2028 100.0 ---
Forty year debenture.............................................. 9 3/8 2031 200.0 200.0
Forty year debenture.............................................. 7 2033 200.0 200.0
Thirty-seven year refunding mortgage bond, Series N............... 4 1/4 2000 70.0 70.0
Forty year refunding mortgage bond, Series M...................... 4 5/8 2002 60.0 60.0
Forty year refunding mortgage bond, Series O...................... 4 5/8 2004 130.0 130.0
Forty year refunding mortgage bond, Series P...................... 4 7/8 2006 100.0 100.0
Thirty-six year refunding mortgage bond, Series T................. 7 3/4 2006 --- 200.0
Forty year refunding mortgage bond, Series Q...................... 6 2007 75.0 75.0
Forty year refunding mortgage bond, Series R...................... 7 1/2 2009 --- 150.0
Forty year refunding mortgage bond, Series V...................... 7 3/8 2011 200.0 200.0
Five year note payable............................................ 5 1/4 1998 --- 100.0
Ten year note payable............................................. 5 7/8 2003 200.0 200.0
Ten year note payable............................................. 5 5/8 2003 150.0 150.0
Ten year note payable............................................. 6 1/4 2004 150.0 150.0
-------- --------
3,735.0 3,785.0
Unamortized discount and premium, net..................................... (26.7) (26.3)
Capital lease obligations - average rate 13.1% and 12.8%.................. 49.4 52.0
-------- --------
Total long-term debt, including current maturities........................ 3,757.7 3,810.7
Less maturing within one year............................................. 2.7 100.7
-------- --------
Total long-term debt...................................................... $3,755.0 $3,710.0
======== ========
</TABLE>
F-14
<PAGE>
New York Telephone Company
All of our refunding mortgage bonds outstanding at December 31, 1998,
totaling $635.0 million, are callable. The call prices range from 101.97% to
100.0% of face value, depending upon the remaining term to maturity of the
issue. Substantially all of our assets are subject to lien under the Refunding
Mortgage Bond indenture.
During 1998, we recorded extraordinary charges that reduced net income by
$7.5 million (net of an income tax benefit of $4.0 million) associated with
early extinguishments of long-term debt. These extinguishments, and subsequent
issuances of debt, consisted of the following:
. In January 1998, we issued $250.0 million of 6.125% debentures due on
January 15, 2010. The proceeds of this issuance were used in February 1998
to redeem $200.0 million of 7.75% refunding mortgage bonds due in 2006.
. In April 1998, we issued $250.0 million of 6.0% debentures due on April
15, 2008 and $100.0 million of 6.5% debentures due on April 15, 2028. The
proceeds of these issuances were used in May 1998 to redeem $200.0 million
of 7.875% debentures due in 2017 and $150.0 million of 7.5% refunding
mortgage bonds due in 2009.
7. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk
consist primarily of short-term investments and trade receivables.
Concentrations of credit risk with respect to trade receivables other than those
from AT&T are limited due to the large number of customers. We generated
revenues from services provided to AT&T (primarily network access and billing
and collection) of $754.7 million in 1998, $908.7 million in 1997 and $763.1
million in 1996.
Fair Value of Financial Instruments
The table below provides additional information about our material financial
instruments at December 31:
Financial Instrument Valuation Method
----------------------------------------------------------------------------
Notes payable to affiliates (NYNEX and Carrying amounts
BANFC) and short-term investments
Debt (excluding capital leases) Market quotes for similar terms
and maturities or future cash
flows discounted at current
rates
1998 1997
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in Millions)
Debt.............. $5,294.9 $5,549.9 $5,210.1 $5,260.4
F-15
<PAGE>
New York Telephone Company
8. COMPREHENSIVE INCOME
Effective January 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive
Income." The new rules establish standards for the reporting of comprehensive
income and its components in financial statements. Comprehensive income
consists of net income and other gains and losses affecting shareowner's
investment that, under generally accepted accounting principles, are excluded
from net income. The adoption of SFAS No. 130 did not affect our statement of
income, but did affect the presentation of our balance sheet. We also have
included a statement of shareowner's investment as part of our basic financial
statements.
The change in other compehensive loss, net of an income tax benefit, is as
follows:
Years ended December 31,
1998 1997 1996
-------- ----- -----
(Dollars in Millions)
Other comprehensive loss:
Minimum pension liability adjustment (net of
income tax benefit of $1.1)................. $(2.0) $ --- $ ---
----- ----- -----
$(2.0) $ --- $ ---
===== ===== =====
Accumulated other comprehensive loss is comprised of the following:
December 31,
1998 1997
----- -----
Accumulated other comprehensive loss:
Minimum pension liability adjustment.......... $(2.0) $ ---
----- -----
$(2.0) $ ---
===== =====
9. STOCK INCENTIVE PLANS
We participate in stock-based compensation plans sponsored by Bell Atlantic.
Bell Atlantic applies APB Opinion No. 25 and related interpretations in
accounting for the plans and has adopted the disclosure-only provisions of SFAS
No. 123. If Bell Atlantic had elected to recognize compensation expense based
on the fair value at the grant dates for 1996 and subsequent awards consistent
with the provisions of SFAS No. 123, our net income would have been changed to
the pro forma amounts indicated below:
1998 1997 1996
------ ------ ------
(Dollars in Millions)
Net income --As reported.......... $307.5 $430.0 $868.8
--Pro forma............ 293.1 409.5 855.4
These results may not be representative of the effects on pro forma net
income for future years.
The pro forma net income amounts were determined using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
1998 1997 1996
------ ------ ------
Dividend yield....................... 4.59% 4.86% 4.66%
Expected volatility.................. 18.63% 14.87% 15.30%
Risk-free interest rate.............. 5.55% 6.35% 5.42%
Expected lives (in years)............ 5 5 5
The weighted average value of options granted was $6.47 per option during
1998, $4.30 per option during 1997 and $2.76 per option during 1996.
The NYNEX stock options outstanding and exercisable at the date of the merger
were converted to Bell Atlantic stock options using the exchange ratio of 0.768
shares of Bell Atlantic common stock to one share of NYNEX common stock.
F-16
<PAGE>
New York Telephone Company
10. EMPLOYEE BENEFITS
We participate in the Bell Atlantic benefit plans. Bell Atlantic maintains
noncontributory defined benefit pension plans for substantially all management
and associate employees, as well as postretirement healthcare and life insurance
plans for our retirees and their dependents. Bell Atlantic also sponsors savings
plans to provide opportunities for eligible employees to save for retirement on
a tax-deferred basis and to encourage employees to acquire and maintain an
equity interest in Bell Atlantic.
In 1997, following the completion of the merger with NYNEX, the assets of the
Bell Atlantic and NYNEX pension and savings plans were commingled in a master
trust, and effective January 1, 1998, Bell Atlantic established common pension
and savings plan benefit provisions for all management employees.
The Financial Accounting Standards Board issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," (SFAS No. 132) in
February 1998. This new standard does not change the measurement or recognition
of costs for pensions or other postretirement plans. It standardizes disclosures
and eliminates those that are no longer useful. The structure of Bell
Atlantic's benefit plans does not provide for the separate determination of
certain disclosures required by SFAS No. 132 for our company. The required
information is provided on a consolidated basis in Bell Atlantic's Annual Report
on Form 10-K for the year ended December 31, 1998. What follows are our benefit
costs and obligations for 1998, 1997 and 1996. The disclosures in 1997 and 1996
reflect the historic benefit plans and actuarial assumptions in effect during
those years, as shown in the tables below.
Pension and Other Postretirement Benefits
Substantive commitments for future plan amendments are reflected in the
pension costs and benefit obligations. Pension and other postretirement benefits
for our associate employees are subject to collective bargaining agreements.
Modifications in associate benefits have been bargained from time to time, and
Bell Atlantic may also periodically amend the benefits in the management plans.
As a result of the merger of Bell Atlantic and NYNEX, we recorded conforming
adjustments for the immediate recognition of the postretirement transition
benefit obligation as if the merger had occurred as of the beginning of the
earliest period presented. In our historical financial statements prior to the
merger, we amortized the transition obligation over a twenty-year period.
The following table summarizes our benefit costs for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in Millions)
Pension Healthcare and Life
--------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net periodic (income) benefit cost $(170.7) $(140.4) $(132.7) $139.9 $173.4 $210.2
--------------------------------------------------------
Special termination benefits 733.7 258.7 146.2 27.3 19.9 11.7
Curtailment (gain)loss (including recognition of prior (97.8) (85.2) (50.8) 80.7 46.5 25.6
service cost)
Release of severance and postretirement medical
reserves (31.8) (30.2) (26.0) (44.8) (38.8) (36.0)
--------------------------------------------------------
Retirement incentive cost, net 604.1 143.3 69.4 63.2 27.6 1.3
--------------------------------------------------------
Total benefit cost $ 433.4 $ 2.9 $ (63.3) $203.1 $201.0 $211.5
--------------------------------------------------------
</TABLE>
Above table does not include costs allocated from Telesector Resources. See
"Retirement Incentives" section for additional information.
F-17
<PAGE>
New York Telephone Company
Amounts recognized on the balance sheets consist of:
<TABLE>
<CAPTION>
At December 31,
(Dollars in Millions)
Pension Healthcare and Life
---------------------------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee benefit obligations $(1,475.4) $(994.9) $(2,023.1) $(1,981.1)
Other assets 2.2 --- --- ---
Accumulated other comprehensive loss 3.1 --- --- ---
- ----------------------------------------------------------------------------------------------------
</TABLE>
The changes in benefit obligations from year to year were caused by a number
of factors, including changes in actuarial assumptions (see Assumptions), plan
amendments and special termination benefits.
Assumptions
The actuarial assumptions used are based on financial market interest rates,
past experience, and management's best estimate of future benefit changes and
economic conditions. Changes in these assumptions may impact future benefit
costs and obligations. The weighted-average assumptions used in determining
expense and benefit obligations are as follows:
<TABLE>
<CAPTION>
Pension Healthcare and Life
--------------------------------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate at end of year 7.00% 7.25% 7.75% 7.00% 7.25% 7.75%
Long-term rate of return on plan assets for the year 8.90 8.90 8.90 8.90 8.40 8.40
Rate of future increases in compensation at end of 4.00 4.00 4.00 4.00 4.00 4.00
year
Medical cost trend rate at end of year 6.00 6.50 10.60
Ultimate (year 2001 for 1998 and 1997, year 2008
for 1996) 5.00 5.00 4.50
Dental cost trend rate at end of year 3.50 3.50 3.50
Ultimate (year 2002) 3.00 3.00 3.00
- -------------------------------------------------------------------------------------------------
</TABLE>
Retirement Incentives
In 1993, we announced a restructuring plan which included an accrual of
approximately $630.9 million (pre-tax) for severance and postretirement medical
benefits under a force reduction plan, of which $74.1 million was our allocated
portion of Telesector Resources' cost for its force reduction plan. Beginning
in 1994, retirement incentives have been offered as a voluntary means of
implementing substantially all of the work force reductions planned in 1993.
Since the inception of the retirement incentive program, we recorded
additional costs totaling approximately $1,882.4 million (pre-tax) through
December 31, 1998. The retirement incentive costs include amounts charged to us
by Telesector Resources for an allocated portion of the employees who left
Telesector Resources under the retirement incentive program. The Company's
allocated portion of Telesector Resources' costs are $33.1 million in 1998,
$87.4 million in 1997, $14.4 million in 1996, $82.5 million in 1995 and $57.4
million in 1994. As of December 31, 1998, employees who have left the business
under the retirement incentive program totaled 16,117, consisting of 5,475
management and 10,642 associate employees (including 2,433 management and 535
associate employees of Telesector Resources). These additional costs and the
corresponding number of employees accepting the retirement incentive offer for
each year are as follows:
<TABLE>
<CAPTION>
(Dollars in Millions)
Year Amount Employees
- ---------------------------------------------------------------------------------------
<S> <C> <C>
1994 $ 523.4 4,802
1995 304.0 2,551
1996 87.8 1,295
1997 262.9 2,314
1998 704.3 5,155
------------------------------------------------------------------
$1,882.4 16,117
- ---------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
New York Telephone Company
The retirement incentive costs paid for our employees are included in
Employee Costs and the allocated costs from Telesector Resources are included in
Other Operating Expenses on our statements of income. The accrued liability
related to our employees is a component of the Employee Benefit Obligations and
the accrued liability related to our allocated portion of Telesector Resources'
employees is a component of Accounts payable and accrued liabilities -
Affiliates recorded on our consolidated balance sheets. The additional costs are
comprised of special termination pension and postretirement benefit amounts, as
well as employee costs for other items. These costs have been 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 on March 31, 1997 and the program covering
associate employees was completed in September 1998.
The following table provides the amounts transferred from the 1993 reserve
balance to pension and postretirement benefits (OPEB) liabilities:
(Dollars in Millions)
Years Severance OPEB Total
- --------------------------------------------------------------------------
1994 $177.8 $113.4 $291.2
1995 40.4 35.9 76.3
1996 44.2 61.4 105.6
1997 33.7 43.5 77.2
1998 33.5 47.1 80.6
- --------------------------------------------------------------------------
$329.6 $301.3 $630.9
-------------------------------------------------------
The remaining severance and postretirement medical reserves balances
associated with the 1993 restructuring plan were as follows at December 31, 1997
and 1998:
(Dollars in Millions)
1997 1998
- -------------------------------------------------------------------------------
Beginning of year $157.8 $ 80.6
Utilization (77.2) (80.6)
------------------------------------
End of year $ 80.6 $ 0
------------------------------------
Savings Plans and Employee Stock Ownership Plans
Substantially all of our employees are eligible to participate in savings
plans maintained by Bell Atlantic. Bell Atlantic maintains a leveraged employee
stock ownership plan (ESOP) for its management employees of the former NYNEX
companies. Under this plan, a certain percentage of eligible employee
contributions are matched with shares of Bell Atlantic common stock. At the
date of the merger, NYNEX common stock outstanding was converted to Bell
Atlantic shares using an exchange ratio of 0.768 of a share of Bell Atlantic
common stock to one share of NYNEX common stock. Bell Atlantic recognizes
leveraged ESOP cost based on the shares allocated method for this leveraged ESOP
that held shares after December 31, 1989. We recognize ESOP cost based on our
matching obligation attributable to our participating employees. We recorded
ESOP costs of $16.7 million in 1998, $11.6 million in 1997 and $10.8 million in
1996. In addition to the ESOP, Bell Atlantic maintains savings plans for our
associate employees. Compensation expense associated with these savings plans
was $44.6 million in 1998, $43.7 million in 1997 and $40.8 million in 1996.
F-19
<PAGE>
New York Telephone Company
11. INCOME TAXES
The components of income tax expense are presented in the following table:
Years Ended December 31
--------------------------
1998 1997 1996
-------- ------- -------
(Dollars in Millions)
Current:
Federal.............. $ 313.5 $120.6 $390.4
State and local...... 4.8 4.0 4.6
------- ------ ------
318.3 124.6 395.0
------- ------ ------
Deferred:
Federal.............. (160.6) 96.4 30.9
State and local...... (3.5) (.3) .7
------- ------ ------
(164.1) 96.1 31.6
------- ------ ------
154.2 220.7 426.6
Investment tax credits.... (10.3) (13.1) (24.1)
------- ------ ------
Total income tax expense.. $ 143.9 $207.6 $402.5
======= ====== ======
The following table show the principal reasons for the difference between the
effective income tax rate and the statutory federal income tax rate:
Years Ended December 31
--------------------------
1998 1997 1996
-------- ------- -------
Statutory federal income tax rate................ 35.0% 35.0% 35.0%
Investment tax credits........................... (1.4) (1.4) (1.3)
State income taxes, net of federal tax benefits.. .2 .4 .5
Other, net....................................... (2.4) (1.4) (1.1)
---- ---- ----
Effective income tax rate........................ 31.4% 32.6% 33.1%
==== ==== ====
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax
liabilities (assets) are shown in the following table:
December 31
-----------------------
1998 1997
----------- ----------
(Dollars in Millions)
Deferred tax assets:
Employee benefits....... $(1,310.4) $(1,164.4)
Investment tax credits.. (30.0) (33.6)
Other................... (94.7) (283.1)
--------- ---------
(1,435.1) (1,481.1)
--------- ---------
Deferred tax liabilities:
Depreciation............ 877.0 974.3
Other................... 79.8 194.5
--------- ---------
956.8 1,168.8
--------- ---------
Net deferred tax (asset)..... $ (478.3) $ (312.3)
========= =========
Deferred tax assets include approximately $746 million at December 31, 1998
and $693 million at December 31, 1997 related to postretirement benefit costs
recognized under SFAS No. 106. This deferred tax asset will gradually be
realized over the estimated lives of current retirees and employees.
F-20
<PAGE>
12. ADDITIONAL FINANCIAL INFORMATION
The tables below provide additional financial information related to our
consolidated financial statements:
December 31
--------------------------
1998 1997
-------- --------
(Dollars in Millions)
BALANCE SHEETS:
Accounts payable and accrued liabilities:
Accounts payable - affiliates............. $1,195.8 $ 915.9
Accounts payable - other.................. 793.6 713.2
Accrued vacation pay...................... 178.8 174.2
Interest payable.......................... 86.6 81.6
Accrued taxes............................. 42.0 69.3
Accrued expenses.......................... 24.3 37.2
-------- --------
$2,321.1 $1,991.4
======== ========
Other current liabilities:
Advance billings and customer deposits.... $ 180.2 $ 176.0
Deferred income taxes..................... 102.8 67.7
-------- --------
$ 283.0 $ 243.7
======== ========
Years Ended December 31
--------------------------
1998 1997 1996
-------- -------- ------
(Dollars in Millions)
STATEMENTS OF CASH FLOWS:
Cash paid during the year for:
Income taxes, net of amounts refunded..... $252.0 $280.0 $338.4
Interest, net of amounts capitalized...... 335.2 313.2 299.9
STATEMENTS OF INCOME:
Interest expense incurred,
net of amounts capitalized................ 343.8 332.1 288.5
Capitalized interest....................... 24.0 21.6 22.4
Advertising expense........................ 45.8 57.4 58.2
Interest paid during the year includes $47.5 million in 1998, $46.2 million
in 1997 and $25.2 million in 1996 related to short-term financing services
provided by NYNEX. Interest paid during the year also includes $.3 million in
1998 related to short-term financing services provided by BANFC (see Note 6).
Advertising expense includes $44.0 million in 1998, $57.4 million in 1997 and
$58.2 million in 1996 allocated to us by Telesector Resources. Advertising
expense also includes $1.2 million in 1998 allocated to us by Bell Atlantic
Network Services Inc. (NSI).
At December 31, 1998 and 1997, $65.1 million and $44.2 million of bank
overdrafts were classified as accounts payable.
F-21
<PAGE>
New York Telephone Company
13. COMMITMENTS AND CONTINGENCIES
Various legal actions and regulatory proceedings are pending to which we are
a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters which we currently deem to be probable and
estimable. We do not expect that the ultimate resolution of pending regulatory
and legal matters in future periods will have a material effect on our financial
condition, but could have a material effect on our results of operations.
We deferred revenues under a plan approved by the New York State Public
Service Commission (NYSPSC) in 1995 associated with commitments for fair
competition, universal service, service quality and infrastructure improvements
(the Incentive Plan), and also deferred revenues for a 1994 service improvement
plan obligation. These deferred revenues are included in Accounts Payable and
Accrued Liabilities and Deferred Credits and Other Liabilities - Other on our
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 as of December 31:
1998 1997 1996
------- ------- -------
Balance at beginning of year.... $56.3 $ 95.0 $188.0
Amounts utilized for rebates ... --- (16.5) (50.0)
Amounts reversed into revenues.. (7.5) (22.2) (43.0)
----- ------ ------
Balance at end of year.......... $48.8 $ 56.3 $ 95.0
===== ====== ======
The Incentive Plan also established annual service quality targets with
stringent rebate provisions if we are unable to meet some or all of the targets.
Each year, our performance results are reviewed and a determination is made
regarding the requirement for rebates to our customers. If targets are met, any
liabilities are reversed and recognized in revenues. Each year is defined as a
plan year, with Plan Year 1 being the year ended August 31, 1996 and continuing
through Plan Year 4, which is the year ended August 31, 1999. The amounts below
represent the cumulative totals for Plan Years 1 to 4. This liability has been
included in Accounts Payable and Accrued Liabilities and Deferred Credits and
Other Liabilities - Other on our consolidated balance sheet. A summary of the
liabilities related to this portion of the Incentive Plan is shown below as of
December 31:
1998 1997 1996
------- ------- -------
Balance at beginning of year.... $ 7.8 $ 47.3 $ ---
Additional amounts accrued...... 18.4 21.0 63.6
Amounts utilized for rebates.... (2.5) (60.5) (16.3)
Amounts reversed into revenues.. (11.8) --- ---
------ ------ ------
Balance at end of year.......... $ 11.9 $ 7.8 $ 47.3
====== ====== ======
Of the remaining liability balance at December 31, 1998, $10.4 million is
related to Plan Year 4 and $1.5 million is related to Plan Year 1.
Several state and federal regulatory matters may require us to refund a
portion of the revenues collected in the current and prior periods. In the
first quarter of 1997, the NYSPSC approved a settlement agreement with respect
to affiliate transaction issues resulting from our 1990 intrastate rate case.
Under that agreement we refunded approximately $83 million of such revenues to
customers and paid an additional $6 million in interest. (We recorded charges
for the refund in 1995 and 1996). The settlement resolved all pending issues
related to affiliate transactions. As of December 31, 1998, the aggregate
amount of revenues estimated to be subject to possible refund was approximately
$55 million plus related interest. The outcome of each pending matter, as well
as the time frame within which each will be resolved, is not presently
determinable.
F-22
<PAGE>
New York Telephone Company
14. TRANSACTIONS WITH AFFILIATES
Our financial statements include transactions with Telesector Resources,
NYNEX, NSI, BANFC and various other affiliates.
We have contractual arrangements with Telesector Resources, NSI and NYNEX for
the provision of various centralized services. Telesector Resources principally
provides network related services which generally benefit only the operating
telephone subsidiaries, including us. These services include marketing, legal
and accounting, finance, data processing, and materials management for various
network operations. Costs may be either directly assigned to one subsidiary or
allocated to more than one subsidiary based on identification of detailed work
functions. We were also allocated a portion of Telesector Resources retirement
incentive program costs (see Note 10).
NSI services are divided into two broad categories. The first category is
comprised of network related services which generally benefit only Bell
Atlantic's operating telephone subsidiaries. These services include marketing,
sales, legal, accounting, finance, data processing, materials management,
procurement, labor relations, and staff support for various network operations.
The second category is comprised of overhead and support services which
generally benefit all subsidiaries of Bell Atlantic. Such services include
corporate governance, corporate finance, external affairs, legal, media
relations, employee communications, corporate advertising, human resources, and
treasury. Costs may be either directly assigned to one subsidiary or allocated
to more than one subsidiary based on functional reviews of the work performed.
NYNEX principally provided overhead and support services which generally
benefit the operating telephone companies as well as other subsidiaries. These
services include corporate governance, corporate finance, external affairs,
legal, media relations, employee communications, corporate advertising, human
resources, and treasury. Costs may be either directly assigned to one
subsidiary or allocated to more than one subsidiary based on work studies
performed to identify on whose behalf services are being performed. The costs
of certain functions which are performed on behalf of all subsidiaries are
allocated to those subsidiaries based on their relative size. On January 1,
1999, all NYNEX employees and their associated functions were transferred to
NSI, Telesector Resources and Bell Atlantic.
We receive technical and support services from Bell Communications Research,
Inc. (Bellcore), a company previously owned jointly by the regional holding
companies. In 1997, Bell Atlantic and the other Bellcore owners sold their
jointly owned investment in Bellcore. We continue to contract with Bellcore for
technical and support services. The costs of these services were billed to us
separately through Telesector Resources until July 1998 and are now billed
through NSI.
We recognize interest expense/income in connection with contractual
arrangements with NYNEX and BANFC to provide short-term financing, investing and
cash management services to us (see Note 6).
Operating revenues include fees earned from Yellow Pages for the use of the
Company's name in soliciting directory advertising and in publishing and
distributing directories. These revenues are earned under an agreement whereby
Yellow Pages must pay all of its earnings related to directory publishing in New
York which are in excess of a regulated rate of return. Other operating
revenues and expenses include miscellaneous items of income and expense
resulting from transactions with other affiliates, primarily rental of
facilities and equipment.
We record income under the equity method of accounting from our investment in
Telesector Resources. We also paid cash distributions of additional paid-in
capital to our parent company, NYNEX.
F-23
<PAGE>
New York Telephone Company
Transactions with affiliates are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Operating revenues:
Yellow Pages directory revenues............... $ 145.0 $ 148.4 $ 169.7
Other revenue from affiliates................. 102.3 86.9 80.3
-------- -------- --------
247.3 235.3 250.0
-------- -------- --------
Operating expenses:
Telesector Resources.......................... 1,177.4 1,381.3 1,206.8
NSI........................................... 149.9 --- ---
NYNEX......................................... 22.0 27.4 34.1
Bellcore...................................... --- 28.2 41.1
Other......................................... 6.1 6.2 6.6
-------- -------- --------
1,355.4 1,443.1 1,288.6
-------- -------- --------
Other income:
Telesector Resources - equity income........... 31.4 36.0 18.4
NYNEX - interest income........................ .1 .5 .4
BANFC - interest income........................ .1 --- ---
-------- -------- --------
31.6 36.5 18.8
-------- -------- --------
Interest expense to NYNEX....................... 48.1 46.2 25.2
Interest expense to BANFC....................... .3 --- ---
-------- -------- --------
48.4 46.2 25.2
-------- -------- --------
Distributions of additional paid-in capital to
NYNEX......................................... 649.3 487.4 574.8
Dividends received from Telesector Resources.... 42.9 16.5 20.6
</TABLE>
Outstanding balances with affiliates are reported on the Balance Sheets at
December 31, 1998 and 1997 as Accounts Receivable - Affiliates, Notes Payable to
Affiliates, and Accounts Payable and Accrued Liabilities - Affiliates.
On February 1, 1999, we paid a dividend from Additional Paid-in-Capital in
the amount of $101.4 million to NYNEX.
15. SEGMENT INFORMATION
We have adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards for the way companies
must determine and report information about operating segments in their annual
and interim reports.
We have one reportable segment, which provides domestic wireline
telecommunications services. Specifically, we provide local telephone services
including voice and data transport, enhanced and custom calling features,
network access, directory assistance, private lines and public telephones. In
addition, we provide customer premises equipment distribution and billing and
collection services. We have four strategic business units (consumer,
enterprise, general and network services) supporting our operations that have
been aggregated into one reportable segment.
F-24
<PAGE>
New York Telephone Company
16. QUARTERLY FINANCIAL INFORMATION (unaudited)
Income Before
Operating Operating Extraordinary Net
Quarter Ended Revenues Income (loss) Item Income (loss)
- ------------- --------- ------------- -------------- -------------
(Dollars in Millions)
1998:
March 31.......... $2,011.8 $ 380.6 $ 202.0 $ 200.5
June 30........... 2,151.9 464.1 244.0 238.0
September 30...... 2,025.9 (405.9) (306.2) (306.2)
December 31....... 2,080.3 328.8 175.2 175.2
-------- ------- ------- -------
Total............. $8,269.9 $ 767.6 $ 315.0 $ 307.5
======== ======= ======= =======
1997:
March 31.......... $1,913.4 $ 292.2 $ 123.7 $ 123.7
June 30........... 2,095.1 426.6 239.6 239.6
September 30...... 1,942.2 (34.4) (66.2) (66.2)
December 31....... 2,006.6 268.7 132.9 132.9
-------- ------- ------- -------
Total............. $7,957.3 $ 953.1 $ 430.0 $ 430.0
======== ======= ======= =======
*Results of operations for the third quarter of 1997 include costs incurred in
connection with consolidating operations and combining the organizations of
Bell Atlantic and NYNEX and for other special items arising during the
quarter, as well as charges associated with the completion of the merger (see
Note 2) and our retirement incentive program.
F-25
<PAGE>
New York Telephone Company
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in Millions)
<TABLE>
<CAPTION>
Additions
-----------------------------------------------------------
Charged
Balance at Charged to Other Balance
Beginning to Accounts Deductions at End
Description of Period Expenses Note(a) Note(b) of Period
- ----------- ---------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible
Accounts Receivable:
Year 1998............... $184.9 $112.1 $216.8 $344.6 $169.2
Year 1997............... $166.9 $122.5 $256.5 $361.0 $184.9
Year 1996............... $159.3 $107.8 $167.4 $267.6 $166.9
Restructuring Reserves:
Year 1998............... $ 80.6 $ --- $ --- $ 80.6 $ ---
Year 1997............... $160.8 $ --- $ --- $ 80.2 $ 80.6
Year 1996............... $336.5 $ --- $ --- $175.7 $160.8
</TABLE>
- ------------------
(a) (1) Allowance for Uncollectible Accounts Receivable includes amounts
previously written off which were credited directly to this account when
recovered, and (2) accruals charged to accounts payable for anticipated
uncollectible charges on purchases of accounts receivable from others which
we billed.
(b) Amounts written off as uncollectible or transferred to other accounts or
utilized.
F-26
<PAGE>
EXHIBITS
FILED WITH ANNUAL REPORT FORM 10-K
UNDER THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
New York Telephone Company
COMMISSION FILE NUMBER 1-3435
<PAGE>
Form 10-K for 1998
File No. 1-3435
Page 1 of 1
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission (SEC), are incorporated herein by reference as exhibits
hereto.
(3) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission (SEC), are incorporated herein
by reference as exhibits hereto.
3a Certificate of Incorporation of New York Telephone Company, as
amended and restated December 2, 1987 (Exhibit No. 3(a) to the
registrant's filing on Form SE dated March 24, 1988, File No.
1-3435).
3b By-Laws of the registrant, as amended April 22, 1987 (Exhibit No.
3(b) to the registrant's filing on Form SE dated March 24, 1988,
File No. 1-3435).
4 No instrument which defines the rights of holders of long-term
debt of the registrant and its subsidiary is filed herewith
pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to
this regulation, the registrant hereby agrees to furnish a copy
of any such instrument to the SEC upon request.
10(ii)(B) Service agreement concerning provision by Telesector
Resources Group, Inc. to the registrant of numerous services,
including (i) purchasing, materials handling, inspection,
distribution, storage and similar services and (ii) technical,
regulatory, government relations, marketing operational support
and similar services, dated March 31, 1992 (Exhibit No. 19(I)1 to
the registrant's filing on Form SE dated March 23, 1993, File No.
1-3435).
23 Consent of Independent Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
New York Telephone Company on Form S-3 (File No. 333-45779) of our report dated
February 9, 1999, on our audits of the consolidated financial statements and
financial statement schedule of the Company as of December 31, 1998 and December
31, 1997, and for each of the three years in the period ended December 31, 1998,
which report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 29, 1999
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Richard L. Carrion
-----------------------------------
Richard L. Carrion
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Lodweijk J. R. de Vink
------------------------------------
Lodewijk J.R. de Vink
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Stanley P. Goldstein
---------------------------------
Stanley P. Goldstein
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Helene L. Kaplan
--------------------------------
Helene L. Kaplan
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Elizabeth T. Kennan
--------------------------------
Elizabeth T. Kennan
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ John F. Maypole
----------------------------------
John F. Maypole
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Joseph Neubauer
--------------------------------
Joseph Neubauer
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Hugh B. Price
------------------------------------
Hugh B. Price
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints Edwin F. Hall as attorney
for the undersigned for the purpose of executing and filing such Annual Report
and any amendment or amendments or other necessary documents, hereby giving to
said attorney full authority to perform all acts necessary thereto as fully as
the undersigned could do if personally present, and hereby ratifying all that
said attorney may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Ivan G. Seidenberg
---------------------------------
Ivan G. Seidenberg
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Walter V. Shipley
------------------------------------
Walter V. Shipley
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints each of Ivan G. Seidenberg
and Edwin F. Hall as attorney for the undersigned for the purpose of executing
and filing such Annual Report and any amendment or amendments or other necessary
documents, hereby giving to each said attorney full authority to perform all
acts necessary thereto as fully as the undersigned could do if personally
present, and hereby ratifying all that said attorney may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ John R. Stafford
----------------------------------
John R. Stafford
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, NEW YORK TELEPHONE COMPANY, a New York corporation (hereinafter
referred to as the "Company"), proposes to file with the Securities and Exchange
Commission under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
NOW, THEREFORE, the undersigned hereby appoints Ivan G. Seidenberg as
attorney for the undersigned for the purpose of executing and filing such Annual
Report and any amendment or amendments or other necessary documents, hereby
giving to said attorney full authority to perform all acts necessary thereto as
fully as the undersigned could do if personally present, and hereby ratifying
all that said attorney may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March, 1999.
/s/ Edwin F. Hall
---------------------------------------
Edwin F. Hall
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 400
<SECURITIES> 0
<RECEIVABLES> 1,703
<ALLOWANCES> 169
<INVENTORY> 149
<CURRENT-ASSETS> 2,414
<PP&E> 22,633
<DEPRECIATION> 12,749
<TOTAL-ASSETS> 13,272
<CURRENT-LIABILITIES> 4,193
<BONDS> 3,755
0
0
<COMMON> 1
<OTHER-SE> 1,386
<TOTAL-LIABILITY-AND-EQUITY> 13,272
<SALES> 0
<TOTAL-REVENUES> 8,270
<CGS> 0
<TOTAL-COSTS> 7,502
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344
<INCOME-PRETAX> 459
<INCOME-TAX> 144
<INCOME-CONTINUING> 315
<DISCONTINUED> 0
<EXTRAORDINARY> (7)
<CHANGES> 0
<NET-INCOME> 308
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
