<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
______________________
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-3435
NEW YORK TELEPHONE COMPANY
A New York Corporation I.R.S. Employer Identification No. 13-5275510
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
__________________________
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
New York Telephone Company
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
----------------------------
(Dollars in Millions) (Unaudited) 2000 1999
- --------------------------------------------------------------------------------
OPERATING REVENUES
(including $62.2 and $45.8 from affiliates) $2,080.6 $ 2,047.6
----------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 538.9 564.9
Depreciation and amortization 395.8 370.7
Other (including $332.0 and $290.6 to affiliates) 789.6 697.2
----------------------------
1,724.3 1,632.8
----------------------------
OPERATING INCOME 356.3 414.8
OTHER INCOME, NET
(including $13.0 and $9.1 from affiliates) 17.3 12.2
INTEREST EXPENSE
(including $27.5 and $17.8 to affiliates) 85.4 82.0
----------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 288.2 345.0
PROVISION FOR INCOME TAXES 98.7 117.5
----------------------------
NET INCOME $ 189.5 $ 227.5
============================
See Notes to Condensed Consolidated Financial Statements.
1
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New York Telephone Company
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
March 31, December 31,
(Dollars in Millions) (Unaudited) 2000 1999
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ --- $ 78.3
Short-term investments 224.7 337.0
Note receivable from affiliate 565.0 251.3
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $120.4 and $131.6 1,542.4 1,556.4
Affiliates 142.5 176.2
Material and supplies 97.4 104.7
Prepaid expenses 138.1 114.7
Other 83.1 72.1
---------------------------------
2,793.2 2,690.7
---------------------------------
PLANT, PROPERTY AND EQUIPMENT 24,470.9 24,108.0
Less accumulated depreciation 13,843.9 13,570.6
---------------------------------
10,627.0 10,537.4
---------------------------------
DEFERRED INCOME TAXES 417.8 483.9
---------------------------------
OTHER ASSETS 505.1 384.8
---------------------------------
TOTAL ASSETS $14,343.1 $14,096.8
=================================
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
New York Telephone Company
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
March 31, December 31,
(Dollars in Millions) (Unaudited) 2000 1999
- --------------------------------------------------------------------------------
CURRENT LIABILITIES Debt maturing within one year:
Note payable to affiliates $ 2,113.8 $ 1,961.6
Other 3.0 72.9
Accounts payable and accrued liabilities:
Affiliates 1,134.3 1,155.8
Other 1,315.8 1,200.9
Other liabilities 333.9 333.2
------------------------------
4,900.8 4,724.4
------------------------------
LONG-TERM DEBT 3,616.8 3,617.0
------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 3,343.2 3,446.3
------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 14.6 14.3
Unamortized investment tax credits 72.9 74.4
Other 203.6 189.6
------------------------------
291.1 278.3
------------------------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value 1.0 1.0
Additional paid-in capital 1,270.6 1,299.7
Reinvested earnings 921.7 732.2
Accumulated other comprehensive loss (2.1) (2.1)
------------------------------
2,191.2 2,030.8
------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $14,343.1 $14,096.8
==============================
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
New York Telephone Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
(Dollars in Millions) (Unaudited) 2000 1999
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 687.9 $ 748.8
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 112.3 116.7
Capital expenditures (558.0) (395.3)
Net change in note receivable from affiliate (313.7) ---
Other, net (22.5) (28.2)
----------------------------
Net cash used in investing activities (781.9) (306.8)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital
lease obligations (70.7) (.6)
Net change in note payable to affiliate 152.2 (311.3)
Distributions of additional paid-in capital (62.0) (101.4)
Net change in outstanding checks drawn
on controlled disbursement accounts (3.8) (16.6)
----------------------------
Net cash provided by/(used in) financing activities 15.7 (429.9)
----------------------------
NET CHANGE IN CASH (78.3) 12.1
CASH, BEGINNING OF PERIOD 78.3 50.4
----------------------------
CASH, END OF PERIOD $ --- $ 62.5
============================
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
New York Telephone Company
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
New York Telephone Company and its wholly owned subsidiary, Empire City
Subway Company (Limited) are wholly owned subsidiaries of NYNEX Corporation
(NYNEX), which is a wholly owned subsidiary of Bell Atlantic Corporation (Bell
Atlantic). The accompanying unaudited condensed consolidated financial
statements have been prepared based upon Securities and Exchange Commission
(SEC) rules that permit reduced disclosure for interim periods. These financial
statements reflect all adjustments that are necessary for a fair presentation of
results of operations and financial position for the interim periods shown
including normal recurring accruals. The results for the interim periods are not
necessarily indicative of results for the full year. For a more complete
discussion of significant accounting policies and certain other information, you
should refer to the consolidated financial statements included in our 1999
Annual Report on Form 10-K.
2. Dividend
On March 28, 2000, we declared a dividend in the amount of $29.1 million
from Additional Paid-in-Capital. The dividend was paid to NYNEX on May 1, 2000.
3. Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year. We must adopt SFAS No. 133 no later than January 1, 2001.
On March 3, 2000, the FASB issued a Proposed SFAS "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which would amend SFAS
No. 133. The proposed amendments address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated debt instruments, and intercompany derivatives.
The adoption of SFAS No. 133 will have no material effect on our results
of operations or financial condition because we currently do not enter into the
use of derivative instruments or participate in hedging activities.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." Interpretation No. 44 was
issued in order to clarify certain issues arising from Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," which was
previously issued in October 1972. Interpretation No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur either after
December 15, 1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
We do not expect that Interpretation No. 44 will have a material impact on
our results of operations or financial position.
5
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New York Telephone Company
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," currently which must be adopted
by June 30, 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria from when revenue is generally realized and
earned, and also requires the deferral of incremental direct selling costs. We
are currently assessing the impact of SAB No. 101 on our results of operations
and financial position.
4. Shareowner's Investment
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Reinvested Comprehensive
(Dollars in Millions) Stock Capital Earnings Loss
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $1.0 $1,299.7 $732.2 $(2.1)
Net income 189.5
Distributions of additional paid-in capital
declared to NYNEX (29.1)
-----------------------------------------------------------------------
Balance at March 31, 2000 $1.0 $1,270.6 $921.7 $(2.1)
================ ================= ================= ==================
</TABLE>
Net income and comprehensive income were the same for the three months
ended March 31, 2000 and 1999.
5. 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:
(Dollars in Millions)
- --------------------------------------------------------------
Balance at December 31, 1999 $ 35.4
Amounts utilized for rebates ---
Amounts reversed into revenues ---
-----------------
Balance at March 31, 2000 $ 35.4
=================
The Incentive Plan also established annual service quality targets with
stringent rebate provisions if we are unable to meet some or all of the targets.
Each year, our performance results are reviewed and a determination is made
regarding the requirement for rebates to our customers. If targets are met, any
liabilities are reversed and recognized in revenues. Each year is defined as a
plan year, with Plan Year 1 being the year ended August 31, 1996 and continuing
through Plan Year 5, which is the year ended August 31, 2000. The amounts below
represent the cumulative totals for Plan Years 1 to 5. This liability has been
included in Accounts Payable and Accrued Liabilities and Deferred Credits and
Other Liabilities - Other on our consolidated balance sheet. A summary of the
liabilities related to this portion of the Incentive Plan is shown below:
(Dollars in Millions)
- --------------------------------------------------------------
Balance at December 31, 1999 $ 15.1
Additional amounts accrued 1.8
Amounts utilized for rebates (2.8)
-----------------
Balance at March 31, 2000 $ 14.1
=================
6
<PAGE>
New York Telephone Company
Several state and federal regulatory matters may require us to refund a
portion of the revenues collected in the current and prior periods. The outcome
of each pending matter, as well as the time frame within which each matter will
be resolved, is not presently determinable.
6. Proposed Bell Atlantic - GTE Merger
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
It is expected that the merger will qualify as a pooling of interests,
which means that for accounting and financial reporting purposes the companies
will be treated as if they had always been combined. At annual meetings held in
May 1999, the shareholders of each company approved the merger. The completion
of the merger is subject to a number of conditions, including certain regulatory
approvals (all of which have been obtained except that of the Federal
Communications Commission) and receipt of opinions that the merger will be
tax-free.
The companies are targeting completion of the merger in the second quarter
of 2000. In April 2000, Bell Atlantic announced that the combined company will
be called Verizon Communications.
7
<PAGE>
New York Telephone Company
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
We reported net income of $189.5 million for the three month period ended
March 31, 2000, compared to net income of $227.5 million for the same period in
1999.
Our results for 1999 were affected by special items. The special items
included our allocated share of charges from Telesector Resources Group, Inc.
(Telesector Resources) and our allocated share of charges from Bell Atlantic
Network Services, Inc. (NSI).
Merger-related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax transition and integration costs of $5.7
million in the first quarter of 1999. Of this amount, $.3 million was recorded
in Employee Costs and $5.4 million was recorded in Other Operating Expenses.
Transition and integration costs consisted 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 were expensed as incurred.
OPERATING REVENUE STATISTICS
- ----------------------------
2000 1999 % Change
- --------------------------------------------------------------------------------
At March 31,
Access Lines in Service (in thousands)*
Residence 7,766 7,594 2.3%
Business 4,201 4,157 1.1
Public 164 165 (.6)
---------------------
12,131 11,916 1.8
=====================
Three Months Ended March 31,
Access Minutes of Use (in millions) 11,682 11,679 ---
=====================
*1999 reflects a restatement of access lines in service
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Three Months Ended March 31,
------------------------------
2000 1999
- -------------------------------------------------------------------------------
Local services $1,349.7 $1,283.4
Network access services 572.7 564.3
Long distance services 59.1 62.0
Ancillary services 99.1 137.9
-------------------------------
Total $2,080.6 $2,047.6
===============================
8
<PAGE>
New York Telephone Company
LOCAL SERVICES
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $66.3 5.2%
- --------------------------------------------------------------------------------
Local service revenues are earned from the provision of local exchange,
local private line, public telephone (pay phone) and value-added services.
Value-added services are a family of services that expand the utilization of the
network. These services include products such as Caller ID, Call Waiting and
Return Call.
Local service revenues increased in the first quarter of 2000 due to the
reversal of an accrual as a result of a favorable resolution of a state
regulatory matter and higher usage of our network facilities. Revenue growth was
generated, in part, by an increase in access lines in service of 1.8% from March
31, 1999. Revenue growth also reflects higher customer demand and usage of our
national directory assistance services.
Growth in local service revenues was partially offset by the effect of
resold access lines and the provision of unbundled network elements to
competitive local exchange carriers, lower business and residence message
volumes, and lower revenues from our pay phone services due to the increasing
popularity of wireless communications.
NETWORK ACCESS SERVICES
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $8.4 1.5%
- --------------------------------------------------------------------------------
Network access revenues are earned from end-user subscribers and from long
distance and other competing carriers who use our local exchange facilities to
provide services to their customers. Switched access revenues are derived from
fixed and usage-based charges paid by carriers for access to our local network.
Special access revenues originate from carriers and end-users that buy dedicated
local exchange capacity to support their private networks. End-user access
revenues are earned from our customers and from resellers who purchase dial-tone
services.
Network access revenue growth in the first quarter of 2000 was mainly
attributable to increased demand for special access services, reflecting a
greater utilization of our network. Higher network usage by alternative
providers of intraLATA toll services also contributed to revenue growth in the
first quarter of 2000.
In addition, network access revenues included higher revenues received from
customers for the recovery of local number portability (LNP) costs. LNP allows
customers to change local exchange carriers while maintaining their existing
telephone numbers. In December 1998, the Federal Communications Commission (FCC)
issued an order permitting us to recover costs incurred for LNP in the form of
monthly end-user charges for a five-year period beginning in March 1999.
Revenue growth was substantially offset by price reductions associated with
a federal price cap filing and other regulatory decisions. The FCC regulates the
rates that we charge long distance carriers and end-user subscribers for
interstate access services. We are required to file new access rates with the
FCC each year. In July 1999, we implemented interstate price decreases of
approximately $123 million on an annual basis in connection with the FCC's Price
Cap Plan. The rates included in our July 1999 filing will be in effect through
June 2000. Interstate price decreases were $78 million on an annual basis for
the period July 1998 through June 1999. The rates include amounts necessary to
recover our contribution to the FCC's universal service fund which are subject
to adjustment every quarter due to potential increases or decreases in our
contribution to the fund. Our contributions to the universal service fund are
included in Other Operating Expenses. As a result of a U.S. Court of Appeals
decision last year, our contributions to the universal service fund were reduced
by approximately $37 million annually beginning November 1, 1999, and our
interstate access rates were reduced accordingly because we will no longer have
to recover these contributions in our rates.
9
<PAGE>
New York Telephone Company
LONG DISTANCE SERVICES
2000 - 1999 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(2.9) (4.7)%
- --------------------------------------------------------------------------------
Long distance revenues are earned primarily from calls made to points
outside a customer's local calling area, but within our service area (intraLATA
toll). IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call. These services are
regulated by the New York State Public Service Commission (NYSPSC) and the
Connecticut Department of Public Utility Control (CDPUC), except where they
cross state lines. Other long distance services that we provide include 800
services, Wide Area Telephone Service (WATS), private line services and corridor
services (between LATAs in New York City and northern New Jersey).
The decline in long distance revenues in the first quarter of 2000 was
principally caused by the competitive effects of presubscription, which enables
customers to make intraLATA toll calls using a competing carrier without having
to dial an access code. The negative effect of presubscription on long distance
revenues was partially mitigated by increased network access services for usage
of our network by alternative service providers. In response to presubscription,
we have implemented customer win-back and retention initiatives that include
toll calling discount packages and product bundling offers. The decline in long
distance revenue was partially offset by price increases implemented on certain
toll services.
ANCILLARY SERVICES
2000 - 1999 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(38.8) (28.1)%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation for competitive local exchange carriers, usage of
separately priced (unbundled) components of our network by competitive local
exchange carriers, voice messaging, customer premises equipment (CPE) and wiring
and maintenance services, and sales of software to nonaffiliates. Amounts
recognized in connection with obligations and commitments for regulatory
matters, if any, are also included in this revenue category. Ancillary services
revenues also include payments from an affiliate, Bell Atlantic Yellow Pages
Company (Yellow Pages), for earnings related to its directory activities in New
York based on a regulated rate of return. We also earn revenues from Yellow
Pages for the use of our name in soliciting directory advertising and in
publishing and distributing directories and from customers for nonpublication of
telephone numbers and multiple white page listings.
Ancillary services revenues decreased in the first quarter of 2000 due to
an accrual for state regulatory matters and lower payments received from Yellow
Pages for earnings related to its directory activities. These decreases were
partially offset by higher revenues from our billing and collection services and
higher payments received from competitive local exchange carriers for
interconnection of their networks with our network. Higher facilities rental
revenues received from affiliates further offset the decreases in ancillary
services revenues in the first quarter of 2000.
10
<PAGE>
New York Telephone Company
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Three Months Ended March 31,
----------------------------
2000 1999
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes $ 538.9 $ 564.9
Depreciation and amortization 395.8 370.7
Other operating expenses 789.6 697.2
----------------------------
Total $1,724.3 $1,632.8
============================
EMPLOYEE COSTS
2000 - 1999 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(26.0) (4.6)%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of Telesector Resources, NSI and NYNEX, who provide centralized
services on a contract basis, are allocated to us and are included in Other
Operating Expenses.
Employee costs decreased in the first quarter of 2000 primarily as a result
of lower pension and benefits costs. The decline in pension and benefit costs
was due to favorable pension plan investment returns and changes in actuarial
assumptions. These factors were partially offset by changes in certain plan
provisions, including a previously reported amendment to our management cash
balance plan and a special lump sum pension payment to management and associate
retirees. The effect of lower work force levels also contributed to the decrease
in employee costs, but to a lesser extent.
These cost reductions were partially offset by higher overtime payments and
annual salary and wage increases for management and associate employees.
DEPRECIATION AND AMORTIZATION
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $25.1 6.8%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first quarter of
2000 over the same period in 1999 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The growth
in telephone plant was largely attributable to increased capital expenditures
for software and hardware to support the expansion of our network. These factors
were partially offset by the effect of lower rates of depreciation and
amortization.
OTHER OPERATING EXPENSES
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $92.4 13.3%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from Telesector Resources, NYNEX and NSI, rent,
network software costs, operating taxes other than income, the provision for
uncollectible accounts receivable, and other costs.
The increase in other operating expenses in the first quarter of 2000 was
largely attributable to higher combined centralized services expenses allocated
from Telesector Resources, NYNEX and NSI and higher interconnection and related
costs associated with reciprocal compensation arrangements with competitive
local exchange and other carriers to terminate calls on their networks. The
effect of a reversal in 1999 of an accrual for a tax-related matter also
contributed to the increase in other operating expenses.
11
<PAGE>
New York Telephone Company
OTHER INCOME, NET
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $5.1 41.8%
- --------------------------------------------------------------------------------
The change in other income, net, was primarily attributable to additional
interest income associated with a note receivable from an affiliate.
INTEREST EXPENSE
2000 - 1999 Increase
- --------------------------------------------------------------------------------
First Quarter $3.4 4.1%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense increased in the first quarter of 2000 over the same
period in 1999 primarily due to higher levels of average short-term debt with an
affiliate and higher interest rates associated with this debt. These factors
were partially offset by higher capitalized interest costs resulting from higher
levels of average telephone plant under construction.
EFFECTIVE INCOME TAX RATES
Three Months Ended March 31,
- --------------------------------------------------------------------------------
2000 34.2%
- --------------------------------------------------------------------------------
1999 34.1%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes and extraordinary
item. Our effective income tax rate was higher in the first quarter of 2000 due
to lower investment tax credit amortization in the first quarter of 2000.
FINANCIAL CONDITION
- -------------------
We use the net cash generated from operations and from external financing
to fund capital expenditures for network expansion and modernization, and to pay
dividends. While current liabilities exceeded current assets at both March 31,
2000 and 1999 and December 31, 1999, our sources of funds, primarily from
operations and, to the extent necessary, from readily available financing
arrangements with affiliates, are sufficient to meet ongoing operating
requirements. Management expects that presently foreseeable capital requirements
will continue to be financed primarily through internally generated funds.
Additional long-term debt may be needed to fund development activities or to
maintain our capital structure to ensure financial flexibility.
We obtain our short-term financing through advances from Bell Atlantic
Administrative Services, Inc. (BAAS) and a line of credit with Bell Atlantic
Network Funding Corporation (BANFC). As of March 31, 2000, we had $50.0 million
available under our line of credit with BANFC, and no borrowings outstanding. We
had $2,113.8 million outstanding with BAAS at March 31, 2000. In addition, we
had $400.0 million remaining under a shelf registration statement filed with the
Securities and Exchange Commission for the issuance of unsecured debt
securities. Our debt securities continue to be accorded high ratings by primary
rating agencies. After the announcement of the Bell Atlantic-GTE merger, the
rating agencies placed the rating of our securities under review for a potential
downgrade.
Our debt ratio was 72.4% at March 31, 2000, compared to 76.4% at March 31,
1999 and 73.6% at December 31, 1999.
On March 28, 2000, we declared a dividend in the amount of $29.1 million
from Additional Paid-in-Capital. The dividend was paid to NYNEX on May 1, 2000.
12
<PAGE>
New York Telephone Company
OTHER MATTERS
- -------------
FCC Regulation and Interstate Rates
Price Caps
As previously reported, in May 1999, the U. S. Court of Appeals reversed
the FCC order that adopted the current 6.5% productivity factor applied to
interstate access rates, but granted the FCC a stay of its order until April 1,
2000. The Court has further extended the stay until June 30, 2000 to allow the
FCC time to consider an industry proposal to further restructure access rates.
Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of the derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year. We must adopt SFAS No. 133 no later than January 1, 2001.
On March 3, 2000, the FASB issued a Proposed SFAS "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which would amend SFAS
No. 133. The proposed amendments address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized foreign-currency-
denominated debt instruments, and intercompany derivatives.
The adoption of SFAS No. 133 will have no material effect on our results of
operations or financial condition because we currently do not enter into the use
of derivative instruments or participate in hedging activities.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." Interpretation No. 44 was
issued in order to clarify certain issues arising from Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," which was
previously issued in October 1972. Interpretation No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur either after
December 15, 1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
We do not expect that Interpretation No. 44 will have a material impact on
our results of operations or financial position.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which currently must be adopted by June 30, 2000. SAB No. 101
provides additional guidance on revenue recognition, as well as criteria from
when revenue is generally realized and earned, and also requires the deferral of
incremental direct selling costs. We are currently assessing the impact of SAB
No. 101 on our results of operations and financial position.
13
<PAGE>
New York Telephone Company
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the quarter
ended March 31, 2000.
14
<PAGE>
New York Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEW YORK TELEPHONE COMPANY
Date: May 12, 2000 By /s/ Edwin F. Hall
--------------------------------------
Edwin F. Hall
Chief Financial Officer
and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 10, 2000.
15
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31,
2000 AND THE CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 225
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<RECEIVABLES> 1,663
<ALLOWANCES> 120
<INVENTORY> 97
<CURRENT-ASSETS> 2,793
<PP&E> 24,471
<DEPRECIATION> 13,844
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<BONDS> 3,617
0
0
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