Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
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 1-8608
NYNEX Corporation
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 13-3180909
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
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 .
At October 31, 1994, 422,076,088 common shares were outstanding.
<PAGE>
Form 10-Q Part I PART I - FINANCIAL INFORMATION
NYNEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions, except per share amounts) (Unaudited)
Three Months Nine Months
For the Period Ended September 30, 1994 1993 1994 1993
OPERATING REVENUES
Local service $1,649.5 $1,627.3 $4,937.9 $4,829.6
Long distance 272.6 287.3 823.3 847.9
Network access 857.7 837.2 2,566.7 2,535.2
Other 551.0 578.6 1,587.8 1,802.2
Total operating revenues 3,330.8 3,330.4 9,915.7 10,014.9
OPERATING EXPENSES
Maintenance and support 786.7 757.0 2,300.8 2,220.3
Depreciation and amortization 647.2 639.4 1,963.1 1,879.1
Marketing and customer services 356.9 357.3 1,056.3 1,020.9
Taxes other than income 241.3 244.2 746.2 774.4
Selling, general and administrative 509.1 479.1 1,947.6 1,540.3
Other 206.6 207.9 594.0 597.4
Total operating expenses 2,747.8 2,684.9 8,608.0 8,032.4
Operating income 583.0 645.5 1,307.7 1,982.5
Other income (expense) - net 7.8 (13.5) 6.2 (24.9)
Interest expense 171.5 161.0 493.2 494.4
Earnings before income taxes and
cumulative effect of change in
accounting principle 419.3 471.0 820.7 1,463.2
Income taxes
Federal 90.9 151.1 151.2 423.9
State, local and other 25.9 21.6 75.2 69.7
Total income taxes 116.8 172.7 226.4 493.6
Earnings before cumulative effect
of change in accounting principle 302.5 298.3 594.3 969.6
Cumulative effect of change in
accounting for postemployment
benefits, net of taxes - 1.8* - (121.7)*
NET INCOME $ 302.5 $ 300.1* $ 594.3 $ 847.9 *
Earnings per share before cumulative
effect of change in accounting
principle $ .72 $ .72 $ 1.42 $ 2.35
Cumulative effect per share of
change in accounting principle - .01* - (.30)*
Earnings per share $ .72 $ .73 $ 1.42 $ 2.05
Weighted average number of shares
outstanding 421.1 412.8 418.0 412.6
Dividends declared per share $ .59 $ .59 $ 1.77 $ 1.77
Retained earnings
Beginning of period $2,274.0 $4,024.2* $2,388.3 $3,958.7
Prior period adjustment
(Note (h)) (73.5) - - -
Beginning retained
earnings-adjusted 2,200.5 4,024.2 2,388.3 3,958.7
Net income 302.5 300.1* 594.3 847.9 *
Dividends declared (248.9) (243.6) (743.1) (730.0)
Stock dividend - (206.4) - (206.4)
Other 5.4 (1.3) 20.0 2.8
End of period $2,259.5 $3,873.0* $2,259.5 $3,873.0 *
*Restated to reflect the adoption of Statement of Financial
Accounting Standards No. 112 in the fourth quarter of 1993
retroactive to January 1, 1993.
See accompanying notes to consolidated financial statements.
-2-
Form 10-Q Part I NYNEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30, December 31,
1994 1993
ASSETS (Unaudited)
Current assets:
Cash and temporary cash investments $ 112.1 $ 157.8
Receivables (net of allowance of $220.0
and $210.2, respectively) 2,496.5 2,439.1
Inventories 160.8 169.2
Prepaid expenses 413.3 306.2
Deferred charges and other current assets 649.8 849.4
Total current assets 3,832.5 3,921.7
Property, plant and equipment - at cost 35,331.3 33,969.4
Less: accumulated depreciation (14,882.2) (13,719.4)
20,449.1 20,250.0
Deferred charges and other assets 5,471.9 5,286.7
Total Assets $29,753.5 $29,458.4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,362.2 $ 2,853.3
Short-term debt 3,007.3 3,190.1
Other current liabilities 637.3 763.3
Total current liabilities 6,006.8 6,806.7
Long-term debt 7,165.7 6,937.8
Deferred income taxes 3,261.0 3,545.0
Unamortized investment tax credits 319.4 360.3
Other long-term liabilities
and deferred credits 4,435.9 3,393.1
Total liabilities 21,188.8 21,042.9
Commitments and contingencies [Notes (d) and (e)]
Stockholders' equity:
Preferred stock - $1 par value - -
shares authorized: 70,000,000
shares issued: None
Preferred stock - Series A Junior Participating - -
- $1 par value
shares authorized: 5,000,000
shares issued: None
Common stock - $1 par value 438.0 431.1
shares authorized: 750,000,000
shares issued:
at September 30, 1994 - 438,015,890
at December 31, 1993 - 431,080,155
Additional paid-in capital 6,880.0 6,624.5
Retained earnings 2,259.5 2,388.3
Treasury stock (16,125,836 and 16,215,353
shares, respectively, at cost) (645.2) (648.1)
Deferred compensation - LESOP Trust (367.6) (380.3)
Total stockholders' equity 8,564.7 8,415.5
Total Liabilities and Stockholders'
Equity $29,753.5 $29,458.4
See accompanying notes to consolidated financial statements.
-3-
Form 10-Q Part I NYNEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
For the Nine Months Ended September 30, 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 594.3 $ 847.9 *
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,963.1 1,879.1
Amortization of unearned lease income-net (61.4) (62.0)
Allowance for funds used during construction-
equity component (21.2) (23.4)
Changes in operating assets and liabilities:
Receivables (57.4) 19.1
Inventories 8.4 (4.5)
Prepaid expenses (107.1) (58.2)
Deferred charges and other current assets 199.6 (100.5)*
Accounts payable (495.2) (192.2)*
Other current liabilities (126.0) (28.8)
Deferred income taxes and Unamortized
investment tax credits (325.0) 264.9 *
Other long-term liabilities
and deferred credits 880.6 4.1 *
Other-net (68.2) (18.9)
Total adjustments 1,790.2 1,678.7
Net cash provided by operating activities 2,384.5 2,526.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,119.5) (1,738.4)
Investment in leased assets (44.7) (154.8)
Cash received from leasing activities 48.6 45.6
Other investing activities-net (14.8) 21.0
Net cash used in investing activities (2,130.4) (1,826.6)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of commercial paper
and short-term debt 15,352.5 8,056.4
Repayment of commercial paper
and short-term debt (16,116.6) (7,759.1)
Issuance of long-term debt 898.7 1,435.9
Repayment of long-term debt
and capital leases (105.2) (120.2)
Debt refinancings and call premiums - (1,534.4)
Issuance of common stock 176.2 43.9
Purchase of treasury stock - (92.3)
Dividends paid (660.1) (726.3)
Minority interest 154.7 -
Net cash used in financing activities (299.8) (696.1)
Net (decrease) increase in Cash and temporary
cash investments (45.7) 3.9
Cash and temporary cash investments at
beginning of period 157.8 88.9
Cash and temporary cash investments at
end of period $ 112.1 $ 92.8
*Restated to reflect the adoption of Statement of Financial
Accounting Standards No. 112 in the fourth quarter of 1993
retroactive to January 1, 1993.
See accompanying notes to consolidated financial statements.
-4-
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(a) BASIS OF PRESENTATION - The consolidated financial statements
have been prepared by NYNEX Corporation ("NYNEX") pursuant to the
rules and regulations of the Securities and Exchange Commission
(the "SEC") and, in the opinion of Management, include all
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial information
for each period shown. Certain information and footnote
disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such SEC rules and regulations. Management believes that the
disclosures made are adequate to make the information presented
not misleading. Certain information in the consolidated
financial statements for 1993 has been reclassified to conform to
the current year's presentation. The results for interim periods
are not necessarily indicative of the results for the full year.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto incorporated by reference in the NYNEX 1993 Annual Report
on Form 10-K and the current year's previously issued Quarterly
Reports on Form 10-Q.
(b) CASH AND TEMPORARY CASH INVESTMENTS - NYNEX's cash management
policy is to make funds available in banks when checks are
presented. At September 30, 1994, NYNEX had recorded in Accounts
payable checks outstanding but not yet presented for payment of
$195.8 million.
(c) ADOPTION OF FINANCIAL ACCOUNTING STANDARDS - Effective
January 1, 1994, NYNEX adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("Statement No. 115"). The effect of
implementing Statement No. 115 on NYNEX's results of operations
and financial position was not significant.
(d) REVENUES SUBJECT TO POSSIBLE REFUND - Several state and
federal regulatory matters, including affiliate transaction
issues in New York Telephone Company's ("New York Telephone")
1990 intrastate rate case, service issues in New York Telephone's
incentive regulation proceeding and other matters, may possibly
require the refund of a portion of the revenues collected in the
current and prior periods. As of September 30, 1994, the
aggregate amount of such revenues that was estimated to be
subject to possible refund was approximately $256 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.
(e) LITIGATION AND OTHER CONTINGENCIES - It is probable that
local tax claims aggregating approximately $215 million in tax
and $144 million in associated interest will be asserted against
New York Telephone for the period 1983 through the third quarter
of 1994. The claims relate to the taxability of New York
Telephone's interstate and intrastate network access revenues.
The current status is that these matters have been identified as
possible audit adjustments by the taxing authority, and New York
Telephone is presenting its arguments against those adjustments.
While New York Telephone's counsel cannot give assurance as to
the outcome, counsel believes that New York Telephone has strong
legal positions in these matters.
-5-
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(e) LITIGATION AND OTHER CONTINGENCIES (CONT'D)
Various other legal actions and regulatory proceedings are
pending that may affect NYNEX, including matters involving
Racketeer Influenced and Corrupt Organizations Act, antitrust,
tort, contract and tax deficiency claims.
While counsel cannot give assurance as to the outcome of any of
these matters, in the opinion of Management based upon the advice
of counsel, the ultimate resolution of these matters in future
periods is not expected to have a material effect on NYNEX's
financial position but could have a material effect on annual
operating results.
(f) SUPPLEMENTAL INFORMATION - The following information is
provided in accordance with Statement of Financial Accounting
Standards No. 95, "Statement of Cash Flows":
For the
Nine Months Ended
September 30,
(In millions) 1994 1993
Income tax payments $395.3 $472.6
Interest payments $445.3 $452.7
Additions to property, plant and
equipment under capital lease obligations $ 10.6 -
Common Stock issued for Dividend Reinvestment
and Stock Purchase Plan and
stock compensation plans $ 88.9 $ 3.6
(g) SEGMENT INFORMATION - The following table sets forth summary
financial information by business segment. Information regarding
operating revenues by business segment is presented in
Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 14-16 and 18-20. Total
intersegment sales for the third quarter of 1994 and 1993 were
$101.5 and $87.5 million, respectively, and for the nine months
ended September 30, 1994 and 1993 were $297.2 and $255.5 million,
respectively, principally in the telecommunications segment. The
financial services segment had total outstanding debt of $832.7
and $578.9 million at September 30, 1994 and 1993, respectively.
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1994 1993 1994 1993
OPERATING INCOME:
Telecommunications $620.9 $658.0 $1,378.6 $2,055.7
Cellular 11.4 21.2 34.5 52.6
Publishing 15.7 12.7 56.7 47.6
Financial services 14.8 18.3 53.7 53.3
Other diversified operations (37.3) (23.0) (90.3) (56.0)
Total operating income by segment 625.5 687.2 1,433.2 2,153.2
Adjustments/Eliminations 1.2 4.2 (0.9) 8.9
Corporate expenses (43.7) (45.9) (124.6) (179.6)
Operating Income $583.0 $645.5 $1,307.7 $1,982.5
-6-
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(g) SEGMENT INFORMATION (CONT'D)
Cellular operating income includes certain amounts that are
subsequently paid out to minority shareholders. Minority
interest expense for the cellular segment for the third quarter
of 1994 and 1993 was $7.4 and $11.6 million, respectively, and
for the nine months ended September 30, 1994 and 1993 was $33.5
and $32.8 million, respectively.
September 30, September 30,
(In millions) 1994 1993
IDENTIFIABLE ASSETS:
Telecommunications $24,749.0 $24,351.9
Cellular 853.2 594.3
Publishing 555.7 526.6
Financial services 1,554.1 1,384.7
Other diversified operations 2,006.8 1,771.9
Total identifiable assets by segment 29,718.8 28,629.4
Adjustments/Eliminations (1,407.3) (917.3)
Investment in unconsolidated subsidiary 29.5 29.7
Corporate assets 1,412.5 220.2
Total Assets $29,753.5 $27,962.0
(h)STOCKHOLDERS' EQUITY - Retained Earnings at June 30, 1994 has
been adjusted to correct an error by the outside actuary of the
registrant in calculating the cost of pension enhancements in the
second quarter of 1994. The effect of the correction on net
income for the second quarter was a decrease of $73.5 million or
$.18 per share, net of income tax of $40.5 million, and NYNEX's
Quarterly Report on Form 10-Q for the period ended June 30, 1994
has been amended. This adjustment has no effect on net income
for the nine months ended September 30, 1994.
(i)SUBSEQUENT EVENTS- Subsequent to September 30, 1994, NYNEX
Capital Funding Company ("CFC") issued $357.5 million of medium-
term notes with maturities ranging from 3.25 to 10 years and
coupon rates ranging from 7.18% to 8.43%. The issuance of these
notes reduced the commercial paper requirements. It is
anticipated that CFC will issue additional medium-term notes
throughout 1994. CFC had $837.3 million of unissued medium-term
debt securities registered with the SEC.
-7-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATE REGULATORY MATTERS
As previously reported (see NYNEX's Annual Report on Form 10-K
for the year ended December 31, 1993), on February 4, 1993, the
New York State Public Service Commission ("NYSPSC") issued an
order with respect to the Second and Third Stages, permitting New
York Telephone to retain 1993 earnings above a return on equity
of 11.7% and up to 12.7%, depending on its attainment of
specified service quality criteria, with earnings above 12.7%
return on equity to be held for the ratepayers' benefit. New
York Telephone has submitted a report to the NYSPSC showing 1993
earnings below 11.7%. The NYSPSC staff is currently reviewing
New York Telephone's submission.
On April 14, 1994, New England Telephone and Telegraph Company
("New England Telephone") filed comprehensive tariff provisions
with the Massachusetts Department of Public Utilities ("MDPU") as
part of an Alternative Regulatory Plan to govern New England
Telephone's Massachusetts intrastate operations. New England
Telephone's filing proposes the following: (1) regulation of
New England Telephone for a period of ten years from the date of
MDPU approval under a price framework; (2) pricing rules that
limit New England Telephone's ability to increase both overall
average prices and specific rate elements, including a ceiling on
the weighted average price of all tariffed services based on a
formula of inflation minus a productivity factor plus or minus
exogenous changes; (3) no earnings restriction; (4) a cap on the
monthly rates for residence services until August 2001; (5) an
increase of $2.50 monthly in the credit on exchange services for
Lifeline customers; (6) investment commitments for the public
telecommunications network, including commencing the deployment
of a broadband network in Massachusetts; (7) quality of service
commitments; (8) rate reductions for switched access services;
and (9) a new streamlined standard of regulation governing the
review of tariff filings. On May 24, 1994, the MDPU ruled that
New England Telephone's filing would be treated as a petition for
alternative regulation and, consequently, the MDPU's review is
not subject to the statutory suspension period. Hearings
concerning New England Telephone's filing are expected to
conclude by late November 1994.
On June 30, 1994, the New Hampshire Public Utilities Commission
("NHPUC") approved New England Telephone's proposed toll rate
reduction targeted at small and medium volume usage customers,
effective August 5, 1994. The annual revenue effect of the toll
rate reduction is estimated to be approximately $7.1 million.
The NHPUC previously approved, effective January 31, 1994, a New
England Telephone-requested toll rate reduction targeted at high
and medium volume usage customers, with an annual revenue effect
of $3.5 million.
-8-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATE REGULATORY MATTERS (CONT'D)
On September 26, 1994, New York Telephone, the New York State
Department of Public Service staff and 15 other parties filed a
proposed Regulatory Plan (the "Plan") for approval by the NYSPSC.
The Plan would modify the manner in which New York Telephone is
regulated by the NYSPSC over the next seven years. The Plan was
developed by the parties in the third phase of the incentive
regulation proceeding that the NYSPSC instituted in 1992. As
previously reported (see NYNEX's Annual Report on Form 10-K for
the year ended December 31, 1993 and Quarterly Report on Form 10-
Q for the period ended June 30, 1994), in the first phase of the
proceeding, the NYSPSC ordered New York Telephone's rates to be
reduced by $170 million annually, effective January 1, 1994. The
NYSPSC also ordered that an additional $153 million in revenues
be "set aside" for short-term service incentive plans and a
longer term plan for performance-based earnings incentives and
network improvements to be determined in the second phase.
The Plan is a performance-based plan that, if approved by the
NYSPSC, will operate as follows:
(1) The new framework
will replace the traditional way New York Telephone's
operations have been regulated in New York - a method based
on limited earnings - with incentives to invest in new
technologies and improve service. Rate of return will no
longer be the focus of regulation. The Plan will cap, at
current rates, the prices for such "basic" services as
residence and business exchange access, residence and
business local calling and LifeLine service. In addition, by
the end of the seven-year term of the Plan, New York
Telephone's prices will have been decreased by an amount that
would produce a $425 million reduction in annual revenue
based on current volumes of business. This reduction will be
accomplished primarily by reducing the average prices of toll
and carrier access services. The first price reduction,
estimated at $100 million in annual revenue, will be
effective January 1, 1995. During its term, the Plan allows
certain prices to be adjusted to take into account inflation
in excess of 4 percent annually or costs associated with
government mandates and other "exogenous" events.
(2)New York Telephone will commit to maintain and improve its
service quality over the term of the Plan, with rebates to
customers if it fails to meet the specified service quality
standards. If New York Telephone does not meet specified
service quality criteria, the Plan will terminate at the end
of five years.
(3)The Plan will encourage New York Telephone to achieve
substantial productivity gains over the term of the Plan.
The NYSPSC may terminate the Plan at the end of five years
unless New York Telephone's prices, as measured by an index,
are at least 4.5 percentage points lower than a price index
of national telecommunications companies.
-9-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATE REGULATORY MATTERS (CONT'D)
(4)The Plan includes competitive enhancements, including a
specific schedule to provide IntraLATA Presubscription
("ILP") by 1996. ILP will give a customer the option of
designating, in advance, a carrier that would carry the
customer's intraLATA toll calls without the necessity of
dialing extra digits. The Plan will require New York
Telephone to pay ILP implementation costs.
(5)Approximately $122 million of the $153 million "set aside"
ordered by the NYSPSC in the first phase of the incentive
regulation proceeding will be released to New York Telephone
in exchange for the various commitments New York Telephone
has made under the Plan. $31 million of the $153 million has
already been dedicated to a service improvement plan that is
being implemented in 1994.
It is expected that the Plan will be reviewed by the NYSPSC by
the end of 1994.
The NYSPSC has instituted a proceeding to consider the terms that
should govern local exchange competition in New York State.
(Competition for local exchange services has been authorized on
an interim basis pending the development of final regulations.)
Among the matters being considered in this proceeding are
interconnection between competing local exchange providers,
regulation of new entrants, and the possibility of creating a
"universal service fund." Decisions in this proceeding could
have a significant impact on New York Telephone's revenues.
In the first phase of the incentive regulation proceeding, New
York Telephone and the NYSPSC agreed to a service quality plan
for 1994. In this plan, New York Telephone committed to achieve
certain measurable levels of customer service, or, failing to
achieve those levels, accept a penalty, the amount of which would
be determined by the achieved service performance levels. Based
on the effects of the third quarter, New York Telephone's level
of performance (measured by the service quality indicators) does
not meet plan levels. New York Telephone and the NYSPSC are
discussing the effect of unusually severe weather on the achieved
year to date results.
On October 5, 1994, the Vermont Public Service Board ("VPSB")
issued its order in New England Telephone's Price Regulation Plan
proceeding. The VPSB's order proposes changes to the proposed
agreement previously submitted by New England Telephone and the
Vermont Department of Public Service ("VDPS"). The VPSB's
proposed changes would not restrict New England Telephone's
earnings during the four-year term of the agreement but would
impose a higher productivity factor and a narrow definition of
exogenous costs in the price regulation
-10-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATE REGULATORY MATTERS (CONT'D)
formula, additional pricing restrictions and additional quality
of service standards. On October 20, 1994, New England Telephone
notified the VPSB of its rejection of the VPSB's proposed changes
and that, accordingly, New England Telephone would continue under
rate of return regulation. New England Telephone also filed a
motion with the VPSB to reconsider certain other provisions of
the VPSB's order. On the same date, the VDPS filed a motion with
the VPSB to reconsider certain provisions of the VPSB's order.
In the related proceeding to examine New England Telephone's
level of earnings, on October 5, 1994, the VPSB ordered New
England Telephone to reduce its annual intrastate revenues by
approximately $15 million. The reduction is retroactive to
December 29, 1993, the date the VPSB opened the proceeding.
Among the adjustments ordered was a reduction, effective
September 1994 retroactive to January 1994, in New England
Telephone's Vermont depreciation rate to match the parameters
agreed to by the Federal Communications Commission ("FCC") in the
1993 triennial represcription review. In September 1994, New
England Telephone reduced local operating revenues by
approximately $12 million for subsequent refunds to Vermont
customers for the period from December 29, 1993 through
September 30, 1994 (see OPERATING REVENUES and OPERATING EXPENSES
below). On October 19, 1994, the VDPS advised the VPSB of its
belief that the VPSB's order understated New England Telephone's
level of overearnings by approximately $5 million. New England
Telephone has requested reconsideration of portions of the VPSB's
order. On November 2, 1994, the VPSB granted New England
Telephone's request for a stay of implementation of that order
pending a decision on the motion for reconsideration.
On October 28, 1994, a lawsuit was filed in Vermont State Court
by a ratepayer group seeking an additional refund by New England
Telephone, with respect to 1993 and 1994 revenues, of up to
$54 million.
FEDERAL REGULATORY MATTERS
On July 1, 1994, New York Telephone and New England Telephone
(collectively, the "telephone subsidiaries") implemented the
fourth annual update to the price cap rates. These tariffs will
result in a net reduction in the telephone subsidiaries' annual
interstate access rates of approximately $9.4 million during the
tariff period from July 1, 1994 to June 30, 1995.
On September 1, 1994, the telephone subsidiaries filed tariff
revisions with the FCC to amend price cap indices to reflect
additional exogenous costs resulting from the implementation of
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions"
("OPEB"). The filing reflects $37.6 million of costs already
accrued and increased annual costs of $21 million. The filing
follows a
-11-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FEDERAL REGULATORY MATTERS (CONT'D)
July 12, 1994 decision of the U.S. Court of Appeals for the
District of Columbia Circuit overturning the FCC's prior order
denying exogenous treatment of additional OPEB costs. On
September 26, 1994, the telephone subsidiaries filed a reply
opposing MCI Communications Corp's petition to suspend and
investigate the tariff filing.
BUSINESS RESTRUCTURING
Results for the first nine months of 1994 include approximately
$482 million of pretax charges ($312 million after-tax) for
pension enhancements, primarily in the telecommunications
segment, for approximately 3,000 management and 2,100
nonmanagement employees who elected during the second and third
quarters to leave NYNEX under retirement incentives. A portion
of the year-end 1993 accrual for severance was utilized on a per
employee basis, and the incremental costs of the pension
enhancements were recorded. The retirement incentives are
intended to provide a voluntary means to implement a portion of
the planned work force reductions of approximately 16,800 by the
end of 1996. The components of the $482 million pretax charges
are: $309 million ($201 million after-tax) for pension
enhancements, and $173 million ($111 million after-tax) for
associated postretirement medical benefits.
As previously reported (see NYNEX's Annual Report on Form 10-K
for the year ended December 31, 1993), NYNEX recorded pretax
charges of approximately $2.1 billion ($1.4 billion after-tax) in
the fourth quarter of 1993 for business restructuring, of which
approximately $586 million was for employee severance payments
and $520 million was for the medical curtailment loss recognized
as a result of the planned decrease in the work force. The
second and third quarter charges are a portion of an anticipated
additional $2.0 billion in pretax charges ($1.3 billion after-
tax) for pension enhancements to be recorded as employees leave
NYNEX through December 31, 1996 under the retirement incentives;
the amount to be recorded in each year is not presently
determinable because the charges are dependent on the number of
employees accepting the incentives. The retirement incentives
credit employees with an additional six years toward both their
age and their length of service for the purpose of determining
pension eligibility and benefits. Much of the cost of the
incentives will be funded by NYNEX's pension plans. These
incentives also resulted in more individuals qualifying for
lifetime medical coverage than under the severance plan. The
pension enhancement to the NYNEX management pension plan was
announced in February 1994 and will be offered at different times
through 1996 according to local force requirements. NYNEX's
agreements with the Communications Workers of America ("CWA") and
with the International Brotherhood of Electrical Workers
("IBEW"), which extend the existing labor agreements to August
1998, provide a retirement incentive (see OTHER MATTERS).
-12-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (CONT'D)
The restructuring reserve balance for the 1993 business
restructuring charges at September 30, 1994 was approximately
$1.0 billion, excluding the liability recorded at year-end for
postretirement medical benefits associated with employees leaving
NYNEX under the business restructuring. In December 1993, NYNEX
utilized $181 million of the restructuring reserves primarily
relating to the sale or discontinuance of its information
products and services businesses. In the first nine months of
1994, NYNEX reduced 1993 restructuring reserves by $395 million
as follows: $202 million of reserves established for severance
was transferred to the pension liability on a per employee basis
as a result of employees' leaving under the pension
enhancements as opposed to severance provisions as previously
accrued for; $23 million of reserves established for severance
was utilized for other retiree costs and severance; $58 million
was utilized for the exit from the information products and
services business; $19 million was utilized for developing a
single "NYNEX" brand identity; $54 million was utilized for
systems re-engineering; $26 million was utilized for other costs
related to various re-engineering initiatives in the
telecommunications segment; $5 million was reversed due to the
actual loss on disposal of United Publishers Corporation ("UPC")
being less than the estimated amount accrued in the publishing
segment in December 1993 under the assumption that UPC would be
shut down; and $8 million was utilized for nontelephone
restructuring. Additionally, $43 million of reserves established
in 1991 for severance costs were transferred to the pension
liability as a result of the pension enhancements.
During the third quarter of 1994, NYNEX began to realize
significant expense savings associated with force reductions.
For the first nine months of 1994, NYNEX experienced a
$63 million reduction in wages as a result of approximately 5,100
employees' leaving under retirement incentives and approximately
140 nonmanagement employees' leaving under a severance plan.
NYNEX expects to reduce its work force by a total of
approximately 6,000 employees by the end of 1994 as re-
engineering initiatives are implemented and as retirement
incentives are offered to eligible employees.
-13-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD QUARTER OF 1994 AS COMPARED TO THIRD QUARTER OF 1993
OPERATING REVENUES
Operating revenues for the quarter ended September 30, 1994
increased $0.4 million over the same period last year. A summary
of revenues by segment is as follows:
UNAFFILIATED REVENUES BY SEGMENT:
(In millions)
For The Three Months Ended
September 30,
1994 1993
Telecommunications $2,871.6 $2,877.7
Cellular 192.6 115.4
Publishing 225.3 221.7
Financial services 18.8 22.9
Other diversified operations 22.5 92.7
Total Consolidated Operating Revenues $3,330.8 $3,330.4
Telecommunications
Telecommunications revenues for the third quarter of 1994
decreased $6.1 million from the third quarter of 1993.
Local service revenues increased $22.2 million, or 1.4%,
primarily due to a net $62 million increase resulting from
increased demand as evidenced by growth in access lines and
growth in sales of calling features and an $8 million increase in
local service rates at New England Telephone primarily
attributable to the implementation of the third transitional
filing of a restructuring of Massachusetts rates effective
April 14, 1994. These increases were partially offset by a
$34 million revenue reduction at New York Telephone pursuant to
an NYSPSC order and a $12 million decrease at New England
Telephone resulting from a deferral of revenues in September 1994
for subsequent refund to Vermont customers as required by a VPSB
order (see STATE REGULATORY MATTERS above).
Long distance revenues decreased $14.7 million, or 5.1%,
primarily due to: (1) decreased demand for private line services
and wide area telecommunications services as a result of
increased competition and customer shifts to lower priced
services offered by the telephone subsidiaries, (2) a $3 million
revenue reduction at New York Telephone pursuant to an NYSPSC
order (see STATE REGULATORY MATTERS above) and (3) a $12 million
decrease in long distance rates at New England Telephone
primarily attributable to the implementation of the third
transitional filing of a restructuring of Massachusetts rates
effective April 14, 1994. These decreases were partially offset
by increased demand for message toll services.
-14-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD QUARTER OF 1994 AS COMPARED TO THIRD QUARTER OF 1993
(CONT'D)
OPERATING REVENUES (CONT'D)
Network access revenues increased $20.5 million, or 2.4%.
Switched access revenues increased $22 million as a result of
increased usage, partially offset by a reduction in interstate
rates, which included the phase-out of the equal access cost
recovery charge, and by a $3 million revenue reduction at New
York Telephone pursuant to an NYSPSC order (see STATE REGULATORY
MATTERS above). Special access revenues were virtually flat
primarily due to a reduction in rates, increased competition and
customer shifts to lower priced services offered by the telephone
subsidiaries, offset by the positive effects of one-time credits
and adjustments.
Other revenues decreased $34.1 million, primarily due to a
$38 million reduction in revenues at New York Telephone as
ordered by the NYSPSC representing the third quarter deferral of
the $153 million (see STATE REGULATORY MATTERS above), partially
offset by a $2 million increase in revenues from inside wire
related charges and voice messaging services.
Cellular
Cellular revenues for the third quarter of 1994 increased
$77.2 million, or 66.9%, over the third quarter of 1993. The
segment's customer base for mobile telecommunications services
continued to expand, increasing 71% as compared to the third
quarter of 1993, including customers associated with the
acquisition of a cellular property. This growth was spread
across all cellular markets; however, customer growth was
partially offset by a decline in average minutes of use per
customer. Third quarter revenues include $14 million as a result
of the restructuring of the New York partnership.
Publishing
Publishing revenues for the third quarter of 1994 increased
$3.6 million, or 1.6%, over the third quarter of 1993 primarily
due to increased Yellow Page advertising revenues as a result of
higher prices in the New York and New England markets. This
increase was partially offset by decreased revenues due to the
sale of UPC in April 1994 as part of the 1993 business
restructuring.
Financial Services
Financial services revenues for the third quarter of 1994
decreased $4.1 million, or 17.9%, from the third quarter of 1993
principally due to a temporary lag in the growth of new
investments in the leased asset portfolio.
-15-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD QUARTER OF 1994 AS COMPARED TO THIRD QUARTER OF 1993
(CONT'D)
OPERATING REVENUES (CONT'D)
Other Diversified Operations
Other diversified operations revenues for the third quarter of
1994 decreased $70.2 million, or 75.7%, from the third quarter of
1993 primarily attributable to NYNEX's exit from the information
products and services business. The BIS Group Limited ("BIS")
and AGS Computers, Inc. ("AGS") were sold in July 1993 and
January 1994, respectively, and had contributed $78.4 million in
revenues in the third quarter of 1993. These decreases were
partially offset by growth in the customer base for international
cable television and telephone operations.
OPERATING EXPENSES
Operating expenses for the third quarter of 1994 were
$2.7 billion, an increase of $62.9 million, or 2.3%, over the
third quarter of 1993. Operating expenses excluding Depreciation
and amortization and Taxes other than income increased
$40.3 million at the telephone subsidiaries and Telesector
Resources Group, Inc. (collectively, the "telecommunications
group"), principally due to a $30 million pretax charge for
pension enhancements and associated postretirement medical
benefits. Operating expenses excluding Depreciation and
amortization and Taxes other than income increased $17.7 million
at NYNEX's subsidiaries other than the telecommunications group
principally due to increased costs associated with the continued
expansion of the customer base for mobile telecommunications
services, increased expenses related to the growth in the
customer base for international cable television and telephone
operations, and business development costs in other international
operations. These increases were partially offset by the sale of
BIS and AGS, which had operating expenses of $84.7 million in the
third quarter of 1993, and by the transfer of Corporate employees
into the telecommunications group as part of the single
enterprise reorganization.
At the telecommunications group, employee costs, consisting
primarily of wages, payroll taxes, and employee benefits,
increased $17.7 million. Wages and payroll taxes increased a net
$19 million due to increases in salary and wage rates, additional
labor costs to support increased demand for services and to
improve service quality, and increases resulting from the
transfer of Corporate employees into the telecommunications group
as part of the single enterprise reorganization, partially offset
by a reduction in the work force as a result of force reduction
plans.
-16-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD QUARTER OF 1994 AS COMPARED TO THIRD QUARTER OF 1993
(CONT'D)
OPERATING EXPENSES (CONT'D)
At the telecommunications group, all other operating expenses,
which consist primarily of contracted and centralized services,
rent and other general and administrative costs, decreased
$6.5 million. The decrease was due primarily to an $11 million
decrease due to the completion of equal access amortization in
1993, a $9 million decrease in bad debt expense recognized
pursuant to provisions of billing and collection contracts,
primarily with AT&T Corp.("AT&T"), and a $4 million decrease in
material and supply expense. These decreases were partially
offset by a $19 million increase in contracted and centralized
services, which included the following: (1) a $10 million
increase resulting from the transfer of Corporate employees into
the telecommunications group as part of the single enterprise
reorganization, (2) a $5 million increase in sales commissions
and (3) a $2 million increase in right to use fees.
Depreciation and amortization increased $7.8 million, or 1.2%,
principally at the telecommunications group. There was a
$24 million increase due to increased plant investment, partially
offset by a $14 million decrease resulting from an adjustment of
prior year estimates for cost of removal (net of salvage) for
electro-mechanical switching equipment at New England Telephone
in Massachusetts, Maine and Rhode Island and a $7 million
decrease resulting from implementation of revised intrastate
depreciation rates in Vermont in September 1994 retroactive to
January 1994 (see STATE REGULATORY MATTERS above).
Taxes other than income decreased $2.9 million, or 1.2%,
principally due to an $11 million decrease in revenue taxes at
New York Telephone resulting primarily from a decrease in the
surcharge rate from 15% to 12.5%, partially offset by a
$6 million increase in property taxes at New York Telephone
attributable to an adjustment in the third quarter of 1994.
OTHER INCOME (EXPENSE) - NET
Other income (expense) - net for the third quarter of 1994
increased $21.3 million over the third quarter of 1993. The
increase was principally due to dividends received from Viacom
Inc. ("Viacom") and higher expenses in the third quarter of 1993
for the interstate portion of call premiums and other charges
associated with the refinancings of long-term debt. These
increases were partially offset by increased minority interest
expense and partnership losses in connection with investments in
international ventures.
INTEREST EXPENSE
Interest expense for the third quarter of 1994 increased
$10.5 million, or 6.5%, over the third quarter of 1993. This
increase was principally due to increased average debt levels in
1994 and higher expenses in the third quarter of 1993 for
interest on customer overbillings, partially offset by a decrease
in average interest rates resulting from long-term debt
refinancings in 1993.
-17-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD QUARTER OF 1994 AS COMPARED TO THIRD QUARTER OF 1993
(CONT'D)
OPERATING EXPENSES (CONT'D)
INCOME TAXES
Income taxes for the third quarter of 1994 decreased
$55.9 million, or 32.4%, from the same period last year. The
decrease was principally due to a decrease in pretax income and a
$33.5 million reduction in the deferred tax valuation allowance
as a result of the development of tax planning strategies to
dispose of certain assets to utilize capital losses generated by
the exit from the information products and services business.
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF
1993
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994
decreased $99.2 million, or 1.0%, from the same period last year.
A summary of revenues by segment is as follows:
UNAFFILIATED REVENUES BY SEGMENT:
(In millions)
For The Nine Months Ended
September 30,
1994 1993
Telecommunications $8,600.1 $8,618.3
Cellular 510.7 311.9
Publishing 669.9 652.8
Financial services 69.4 69.4
Other diversified operations 65.6 362.5
Total Consolidated Operating Revenues $9,915.7 $10,014.9
Telecommunications
Telecommunications revenues for the first nine months of 1994
decreased $18.2 million from the first nine months of 1993.
Local service revenues increased $108.3 million, or 2.2%,
primarily due to (1) a net $190 million increase resulting from
increased demand as evidenced by growth in access lines, growth
in sales of calling features and higher usage associated with the
severe winter storms, (2) a $16 million increase in local service
rates at New England Telephone primarily attributable to the
implementation of the third transitional filing of a
restructuring of Massachusetts rates effective April 14, 1994,
(3) a $5 million increase due to a 1993 reduction in revenues
associated with the reversal of a 1990 deferral of private line
revenues at New York Telephone, (4) a $7 million increase
primarily attributable to the 1994 reversal of revenues deferred
in 1993 that were in excess of amounts required to be refunded to
Rhode Island customers for 1993 overearnings pursuant to the
Rhode Island price regulation trial at
-18-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF
1993 (CONT'D)
OPERATING REVENUES (CONT'D)
New England Telephone, and (5) a $3 million increase in local
directory assistance revenues at New England Telephone resulting
from the reversal of previously deferred revenues pursuant to a
regulatory agreement with the State of Massachusetts to offset
expenses to enhance E911 systems. These increases were partially
offset by a $101 million revenue reduction at New York Telephone
pursuant to an NYSPSC order, and a $12 million decrease at
New England Telephone resulting from a deferral of revenues in
September 1994 for subsequent refund to Vermont customers as
required by a VPSB order (see STATE REGULATORY MATTERS above).
Long distance revenues decreased $24.6 million, or 2.9%,
primarily due to: (1) decreased demand for private line services
and wide area telecommunications services as a result of
increased competition and customer shifts to lower priced
services offered by the telephone subsidiaries, (2) a $10 million
revenue reduction at New York Telephone pursuant to an NYSPSC
order (see STATE REGULATORY MATTERS above), and (3) a $24 million
decrease in long distance rates at New England Telephone
primarily attributable to the implementation of the third
transitional filing of a restructuring of Massachusetts rates
effective April 14, 1994. These decreases were partially offset
by increased demand for message toll services, and a $3 million
increase in long distance directory assistance revenues at New
England Telephone resulting from the reversal of previously
deferred revenues pursuant to a regulatory agreement with the
State of Massachusetts to offset expenses to enhance E911
systems.
Network access revenues increased $31.5 million, or 1.2%,
principally due to a $55 million increase in switched access
revenues as a result of increased usage, partially offset by a
reduction in interstate rates, which included the phase-out of
the equal access cost recovery charge, and by a $9 million
revenue reduction at New York Telephone pursuant to an NYSPSC
order (see STATE REGULATORY MATTERS above). Special access
revenues declined $18 million primarily due to a reduction in
rates, increased competition and customer shifts to lower priced
services offered by the telephone subsidiaries.
Other revenues decreased $133.4 million, primarily due to the
following at New York Telephone: (1) a $115 million reduction in
revenues as ordered by the NYSPSC representing the first, second
and third quarter deferrals of the $153 million (see STATE
REGULATORY MATTERS above), (2) a $24 million decrease
attributable to the 1993 reversal of previously recorded
reductions in revenues in connection with the phase out of ad
valorem taxes on central office equipment and (3) a $12 million
decrease due to the 1994 cessation of imputed revenues for
procurement costs. These decreases were partially offset by a
$10 million increase associated with the 1993 reversal of a 1992
deferral of revenues for concession service at New York Telephone
and a $7 million increase in revenues from inside wire related
charges and voice messaging services.
-19-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF
1993 (CONT'D)
OPERATING REVENUES (CONT'D)
Cellular
Cellular revenues for the first nine months of 1994 increased
$198.8 million, or 63.7%, over the first nine months of 1993.
The segment's customer base for mobile telecommunications
services continued to expand, increasing 71% as compared to the
first nine months of 1993, including customers associated with
the acquisition of a cellular property. This growth was spread
across all cellular markets; however, customer growth was
partially offset by a decline in average minutes of use per
customer. Revenues for the first nine months of 1994 include
$22.7 million as a result of the restructuring of the New York
partnership.
Publishing
Publishing revenues for the first nine months of 1994 increased
$17.1 million, or 2.6%, over the first nine months of 1993
primarily due to increased Yellow Page advertising revenues as a
result of higher prices in the New England and New York markets
and the publication of directories in the Czech Republic. These
increases were partially offset by decreased revenues due to the
sale of UPC in April 1994 as part of the 1993 business
restructuring.
Financial Services
Financial services revenues for the first nine months of 1994
were flat as compared to the first nine months of 1993
principally due to a temporary lag in the growth of new
investments in the leased asset portfolio.
Other Diversified Operations
Other diversified operations revenues for the first nine months
of 1994 decreased $296.9 million, or 81.9%, from the first nine
months of 1993, primarily attributable to NYNEX's exit from the
information products and services business. BIS and AGS were
sold in July 1993 and January 1994, respectively, and had
contributed $318.9 million in revenues in the first nine months
of 1993. These decreases were partially offset by growth in the
customer base for international cable television and telephone
operations.
OPERATING EXPENSES
Operating expenses for the first nine months of 1994 were
$8.6 billion, an increase of $575.6 million, or 7.2%, over the
first nine months of 1993.
Operating expenses excluding Depreciation and amortization and
Taxes other than income increased $650.6 million at the
telecommunications group, principally due to a $480 million
pretax charge for pension enhancements and associated
postretirement medical benefits. Operating expenses excluding
Depreciation and amortization and Taxes other than income
decreased $130.8 million at NYNEX's subsidiaries other than the
telecommunications group principally due to the sale of BIS and
AGS, which had operating expenses of $334.5 million in the first
nine months of 1993, and the transfer of Corporate
-20-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF
1993 (CONT'D)
OPERATING EXPENSES (CONT'D)
employees into the telecommunications group as part of the single
enterprise
reorganization. These decreases were partially offset by
increased costs associated with the continued expansion of the
customer base for mobile telecommunications services, increased
expenses related to the growth in the customer base for
international cable television and telephone operations, and
business development costs in other international operations.
At the telecommunications group, employee costs, consisting
primarily of wages, payroll taxes, and employee benefits,
increased $106.7 million. Wages and payroll taxes increased a
net $90 million due to increases in salary and wage rates,
additional labor costs to support increased demand for services
and to improve service quality, and increases resulting from the
transfer of Corporate employees into the telecommunications group
as part of the single enterprise reorganization, partially offset
by a reduction in the work force as a result of force reduction
plans. In addition, benefit expenses increased $17 million due
primarily to increased medical costs.
At the telecommunications group, all other operating expenses,
which consist primarily of contracted and centralized services,
rent and other general and administrative costs, increased
$65.7 million. The increase was due primarily to a $64 million
increase in contracted and centralized services which included
the following: (1) a $33 million increase resulting from the
transfer of Corporate employees into the telecommunications group
as part of the single enterprise reorganization, (2) a
$14 million increase in sales commissions, and (3) a $6 million
increase in right to use fees. Other increases include: a
$14 million increase in the provision for uncollectible revenues,
a $13 million increase in bad debt expense recognized pursuant to
provisions of billing and collection contracts, primarily with
AT&T, a $7 million increase in material and supply expense, and a
$7 million increase at New England Telephone resulting from
capitalization in 1993 of certain 1992 engineering charges.
Partially offsetting these increases were a $30 million decrease
due to the completion of equal access amortization in 1993 and a
$9 million decrease attributable to the reversal in 1993 of
deferred inside wire expense recorded in 1991 and 1992 at New
York Telephone.
Depreciation and amortization increased $84.0 million, or 4.5%,
principally at the telecommunications group where there was a
$60 million increase due to increased plant investment and a
$33 million increase due to revised intrastate depreciation rates
in Massachusetts effective July 1993, partially offset by a
$14 million decrease resulting from an adjustment of prior year
estimates for cost of removal (net of salvage) for electro-
mechanical switching equipment at New England Telephone in
Massachusetts, Maine and Rhode Island and a $7 million decrease
resulting from implementation of revised intrastate depreciation
rates in Vermont in September 1994 retroactive to January 1994
(see STATE REGULATORY MATTERS above).
-21-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF
1993 (CONT'D)
Taxes other than income decreased $28.2 million, or 3.6%,
principally due to a $23 million decrease in property taxes
resulting primarily from lower assessments of property value and
a $5 million decrease at New England Telephone primarily due to a
reversal of a 1993 accrual as a result of unasserted municipal
assessments, and an $11 million decrease in revenue taxes at New
York Telephone due primarily to a decrease in the surcharge rate
from 15% to 12.5% at New York Telephone. Partially offsetting
these decreases was a $3 million increase in New York State
capital stock tax.
OTHER INCOME (EXPENSE) - NET
Other income (expense) - net for the first nine months of 1994
increased $31.1 million over the first nine months of 1993. This
increase was principally due to dividends received from Viacom, a
one-time payment to NYNEX Mobile Communications Company from its
New York partners related to restructure of the New York
partnership, and higher expenses in the first nine months of 1993
for the interstate portion of call premiums and other charges
associated with the refinancings of long-term debt. These
increases were partially offset by increased minority interest
expense and partnership losses in connection with investments in
international ventures.
INTEREST EXPENSE
Interest expense for the first nine months of 1994 decreased
$1.2 million from the first nine months of 1993. This decrease
was principally due to a decline in average interest rates
resulting from long-term debt refinancings in 1993, increased
average debt levels in 1994, and higher expenses in the first
nine months of 1993 for interest on customer overbillings.
INCOME TAXES
Income taxes for the first nine months of 1994 decreased
$267.2 million, or 54.1%, from the same period last year. The
decrease was principally due to a decrease in pretax income and a
$66.7 million reduction in the deferred tax valuation allowance
as a result of the development of tax planning strategies to
dispose of certain assets to utilize capital losses generated by
the exit from the information products and services business.
-22-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 AS COMPARED TO FIRST NINE MONTHS OF
1993 (CONT'D)
CAPITAL RESOURCES AND LIQUIDITY
Capital expenditures increased $381.1 million, or 21.9%, over the
first nine months of 1993. During the first nine months of 1994,
NYNEX continued its capital expenditure program designed to meet
the expanding needs for telecommunications services by upgrading
the existing telecommunications network, including new
construction, optical fiber and modernization at the telephone
subsidiaries. The telephone subsidiaries funded their capital
expenditures of $1.6 billion primarily through cash generated
from operations. Capital expenditures in the first nine months
of 1994 also included the construction of cable television and
telephone networks in the United Kingdom and the addition of 84
mobile cell sites.
The pace of new investments in leased assets in the first nine
months of 1994 as compared to the first nine months of 1993
declined at NYNEX Credit Company ("NCC") due to the timing of
market opportunities in leveraged leases. Other investing
activities for the first nine months of 1994 included the receipt
of proceeds from the exit from the information products and
services business, the purchase of cellular properties, and
continued investment in international ventures.
During the first nine months of 1994, the net decrease in cash
flows from issuances and repayments of commercial paper and short-
term debt was due primarily to the issuance of long-term debt in
1993 at New York Telephone. New York Telephone had cash flows
from debt issuances in 1994 of $593.5 million, primarily due to
refinancings to obtain lower interest rates.
CFC had cash flows from the issuance of medium-term notes of
$305.2 million. Subsequent to September 30, 1994, CFC issued an
additional $357.5 million of medium-term notes with maturities
ranging from 3.25 to 10 years and coupon rates ranging from 7.18%
to 8.43%. The issuance of these notes reduced the commercial
paper requirements. It is anticipated that CFC will issue
additional medium-term notes throughout 1994. CFC had
$837.3 million of unissued medium-term debt securities registered
with the SEC.
Repayment of long-term debt and capital leases includes
$78 million at NCC for debt repayment, $17.6 million at NYNEX for
the debt related to the leveraged employee stock ownership plan,
and $7.7 million at other NYNEX subsidiaries for capital lease
payments. At September 30, 1994, New England Telephone and New
York Telephone had $500 million and $250 million, respectively,
of unissued, unsecured debt securities registered with the SEC.
-23-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY (CONT'D)
NYNEX issued new shares of common stock and reissued treasury
stock for employee savings plans, the Dividend Reinvestment and
Stock Purchase Plan, stock option plans, and stock compensation
plans, which increased equity by approximately $265 million and
provided cash flows of $176 million in the first nine months of
1994. NYNEX expects to continue issuing new shares and treasury
shares for these plans as required.
Financing cash flows in 1994 included net funds of $154.7 million
provided by a minority partner in the partnership formed in
December 1993 for the network construction program in the United
Kingdom. NYNEX expects to continue seeking funds for this
network construction program through the formation of
partnerships.
Pursuant to the indentures for certain of its debentures,
New York Telephone has covenanted that it will not issue
additional funded debt securities ranking equally with or prior
to such debentures unless it has maintained an earnings coverage
of 1.75 for interest charges for a period of any 12 consecutive
months out of the 15 month period prior to the date of the
proposed issuance. As a result of the 1993 business restructuring
charges and the 1994 pension enhancements, New York Telephone
does not currently meet the earnings coverage requirement.
NYNEX filed a registration statement with the SEC in the second
quarter of 1994 for the issuance of up to $900 million of debt
and equity securities. The proceeds from the sale of securities
would be used to provide funds to NYNEX and/or NYNEX's
subsidiaries other than the telecommunications group for their
respective general corporate purposes.
OTHER MATTERS
On March 24, 1994, NYNEX reached agreements with the CWA and
Local 2213 of the IBEW in New York to extend through August 8,
1998 the collective bargaining agreements that were to expire on
August 5, 1995. The agreements were ratified in May 1994. On
August 5, 1994, NYNEX reached a similar agreement with Locals of
the IBEW in New England. This agreement was ratified in August
1994. Under the terms of the new agreements, there will be basic
wage increases of 10.5% during the life of the agreements. Wages
will increase 4.0% on August 6, 1995, 3.5% on August 4, 1996 and
3.0% on August 3, 1997. In 1997 there may also be a cost-of-
living adjustment. The agreements also provide for retirement
incentives, a commitment to no layoffs or loss of wages as a
result of company-initiated "process change", an enhanced
educational program and incentives to improve service quality.
-24-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OTHER MATTERS (CONT'D)
On June 30, 1994, NYNEX and Bell Atlantic Corporation ("Bell
Atlantic"), announced the formation of a joint venture that will
combine NYNEX's and Bell Atlantic's domestic cellular services
properties and will bid in the FCC's auction of licenses for
personal communications services ("PCS"). Initially, Bell
Atlantic will own 62.35 percent of the joint venture and NYNEX
will own 37.65 percent. NYNEX has the right to increase its
share to 40 percent by contributing an additional $500 million to
the joint venture. The transaction is expected to close in the
second quarter of 1995. The joint venture will be controlled
equally by both companies.
On October 20, 1994, NYNEX, Bell Atlantic, AirTouch
Communications Inc. ("AirTouch") and U S WEST Inc. ("U S WEST")
announced that they have signed definitive agreements to form a
venture to provide national wireless communications services.
The venture is comprised of two partnerships. One partnership
will bid for licenses in the FCC auction of licenses for PCS and
deploy PCS services. On October 28, 1994, that partnership filed
its application with the FCC to participate in the PCS auction.
That partnership will be governed by a board of three members
representing Bell Atlantic and NYNEX and three members
representing AirTouch and U S WEST. The second partnership will
develop technical and service standards and a national branding
and marketing strategy for both cellular and PCS services. That
partnership will be governed by a board of three members
representing Bell Atlantic and NYNEX, three members representing
AirTouch and U S WEST and one independent member.
On October 31, 1994, NYNEX, Bell Atlantic and Pacific Telesis
Group (collectively, the "partners") announced the formation of
two jointly owned companies, a media company and a platform
company, to develop and deliver home entertainment, information,
and interactive programming and services over the partners' video
dialtone networks. The media company has entered into a
broadbased consulting arrangement with Creative Artists Agency
Inc. to develop a branding and marketing strategy to establish
relationships with and assemble programming from various segments
of the entertainment industry. The platform company is
developing technical systems to support the development and
distribution of programming and services over the video dialtone
networks and will provide technical support services and systems
to the media company. Each of the partners will contribute
approximately $100 million in cash and/or assets to the new
companies over the next three years.
The telephone subsidiaries currently account for the economic
effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards No. 71 ("Statement
No. 71"). Statement No. 71 would no longer apply in the event
that the recoverability of operating costs through rates becomes
unlikely or uncertain, whether resulting from competitive effects
or specific regulatory actions. NYNEX continuously assesses its
-25-
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OTHER MATTERS (CONT'D)
position and the recoverability of its telecommunications assets
with respect
to Statement No. 71 and believes that Statement No. 71 still
applies. However, it is possible that events in the industry and
the markets in which NYNEX operates could change NYNEX's position
in the near future. The impact of such a change would result in
a material non-cash charge and would be reported as an
extraordinary item. This charge would include: (1) the write-off
of previously established regulatory assets and liabilities,
including regulatory assets associated with telephone plant, and
(2) an adjustment to the carrying value of telephone plant if it
is determined, using a projected cash flow approach, that
impairment exists. It is not practicable to estimate the charge
at this time due to the effect of possible regulatory settlements
that would affect the recovery of asset balances should
subsequent events require discontinuance of Statement No. 71.
-26-
Form 10-Q Part II
NYNEX CORPORATION
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On August 8, 1994, NYNEX Corporation ("NYNEX") and Bell
Atlantic Corporation ("Bell Atlantic") filed an antitrust
lawsuit against AT&T Corp. ("AT&T") and McCaw Cellular
Communications Inc. ("McCaw"), seeking to enjoin the
proposed merger of AT&T and McCaw. The lawsuit, filed in
the United States District Court for the Eastern District
of New York, alleged, among other things, that the merger
would violate provisions of the Clayton Act and would
give AT&T the incentive to use its power as a
manufacturer to limit competition in the cellular
industry. As a result of a hearing on September 13, 1994
before the United States District Court for the Eastern
District of New York, the merger was permitted to close
subject to certain conditions. On November 7, 1994, the
day before trial was scheduled to begin, the parties
announced a settlement of the suit. Terms of the
settlement are confidential, but in general AT&T has made
several commitments to accelerate its pursuit of open
interfaces in its cellular network equipment.
See also Part II, ITEM 1 in NYNEX's Quarterly Reports on
Form 10-Q for the periods ended March 31, 1994 and
June 30, 1994.
ITEM 5.Other Information
State Regulatory Matters
Maine. In an order dated August 18, 1994, the Maine
Public Utilities Commission ("MPUC") decided to address a
ratepayer complaint challenging the level of earnings of
New England Telephone and Telegraph Company ("New England
Telephone") in Maine by including the matter in the
pending alternative regulation proceeding. The MPUC has
scheduled hearings in the alternative regulation
proceeding for January 1995.
Rhode Island. On October 13, 1994, New England Telephone
made its third annual filing with the Rhode Island Public
Utilities Commission ("RIPUC") under the Price Regulation
Trial, for effect on January 15, 1995. This filing calls
for an overall revenue reduction of approximately
$445,000, with numerous minor price adjustments.
In a separate proceeding the RIPUC is considering
proposals from the Rhode Island Division of Public
Utilities and Carriers and various interexchange carriers
with respect to New England Telephone's intrastate access
charges, including a proposal to freeze New England
Telephone's annual carrier common line revenues based on
the most recent available annual amount. A decision by
the RIPUC is expected by mid-November.
-27-
Form 10-Q Part II
NYNEX CORPORATION
PART II - OTHER INFORMATION
ITEM 5.Other Information (Cont'd)
State Regulatory Matters (Cont'd)
On October 25, 1994, The RIPUC initiated a proceeding
with respect to competition. The scope of the proceeding
is yet to be defined but may include intraLATA
presubscription and local exchange competition.
Federal Regulatory Matters
In accordance with the Federal Communications
Commission's ("FCC") July 14, 1994 order on virtual
collocation, New England Telephone and New York Telephone
Company (collectively, the "telephone subsidiaries")
advised the FCC on September 1, 1994 that, because the
telephone subsidiaries' physical collocation tariff
complies with the requirements in the FCC's order, the
telephone subsidiaries did not intend to file a virtual
collocation tariff.
On September 9, 1994, the New England Cable Television
Association, National Cable Television Association and
Cox Enterprises filed with the FCC petitions to deny
New England Telephone's July 8, 1994 request to construct
facilities and provide video dialtone service in portions
of Massachusetts and Rhode Island. On September 22,
1994, New England Telephone filed its opposition to the
petitions to deny.
On October 20, 1994, the FCC announced that it had
adopted a decision responding to petitions for
reconsideration of its 1992 order establishing the rules
and regulatory framework governing telephone company
provision of video dialtone. The FCC generally affirmed
its rules for video dialtone, with some clarifications
and modifications. The FCC affirmed the common carrier
nature of the video dialtone platform, indicated that the
video dialtone platform will be subject to dual
federal/state regulation, stated that cost allocation
issues will be resolved in the tariff process and relaxed
in certain respects its telephone company/cable non-
ownership affiliation rules.
See, also, discussion of STATE REGULATORY MATTERS and
FEDERAL REGULATORY MATTERS in Part I, Management's
Discussion and Analysis of Financial Condition and
Results of Operations, which is incorporated herein by
reference.
-28-
Form 10-Q Part II
NYNEX CORPORATION
PART II - OTHER INFORMATION
ITEM 5.Other Information (Cont'd)
Operations under the Modification of Final Judgment
("MFJ")
On August 18, 1994, the United States District Court for
the District of Columbia (the "MFJ Court") ordered that
the July 6, 1994 motion of NYNEX, Bell Atlantic,
BellSouth Corporation ("BellSouth") and Southwestern Bell
Corporation ("SBC") to vacate the MFJ be referred to the
Department of Justice ("DOJ") for investigation. The MFJ
Court's order provides that interested parties are to
file their comments on the motion with the DOJ by mid-
November. Following completion of its investigation, the
DOJ is expected to file its response to the motion with
the MFJ Court in late 1995 or early 1996, following which
there shall be an opportunity for additional public
comment and responses by NYNEX, Bell Atlantic, BellSouth,
and SBC.
On August 25, 1994, NYNEX filed a request with the DOJ
for a waiver from the MFJ to provide interexchange
services for calls originating in New York State. Public
comments on the waiver request are expected to be filed
with the DOJ by mid-November.
ITEM 6.Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
(27) Financial Data Schedule
(b) Reports on Form 8-K.
The Company's Current Report on Form 8-K, date of report
June 30, 1994 and filed July 5, 1994, reporting on Item 5.
-29-
Form 10-Q
NYNEX CORPORATION
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.
NYNEX CORPORATION
P. M. Ciccone
P. M. Ciccone
Vice President and Comptroller
(Principal Accounting Officer)
November 8, 1994
-30-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 112
<SECURITIES> 0
<RECEIVABLES> 2,497
<ALLOWANCES> 220
<INVENTORY> 161
<CURRENT-ASSETS> 3,833
<PP&E> 35,331
<DEPRECIATION> 14,882
<TOTAL-ASSETS> 29,754
<CURRENT-LIABILITIES> 6,007
<BONDS> 7,166
<COMMON> 438
0
0
<OTHER-SE> 8,127
<TOTAL-LIABILITY-AND-EQUITY> 29,754
<SALES> 0
<TOTAL-REVENUES> 9,916
<CGS> 0
<TOTAL-COSTS> 8,608
<OTHER-EXPENSES> (6)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 493
<INCOME-PRETAX> 821
<INCOME-TAX> 226
<INCOME-CONTINUING> 594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 594
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
</TABLE>
