Form 10-Q/A
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 June 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 July 31, 1994, 420,546,657 common shares were outstanding.
AMENDMENT NO.2
The registrant hereby amends the following item of its Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1994, as set forth in the
pages attached hereto:
Part I - Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations"
<PAGE>
Form 10-Q/A 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.
As previously reported (see NYNEX's Annual Report on Form 10-K for the year
ended December 31, 1993), in the first phase of the incentive regulation
proceeding, the NYSPSC issued Orders on December 24, 1993 and January 28, 1994
for a reduction in New York Telephone's rates of $170 million annually,
effective January 1, 1994, and required that an additional $153 million of
current revenues be made available "for the ultimate benefit of customers and
the Company's competitive position through earnings incentives for short-term
service improvements and a longer term plan for performance-based earning
incentives and network improvements." That incentive regulatory plan is
currently being pursued in a second phase of the proceeding. The $170 million
rate reduction was intended to reduce intrastate revenues by approximately
$141 million annually. As ordered by the NYSPSC, $31 million of the $153
million has been designated by New York Telephone as an incentive to improve
overall service quality in the Brooklyn-Queens-Bronx service area.
As previously reported (see NYNEX's Annual Report on Form 10-K for the year
ended December 31, 1993), the NYSPSC has issued an Opinion and Order which
would require New York Telephone to provide IntraLATA Presubscription ("ILP")
within 18 months of a bona fide request from a carrier. ILP would give a
customer the option of designating, in advance, a carrier that would carry the
customer's intraLATA toll calls. On April 4, 1994, the NYSPSC issued an
opinion which confirmed the 18 month requirement, provided that Interexchange
Carriers should pay the cost of ILP implementation, and ruled that New York
Telephone should be compensated for contribution losses resulting from ILP. In
its decision, the NYSPSC suggested that certain issues relating to ILP,
including scheduling, would be made the subject of negotiations and a
"collaborative effort" between the parties to the incentive regulation
proceeding.
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 ("Plan") to govern New England Telephone's Massachusetts intrastate
operations. The Plan 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
-8-
<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATE REGULATORY MATTERS (CONT'D)
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 commenced on July 11, 1994.
As previously reported (see NYNEX's Annual Report on Form 10-K for the year
ended December 31, 1993), New England Telephone filed a petition for a price
regulation plan with the Vermont Public Service Board ("VPSB") on October 5,
1993. In a related proceeding, on December 1, 1993, the Vermont Department of
Public Service ("VDPS") filed a petition seeking to examine New England
Telephone's rates and to ensure that rates are at appropriate levels prior to
the initiation of a price regulation plan. On May 27, 1994, New England
Telephone and the VDPS submitted to the VPSB a proposed agreement to resolve
the major issues in New England Telephone's Price Regulation Plan proceeding.
The agreement would afford New England Telephone pricing and marketing
flexibility and would not restrict New England Telephone's earnings. In
connection with the proposed agreement, the VDPS has reduced its allegation of
New England Telephone overearnings from $27.5 million to $17.1 million on an
annual basis. Hearings before the VPSB concluded on July 21, 1994, and a
decision with respect to the agreement is expected in October.
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.
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.
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING
Second quarter 1994 results include approximately $449 million of pretax
charges ($291 million after-tax) for pension enhancements, primarily in the
telecommunications segment, for approximately 2,100 management and 1,900
nonmanagement employees who elected during the quarter 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 $449 million
pretax charges are: $286 million ($186 million after-tax) for pension
enhancements, and $163 million ($105 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 approximately $520 million was for postretirement medical costs
recognized as a result of the planned decrease in the work force. The second
quarter charges are the first step in 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. Much of the cost of the incentives will be funded by
NYNEX's pension plans. 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 and with the International Brotherhood
of Electrical Workers ("IBEW") in New York, which extend the existing labor
agreements to August 1998, provide a retirement incentive. On August 5, 1994,
a similar agreement with the IBEW in New England was tentatively reached
subject to ratification by the union membership (see OTHER MATTERS).
The reserves established for severance will be 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, and the incremental
cost of the pension enhancements will be charged to expense as employees
leave. 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. Postretirement medical costs
will be increased on a per employee basis, because these incentives resulted
in more individuals qualifying for lifetime medical coverage than under the
severance plan, and will be charged to expense as employees leave. Under the
assumption that nonmanagement employees will leave under the retirement
incentive, the expected utilization of nonmanagement severance reserves and
the application of the postretirement medical liability per year have been
revised from the expected utilization as previously reported (see NYNEX's
Annual Report on Form 10-K/A, Amendment No.2, for the year ended December 31,
1993) as follows:
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (CONT'D)
(In millions)
Severance 1994 1995 1996 Total
--------- ---- ---- ---- -----
Management $160 $ 91 $ 78 $ 329
Nonmanagement 33 97 127 257
---- ---- ---- -----
Subtotal 193 188 205 586
Remaining 1991 reserve 45 - - 45
----- ---- ---- -----
Total $238 $188 $205 $ 631
==== ==== ==== =====
Medical 1994 1995 1996 Total
------- ---- ---- ---- -----
Management $ 85 $ 35 $ 29 $ 149
Nonmanagement 57 139 175 371
---- ---- ---- -----
Total $142 $174 $204 $ 520
==== ==== ==== =====
The expected additional costs for the pension incentives and related
postretirement medical costs by year are as follows:
(In millions) 1994 1995 1996 Total
---- ---- ---- ------
Management $173 $ 71 $ 58 $ 302
Nonmanagement 647 547 454 1,648
---- ---- ---- ------
Total $820 $618 $512 $1,950
==== ==== ==== ======
The restructuring reserve balance at June 30, 1994, which does not include the
liability recorded at year-end for postretirement medical benefits associated
with employees' leaving NYNEX under the business restructuring, was
approximately $1.2 billion. 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 six months of
1994, NYNEX reduced 1993 restructuring reserves by $255 million in the
following categories:
Severance:
Management $129
Nonmanagement 16
----
Total severance $145
Systems redesign:
Customer contact 27
Customer provisioning 1
Customer operations -
Customer support 1
----
Total systems redesign 29
Work center consolidation -
Branding 18
Relocation -
Training -
Re-engineering implementation 12
Sale/discontinuance of information products
and services businesses 40
Nontelephone subsidiaries' restructuring 11
----
Total $255
====
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING (CONT'D)
The severance reduction amount is comprised of $130 million of severance
reserves 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, and $15 million utilized for
other retiree costs. The nontelephone subsidiaries' restructuring reduction
amount includes the reversal of $5 million of reserves 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.
In addition, in the first six months of 1994, NYNEX utilized approximately $40
million of severance reserves established in 1991.
There were no significant cost savings as a result of business restructuring
in the first six months of 1994. Since most of the employees that left NYNEX
under the terms of the enhanced pension offering left in late June, the
expense savings associated with this force reduction have not yet been
realized. 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.
SECOND QUARTER OF 1994 AS COMPARED TO SECOND QUARTER OF 1993
OPERATING REVENUES
Operating revenues for the quarter ended June 30, 1994 decreased $52.7
million, or 1.6%, from 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
June 30, June 30,
1994 1993
--------- --------
Telecommunications $2,859.4 $2,880.7
Cellular 177.8 105.9
Publishing 229.5 216.4
Financial services 22.8 24.8
Other diversified operations 22.1 136.5
-------- --------
Total Consolidated Operating Revenues $3,311.6 $3,364.3
======== ========
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1994 AS COMPARED TO SECOND QUARTER OF 1993 (CONT"D)
OPERATING REVENUES (CONT'D)
Telecommunications
Telecommunications revenues for the second quarter of 1994 decreased $21.3
million from the second quarter of 1993.
Local service revenues increased $40.5 million, or 2.5%, primarily due to: (1)
a net $64 million increase resulting from increased demand as evidenced by
growth in access lines and growth in sales of calling features, (2) a $6
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 and (3) 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 $34
million revenue reduction at New York Telephone pursuant to an NYSPSC order
(see STATE REGULATORY MATTERS above).
Long distance revenues decreased $11.6 million, or 4.1%, primarily due to
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, and a $4 million
revenue reduction at New York Telephone pursuant to an NYSPSC order (see STATE
REGULATORY MATTERS above). In addition, there was an $8 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 $2 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 decreased $1.2 million. Special access revenues
decreased $9 million primarily due to a reduction in rates, increased
competition and customer shifts to lower priced services offered by the
telephone subsidiaries. Switched access revenues increased $9 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).
Other revenues decreased $49.0 million primarily due to the following at New
York Telephone: (1) a $38 million reduction in revenues as ordered by the
NYSPSC representing the second quarter deferral of the $153 million (see STATE
REGULATORY MATTERS above), and (2) a $7 million decrease due to the 1994
cessation of imputed revenues for procurement costs.
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1994 AS COMPARED TO SECOND QUARTER OF 1993 (CONT"D)
OPERATING REVENUES (CONT'D)
Cellular
Cellular revenues for the second quarter of 1994 increased $71.9 million, or
67.9%, over the second quarter of 1993. The segment's customer base for mobile
telecommunications services continued to expand, increasing 65% as compared to
the second 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. Second quarter revenues include $11.1 million as
a result of the restructuring of the New York partnership.
Publishing
Publishing revenues for the second quarter of 1994 increased $13.1 million, or
6.1%, over the second quarter of 1993 primarily due to the publication of
directories in the Czech Republic. In addition, Yellow Pages advertising
revenues in the New England market increased as a result of higher prices.
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 second quarter of 1994 decreased $2.0
million, or 8.1%, from the second quarter 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 second quarter of 1994 decreased
$114.4 million, or 83.8%, from the second 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 $123.5
million in revenues in the second 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 second quarter of 1994 were $3.2 billion, an
increase of $486.2 million, or 18.0%, over the second quarter of 1993.
Operating expenses excluding Depreciation and amortization and Taxes other
than income increased $518.1 million at the telephone subsidiaries and
Telesector Resources Group, Inc. (collectively, the "telecommunications
group"), principally due to a $449.1 million pretax charge for pension
enhancements and associated postretirement medical benefits. Operating
expenses excluding Depreciation and amortization and Taxes other than income
decreased $68.4 million at NYNEX's subsidiaries other than the
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1994 AS COMPARED TO SECOND QUARTER OF 1993 (CONT'D)
OPERATING EXPENSES (CONT'D)
telecommunications group principally due to the sale of BIS and AGS, which had
operating expenses of $127.4 million in the second quarter of 1993, and the
transfer of Corporate employees into the telecommunications group as part of
the single enterprise reorganization. The decrease was 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 $24.6 million. Wages
and payroll taxes increased $20 million due to increases in salary and wage
rates, additional labor costs due to ongoing service quality improvement
initiatives, and a $5 million increase 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
$5 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 $44.4 million. The increase was due primarily
to a $29 million increase in contracted and centralized services, which
included a $13 million increase resulting from the transfer of Corporate
employees into the telecommunications group as part of the single enterprise
reorganization, a $14 million increase in bad debt expense recognized pursuant
to provisions of the billing and collection contract primarily with AT&T, and
a $9 million increase in the provision for uncollectible revenues, partially
offset by a $9 million decrease due to the completion of equal access
amortization in 1993.
Depreciation and amortization increased $39.4 million, or 6.3%, principally at
the telecommunications group. There was a $21 million increase due to
increased plant investment and a $16 million increase due to revised
intrastate depreciation rates in Massachusetts effective July 1993.
Taxes other than income decreased $2.9 million, or 1.1%, principally due to a
$4 million decrease in property taxes at New York Telephone resulting
primarily from lower assessments of property value.
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1994 AS COMPARED TO SECOND QUARTER OF 1993 (CONT'D)
OTHER INCOME (EXPENSE) - NET
Other income (expense) - net for the second quarter of 1994 increased $12.1
million over the second quarter of 1993. The increase was principally due to
dividends received from Viacom Inc., a one-time payment to NYNEX Mobile
Communications Company ("NYNEX Mobile") from its New York partners related to
restructure of the New York partnership, and higher expenses in the second
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 second quarter of 1994 decreased $1.9 million, or
1.2%, from the second quarter of 1993. This decrease was principally due to a
decline in average interest rates resulting from long-term debt refinancings
in 1993 and increased average debt levels and higher expenses in the second
quarter of 1993 for interest on customer overbillings.
INCOME TAXES
Income taxes for the second quarter of 1994 decreased $185.9 million from the
same period last year. The decrease was principally due to a decrease in
pretax income and a $21 million reduction in the deferred tax valuation
allowance as a result of expected future capital gains arising from the
planned disposition of certain cellular partnership interests as a result of
the planned joint venture between NYNEX and Bell Atlantic Corporation ("Bell
Atlantic") which would permit NYNEX to utilize capital losses generated by the
exit from the information products and services business (see OTHER MATTERS
below).
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993
OPERATING REVENUES
Operating revenues for the six months ended June 30, 1994 decreased $99.6
million, or 1.5%, from the same period last year. A summary of revenues by
segment is as follows:
UNAFFILIATED REVENUES BY SEGMENT:
(In millions) For the Six Months Ended
June 30, June 30,
1994 1993
-------- --------
Telecommunications $5,728.5 $5,740.6
Cellular 318.1 196.5
Publishing 444.6 431.1
Financial services 50.6 46.5
Other diversified operations 43.1 269.8
-------- --------
Total Consolidated Operating Revenues $6,584.9 $6,684.5
======== ========
Telecommunications
Telecommunications revenues for the first six months of 1994 decreased $12.1
million from the first six months of 1993.
Local service revenues increased $86.1 million, or 2.7%, primarily due to (1)
a net $128 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) 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, (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 $6 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
New England Telephone, and (5) a $5 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 $67 million revenue reduction at New York Telephone
pursuant to an NYSPSC order (see STATE REGULATORY MATTERS above).
Long distance revenues decreased $9.9 million, or 1.8%, primarily due to
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, a $7 million revenue
reduction at New York Telephone pursuant to an NYSPSC order (see STATE
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993
OPERATING REVENUES (CONT'D)
REGULATORY MATTERS above), and 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, and a $5 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 $11.0 million principally due to a $33
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 $6 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 $99.3 million, primarily due to the following at New
York Telephone: (1) a $77 million reduction in revenues as ordered by the
NYSPSC representing the first and second 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,
(3) a $7 million decrease due to the 1994 cessation of imputed revenues for
procurement costs, and (4) a $10 million increase associated with the 1993
reversal of a 1992 deferral of revenues for concession service.
Cellular
Cellular revenues for the first six months of 1994 increased $121.6 million,
or 61.9%, over the first six months of 1993. The segment's customer base for
mobile telecommunications services continued to expand, increasing 65% as
compared to the first six 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 six months of
1994 include $11.1 million as a result of the restructuring of the New York
partnership.
Publishing
Publishing revenues for the first six months of 1994 increased $13.5 million,
or 3.1%, over the first six months of 1993 primarily due to the publication of
directories in the Czech Republic. In addition, Yellow Pages advertising
revenues in the New England market increased as a result of higher prices.
These increases were partially offset by decreased revenues due to the sale of
UPC in April 1994 as part of the 1993 business restructuring.
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993 (CONT'D)
OPERATING REVENUES (CONT'D)
Financial Services
Financial services revenues for the first six months of 1994 increased $4.1
million, or 8.8%, over the first six months of 1993, principally due to
continued growth in the leased asset portfolio.
Other Diversified Operations
Other diversified operations revenues for the first six months of 1994
decreased $226.7 million, or 84.0%, from the first six 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 $240.5 million in revenues in the first six
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 six months of 1994 were $5.9 billion, an
increase of $512.7 million, or 9.6%, over the first six months of 1993.
Operating expenses excluding Depreciation and amortization and Taxes other
than income increased $610.5 million at the telecommunications group,
principally due to a $449.1 million pretax charge for pension enhancements and
associated postretirement medical benefits. Operating expenses excluding
Depreciation and amortization and Taxes other than income decreased $148.7
million at NYNEX's subsidiaries other than the telecommunications group
principally due to the sale of BIS and AGS, which had operating expenses of
$249.7 million in the first six months of 1993, and the transfer of Corporate
employees into the telecommunications group as part of the single enterprise
reorganization. The decrease was 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 $85.4 million. Wages
and payroll taxes increased $67 million due to increases in salary and wage
rates, additional labor costs due to ongoing service quality improvement
initiatives, and an $11 million increase 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
$18 million due primarily to increased medical costs.
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS 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, increased $76.1 million. The increase was due primarily
to a $48 million increase in contracted and centralized services, which
included a $23 million increase resulting from the transfer of Corporate
employees into the telecommunications group as part of the single enterprise
reorganization, a $23 million increase in bad debt expense recognized pursuant
to provisions of the billing and collection contract primarily with AT&T, a
$15 million increase in the provision for uncollectible revenues, a $10
million increase in material and supply expenses, and a $7 million increase at
New England Telephone resulting from capitalization in 1993 of certain 1992
engineering charges. Partially offsetting these increases was an $18 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 $76.2 million, or 6.1%, principally at
the telecommunications group where there was a $38 million increase due to
increased plant investment and a $33 million increase due to revised
intrastate depreciation rates in Massachusetts effective July 1993.
Taxes other than income decreased $25.3 million, or 4.8%, principally due to a
$28 million decrease in property taxes at New York Telephone resulting
primarily from lower assessments of property value and an $8 million decrease
in property taxes at New England Telephone primarily attributable to a
reversal of a 1993 accrual as a result of unasserted municipal assessments.
Partially offsetting these decreases were a $2 million increase in
Massachusetts property taxes and a $2 million increase in New York State
capital stock tax.
OTHER INCOME (EXPENSE) - NET
Other income (expense) - net for the first six months of 1994 increased $9.8
million over the first six months of 1993. This increase was principally due
to dividends received from Viacom Inc., a one-time payment to NYNEX Mobile
from its New York partners related to restructure of the New York partnership,
and higher expenses in the first six 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.
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993 (CONT'D)
INTEREST EXPENSE
Interest expense for the first six months of 1994 decreased $11.7 million, or
3.5%, from the first six months of 1993. This decrease was principally due to
a decline in average interest rates resulting from long-term debt refinancings
in 1993 and increased average debt levels and higher expenses in the first six
months of 1993 for interest on customer overbillings.
INCOME TAXES
Income taxes for the first six months of 1994 decreased $211.3 million, or
65.8%, from the same period last year. The decrease was principally due to a
decrease in pretax income and a $33 million reduction in the deferred tax
valuation allowance as a result of the development of tax planning strategies
to utilize capital losses generated by the exit from the information products
and services business, including expected future capital gains arising from
the planned disposition of certain cellular partnership interests as a result
of the planned joint venture between NYNEX and Bell Atlantic (see OTHER
MATTERS below). These increases were partially offset by the enactment of the
Revenue Reconciliation Act of 1993 on August 10, 1993, which increased the
statutory corporate federal income tax rate from 34 percent to 35 percent
retroactive to January 1, 1993.
CAPITAL RESOURCES AND LIQUIDITY
Capital expenditures increased $284.7 million, or 26.1%, over the first six
months of 1993. During the first six 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 $1.1 billion primarily through cash generated from operations,
and it is expected that they will continue to do so. Capital expenditures in
the first six months of 1994 also included the construction of cable
television and telephone networks in the United Kingdom and the addition of 65
mobile cell sites.
The pace of new investments in leased assets in the first six months of 1994
as compared to the first six months of 1993 declined at NYNEX Credit Company
due to the timing of market opportunities in leveraged leases. Other investing
activities for the first six 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.
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993 (CONT'D)
CAPITAL RESOURCES AND LIQUIDITY (CONT'D)
During the first six 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 at New York Telephone. New York
Telephone had cash flows from debt issuances of $593.5 million, primarily due
to refinancings to obtain lower interest rates.
NYNEX Capital Funding Company had cash flows from the issuance of medium-term
notes of $124.5 million. The proceeds will be used to provide financing for
NYNEX and the nontelephone subsidiaries. Repayment of long-term debt and
capital leases includes $55.5 million at NYNEX Credit Company for debt
repayment, $17.6 million at NYNEX for the debt related to the leveraged
employee stock ownership plan, and $5.4 million at other NYNEX subsidiaries
for capital lease payments. At June 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.
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 $204 million and provided cash flows of $142 million in the
first six 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 $122.4 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 has filed a registration statement with the SEC 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.
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<PAGE>
Form 10-Q/A Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1994 AS COMPARED TO FIRST SIX MONTHS OF 1993 (CONT'D)
OTHER MATTERS
On June 30, 1994, NYNEX and 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 Federal Communications Commission'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 March 24, 1994, NYNEX reached agreements with the Communications Workers of
America 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
tentatively reached a similar agreement with Locals of the IBEW in New
England, subject to ratification by the union membership. 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.
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
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 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.
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<PAGE>
Form 10-Q/A
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)
December 13, 1994
