1
Form 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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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.
AMENDMENT NO.1
The registrant hereby amends the following item of its Quarterly Report on
Form 10-Q for the quarterly period ended September 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.
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.
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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
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.
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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
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
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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
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
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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
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 approximately $520 million was for postretirement medical costs
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. 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 ("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).
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
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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)
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:
(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 September 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 $1.0 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 nine months of
1994, NYNEX reduced 1993 restructuring reserves by $395 million in the
following categories:
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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)
Severance:
Management $202
Nonmanagement 23
----
Total severance $225
Systems redesign:
Customer contact 42
Customer provisioning 4
Customer operations 5
Customer support 3
----
Total systems redesign 54
Work center consolidation -
Branding 19
Relocation -
Training -
Re-engineering implementation 26
Sale/discontinuance of information products
and services businesses 58
Nontelephone subsidiaries' restructuring 13
----
Total $395
====
The severance reduction amount is comprised of $202 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 $23 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 nine months of 1994, NYNEX utilized approximately
$43 million of severance reserves established in 1991.
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.
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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
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.
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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
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.
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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
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.
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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
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.
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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
THIRD QUARTER OF 1994 AS COMPARED TO THIRD QUARTER OF 1993 (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
-19-
<PAGE>
Form 10-Q/A 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.
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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 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
-21-
<PAGE>
Form 10-Q/A 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).
-22-
<PAGE>
Form 10-Q/A 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.
-23-
<PAGE>
Form 10-Q/A 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.
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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
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.
-25-
<PAGE>
Form 10-Q/A 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
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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
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.
-27-
<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
