Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
- ---
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-8608
NYNEX CORPORATION
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 13-3180909
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ___.
At October 31, 1995, 429,990,819 common shares were outstanding.
<PAGE>
<TABLE>
<CAPTION>
Form 10-Q Part I Part I - FINANCIAL INFORMATION
------------------------------
NYNEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions, except per share amounts) (Unaudited)
Three Months Nine Months
For the Period Ended September 30, 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local services $1,694.0 $1,649.5 $ 5,036.0 $4,937.9
Long distance 261.0 272.6 774.4 823.3
Network access 855.2 857.7 2,644.2 2,566.7
Other 428.2 551.0 1,633.6 1,587.8
-------- -------- --------- --------
Total operating revenues 3,238.4 3,330.8 10,088.2 9,915.7
-------- -------- --------- --------
OPERATING EXPENSES
Maintenance and support 780.5 786.7 2,290.3 2,300.8
Depreciation and amortization 622.9 647.2 1,935.6 1,963.1
Marketing and customer services 359.8 356.9 1,041.4 1,056.3
Taxes other than income 206.0 241.3 711.5 746.2
Selling, general and administrative 477.9 509.1 1,907.6 1,947.6
Other 155.3 206.6 596.1 594.0
-------- -------- --------- --------
Total operating expenses 2,602.4 2,747.8 8,482.5 8,608.0
-------- -------- --------- --------
Operating income 636.0 583.0 1,605.7 1,307.7
Gain on sale of stock
by subsidiary (Note (i)) - - 264.1 -
Other income (expense) - net 77.7 (5.7) 20.1 (32.4)
Interest expense 202.1 171.5 585.1 493.2
Income (loss) from long-term
investments 37.8 13.5 48.3 38.6
-------- -------- --------- --------
Earnings before income taxes
and extraordinary item 549.4 419.3 1,353.1 820.7
Income taxes
Federal 174.1 90.9 385.0 151.2
State, local and other 32.4 25.9 134.2 75.2
-------- -------- --------- --------
Total income taxes 206.5 116.8 519.2 226.4
-------- -------- --------- --------
Earnings before extraordinary item 342.9 302.5 833.9 594.3
Extraordinary item for the
discontinuance of regulatory
accounting principles,
net of taxes (Note (b)) - - (2,919.4) -
-------- -------- --------- ------
NET INCOME (LOSS) $ 342.9 $ 302.5 $(2,085.5) $ 594.3
-------- -------- --------- --------
Earnings per share before
extraordinary item $ .80 $ .72 $ 1.96 $ 1.42
Extraordinary item per share - - (6.86) -
-------- -------- --------- ------
Earnings (loss) per share $ .80 $ .72 $ (4.90) $ 1.42
-------- -------- --------- --------
Weighted average number of shares
outstanding 428.1 421.1 425.9 418.0
-------- -------- --------- --------
Dividends declared per share $ 0.59 $ 0.59 $ 1.77 $ 1.77
-------- -------- --------- --------
Retained earnings (Accumulated deficit)
Beginning of period $ (457.0) $2,200.5 $ 2,208.2 $2,388.3
Net income (loss) 342.9 302.5 (2,085.5) 594.3
Dividends declared * - (248.9) (251.0) (743.1)
Other (6.2) 5.4 8.0 20.0
-------- -------- --------- --------
End of period $ (120.3) $2,259.5 $ (120.3) $2,259.5
======== ======== ========= ========
</TABLE>
* The second and third quarter 1995 dividends were
declared out of Additional paid-in capital.
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
Form 10-Q Part I
NYNEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
- -----------------------------------------------------------------------------------------------------------------
September 30, December 31,
1995 1994
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 130.2 $ 137.5
Receivables (net of allowance of $225.9
and $226.7, respectively) 2,487.0 2,532.5
Inventories 141.9 173.3
Prepaid expenses 505.9 361.2
Deferred charges and other current assets 623.6 593.5
--------- ---------
Total current assets 3,888.6 3,798.0
--------- ---------
Property, plant and equipment - at cost 35,087.6 35,467.1
Less: accumulated depreciation (18,460.7) (14,843.7)
--------- ---------
16,626.9 20,623.4
--------- ---------
Long-term investments 3,100.0 1,999.4
Deferred charges and other assets 2,008.9 3,647.2
--------- ---------
Total Assets $25,624.4 $30,068.0
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 2,611.5 $ 2,668.2
Short-term debt 2,135.8 2,128.8
Other current liabilities 829.2 1,053.5
--------- ---------
Total current liabilities 5,576.5 5,850.5
--------- ---------
Long-term debt 7,759.1 7,784.5
Deferred income taxes 1,672.8 3,364.7
Unamortized investment tax credits 162.4 304.4
Other long-term liabilities and deferred credits 4,467.3 4,182.5
--------- ---------
Total liabilities 19,638.1 21,486.6
--------- ---------
Commitments and contingencies (Notes (e, f and h)) Stockholders' equity:
Preferred stock - $1 par value - -
shares authorized: 70,000,000
shares issued: None
Preferred stock - Series A Junior Participating - -
- $1 par value
shares authorized: 5,000,000
shares issued: None
Common stock - $1 par value 444.5 439.7
shares authorized: 750,000,000
shares issued:
at September 30, 1995 - 444,451,161
at December 31, 1994 - 439,669,480
Additional paid-in capital * 6,619.3 6,942.0
Retained earnings (Accumulated deficit) (120.3) 2,208.2
Treasury stock (15,232,540 and 16,102,683
shares, respectively, at cost) (609.9) (644.3)
Deferred compensation - LESOP Trust (347.3) (364.2)
--------- ---------
Total stockholders' equity 5,986.3 8,581.4
--------- ---------
Total Liabilities and Stockholders'
Equity $25,624.4 $30,068.0
========= =========
</TABLE>
* The second and third quarter 1995 dividends were declared out of Additional
paid-in capital.
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Form 10-Q Part I
NYNEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
For the Nine Months Ended September 30, 1995 1994
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $(2,085.5) $ 594.3
--------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary item, net of taxes 2,919.4 -
Depreciation and amortization 1,935.6 1,963.1
Amortization of unearned lease income-net (68.3) (61.4)
Gain on sale of stock by subsidiary (264.1) -
Changes in operating assets and liabilities*:
Receivables (64.4) (57.4)
Inventories 25.3 8.4
Prepaid expenses (158.0) (107.1)
Deferred charges and other current assets (48.7) 199.6
Accounts payable 75.1 (495.2)
Other current liabilities (11.9) (126.0)
Deferred income taxes and Unamortized
investment tax credits (184.7) (325.0)
Other long-term liabilities and deferred credits* 581.7 880.6
Other-net* (119.3) (89.4)
--------- ---------
Total adjustments 4,617.7 1,790.2
--------- ---------
Net cash provided by operating activities 2,532.2 2,384.5
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,125.3) (2,119.5)
Investment in leased assets (171.3) (44.7)
Cash received from leasing activities 72.7 48.6
Other investing activities-net (384.9) (14.8)
--------- ---------
Net cash used in investing activities (2,608.8) (2,130.4)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of commercial paper and short-term debt 9,900.6 15,352.5
Repayment of commercial paper and short-term debt (9,916.1) (16,116.6)
Issuance of long-term debt 134.5 898.7
Repayment of long-term debt and capital leases (120.4) (105.2)
Issuance of common stock 120.2 176.2
Dividends paid (672.4) (660.1)
Minority interest 12.6 154.7
Proceeds from sale of stock by subsidiary, net 610.3 -
--------- -------
Net cash provided by (used in) financing activities 69.3 (299.8)
--------- ---------
Net decrease in Cash and temporary
cash investments (7.3) (45.7)
Cash and temporary cash investments at
beginning of period 137.5 157.8
--------- ---------
Cash and temporary cash investments at
end of period $ 130.2 $ 112.1
========= =========
</TABLE>
* Excludes non-cash effects of deconsolidation of cellular subsidiary.
See accompanying notes to consolidated financial statements.
4
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(a) BASIS OF PRESENTATION - The consolidated financial statements have been
prepared by NYNEX Corporation ("NYNEX") pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC") and, in the opinion of
Management, include all adjustments necessary for a fair presentation of the
financial information for each period shown. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Management believes that the
disclosures made are adequate to make the information presented not misleading.
Certain information in the consolidated financial statements for 1994 has been
reclassified to conform to the current year's presentation. The results for
interim periods are not necessarily indicative of the results for the full year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto incorporated by reference in
the NYNEX 1994 Annual Report on Form 10-K and the current year's previously
issued Quarterly Reports on Form 10-Q. In the second quarter of 1995, NYNEX
discontinued using generally accepted accounting principles applicable to
regulated entities for the operations of New York Telephone Company and New
England Telephone and Telegraph Company (collectively, the "telephone
subsidiaries") (see Note (b)). In the third quarter of 1995, NYNEX
deconsolidated certain assets and liabilities of NYNEX Mobile Communications
Company ("NYNEX Mobile"), a wholly-owned subsidiary of NYNEX, in exchange for an
equity interest in a cellular partnership between NYNEX and Bell Atlantic
Corporation ("Bell Atlantic") (see Note (j)).
In the third quarter of 1995, NYNEX discontinued reporting segment information
in accordance with Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise". This change had no
effect on NYNEX's results of operations or financial position. Upon the
deconsolidation of NYNEX Mobile (see Note (j)), Management reassessed its
determination of reportable segments and concluded that a dominant portion of
NYNEX's operations is in a single industry segment.
(b) DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES - In the second quarter
of 1995, NYNEX discontinued accounting for the operations of the telephone
subsidiaries in accordance with the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" ("Statement No. 71"). As a result, NYNEX recorded an extraordinary
non-cash charge of $2.9 billion, net of income taxes of $1.6 billion.
The operations of the telephone subsidiaries no longer met the criteria for
application of Statement No. 71 due to a number of factors including:
significant changes in regulation, including the achievement of price regulation
rather than rate-of-return regulation in New York, Massachusetts
5
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(b) DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES (CONT'D)
and Maine, representing a significant portion of NYNEX's operations, and the
ongoing efforts to achieve price regulation in the remaining jurisdictions, an
intensifying level of competition, and the increasingly rapid pace of
technological change. Under Statement No. 71, NYNEX had accounted for the
effects of rate actions by federal and state regulatory commissions by
establishing certain regulatory assets and liabilities, including the
depreciation of its telephone plant and equipment using asset lives approved by
regulators and the deferral of certain costs and obligations based on approvals
received from regulators. NYNEX had continually assessed its position and the
recoverability of its telecommunications assets with respect to Statement No.
71.
As a result of the discontinuance of Statement No. 71, NYNEX has implemented
Statement of Financial Accounting Standards No. 101, "Regulated Enterprises -
Accounting for the Discontinuation of Application of FASB Statement No. 71"
("Statement No. 101"). NYNEX has adjusted its telephone plant and equipment
through an increase in accumulated depreciation, to reflect the difference
between recorded depreciation and the amount of depreciation that would have
been recorded had NYNEX not been subject to rate regulation. As a result of the
increase in accumulated depreciation, gross plant was written off where fully
depreciated. Non-plant regulatory assets and liabilities were eliminated from
the balance sheet.
The after-tax extraordinary charge recorded consists of $2.2 billion for the
adjustment to telephone plant and equipment and $0.7 billion for the write-off
of non-plant regulatory assets and liabilities.
The net adjustment to telephone plant and equipment was a decrease of $3.6
billion ($2.2 billion after-tax). This decrease was supported by a depreciation
analysis, which identified inadequate depreciation reserve levels which NYNEX
believes resulted principally from the cumulative under-depreciation of
telephone plant and equipment as a result of the regulatory process. An
impairment analysis was performed and did not identify any additional amounts
not recoverable from future operations. Investment tax credits ("ITCs") are
deferred and amortized over the estimated service lives of the related telephone
plant and equipment. ITC amortization was accelerated as a result of the
reduction in asset lives of the associated telephone plant and equipment.
6
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(b) DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES (CONT'D)
The major components of non-plant regulatory net assets which were written off
as a result of the discontinued application of Statement No. 71 are as follows:
<TABLE>
<CAPTION>
(In millions) Pretax After-tax
<S> <C> <C>
Compensated absences $173.2 $109.4
Deferred pension costs 381.1 239.5
Refinancing costs 255.6 166.5
Deferred taxes - 55.7
Other 130.8 85.6
------ ------
Total $940.7 $656.7
====== ======
</TABLE>
Upon the adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the effects of required adjustments to deferred
tax balances were deferred on the balance sheets as regulatory assets and
liabilities. These deferrals were amortized during the period in which the
related deferred taxes were recognized in the ratemaking process. During the
second quarter of 1995, tax-related regulatory net assets of $55.7 million were
eliminated.
Upon the adoption of Statement No. 101, NYNEX began using estimated asset lives
for certain categories of telephone plant and equipment that are shorter than
those approved by regulators. The shorter asset lives result from NYNEX's
expectations as to the revenue-producing lives of the assets. A comparison of
average asset lives before and after the discontinuance of Statement No. 71, for
the most significantly affected categories of telephone plant and equipment, is
as follows:
<TABLE>
<CAPTION>
Average lives (in years)
Composite
Regulator-Approved Economic
Asset Lives Asset Lives
<S> <C> <C>
Digital Switching 16.5 12.0
Circuit - Other 10.5 8.0
Aerial Metallic Cable 21.0 17.0
Underground Metallic Cable 25.0 15.0
Buried Metallic Cable 24.0 17.0
Fiber 26.0 20.0
</TABLE>
As a result of the discontinued application of Statement No. 71, regulatory
accounting principles no longer apply to the operations of the telephone
subsidiaries for financial accounting and reporting purposes. NYNEX no longer
recognizes regulatory assets and liabilities and the related amortization. The
application of Statement No. 101 does not change the telephone subsidiaries'
accounting and reporting for regulatory purposes.
7
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(c) CASH AND TEMPORARY CASH INVESTMENTS - NYNEX's cash management policy is to
make funds available in banks when checks are presented. At September 30, 1995,
NYNEX had recorded in Accounts payable checks outstanding but not yet presented
for payment of $177.0 million.
(d) ADOPTION OF FINANCIAL ACCOUNTING STANDARDS - Effective January 1, 1995,
NYNEX adopted Statement of Financial Accounting Standards No. 116, "Accounting
for Contributions Received and Contributions Made" ("Statement No. 116"). The
effect of implementing Statement No. 116 on NYNEX's results of operations and
financial position was insignificant.
(e) REVENUES SUBJECT TO POSSIBLE REFUND - Several state and federal regulatory
matters, including affiliate transaction issues in New York Telephone Company's
("New York Telephone") 1990 intrastate rate case ($176.3 million), may possibly
require the refund of a portion of the revenues collected in the current and
prior periods. As of September 30, 1995, the aggregate amount of such revenues
that was estimated to be subject to possible refund was approximately $238.9
million, plus related interest. The outcome of each pending matter, as well as
the time frame within which each will be resolved, is not presently
determinable.
(f) LITIGATION AND OTHER CONTINGENCIES - It is probable that local tax claims
aggregating approximately $235 million in tax and $180 million in associated
interest will be asserted against New York Telephone for the period 1984 through
the third quarter of 1995. The claims relate to the taxability of New York
Telephone's interstate and intrastate network access revenues. The current
status is that these matters have been identified as possible audit adjustments
by the taxing authority, and New York Telephone is presenting its arguments
against those adjustments. While New York Telephone's counsel cannot give
assurance as to the outcome, counsel believes that New York Telephone has strong
legal positions in these matters.
Various other legal actions and regulatory proceedings are pending that may
affect NYNEX, including matters involving Racketeer Influenced and Corrupt
Organizations Act, antitrust, tort, contract and tax deficiency claims.
While counsel cannot give assurance as to the outcome of any of these matters,
in the opinion of Management based upon the advice of counsel, the ultimate
resolution of these matters in future periods is not expected to have a material
effect on NYNEX's financial position but could have a material effect on
operating results.
8
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(g) SUPPLEMENTAL INFORMATION - The following information is provided in
accordance with Statement of Financial Accounting Standards No. 95, "Statement
of Cash Flows":
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
(In millions) 1995 1994
---- ----
<S> <C> <C>
Income tax payments $365.2 $395.3
Interest payments $448.9 $445.3
Non-cash transactions:
Contribution of certain cellular net assets in exchange for an equity investment
in Bell Atlantic NYNEX Mobile cellular
partnership (see Note (j)) $593.5 -
Common Stock issued for Dividend Reinvestment
and Stock Purchase Plan and stock compensation
plans $ 83.7 $ 88.9
Additions to property, plant and equipment
under capital lease obligations $ 0.1 $ 10.6
</TABLE>
(h) FINANCIAL COMMITMENTS AND GUARANTEES - As of September 30, 1995, NYNEX, the
managing sponsor of FLAG Limited ("FLAG"), held approximately a 39% equity
interest and a 41% funding obligation in the venture which was created to
construct a $1.5 billion submarine cable system from the United Kingdom to
Japan. As of that date, NYNEX had invested approximately $41 million in the
venture. Under the terms of the FLAG project documentation and the related
financing agreements, NYNEX's obligation to furnish its pro rata share of
funding would require additional cash contributions of approximately $187
million to FLAG. The contributions are anticipated to be complete by the end of
1997.
A $950 million limited recourse debt facility was made available to the project
by a number of major lending institutions. On October 30, 1995, $50 million of
this facility was utilized. Under the terms of the financing, the funding FLAG
shareholders have entered into contingent sponsor support agreements which could
require additional payments in an aggregate amount of $500 million by such
shareholders on a pro rata basis upon the occurrence of certain limited events
of default. These events of default represent risks of a type that equity
shareholders typically are required to assume in construction projects, and
which, after due diligence, the FLAG shareholders consider to be unlikely to
occur. The maximum contingent payment each funding shareholder may be required
to make may be reduced in the future on a pro rata basis based primarily on the
remaining amount of FLAG's outstanding debt which, in turn, is dependent upon
the level of sales.
9
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(h) FINANCIAL COMMITMENTS AND GUARANTEES (CONT'D)
NYNEX's allocable percentage of the contingent sponsor support commitment is
51%, up to a maximum of $255 million. This includes an additional 10% share that
NYNEX assumed on behalf of another shareholder in return for a fee. In addition,
NYNEX has backstopped, for a fee, the guarantee of the parent corporation of a
third shareholder of its contingent sponsor support obligation in an amount not
to exceed $95 million. This backstop obligation would be triggered only upon a
failure by such parent corporation to fulfill the obligations under its primary
guarantee, if required to do so upon the default of its subsidiary to make any
payment under the aforementioned contingent sponsor support agreement. This
contingent obligation of NYNEX is itself supported by a reimbursement agreement
between NYNEX and the shareholder and further supported by a direct guarantee by
that shareholder's parent corporation in favor of NYNEX.
NYNEX also maintains a 33% equity interest in the Tele-TV Partnerships (the
"Partnerships") which were formed primarily to develop and obtain a
nationally-branded portfolio of programming and other products and services for
transmission over both wireline and wireless networks. Bell Atlantic and Pacific
Telesis Group are equal partners with NYNEX in this venture. Prior to September
30, 1995, NYNEX had invested cash totaling approximately $29 million into the
Partnerships. As of September 30, 1995, under the terms of the Partnership
agreements, NYNEX is obligated to make additional cash contributions on a pro
rata basis totaling approximately $91 million. These infusions are anticipated
to be completed by the end of 1997.
As of September 30, 1995, NYNEX held a 15% interest, with an initial investment
of approximately $24.0 million, in Bayan Telecommunications Holdings Corporation
("BayanTel"), a newly formed holding company whose subsidiaries have been
awarded licenses by the National Telecommunications Commission of the
Philippines to provide telecommunications services in certain regions of the
Philippines. NYNEX has committed to invest an additional $24 million in BayanTel
over the next two years.
As of September 30, 1995, New York Telephone had deferred $166 million of
revenues under the approved regulatory plan (see State Regulatory) associated
with commitments for fair competition, universal service, service quality and
infrastructure improvements, as well as for a 1994 service penalty obligation.
These revenues will be released as commitments are met under the plan.
(i) SALE OF STOCK BY SUBSIDIARY - During February 1995, two entities were
formed: NYNEX CableComms Group PLC ("UK CableComms"), a public limited liability
company incorporated under the laws of England and Wales, and NYNEX CableComms
Inc. ("US CableComms"), a Delaware Corporation (known collectively as
"CableComms"). Both were wholly owned subsidiaries of NYNEX and are separate and
distinct legal entities. The sole assets of UK CableComms and
10
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(i) SALE OF STOCK BY SUBSIDIARY (CONT'D)
US CableComms are 90% and 10%, respectively, of the outstanding stock of NYNEX
CableComms Holdings, Inc. ("UK Holdings") which holds, through various
subsidiaries and partnerships, interests in cable television and
telecommunication franchises, assets and operations in the United Kingdom. The
shares of UK Holdings are held by CableComms.
An initial public offering ("IPO") was completed in June 1995 of 305 million
equity units of UK CableComms and US CableComms. These units are traded as
"stapled units" and are comprised of one ordinary share of UK CableComms and one
share of common stock of US CableComms ("the Combined Offering"). Of the 305
million units issued, 170,222,000 were issued as units at a price of 137 pence
per unit in the United Kingdom, and 13,477,800 were issued as American
Depository Shares ("ADSs") at $21.81 per ADS in the United States, each ADS
comprising 10 units. The Combined Offering represented 33% of the total units
outstanding, with NYNEX retaining the balance. Net proceeds from the offering of
approximately $610 million were used to repay commercial paper and to fund a
portion of the cost of construction of CableComms' network.
It is NYNEX's policy to recognize as income any gains or losses related to the
sale of stock by an investee. NYNEX recognized an after-tax gain on the IPO of
$155 million in the second quarter of 1995, net of $109 million in deferred
taxes, in recognition of the net increase in the value of NYNEX's investment in
CableComms.
(j) BELL ATLANTIC NYNEX MOBILE CELLULAR PARTNERSHIP - Effective July 1, 1995,
NYNEX and Bell Atlantic completed the combination of substantially all of their
domestic cellular properties by contributing them to a partnership, Bell
Atlantic NYNEX Mobile, to own and operate these properties. The combination
represents the consummation of the transaction that was agreed to and announced
in June 1994. Bell Atlantic owns approximately 63% of Bell Atlantic NYNEX
Mobile, and NYNEX owns approximately 37%. The partnership is controlled jointly
by NYNEX and Bell Atlantic.
NYNEX contributed certain cellular assets and liabilities of NYNEX Mobile, a
wholly-owned subsidiary of NYNEX, in exchange for an equity interest in Bell
Atlantic NYNEX Mobile. Subject to post-closing adjustments, NYNEX deconsolidated
approximately $630 million of net assets and recorded an equity method
investment in the partnership.
As a condition to the completion of the combination, in July, NYNEX sold certain
of its cellular properties overlapping with Bell Atlantic's cellular properties
to SNET Cellular, Inc. As a result of the formation of the partnership, NYNEX
recorded a net after-tax gain of $67.4 million resulting primarily from the sale
of overlapping cellular properties and a pension curtailment.
11
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NYNEX reported net income (loss) for the three months and nine months ended
September 30, 1995 of $342.9 million, or $.80 per share, and $(2.1) billion, or
$(4.90) per share, respectively. Net income for the three months and nine months
ended September 30, 1994 was $302.5 million, or $.72 per share, and $594.3
million, or $1.42 per share, respectively.
Net income for the three months ended September 30, 1995 of $342.9 million, or
$.80 per share, includes a net charge of $23.9 million, or $.06 per share, for
non-recurring items, including after-tax charges of $91.3 million, or $.21 per
share, for non-recurring items and for pension enhancements, and a net after-tax
gain of $67.4 million, or $.15 per share, as a result of the formation of the
Bell Atlantic NYNEX Mobile cellular partnership (see Note (j)). Approximately
400 management and 500 nonmanagement employees elected to leave NYNEX under
retirement incentives during the quarter. Results for the three months ended
September 30, 1994 included an after-tax charge of $20.5 million, or $.05 per
share, for pension enhancements for approximately 900 management and 200
nonmanagement employees who elected to leave NYNEX during the third quarter of
1994.
Operating revenues decreased $92.4 million, or 2.8%, from the third quarter of
1994. Included in this decrease were a non-recurring item in 1995, a change in
the presentation of gross receipts tax in 1995, and NYNEX Mobile revenues in
1994, as described below. Excluding these items, operating revenues increased
4.9% to $3.3 billion, with revenues from the telephone subsidiaries and
Telesector Resources Group, Inc. (collectively, the "telecommunications group")
increasing 4.3%, to $3.0 billion and revenues from NYNEX's subsidiaries other
than the telecommunications group (the "nontelephone subsidiaries" or
"nontelephone businesses") increasing 11.4%, to $297.0 million. Supporting this
revenue growth were a 3.0% growth in access lines and a 9.4% increase in access
usage over the third quarter of last year. Third quarter 1995 operating revenues
included a non-recurring item of $14.4 million resulting from a court decision
on overearnings complaints. There was a $40.6 million change in the third
quarter of 1995 in the presentation of gross receipts tax collected by New York
Telephone on behalf of interexchange carriers (see Operating expenses), and
$192.6 million of NYNEX Mobile revenues were included in the third quarter of
1994. In the third quarter of 1995, NYNEX deconsolidated NYNEX Mobile in
exchange for an equity interest in a cellular partnership (see Note (j)).
Operating expenses decreased $145.4 million, or 5.3%, from the third quarter of
1994. Included in this decrease were pension enhancement charges in both
periods, non-recurring net charges in 1995, a change in the presentation of
gross receipts tax in 1995, and NYNEX Mobile expenses in 1994, as described
below. Excluding these items, operating expenses increased $53.1 million, or
2.1%; at the telecommunications group, operating expenses increased $24.0
million, or 1.0%, and at the nontelephone subsidiaries, operating expenses
increased $29.1 million, or 13.1%. Third quarter operating
12
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
expenses included pretax pension enhancement charges of $38.0 million and $31.2
million in 1995 and 1994, respectively. The components of the third quarter
1995 pretax pension enhancement charges are an $80.6 million ($50.7 million
after-tax) charge for pension enhancements, and a $42.6 million ($27.0 million
after-tax) benefit for associated postretirement medical costs. The
non-recurring net charges included: (1) a $53.5 million net expense reduction
in the third quarter of 1995 primarily resulting from the recognition of a
pension curtailment gain and certain non-recurring charges associated with the
formation of the Bell Atlantic NYNEX Mobile cellular partnership (see Note (j))
and (2) $70.0 million of non-recurring operating tax provisions in the third
quarter of 1995. There was a $40.6 million change in the third quarter of 1995
in the presentation of gross receipts tax collected by New York Telephone on
behalf of interexchange carriers (see Operating revenues), and $181.2 million
of NYNEX Mobile expenses were included in the third quarter of 1994. In the
third quarter of 1995, NYNEX deconsolidated NYNEX Mobile in exchange for an
equity interest in a cellular partnership (see Note (j)).
Operating income, excluding the pension enhancement charges, non-recurring items
and the third quarter 1994 operating income of NYNEX Mobile, increased $102.1
million, or 16.9%, and operating margin for the third quarter improved 2.2
percentage points to 21.40% from 19.21%. This improvement resulted from revenue
growth of 4.9% outpacing expense growth of 2.1%.
THIRD QUARTER OF 1995 AS COMPARED TO THIRD QUARTER OF 1994
Operating revenues
Operating revenues for the quarter ended September 30, 1995 decreased $92.4
million, or 2.8%, from the same period last year. The change in revenues
consists of the following:
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
(In millions) 1995 1994
----------- ------
<S> <C> <C>
Local service $1,694.0 $1,649.5
Long distance 261.0 272.6
Network access 855.2 857.7
Other 428.2 551.0
-------- --------
Total Consolidated Operating Revenues $3,238.4 $3,330.8
======== ========
</TABLE>
As discussed above in RESULTS OF OPERATIONS, third quarter operating revenues
included a non-recurring item and a change in the presentation of gross receipts
tax at New York Telephone in 1995, and NYNEX Mobile revenues in 1994. Excluding
these items, operating revenues increased $155.2 million, or 4.9%.
13
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Local service revenues increased $44.5 million, or 2.7%, primarily due to a net
$46 million increase in demand driven by a 3.0% increase in access lines and
sales of calling features. This increase was partially offset by a $6 million
decrease due to a reduction in rates effective September 1, 1995 pursuant to a
New York State Public Service Commission ("NYSPSC") order approving a proposed
Regulatory Plan (the "Plan") (see State Regulatory).
Long distance revenues decreased $11.6 million, or 4.3%, primarily due to a $7
million decrease in rates primarily at New England Telephone and Telegraph
Company ("New England Telephone"), and decreased demand for message toll
service, private line and wide area telecommunications services as a result of
customer shifts to lower priced services offered by the telephone subsidiaries
and increased competition. However, certain competitive losses in long distance
revenues are being mostly offset by increases in network access revenues,
primarily at New England Telephone.
Network access revenues decreased $2.5 million, or 0.3%. Excluding a $40.6
million decrease attributable to a change in the presentation of gross receipts
tax collected by New York Telephone on behalf of interexchange carriers (see
Operating expenses) and a $14.4 million decrease resulting from a court decision
on overearnings complaints for the periods 1987-1988 and 1989-1990 (see Federal
Regulatory), network access revenues increased $52.5 million, or 6.1%. There
were increases in demand for both switched and special access and increased
special access interstate rates, partially offset by decreased switched access
interstate rates.
Other revenues decreased $122.8 million, or 22.3%, as a result of a $192.6
million decrease associated with the deconsolidation of NYNEX Mobile due to the
formation of the Bell Atlantic NYNEX Mobile cellular partnership (see Note (j)).
Excluding NYNEX Mobile, other revenues increased $69.8 million, or 19.5%. NYNEX
CableComms revenues more than doubled, increasing $17.8 million, due to
increases in the subscriber base and business line growth. NYNEX Information
Resources revenues increased $8.4 million, or 3.7%, due primarily to increased
Yellow Pages advertising revenues, driven by increased prices and the
publication of international directories. Telecommunications revenues increased
$39.4 million due primarily to increases of: (1) $38 million resulting from the
cessation of "setting aside" revenues in the second quarter of 1995 at New York
Telephone as a result of an NYSPSC order approving the Plan (see State
Regulatory), and (2) $13 million resulting from the elimination of the deferral
of intrastate revenues as a result of the discontinuance of regulatory
accounting principles at New York Telephone (see Note (b)). These increases were
partially offset by an $8 million decrease in billing and collection revenues
pursuant to a contract with AT&T Corp. ("AT&T").
14
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operating expenses
Operating expenses for the third quarter of 1995 were $2.6 billion, a decrease
of $145.4 million, or 5.3%, from the third quarter of 1994. As discussed above
in RESULTS OF OPERATIONS, third quarter operating expenses included pension
enhancement charges in both periods, non-recurring net charges in 1995, a change
in the presentation of gross receipts tax at New York Telephone in 1995, and
NYNEX Mobile expenses in 1994. Excluding these items, operating expenses
increased $53.1 million, or 2.1%.
At the telecommunications group, operating expenses increased $24.0 million, or
1.0%. There was a $31.2 million increase in non-employee costs, and an $11.5
million increase in Taxes other than income, partially offset by a $3.1 million
decrease in employee related costs and a $15.6 million decrease in depreciation
expense. Non-employee costs increased primarily as a result of a $22 million
increase in bad debt expense and a $10 million increase in advertising costs.
Taxes other than income increased principally due to increases in real estate
property taxes at New York Telephone. Employee related costs, consisting
primarily of wages, payroll taxes, and employee benefits, decreased principally
due to the reduction in the work force partially offset by salary and wage rate
increases. The decrease in depreciation and amortization is primarily due to an
adjustment of plant balances partially offset by the effect of shorter asset
lives as a result of the discontinuance of regulatory accounting principles (see
Note (b)). It is expected that the smaller depreciable base partially offset by
the use of shorter lives will decrease depreciation expense in the remaining
quarter of 1995 and that depreciation expense will increase in the future as new
telephone plant is added.
At the nontelephone subsidiaries, operating expenses increased $29.1 million, or
13.1%. This increase was almost entirely due to the expansion of NYNEX
CableComms.
Other Income (Expense) - Net
Other income (expense) - net for the third quarter of 1995 increased $83.4
million over the third quarter of 1994. There was a $70 million non-recurring
gain on the sale of cellular properties in connection with the formation of the
Bell Atlantic NYNEX Mobile cellular partnership (see Note (j)), and a $7 million
increase resulting from New York Telephone's share of interest income on a
federal income tax refund to AT&T for the tax years 1981-1983.
Interest expense
Interest expense for the third quarter of 1995 increased $30.6 million, or
17.8%, over the third quarter of 1994 due primarily to higher average interest
rates of 8.2% compared to 6.7% in the third quarter of 1994. The higher interest
rates are due to both higher short-term rates and a greater average
15
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
mix of long-term debt to total debt (79% compared to 69% in the third quarter of
1994). While the debt mix changed, total debt remained essentially flat. In
addition, there was an $8 million non-recurring charge for interest incurred in
connection with a court decision on overearnings complaints for the periods
1987-1988 and 1989-1990 (see Federal Regulatory).
Income (loss) from long-term investments
Income (loss) from long-term investments for the third quarter of 1995 increased
$24.3 million over the same period last year, primarily due to equity income of
$41 million from the Bell Atlantic NYNEX Mobile cellular partnership (see Note
(j)), partially offset by losses from start-up investments in the Tele-TV
Partnerships, FLAG and PCS Primeco.
Income taxes
Income taxes for the third quarter of 1995 increased $89.7 million, or 76.8%,
over the same period last year, reflecting higher pretax income and a 7%
increase in the effective tax rate as a result of a decreased effective tax rate
in 1994. The effective tax rate was lower in 1994 primarily due to a $33.5
million reduction in the deferred tax valuation allowance in the third quarter
of 1994 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 1995 AS COMPARED TO FIRST NINE MONTHS OF 1994
Operating revenues
Operating revenues for the nine months ended September 30, 1995 increased $172.5
million, or 1.7%, over the same period last year. The change in revenues
consists of the following:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
(In millions) 1995 1994
--------- ------
<S> <C> <C>
Local service $ 5,036.0 $4,937.9
Long distance 774.4 823.3
Network access 2,644.2 2,566.7
Other 1,633.6 1,587.8
--------- --------
Total Consolidated Operating Revenues $10,088.2 $9,915.7
========= ========
</TABLE>
As discussed above in RESULTS OF OPERATIONS, 1995 operating revenues included a
non-recurring item and a change in the presentation of gross receipts tax at New
York Telephone. Operating revenues also included 1995 and 1994 NYNEX Mobile
revenues. Excluding these items, operating revenues increased $338.4 million, or
3.6%.
16
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Local service revenues increased $98.1 million, or 2.0%, primarily due to a net
$113 million increase in demand driven by a 3.0% increase in access lines and
sales of calling features and a $6 million increase in rates attributable to the
Massachusetts rates restructuring. These increases were partially offset by a
$10 million decrease attributable to potential customer billing claims at New
York Telephone, a $6 million decrease due to a reduction in rates effective
September 1, 1995 pursuant to an NYSPSC order approving the Plan (see State
Regulatory), a $5 million decrease due to the 1994 reversal of deferred revenues
that were in excess of the required credit to customers pursuant to the 1993
Rhode Island price regulation trial and a $6 million decrease as required by an
order of the Maine Public Utilities Commission ("MPUC") (see State Regulatory).
Long distance revenues decreased $48.9 million, or 5.9%, primarily due to a $21
million decrease in rates at New England Telephone, and decreased demand for
message toll service, private line and wide area telecommunications services as
a result of customer shifts to lower priced services offered by the telephone
subsidiaries and increased competition. However, certain competitive losses in
long distance revenues are being mostly offset by increases in network access
revenues, primarily at New England Telephone.
Network access revenues increased $77.5 million, or 3.0%. Excluding a $40.6
million decrease attributable to a change in the presentation of gross receipts
tax collected by New York Telephone on behalf of interexchange carriers (see
Operating expenses), and a $14.4 million decrease resulting from a court
decision on overearnings complaints for the periods 1987-1988 and 1989-1990 (see
Federal Regulatory), network access revenues increased $132.5 million, or 5.2%.
Special access revenues increased $20 million primarily due to increased demand
and an increase in interstate rates. Switched access revenues increased a net
$112 million primarily due to a $131 million increase resulting from increased
demand, partially offset by a $20 million reduction in interstate rates.
Other revenues increased $45.8 million, or 2.9% as a result of a $110.9 million
decrease associated with the deconsolidation of NYNEX Mobile due to the
formation of the Bell Atlantic NYNEX Mobile cellular partnership (see Note (j)).
Excluding NYNEX Mobile, other revenues increased $156.7 million, or 14.5%. NYNEX
CableComms revenues more than doubled, increasing $47.5 million, due to
increases in the subscriber base and business line growth. NYNEX Information
Resources revenues increased $37.5 million, or 5.6%, due primarily to increased
Yellow Pages advertising revenues, driven by increased prices, volume growth and
the publication of international directories. Telecommunications revenues
increased $72.9 million due primarily to increases of: (1) approximately $32.5
million of revenues that would previously have been "set aside" that were
recognized by New York Telephone in the second quarter of 1995 as a result of an
NYSPSC order approving the Plan, (2) $38 million in the third quarter of 1995
due to the cessation of "setting aside" revenues in the second quarter of 1995,
17
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(3) $27 million due to the elimination of the deferral of intrastate revenues as
a result of the discontinuance of regulatory accounting principles at New York
Telephone (see Note (b)) and (4) $4.5 million at New York Telephone from
revenues earned under a service improvement plan implemented in 1994. These
increases were partially offset by a $30 million decrease in billing and
collection revenues pursuant to a contract with AT&T. Future quarters will
reflect the cessation of setting aside revenues of $38 million per quarter,
partially offset by price decreases which took effect on September 1, 1995. New
York Telephone had deferred $38 million per quarter since the first quarter of
1994. Approximately $166 million of revenues "set aside" ($122 million in 1994,
$38 million in the first quarter of 1995, and $6 million in the second quarter
of 1995) remain deferred and will be released as New York Telephone's
commitments are met under the Plan. These "set aside" revenues are not expected
to have a material effect on earnings for the remainder of the year. If New York
Telephone is unable to meet certain of these commitments, the NYSPSC has
stipulated in its order that New York Telephone will be subject to financial
penalties. An additional $27 million of revenues "set aside" under the service
improvement plan will continue to be deferred (see State Regulatory.)
Operating expenses
Operating expenses for the first nine months of 1995 were $8.5 billion, a
decrease of $125.5 million, or 1.5%, from the first nine months of 1994.
Included in this decrease were pension enhancement charges in both periods,
non-recurring net charges in 1995, a change in the presentation of gross
receipts tax in 1995, and NYNEX Mobile expenses in both periods, as described
below. Excluding these items, operating expenses increased $32.4 million, or
0.4%. 1995 operating expenses included pension enhancement charges of $287.7
million and $480.5 million in 1995 and 1994, respectively. The non-recurring net
charges included: (1) accruals of $269.0 million related to various
self-insurance programs, legal and regulatory contingencies, operating tax
provisions and revised benefit charges; these charges reflect events that
occurred in the second and third quarters and additional information made
available through revised estimates and analyses completed during the second and
third quarters and (2) a $53.5 million net expense reduction in the third
quarter of 1995 primarily from the recognition of a pension curtailment gain and
certain non-recurring charges associated with the Bell Atlantic NYNEX Mobile
cellular partnership (see Note (j)). There was a $40.6 million change in the
third quarter of 1995 in the presentation of gross receipts tax collected by New
York Telephone on behalf of interexchange carriers (see Network access
revenues). 1995 operating expenses included $336.2 million of NYNEX Mobile
expenses and 1994 operating expenses included $476.2 million of NYNEX Mobile
expenses.
18
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
At the telecommunications group, operating expenses decreased $59.3 million, or
0.8%. There was a $54.1 million decrease in employee related costs and a $38.4
million decrease in depreciation expense, partially offset by a $23.7 million
increase in non-employee costs and a $9.5 million increase in Taxes other than
income. Employee related costs decreased principally due to the reduction in the
work force, partially offset by salary and wage rate increases. The decrease in
depreciation and amortization is primarily due to an adjustment of plant
balances partially offset by the effect of shorter asset lives as a result of
the discontinuance of regulatory accounting principles (see Note (b)). It is
expected that the smaller depreciable base partially offset by the use of
shorter lives will decrease depreciation expense in the remaining quarter of
1995 and that depreciation expense will increase in the future as new telephone
plant is added. Non-employee costs increased primarily as a result of increases
in bad debt expense and advertising costs. Taxes other than income increased
principally due to increases in real estate property tax.
At the nontelephone subsidiaries, operating expenses increased $91.7 million, or
14.5%. This increase was almost entirely due to the expansion of CableComms.
Gain on sale of stock by subsidiary
An IPO of the ordinary shares of UK CableComms and US CableComms was completed
in June 1995. The Combined Offering represented 33% of the total units
outstanding, with NYNEX retaining the balance. Net proceeds of the offering were
approximately $610 million. NYNEX recognized a pretax gain of $264.1 million on
the IPO in recognition of the net increase in the value of NYNEX's investment in
CableComms (see Note (i)).
Other Income (Expense) - Net
Other income (expense) - net for the first nine months of 1995 had a positive
impact of $52.5 million from the first nine months of 1994, principally due to a
$70 million non-recurring gain on the sale of cellular properties in connection
with the formation of the Bell Atlantic NYNEX Mobile cellular partnership (see
Note (j)), and a $7 million increase resulting from New York Telephone's share
of interest income on a federal income tax refund to AT&T for the tax years
1981-1983. These increases were partially offset by a $27 million increase in
minority interest expense and an $11 million one-time payment in June of 1994 to
NYNEX Mobile from its New York partners related to restructure of the New York
partnership.
Interest expense
Interest expense for the first nine months of 1995 increased $91.9 million, or
18.6%, over the first nine months of 1994 due primarily to higher average
interest rates of 7.8% compared to 6.5% in 1994. The higher average interest
rates are due to both higher short-term rates and a greater average mix of
long-term debt to total debt (78% compared to 68% in 1994). While the debt mix
changed, total debt remained essentially flat. In addition, there was an $8
million non-recurring charge for interest incurred in connection with a court
decision on overearnings complaints for the periods 1987-1988 and 1989-1990 (see
Federal Regulatory).
19
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Income (loss) from long-term investments
Income (loss) from long-term investments for the first nine months of 1995
increased $9.7 million, or 25.1%, over the same period last year, primarily due
to equity income of $41 million from the Bell Atlantic NYNEX Mobile cellular
partnership (see Note (j)), partially offset by losses from start-up investments
in the Tele-TV Partnerships, FLAG and PCS Primeco.
Income taxes
Income taxes for the first nine months of 1995 increased $292.8 million over the
same period last year, reflecting higher pretax income and a 5% increase in the
effective tax rate as a result of a decreased effective tax rate in 1994. The
effective tax rate was lower in 1994 primarily due to a $66.7 million reduction
in the deferred tax valuation allowance in the first nine months of 1994 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.
Extraordinary item
The discontinued application of Statement No. 71 required NYNEX, for financial
accounting purposes, to adjust telephone plant and equipment and to eliminate
non-plant regulatory assets and liabilities from the balance sheet. This change
resulted in an after-tax charge of $2.9 billion, consisting of $2.2 billion to
adjust the carrying amount of telephone plant and equipment and $0.7 billion to
write off non-plant regulatory assets and liabilities. As a result of the
discontinuance of regulatory accounting principles, NYNEX utilized shorter asset
lives for certain categories of telephone plant and equipment than those
approved by regulators. It is expected that the smaller depreciable base,
partially offset by the use of shorter lives, will decrease depreciation expense
in the remaining quarter of 1995. It is expected that depreciation expense will
increase in the future as new telephone plant is added. The elimination of the
amortization of net regulatory assets and the effects of certain changes in
accounting policies are not expected to have a significant impact on financial
results in future periods. (See Note (b) for additional information on the
discontinuance of regulatory accounting principles.)
20
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CURRENT STATUS OF BUSINESS RESTRUCTURING
Reserve Utilization in 1995
The restructuring reserve balance at September 30, 1995, 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 $510 million. In the first nine months of 1995, NYNEX utilized
1993 restructuring reserves of $271 million in the following categories:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Severance:
Management $52
Nonmanagement 10
Total severance $ 62
Process Re-engineering:
Systems redesign:
Customer contact 42
Customer provisioning 27
Customer operations 30
Customer support 23
---
Total systems redesign $122
Work center consolidation 7
Branding 3
Relocation -
Training 2
Re-engineering implementation 57
---
Total process re-engineering 191
Sale/discontinuance of information
products and services businesses 18
Nontelephone subsidiaries' restructuring -
----
Total $271
====
</TABLE>
Cost Savings
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 10,100 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits attributable to employees' leaving under
retirement incentives of approximately $600 million. Partially offsetting these
cost savings will be the effects of wage and price inflation, growth in volume
of business and higher costs attributable to service improvements.
Force Reduction Plans
When business restructuring charges were recorded in 1993, NYNEX anticipated
that 16,800 positions (4,200 management and 12,600 nonmanagement) would be
eliminated through process re-engineering initiatives. In the first quarter of
1994, NYNEX announced the offering of pension enhancements and anticipated that
the planned work force reductions as a result of re-engineering could be
achieved through the offering of pension enhancements. At the present time,
21
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NYNEX expects to achieve a targeted reduction of between approximately 17,000
and 18,000 positions through process re-engineering; it appears that the
management reductions will be higher than originally planned due to single
enterprise management staff reduction efforts and nonmanagement reductions will
be less due to volume of business growth. NYNEX also expects the targeted number
of employees who will elect to take the pension enhancements to approximate the
number of position reductions through process re-engineering, but expects that
the number of management employees electing will be higher and nonmanagement
will be lower than originally anticipated. Based on employee acceptance of
pension enhancements to date, NYNEX continues to monitor the calculation of the
estimated additional charges to be recorded but at present still anticipates the
additional charges to be in the range of the previously-announced estimate of
approximately $1.3 billion.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS
Operating activities: Net cash provided by operating activities was $2,532.2 and
$2,384.5 million for the nine months ended September 30, 1995 and 1994,
respectively, an increase of $147.7 million. Costs associated with
re-engineering activities reserved for in the fourth quarter of 1993 were
planned to result in cash outlays in the years 1994 through 1996. Approximately
$120 and $62 million was expended in the first nine months of 1995 and 1994,
respectively. Pension enhancement charges in the first nine months of 1995 and
1994 did not materially affect operating cash flows because increased cash
outflows due to the pension enhancement charges are being incurred primarily by
the NYNEX Pension Plans.
Investing activities: Net cash used in investing activities was $2,608.8 and
$2,130.4 million for the nine months ended September 30, 1995 and 1994,
respectively, an increase of $478.4 million. Cash used in other investing
activities increased $370.1 million primarily due to an increase in NYNEX's
investments in 1995, including a $264 million investment in PCS Primeco (see
LIQUIDITY below) and investments in BANX (a partnership formed to invest in
wireless cable systems), BayanTel, Tele-TV Partnerships and FLAG, and the effect
of cash received in 1994 from the exit from the information products and
services business, partially offset by $90 million of cash received from the
sale of cellular properties overlapping with Bell Atlantic's cellular properties
prior to the formation of the Bell Atlantic NYNEX Mobile cellular partnership
(see Note (j)). In addition, investment in leased assets increased $126.6
million due primarily to new leveraged leases at NYNEX Credit Company. Capital
expenditures increased $5.8 million due to continued construction of the
cable/telecommunication network in the United Kingdom, partially offset by a
decrease in capital expenditures at the telecommunications group.
22
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financing activities: Net cash provided by (used in) financing activities was
$69.3 and ($299.8) million for the nine months ended September 30, 1995 and
1994, respectively, an increase of $369.1 million. This increase was primarily
due to the receipt of $610 million of proceeds in the second quarter of 1995 as
a result of the IPO of NYNEX CableComms' equity (see Note (i)), partially offset
by a decrease in net funds provided by minority interests at NYNEX CableComms
and a decrease in cash received from the issuance of common stock through
Savings Plans primarily due to fewer employees as a result of force reduction
plans.
In the first nine months of 1995, net cash used in investing activities of
$2,608.8 million exceeded net cash provided by operating activities of $2,532.2
million by $76.6 million. This difference was funded primarily by IPO proceeds
and equity. Commercial paper levels decreased due to repayments made using a
portion of the proceeds from the IPO, partially offset by additional borrowings
to fund operating and equity investments. Equity increased approximately $203.9
million in the first nine months of 1995 as NYNEX issued new shares of common
stock for employee savings plans, the Dividend Reinvestment and Stock Purchase
Plan ("DRISPP"), and stock compensation plans. Dividends paid in 1995 were
$672.4 million. Financing cash flows in the first nine months of 1995 included
net funds provided of $12.6 million primarily by a minority interest in the
financing structures formed in December 1993 and 1994 for the network
construction program in the United Kingdom.
Liquidity
At September 30, 1995, NYNEX had $950 million of unissued, unsecured debt and
equity securities registered with the SEC. The proceeds from the sale of
securities would be used to provide funds to NYNEX and/or NYNEX's nontelephone
subsidiaries for their general corporate purposes.
At September 30, 1995, NYNEX Capital Funding Company had $637 million of
unissued medium-term debt securities registered with the SEC. When issued, these
securities will be guaranteed by NYNEX. The proceeds from the sale of these
securities would be used to provide financing for NYNEX and/or NYNEX's
nontelephone subsidiaries.
At September 30, 1995, New England Telephone and New York Telephone had $500 and
$250 million, respectively, of unissued, unsecured debt securities registered
with the SEC. 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, excluding the
effect of any extraordinary items, for a period of any 12 consecutive months out
of the 15 month period prior to the date of the
23
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
proposed issuance. As a result of the 1993 business restructuring charges and
the 1994 pension enhancements, New York Telephone did not meet the earnings
coverage requirement at September 30, 1994. At September 30, 1995, New York
Telephone meets the requirement.
In the third quarter of 1995, an independent bond rating agency lowered its
rating of the long-term debt of NYNEX Corporation, which includes NYNEX Credit
Company and NYNEX Capital Funding Company. The bond ratings of New York
Telephone and New England Telephone were reaffirmed at current levels, but the
rating outlook on New England Telephone was upgraded by the agency. Management
believes that the bond ratings will remain at levels that are indicative of
strong credit support for timely principal and interest payments in the
foreseeable future.
NYNEX, Bell Atlantic, AirTouch Communications Inc. and U S West Inc. have formed
a venture to provide national wireless communications services. The venture is
comprised of two partnerships, one of which, PCS Primeco, participated in the
FCC auction of personal communications services ("PCS") licenses and bid a total
of approximately $1.1 billion for licenses in eleven cities, of which NYNEX's
portion was approximately $277 million. The bid was paid upon grant of the
licenses and final review of bidder qualifications by the FCC in June of 1995.
NYNEX's portion of the bid was funded through the issuance of commercial paper.
On November 10, 1995 NYNEX and NYNEX Credit Company ("Credit Company") expect to
enter into a $2.75 billion unsecured revolving credit facility, with Chemical
Bank as the administrative agent. Credit Company may borrow up to $300 million
under this facility. NYNEX may request an increase in the aggregate commitments
under the facility of up to $500 million. The initial term is for five years,
but the borrowers may request two extensions of the facility, in each case for
an additional year. Under the terms of the agreement, the proceeds may be used
to fund working capital and/or any lawful corporate purposes.
REGULATORY AND OTHER MATTERS
State Regulatory
Maine: The May 15, 1995 orders of the MPUC, which adopted an alternative form of
regulation for New England Telephone and concluded a related earnings
investigation, have been appealed to the Maine Supreme Judicial Court. The
appellants contend that the MPUC should have ordered greater rate reductions by
New England Telephone and challenge the MPUC's authority to apply $4 million of
the ordered $14.4 million reduction to the provision of new services and/or
equipment to schools and libraries. The Court has scheduled oral argument on the
case for January 1996.
24
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Massachusetts: Rates proposed in New England Telephone's initial price cap
filing, in compliance with the Massachusetts Department of Public Utilities
("MDPU") May 12, 1995 Order, became effective on September 15, 1995. Rate
changes in the filing, which result in an annual reduction of approximately
$32.8 million, relate to switched access services, residence optional calling
plans, business local usage, and conduit attachment fees. An additional
reduction of $5.3 million, associated with New England Telephone's monthly
increase of $2.50 in the Lifeline Service credit, took effect on June 11, 1995,
as directed by the MDPU's Order.
Rhode Island: On June 27, 1995, the Rhode Island Public Utilities Commission
("RIPUC") issued an initial order in the competition proceeding, expressing an
overall policy favoring local competition, asserting jurisdiction over potential
local competitors and requiring seamless interconnection of networks. Pursuant
to a prehearing conference on September 21, 1995, the RIPUC issued a schedule
for the next phase of the proceeding. The parties are to file testimony on the
issues raised in the initial phase of the docket by November 17, 1995 with
discovery and hearings to follow. The RIPUC proposes to issue a decision in the
proceeding by June 30, 1996.
Vermont: As previously reported (see NYNEX's Quarterly Report on Form 10-Q for
the period ended March 31, 1995), New England Telephone has appealed portions of
the Vermont Public Service Board's ("VPSB") order on the rate reduction and in
the companion price regulation case to the Vermont Supreme Court. On October 5,
1995, the VPSB issued an order on issues remanded to it by the Court. The VPSB
accepted New England Telephone's proposal for extended time frames to eliminate
multiparty service and to replace one of the two remaining analog switches in
the state. New England Telephone intends to withdraw its appeal on those issues.
On September 8, 1995, New England Telephone filed a rate case seeking an annual
increase in rates of $12.2 million. The Vermont Department of Public Service
("VDPS") has recommended that the VPSB suspend and investigate the proposed
tariff filing. On October 31, 1995, New England Telephone and the VDPS entered
into a stipulation that, if approved by the VPSB, will result in an annual
increase in rates of $7.5 million. The VPSB is expected to hold hearings on the
stipulation by January 1996.
Hearings in Phase I of the VPSB's proceeding on competition have ended. Phase I
of the proceeding addresses public policy issues and rules involving unbundling,
cost study methodologies and the definition of universal service. A decision in
Phase I is expected by the end of 1995. Phase II of the proceeding will address
specific pricing and technical questions with respect to local service and
intraLATA toll competition, including intraLATA presubscription, pricing
(including imputation rules) and interconnection. A decision in Phase II is not
expected until late 1996.
25
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
New York: On August 16, 1995, the NYSPSC issued an order reaffirming its
approval of the Performance Regulation Plan (the "Plan"). On August 23, 1995,
New York Telephone filed its compliance tariffs under the Plan. The tariffs
became effective on a temporary basis as of September 1, 1995, and will remain
temporary pending the NYSPSC Staff's review of parties' comments and the
completion of the Staff's investigation of whether the tariffs comply with the
Plan. Several parties have filed petitions for reconsideration of the NYSPSC's
final order approving the Plan. New York Telephone has filed responses to those
petitions.
On September 19, 1995, the NYSPSC issued an order concerning New York
Telephone's performance under the 1994 service quality plan. The NYSPSC
determined that, given the 1994 service performance results, New York Telephone
must refund $50 million to ratepayers, which was accrued by New York Telephone
in the second quarter of 1995 (see Note (h)).
As an outgrowth of New York Telephone's 1990 general rate case, in November
1990, the NYSPSC commenced a proceeding to review the financial effects on
ratepayers of the transactions in the years 1984 through 1990 between New York
Telephone and other NYNEX affiliates. In March 1991, the NYSPSC authorized a
$250 million increase in New York Telephone's rates, effective January 1, 1991,
of which $47.5 million annually remains subject to refund pending resolution of
certain affiliate transactions issues. The NYSPSC selected an independent
consulting firm to perform an investigation of such transactions. On September
13, 1995, the consultant submitted to the NYSPSC a final report detailing its
findings and recommendations. On September 20, 1995, an administrative law
judge of the NYSPSC issued a procedural ruling for future hearings and directed
that the NYSPSC Staff and other parties must file any evidence they wish to
submit by January 26, 1996. New York Telephone will have the opportunity to
respond at a subsequent date to be determined.
On September 27, 1995, the NYSPSC issued an order resolving certain issues in
its Competition II proceeding which is to consider the terms that should govern
local exchange competition in New York State. The NYSPSC directed New York
Telephone to list customers of competitive local exchange carriers ("LECs")in
its White Pages directories at no charge. However, New York Telephone is free to
negotiate with those carriers arrangements under which New York Telephone would
deliver the White Pages directories to the competitive carriers' customers for a
fee. The NYSPSC also established a reciprocal compensation scheme for the
payment of access rates when New York Telephone and competitive LECs terminate
traffic on each other's networks. Generally, New York Telephone and the
competitive carrier will pay each other the same rate when providing the same or
equivalent functions. The NYSPSC also determined that New York Telephone must,
upon request, provide services to interconnect two competitive LECs that are
collocated in New York Telephone's central offices. Finally, the NYSPSC directed
competitive LECs to provide intraLATA presubscription.
26
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Federal Regulatory
Price caps
On September 27, 1995, the Federal Communications Commission ("FCC") issued a
Notice of Proposed Rulemaking in the Price Cap proceeding, regarding the
productivity factor used by LECs in the FCC price cap formula. The FCC price cap
formula adjusts the limits on access price levels ("price cap index") upward for
inflation, downward for productivity improvement and up or down for exogenous
costs. Depending on the productivity factor selected by the LEC, earnings above
certain levels are shared with ratepayers. The Proposed Rulemaking will consider
changes in the determination of the productivity factor, the recognition of
exogenous costs, the extent of carrier sharing, and the formula for calculating
the price cap index for certain services. The FCC has requested comments by
November 27, 1995, and replies by December 27, 1995. The FCC has indicated that
it intends to issue an order in time for the final changes to be reflected in
LECs' rates as of July 1, 1996.
On September 20, 1995, the FCC issued a Notice of Proposed Rulemaking to
determine how the price cap rules should be modified to accommodate increasing
levels of competition. The FCC intends to consider whether to allow greater
flexibility to lower prices, adopting procedures to allow a more rapid
introduction of new services, and establishing criteria that can be used in
assessing whether LECs warrant streamlined or non-dominant treatment for certain
services when they face substantial competition in a geographic area. The FCC
asked for comments on a proposal by the telephone subsidiaries that earnings
sharing be reduced or eliminated as an LEC implements measures to promote
competition for local exchange services.
Other Federal Regulatory Matters
On September 11, 1995, the telephone subsidiaries filed a further response to
the FCC's March 3, 1995 Order to Show Cause in connection with an audit of
costs reported by the LECs to the National Exchange Carrier Association (see
NYNEX's Annual Report on Form 10-K for the year ended December 31, 1994). In
that response the telephone subsidiaries argued that no forfeitures or price
cap reductions should be imposed and that their internal processes are in
compliance with the FCC's rules.
On August 1, 1995, the U.S. Court of Appeals for the District of Columbia
Circuit found that a decision of the FCC had understated the amount of damages
to be paid by the telephone subsidiaries in connection with overearnings
complaints for the period 1987-1988, and by New York Telephone for the period
1989-1990. On October 4, 1995, the Court denied the telephone subsidiaries'
petition for rehearing. It is probable that, as a result of the Court's
decisions, the telephone subsidiaries will be required to pay damages plus
interest. For the period 1987-1988 the damages and interest are approximately
$12.8 million, $5.4 million for New York Telephone and $7.4 million for New
England Telephone. For the period 1989-1990 the damages and interest for New
York Telephone are approximately $9.7 million.
27
<PAGE>
Form 10-Q Part II
NYNEX CORPORATION
PART II - OTHER INFORMATION
ITEM 5. Other Information
Operations Under the Modification of Final Judgment ("MFJ")
On April 28, 1995, the United States District Court for the
District of Columbia ("MFJ Court") issued a decision granting the
regional holding companies' ("RHCs") joint motion for a waiver of
the MFJ permitting the RHCs to provide interLATA wireless
telecommunications services. The MFJ Court attached a number of
restrictions and conditions that limit the extent and manner in
which the RHCs may provide such services. NYNEX, through Bell
Atlantic NYNEX Mobile, is proceeding to comply with the
requirements of the decision in order that it may begin to provide
the services authorized. In this regard, the compliance plan for
Bell Atlantic NYNEX Mobile's Connecticut/Western Massachusetts
cellular system has been approved by the Department of Justice
("DOJ") and is now pending before the MFJ Court, which is expected
to rule on the plan shortly. NYNEX has also sought clarification
of the April 28 decision from the MFJ Court and has appealed that
decision to the United States Court of Appeals for the District of
Columbia Circuit. The Court of Appeals decision in this case is
expected during the second quarter of 1996.
Pursuant to an August 18, 1994 order of the MFJ Court, the DOJ is
conducting an extensive discovery process in connection with its
investigation relating to the motion of NYNEX, BellSouth
Corporation ("BellSouth") and SBC Communications Inc. ("SBC") to
vacate the MFJ. The investigation is expected to be completed
shortly. Following completion of its investigation, the DOJ is
expected to file its response to the motion with the MFJ Court in
late 1995 or early 1996, following which there will be an
opportunity for additional public comment and responses by NYNEX,
BellSouth, SBC and other interested parties.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number
(27) Financial Data Schedule
(b) Reports on Form 8-K.
NYNEX's Current Report on Form 8-K, date of report July 1, 1995
and filed July 10, 1995, reporting on Item 5.
NYNEX's Current Report on Form 8-K, date of report August 2, 1995
and filed August 2, 1995, reporting on Item 5.
28
<PAGE>
Form 10-Q
NYNEX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NYNEX CORPORATION
P. M. Ciccone
------------------------------
P. M. Ciccone
Vice President and Comptroller
(Principal Accounting Officer)
November 9, 1995
29
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