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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to________
Commission file number 1-8608
NYNEX CORPORATION
A Delaware I.R.S. Employer
Corporation Identification No. 13-3180909
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------------
Common Stock (par value New York, Boston, Chicago,
$1.00 per share) Pacific and Philadelphia
Stock Exchanges
Twenty year 9.55% Debentures
due May 1, 2010 New York Stock Exchange,Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
At February 28, 1995, approximately 425,380,000 shares of Common Stock were
outstanding.
At February 28, 1995, the aggregate market value of the voting stock held
by nonaffiliates was approximately $16,679,399,000
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 .....
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Portions of the Registrant's 1994 Annual Report to Stockholders (Part II)
(2) Portions of the Registrant's Proxy Statement dated March 20, 1995 issued in
connection with the 1995 Annual Meeting of Stockholders (Part III).
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TABLE OF CONTENTS
PART I
<TABLE>
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Item Page
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<S> <C> <C>
1. Business........................................... 3
2. Properties......................................... 21
3. Legal Proceedings.................................. 21
4. Submission of Matters to a Vote of Security Holders 25
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 26
6. Selected Financial Data............................ 27
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 27
8. Consolidated Financial Statements and Supplementary
Data............................................... 27
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 27
PART III
10. Directors and Executive Officers of the Registrant. 27
11. Executive Compensation............................. 27
12. Security Ownership of Certain Beneficial Owners
and Management..................................... 27
13. Certain Relationships and Related Transactions..... 28
PART IV
14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K ................................ 28
</TABLE>
2
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PART I
Item 1. BUSINESS.
General
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NYNEX Corporation ("NYNEX") was incorporated on October 7, 1983 under the
laws of the State of Delaware and has its principal executive offices at 1095
Avenue of the Americas, New York, New York 10036 (telephone number 212-395-
2121). NYNEX is a holding company with various subsidiaries engaged in the
provision of telecommunications products and services, directory publishing,
information delivery, and other business services.
NYNEX provides products and services in several industry segments (see
"Consolidated Financial Statements and Supplementary Data" below). NYNEX's
dominant industry segment is Telecommunications, which includes New York
Telephone Company ("New York Telephone"), New England Telephone and Telegraph
Company ("New England Telephone") and their subsidiaries (see
"Telecommunications" below).
In addition to Telecommunications, NYNEX has wholly-owned subsidiaries in
the following industry segments: Cellular (NYNEX Mobile Communications
Company), Publishing (NYNEX Information Resources Company), Financial Services
(NYNEX Credit Company, NYNEX Capital Funding Company and NYNEX Trade Finance
Company) and Other Diversified Operations (including NYNEX Network Systems
Company and NYNEX CableComms Limited, among others). Each of these segments
is described below.
Telecommunications
------------------
The two principal operating subsidiaries of NYNEX are operating telephone
companies, New York Telephone and New England Telephone (collectively, the
"Telephone Companies"). The Telephone Companies provided NYNEX with 86.5% of
its operating revenues in 1994. Approximately 87% of the Telephone Companies'
revenues was derived from operations in New York and Massachusetts. In 1994,
revenues from one customer, AT&T Corp. ("AT&T"), accounted for approximately
15% of NYNEX's total operating revenues, primarily in network access and other
revenues.
New York Telephone is incorporated under the laws of the State of New
York and is primarily engaged in providing telecommunications services in a
large portion of New York and a small portion of Connecticut (Greenwich and
Byram only). New England Telephone is incorporated under the laws of the State
of New York and is primarily engaged in providing telecommunications services
in Massachusetts, Maine, New Hampshire, Rhode Island and Vermont. The
Telephone Companies are primarily engaged in providing two types of
telecommunications services, exchange telecommunications and exchange access,
in their respective territories.
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Exchange telecommunications service is the transmission of
telecommunications among customers located within geographical areas (local
access and transport areas or "LATAs"). These LATAs are generally centered
on a city or other identifiable community of interest and, subject to certain
exceptions, each LATA marks an area within which a former Bell System local
exchange company ("LEC") operating within such territory may provide
telecommunications services (see "Operations Under the Modification of Final
Judgment" below). Exchange telecommunications service may include long
distance service as well as local service within LATAs. Examples of exchange
telecommunications services include switched local residential and business
services, private line voice and data services, Wide Area Telecommunications
Service ("WATS"), long distance and Centrex services.
Exchange access service refers to the link provided by LECs between a
customer's premises and the transmission facilities of other
telecommunications carriers, generally interLATA carriers. Examples of
exchange access services include switched access and special access services.
Certain billing and collection services are performed by the Telephone
Companies for other carriers, primarily AT&T, and certain information
providers that elect to subscribe to these services rather than perform such
services themselves. Effective January 1, 1987, such billing and collection
services were detariffed on an interstate basis and are offered to
interexchange carriers under contract. In addition, many components of
billing and collection services in New York State have been detariffed
pursuant to orders of the New York State Public Service Commission ("NYSPSC").
The NYSPSC has determined that other components of intrastate billing and
collection services shall remain under tariff. In 1994, approximately 1% of
NYNEX's total operating revenues was derived from billing and collection
services. In 1990, the Telephone Companies and AT&T signed a six-year
contract extending the Telephone Companies' roles as AT&T long distance
billing and collection agents. The agreement allows AT&T the flexibility of
gradually assuming certain administrative and billing functions now performed
by the Telephone Companies. The contract expires on December 31, 1995.
There are six LATAs that comprise the area served by New York Telephone,
and they are referred to as follows: the New York City Metropolitan Area
(which includes Westchester, Rockland, Putnam, Nassau and Suffolk Counties in
New York and Greenwich and Byram in Connecticut), Poughkeepsie, Albany-Glens
Falls, Syracuse-Utica, Buffalo and Binghamton-Elmira. There are six LATAs
served by New England Telephone: Eastern Massachusetts, Western
Massachusetts, Maine, New Hampshire, Vermont and Rhode Island. Although the
Telephone Companies generally are prohibited by the Modification of Final
Judgment from providing interLATA service, New York Telephone is permitted to
and does provide interLATA service in certain areas, including service between
New York City and northern New Jersey (see "Operations Under the Modification
of Final Judgment" below).
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The following table sets forth for the Telephone Companies the
approximate number of network access lines in service at the end of each year:
<TABLE>
<CAPTION>
Network Access Lines In Service
--------------------------------------
(In Thousands)
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
New York Telephone.................. 10,477 10,135 9,897 9,735 9,658
New England Telephone............... 6,101 5,906 5,721 5,604 5,544
------ ------ ------ ------ ------
Total*............................. 16,578 16,041 15,618 15,339 15,202
====== ====== ====== ====== ======
</TABLE>
* Network access lines in service have been restated for retroactive
adjustments to the in-service base for New York Telephone. This
restatement was not material and had no impact on revenues.
The territories served by the Telephone Companies contain sizeable areas
and many localities in which local service is provided by nonaffiliated
telephone companies. Rochester, Jamestown, Middletown, Webster and Henrietta,
New York are the only cities with a population of more than 25,000 within the
Telephone Companies' general operating area that are served by such
nonaffiliated companies. On December 31, 1994 these nonaffiliated companies
had approximately 1,418,086 network access lines in service.
In 1990, NYNEX Materiel Enterprises Company was transferred from NYNEX to
the Telephone Companies and then merged into another jointly owned subsidiary,
NYNEX Service Company, which was renamed Telesector Resources Group, Inc.
("Telesector Resources").
The Telephone Companies have consolidated all or part of many regional
service and support functions into Telesector Resources. Regional service
functions are interstate access services, operator services, public
communications, sales, market area services, corporate services, information
services, labor relations, engineering/construction and business planning.
Support functions are quality and process re-engineering, marketing,
technology and planning, public relations, legal and human resources. In
addition, Telesector Resources provides various procurement, procurement
support and materials management services to the Telephone Companies, on a
nonexclusive basis. These services include product evaluation, contracting,
purchasing, materials management and disposition, warehousing, transportation,
and equipment repair management. Under a reciprocal services agreement, the
Telephone Companies provide certain administrative and other services for
Telesector Resources.
Each of the seven regional holding companies ("RHCs") formed in
connection with the AT&T divestiture owns an equal interest in Bell
Communications Research, Inc. ("Bellcore") (see "Operations Under the
Modification of Final Judgment" below). Bellcore furnishes to the LECs,
including the Telephone Companies, and certain of their subsidiaries technical
and support services (that include research and development) relating to
exchange telecommunications and exchange access services that can be provided
more efficiently on a centralized basis. Bellcore serves as a central point
of contact for coordinating the efforts of NYNEX and the other
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RHCs in meeting the national security and emergency preparedness requirements
of the federal government.
Cellular
--------
NYNEX Mobile Communications Company ("NYNEX Mobile"), through its
operating subsidiaries and partnerships, provides a variety of wireless
telecommunications services and products, including services and products that
incorporate cellular technology, throughout the northeastern United States.
On June 30, 1994, NYNEX and Bell Atlantic Corporation ("Bell Atlantic")
announced the formation of a joint venture to combine NYNEX's and Bell
Atlantic's domestic cellular services properties and bid in the Federal
Communications Commission (the "FCC") 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. The
transaction is expected to close in mid 1995. The joint venture will be
controlled equally by both companies.
Publishing
----------
NYNEX Information Resources Company ("Information Resources") produces,
publishes and distributes alphabetical (White Pages) and classified (Yellow
Pages) directories for the Telephone Companies pursuant to agreements that
provide for the payment of fees to the Telephone Companies in exchange for the
right to publish such directories. Acting through its subsidiaries,
Information Resources also publishes, on its own and in partnership with other
entities, other telephone directories, both domestically and internationally.
NYNEX Information Technologies Company, a subsidiary of Information Resources,
provides on-line electronic directories in the United States and France and
also provides CD-ROM directories.
Financial Services
------------------
NYNEX Credit Company is primarily engaged in the business of financing
transportation, industrial, and commercial equipment and facilities to a broad
range of companies through leasing transactions unrelated to NYNEX's other
businesses.
NYNEX Capital Funding Company provides a source of funding to NYNEX and
its subsidiaries, other than the Telephone Companies, through its ability to
issue debt securities in the United States, Europe and other international
markets.
NYNEX Trade Finance Company evaluates and obtains non-recourse and trade-
related financing for NYNEX projects, evaluates and manages foreign currency
risk and arranges the repatriation of profits from foreign operations,
principally in developing and third-world economies.
NYNEX has exited the real estate development and management business. In
1994, NYNEX sold NYNEX Properties Company.
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Other Diversified Operations
----------------------------
NYNEX Network Systems Company provides wireline and wireless network
services outside the United States.
NYNEX CableComms Limited ("CableComms") builds and operates cable
television and telecommunications networks in the United Kingdom.
Information products and services and consulting services are provided
both nationally and internationally by other companies within this segment.
NYNEX has exited the information products and services business. During 1993
and early 1994, NYNEX sold The BIS Group Limited and AGS Computers, Inc.
Business Restructuring
----------------------
During 1994, NYNEX reached new agreements with the Communications Workers
of America ("CWA") and the International Brotherhood of Electrical Workers
("IBEW") which provided for retirement incentives (see "Employee Relations"
below). NYNEX also announced retirement incentives for its management
employees. These incentives are intended to provide a voluntary means to
implement substantially all of the planned work force reductions of
approximately 16,800 employees by the end of 1996. The retirement incentives
are expected to generate an estimated $2.0 billion in pretax charges ($1.3
billion after-tax) through 1996 as employees elect to leave the business under
the incentives rather than under the 1993 force reduction plan. Much of the
cost will be funded by the NYNEX pension plans. In 1994, NYNEX recorded
$693.5 million of pretax charges ($452.8 million after-tax) primarily for the
incremental cost of pension enhancements and associated postretirement medical
costs for 7,200 employees who left NYNEX under the retirement incentives.
In 1993, NYNEX recorded $2.1 billion in pretax charges ($1.4 billion
after-tax) for business restructuring. These charges resulted from a
comprehensive analysis of operations and work processes, resulting in a
strategy to redesign them to improve efficiency and customer service, to
adjust quickly to accelerating change, to implement work force reductions, and
to produce cost savings necessary for NYNEX to operate in an increasingly
competitive environment.
Capital Expenditures
--------------------
NYNEX meets the expanding needs for telecommunications services by making
capital expenditures to upgrade and extend the existing telecommunications
network, including new construction, optical fiber and modernization at both
Telephone Companies. Capital expenditures also include the construction of
mobile cell sites within the Northeast and cell site digital upgrades and the
building of the cable television and telecommunications network in the United
Kingdom. Capital expenditures (excluding the equity component of allowance
for funds used during construction and additions under capital leases) for
1990 through 1994 are set forth below.
<TABLE>
<CAPTION>
In Millions
------------------------------
<S> <C>
1994. . . . . . . . . . $3,012
1993. . . . . . . . . . $2,717
1992. . . . . . . . . . $2,450
1991. . . . . . . . . . $2,499
1990. . . . . . . . . . $2,493
</TABLE>
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NYNEX's capital expenditures in 1995, excluding capital expenditures
resulting from business restructuring, are currently expected to be at a level
comparable to 1994 expenditures. Most of such expenditures will be for the
Telephone Companies, Telesector Resources, and CableComms.
Operations Under the Modification of Final Judgment
---------------------------------------------------
The operations of NYNEX and its subsidiaries in all industry segments are
subject to the requirements of a consent decree known as the "Modification of
Final Judgment" ("MFJ"). The MFJ arose out of an antitrust action brought by
the United States Department of Justice ("DOJ") against AT&T. In August 1982,
the United States District Court for the District of Columbia (the "MFJ
Court") approved the MFJ as in the public interest. In February 1983, the
United States Supreme Court affirmed the MFJ Court's action. Pursuant to the
MFJ, AT&T divested its 22 wholly-owned LECs, including the Telephone
Companies, distributed them to the RHCs, and distributed the stock of the RHCs
to AT&T's stockholders on January 1, 1984.
As initially approved, the MFJ restricted the RHCs, including NYNEX and
its subsidiaries, to the provision of exchange telecommunications service,
exchange access and information access services, the provision (but not
manufacture) of customer premises equipment ("CPE") and the publishing of
printed directory advertising. Although some restrictions placed on RHC
operations have been removed or modified since entry of the MFJ, the RHCs are
still required to seek MFJ Court approval in order to provide interLATA
telecommunications services, to manufacture or provide telecommunications
products and to manufacture CPE. Also, the Telephone Companies are still
required to offer to all interexchange carriers and information service
providers exchange access and information access, at certain locations, which
are equal in quality, type and price to that provided to AT&T and its
affiliates ("Equal Access"). Included in capital expenditures for the period
1990 through 1993 are costs incurred in connection with the requirement to
provide Equal Access (see "Capital Expenditures" above).
MFJ Court approval to engage in any of the prohibited activities is
normally predicated upon a showing to the MFJ Court that there is no
substantial possibility that an RHC could use its monopoly power to impede
competition in the market it seeks to enter. The MFJ Court has established
procedures for dealing with requests by an RHC to enter new businesses. Such
requests must first be submitted to the DOJ for its review. After DOJ review,
the RHC seeks approval directly from the MFJ Court. The MFJ Court will
consider the recommendation of the DOJ in deciding whether a specific request
should be granted.
In July 1991, the MFJ Court lifted the MFJ restriction on the provision
of the content of information services by the RHCs and LECs, including NYNEX
and the Telephone Companies. In May 1993, the United States Court of Appeals
for the District of Columbia Circuit ("Court of Appeals") affirmed that
decision. The Court of Appeals decision allows the RHCs and LECs, including
NYNEX and the Telephone Companies, to create and own the content of the
information they transmit over the telephone lines and to provide data
processing services to customers. In November 1993, the United States Supreme
Court declined to review the Court of Appeals decision.
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On August 18, 1994, the MFJ Court ordered that the July 6, 1994 motion of
NYNEX, Bell Atlantic, BellSouth Corporation ("BellSouth") and Southwestern
Bell Corporation ("SBC") to vacate the MFJ be referred to the DOJ for
investigation. Interested parties filed their comments on the motion with the
DOJ in November. On December 16, 1994, Bell Atlantic advised the DOJ of its
withdrawal from the proceeding. The DOJ is now conducting an extensive
discovery process in connection with the motion. Following completion of its
investigation, the DOJ is expected to file its response to the motion with the
MFJ Court in late 1995 or early 1996, following which there shall be an
opportunity for additional public comment and responses by NYNEX, BellSouth
and SBC.
On August 25, 1994, NYNEX filed a request with the DOJ for a waiver from
the MFJ to provide interexchange services for calls originating in New York
State. Public comments on the waiver request have been filed with the DOJ,
and NYNEX is preparing its reply.
Regulated Services
------------------
Various services offered by NYNEX's subsidiaries in the
Telecommunications and Cellular segments are subject to the jurisdiction of
state and federal regulators. Intrastate communications services offered by
these subsidiaries are under the jurisdiction of state public utility
commissions (see "State Regulatory Matters" below), and interstate
communications services are under the jurisdiction of the FCC (see "Federal
Regulatory Matters" below). In addition, state and federal regulators review
various transactions between these subsidiaries and the other subsidiaries of
NYNEX.
State Regulatory Matters
------------------------
Set forth below is a description of certain intrastate regulatory
proceedings with respect to changes in rates and revenues/1//.
-
--------------------------------------
Maine
-----
On May 10, 1994, the Maine Public Utilities Commission ("MPUC") commenced
a proceeding to explore alternatives to traditional rate of return regulation
for New England Telephone. In an Order dated August 18, 1994, the MPUC
consolidated this proceeding with an earnings investigation commenced in
---------------
/1// The term "rates" is synonymous with prices. When changes in rates are
-
referred to in the aggregate, the reference is to the aggregate effect of
individual price changes multiplied by the volumes of services, assuming no
change in volume as a result of the price changes. The term "revenues", on
the other hand, refers to the aggregate effect of prices multiplied by volumes
of service, with effect given to the change in volume as a result of any price
changes.
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response to a ratepayer complaint. In testimony filed October 3, 1994 and
amended January 13, 1995, New England Telephone maintained that it was not
earning above its authorized rate of return and identified a potential revenue
requirement of approximately $12 million under a traditional rate of return
methodology. Accordingly, New England Telephone argued that current rates
represent the appropriate starting point for any alternative regulation plan.
The MPUC Staff and the Office of the Public Advocate each filed testimony on
December 13, 1994 contesting New England Telephone's analysis. The Staff
concluded that current rates produced nearly $40 million in overearnings,
while the Public Advocate estimated overearnings at $65 million. Both argued
for a revenue reduction prior to the initiation of any incentive regulation
plan. Hearings on this consolidated proceeding were held in February 1995,
with a decision expected from the MPUC in May 1995.
Massachusetts
-------------
On April 14, 1994, 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 concluded in November 1994 and final briefs were submitted in January
1995. Decision by the MDPU is pending.
In June 1990, the MDPU issued an order in Phase III of a proceeding that
culminated a five-year investigation into New England Telephone's rates, costs
and revenues. The order calls for the gradual restructuring of local and long
distance rates within the state, with the objective of moving prices for
services closer to the costs of providing them. This is accomplished through
an annual transitional filing of new rates by New England Telephone. At the
time the rates are established, revenue neutrality is maintained. New England
Telephone's first, second and third transitional filings became effective on
November 15, 1991, January 15, 1993, and April 14, 1994, respectively. On
June 14, 1994, the MDPU granted New England Telephone's motion to defer
further transitional filings pending the outcome of the alternative regulation
proceeding.
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On January 6, 1995, the MDPU opened an investigation concerning intraLATA
and local exchange competition in Massachusetts. The MDPU indicated that
among the matters it intends to address are collocation, interconnection of
networks, intraLATA toll presubscription, telephone number assignment and
portability and universal service funding. New England Telephone and other
parties submitted their comments on the scope of the proceeding in February
1995. Decisions in this proceeding could have a significant impact on New
England Telephone's revenues.
New Hampshire
-------------
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. Effective with billing periods on and after June 15, 1994, New
England Telephone was granted authority to impose a late payment charge on
overdue residence and business customer balances, with an annual revenue
effect of $2.5 million. The NHPUC 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.
New York
--------
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 five to
seven years. The Plan was developed by the parties in the third phase of the
incentive regulation proceeding that the NYSPSC instituted in 1992. In the
initial 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
proceeding.
The Plan is a performance-based plan that, if approved by the NYSPSC,
will operate as follows:
(1) The new framework replaces 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, depending on whether the Plan
remains in effect for five or seven years, New York Telephone's prices
will have been decreased by an amount that would produce a $375 million or
a $425 million reduction, respectively, 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
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revenue, will be effective in 1995. During its term, the Plan allows
certain prices to be adjusted to take into account an inflation index in
excess of four percent annually or costs associated with government
mandates and other defined "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 encourages 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.
(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 1994 "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 was
implemented in 1994.
On March 14, 1995, NYSPSC administrative law judges issued a recommended
decision that gave a positive evaluation of the Plan's concept and suggested
that, with some modifications in the service and pricing provisions, the Plan
"can provide a sound regulatory regime." It is expected that the NYSPSC will
issue a decision on the Plan during the second quarter of 1995.
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 under interim regulations 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 ("the
Service Plan"). In the Service 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 service performance results
through December 31, 1994, it is probable that New York Telephone will incur a
penalty. The precise amount of the penalty obligation cannot be determined
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pending further NYSPSC action regarding the waiver of certain service results
for the period in question, but it is estimated that the penalty will be in
the range of $40 to $50 million. The Service Plan is silent as to how New
York Telephone must satisfy any penalty. The ultimate resolution as to the
disposition of the Service Plan penalty through an additional capital
investment to improve infrastructure, a refund to ratepayers, or other means,
will be made by the NYSPSC in the future. The NYSPSC may allow all interested
parties the opportunity to state their positions.
Pursuant to a February 1993 NYSPSC order, New York Telephone may retain
1993 earnings above a return on equity of 11.7% and up to 12.7%, depending on
its attainment of specified service quality criteria, with earnings above
12.7% return on equity to be held for the ratepayers' benefit. New York
Telephone has submitted a report to the NYSPSC showing 1993 earnings below
11.7%. The NYSPSC staff is currently reviewing New York Telephone's
submission.
As 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 audit of such
transactions. The consultant commenced the audit in November 1991 and is
expected to complete the audit and submit a final report detailing its
findings and recommendations in 1995. The NYSPSC may hold hearings on the
consultant's audit report.
Rhode Island
------------
In August 1992, the Rhode Island Public Utilities Commission ("RIPUC")
approved a Price Regulation Trial ("PRT") that provides New England Telephone
with significantly increased pricing and earnings freedom through 1995 and
calls for specific investment and service-quality commitments. As a part of
the PRT, New England Telephone makes an annual filing, with overall price
increases capped by a formula indexing prices to the Gross National Product
Price Index, adjusted for productivity and exogenous factors. The PRT allows
New England Telephone to continue moving the prices of its services closer to
the costs of providing them. New England Telephone's 1993 filing, effective
January 15, 1994, resulted in an overall revenue reduction of approximately
$3.2 million for 1994, resulting from decreases in long distance revenues
partially offset by increases in local service revenues. New England
Telephone's most recent annual filing became effective on January 15, 1995.
This filing effects an overall revenue reduction of approximately $445,000 for
1995, with numerous price adjustments. Under the PRT, New England Telephone
must apply a one-time credit to customers' bills of 50% of any earnings
between 12.25% and 19.25% return on equity and 100% of any earnings in excess
of 19.25% return on equity. On March 1, 1995, New England Telephone filed a
statement of its 1994 Rhode Island intrastate earnings with the RIPUC
proposing no 1994 shared earnings credit.
13
<PAGE>
In a separate proceeding, the RIPUC considered proposals from the Rhode
Island Division of Public Utilities and Carriers and various interexchange
carriers with respect to New England Telephone's intrastate access charges,
including a proposal to freeze New England Telephone's annual carrier common
line revenues based on the most recent available amount. On November 18,
1994, the RIPUC decided to take no action to alter rates or rate structure at
this time.
On October 25, 1994, the RIPUC initiated a proceeding with respect to
competition. In an order dated February 26, 1995, the RIPUC stated that it
will consider numerous issues including intraLATA toll presubscription,
telephone number assignment and portability, interconnection of networks and
collocation.
Vermont
-------
On February 6, 1995, the Vermont Public Service Board ("VPSB"), on
motions for reconsideration, amended its earlier order in New England
Telephone's Price Regulation Plan proceeding to remove additional pricing
restrictions and to permit New England Telephone to modify or exit the Price
Regulation Plan during its term. As with the VPSB's earlier order, the
proposed changes would not restrict New England Telephone's earnings during
the four-year term of the plan but would impose a higher productivity factor
and a narrow definition of exogenous costs in the price regulation formula,
and additional quality of service standards. On March 8, 1995, 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.
In the related proceeding to examine New England Telephone's level of
earnings, on February 6, 1995, the VPSB issued an order, on motions for
reconsideration of its October 5, 1994 order, recalculating certain aspects of
the required annual revenue reduction, the net effect of which remained
approximately $15 million. The reduction is retroactive to December 29, 1993,
the date the VPSB opened the proceeding. Among the adjustments ordered was a
reversal of the VPSB's previous position on depreciation rates and the
approval of stipulated depreciation parameters, with the result that the
adjustment previously taken by New England Telephone in response to the VPSB's
October 5 order must be reversed and reserves adjusted to conform with the
February 6 order. In 1994, New England Telephone reduced local operating
revenues by approximately $15 million for subsequent refunds to Vermont
customers for the period from December 29, 1993 through December 31, 1994. A
date for refunds to customers will be set once the VPSB completes supplemental
hearings on rate reduction design issues. On March 6, 1995, New England
Telephone filed an appeal of certain portions of the VPSB's February 6 order
with the Vermont Supreme Court.
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. New England
Telephone and other defendants filed motions to dismiss the complaint, and on
December 30, 1994, the Court dismissed the lawsuit in its entirety.
14
<PAGE>
In February 1995, New England Telephone and other parties submitted to
the VPSB their comments on the proposed order of procedure in the VPSB's
proceeding on competition. The proceeding will address issues such as open
network architecture, interconnection, unbundling, intraLATA toll
presubscription, telephone number assignment and portability and universal
service policy.
Federal Regulatory Matters
--------------------------
Interstate Access Charges
-------------------------
Interstate access charges are tariff charges filed with the FCC that
compensate LECs, including the Telephone Companies, for services that allow
carriers and other customers to originate and terminate interstate
telecommunications traffic on the LECs' local distribution networks. Such
charges recover the LECs' access-related costs allocated to the interstate
jurisdiction ("Interstate Costs") under the FCC's jurisdictional cost
allocation rules.
With respect to the provision of access to the switched network, separate
charges are applied to end users ("End User Common Line Charges") and to
interexchange carriers ("switched access"). End User Common Line Charges
recover, through a fixed charge, a portion of the Interstate Costs of the line
connecting an end user's premises with the LEC's central office. The LECs
recover their remaining Interstate Costs through mileage and usage sensitive
charges to the interexchange carriers.
Effective January 1, 1991, the FCC lowered its interstate access rate of
return from 12% to 11.25%. Interstate access tariffs for the Telephone
Companies reflect this rate of return.
Effective January 1, 1991, the FCC adopted incentive regulation in the
form of price caps with respect to interstate services provided by the
Telephone Companies. Price caps focus on LECs' prices rather than costs and
set maximum limits on prices LECs can charge for their services. These limits
are subject to adjustment each year to reflect inflation, a productivity
factor and certain other cost changes. Future improvements in interstate
earnings will depend upon actual productivity improvements in excess of the
productivity rate established by the FCC, effective response to competition
and continued growth in the demand for interstate access services. Moreover,
the FCC retained cost of service rate-making methodologies for new services,
which may limit the benefits of incentive regulation. Under FCC price cap
regulation, the Telephone Companies may earn a return on equity up to
approximately 15%. Above that level, earnings are subject to equal sharing
with ratepayers, until they reach an effective cap on interstate return on
equity of approximately 18.7%.
In 1992, the Telephone Companies implemented a plan to unify their
interstate access rates. With unification of interstate rates, the Telephone
Companies report one unified interstate rate of return to the FCC, which will
be the basis for determining any possible refund obligations due to
overearnings as well as any need to increase interstate rates due to
underearnings under the price cap plan.
15
<PAGE>
In June 1994, the FCC completed a review of the performance of LECs
during the initial period of price cap regulation. The Telephone Companies
filed comments advocating price cap and access reform to keep pace with the
intensifying competitive environment. Among other things, the Telephone
Companies recommended increased pricing flexibility, elimination of sharing
and low end adjustment mechanisms, and reduction of the productivity factor.
An FCC decision is pending.
Revised tariffs under the price cap rules became effective in July 1991,
1992 and 1993 and reduced interstate access rates by approximately $68
million, $25 million and $90 million, respectively. On July 1, 1994, the
Telephone Companies implemented the fourth annual update to the price cap
rates, which will result in a net reduction in interstate access rates of
approximately $9.4 million by June 1995.
Tariff revisions were filed by the Telephone Companies with the FCC on
September 1, 1994 and amended on December 19, 1994, to amend price cap indexes
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 as
amended reflected $42 million of costs already accrued, increased annual costs
of $21 million and increased rates of $2.2 million. The filing follows a July
12, 1994 decision of the Court of Appeals overturning the FCC's prior order
denying exogenous treatment of additional OPEB costs. On December 29, 1994,
the FCC's Common Carrier Bureau (the "Bureau") issued an order allowing the
proposed rates to go into effect December 30, 1994, subject to an
investigation and accounting order. Commencing December 30, 1994, the
Telephone Companies began collecting these revenues, subject to possible
refund pending resolution of the Bureau's investigation.
On March 3, 1995, the FCC released Orders to Show Cause to each of the
LECs, including the Telephone Companies, resulting from an audit of the costs
that the LECs reported to the National Exchange Carrier Association ("NECA")
for Common Line Pooling purposes for 1988 and the first quarter of 1989. The
audit report cites each of the LECs for alleged violations of the FCC's
accounting rules and reporting errors which, as to the Telephone Companies,
were calculated to total $37.8 million in respect of all interstate costs for
the period. Some of the alledged errors would have the effect of understating
the Telephone Companies' revenue requirement; the net effect, therefore, is an
alleged revenue requirement overstatement of $19.8 million. That estimate is
considered preliminary, however, because the auditors did not have sufficient
information for several items to reach final conclusions.
The Order requires the Telephone Companies to show cause why the FCC
should not (1) issue a Notice of Apparent Liability for Forfeiture for
violations of the FCC's accounting rules; (2) require the Telephone Companies
to adjust their price cap indexes; and (3) require the Telephone Companies to
improve their internal processes to bring them into compliance. The Telephone
Companies must respond to the Order by May 2, 1995.
Following the FCC's adoption of physical collocation rules in September
1992 and 1993, the Telephone Companies filed Special Access Expanded
Interconnection tariffs in February 1993 and Switched Transport Expanded
16
<PAGE>
Interconnection tariffs in November 1993. Pursuant to provisions of the FCC
rules that permit additional pricing flexibility when physical collocation for
switched access reaches a threshold penetration level, on January 24, 1994,
New York Telephone filed volume and term discount tariffs, which became
effective May 24, 1994, for switched transport in certain areas of New York.
On June 10, 1994, the Court of Appeals overturned the FCC's physical
collocation rules. On July 25, 1994, the FCC adopted rules making physical
collocation optional but requiring virtual collocation where physical
collocation is not offered. The Telephone Companies decided to continue
offering physical collocation.
On December 15, 1993, the Telephone Companies filed a petition with the
FCC for a waiver to implement the Universal Service Preservation Plan ("USPP")
in order to compete more effectively with alternative providers of local
telephone service. The USPP would reduce the Switched Access rate for
multiline business users in zones of high traffic density by approximately 40
percent and would shift most of the revenues lost from this rate reduction to
flat, per-line charges applicable to all access lines. Overall annual access
revenues would be reduced by $25 million.
In August 1992, the FCC determined that the LECs may provide video
dialtone service, a common carrier platform for transporting and switching
video programming from programmers to subscribers, and that neither the LEC
providing video dialtone nor its programmer-customers require a local cable
franchise. In June 1993, the FCC granted New York Telephone's request for
permission to conduct a trial of video dialtone service in New York City. The
trial commenced in January 1994.
On October 20, 1994, the FCC announced that it had adopted a decision
responding to petitions for reconsideration of its 1992 order establishing the
rules and regulatory framework governing telephone company provision of video
dialtone. The FCC generally affirmed its rules for video dialtone, with some
qualifications and modifications. The FCC affirmed the common carrier nature
of the video dialtone platform, indicated that the video dialtone platform
will be subject to dual federal/state regulation, stated that cost allocation
issues will be resolved in the tariff process and relaxed in certain respects
its telephone company/cable non-ownership affiliation rules.
On February 7, 1995, the FCC adopted an order granting New England
Telephone authorization to begin construction of advanced video dialtone
network facilities in portions of Massachusetts and Rhode Island. The
facilities, which are planned to pass 334,000 households in Massachusetts and
63,000 households in Rhode Island, will be used to provide video dialtone
service as an alternative to cable service by early 1996.
--------------------------------------
The outcome of all refund matters, including those described above under
"Regulated Services", as well as the time frame within which each will be
resolved, is not presently determinable. As of December 31, 1994, the
aggregate amount of revenues that was estimated to be subject to possible
refund from all regulatory proceedings was approximately $288.0 million plus
related interest.
--------------------------------------
17
<PAGE>
Competition
-----------
NYNEX faces competition in each of the industry segments in which it
operates. In telecommunications, advances in technology, as well as
regulatory and court decisions, are expanding the types of communications
products and services available in the market, as well as the number of
alternatives to the telecommunications services provided by NYNEX. Various
business alliances and other undertakings were announced or consummated in the
telecommunications industry in 1994 which indicate an intensifying level of
competition, especially with respect to the operations of the Telephone
Companies. AT&T acquired, through a merger, McCaw Cellular Communications
Inc. ("McCaw"), which operates in a number of areas within NYNEX's region in
the Northeast. U S WEST Inc. ("U S WEST") holds a major interest in Time
Warner Entertainment Co. L.P., which includes Time Warner Cable and has
announced an agreement to acquire Cablevision Systems Corp. ("Cablevision").
Time Warner Cable has extensive operations in the Northeast, including New
York City, and has announced its plans to offer a full range of local access
telecommunications services to New York City businesses by mid-1995.
Cablevision, which operates in Boston, Long Island, and Westchester County,
plans to construct a fiber-optic network to deliver telecommunications and
video services. MCI Communications Corp. ("MCI") plans to spend $2 billion to
establish local fiber-optic networks in 20 major cities, including New York
and Boston, offering a way to bypass the local exchange carrier, including the
Telephone Companies, and connect directly to MCI's long-distance network. MCI
has acquired Digital Equipment Corporation's fiber-optic network in New
England. In certain markets in New York City and New England, the Telephone
Companies face significant competition from local access providers with
substantial resources, such as Teleport Communications Group, which is owned
by Tele-Communications Inc. ("TCI") and Cox Enterprises Inc. ("Cox"), two
major cable companies. The NYSPSC has authorized 28 companies to provide
competitive local exchange services in the state of New York. Three companies
have begun local exchange operations in direct competition with New York
Telephone, which has implemented interim interconnection agreements with local
exchange competitors. The Telephone Companies have allowed alternative
service providers to place transmission equipment in the Telephone Companies'
central offices, under an arrangement known as collocation. The Telephone
Companies also face increasing competition in Centrex services, long distance,
WATS, billing and collection services, pay telephones, and various other
services.
NYNEX Mobile faces competition in its provision of cellular services and
equipment, from both facilities-based cellular service competitors and
resellers in its two largest markets (New York City and Boston) as well as in
a number of other markets. There is also competition from non-cellular mobile
services in some markets.
Information Resources competes with various alternative directory
publishers in all areas where it offers published directories. Competitive
advertising media include newspapers, magazines, and broadcast. Information
Resources is also facing competition in its business development activities in
Asia.
18
<PAGE>
There is substantial competition in the Financial Services segment.
Banks, captive and independent financial institutions offer various commercial
financing products and services in direct competition with this segment.
NYNEX's Other Diversified Operations segment also faces substantial
competition. In pursuit of business opportunities outside the United States,
NYNEX Network Systems Company faces competition from other RHCs and United
States interexchange carriers, as well as from multi-national corporations and
local entities.
CableComms' business opportunity in the United Kingdom is a direct result
of Government policy to introduce competition to the dominant carrier. Just
as CableComms is providing a competitive service in the local loop, the
Government has also licensed alternative long distance operators and a growing
number of wireless providers. In entertainment services CableComms competes
with direct to home satellite, broadcast television and video cassette rental
and retail outlets. The dominant telecommunications carrier in the United
Kingdom has also announced an intention to offer a form of entertainment
service over its existing network.
NYNEX cannot predict the effect of such competition on its business, but
all categories of revenue could be affected.
NYNEX is implementing a major restructuring of its business (see
"Business Restructuring" above) and has entered into various strategic
alliances in order to meet this competition, including the agreement by NYNEX
and Bell Atlantic to combine their domestic cellular services properties (see
"Cellular" above).
On October 20, 1994, NYNEX, Bell Atlantic, AirTouch Communications Inc.
("AirTouch") and U S WEST announced definitive agreements to form 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 PCS licenses and will deploy PCS services. 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.
Parties competing against PCS Primeco in the FCC PCS auction included
AT&T/McCaw and Wireless Co., an alliance of Sprint Corp. and three major cable
companies, including TCI and Cox. On March 13, 1995, the FCC completed its
auction of 99 broadband PCS licenses for 51 major markets. PCS Primeco, which
bid a total of approximately $1.1 billion for licenses in eleven cities,
announced that it expects to begin offering PCS services within 18 months and
to complete a nationwide network in two years. PCS Primeco will receive
licenses for the following markets: Chicago, Dallas, Tampa, Houston, Miami,
New Orleans, Milwaukee, Richmond, San Antonio, Jacksonville and
19
<PAGE>
Honolulu. On March 20, 1995, PCS Primeco submitted a deposit of approximately
$167 million in accordance with FCC auction rules. The balance of PCS
Primeco's bid is due upon grant of the licenses, following final review of
bidder qualifications by the FCC.
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.
NYNEX is aggressively pursuing the enactment of changes to current
restrictions on providing certain communication, information, and
entertainment services over the network. NYNEX currently provides some of
these services overseas, such as cable television and telecommunications
services in the United Kingdom and advanced voice, data, video and cable
services in Thailand.
Research and Development
------------------------
Research and development is primarily conducted at NYNEX Science &
Technology, Inc.("Science & Technology"), which was formed in June 1991 to
continue the activities previously performed within a department of NYNEX.
Science & Technology provides NYNEX with technical direction and support that
is essential in developing new services, improving current services and
increasing operational efficiencies. It focuses on applied research and
development of advanced communications, information and network technologies.
Another NYNEX business unit, Telesector Resources, performs market research,
product development and field trials associated with new services NYNEX plans
to introduce. Bellcore conducts research and development in areas relating
primarily to exchange telecommunications and exchange access services.
Research and development costs charged to expense were approximately $159.7,
$162.8, and $131.7 million in 1994, 1993 and 1992 respectively.
Employee Relations
------------------
NYNEX and its subsidiaries had approximately 65,400 employees at December
31, 1994. Approximately 46,800 employees are represented by unions. Of those
so represented, approximately 68% are represented by the CWA and approximately
32% by the IBEW, both of which are affiliated with the AFL-CIO.
In 1994, collective bargaining agreements between NYNEX, the CWA and the
IBEW were extended until August 8, 1998. These agreements were scheduled to
20
<PAGE>
expire on August 5, 1995. Basic wages will increase approximately 14.5%,
including a 4.0% increase in August 1994, and a pension enhancement is
provided to encourage early retirement. Wages will increase 4.0%, 3.5% and
3.0% in August 1995, 1996 and 1997, respectively. There may be a cost-of-
living adjustment in 1997, and employees may receive added compensation for
meeting service standards (in March 1996, 1997 and 1998) and for enrollment
into a managed care network (in 1996 and 1997).
The effective date of their agreements and the initial wage increase for
CWA and the IBEW in New York was April 3, 1994.
The effective date of the agreement with the IBEW in New England was
August 5, 1994 and the initial wage increase was effective on August 7, 1994.
Item 2. PROPERTIES.
The properties of NYNEX and its subsidiaries do not lend themselves to
simple description by character and location of principal units.
At December 31, 1994, the gross book value of property, plant and
equipment was $35.5 billion, consisting principally of telephone plant and
equipment (84%). Other classifications include: land, land improvements and
buildings (9%); furniture and other equipment (4%); and plant under
construction and other (3%).
Substantially all of the Telephone Companies' central office equipment is
located in buildings owned by the Telephone Companies and is situated on land
that they own. Many administrative offices of NYNEX and the Telephone
Companies, as well as many garages and business offices of the Telephone
Companies, are in rented quarters.
Substantially all of New York Telephone's assets are subject to lien
under New York Telephone's Refunding Mortgage Bond indenture. At December 31,
1994, the principal amount of Refunding Mortgage Bonds outstanding was $1.10
billion.
As part of NYNEX's 1993 restructuring associated with re-engineering the
way service is delivered to customers, NYNEX intends to consolidate work
centers from approximately 300 to 50 by the end of 1996 to build larger work
teams in fewer locations.
Item 3. LEGAL PROCEEDINGS.
Contingent Liabilities Agreement
--------------------------------
The Plan of Reorganization, which was approved by the MFJ Court in August
1983 in connection with the AT&T divestiture, provides for the recognition and
payment of liabilities that are attributable to predivestiture events
(including transactions to implement divestiture), but that do not become
certain until after divestiture. These contingent liabilities relate
principally to predivestiture litigation and other claims against AT&T, its
affiliates and the LECs with respect to the environment,
21
<PAGE>
rates, taxes, contracts and torts (including business torts, such as alleged
violations of the antitrust laws).
With respect to such liabilities, AT&T and the LECs will share the costs
of any judgment or other determination of liability entered by a court or
administrative agency against any of them, whether or not a given entity is a
party to the proceeding and regardless of whether an entity is dismissed from
the proceeding by virtue of settlement or otherwise. Other costs to be shared
would include the costs of defending the claim (including attorneys' fees and
court costs) and the cost of interest or penalties with respect to any such
judgment or determination. With certain exceptions, responsibility for such
contingent liabilities will generally be divided among AT&T and the LECs on
the basis of their relative net investment as of the effective date of
divestiture. Under this general rule of allocation, the Telephone Companies
pay approximately 10.9% of any judgment or determination of liability.
In January 1995, NYNEX and the other RHCs agreed to terminate the sharing
arrangement among the LECs with respect to predivestiture contingent
liabilities for certain matters. AT&T did not enter into the agreement and,
accordingly, the sharing arrangement remains in effect with respect to AT&T's
predivestiture liabilities and with respect to AT&T's share of LEC
predivestiture liabilities.
Antitrust Actions
-----------------
In October 1990, North American Industries Inc. filed a third party
complaint against New York Telephone alleging, among other things, violations
of the federal antitrust laws relating to the provision of facilities for pay
telephone services. The case is pending in the United States District Court
for the Southern District of New York. In 1992, three similar suits were
filed in the same court, and one was filed against New England Telephone in
the United States District Court for the District of Massachusetts.
In May 1990, Discon Incorporated filed an action in the United States
District Court for the Western District of New York alleging, among other
things, violations of the Racketeer Influenced and Corrupt Organizations Act
("RICO") and the federal antitrust laws. The defendants include NYNEX, New
York Telephone, NYNEX Materiel Enterprises Company, and an officer and
director of NYNEX. Plaintiff's allegations relate to, among other things, the
removal of equipment from New York Telephone's central offices. In June 1992,
the District Court dismissed the original complaint in this case. Discon then
filed an amended complaint. A motion to dismiss is pending before the
District Court.
Other Litigation
----------------
In April 1990, Scott J. Rafferty filed a lawsuit against New York
Telephone, NYNEX Information Solutions Group, Inc. and various individuals,
including an officer and director of NYNEX. The lawsuit, filed in the United
States District Court for the Southern District of New York, alleged
violations of RICO and state common law relating to, among other things, the
22
<PAGE>
termination of Mr. Rafferty's employment with Telco Research Corporation,then
a subsidiary of NYNEX Information Solutions Group, Inc. In July 1991, the
Court issued an order dismissing some of the plaintiff's claims and staying
the remainder pending dismissal. In November 1993, the Court dismissed the
remainder of Mr. Rafferty's claims and issued a final judgment in favor of the
defendants. On February 15, 1995, the U. S. Court of Appeals for the Second
Circuit affirmed the dismissal.
In January 1990, Wegoland Ltd. and Howard Weiner filed an action in the
United States District Court for the Southern District of New York on behalf
of the telephone ratepayers of New York Telephone and New England Telephone
alleging violations of RICO and various state laws. A substantially identical
case was filed by Donna Roazen in March 1990. The defendants in these cases
were NYNEX, certain of its subsidiaries and certain present and former
officers of those companies. Plaintiffs alleged that the Telephone Companies
had been charged inflated prices in transactions with their affiliates and
that those prices were unlawfully reflected in the Telephone Companies'
regulated rates. In November 1992, the District Court granted defendants'
motions to dismiss these actions with prejudice. The U. S. Court of Appeals
for the Second Circuit affirmed the dismissal on May 20, 1994. No further
appeal was taken.
Fifty-four actions, of which approximately seven remain, were brought in
New York State Supreme Court, New York County, against New York Telephone,
Empire City Subway Company (Limited) and others arising out of a power failure
in a predominantly commercial section of New York City in August 1983. The
actions are predicated on broad and general claims of negligence in excavating
and/or installing underground equipment. Several of these cases involve
multiple plaintiffs.
------------------------------------------
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 or annual operating results
but could have a material effect on quarterly operating results.
--------------------------------------
On August 8, 1994, NYNEX and Bell Atlantic filed an antitrust lawsuit
against AT&T and McCaw seeking to enjoin the proposed merger of AT&T and
McCaw. The lawsuit, filed in the United States District Court for the Eastern
District of New York, alleged, among other things, that the merger would
violate provisions of the Clayton Act and would give AT&T the incentive to use
its power as a manufacturer to limit competition in the cellular industry. As
a result of a hearing on September 13, 1994 before the court, the merger was
permitted to close subject to certain conditions. On November 7, 1994, the
day before trial was scheduled to begin, the parties announced a settlement of
the suit. Terms of the settlement are confidential, but in general AT&T has
made several commitments to accelerate its pursuit of open interfaces in its
cellular network equipment.
23
<PAGE>
In November 1993, NYNEX and New England Telephone filed suit in the
United States District Court for the District of Maine seeking an order
declaring that section 533(b) of the Cable Communications Policy Act of 1984
is unconstitutional and permanently enjoining the United States from enforcing
section 533(b) against NYNEX. Section 533(b) prohibits NYNEX from providing
video programming to subscribers in areas where the Telephone Companies
provide service. On December 8, 1994, the court issued an opinion and order
declaring that section 533(b) is unconstitutional and stating that it will
enjoin the enforcement of section 533(b) against NYNEX and its subsidiaries
within the NYNEX service area. The Department of Justice has appealed.
24
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this Annual Report on Form 10-K.
--------------------------------------------------------------------------------
Executive Officers of the Registrant (as of March 1, 1995)
----------------------------------------------------------
For each of the executive officers of NYNEX, set forth below is the name, age,
position and date each person initially became an executive officer:
<TABLE>
<CAPTION>
Name Age Position Date
-------------------------- --- ------------------------------- --------------
<S> <C> <C> <C>
William C. Ferguson 64 Chairman of the Board January 1987
Ivan G. Seidenberg 48 President, Chief Executive
Officer, and Chairman Designate March 1986
Frederic V. Salerno 51 Vice Chairman-Finance and
Business Development March 1991
Raymond F. Burke 61 Executive Vice President-
Law and Secretary October 1983
Alan Z. Senter 53 Executive Vice President and
Chief Financial Officer September 1994
Morrison DeS. Webb 47 Executive Vice President and
General Counsel May 1994
Richard A. Jalkut 50 President and Group Executive-
NYNEX Telecommunications January 1995
Richard Blackburn 52 President and Group Executive-
NYNEX Worldwide Services January 1995
Donald B. Reed 50 President and Group Executive-
NYNEX External Affairs and
Corporate Communications January 1995
Arnold J. Eckelman 51 Executive Vice President and
Group Executive-Network Services February 1995
Robert T. Anderson 48 Vice President-Business
Development February 1995
Jeffrey A. Bowden 48 Vice President-Strategy &
Corporate Assurance September 1994
Peter M. Ciccone 52 Vice President and Comptroller June 1992
John M. Clarke 53 Vice President-Law May 1994
Saul Fisher 51 Vice President-Law March 1993
Patrick F. X. Mulhearn 43 Vice President-Public Relations January 1994
Donald J. Sacco 53 Vice President-Human Resources May 1990
Thomas J. Tauke 44 Vice President-Government
Affairs September 1991
Colson P. Turner 52 Vice President and Treasurer July 1991
</TABLE>
Prior to their election as executive officers of NYNEX, all of such
officers except Mr. Senter, Mr. Bowden and Mr. Tauke had held, for at least the
past five years, high level managerial positions with NYNEX or a subsidiary of
NYNEX. Officers are not elected for a fixed term of office, but serve at the
discretion of the Board of Directors.
25
<PAGE>
Alan Z. Senter was elected Executive Vice President and Chief Financial
Officer of NYNEX effective September 1, 1994. Mr. Senter came to NYNEX from
GAF/ISP Corporation where he held the position of Executive Vice President and
Chief Financial Officer and was a member of the Board of Directors from 1992
to 1993. Prior thereto, he held the following positions at Xerox: Vice
President-Finance from 1990 to 1992; Vice President-Treasurer from 1985 to
1990; Assistant Controller-Strategic Planning from 1982 to 1985; and Vice
President-Finance for U.S. Operations in 1980 and for Latin American
Operations in 1978.
Jeffrey A. Bowden was elected Vice President-Strategy & Corporate
Assurance for NYNEX, effective September 1, 1994. Prior to joining NYNEX, Mr.
Bowden held the position of Vice President and Director at The Boston
Consulting Group from 1988 to 1994, where he founded and directed the
telecommunications practice. He served as director of Arthur D. Little's
telecommunications practice from 1986 to 1988. From 1980 to 1986 he served as
a telecommunications consultant for Booz, Allen and Hamilton and he was the
founding member of its Technology Management Services practice.
Thomas J. Tauke was elected Vice President-Government Affairs of NYNEX,
effective September 1, 1991. Prior to joining NYNEX, he was founder and
senior partner of Tauke, Walgren and Associates, a public policy consulting
firm specializing in telecommunications, health, environmental and energy
issues. Mr. Tauke was also president and chief executive officer of Home
Technology Systems, Inc., a small business specializing in personal emergency
systems. From January 1979 to January 1991, Mr. Tauke represented Iowa's
Second Congressional District in the United States House of Representatives.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Information with respect to quarterly dividends and Common Stock prices
appearing on page 48 of the Registrant's 1994 Annual Report to Stockholders;
information with respect to Common Stock exchange listings appearing on the
back cover of such Annual Report under the caption "Stock Exchange Listings";
and information with respect to the number of stockholders of record of Common
Stock appearing on page 32 of such Annual Report are incorporated herein by
reference.
During 1994, NYNEX issued approximately 8.6 million shares of Common
Stock for the NYNEX Share Owner Dividend Reinvestment and Stock Purchase Plan
("DRISPP"), the NYNEX Corporation Savings Plan for Salaried Employees and the
NYNEX Corporation Savings and Security Plan (Non-Salaried Employees) ("Savings
Plans"), and other stock incentive programs. For the NYNEX 1992 Management
Stock Option Plan and the NYNEX 1992 Non-Management Stock Option Plan, NYNEX
has repurchased and placed in treasury stock approximately one million shares
of Common Stock. NYNEX continues to buy stock as needed for the continuous
exercise of the stock options. Upon exercise of the stock options, these
repurchased shares will be released into the open market.
26
<PAGE>
On March 16, 1995, the Board of Directors of NYNEX announced a quarterly
cash dividend of $.59 per share of Common Stock, which was unchanged from the
previous quarter. The dividend is payable on May 1, 1995, to stockholders of
record at the close of business on March 31, 1995.
Item 6. SELECTED FINANCIAL DATA.
Selected financial data for the five years ended December 31, 1994,
appearing on page 28 of the Registrant's 1994 Annual Report to Stockholders,
is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results
of Operations, appearing on pages 10 through 27 of the Registrant's 1994
Annual Report to Stockholders, is incorporated herein by reference.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Registrant and its wholly-
owned subsidiaries, appearing on page 28 and pages 30 through 48 of the
Registrant's 1994 Annual Report to Stockholders, are incorporated herein by
reference and are listed in Item 14 below.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During 1994 and 1993, NYNEX did not change its auditors.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Item 11. EXECUTIVE COMPENSATION.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information regarding Executive Officers of the Registrant required by
Item 401 of Regulation S-K is included in Part I of this Annual Report on Form
10-K following Item 4.
Other information required under Items 10, 11, and 12 is included in the
Registrant's Proxy Statement dated March 20, 1995, on pages 2 (commencing
under the caption "Stock Ownership of Directors and Executive Officers")
through 5, and pages 14 (commencing under the caption "Committee on Benefits
Report on Executive Compensation") through the top of page 20. Such
information is incorporated herein by reference.
27
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There existed no relationship and there were no transactions reportable
under Item 13.
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K.
(a) Documents filed as part of this Annual Report on Form 10-K.
----------------------------------------------------------
(1) Consolidated Financial Statements. The following report and
---------------------------------
consolidated financial statements, included in the Registrant's 1994
Annual Report to Stockholders, are incorporated herein by reference
in response to Item 8:
<TABLE>
<CAPTION>
Page(s)
in Registrant's
1994 Annual Report
to Stockholders
<S> <C>
Report of Independent Accountants............... 28
Consolidated Statements of Income for each
of the Three Years in the Period Ended
December 31, 1994.............................. 30
Consolidated Balance Sheets as of
December 31, 1994 and 1993..................... 31
Consolidated Statements of Changes in
Stockholders' Equity for each of the Three
Years in the Period Ended December 31, 1994 ... 32
Consolidated Statements of Cash Flows for each
of the Three Years in the Period Ended
December 31, 1994.............................. 33
Notes to Consolidated Financial Statements...... 34 - 47
Supplementary Information
Quarterly Financial Data (Unaudited)........... 48
</TABLE>
(2) Consolidated Financial Statement Schedule. The following
-----------------------------------------
consolidated financial statement schedule of the Registrant is
included herein in response to Item 14:
<TABLE>
<CAPTION>
Page(s) in this
Annual Report on
Form 10-K
----------------
<S> <C>
Report of Independent Accountants............... 34
II - Valuation and Qualifying Accounts 35
</TABLE>
Consolidated financial statement schedules other than that listed
above have been omitted because the required information is
28
<PAGE>
contained in the consolidated financial statements and notes thereto
or because such schedules are not required or applicable.
(3) Exhibits. Exhibits on file with the Securities and Exchange
--------
Commission (the "SEC"), as identified in parentheses below, are
incorporated herein by reference as exhibits hereto.
Exhibit
Number
-------
(3)a Restated Certificate of Incorporation of NYNEX Corporation
dated May 6, 1987 (Exhibit No. (3)a to the Registrant's filing
on Form SE dated March 24, 1988, File No. 1-8608).
(3)b By-Laws of NYNEX Corporation dated October 12, 1983, as
amended October 17, 1991 (Exhibit No. (3)b to the Registrant's
filing on Form 10-Q dated October 31, 1991, File No. 1-8608).
(4) No instrument which defines the rights of holders of long-term
debt of NYNEX and its subsidiaries is filed herewith pursuant
to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, NYNEX hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
(10)(ii)1 Preferred Stock Purchase Agreement between NYNEX Corporation
and Viacom Inc., dated October 4, 1993, and amendment thereto
dated November 19, 1993. (Exhibit 10(ii)(2) to the
Registrant's 1993 Annual Report on Form 10-K, File
No. 1-8608).
(10)(ii)2 Joint Venture Formation Agreement dated as of June 29, 1994
between NYNEX and Bell Atlantic (Exhibit 10 to the
Registrant's June 30, 1994 Form 10-Q, File No. 1-8608).
(10)(ii)3 Agreement of Limited Partnership of Tomcom, L.P., dated as of
October 20, 1994, by and between WMC Partners, L.P. (a
Delaware limited partnership wholly owned by AirTouch
Communications and U S WEST, Inc.) and Cellco Partnership (a
Delaware general partnership wholly owned by affiliates of
NYNEX Corporation and Bell Atlantic Corporation).
(10)(ii)4 Agreement of Limited Partnership of PCS Primeco, L.P., dated
as of October 20, 1994, by and between PCS Nucleus, L.P. (a
Delaware limited partnership wholly owned by AirTouch
Communications and U S WEST, Inc.) and PCSCO Partnership (a
Delaware general partnership wholly owned by affiliates of
NYNEX Corporation and Bell Atlantic Corporation).
(10)(iii)1 NYNEX Senior Management Short Term Incentive Plan (Exhibit No.
10-aa to Registration Statement No. 2-87850).
(10)(iii)2 NYNEX Senior Management Long Term Disability and Survivor
Protection Plan (Exhibit No. 10-dd to Registration Statement
No. 2-87850).
(10)(iii)3 NYNEX Senior Management Transfer Program (Exhibit No. 10-ee to
Registration Statement No. 2-87850).
29
<PAGE>
Exhibit
Number
-------
(10)(iii)4 Description of NYNEX Financial Counseling Service for Senior
Managers (Exhibit No. 10-ff to Registration Statement No.
2-87850).
(10)(iii)5 NYNEX Corporation Deferred Compensation Plan for Non-Employee
Directors (Exhibit No. 10-gg to Registration Statement No. 2-
87850).
(10)(iii)6 Description of NYNEX Insurance Plan for Directors (Exhibit No.
10-hh to Registration Statement No. 2-87850).
(10)(iii)7 Description of NYNEX Plan for Non-Employee Directors' Travel
Accident Insurance (Exhibit No. 10-ii to Registration
Statement No. 2-87850).
(10)(iii)8 NYNEX Senior Management Incentive Award Deferral Plan (Exhibit
No. 10-kk to Registration Statement No. 2-87850).
(10)(iii)9 Description of NYNEX Mid-Career Hire Program (Exhibit No. 10-
ll to Registration Statement No. 2-87850).
(10)(iii)10 NYNEX Mid-Career Pension Program (Exhibit No. 10-mm to
Registration Statement No. 2-87850).
(10)(iii)11 NYNEX Estate Planning Legal Services Program (Exhibit No. 10-
nn to Registration Statement No. 2-87850).
(10)(iii)12 NYNEX 1984 Stock Option Plan, as amended and restated. (Post-
Effective Amendment No. 1 to Registration No. 2-97813, dated
September 21, 1987).
(10)(iii)13 NYNEX Senior Management Long Term Incentive Plan (Exhibit No.
(19)(ii)1 to the Registrant's 1984 Annual Report on Form 10-K,
File No. 1-8608).
(a) Description of certain amendments to the NYNEX Senior
Management Long Term Incentive Plan (Exhibit No. (19)(ii)4 to
the Registrant's Filing on Form SE dated March 27, 1987, File
No. 1-8608).
(10)(iii)14 NYNEX Senior Management Non-Qualified Pension Plan (Exhibit
No. (19)(ii)2 to the Registrant's 1984 Annual Report on Form
10-K, File No. 1-8608).
(a) Description of certain amendments to the NYNEX Senior
Management Non-Qualified Pension Plan (Exhibit No. (19)(ii)6
to the Registrant's Filing on Form SE dated March 27, 1987,
File No. 1-8608).
(b) Description of certain amendments to the NYNEX Non-
Qualified Pension Plan (Exhibit No. (19)(ii)7 to the
Registrant's Filing on Form SE dated March 27, 1987, File No.
1-8608).
30
<PAGE>
Exhibit
Number
-------
(c) Description of certain amendments to the NYNEX Senior
Management Non-Qualified Pension Plan (Exhibit No. (19)(ii)1
to the Registrant's 1987 Annual Report on Form 10-K, File No.
1-8608).
(d) Description of certain amendments to the NYNEX Senior
Management Non-Qualified Pension Plan (Exhibit No. (19)(ii)l
to the Registrant's 1991 Annual Report on Form 10-K, File No.
1-8608).
(10)(iii)15 Description of NYNEX Corporation Non-Employee Director Pension
Plan (Exhibit No. (28)(i)1 to Amendment No. 1 to the
Registrant's 1987 Annual Report on Form 10-K, File No.
1-8608).
(10)(iii)16 NYNEX Senior Management Non-Qualified Supplemental Savings
Plan (Exhibit No. (10)(iii)(A)(18) to the Registrant's 1988
Annual Report on Form 10-K, File No. 1-8608).
(10)(iii)17 NYNEX 1987 Restricted Stock Award Plan (Exhibit No. (28)(i)1
to the Registrant's Filing on Form SE dated March 23, 1988,
File No. 1-8608).
(10)(iii)18 NYNEX 1990 Long Term Incentive Program (Exhibit No. 1 to the
Registrant's Proxy Statement dated March 26, 1990, File No. 1-
8608).
(10)(iii)19 NYNEX 1990 Stock Option Plan (Exhibit No. 2 to the
Registrant's Proxy Statement dated March 26, 1990, File No. 1-
8608).
(10)(iii)20 NYNEX Stock Plan for Non-Employee Directors (Exhibit No.
(10)(iii)(A)22 to the Registrant's 1990 Annual Report on Form
10-K, File No. 1-8608).
(10)(iii)21 Description of the NYNEX Supplemental Life Insurance Plan
(Exhibit No. (19)(i)2 to the Registrant's filing on Form SE,
dated March 23, 1993, File No. 1-8608).
(10)(iii)22 Description of certain amendments to the NYNEX Senior
Management Long Term Incentive Plan (Exhibit No. (19)(ii)1 to
the Registrant's filing on Form SE, dated March 23, 1993, File
No. 1-8608).
(10)(iii)23 Description of certain amendments to the NYNEX Senior
Management Non-Qualified Pension Plan (Exhibit No. (19)(ii)2
to the Registrant's filing on Form SE, dated March 23, 1993,
File No. 1-8608).
(10)(iii)24 NYNEX Executive Retention Agreement (Exhibit No. (10)(ii)(A)24
to the Registrant's 1993 Annual Report on Form 10-K, File No.
1-8608).
(10)(iii)25 NYNEX Executive Severance Pay Plan (Exhibit No. (10)(ii)(A)25
to the Registrant's 1993 Annual Report on Form 10-K, File No.
1-8608).
31
<PAGE>
Exhibit
Number
-------
(10)(iii)26 NYNEX 1995 Long Term Incentive Program (Exhibit No. 1 to the
Registrant's Proxy Statement dated March 21, 1994, File No. 1-
8608).
(10)(iii)27 NYNEX 1995 Stock Option Plan (Exhibit No. 2 to the
Registrant's Proxy Statement dated March 21, 1994, File No. 1-
8608).
(10)(iii)28 NYNEX Executive Retention and Employment Agreement.
(10)(iii)29 NYNEX 1990 Stock Option Plan as amended (Exhibit No. 2 to the
Registrant's Proxy Statement dated March 20, 1995, File No. 1-
8608).
(10)(iii)30 NYNEX 1995 Stock Option Plan as amended (Exhibit No. 1 to the
Registrant's Proxy Statement dated March 20, 1995, File No. 1-
8608).
(10)(iii)31 NYNEX 1995 Long Term Incentive Program as amended (Exhibit No.
3 to the Registrant's Proxy Statement dated March 20, 1995,
File No. 1-8608).
(10)(iii)32 NYNEX Executive Officer Short Term Incentive Plan (Exhibit No.
4 to the Registrant's Proxy Statement dated March 20, 1995,
File No. 1-8608).
(11) Computation of Earnings Per Share.
(13) NYNEX 1994 Annual Report to Stockholders.
(21) Subsidiaries of NYNEX.
(23) Consent of Independent Accountants.
(24) Powers of attorney.
(b) Reports on Form 8-K.
-------------------
The Company's Current Report on Form 8-K, date of report September 26,
1994 and filed October 4, 1994, reporting on Item 5.
The Company's Current Report on Form 8-K, date of report October 20, 1994
and filed October 28, 1994, reporting on Item 5.
The Company's Current Report on Form 8-K, date of report December 8, 1994
and filed December 22, 1994, reporting on Item 5.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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
By P. M. Ciccone
-------------------------------
P. M. Ciccone
Vice President and Comptroller
March 24, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer:
I. G. Seidenberg* President and Chief Executive Officer
Principal Financial Officer:
A. Z. Senter* Executive Vice President
and Chief Financial Officer
Principal Accounting Officer:
P. M. Ciccone Vice President and Comptroller
Directors:
John Brademas*
Randolph W. Bromery*
Richard L. Carrion*
John J. Creedon*
William C. Ferguson*
Stanley P. Goldstein*
Helene L. Kaplan*
Elizabeth T. Kennan* *By P. M. Ciccone
Edward E. Phillips* -----------------------------------
Frederic V. Salerno* (P. M. Ciccone, as attorney-in-fact
Ivan Seidenberg* and on his own behalf as
Walter V. Shipley* Principal Accounting Officer)
John R. Stafford* March 24, 1995
33
<PAGE>
REPORT of INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of NYNEX Corporation
and its subsidiaries has been incorporated by reference in this Annual Report
on Form 10-K from page 28 of the 1994 Annual Report of NYNEX Corporation. In
connection with our audits of such consolidated financial statements, we have
also audited the related consolidated financial statement schedule listed in
the index on page 28 of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein. This information should be read
in conjunction with the last paragraph of our report on page 28 of the 1994
Annual Report of NYNEX Corporation.
Coopers & Lybrand L.L.P.
New York, New York
February 8, 1995
34
<PAGE>
NYNEX CORPORATION
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In millions)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------ ---------------------- ---------- ----------
ADDITIONS
----------------------
(1) (2)
Charged to Charged to
Balance at Costs and Other Balance at
Description Beginning of Expenses Accounts Deductions End of
Period Period
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTIBLES
Year 1994........................ $ 204.7 $ 178.9 $200.0 (a) $356.9 (b) $ 226.7
Year 1993........................ $ 190.3 $ 144.0 $134.0 (a) $263.6 (b) $ 204.7
Year 1992........................ $ 169.9 $ 139.4 $164.8 (a) $283.8 (b) $ 190.3
RESTRUCTURING
Year 1994........................ $1,522.5 $--- $--- $674.6 $ 847.9
Year 1993........................ $ 274.0 $1,570.1 $ 31.0 (c) $352.6 $1,522.5
Year 1992........................ $ 697.3 $--- $--- $423.3 $ 274.0
VALUATION ALLOWANCE FOR DEFERRED
TAX ASSETS
Year 1994........................ $ 113.9 $--- $--- $ 71.7 $ 42.2
Year 1993........................ $ --- $ 113.9 $--- $--- $ 113.9
</TABLE>
----------------
(a) Includes amounts to establish a reserve for purchased accounts receivables.
(b) Amounts written-off as uncollectible. Amounts previously written-off are
credited directly to this account when recovered.
(c) Amounts charged to other income.
35
<PAGE>
EXHIBIT 10(ii)3
________________________________________
TOMCOM, L.P.
AGREEMENT OF
LIMITED PARTNERSHIP
DATED AS OF OCTOBER 20, 1994
BETWEEN
CELLCO PARTNERSHIP
AND
WMC PARTNERS, L.P.
________________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
(Not part of the Agreement)
<TABLE>
<CAPTION>
Section Page
-------
<C> <S> <C>
ARTICLE 1 GENERAL PROVISIONS......................... 1
1.1. Formation of the Partnership............... 1
1.2. Name....................................... 1
1.3. Principal Place of Business................ 1
1.4. Registered Office; Agent for Service of
Process.................................... 2
1.5. Business of the Partnership................ 2
1.6. Term of the Partnership.................... 4
1.7. Qualification in Other Jurisdictions....... 4
1.8. Definitions................................ 4
ARTICLE 2 MANAGEMENT................................. 12
2.1. Partnership Committee...................... 12
2.2. Partnership Committee Meetings............. 13
2.3. Voting..................................... 15
2.4. No Compensation............................ 17
2.5. Acts by Partners........................... 17
2.6. Procedures in the Event of a Dispute....... 17
2.7. Management................................. 18
2.8. Business Plan.............................. 18
2.9. Access to Books of Account................. 19
2.10. Confidential Information................... 19
2.11. Duty of Partners to Cooperate.............. 21
2.12. Insurance and Risk Management.............. 21
2.13. Agreements with Partnership................ 21
2.14. Relationship with International Affiliates. 21
ARTICLE 3 JOINT VENTURE PROJECTS/DEVELOPMENT AND
EXECUTION.................................. 21
3.1. General.................................... 21
3.2. Project Development Teams.................. 22
3.3. Approval of Initial Project Plans.......... 22
3.4. Approval of Revised Project Plans.......... 23
3.5. Project Management......................... 23
3.6. Use of Partner Resources................... 23
ARTICLE 4 CAPITAL CONTRIBUTIONS, WITHDRAWALS AND CAPITAL
ACCOUNTS................................... 23
4.1. Capital Accounts........................... 23
4.2. Initial Contributions of Capital........... 25
4.3. Additional Contributions by Partners....... 25
4.4. Partner Obligations........................ 27
4.5. Withdrawals of Capital Accounts............ 27
4.6. Interest on Capital Accounts............... 27
4.7. Revaluation of Partnership Assets.......... 28
4.8. Redetermination of Percentage Interests.... 28
4.9. Determination of Fair Market Value......... 28
</TABLE>
- i -
<PAGE>
<TABLE>
<CAPTION>
Section Page
-------
<S> <C> <C>
ARTICLE 5 ALLOCATIONS AND DISTRIBUTIONS............. 31
5.1. Profits and Losses........................ 31
5.2. Distributions............................. 34
ARTICLE 6 TAX MATTERS AND REPORTS; ACCOUNTING....... 35
6.1. Filing of Tax Returns..................... 35
6.2. Tax Matters Partner....................... 35
6.3. Tax Reports to Current and Former Partners 36
6.4. Accounting Records; Independent Audit..... 36
6.5. Fiscal Year............................... 36
6.6. Tax Accounting Method..................... 36
6.7. Withholding............................... 36
6.8. Tax Elections............................. 36
6.9. Prior Tax Information..................... 37
ARTICLE 7 INDEMNIFICATION AND EXCULPATION; CERTAIN
AGREEMENTS................................ 37
7.1. Indemnification of the Partners........... 37
7.2. Exculpation............................... 38
7.3. Restrictions on Partners.................. 38
7.4. Outside Activities........................ 39
7.5. Elimination of Conflicts.................. 43
7.6. Duties of Partners........................ 44
ARTICLE 8 TERMINATION AND DISSOLUTION............... 45
8.1. Events of Dissolution..................... 45
8.2. Bankruptcy of a General Partner........... 45
8.3. Order of Dissolution...................... 46
8.4. Orderly Winding Up........................ 47
8.5. Dissolution Election...................... 47
8.6. Obligation to Restore Deficit Balance..... 49
8.7. Termination of Partnership................ 49
ARTICLE 9 ADMISSION OF ADDITIONAL PARTNERS.......... 49
9.1. Admission Procedures...................... 49
ARTICLE 10 TRANSFER OR ENCUMBRANCE OF INTEREST....... 49
10.1. Restriction on Transfer or Encumbrance.... 49
10.2. Permitted Transfers....................... 49
10.3. Invalid Transfers Void.................... 50
10.4. Change in Ownership....................... 50
ARTICLE 11 REGULATORY MATTERS........................ 51
11.1. MFJ Compliance............................ 51
ARTICLE 12 ENHANCED RESALE AGREEMENTS................ 54
12.1. Agreement on Form......................... 54
ARTICLE 13 MISCELLANEOUS............................. 54
13.1. Notices................................... 54
13.2. Governing Law, etc........................ 56
13.3. Amendments................................ 57
13.4. Entire Agreement.......................... 57
13.5. Waiver of Partition....................... 57
</TABLE>
- ii -
<PAGE>
<TABLE>
<CAPTION>
Section Page
-------
<S> <C> <C>
13.6. Consents.................................. 57
13.7. Successors................................ 57
13.8. Counterparts.............................. 57
13.9. Severability.............................. 57
13.10. Survival.................................. 57
13.11. Arbitration............................... 58
13.12. No Third Party Beneficiaries.............. 58
</TABLE>
- iii -
<PAGE>
TOMCOM, L.P.
AGREEMENT OF
LIMITED PARTNERSHIP
-------------------
THIS AGREEMENT OF LIMITED PARTNERSHIP of TOMCOM, L.P. (the "Partnership")
is entered into and effective as of October 20, 1994, by and between WMC
Partners, L.P., a Delaware limited partnership ("WMC"), and Cellco Partnership,
a Delaware general partnership ("Cellco"), each of which shall be both a general
partner and a limited partner as set forth herein (collectively, the
"Partners").
WHEREAS it is becoming increasingly important to increase the scale and
scope of wireless services offered in increasingly competitive wireless markets
and, in furtherance of increasing the scale and scope of their respective
businesses, Cellco and WMC wish to become partners in the Partnership (as
hereinafter defined); and
WHEREAS, the Partners wish to develop PCS, cellular and other
technologically innovative wireless services that provide standardized features
that are easy for customers to use; and
WHEREAS, the Partners wish to offer customers seamless service across local
geographic boundaries;
NOW, THEREFORE, in consideration of the promises, mutual covenants and
agreements herein contained and in order to set forth the respective rights,
obligations and interests of the Partners to one another and to the Partnership,
the Partners hereby agree as follows:
ARTICLE 1
GENERAL PROVISIONS
1.1. Formation of the Partnership. The Partners agree and hereby form the
----------------------------
Partnership as a limited partnership, pursuant to the Delaware Revised Uniform
Limited Partnership Act, as it may be amended from time to time (the "Act"), and
this Agreement. Except as provided in this Agreement, the rights, duties,
liabilities and obligations of the Partners and the administration, dissolution,
winding up and termination of the Partnership shall be governed by the Act.
1.2. Name. The name of the Partnership shall be: Tomco, L.P. The name
----
of the Partnership may be changed by the Partnership Committee.
1.3. Principal Place of Business. The principal place of business of the
---------------------------
Partnership shall be at such place within or outside the State of Delaware as
the Partnership Committee may determine from time to time.
<PAGE>
1.4. Registered Office; Agent for Service of Process. The address of the
-----------------------------------------------
Partnership's registered office in the State of Delaware is c/o The Corporation
Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801. The agent for service of process at such address
for the Partnership in the State of Delaware is The Corporation Trust Company.
Agents for service of process of the Partnership may be changed by the
Partnership Committee.
1.5. Business of the Partnership.
---------------------------
(a) The purpose of the Partnership (the "Partnership Business") is:
(i) To set national technical and service standards for the Systems
of the Partners and their respective Affiliates, with a goal of
providing seamless Services on a national basis;
(ii) To either adopt or create a nationally competitive brand under
which to market on a national basis the Services provided by the
Partners and their respective Affiliates;
(iii) To establish nationwide roaming and resale agreements among the
Systems of the Partners and their respective Affiliates;
(iv) To improve the research and development capabilities of the
Partners through cooperative or centralized projects;
(v) To coordinate and centralize the management of marketing of
Services to National Accounts; and
(vi) To coordinate and/or centralize and integrate certain functions
relating to Systems to achieve economies and efficiencies of
scale and scope. These functions may include, without
limitation:
(A) national advertising, national marketing, and national brand
management and licensing;
(B) adoption and evolution of common technology platforms;
(C) coordination of product and service research and
development;
(D) roaming and billing clearinghouse management;
(E) common advanced intelligent network feature development;
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<PAGE>
(F) coordination of information systems for purposes of
consolidated billing, consistent management of customer
service, and management of the interconnection of local and
regional networks to form a seamless national network;
(G) joint purchasing of subscriber equipment and network and
other infrastructure;
(H) coordination of national distribution networks; and
(I) consolidation of account servicing and customer care for
National Accounts.
The Partnership may engage in any business other than the Partnership Business
as the Partnership Committee may determine.
(b) Subject to the terms of this Agreement, the Partnership may enter into,
deliver and perform all contracts, agreements and other undertakings and engage
in all activities and transactions as may be necessary or appropriate to carry
out the foregoing purposes. Without limiting the foregoing, the Partnership
may, subject to the terms of this Agreement:
(i) enter into license agreements, service contracts or other
contractual relationships with WMC or Cellco;
(ii) borrow or raise money and secure the payment of any obligations
of the Partnership by mortgage upon, or pledge or hypothecation of, all or
any part of the assets of the Partnership;
(iii) engage personnel, whether part-time or full-time, to do such
acts as are necessary or advisable in connection with the maintenance,
operation and administration of the Partnership (avoiding redundancies with
the staff and operations of WMC and Cellco); and
(iv) engage attorneys, independent accountants, investment bankers,
consultants or such other Persons as are necessary or advisable.
(c) Notwithstanding the foregoing, the Partnership will not engage in any
act that would put the Partnership, or any Partner, in violation of the MFJ.
Specifically, the Partnership will not engage in any activity that would
constitute the provision of interexchange (interLATA) telecommunications
service, the provision of telecommunications equipment, or the manufacture of a
telecommunications product (all as defined by the MFJ, the Decree Court, or
both), unless any such activity has been the subject of a waiver or other
legislative or court
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<PAGE>
relief, or the MFJ otherwise ceases to apply to the activities of the
Partnership.
1.6. Term of the Partnership. The term of the Partnership shall commence
-----------------------
on the date the Certificate of Limited Partnership of the Partnership is filed
in the office of the Secretary of State of the State of Delaware, and shall
continue through the 99th anniversary thereof, unless earlier dissolved as
provided in Section 8.1. The existence of the Partnership as a separate legal
entity shall continue until the cancellation of the Partnership's Certificate of
Limited Partnership.
1.7. Qualification in Other Jurisdictions. The General Partners shall
------------------------------------
cause the Partnership to be qualified, formed, or registered under assumed or
fictitious name statutes or similar laws in any jurisdiction in which the
Partnership owns property or engages in activities if such qualification,
formation or registration is necessary to permit the Partnership lawfully to own
property and engage in the Partnership's business or transact business. The
General Partners shall execute, file and publish all such certificates, notices,
statements or other instruments necessary to permit the Partnership to engage in
the Partnership's business as a limited partnership in all jurisdictions where
the Partnership elects to engage in or do business.
1.8. Definitions. (a) For purposes of this Agreement the following terms
-----------
have the following meanings (unless indicated otherwise, all Article and Section
references are to Articles and Sections in this Agreement, and all Schedule
references are to Schedules to this Agreement):
"Additional Partner" means any additional Person admitted to the
------------------
Partnership pursuant to Article 9.
"Adjusted Capital Contributions" means, for each Partner, the cumulative
------------------------------
amount of such Partner's contributions to the Partnership which for purposes of
this definition shall be equal to the sum of (i) the amount of cash (other than
Organizational Expenses paid or accrued by such Partner and other than amounts
contributed to the Partnership by WMC pursuant to Section 7.5 hereof) and the
Fair Market Value of any other property (net of liabilities secured by such
property that the Partnership is considered to take subject to or assume under
Section 752 of the Code), plus (ii) the cumulative amount of Adjusted
----
Revaluation Gain, and less (iii) the cumulative amount of Adjusted Revaluation
Loss
"Adjusted Revaluation Gain" or "Adjusted Revaluation Loss" means,
------------------------- -------------------------
respectively, the Revaluation Gain or Revaluation Loss, as the case may be, with
respect to an asset being revalued which would have arisen had the basis used in
computing Revaluation Gain or Revaluation Loss been equal to the Capital Account
book basis of such asset immediately following the later of its contribution or
acquisition or any immediately preceding revaluation under Section 4.7 hereof.
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<PAGE>
"Affiliate" means a Person that directly, or indirectly through one or more
---------
intermediaries, controls, is controlled by or is under common control with the
Person specified; provided, however, that (i) the Partnership shall not be
-------- -------
deemed to be an Affiliate of Cellco or WMC or any of their respective
Affiliates, (ii) any wireline cable television company in which a Partner and
its Affiliates do not have an aggregate ownership interest in excess of 50%
shall not be considered an Affiliate of such Partner or any of its Affiliates,
and (iii) Cellular Communications, Inc., a Delaware corporation ("CCI"), shall
not be considered an Affiliate of ATI until such time, if ever, as ATI shall be
entitled to exercise full discretion with respect to voting the shares of common
stock of CCI beneficially owned by ATI (other than shares of common stock of CCI
beneficially owned by ATI by virtue of its ownership of the Class A Preference
Stock of CCI). For purposes of this definition, the term "control" (including
the terms "controlling," "controlled by" and "under common control with") of a
Person means the possession, direct or indirect, of the power to (i) vote in
excess of 50% of the Voting Stock of such Person, or (ii) direct or cause the
direction of the management and policies of such Person, whether by contract or
otherwise. Notwithstanding the preceding sentence, the parties agree that,
solely for purposes of this Agreement, Affiliates of Cellco shall specifically
include BAC and NYN and their respective Affiliates, and Affiliates of WMC shall
specifically include ATI and USW and their respective Affiliates.
Notwithstanding the foregoing, Upstate Cellular Network shall not be deemed an
Affiliate of Cellco and CMT Partners or New Par shall not be deemed an Affiliate
of WMC, so long as Cellco or WMC, respectively, together with their respective
Affiliates own an equity interest of not more than 50% in Upstate Cellular
Network or CMT Partners or New Par, respectively, and have no greater management
authority with respect thereto than they had on the date of this Agreement.
"Agreement" means this Agreement of Limited Partnership of the Partnership,
---------
as it may be amended, supplemented or restated from time to time.
"Appraiser" means any of the First Appraiser, the Second Appraiser and the
---------
Third Appraiser as defined in Section 4.9 hereof.
"Appraiser's Certificate" means a certificate prepared by an Appraiser,
-----------------------
executed on behalf of an Appraiser by a duly authorized officer thereof, and
setting forth such Appraiser's opinion as to the Fair Market Value of an asset.
"ATI" means AirTouch Communications, a California corporation.
---
"Attributed Entity" means, with respect to any Partner, any Person whose
-----------------
ownership of Systems (or licenses or permits therefor) would be attributable, in
whole or in part, to such
- 5 -
<PAGE>
Partner under applicable FCC regulations.
"BAC" means Bell Atlantic Corporation, a Delaware corporation.
---
"Bankruptcy" of a Partner means (i) the filing by such Partner of a
----------
voluntary petition seeking liquidation, reorganization, arrangement or
readjustment, in any form, of its debts under Title 11 of the United States Code
(or corresponding provisions of future laws) or any other bankruptcy or
insolvency law, or such Partner's filing an answer consenting to or acquiescing
in any such petition, (ii) the making by such Partner of any assignment for the
benefit of its creditors or the admission by such Partner in writing of its
inability to pay its debts as they mature or (iii) the expiration of 60 days
after the filing of an involuntary petition under Title 11 of the United States
Code (or corresponding provisions of future laws), an application for the
appointment of a receiver for the assets of such Partner, or an involuntary
petition seeking liquidation, reorganization, arrangements, composition,
dissolution or readjustment of its debts or similar relief under any bankruptcy
or insolvency law; provided that the same shall not have been vacated, set aside
--------
or stayed within such 60-day period.
"Bankruptcy Code" means the United States Bankruptcy Code of 1978, as
---------------
amended.
"Business Plan" means a multi-year business plan for the Partnership based
-------------
on a compilation of the Project Plans, as it may be amended from time to time in
accordance with the terms of this Agreement, which shall include (i) an annual
operating budget for each year contemplated in the business plan presenting
separately the budget for each Project as well as a budget for all non-Project
costs; (ii) an aggregate multi-year financial plan for the Partnership including
the Partnership's capital structure; and (iii) a general description of the key
underlying assumptions (including the scope) and key strategies for each
Project.
"Capital Account" means the capital account maintained by the Partnership
---------------
for each Partner as described in Section 4.1.
"Capital Contribution Percentage" means for each Partner, the sum of the
-------------------------------
initial General Partner and Limited Partner Percentage Interests of such Partner
as set forth on Schedule 1.
"CECO" means the Civil Enforcement Consent Order entered by the Decree
----
Court on February 2, 1989.
"CECO Decree Committee" means the committee created by USW pursuant to the
---------------------
CECO for the review of USW's business activities.
"Cellco" means Cellco Partnership, a Delaware general partnership, or any
------
successor thereto.
- 6 -
<PAGE>
"Cellular Service" means the provision of any commercial mobile radio
----------------
service by a Cellular System, including the resale of such service.
"Cellular System" means a radio communications system authorized under the
---------------
rules for the domestic public cellular radio telecommunications service
designated as Subpart K of Part 22 of the FCC's rules in effect on the Effective
Date, or any revision thereto or successor thereof which may be in effect from
time to time, including the network, marketing, distribution, sales, customer
interface and operations functions relating thereto.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Confidential Information" means all confidential documents and information
------------------------
(including, without limitation, confidential commercial information and
information with respect to customers and proprietary technologies or processes
and the design and development of new products or services) concerning the
Partnership, WMC, Cellco, the Partners or their Affiliates furnished to a
Partner in connection with the transactions leading up to and contemplated by
this Agreement and the operation of the Partnership, WMC, Cellco, or Systems in
which the Partners or their respective Affiliates have an ownership interest or
their respective businesses, except to the extent that such information can be
shown to have been (a) generally available to the public other than as a result
of a breach of the provisions of Section 2.10 of this Agreement; (b) already in
the possession of the receiving Person or its Representatives (as such term is
defined in Section 2.10 hereof) without restriction and prior to any disclosure
in connection with the Partnership or pursuant to any of the terms of this
Agreement; (c) lawfully disclosed to the receiving Person or its Representatives
by a third party who is free lawfully to disclose the same; or (d) independently
developed by the receiving Person without use of any Confidential Information
obtained in connection with the transactions leading up to and contemplated by
this Agreement and the operation of the Partnership, WMC, Cellco, their
respective Affiliates or their respective businesses.
"Decree Court" means the court having original jurisdiction over MFJ
------------
waivers.
"Effective Date" means October 20, 1994.
--------------
"Enhanced Resale Agreement" means an agreement relating to the resale of
-------------------------
Services, in the form approved by the Partnership pursuant to Section 12.1 and
incorporating the terms set forth in Schedule 12.1.
"EO" means the Enforcement Order entered by the Decree Court on February
--
15, 1991.
- 7 -
<PAGE>
"ESMR Service" means the provision of any commercial mobile radio service
------------
by an ESMR System, including the resale of such service.
"ESMR System" means a radio communications system authorized under the
-----------
rules for Enhanced Specialized Mobile Radio services designated under Subpart S
of Part 90 of the FCC's rules in effect on the Effective Date, or any revision
or successor thereof which may be in effect from time to time, including the
network, marketing, distribution, sales, customer interface and operations
functions relating thereto.
"Fair Market Value" means, with respect to any asset, as of the date of
-----------------
determination, the cash price at which a willing seller would sell, and a
willing buyer would buy, each being apprised of all relevant facts and neither
acting under compulsion, such asset in an arm's-length negotiated transaction
with an unaffiliated third party without time constraints.
"FCC" means the Federal Communications Commission or any successor agency
---
or entity performing substantially the same functions.
"GAAP" means generally accepted accounting principles.
----
"General Partner" means each of Cellco and WMC, for as long as each remains
---------------
a General Partner in accordance with the provisions hereof, and includes any
Person who becomes an Additional General Partner of the Partnership or a
Substitute General Partner of the Partnership pursuant to the provisions of this
Agreement.
"General Partner Percentage Interest" means, with respect to any Partner,
-----------------------------------
the Percentage Interest of such Partner as a General Partner of the Partnership.
The initial General Partner Percentage Interest of each Partner is set forth on
Schedule 1.
"Intellectual Property" means all patents, patent applications, trademarks,
---------------------
trademark applications, trade secrets, service marks, trade names, copyrights,
inventions, customer lists, proprietary information, licenses and other rights
to use computer software and software programs, and any other rights with
respect thereto.
"Limited Partner" means each of Cellco and WMC, and includes any Person
---------------
admitted as an Additional Limited Partner of the Partnership or a Substitute
Limited Partner of the Partnership pursuant to the provisions of this Agreement.
"Limited Partner Percentage Interest" means, with respect to any Partner,
-----------------------------------
the Percentage Interest of such Partner as a limited partner of the Partnership.
The initial Limited Partner Percentage Interest of each Partner is set forth on
Schedule 1.
"MFJ" means the Modification of Final Judgment entered in United States v.
--- ----------------
AT&T, 552 F. Supp. 131 (D.D.C. 1982), and as
----
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<PAGE>
subsequently modified from time to time, or any legislative scheme embodying
substantially similar restrictions.
"MFJ Compliance Committee" means the committee created by USW pursuant to
------------------------
the EO for the review of USW's business practices.
"MFJ Restricted Activity" means an activity or business the undertaking of
-----------------------
which by the Partnership would cause the Partnership, or any Partner, to be in
violation of the MFJ.
"National Account" means any commercial customer requiring activations of
----------------
Services (other than roaming) in markets in which Services are provided by any
two of (i) WMC or its Affiliates, (ii) Cellco or its Affiliates and (iii) PCS
JV; or as otherwise agreed to jointly by the Partners.
"Net Operating Available Cash" means at the time of determination, (a) all
----------------------------
cash and cash equivalents on hand in the Partnership, less (b) the Forecast Cash
----
Requirements, if any, of the Partnership, as determined by the Partnership
Committee in a manner consistent with an Approved Business Plan. For purposes
of this definition, "Forecast Cash Requirements" means, for the twelve-month
--------------------------
period following the date of determination, the excess, if any, of (a) forecast
capital expenditures, capital contributions to other entities and other
investments, acquisitions, cash income tax payments and debt service (including
principal and interest) requirements and other non-cash credits to income, plus
----
forecast cash reserves for future operations or other requirements, over (b)
----
forecast net income of the Partnership, plus the sum of forecast depreciation,
----
amortization, interest expenses, income tax expenses and other non-cash charges
to income, in each case to the extent deducted in determining such net income,
plus or minus forecast changes in working capital, plus the forecast cash
---- ----- ----
proceeds of dispositions of assets (net of expenses), plus an amount equal to
----
the forecast net proceeds of debt financings.
"NYN" means NYNEX Corporation, a Delaware corporation.
---
"Organizational Expenses" shall mean organizational expenses as defined
-----------------------
under Section 709 of the Code.
"Partner" means WMC or Cellco and any Additional or Substitute General
-------
Partner or Limited Partner of the Partnership. WMC and Cellco shall be admitted
as Partners of the Partnership on the date hereof. A Person who is not admitted
on the date hereof as a partner of the Partnership shall be admitted as a
Partner upon satisfaction of the requirements of Section 9.1 of this Agreement
upon execution by or on behalf of such Person of this Agreement or a counterpart
hereof.
"Partner Parent" means (i) with respect to Cellco, BAC and NYN and (ii)
--------------
with respect to WMC, ATI and USW, and their respective successors and assigns,
whether by means of merger,
- 9 -
<PAGE>
spinoff or otherwise.
"Partnership Interest" means, for each Partner separately, all of the
--------------------
Partner's interest in, and rights and obligations in connection with, the
Partnership whether as a General Partner or Limited Partner.
"PCS" means those commercial mobile radio services offered by a PCS System.
---
"PCS JV" means PCS Primeco, L.P., a Delaware limited partnership, and any
------
successor thereto.
"PCS JV Agreement" means the Agreement of Limited Partnership of PCS
----------------
Primeco, L.P., of even date herewith, between PCS Nucleus, L.P. and PCSCO
Partnership.
"PCS Service" means the provision of any commercial mobile radio service by
-----------
a PCS System, including the resale of such service.
"PCS System" means a radio communications system authorized under the rules
----------
for broadband personal communications services designated as Subpart E of Part
24 of the FCC's rules in effect on the Effective Date, or any revision thereto
or successor thereof which may be in effect from time to time, including the
network, marketing, distribution, sales, customer interface and operations
functions relating thereto.
"Percentage Interest" means, for each Partner, the quotient obtained by
-------------------
dividing (i) such Partner's Adjusted Capital Contributions by (ii) the aggregate
Adjusted Capital Contributions of all Partners, as adjusted from time to time
pursuant to Section 4.8 hereof. The initial General Partner and Limited Partner
Percentage Interests of each Partner are set forth on Schedule 1.
"Person" means any individual, corporation, partnership, firm, joint
------
venture, association, joint-stock company, trust, estate, unincorporated
organization, governmental or regulatory body or other entity.
"Prime Rate" means the rate quoted, from time to time, by the Wall Street
----------
Journal as the prime rate.
"Project" means an undertaking of the Partnership with respect to which a
-------
Project Plan has been approved by the Partnership Committee in accordance with
Section 2.3.
"Project Plan" means a work plan with respect to a Project which will
------------
include (i) a definition of the scope and duration of the Project, (ii) an
operational structure for the Project, (iii) an annual budget and multi-year
financial forecast over the Project's duration for the Project (including an
identification of Partnership and other resources required for the execution and
performance of the Project), (iv) a schedule
- 10 -
<PAGE>
for the Project (including a timeline and due dates); (v) a list of objectives
and deliverables for the Project; (vi) a Senior Manager and a Project Manager
for the Project; and (vii) the expected financial or strategic benefits (and the
means by which these benefits will be measured) from the Project and the key
assumptions and key strategies utilized in developing the Project Plan.
"Revaluation Gain" means the amount of gain which would have been realized
----------------
had there been a disposition of any Partnership asset being revalued under
Section 4.7 for an amount of cash equal to such asset's then Fair Market Value,
determined in accordance with the provisions of Section 4.9 hereof.
"Revaluation Loss" means the amount of loss which would have been realized
----------------
had there been a disposition of any Partnership asset being revalued under
Section 4.7 for an amount of cash equal to such asset's then Fair Market Value,
determined in accordance with the provisions of Section 4.9 hereof.
"Services" means Cellular Service, ESMR Service and PCS Service.
--------
"Substitute Partner" means any Person admitted to the Partnership pursuant
------------------
to Article 10.
"System" means a Cellular System, an ESMR System or a PCS System.
------
"Tax Matters Partner" means the Tax Matters Partner of the Partnership as
-------------------
referred to in Section 6.2.
"Taxes" means all taxes, charges, fees, levies or other assessments imposed
-----
by any taxing authority, including, but not limited to, income, gross receipts,
excise, property, sales, use, transfer, payroll, license, ad valorem, value
added, withholding, social security, national insurance (or other similar
contributions or payments), franchise, estimated, severance and stamp taxes
(including any interest, fines, penalties or additions attributable to, or
imposed on or with respect to, any such taxes, charges, fees, levies or other
assessments) and "Tax Return" means any return, report, information return or
----------
other document (including any related or supporting information) with respect to
Taxes.
"USW" means U S WEST, Inc., a Colorado corporation.
---
"Voting Stock" means capital stock issued by a corporation, or comparable
------------
interests in any other Person, the holders of which are ordinarily entitled to
vote for the election of directors (or Persons performing similar functions) of
such Person.
"Wholly Owned Affiliate" means, as to any Person, an Affiliate all of the
----------------------
equity interests of which are owned, directly or indirectly, by a Partner, by
another Wholly Owned
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<PAGE>
Affiliate, or by one or both of the Partner Parents thereof.
"WMC" means WMC Partners, L.P., a Delaware limited partnership, or any
---
successor thereto.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Act 1.1
Affiliate Transferee 10.2(a)
Approved Business Plan 2.8(a)
Indemnified Party 7.1
Initial Project Plan 3.2
LEC Affiliates 2.3(e)
Member 2.1(a)
Partnership Business 1.5(a)
Partnership Committee 2.1(a)
Project Development Team 3.2
Project Manager 3.2
Related Party Agreement 2.13
Replacement Pool 2.1(a)
Senior Manager 2.7
</TABLE>
ARTICLE 2
MANAGEMENT
2.1. Partnership Committee.
---------------------
(a) The partnership committee of the Partnership (the "Partnership
Committee") shall be composed of three individuals appointed by each General
Partner (collectively the "Members" and individually a "Member"), or such lesser
number of Members as may be determined by a vote of the Members representing
each General Partner; provided that any Affiliate Transferee shall not be
--------
entitled separately to designate Members unless it acquires the entire General
Partner interest of the transferor. The Members shall appoint one additional
individual (the "Independent Member") to serve on the Partnership Committee as
set forth in subsection (b) below.
(b) (i) Within 60 days after the Effective Date, each General Partner
shall nominate two individuals to serve as the initial Independent Member. If
the General Partners are unable to agree on the appointment of an Independent
Member from among the four nominees within 15 days after the nomination of such
individuals, the selection of the initial Independent Member shall be determined
in accordance with Section 2.6.
(ii) The Independent Member will serve for an initial term to be
mutually agreed upon by the General Partners, not to exceed three years. Any
subsequent term of an Independent Member shall be mutually agreed upon by the
General Partners,
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<PAGE>
but shall not exceed three years. The General Partners will agree on five
individuals (the "Replacement Pool"), one of whom would replace the Independent
Member (A) upon expiration of his term (unless the Independent Member is
reappointed for another term), (B) his death or resignation, or (C) his removal
by unanimous vote of the General Partners. In any such event, the General
Partners will select an individual from the Replacement Pool to replace the
incumbent Independent Member. If the General Partners are unable to agree on a
replacement, the Independent Member will name his replacement from one of the
five individuals. If the General Partners are unable to agree and if the
Independent Member is unable to name his replacement or has been removed, each
of the General Partners will eliminate two of the five individuals from the
Replacement Pool, with the remaining individual becoming the Independent Member.
If an individual in the Replacement Pool is selected to become the Independent
Member, or dies, resigns, is removed from the Replacement Pool by unanimous vote
of the Representative Partners or otherwise becomes incapable of serving as an
Independent Member, the General Partners will agree on an individual to replace
such individual in the Replacement Pool. If the Partners are unable to agree on
a replacement, the individuals in the Replacement Pool will name such
replacement.
(c) Effective upon the giving of notice thereof to the other Partners,
any General Partner may, at any time, in its sole discretion, replace any or all
of its appointed Members with other individuals and may designate one or more
alternates for any or all of its Members. Each Member shall serve on the
Partnership Committee until his successor is appointed, or until his earlier
death, resignation or removal. Each Member shall be an officer or employee or
former employee of a Partner or an Affiliate thereof. Effective upon a General
Partner ceasing to be a general partner of the Partnership, the Members
representing such General Partner on the Partnership Committee shall cease to be
Members.
(d) Except as otherwise required by the Act, no vote or approval by
any Limited Partner shall be required under this Agreement for the taking of an
action, including without limitation the amendment of this Agreement, and the
Percentage Interest of any Limited Partner who is not also a General Partner
shall not be included in any calculation of a Partner's Percentage Interest
entitled to vote on any matter.
(e) The Partnership Committee shall cause the Partnership to fulfill
the Partnership's obligations under this Agreement, and to enforce all rights of
the Partnership under this Agreement.
2.2. Partnership Committee Meetings.
------------------------------
(a) The Partnership Committee shall hold regular meetings (at least
quarterly) at such time and place as shall be determined by the Partnership
Committee (or by the Chairman of the Partnership Committee). Special meetings of
the Partnership
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<PAGE>
Committee may be called at any time by any General Partner by delivering a
notice of meeting in accordance with Section 2.2(g) hereof. Each General Partner
shall be limited to calling two special meetings per year.
(b) The initial Chairman of the Partnership Committee shall be
appointed by the Partnership Committee within 90 days after the Effective Date
and shall serve until November 15, 1996. The successor Chairmen shall be
appointed by one of the General Partners, subject to the approval of the other
General Partner (which approval shall not be unreasonably withheld), with the
right to make such appointment alternating between the General Partners every
two years. The first successor Chairman shall be appointed by the General
Partner who was not represented by the initial Chairman. The Chairman shall be
subject to removal by the Partnership Committee. The Chairman shall establish
the agendas for, and regulate the proceedings of, meetings of the Partnership
Committee, but must include on such agendas matters requested by any General
Partner in writing received at least five business days in advance of any
meeting.
(c) Members may participate in a meeting of the Partnership Committee
by conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation shall constitute presence in person at such meeting.
(d) Any action required or permitted to be taken at any meeting of the
Partnership Committee may be taken without a meeting upon the unanimous written
consent of the Members representing each General Partner.
(e) The Partnership Committee shall appoint a Secretary from time to
time. The Secretary shall keep written minutes of all Partnership Committee
meetings. A duplicate copy of such minutes shall be provided to the Chairman of
the Partnership Committee and to each Member.
(f) A Member shall have the right to designate an alternate to attend
meetings of the Partnership Committee, in stead and in place of such Member, and
to exercise all of the functions of such Member. Any such alternate shall be an
officer or employee or former employee of a Partner or an Affiliate thereof.
Any such alternate shall be deemed to be a Member for all purposes hereunder
until such designation is revoked.
(g) Notice of each regular meeting and each special meeting of the
Partnership Committee shall be given to each Member at least five business days
before such meeting. Notices of special meetings shall contain a description,
in reasonable detail, of the items of business to be conducted at such meeting
and no business other than those items (unless expressly agreed to by Members
representing each of the General Partners whose Members are entitled to vote
thereon) may be conducted at such
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<PAGE>
special meeting. The notice provisions of this Section 2.2(g) shall be waived
upon either the signing of a written waiver thereof or attendance at a meeting
by Members representing each General Partner.
2.3. Voting.
------
(a) On any matter on which a vote of the Partnership Committee is
taken, the Members representing a General Partner, if more than one Member has
been designated and is present at a meeting, shall vote the entire Percentage
Interest of such Partner (whether as a general partner or a limited partner of
the Partnership) as a single bloc. Any action that may be taken by the
Partnership Committee shall require the affirmative vote of Members representing
each of the General Partners entitled to vote thereon; provided that in the
--------
event that all Members representing any General Partner shall abstain from the
vote on any matter (because of a conflict of interest or for any other reason),
the outcome of such vote shall be determined by the affirmative vote of Members
representing the other General Partners entitled to vote on such matter, and
such vote shall constitute the act of the Partnership Committee with respect to
such matter. A quorum of any meeting of the Partnership Committee shall require
the presence of at least one Member representing each General Partner entitled
to vote thereon.
(b) The Independent Member, if one has been appointed pursuant to
Section 2.1, shall be entitled to attend all meetings of the Partnership
Committee and shall receive all information regarding the Partnership made
available to the Partnership Committee, but shall be entitled to vote only as
contemplated by Section 2.6. The Independent Member shall not be deemed to
represent any General Partner.
(c) Except as otherwise expressly provided herein, without the prior
approval of the Partnership Committee, the Partnership shall take no action with
respect to the following matters:
(i) any amendment of this Agreement;
(ii) a determination to engage in any business other than the
Partnership Business as described in Section 1.5;
(iii) the admission of any Additional General and Limited Partners to
the Partnership;
(iv) the dissolution or liquidation of the Partnership;
(v) a merger or consolidation of the Partnership with or into another
Person, or the sale of all or substantially all of the Partnership's
assets;
(vi) the authorization of an Initial Project Plan to be prepared and
proposed by a Project Development Team with respect to a defined field of
activity;
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<PAGE>
(vii) the approval of an Initial Project Plan;
(viii) the approval of any amendment or revision to a Project Plan,
other than any such amendment or revision described in clause (ix);
(ix) the approval of any amendment or revision to a Project Plan that
would result in either: (A) an increase in budgeted expenditures for the
current fiscal year which would exceed 115% of the budgeted expenditures
for such fiscal year in the last Project Plan (or amendment or revision
thereto) which had been approved by the affirmative vote of Members
representing each General Partner or (B) a material change in the scope or
duration of the Project.
(x) the approval of Business Plans and material amendments or
revisions to any Business Plan;
(xi) a determination to require additional capital contributions
within any fiscal year; provided that capital contributions specifically
--------
identified in an Approved Business Plan shall not require a further vote of
the Partnership Committee pursuant to this clause (xi);
(xii) the entering into of any Related Party Agreement;
(xiii) the authorization of the incurrence by the Partnership of
indebtedness for borrowed money not otherwise specifically identified in an
Approved Business Plan;
(xiv) the authorization of any acquisition or disposition of assets
(not otherwise specifically identified in an Approved Business Plan) having
a Fair Market Value in excess of $250,000;
(xv) the appointment and removal of the Executive Manager;
(xvi) the delegation of powers and authority of the Partnership
Committee to the Executive Manager; and
(xvii) any distribution to the Partners of Partnership assets, other
than Net Operating Available Cash, not otherwise contemplated in an
Approved Business Plan.
Each Partner, by execution of this Agreement, agrees to, consents to, and
acknowledges the delegation of powers and authority to the Members of the
Partnership Committee, and to the actions and decisions of such Members within
the scope of such Members' authority as provided herein.
(d) The Partnership Committee shall receive such reports and information
from the Executive Manager as are usually provided to the board of directors of
a publicly held Delaware
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<PAGE>
corporation.
(e)(i) Each Partner agrees that no Member designated by such Partner shall
participate in decisions regarding the existing or planned wireless
communications operations of a local exchange carrier Affiliate of a Partner
Parent (a "LEC Affiliate"), whether through the furnishing of advice or
information or otherwise, it being understood that certain Members designated by
a Partner may have ultimate responsibility for those who participate in such
decisions (and that such Members shall not be deemed to have participated in
such decision solely by virtue of having such ultimate responsibility).
(ii) Without limitation of the obligations of the Partners under Section
2.10, neither a Partner nor any Member appointed by a Partner shall provide to
any LEC Affiliate operating data or financial or other information with respect
to the Partnership's existing or planned operations in the local exchange
markets of such LEC Affiliate.
2.4. No Compensation. No Member (other than the Independent Member) shall
---------------
be compensated for his services as a member of the Partnership Committee from
the assets of the Partnership, nor shall such Member be reimbursed by the
Partnership for out-of-pocket expenses incurred in connection therewith. The
Independent Member shall be entitled to such compensation and reimbursement of
out-of-pocket expenses as may be determined from time to time by the Partnership
Committee.
2.5. Acts by Partners. Other than actions of the Tax Matters Partner
----------------
pursuant to Article 6 hereof, no Partner shall take, or commit the Partnership
to take, any action, either in its own name in respect of the Partnership or in
the name of the Partnership, without the prior approval of the Partnership
Committee.
2.6. Procedures in the Event of a Dispute. In cases where the Members are
------------------------------------
unable to reach agreement on the matters specified in Section 2.3(c) above (or
the selection from time to time of an Independent Member or individuals in the
Replacement Pool), the matter shall be resolved as follows:
(a) Each General Partner shall first refer the matter to the chief
executive officer of that partner of the General Partner designated by such
General Partner for resolution of the matter.
(b) If such officers, after a good faith effort, are unable to resolve the
dispute, they shall (at the instance of either of them, but in no event later
than 20 days after the matter has been referred to them) refer the matter to the
Chairman of the Partner Parent of such partner for resolution of the matter.
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<PAGE>
(c) Should the designated Chairmen of the respective Partner Parents fail
to resolve the matter within 40 days, the matter shall be considered defeated,
except as provided in (d) below.
(d) If the Chairmen by unanimous agreement are unable to resolve a disputed
matter within 40 days after the referral to them of a dispute (or such longer
period of time as to which the Chairmen unanimously agree in writing), the
dispute shall be (i) in the case of matters specified in Section 2.3(c)(viii) or
(c)(x), resolved by the vote of the Independent Member or (ii) in the case of
matters specified in Section 2.3(c)(xv), referred to the Boards of Directors of
such Chairman's Partner Parent for resolution by unanimous agreement.
2.7. Management.
----------
(a) The Executive Manager of the Partnership shall have authority and
discretion comparable to that of a chief executive officer of a publicly held
Delaware corporation of similar size to direct and control the business and
affairs of the Partnership, including its day-to-day operations, but only in a
manner consistent with the Approved Business Plan. The Executive Manager may,
but need not be, an employee (who may be seconded to the Partnership from
Cellco, WMC or the Partner Parents) of Cellco or WMC or the Partner Parents.
Each Partner, by execution of this Agreement, agrees to, consents to, and
acknowledges the delegation of powers and authority to the Executive Manager
hereunder and to the actions and decisions of the Executive Manager within the
scope of such authority. The General Partners shall unanimously designate the
initial Executive Manager on or before December 31, 1994.
(b) The other officers of the Partnership shall consist of: a Manager-
Marketing, a Manager-Finance, a Manager-Technical and a Manager-Information
Technology (the "Senior Managers"). The Senior Managers shall be appointed by,
and subject to removal by, the Executive Manager. The Executive Manager shall
select individuals to serve as Senior Managers from among candidates nominated
by the General Partners. At all times, two candidates nominated by each General
Partner shall serve as Senior Managers of the Partnership.
2.8. Business Plan. The Executive Manager shall submit to the Partnership
-------------
Committee a Business Plan for the Partnership, not less frequently than
annually, at least 60 days prior to the start of the first fiscal year covered
by such Business Plan. Each such Business Plan shall be considered at the first
meeting of the Partnership Committee following its submission and shall be
subject to the approval of the Partnership Committee. Any such Business Plan (or
any amendment thereto) which is approved by the Partnership Committee shall be
considered approved for all purposes of this Agreement until amended or replaced
(an "Approved Business Plan").
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<PAGE>
2.9. Access to Books of Account. Notwithstanding any other provision of
--------------------------
this Agreement, each Partner shall have the right at all reasonable times during
usual business hours to audit, examine, and make copies or extracts of or from
the complete books of account of the Partnership, including but not limited to
the books and records maintained in accordance with Section 6.4 and all other
books and records of the Partnership. Such right may be exercised through any
agent or employee of such Partner designated by it or by independent certified
public accountants or counsel designated by such Partner. Each Partner shall
bear all expenses incurred in any examination made for such Partner's account.
2.10. Confidential Information.
------------------------
(a) The Partnership and each Partner shall, and each Partner shall cause
each of its Affiliates, and its and their respective partners, shareholders,
directors, officers, employees and agents (collectively, "Representatives") to,
keep secret and retain in strictest confidence, except as provided in subsection
(c) hereof, any and all Confidential Information and shall not distribute,
disseminate or disclose such Confidential Information, and shall cause its
Representatives not to distribute, disseminate or disclose such Confidential
Information, except to (i) the Partnership, (ii) if in connection with a
corporate transaction (including, without limitation, any debt or equity
financing, any merger, consolidation, acquisition or disposition of assets, or
formation of any joint venture, partnership or affiliation) relating to the
Partnership or any Partner Parent or Affiliate thereof, any other Person that
agrees in writing to keep in confidence such Confidential Information in
accordance with the terms of this Section 2.10, or (iii) any Partner, or any
Affiliate thereof or other Representatives on a "need to know" basis in
connection with the transactions leading up to and contemplated by this
Agreement and the operation of the Partnership, and such Partner or the
Partnership disclosing Confidential Information pursuant to this Section 2.10
shall use, and shall cause its Affiliates and other Representatives to use, such
Confidential Information only for the benefit of the Partnership in conducting
the Partnership Business or for any other specific purposes referred to above
for which it was disclosed to such party; provided that the disclosure of
--------
financial statements of, or other information relating to, the Partnership shall
not be deemed to be the disclosure of Confidential Information (i) to the extent
that any Partner is required by law or GAAP to disclose such financial
statements or other information or (ii) to the extent that in order to sustain a
position taken for tax purposes, any Partner deems it necessary and appropriate
to disclose such financial statements or other information to any governmental
agency or authority. All Confidential Information disclosed in connection with
the Partnership or pursuant to this Agreement shall remain the property of the
Person whose property it was prior to such disclosure.
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<PAGE>
(b) No Confidential Information regarding the plans or operations of any
Partner, a Partner Parent or any Affiliate thereof received or acquired by or
disclosed to any unaffiliated Partner or Affiliate thereof in the course of the
conduct of Partnership Business, or otherwise as a result of the existence of
the Partnership, may be used by such unaffiliated Partner or Affiliate thereof
for any purpose other than for the benefit of the Partnership in conducting the
Partnership Business. The Partnership and each Partner shall have the
affirmative obligation to take all necessary steps to prevent the disclosure to
any Partner or Affiliate thereof of information regarding the plans or
operations of such Partner and its Affiliates in markets and areas in which any
other Partner and the unaffiliated Partner and their respective Affiliates
compete in the provision of telecommunications services.
(c) In the event that a Partner or anyone to whom a Partner transmits any
Confidential Information becomes legally compelled (by oral questions,
interrogatories, requests for information or documents, subpoena, investigative
demand or similar process) to disclose any of the Confidential Information, such
Partner will use its best efforts to provide the other Partners and the
Partnership with prompt written notice prior to disclosure (not less than 24
hours) so that the other Partners and the Partnership may seek a protective
order or other appropriate remedy and/or waive compliance with the provisions of
this Agreement. In the event that such protective order or other remedy is not
obtained, or that the Partnership and the other Partners waive compliance with
the provisions of this Section 2.10, the Partner or Person who is compelled to
disclose such Confidential Information will furnish only that portion of the
Confidential Information which (based on the advice of counsel) it is legally
required to disclose and will exercise its best efforts to obtain reliable
assurance that protective treatment will be accorded the Confidential
Information.
(d) Each Partner who ceases to be such will, and will cause its Affiliates
and representatives to, maintain the confidentiality required by this Section
2.10 and immediately to destroy or return upon request, all documents and other
materials, and all copies thereof, obtained by such Partner or on its behalf
from the Partnership or the other Partners or any of their Affiliates in
connection with the transactions leading up to and contemplated by this
Agreement and the operation of the Partnership that are subject to such
confidentiality obligations. The obligations under this Section 2.10 shall
survive the termination of the Partnership for a period of five years.
(e) To the fullest extent permitted by law, if a Partner or any of its
Affiliates or Representatives breaches, or threatens to commit a breach of, this
Section 2.10, the other Partners and the Partnership shall have the right and
remedy to have this Section 2.10 specifically enforced pursuant to the
provisions of the Arbitration Agreement referred to in Section
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<PAGE>
13.11, it being acknowledged and agreed that money damages will not provide an
adequate remedy to such other Partners or the Partnership. Nothing in this
Section 2.10 shall be construed to limit the right of any Partner or the
Partnership to collect money damages in the event of breach of this Section
2.10.
2.11. Duty of Partners to Cooperate. Each Partner will, to the extent
-----------------------------
permitted by applicable law and consistent with this Agreement, furnish such
information, execute such applications and similar documents as are required by
governmental authorities, and take such other action reasonably requested by the
Partnership Committee and as may be necessary or reasonably desirable in
connection with the business of the Partnership.
2.12. Insurance and Risk Management. The property and casualty insurance
-----------------------------
program for the Partnership shall be integrated into the insurance program of a
Partner or Partner Parent providing customary business insurance coverage as of
the Effective Date. Each Partner hereby consents and agrees that the
Partnership shall compensate that Partner or Partner Parent for a proportional
allocation to the Partnership for insurance premiums, casualty loss funding
pools, and related expenses.
2.13. Agreements with Partnership. Any Partner or any Affiliate thereof
---------------------------
may enter into and maintain in effect any contract, agreement, transaction or
relationship between such Partner or Affiliate and the Partnership (a "Related
Party Agreement") on terms and conditions approved by the Partnership Committee
(by vote of Members representing Partners other than any Partner interested in
such Related Party Agreement) or otherwise pursuant to the terms hereof and may
derive and retain profits therefrom.
2.14. Relationship with International Affiliates. Intellectual property
------------------------------------------
(other than trade names or trademarks developed by the Partnership) shall be
made available on an arm's length basis to Affiliates of the Partners having
international operations.
ARTICLE 3
JOINT VENTURE PROJECTS/DEVELOPMENT AND EXECUTION
3.1. General. Each Partner and each Affiliate thereof (other than a LEC
-------
Affiliate or a wireline cable television company Affiliate) shall use reasonable
efforts, subject to fiduciary duties, to cause (other than through LEC
Affiliates or wireline cable television company Affiliates) each System in
which it, directly or indirectly has an ownership interest to be operated in a
manner consistent with the approved Projects. The Partners recognize that the
timing of initiation and execution of Projects, in certain circumstances, will
be subject to the elimination of certain conflicts by Cellco (as contemplated by
Section 7.5) and other contractual or regulatory limitations.
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<PAGE>
3.2. Project Development Teams.
-------------------------
(a) The Partnership Committee shall establish four Project Development
Teams (having the responsibilities set forth on Schedule 3.2(a)) to develop,
when authorized by action of the Partnership Committee pursuant to Section
2.3(c)(vi), Project Plan proposals ("Initial Project Plans") in their respective
areas of expertise--Marketing, Technical, Operations (Information Technology)
and Finance. Initial Project Plans shall be intended to create common standards
and to create scale and scope efficiencies through the coordination of the
Systems of the Partners and their Affiliates.
(b)(i) The Partners agree that on or before December 1, 1994, the Project
Development Teams will recommend to the Partnership Committee Initial Project
Plans relating to, without limitation, the fields of activity set forth on
Schedule 3.2(b)(i) hereto.
(ii) The Partners agree to the principles set forth on Schedule 3.2(b)(ii)
hereto with respect to the Partnership's planning and implementation of a
national brand strategy.
(c) Each Project Development Team shall be comprised of two representatives
of each Partner and a Senior Manager who will serve as chairman thereof (and who
shall have no vote with respect to matters considered by the Project Development
Team). On any matter on which a vote of a Project Development Team is taken,
the members (including the Senior Manager) representing a Partner shall vote as
a single bloc. Initial Project Plans shall be developed as follows:
(i) Any Initial Project Plan proposed by a Project Development Team
shall require the affirmative vote of the members representing each
Partner.
(ii) However, except as provided in (b) above, if a Project
Development Team is unable to recommend an Initial Project Plan to the
Partnership Committee within 60 days after the authorization by the
Partnership Committee of the preparation of an Initial Project Plan (or
such longer period as may be unanimously agreed by the members of the
Project Development Team), the members representing each Partner on such
Project Development Team, for a period of 30 days, shall be entitled to
make separate Initial Project Plan recommendations to the Partnership
Committee.
3.3. Approval of Initial Project Plans. Initial Project Plan
---------------------------------
recommendations by the Project Development Teams shall be subject to the
approval of the Partnership Committee pursuant to Section 2.3(c)(vii).
3.4. Approval of Revised Project Plans. (a) The Senior Manager
---------------------------------
responsible for a Project shall submit to the
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<PAGE>
Partnership Committee a revised Project Plan for such Project, not less
frequently than annually, at least 90 days prior to the start of the first
fiscal year covered by such Project Plan. Each such revised Project Plan shall
be considered at the first meeting of the Partnership Committee following its
submission and shall be subject to the approval of the Partnership Committee in
accordance with Sections 2.3(c)(viii) and (ix).
(b) If for any reason, in any fiscal year, no revised Project Plan for a
previously approved Project is agreed upon by the Partnership Committee, then
for such fiscal year the Project shall be managed in a manner consistent with
the forecasts for such fiscal year included in the last approved Project Plan,
as adjusted by the Project Manager to reflect contractual obligations for such
year and other required changes resulting from the passage of time.
3.5. Project Management. A Senior Manager and a Project Manager will be
------------------
assigned to execute each Project Plan which has been approved by the Partnership
Committee. The Project Manager shall have general management responsibility for
executing the Project in accordance with the Project Plan and for proposing,
from time to time, amendments or modifications to the Project Plan. The Project
Manager shall be appointed by, report to, and be subject to removal for
reasonable cause by, the Senior Manager responsible for the Project.
3.6. Use of Partner Resources. (a) Each Project Manager may utilize the
------------------------
services and assets of third-party providers, but shall utilize the services and
assets of the Partners and their respective Affiliates in developing and
executing a Project Plan to the extent such services and assets are of quality
and scope comparable to, and available on terms no less favorable than, those
available from third parties.
(b) Each Partner and its Affiliates shall offer such services and assets to
the Partnership on a direct cost basis, unless the provision of such services or
assets would have an adverse effect on the business activities of such Partner
or its Affiliates.
(c) The personnel of the Partnership shall, to the extent practicable, be
seconded employees of the Partners or their Affiliates.
ARTICLE 4
CAPITAL CONTRIBUTIONS, WITHDRAWALS AND CAPITAL ACCOUNTS
4.1. Capital Accounts.
----------------
(a) The Partnership shall maintain for each Partner a separate capital
account (a "Capital Account") in accordance with the capital accounting rules of
section 704(b) of the Code and the Income Tax Regulations thereunder (including
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<PAGE>
particularly section 1.704-1(b)(2)(iv) of the Income Tax Regulations).
(b) In general, under such capital accounting rules (but subject to any
contrary requirements of the Code and the Income Tax Regulations thereunder), a
Partner's Capital Account shall be (i) increased by the amount of money and the
Fair Market Value (determined in accordance with Section 4.9 hereof) of other
property (net of liabilities secured by such contributed property that the
Partnership is considered to take subject to or assume under section 752 of the
Code) contributed by the Partner to the Partnership (including the amount of any
Organizational Expenses of the Partnership paid or accrued by such Partner) and
allocations to the Partner of Partnership income and gain (or items thereof),
including income and gains exempt from tax, and (ii) decreased by the amount of
money and the Fair Market Value (determined in accordance with Section 4.9
hereof) of other property distributed (net of liabilities secured by such
distributed property that such Partner is considered to take subject to or
assume under section 752 of the Code) to the Partner by the Partnership and
allocations to the Partner of Partnership loss and deduction (or items thereof),
including Partnership expenditures not deductible in computing its taxable
income and not properly chargeable to capital account. Further appropriate
adjustments shall be made as described in Section 4.3(b)(viii).
(c) Where section 704(c) of the Code applies to Partnership property, each
Partner's Capital Account shall be adjusted in accordance with paragraph
(b)(2)(iv)(g) of section 1.704-1 of the Income Tax Regulations as to allocations
-
to the Partners of depreciation, depletion, amortization and gain or loss, as
computed for book purposes with respect to such property.
(d) When Partnership property is distributed in kind (whether in connection
with dissolution and liquidation of the Partnership or otherwise), the Capital
Accounts of the Partners first shall be adjusted to reflect the manner in which
the unrealized income, gain, loss or deduction inherent in such property (that
has not previously been charged to Capital Accounts) would be allocated among
the Partners if there were a taxable disposition of such property for its Fair
Market Value (determined in accordance with Section 4.9 hereof and taking into
account section 7701(g) of the Code) and such income, gain, loss or deduction
had been recognized for federal income tax purposes immediately upon such
distribution or the event requiring such revaluation.
(e) Upon a revaluation of any Partnership assets pursuant to Section 4.7
hereof, the Capital Accounts of the Partners will be adjusted as provided in
Section 4.7(c).
(f) The Tax Matters Partner shall direct the Partnership's accountant to
make all necessary adjustments in each Partner's
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<PAGE>
Capital Account as required by the rules of section 704(b) of the Code and the
Income Tax Regulations thereunder.
4.2. Initial Contributions of Capital.
--------------------------------
On the Effective Date, each Partner shall make the contributions to the
capital of the Partnership set forth opposite such Partner's name on Schedule 1
hereto.
4.3. Additional Contributions by Partners.
------------------------------------
(a) In the event that (i) a capital contribution is required by the terms
of an Approved Business Plan or (ii) the Partnership Committee determines that
an additional capital contribution, payable in cash or other property (or
combination thereof), is necessary or advisable, each Partner will be notified
in writing by the Partnership, at least 60 days prior to the date on which such
capital contribution is payable (the "Due Date"), of the amount of the capital
contribution required from each of them, on a pro rata basis, determined in
--------
accordance with such Partner's respective Capital Contribution Percentage, and
the Due Date for such capital contribution. Each such capital contribution
shall be payable in cash unless otherwise determined by vote of the Partnership
Committee. Such contributions, when made by a Partner, shall be credited to
such Partner's Capital Account.
(b) In the event that a Partner fails to make a required capital
contribution on or prior to the Due Date thereof (a "Defaulting Partner"), any
one or more of the other Partners, who are not Affiliate Transferees of the
Defaulting Partner (the "Non-Defaulting Partners") may by a vote of the Members
representing General Partners who hold a majority of the Percentage Interests of
the Non-Defaulting Partners, elect to cause the Partnership to (x) allow the
Non-Defaulting Partners to withdraw their corresponding additional capital
contribution, in which event the Partnership shall promptly return any such
contributions to such Partners and, pending such return, the amount of such
contribution shall be deemed to be a demand loan from such Partners to the
Partnership, or (y) invoke the following procedure (the "Default Contribution
Procedure") to permit the Non-Defaulting Partners to contribute up to the entire
amount required to be contributed pursuant to Section 4.3(a) by the Defaulting
Partner (the "Default Amount").
(i) The Default Contribution Procedure shall be invoked by the
Partnership by giving notice (the "Default Contribution Notice") to the
Non-Defaulting Partners, with a copy to the Defaulting Partners. Within 30
days following the mailing of the Default Contribution Notice (the "Default
Contribution Date"), any one or more of the Non-Defaulting Partners may pay
some or all of the Default Amount.
(ii) In the event that more than one Non-Defaulting Partner elects to
contribute a Default
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<PAGE>
Amount so that the aggregate amount to be contributed by the Non-Defaulting
Partners would exceed the full Default Amount, each of such Non-Defaulting
Partners shall be entitled to contribute a portion of the Default Amount
that is equal to such Non-Defaulting Partner's Percentage Interest divided
by the Percentage Interests of all Non-Defaulting Partners electing to
contribute such Default Amount.
(iii) The amount contributed pursuant to this Default Contribution
Procedure (as determined at the date 30 days after the Default Contribution
Date, the "Default Contribution Procedure Termination Date") shall
constitute an amount (the "Preferred Amount") allocated appropriately among
the Non-Defaulting Partners, effective as of the Default Contribution
Procedure Termination Date.
(iv) The Preferred Amount of the Capital Account of each such Partner
shall thereafter be (A) increased on the first day of each quarter by the
Quarterly Preferred Return (as hereinafter defined) and (B) reduced by all
Distributions (as hereinafter defined) made to each such Partner, and by
capital contributions made as contemplated by paragraph (vii) below. On
the first day of each month, each Non-Defaulting Partner having a positive
Preferred Amount in its Capital Account (a "Preferred Partner") shall be
entitled to receive, out of cash distributions which would otherwise be
made to the Defaulting Partners pursuant to Article 5 ("Distributions"), an
amount equal to the balance of such Preferred Amount.
(v) The "Quarterly Preferred Return" shall, for the date of
determination, be equal to the product of (A) five percent, and (B) such
Non-Defaulting Partner's average daily balance in the Preferred Amount for
the quarter preceding the relevant payment date.
(vi) Subject to Section 5.1(b) and the minimum gain provisions of
Section 5.1(c), the Partnership's gross income for any fiscal quarter
otherwise attributable to the Defaulting Partners shall first be allocated
to the Preferred Partners until the cumulative amount allocated to each
such Preferred Partner for all periods under this paragraph is equal to the
cumulative amount of Quarterly Preferred Return of such Preferred Partner
for all periods.
(vii) The Defaulting Partners may, at any time, contribute cash to
the Partnership in an amount equal to all or any part of the aggregate
Preferred Amount, which cash shall be promptly distributed to the
Preferred Partners in full or partial satisfaction of their respective
Preferred Amounts.
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<PAGE>
(viii) Immediately prior to the date that PCS JV is dissolved in
accordance with Article 10 of the PCS JV Agreement, the balance of the
Preferred Amount of each Partner may at such Partner's option be converted
into capital of PCS JV and such Partner's Preferred Amount shall be reduced
to zero. Such conversion shall be accomplished by increasing the Capital
Accounts of the Preferred Partner in PCS JV and of the Defaulting Partner
in the Partnership; and by decreasing the Capital Accounts of the Preferred
Partner in the Partnership and of the Defaulting Partner in PCS JV, with
each such adjustment being in an amount equal to the Preferred Amount,
immediately before the reduction thereof to zero under the preceding
sentence.
(c) If the Defaulting Partner fails to contribute a Default Amount, the
Non-Defaulting Partner or Partners may by a vote of the Members representing a
majority of the Percentage Interests of the Non-Defaulting Partners, elect to
cause the Partnership to initiate and maintain an action against the Defaulting
Partner for such Default Amount (and the amount of any Preferred Returns that
have accrued with respect to Preferred Amounts contributed by the Non-Defaulting
Partners to fund such Default Amount) and to pursue any available remedy,
including but not limited to seeking payment by the Defaulting Partner of such
amounts or the unpaid portion thereof and damages incurred by the Partnership in
connection therewith. The Defaulting Partner's Capital Account shall be
increased by an amount equal to that portion of the Default Amount recovered in
any action maintained in accordance with the immediately preceding sentence.
The costs of any action commenced by the Partnership pursuant to this Section
4.3(c) shall be paid by the Partnership and shall be reimbursed by the
Defaulting Partner to the Partnership and to the extent not paid will be
deducted from the amounts otherwise distributable to such Defaulting Partner and
any amounts so deducted shall be treated as a distribution to such Partner.
4.4. Partner Obligations. No Partner shall have any obligation to restore
-------------------
any portion of any deficit balance in such Partner's Capital Account, whether
upon liquidation of its interest in the Partnership, liquidation of the
Partnership or otherwise.
4.5. Withdrawals of Capital Accounts. No Partner shall be entitled to
-------------------------------
withdraw any amount from its Capital Account prior to dissolution of the
Partnership.
4.6. Interest on Capital Accounts. No interest or compensation shall be
----------------------------
paid on or with respect to the Capital Account or capital contributions of any
of the Partners, except as otherwise expressly provided herein.
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<PAGE>
4.7. Revaluation of Partnership Assets.
---------------------------------
(a) The assets of the Partnership shall be revalued in accordance with
Section 4.9 to their then Fair Market Values as of the date of and immediately
prior to (i) the acquisition of an additional interest in the Partnership
(including adjustments to Percentage Interests arising as a result of a failure
of any Partner to make a required capital contribution pursuant to Section 4.3
hereof) by any new or existing Partner in exchange for more than a de minimis
----------
capital contribution to the Partnership, (ii) the distribution by the
Partnership of more than a de minimis amount of property as consideration for
----------
the redemption of a portion (but not all) of a Partner's interest in the
Partnership and (iii) the liquidation of a Partner's entire interest in the
Partnership, or immediately prior to the distribution of Partnership assets in
liquidation of the Partnership within the meaning of Income Tax Regulations
section 1.704-1(b)(2)(ii)(g); provided, however, that no revaluation shall occur
-------- -------
solely by reason of a contribution to the Partnership by WMC pursuant to Section
7.5; and provided further that no revaluation shall occur if the Partnership
-------- -------
Committee reasonably determines that a revaluation would not materially affect
the Capital Accounts of the Partners or that the cost of such revaluation would
be disproportionate to any benefit to be derived by the Partners from such
revaluation.
(b) Immediately prior to the distribution of any asset by the Partnership,
the Partnership Committee shall revalue such asset to its then Fair Market
Value.
(c) Any Revaluation Gain or Revaluation Loss arising from a revaluation of
any Partnership asset pursuant to this Section 4.7 shall be taken into account
as gain or loss to be allocated among the Partners pursuant to Section 5.1.
4.8. Redetermination of Percentage Interests. The respective Percentage
---------------------------------------
Interests of each of the Partners shall be redetermined immediately after any
event giving rise to a change in any Partner's Adjusted Capital Contributions.
If a Partner is both a General Partner and a Limited Partner such adjustment
shall be made to both the General Partner and the Limited Partner Percentage
Interests of such Partner as both a General Partner and a Limited Partner pro
---
rata in proportion to such interests.
----
4.9. Determination of Fair Market Value. The Fair Market Value, as of the
----------------------------------
date of determination, of any asset shall be determined (a) by mutual agreement
of the General Partners or (b) if no such agreement is reached within ten days
of the relevant date of determination, as follows:
(i) Selection of Appraisers. Each General Partner shall designate by
-----------------------
written notice to the Partnership and each other General Partner a firm of
recognized national standing familiar with appraisal techniques applicable
to assets of the type being
- 28 -
<PAGE>
evaluated to serve as an Appraiser pursuant to this Section 4.9 (the firms
designated by the General Partners being referred to herein as the "First
Appraiser" and the "Second Appraiser," respectively) within five business
days after the failure to reach agreement in accordance with the terms of
clause (a) above. In the event that either General Partner fails to
designate its or their Appraiser within the foregoing time period, the
other shall have the right to designate such Appraiser by notifying the
failing party or parties in writing of such designation (and the Appraiser
so designated shall be the First Appraiser or the Second Appraiser, as the
case may be).
(ii) Evaluation Procedures. Each Appraiser shall be directed to
---------------------
determine the Fair Market Value of the asset. Each Appraiser will also be
directed to deliver an Appraiser's Certificate to each General Partner on
or before the 30th day after their respective designation (the "Certificate
Date"), upon the conclusion of its evaluation, and each Appraiser's
Certificate once delivered may not be retracted or modified in any respect.
Each Appraiser will keep confidential all information disclosed by the
Partnership in the course of conducting its evaluation, and, to that end,
will execute such customary documentation as the Partnership may reasonably
request with respect to such confidentiality obligation. The General
Partners will cooperate in causing the Partnership to provide each
Appraiser with such information within the Partnership's possession that
may be reasonably requested in writing by the Appraiser for purposes of its
evaluation hereunder. The Appraisers shall consult with each other in the
course of conducting their respective evaluations. Each General Partner
shall have full access to each Appraiser's work papers. Each Appraiser
will be directed to comply with the provisions of this Section 4.9, and to
that end each party will provide to its respective Appraiser a complete and
correct copy of this Section 4.9 (and the definitions of capitalized terms
used in this Section 4.9 that are defined elsewhere in this Agreement).
(iii) Fair Market Determination. The Fair Market Value of any asset
-------------------------
shall be determined on the basis of the Appraisers' Certificates in
accordance with the provisions of this subparagraph (iii). The higher of
the values set forth on the Appraisers' Certificates is hereinafter
referred to as the "Higher Value" and the lower of such values is
hereinafter referred to as the "Lower Value". If the Higher Value is not
more than 110% of the Lower Value, the Fair Market Value will be the
arithmetic average of such
- 29 -
<PAGE>
two Values. If the Higher Value is more than 110% of the Lower Value, a
third appraiser shall be selected in accordance with the provisions of
subparagraph (iv) below, and the Fair Market Value will be determined in
accordance with the provisions of subparagraph (v) below.
(iv) Selection of and Procedure for Third Appraiser. If the Higher
----------------------------------------------
Value is more than 110% of the Lower Value, within seven days thereafter
the First Appraiser and the Second Appraiser shall agree upon and jointly
designate a third firm of recognized national standing familiar with
appraisal techniques applicable to assets of the type being evaluated to
serve as an appraiser pursuant to this Section 4.9 (the "Third Appraiser"),
by written notice to each General Partner. The General Partners shall
direct the Third Appraiser to determine the Fair Market Value of the asset
(the "Third Value") in accordance with the provisions of subparagraph (ii)
above, and to deliver to the General Partners an Appraiser's Certificate on
or before the 30th day after the designation of such Appraiser hereunder.
The Third Appraiser will be directed to comply with the provisions of this
Section 4.9, and to that end the parties will provide to the Third
Appraiser a complete and correct copy of this Section 4.9 (and the
definitions of capitalized terms used in this Section 4.9 that are defined
elsewhere in this Agreement).
(v) Alternative Determination of Fair Market. Upon the delivery of
----------------------------------------
the Appraiser's Certificate of the Third Appraiser, the Fair Market Value
will be determined as provided in this subparagraph (v). The Fair Market
Value will be (w) the Lower Value, if the Third Value is less than the
Lower Value, (x) the Higher Value, if the Third Value is greater than the
Higher Value, (y) the arithmetic average of the Third Value and the other
Value (Lower or Higher) that is closer to the Third Value if the Third
Value falls within the range between (and including) the Lower Value and
the Higher Value and (z) the Third Value, if the Lower Value and the Higher
Value are equally close to the Third Value.
(vi) Costs. Each General Partner will bear the cost of the Appraiser
-----
designated by it or on its behalf. If the Higher Value is not more than
115% of the Lower Value, or if the Higher Value and the Lower Value are
equally close to the Third Value, each General Partner shall bear 50% of
the cost of the Third Appraiser, if any; otherwise, the party whose
Appraiser's determination of Fair Market Value is further away from the
Third Value shall bear the entire cost of the Third Appraiser. The General
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<PAGE>
Partners agree to pay when due the fees and expenses of the Appraisers in
accordance with the foregoing provisions.
(vii) Conclusive Determination. To the fullest extent provided by
------------------------
law, the determination of the Fair Market Value made pursuant to this
Section 4.9 shall be final and binding on the Partnership and the Partners
hereto, and such determination shall not be appealable to or reviewable by
any court or arbitrator; provided that the foregoing shall not limit a
--------
Partner's rights to seek arbitration of the obligations of the other
Partners and the Partnership hereunder.
ARTICLE 5
ALLOCATIONS AND DISTRIBUTIONS
5.1. Profits and Losses. A Partner's distributive share of income, gain,
------------------
loss, deduction or credit (or items thereof) as shown on the annual federal
income tax return prepared by the Partnership's accountants or as finally
determined by the Internal Revenue Service or the courts, and as modified by the
capital accounting rules of section 704(b) of the Code and the Income Tax
Regulations thereunder as implemented by Section 4.1 hereof, as applicable,
shall be determined as provided in this Article 5.
(a) Except as otherwise provided in this Section 5.1, profits and losses of
the Partnership shall be allocated among the Partners proportionately in
accordance with their respective Percentage Interests.
(b) Solely for tax purposes, in determining each Partner's allocable share
of the taxable income or loss of the Partnership, depreciation, depletion,
amortization and gain or loss with respect to any contributed property, or with
respect to revalued property where Partnership property is revalued pursuant to
Section 4.7 hereof, shall be allocated to the Partners under any method
allowable under section 704(c) of the Code and the applicable Income Tax
Regulations thereunder.
(c) Minimum Gain Chargeback. Notwithstanding anything to the contrary in
-----------------------
this Article 5, if there is a net decrease in Partnership Minimum Gain or
Partner Nonrecourse Debt Minimum Gain (as such terms are defined in sections
1.704-2(b) and 1.704-2(i)(2), respectively, of the Income Tax Regulations)
during a Partnership taxable year, then each Partner shall be allocated items of
Partnership income and gain for such year (and, if necessary, for subsequent
years), to the extent required by, and in the manner provided in, section 1.704-
2 of the Income Tax Regulations.
- 31 -
<PAGE>
This provision is intended to be a "minimum gain chargeback" within the
meaning of sections 1.704-2(f) and 1.704-2(i)(4) of the Income Tax Regulations
and shall be interpreted and implemented as therein provided.
(d) Qualified Income Offset. Subject to the provisions of Section 5.1(c),
-----------------------
but otherwise notwithstanding anything to the contrary in this Article 5, if any
Partner's capital account has a deficit balance in excess of such Partner's
obligation to restore its capital account balance, computed in accordance with
the rules of paragraph (b)(2)(ii)(d) of section 1.704-1 of the Income Tax
-
Regulations (including such Partner's share of Partnership Minimum Gain and
Partner Nonrecourse Debt Minimum Gain as provided in section 1.704-2(g) and
2(i)(5) of the Income Tax Regulations), then sufficient amounts of income and
gain (consisting of a pro rata portion of each item of Partnership income,
--------
including gross income, and gain for such year) shall be allocated to such
Partner in an amount and manner sufficient to eliminate such deficit as quickly
as possible. This provision is intended to be a "qualified income offset"
within the meaning of section 1.704-1(b)(2)(ii)(d) of the Income Tax Regulations
-
and shall be interpreted and implemented as therein provided.
(e) Subject to the provisions of section 704(c) of the Code and Sections
5.1(b) through (d) hereof, gain recognized (or deemed recognized under the
provisions hereof) upon the sale or other disposition of Partnership property,
which is treated as depreciation recapture, shall be allocated to the Partner
who was entitled to deduct such depreciation.
(f) Except as otherwise provided in Section 5.1(j), if and to the extent
any Partner is deemed to recognize income as a result of any loans described
herein pursuant to the rules of sections 1272, 1273, 1274, 7872 or 482 of the
Code, or any similar provision now or hereafter in effect, or any other item of
imputed income, any corresponding resulting deduction of the Partnership shall
be allocated to the Partner who is charged with the income. Subject to the
provisions of section 704(c) of the Code and Sections 5.1(b) through (d) hereof,
if and to the extent the Partnership is deemed to recognize income as a result
of any loans described herein pursuant to the rules of sections 1272, 1273,
1274, 7872 or 482 of the Code, or any similar provision now or hereafter in
effect, or any other item of imputed income, such income shall be allocated to
the Partner who is entitled to any corresponding resulting deduction.
(g) The Partnership shall elect to amortize Organizational Expenses over a
60-month period pursuant to Code section 709. Any such amortization deductions
attributable to Organizational Expenses contributed by a Partner shall be
allocated to such Partner.
(h) Except as otherwise required by law, tax credits shall be allocated
among the Partners pro rata in accordance with the manner in which Partnership
--------
profits are allocated to the Partners under this Article 5, as of the time the
credit prop-
- 32 -
<PAGE>
erty is placed in service or if no property is involved, as of the time the
credit is earned. Recapture of any tax credit required by the Code shall be
allocated to the Partners in the same proportion in which such tax credit was
allocated.
(i) Except as provided in Sections 5.1(e), (f), (g) and (h) hereof or as
otherwise required by law, if the Partnership Interests of the Partners are
changed herein during any taxable year, all items to be allocated to the
Partners for such entire taxable year shall be prorated on the basis of the
portion of such taxable year which precedes each such change and the portion of
such taxable year on and after each such change according to the number of days
in each such portion, and the items so allocated for each such portion shall be
allocated to the Partners in the manner in which such items are allocated as
provided in this Article 5 during each such portion of the taxable year in
question; provided that, if the transferor and the transferee of an interest in
--------
the Partnership (i) shall both have given the Partnership written notice within
15 days of the end of such taxable year of the Partnership stating their
agreement that such division and allocation shall be made on some other basis
permitted by Code section 706(d) and (ii) shall have agreed to reimburse the
Partnership for any incremental accounting fees and other expenses incurred by
the Partnership in utilizing such other basis for such division and allocation,
then such other basis permitted by Code section 706(d) shall be used.
(j) Any special allocation of income or gain pursuant to Section 5.1(c) or
5.1(d) hereof shall be taken into account in computing subsequent allocations of
income and gain pursuant to this Article 5 so that the net amount of all such
allocations to each Partner shall, to the extent possible, be equal to the net
amount that would have been allocated to each such Partner pursuant to the
provisions of this Article 5 if such special allocations of income or gain under
Section 5.1(c) or 5.1(d) hereof had not occurred.
(k) Losses.
------
(i) Items of deduction and loss attributable to Partner nonrecourse
debt within the meaning of section 1.704-2(b)(4) of the Income Tax
Regulations shall be allocated to the Partners bearing the economic risk of
loss with respect to such debt in accordance with section 1.704-2(i) of the
Income Tax Regulations.
(ii) Items of deduction and loss attributable to Partnership
nonrecourse liabilities within the meaning of section 1.704-2(b)(1) of the
Income Tax Regulations shall be allocated among the Partners
proportionately in accordance with their respective Percentage Interests.
(iii) All other items of operating net loss ("Net Loss") shall be
allocated among the Partners,
- 33 -
<PAGE>
proportionately in accordance with their Percentage Interests, except that
Net Loss shall not be allocated to any Partner to the extent it would
create a deficit balance in excess of such Partner's obligation to restore
its Capital Account balance, computed in accordance with the rules of
Section 1.704-1(b)(2)(ii)(d) of the Income Tax Regulations (including such
-
Partner's share of Partnership Minimum Gain and Partner Nonrecourse Debt
Minimum Gain as provided in section 1.704-2(g) and 2(i)(5) of the Income
Tax Regulations). Any Net Loss which cannot be allocated to a Partner
because of the limitation set forth in the previous sentence shall be
allocated first to the other Partners to the extent such other Partners
would not be subject to such limitation and second any remaining amount to
the Partners in the manner required by the Code and the Income Tax
Regulations.
(l) Subject to the provisions of Sections 5.1(c) through (k), items of
income and gain shall be allocated to the Partners in the following priority:
(i) First, if allocations of Net Loss have been made to the Partners
under the last sentence of Section 5.1(k)(iii), then in the amount of, and
proportionate to, the amount of such Net Loss.
(ii) Second, the balance among the Partners in proportion to their
relative Percentage Interests.
5.2. Distributions.
-------------
(a) As promptly as practicable after the end of each fiscal quarter, but in
no event later than the end of the following fiscal quarter, all Net Operating
Available Cash of the Partnership (as determined based on the Partnership's
financial statements for such fiscal quarter) shall be distributed to the
Partners. Other distributions, whether in cash or in kind, shall be made to the
Partners at such times and in such amounts as shall be determined by the
Partnership Committee. The amount of any in-kind distribution shall be the
distributed property's then Fair Market Value.
(b) Except as provided in Sections 4.3(b), 4.3(c), and 5.2(c),
distributions shall be made among the Partners in accordance with their
respective Percentage Interests at the time of such distribution.
(c) Upon liquidation of the Partnership, within the meaning of Income Tax
Regulations section 1.704-1(b)(2)(ii)(g), distributions shall be made among the
-
Partners as provided in Section 8.3.
(d) Any other provision of this Agreement to the contrary notwithstanding,
no distribution shall be made by the
- 34 -
<PAGE>
Partnership, or on behalf of the Partnership which would violate Section 17-
607(a) of the Act, which would render the Partnership insolvent or which is
prohibited by the terms of any Partnership indebtedness.
(e) All matters not expressly provided for by the terms of Article 5 or
elsewhere in this Agreement concerning the valuation of securities and other
assets of the Partnership, the allocation of profits and losses and items
thereof (including credits) among the Partners and accounting procedures shall
be reasonably determined by the Partnership Committee, whose determination shall
be final and conclusive as to all of the Partners.
ARTICLE 6
TAX MATTERS AND REPORTS; ACCOUNTING
6.1. Filing of Tax Returns. The Tax Matters Partner shall prepare and
---------------------
file, or cause the accountants of the Partnership to prepare and file, all Tax
Returns for each tax year of the Partnership.
6.2. Tax Matters Partner.
-------------------
(a) The initial Tax Matters Partner of the Partnership within the meaning
of section 6231(a)(7) of the Code shall be selected by the Partnership Committee
within 90 days after the Effective Date and serve in that capacity until
November 15, 1996. Thereafter the position of Tax Matters Partner shall rotate
between the General Partners every two years. Unless otherwise expressly
provided herein, the Tax Matters Partner is authorized to take any action that
it determines to be necessary or appropriate with respect to all tax matters.
(b) The Tax Matters Partner shall promptly advise the other Partners of all
audits or other actions by the Internal Revenue Service and shall furnish to the
Partnership and to each Partner a copy of each notice or other communication
received by the Tax Matters Partner from the Internal Revenue Service except
such notice or communication sent directly to the Partners by the Internal
Revenue Service. All expenses incurred by the Tax Matters Partner in its
capacity as such shall be expenses of the Partnership and shall be paid by the
Partnership.
(c) To the fullest extent permitted by law, the Partnership shall indemnify
Partners on an after-tax basis against any liabilities incurred while acting as
the Tax Matters Partner of the Partnership but only to the extent such Partner
acts within the scope of its authority as Tax Matters Partner under this
Agreement. The Tax Matters Partner shall not be indemnified against any
liability regarding Partnership tax matters arising by reason of the willful
misconduct, bad faith, gross negligence or reckless disregard of the duties of
the Tax Matters Partner.
- 35 -
<PAGE>
6.3. Tax Reports to Current and Former Partners. After the end of each
------------------------------------------
fiscal year, the Tax Matters Partner shall, in a timely manner, prepare and
mail, or cause its accountants to prepare and mail, to each Partner and, to the
extent necessary, to each former Partner (or its legal representatives), a
report setting forth in sufficient detail such information as is required to be
furnished to partners by law (e.g., section 6031(b) of the Code and the Income
----
Tax Regulations thereunder) and as shall enable such Partner or former Partner
(or its legal representatives) to prepare their respective federal and state
income tax or informational returns in accordance with the laws, rules and
regulations then prevailing.
6.4. Accounting Records; Independent Audit. Complete books and records
-------------------------------------
accurately reflecting the accounts, business, transactions and partners of the
Partnership shall be maintained and kept by the Partnership at the Partnership's
principal place of business. The accounting records of the Partnership shall be
maintained to assure preparation of the financial statements in accordance with
GAAP. The accounting records of the Partnership shall be audited by certified
public accountants selected by the Partnership Committee.
6.5. Fiscal Year. Except as may otherwise be required by the federal tax
-----------
laws, the fiscal year of the Partnership for both financial and tax reporting
purposes shall end on December 31.
6.6. Tax Accounting Method. The books and accounts of the Partnership
---------------------
shall be maintained using the accrual method of accounting for tax purposes.
Those documents relating to allocations of items of partnership income, gain,
loss, deduction or credit and Capital Accounts shall be kept under federal
income tax accounting principles as provided herein.
6.7. Withholding. Notwithstanding any other provision of this Agreement,
-----------
the Tax Matters Partner is authorized to take any action that it determines to
be necessary or appropriate to cause the Partnership to comply with any Federal,
state and local withholding requirement with respect to any allocation, payment
or distribution by the Partnership to any Partner or other Person. All amounts
withheld to satisfy any Federal, state or local withholding requirement with
respect to a Partner shall be treated as distributions to such Partner. If any
such withholding requirement with respect to any Partner exceeds the amount
distributable to such Partner under this Agreement, or if any such withholding
requirement was not satisfied with respect to any amount previously allocated or
distributed to such Partner, such Partner and any successor or assignee with
respect to such Partner's interest in the Partnership hereby, to the fullest
extent permitted by law, indemnifies and agrees to hold harmless the Partners
and the Partnership for such excess amount or such withholding requirement, as
the case may be.
6.8. Tax Elections. Upon the request of a transferee of a Partnership
-------------
Interest or a distributee of a Partnership
- 36 -
<PAGE>
distribution, the Partnership will make the election under section 754 of the
Code in accordance with applicable Income Tax Regulations thereunder for the
first fiscal year in which such election could apply, unless the Tax Matters
Partner reasonably determines that such election is not in the best interest of
the Partnership. In any case where responsibility is granted to the Tax Matters
Partner to make any election or determination or to take any other action which
in the reasonable judgment of the Tax Matters Partners could have a material
adverse economic impact on any other Partner, the Tax Matters Partner shall
notify such other Partners not less than fifteen days preceding the time such
action is to be taken. If any of the other Partners disagree with the proposed
action, responsibility for the matter shall be given to the Partnership
Committee.
6.9. Prior Tax Information. Each Partner agrees to deliver to the
---------------------
Partnership all relevant information regarding Taxes that the Partnership will
require in order to comply with its own tax accounting and reporting
requirements, including without limitation schedules setting forth the fair
market value and tax basis of each asset that may from time to time be
contributed by a Partner to the Partnership; provided, however, that no Partner
-------- -------
shall be required to disclose the income tax returns of itself or any of its
Affiliates.
ARTICLE 7
INDEMNIFICATION AND EXCULPATION; CERTAIN AGREEMENTS
7.1. Indemnification of the Partners. The Partnership shall indemnify and
-------------------------------
hold harmless the Members, the Partners and their Affiliates, and their
respective partners, shareholders, directors, officers and/or the legal
representatives of any of them, and each other Person who may incur liability as
a Partner or otherwise in connection with the management or ownership of the
Partnership or any entity in which the Partnership has an interest (each, an
"Indemnified Party"), against all liabilities, and against all expenses
(including counsel fees) reasonably incurred by him or it, in connection with
the investigation, defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which any Indemnified Party may be
involved or with which he or it may be threatened, while a Partner or serving in
such other capacity or thereafter, by reason of its being or having been a
Partner, or by serving in such other capacity, except with respect to any matter
which constitutes willful misconduct, bad faith, gross negligence or reckless
disregard of the duties of his office. The Partnership shall have the right to
approve any counsel (which approval shall not be unreasonably withheld) selected
by any Indemnified Party and to approve the terms of any proposed settlement
(which approval shall not be unreasonably withheld). The Partnership shall
advance to any Indemnified Party or Partner reasonable attorneys' fees and other
costs and expenses incurred in connection with the defense of any such action or
proceeding. Each Partner hereby agrees, and each other
- 37 -
<PAGE>
Indemnified Party shall agree in writing prior to any such advancement, that in
the event he or it receives any such advance, such Indemnified Party shall
reimburse the Partnership for such fees, costs and expenses to the extent that
it shall be determined that he or it was not entitled to indemnification under
this Section. The rights accruing to a Partner and each other Indemnified Party
under this Section 7.1 shall not exclude any other right to which it or they may
be lawfully entitled; provided that any right of indemnity or reimbursement
--------
granted in this Section 7.1 or to which any Indemnified Party may be otherwise
entitled may only be satisfied out of the assets of the Partnership, and no
Partner and no withdrawn Partner shall be personally liable with respect to any
such claim for indemnity or reimbursement. Notwithstanding any of the foregoing
to the contrary, the provisions of this Section 7.1 shall not be construed so as
to provide for the indemnification of a Partner or any other Indemnified Party
for any liability to the extent (but only to the extent) that such
indemnification would be in violation of applicable law or such liability may
not be waived, modified or limited under applicable law, but shall be construed
so as to effectuate the provisions of this Section 7.1 to the fullest extent
permitted by law.
7.2. Exculpation. Any Member, any Partnership employee, any Partner and
-----------
any Affiliate thereof and their respective partners, shareholders, directors,
officers, employees, or agents and/or the legal representatives of any of them
shall not be liable to any Partner or the Partnership for mistakes of judgment
or for action or inaction which such Member, Partner, Affiliate, partner,
shareholder, director, officer, employee, agent or legal representative (1)
reasonably believed to be in or not opposed to the best interests of the
Partnership unless such action or inaction constitutes willful misconduct, bad
faith, gross negligence or reckless disregard of his or its duties and, (2) with
respect to any criminal action, such party reasonably believed his conduct was
lawful. Each Partner may (on its own behalf or on the behalf of any Member
designated by such Partner, any Affiliates of such Partner or their respective
partners, shareholders, directors, officers, employees or agents and/or legal
representatives of any of them), consult with counsel, accountants and other
experts in respect of the Partnership affairs and such Person shall be fully
protected and justified in any action or inaction which is taken in accordance
with the advice or opinion of such counsel, accountants or other experts;
provided that they shall have been selected with reasonable care.
--------
Notwithstanding any of the foregoing to the contrary, the provisions of this
Section 7.2 shall not be construed so as to relieve (or attempt to relieve) a
Partner or any other Person of any liability, to the extent (but only to the
extent) that such liability may not be waived, modified or limited under
applicable law, but shall be construed so as to effectuate the provisions of
this Section 7.2 to the fullest extent permitted by law.
7.3. Restrictions on Partners. No Partner may, without the prior written
------------------------
consent of all of the other Partners:
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<PAGE>
(i) confess a judgment against the Partnership;
(ii) make any agreement on behalf of any other Partner;
(iii) except to the extent permitted by Article 8 hereof, withdraw as
a Partner, dissolve, terminate, liquidate or wind up the affairs of the
Partnership; or
(iv) use or possess Partnership property except for a Partnership
purpose, except as provided under contractual arrangement.
7.4. Outside Activities.
------------------
(a) Except as otherwise expressly provided in this Section 7.4, any Partner
or Affiliate thereof may engage in or possess any interest in any other business
venture of any nature independently or with others, and neither the Partnership
nor any other Partner shall have any right by virtue of this Agreement in or to
such venture or in or to any income or profits derived therefrom.
(b) Except for Systems (or licenses or permits therefor) acquired in
accordance with this Section 7.4:
(i) No Partner or any Affiliate thereof may, directly or indirectly,
acquire an ownership interest in any Person whose principal business is the
provision of nationwide Services in competition with the Partnership's
nationwide Services or the Partnership Business.
(ii) In light of current regulatory and legal concerns arising from
partner-competitor overlaps in the same wireless services geographic markets and
in light of the need to avoid financial conflicts that would impair productive
coordination of the Systems of Partners, and in light of the numerous potential
acquirors of wireless properties, no Partner may, directly or indirectly,
acquire any ownership interest in or lease (as lessee) any System (or license or
permit therefor) the service area of which overlaps, in any material respect,
the service area of a System (or license or permit therefor) which any Partners
or Affiliate thereof, directly or indirectly, has an ownership interest in, or
leases (as lessee). If such an overlap occurs as a result of a larger
acquisition made by a Partner or Affiliate thereof, the acquiring Partner or
Affiliate shall divest the overlapping service area no later than six months
after the consummation of such acquisition.
(iii) No Partner or any Affiliate thereof may, directly or indirectly,
acquire an ownership interest in any System or provide Services in any market if
such acquisition or provision of Services would result in any material
restrictions being imposed on the Partnership Business, or on the System
operations of any other Partner or Affiliate thereof by any court,
- 39 -
<PAGE>
governmental agency or regulatory or administrative authority. If such
restrictions result as a consequence of an acquisition, the acquiring Partner
shall take prompt action to cause the removal of the restrictions, and shall
indemnify the Partnership and each other Partner or Affiliate thereof for any
financial detriment suffered by the imposition of the restrictions.
(iv) Until December 31, 1995, except as provided in Section 3.1 of the PCS
JV Agreement, no Partner or any Affiliate thereof may, directly or indirectly,
acquire an ownership interest in any System the service area of which overlaps,
in any material respect, the service area of a Designated MTA/BTA (as defined in
the PCS JV Agreement).
(v) Each Partner will promptly notify the Partnership and each other
Partner upon (A) entering into a definitive purchase agreement with respect to
an ownership interest in any System, and (B) the termination of any such
agreement. For purposes of this Section 7.4, a Partner will be deemed to have
an ownership interest in any System which is the subject of an executed
definitive purchase agreement as of the time notice of execution of such
agreement is delivered to the Partnership and each other Partner and until the
termination of such agreement.
(c) Nothing contained in this Section 7.4 shall prohibit or otherwise
restrict:
(i) the ownership of, and provision by, a Partner or its Affiliates
of Cellular Service through Systems which were owned by, or subject to a
definitive purchase agreement to acquire by, such Partner or its Affiliates
on the Effective Date;
(ii) the ownership of an interest in PCS JV by a Partner or its
Affiliates or the ownership of, or the provision of Services by, Systems
acquired by a Partner or its Affiliates in accordance with Section 3.1(b)
or Section 10.3 of the PCS JV Agreement;
(iii) the acquisition by PCS JV of PCS Systems (or licenses or
permits therefor) or the provision of PCS Service by such Systems;
(iv) the acquisition by a Partner Parent of a Partner (or an
Affiliate thereof) from another Partner Parent of such Partner (or an
Affiliate thereof) of direct or indirect ownership interests in Systems (or
licenses or permits therefor) or the provision of Cellular, ESMR or PCS
Services by such Systems;
(v) the acquisition of an ownership interest by a LEC Affiliate or a
wireline cable television company Affiliate of a Partner, if permitted
under applicable law, in a PCS System having 10 MHz of PCS spectrum (and a
10 MHz license or permit therefor), or the provision of PCS Service by such
PCS System, in each
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case, substantially within the service territory of such Affiliate;
(vi) the ownership or other participation of ATI or any Affiliate
thereof in the Globalstar satellite communications venture, or the
ownership or other participation of any Partner or its Affiliates in any
satellite communications venture that would not be competitive with
services provided by Systems, or the provision of wireless communications
services (other than Cellular, PCS or ESMR Services) by Globalstar or such
other ventures; provided that, in either case, the Partnership shall be
--------
entitled to purchase wireless communications services from Globalstar or
such other venture at prices and on terms no less favorable than those
offered to any third party (for like volumes and types of service);
(vii) the acquisition by ATI or any Affiliate thereof of ownership
interests in CCI or New Par, a Delaware general partnership;
(viii) the acquisition by ATI or any Affiliate thereof of ownership
interests in Systems (or licenses or permits therefor) as a result of
distributions from CMT Partners, a Delaware general partnership;
(ix) the acquisition (through merger, consolidation, purchase of
stock or assets, or otherwise) of an ownership interest of less than 5% in
a Person, which owns or leases Systems, or provides Cellular, ESMR or PCS
Services (directly or indirectly through an Affiliate that is controlled by
such Person); provided that, if the Partnership Committee (by vote of the
--------
Members representing Partners other than the acquiring Partner) shall
determine that the acquired business would be reasonably expected to result
in any material restrictions being imposed on such existing or planned
activities or acquisitions by any court, governmental agency or regulatory
or administrative authority, the Partner and its Affiliates shall promptly,
but in any event within 30 days, divest such ownership interest, or take
such other action as is necessary (in the determination of the Partnership
Committee) to remove such restrictions;
(x) the obtaining of the right to nominate or cause the election of
less than 20% of the members of the Board of Directors of a corporation and
any committee thereof, provided that no employee of the Partner or its
Affiliates serves as an officer of such corporation;
(xi) any activity of a LEC Affiliate or wireline cable television
company Affiliate in its service territory required in accordance with all
applicable laws, regulations or order, or any agreement with a
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regulatory authority which agreement is existing as of the date hereof;
(xii) the limited use of radio spectrum by a LEC Affiliate or
wireline cable television company Affiliate for provision of "wireless
tails" or other similar services ancillary to landline communications
within the service territory of such Affiliate;
(xiii) the acquisition, retention and disposition, in the ordinary
course of business, of debt obligations or engaging in equipment financing
and sale-leaseback arrangements, provided that such debt obligations or
financing arrangements (A) are not convertible into or exchangeable for
equity securities (or securities convertible into or exchangeable for
equity securities) and (B) entitle the holder or financier to receive only
interest or other returns that are fixed, or vary by reference to an index
or formula that is not based on the value or results of operations of such
entity;
(xiv) the holding of an ownership interest in a Person that has an
ownership interest in a System or provides Services, if the Partner or its
Affiliate has no responsibility for or control over the conduct of such
ownership or activities, does not permit its name to be used in connection
with such ownership or activities, and uses all reasonable efforts,
including voting its equity interest, to cause such Person to cease such
ownership or activities;
(xv) the purchase by a LEC Affiliate or a wireline cable television
company Affiliate from any Person of Services and the resale thereof within
the service territory of such Affiliate; and
(xvi) the provision and management by a LEC Affiliate or a wireline
cable television company Affiliate in its service territory of network
infrastructure and associated systems for unaffiliated entities providing
Services.
(d) Each Partner and each Affiliate of a Partner that, directly or
indirectly, has an ownership interest in a System shall use its reasonable
efforts, subject to fiduciary duties to third parties, to cause each of its
Attributed Entities to abide by restrictions contained in this Section 7.4 and
to comply with the terms set forth herein.
(e) This Agreement shall not be deemed to create any duties other than as
expressly provided for herein or imposed by applicable law, nor shall its
existence be deemed to alter the legal duties and obligations that any Partner
or any Affiliate thereof has to the other Partners or their Affiliates as to
matters outside the scope of the Agreement, including, without
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limitation, those concerning the terms and conditions of interconnection
services. Each of the Partners and its Affiliates acknowledge their respective
right to compete vigorously with the other Partners and their Affiliates in
markets or areas in which they are otherwise competitors in the offering of
telecommunications services.
(f) A Partner shall remain subject to the provisions of this Section 7.4
for a period of one year from earliest of (i) the date of dissolution of the
Partnership, (ii) the withdrawal of such Partner as a General Partner (pursuant
to Section 8.1(a)(iii)), and (iii) the transfer of such Partner's entire
Partnership Interest to a Person other than an Affiliate. If a General Partner
withdraws from the Partnership in violation of Section 8.1, then the Limited
Partner Percentage Interest of such Partner for purposes of this Section 7.4(f)
shall be deemed to be increased by the General Partner Percentage Interest at
the time of such withdrawal.
7.5. Elimination of Conflicts. (a) Cellco and its Affiliates shall
------------------------
eliminate, as promptly as practicable following the Effective Date, any
ownership or other conflicts with respect to the Systems listed on Schedule
7.5(a) hereto (the "Scheduled Systems") to the extent reasonably necessary to
preclude conflicts that would result in any material restrictions being imposed
on the Partnership Business or the System operations of any other Partner or
Affiliate thereof by any court, governmental agency or regulatory or
administrative authority ("Conflicts").
(b) Cellco and its Affiliates will use their best efforts (consistent with
obtaining value) to accomplish the elimination of such Conflicts in a manner
that would minimize the amount of Section 7.5 Taxes (as defined below) incurred
by Cellco or its Affiliates as a result of the elimination of such Conflicts in
a taxable transaction. For purposes of this Section 7.5 "Section 7.5 Taxes"
means federal and state tax liabilities (exclusive of penalties or interest)
resulting from elimination of such Conflicts, determined using an assumed
combined federal and state tax rate of 40% based on the actual taxable gain
recognized upon the disposition of any relevant Scheduled Systems, without
regard to the availability of net operating loss carry forwards or similar tax
offsets or benefits, and without regard to the tax effect of the contribution or
payment of any amount pursuant to this Section 7.5.
(c) Upon Cellco's written notification to WMC setting forth Cellco's
determination of the amount of Section 7.5 Taxes, Cellco and WMC shall use their
best good faith efforts to reach agreement on a form of payment of 50 percent of
the Section 7.5 Taxes (the "Section 7.5 Taxes Payment") which (A) gives Cellco
the full benefit of the Section 7.5 Taxes Payment (but without any gross-up),
(B) minimizes the tax liability of Cellco with respect to such Payment, and (C)
improves the ability of WMC to treat such amount as an investment under its
method of accounting. If Cellco and WMC fail to reach agreement on the
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<PAGE>
form of such Payment within 30 days of Cellco's notification to WMC of Cellco's
determination of the amount of Section 7.5 Taxes, WMC shall make such Payment in
cash to Cellco upon the later of the expiration of such 30 day period or the
conclusion of the process described in Section 7.5(d).
(d) In the event that WMC disagrees with Cellco's calculation of the amount
of Section 7.5 Taxes, WMC may challenge that determination by notifying Cellco
in writing of the grounds for such disagreement within ten (10) days of WMC's
receipt of Cellco's notification. Cellco and WMC shall negotiate in good faith
to resolve such disagreements. If WMC and Cellco fail to resolve such
disagreements, then the matter will be referred to arbitration in accordance
with the Arbitration Agreement of the partners of even date hereof for
resolution.
(e) In the event of a determination that Section 7.5 Taxes may be different
than the amount originally used for purposes of this Section 7.5, Cellco shall
consult with WMC concerning the audit, appeal, amended return or other process
potentially leading to such redetermination provided that such redetermination
shall be calculated using the assumed tax rate, disregarding net operating loss
carryforwards and similar tax offsets and benefits, and disregarding the tax
effect of the contribution or payment of any amount, all as provided in Section
7.5(b); and upon any such redetermination becoming final, appropriate
adjustments shall be made among the parties to reflect such redetermination.
7.6. Duties of Partners. The fiduciary duties of Partners or Members of
------------------
the Partnership Committee shall not restrict any Partner or Affiliate or any
Member of the Partnership Committee from:
(i) engaging in conduct permitted by Section 7.4;
(ii) taking any action in any capacity other than that of a Partner or
Member of the Partnership Committee, respectively; or
(iii) acting to prevent the Partnership from engaging in an activity
that is outside the scope of the Partnership Business;
whether or not such Partner, Affiliate or Member of the Partnership Committee is
motivated in whole or in part by a desire to further the interests of a Person
other than the Partnership.
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ARTICLE 8
TERMINATION AND DISSOLUTION
8.1. Events of Dissolution.
---------------------
(a) The Partnership shall be dissolved upon (i) expiration of the term
of the Partnership specified in Section 1.6 hereof, (ii) an election to dissolve
the Partnership pursuant to Section 8.2(b)(i), (iii) the withdrawal of a General
Partner, the filing of a certificate of dissolution, or its equivalent, for a
General Partner or the revocation of its charter and the expiration of 90 days
after the date of notice to a General Partner of revocation without a
reinstatement of its charter, or the occurrence of any other event that results
in a General Partner ceasing to be a general partner of the Partnership as
required under the Act; provided, the Partnership shall not be dissolved and
--------
required to be wound up in connection with any of the events specified in this
clause (iii) if (A) at the time of the occurrence of such event there is at
least one remaining General Partner of the Partnership who is hereby authorized
to and does carry on the business of the Partnership without dissolution, or (B)
within 90 days after the occurrence of such event, a majority in interest of the
remaining Partners (or such greater percentage in interest as is required by the
Act) agree in writing to continue the business of the Partnership and to the
appointment, effective as of the date of such event, of one or more additional
general partners of the Partnership, (iv) the transfer or sale of all or
substantially all of the assets of the Partnership, (v) the entry of a decree of
judicial dissolution pursuant to Section 17-802 of the Act, and (vi) the
unanimous written consent of the Partners.
(b) Without the unanimous written consent of the Partners, each
Partner agrees not to withdraw as a Partner or do anything that would otherwise
dissolve the Partnership (except as permitted by the terms of Article 10).
Notwithstanding the foregoing, if a General Partner withdraws from the
Partnership, upon such withdrawal, (i) the general partner interests in the
Partnership of such Partner shall automatically be deemed to become limited
partner interests in the Partnership and (ii) such Partner shall have no right
to participate in the management of the Partnership Business and affairs of the
Partnership, including the right to designate Members of the Partnership
Committee.
8.2. Bankruptcy of a General Partner.
-------------------------------
(a) If the Bankruptcy of a General Partner occurs and at such time
there is at least one other General Partner, such remaining General Partner or
General Partners are hereby authorized to carry on the business of the
Partnership without dissolution, and the Partnership Interests of the General
Partner in Bankruptcy (the "Bankrupt Partner") shall automatically be deemed to
become limited partner interests in the Partnership, and such Bankrupt Partner
shall cease to be a
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General Partner and continue to be, or become, a Limited Partner having (i) no
right to participate in the management of the Partnership Business and affairs
of the Partnership, including no right to designate Members to the Partnership
Committee, and (ii) the same interest in all items of income, gain, loss,
deduction or credit of the Partnership to the same extent as if such Bankruptcy
had not occurred. The Partnership shall continue to be governed by the terms of
this Agreement, the Partnership Business and the property of the Partnership
shall continue to be owned by the Partnership, and the Partnership Business
shall otherwise continue unaffected by such Bankruptcy. Upon the occurrence of
the Bankruptcy of any General Partner, (i) the Bankrupt Partner and the other
Partners shall execute such documents as may be necessary or appropriate to
carry out the provisions of this Section 8.2 and (ii) the other Partners are,
without necessity of any further action or documentation, hereby appointed
attorneys-in-fact of the Bankrupt Partner for the purpose of carrying out the
provisions of this Section 8.2 and taking any action and executing any documents
which such Partners may deem necessary or advisable to accomplish the purposes
hereof, such appointment being irrevocable and coupled with an interest.
(b) If the Bankruptcy of a General Partner occurs and at such time the
Bankrupt Partner is the only General Partner, the other Partners may (i) consent
in writing to dissolve the Partnership or (ii) within 90 days after such
Bankruptcy occurs, agree in writing to continue the business of the Partnership
and to appoint, effective as of the date of such Bankruptcy, one or more
additional General Partners. In the case of clause (ii), the Partnership
Business shall be carried on by such newly appointed General Partner(s) and the
Bankrupt Partner shall have its general partnership interest in the Partnership
converted into a limited partner interest in the Partnership and continue to be,
or become a Limited Partner subject to the provisions of Section 8.2. In the
event the remaining Partners fail to make any election pursuant to this
subsection (b), the Partnership shall be dissolved.
(c) In the event any General Partner shall become a "debtor" as
defined in the Bankruptcy Code in any case commenced thereunder and at any time
during the pendency of such case there shall be appointed (i) a trustee with
respect to the Bankrupt Partner under section 701, 702 or 1104 of the Bankruptcy
Code (or any successor provisions thereto), or (ii) an examiner having expanded
powers beyond those specifically enumerated in section 1104(b) of the Bankruptcy
Code, then the other Partners may, at any time thereafter, so long as such
condition exists, elect to dissolve the Partnership, in which event the affairs
of the Partnership shall be wound up as provided in this Article 8.
8.3. Order of Dissolution. In settling accounts upon winding up and
--------------------
liquidation of the Partnership, the assets of the Partnership shall be applied
and distributed as expeditiously as possible in the following order not later
than the end of the
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taxable year of the liquidation (i.e., the date upon which the Partnership
----
ceases to be a going concern as provided in Income Tax Regulation section 1.704-
1(b)(2)(ii)(g) or if later, within 90 days after the date of such liquidation):
---
(a) to pay (or make reasonable provision for the payment of) all
creditors of the Partnership, including to the extent permitted by law Partners
or their Affiliates who are creditors, in satisfaction of liabilities of the
Partnership in the order of priority provided by law, including expenses
relating to the dissolution and winding up of the affairs of the Partnership
(including, without limitation, expenses of selling assets of the Partnership,
discharging the liabilities of the Partnership, distributing the assets of the
Partnership and terminating the Partnership as a limited partnership in
accordance with this Agreement and the Act); and
(b) to the Partners in proportion to their respective positive Capital
Account balances, as those balances are determined after all adjustments to such
Capital Accounts as required by this Agreement for all periods immediately prior
to such distribution.
8.4. Orderly Winding Up. Notwithstanding anything to the contrary in
------------------
Sections 8.1, 8.2 and 8.3, but subject to Section 8.5 and the order of priority
in Section 8.3, upon winding up and liquidation, if required to maximize the
proceeds of liquidation, the Partnership Committee may, upon unanimous approval,
transfer the assets of the Partnership to a liquidating trustee or trustees.
8.5. Dissolution Election. Notwithstanding the terms of any
--------------------
provision of Section 8.3(b) to the contrary, but subject to Section 17-804(a)(1)
of the Act, any Partner may elect upon the occurrence of any of the events of
dissolution specified in Section 8.1, by written notice to the Partnership any
time prior to actual distribution, to require that the Partnership distribute
the assets of the Partnership upon dissolution and winding up as follows:
(i) First, the Partners shall attempt to reach agreement on the Fair
Market Value and distribution among the Partners of each of the non-cash
assets of the Partnership and liabilities related thereto, subject always
to distributions being made in accordance with Capital Accounts as provided
in Section 8.3(b), with such distributed assets being valued at their Fair
Market Value. To the extent that the Partners are unable to reach
agreement on the Fair Market Value and distribution among the Partners of
certain of such non-cash assets and liabilities, the Chairman of the
Partnership Committee not later than 20 days after an event of dissolution
set forth in Section 8.1 shall implement the following internal auction
procedures. For a period of up to ten days, the Chairman shall entertain
bids by the Partners for
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such non-cash assets and related liabilities, either singly (a "Single
Bid") or as a whole (an "Aggregate Bid"). The Chairman will only entertain
bids which exceed the previous Single Bid for any non-cash asset and
related liabilities or the previous Aggregate Bid for all such non-cash
assets and related liabilities by at least one percent (a "Qualifying
Bid"). The Chairman will promptly make each bid submitted by any Partner
available to each other Partner. If during any 24-hour period within the
ten-day period specified above, the Chairman does not receive a Qualifying
Single Bid with respect to any non-cash asset or related liabilities or a
Qualifying Aggregate Bid, the Chairman shall not entertain any further
Single Bids with respect to such non-cash asset or any further Aggregate
Bids, as the case may be. At the conclusion of such bidding period, the
highest Single Bid by any Partner for each non-cash asset and related
liabilities or, if an Aggregate Bid for such non-cash assets and related
liabilities, which exceeds the sum of the Single Bids, is received such
Aggregate Bid, shall constitute the Fair Market Value of such non-cash
assets and related liabilities. The Partnership shall thereafter pay any
amounts referred to in Section 8.3(a) (except to the extent any such
liabilities are to be assumed by any Partner), and the non-cash assets and
liabilities valued pursuant to the previous sentence shall be distributed
to the Partner who specified the highest Fair Market Value therefor (and
shall be debited against its Capital Account balance), and the remaining
non-cash assets, if any, and liabilities shall be distributed in the manner
agreed upon by the Partners; provided that if the distributions pursuant to
--------
this sentence would result in any Partner receiving more than its positive
Capital Account balance (an "Excess Distribution"), assets with a Fair
Market Value equal to the Excess Distribution shall instead be distributed
among the other Partners in accordance with Capital Account balances (such
assets as selected by such other Partners) and immediately thereafter sold
for cash to the Partner who would have otherwise received the Excess
Distribution in the absence of this proviso, which cash shall be paid
simultaneously with the liquidating distributions;
(ii) All other remaining assets shall be distributed to the Partners
in accordance with Section 8.3(b) hereof; and
(iii) Notwithstanding the foregoing, each Partner shall receive a
right to use, without limitation, any Intellectual Property of the
Partnership on substantially equivalent terms as the other Partners.
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<PAGE>
8.6. Obligation to Restore Deficit Balance. No Partner shall be
-------------------------------------
liable for the return of the capital contributions of any other Partner, nor
shall any Partner be required to have any obligation to restore a deficit
balance in its Capital Account on winding up, liquidation and termination of the
Partnership except to the extent required by the Act.
8.7. Termination of Partnership. The Partnership shall terminate when all
--------------------------
of the assets of the Partnership, after payment of or due provision for all
debts, liabilities and obligations of the Partnership, shall have been
distributed to the Partners in the manner provided for in Article 8, and the
Certificate of Limited Partnership of the Partnership shall be canceled in the
manner required by the Act.
ARTICLE 9
ADMISSION OF ADDITIONAL PARTNERS
9.1. Admission Procedures. With the approval of the Partnership Committee,
--------------------
the Partnership may admit additional Persons as both a General Partner or a
Limited Partner subject to the condition that the proposed Additional Partner
shall execute and deliver to the Partnership an agreement by which it (i) shall
become a party to this Agreement, (ii) shall make representations and warranties
to the Partnership with respect to itself relating to such matters as the
Partnership Committee may request and (iii) shall execute a Standstill Agreement
substantially in the form of Exhibit A hereto.
ARTICLE 10
TRANSFER OR ENCUMBRANCE OF INTEREST
10.1. Restriction on Transfer or Encumbrance. Without the unanimous
--------------------------------------
consent of the General Partners, no Partner may assign, sell, transfer or
otherwise dispose of (any such transaction being referred to in this Article 10
as a "transfer"), pledge, hypothecate, grant a security interest in or otherwise
encumber, its Partnership Interest, except in accordance with the terms of
Section 10.2.
10.2. Permitted Transfers.
-------------------
(a) Any Partner may, without the consent of the other Partners, transfer
ownership of all or any part of its Partnership Interest to a Wholly Owned
Affiliate of a Partner or to a Partner Parent or a person which is a Wholly
Owned Affiliate of a Partner Parent (any Affiliate to which a transfer is
permitted under this Section 10.2 being referred to herein as an "Affiliate
Transferee"). An Affiliate Transferee shall be admitted as both a Substitute
General Partner and a Substitute Limited Partner at the time such (i) Affiliate
Transferee executes this Agreement or a counterpart to this Agreement,
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which evidences such Affiliate Transferee's agreement to be bound to the terms
and conditions of this Agreement and (ii) the Partner Parent(s) of such
Affiliate Transferee shall have executed a letter of responsibility in form and
substance reasonably satisfactory to the other Partner. In the event a transfer
that is permitted under this Section 10.2(a) causes a termination of the
Partnership for tax purposes under Section 708 of the Code, the Affiliate
Transferee shall indemnify and hold harmless the other partners from all costs
arising from such termination.
(b) A transfer of less than all of a Partner's Partnership Interest
pursuant to this Section 10.2 shall be deemed to constitute a transfer of both
the General Partner and Limited Partner Percentage Interests (and the Capital
Contribution Percentage) of such Partner pro rata in proportion to the portion
--------
of such Partner's entire Partnership Interest transferred.
10.3. Invalid Transfers Void. Any purported transfer of any Partnership
----------------------
Interest or any part thereof not in compliance with this Article 10 shall be
void and of no force or effect and the transferring Partner shall be liable to
the other Partners and the Partnership for all liabilities, obligations,
damages, losses, costs and expenses (including reasonable attorneys' fees and
court costs) arising as a result of such noncomplying transfer.
10.4. Change in Ownership.
-------------------
(a) For purposes of this Agreement, a "Change in Ownership" of a Partner
shall be deemed to have occurred when (i) any Person, other than a Partner
Parent of such Partner or a Wholly Owned Affiliate of such Partner Parent (an
"Unaffiliated Entity"), shall acquire (whether by merger, consolidation, sale,
assignment, lease, transfer or otherwise, in one transaction or series of
related transactions), or otherwise beneficially own 50% or more of the
outstanding Voting Stock of any Partner (or any entity, other than a Partner
Parent, which, directly or indirectly, through the ownership of one or more
majority-owned successive subsidiary entities, owns more than 50% of the
outstanding voting interests in such Partner (a "Control Entity")) or (ii) the
Partner Parents of such Partner shall otherwise cease to beneficially own a
majority of the outstanding Voting Stock of such Partner or any Control Entity
of such Partner. Notwithstanding the foregoing, none of (i) a broadly
dispersed, underwritten public offering of the equity securities of a Partner or
a Control Entity, (ii) a tax-free spin-off qualifying under Section 355 of the
Code, by a Partner Parent to its shareholders of an entity the assets of which
include all, but not less than all, of such Partner Parent's ownership interest
in the Partnership and WMC or Cellco, as the case may be, or (iii) a change of
control of a Partner Parent shall result in a Change of Ownership of a Partner
hereunder.
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<PAGE>
(b) Upon any Change in Ownership of a Partner, the Partner not undergoing
the Change in Ownership shall be entitled at any time within a 90-day period
following the Change of Ownership, to elect by notice to the Partner undergoing
a Change of Ownership to purchase all but not less than all of the Partnership
Interest of the Partner undergoing the Change in Ownership at a purchase price
equal to the Fair Market Value of the Partnership Interest determined as
provided in Article 4.9. In the event that a Partnership Interest is not
purchased pursuant to the preceding sentence, any Person effecting such Change
of Ownership (i) shall, by binding written instrument which shall be enforceable
by the Partnership and the other Partners, assume all obligations and
liabilities hereunder of the Partner which is the subject of such Change in
Ownership and (ii) in the case of a Change of Ownership of the Cellco
Partnership Interest, shall execute a Standstill Agreement, substantially in the
form of Exhibit A hereto.
(c) In the event that a Partnership Interest is purchased pursuant to
Section 10.5(b), the Partner undergoing the Change of Ownership shall (i) retain
all rights under the Enhanced Resale Agreements, (ii) receive a royalty-free
license to use Partnership Intellectual Property for five years and (iii) be
entitled to purchase for a five-year period services from the Partnership on
terms and conditions substantially similar to those under which such Partner was
receiving such services prior to the Change of Ownership.
ARTICLE 11
REGULATORY MATTERS
11.1. MFJ Compliance.
--------------
(a) Each of BAC, NYN and USW (the "BOC Participants") and their respective
BOC affiliates in Cellco and WMC agree that they will pursue, in conjunction
with the Regional Bell Operating Companies ("BOCs") within the meaning of the
MFJ, the "Motion of the Bell Companies for a Modification of Section II of the
Decree to Permit Them to Provide Cellular and Other Wireless Services Across
LATA Boundaries," filed with the Decree Court on June 20, 1994. If the Decree
Court were to deny the BOCs' motion or if the Decree Court or Department of
Justice were to take the position that the relief requested in the motion does
not apply to PCS Service, the BOC Participants will request a waiver for the
benefit of the Partnership that would enable the Partnership to conduct the
Partnership Business free of restrictions on BOCs in the MFJ. In addition, the
BOC Participants will request a waiver for the benefit of the Partnership if the
waiver is: (i) to permit the Partnership to offer the same services as those
set forth in any waiver request which such BOC Participant or an affiliate has
pending or which such BOC Participant ,any of its affiliates, or any BOC has
obtained for its cellular or PCS businesses, including businesses incidental
thereto; (ii) based on the same relevant
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facts as those set forth in any such waiver such BOC Participant, an affiliate
thereof or a BOC has pending or has obtained, as the case may be, and (iii) with
respect to the Partnership, within the scope of the Partnership Business.
Except as described above, neither any such BOC Participant nor any affiliate
shall be obliged to request any waiver for the benefit of the Partnership.
(b) Unless and until the (1) Decree Court or (2) the Department of Justice
shall issue a written opinion, or (3) USW, BAC and NYN shall unanimously agree
that the MFJ does not apply to the Partnership, the Partnership will conform to
the requirements and prohibitions of the MFJ. As long as a BOC Participant
holds any ownership interest in the Partnership, the Partnership will not engage
in any MFJ Restricted Activities. ATI or any Affiliate thereof will have the
option to engage in MFJ Restricted Activities, specifically including the
provision of interexchange (interLATA) telecommunications services (it being
understood that such services may be provided by the Partnership if it is
thereafter permitted to do so) and engage in any business practice and enter
into any transaction in which the Partnership does not engage by reason of the
MFJ. ATI shall not be deemed to be engaged in or possessing any interest in a
business venture in violation of Section 7.4 solely as a result of the nature of
the business being an MFJ Restricted Activity. Except as provided in the
preceding sentence, the provisions of this Section 11.1 shall take precedence,
in the event of any conflict, over any other provision of this Agreement.
(c) Unless and until the Decree Court, the Department of Justice, or USW's
CECO Decree Committee shall issue a written opinion that the CECO does not apply
to the Partnership, the Partnership will conform to the requirements and
prohibitions of the CECO. Unless and until the Decree Court, the Department of
Justice, or USW's MFJ Compliance Committee shall issue a written opinion that
the EO does not apply to the Partnership, the Partnership will conform to the
requirements and prohibitions of the EO. In conforming to the requirements and
prohibitions of the CECO and EO, the Partnership will utilize the procedures
established by USW for compliance with them. At the request of the Partnership,
USW will provide training, instruction and assistance to the Partnership in
matters associated with CECO and EO compliance.
(d) If, at any time, a third party raises legitimate concerns regarding
whether as a result of the transactions arising out of this Agreement and the
PCS JV Agreement ATI or Systems in which it has an ownership interest can
lawfully engage in MFJ Restricted Activities, or if a third party or USW's CECO
Decree Committee raises legitimate concerns regarding whether, in light of the
activities of the Partnership and ATI, the BOC Participants are in compliance
with the MFJ (collectively, "MFJ Concerns"), the parties agree:
(i) except in the circumstances set forth in (iii) below, that ATI
and/or the Partnership shall
- 52 -
<PAGE>
have the right to continue the activities giving rise to the MFJ Concerns;
(ii) to restructure the relationships among them and their respective
properties to the minimum extent necessary to satisfy the MFJ Concerns
while preserving, to the fullest extent possible, the intent of the parties
regarding the Partnership. The obligation to restructure shall arise when
(A) counsel for any Partner Parent believes that an MFJ Concern is well
founded, (B) USW's CECO Decree Committee or similar committee representing
another BOC Participant determines that an activity of the Partnership or
ATI has or will put USW or such BOC Participant in violation of the MFJ, or
(C) ATI determines that in light of the activities of the Partnership that
the right of ATI or Systems in which it has an ownership interest to
lawfully engage in MFJ Restricted Activities is subject to a well founded
challenge under the MFJ and (in any such case) outside counsel for any
Partner Parent issues a written opinion that the MFJ Concern cannot be
cured without restructuring. In the event the obligation to restructure
arises pursuant to the preceding sentence, the Partners shall attempt to
determine the manner of restructuring which best gives effect to the first
sentence of this clause (ii). If the Partners reach agreement on a
proposal, they will present it to the Partner Parents and then, if the
Partner Parents approve that proposal, to the Partnership Committee. If
the Partner Parents are unable to agree on a restructuring proposal, each
of them will present its proposal to USW's CECO Decree Committee; the
Partner Parents will then present to the Partnership Committee any of the
proposals the CECO Decree Committee has approved. The Partners will
implement a restructuring proposal only upon the unanimous vote of the
Partnership Committee. If the Partnership Committee does not unanimously
approve any restructuring proposal, the Partner Parents shall resolve the
manner of restructuring by the procedure described in paragraph 2.6(d)(i)
of this Agreement (provided that the 40-day period set forth therein for
--------
referral of disputes to the Independent Member shall be a 30-day period);
and
(iii) If despite their best efforts, the Partners fail to reach
agreement on and implement a restructuring proposal pursuant to (ii) above,
and if a Partner Parent has received either:
(A) an opinion from the Decree Court that activities giving rise
to the MFJ Concerns have put a Partner Parent in violation of the MFJ;
or
(B) a written statement from the Department of Justice that such
activities have put a BOC
- 53 -
<PAGE>
Partner Parent in violation of the MFJ, and either counsel for any one
of the BOC Participants agrees, or USW's CECO Decree Committee or any
committee established by another BOC Participant for purposes of
reviewing MFJ issues has determined, that there is a reasonable
factual and legal basis for such an opinion from the Department of
Justice;
then, ATI, its Cellular and PCS Systems and/or the Partnership will stop the
activities giving rise to the MFJ Concerns until such time as implementation of
a restructuring proposal pursuant to (ii) above permits the resumption of such
activities.
(e) Subject to compliance with the MFJ by the Partnership in connection
therewith, and subject to the restrictions set forth in Section 7.4 hereof, ATI
or any Affiliate thereof will have the option to engage in MFJ Restricted
Activities, specifically including the provision of interexchange (interLATA)
telecommunications services and engage in any business practice and enter into
any transaction in which the Partnership does not engage by reason of the MFJ.
Except as provided in the preceding sentence, the provisions of this Section
11.1 shall take precedence, in the event of any conflict, over any other
provision of this Agreement.
ARTICLE 12
ENHANCED RESALE AGREEMENTS
12.1. Agreement on Form. On or before March 31, 1995, the Partnership
-----------------
Committee shall agree upon the form of the Enhanced Resale Agreements which
shall include, without limitation, the terms and conditions set forth on
Schedule 12.1. If the Partnership Committee is unable to agree on a form of
Enhanced Resale Agreement within the above-specified period the Independent
Member shall determine, within 90 days of the submission of the matter to him,
the form of Enhanced Resale Agreement embodying the terms and conditions set
forth in Schedule 12.1. As promptly as practicable after the approval of a form
of Enhanced Resale Agreement by the Partnership, each Partner and its Affiliates
shall use their reasonable efforts, subject to fiduciary obligations, to cause
the Systems they control or in which they have an ownership interest, to enter
into Enhanced Resale Agreements.
ARTICLE 13
MISCELLANEOUS
13.1. Notices. All notices, requests, demands or other communications
-------
required by or otherwise with respect to this Agreement shall be in writing and
shall be deemed to have been
- 54 -
<PAGE>
duly given to any party (i) when delivered personally (by courier service or
otherwise), (ii) when delivered by telecopy and confirmed by return telecopy,
(iii) on the business day after the date sent by a nationally recognized
overnight courier service, or (iv) seven days after being mailed by first-class,
registered or certified mail, postage prepaid and return receipt requested, in
each case to the applicable addresses set forth below:
If to Cellco:
NYNEX Mobile Communications Company
2000 Corporate Drive
Orangeburg, New York 10962
Attn.: Alfred F. Boschulte, President
Telecopy: (914) 365-9046
and
Bell Atlantic Corporation
1717 Arch Street
Philadelphia, Pennsylvania 19103
Attn.: Lawrence T. Babbio, Jr.
Executive Vice President and Chief Operating Officer
Telecopy: (215) 557-7214
With copies to:
NYNEX Network Systems Company
4 West Red Oak Lane
White Plains, New York 10604
Attn.: Senior Vice President and General Counsel
Telecopy: (914) 644-7966
and
Bell Atlantic Corporation
1717 Arch Street
Philadelphia, Pennsylvania 19103
Attn.: Stephen B. Heimann
Telecopy: (215) 561-9568
If to WMC:
AirTouch Communications
2999 Oak Road
Walnut Creek, CA 94596
Attn: C. Lee Cox, President and
Chief Operating Officer
Telecopy: (510) 210-3599
- 55 -
<PAGE>
U S West, Inc.
7800 East Orchard Road
Englewood, CO 80111
Attn: President
Telecopy: (303) 793-6294
With copies to:
AirTouch Communications
425 Market Street
San Francisco, CA 94105
Attn: Senior Vice President-Legal and
External Affairs
Telecopy: (415) 658-2298
and
Pillsbury Madison & Sutro
235 Montgomery Street
San Francisco, CA 94104
Attn: Nathaniel M. Cartmell III, Esq.
Telecopy: (415) 477-4816
U S West, Inc.
7800 East Orchard Road
Englewood, CO 80111
Attn: General Counsel
Telecopy: (303) 793-6294
or to such other address or telecopy number as any party may have furnished to
the other parties in writing in accordance with this Section 13.1.
13.2. Governing Law, etc.
-------------------
(a) This Agreement has been executed and delivered in the State of Delaware
and shall, in all respects be governed by, interpreted, and construed in
accordance with the laws of the State of Delaware, all rights and remedies of
the Partners in respect thereof being governed by such laws.
(b) Each Partner hereby irrevocably appoints The Corporation Trust Company,
at its office in Wilmington, Delaware, United States of America, its lawful
agent and attorney to accept and acknowledge service of any and all process
against it in any action, suit or proceeding arising in connection with this
Agreement and upon whom such process may be served, with the same effect as if
such party were a resident of the State of Delaware and had been lawfully served
with such process in such jurisdiction, and waives all claim of error by reason
of such service; provided that in the case of any service upon such agent and
--------
attorney, the party effecting such service shall also deliver a copy thereof to
the other party at the address and in the manner specified in Section 13.1. In
the event that such agent and attorney resigns or otherwise becomes incapable of
acting as such, such party will appoint a successor
- 56 -
<PAGE>
agent and attorney in Wilmington, Delaware, reasonably satisfactory to the other
party, with like powers.
(c) The choice of law provisions of this Article 13 have been negotiated in
good faith and agreed upon by the parties hereto and are reasonable especially
considering that this
Agreement is subject to and conforms with the Act. All Partners, by their
execution of this Agreement, expressly agree, to the fullest extent permitted by
law, not to challenge the choice of law provisions contained in this Article 13.
13.3. Amendments. This Agreement may be modified or amended only by an
----------
instrument in writing signed by each Partner, and, as so modified and amended,
shall inure to the benefit of all of the Partners.
13.4. Entire Agreement. Except to the extent other agreements are
----------------
specifically referred to herein, this Agreement constitutes the entire agreement
between the Partners with respect to the matters covered hereby and thereby and
supersedes all prior agreements, understandings, offers and negotiations, oral
or written.
13.5. Waiver of Partition. Each Partner hereby irrevocably waives any and
-------------------
all rights that it may have to maintain an action for partition of any of the
Partnership's property.
13.6. Consents. All consents, agreements and approvals required or
--------
permitted by this Agreement shall be in writing and a signed copy thereof shall
be filed and kept with the books of the Partnership.
13.7. Successors. Subject to Section 10.1, all rights and duties of the
----------
Partners hereunder shall inure to the benefit of and be binding upon their
respective successors and assigns.
13.8. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
13.9. Severability. Each provision of this Agreement shall be considered
------------
severable and if for any reason any provision which is not essential to the
effectuation of the basic purposes of the Agreement is determined by a court of
competent jurisdiction to be invalid or unenforceable and contrary to existing
or future applicable law, such invalidity shall not impair the operation of or
affect those provisions of this Agreement which are valid. In that case, this
Agreement shall be construed so as to limit any term or provision so as to make
it enforceable or valid within the requirements of any applicable law, and in
the event such term or provision cannot be so limited, this Agreement shall be
construed to omit such invalid or unenforceable provisions.
- 57 -
<PAGE>
13.10. Survival. All indemnities and reimbursement obligations made
--------
pursuant to this Agreement shall survive dissolution and liquidation of the
Partnership until expiration of the longest applicable statute of limitations
(including extensions and waivers) with respect to the matter for which a party
would be entitled to be indemnified or reimbursed, as the case may be.
13.11. Arbitration. Each partner hereby acknowledges that this Agreement
-----------
is subject to the Arbitration Agreement of the Partners which is being entered
into of even date herewith, and the Arbitration Agreement will govern the
resolution of disputes relating to this Agreement in accordance with its terms.
Each Additional Partner or Substitute Partner shall execute the Arbitration
Agreement or a counterpart to the Arbitration Agreement on or prior to its
admission to the Partnership.
13.12. No Third Party Beneficiaries. Nothing contained in this Agreement
----------------------------
is intended to, or shall, confer upon any Person other than the parties hereto
any rights or remedies hereunder.
- 58 -
<PAGE>
IN WITNESS WHEREOF, the Partners have executed this Partnership Agreement
as of the date first hereinabove written.
CELLCO PARTNERSHIP
By: Cellco Management Corporation,
Managing General Partner
By: __________________________________
Name: S. Mark Tuller
Title: Vice President
WMC PARTNERS, L.P.
By: AirTouch Communications,
General Partner
By: ________________________________
Name: Arun Sarin
Title: Senior Vice President -
Corporate Strategy/
Development and Human
Resources
and
By: U S WEST Inc.,
General Partner
By: ________________
Name: Charles M. Lillis
Title: Executive Vice President
- 59 -
<PAGE>
<TABLE>
<CAPTION>
Schedule 1
----------
General Limited
Partner Partner
Percentage Percentage
Interest Interest Total Amount
---------- ---------- ----- ------
<S> <C> <C> <C> <C>
Cellco 20% 30% 50% $5,000
WMC 20% 30% 50% $5,000
</TABLE>
S-1
<PAGE>
Schedule 3.2a
-------------
Project Development Team Responsibilities.
-----------------------------------------
(a) The Marketing Project Development Team will coordinate strategy and
establish standards in the following areas:
National/multi-regional account marketing
Product development
Brand selection and brand management and licensing
Purchasing
National channels
Subscriber equipment purchasing
The Marketing Project Development Team will investigate the merits of
coordinating strategy and functions in the following areas:
Strategy/planning
Direct fulfillment
Telemarketing
(b) The Technical Project Development Team will coordinate strategy and
establish standards in the following areas:
Performance standards (which shall serve as a minimum standard for each
wireless property controlled by Partner)
Purchasing
Technology platforms
Interconnection of local and regional networks to form a seamless
national network
Enhanced resale
The Technical Project Development Team will investigate the merits of
coordinating strategy and functions in the following areas:
Technology development
Interconnect
Network management
Operations centers
(c) The Operations (Information Technology) Project Development Team will
coordinate strategy and establish standards in the following areas:
Customer service/billing platform
Informations technology
Network management
S-2
<PAGE>
(d) The Finance Project Development Team will coordinate strategy and
establish standards in the following areas:
Settlements policies
Planning/target setting
Accounting and administration
Revenue assurance
Preparation of the Partnerships annual budget of non-Project costs
S-3
<PAGE>
Schedule 3.2(b)(i)
------------------
Initial Projects
----------------
1. Joint purchasing of subscriber and infrastructure equipment
2. Roamer administration (price and other customer terms and conditions)
3. Network and subscriber equipment interface standards to facilitate
seamless operations
4. Fraud management
5. National Market Development
a. Planning and implementing standards for national products
b. Planning and implementing and directing national strategy and
promotion for agreed-upon brand
c. Planning and implementing strategy for management of national
accounts (accounts with activations in both partners markets)
d. Planning and implementing strategy for information technology to
facilitate management of national accounts (e.g., consolidated
billing)
e. Planning and implementing strategy for selection and management of
national products
f. Planning and implementing strategy for national distribution
channels
S-4
<PAGE>
Schedule 3.2(b)(ii)
-------------------
Principles relating to National Strategy
----------------------------------------
Promotion for Brand Developed by the Partners
---------------------------------------------
1. Each Partner will support the development and use (as further described
below) of the Partnership's agreed-upon national brand.
2. The Partnership will own the rights to the agreed-upon national brand.
3. Promptly following the selection of a national brand for the
Partnership (in accordance with the provisions hereof), each Partner
will use the Partnership's national brand (and no other national brand)
in its local markets; provided that such use may initially take the
--------
form of dual branding (i.e., the use of the national brand on a stand
alone basis in addition to the use of a Partner's local or regional
brand on a stand alone basis).
4. As soon as practicable following the selection of a national brand for
the Partnership, but in any event within one year from the Effective
Date, each Partner will use the Partnership's brand in its local
markets on a co-branding basis (i.e., use of the national brand in
conjunction with the use of a Partner's local or regional brand). The
applicable guidelines for such co-branding will be determined by the
Partnership.
5. The Partners agree that the Partnership will license each Partner and
Affiliate to use the national brand only in the territory covered by
FCC Cellular, PCS and ESMR licenses held by that Partner Affiliate
("Territory") and that the Partner or Affiliate shall not use the
national brand outside its Territory.
6. Subject to the exceptions in 7.4(c), the Partners further agree that a
Partner or Affiliate shall not use, in the existing Territory (as of
the date hereof) of other Partners or Affiliates, any other brand name,
service mark, or trademark in connection with the sale of Services if
(i) the Partner or Affiliate has the right to use that other brand or
mark in connection with the national brand and (ii) the Partner or
Affiliate has used such other brand or mark in its Territory.
S-5
<PAGE>
Schedule 7.5(a)
---------------
Scheduled Systems
-----------------
Albuquerque
Phoenix
Tucson
Las Cruces
Arizona RSA 2
Arizona RSA 5
S-6
<PAGE>
Schedule 12.1
-------------
Terms of Enhanced Resale Agreements
-----------------------------------
The Enhanced Resale Agreements shall include, without limitation, the
following terms and conditions:
1. Pricing
-------
a. Pricing shall be at least equivalent to any other wholesale
pricing arrangements offered by the Partners for similar volumes
of cellular numbers and airtime minutes
b. Pricing shall take into account without limitation:
(1) Exclusivity
(2) Length of agreement
(3) Any commitment to minimum volume levels and/or growth in
volumes
(4) Number of local cellular and PCS markets covered
(5) Technical and operational arrangements between reseller and
facilities provider
(6) Prevalent wireless industry practice for resale arrangements
and existing resale agreements between similar groups of
carriers
2. Term
----
a. The term of the agreement shall be 10 years
3. Technical and operational considerations
----------------------------------------
a. The agreement shall include, without limitation, at least the
following conditions enhancing the resale arrangement
(1) Interconnection agreements equivalent to prevailing industry
practice for similar agreements between resellers and
facilities carriers.
(2) Coordination of reseller and facility provider billing
systems
b. Defining the technical and operational aspects of the resale
relationship will be included in the technical functions of the
Partnership
S-7
<PAGE>
4. Conditions to effectiveness
---------------------------
a. The effective date of the Enhanced Resale Agreements shall be the
earlier of (a) the exercise by a Partner of its option to purchase
the Partnership Interest of a Partner undergoing a Change of
Ownership pursuant to Section 10.5(b), (b) the dissolution of the
Partnership and (c) the imposition by a court, governmental agency
or regulatory or administrative authority of restrictions on the
operation of the Partnership that would materially impair the
ability of the Partnership to perform the Partnership Business.
5. Brand considerations
--------------------
a. The Partners will be permitted to use the national brand for their
resale operations but only on a co-branded basis.
----
b. The Partners shall retain for their facilities-based operations
the rights to use the national brand on a stand alone basis.
S-8
<PAGE>
EXHIBIT 10(ii)4
________________________________________________
AGREEMENT OF LIMITED PARTNERSHIP
OF
PCS PRIMECO, L.P.
DATED AS OF OCTOBER 20, 1994
________________________________________________
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
OF
PCS PRIMECO, L.P.
This Partnership Agreement dated as of October 20, 1994, is made between
PCSCO Partnership, a Delaware general partnership ("PCSCO") and a direct or
indirect wholly-owned partnership of Bell Atlantic Corporation ("BAC") and NYNEX
Corporation ("NYN"), and PCS Nucleus, L.P. a Delaware limited partnership
("PCSN") and a direct or indirect wholly-owned partnership of AirTouch
Communications ("ATI") and U S West, Inc. ("USW"), pursuant to the provisions of
the Delaware Revised Uniform Limited Partnership Act. Each of PCSCO and PCSN
shall be both a general partner and a limited partner as set forth herein
(collectively, the "Partners").
In consideration of the mutual agreements hereinafter set forth, the parties
agree as follows:
ARTICLE 1.
DEFINITIONS
-----------
The following terms when used in this Agreement will have the respective
meanings set forth below:
1.1. ACT means the Delaware Revised Uniform Limited Partnership Act, 6 Del.
Tit. (S)(S) 17-101 et seq., as from time to time amended.
-- ---
1.2. ADJUSTED CAPITAL ACCOUNT means, with respect to a Partner, an account
with a balance (which may be a deficit balance) equal to the balance in such
Partner's Capital Account as of the end of the relevant fiscal year, after
giving effect to the following adjustments: (i) credit to such Capital Account
any amounts which such Partner is obligated to restore pursuant to any provision
of this Agreement or is deemed to be obligated to restore to the Partnership
pursuant to Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) debit
to such Capital Account such Partner's share of items described in Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of
- - - -
Adjusted Capital Account is intended to comply with the provisions of
Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
-
therewith.
1.3. ADJUSTED CAPITAL ACCOUNT DEFICIT means, with respect to a Partner, the
deficit balance, if any, in such Partner's Adjusted Capital Account.
- 1 -
<PAGE>
1.4. AFFILIATE of a person shall mean any Person directly or indirectly
controlling, controlled by, or under common control with, such other person
provided, however, that (i) the Partnership shall not be deemed to be an
-------- -------
Affiliate of PCSCO or PCSN or any of their respective Affiliates, (ii) any
wireline cable television company in which a Partner and its Affiliates do not
have an aggregate ownership interest in excess of 50% shall not be considered an
Affiliate of such Partner or any of its Affiliates, and (iii) Cellular
Communications, Inc., a Delaware corporation ("CCI"), shall not be considered an
Affiliate of ATI until such time, if ever, as ATI shall be entitled to exercise
full discretion with respect to voting the shares of common stock of CCI
beneficially owned by ATI (other than shares of common stock of CCI beneficially
owned by ATI by virtue of its ownership of the Class A Preference Stock of CCI);
and PERSON shall mean an individual, a corporation, a limited or an unlimited
liability company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof. The term CONTROL (including the terms "controlling,
"controlled by" and "under common control with") of a person means the
possession, direct or indirect of the power to (i) vote 50% or more, or in the
case of references to Affiliates in Article 8 hereof, more than 50%, of the
voting securities or other voting interests of such person, or (ii) the
possession, directly or indirectly, of the power to direct, or cause the
direction of the management and policies of such person, whether through the
ownership of voting shares, by contract or otherwise. Notwithstanding the
foregoing, the parties agree that solely for purposes of this Agreement,
Affiliates of PCSCO shall specifically include BAC and NYN and their respective
Affiliates, and Affiliates of PCSN shall specifically include ATI and USW and
their respective Affiliates. Notwithstanding the foregoing, Upstate Cellular
Network shall not be deemed an Affiliate of PCSCO and CMT Partners and New Par
shall not be deemed an Affiliate of PCSN, so long as PCSCO or PCSN,
respectively, together with their respective Affiliates own an equity interest
of not more than 50% in Upstate Cellular Network or CMT Partners and New Par,
respectively, and have no greater management authority with respect thereto than
they had on the date of this Agreement.
1.5. AGREED VALUE means, with respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:
(a) The initial Agreed Value of any asset contributed by a Partner to the
Partnership shall be the gross fair market value of such asset;
(b) The Agreed Values of all Partnership assets shall be adjusted to equal
their respective gross fair market values (taking Code Section 7701(g)
into account) as of
- 2 -
<PAGE>
the following times: (i) the acquisition of an additional interest in
the Partnership by any new or existing Partner in exchange for more than
a de minimis capital contribution; (ii) the distribution by the
-- -------
Partnership to a Partner of more than a de minimis amount of Partnership
-- -------
property as consideration for an interest in the Partnership; (iii) the
liquidation of the Partnership within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); (iv) the dissolution of the Partnership in
-
accordance with Article 10; and (v) at such other times as the Tax
Matters Partner shall reasonably determine necessary or advisable in
order to comply with Regulations Sections 1.704-1(b) and 1.704-2;
provided that the adjustments described in clauses (i) and (ii) of this
paragraph shall be made only if the Tax Matters Partner reasonably
determines that such adjustment is necessary or appropriate to reflect
the relative economic interests of the Partners in the Partnership; and
provided further that such adjustments shall not be made solely by
reason of a contribution to the Partnership by WMC pursuant to Section
7.5 of the Tomcom Partnership Agreement;
(c) The Agreed Value of any Partnership asset distributed to any Partner
shall be the gross fair market value (taking Code Section 7701(g) into
account) of such asset on the date of distribution; and
(d) The Agreed Values of Partnership assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such
assets pursuant to Code Section 732(d), Code Section 734(b) or Code
Section 743(b), but only to the extent that such adjustments are taken
into account in determining capital accounts pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m); provided, however, that Agreed Values
-
shall not be adjusted pursuant to this clause (d) to the extent that an
adjustment pursuant to clause (b) hereof is made in connection with a
transaction that would otherwise result in an adjustment pursuant to
this clause (d).
The Agreed Value of any interest in another partnership held by the
Partnership shall be determined as provided above, except that (i) at any time
at which such Agreed Value is determined pursuant to clause (a), (b) or (c)
above, it shall be increased by the Partnership's share of the liabilities of
such other partnership under Code Section 752 at such time and (ii) Agreed Value
shall be increased or decreased to reflect subsequent increases or decreases in
the Partnership's share of such liabilities or increases in the Partnership's
individual liabilities by reason of its assumption of liabilities of such other
partnership or decreases in the Partnership's individual
- 3 -
<PAGE>
liabilities by reason of such other partnership's assumption thereof to the same
extent and at the same time that it would be so increased or decreased if it
were actually the federal income tax basis of the Partnership's interest in such
other partnership.
If the Agreed Value of an asset has been determined or adjusted pursuant to
this definition of Agreed Value, such Agreed Value shall thereafter be adjusted
by the Depreciation with respect to such asset taken into account in computing
Profits and Losses.
Determinations of gross fair market value for purposes of this definition of
Agreed Value shall be made as follows: (i) in situations described in
paragraphs (a), (b)(i), (b)(ii) and (c) above by agreement between the Tax
Matters Partner and the Partner making the contribution or receiving the
distribution as the case may be, provided, however that if the Tax Matters
Partner (or any Affiliate of the Tax Matters Partner) is the contributor or the
distributee, such determination shall require agreement between the contributor
or the distributor and the Executive Committee; and (ii) in other situations by
the Executive Committee.
1.6. AGREEMENT means this Partnership Agreement, as it may be amended or
restated from time to time.
1.7. BID PRICE means the amount of any payment made, or offered to be made,
to the FCC or other governmental agency as a condition to or in connection with
the application for or award of a PCS License.
1.8. BUSINESS PLAN has the meaning set forth in Section 5.1.11.
1.9. CAPITAL ACCOUNTS mean the capital accounts maintained with respect to
Partnership Interests pursuant to Section 4.4.
1.10. CAPITAL CALL means a request for additional contributions of capital
to the Partnership.
1.11. CHANGE OF CONTROL has the meaning set forth in Section 10.1.
1.12. CECO means the Civil Enforcement Consent Order entered by the Decree
Court on February 2, 1989.
1.13. CECO DECREE COMMITTEE means the committee created by USW pursuant to
the CECO for the review of USW's business activities.
- 4 -
<PAGE>
1.14. CODE means the Internal Revenue Code of 1986, as amended from time to
time (or any corresponding provisions of succeeding law).
1.15. DECREE COURT means the court having original jurisdiction over MFJ
waivers.
1.16. DEFAULT INTEREST RATE means a rate of interest equal to that which is,
at the time of issuance of the debt security, charged on debt of comparable term
to maturity to issuers of comparable creditworthiness to the Partnership, plus
3%.
1.17. DELINQUENT PARTNER with respect to a Capital Call means a Partner who
fails to pay its portion of such Capital Call at the time and in the amount
required under this Agreement.
1.18. DEPRECIATION means, for each fiscal year or other relevant period, an
amount equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such year or other relevant period,
except that if the Agreed Value of an asset differs from its adjusted basis for
federal income tax purposes at the beginning of such year, Depreciation shall be
an amount which bears the same ratio to such beginning Agreed Value as the
federal income tax depreciation, amortization or other cost recovery deduction
for such year bears to such beginning adjusted tax basis; provided, however,
that if the federal income tax depreciation, amortization or other cost recovery
deduction for such year is zero, Depreciation shall be determined with reference
to such beginning Agreed Value using any reasonable method selected by the Tax
Matters Partner.
1.19. DESIGNATED ENTITY means a Person qualifying as a designated entity for
purposes of the FCC's decision in that certain matter entitled Implementation of
-----------------
Section 309(j) of the Communications Act - Competitive Bidding, Fifth Report and
-------------------------------------------------------------- ----------------
Order in PP Docket No. 93-253, as modified by subsequent decisions through the
-----
date hereof.
1.20. DESIGNATED MTAS/BTAS means the MTAs and BTAs designated by the
Executive Committee for development of the PCS Business.
1.21. DISSOLUTION EVENT has the meaning set forth in Section 10.1.
1.22. EO means the Enforcement Order entered by the Decree Court on February
15, 1991.
1.23. EQUITY INTEREST has the meaning set forth in Section 8.1.
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1.24. EVENT OF BANKRUPTCY means, with respect to any Partner or the
Partnership, any of the following:
(a) filing a voluntary petition in bankruptcy or for reorganization or for
the adoption of an arrangement under the Bankruptcy Code as now or in
the future amended) or an admission seeking the relief therein provided;
(b) making a general assignment for the benefit of creditors;
(c) consenting to the appointment of a receiver for all or a substantial
part of such person's property;
(d) in the case of the filing of an involuntary petition in bankruptcy, an
entry of an order for relief;
(e) the entry of a court order appointing a receiver or trustee for all or a
substantial part of such Person's property without his consent; or
(f) the assumption of custody or sequestration by a court of competent
jurisdiction of all or substantially all of such Person's property.
1.25. EXECUTIVE COMMITTEE means the Executive Committee of the Partnership
formed and acting pursuant to Section 5.1.
1.26. FCC means the United States Federal Communications Commission and any
successor thereto that has authority to regulate PCS Licenses and the PCS
Business.
1.27. GAAP means the generally accepted accounting principles in the United
States of America in effect from time to time.
1.28. GENERAL PARTNER means each of PCSCO and PCSN, for as long as each
remains a General Partner in accordance with the provisions hereof, in their
capacities as general partners of the Partnership, and any person who becomes an
additional or substitute General Partner of the Partnership pursuant to the
provisions of this Agreement.
1.29. HOLDING COMPANY has the meaning set forth in Section 8.1.
1.30. LIMITED PARTNER means each of PCSCO and PCSN, in their capacities as
limited partners of the Partnership, and any person who becomes an additional
Limited Partner of the Partnership pursuant to the provisions of this Agreement.
1.31. LIQUIDATING PARTNER has the meaning set forth in Section 10.3.
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<PAGE>
1.32. MFJ has the meaning set forth in Section 11.10.
1.33. MFJ COMPLIANCE COMMITTEE means the committee created by USW pursuant
to the EO for the review of USW's business practices.
1.34. MFJ RESTRICTED ACTIVITY means an activity or business the undertaking
of which by the Partnership would cause the Partnership, or any Partner, to be
in violation of the MFJ.
1.35. MTA means a Major Trading Area and BTA means a Basic Trading Area,
each as defined in FCC Rules at 47 C.F.R. (S) 24.202.
1.36. NET OPERATING AVAILABLE CASH means at the time of determination, (a)
all cash and cash equivalents on hand in the Partnership, less (b) the
----
Forecast Cash Requirement, if any, of the Partnership, as determined by the
Partnership Committee in a manner consistent with the then-current Business
Plan. For purposes of this definition, FORECAST CASH REQUIREMENTS means, for the
twelve-month period following the date of determination, the excess, if any, of
(a) forecast capital expenditures, capital contributions to other entities and
other investments, acquisitions, cash contributions to other entities and other
investments, acquisitions, cash income tax payments and debt service (including
principal and interest) requirements and other non-cash credits to income, plus
----
forecast cash reserves for future operations or other requirements, over (b)
----
forecast net income of the Partnership, plus the sum of forecast depreciation,
----
amortization, interest expenses, income tax expenses and other non-cash charges
to income, in each case to the extent deducted in determining such net income,
plus or minus forecast changes in working capital, plus the forecast cash
---- ----- ----
proceeds of dispositions of assets (net of expenses), plus an amount equal to
----
the forecast net proceeds of debt financings.
1.37. NONDEDUCTIBLE EXPENDITURE has the meaning specified under the
definition of Profits below.
1.38. NONDELINQUENT PARTNER means any Partner who is not a Delinquent
Partner.
1.39. NONRECOURSE DEDUCTIONS has the meaning set forth in Regulations Section
1.704-2(b)(1). The amount and items of Nonrecourse Deductions shall be
determined in accordance with Regulations Sections 1.704-2(c) and 1.704-2(j)(1).
1.40. ORGANIZATIONAL EXPENSES means organizational expenses as defined under
Section 709 of the Code.
1.41. PARTNER means each of PCSCO and PCSN and any other Person admitted as
a Partner pursuant to the terms of this Agreement.
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<PAGE>
1.42. PARTNER NONRECOURSE DEBT MINIMUM GAIN has the meaning set forth in
Regulations Section 1.704-2(i).
1.43. PARTNER NONRECOURSE DEBT has the meaning set forth in Regulations
Section 1.704-2(b)(4).
1.44. PARTNER NONRECOURSE DEDUCTIONS has the meaning set forth in
Regulations Section 1.704-2(i).
1.45. PARTNER NOTE has the meaning set forth in Section 4.4 hereof.
1.46. PARTNER PARENT means (i) with respect to Cellco, BAC and NYN and (ii)
with respect to WMC, ATI and USW, and their respective successors and assigns,
whether by means of merger, spinoff or otherwise.
1.47. PARTNERSHIP means the partnership established pursuant to this
Agreement.
1.48. PARTNERSHIP INTEREST means the entire ownership interest of a Partner
in the Partnership.
1.49. PARTNERSHIP MINIMUM GAIN has the meaning set forth in Regulations
Sections 1.704-2(b)(2) and 1.704-2(d).
1.50. PCS BUSINESS means the provision of broadband personal communications
services as contemplated by Subpart E of Part 24 of the FCC's rules, pursuant to
one or more PCS Licenses.
1.51. PCS LICENSE means any license issued by the FCC pursuant to Subpart E
of Part 24 of the FCC's rules. A 10 MHZ PCS LICENSE shall mean a PCS License
with respect to no more than 10 MHz.
1.52. PERCENTAGE INTEREST means initially, with respect to any Partner, the
Percentage Interest ascribed to such Partner in Section 4.1 hereof. If an event
described in clause (b)(i) or (ii) of the definition of Agreed Value occurs, the
Percentage Interests shall be recalculated such that the Percentage Interest of
each Partner shall be equal to the ratio of such Partner's Specified Account
Value to the aggregate Specified Account Value of all of the Partners, such
Specified Account Values to be determined after giving effect to the event or
circumstance giving rise to the recalculation and all contributions,
distributions, and allocations for all periods ending on or prior to the date of
recalculation; provided that if any Partner's Specified Account Value is zero or
less, the Percentage Interests shall be recalculated by the Executive Committee
based upon the relative economic interests of the Partners immediately after
such event. In the event of any transfer of an interest by a Partner in
accordance with the provisions of this Agreement, the
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<PAGE>
transferee of such interest shall succeed to the Percentage Interest of his
transferor to the extent it relates to the transferred interest. If a Partner is
both a General Partner and a Limited Partner, all adjustments of Percentage
Interests of such Partner shall be made to both the General Partner Percentage
Interests and the Limited Partner Percentage Interests pro rata in proportion to
--- ----
such interests.
1.53. PROFITS and LOSSES means, for each fiscal year or other relevant
period, an amount equal to the Partnership's taxable income or loss for such
year or other relevant period, determined in accordance with Code Section 703(a)
(for this purpose, all items of income, gain, loss or deduction required to be
stated separately pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments:
(a) Any income of the Partnership that is exempt from federal income tax and
not otherwise taken into account in computing Profits or Losses pursuant
to this definition shall be added to such taxable income or loss;
(b) Any expenditures of the Partnership described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i) (NONDEDUCTIBLE
-
EXPENDITURES), and not otherwise taken into account in computing Profits
or Losses pursuant to this definition shall be subtracted from such
taxable income or loss;
(c) If the Agreed Value of any Partnership asset is adjusted pursuant to
clause (b) or clause (c) of the definition of Agreed Value hereunder,
the amount of such adjustment shall be taken into account as gain or
loss from the disposition of such asset for purposes of computing
Profits or Losses;
(d) Gain or loss resulting from any disposition of Partnership property with
respect to which gain or loss is recognized for federal income tax
purposes shall be computed by reference to the Agreed Value of the
property disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Agreed Value;
(e) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such fiscal year or
other relevant period;
(f) To the extent an adjustment to the adjusted tax basis of any Partnership
asset pursuant to Code Section 734(b) is required, pursuant to
Regulations Section
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<PAGE>
1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital
- -
Accounts as a result of a distribution other than in liquidation of a
Partner's interest in the Partnership, the amount of such adjustment
shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis)
from the disposition of such asset and shall be taken into account for
purposes of computing Profits or Losses; and
(g) Notwithstanding any other provision of this definition, any items which
are specially allocated pursuant to Section 6.2 or Section 6.3 hereof
shall not be taken into account in computing Profits or Losses.
1.54. REGULATIONS means the Income Tax Regulations promulgated under the
Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
1.55. SPECIFIED ACCOUNT VALUE means with respect to any Partner at any given
time, its Capital Account balance at such time, as such Account would be
increased if all Partner Notes were paid in full immediately prior to such
determination; as reduced by the unamortized amount of Organizational Expenses
contributed by that Partner; and reduced by any amount contributed to the
Partnership by WMC pursuant to Section 7.5 of the Tomcom Partnership Agreement.
1.56. TAX MATTERS PARTNER has the meaning set forth in Section 6231 of the
Code.
1.57. TAXES shall mean federal, state, local or foreign income, capital
gains, profits, gross receipts, payroll, capital stock, franchise, employment,
withholding, social security, unemployment, disability, real property, personal
property, stamp, excise, occupation, sales, use, transfer, mining, value added,
investment credit recapture, alternative or add-on minimum, severance,
environmental, estimated or other taxes, duties or assessments of any kind,
including any interest, penalty, and additions imposed with respect to such
amounts.
1.58. TOMCOM PARTNERSHIP AGREEMENT means the Tomcom L.P. Agreement of Limited
Partnership, of even date herewith, between Cellco Partnership (CELLCO) and WMC
Partners, L.P. (WMC), without regard to any amendments thereto except those
approved by the Executive Committee.
1.59. TRANSFER has the meaning set forth in Section 8.1.
1.60. WHOLLY OWNED AFFILIATE means as to any Person, an Affiliate all of the
equity interests of which are owned,
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directly or indirectly, by a Partner, by another Wholly Owned Affiliate, or by
one or both of the Partner Parents thereof.
ARTICLE 2.
ORGANIZATION
------------
2.1. Formation. The Partners agree to, and hereby do, form a limited
---------
partnership pursuant to the provisions of the Act. The Partnership Interests of
the Partners in the Partnership, and the rights and obligations of the Partners
with respect thereto, are subject to all of the terms and conditions of the Act,
except as otherwise expressly set forth in this Agreement.
2.2. Name. The business of the Partnership shall be carried on under the
----
name of PCS PRIMECO, L.P. or under such other name as the Partners may from time
to time designate. Such name shall be the exclusive property of the Partnership,
and no Partner shall have any right to use, and each Partner agrees not to use,
such name other than on behalf of the Partnership except, as may be permitted
from time to time by the Executive Committee.
2.3. Purpose. The purpose of the Partnership is to undertake the following
-------
activities:
(a) To acquire, hold title to and maintain PCS Licenses and to acquire PCS
Businesses in Designated MTAs/BTAs, and potentially in other areas, in
accordance with the eligibility and other requirements of FCC rules,
directly and by acquisition of equity interests in entities (including
Designated Entities) engaged in the PCS Business;
(b) To develop and coordinate the process by which the Partnership shall
submit bids in the name of the Partnership to the FCC in respect of the
auction of PCS Licenses;
(c) If the Partnership acquires one or more PCS Licenses or PCS Businesses,
to design, build, own and operate a PCS network in such manner as the
Partnership may deem appropriate from time to time, which may include,
without limitation, through management contracts and other
relationships; and
(d) To engage in any and all acts necessary, advisable, appropriate or
incidental to any of the foregoing that may lawfully be conducted by a
limited partnership organized under the Act.
2.4. Place of Business. The Partnership's principal place of business will
-----------------
be at such location as the Executive Committee may
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from time to time designate. The Partnership may have such other or additional
places of business or headquarters within or outside the State of Delaware as
the Executive Committee may from time to time designate.
2.5. Registered Office; Agent for Service of Process. The address of the
-----------------------------------------------
Partnership's registered office in the State of Delaware is c/o The Corporation
Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801. The agent for service of process at such address
for the Partnership in the State of Delaware is The Corporation Trust Company.
Agents for service of process of the Partnership may be changed by the Executive
Committee.
2.6. Term. The term of the Partnership shall commence on the date the
----
Certificate of Limited Partnership of the Partnership is filed in the office of
the Secretary of State of the State of Delaware, and shall continue through the
99th anniversary thereof, unless earlier dissolved pursuant to Article 10.
2.7. Partition. No Partner, nor any successor-in-interest to such Partner,
---------
shall have the right, while this Agreement remains in effect, to have the
property of the Partnership partitioned, or to file a complaint or institute any
proceeding at law or in equity to have the property of the Partnership
partitioned, and each Partner, on behalf of itself and its successors,
representatives and assigns, hereby waives any such right.
2.8. Capacity of the Partners. No Partner shall have any authority to act
------------------------
for, or to assume any obligation or responsibility on behalf of, any other
Partner or the Partnership, except as expressly provided in this Agreement or as
authorized by the Executive Committee.
2.9. Qualification in Other Jurisdictions. The General Partners shall cause
------------------------------------
the Partnership to be qualified, formed, or registered under assumed or
fictitious name statues or similar laws in any jurisdiction in which the
Partnership owns property or engages in activities if such qualification,
formation or registration is necessary to permit the Partnership lawfully to own
property and engage in the Partnership's business or transact business. The
General Partners shall execute, file and publish all such certificates, notices,
statements or other instruments necessary to permit the Partnership to engage in
the Partnership's business as a limited partnership in all jurisdictions where
the Partnership elects to engage in or do business.
2.10. Relationship with International Affiliates. Intellectual property
------------------------------------------
(other than trade names or trademarks developed by the Partnership) shall be
made available on an arm's
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length basis to Affiliates of the Partners having international operations.
ARTICLE 3.
OUTSIDE ACTIVITIES; ACQUISITION OF LICENSES
-------------------------------------------
3.1. Non-10 MHz PCS Licenses.
-----------------------
(a) No Partner nor any of its Affiliates shall bid, in the FCC auctions for
PCS Licenses, on any PCS License to use more than 10 MHz in any license
area except through the Partnership. If either (i) the Partnership has
not determined to bid on one or more specified PCS Licenses to use more
than 10 MHz in any license area, or (ii) the Partnership has entered a
bid or bids for such License but a third-party bid has been entered
which equals or exceeds the maximum amount that the Partnership has
determined to bid for such License, then one or more Partners or their
Affiliates may require the Partnership to bid for such licenses on their
behalf upon the following conditions. In the circumstances described in
clause (i), a Partner or its Affiliate may require the Partnership to
bid on such License on its behalf only if the representatives of such
Partner voted in favor of the Partnership's bidding in such area and, in
the circumstances described in clause (ii), a Partner or its Affiliate
may require the Partnership to enter a higher bid on its behalf only if
the representatives of such Partner voted in favor of the Partnership's
bidding at a higher level than the established maximum bid. If the
Partnership shall bid on any License on behalf of one or more Partners
or their Affiliates in accordance with the foregoing and shall be the
winning bidder on such License, then such Partner(s) shall be obligated
to fund any required payment by the Partnership for such License, and
the Partnership shall immediately transfer to such Partner(s) or their
Affiliate(s) such License or the right to receive such License (and all
remaining obligations to make payment therefor) and shall duly prosecute
all necessary regulatory or other approvals for such transfer; provided,
however, that if, during the 30-day period immediately following the FCC
auctions for such License, the Partner(s) other than such Partner make
an election in writing to have the Partnership acquire such License, the
Partnership shall retain such License and shall make all required
payments therefor. Following any transfer of a License to a Partner
such Partner and its Affiliates shall have the sole right and interest
in and to such License. Such Partner or Affiliate shall comply with
Section 3.1(c).
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<PAGE>
(b) If any Partner or any of its Affiliates wishes to acquire any ownership
interest in any PCS Business (excluding the acquisition of any license
to operate a PCS Business pursuant to one or more 10 MHz PCS Licenses),
other than the acquisition of PCS Licenses in the FCC auctions, then
such Partner shall first propose to the Partnership that the Partnership
make such acquisition, and shall present to the Partnership any
opportunity that may have been offered to such Partner or any of such
Affiliates to make such acquisition. If the Executive Committee does
not approve the making of such acquisition by the Partnership not later
than 30 days after the Partner has given notice to the Partnership of
the opportunity and the proposed material terms of the acquisition, and
if the representatives of such Partner voted in favor of making such
acquisition by the Partnership, then such Partner or any of such
Affiliates shall be free to make such acquisition on terms no more
favorable to the Partner or its Affiliates than those described in the
notice to the Partnership, provided (i) that the Partner or its
Affiliate enters into a definitive agreement (subject solely to
obtaining the requisite regulatory approvals and fulfilling the
requisite regulatory waiting periods) with respect thereto within 150
days after the Partner gave notice to the Partnership of the opportunity
and (ii) that such Partner complies with Section 3.1(c).
(c) It shall be a condition to any acquisition by a Partner or its Affiliate
of any PCS License (other than a 10 MHz PCS License) or an ownership
interest in any PCS Business that such PCS Business shall offer to enter
into an affiliation agreement with the Partnership on terms and
conditions comparable to those which the Partnership offers to other
affiliated PCS Businesses in similar situations (or if no such agreement
then exists, such terms and conditions as are approved by the Executive
Committee which terms and conditions shall include a "most-favored
nation" provision), under which such PCS Business will provide its
services to the public as an affiliate of the Partnership's business (an
AFFILIATION AGREEMENT). The Partnership may waive compliance with all
or any part of this Section 3.1(c) with respect to any transaction by
vote of the Executive Committee.
3.2. 10 MHz PCS Licenses. No Affiliate shall bid on or acquire, in the FCC
-------------------
auctions for PCS Licenses or otherwise, any PCS License to use a 10 MHz PCS
License, except that an Affiliate that is a landline communications carrier
(including, without limitation, a wireline cable television company) may acquire
a 10 MHz License for regions located substantially in the service territory of
such carrier.
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<PAGE>
3.3. Restrictions on Acquisitions of System Licenses. The Partners and
-----------------------------------------------
their Affiliates shall comply with the provisions of Section 7.4 of the Tomcom
Partnership Agreement, as if they were parties thereto.
3.4. Enforceability and Enforcement.
------------------------------
(a) The Partners acknowledge and agree that the time, scope, geographic area
and other provisions of Sections 3.1, 3.2 and 3.3 have been specifically
negotiated by sophisticated parties and specifically agree that such
time, scope, geographic area, and other provisions are reasonable under
the circumstances. The Partners agree that if, despite this express
agreement of the Partners, a court should hold any portion of Sections
3.1, 3.2 or 3.3 to be unenforceable for any reason, the maximum
restrictions of time, scope and geographic area reasonable under the
circumstances, as determined by the court, will be substituted for the
restrictions held to be unenforceable.
(b) Each Partner agrees that the Partnership shall be entitled to
preliminary and permanent injunctive relief, without the necessity of
proving actual damages or posting any bond or other security, as well as
an equitable accounting of all earnings, profits and other benefits
arising from any violation of Sections 3.1, 3.2 and 3.3, which rights
shall be cumulative and in addition to any other rights or remedies to
which the Partnership may be entitled.
3.5. Exceptions to Restrictions. The restrictions set forth in Sections
--------------------------
3.1, 3.2 and 3.3 on the activities described therein shall not be construed to
prohibit the activities of the Partners and their Affiliates of the type
described in Section 7.4(c) of the Tomcom Partnership Agreement.
3.6. Activities of the Partners. Except as expressly restricted by this
--------------------------
Article 3, each Partner and its Affiliates may engage in or hold an interest in
other business ventures and activities of any nature, including, without
limitation, ventures and activities similar to those of the Partnership, and
neither the Partnership nor the other Partners shall, by virtue of this
Agreement, have any interest or rights in or to such other ventures or business
or any liability or obligation with respect thereto.
3.7. Provision of Services to Telephone Companies. Subject to existing
--------------------------------------------
partnership agreements and regulatory requirements, the Partnership shall
provide to any Affiliate of a Partner which is a landline communications
carrier, such services provided by its PCS Business as such Affiliate (whether
acting as a
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<PAGE>
wholesaler or a retailer) may request at the lowest rates made available from
time to time by the Partnership to other retailers of such services for similar
volumes of such services.
3.8. Determination of Designated MTAs/BTAs. On or before December 5, 1994,
-------------------------------------
the Partners shall designate the Designated MTAs/BTAs for which the Partnership
will seek to acquire PCS Licenses, and shall determine the Bid Prices to be bid
for, or other acquisition prices to be paid for, such PCS Licenses. If the
Partners are unable to agree upon such Designated MTA/BTAs the matter shall be
referred for resolution by the chief executive officers of the respective
Partner Parents designated by each Partner.
ARTICLE 4.
CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS
---------------------------------------
4.1. Initial Capital Contributions. Contemporaneously with the execution
-----------------------------
hereof, each of the Partners have contributed to the capital of the Partnership
the cash amount set forth on Schedule I hereto, receipt of which is hereby
acknowledged. The Partners and the Partnership agree and acknowledge that
immediately after the foregoing contribution, the initial Percentage Interests
of the Partners and the initial ratio of the Specified Account Value of a
Partner to all Partners shall be in the ratios set forth on Schedule I hereto.
4.2. Additional Capital Calls. Not later than November 18, 1994, each of
------------------------
the Partners shall contribute to the capital of the Partnership in proportion to
their respective Partnership Interests an amount sufficient to pay all filing
and qualification fees to enable the Partnership to bid on the Designated
MTAs/BTAs identified pursuant to Section 3.8. Each Partner may contribute to
the capital of the Partnership, not necessarily in proportion to their
Percentage Interests, an amount sufficient to fund the bids which such Partner
may desire to make pursuant to Section 3.1(a) hereof. In addition, upon 30 days
prior written notice to the Partners, the Partnership may, from time to time,
issue Capital Calls, requiring the Partners to make additional contributions of
capital to the Partnership in proportion to their respective Percentage
Interests. Capital Calls specifically referred to in any annual budget included
in any Business Plan may be made by the chief executive officer of the
Partnership. Any Capital Call not so provided for must be approved by the
Executive Committee.
4.3. Failure to Pay a Capital Call.
-----------------------------
(a) If any Partner fails to make payment when due of all or any portion of
its share of a Capital Call, the secretary of the Partnership shall give
written notice of the
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<PAGE>
failure to such Partner, with a copy to all other Partners. If the
Partner fails to pay the amount due within 10 days following receipt of
notice, the secretary shall promptly give notice of such failure to the
other Partners. At any time within 15 days following receipt of such
notice, then, unless the Nondelinquent Partners elect to make capital
contributions in accordance with Section 4.3(b) hereof, (i) the amount
contributed by each Nondelinquent Partner pursuant to the Capital Call
shall be treated as a loan to the Partnership for a term to be specified
by such Nondelinquent Partner, bearing interest payable quarterly at the
Default Interest Rate and (ii) each Nondelinquent Partner may make an
additional loan to the Partnership for a term to be specified by such
Non-Delinquent Partner, also bearing interest payable quarterly at the
Default Interest Rate, in an amount equal to all or any portion of the
unpaid contribution. If two or more Partners desire to provide funds
under clause (ii) of the preceding sentence, the total amount of funds
provided shall be allocated among such Partners in proportion to their
then current relative Percentage Interests or in such other manner as
they may agree.
(b) If Nondelinquent Partners whose Percentage Interests represent more than
50% of the Percentage Interests of all of the Nondelinquent Partners so
elect (for purposes of such calculations, any Partner that is an
Affiliate of a Delinquent Partner shall be treated as a Delinquent
Partner, and all Partners which are Affiliates of each other shall be
deemed to be a single Partner), then in lieu of making loans to the
Partnership in accordance with Section 4.3(a) hereof, (A) the amount
contributed by each Nondelinquent Partner pursuant to the Capital Call
shall be treated as a contribution to the capital of the Partnership in
exchange for an additional interest in the Partnership and (B) each
Nondelinquent Partner may make an additional contribution of capital to
the Partnership in exchange for an additional interest in the
Partnership in an amount equal to all or any portion of the unpaid
contribution. If two or more Partners desire to make capital
contributions under clause (B) of the preceding sentence, the total
amount of capital to be contributed shall be allocated among such
Partners in proportion to their then current relative Percentage
Interests or in such other manner as they may agree.
(c) The amounts contributed pursuant to Section 4.3(b) hereof shall increase
the Capital Accounts of the contributing Partners in accordance with the
terms of this Agreement. In addition, the Percentage Interests shall be
recalculated (and such recalculated Percentage Interests shall
thereafter apply for all purposes of this
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<PAGE>
Agreement) such that the Percentage Interest of each Partner shall equal
the ratio of its Specified Account Value to the aggregate Specified
Account Values of all of the Partners calculated as if the amounts
contributed pursuant to Section 4.3(b) were 115% of the amounts actually
contributed. Once an adjustment is made pursuant to this Section 4.3(c),
any future calculations of Percentage Interests in the Partnership shall
be calculated on an aggregate basis using the methodology (including the
115% weighing) specified above.
(d) Any Partner who becomes a Delinquent Partner hereby agrees to cause each
of its Affiliated Entities to agree to the terms of this Section 4.3.
4.4. Capital Accounts. The Partnership shall maintain for each Partner a
----------------
single Capital Account with respect to the Partner's Partnership Interest in
accordance with the regulations issued pursuant to Section 704 of the Code. The
Capital Account of each Partner shall be maintained for such Partner in
accordance with the following provisions:
(a) To each Partner's Capital Account there shall be credited the amount of
cash and the Agreed Value of any assets contributed to the capital of
the Partnership by such Partner pursuant to any provision of this
Agreement, such Partner's distributive share of Profits and any items in
the nature of income or gain which are specially allocated pursuant to
Section 6.2 or Section 6.3 or Section 6.4.5, and the amount of any
Partnership liabilities which are assumed by such Partner or which are
secured by any Partnership property distributed to such Partner.
(b) To each Partner's Capital Account there shall be debited the amount of
cash and the Agreed Value of any Partnership property distributed to
such Partner pursuant to any provision of this Agreement, such Partner's
distributive share of Losses and any items in the nature of expenses or
losses which are specially allocated pursuant to Section 6.2 or Section
6.3 or Section 6.4.5, and the amount of any liabilities of such Partner
which are assumed by the Partnership or which are secured by any
property contributed by such Partner to the Partnership, and the amount
of any liabilities of any other partnership, interests in which were
contributed to the Partnership, to the extent such liabilities are
included in the Agreed Value of such contributed partnership interests.
(c) In the event that all or a portion of a Partnership Interest is
transferred in accordance with the terms of
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<PAGE>
this Agreement, the transferee shall succeed to the Capital Account of
the transferor to the extent that it relates to the transferred
interest.
(d) In determining the amount of any liability for purposes of paragraphs
(a) and (b) hereof, there shall be taken into account Code Section
752(c) and any other applicable provisions of the Code and Regulations.
(e) Further adjustments shall be made to the extent provided in Section
4.3(b)(viii) of the Tomcom Partnership Agreement.
The principal amount of a promissory note which is not readily traded on an
established securities market and which is contributed to the Partnership by the
maker of the note (or by a person related to the maker of the note within the
meaning of Regulation Sections 1.704-1(b)(2)(ii)(c)) shall not be included in
-
the Capital Account of any Partner until the Partnership makes a taxable
disposition of the note or until (and to the extent) principal payments are made
on the note, all in accordance with Regulations Section 1.704-1(b)(2)(iv)(d)(2)
- -
(any such note being referred to as a PARTNER NOTE).
The foregoing provisions and the other provisions of this Agreement relating
to the maintenance of Capital Accounts are intended to comply with Regulations
Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a
manner consistent with such Regulations. To the extent that such Regulations
require that adjustments other than those set out above or in Section 6.2.6 be
made to the Capital Accounts of the Partners, such adjustments shall be made.
4.5. Conversion to Limited Partner. If at any time the Percentage Interests
-----------------------------
of a Partner and its Affiliates who are Partners aggregate less than 35% for a
period of more than 90 days (except solely as a result of capital contributions
made in accordance with the second sentence of Section 4.2 to fund bids in
accordance with Section 3.2(a)), then such Partner shall cease to be a General
Partner and shall continue to be, or become, a Limited Partner having no right
to participate in the management of the business and affairs of the Partnership,
including the right to designate members of the Executive Committee.
ARTICLE 5.
MANAGEMENT OF THE PARTNERSHIP
-----------------------------
5.1. Executive Committee.
-------------------
5.1.1. Powers. The business and affairs of the Partnership shall be
------
managed under the direction of the
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<PAGE>
Executive Committee; and all powers of the Partnership, except those
specifically reserved or granted to the Partners by statute or this
Agreement, are hereby granted to and vested in the Executive Committee. The
Executive Committee shall have the power to delegate authority to such
officers, employees, agents and representatives of the Partnership as it may
from time to time deem appropriate. Any delegation of authority to take any
action must be approved in the same manner as would be required for the
Executive Committee to directly approve such action. No Partner shall take
any action in the name of or on behalf of the Partnership, including without
limitation assuming any obligation or responsibility on behalf of the
Partnership, unless such action, and the taking thereof by such Partner,
shall have been expressly authorized by the Executive Committee or shall be
expressly and specifically authorized by this Agreement. Each Partner, by
execution of this Agreement, agrees to, consents to, and acknowledges the
delegation of powers and authority to the members of the Executive Committee
hereunder and to the actions and decisions of the members of the Executive
Committee within the scope of such authority.
5.1.2. Number and Term of Office. Each of the General Partners shall
-------------------------
have the right to designate three members of the Executive Committee by
written notice to the secretary of the Partnership and to each other General
Partner. Any General Partner may at any time, and from time to time, remove
or replace any or all of the members designated by such General Partner, and
shall give written notice to the secretary of the Partnership and to each
other General Partner of any such removal or replacement. Each member of the
Executive Committee shall be an officer or employee or former employee of a
Partner or an Affiliate thereof.
5.1.3. Resignations; Removals. Any member of the Executive Committee
----------------------
may resign at any time by giving written notice to the secretary of the
Partnership and the General Partner that appointed such member. Such
resignation shall take effect on the date shown on or specified in such
notice or, if such notice is not dated, at the date of the receipt of such
notice by the secretary of the Partnership. No acceptance of such
resignation shall be necessary to make it effective. The General Partner
that appointed a resigning member shall be entitled to appoint a member to
fill the vacancy created by such resignation by written notice to the
secretary of the Partnership and to each other General Partner. Effective
upon a General Partner ceasing to be a general partner of the Partnership,
the members of the Executive Committee appointed by such Partner shall cease
to be members.
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<PAGE>
5.1.4. Place of Meeting. The Executive Committee may hold its meetings
----------------
at such place or places within or outside the State of Delaware as the
Executive Committee may from time to time determine or as may be designated
in the notice calling the meeting. If a meeting place is not so designated,
the meeting shall be held at the Partnership's principal office.
5.1.5. Regular Meetings. Regular meetings of the Executive Committee
----------------
may be held without notice at such time and place as shall be designated from
time to time by resolution of the Executive Committee, but such meetings
shall be held at least once each calendar month unless otherwise specified by
the Executive Committee. If the date fixed for any such regular meeting is a
Saturday, Sunday or legal holiday under the laws of the state where such
meeting is to be held, then the meeting shall be held on the next succeeding
business day or at such other time as may be determined by resolution of the
Executive Committee. At such meetings the members of the Executive Committee
shall transact such business as may properly be brought before the meeting.
5.1.6. Special Meetings. Special meetings of the Executive Committee
----------------
may be called by any member of the Executive Committee or by the chief
executive officer of the Partnership. Notice of each such meeting shall be
given to each member of the Executive Committee by telephone, telecopy,
telegram or similar method (in which case notice shall be given at least five
days before the time of the meeting) or sent by first-class mail (in which
case notice shall be given at least seven days before the meeting), unless
otherwise specified by the Executive Committee. Each such notice shall state
the time, place and purpose of the meeting to be so held.
5.1.7. Voting. The member or members of the Executive Committee
------
appointed by each General Partner who are present (in person or by written
proxy) at any meeting of the Executive Committee (or who are acting by
written consent in lieu of a meeting) shall be entitled to act on behalf of
such General Partners. If only one member appointed by a given General
Partner is present at a meeting, such member shall be entitled to vote the
entire voting power held by all members appointed by such General Partner.
If more than one member appointed by a given General Partner is present at a
meeting, such members shall vote such General Partner's entire voting power
as a single unit. In the event of a disagreement at a meeting among members
appointed by a single General Partner as to how to vote on any matter, the
vote of the member designated by such General Partner as its senior
representative shall be controlling and the vote of the other
- 21 -
<PAGE>
member or members representing such General Partner shall be disregarded with
respect to such matter.
5.1.8. Manner of Acting and Adjournment. Any action of the Executive
--------------------------------
Committee shall require the affirmative vote of members of the Executive
Committee representing each of the General Partners, except as may be
otherwise specifically provided by this Agreement. The presence at a duly
called meeting of the Executive Committee of members representing each
General Partner shall constitute a quorum. If a quorum shall not be present
at any meeting of the Executive Committee, the members of the Executive
Committee present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present. For all purposes of this Article 5, all General Partners which are
Affiliates of each other shall be deemed to be a single General Partner.
5.1.9. Actions Requiring Vote of the Executive Committee. Without
-------------------------------------------------
limitation of the powers and authority of the Executive Committee, the
following actions shall require the affirmative vote of members of the
Executive Committee representing all of the General Partners:
(a) Admission of any Person as a partner in the Partnership;
(b) Engaging, directly or indirectly, in any business other than the
PCS Business;
(c) Any amendment of this Agreement;
(d) Voluntary dissolution or winding-up of the Partnership, except as
specifically provided in this Agreement, or voluntary initiation by
and with respect to the Partnership of bankruptcy or similar
proceedings;
(e) Acquisitions or dispositions of assets or property (in one or a
series of related transactions) with a fair market value (as
determined in good faith by the Executive Committee) of twenty-five
percent (25%) or more of the total fair market value of all the
assets of the Partnership;
(f) Approval of a Business Plan (including the initial Business Plan
and the auction strategy), or a material modification to a Business
Plan;
(g) Making of any Capital Call other than a Capital Call provided for
in any annual budget included in any Business Plan; and
- 22 -
<PAGE>
(h) Appointment, removal, and compensation of the Chief Executive
Officer, the Chief Operating Officer and the Chief Financial
Officer of the Partnership;
(i) Entry into any material transaction outside the scope or
contemplation of the Business Plan, or any other material deviation
from the Business Plan;
(j) Approval of the terms of the standard Affiliation Agreement to be
entered into between the Partnership and third-party owners of PCS
Businesses; and
(k) Appointment of and any change in the auditors of the Partnership.
5.1.10. Affiliated Transactions. In lieu of any other approval by the
-----------------------
Executive Committee hereunder, any claim or proceeding or similar action may
be brought or made in the name of the Partnership against a Partner or any of
its Affiliates, and any rights of the Partnership against the other Partner
may be exercised upon the affirmative vote of members of the Executive
Committee representing a majority Percentage Interest of all General Partners
other than the Partner against whom or whose Affiliate the action is brought.
5.1.11. Business Plan. On or before December 5, 1994, the Executive
-------------
Committee shall adopt an initial one-year and five-year business plan for the
Partnership. Such business plan, and each subsequent business plan prepared
for the Partnership and approved by the Executive Committee are referred to
herein as a BUSINESS PLAN. Not later than one month after completion of the
initial PCS auctions for Designated MTA/BTAs, and not later than three months
prior to the start of each subsequent fiscal year of the Partnership, the
Chief Executive Officer of the Partnership shall submit to the Executive
Committee a proposed Business Plan including an operating budget for such
fiscal year, a financial commitment for the five-year period beginning with
such fiscal year, and a financial view for the five-year period beginning
with such fiscal year. If the Executive Committee fails to approve a
Business Plan prior to the beginning of any fiscal year, then the Partnership
shall be operated on the basis of the Business Plan in effect for the prior
year until a new Business Plan is approved, provided, however, that no
Capital Calls or borrowings provided for in the annual budget for such prior
year shall be repeated in such new year unless specifically approved for such
new year by all of the General Partners or unless specifically provided for
in the financial commitment or financial view portions of the Business Plan
applicable to such period.
- 23 -
<PAGE>
5.1.12. Deadlocks. Upon the occurrence of a Deadlock Event (as
---------
detailed below), the General Partners shall first use their good faith
efforts to resolve such matter in a mutually satisfactory manner. If, after
such efforts have continued for 20 days (or, if shorter, until ten days
before the vote or action on such matter must be taken, provided that the
General Partners shall have used their mutual good faith efforts to secure
all possible extensions of time for such vote or action), no mutually
satisfactory solution has been reached, the parties shall resolve the
Deadlock Event as provided herein:
(a) Each General Partner shall first refer the matter to the chief executive
officer of that partner of the General Partner designated by such
General Partner for resolution of the matter.
(b) If such officers, after a good faith effort, are unable to resolve the
dispute, they shall (at the instance of either of them, but in no event
later than 20 days after the matter has been referred to them) refer the
matter to the chief executive officers of the respective Partner Parent
of such Partner for resolution of the matter.
(c) Should the designated chief executive officers of the respective Partner
Parents fail to resolve the matter within 40 days, the matter shall be
considered defeated.
(d) DEADLOCK EVENT shall be deemed to have occurred if (i) after failing to
approve a Business Plan for one fiscal year, the Executive Committee
fails to approve a one-year Business Plan not less than 90 days prior to
the commencement of the next succeeding fiscal year, (ii) a disagreement
that continues for at least 30 days over the removal of the Chief
Executive Officer or the position of Chief Executive Officer of the
Partnership is vacant for a period of more than 30 days after one of the
General Partners has proposed a candidate to fill such vacancy, or (iii)
a disagreement continues for at least 30 days over the timing or amount
of a Capital Call other than as provided for in a Business Plan.
5.1.13. Action Without Meeting. Any action required or permitted to be
----------------------
taken at any meeting of the Executive Committee may be taken without a
meeting upon the written consent of members of the Executive Committee
representing each General Partner then in office and entitled to vote on such
action.
5.1.14. Approval by Limited Partners. Except as otherwise required by
----------------------------
the Act, no vote or approval by any Limited Partner shall be required under
this Agreement for the taking of an action, including without limitation the
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<PAGE>
amendment of this Agreement, and the Percentage Interest of any Limited
Partner who is not also a General Partner shall not be included in any
calculation of a Partner's Percentage Interest entitled to vote on any
matter.
5.2. Indemnification of Partners, Executive Committee, Officers and Others.
---------------------------------------------------------------------
5.2.1. In General. The Partnership, to the maximum extent permitted by
----------
law, shall indemnify and hold harmless each Partner, its Affiliates and each
of its and their respective officers, directors or management committee
members, as the case may be, and each of the members of the Executive
Committee (MANDATORY INDEMNITEES) and may indemnify and hold harmless each of
the officers, employees or agents of the Partnership (PERMITTED INDEMNITEES),
from and against any and all judgments, interest on such judgments, fines,
penalties, charges, costs, amounts paid in settlement, expenses and
reasonable attorneys' fees incurred in connection with any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing
by or before any court or governmental, administrative or other regulatory
agency, body or commission, whether pending or threatened, and whether or not
an Indemnitee is or may be a party thereto, which arise out of the business
or affairs of the Partnership or their activities with respect thereto on or
after the date hereof (INDEMNIFIED DAMAGES), except for any such Indemnified
Damages that are Taxes imposed on or against any Partner or that have
resulted primarily from gross negligence, fraud, bad faith or willful
misconduct of or knowing violation of law by the person seeking
indemnification (or any of its Affiliates). The Partnership shall pay for or
reimburse the reasonable expenses incurred by any Mandatory Indemnitee, and
may pay for and reimburse the reasonable expenses incurred by any Permitted
Indemnitee, in any such proceeding in advance of the final disposition of the
proceeding if the person sets forth in writing (a) the person's good faith
belief that the person is entitled to indemnification under this provision
and (b) the person's agreement to repay all advances if it is ultimately
determined that the person is not entitled to indemnification under this
Section 5.2.1. Any repeal or modification of any portion of the foregoing
provisions of this Section 5.2.1 or the adoption of any provision of this
Agreement inconsistent with any portion of the foregoing provisions of this
Section 5.2.1 shall not adversely affect any right or protection of any
person indemnified under this Section 5.2.1 for any act or omission
occurring, or any cause of action, suit, claim or other matter arising or
accruing, prior to the later of (y) the effective date of such repeal,
modification or adoption or (z) the date notice of the amendment is given to
all Partners. This Section 5.2.1 shall not be deemed exclusive of any other
provisions for
- 25 -
<PAGE>
indemnification or advancement of expenses of directors, officers, employees,
agents and fiduciaries that may be included in any statute, any agreement,
any general or specific action of the Executive Committee, any vote of
Partners or other document or arrangement.
5.2.2. Reliance on Provisions. Each person who shall act as a member
----------------------
of the Executive Committee of the Partnership shall be deemed to be doing so
in reliance upon the rights of indemnification and advancement of expenses
provided by this Article.
5.2.3. Insurance. The Partnership may purchase and maintain insurance
---------
on behalf of any person who is or was a member of the Executive Committee or
an officer of the Partnership against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the Partnership would have the
power to indemnify such person against such liability under the provisions of
this Section 5.2.3 or otherwise.
5.3. Partner Compensation; Reimbursement.
-----------------------------------
(a) The Partners shall receive no compensation for performing their duties
under this Agreement; provided that this provision shall not affect (i)
--------
any Partner's right to receive its allocation of Profits and Losses or
distributions as set forth in Article 6, (ii) the right of any Partner
or its Affiliates to receive such compensation as may be expressly
approved by the Executive Committee, (iii) any Partner's right to be
reimbursed for payment of Partnership obligations as provided in
subsection (b) of this Section 5.3 or (iv) the right of a Partner to be
repaid the amount of any loans to the Partnership by a Partner.
(b) Each of the Partners shall be entitled to receive, out of Partnership
funds available therefor, reimbursement of all amounts expended by such
Partner in payment of properly incurred Partnership obligations paid by
such Partner out of its own funds.
5.4. Taxes and Charges; Governmental Rules. Each Partner shall (i) promptly
-------------------------------------
pay all applicable Taxes and other governmental charges imposed on or against
such Partner, except to the extent (x) the failure to promptly pay such Taxes or
other governmental charges will not have a material adverse effect on the
Partnership or its assets or (y) any such Taxes or other governmental charges
are being contested in good faith by appropriate proceedings, and (ii) comply
with all applicable
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<PAGE>
governmental rules, except to the extent that such noncompliance will not have a
material adverse effect on the Partnership.
5.5. Further Assurances. Following execution and delivery of this Agreement
------------------
by all of the Partners, each Partner shall, at its own cost, do, execute and
perform all such other acts, deeds and documents as the other Partner or the
Partnership may from time to time reasonably require in order to carry out fully
the intents and purposes of this Agreement or to comply with any applicable
governmental rules.
ARTICLE 6.
ALLOCATIONS OF PROFITS AND LOSSES; DISTRIBUTIONS
------------------------------------------------
6.1. General Allocation Rule. After giving effect to the special
-----------------------
allocations set forth in Sections 6.2 and 6.3 hereof, Profits and Losses for any
fiscal year (or any shorter period if during any fiscal year there is a change
in Percentage Interests) shall be allocated among the Partners in proportion to
their respective Percentage Interests; provided, however, that amortization
deductions attributable to Organizational Expenses paid or incurred directly by
a Partner shall be allocated to such Partner.
6.2. Special Allocations. The following special allocations shall be made
-------------------
in the following order:
6.2.1. Minimum Gain Chargeback. Except as otherwise provided in
-----------------------
Section 1.704-2(f) of the Regulations, notwithstanding any other provision of
this Article 6, if there is a net decrease in Partnership Minimum Gain during
any Partnership fiscal year, each Partner shall be specially allocated items
of Partnership income and gain for such fiscal year (and, if necessary,
subsequent years) in an amount equal to such Partner's share of the net
decrease in Partnership Minimum Gain, determined in accordance with
Regulations Section 1.704-2(g). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Partner pursuant thereto. The items to be so allocated
shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-
2(j)(2) of the Regulations. This Section 6.2.1 is intended to comply with
the minimum gain chargeback requirement in Section 1.704-2(f) of the
Regulations and shall be interpreted consistently therewith.
6.2.2. Partner Minimum Gain Chargeback. Except as otherwise provided
-------------------------------
in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other
provision of this Article 6, if there is a net decrease in Partner
Nonrecourse Debt Minimum Gain attributable to a Partner Nonrecourse Debt
- 27 -
<PAGE>
during any fiscal year, each Partner who has a share of the Partner
Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt,
determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall
be specially allocated items of Partnership income and gain for such fiscal
year (and, if necessary, subsequent years) in an amount equal to such
Partner's share of the net decrease in Partner Nonrecourse Debt Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Partner pursuant thereto. The items to be so allocated
shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-
2(j)(2) of the Regulations. This Section 6.2.2 is intended to comply with
the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the
Regulations and shall be interpreted consistently therewith.
6.2.3. Qualified Income Offset. If any Partner unexpectedly receives
------------------------
any adjustment, allocation or distribution described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and gain
- - - -
shall be specially allocated to such Partner in an amount and manner
sufficient to eliminate, to the extent required by the Regulations, any
resulting Adjusted Capital Account Deficit of such Partner as quickly as
possible; provided, however,that an allocation pursuant to this Section
6.2.3 shall be made if and only to the extent that such Partner would have an
Adjusted Capital Account Deficit after all other allocations provided for in
this Article 6 have been tentatively made as if this Section 6.2.3 were not
in this Agreement.
6.2.4. Nonrecourse Deductions. Nonrecourse Deductions for any fiscal
----------------------
year shall be allocated among the Partners in proportion to their respective
Percentage Interests.
6.2.5. Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
------------------------------
for any fiscal year shall be allocated to the Partner who bears the economic
risk of loss with respect to the Partner Nonrecourse Debt to which such
Partner Nonrecourse Deductions are attributable in accordance with
Regulations Section 1.704-2(i).
6.2.6. Certain Section 754 Adjustments. To the extent an adjustment to
-------------------------------
the adjusted tax basis of any Partnership asset pursuant to Code Section
743(b), Code Section 732(d) or Code Section 734(b) is required, pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in
-
determining Capital Accounts as the result of a distribution to a Partner in
complete liquidation of its interest in the
- 28 -
<PAGE>
Partnership, the amount of such adjustment to Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis) and such gain or loss
shall be specially allocated to the Partners in accordance with their
interests in the Partnership as determined under Regulations Section 1.704-
1(b)(3) in the event Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or
- -
to the Partner to whom such distribution was made in the event Regulations
Section 1.704-1(b)(2)(iv)(m)(4) applies.
- -
6.3. Curative Allocations. The allocations set forth in Sections 6.2.1
--------------------
through 6.2.6 hereof (REGULATORY ALLOCATIONS) are intended to comply with
certain requirements of the Regulations and Internal Revenue Service advance
ruling requirements. It is the intent of the parties to this Agreement that, to
the extent possible, all Regulatory Allocations shall be offset either with
other Regulatory Allocations or with special allocations of other items of
income, gain, loss or deduction pursuant to this Section 6.3. Therefore,
notwithstanding any other provision of this Article 6 (other than the Regulatory
Allocations and the following sentence), the Tax Matters Partner shall make such
offsetting special allocations of Partnership income, gain, loss or deduction in
whatever manner it determines in reasonable good faith is appropriate so that,
after such offsetting allocations are made, each Partner's Capital Account
balance is, to the extent possible, equal to the Capital Account balance which
such Partner would have had if the Regulatory Allocations were not part of this
Agreement and all Partnership items were allocated pursuant to Section 6.1
hereof. In exercising its discretion under this Section 6.3, the Tax Matters
Partner shall take into account Regulatory Allocations under Sections 6.2.1 and
6.2.2 that, although not yet made, are likely to offset other Regulatory
Allocations previously made under Sections 6.2.4 and 6.2.5.
6.4. Other Allocation Rules.
----------------------
6.4.1. Allocations When Percentage Interests Change. For purposes of
--------------------------------------------
determining the Profits, Losses or any other items allocable to any period,
Profits, Losses and any such other items shall be determined on a daily,
monthly, or other basis, as determined by the Tax Matters Partner using any
permissible method under Code Section 706 and the Regulations thereunder;
provided, however, that any adjustments to the Agreed Value of a Partnership
asset treated as gain or loss under paragraph (c) of the definition of
"Profits" and "Losses" or under paragraph (c) of Section 6.4.5 hereof, shall
be allocated only to those persons who were Partners immediately before the
event giving rise to such adjustment.
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<PAGE>
6.4.2. Allocation of Particular Items. Except as otherwise provided in
------------------------------
this Agreement, all items of Partnership income, gain, loss, deduction and
any other allocations not otherwise provided for shall be divided among the
Partners in the same proportions as they share Profits or Losses, as the case
may be, for the fiscal year or other relevant period.
6.4.3. Tax Reporting. The Partners are aware of the income tax
-------------
consequences of the allocations made by this Article 6 and hereby agree to be
bound by the provisions of this Article 6 in reporting their shares of
Partnership income and loss for income tax purposes.
6.4.4. Profit Shares. Solely for purposes of determining a Partner's
-------------
proportionate share of the Partnership's "excess nonrecourse liabilities," as
defined in Regulations Section 1.752-3(a), the Partners' interests in
Partnership profits shall be deemed to be in proportion to their respective
shares of Profits set forth in Section 6.1.
6.4.5. Book Items Used in Special Allocations. For purposes of
--------------------------------------
determining the Partnership's items of income, gain, loss or deduction for
any fiscal year or other relevant period available to be allocated pursuant
to Sections 6.2 and 6.3 hereof, the following rules shall be applied:
(a) Exempt Items. Any income of the Partnership that is exempt from
------------
federal income tax shall be taken into account as an item of
income;
(b) Nondeductible Expenditures. Any Nondeductible Expenditure of the
--------------------------
Partnership shall be taken into account as an item of deduction;
(c) Adjustments to Agreed Values. In the event the Agreed Value of any
----------------------------
Partnership asset is adjusted pursuant to paragraph (b) or
paragraph (c) under the definition herein of "Agreed Value," the
amount of such adjustment shall be taken into account as gain or
loss from the disposition of such asset;
(d) Certain Dispositions. Gain or loss resulting from any disposition
--------------------
of Partnership property with respect to which gain or loss is
recognized for federal income tax purposes shall be computed by
reference to the Agreed Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property
differs from its Agreed Value;
(e) Depreciation. In lieu of the depreciation, amortization and other
------------
cost recovery deductions taken into account in computing the
Partnership's
- 30 -
<PAGE>
taxable income or loss there shall be taken into account
Depreciation for such fiscal year or relevant period; and
(f) Certain Section 734(b) Adjustments. To the extent an adjustment to
----------------------------------
the adjusted tax basis of any Partnership asset pursuant to Code
Section 734(b) is required, pursuant to Regulations Section 1.704-
(b)(2)(iv)(m)(4), to be taken into account in determining Capital
- -
Accounts as a result of a distribution other than in liquidation of
a Partner's interest in the Partnership, the amount of such
adjustment shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment
decreases such basis) from the disposition of such asset.
6.5. Tax Allocations; Code Section 704(c).
------------------------------------
6.5.1. Generally. A Partner's allocable share of the Partnership's
---------
items of income (including income exempt from tax), gain, deduction, loss and
Nondeductible Expenditure for tax purposes shall be determined under the
foregoing provisions of this Article 6 except as provided in this Section
6.5.
6.5.2. Contributed Property. In accordance with Code Section 704(c)
--------------------
and the Regulations thereunder, income, gain, loss and deduction with respect
to any property contributed to the capital of the Partnership shall, solely
for tax purposes, be allocated among the Partners so as to take account of
any variation between the adjusted basis of such property to the Partnership
for federal income tax purposes and its initial Agreed Value, determined in
accordance with the definition of Agreed Value hereunder.
6.5.3. Adjustments to Agreed Value. If the Agreed Value of any
---------------------------
Partnership asset is adjusted pursuant to the definition of Agreed Value
hereunder, subsequent allocations of income, gain, loss and deduction with
respect to such asset for tax purposes shall take account of any variation
between the adjusted basis of such asset for federal income tax purposes and
its Agreed Value in the same manner as under Code Section 704(c) and the
Regulations thereunder.
6.5.4. Elections. Upon the request of a transferee of a Partnership
---------
Interest or of a distributee of a Partnership distribution, the Partnership
shall make the election under Section 754 of the Code in accordance with
applicable Regulations thereunder for the first fiscal year in which such
election could apply, unless the Tax Matters Partner reasonably determines
that such election is not in the best
- 31 -
<PAGE>
interest of the Partnership. Subject to Section 11.17, any other elections
or other decisions relating to allocations pursuant to this Section 6.5 shall
be made by the Tax Matters Partner in any manner that reasonably reflects the
purpose and intention of this Agreement. Allocations pursuant to this
Section 6.5 are solely for purposes of federal, state and local taxes and
shall not affect, or in any way be taken into account in computing, any
Partner's Capital Account or share of Profits, Losses, other items or
distributions pursuant to any provision of this Agreement.
6.6. Distributions.
-------------
6.6.1. In General. Unless otherwise determined by the Executive
----------
Committee, the Partnership shall distribute to the Partners in proportion to
their respective Percentage Interests, on a fiscal quarterly basis as
promptly as practicable after the end of each quarter, all Net Operating
Available Cash.
6.6.2. Partner Loans. For so long as any loans made pursuant to
-------------
Section 4.3(a) remain outstanding, any amounts that would otherwise be
distributed pursuant to Section 6.6.1 shall instead be used to repay such
loans. Amounts paid pursuant to this Section 6.6.2 shall be apportioned
among the holders of such loans in proportion to the relevant amounts owing
under each loan.
6.6.3. Liquidating Distributions. Notwithstanding Section 6.6.1 to the
-------------------------
contrary, following the dissolution of the Partnership, distributions to the
Partners shall be made in accordance with the provisions of Article 10.
6.6.4. Amounts Withheld. All amounts withheld pursuant to the Code or
----------------
any provision of any state or local tax law with respect to any payment or
distribution to the Partnership or the Partners shall be treated as amounts
distributed to the Partners pursuant to this Section 6.6 for all purposes
under this Agreement. The Tax Matters Partner is authorized to withhold from
distributions, or with respect to allocations, to the Partners and to pay
over to any federal, state or local government any amounts required to be so
withheld pursuant to the Code or any other provision of federal, state or
local law and shall allocate any such amounts to the Partners with respect to
which such amounts were withheld.
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<PAGE>
ARTICLE 7.
BOOKS AND RECORDS
-----------------
7.1. Accounting. Except as may be otherwise agreed to by the Executive
----------
Committee, the Partnership will maintain books and records for tax purposes in
accordance with federal income tax accounting principles utilizing the accrual
method of accounting, and for accounting purposes in accordance with GAAP. In
addition, the Partnership shall cause to be prepared with respect to each fiscal
year of the Partnership financial statements based on GAAP. Appropriate records
will be kept so that upon each closing of the Partnership books it is possible
to determine, among other items defined in this Agreement, (i) the amount of
capital actually contributed by each Partner; (ii) the amount of cash or other
property distributed to each Partner; (iii) the effect of all Partnership items
of Profit, Loss, income, gain, loss, deduction or credit on each Partner's
Capital Account; and (iv) all pertinent expenses and cash disbursement accounts.
7.2. Fiscal Year. Except as may be otherwise determined by the Executive
-----------
Committee, the fiscal year of the Partnership shall be the twelve months ending
December 31 of each year. Notwithstanding the foregoing, the taxable year of
the Partnership shall be determined in accordance with Code Section 706(b).
7.3. Statements and Reports. Except as may be otherwise determined by the
----------------------
Executive Committee, as soon as practicable, but in no event later than 45 days
after the close of each fiscal year of the Partnership, the Partnership will
cause to be prepared and will have furnished to each of the Partners, with
respect to such period, (i) a profit and loss statement, (ii) a statement of
cash flows, (iii) a Partnership balance sheet as of the close of such period,
(iv) such other statements showing in reasonable detail each Partner's interest
in each of the items described in Section 7.1., and (v) proportional accounting
information with respect to the Partnership's interest in its PCS systems. The
foregoing statements will be prepared in accordance with GAAP, consistently
applied, and audited by an independent certified public accounting firm of
national reputation which shall be designated by the Executive Committee, and
the cost of preparing the statements and of each such audit will be paid for by
the Partnership. In addition, unaudited quarterly financial reports and updates
with respect to the Partnership's business shall be prepared and furnished to
each Partner as soon as practicable after the end of each fiscal quarter, but in
no event later than 20 days following the close of each fiscal quarter.
7.4. Inspection. The Partnership shall maintain or cause to be maintained
----------
complete and accurate books and records with
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<PAGE>
respect to its business. All books of account and all other records of the
Partnership (including an executed counterpart of this Agreement and all
amendments hereto) will at all times be kept at the Partnership's principal
place of business. Any General Partner and its representatives or designees may,
during regular business hours, inspect the books and records of the Partnership,
and each General Partner and its auditors may, during regular business hours,
conduct an audit of such books and records at its own expense. The Partnership
shall provide access to the facilities, systems and books and records of the
Partnership to the extent reasonably considered necessary by the auditors and
internal audit departments of the inspecting General Partner in the performance
of the audits of the inspecting General Partner. Whenever any such audit is
conducted by any General Partner and its auditors, such General Partner shall
advise the other General Partners and permit the other General Partners and
their auditors to be present during such audit.
7.5. Certain Tax Matters.
-------------------
7.5.1. Preparation of Tax Returns. The Tax Matters Partner shall
--------------------------
arrange for the preparation and timely filing of all returns of Partnership
income, gains, losses, deductions, credits, and other items necessary for
federal and state income tax purposes, shall provide copies of draft tax
returns to all of the Partners at least fifteen days prior to filing the
returns and shall use reasonable good faith efforts to furnish to the
Partners within ninety days after the close of each taxable year of the
Partnership the tax information reasonably required for federal, state and
local income tax reporting purposes. The Tax Matters Partner shall use good
faith efforts to supply each Partner with the information necessary to
determine estimated tax payments or any other information related to taxes
reasonably requested by each Partner. The classification, realization, and
recognition of income, gains, losses, deductions, credits, and other items
shall be on the accrual method of accounting for federal income tax purposes.
The Tax Matters Partner shall not change from the accrual method of
accounting initially elected by the Partnership (except if required to do so
by law) without approval of the Executive Committee.
7.5.2. Tax Elections. Except as provided in Sections 7.5.1 and 11.17,
-------------
the Tax Matters Partner shall, in its sole discretion, determine whether to
make any election available under the Code or any other applicable taxing
statute.
7.5.3. Tax Controversies. Within 60 days after the date hereof, the
-----------------
Executive Committee shall select a General Partner to serve as the initial
Tax Matters Partner and in any other similar capacity under state or local
law for an initial term ending November 15, 1996. Upon expiration of such
term, the
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<PAGE>
other General Partner shall be designated to act as the Tax Matters Partner
and the General Partners shall thereafter alternate as Tax Matters Partner
for two year periods during the term of this Agreement. The Tax Matters
Partner is authorized and required to represent the Partnership (at the
Partnership's expense) in connection with all examinations of the
Partnership's affairs by tax authorities, including resulting administrative
and judicial proceedings, and to expend Partnership funds for professional
services and costs associated therewith. Each of the Partners agrees to
cooperate with the Tax Matters Partner and to do or refrain from doing any
and all things reasonably required by the Tax Matters Partner to conduct such
proceedings. The Partner designated as the Tax Matters Partner shall serve in
such role until the earlier of (i) the expiration of its term, (ii) its
resignation or (iii) a determination by the Executive Committee that a
different Partner should serve as the Tax Matters Partner.
7.6. Bank Accounts. The Partnership shall maintain appropriate accounts at
-------------
one or more financial institutions for all funds of the Partnership. Such
accounts shall be used solely for the business of the Partnership. Withdrawal
from such accounts shall be made only upon the signature of those persons
authorized by the Executive Committee.
ARTICLE 8.
TRANSFER OF PARTNERSHIP INTERESTS; CHANGE OF
---------------------------------------------
OWNERSHIP; ADDITIONAL PARTNERS
------------------------------
8.1. Certain Definitions. The following terms when used in this Agreement
-------------------
will have the respective meanings set forth below:
HOLDING COMPANY means any person of which a Partnership Interest or the
direct or indirect ownership thereof comprises all or substantially all of
its value in the reasonable judgment of the Executive Committee (as
determined by affirmative vote of members of the Executive Committee
representing Partners who then hold a majority of the then outstanding
Percentage Interests of all Partners excluding the Partner whose Partnership
Interest is at issue).
EQUITY INTEREST means any equity interest in a Holding Company.
TRANSFER means any disposition of all or any part of a Partnership Interest
or an Equity Interest, voluntarily, involuntarily or by operation of law,
including, without limitation, any sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or merger; provided, however,
that any transaction involving a transfer both of
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<PAGE>
ownership of a Partner's entire Partnership Interest and of other substantial
(in the reasonable judgment of the Executive Committee as determined by
affirmative vote of members of the Executive Committee representing Partners
who then hold a majority of the then outstanding Percentage Interests of all
Partners excluding the Partner whose Partnership Interest is at issue) assets
of such Partner or its Affiliates shall not constitute a Transfer.
8.2. Restrictions on Transfer of Interests. Except as otherwise expressly
-------------------------------------
permitted by this Agreement, no Partner or its Affiliates shall Transfer all or
any part of its Partnership Interest or all or any part of its Equity Interest,
unless (i) such Transfer is permitted pursuant to Section 8.3 hereof and (ii)
such Partner has complied with the provisions of Section 8.4 hereof. Any
Transfer or purported Transfer of any Equity Interest or Partnership Interest
not made in accordance with this Article 8 shall be null and void, but shall
give rise to the consequences described in Section 8.8 hereof.
8.3. Permitted Transfers. Subject to the conditions and restrictions set
-------------------
forth in Section 8.4 hereof, (a) a Partner or its Affiliates may at any time
Transfer all or any portion of its Partnership Interest or Equity Interest to a
Wholly Owned Affiliate of the transferor without the consent of the Executive
Committee if such Wholly Owned Affiliate agrees in writing to be bound by the
terms and conditions of this Agreement applicable to the transferor as if it had
been a signatory hereto, (b) a Partner or its Affiliates may transfer its
Partnership Interests or Equity Interests in PCSCO or PCSN, as the case may be,
to Cellco and WMC, respectively, (c) a Partner or its Affiliates may make
broadly dispersed, underwritten public offerings of Equity Interests, or (d) a
Partner Parent may make a tax-free spinoff qualifying under section 355 of the
Code, to its shareholders of an entity the assets of which include all, but not
less than all, of such Partner Parent's ownership interest in the Partnership
and PCSCO or PCSN, as the case may be. A Transfer of less than all of a
Partner's Partnership Interest pursuant to this Section 8.3 shall be deemed to
constitute a transfer of both the General Partner and Limited Partner Percentage
Interests of such Partner pro rata in proportion to the portion of such
--------
Partner's entire Partnership Interest transferred. In addition, a Partner or
its Affiliates may effect a spin-off, distribution or dividend of Equity
Interests to the shareholders of the Partner Parents of the Partner or
Affiliate. In the event that a Transfer permitted under this Section 8.3 causes
a termination of the Partnership under Section 708 of the Code, the transferee
shall indemnify and hold harmless the other Partners from all costs or other
adverse effects (including, but not limited to, the reduction of tax benefits
attributable to depreciation or amortization) resulting from such termination.
- 36 -
<PAGE>
8.4. Effective Transfer.
------------------
(a) Prior to the date of any Transfer of a Partnership Interest, the
transferor and transferee shall furnish the Partnership with the
transferee's taxpayer identification number, sufficient information to
determine the transferee's initial tax basis in the Partnership Interest
transferred, and any other information reasonably necessary to permit
the Partnership to file all required federal, state and local tax
returns and other legally required information statements or returns.
Without limiting the generality of the foregoing, the Partnership shall
not be required to make any distribution otherwise provided for in this
Agreement with respect to any transferred Partnership Interest until it
has received such information.
(b) Prior to the Transfer of any Partnership Interest, the transferee shall:
(i) execute an amendment of this Agreement or a counterpart to the
signature page of this Agreement which shall provide, "The
undersigned hereby accepts and agrees to be bound by all of the
terms and provisions of this Agreement and shall become a
substitute Partner under this Agreement"; and
(ii) if the transferee is a corporation, provide the Partnership with
evidence satisfactory to the Partnership of its authority to become
a Partner and to be bound by the terms of this Agreement.
(c) Prior to the Transfer of any Partnership Interest or Equity Interest,
the transferee shall:
(i) provide an opinion of counsel to the Partnership that the Transfer
does not (a) violate the then applicable federal or state
securities laws or rules and regulations of the Securities and
Exchange Commission or any successor thereto, any state securities
commission and any other government agencies with jurisdiction over
such Transfer; (b) subject the Partnership to greater regulation or
restriction under the MFJ than existed immediately prior to such
admission; (c) subject the Partnership to any federal, state or
local rule, regulation or law that materially adversely affects the
business or financial condition of the Partnership; or (d)
materially adversely affect the Partnership's existence or
qualification under the Act; and
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<PAGE>
(ii) provide the Partnership with evidence satisfactory to the
Partnership that any necessary prior consents have been obtained
from any regulatory authorities.
8.5. Change of Ownership. Upon any Change of Control of a General Partner
-------------------
(other than a Change of Control resulting from a change of control of a Partner
Parent) (a CHANGE OF OWNERSHIP), the Partner subject to the Change of Ownership
shall promptly give notice thereof to the other General Partner and the Partner
not undergoing the Change of Ownership shall be entitled, at any time within a
90-day period following the later of such notice or the Change of Ownership, to
purchase all but not less than all of the Partnership Interest of the Partner
undergoing the Change of Ownership at a purchase price equal to the Private
Market Value of the Partnership Interest determined as described below. In the
event that a Partnership Interest is not purchased pursuant to the preceding
sentence, any Person effecting such Change of Ownership shall, by binding
written instrument which shall be enforceable by the Partnership and the other
Partners, assume all of the obligations and liabilities hereunder of the Partner
which is the subject of such Change of Ownership. PRIVATE MARKET VALUE means,
with respect to any interest in the Partnership, as of the date of
determination, the Fair Market Value of such asset adjusted to include a pro
rata share of any control premium inherent in a sale of the Partnership as a
whole. FAIR MARKET VALUE shall have the meaning ascribed thereto in the Tomcom
Partnership Agreement and the Fair Market Value, as of the date of
determination, of any asset shall be determined (a) by mutual agreement of the
General Partners or (b) if no such agreement is reached within ten days of the
relevant date of determination, as follows:
(i) Selection of Appraisers. Each General Partner shall designate by
-----------------------
written notice to the Partnership and each General Partner a firm
of recognized national standing familiar with appraisal techniques
applicable to assets of the type being evaluated to serve as an
Appraiser pursuant to this Section 8.5 (the firms designated by the
General Partners being referred to herein FIRST APPRAISER and the
SECOND APPRAISER, respectively) with five business days after the
failure to reach agreement in accordance with the terms of clause
(a) above. In the event that either General Partner fails to
designate its or their Appraiser within the foregoing time period,
the other shall have the right to designate such Appraiser by
notifying the failing party or parties in writing of such
designation (and the Appraiser so designated shall be the First
Appraiser or the Second Appraiser, as the case may be).
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<PAGE>
(ii) Evaluation Procedures. Each Appraiser shall be directed to
---------------------
determine the Private Market Value of the asset. Each Appraiser
will also be directed to deliver an Appraiser's Certificate to each
General Partner on or before the 30th day after their respective
designation (the CERTIFICATE DATE), upon the conclusion of its
evaluation, and each Appraiser's Certificate once delivered may not
be retracted or modified in any respect. Each Appraiser will keep
confidential all information disclosed by the Partnership in the
course of conducting its evaluation, and, to that end, will execute
such customary documentation as the Partnership may reasonably
request with respect to such confidentiality obligation. The
General Partners will cooperate in causing the Partnership to
provide each Appraiser with such information within the
Partnership's possession that may be reasonably requested in
writing by the Appraiser for purposes of its evaluation hereunder.
The Appraisers shall consult with each other in the course of
conducting their respective evaluations. Each General Partner
shall have full access to each Appraiser's work papers. Each
Appraiser will be directed to comply with the provisions of this
Section 8.5, and to that end each party will provide to its
respective Appraiser a complete and correct copy of this Section
8.5 (and the definitions of capitalized terms used in this Section
8.5 that are defined elsewhere in this Agreement).
(iii) Private Market Determination. The Private Market Value of any asset
----------------------------
shall be determined on the basis of the Appraisers Certificates in
accordance with the provisions of this subparagraph (iii). The
higher of the values set forth on the Appraisers' Certificates is
hereinafter referred to as the HIGHER VALUE, and the lower of such
values is hereinafter referred to as the LOWER VALUE. If the
Higher Value is not more than 110% of the Lower Value, the Private
Market Value will be the arithmetic average of such two Values. If
the Higher Value is more than 110% of the Lower Value, a third
appraiser shall be selected in accordance with the provisions of
subparagraph (iv) below, and the Private Market Value will be
determined in accordance with the provisions of subparagraph (v)
below.
(iv) Selection of and Procedures for Third Appraiser. If the Higher
-----------------------------------------------
Value is more than 110% of the Lower Value, within seven days
thereafter the First
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<PAGE>
Appraiser and the Second Appraiser shall agree upon and jointly
designate a third firm of recognized national standing familiar
with appraisal techniques applicable to assets of the type being
evaluated to serve as an appraiser pursuant to this Section 8.5
(the THIRD APPRAISER), by written notice to each General Partner.
The General Partners shall direct the Third Appraiser to determine
the Private Market Value of the asset (the THIRD VALUE) in
accordance with the provisions of subparagraph (ii) above, and to
deliver to the General Partners and Appraiser's Certificate on or
before the 30th day after the designation of such appraiser
hereunder. The Third Appraiser will be directed to comply with the
provisions of this Section 8.5, and to that end of the parties will
provide to the Third Appraiser a complete and correct copy of this
Section 8.5 (and the definitions of capitalized terms used in this
Section 8.5 that are defined elsewhere in this Agreement).
(v) Alternative Determination of Private Market. Upon the delivery of
-------------------------------------------
the Appraiser's Certificate of the Third Appraiser, the Private
Market Value will be determined as provided in this subparagraph
(v). The Private Market Value will be (w) the Lower Value, if the
Third Value is less than the Lower Value, (x) the Higher Value, if
the Third Value is greater than the Higher Value, (y) the
arithmetic average of the Third Value and the other Value (Lower or
Higher) that is closer to the Third Value if the Third Value falls
within the range between (and including) the Lower Value and the
Higher Value and (z) the Third Value, if the Lower Value and the
Higher Value are equally close to the Third Value.
(vi) Costs. Each General Partners will bear the cost of the Appraiser
-----
designated by it or on its behalf. If the Higher Value is not more
than 115% of the Lower Value, or if the Higher Value and the Lower
Value are equally close to the Third Value, each General Partner
shall bear 50% of the cost of the Third Appraiser, if any;
otherwise, the party whose Appraiser's determination of Private
Market Value is further away from the Third Value shall bear the
entire costs of the Third Appraiser. The General Partners agree to
pay when due the fees and expenses of the Appraisers in accordance
with the foregoing provisions.
(vii) Conclusive Determination. To the fullest extent provided by law,
------------------------
the determination of the Private
- 40 -
<PAGE>
Market Value made pursuant to this Section 8.5 shall be final and
binding on the Partnership and the Partners hereto, and such
determination shall not be appealable to or reviewable by any court
or arbitrator; provided that the foregoing shall not limit a
--------
Partner's rights to seek arbitration of the obligations of the
other Partners and the Partnership hereunder.
8.6. Additional Partners. Additional partners may be admitted to the
-------------------
Partnership as General Partners or Limited Partners upon approval by the
Executive Committee.
(a) Any additional partner admitted to the Partnership pursuant to this
Section 8.6 (the ADDITIONAL PARTNER) shall become a Partner in the
Partnership and shall be bound by this Agreement upon the completion of
the following:
(i) Execution by the Additional Partner of an amendment of this
Agreement or a counterpart to the signature page of this Agreement
which shall provide, "The undersigned hereby accepts and agrees to
be bound by all of the terms and provisions of this Agreement.";
(ii) If the Additional Partner is a corporation, it shall have provided
the Partnership with evidence satisfactory to the Partnership of
its authority to become a Partner and to be bound by the terms of
this Agreement;
(iii) The Additional Partner shall have provided an opinion of counsel to
the Partnership that the admission of the Additional Partner does
not (a) violate the then applicable federal or state securities
laws or rules and regulations of the Securities and Exchange
Commission or any successor thereto, any state securities
commissions and any other government agencies with jurisdiction
over the Partnership; (b) subject the Partnership to greater
regulation or restriction under the MFJ than existed immediately
prior to such admission; (c) subject the Partnership to any
federal, state or local rule, regulation or law that materially
adversely affects the business or financial condition of the
Partnership; or (d) materially adversely affect the Partnership's
existence or qualification under the Act; and
(iv) Any necessary prior consents shall have been obtained from any
regulatory authorities.
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<PAGE>
8.7. Covenant Not to Withdraw or Dissolve. Notwithstanding any provision of
------------------------------------
the Act, each Partner hereby covenants and agrees that the Partners have entered
into this Agreement based on their mutual expectation that, except as otherwise
expressly required or permitted hereby, no Partner shall withdraw or retire from
the Partnership, be entitled to demand or receive a return of such Partner's
contributions or profits (or a bond or other security for the return of such
contributions or profits), or exercise any power under the Act to dissolve the
Partnership without the approval of the Executive Committee.
8.8. Consequences of Breaches of Covenant. Notwithstanding anything to the
------------------------------------
contrary in the Act, if a Partner or its Affiliate (BREACHING PARTNER) (i)
attempts to Transfer its Partnership Interest or Equity Interest in breach of
Section 8.2, (ii) attempts to cause a partition in breach of Section 2.7, (iii)
attempts to withdraw from the Partnership or dissolve the Partnership in breach
of Section 8.7, or (iv) suffers an Event of Bankruptcy, the Partnership shall
continue and such Breaching Partner shall be subject to this Section 8.8 and in
such event, the following shall occur:
(a) (i) the Breaching Partner shall immediately cease to be a General
Partner, (ii) the general partnership interests in the Partnership of
such Breaching Partner shall automatically be deemed to become limited
partnership interests, (iii) such Breaching Partner shall have no right
to participate in the management of the Partnership, including the right
to appoint members at the Executive Committee, and shall have no further
power to act for or bind the Partnership, and (iv) the other Partners
are, without necessity of any further action or documentation, hereby
appointed attorneys-in-fact of the Breaching Partner for the purpose of
carrying out the provisions of this Section 8.8 and taking any action
and executing any documents which such Partners may deem necessary or
advisable to accomplish the purposes hereof, such appointment being
irrevocable and coupled with an interest;
(b) the other Partners shall continue to have the right to possess the
Partnership's property and goodwill and to conduct its business and
affairs;
(c) the Breaching Partner shall be liable in damages, without requirement of
a prior accounting, to the Partnership for all costs and liabilities
that the Partnership or any Partner may incur as the result of such
breach;
(d) the Partnership shall have no obligation to pay to the Breaching Partner
its contributions, capital, or profits,
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<PAGE>
but may, by notice to the Breaching Partner within 30 days of its
withdrawal, elect to make Breach Payments (as hereinafter defined) to
the Breaching Partner in complete satisfaction of the Breaching
Partner's interest in the Partnership;
(e) if the Partnership does not elect to make Breach Payments pursuant to
Section 8.8(d) hereof, the Partnership shall treat the Breaching Partner
as if it were an unadmitted assignee of the interest of the Breaching
Partner and shall make distributions and allocations to the Breaching
Partner only of those amounts and items otherwise payable or allocable
with respect to such interest hereunder;
(f) the Partnership may apply any distributions otherwise payable with
respect to such interest (including Breach Payments) to satisfy any
claims it may have against the Breaching Partner;
(g) the Breaching Partner shall have no right to inspect the Partnership's
books or records or obtain other information concerning the
Partnership's operations; and
(h) the Breaching Partner shall continue to be liable to the Partnership for
any unpaid capital contributions required hereunder with respect to such
interest and to be jointly and severally liable with the other Partners
for any debts and liabilities (whether actual or contingent, known or
unknown) of the Partnership existing at the time the Breaching Partner
withdraws or dissolves.
8.8.1. Breach Payments. For purposes hereof, Breach Payments shall be made
---------------
in five installments, each equal to 20% of the Breach Amount, payable on the
next five consecutive anniversaries of the breach by the Breaching Partner, with
simple interest accrued from the date of such breach through the date each such
installment is paid on the unpaid balance of such Breach Amount at the lowest
rate per annum necessary to avoid imputed interest on such payments under the
Code. The Breach Amount shall be an amount equal to 90% of the greater of (i)
100 dollars or (ii) the Capital Account balance (calculated on the assumption
that Partner Notes then outstanding are not repaid) of the Breaching Partner as
of the last day of the month preceding the month during which such breach
occurred, less any Partnership distributions to the Breaching Partner after such
day. In addition, any Partner Note of the Breaching Partner shall be cancelled,
but without the necessity of making any payment in respect thereof. The Breach
Amount as so determined shall be final and binding on the Partnership and the
Breaching Partner. The Partnership may, at its sole election, prepay all or any
portion of the Breach Payments or interest accrued thereon at any time without
penalty.
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<PAGE>
8.8.2. No Bonding. Notwithstanding anything to the contrary in the Act, if,
----------
under Section 8.8(e) hereof, the Partnership treats a Breaching Partner as an
unadmitted assignee of an interest in the Partnership, the Partnership shall not
be obligated to secure the value of the Breaching Partner's interest by bond or
otherwise; provided, however, that if a court of competent jurisdiction
determines that, in order to continue the business of the Partnership such value
must be so secured, the Partnership may provide such security. If the
Partnership provides such security, the Breaching Partner shall not have any
right to participate in Partnership profits or distributions during the term of
the Partnership, or to receive any interest on the value of such interest. For
this purpose, the value of the interest of the Breaching Partner shall be an
amount equal to 90% of the greater of (i) 100 dollars or (ii) the Capital
Account balance (calculated on the assumption that Partner Notes then
outstanding are not repaid) of such interest as of the last day of the month
preceding the month during which the breach by the Breaching Partner occurs.
ARTICLE 9.
CONFIDENTIALITY
---------------
9.1. Maintenance of Confidentiality. Each of the Partners shall, during the
------------------------------
term of this Agreement and at all times thereafter, maintain in confidence all
confidential and proprietary information and data of the Partnership and the
other Partner or its Affiliates disclosed to it (the CONFIDENTIAL INFORMATION).
Each of the Partners further agrees that it shall not use the Confidential
Information during the term of this Agreement or at any time thereafter for any
purpose other than the performance of its obligations or the exercise of its
rights under this Agreement. The Partnership and each Partner shall take all
reasonable measures necessary to prevent any unauthorized disclosure of the
Confidential Information by any of their employees, agents or consultants.
9.2. Permitted Disclosures. (a) Nothing herein shall prevent the
---------------------
Partnership, any Partner, or any employee, agent or consultant of the
Partnership or any Partner (the RECEIVING PARTY) from using, disclosing, or
authorizing the disclosure of any information it receives in the course of the
business of the Partnership which:
(i) becomes publicly available without default hereunder by the
receiving party;
(ii) is lawfully acquired by the receiving party from a source not under
any obligation to the disclosing party regarding disclosure of such
information;
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<PAGE>
(iii) is in the possession of the receiving party in written or other
recorded form at the time of its disclosure hereunder;
(iv) is non-confidentially disclosed to any third party by or with the
permission of the disclosing party; or
(v) the receiving party believes in good faith to be required to be
disclosed by law or by the terms of any listing agreement with a
securities exchange, provided that the receiving party consults
--------
with the other Partners prior to making such disclosure.
(b) Nothing contained herein shall prevent the receiving party from
disclosing any Confidential Information in connection with any corporate
transaction (including, without limitation, the issuance of debt or
equity, any merger, consolidation, acquisition or disposition of assets,
or the formation of a joint venture, partnership or other affiliation)
related to the Partnership or any Partner Parent or Affiliate thereof if
the receiving party agrees in writing to keep in confidence such
Confidential Information in accordance with the terms of this Section
9.2.
ARTICLE 10.
DISSOLUTION AND LIQUIDATION
---------------------------
10.1. Dissolution Generally.
---------------------
(a) The Partnership will be dissolved on the earliest of (i) an affirmative
vote of the Executive Committee; (ii) delivery of the Change of Control
Dissolution Notice contemplated by Section 10.1(c); or (iii) 12:00
midnight on the Termination Date (hereinafter defined); provided,
--------
however, that the Partnership shall not terminate until its affairs have
-------
been wound up and its assets distributed as provided herein (a
DISSOLUTION EVENT).
(b) Without the unanimous written consent of the Partners, each Partner
agrees not to withdraw as a Partner or do anything that would otherwise
dissolve the Partnership (except as permitted by the terms of Article
10). Notwithstanding the foregoing, if a General Partner withdraws from
the Partnership, upon such withdrawal, (i) the general partner interests
in the Partnership of such Partner shall automatically be deemed to
become limited partner interests in the Partnership and (ii) such
Partner shall have no right to participate in the management of the
business and affairs of the
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<PAGE>
Partnership, including the right to designate members of the Executive
Committee.
(c) Changes of Control. In the event of a Change of Control (hereinafter
------------------
defined) of any General Partner (such Partner, the CHANGE OF CONTROL
PARTNER), the other General Partner shall have the right to elect, by
notice in writing to all Partners (the CHANGE OF CONTROL DISSOLUTION
NOTICE), to cause the Partnership to be dissolved and liquidated in
accordance with Section 10.3. Such Change of Control Dissolution Notice
shall be given not later than 90 days after the Change of Control, and,
if not given within such period, the right to cause a dissolution and
liquidation based on such Change of Control will cease. CHANGE OF
CONTROL shall be deemed to have occurred when (i) any Person, other than
a Partner Parent of such Partner or a Wholly Owned Affiliate of such
Partner Parent (an UNAFFILIATED ENTITY), shall acquire (whether by
merger, consolidation, sale, assignment, lease, transfer or otherwise,
in one transaction or a series of related transactions), or otherwise
beneficially own 50% or more of the outstanding voting securities of any
Partner (or any entity which, directly or indirectly through the
ownership of one or more majority-owned successive subsidiary entities,
owns more than 50% of the outstanding voting interests in such Partner)
(a CONTROL ENTITY) or (ii) the Partner Parents of such Partner shall
otherwise cease to beneficially own a majority of the outstanding voting
securities of such Partner or any Control Entity of such Partner.
Notwithstanding the foregoing, the transactions contemplated by Section
8.3 shall not constitute a Change of Control hereunder.
(d) The TERMINATION DATE shall mean December 31, 2014, provided that the
Termination Date shall be October 20, 2001 if (i) either Partner elects
in its sole discretion in light of business circumstances at that time
to terminate the Partnership on that date, and (ii) the Tax Cost
(hereinafter defined) associated with such termination would not exceed
$100 million. TAX COST shall mean the total amount of Taxes which would
be recognized by all Partners as a result of the liquidation of the
Partnership in accordance with Section 10.3 hereof immediately after the
Termination Date.
10.2. Bankruptcy of a General Partner. If a General Partner suffers an
-------------------------------
Event of Bankruptcy at such time the bankrupt Partner is the only General
Partner, the other Partners may (i) consent in writing to dissolve the
Partnership or (ii) within 90 days after such Event of Bankruptcy occurs, agree
in writing to continue the business of the Partnership and to appoint,
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<PAGE>
effective as of the date of such Event of Bankruptcy, one or more additional
General Partners. In the case of clause (ii), the business of the Partnership
shall be carried on by such newly appointed General Partner(s) and the bankrupt
Partner shall have its general partnership interest in the Partnership converted
into a limited partner interest in the Partnership and continue to be, or become
a Limited Partner subject to the provisions of Section 10.2. In the event the
remaining Partners fail to make any election pursuant to this Section 10.2, the
Partnership shall be dissolved. In the event any General Partner shall become a
"debtor" as defined in the United States Bankruptcy Code of 1978, as amended
(the BANKRUPTCY CODE) in any case commenced thereunder and at any time during
the pendency of such case there shall be appointed (i) a trustee with respect to
the bankrupt Partner under Section 701, 702 or 1104 of the Bankruptcy Code (or
any successor provisions thereto), or (ii) an examiner having expanded powers
beyond those specifically enumerated in Section 1104(b) of the Bankruptcy Code,
then the other Partners may, at any time thereafter, so long as such condition
exists, elect to dissolve the Partnership, in which event the affairs of the
Partnership shall be wound up as provided in this Article 10.
10.3. Liquidation.
-----------
(a) Upon dissolution of the Partnership, the Partner selected by the
Executive Committee shall be the liquidator of the Partnership (the
LIQUIDATING PARTNER). The Liquidating Partner shall be entitled to
receive such compensation for its services as may be approved by the
Executive Committee. The Liquidating Partner shall not resign at any
time without fifteen days' prior written notice and may be removed only
by a decision of the Executive Committee. Upon dissolution,
resignation, or removal of the Liquidating Partner, a successor and
substitute Liquidating Partner (who shall have and succeed to all
rights, powers, and obligations of the original Liquidating Partner)
shall, within thirty days thereafter, be approved by the Executive
Committee. Except as expressly provided in this Article 10, the
Liquidating Partner approved in the manner provided herein shall have
and may exercise, without further authorization or approval of the
Executive Committee or any Partner, all of the powers conferred upon the
Tax Matters Partner under the terms of this Agreement (but subject to
all of the applicable limitations, contractual and otherwise, upon the
exercise of such powers) to the extent appropriate or necessary in the
good faith judgment of the Liquidating Partner to carry out the duties
and functions of the Liquidating Partner hereunder for and during such
period of time as shall be reasonably required in the good faith
judgment of the Liquidating Partner to complete the winding-up and
liquidation of the
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<PAGE>
Partnership as provided for herein. Prior to any distribution, the
Capital Accounts of the Partners shall be adjusted pursuant to Article 6
to reflect their respective distributive shares of the income, gain,
loss and deduction of the Partnership up through and including the date
of distribution (including any income, gain, loss, and deduction that
arises by reason of the adjustment of the Agreed Values of Partnership
assets that occurs by reason of the dissolution). The Liquidating
Partner shall, subject to providing adequate reserves for the payment of
amounts payable under Section 10.3(a)(i) hereof, implement the
definitive liquidation plan described in Section 10.3(e) and shall
distribute assets among the Partners as contemplated thereby (with the
Agreed Value being debited against such Partner's Capital Account
balance), provided that no Partner may receive an amount in excess of
--------
its positive Capital Account balance. If any assets still remain in the
Partnership, the Liquidating Partner shall liquidate such assets and
apply and distribute the proceeds of such liquidation in the following
order and priority, to the maximum extent permitted by law:
(i) First, to creditors of the Partnership (including Partners to the
extent permitted by law) in satisfaction of the Partnership's known
debts and liabilities (whether by payment or the making of
provision for the known amount thereof); and
(ii) Second, to the Partners, in proportion to and to the extent of the
positive balances in their respective Capital Accounts
appropriately adjusted as set forth above.
(b) On or before December 31, 2013, unless a Partner has elected to cause
the Termination Date to be October 20, 2001, in which case on or before
October 20, 2000, or on or before the 30th day after an event described
in Section 10.1(a)(i) or (ii) or any other event of dissolution, each
General Partner shall submit a proposed plan of liquidation of the
Partnership (a LIQUIDATING PROPOSAL) to the Executive Committee. The
Liquidating Proposals shall provide for distributions to Partners of the
Partnership's assets, in kind, in proportion to and to the extent of the
respective balances in their Capital Accounts adjusted as provided in
Section 10.3(a)(ii). Subject to the foregoing, a Liquidating Proposal
shall also take into account the following considerations (with the
matters described in clause (i) and (ii)(E) on the one hand and clauses
(ii)(A), (B) and (C) on the other hand, being given equal weight):
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<PAGE>
(i) To the extent practicable, the Liquidating Proposal shall be
designed to minimize the imposition of taxes upon the Partners (and
may, to that end, provide for the continuation of certain
operations) and to provide for a distribution of Section 751
property on a pro rata basis.
(ii) The proposed allocation of PCS Licenses and related properties
(including equity interests in entities owned by the Partnership)
among the Partners shall be developed with a view to achieving the
following objectives:
(A) Each Partner shall receive PCS Licenses covering geographical
areas which, in the aggregate, contain an approximately equal
number of natural persons in the service area;
(B) Each PCS License shall be distributed to the Partner, if any,
which holds other wireless telecommunications businesses that
are contiguous to or would otherwise have geographical synergy
with such PCS License;
(C) PCS Licenses concentrated in a particular geographic area
shall be distributed to a single Partner;
(D) The indirect joint ownership of a PCS License by the
Partnership and a Designated Entity and the terms of such
relationship shall be taken into account in determining the
relative value of such interest; and
(E) The amount of any cash payment needed to offset the receipt by
a Partner of PCS Licenses and related assets and liabilities
having a fair market value greater than such Partner's
proportionate share of the positive Capital Account balances
of the Partners shall be minimized, and to that end, the
proposed allocation may provide for the continuation of
certain operations in joint venture or partnership form.
(c) The Executive Committee shall consider each Liquidating Proposal in good
faith and shall adopt a plan of liquidation of the Partnership by
unanimous vote within twenty days of receiving the Liquidating
Proposals. If the Executive Committee is unable to agree upon a
mutually satisfactory plan of liquidation, each of the General Partners
shall first refer the matter to the
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<PAGE>
chief executive officer of the respective Partner Parent designated by
each such General Partner for resolution by unanimous vote of such chief
executive officers. If such officers are unable to resolve the dispute
within 20 days after the matter has been referred to them, they shall
refer the matter to arbitration in accordance with paragraph (d) below.
(d) Not later than 10 days following the failure of the designated chief
executive officers of the Partner Parents to agree upon a plan of
liquidation, the issue shall be submitted to arbitration by a single
arbitrator under the direction of the American Arbitration Association.
The situs of the arbitration shall be Chicago, Illinois. The arbitrator
shall be selected by the General Partners and shall be familiar with the
PCS and cellular industries. If the General Partners cannot agree on
the arbitrator within 10 days of the submission of the dispute to
arbitration, an arbitrator with such qualifications shall be named by
the American Arbitration Association within 10 days thereafter. Each of
the Liquidating Proposals submitted by the General Partners to the
Executive Committee pursuant to Section 10.3(c) above shall be presented
to the arbitrator. Within 45 days of the submission of the Liquidating
Proposals to arbitration, the arbitrator shall select the Liquidating
Proposal that the arbitrator determines best satisfies the criteria set
forth in Sections 10.3(b)(i) and 10.3(b)(ii) above. The arbitrator must
select one such Liquidating Proposal in its entirety, without
incorporating terms from any other Liquidating Proposal or varying,
modifying or otherwise altering the terms of the Liquidating Proposal in
any way. The arbitrator shall have no right to include or decide issues
other than the selection of a Liquidating Proposal and the Agreed Values
of any asset to be distributed. The decision of the arbitrator shall be
final, unappealable and legally binding and the Partnership shall
promptly implement the Liquidating Proposal selected by the arbitrator.
Except as specified herein, the then existing Commercial Arbitration
Rules of the American Arbitration Association shall govern the conduct
of the arbitration.
(e) After a definitive plan of liquidation pursuant to this Section 10.3 has
been approved, the Executive Committee and each Partner and its
Affiliates shall promptly seek all necessary regulatory and other
approvals and shall take all other necessary actions to effect such plan
of liquidation.
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<PAGE>
10.4. Distribution in Trust. Notwithstanding the provisions of Section
---------------------
10.3 requiring the liquidation of the assets of the Partnership, but subject
to the order of priorities set forth therein, in the discretion of the
Executive Committee, a pro rata portion of the distributions that would
otherwise be made to the Partners pursuant to Section 10.3(a)(ii) hereof may
be:
(a) distributed to a trust established for the benefit of the Partners for
the purposes of liquidating Partnership assets, collecting amounts owed
to the Partnership, and paying any contingent or unforeseen liabilities
or obligations of the Partnership or of the Partners arising out of or
in connection with the Partnership. The assets of any such trust shall
be distributed to the Partners from time to time, in the reasonable
discretion of the Executive Committee, in the same proportions as the
amount distributed to such trust by the Partnership would otherwise have
been distributed to the Partners pursuant to this Agreement; or
(b) withheld to provide a reasonable reserve of Partnership liabilities
(contingent or otherwise) and to reflect the unrealized portion of any
installment obligations owed to the Partnership, provided that such
withheld amounts shall be distributed to the Partners as soon as
practicable.
In exercising its rights under this Section 10.4, the Executive Committee
must comply with the liquidating distribution timing requirements of Section
10.6 hereof. By way of clarification, for purposes of determining the Partners'
respective shares of income, gain, loss, and deduction of the Partnership for
the taxable year of the Partnership in which the distribution in liquidation
occurs and of adjusting the Capital Accounts of the Partners therefor in
accordance with Section 10.3 and Article 6, the definitions herein of "Agreed
Value" and "Profits" and "Losses" require that Partnership assets to be
distributed to the trust referred to in clause (a) above or to the Partners in
accordance with Section 10.3 hereof shall be considered to have been first sold
at their fair market values (taking Code Section 7701(g) into account) and the
Profits or Losses deemed realized therefrom shall be allocated among the
Partners as if an actual sale had occurred, and the Capital Accounts of the
Partners shall be adjusted to reflect such allocation in accordance with Article
6. The fair market value of any property distributed to such trust shall be the
value determined by the Executive Committee.
10.5. Rights of Partners. Except as otherwise provided in this Agreement,
------------------
each Partner shall look solely to the assets of the Partnership for the return
of its capital contributions and
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<PAGE>
shall have no right or power to demand or receive property other than cash from
the Partnership. No Partner shall have priority over any other Partner as to
the return of his capital contributions, distributions, or allocations except as
provided in this Agreement.
10.6. Compliance with Timing Requirements of Regulations. In the event that
--------------------------------------------------
the Partnership is liquidated within the meaning of Regulations Section 1.704-
1(b)(2)(ii)(g), then distributions shall be made pursuant to Section 10.3 to the
-
Partners who have positive Capital Accounts in compliance with the timing
requirements of Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has
- -
a deficit balance in its Capital Account (after giving effect to all
contributions, distributions and allocations for all taxable years, including
the year during which such liquidation occurs), such Partner shall contribute to
the capital of the Partnership the amount necessary to restore such deficit
balance to zero in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(3).
- -
10.7. Non-Dissolving Code Section 708(b) Terminations. Notwithstanding any
-----------------------------------------------
other provision of this Article 10, in the event that the Partnership is
liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no
-
Dissolution Event has occurred, the Partnership's assets shall not be
liquidated, the Partnership's liabilities shall not be paid or discharged, and
the Partnership's affairs shall not be wound up. Instead, the Partnership shall
be deemed to have distributed the assets of the Partnership in kind to the
Partners, who shall be deemed to have assumed and taken subject to all
Partnership liabilities, all in accordance with their Capital Accounts and if
any Partner's Capital Account has a deficit balance (after giving effect to all
contributions, distributions, and allocations for all fiscal years, including
the fiscal year during which such liquidation occurs), such Partner shall
contribute to the capital of the Partnership the amount necessary to restore
such deficit balance to zero in compliance with Regulation Section 1.704-
1(b)(2(ii)(b)(3). Immediately thereafter the Partners shall be deemed to have
- -
recontributed such assets in kind to the Partnership, which shall be deemed to
have assumed and taken subject to all such liabilities.
10.8. Allocations during the Period of Liquidation. Until the date on which
--------------------------------------------
all of the assets of the Partnership have been distributed to the Partners
pursuant to Section 10.3 hereof, the Partners shall continue to share Profits,
Losses and other items of Partnership income, gain, deduction and loss as
provided in Article 6 hereof.
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<PAGE>
ARTICLE 11.
MISCELLANEOUS PROVISIONS
------------------------
11.1. Further Assurances. From and after the date of execution and delivery
------------------
of this Agreement, the Partners shall execute and deliver such further documents
and instruments and shall do such further acts and things as any Partner may
reasonably request in order to effectuate the transactions contemplated by this
Agreement. The Partners shall cooperate and assist one another in the
performance of the provisions of this Agreement and shall take such steps as are
reasonably necessary to allow another party to this Agreement to discharge its
obligations under this Agreement.
11.2. Assignment. No Partner may assign or otherwise transfer, including,
----------
without limitation, by operation of law, this Agreement or any of its rights or
obligations hereunder except in accordance with the provisions of Articles 8 and
10. Subject to the foregoing, this Agreement shall be binding upon the
Partners, their legal representatives, successors and assigns.
11.3. Breach; Equitable Relief. The Partners acknowledge that the rights of
------------------------
the Partners described in this Agreement are unique and that money damages alone
for breach of this Agreement would not constitute an adequate remedy. Any
Partner aggrieved by a breach of the provisions hereof may bring an action at
law or suit in equity to obtain redress, including without limitation specific
performance, injunctive relief or any other available equitable remedy. Time
and strict performance are of the essence in this Agreement.
11.4. Amendment. No amendment to this Agreement shall be valid unless such
---------
amendment is in writing and is signed by authorized representatives of the
parties hereto.
11.5. Waiver. Any of the terms and conditions of this Agreement may be
------
waived at any time and from time to time in writing by the party entitled to the
benefit thereof, but a waiver in one instance shall not be deemed to constitute
a waiver in any other instance. A failure to enforce any provision of this
Agreement shall not operate as a waiver of such provision or of any other
provision hereof.
11.6. Severability. In the event that any provision of this Agreement shall
------------
be held invalid, illegal or unenforceable in any circumstance, the remaining
provisions shall nevertheless remain in full force and effect and shall be
construed as if the unenforceable portion or portions were deleted.
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<PAGE>
11.7. Construction. None of the provisions of this Agreement shall be for
------------
the benefit of or enforceable by any third party; provided, however, that
Mandatory Indemnitees shall have the right to enforce the indemnification
provisions of Section 5.2 as such provisions apply to them. No third party,
including without limitation any creditor or employee of the Partnership, shall
have any rights against the Partners or any of their Affiliates, successors or
assigns by reason of or under this Agreement.
11.8. Governing Law; Arbitration.
--------------------------
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE CONFLICTS OF
LAW PRINCIPLES THEREOF.
(b) Each Partner hereby irrevocably appoints The Corporation Trust Company,
at its office in Wilmington, Delaware, United States of America, its
lawful agent and attorney to accept and acknowledge service of any and
all process against it in any action, suit or proceeding arising in
connection with this Agreement and upon whom such process may be served,
with the same effect as if such party were a resident of the State of
Delaware and had been lawfully served with such process in such
jurisdiction, and waives all claim of error by reason of such service;
provided that in the case of any service upon such agent and attorney,
--------
the party effecting such service shall also deliver a copy thereof to
the other party at the address and in the manner specified in Section
11.12. In the event that such agent and attorney resigns or otherwise
becomes incapable of acting as such, such party will appoint a successor
agent and attorney in Wilmington, Delaware, reasonably satisfactory to
the other party, with like powers.
(c) Each Partner hereby acknowledges that this Agreement is subject to the
Arbitration Agreement of the Partners which is being entered into of
even date herewith, and the Arbitration Agreement will govern the
resolution of disputes relating to this Agreement in accordance with its
terms. Each Additional Partner or substitute Partner shall execute the
Arbitration Agreement or a counterpart to the Arbitration Agreement on
or prior to its admission to the Partnership.
11.9. Attorneys' Fees. If suit or action is filed by any Partner to enforce
---------------
the provisions of this Agreement, or otherwise with respect to the subject
matter of this Agreement, the prevailing party shall be entitled to recover
reasonable attorneys' fees as fixed by the trial court and, if any appeal is
taken from the decision of the trial court, reasonable attorneys' fees as fixed
by the appellate court. For purposes of this
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<PAGE>
Agreement, the term prevailing party shall be deemed to include a Partner that
successfully opposes a petition for review filed with an appellate court.
11.10. MFJ Compliance.
--------------
11.10.1. Each of BAC, NYN and USW (the "BOC Participants") and their
respective BOC affiliates in Cellco and WMC agree that they will pursue, in
conjunction with the Regional Bell Operating Companies ("BOCs") within the
meaning of the MFJ, the "Motion of the Bell Companies for a Modification of
Section II of the Decree to Permit Them to Provide Cellular and Other Wireless
Services Across LATA Boundaries," filed with the Decree Court on June 20, 1994.
If the Decree Court were to deny the BOCs' motion or if the Decree Court or
Department of Justice were to take the position that the relief requested in the
motion does not apply to PCS Service, the BOC Participants will request a waiver
for the benefit of the Partnership that would enable the Partnership to conduct
the Partnership Business free of restrictions on BOCs in the MFJ. In addition,
the BOC Participants will request a waiver for the benefit of the Partnership if
the waiver is: (a) to permit the Partnership to offer the same services as those
set forth in any waiver request which such BOC Participant or an affiliate has
pending or which such BOC Participant ,any of its affiliates, or any BOC has
obtained for its cellular or PCS businesses, including businesses incidental
thereto; (b) based on the same relevant facts as those set forth in any such
waiver such BOC Participant, an affiliate thereof or a BOC has pending or has
obtained, as the case may be, and (c) with respect to the Partnership, within
the scope of the Partnership Business. Except as described above, neither any
such BOC Participant nor any affiliate shall be obliged to request any waiver
for the benefit of the Partnership.
11.10.2. Unless and until the (1) Decree Court or (2) the Department of
Justice shall issue a written opinion, or (3) USW, BAC and NYN shall unanimously
agree that the MFJ does not apply to the Partnership, the Partnership will
conform to the requirements and prohibitions of the MFJ. As long as a BOC
Participant holds any ownership interest in the Partnership, the Partnership
will not engage in any MFJ Restricted Activities. ATI or any Affiliate thereof
will have the option to engage in MFJ Restricted Activities, specifically
including the provision of interexchange (interLATA) telecommunications services
(it being understood that such services may be provided by the Partnership if it
is thereafter permitted to do so) and engage in any business practice and enter
into any transaction in which the Partnership does not engage by reason of the
MFJ. ATI shall not be deemed to be engaged in or possessing any interest in a
business venture in violation of Article 3 hereof or Section 7.4 of the Tomcom
Partnership Agreement solely as a result of the nature of the business being an
MFJ Restricted Activity. Except
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<PAGE>
as provided in the preceding sentence, the provisions of this Section 11.10
shall take precedence, in the event of any conflict, over any other provision of
this Agreement.
11.10.3. Unless and until the Decree Court, the Department of Justice, or
USW's CECO Decree Committee shall issue a written opinion that the CECO does not
apply to the Partnership, the Partnership will conform to the requirements and
prohibitions of the CECO. Unless and until the Decree Court, the Department of
Justice, or USW's MFJ Compliance Committee shall issue a written opinion that
the EO does not apply to the Partnership, the Partnership will conform to the
requirements and prohibitions of the EO. In conforming to the requirements and
prohibitions of the CECO and EO, the Partnership will utilize the procedures
established by USW for compliance with them. At the request of the Partnership,
USW will provide training, instruction and assistance to the Partnership in
matters associated with CECO and EO compliance.
11.10.4. If, at any time, a third party raises legitimate concerns regarding
whether as a result of the transactions arising out of this Agreement and the
Tomcom Partnership Agreement ATI or Systems in which it has an ownership
interest can lawfully engage in MFJ Restricted Activities, or if a third party
or USW's CECO Decree Committee raises legitimate concerns regarding whether, in
light of the activities of the Partnership and ATI, the BOC Participants are in
compliance with the MFJ (collectively, "MFJ Concerns"), the parties agree:
(a) except in the circumstances set forth in (iii) below, that ATI and/or
the Partnership shall have the right to continue the activities giving
rise to the MFJ Concerns;
(b) to restructure the relationships among them and their respective
properties to the minimum extent necessary to satisfy the MFJ Concerns
while preserving, to the fullest extent possible, the intent of the
parties regarding the Partnership. The obligation to restructure shall
arise when (A) counsel for any Partner Parent believes that an MFJ
Concern is well founded, (B) USW's CECO Decree Committee or similar
committee representing another BOC Participant determines that an
activity of the Partnership or ATI has or will put USW or such BOC
Participant in violation of the MFJ, or (C) ATI determines that in light
of the activities of the Partnership that the right of ATI or Systems in
which it has an ownership interest to lawfully engage in MFJ Restricted
Activities is subject to a well founded challenge under the MFJ and (in
any such case) outside counsel for any Partner Parent issues a written
opinion that the MFJ Concern cannot be cured without restructuring. In
the event the obligation to
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<PAGE>
restructure arises pursuant to the preceding sentence, the Partners
shall attempt to determine the manner of restructuring which best gives
effect to the first sentence of this clause (ii). If the Partners reach
agreement on a proposal, they will present it to the Partner Parents and
then, if the Partner Parents approve that proposal, to the Partnership
Committee. If the Partner Parents are unable to agree on a
restructuring proposal, each of them will present its proposal to USW's
CECO Decree Committee; the Partner Parents will then present to the
Partnership Committee any of the proposals the CECO Decree Committee has
approved. The Partners will implement a restructuring proposal only
upon the unanimous vote of the Partnership Committee. If the
Partnership Committee does not unanimously approve any restructuring
proposal, the Partner Parents shall resolve the manner of restructuring
by the procedure described in paragraph 2.6(d)(i) of the Tomcom
Agreement (provided that the 40-day period set forth therein for
--------
referral of disputes to the Independent Member shall be a 30-day
period); and
(c) If despite their best efforts, the Partners fail to reach agreement on
and implement a restructuring proposal pursuant to (ii) above, and if a
Partner Parent has received either:
(i) an opinion from the Decree Court that activities giving rise to the
MFJ Concerns have put a Partner Parent in violation of the MFJ; or
(ii) a written statement from the Department of Justice that such
activities have put a BOC Partner Parent in violation of the MFJ,
and either counsel for any one of the BOC Participants agrees, or
USW's CECO Decree Committee or any committee established by another
BOC Participant for purposes of reviewing MFJ issues has
determined, that there is a reasonable factual and legal basis for
such an opinion from the Department of Justice;
then, ATI, its Cellular and PCS Systems and/or the Partnership will stop the
activities giving rise to the MFJ Concerns until such time as implementation of
a restructuring proposal pursuant to (ii) above permits the resumption of such
activities.
11.10.5. Subject to compliance with the MFJ by the Partnership in connection
therewith, and subject to the restrictions set forth in Section 7.4 of the
Tomcom Partnership Agreement, ATI or any Affiliate thereof will have the option
to engage in MFJ Restricted Activities, specifically including the
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<PAGE>
provision of interexchange (interLATA) telecommunications services and engage in
any business practice and enter into any transaction in which the Partnership
does not engage by reason of the MFJ. Except as provided in the preceding
sentence, the provisions of this Section 11.10 shall take precedence, in the
event of any conflict, over any other provision of this Agreement.
11.11. Availability of Documents. The Partners and their Affiliates will
-------------------------
make available to the Partnership true and complete copies of any and all
documents necessary for the Partnership to fulfill its responsibilities under
this Agreement or applicable law.
11.12. Notices. Any notice or notification required, permitted or
-------
contemplated hereunder shall be in writing, shall be addressed to the party to
be notified at the address set forth below, or at such other address as each
party may designate for itself from time to time by notice hereunder, and,
unless otherwise specifically stated herein, shall be deemed to have been
validly served, given or delivered (i) three days following deposit in the
United States mail, with proper first-class postage prepaid, (ii) the next
business day after such notice was delivered to a regularly scheduled overnight
delivery carrier with delivery fees either prepaid or an arrangement,
satisfactory to such carrier, made for the payment of such fees, or (iii) upon
receipt of notice given by telecopy, mailgram, telegram, or personal delivery if
such receipt is during normal business hours, or if not received during normal
business hours, on the next business day following receipt:
If to PCSCO:
NYNEX Mobile Communications Company
2000 Corporate Drive
Orangeburg, New York 10962
Attn.: Alfred F. Boschulte, President
Telecopy No.: (914) 365-9046
and
Bell Atlantic Corporation
1717 Arch Street
Philadelphia, Pennsylvania 19103
Attn.: Lawrence T. Babbio, Jr.
Executive Vice President and Chief
Operating Officer
Telecopy No.: (215) 557-7214
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<PAGE>
With copies to:
NYNEX Network Systems Company
4 West Red Oak Lane
White Plains, New York 10604
Attn.: Senior Vice President and General Counsel
Telecopy No.: (914) 644-7966
and
Bell Atlantic Corporation
1717 Arch Street
Philadelphia, Pennsylvania 19103
Attn.: Stephen B. Heimann
Telecopy No.: (215) 561-9568
If to PCSN:
Airtouch Communications
2999 Oak Road
Walnut Creek, California 94596
Attn.: C. Lee Cox, President and Chief
Operating Officer
Telecopy No.: (510) 210-3599
and
U S West, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Attn.: President
Telecopy No.: (303) 793-6294
With copies to:
Airtouch Communications
425 Market Street
San Francisco, California 94105
Attn.: Senior Vice President-Legal and
External Affairs
Telecopy No. (415) 658-2298
and
- 59 -
<PAGE>
Pillsbury Madison & Sutro
235 Montgomery Street
San Francisco, California 94104
Attn.: Nathaniel M. Cartmell III, Esq.
Telecopy No.: (415) 477-4816
and
U S West, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Attn.: General Counsel
Telecopy No.: (303) 793-6294
11.13. Headings and Section References. The headings of the Articles and
-------------------------------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement. All references herein to articles, sections, schedules and exhibits,
unless otherwise specified, are references to articles and sections of, and
schedules and exhibits to, this Agreement.
11.14. Entire Agreement. This Agreement supersedes all prior agreements and
----------------
all contemporaneous agreements not required hereby or expressly referred to
herein and all representations, warranties, undertakings and understandings of
and among the parties with respect to the same subject and, with the other
agreements required hereby or expressly referred to herein, is the entire
agreement of the parties as to such subject. All exhibits and schedules
referred to herein, and all attachments to such exhibits or schedules, and any
other attachments to this Agreement, are hereby incorporated into this Agreement
and are hereby made a part hereof as if set out in full in this Agreement.
11.15. Disclaimer of Agency, etc. This Agreement does not create any
--------------------------
partnership beyond the scope set forth herein, and except as otherwise expressly
provided herein and under mandatory provisions of applicable law, this Agreement
shall not constitute any Partner the legal representative or agent of any other,
nor shall either Partner have the right or authority to assume, create or incur
any liability or obligation, express or implied, against, in the name of or on
behalf of any other Partner.
11.16. Publicity. No press release or other public announcement related to
---------
this Agreement or the Partnership or the transactions contemplated hereby shall
be issued by any Partner without the prior approval of the Executive Committee,
except that any Partner or Partner Parent may make such public disclosure which
it believes in good faith to be required by law or by the terms of any listing
agreement with a securities exchange (in which case such Partner shall consult
with the
- 60 -
<PAGE>
Executive Committee prior to making such disclosure).
11.17. Tax Matters Partner. Except as provided in Section 6.5.4 with
-------------------
respect to elections under Section 754 of the Code, in any case where
responsibility is granted to the Tax Matters Partner to make any election or
determination or to take any other action which in the reasonable judgment of
the Tax Matters Partner could have a material adverse economic impact on any
other Partner, the Tax Matters Partner shall notify such other Partners within
fifteen days preceding the time such action is to be taken. If any of the other
Partners disagree with the proposed action, responsibility for the matter shall
be given to the Executive Committee.
11.18. Counterparts. This Agreement may be executed in two or more
------------
counterparts, and all such counterparts shall constitute one and the same
instrument.
- 61 -
<PAGE>
IN WITNESS WHEREOF, the Partners have executed this Agreement the day and
year first above written.
PCSCO PARTNERSHIP
By: Bell Atlantic Personal
Communications, Inc., General Partner
By: _______________________________
Name: Lawrence T. Babbio, Jr.
Title: Chairman
and
By: NYNEX PCS, Inc., General Partner
By: ______________________________
Name: Alfred F. Boschulte
Title: Chairman
PCS NUCLEUS, L.P.
By: AirTouch Communications,
General Partner
By: _______________________________
Name: Arun Sarin
Title: Senior Vice President -
Corporate Strategy/
Development and Human
Resources
and
By: U S West, Inc.,
General Partner
By: _______________________________
Name: Charles M. Lillis
Title: Executive Vice President
- 62 -
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
CASH TYPE OF PERCENTAGE
NAME OF CONTRIBUTION PARTNERSHIP INTEREST
PARTNER AND SPECIFIED INTEREST
ACCOUNT VALUE
<S> <C> <C> <C>
PCSCO Partnership $2,000.00 General 20%
$3,000.00 Limited 30%
PCS Nucleus, L.P. $2,000.00 General 20%
$3,000.00 Limited 30%
</TABLE>
- 63 -
<PAGE>
EXHIBIT 10(iii)28
EXECUTIVE RETENTION
AND
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT, effective as of August 1, 1994, between NYNEX Corporation, a
Delaware corporation (the "Company"), and Frederic V. Salerno, an individual
(the "Executive").
In consideration of the mutual agreements and covenants contained herein,
the Company and the Executive hereby agree as follows:
1. Executive Duties. The Company hereby employs the Executive and the
----------------
Executive hereby agrees to serve the Company in the capacity of Vice Chairman
and that the Executive's entire business time and best efforts during the Term
of Employment (as hereinafter defined) will be devoted to the performance of the
Executive's duties, as now or hereafter assigned to the Executive by the Board
of Directors, the Chairman of the Board, or the President of the Company.
2. Term of Employment. The term of employment (the "Term of Employment")
------------------
shall commence on August 1, 1994 and shall continue until December 31, 1996 and
thereafter shall continue day to day.
3. Compensation. Except as hereinafter provided, the Company shall pay to the
------------
Executive, and the Executive shall accept from the Company, for the services and
duties to be rendered and performed by the Executive during the Term of
Employment:
(a) Base Compensation. During the Term of Employment, base compensation
-----------------
at an annual rate not less than his current rate (subject to
applicable withholding and other taxes), (i) payable in equal monthly
installments on or before the first day of the month following each of
the months during such period, and (ii) as subsequently adjusted by
the Board of Directors of the Company.
(b) Short Term Incentive Plan. During the Term of Employment, the
-------------------------
Executive shall participate in the Company's Senior Management Short
Term Incentive Plan (the "STIP"), if any, as a tier (D+) equivalent or
higher member of the Senior Management Compensation Group.
(c) Long Term Incentive Plan. During the Term of Employment, the
------------------------
Executive shall participate in the NYNEX Senior Management Long Term
Incentive Plan (the "LTIP"), if any, as a tier (D+) equivalent or
higher member of the Senior Management Compensation Group.
<PAGE>
(d) Stock Options. During the Term of Employment, the Executive will be
-------------
eligible to participate in the NYNEX Stock Option Plan to the extent
options are offered to tier (D+) equivalent or higher members of the Senior
Management Compensation Group.
(e) Other Compensation. During the Term of Employment, the Executive
------------------
shall participate in any NYNEX Senior Management Plans as a tier D+
equivalent or higher member of the Senior Management Compensation
Groups that are initiated in lieu of or in addition to 3(a), (b) or
(c).
(f) Retention Award. As of January 3, 1994, the Company will award the
---------------
Executive 9513 shares of restricted stock (the "Award"), pursuant to
the terms of the NYNEX 1987 Restricted Stock Award Plan, (1987 Plan)
under the following terms:
(i) dividends on the Award will be used to purchase additional shares
of restricted stock (the additional shares and the Awarded shares
shall be referred to collectively as the "Retention Award");
(ii) the shares which comprise the Retention Award shall be subject to
the terms and conditions provided in the 1987 Plan;
(iii) the Restriction Period for the Retention Award as defined in
the 1987 Plan shall end when the Executive:
(A) voluntarily separates from service with the Company with the
consent of the Chairman of the Company;
(B) dies; or
(C) is terminated without cause.
(g) Benefits. In addition to the Base Compensation, STIP, LTIP, Other
--------
Compensation and Stock Option Plan grants and awards payable to the
Executive pursuant to this paragraph 3, the Company shall provide the
following benefits to the Executive during the Term of Employment:
(i) The Executive, to the extent eligible, shall participate in the
Company's current and future employee benefit plans and programs
for members of the Senior Management Compensation Group and
employees generally in accordance with the terms of such plans
and programs.
2
<PAGE>
(ii) The Executive, as a member of the Senior Management Compensation Group as
defined by the NYNEX Board of Directors, shall be entitled to all
perquisites and benefits available to members of the Senior Management
Compensation Group of the Company.
(h) Termination of Payments and Severance Pay. If the Term of Employment
-----------------------------------------
is terminated, compensation and benefits under this subparagraph 3
shall be paid as follows:
(i) If the Executive voluntarily separates from service with the
Company without the consent of the Chairman of the Company:
(A) the Company shall make no further payments to the Executive
under sub-paragraph 3(a) for any period of time subsequent
to the date of such separation;
(B) grants and awards previously made to the Executive under the
LTIP, STIP and the Stock Option Plan shall be governed by
the terms of those plans;
(C) the Retention Awards provided for under sub-paragraph 3(f),
shall be forfeited;
(D) all benefits provided under sub-paragraphs 3(e) and 3(g)
shall cease as of the date of such separation, except as may
be provided in the plans and programs; and
(E) the Executive shall not be entitled to severance pay
pursuant to the NYNEX Executive Serverance Pay Plan
("Severance Pay Plan").
(ii) If the Executive voluntarily separates from service with the
Company with the consent of the Chairman of the Company:
(A) the Company shall make payments to the Executive under sub-
paragraph 3(a) for any period of time subsequent to the date
of separation through December 31, 1996, and shall make no
further payments to the Executive under sub-paragraph 3(a)
for any period of time subsequent to December 31, 1996;
(B) grants and awards previously made to the Executive pursuant
to the LTIP, STIP, and the Stock Option Plan shall be
governed by the terms of those plans as if the Executive was
employed and served the Company through December 31, 1996;
(C) the restrictions on the Retention Awards, provided for under
sub-paragraph 3(f), shall lapse;
(D) all benefits provided under sub-paragraphs 3(e) and 3(g)
shall be governed by the terms of the
3
<PAGE>
plans and programs as if the Executive was employed and
served the Company through December 31, 1996; and
(E) the Executive shall be entitled to severance pay pursuant to
the Severance Pay Plan 7 days after the Executive signs the
release provided for in the Severance Pay Plan.
(iii) If the Executive dies:
(A) the Company shall make payments to the Executive under sub-
paragraph 3(a) for any period of time subsequent to the date
of death through December 31, 1996, and shall make no
further payments to the Executive's estate or beneficiary
under sub-paragraph 3(a) for any period of time subsequent
to December 31, 1996;
(B) grants and awards previously made to the Executive pursuant
to the LTIP, STIP and the Stock Option Plan shall be
governed by the terms of those plans as if the Executive was
employed and served the Company through December 31, 1996;
(C) the restrictions on the Retention Awards provided for, under
sub-paragraph 3(f), shall lapse;
(D) all benefits provided under sub-paragraphs 3(e) and 3(g)
shall be governed by the terms of the plans and programs as
if the Executive was employed and served the Company through
December 31, 1996; and
(E) the Executive's Estate or beneficiary shall be entitled to
severance pay pursuant to the Severance Pay Plan 7 days
after the Executive's Estate or beneficiary sign the release
provided for in the Severance Pay Plan.
4
<PAGE>
(iv) If the Executive's employment is terminated for cause as defined
in Paragraph 4 below:
(A) the Company shall make no further payments to the Executive
under sub-paragraph 3(a) for period of time subsequent to
the date of such termination;
(B) grants and awards previously made to the Executive pursuant
to the LTIP, STIP and the Stock Option Plan shall be
governed by the terms of those plans;
(C) the Retention Awards, provided for under sub-paragraph 3(f),
shall be forfeited;
(D) all benefits provided under sub-paragraphs 3(e) and 3(g)
shall cease as of the date of such termination except as may
be provided in the plans and programs; and
(E) the Executive shall not be entitled to severance pay
pursuant to the Severance Pay Plan.
(v) If the Executive becomes and remains totally disabled:
(A) the Company shall pay the monthly payments specified in sub-
paragraph 3(a) to the Executive, (i) pursuant to the terms
of the Company's Short Term Disability Plan for the period
of time specified in such Plan, (ii) and shall continue such
payments for any period of time subsequent to the cessation
of payments or a portion thereof pursuant to the Company's
Short Term Disability Plan through December 31, 1996, and
(iii) after December 31, 1996, shall make further payments
to the Executive under sub-paragraph 3(a) for any period of
time subsequent to December 31, 1996 only pursuant to the
terms of the Company's Short Term Disability Plan;
(B) grants and awards previously made to the Executive pursuant
to the LTIP, STIP, and the Stock Option Plan shall be
governed by the terms of those plans as if the Executive was
employed and served the Company through December 31, 1996;
(C) the Retention Awards provided for under sub-paragraph 3(f)
shall be continued until the expiration of the Term of
Employment; and
(D) all benefits provided under sub-paragraphs 3(e) and 3(g)
shall continue to be provided until the expiration of the
Term of Employment;
(E) the Severance Pay Plan shall be continued until the
expiration of the Term of Employment.
5
<PAGE>
(vi) If the Executive's employment is terminated by the Company
without cause:
(A) the Company shall make payments to the Executive under sub-
paragraph 3(a) for any period of time subsequent to the date
of termination through December 31, 1996, and shall make no
further payments to the Executive under sub-paragraph 3(a)
for any period of time subsequent to December 31, 1996;
(B) grants and awards previously made to the Executive pursuant
to the LTIP, STIP, and the Stock Option Plan shall be
governed by the terms of those plans as if the Executive was
employed and served the Company through December 31, 1996;
(C) the restrictions on the Retention Awards provided for under
sub-paragraph 3(f) shall lapse;
(D) all benefits provided under sub-paragraphs 3(e) and 3(g)
shall be governed by the terms of the plans and programs as
if the Executive was employed and served the Company through
December 31, 1996; and
(E) the Executive shall be entitled to severance pay pursuant to
the Severance Pay Plan 7 days after the Executive signs the
release provided for the Severance Pay Plan.
4. Termination of Employment
-------------------------
(a) The Executive may voluntarily terminate employment with the Company at
any time with or without cause at the sole discretion of the employee.
(b) The Executive's employment may be terminated by the Company at any
time with or without cause at the sole discretion of the Company. The
Company shall give the Executive 90 days' notice if the Executive's
employment is being terminated without cause. If the Company
terminates the Executive's employment without cause and without 90
days notice, not withstanding the provisions of 3(g)(vi)(A), the
Company will pay the Executive's Base Compensation for each day that
the period between notice and termination of employment is less than
90 days. The term "cause" as used in this Agreement shall mean
grossly incompetent performance or substantial or continuing
inattention to or neglect of the duties and responsibilities assigned
to the Executive, as determined in the sole discretion and judgment of
the Chairman and Chief Executive Officer of the Company; fraud,
misappropriation, embezzlement, involving the Company or any of its
subsidiaries or Affiliates; or commission of any felony of which the
Executive is finally adjudged guilty in a court of competent
jurisdiction; or a breach of Paragraph 8 (Non-Competition and Non-
Solicitation), 9 (Intellectual Property and Proprietary Information),
10 (Company Rules; Code of
6
<PAGE>
Business Conduct), or 11 (Modification of Final Judgment) of this
Agreement. In the event that the Company terminates the employment of
the Executive for cause, it will state in writing the grounds for such
termination and provide this statement to the Executive within 10
business days after the date of termination, except that, in the event
that the reason for termination for cause is grossly incompetent
performance or substantial or continuing inattention to or neglect of
the duties and responsibilities assigned to the Executive, the Company
will give the Executive 60 calendar days prior written notice and an
opportunity to cure the performance within these 60 calendar days.
Evidence of such cause or evidence of other cause discovered after the
notice may also be considered to support the termination decision and
will, by itself, be sufficient to constitute cause.
5. Expenses. In accordance with the Company's usual practices and procedures,
--------
the Company agrees to reimburse the Executive for reasonable travel expenses
(other than normal commutation expenses) and other reasonable out-of-pocket
expenses directly related to the Executive's work for the Company.
6. Holidays and Vacation. The Executive shall have the same holidays per
---------------------
calendar year recognized by the Company for its management employees (presently
11). During each calendar year during the Term of Employment, the Executive
shall have an aggregate of 4 Management Personal Days and 5 weeks vacation.
Notwithstanding the foregoing, such Management Personal Days and vacation days
shall be scheduled at such times and in such number with due regard to the needs
of the business. The Executive agrees to use his best efforts to take or use
all accrued and to be accrued vacation and excused work days prior to December
31, 1996, and the Company will not be obligated to pay the Executive for any
accrued but unused vacation or excused work days after December 31, 1996 in
excess of five weeks.
7
<PAGE>
7. Capacity.
--------
(a) The Executive hereby warrants and represents that the Executive is
legally capable and now physically capable (with or without reasonable
accommodation) of performing the duties contemplated in this Agreement
and that such performance will not violate any agreements the
Executive has with, or breach any duties owed to, any other employer
or organization.
(b) The Company hereby warrants and represents that this Agreement has
been duly and validly authorized, executed, and delivered.
8. Non-Competition and Non-Solicitation.
------------------------------------
(a) Without the prior written consent of the Company, the Executive shall
not, during the Term of Employment and for a period of two years from
the date of termination of employment with the Company, or its
Affiliates, either for himself or as an agent, partner, joint venturer
or employee of any Person, other than the Company, or its Affiliates,
or in any other capacity, directly or indirectly:
(i) engage in Competitive Services for any Customer or any
Prospective Customer; or
(ii) contact, solicit or attempt to solicit, whether for the
Executive's own account or for the account of any Person other
than the Company, or its Affiliates, any Customer or any
Prospective Customer; or
(iii) induce away from the Company, or its Affiliates, or facilitate
the inducement away from the Company, or its Affiliates of, any
personnel of the Company, or its Affiliates, or interfere with
the faithful discharge by such personnel of their contractual and
fiduciary obligations to serve the interests of the Company, or
its Affiliates and their Customers; or
(iv) invest in or otherwise be connected with, in any manner, any
Person that provides or intends to provide products or services
of the type provided by the Company or its Affiliates for any
Customers or any Prospective Customer.
(b) For the purposes of this Paragraph 8, the following terms shall have
the following definitions:
(i) "Affiliate" of a Person means any Person directly or indirectly
controlling, controlled by, or under common control with, such
other Person.
(ii) "Customer" means any Person for whom the Company or its
Affiliates performed Competitive Services within the 18 months
immediately preceding such engagement, contact, solicitation
attempted solicitation or inducement, or the Executive's
termination of employment.
8
<PAGE>
(iii) "Competitive Services" means any business activity of the
Company or its Affiliates which is, being conducted or planned
during the Term of Employment or was being conducted or planned
by the Company or its Affiliates at the time of the Executive's
termination of employment.
(iv) "Person" means an individual, a corporation, a partnership, and
association, a trust or any other entity, including a government
or political subdivision or an agency or instrumentality thereof.
(v) "Prospective Customer" means any Person to whom the Company or
its Affiliates submitted, or assisted in the submission of, a
proposal for Competitive Services during the 18 months
immediately preceding such (x) engagement, contact, solicitation,
attempted solicitation or inducement, or (y) the Executive's
termination of employment.
(c) Ownership of less than 5% of the securities in a publicly traded
corporation shall not constitute a violation of this Agreement.
(d) Notwithstanding the foregoing, the Executive may, at any time, submit
in writing a request for permission to participate in any facet of the
Telecommunications Business. Such request shall set forth in detail
the specifics of such participation, including job or venture
description, geographic scope and such other information appropriate
for an informed decision by the Company. The Company can request
further information concerning such proposed undertaking. The Company
will respond as soon as reasonably possible, giving due consideration
to the completeness of the request and information provided by the
Executive. Such request should be submitted in writing to the
Chairman of the Company. The final decision to grant or deny such
request shall be at the sole discretion of the Company, limited only
by the overall intent of this paragraph 8(d) that the Executive not
compete and assist in any way any present or potential competitor of
the Company, its present or future affiliates, subsidiaries, partners
or joint ventures during this two-year period.
9
<PAGE>
9. Intellectual Property and Proprietary Information. The Executive has
-------------------------------------------------
executed the NYNEX Employee Agreement Regarding Intellectual Property and
Proprietary Information which is attached hereto as Appendix A and made a part
of this Agreement.
10. Company Rules: Code of Business Conduct. The Executive agrees to abide by
---------------------------------------
all of the rules applicable to Company employees as such rules are made known to
the Executive from time to time. The Executive has received and read the
publication entitled the NYNEX Code of Business Conduct.
11. Modification of Final Judgment. The Executive has received and read the
------------------------------
publication entitled NYNEX Policy for Compliance with the Modification of Final
Judgment (August 1988) and has executed the Acknowledgment attached thereto.
Such Acknowledgment is attached hereto as Appendix B and made a part of this
Agreement.
12. Additional Remedies. In addition to any other rights or remedies, whether
-------------------
legal, equitable or otherwise, which each of the parties may have:
(a) The Executive acknowledges that Paragraph 8, 9, 10 and 11 of this
Agreement are essential to the continued good will and profitability
of the Company and its Affiliates and further acknowledges that the
application and operation thereof shall not involve a substantial
hardship upon the Executive's future livelihood. Should any court or
arbitrator determine that any or all of such paragraphs of this
Agreement are unenforceable in respect of scope, duration or
geographic area, such court or arbitrator shall substitute, to the
extent enforceable, provisions similar thereto or other provisions, so
as to provide to the Company and its Affiliates, to the fullest extent
permitted by applicable law, the benefits intended by this Agreement.
(b) The parties hereto further recognize that irreparable damage to the
Company and its Affiliates will result in the event that Paragraphs 8,
9, 10 and 11 of this Agreement are not specifically enforced and that
monetary damages will not adequately protect the Company and its
Affiliates from a breach of this Agreement. If any dispute arises
concerning the violation by the Executive of this Agreement, the
parties hereto agree that an injunction may be issued restraining such
violation pending the determination of such controversy, and no bond
or other security may be required in connection therewith.
13. Waiver. Failure to insist upon strict compliance with any of the terms,
------
covenants or conditions hereof shall not be deemed a waiver of such term,
covenant or condition, nor shall any waiver or relinquishment of any right or
power hereunder at any one or more times be deemed a waiver or relinquishment of
such right or power at any other time or times.
14. Reformation and Severability. The Executive and the Company agree that the
----------------------------
agreements contained herein shall each constitute a separate agreement
independently supported by good and adequate consideration, shall each be
severable from the other provisions of the Agreement, and shall survive the
Agreement. If an arbitrator or court of competent jurisdiction determines that
any terms, provision or portion of this
10
<PAGE>
Agreement is void, illegal or unenforceable, the other terms, provisions and
portions of this Agreement shall remain in full force and effect and the terms,
provisions and portions that are determined to be void, illegal or unenforceable
shall be limited so that they shall remain in effect to the extent permissible
by law.
15. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed to have been duly given if delivered by hand or
messenger, transmitted by telex or telegram or mailed by registered or certified
mail, return receipt requested and postage prepaid, as follows:
(a) If to the Company, to:
NYNEX Corporation
1113 Westchester Avenue
White Plains, New York 10604
Attention: Executive Vice President
and General Counsel
(b) If to the Executive, to:
Frederic V. Salerno
8 Commodore Avenue
Rye, New York 10580.
or to such other person or address as either of the parties shall designate to
the other from time to time by similar notice.
16. Assignability. This Agreement is personal in nature. The Executive shall
-------------
have no right to assign or transfer this Agreement. In the event of any
attempted assignment or transfer by the Executive of the Executive's duties an
obligations contrary to this paragraph, all the Executive's rights under this
Agreement shall be forfeited, and the Company shall have no further liability
under this Agreement. The Company may assign or transfer its rights under this
Agreement only to an Affiliate of the Company. No assignment by the Company
shall relieve the Company of the liabilities and responsibilities created by
this Agreement.
17. Entire Understanding. This Agreement constitutes the entire understanding
--------------------
between the Company and the Executive with respect to the subject matter hereof,
superseding any and all prior written or oral understandings which may have
existed.
18. Amendment. This Agreement may be amended or modified, in whole or in part,
---------
only by an agreement in writing signed by the Company and the Executive.
19. Headings. The headings in this Agreement are inserted for convenience of
--------
reference only and are not to be considered in the construction of the
provisions herein.
20. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of New York without regard to the
principles of conflicts of laws of that State.
21. Arbitration. Any disputes under this Agreement shall be submitted to
-----------
Arbitration. The Arbitration shall be conducted under the rules of the American
Arbitration Association.
11
<PAGE>
22. Conflict. In the event of any conflict between the terms of this Agreement
--------
and any benefit plan or program in which the Executive participates, or with the
terms of any other contract that the Executive has with the Company or an
Affiliate, the terms of this Agreement shall control.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the 12th day of August, 1994.
EXECUTIVE COMPANY
FREDERIC V. SALERNO BY WILLIAM C. FERGUSON
------------------- --------------------
FREDERIC V. SALERNO WILLIAM C. FERGUSON
12
<PAGE>
NEW YORK TELEPHONE CO. APPENDIX A
EMPLOYEE AGREEMENT
REGARDING
INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION
F. V. SALERNO B00000000
IN CONSIDERATION of my employment or my continued employment at will
by New York Telephone; and in further consideration of New York Telephone's
award to me, while employed by New York Telephone, of an inventor's honorarium
for the specific assignment to New York Telephone of each original U.S. Patent
Application:
A. I hereby assign and agree to assign to New York Telephone, all my right,
title and interest in and to all inventions, discoveries, improvements,
ideas, computer or other apparatus programs and related documentation, and
other works of authorship (hereinafter each designated "Intellectual
Property"), whether or not patentable, copyrightable or susceptible to
other forms of protection, which during the period of my employment by New
York Telephone I may make, create, develop, write or conceive, whether
during or outside of regular working hours, either solely or jointly with
another, in whole or in part, either:
1. in the course of such employment, or
2. relating to the business or research or development of New York
Telephone or of any NYNEX company, or
3. with the use of the time, material, private or proprietary information,
or facilities of New York Telephone or of any NYNEX company.
B. I further agree, without charge to New York Telephone, but at its expense:
1. to disclose promptly to New York Telephone all such Intellectual
Property,
2. to promptly, at the request of New York Telephone, execute a specific
assignment to New York Telephone of any right, title and interest to
such Intellectual Property, including priority rights arising from
patent applications, and
3. to do anything else reasonably necessary to enable New York Telephone to
secure patents, copyrights or other forms of protection for such
Intellectual Property in the United States and in other countries.
13
<PAGE>
C. I further agree that I will keep in confidence and will not, except as
required in the conduct of the business of New York Telephone, or as authorized
in writing on behalf of New York Telephone, publish, disclose or use, or
authorize anyone else to publish, disclose or use, during said period of my
employment and subsequent thereto, any private or proprietary information which
I may in any way acquire, learn, develop or create by reason of my employment by
New York Telephone and that when my employment terminates, I will relinquish all
documents and records containing such information to New York Telephone.
D. I further agree that the various provisions of this Agreement:
1. shall be interpreted in accordance with New York law,
2. shall be binding upon my heirs, executors, administrators and assigns,
3. shall be deemed separable from each other, and the invalidity of one
provision shall not affect the validity of any other provision, and
4. shall not be deemed to provide or imply the duration or other terms and
conditions of my employment.
E. I hereby acknowledge that I have on this day received a copy of this
Agreement.
SSN ###-##-####
Frederic V. Salerno 7/7/87 Frederic V. Salerno-President & CEO
--------------------------- -----------------------------------
EMPLOYEE SIGNATURE AND DATE EMPLOYEE NAME (PRINT) AND TITLE
WITNESSED BY:
Maria E. Cabezas 7/7/87 Maria E. Cabezas - Executive Asst.
--------------------------- ----------------------------------
SUPERVISORY SIGNATURE AND DATE SUPERVISORY NAME (PRINT)AND TITLE
14
<PAGE>
APPENDIX B
MODIFICATION OF FINAL JUDGMENT
------------------------------
CERTIFICATE
-----------
The undersigned hereby (1) acknowledges receipt of a copy of the
1982 United States v. Western Electric, Modification of Final
Judgment and a written directive setting forth Company policy
regarding compliance with the antitrust laws and with such
Modification of Final Judgment, (2) represents that the undersigned
has read such Modification of Final Judgment and directive and
understands those provisions for which the undersigned has
responsibility, (3) acknowledges that the undersigned has been
advised and understands that non-compliance with such policy and
Modification of Final Judgment will result in appropriate
disciplinary measures determined by the Company and which may
include dismissal, and (4) acknowledges that the undersigned has
been advised and understand that non-compliance with the
Modification of Final Judgment may also result in conviction for
contempt of court and imprisonment and/or fine.
Date April 1, 1987
-------------------
Signature F. V. Salerno
---------------
Name (printed) F. V. Salerno
---------------
Title President and Chief Executive Officer
----------------------------------------
Department Executive
-----------
15
<PAGE>
EXHIBIT 11
NYNEX CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(In millions, except per share amounts)
<TABLE>
<CAPTION>
For the
Year Ended December 31,
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Earnings (loss) before cumulative effect of change in
accounting principle.................................. $792.6 $(272.4) $1,311.2
Cumulative effect of change in accounting for
postemployment benefits, net of taxes................. - (121.7) -
------ ------- --------
Net income (loss)...................................... $792.6 $(394.1) $1,311.2
====== ======= ========
I. Earnings (loss) per share (used for financial
reporting):
Weighted average number of common shares
outstanding (a).................................. 418.8 412.7 409.8
====== ======= ========
Earnings (loss) per share before cumulative effect
of change in accounting principle................ $ 1.89 $ (.66) $ 3.20
Cumulative effect per share of change in
accounting principle............................. - (.29) -
------ ------- --------
Earnings (loss) per weighted average share of
common stock..................................... $ 1.89 $ (.95) $ 3.20
====== ======= ========
II. Primary earnings (loss) per share (including
common stock equivalents) (b):
Weighted average number of common shares
outstanding...................................... 418.8 412.7 409.8
Dilutive effect of outstanding options (determined
by application of the treasury stock method)..... 1.1 3.3 1.2
------ ------- --------
Total shares used in calculation of primary
earnings (loss) per share........................ 419.9 416.0 411.0
====== ======= ========
Primary earnings (loss) per share before cumulative
effect of change in accounting principle......... $ 1.89 $ (.66) $ 3.19
Cumulative effect per share of change in
accounting principle............................. - (.29) -
------ ------- --------
Primary earnings (loss) per share................. $ 1.89 $ (.95) $ 3.19
====== ======= ========
III. Fully diluted earnings (loss) per share (b):
Weighted average number of common shares used in
calculation of primary earnings (loss) per
share above...................................... 419.9 416.0 411.0
Additional dilutive effect of outstanding options
(as determined by application of treasury
stock method)................................... .2 .2 .4
------ ------- --------
Total shares used in calculation of fully diluted
earnings (loss) per share........................ 420.1 416.2 411.4
====== ======= ========
Fully diluted earnings (loss) per share before
cumulative effect of change in accounting
principle........................................ $ 1.89 $ (.66) $ 3.19
Cumulative effect per share of change in
accounting principle............................. - (.29) -
------ ------- --------
Fully diluted earnings (loss) per share........... $ 1.89 $ (.95) $ 3.19
====== ======= ========
</TABLE>
(a) Excludes common stock equivalents in accordance with provisions of
Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB No.
15") because such equivalent shares result in dilution of less than 3%.
(b) This calculation is submitted in accordance with Item 601 of Regulation S-K
of the Securities and Exchange Commission, although not required by APB No.
15 because it results in dilution of less than 3%.
<PAGE>
EXHIBIT 13
1994 NYNEX Annual Report
MD&A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Review
NYNEX Corporation and its subsidiaries ("NYNEX") are grouped into five segments
for financial reporting purposes. The telecommunications segment
("Telecommunications") provides local telephone service, network access to long
distance services, technical and support services, and is involved in product
development and marketing. Intrastate communications services are regulated by
state public service commissions, and interstate communications services are
regulated by the Federal Communications Commission ("FCC"). The cellular segment
("Cellular") provides wireless telecommunications services and products. The
publishing segment ("Publishing") publishes White and Yellow Pages directories
and provides database products and services. The financial services segment
("Financial Services") primarily engages in leasing activities. The other
diversified operations segment ("Other Diversified Operations") provides
consulting services nationally and internationally, and cable television and
telecommunications services internationally; NYNEX has exited the information
products and services business (see Business Restructuring). Operating revenues
and operating income are discussed by segment on pages 17 to 19 and 21 to 22,
respectively.
Business Restructuring
Purpose of Restructuring
------------------------
Externally, rapid changes in technology and regulation are opening NYNEX's
markets to competitors in all segments (see Competition and Other Matters and
State and Federal Regulatory Matters). As there are more communications
alternatives available to customers, and their expectations for better quality
and service at lower prices are rising, it is possible that competitors can
serve parts of NYNEX's markets at lower costs. Business restructuring resulted
from a comprehensive analysis of operations and work processes, resulting in a
strategy to redesign them to improve efficiency and customer service, to adjust
quickly to accelerating change, to implement work force reductions, and to
produce cost savings necessary for NYNEX to operate in an increasingly
competitive environment. The most significant restructuring is occurring within
the telecommunications segment. The restructuring plan within the
nontelecommunications segments includes work force reductions and results from
the decision to focus on core businesses, including the exit from certain
nontelephone businesses and investments.
1993 Restructuring Charges
--------------------------
As a result of the planned business restructuring, 1993 results include pretax
charges of approximately $2.1 billion ($1.4 billion after-tax) comprised of $1.1
billion in employee termination costs, $626 million of process re-engineering
charges, $283 million in costs associated with planned exits from certain
businesses and $106 million for asset write-offs and loss contingency accruals.
Employee Termination Costs: In 1993, approximately $586 million of pretax
charges was recorded for employee severance payments and approximately $520
million of pretax charges was recorded for postretirement medical costs for the
work force reductions (total after-tax charges of $700 million). The severance
charges included salary, payroll taxes, and outplacement costs to be paid under
provisions of NYNEX's force management plan for management employees and the
terms of collective bargaining agreements for nonmanagement employees.
At December 31, 1993, the expected work force reductions by year are as follows:
<TABLE>
<CAPTION>
1994 1995 1996 Total
----- ----- ----- ------
<S> <C> <C> <C> <C>
Management 2,400 1,000 800 4,200
Nonmanagement 4,100 4,300 4,200 12,600
----- ----- ----- ------
Total 6,500 5,300 5,000 16,800
===== ===== ===== ======
</TABLE>
Process Re-engineering: Approximately $626 million of the 1993 charges ($395
million after-tax) consists of costs associated with re-engineering the way
service is delivered to customers. During the period 1994 through 1996, NYNEX
intends to decentralize the provision of residence and business customer service
throughout the region, create regional businesses to focus on unique markets,
and centralize numerous operations and support functions. Included in this
amount are:
<TABLE>
<CAPTION>
(In millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Systems redesign $113 $119 $16 $248
Work center
consolidation 11 129 21 161
Branding 47 - - 47
Relocation 17 24 2 43
Training 26 34 - 60
Re-engineering
implementation 24 28 15 67
---- ---- --- ----
Total $238 $334 $54 $626
==== ==== === ====
</TABLE>
Systems redesign is the cost of developing new systems, processes and procedures
to realize operational efficiencies and enable NYNEX to reduce work force
levels. Commencing in 1994, certain specific new systems development initiatives
were begun to facilitate implementation of process re-engineering initiatives.
These projects consist of radical changes in the applica-
10
<PAGE>
tions and systems supporting business functions. The redesign of these business
functions is an integral part of the restructuring plan, and all the costs
associated with these projects are incremental to ongoing operations.
Specifically, only software purchases and external contractor expenses, which
are normally expensed in accordance with NYNEX policy, were included in the 1993
restructuring charges for the following business processes:
<TABLE>
<CAPTION>
(In millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Customer contact $ 36 $ 32 $ 3 $ 71
Customer provisioning 10 15 4 29
Customer operations 35 35 - 70
Customer support 32 37 9 78
---- ---- --- ----
Total $113 $119 $16 $248
==== ==== === ====
</TABLE>
Customer contact represents the direct interface with the customer to provide
sales, billing inquiry and repair service scheduling on the first contact,
eliminating the number of handoffs that presently exist. New processes will
allow customers to define the way they want to do business with NYNEX. Customer
provisioning involves the development of the network infrastructure, circuit and
dialtone provisioning and installation, and process standardization. Customer
operations focuses on network monitoring and surveillance, trouble testing,
dispatch control, and proactive repair with reliability as a critical source of
competitive advantage. Customer support facilitates low cost reliable service by
providing support to the other three business processes.
Work center consolidation costs are incremental costs associated with
establishing work teams in fewer locations to take advantage of lower force
levels and system efficiencies, such as lease termination costs from the date
premises are vacated, moving property to new locations and other consolidation
costs. Branding includes the costs to develop a single "NYNEX" brand identity
associated with the restructured business operations. Relocation costs are
required to move personnel to different locations due to work center
consolidations and include employee home sale and purchase expenses, moving
expenses, travel and lodging expenses, and other costs based on NYNEX's
relocation guidelines and the provisions of collective bargaining agreements.
Training costs are for training nonmanagement employees on newly-designed,
cross-functional job positions and re-engineered systems created as part of the
restructuring plan and include tuition, out of pocket course development and
administrative costs, facilities charges, and related travel and lodging. This
training reflects broadening of job skills that will permit one employee to
perform tasks formerly performed by several employees. Re-engineering
implementation costs are incremental costs to complete the various
re-engineering initiatives.
Other Restructuring Charges: Approximately $283 million of the restructuring
charges ($271 million after-tax) relates to NYNEX's sale or discontinuance of
its information products and services businesses, including the sale of AGS
Computers, Inc. ("AGS") and several of its business units and The BIS Group
Limited ("BIS"). These charges include the write-off of the net book value of
the businesses and estimated provision for future operating losses and disposal
costs. An additional $106 million ($69 million after-tax) was recorded for
write-offs of assets and accrual of loss contingencies directly associated with
restructuring at other nontelephone subsidiaries.
1994 Additional Charges
-----------------------
During 1994, NYNEX reached new agreements with the Communications Workers of
America ("CWA") and the International Brotherhood of Electrical Workers ("IBEW")
(see Collective Bargaining Agreements) which provided for retirement incentives.
NYNEX also announced retirement incentives for its management employees. 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. These incentives are intended to provide a voluntary
means to implement substantially all of the planned work force reductions of
approximately 16,800 employees by the end of 1996. Postretirement medical costs
will be increased on a per employee basis, because more individuals will qualify
for lifetime medical coverage than under the 1993 force reduction plan. Other
retiree costs include vacation buyout and outplacement costs.
The retirement incentives will be offered at different times through 1996
according to local force requirements and are expected to generate an estimated
additional $2.0 billion in pretax charges ($1.3 billion after-tax) over that
period of time as employees elect to leave the business under retirement
incentives rather than under the 1993 force reduction plan (see additional costs
table). In 1994, $693.5 million of pretax charges ($452.8 million after-tax) was
recorded, primarily for the incremental cost of retirement incentives for 7,200
employees who left NYNEX. The components of the $693.5 pretax charges are $443.4
million ($289.6 million after-tax) for pension enhancements, and $250.1 million
($163.2 million after-tax) for associated postretirement medical costs. Much of
the cost of the enhancements will be funded by NYNEX's pension plans.
11
<PAGE>
1994 NYNEX Annual Report
Current Status of Business Restructuring
----------------------------------------
Employee Reductions: Due to acceleration of certain staff group reductions, the
number of employees leaving NYNEX under the retirement incentives during 1994
was higher than originally planned, reflecting an acceleration, but not an
increase, in the total number of employees expected to leave. The actual number
of work force reductions in 1994 and the revised expectation for 1995 and 1996
are as follows:
<TABLE>
<CAPTION>
1994 1995 1996 Total
----- ----- ----- ------
<S> <C> <C> <C> <C>
Management 3,700 500 - 4,200
Nonmanagement 3,500 5,600 3,500 12,600
----- ----- ----- ------
Total 7,200 6,100 3,500 16,800
===== ===== ===== ======
</TABLE>
Advances in technology and streamlined processes are expected to make it
possible for a smaller work force to maintain the same size network. As a
result, force reductions will continue in areas where redesigned processes can
meet customer service requirements with fewer people. The analysis of operations
and work processes resulted in recommendations for specific process and system
changes, and force reductions were identified as a result. This, in turn, will
enable NYNEX to reduce expenses.
The actual additional costs for 1994 and the expected additional costs for 1995
and 1996 for the retirement incentives and related postretirement medical costs
are as follows:
<TABLE>
<CAPTION>
(In millions) 1994 1995* 1996* Total
----- ----- ----- ------
<S> <C> <C> <C> <C>
Management $191 $ 31 $ - $ 222
Nonmanagement 503 804 434 1,741
---- ---- ---- ------
Total $694 $835 $434 $1,963
==== ==== ==== ======
</TABLE>
* The 1995 and 1996 expected additional costs are based on the actual experience
for 1994 and, therefore, update the amounts disclosed during 1994 in the
Quarterly Reports on Form 10-Q.
The reserves established for severance in 1993 have been and will continue to be
primarily transferred to the pension liability on a per employee basis as a
result of employees' leaving under the retirement incentives as opposed to
severance provisions of the 1993 force reduction plan. The severance reserves
utilized and the application of the postretirement medical liability established
in 1993 for those employees are detailed in the 1994 column below under
"Retirement Incentives." Assuming that employees will continue to leave under
the retirement incentives, the expected utilization of severance reserves and
the application of the postretirement medical liability established in 1993 have
been revised from the expectations previously reported under the 1993 force
reduction plan as follows:
<TABLE>
<CAPTION>
Severance
1993 Force Reduction Plan
(In millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Management $205* $ 91 $ 78 $374
Nonmanagement 123 100 34 257
---- ---- ---- ----
Total $328 $191 $112 $631
==== ==== ==== ====
<CAPTION>
Retirement Incentives**
(In millions) 1994*** 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Management $303* $ 71 $ - $374
Nonmanagement 34 118 105 257
---- ---- ---- ----
Total $337 $189 $105 $631
==== ==== ==== ====
</TABLE>
* Includes $45 million of severance associated with the balance of the 1991
restructuring reserve at December 31, 1993.
** The revised expected utilization for severance reserves per year is based on
1994 actual experience for the year and, therefore, updates the amounts
disclosed during 1994 in the Quarterly Reports on Form 10-Q.
*** The severance reduction amount is comprised of $315 million of severance
reserves transferred to the pension liability on a per employee basis and
$22 million utilized for other retiree costs.
<TABLE>
<CAPTION>
Postretirement Medical
1993 Force Reduction Plan
(In millions) 1994 1995 1996 Total
----- ----- ---- -----
<S> <C> <C> <C> <C>
Management $ 85 $ 35 $29 $149
Nonmanagement 171 142 58 371
---- ---- --- ----
Total $256 $177 $87 $520
==== ==== === ====
<CAPTION>
Retirement Incentives*
(In millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Management $129 $ 20 $ - $149
Nonmanagement 50 175 146 371
---- ---- ---- ----
Total $179 $195 $146 $520
==== ==== ==== ====
</TABLE>
* The revised expected utilization for the application of the postretirement
medical liability per year is based on 1994 actual experience for the year
and, therefore, updates the amounts disclosed during 1994 in the Quarterly
Reports on Form 10-Q.
Process Re-engineering: The actual 1994 utilization of reserves and the revised
expected utilization for 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
(In millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Systems redesign $108 $162 $ 2 $272
Work center
consolidation 27 97 49 173
Branding 21 21 - 42
Relocation - 6 1 7
Training - 21 28 49
Re-engineering
implementation 43 28 12 83
---- ---- --- ----
Total $199 $335 $92 $626
==== ==== === ====
</TABLE>
12
<PAGE>
Systems redesign: During 1994, it was determined that systems redesign would
require a larger than anticipated upfront effort to fully integrate interfaces
between various systems to permit development of multi-tasking capabilities. A
higher degree of complexity and additional functionality required by real time,
interactive systems contributed to the increase. Approximately $44 million
relating to software systems addressed by the restructure plan, but not
specifically provided for in the 1993 accrual, was expensed in 1994. The actual
utilization in 1994 and the revised expected utilization in 1995 and 1996 of the
systems redesign reserves are as follows:
<TABLE>
<CAPTION>
(In millions) 1994 1995 1996 Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Customer contact $ 52 $ 43 $- $ 95
Customer provisioning 11 34 - 45
Customer operations 19 44 - 63
Customer support 26 41 2 69
---- ---- -- ----
Total $108 $162 $2 $272
==== ==== == ====
</TABLE>
Work center consolidation has been revised and expected costs have increased
slightly due to an increase in the number of work centers from what was
originally planned based on the union agreements. Branding will require
additional time to complete. Relocation of employees has been significantly
revised due to the increase in work centers and terms of the union agreements.
Training was delayed due to the timing of the union agreements and the higher
degree of complexity of the systems redesign; total expected costs were
decreased due to the planned use of more in-house training. Re-engineering
implementation cost more than expected because of an expanded work effort for
the initiatives and the related retention of outside consultants.
Other Restructuring Charges: NYNEX utilized $62 million and $194 million in 1994
and 1993, respectively, of the restructuring reserves primarily relating to the
sale or discontinuance of its information products and services businesses.
Reserves for write-offs of assets and loss contingencies were reduced in 1994 as
follows: $40 million was utilized for the disposition of NYNEX Properties
Company; $5 million was reversed due to the actual loss on disposal of United
Publishers Corporation ("UPC") being less than the estimated amount accrued in
the publishing segment in December 1993 under the assumption that UPC would be
shut down; and $6 million was used for other restructuring activities.
Future Cash Effects and Cost Savings
------------------------------------
The 1993 restructuring charges had anticipated approximately $550 million in
cash outflows during the three-year period from 1994 through 1996 for severance
and re-engineering costs. In 1994, NYNEX implemented retirement incentives and
no longer expects to incur significant severance costs during that period. Cash
outflows for re-engineering are currently expected to total approximately $395
million ($125, $210, and $60 million in 1994, 1995, and 1996, respectively).
Noncash restructuring charges include the pension enhancements, postretirement
medical costs, charges related to discontinuance of information products and
services businesses, and write-offs of assets at other nontelephone
subsidiaries. Capital expenditures for 1994 through 1996 are currently expected
to total approximately $520 million ($170, $270, and $80 million in 1994, 1995,
and 1996, respectively), primarily related to systems re-engineering and work
center consolidations. Over time, it is anticipated that savings generated by
restructuring will provide the funds required, with any short-term cash flow
needs being met through NYNEX's usual financing channels.
During 1994, NYNEX began to realize significant expense savings associated with
force reductions. NYNEX experienced a $127 million reduction in wages as a
result of approximately 7,200 employees' leaving primarily under retirement
incentives.
It is anticipated that the restructuring will result in reduced costs during the
period of restructuring and reduced annual operating expenses of approximately
$1.7 billion beginning in 1997. These savings include approximately $1.1 billion
in reduced wage and benefit expenses due to lower work force levels, and
approximately $600 million in non-wage savings including reduced rent expense
for fewer work locations and lower purchasing costs. Partially offsetting these
savings are higher costs due to inflation and growth in the business.
Collective Bargaining Agreements
On March 24, 1994, NYNEX reached agreements with the CWA and 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. A
similar agreement was reached with and ratified by the IBEW in New England 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. The wage rates will
increase 4.0%, 3.5%, and 3.0% in August 1995, 1996 and 1997, respectively. 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.
13
<PAGE>
1994 NYNEX Annual Report
State Regulatory Matters
Maine
-----
On May 10, 1994, the Maine Public Utilities Commission ("MPUC") commenced a
proceeding to explore alternatives to traditional rate of return regulation for
New England Telephone and Telegraph Company ("New England Telephone"). In an
Order dated August 18, 1994, the MPUC consolidated this proceeding with an
earnings investigation commenced in response to a ratepayer complaint. In
testimony filed October 3, 1994, and amended January 13, 1995, New England
Telephone maintained that it was not earning above its authorized rate of return
and identified a potential revenue requirement of approximately $12 million
under a traditional rate of return methodology. Accordingly, New England
Telephone argued that current rates represent the appropriate starting point for
any alternative regulation plan. The MPUC Staff and the Office of the Public
Advocate each filed testimony on December 13, 1994 contesting New England
Telephone's analysis. The Staff concluded that current rates produced nearly $40
million in overearnings, while the Public Advocate estimated overearnings at $65
million. Both argued for a revenue reduction prior to the initiation of any
incentive regulation plan. Hearings on this consolidated proceeding were held in
February 1995, with a decision expected from the MPUC in May 1995.
Massachusetts
-------------
On April 14, 1994, 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 concluded in November 1994 and final briefs were
submitted in January 1995. Decision by the MDPU is pending.
In June 1990, the MDPU issued an order in Phase III of a proceeding that
culminated a five-year investigation into New England Telephone's rates, costs
and revenues. The order calls for the gradual restructuring of local and long
distance rates within the state, with the objective of moving prices for
services closer to the costs of providing them. This is accomplished through an
annual transitional filing of new rates by New England Telephone. At the time
the rates are established, revenue neutrality is maintained. New England
Telephone's first, second and third transitional filings became effective on
November 15, 1991, January 15, 1993, and April 14, 1994, respectively. On June
14, 1994, the MDPU granted New England Telephone's motion to defer further
transitional filings pending the outcome of the alternative regulation
proceeding.
On January 6, 1995, the MDPU opened an investigation concerning intraLATA and
local exchange competition in Massachusetts. The MDPU indicated that among the
matters it intends to address are collocation, interconnection of networks,
intraLATA toll presubscription, telephone number assignment and portability and
universal service funding. New England Telephone and other parties submitted
their comments on the scope of the proceeding in February 1995. Decisions in
this proceeding could have a significant impact on New England Telephone's
revenues.
New York
--------
On September 26, 1994, New York Telephone Company ("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 New York State Public
Service Commission ("NYSPSC"). The Plan would modify the manner in which New
York Telephone is regulated by the NYSPSC over the next five to seven years. The
Plan was developed by the parties in the third phase of the incentive regulation
proceeding that the NYSPSC instituted in 1992. In the initial 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 proceeding.
The Plan is a performance-based plan that, if approved by the NYSPSC, will
operate as follows:
14
<PAGE>
(1) The new framework replaces 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, depending on whether the Plan
remains in effect for five or seven years, New York Telephone's prices will
have been decreased by an amount that would produce a $375 million or a
$425 million reduction, respectively, 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 in 1995. During its term, the Plan allows certain prices to be
adjusted to take into account an inflation index in excess of four percent
annually or costs associated with government mandates and other defined
"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 encourages 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.
(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 1994 "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 was
implemented in 1994.
It is expected that the NYSPSC will issue a decision on the Plan during the
second quarter of 1995.
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 under interim regulations 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 ("the Service Plan").
In the Service 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 service performance results through December
31, 1994, it is probable that New York Telephone will incur a penalty. The
precise amount of the penalty obligation cannot be determined pending further
NYSPSC action regarding the waiver of certain service results for the period in
question, but it is estimated that the penalty will be in the range of $40 to
$50 million. The Service Plan is silent as to how New York Telephone must
satisfy any penalty. The ultimate resolution as to the disposition of the
Service Plan penalty through an additional capital investment to improve
infrastructure, a refund to ratepayers, or other means, will be made by the
NYSPSC in the future. The NYSPSC may allow all interested parties the
opportunity to state their positions.
Pursuant to a February 1993 NYSPSC order, New York Telephone may 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.
The NYSPSC authorized a $250 million increase in New York Telephone rates,
effective January 1, 1991, of which $47.5 million annually remains subject to
refund pending resolution of certain affiliate transactions issues.
15
<PAGE>
1994 NYNEX Annual Report
Vermont
-------
On February 6, 1995, the Vermont Public Service Board ("VPSB"), on motions for
reconsideration, amended its earlier order in New England Telephone's Price
Regulation Plan proceeding to remove additional pricing restrictions and to
permit New England Telephone to modify or exit the Price Regulation Plan during
its term. New England Telephone has 60 days to accept or reject the VPSB's
proposed changes. If New England Telephone rejects the proposed changes, it will
continue under rate of return regulation. As with the VPSB's earlier order, the
proposed changes would not restrict New England Telephone's earnings during the
four-year term of the plan but would impose a higher productivity factor and a
narrow definition of exogenous costs in the price regulation formula, and
additional quality of service standards.
In the related proceeding to examine New England Telephone's level of earnings,
on February 6, 1995, the VPSB issued an order, on motions for reconsideration of
its October 5, 1994 order, recalculating certain aspects of the required annual
revenue reduction, the net effect of which remained approximately $15 million.
The reduction is retroactive to December 29, 1993, the date the VPSB opened the
proceeding. Among the adjustments ordered was a reversal of the VPSB's previous
position on depreciation rates and the approval of stipulated depreciation
parameters, with the result that the adjustment previously taken by New England
Telephone in response to the VPSB's October 5 order must be reversed and
reserves adjusted to conform with the February 6 order. In 1994, New England
Telephone reduced local operating revenues by approximately $15 million for
subsequent refunds to Vermont customers for the period from December 29, 1993
through December 31, 1994 (see Operating Revenues and Operating Expenses). A
date for refunds to customers will be set once the VPSB completes supplemental
hearings on rate reduction design issues.
Federal Regulatory Matters
Effective January 1, 1991, the FCC lowered its interstate access rate of return
from 12% to 11.25%. Interstate access tariffs for New York Telephone and New
England Telephone (collectively, the "telephone subsidiaries") reflect this rate
of return.
Effective January 1, 1991, the FCC adopted incentive regulation in the form of
price caps with respect to interstate services provided by the telephone
subsidiaries. Price caps focus on local exchange carriers' ("LECs") prices
rather than costs and set maximum limits on prices LECs can charge for their
services. These limits are subject to adjustment each year to reflect inflation,
a productivity factor and certain other cost changes. Future improvements in
interstate earnings will depend upon actual productivity improvements in excess
of the productivity rate established by the FCC, effective response to
competition and continued growth in the demand for interstate access services.
Moreover, the FCC retained cost of service rate-making methodologies for new
services, which may limit the benefits of incentive regulation. Under FCC price
cap regulation, the telephone subsidiaries may earn a return on equity up to
approximately 15%. Above that level, earnings are subject to equal sharing with
ratepayers, until they reach an effective cap on interstate return on equity of
approximately 18.7%.
In 1992, the telephone subsidiaries implemented a plan to unify their interstate
access rates. With unification of interstate rates, the telephone subsidiaries
report one unified interstate rate of return to the FCC, which will be the basis
for determining any possible refund obligations due to overearnings as well as
any need to increase interstate rates due to underearnings under the price cap
plan.
In June 1994, the FCC completed a review of the performance of LECs during the
initial period of price cap regulation. The telephone subsidiaries filed
comments advocating price cap and access reform to keep pace with the
intensifying competitive environment. Among other things, the telephone
subsidiaries recommended increased pricing flexibility, elimination of sharing
and low end adjustment mechanisms, and reduction of the productivity factor. An
FCC decision is pending.
Revised tariffs under the price cap rules became effective in July 1991, 1992
and 1993 and reduced interstate access rates by approximately $68, $25, and $90
million, respectively. On July 1, 1994, the telephone subsidiaries implemented
the fourth annual update to the price cap rates, which will result in a net
reduction in interstate access rates of approximately $9.4 million by June 1995.
Tariff revisions were filed by the telephone subsidiaries with the FCC on
September 1, 1994 and amended on December 19, 1994, 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 as amended
reflected $42 million of costs already accrued, increased annual costs of $21
million and increased rates of $2.2 million. The filing follows a July 12, 1994
decision of the U.S. Court of Appeals for the District of Columbia Circuit
("Court of Appeals") overturning the FCC's prior order denying exogenous
treatment of additional OPEB costs. On December 29, 1994, the FCC's Common
Carrier Bureau (the "Bureau") issued an order allowing the proposed rates to go
into effect December 30, 1994, subject to an investigation and accounting order.
Commencing
16
<PAGE>
December 30, 1994, the telephone subsidiaries began collecting these
revenues, subject to possible refund pending resolution of the Bureau's
investigation.
Following the FCC's adoption of physical collocation rules in September 1992 and
1993, the telephone subsidiaries filed Special Access Expanded Interconnection
tariffs in February 1993 and Switched Transport Expanded Interconnection tariffs
in November 1993. Pursuant to provisions of the FCC rules that permit additional
pricing flexibility when physical collocation for switched access reaches a
threshold penetration level, on January 24, 1994, New York Telephone filed
volume and term discount tariffs, which became effective May 24, 1994, for
switched transport in certain areas of New York. On June 10, 1994, the Court of
Appeals overturned the FCC's physical collocation rules. On July 25, 1994, the
FCC adopted rules making physical collocation optional but requiring virtual
collocation where physical collocation is not offered. The telephone
subsidiaries decided to continue to offer physical collocation.
On December 15, 1993, the telephone subsidiaries filed a petition with the FCC
for a waiver to implement the Universal Service Preservation Plan ("USPP") in
order to compete more effectively with alternative providers of local telephone
service. The USPP would reduce the Switched Access rate for multiline business
users in zones of high traffic density by approximately 40 percent and would
shift most of the revenues lost from this rate reduction to flat, per-line
charges applicable to all access lines. Overall annual access revenues would be
reduced by $25 million.
Summary of Operations
Operating revenues Operating revenues decreased in 1994, principally due to the
sale of BIS in July 1993 and AGS in January 1994 partially offset by increased
cellular revenues. In 1993, operating revenues increased principally due to
telecommunications and cellular revenues, partially offset by decreased revenues
principally due to the sale of BIS in July 1993.
Operating expenses The decrease in Operating expenses for 1994 reflects the
effect of 1993 business restructuring charges and the exit from the information
products and services business, partially offset by $693.5 million of pretax
charges for pension enhancements and associated postretirement medical benefits
in 1994. The increase in Operating expenses for 1993 reflects the effect of $2.1
billion of pretax restructuring charges (see Business Restructuring).
Operating income The increase in Operating income for 1994 reflects the effect
of 1993 business restructuring charges, partially offset by pretax charges for
pension enhancements and associated postretirement medical costs in 1994. The
decrease in Operating income for 1993 reflects the effect of $2.1 billion of
pretax restructuring charges.
Other The increase in Other income (expense)-net for 1994 was due primarily to
the 1993 interstate portion of call premiums and other charges associated with
the refinancing of long-term debt. Interest expense reflects the increase in
average debt levels partially offset by a decline in average interest rates. The
increase in Income taxes was due to increased pretax income.
<TABLE>
<CAPTION>
Segment Operating Revenues
(In millions) For the years ended December 31,
Unaffiliated Revenues 1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Telecommunications $11,511.1 $11,525.8 $11,301.0
Cellular 720.0 440.5 351.4
Publishing 894.4 872.2 863.0
Financial Services 88.5 101.8 75.5
Other Diversified Operations 92.6 467.5 591.6
--------- --------- ---------
Consolidated revenues $13,306.6 $13,407.8 $13,182.5
========= ========= =========
</TABLE>
Telecommunications
------------------
Telecommunications revenues decreased $14.7 million in 1994 and increased $224.8
million, or 2.0%, in 1993.
Local service revenues increased $132.5 million, or 2.0%, in 1994 primarily due
to: (1) a net $240 million increase resulting primarily 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 $23 million
increase in local service rates due to the restructuring of Massachusetts rates
(see State Regulatory Matters), and (3) a $9 million increase primarily
attributable to the 1994 recognition of revenues deferred in 1993 that were in
excess of the required one-time credit to Rhode Island customers' bills for
1993. These increases were partially offset by a $135 million revenue reduction
pursuant to an NYSPSC order and a $15 million decrease resulting from a deferral
of revenues in September 1994 for subsequent refund to Vermont customers (see
State Regulatory Matters).
Local service revenues increased $165.3 million, or 2.6% in 1993, primarily due
to a net $225 million increase resulting from increased demand as evidenced by
growth in access lines, growth in sales of advanced calling features, higher
usage associated with winter storms and the World Trade Center bombing in 1993
(see Operating Expenses), approximately $52 million from increased rates for
local services due to the restructuring of Massachusetts rates (see State
Regulatory Matters), and an increase in rates to cover higher New York gross
receipts taxes. These increases were partially offset by a $55 million revenue
reduction pursuant to a regulatory proceeding and a $5 million reduction
associated with the reversal of a 1990 deferral of private line revenues.
17
<PAGE>
1994 NYNEX Annual Report
Long distance revenues decreased $53.2 million, or 4.7%, in 1994 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 $25
million decrease in long distance rates due to the restructuring of
Massachusetts rates, (3) a $13 million revenue reduction pursuant to an NYSPSC
order (see State Regulatory Matters), (4) a $12 million decrease at New York
Telephone attributable to the shift in interstate toll revenues from long
distance to network access (see Network access revenues), (5) an $8 million
decrease resulting from reductions in New Hampshire long distance rates, and (6)
a $5 million decrease due to commission-required reductions in Rhode Island long
distance rates. These decreases were partially offset by increased demand for
message toll services.
Long distance revenues increased $21.0 million, or 1.9%, in 1993, primarily due
to a $55 million increase attributable to regulatory accounting adjustments
relating to intraLATA toll calling in upstate New York (see Operating Expenses).
This increase was partially offset by decreases in demand for long distance
services, primarily private line and wide area telecommunications, as a result
of increased competition and customer shifts to lower priced services offered by
the telephone subsidiaries, and a net $51 million decrease resulting from
decreased rates due to the restructuring of Massachusetts rates.
Network access revenues increased $59.8 million, or 1.8%, in 1994 principally
due to a $94 million increase in switched access revenues as a result of: (1)
increased usage, (2) a $12 million increase at New York Telephone due to the
shift in interstate toll revenues from long distance to network access (see Long
distance revenues) and (3) a $12 million increase due to the recognition of
revenues previously deferred for postretirement medical costs (see Federal
Regulatory Matters). These increases were partially offset by a reduction in
interstate rates, which included the phase-out of the equal access cost recovery
charge, and by a $12 million revenue reduction pursuant to an NYSPSC order (see
State Regulatory Matters). Special access revenues declined $27 million
primarily due to a reduction in interstate rates, increased competition and
customer shifts to lower priced services offered by the telephone subsidiaries.
Network access revenues increased $31.4 million in 1993. Switched access
revenues increased $58 million as a result of increased usage partially offset
by a reduction in rates, which included decreased rates to reflect lower New
York gross receipts taxes. This increase was partially offset by a $27 million
decline in special access revenues primarily due to a reduction in rates,
increased competition and customer shifts to lower priced services offered by
the telephone subsidiaries. The total effect of interstate rate reductions on
Network access revenues was $82 million.
Other revenues decreased $153.8 million in 1994, primarily due to the following:
(1) a $153 million reduction in revenues as ordered by the NYSPSC (see State
Regulatory Matters), (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 $14 million
decrease due to the 1994 cessation of imputed revenues for procurement costs.
These decreases were partially offset by: (1) a $22 million increase due to the
imputation of revenue associated with the enactment of the Revenue
Reconciliation Act of 1993, (2) a $10 million increase due to the 1993 reversal
of a 1992 deferral of revenues for concession service, and (3) an $8 million
increase in revenues from inside wire related charges and voice messaging
services.
Other revenues increased $7.1 million in 1993, primarily due to the following:
(1) a $24 million increase from the reversal of previously recorded reductions
in revenues in connection with the phase-out of ad valorem taxes on central
office equipment, (2) a $22 million increase due to the imputed reduction of
these revenues in 1992, (3) a $10 million reduction associated with the reversal
of a 1992 deferral of revenues for concession service, (4) a $10 million
decrease due to the 1992 imputation of these revenues, and (5) a $9 million
increase in wire installation revenues. There was also a net $26 million
decrease in billing and collection revenues primarily attributable to a contract
provision with AT&T Corp. ("AT&T").
Cellular
--------
Cellular revenues increased $279.5 million, or 63.5%, in 1994 and $89.1 million,
or 25.4%, in 1993. The segment's customer base for mobile telecommunications
services continued to expand, increasing 68% in 1994 and 47% in 1993. This
growth was spread across all cellular markets; however, in both years, customer
growth was partially offset by a decline in average minutes of use per customer
and lower average prices. 1994 revenues include $39 million as a result of the
restructuring of the New York partnership.
The growth in cellular revenues is expected to continue, consistent with
anticipated growth in the cellular industry as a whole. However, future revenues
may be affected by increased competitive pressures on pricing and market share,
and the effects of a broader customer base with lower average usage.
18
<PAGE>
On June 30, 1994, NYNEX and Bell Atlantic Corporation ("Bell Atlantic")
announced the formation of a joint venture to combine NYNEX's and Bell
Atlantic's domestic cellular services properties. Initially, Bell Atlantic will
own 62.35% of the joint venture and NYNEX will own 37.65%. The joint venture
will be controlled equally by both companies. The transaction is expected to
close in mid-1995 at which time NYNEX will deconsolidate NYNEX Mobile
Communications Company ("NYNEX Mobile"), a wholly-owned subsidiary of NYNEX, and
account for its investment under the equity method.
During 1994, NYNEX Mobile purchased properties in New Hampshire and Vermont from
Contel Cellular Inc. and intends to purchase additional northeastern properties
in 1995.
Publishing
----------
Publishing revenues increased $22.2 million, or 2.5%, in 1994 and $9.2 million,
or 1.1%, in 1993. The 1994 increase was primarily due to increased Yellow Pages
advertising revenues, driven by increased prices, and increased revenues from
the publication of directories in the Czech Republic. The 1993 increase was
primarily due to the publication of directories in the Czech Republic. In 1993,
Yellow Pages advertising revenues did not fluctuate significantly, as decreased
sales volume was offset by increased prices; the decreased sales volume was
attributed primarily to the recessionary impact on many companies' advertising
expenditures. Revenues are expected to grow over the next several years
primarily as a result of increased revenues from the publication of directories
internationally and increased Yellow Pages revenues due to higher sales volumes
and prices.
Financial Services
------------------
Financial Services revenues decreased $13.3 million, or 13.1%, in 1994 and
increased $26.3 million, or 34.8%, in 1993. The 1994 decrease was principally
due to the 1993 change in the corporate tax rate and the timing of the
investments in the leased asset portfolio. The 1993 increase was principally due
to growth in the portfolio of leveraged leases. Major leasing projects included
financing for aircraft, industrial equipment, railroad cars, power generation
equipment, residential real estate and telecommunications and computer
equipment.
Other Diversified Operations
----------------------------
Other Diversified Operations revenues decreased $374.9 million, or 80.2%, in
1994 and $124.1 million, or 21.0%, in 1993. The sale of BIS in July 1993 and AGS
in January 1994 (see Business Restructuring) resulted in a reduction in 1994
revenues of $105 and $287 million, respectively. The sale of BIS resulted in a
reduction in 1993 revenues of $104 million. Total 1993 revenues from AGS were
$296 million. In both years, there was also a decrease in demand for
professional services, partially offset by growth in the customer base for
international cable television and telecommunications operations.
Operating Expenses
Total Operating expenses in 1994, 1993, and 1992 were $11.6, $13.1, and $10.7
billion, respectively, representing a decrease from the prior year of $1.5
billion, or 11.7%, in 1994 and an increase over the prior year of $2.4 billion,
or 22.7%, in 1993.
Operating expenses excluding Depreciation and
amortization and Taxes other than income (In millions)
1994 $ 7,916.6
1993 $ 9,501.6
1992 $ 7,082.4
In 1994, Operating expenses excluding Depreciation and amortization and Taxes
other than income decreased $964.3 million at the "telecommunications group"
(consisting of New York Telephone, New England Telephone and Telesector
Resources Group, Inc.) principally due to a $919.6 million decrease in year-
over-year restructuring charges and to decreased employee benefit costs.
Operating expenses excluding Depreciation and amortization and Taxes other than
income at NYNEX's subsidiaries other than the telecommunications group decreased
$620.7 million, principally due to the restructuring charges recorded in 1993
and decreased expenses resulting from the sale of BIS and AGS, partially offset
by increased product costs associated with the increased customer base for
cellular telecommunications services and increased expenses related to the
growth in international cable television and telecommunications operations.
In 1993, Operating expenses excluding Depreciation and amortization and Taxes
other than income increased $2.0 billion at the telecommunications group,
principally due to $1.6 billion of 1993 pretax restructuring charges (see
Business Restructuring) and increased employee benefit costs. Operating expenses
excluding Depreciation and amortization and Taxes other than income at NYNEX's
subsidiaries other than the telecommunications group increased $465.2 million,
principally due to $465.8 million of 1993 restructuring charges recorded in
operating expenses; increased data processing, commissions, and advertising
costs associated with the continued expansion of the customer base for cellular
telecommunications services; and increased expenses related to the growth in
international cable television and telecommunications operations. These
increases were partially offset by decreased expenses resulting from the sale of
BIS.
19
<PAGE>
1994 NYNEX Annual Report
Employee costs, consisting primarily of wages, payroll taxes, and employee
benefits, decreased $70.3 million in 1994 at the telecommunications group. There
was a $136 million decrease in benefit costs for active and retired employees
due primarily to a $75 million charge recorded in 1993 at New York Telephone for
deferred pension costs as ordered by the NYSPSC, a net $52 million decrease in
pension expense resulting primarily from plan amendments and actual plan
experiences, partially offset by increased amortization of deferred pension
costs, a $28 million accrual recorded in 1993 for a supplemental executive
retirement plan, a $17 million deferral recorded in 1994 for postemployment
benefits as ordered by the NYSPSC which will be amortized over the next five
years, and a $4 million decrease in active employee medical expenses due
primarily to a decrease in employees. These decreases were partially offset by a
$40 million increase in retired employees' benefits other than pensions
primarily due to actuarial assumptions and plan amendments. In 1994, wages and
payroll taxes increased $66 million due to increases in salary and wage rates,
additional labor costs to support significantly 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 due
to force reduction plans.
Employee costs increased $294.9 million in 1993 at the telecommunications group.
There was a $141 million increase in benefit costs for active and retired
employees due primarily to increased medical costs and an accrual for a
supplemental executive retirement plan, and the aforementioned $75 million
charge resulting from a reversal of deferred pension costs at New York
Telephone. In 1993, wages and payroll taxes increased $79 million due to
increases in salary and wage rates and additional labor costs due to winter
storms, the World Trade Center bombing in 1993 (see Operating Revenues), and
initiatives to improve service-quality levels, partially offset by a reduction
in the work force due to force reduction plans.
All other operating expenses, consisting primarily of contracted and centralized
services, rent and other general and administrative costs, increased $25.6
million in 1994 at the telecommunications group. The increase was due primarily
to a $76.3 million increase in contracted and centralized services which
included a $48 million increase resulting from the transfer of Corporate
employees into the telecommunications group as part of the single enterprise
reorganization, an $18 million increase in sales commissions, and a $6 million
increase in right-to-use fees. In addition, there was a $13 million increase in
bad debt expense recognized pursuant to provisions of billing and collection
contracts, primarily with AT&T, a $9 million increase in the provision for
uncollectible revenues, and a $7 million increase resulting from the
capitalization in 1993 of certain 1992 engineering charges. Partially offsetting
these increases were a $43 million decrease due to the completion of equal
access amortization in 1993, a $13 million decrease due to the telephone
subsidiaries' contractual share of a predivestiture AT&T liability recognized in
1993, and a $9 million decrease attributable to the reversal in 1993 of deferred
inside wire expense recorded in 1991 and 1992.
All other operating expenses increased $48.0 million in 1993 at the
telecommunications group due primarily to a $64 million increase resulting from
regulatory accounting adjustments relating to intraLATA toll calling in upstate
New York (see Operating Revenues), a $13 million increase due to the telephone
subsidiaries' contractual share of a predivestiture AT&T liability, and a $9
million increase primarily attributable to the reversal of deferred inside wire
expense recorded in 1991 and 1992. These increases were partially offset by a
$15 million decrease in bad debt expense recognized pursuant to provisions of
the billing and collection contract with AT&T, a $13 million decrease resulting
from capitalization in 1993 of certain 1993 and 1992 engineering charges, and a
$13 million decrease in material and supply expense.
Taxes other than income (In millions)
1994 $ 993.2
1993 $ 1,038.9
1992 $ 1,054.6
In 1994, Taxes other than income decreased $48.8 million at the
telecommunications group due to: (1) a $26 million decrease in property taxes
resulting from lower assessments of property value, (2) an $18 million decrease
due to a reversal in 1994 of a 1993 accrual as a result of unasserted municipal
assessments, (3) a $9 million decrease in revenue taxes primarily attributable
to a decrease in the surcharge rate from 15% to 12.5%, and (4) a $4 million
increase in New York State capital stock tax. At NYNEX's subsidiaries other than
the telecommunications group, there was a $3.1 million increase principally due
to increased property taxes.
In 1993, Taxes other than income decreased $21.5 million at the
telecommunications group due to: (1) a $29 million decrease in ad valorem taxes
primarily attributable to the completion of the phase-out of the tax on central
office equipment, (2) a $22 million decrease in property taxes due principally
to lower assessments, (3) a $19 million increase in property taxes primarily
attributable to increased tax rates and municipal assess-
20
<PAGE>
ments, and (4) a $4 million increase due to increased gross receipts tax rates.
At NYNEX's subsidiaries other than the telecommunications group, there was a
$5.8 million increase principally due to increased property taxes.
Depreciation and amortization (In millions)
1994 $ 2,640.6
1993 $ 2,534.0
1992 $ 2,518.0
In 1994, Depreciation and amortization increased $94.2 million at the
telecommunication group. The increase included: (1) a $78 million increase due
to increased depreciable plant investment, (2) a $33 million increase resulting
from revised intrastate depreciation rates in Massachusetts effective July 1993,
(3) a $15 million decrease resulting from an adjustment recorded in 1994 for the
cost of removal (net of salvage) for electro-mechanical switching equipment in
Massachusetts, Maine and Rhode Island, and (4) a $9 million decrease resulting
from revised intrastate depreciation rates in Vermont. The 1994 net increase in
Depreciation and amortization of $12.4 million at NYNEX's subsidiaries other
than the telecommunications group was primarily due to the growth in cellular
telecommunications services and international cable television and
telecommunications operations, partially offset by the sale of BIS and AGS.
In 1993, Depreciation and amortization increased $18.1 million at the
telecommunications group. The increase included: (1) a $69 million increase due
to increased depreciable plant investment, (2) a $41 million increase resulting
from revised intrastate depreciation rates in Massachusetts, Rhode Island, and
New Hampshire, (3) a $25 million increase due to represcribed interstate
depreciation rates, (4) a $62 million decrease due to the completion of
intrastate amortization of electro-mechanical switching equipment in
Massachusetts in 1992, (5) a $20 million decrease due to the completion of
interstate amortization of the reserve deficiency in 1992, (6) an $11 million
decrease in the amortization of the reserve deficiency for analog electronic
switching systems offices in Rhode Island, (7) a $4 million decrease due to
recognition in 1992 of expenses that were previously deferred in accordance with
a prior regulatory agreement in New Hampshire, and (8) a $3 million decrease due
to the completion of the amortization of customer premise wiring in 1992.
<TABLE>
<CAPTION>
Segment Operating Income
(In millions) For the years ended December 31,
Operating Income 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Telecommunications $1,874.7 $ 967.2 $2,643.7
Cellular 50.9 1.4 61.3
Publishing 66.2 52.2 57.2
Financial Services 69.6 38.9 63.4
Other Diversified Operations (134.8) (384.8) (67.6)
-------- -------- --------
1,926.6 674.9 2,758.0
Adjustments and
eliminations (1.1) 14.9 2.5
Corporate expenses (169.3) (356.5) (233.0)
-------- -------- --------
Consolidated operating income $1,756.2 $ 333.3 $2,527.5
======== ======== ========
</TABLE>
Telecommunications
------------------
Telecommunications operating income increased $907.5 million, or 93.8%, in 1994
and decreased $1.7 billion, or 63.4%, in 1993. The 1994 increase was princi-
pally due to the restructuring charges recorded in 1993, partially offset by
$691.5 million of pretax charges for pension enhancements and associated
postretirement medical benefits in 1994. The 1993 decrease was principally due
to $1.6 billion of 1993 pretax restructuring charges (see Business
Restructuring) and increased benefit costs, partially offset by increased
revenues.
Cellular
--------
Cellular operating income increased $49.5 million in 1994 and decreased $59.9
million, or 97.7%, in 1993. The 1994 increase was principally due to 1993
restructuring charges. Excluding these charges, 1994 operating income decreased
$11 million due to increased commissions and product costs associated with
continued expansion of the customer base for mobile telecommunications services,
partially offset by increased revenues. The 1993 decrease was principally due to
$61 million of pretax restructuring charges (see Business Restructuring).
Excluding these charges, 1993 operating income was flat compared to 1992. In
1993, increased revenues were offset by increased data processing, commissions,
and advertising costs associated with the expansion of the customer base.
Publishing
----------
Publishing operating income increased $14.0 million, or 26.8%, in 1994 and
decreased $5.0 million, or 8.7%, in 1993. The 1994 increase was principally due
to increased revenues and 1993 restructuring charges. The 1993 decrease was
principally due to $6 million of pretax restructuring charges (see Business
Restructuring). Excluding these charges, 1993 operating income was flat compared
to 1992. In 1993, increased revenues from the publication of directories in the
Czech Republic were offset by increased data processing costs and increased
expenses for the publication of international directories.
21
<PAGE>
1994 NYNEX Annual Report
Financial Services
------------------
Financial Services operating income increased $30.7 million, or 78.9%, in 1994
and decreased $24.5 million, or 38.6%, in 1993. The 1994 increase was
principally due to 1993 restructuring charges partially offset by decreased
revenues from leveraged leases. The 1993 decrease was principally due to $40
million of pretax restructuring charges associated with plans to sell certain
real estate holdings (see Business Restructuring), partially offset by increased
revenues from leveraged leases.
Other Diversified Operations
----------------------------
The operating loss from Other Diversified Operations decreased $250.0 million,
or 65.0%, in 1994 and increased $317.2 million in 1993. The 1994 decrease was
principally due to 1993 restructuring charges and decreased operating loss
associated with the sale of BIS and AGS, partially offset by increased expenses
related to growth in international cable television and telecommunications
operations. The 1993 increase was principally due to $301 million of pretax
restructuring charges (see Business Restructuring), increased expenses related
to growth in international cable television and telecommunications operations,
and decreased operating income associated with the sale of BIS in July 1993.
<TABLE>
<CAPTION>
Other income (expense)-net
(In millions) 1994 1993 1992
----- ------- -----
<S> <C> <C>
$13.9 $(118.9) $38.7
===== ======= =====
</TABLE>
The increase in 1994 was primarily due to the 1993 interstate portion of call
premiums and other charges associated with the refinancing of long-term debt,
dividends received from Viacom Inc., and 1993 restructuring charges. The
decrease in 1993 was primarily due to $84 million for the interstate portion of
call premiums and other charges associated with the refinancing of long-term
debt, a net $37 million of interest received in 1992 as a result of tax audit
settlements, primarily at the telephone subsidiaries, and $31 million of pretax
restructuring charges (see Business Restructuring).
<TABLE>
<CAPTION>
Interest expense
(In millions) 1994 1993 1992
------ ------ ------
<S> <C> <C>
$673.8 $659.5 $684.6
====== ====== ======
</TABLE>
In 1994, average debt levels increased from $8.7 billion in 1993 to $9.7 billion
and average interest rates declined from 7.3% in 1993 to 6.7% primarily as a
result of long-term debt refinancings throughout 1993 (see Capital Resources and
Liquidity). In 1993, average interest rates declined from 7.8% in 1992 to 7.3%
primarily as a result of long-term debt refinancings, and average debt levels
increased from $8.5 billion in 1992 to $8.7 billion.
<TABLE>
<CAPTION>
Income taxes
(In millions) 1994 1993 1992
------ ------- ------
<S> <C> <C>
$303.7 $(172.7) $570.4
====== ======= ======
</TABLE>
Earnings (loss) before income taxes and cumulative effect of change in
accounting principle increased $1.5 billion in 1994, principally due to 1993
restructuring charges partially offset by a decrease in pretax income due to
1994 pension enhancements and associated postretirement medical benefits. In
addition, there was a $58.6 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. Earnings (loss) before income taxes
and cumulative effect of change in accounting principle decreased $2.3 billion
in 1993, principally due to pretax restructuring charges, and there was an
increase in the reversal of excess deferred taxes from previous years that had
been deferred at a tax rate higher than the 1993 statutory rate. These decreases
were partially offset by the effect of the Revenue Reconciliation Act of 1993,
which increased the statutory corporate federal income tax rate from 34 percent
to 35 percent.
Capital Resources and Liquidity
The net decrease in cash of $20.3 million in 1994 is primarily due to increased
capital expenditures and net cash used in financing activities partially offset
by decreased cash outflows in other investing activities.
Operating Activities
--------------------
Net cash provided by operating activities was $3.7, $3.7 and $3.5 billion in
1994, 1993 and 1992, respectively. In 1994, operating cash flow remained
virtually unchanged from 1993. 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 $125 million was expended
in 1994. Restructuring charges in 1993 and pension enhancement charges in 1994
did not materially affect operating cash flows in the years in which they were
recorded. Increased cash outflows due to the pension enhancement charges will be
incurred primarily by the NYNEX Pension Plans in future years.
22
<PAGE>
Operating cash flow improved in 1993 vs. 1992 as a result of reduced levels of
severance and other force restructuring costs reserved for in the fourth quarter
of 1991 and expended during 1992 and 1993. Excluding the effects of
restructuring charges (see Business Restructuring), Management anticipates cash
provided by operating activities in 1995 to continue in the range attained in
recent years.
Investing Activities
--------------------
Capital expenditures: Capital expenditures were $3.0, $2.7 and $2.4 billion in
1994, 1993 and 1992, respectively, and are projected in 1995 to remain at a
level comparable to 1994, excluding capital expenditures resulting from the re-
engineering of systems and work processes (see Business Restructuring). Capital
expenditures in 1994 for the telephone subsidiaries for the upgrade and
extension of the existing telecommunications network, including new
construction, optical fiber and modernization, continued at the same level as
1993. These capital expenditures were funded primarily through cash generated
from operations, and it is anticipated that 1995 capital expenditures will be
similarly funded. Capital expenditures in 1994 increased over 1993 for the
construction of mobile cell sites, cell site digital upgrades, and the continued
building of the cable television/telecommunications network in the United
Kingdom.
Investment in leased assets: Decreased investments in leased assets are the
result of heightened competition in the leasing market.
Other investing activities: In 1993, NYNEX invested $1.2 billion in Viacom Inc.
("Viacom"), which owns and operates cable television networks and other
businesses worldwide. NYNEX and Viacom will pursue strategic partnership
opportunities in domestic and international cable television, media
entertainment, video transmission, and telecommunications. Other investments in
1993 included a $176.8 million investment in Orient Telecom & Technology
Holdings Ltd. to acquire an indirect interest of approximately five percent in
TelecomAsia Corporation Public Company Limited ("TelecomAsia"), primarily for a
network expansion project in Bangkok, Thailand, and to develop
telecommunications opportunities in China, a $25.7 million investment in STET
Hellas Telecommunications S.A. for a Greek cellular project, and an additional
$23.7 million investment in TelecomAsia.
Financing Activities
--------------------
Commercial paper and short-term debt: During 1994, commercial paper and short-
term debt decreased a net $1.7 billion, due primarily to the repayment of
commercial paper through the issuance of long-term debt.
Issuance of long-term debt: In February 1994, New York Telephone issued $450
million in debentures and $150 million in notes and used the proceeds to repay
short-term borrowings from NYNEX. The proceeds were, in turn, used by NYNEX to
repay commercial paper borrowings. NYNEX Capital Funding Company ("CFC") issued
$863 million of medium-term notes in order to reduce NYNEX's commercial paper
requirements. The majority of refinancing charges in 1993 for the telephone
subsidiaries, including call premiums, were deferred and amortized for
intrastate rate-making purposes. It is estimated that these refinancings will
continue to result in an annual interest savings of approximately $62 million
for the next four years, with savings thereafter varying.
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 and 1994 business restructuring charges (see Business
Restructuring), beginning in March 1994, New York Telephone did not meet the
earnings coverage requirement. As of December 31, 1994, New York Telephone meets
the earnings coverage requirement.
Issuance of common stock: In 1994, 1993 and 1992, NYNEX issued common stock for
employee savings plans, the Dividend Reinvestment and Stock Purchase Plan
("DRISPP") and stock compensation plans, increasing equity by approximately $320
million in 1994, $128 million in 1993, and $249 million in 1992. The noncash
issuance of stock, primarily for dividends in connection with DRISPP is $107,
$30, and $102 million, respectively.
Purchase of treasury stock: In October 1994, NYNEX granted additional stock
options in connection with the employee stock option plans established in 1992.
NYNEX's purchase of treasury stock in 1993 and future purchases will be released
into the open market as stock options are exercised. At this time, the level of
exercise activity has not warranted the repurchase of additional shares
applicable to the second grant.
23
<PAGE>
1994 NYNEX Annual Report
Minority interest: Financing cash flows in 1994 included net funds of $359.2
million primarily provided by a minority interest in the financing structures
formed in December 1993 and 1994 for the network construction program in the
United Kingdom.
Current and Future Financing Strategies
---------------------------------------
NYNEX CableComms, Ltd. ("CableComms") is constructing and operating a $3 billion
broadband (high capacity) network, to be substantially completed by 1997, for
the provision of cable television and telecommunications services in certain
licensed areas in the United Kingdom. In December 1993, NYNEX invested in two
newly-formed partnerships for the purpose of funding the construction program
for this network in the licensed areas in the Southern United Kingdom (the
"South"). NYNEX, as the general partner, contributed assets with an aggregate
initial market value of $130 million and a book value of $109 million to the
partnership that will manage the assets to be used to fund the construction
program. This partnership is consolidated in NYNEX's financial statements. NYNEX
contributed $4 million as a limited partner in a second partnership which will
obtain up to $427 million (based on applicable exchange rates) in financing with
a term of ten years for the construction program. The $4 million investment was
accounted for using the equity method.
In December 1994, NYNEX invested in three newly-formed entities (a limited
partnership and two limited liability companies) for the purpose of funding the
construction program for this network in the Northern United Kingdom (the
"North"). NYNEX has contributed, in the aggregate, assets with a market value of
$829 million and a book value of $142 million at December 19, 1994 and $82
million in cash to the partnership and one limited liability company which will
manage the assets to be used to fund the construction program. These entities
are consolidated in NYNEX's financial statements. NYNEX contributed $11 million,
accounted for as an equity method investment, as a member of the other limited
liability company which will obtain up to $1 billion (based on applicable
exchange rates) in financing with a term of ten years for the construction
program.
In connection with the financing of the South and North, NYNEX has provided
certain guarantees and indemnifications to the financing partnership and limited
liability company regarding the completion of the construction program and any
breach of the agreements due to events prior to the creation of the entities.
This type of financing could provide significant additional funds over the first
five years of each financing.
On February 27, 1995, NYNEX Cablecomms Group PLC and NYNEX Cablecomms Group
Inc., indirect wholly-owned subsidiaries of NYNEX, filed a registration
statement with the Securities and Exchange Commission (the "SEC") for an initial
public offering. The Ordinary Shares of NYNEX Cablecomms Group PLC and the
shares of Common Stock of NYNEX Cablecomms Group Inc. will be traded together as
Units. Following the offering, NYNEX will continue to be the controlling
shareholder of the outstanding Units. Proceeds of the offering will be used to
repay outstanding revolving loans under credit facilities, to finance a portion
of the cost of construction of Cablecomms' network, for operating cash flows and
interest, and for possible future acquisitions of other franchises in the United
Kingdom or investments in programming.
At December 31, 1994, NYNEX had $950 million of unissued, unsecured debt and
equity securities registered with the SEC. The proceeds from the sale of these
securities would be used to provide funds to NYNEX and/or NYNEX's nontelephone
subsidiaries for their respective general corporate purposes.
At December 31, 1994, CFC 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 may be used
to provide financing for NYNEX and the nontelephone subsidiaries.
At December 31, 1994, New England Telephone and New York Telephone had $500 and
$250 million, respectively, of unissued, unsecured debt securities registered
with the SEC.
Financial Instruments
---------------------
NYNEX has entered into transactions involving the use of derivative financial
instruments as part of its risk management program. The purpose of NYNEX's risk
management program is to protect against adverse changes in foreign exchange
rates, interest rates, and other prices or rates, or to otherwise facilitate
NYNEX's financing strategy.
The derivative instruments used by NYNEX to manage these risks may be separated
into three fundamental types: forwards, options and swaps. NYNEX matches its
derivative positions to proportional underlying financial exposures. NYNEX does
not hold or issue any financial instruments for trading purposes. Liquidity and
results of operations are not expected to be, but may be, materially affected by
NYNEX's financing strategy, a portion of which is accomplished through the
aforementioned risk management program.
24
<PAGE>
NYNEX's use of derivatives for risk management purposes is represented by
notional amounts. These notional values solely represent contractual amounts
that serve as the basis or reference amount upon which contractually stipulated
calculations are based. Therefore, these amounts are intended to serve as
general volume indicators only and do not represent the potential gain or loss
from market or credit risks. At December 31, 1994 and 1993, NYNEX had derivative
transactions maturing between 1994 and 2004 with notional amounts as follows
(categorized by the type of risk being managed):
<TABLE>
<CAPTION>
(In millions) 1994 1993
-------- --------
<S> <C> <C>
Basis swaps/Swaptions $1,001.0 $1,001.0
Foreign currency/Interest rate swaps 928.4 715.2
Interest rate swaps/Caps 285.9 217.7
Foreign currency swaps/Other 61.5 63.3
Structured note swaps 55.0 -
-------- --------
Total $2,331.8 $1,997.2
======== ========
</TABLE>
Basis swaps/Swaptions: In 1993, NYNEX entered into J.J.Kenny/LIBOR basis
swaption agreements as part of a risk management program to protect against the
effect of increased corporate tax rates on NYNEX Credit Company's leveraged
lease portfolio. As of December 31, 1993, NYNEX had received approximately $12
million of premiums on the basis swaption agreements exercised in January of
1994. The premiums are being amortized over the life of the resultant basis swap
agreements maturing in January 2004. At December 31, 1994, approximately $11
million remains unamortized and is included in Other long-term liabilities and
deferred credits in NYNEX's consolidated financial statements.
Foreign currency/Interest rate swaps: NYNEX uses derivatives as a more flexible
alternative to borrowing in a foreign currency in order to manage its net
investments in wholly-owned foreign subsidiaries and certain foreign cost
investments. Generally, this hedging arrangement involves a derivative contract
which includes interest rate and foreign currency components. With respect to
the foreign currency components (primarily long dated forward and range forward
contracts) of the hedges of net investments of wholly-owned foreign
subsidiaries, cumulative net gains of $5.9 and $19.3 million at December 31,
1994 and 1993, respectively, have been recorded as adjustments to Stockholders'
Equity. In connection with managing the cost and interest elements related to
these contracts, the interest rate swap components of these contracts generally
require NYNEX to receive interest at a fixed rate averaging approximately 3.3%
and 2.6% and to pay a floating interest rate based on the three-month or six-
month LIBOR averaging approximately 6.0% and 4.5%, as of December 31, 1994 and
1993, respectively.
Interest rate swaps/Caps: In order to manage interest rate exposures, NYNEX
employs various risk management strategies primarily involving interest rate
swaps which sometimes incorporate interest rate options. The net costs of these
options are normally included in the fixed or floating rate interest terms of
the base interest swaps, and, therefore, are amortized to interest expense over
the lives of the applicable agreements.
NYNEX has entered into several interest rate swap agreements to modify the
interest rate structure associated with either a portion of NYNEX's outstanding
commercial paper or several outstanding non-callable medium-term notes. The
following table indicates the types of interest rate swaps used for this purpose
and their weighted average interest rates. Average variable rates are based on
the rates implied in the yield curve at the reporting date; those may change
significantly, but are not expected to have a material effect on future cash
flows. These swap contracts are principally between two and eight years in
maturity.
<TABLE>
<CAPTION>
(In millions) 1994 1993
------- -------
<S> <C> <C>
Receive-fixed swaps-notional amount $186.7 $131.0
Average receive rate 6.60% 6.31%
Average pay rate 5.55% 8.20%
Pay-fixed swaps-notional amount $ 89.2 $ 76.7
Average pay rate 6.34% 6.26%
Average receive rate 8.45% 4.90%
------- -------
</TABLE>
Foreign currency swaps/Other: In order to mitigate the impacts of foreign
currency and interest rate fluctuations on certain payments in conjunction with
the financing of the network construction project in the U.K., NYNEX entered
into two foreign currency swaps. The contract terms for these swap agreements
include foreign currency and interest rate components which are settled
quarterly when payments are made and received. For the swap relating to the
financing of the franchises in the North, which was entered into on December 19,
1994, the swap rate is 1.5625 dollars per pound sterling. For the swap relating
to the financing of the franchises in the South, which was entered into on
December 31, 1993, the swap rate is 1.4795 dollars per pound sterling. The swaps
require NYNEX to pay in U.S. dollars an average fixed interest rate of 13% and
15.4% for the North and South financings, respectively, and to receive a
variable interest rate based on 3-Month LIBOR, payable in pounds sterling. The
net impact of activities related to the swaps is recorded in income from
continuing operations.
25
<PAGE>
1994 NYNEX Annual Report
Additionally, in 1993, NYNEX entered into a $37.5 million combined foreign
currency and interest rate swap transaction in order to fix in U.S. dollar terms
the value of an interest bearing on-balance-sheet receivable denominated in
pounds sterling. The receivable and currency swap both matured in accordance
with their stipulated terms in 1994. The settlement of the receivable and the
swap contract were recorded on a net basis.
Structured note swaps: In order to achieve the lowest cost financing possible,
during 1994, NYNEX entered into three derivative contracts in connection with
the issuance of $55 million of structured medium-term notes. The three
derivative contracts with notional values equaling $55 million and maturities of
three to ten years have effectively converted the structured notes into three
standard medium-term notes. These notes have effective interest rates of 7.18%
and a $20 million principal, 7.785% and a $10 million principal and 3-Month
LIBOR + 0.15% and a $25 million principal.
In 1994, 1993, and 1992, NYNEX's income from continuing operations was reduced
by $8.6, $10.7, and $7.6 million, respectively, from all risk management
activities, primarily relating to the cost of NYNEX's combined foreign
currency/interest rate swaps. As a result of NYNEX's policy of hedging against
foreign currency risk associated with its significant international equity
investments, NYNEX has incurred additional costs which have been reflected in
Interest expense and in the fair value of the respective derivative liabilities.
The costs associated with these hedges are managed, in terms of timing and
magnitude. As of December 31, 1994, approximately $43.6 million of the fair
market value of NYNEX's hedging liabilities reflects the remaining unamortized
cost of protecting NYNEX's foreign exchange exposure related to its equity
investments in the United Kingdom and Thailand. The remainder represents changes
in market rates from the date the contracts were entered into through December
31, 1994.
Competition and Other Matters
Competition
-----------
Telecommunications: Various business alliances and other undertakings were
announced or consummated in the telecommunications industry in 1994 which
indicate an intensifying level of competition, especially with respect to the
operations of the telephone subsidiaries. AT&T acquired, through a merger, McCaw
Cellular Communications Inc. ("McCaw"), which operates in a number of areas
within NYNEX's region in the Northeast. U S WEST Inc. ("U S WEST") holds a major
interest in Time Warner Entertainment Co. L.P., which includes Time Warner Cable
and has announced an agreement to acquire Cablevision Systems Corp.
("Cablevision"). Time Warner Cable has extensive operations in the Northeast,
including New York City, and has announced its plans to offer a full range of
local access telecommunications services to New York City businesses by mid-
1995. Cablevision, which operates in Boston, Long Island, and Westchester
County, plans to construct a fiber-optic network to deliver telecommunications
and video services. MCI Communications Corp. ("MCI") plans to spend $2 billion
to establish local fiber-optic networks in 20 major cities, including New York
and Boston, offering a way to bypass the local exchange carrier, including the
telephone subsidiaries, and connect directly to MCI's long-distance network. MCI
has acquired Digital Equipment Corporation's fiber-optic network in New
England. In certain markets in New York City and New England, the telephone
subsidiaries face significant competition from local access providers with
substantial resources.
The NYSPSC has authorized 28 companies to provide competitive local exchange
services in the state of New York. Three companies have begun local exchange
operations in direct competition with New York Telephone, which has implemented
interim interconnection agreements with local exchange competitors. The
telephone subsidiaries have allowed alternative service providers to place
transmission equipment in their central offices, under an arrangement known as
collocation. The telephone subsidiaries also face increasing competition in
Centrex services, long distance, WATS, billing and collection services, pay
telephones, and various other services.
Nontelecommunications: NYNEX Mobile faces competition in its provision of
cellular services and equipment, from both facilities-based cellular service
competitors and resellers in its two largest markets (New York City and Boston)
as well as in a number of other markets. There is also competition from non-
cellular mobile services in some markets.
NYNEX Information Resources Company ("Information Resources") competes with
various alternative directory publishers in all areas where it offers published
directories. Competitive advertising media include newspapers, magazines, and
broadcast. Information Resources is also facing competition in its business
development activities in Asia.
NYNEX's Other Diversified Operations segment also faces substantial competition.
In pursuit of business opportunities outside the United States, NYNEX Network
Systems Company faces competition from other regional holding companies and
United States interexchange carriers, as well as from multi-national
corporations and local entities.
26
<PAGE>
CableComms' business opportunity in the United Kingdom is a direct result of
Government policy to introduce competition to the dominant carrier. Just as
CableComms is providing a competitive service in the local loop, the Government
has also licensed alternative long distance operators and a growing number of
wireless providers. In entertainment services CableComms competes with direct to
home satellite, broadcast television and video cassettes rental and retail
outlets. The dominant telecommunications carrier in the United Kingdom has also
announced an intention to offer a form of entertainment service over its
existing network.
NYNEX cannot predict the effect of such competition on its business, but all
categories of revenue could be affected.
Response to competition
-----------------------
NYNEX is implementing a major restructuring of its business (see Business
Restructuring), has entered into various domestic strategic alliances, is
expanding globally and is pursuing regulatory reforms in order to meet this
competition.
The alliances include (1) the agreement by NYNEX and Bell Atlantic to combine
their domestic cellular services properties and bid in the FCC auction of
licenses for personal communications services, (2) the formation of a joint
venture between NYNEX and Bell Atlantic as one partner and U S WEST and AirTouch
Communications Inc. as the other to provide national wireless communications
services and (3) the formation by NYNEX, Bell Atlantic and Pacific Telesis Group
of a venture to develop and deliver home entertainment, information, and
interactive programming and services over the partners' video dialtone networks.
NYNEX's global expansion includes the following: (1) a strategic alliance in
Thailand for the construction of a two-million line telecommunications network
and a recently awarded license to provide cable television services; (2) NYNEX
as the managing partner of FLAG, Ltd., a $1.2 billion submarine cable system
that will link business centers and high-growth regions along its route from
London to Tokyo; (3) a solid presence in international directory publishing
markets such as Gibraltar, Poland, and the Czech Republic; and (4) providing
cellular services in Greece through STET Hellas Telecommunications S.A.
NYNEX continues to pursue reforms in telecommunications policy at both the state
and federal levels including: (1) incentive regulation plans (see State
Regulatory Matters); (2) receiving a federal court ruling that allows NYNEX to
provide video programming services in its service area; and (3) working towards
a national telecommunications policy that would enable NYNEX to offer diverse
communications, entertainment and information services.
Effects of Regulatory Accounting
--------------------------------
NYNEX currently accounts 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"). The provisions of Statement No. 71 are followed when the regulation of
an enterprise's rates is intended to permit recovery of the enterprise's costs
and such rates are likely to be collected from customers. This process can
create assets or liabilities solely by the action of the regulatory authorities.
Under Statement No. 71, companies generally depreciate plant and equipment over
lives approved by regulators. It also requires deferral of certain costs and
obligations based on approvals received from regulators. In the event that the
recoverability of costs through rates becomes unlikely or uncertain, whether
resulting from competitive effects or specific regulatory actions, Statement No.
71 would no longer apply. NYNEX continually assesses its position and the
recoverability of its telecommunications assets with respect to Statement No. 71
and believes that Statement No. 71 still applies. However, it is possible that
events in the industry, the markets in which NYNEX operates and the possible
effects of regulatory and legislative initiatives could change NYNEX's position
in the near future. In that event, implementation of Statement of Financial
Accounting Standards No. 101, "Regulated Enterprises -- Accounting for the
Discontinuation of Application of FASB Statement No. 71" ("Statement No. 101")
would require the write-off of previously established regulatory assets and
liabilities, including the adjustment of certain plant balances to reflect the
difference between recorded depreciation and the amount of depreciation that
would have been recorded had the telephone subsidiaries not been subject to rate
regulation. The impact of such a change would result in a material non cash
charge and would be reported as an extraordinary item. This charge could also
include an adjustment to the carrying value of telephone plant if it is
determined, using a projected cash flow approach, that impairment exists. While
the effect of implementing Statement No. 101 cannot be precisely estimated at
this time, Management believes that the total non cash effect of the accounting
change on net income would be between $3.0 and $4.0 billion.
27
<PAGE>
1994 NYNEX Annual Report
Selected Financial and Operating Data
<TABLE>
<CAPTION>
(In millions, except per share
amounts) 1994 1993 1992 1991 1990
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenues $13,307 $13,408 $13,183 $13,255 $13,608
Operating expenses $11,550 $13,075 $10,655 $11,665 $11,593
Interest expense $ 674 $ 660 $ 685 $ 726 $ 700
Earnings (loss) before cumulative
effect of change in accounting
principle $ 793 $ (272) $ 1,311 $ 601 $ 949
Cumulative effect of change in
accounting for postemployment
benefits, net of taxes - (122) - - -
Net income (loss) $ 793 $ (394) $ 1,311 $ 601 $ 949
Earnings (loss) per share before
cumulative effect of change in
accounting principle $ 1.89 $ (.66) $ 3.20 $ 1.49 $ 2.39
Cumulative effect per share of
change in accounting principle - (.29) - - -
------- ------- -------- ------- -------
Earnings (loss) per share $ 1.89 $ (.95) $ 3.20 $ 1.49 $ 2.39
Dividends per share $ 2.36 $ 2.36 $ 2.32 $ 2.28 $ 2.28
Property, plant and equipment-net $20,623 $20,250 $19,973 $19,915 $19,729
Total assets $30,068 $29,458 $27,732 $27,503 $26,651
Long-term debt $ 7,785 $ 6,938 $ 7,018 $ 6,833 $ 6,945
Stockholders' equity $ 8,581 $ 8,416 $ 9,724 $ 9,120 $ 9,149
Book value per share $ 20.26 $ 20.28 $ 23.51 $ 22.38 $ 22.86
Capital expenditures+ $ 3,012 $ 2,717 $ 2,450 $ 2,499 $ 2,493
Network access lines in service* 16.6 16.0 15.6 15.3 15.2
======= ======= ======== ======= =======
</TABLE>
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for the effect of restructuring charges on 1994 and 1993 results of
operations. Results of Operations for 1991 include $841 million of pretax ($550
million after-tax) restructuring charges, and results of operations for 1990
include $305 million of pretax ($211 million after-tax) restructuring charges.
+ Excludes additions under capital lease obligations and the equity component of
allowance for funds used during construction.
* Network access lines in service have been restated for retroactive adjustments
to the in-service base. This restatement was not material and had no impact on
revenues.
Report of Independent Accountants
To the Share Owners and Board of Directors of
NYNEX Corporation:
We have audited the accompanying consolidated balance sheets of NYNEX
Corporation and its subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
These consolidated financial statements are the responsibility of NYNEX
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NYNEX
Corporation and its subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Notes A and C to the consolidated financial statements, NYNEX
Corporation changed its methods of accounting for income taxes, postretirement
benefits other than pensions, and postemployment benefits in 1993.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
New York, New York
February 8, 1995
28
<PAGE>
1994 NYNEX Annual Report
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the year ended December 31,
(In millions, except per share amounts) 1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES
Local service $ 6,605.4 $ 6,472.9 $ 6,307.6
Long distance 1,081.2 1,134.4 1,113.4
Network access 3,447.0 3,387.2 3,355.8
Other 2,173.0 2,413.3 2,405.7
--------- --------- ---------
Total operating revenues 13,306.6 13,407.8 13,182.5
--------- --------- ---------
OPERATING EXPENSES [Note Q]
Maintenance and support 3,039.7 3,194.2 2,778.6
Depreciation and amortization 2,640.6 2,534.0 2,518.0
Marketing and customer services 1,415.7 1,441.1 1,281.0
Taxes other than income [Note M] 993.2 1,038.9 1,054.6
Selling, general and administrative 2,639.7 4,031.1 2,163.9
Other 821.5 835.2 858.9
--------- --------- ---------
Total operating expenses 11,550.4 13,074.5 10,655.0
--------- --------- ---------
Operating income 1,756.2 333.3 2,527.5
Other income (expense) -- net 13.9 (118.9) 38.7
Interest expense 673.8 659.5 684.6
--------- --------- ---------
Earnings (loss) before income taxes and
cumulative effect of change in accounting
principle 1,096.3 (445.1) 1,881.6
Income taxes [Note B] 303.7 (172.7) 570.4
--------- --------- ---------
Earnings (loss) before cumulative effect
of change in accounting principle 792.6 (272.4) 1,311.2
Cumulative effect of change in accounting
for postemployment benefits, net of
taxes [Note C] - (121.7) -
--------- --------- ---------
Net income (loss) $ 792.6 $ (394.1) $ 1,311.2
========= ========= =========
Earnings (loss) per share before
cumulative effect of change in accounting
principle $ 1.89 $ (.66) $ 3.20
Cumulative effect per share of change in
accounting principle - (.29) -
--------- --------- ---------
Earnings (loss) per share $ 1.89 $ (.95) $ 3.20
--------- --------- ---------
Weighted average number of shares
outstanding 418.8 412.7 409.8
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(In millions) 1994 1993
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 137.5 $ 157.8
Receivables (net of allowance of $226.7 and
$204.7, respectively) 2,532.5 2,439.1
Inventories 173.3 169.2
Prepaid expenses 361.2 306.2
Deferred charges and other current assets 593.5 849.4
--------- ---------
Total current assets 3,798.0 3,921.7
--------- ---------
Property, plant and equipment-net [Note D] 20,623.4 20,250.0
Deferred charges and other assets [Notes E, H,
K, and L] 5,646.6 5,286.7
--------- ---------
Total Assets $30,068.0 $29,458.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable [Note M] $ 2,668.2 $ 2,853.3
Short-term debt [Note G] 2,128.8 3,190.1
Other current liabilities [Note M] 1,053.5 763.3
--------- ---------
Total current liabilities 5,850.5 6,806.7
--------- ---------
Long-term debt [Notes F and L] 7,784.5 6,937.8
Deferred income taxes 3,364.7 3,545.0
Unamortized investment tax credits 304.4 360.3
Other long-term liabilities and deferred
credits [Notes B, C, and H] 4,182.5 3,393.1
--------- ---------
Total Liabilities 21,486.6 21,042.9
--------- ---------
Commitments and contingencies [Notes K, L, O,
and P]
Stockholders' equity: [Notes I and J]
Preferred stock -- $1 par value, 70,000,000 shares
authorized - -
Preferred stock -- Series A Junior Participating --
$1 par value, 5,000,000 shares authorized - -
Common stock -- $1 par value, 750,000,000 shares
authorized 439.7 431.1
Additional paid-in capital 6,942.0 6,624.5
Retained earnings 2,208.2 2,388.3
Treasury stock -- (16,102,683 and 16,215,353 shares,
respectively, at cost) (644.3) (648.1)
Deferred compensation -- LESOP Trust (364.2) (380.3)
--------- ---------
Total Stockholders' Equity 8,581.4 8,415.5
--------- ---------
Total Liabilities and Stockholders' Equity $30,068.0 $29,458.4
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
1994 NYNEX Annual Report
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Deferred
Additional Compensation Total
Common Common Paid-In Retained Treasury LESOP Stockholders'
(In millions) Shares Stock Capital Earnings Stock Trust Equity
------ ------- ---------- --------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991 211.1 $211.1 $6,282.3 $3,614.8 $(572.9) $(415.4) $9,119.9
Employee benefit and dividend
reinvestment plans [Notes I and J] 3.1 3.1 237.2 (.1) - 19.1 259.3
Dividends ($2.32 per common share) - - - (954.3) - - (954.3)
Other - - .5 (12.9) - - (12.4)
Net income - - - 1,311.2 - - 1,311.2
----- ------ -------- -------- ------- ------- --------
Balance, December 31, 1992 214.2 $214.2 $6,520.0 $3,958.7 $(572.9) $(396.3) $9,723.7
Employee benefit and dividend
reinvestment plans [Notes I and J] 2.3 2.3 100.3 - (67.0) 16.0 51.6
Stock split [Note I] 214.6 214.6 - (206.4) (8.2) - -
Dividends ($2.36 per common share) - - - (974.8) - - (974.8)
Other - - 4.2 4.9 - - 9.1
Net loss - - - (394.1) - - (394.1)
----- ------ -------- -------- ------- ------- --------
Balance, December 31, 1993 431.1 $431.1 $6,624.5 $2,388.3 $(648.1) $(380.3) $8,415.5
Employee benefit and dividend
reinvestment plans [Notes I and J] 8.6 8.6 317.4 - 3.8 16.1 345.9
Dividends ($2.36 per common share) - - - (993.0) - - (993.0)
Other - - .1 20.3 - - 20.4
Net income - - - 792.6 - - 792.6
----- ------ -------- -------- ------- ------- --------
Balance, December 31, 1994 439.7 $439.7 $6,942.0 $2,208.2 $(644.3) $(364.2) $8,581.4
===== ====== ======== ======== ======= ======= ========
</TABLE>
At December 31, 1994, there were 936,468 stockholders of record of common
shares.
See accompanying notes to consolidated financial statements.
32
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the year ended December 31,
(In millions) 1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 792.6 $ (394.1) $ 1,311.2
--------- --------- ---------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 2,640.6 2,534.0 2,518.0
Amortization of unearned lease income-net (82.0) (91.7) (67.1)
Allowance for funds used during
construction-equity component (29.1) (30.8) (30.6)
Changes in operating assets and
liabilities:
Receivables (93.4) (56.9) 107.8
Inventories (4.1) 17.3 51.4
Prepaid expenses (55.0) 14.8 22.1
Deferred charges and other current
assets 255.9 (303.7) 43.4
Accounts payable (190.2) 284.4 (483.6)
Other current liabilities 290.2 (47.7) 24.4
Deferred income taxes and Unamortized
investment tax credits (236.3) 72.4 214.4
Other long-term liabilities and deferred
credits 400.3 1,025.7 (168.5)
Other-net 10.2 626.5 (36.7)
--------- --------- ---------
Total adjustments 2,907.1 4,044.3 2,195.0
--------- --------- ---------
Net cash provided by operating activities 3,699.7 3,650.2 3,506.2
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,012.2) (2,717.2) (2,449.6)
Investment in leased assets (173.8) (241.5) (198.6)
Cash received from leasing activities 67.0 57.7 62.8
Other investing activities-net (43.6) (1,349.5) (308.0)
--------- --------- ---------
Net cash used in investing activities (3,162.6) (4,250.5) (2,893.4)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of commercial paper and
short-term debt 18,230.0 14,438.6 9,030.2
Repayment of commercial paper and short-
term debt (19,905.6) (11,985.6) (8,781.0)
Issuance of long-term debt 1,556.2 2,410.9 573.0
Repayment of long-term debt and capital
leases (127.9) (141.3) (673.7)
Debt refinancings and call premiums - (3,120.3) (123.2)
Issuance of common stock 213.2 98.3 146.9
Purchase of treasury stock - (92.3) -
Dividends paid (882.5) (944.1) (855.6)
Minority interest 359.2 5.0 1.5
--------- --------- ---------
Net cash (used in) provided by financing
activities (557.4) 669.2 (681.9)
--------- --------- ---------
Net (decrease) increase in Cash and
temporary cash investments (20.3) 68.9 (69.1)
Cash and temporary cash investments at
beginning of year 157.8 88.9 158.0
--------- --------- ---------
Cash and temporary cash investments at
end of year $ 137.5 $ 157.8 $ 88.9
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
1994 NYNEX Annual Report
Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of NYNEX Corporation
and its subsidiaries ("NYNEX"). The 1993 and 1992 consolidated financial
statements have been reclassified to conform to the current year's format.
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, which includes the application of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" ("Statement No. 71") to the effects of rate
actions by the Federal Communications Commission (the "FCC") and certain state
regulatory commissions for New York Telephone Company ("New York Telephone") and
New England Telephone and Telegraph Company ("New England Telephone")
(collectively, the "telephone subsidiaries"). The rate actions of regulators can
provide reasonable assurance of the existence of an asset, reduce or eliminate
the value of an asset, impose a liability, or eliminate a previously imposed
liability on a regulated enterprise. The telephone subsidiaries apply Statement
No. 71 instead of any conflicting provisions of accounting standards in other
authoritative pronouncements. The effects of Statement No. 71 are reflected in
the consolidated financial statements and material effects, where practicable to
determine, are detailed in this Note and the individual Notes to Consolidated
Financial Statements related to the specific financial statement line items.
The major components of non-plant regulatory net assets are as follows:
<TABLE>
<CAPTION>
December 31,
(In millions) 1994 1993
-------- --------
<S> <C> <C>
Compensated absences $ 183.9 $ 186.4
Deferred pension costs 397.4 448.4
Refinancing costs 275.9 286.5
Deferred taxes 87.9 38.0
Other 156.8 172.9
-------- --------
Total $1,101.9 $1,132.2
======== ========
</TABLE>
Cash and Temporary Cash Investments
Temporary cash investments are liquid investments with maturities of three
months or less. Temporary cash investments are stated at cost, which
approximates market value.
NYNEX's cash management policy is to make funds available in banks when checks
are presented. At December 31, 1994 and 1993, NYNEX had recorded in Accounts
payable checks outstanding but not presented for payment of $223.5 and $186.3
million, respectively.
Inventories
The telephone subsidiaries' inventories consist of materials and supplies that
are stated principally at average cost. Inventories purchased for resale are
calculated using weighted average cost and are stated at the lower of cost or
market. Certain other inventories are carried on a last-in, first-out basis and
are stated at the lower of cost or market.
Property, Plant and Equipment
Property, plant and equipment is stated at its original cost.
When depreciable plant is disposed of by the telephone subsidiaries, the
carrying amount, salvage, and cost to remove such plant are charged to
accumulated depreciation.
Depreciation rates used by the telephone subsidiaries are prescribed by the FCC
and by the various state public service commissions ("commissions") for
interstate operations and for intrastate operations, respectively. All rates are
calculated on a straight-line basis using the concept of "remaining life." The
represcription process requires the telephone subsidiaries to perform a detailed
study using actual and estimated factors to develop future life expectancy of
telephone plant investments, including technological evolution, competition,
asset utilization, modernization plans, and regulatory commitments. Both the
telephone subsidiaries and the commissions' staffs submit factors deemed
appropriate to permit asset recovery. The commissions select the one they
believe to be the most appropriate from among these alternatives. Utilizing
these factors, new depreciation rates are set to enable the telephone
subsidiaries to recover costs of plant additions as well as to permit the
prospective recovery of deficiencies in existing depreciation reserve balances
as a result of shorter asset lives to be utilized on a going forward basis. The
represcription process occurs on a triennial basis and includes the commissions
and the telephone subsidiaries. Once new depreciation rates are set, the
commissions may take rate actions to permit the telephone subsidiaries to
recover costs if deemed necessary.
The quantification of the difference between recorded depreciation and
depreciation that would have been recorded in accordance with generally accepted
accounting principles for an entity not subject to the provisions of Statement
No. 71 cannot be precisely estimated at this time, but is expected to be between
$3.5 and $5.0 billion. Property, plant and equipment for all other subsidiaries
is depreciated on a straight-line basis over its useful life.
Regulatory authorities allow the telephone subsidiaries to capitalize interest,
including an allowance on shareowner's equity, as a cost of constructing certain
plant and as
34
<PAGE>
income, included in Other income (expense)-net. Such income will be realized
over the service life of the plant as the resulting higher depreciation expense
is recovered through the rate-making process.
Financial Instruments
NYNEX manages certain portions of its exposure to foreign currency and interest
rate fluctuations through a variety of strategies and instruments. Generally,
foreign currency derivatives and forwards are valued relative to the period
ending spot rate. Gains and losses applicable to these derivatives are recorded
to income currently with the exception of amounts related to foreign currency
derivatives that have been identified as a hedge of a net investment in a
foreign subsidiary. Hedge results of a net investment in a foreign subsidiary
are excluded from income and recorded as adjustments to stockholders' equity
until the related subsidiary is sold or substantially liquidated. The interest
elements of these foreign currency derivatives are recognized to income ratably
over the life of the contract. Interest rate swaps and related interest rate
derivatives (swaptions, caps) identified as hedges are generally not carried at
fair value. Rather, interest rate swap receipts or payments are recognized as
adjustments to interest expense as received or paid. Swap termination payments
and fees or premiums applicable to swaptions and caps are recognized as
adjustments to interest expense over the life of the agreements.
Computer Software Costs
The telephone subsidiaries capitalize initial right-to-use fees for central
office switching equipment, including initial operating system and initial
application software costs. For non-central office equipment, only the initial
operating system software is capitalized. Subsequent additions, modifications,
or upgrades of initial software programs, whether operating or application
packages, are expensed. This accounting treatment conforms to the rules set
forth by the FCC. The nontelephone subsidiaries expense computer software
acquired or developed for internal use, as incurred.
Refinancing Charges
The telephone subsidiaries defer the intrastate portion of call premiums and
other charges associated with the redemption of long-term debt and expense the
interstate portion of these charges, as required by the state regulatory
commissions and the FCC, respectively. The deferred amounts are amortized over
periods stipulated by state regulatory commissions. Prior to January 1, 1988,
these charges were deferred and amortized for both intrastate and interstate
purposes.
Income Taxes
Effective January 1, 1993, NYNEX adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement No. 109"), which
superseded Statement of Financial Accounting Standards No. 96, "Accounting for
Income Taxes." The effect of implementing Statement No. 109 on NYNEX's financial
position and results of operations was not significant. Statement No. 109
requires that deferred tax assets and liabilities be measured based on the
enacted tax rates that will be in effect in the years in which temporary
differences are expected to reverse. However, for the telephone subsidiaries,
the treatment of excess deferred taxes resulting from the reduction of tax rates
in prior years is subject to federal income tax and regulatory rules.
Deferred income tax provisions of the telephone subsidiaries are based on
amounts recognized for rate-making purposes. The telephone subsidiaries
recognize a deferred tax liability and establish a corresponding regulatory
asset for tax benefits previously flowed through to ratepayers. The major
temporary difference that gave rise to the net deferred tax liability is
depreciation, which for income tax purposes is determined based on accelerated
methods and shorter lives.
Statement No. 71 requires the telephone subsidiaries to reflect the additional
deferred income taxes as regulatory assets to the extent that they will be
recovered in the rate-making process. In accordance with the normalization
provisions under federal tax law, the telephone subsidiaries reverse excess
deferred taxes relating to depreciation of regulated assets over the regulatory
lives of those assets. For other excess deferred taxes, the commissions
generally allow amortization of excess deferred taxes over the reversal period
of the temporary difference giving rise to the deferred taxes.
On August 10, 1993, the Revenue Reconciliation Act of 1993 was signed into law,
and the statutory corporate federal income tax rate increased to 35% from 34%,
retroactive to January 1, 1993. In accordance with Statement No. 109, NYNEX
adjusted its current and deferred income tax balances to reflect the tax rate
change. The telephone subsidiaries reflected the additional deferred income
taxes arising from the tax rate increase primarily as increases to the
regulatory asset and decreases to the regulatory liability.
The Tax Reform Act of 1986 repealed the investment tax credit ("ITC"), effective
January 1, 1986. As required by tax law, ITC for the telephone subsidiaries was
deferred and is amortized as a reduction to tax expense over the estimated
service lives of the related assets giving rise to the credits.
35
<PAGE>
1994 NYNEX Annual Report
B. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
(In millions) 1994 1993* 1992
------- ------- -------
<S> <C> <C> <C>
Federal:
Current $ 488.7 $ 466.9 $ 553.8
Deferred-net (191.5) (611.9) 13.2
Deferred tax credits-net (49.8) (59.7) (63.8)
------- ------- -------
247.4 (204.7) 503.2
------- ------- -------
State and local:
Current 18.7 88.1 25.8
Deferred-net 31.3 (59.2) 35.7
------- ------- -------
50.0 28.9 61.5
------- ------- -------
Foreign 6.3 3.1 5.7
------- ------- -------
Total $ 303.7 $(172.7) $ 570.4
======= ======= =======
</TABLE>
* Does not include the deferred tax benefit of $67.5 million associated with
the Cumulative effect of change in accounting for postemployment benefits.
A reconciliation between the federal income tax expense (benefit) computed at
the statutory rate and NYNEX's effective tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------- ------
<S> <C> <C> <C>
Federal income tax expense
(benefit) computed at
statutory rate $383.7 $(155.8) $639.7
a. Amortization of investment
tax credits over the life of
the assets which gave rise
to the credits (55.9) (65.8) (69.4)
b. Amortization of excess
deferred federal taxes
due to change in the
tax rates (48.1) (66.8) (56.3)
c. State and local income taxes,
net of federal tax benefit 32.5 18.8 40.5
d. Depreciation of certain taxes
and payroll-related construction
costs capitalized for financial
statement purposes, but
deducted for income tax
purposes in prior years 20.5 31.6 38.4
e. Capital loss carryforwards and
reversal of valuation allowance on
capital loss carryforwards due to
tax planning strategies (58.6) 87.1 -
f. Other items-net 29.6 (21.8) (22.5)
------ ------- ------
Income tax expense (benefit) $303.7 $(172.7) $570.4
====== ======= ======
</TABLE>
Instead of a state income tax, New York Telephone is subject to a gross receipts
tax that is not included in "c" above. Temporary differences for which deferred
income taxes have not been provided by the telephone subsidiaries are
represented principally by "d" above. Only taxes currently payable on these
temporary differences are recognized in the rate-making process.
The components of current and long-term deferred tax assets and liabilities at
December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
(In millions) 1994 1993
----------------------- -------------------------
Assets Liabilities Assets Liabilities
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Depreciation and
amortization $ - $3,150.0 $ - $3,265.0
Leveraged leases - 917.7 - 787.7
Restructuring charges 502.9 - 707.6 -
Employee benefits 1,228.2 189.7 860.0 191.1
Unamortized ITC 168.2 - 197.1 -
Deferred publishing
revenues 134.4 - 178.2 -
Other 229.8 646.2 195.5 633.1
-------- -------- -------- --------
Total deferred taxes 2,263.5 4,903.6 2,138.4 4,876.9
-------- -------- -------- --------
Valuation allowance* (42.2) - (113.9) -
-------- -------- -------- --------
Net deferred
tax assets $2,221.3 2,221.3 $2,024.5 2,024.5
-------- -------- -------- --------
Net deferred tax
liabilities - $2,682.3 - $2,852.4
======== ======== ======== ========
</TABLE>
* The valuation allowance established in 1993 primarily represents capital
losses generated from the exit from the information products and services
business. During 1994, the valuation allowance decreased by $71.7 million
primarily due to tax planning strategies.
At December 1994 and 1993, the telephone subsidiaries recorded approximately
$631 and $674 million, respectively, in deferred taxes representing the
cumulative amount of income taxes on temporary differences that were previously
flowed through to ratepayers. The telephone subsidiaries recorded a
corresponding regulatory asset in deferred charges for these items, representing
amounts that will be recovered through the rate-making process. These deferrals
have been increased for the tax effect of future revenue requirements and will
be amortized over the lives of the related depreciable assets concurrently with
their recovery in rates.
The telephone subsidiaries recorded a regulatory liability at December 31, 1994
and 1993, of approximately $519 and $630 million, respectively, in Other long-
term liabilities and deferred credits and in Other current liabilities. A
substantial portion of the regulatory liability relates to the reduction in the
statutory federal income tax rate in 1986 and unamortized ITC. These liabilities
have been increased for the tax effect of future revenue requirements.
C. EMPLOYEE BENEFITS
Pensions
Substantially all NYNEX employees are covered by one of two noncontributory
defined benefit pension plans (the "Plans"). Benefits for management employees
are based on a modified career average pay plan while benefits for nonmanagement
employees are based on a nonpay-related plan. Contributions are made, to the
extent deductible under the provisions of the Internal Revenue Code, to an
36
<PAGE>
irrevocable trust for the sole benefit of pension plan participants. Total
pension (benefit) cost for 1994, 1993 and 1992 was ($290.0), ($167.0), and $22.8
million, respectively. The components are as follows:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Estimated return on plan assets:
Actual $ 74 $(1,964) $ (757)
Deferred portion (1,265) 833 (350)
------- ------- -------
Net (1,191) (1,131) (1,107)
Service cost 238 199 213
Interest cost on projected
benefit obligation 884 928 997
Other-net (221) (163) (77)
------- ------- -------
Net pension (benefit) cost (290) (167) 26
Deferred benefits (costs)
principally due to state
regulatory decisions - - (3)
------- ------- -------
Total pension (benefit) cost $ (290) $ (167) $ 23
======= ======= =======
</TABLE>
The pension benefit for 1994 and 1993 includes the effect of plan amendments and
changes in actuarial assumptions for the discount rate and future compensation
levels.
The following table sets forth the Plans' funded status and amounts recognized
in the consolidated balance sheets:
<TABLE>
<CAPTION>
December 31,
(In millions) 1994 1993
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$10,147 and $10,154, respectively $11,048 $11,082
======= =======
Plan assets at fair value, primarily listed
stock, corporate and governmental debt
and real estate $13,681 $14,607
Less: Actuarial present value of projected
benefit obligation 12,070 12,570
------- -------
Excess of plan assets over projected
benefit obligation 1,611 2,037
Unrecognized prior service cost (2,029) (2,008)
Unrecognized net gain (862) (785)
Unrecognized transition asset (488) (548)
------- -------
Accrued pension cost $(1,768) $(1,304)
======= =======
</TABLE>
The assumptions used to determine the projected benefit obligation at December
31, 1994 and 1993 include a discount rate of 8.5% and 7.5%, respectively, and an
increase in future compensation levels of 4.5% in both years for management
employees and 4.0% in both years for nonmanagement employees. The expected long-
term rate of return on pension plan assets used to calculate pension expense was
8.9% in 1994, 1993 and 1992. Periodically, the Plans have been amended to
increase the level of plan benefits. The actuarial projections included herein
anticipate plan improvements in the future.
As a result of planned work force reductions in 1994, NYNEX incurred additional
pension costs of $758.2 million, comprised of a charge for special termination
benefits of $1,142.5 million and a curtailment gain of $384.3 million, due to
employees leaving under retirement incentives. These pension costs were
partially offset by 1993 severance reserves of $314.8 million which were
transferred to the pension liability.
In 1992, NYNEX amended its management pension plan to provide early retirement
incentives, which increased the projected benefit obligation by $11.7 million,
of which $5.8 million was expensed and $5.9 million was deferred. In addition,
management employees who left NYNEX in 1992 and 1993 under the Force Management
Plan could elect to receive their pension benefit in a lump sum distribution, or
as a monthly annuity beginning when they left the company. The 1992 reduction in
the number of management employees and the lump sum option were accounted for as
a curtailment and a settlement, respectively, and reduced pension costs by $75.3
million in 1992, of which $42.9 million was recognized as a reduction to expense
and $32.4 million was deferred. The impact of the 1993 reduction in the number
of employees and the lump sum option was not significant.
Postretirement Benefits Other Than Pensions
NYNEX provides certain health care and life insurance benefits for retired
employees and their families. Substantially all of NYNEX's employees may become
eligible for these benefits if they reach pension eligibility while working for
NYNEX.
Effective January 1, 1993, NYNEX adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("Statement No. 106"). Statement No. 106 changed the practice of
accounting for postretirement benefits from recognizing costs as benefits are
paid to accruing the expected cost of providing these benefits during an
employee's working life. NYNEX is recognizing the transition obligation for
retired employees and the earned portion for active employees over a 20-year
period. The cost of health care benefits and group life insurance was determined
using the unit credit cost actuarial method.
Net postretirement benefit cost for 1994 and 1993 includes the following
components:
<TABLE>
<CAPTION>
(In millions) 1994 1993
------ ------
<S> <C> <C>
Service cost $ 56.6 $ 45.6
Interest cost 373.0 333.6
Estimated return on plan assets (41.3) (92.6)
Deferred asset (loss) gain (47.1) 9.4
Amortization of transition obligation 178.7 177.6
------ ------
Net postretirement benefit cost $519.9 $473.6
====== ======
</TABLE>
37
<PAGE>
1994 NYNEX Annual Report
The following table sets forth the funded status and amounts recognized for
postretirement benefit plans:
<TABLE>
<CAPTION>
December 31,
(In millions) 1994 1993
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit
obligation attributable to:
Retirees $(3,880.0) $(3,431.5)
Fully eligible plan participants (648.2) (456.1)
Other active plan participants (516.9) (881.1)
--------- ---------
Total accumulated postretirement
benefit obligation (5,045.1) (4,768.7)
Fair value of plan assets 1,081.8 1,063.5
--------- ---------
Accumulated postretirement benefit
obligation in excess of plan assets (3,963.3) (3,705.2)
Unrecognized net (gain) loss (21.1) 269.0
Unrecognized prior service cost 146.1 -
Unrecognized transition obligation 3,048.8 3,170.3
--------- ---------
Accrued postretirement benefit cost $ (789.5) $ (265.9)
========= =========
</TABLE>
The actuarial assumptions used to determine the 1994 and 1993 obligation for
postretirement benefit plans under Statement No. 106 include the following:
discount rate of 8.5% and 7.5%, respectively; weighted average expected long-
term rate of return on plan assets of 8.4%, in both years; weighted average
salary growth rate of 4.2%, in both years; medical cost trend rate of 12.6%
grading down to 4.5% in 2008, and 14.3% grading down to 4.5% in 2008,
respectively; and dental cost trend rate of 4.5% grading down to 3.0% in 2002,
and 5.0% grading down to 3.0% in 2002, respectively.
A one percent increase in the assumed health care cost trend rates for each
future year would have increased the aggregate of the service and interest cost
components of net postretirement benefit cost for 1994 and 1993 by $30.0 million
and $29.2 million, respectively, and would have increased the accumulated
postretirement benefit obligation at December 31, 1994 and 1993 by $361.6
million and $298.6 million, respectively.
As a result of planned work force reductions, NYNEX recorded an additional
$519.5 million of postretirement benefit cost in 1993 accounted for as a
curtailment. In 1994, under work force reduction retirement incentives, NYNEX
incurred additional postretirement benefit costs of $429.0 million, comprised of
a curtailment loss of $325.3 million and a charge for special termination
benefits of $103.7 million. These postretirement benefit costs were partially
offset by $178.9 million which was previously accrued for in 1993.
Total costs of providing benefits for retired employees and their families were
$198.5 million in 1992.
With respect to interstate treatment, on July 12, 1994, the U.S. Court of
Appeals for the District of Columbia Circuit overturned the FCC's January 1993
order denying exogenous treatment of additional costs recognized under Statement
No. 106. Tariff revisions were filed by the telephone subsidiaries with the FCC
on September 1, 1994, and amended on December 19, 1994, to amend price cap
indices to reflect additional exogenous costs recognized under Statement No.
106. The filing as amended reflected $42 million of costs already accrued,
increased annual costs of $21 million and increased rates of $2.2 million. On
December 29, 1994, the FCC's Common Carrier Bureau ("the Bureau") issued an
order allowing the proposed rates to go into effect December 30, 1994, subject
to investigation and an accounting order. Commencing December 30, 1994, the
telephone subsidiaries began collecting these revenues, subject to possible
refund pending resolution of the Bureau's investigation.
With respect to intrastate treatment, in January 1994 the New York State Public
Service Commission ("NYSPSC") approved New York Telephone's plan for regulatory
accounting and rate-making treatment allowing the adoption of both Statement No.
106 and Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions" ("Statement No. 87"), on a revenue requirement neutral
basis, providing for the amortization of existing deferred pension costs within
a ten-year period, except that the NYSPSC required New York Telephone to write-
off $75 million of previously deferred pension costs in 1993, and eliminating
the need for additional deferrals of Statement No. 106 and Statement No. 87
costs. In December 1994, New York Telephone amortized $39 million of deferred
pension costs according to this accounting plan.
New England Telephone has implemented a similar plan as previously discussed
with each of its state regulatory commissions. The plan provided for immediate
adoption of Statement No. 106 and Statement No. 87 on a revenue requirement
neutral basis, amortization of existing deferred pension costs within a ten-year
period, and discontinuance of additional deferrals of Statement No. 106 and
Statement No. 87 costs. In December 1994, New England Telephone amortized $12.1
million of deferred pension costs according to this accounting plan. Approval of
the plan is still pending in the state of Rhode Island.
The telephone subsidiaries implemented Statement No. 106 for financial reporting
purposes in accordance with the accounting plans submitted to state regulatory
commissions.
NYNEX established two separate Voluntary Employees' Beneficiary Association
Trusts ("VEBA Trusts"), one for management and the other for nonmanagement, to
begin prefunding postretirement health care benefits. At December 31, 1992,
NYNEX had transferred excess pension assets, totaling $486 million, to health
care bene-
38
<PAGE>
fit accounts within the pension plans and then contributed those assets to the
VEBA Trusts. No additional contributions were made in 1994 and 1993. The assets
in the VEBA Trusts consist primarily of equity and fixed income securities.
Additional contributions to the VEBA Trusts are evaluated and determined by
NYNEX management.
Postemployment Benefits
NYNEX adopted Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("Statement No. 112"), in the fourth
quarter of 1993, retroactive to January 1, 1993. Statement No. 112 applies to
postemployment benefits, including workers' compensation, disability plans and
disability pensions, provided to former or inactive employees, their
beneficiaries, and covered dependents after employment but before retirement.
Statement No. 112 changed NYNEX's method of accounting from recognizing costs as
benefits are paid to accruing the expected costs of providing these benefits.
The initial effect of adopting Statement No. 112 was reported as a cumulative
effect of a change in accounting principle and resulted in a one-time, non cash
charge of $189.2 million ($121.7 million after-tax) in 1993. In 1994, the effect
of Statement No. 112 did not result in periodic expense materially different
from the expense recognized under the prior method. During 1994, New York
Telephone deferred $17 million for postemployment benefits as ordered by the
NYSPSC to be amortized over five years.
D. PROPERTY, PLANT AND EQUIPMENT -- NET
The components of property, plant and equipment-net are as follows:
<TABLE>
<CAPTION>
December 31,
(In millions) 1994 1993
--------- ---------
<S> <C> <C>
Buildings $ 2,847.9 $ 2,789.2
Telephone plant and equipment 29,902.0 28,568.9
Furniture and other equipment 1,548.6 1,463.7
Other 148.6 149.4
--------- ---------
Total depreciable property, plant
and equipment 34,447.1 32,971.2
Less: accumulated depreciation 14,843.7 13,719.4
--------- ---------
19,603.4 19,251.8
Land 155.6 161.4
Plant under construction and other 864.4 836.8
--------- ---------
Total property, plant and equipment-net $20,623.4 $20,250.0
========= =========
</TABLE>
E. LONG-TERM INVESTMENTS
Effective January 1, 1994, NYNEX adopted Statement of Financial Accounting
Standards No. 115, "Accounting For Certain Investments in Debt and Equity
Securities" ("Statement No. 115"). Statement No. 115 addresses the accounting
and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. At
acquisition, debt and equity securities are classified into one of three
categories, and at each reporting date, the classification of these securities
is assessed as to its appropriateness. The implementation of Statement No. 115
did not have a material effect on NYNEX's results of operations or financial
position.
NYNEX's long-term investments were $2.0 billion and $1.9 billion at December 31,
1994 and 1993, respectively, and are included in Deferred charges and other
assets. These long-term investments are accounted for under the equity or cost
method. Statement No. 115 specifically excludes equity securities accounted for
under the equity method and equity securities accounted for under the cost
method that do not have readily determinable fair market values. Therefore, all
of NYNEX's long-term investments are excluded from Statement No. 115.
NYNEX did not make any significant long-term investments in 1994. In November
1993, NYNEX invested $1.2 billion in Viacom Inc. ("Viacom"), which owns and
operates cable television networks worldwide. NYNEX purchased 24 million shares
of Viacom preferred stock, carrying an annual dividend of five percent. The
stock is convertible into shares of Viacom Class B non-voting common stock at a
price of $70 per share. NYNEX has two seats on Viacom's board and will pursue
strategic partnership opportunities in domestic and international cable
television, media entertainment, video transmission and telecommunications. In
November 1993, NYNEX invested $176.8 million for a 23.1% interest in Orient
Telecom & Technology Holdings Ltd. ("OTT") to acquire an indirect interest of
approximately five percent in TelecomAsia Corporation Public Company Limited
("TelecomAsia"), primarily for a network expansion project in Bangkok, Thailand,
and to develop telecommunications opportunities in China. At December 31, 1993,
NYNEX had invested $312.8 million in TelecomAsia.
Viacom, OTT, and TelecomAsia are accounted for under the cost method. NYNEX's
other long-term investments include equity and cost method investments in
domestic and international interests, including cellular, real estate,
telecommunications, and publishing ventures.
39
<PAGE>
1994 NYNEX Annual Report
F. LONG-TERM DEBT
Interest rates and maturities on long-term debt outstanding are as follows:
<TABLE>
<CAPTION>
December 31,
(In millions) Interest Rates Maturities 1994 1993
-------------- ---------- -------- --------
<S> <C> <C> <C> <C>
Refunding Mortgage Bonds: 3 3/8%-7 3/4% 1996-2006 $ 675.0 $ 675.0
6%-9% 2007-2011 425.0 425.0
Debentures: 4 1/2%-7 3/8% 1999-2008 780.0 580.0
7%-9 3/5% 2010-2017 918.7 1,137.6
6 5/7%-9 3/8% 2022-2033 2,250.0 1,800.0
Notes 4%-14 1/2% 1996-2009 2,683.3 1,675.5
Other 30.5 619.4
Unamortized discount-net (47.9) (45.5)
-------- --------
7,714.6 6,867.0
-------- --------
Long-term capital lease
obligations 69.9 70.8
-------- --------
Total long-term debt $7,784.5 $6,937.8
======== ========
</TABLE>
The annual requirements for principal payments on long-term debt, excluding
capital leases, are $132.3, $129.6, $484.1, $167.4 and $492.8 million for the
years 1995 through 1999, respectively.
The telephone subsidiaries' Refunding Mortgage Bonds and $3.2 billion of
Debentures outstanding at December 31, 1994 are callable, upon thirty days'
notice, by the respective telephone subsidiary, after the required term of
years. Additionally, $350 million of Debentures are repayable on November 15,
1996, in whole or in part, at the option of the holder.
Substantially all of New York Telephone's assets are subject to lien under New
York Telephone's Refunding Mortgage Bond indenture. At December 31, 1994, New
York Telephone's total assets were approximately $15.3 billion.
On February 28, 1994, New York Telephone issued $150 million of its Ten Year
6 1/4% Notes due February 15, 2004 and $450 million of its Thirty Year 7 1/4%
Debentures due February 15, 2024. Net proceeds of the offering were used to
repay short-term borrowings from NYNEX. NYNEX used the amount received from New
York Telephone to repay commercial paper borrowings and, accordingly, $588.6
million of Short-term debt was classified as Long-term debt at December 31, 1993
and is presented in "Other" in the table above.
At December 31, 1994, New York Telephone had $250 million of unissued, unsecured
debt securities registered with the Securities and Exchange Commission (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 for a period of any 12 consecutive months
out of the 15-month period prior to the date of proposed issuance. As a result
of the 1993 and 1994 business restructuring charges (see Note Q), beginning in
March 1994, New York Telephone did not meet the earnings coverage requirement.
As of December 31, 1994, New York Telephone meets the earnings coverage
requirement.
At December 31, 1994, New England Telephone had $500 million of unissued,
unsecured debt securities registered with the SEC.
At December 31, 1994, 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.
At December 31, 1994, NYNEX had $950 million of unissued, unsecured debt and
equity securities registered with the SEC. The proceeds from the sale of these
securities would be used to provide funds to NYNEX and/or NYNEX's nontelephone
subsidiaries for their respective general corporate purposes.
40
<PAGE>
G. SHORT-TERM DEBT
At December 31, 1994, NYNEX had unused lines of credit with various financial
institutions amounting to approximately $2.4 billion. These lines of credit,
together with cash and temporary cash investments, are used to support
outstanding commercial paper.
NYNEX's short-term borrowings and related weighted average interest rates are as
follows:
<TABLE>
<CAPTION>
Weighted average
interest rates
December 31, December 31,
(In millions) 1994 1993 1994 1993
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Commercial paper and short-term
Debt++ $1,987.4 $3,068.6 6.0% 3.4%
Debt maturing within one year 132.3 113.1 6.8% 7.8%
Current portion of long-term
capital lease obligations 9.1 8.4
-------- --------
Total short-term debt $2,128.8 $3,190.1
======== ========
<CAPTION>
(In millions) 1994 1993 1994 1993
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Average amount of commercial paper
outstanding during the year+ $2,836.4 $1,743.7 4.3%* 3.2%*
Maximum amount of commercial paper
outstanding at any month's end
during the year $3,621.9 $3,642.1
======== ========
</TABLE>
++ At December 31, 1993, $588.6 million of commercial paper borrowings was
classified as Long-term debt because of their repayment by long-term
borrowings.
+ Computed by dividing the sum of the aggregate principal amounts outstanding
each day during the year by the total number of calendar days in the year.
* Computed by dividing the aggregate related interest expense by the average
daily face amount.
H. FINANCING OF OPERATIONS IN THE UNITED KINGDOM
On December 31, 1993, a financing arrangement was entered into for the southern
franchises in the United Kingdom. Prior to this financing, two partnerships were
formed: South CableComms, L.P. ("SC"), and Chartwell Investors L.P.
("Chartwell"), both Delaware limited partnerships. These partnerships and their
subsidiaries are legal entities separate and distinct from NYNEX, as are their
assets and liabilities. Two wholly-owned subsidiaries of NYNEX contributed
assets, consisting of cash and stock, with an aggregate initial market value of
$130 million and a book value of $109 milllion at December 31, 1993, to SC in
exchange for general partnership interests, and Chartwell contributed $20
million in cash to SC in exchange for a limited partner interest. All of the
partners of SC have committed to make future capital contributions as required
by the various documents, and with respect to Chartwell's commitment, such
contributions must be matched by NYNEX subsidiaries. As of December 31, 1994,
total contributions of $178 million and $222 million were made by the two
wholly-owned subsidiaries of NYNEX and Chartwell, respectively. SC's purpose is
to manage and protect a portfolio of assets, which is being used to fund the
construction, operations and working capital requirements of cable television
and telecommunications systems in certain licensed areas in the southern United
Kingdom (the "South"). SC is included in NYNEX's consolidated financial
statements, and Chartwell's interest in SC is reflected in minority interest
which is included in Other long-term liabilities and deferred credits.
NYNEX also contributed cash to Chartwell in exchange for an initial 20% limited
partnership interest. The purpose of Chartwell is to invest up to $427 million
(based on applicable exchange rates) over the five year contribution term in SC,
and the funding of Chartwell will consist of equity and amounts made available
to it, subject to the satisfaction of funding conditions, under existing
arrangements with financial institutions. A portion of the funding is
collateralized by Chartwell's assets, is non-recourse to the partners of
Chartwell, and bears interest at market rates. It includes representations,
warranties, covenants and events of default customary in financings of this
nature. The term of the funding arrangements is ten years, with repayments
beginning after the fifth year, and Chartwell is entitled to receive cumulative
preferential distributions from SC sufficient to meet these repayment
requirements. For financial reporting purposes, NYNEX's investment in Chartwell
is reflected in Deferred charges and other assets, and is accounted for under
the equity method.
On December 19, 1994, a financing arrangement was entered into for the northern
franchises of the United Kingdom. Prior to this financing, three entities were
41
<PAGE>
1994 NYNEX Annual Report
formed: North CableComms L.P. ("NCLP"), a Delaware limited partnership; North
CableComms, L.L.C. ("NCLLC"), a Delaware limited liability company; and Winston
Investors L.L.C. ("Winston"), a Delaware limited liability company. These
entities and their subsidiaries are legal entities separate and distinct from
NYNEX, as are their assets and liabilities. Three wholly-owned subsidiaries of
NYNEX contributed stock to NCLP in exchange for general partnership interests
(with an aggregate market value of $827 million and a book value of $142 million
at December 19, 1994). NCLLC contributed $79 million in cash to NCLP in exchange
for a limited partnership interest. Two wholly-owned subsidiaries of NYNEX
contributed in the aggregate $82 million in cash, and Winston contributed $225
million in cash, each for member interests in NCLLC. All of the partners of
NCLP and members of NCLLC have committed to make future capital contributions as
required by the various documents, and with respect to Winston's commitment,
such contributions must be matched by the NYNEX contributions.
NCLP's purpose is to manage and protect a portfolio of assets, which is being
used to fund the construction, operations and working capital requirements of
cable television and telecommunications systems in certain licensed areas in the
northern United Kingdom (the "North") under contracts with NYNEX CableComms,
Limited. NCLLC's purpose is to provide funding arrangements to NCLP and its
operating companies in the North with the proceeds of capital contributions
received from its members. One of the wholly-owned subsidiaries of NYNEX manages
and controls the business and operations of NCLLC. NCLP and NCLLC are included
in NYNEX's consolidated financial statements, and Winston's interest in NCLLC is
reflected in minority interest which is included in Other long-term liabilities
and deferred credits.
NYNEX also contributed cash to Winston in exchange for an initial 20% equity
interest. The purpose of Winston is to invest up to $1 billion (based on
applicable exchange rates) over the five-year contribution term in NCLLC, and
the funding of Winston will consist of equity and amounts made available to it,
subject to the satisfaction of funding conditions, under existing arrangements
with financial institutions. A portion of the funding is collateralized by
Winston's assets, is non-recourse to the partners of Winston, and bears interest
at market rates. It includes representations, warranties, covenants and events
of default customary in financings of this nature. The term of the funding
arrangements is ten years with repayments beginning after the fifth year, and
Winston is entitled to receive cumulative preferential distributions from NCLLC
sufficient to meet these repayment requirements. For financial reporting
purposes, NYNEX's investment in Winston is reflected in Deferred charges and
other assets, and is accounted for under the equity method.
NYNEX provides certain performance guarantees to Chartwell and Winston, and for
the first five years, a completion guarantee that requires a specified number of
homes be passed by the network in the South and in the North by December 31,
1998, and 1999, respectively (subject to one-year extensions). At December 31,
1994, the related construction program was progressing toward the appropriate
targets for release from the completion guarantee. In order to gain release from
the completion guarantee, NYNEX must demonstrate that various financial ratios,
based on, among other things, operating cash flows, and other tests such as
material compliance with communication licenses, are satisfied. If the
construction program does not meet such tests and these shortfalls are not cured
within a specified time period, the completion guarantee will necessitate
payments to be made directly to Chartwell or Winston, as appropriate. NYNEX also
provides indemnifications to these entities, among others, in respect of certain
liabilities, including all liability, loss or damage incurred as a result of any
breach of the agreements set forth, and tax indemnifications relating to events
prior to the creation of SC, NCLP, and NCLLC. In addition, NYNEX shall maintain
certain financial and operating standards and may, at any time, elect to
purchase the equity interest in Chartwell and Winston on certain terms.
During January 1995, negotiations commenced with the intention of converting the
financing arrangements for the South to a structure that will closely resemble
the structure that exists for the North.
I. STOCKHOLDERS' EQUITY
Common Stock
On July 15, 1993, the Board of Directors of NYNEX declared a two-for-one common
stock split in the form of a 100 percent stock dividend, payable September 15,
1993 to holders of record at the close of business on August 16, 1993.
As of November 1, 1993, NYNEX discontinued purchasing shares of its common stock
and began issuing new shares in connection with employee savings plans and the
Dividend Reinvestment and Stock Purchase Plan.
Shareholder Rights Agreement
In October 1989, NYNEX adopted a Shareholder Rights Agreement, pursuant to which
shareholders received a dividend distribution of one right for each outstanding
42
<PAGE>
share of NYNEX's common stock. As a result of the two-for-one common stock
split, the rights have been adjusted so that shareholders receive one right for
every two shares of common stock. Each right entitles the shareholder to buy
1/100 of a share of $1.00 par value Series A Junior Participating Preferred
Stock from NYNEX at an exercise price of $250 per right. Five million shares of
this Preferred Stock have been authorized, with three million shares reserved
for exercise of the rights. The rights, which are subject to adjustment, will
not be exercisable or separable from the common stock until ten days following a
public announcement that a person or group has acquired beneficial ownership of
15% or more of NYNEX's outstanding common stock or ten business days following
the commencement of, or public announcement of the intent to commence, a tender
or exchange offer by a beneficial owner of 15% or more of the outstanding common
stock.
If any person becomes the beneficial owner of 15% or more of the outstanding
common stock, each holder of a right will receive, upon exercise at the right's
then current exercise price, common stock having a value equal to twice the
exercise price. If NYNEX is acquired in a merger or business combination, or if
50% or more of NYNEX's assets or earning power is sold, each right holder will
receive, upon exercise at the right's then current exercise price, common stock
in the new company having a value equal to twice the exercise price of the
right.
NYNEX may exchange rights for shares of common stock or redeem rights in whole
at a price of $.01 per right at any time prior to their expiration on October
31, 1999.
Leveraged Stock Ownership Plan
In February 1990, NYNEX established a leveraged employee stock ownership plan
("LESOP") and loaned $450 million to the LESOP Trust ("internal LESOP note").
The LESOP Trust used the proceeds to purchase, at fair market value, 5.6 million
shares of NYNEX's common stock held in treasury. NYNEX issued and guaranteed
$450 million of 9.55% Debentures, the proceeds of which were principally used to
repurchase 5.4 million shares in the open market, completing the stock
repurchase plan. The Debentures require payments of principal annually and are
due May 1, 2010. Interest payments are due semiannually. The Debentures and the
internal LESOP note are recorded as Long-term debt and as Deferred compensation,
respectively. Deferred compensation will be reduced as shares are released and
allocated to participants.
NYNEX maintains savings plans that cover substantially all of its employees.
Under these plans, NYNEX matches a certain percentage of eligible employee
contributions. Under provisions of the Savings Plan for Salaried Employees,
NYNEX's matching contributions are allocated to employees in the form of NYNEX
stock from the LESOP Trust, based on the proportion of principal and interest
paid by the LESOP Trust in a year to the remaining principal and interest due
over the life of the internal LESOP note. Compensation expense is recognized
based on the shares allocated method. LESOP shares are not considered
outstanding until they are allocated to participants.
NYNEX's matching contributions to the savings plans and any change in the
required contribution as a result of leveraging this obligation are recorded as
compensation expense. Compensation expense applicable to the savings plans for
1994, 1993 and 1992 was $88.2, $81.3 and $76.9 million, respectively, and has
been reduced by $26.1, $26.2 and $26.1 million, respectively, for the dividends
paid on LESOP shares used to service the internal LESOP note. As of December 31,
1994 and 1993, the number of shares allocated to the LESOP were 2.1 and 1.7
million, respectively, and the number of shares held by the LESOP for future
allocation were 9.1 and 9.5 million, respectively.
J. STOCK OPTION PLANS
NYNEX has stock option plans for key management employees under which options to
purchase NYNEX common stock are granted at a price equal to or greater than the
market price of the stock at the date of grant. In November 1989, NYNEX
established the 1990 Stock Option Plan, approved by shareholders in May 1990,
that permits the grant of options no later than December 1994 to purchase up to
4 million shares of common stock; options may not be exercisable for a period
less than one year or greater than ten years from date of grant.
The 1990 Stock Option Plan for key management employees allows for the granting
of stock appreciation rights ("SARs") in tandem with options granted. Upon
exercise of a SAR, the holder may receive shares of common stock and/or cash
equal to the excess of the market price of the common stock at the exercise date
over the option price. SARs may be exercised in lieu of the underlying option
only when those options become exercisable.
In August 1990, NYNEX acquired Stockholder Systems, Inc. ("SSI"). Under the
terms of the SSI Acquisition Agreement, SSI employees were entitled to receive
NYNEX common stock upon exercise of SSI stock options at a conversion rate that
allowed the SSI stock option price to remain unchanged. The SSI option holders
were not entitled to any SARs. As a result of NYNEX's sale of SSI in January
1994, SSI stock options are no longer exercisable for NYNEX common stock.
Effective March 31, 1992, NYNEX established stock option plans for nonmanagement
employees and for management employees other than those who are eligible to
43
<PAGE>
1994 NYNEX Annual Report
participate in the 1990 Stock Option Plan. Employees were granted options, with
the number of options varying according to employee level, to purchase a fixed
number of shares of NYNEX common stock at the market price of the stock on the
grant date. Fifty percent of the options could be exercised one year from the
grant date, with the remaining fifty percent exercisable two years from the
grant date. These options expire ten years from the grant date. In October 1994,
employees were granted additional options under these plans.
NYNEX has repurchased and placed in treasury stock approximately one million
shares of its common stock for subsequent reissuance in connection with the
employee stock option plans established in 1992.
The following summarizes the activity for those shares under option under the
various stock option plans and the SSI Acquisition Agreement, including the
related SARs:
<TABLE>
<CAPTION>
Price Range
(Stock Options) Shares Per Share
---------- -----------------
<S> <C> <C>
Outstanding at December 31, 1991 1,476,526 $27.60 to $ 88.13
Granted 8,316,058 $70.63 to $ 88.13
Exercised (200,827) $31.35 to $ 75.57
Canceled (103,021) $49.38 to $ 88.13
SSI net activity (35,596) $27.60 to $ 37.95
---------- -----------------
Outstanding at December 31, 1992 9,453,140 $27.60 to $ 88.13
Granted prior to stock split 806,891 $70.63 to $ 88.88
Exercised prior to stock split (644,196) $31.34 to $ 88.13
Canceled prior to stock split (79,473) $69.13 to $ 88.13
Stock split (Note I) 9,519,950
Granted after stock split 16,595 $42.32 to $ 46.07
Exercised after stock split (281,500) $16.50 to $ 44.07
Canceled after stock split (106,605) $21.91 to $ 44.07
SSI net activity (16,412) $13.80 to $ 18.98
---------- -----------------
Outstanding at December 31, 1993 18,668,390 $13.80 to $ 46.07
Granted 14,724,360 $37.94 to $ 39.88
Exercised (261,131) $21.91 to $ 36.13
Canceled (716,391) $32.97 to $ 44.07
---------- -----------------
Outstanding at December 31, 1994 32,415,228 $21.91 to $ 46.07
========== =================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31,
(Number of shares) 1994 1993 1992
------ ------- -------
<S> <C> <C> <C>
Stock appreciation rights:
Outstanding at beginning of year 1,864 29,247 97,343
Granted - - 2,232
Exercised - (7,551) (19,579)
Canceled - (23,571) (50,749)
Stock split (Note I) - 3,739 -
------ ------- -------
Outstanding at end of year 1,864 1,864 29,247
====== ======= =======
</TABLE>
There were 16,604,260 and 8,250,014 stock options exercisable at December 31,
1994 and 1993, respectively. Effective January 1, 1995, NYNEX established the
1995 Stock Option Plan which replaces the predecessor 1990 Stock Option Plan
that expired on December 31, 1994. This plan permits the grant of options no
later than December 31, 1999 to purchase up to 20 million shares of common
stock.
K. LEASES
NYNEX leases certain facilities and equipment used in its operations. Rental
expense was $310.5, $337.0 and $362.6 million for 1994, 1993 and 1992,
respectively. At December 31, 1994, the minimum lease commitments under
noncancelable leases for the periods shown are as follows:
<TABLE>
<CAPTION>
(In millions) Operating Capital
--------- -------
<S> <C> <C>
1995 $ 170.4 $ 20.0
1996 139.9 18.6
1997 119.1 14.6
1998 104.5 14.1
1999 92.7 11.5
Thereafter 598.5 392.9
-------- ------
Total minimum lease payments $1,225.1 471.7
Less: executory costs - 13.4
-------- ------
Net minimum lease payments - 458.3
Less: interest - 379.3
-------- ------
Present value of net minimum
lease payments - $ 79.0
======== ======
</TABLE>
NYNEX Credit Company ("NCC") is the lessor in leveraged and direct financing
lease agreements under which commercial aircraft, railroad cars, industrial
equipment, power generators, residential real estate, telecommunications and
computer equipment are leased for terms of 3 to 36 years. Minimum lease payments
receivable represent unpaid rentals, less principal and interest on third-party
non-recourse debt relating to leveraged lease transactions. Since NCC has no
general liability for this debt, the related principal and interest have been
offset against the minimum lease payments receivable. Minimum lease payments
receivable are subordinate to the debt, and the debt holders have a security
interest in the leased equipment.
At December 31, 1994, the net investment in leveraged leases was $406.7 million
and in direct financing leases was $133.7 million. At December 31, 1993, the net
investment in leveraged leases was $447.3 million and in direct financing leases
was $90.1 million. The components of NCC's net investment in these leases are
included in Deferred charges and other assets and were as follows:
44
<PAGE>
<TABLE>
<CAPTION>
December 31,
(In millions) 1994 1993
-------- --------
<S> <C> <C>
Minimum lease payments receivable $1,561.2 $1,344.9
Unguaranteed residual value 1,027.6 908.7
Initial direct costs 1.2 .8
Less: Unearned income 1,127.2 995.7
Deferred income taxes 900.2 702.9
Allowance for uncollectibles 22.2 18.4
-------- --------
Net investment $ 540.4 $ 537.4
======== ========
</TABLE>
At December 31, 1994, future minimum lease payments receivable, in millions, in
excess of debt service requirements on nonrecourse debt related to leveraged and
direct financing leases, are collectible as follows: $59.4 in 1995; $58.1 in
1996; $45.6 in 1997; $44.2 in 1998; $39.8 in 1999; and $1,314.1 thereafter.
L. FINANCIAL INSTRUMENTS
Risk Management, Off-Balance-Sheet Risk and Concentrations of Credit Risk
NYNEX has entered into transactions in financial instruments with off-balance-
sheet risk, to reduce its exposure to market and interest rate risk in its
short-term and long-term securities. NYNEX entered into various interest rate,
currency, and basis swap transactions, with an aggregate notional amount of $2.3
billion and $2.0 billion at December 31, 1994 and 1993, respectively, to manage
interest rate, foreign exchange rate, and tax exposures. Of these amounts, there
were $990 million and $679 million, respectively, of foreign exchange contracts
to counter currency fluctuations associated with foreign investments. These
contracts mature at various dates from 1994 through 2004.
Risk in these transactions involves both risk of counterparty nonperformance
under the contract terms and risk associated with changes in market values,
interest rates, and foreign exchange rates. The counterparties to these
contracts consist of major financial institutions and organized exchanges. NYNEX
continually monitors its positions and the credit ratings of its counterparties
and limits the amount of contracts it enters into with any one party. While
NYNEX may be exposed to credit losses in the event of nonperformance by these
counterparties, it does not anticipate such losses, due to the aforementioned
control procedures. The settlement of these transactions is not expected to, but
may, have a material effect upon NYNEX's financial position or results of
operations.
A description of NYNEX's financial instruments is presented in Management's
Discussion and Analysis on pages 24-26.
Fair Value of Financial Instruments The following table presents the carrying
amounts and fair values of NYNEX's financial instruments at December 31, 1994
and 1993. Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," defines fair value as the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than a forced liquidation or sale.
<TABLE>
<CAPTION>
1994 1993
------------------ ------------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Non-Derivatives:
Long-term investments:
Practicable to estimate fair value $ 538.9 $ 990.8 $ 539.3 $1,988.6
Not practicable 1,206.0 1,206.0 1,201.1 1,201.1
Long-term debt 7,975.5 7,074.4 6,867.0 7,148.6
Derivatives:*
Assets 11.8 18.3 16.2 17.2
Liabilities** (7.5) (100.5) 3.2 (35.3)
</TABLE>
* The carrying amounts in the table are included in Deferred charges and other
assets.
** The liability fair values have been reduced by an $11 million and $12 million
premium at December 31, 1994 and 1993, respectively, received in connection
with basis swaption agreements and currently amortized over the resultant
basis swap agreements.
The fair value of the derivative contracts includes the remaining unamortized
costs of foreign exchange hedges, which are ($43.6) and ($35.8) million for 1994
and 1993, respectively. These values reflect the implicit incremental borrowing
costs associated with NYNEX's overseas investments in the United Kingdom and
Thailand.
The following methods and assumptions were used to estimate the fair value of
each type of financial instrument for which estimation was practicable:
Long-term investments The estimated fair value of some investments accounted
for under the cost method is based on quoted market prices for those or similar
investments. For other investments for which there are no quoted market prices,
a reasonable estimate of fair market value could not be made without incurring
excessive costs. It is not practicable to estimate the fair value of NYNEX's
investment in the preferred stock of a public company because of the nature of
the investment. Accordingly, the carrying value is presented as the fair value.
Long-term debt The estimated fair value of long-term debt is based on quoted
market prices or discounted future cash flows using the weighted average coupon
rate and current interest rates.
Derivatives The estimated fair value is based on amounts NYNEX would receive
or pay to terminate such agreements taking into account current mid-market
rates.
45
<PAGE>
1994 NYNEX Annual Report
M. ADDITIONAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
------ -------- --------
<S> <C> <C> <C>
Taxes other than income:
Property $351.9 $ 399.6 $ 432.8
Gross receipts 495.3 500.1 492.0
Payroll-related 65.4 65.1 53.9
Other 80.6 74.1 75.9
------ -------- --------
Total $993.2 $1,038.9 $1,054.6
====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
(In millions) 1994 1993
-------- --------
<S> <C> <C>
Accounts payable:
Trade $1,146.5 $1,089.0
Taxes 97.9 146.7
Compensated absences 305.9 291.2
Dividends 249.9 244.8
Payroll 131.3 155.7
Interest 125.6 113.4
Other 611.1 812.5
-------- --------
Total $2,668.2 $2,853.3
======== ========
Other current liabilities:
Advance billings and customers' deposits $ 291.3 $ 279.0
Deferred income taxes 1.1 4.1
Other 761.1 480.2
-------- --------
Total $1,053.5 $ 763.3
======== ========
</TABLE>
Total research and development costs charged to expense for 1994, 1993 and 1992
were $159.7, $162.8 and $131.7 million, respectively.
In 1994, 1993 and 1992, AT&T Corp. ("AT&T") provided approximately 15%, 16% and
17%, respectively, of NYNEX's total operating revenues, primarily Network access
revenues and Other revenues from billing and collection services performed by
the telephone subsidiaries for AT&T.
Telesector Resources Group, Inc., a NYNEX subsidiary, owns a one-seventh
interest in Bell Communications Research, Inc. ("Bellcore"). Bellcore furnishes
technical and support services to NYNEX relating to exchange telecommunications
and exchange access services. For 1994, 1993 and 1992, NYNEX recorded charges of
$112.2, $128.5 and $142.1 million, respectively, in connection with these
services.
N. SUPPLEMENTAL CASH FLOW INFORMATION
The following information is provided in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows":
<TABLE>
<CAPTION>
December 31,
(In millions) 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Income tax payments $519.4 $591.8 $533.5
------ ------ ------
Interest payments $601.7 $611.7 $659.2
------ ------ ------
Additions to property, plant and equipment
under capital lease obligations $ 10.6 $ - $ 2.7
------ ------ ------
Noncash items excluded from the Statement
of Cash Flows:
Common Stock issued for dividend
reinvestment and stock compensation plans $107.1 $ 29.6 $102.0
Short-term debt classified as Long-term
debt (see Note F) $ - $588.6 $ 97.7
====== ====== ======
</TABLE>
O. REVENUES SUBJECT TO POSSIBLE REFUND
Several state and federal regulatory matters, including affiliate transaction
issues in New York Telephone's 1990 intrastate rate case ($190.0 million),
service issues in New York Telephone's incentive regulation proceeding ($50.0
million) and other matters ($48.0 million), may possibly require the refund of a
portion of the revenues collected in the current and prior periods. As of
December 31, 1994, the aggregate amount of such revenues that was estimated to
be subject to possible refund was approximately $288.0 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.
P. LITIGATION AND OTHER CONTINGENCIES
It is probable that local tax claims aggregating approximately $220 million in
tax and $152 million in associated interest will be asserted against New York
Telephone for the period 1984 through 1994. The claims relate to the taxability
of New York Telephone's interstate and intrastate network access revenues. The
current status is that these
46
<PAGE>
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 annual
operating results.
Q. BUSINESS RESTRUCTURING
In 1994, $693.5 million of pretax pension enhancement charges were recorded.
These charges are a portion of an estimated $2.0 billion of pretax charges to be
recorded for pension enhancements as employees leave NYNEX through 1996 under
retirement incentives. The pension enhancement charges were included in the
Consolidated Statements of Income as Selling, general and administrative.
In the fourth quarter of 1993, $2.1 billion of pretax business restructuring
charges were recorded, primarily related to efforts to redesign operations and
work force reductions. These charges include: $1.1 billion for severance and
postretirement medical costs for employees leaving NYNEX through 1996; $626
million for re-engineering service delivery; $283 million for sale or
discontinuance of information product and services businesses; and $106 million
for restructuring at other nontelephone subsidiaries. The restructuring charges
were included in the Consolidated Statements of Income as follows: Maintenance
and support -- $192 million; Marketing and customer services -- $53 million;
Selling, general and administrative -- $1.8 billion; and Other income (expense)-
net -- $31 million.
R. SEGMENT INFORMATION
A description of NYNEX's key business segments and Management's Discussion and
Analysis of operating revenues and operating income by segment are presented on
pages 17 to 19 and 21 to 22, respectively.
Identifiable assets, depreciation expense and capital expenditures by business
segment are as follows:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Identifiable Assets:
Telecommunications $24,788.6 $24,857.2 $24,343.3
Cellular 961.4 676.4 523.4
Publishing 529.0 529.3 492.4
Financial Services 1,610.2 1,491.3 1,244.8
Other Diversified Operations 2,177.6 1,856.9 1,675.1
--------- --------- ---------
Total identifiable assets $30,066.8 $29,411.1 $28,279.0
========= ========= =========
Depreciation and Amortization
Expense:
Telecommunications $ 2,487.1 $ 2,392.9 $ 2,374.8
Cellular 82.2 66.1 67.3
Publishing 14.8 14.0 12.3
Financial Services 1.1 .8 .5
Other Diversified Operations 55.4 60.2 63.1
--------- --------- ---------
Total depreciation and
amortization expense $ 2,640.6 $ 2,534.0 $ 2,518.0
========= ========= =========
Capital Expenditures:
Telecommunications $ 2,309.9 $ 2,327.8 $ 2,119.7
Cellular 207.1 164.8 164.5
Publishing 16.6 13.1 17.5
Financial Services 5.9 1.1 16.7
Other Diversified Operations 472.7 210.4 131.2
--------- --------- ---------
Total capital expenditures $ 3,012.2 $ 2,717.2 $ 2,449.6
========= ========= =========
</TABLE>
Total intersegment sales in 1994, 1993 and 1992 were $397.1, $343.0 and $358.1
million, respectively, principally in the Telecommunications segment. The
Financial Services segment had total outstanding debt of $1,466.1, $637.0 and
$565.2 million at December 31, 1994, 1993 and 1992, respectively.
A reconciliation of total segment identifiable assets to consolidated assets is
as follows:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Segment identifiable assets $30,066.8 $29,411.1 $28,279.0
Adjustments and eliminations (1,459.3) (1,445.0) (872.6)
Corporate assets 1,432.4 1,462.7 295.7
Investment in unconsolidated
subsidiary (Note M) 28.1 29.6 29.6
--------- --------- ---------
Consolidated assets $30,068.0 $29,458.4 $27,731.7
========= ========= =========
</TABLE>
47
<PAGE>
1994 NYNEX Annual Report
Supplementary Information
Quarterly Financial Data (Unaudited)
All adjustments (consisting only of normal recurring accruals) necessary for a
fair statement of income for each period have been included in the following
table:
<TABLE>
<CAPTION>
(In millions, except per For the quarter ended
share amounts) March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1994
Operating revenues $3,273.3 $3,311.6 $3,330.8 $ 3,390.9
Operating income $ 595.5 $ 129.2 $ 583.0 $ 448.5
Net income (loss) $ 290.6 $ 1.2 $ 302.5 $ 198.3
Earnings (loss) per share $ .70 $ .00 $ .72 $ .47
Dividends per share $ .59 $ .59 $ .59 $ .59
Market price:*
High $ 41.375 $ 39.750 $ 39.125 $ 39.750
Low $ 34.250 $ 33.250 $ 35.625 $ 36.250
-------- -------- -------- ---------
1993
Operating revenues $3,320.2 $3,364.3 $3,330.4 $ 3,392.9
Operating income $ 668.9 $ 668.1 $ 645.5 $(1,649.2)
Earnings (loss) before
cumulative effect
of change in
accounting principle $ 331.1 $ 340.2 $ 298.3 $(1,242.0)
Cumulative effect of
change in accounting for
postemployment benefits,
net of taxes $ (123.5) $ - $ 1.8 $ -
Net income (loss)+ $ 207.6 $ 340.2 $ 300.1 $(1,242.0)
Earnings (loss) per share
before cumulative effect
of change in
accounting principle $ .80 $ .82 $ .72 $ (3.00)
Cumulative effect per
share of change
in accounting
principle $ (.30) $ - $ .01 $ -
Earnings (loss) per share+ $ .50 $ .82 $ .73 $ (3.00)
Dividends per share $ .59 $ .59 $ .59 $ .59
Market price:*
High $ 46.250 $ 46.125 $ 48.875 $ 46.500
Low $ 41.000 $ 40.313 $ 43.500 $ 40.125
-------- -------- -------- ---------
</TABLE>
+ The quarters ended March 31, 1993 and September 30, 1993 have been restated
as a result of the adoption of Statement No. 112 effective January 1, 1993
and for the effect of the increase in the tax rate on this item.
* Market price obtained from the New York Stock Exchange-Composite Transactions
Index.
Results for the second, third and fourth quarters of 1994 include $449.3, $31.2
and $213.0 million, respectively, of pretax charges for pension enhancements,
which were reflected in operating expenses. The after-tax effect of these
charges was $291.5, $20.5 and $140.8 million in the second, third and fourth
quarters, respectively.
Results for the fourth quarter of 1994 include $51.9 million of pretax credits
to pension and medical expense associated with plan amendments and favorable
plan experience, and $30.1 million for research tax credits and federal and
state tax credits, partially offset by a $10.8 million pretax charge for costs
associated with planned exits from media communication ventures. The total
pretax effect was distributed as follows: a $41.8 million benefit in operating
expenses, a $30.1 million benefit in income taxes and a $0.7 million charge in
other income (expense)-net. The after-tax effect of these net benefits was an
increase in net income of $55.9 million, of which $1.2 million was applicable to
the fourth quarter.
Results for the first quarter of 1993 include the adoption of Statement No. 112.
See Note C, "Employee Benefits," for further discussion. Results for the third
quarter of 1993 reflect the effect of the increase in the statutory corporate
federal income tax rate. See Note A, "Accounting Policies -- Income Taxes," for
further discussion. Results for the fourth quarter of 1993 reflect the effect of
charges for business restructuring, including re-engineering operations and
force reductions. The total pretax effect of these charges was distributed as
follows: $2.1 billion was reflected in operating expenses and $31 million was
reflected in Other income (expense)-net. The after-tax effect of these charges
was a reduction in net income of approximately $1.4 billion.
For further discussion of these charges, see Management's Discussion and
Analysis of Financial Condition and Results of Operations.
48
<PAGE>
EXHIBIT 21
MAJOR SUBSIDIARIES
(as of March 1, 1995)
State or Country
Name of Organization
---- ----------------
New England Telephone and Telegraph Company New York
Telesector Resources Group, Inc.* Delaware
New York Telephone Company New York
Empire City Subway Company (Limited) New York
Telesector Resources Group, Inc.* Delaware
NYNEX Asset Management Company Delaware
NYNEX Capital Funding Company Delaware
NYNEX Credit Company Delaware
NYNEX Government Affairs Company Delaware
NYNEX Information Resources Company Delaware
NYNEX Mobile Communications Company Delaware
NYNEX Science & Technology, Inc. Delaware
NYNEX Trade Finance Company Delaware
NYNEX U.K. Telephone and Cable T.V. Holding
Company Limited England
NYNEX CableComms Limited England
NYNEX Entertainment & Information Services Company Delaware
NYNEX Worldwide Services Group, Inc. Delaware
NYNEX Network Systems Company Delaware
* Telesector Resources Group, Inc. is a wholly-owned subsidiary of New York
Telephone Company and New England Telephone and Telegraph Company.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following Registration
Statements of NYNEX Corporation of our reports dated February 8, 1995 on our
audits of the consolidated financial statements and financial statement schedule
of NYNEX Corporation and its subsidiaries as of December 31, 1994 and 1993, and
for each of the three years in the period ended December 31, 1994, which reports
are included or incorporated by reference in this Annual Report on Form 10-K:
. Registration Statement Nos. 2-94110, 33-16570, 33-27802 and 33-51897 on
Form S-8 relating to the NYNEX Corporation Savings and Security Plan;
. Post-Effective Amendment Nos. 1 and 2 to Registration Statement No. 2-94110
on Form S-8 relating to the NYNEX Corporation Savings and Security Plan;
. Registration Statement Nos. 2-95141, 33-23156 and 33-49105 on Form S-3
relating to the NYNEX Corporation Share Owner Dividend Reinvestment and
Stock Purchase Plan;
. Post-Effective Amendment Nos. 1 and 2 to Registration Statement No. 2-95141
on Form S-3 relating to the NYNEX Corporation Share Owner Dividend
Reinvestment and Stock Purchase Plan;
. Registration Statement Nos. 2-95634, 2-95780, 33-21635 and 33-53477 on Form
S-8 relating to the NYNEX Corporation Savings Plan for Salaried Employees;
. Post-Effective Amendment Nos. 1 and 2 to Registration Statement No. 2-95780
on Form S-8 relating to the NYNEX Corporation Savings Plan for Salaried
Employees;
. Registration Statement No. 2-97813 on Form S-8 relating to the NYNEX 1984
Stock Option Plan;
. Post-Effective Amendment No. 1 to Registration Statement No. 2-97813 on
Form S-8 relating to the NYNEX 1984 Stock Option Plan;
. Registration Statement No. 33-23447 on Form S-8 relating to the NYNEX
Corporation UK Savings-Related Share Option Scheme;
. Registration Statement No. 33-33592 on Form S-3 relating to $500,000,000 of
NYNEX Corporation Debt Securities;
. Registration Statement Nos. 33-34401 and 33-34401-01 on Form S-3 (as
coregistrant and guarantor) relating to $300,000,000 of NYNEX Capital
Funding Company Debt Securities, unconditionally guaranteed by NYNEX
Corporation;
. Registration Statement No. 33-35212 on Form S-3 relating to the resale of
shares of NYNEX Common Stock in connection with the acquisition of Lamarian
Systems, Inc.;
. Registration Statement No. 33-35919 on Form S-8 relating to the NYNEX 1990
Stock Option Plan;
. Registration Statement No. 33-36342 on Form S-4 relating to the acquisition
of Stockholder Systems, Inc.;
. Registration Statement No. 33-48647 and 33-57945 on Form S-8 relating to
the NYNEX 1992 Non-Management Stock Option Plan;
. Registration Statement No. 33-48648 and 33-57947 on Form S-8 relating to
the NYNEX 1992 Management Stock Option Plan;
. Post-Effective Amendment Nos. 1 and 2 to Registration Statement No. 33-
49105 on Form S-3 relating to the NYNEX Corporation Share Owner Dividend
Reinvestment and Stock Purchase Plan;
<PAGE>
. Registration Statement Nos. 33-51147 and 33-51147-01 on Form S-3 (as
coregistrant and guarantor), which also constitutes Post-Effective
Amendment No. 1 to Registration Statement Nos. 33-34401 and 33-34401-01,
relating to $1,331,000,000 of NYNEX Capital Funding Company Debt
Securities, unconditionally guaranteed by NYNEX Corporation;
. Registration Statement No. 33-51993 on Form S-8 relating to the Upstate
Partners Employees' Retirement Savings Plan;
. Post-Effective Amendment No. 1 to Registration Statement Nos. 33-51147 and
33-51147-01 on Form S-3, which also constitutes Post-Effective Amendment
No. 2 to Registration Statement Nos. 33-34401 and 33-34401-01, relating to
$1,331,000,000 of NYNEX Capital Funding Company Debt Securities,
unconditionally guaranteed by NYNEX Corporation;
. Registration Statement No. 33-54693 on Form S-8 relating to the 1995 Stock
Option Plan;
. Registration Statement No. 33-57943 on Form S-3 relating to 367,722 shares
of NYNEX Common Stock;
. Registration Statement No. 33-53693 on Form S-3 relating to $900,000,000 of
NYNEX Corporation Debt and Equity Securities, which also constitutes Post-
Effective Amendment No. 1 to Registration Statement No. 33-33592; and
. Post-Effective Amendment No. 1 to Registration Statement No. 33-53693 on
Form S-3 relating to $900,000,000 of NYNEX Corporation Debt and Equity
Securities.
Coopers & Lybrand L.L.P.
New York, New York
March 24, 1995
2
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, NYNEX Corporation, a Delaware corporation (hereinafter referred
to as the "Corporation"), proposes to file with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the fiscal year ended December 31,
1994; and
WHEREAS, each of the undersigned is an Officer or both an Officer and a
Director of the Corporation;
NOW, THEREFORE, each of the undersigned hereby constitutes and appoints
I. G. Seidenberg, A. Z. Senter and P. M. Ciccone, and each of them severally,
as attorneys for the undersigned and in the undersigned's name, place and
stead, and in each of the undersigned's offices and capacities as an Officer
or as both an Officer and a Director of the Corporation, to execute and file
such Annual Report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform all and every act and thing whatsoever
requisite, necessary and/or desirable to be done in and about the premises as
fully, to all intents and purposes, as the undersigned might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney this 21 day of March, 1995.
W. C. Ferguson Ivan Seidenberg F. V. Salerno
--------------------- ----------------------- ------------------------
William C. Ferguson, I. G. Seidenberg, Frederic V. Salerno,
Chairman of the Board President, Vice Chairman-Finance
Chief Executive Officer and Business Development
and Director and Director
A. Z. Senter P. M. Ciccone
---------------------------- ------------------------------
A. Z. Senter, P. M. Ciccone,
Executive Vice President and Vice President and Comptroller
Chief Financial Officer
State of New York )
) ss.:
County of Westchester )
On the 21 day of March 1995, personally appeared before me, William C.
Ferguson, I. G. Seidenberg, Frederic V. Salerno, A. Z. Senter and P. M.
Ciccone, to me known and known to me to be the persons described in and who
executed the foregoing instrument, and they severally duly acknowledged to me
that they and each of them executed and delivered the same for the purposes
therein expressed.
Witness my hand and official seal this 21 day of March 1995.
Joanna Versaci
--------------------------------
Notary Public, State of New York
No. 4809035
Qualified in Westchester County
Cert. Filed in Bronx County
Commission Expires October 31, 1996
Joanna Versaci
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, NYNEX Corporation, a Delaware corporation (hereinafter referred
to as the "Corporation"), proposes to file with the Securities and Exchange
Commission, under the provisions of the Securities Act of 1934, as amended, an
Annual Report on Form 10-K for the fiscal year ended December 31, 1994; and
WHEREAS, each of the undersigned is a Director of the Corporation;
NOW, THEREFORE, each of the undersigned hereby constitutes and appoints
I. G. Seidenberg, A. Z. Senter and P. M. Ciccone, and each of them severally,
as attorneys for the undersigned and in the undersigned's name, place and
stead, as a Director of the Corporation, to execute and file such Annual
Report, and thereafter to execute and file any amendment or amendments
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform all and every act and thing whatsoever requisite, necessary
and/or desirable to be done in and about the premises as fully, to all intents
and purposes, as the undersigned might or could do if personally present at
the doing thereof, hereby ratifying and confirming all that said attorneys may
or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney this 16th day of March, 1995.
John Brademas R. W. Bromery R. L. Carrion
--------------------- -------------------- ------------------
John Brademas Randolph W. Bromery Richard L. Carrion
Director Director Director
John J. Creedon Stanley P. Goldstein Helene L. Kaplan
--------------------- -------------------- ------------------
John J. Creedon Stanley P. Goldstein Helene L. Kaplan
Director Director Director
Elizabeth T. Kennan Edward E. Phillips Walter V. Shipley
--------------------- -------------------- ------------------
Elizabeth T. Kennan Edward E. Phillips Walter V. Shipley
Director Director Director
John R. Stafford
---------------------
John R. Stafford
Director
State of New York )
) ss.:
County of New York )
On the 16th day of March, 1995, personally appeared before me each of the
Directors, all to me known and known to me to be the persons described in and
who executed the foregoing instrument, and each such person duly acknowledged
to me that he or she executed and delivered the same for the purposes therein
expressed.
Witness my hand and official seal this 16th day of March, 1995.
Robert Erb
-----------------------------------
Notary Public, State of New York
No. 31-4808105
Qualified in New York County
Commission Expires January 31, 1997
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 138
<SECURITIES> 0
<RECEIVABLES> 2,533
<ALLOWANCES> 227
<INVENTORY> 173
<CURRENT-ASSETS> 3,798
<PP&E> 35,467
<DEPRECIATION> 14,844
<TOTAL-ASSETS> 30,068
<CURRENT-LIABILITIES> 5,851
<BONDS> 7,785
<COMMON> 440
0
0
<OTHER-SE> 8,142
<TOTAL-LIABILITY-AND-EQUITY> 30,068
<SALES> 0
<TOTAL-REVENUES> 13,307
<CGS> 0
<TOTAL-COSTS> 11,550
<OTHER-EXPENSES> (14)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 674
<INCOME-PRETAX> 1,096
<INCOME-TAX> 304
<INCOME-CONTINUING> 793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 793
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.89
</TABLE>
