<PAGE>
From This
POINT
Forward
In New England,
New York and the World
Annual Report 1994
NYNEX
<PAGE>
Our Corporate Mission
NYNEX Corporation's mission is to be a world-class leader in helping people
communicate using information networks and services. NYNEX provides wireline
and wire-free telecommunications services, directory publishing and information
delivery services to approximately 16.5 million customers in New England, New
York and selected markets around the world.
- --------------------------------------------------------------------------------
About this report: The NYNEX 1994 Annual Report, which is printed on non-glossy,
recycled paper, reflects our efforts to create a more cost-effective and
environmentally responsible share owner report.
CONTENTS
<TABLE>
<S> <C>
Introduction 1
Financial Highlights 2
Letter to Share Owners 3
Corporate Citizenship 7
1994 Consolidated Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Selected Financial and Operating Data 28
Report of Independent Accountants 28
Report of Management 29
Consolidated Statements of Income 30
Consolidated Balance Sheets 31
Consolidated Statements of Changes in
Stockholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34
Supplementary Information 48
NYNEX Corporate Officers, Officers of Principal
Operating Groups and Share Owner Information 49
Board of Directors 50
</TABLE>
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At NYNEX, we are expanding the world of communications and multimedia for
customers. It's a world of wireline and wire-free solutions. Voice, video and
data services. Information and entertainment. NYNEX is reinventing itself to
meet the promise and potential of the Information Age -- envisioning not only
what the world will be, but how we will participate in shaping it from this
point forward ....
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1994 NYNEX Annual Report
Financial Highlights
<TABLE>
<CAPTION>
December 31,
(In millions, except per share
data and total employees) 1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
OPERATING DATA
Operating Revenues $13,307 $13,408 $13,183
Earnings (Loss) before Cumulative Effect
of Change in Accounting Principle $ 793 $ (272) $ 1,311
Cumulative Effect of Change in Accounting
for Postemployment Benefits, Net of Taxes - (122) -
------- ------- -------
Net Income (Loss) $ 793 $ (394) $ 1,311
PER SHARE DATA
Earnings (Loss) before Cumulative Effect
of Change in Accounting Principle $ 1.89 $ (.66) $ 3.20
Cumulative Effect of Change in
Accounting Principle - (.29) -
------- ------- -------
Earnings (Loss) $ 1.89 $ (.95) $ 3.20
Dividends $ 2.36 $ 2.36 $ 2.32
Book Value $ 20.26 $ 20.28 $ 23.51
OTHER DATA
Total Assets $30,068 $29,458 $27,732
Stockholders' Equity $ 8,581 $ 8,416 $ 9,724
Capital Expenditures* $ 3,012 $ 2,717 $ 2,450
Network Access Lines in Service# 16.6 16.0 15.6
Total Employees 70,600 76,200 82,500
</TABLE>
<TABLE>
<CAPTION>
Earnings (Loss) Per Share
(in dollars)
Excluding restructure
Reported and other charges
<S> <C> <C>
1990 2.39 3.04
1991 1.49 2.86
1992 3.20 3.20
1993 (.95) 3.00
1994 1.89 2.97
</TABLE>
<TABLE>
<CAPTION>
Return to Equity
Excluding restructure
Reported and other charges
<S> <C> <C>
1990 10.2% 13.0%
1991 6.4% 12.2%
1992 13.8% 13.8%
1993 (4.0%) 12.5%
1994 9.2% 14.4%
</TABLE>
<TABLE>
<CAPTION>
Operating Revenues
(dollars in billions)
Reported
<S> <C>
1990 13.6
1991 13.3
1992 13.2
1993 13.4
1994 13.3
</TABLE>
<TABLE>
<CAPTION>
Net Income (Loss)
(dollars in millions)
Excluding restructure
Reported and other charges
<S> <C> <C>
1990 949 1,208
1991 601 1,151
1992 1,311 1,311
1993 (394) 1,235
1994 793 1,245
</TABLE>
Results for 1994 include after-tax charges of $452.8 million for pension
enhancements due to work force reductions. Results for 1993 include after-tax
charges of $1.6 billion for business restructuring and other charges, primarily
related to efforts to redesign operations and force reduction programs. Results
for 1991 and 1990 include after-tax charges of $550 million and $259 million,
respectively, reflecting the costs of organizational restructuring, force
reduction programs, and other 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.
2
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[Photograph] [Photograph]
WILLIAM C. FERGUSON IVAN SEIDENBERG
Chairman President, CEO and
Chairman Designate
To Our Share Owners:
For NYNEX, 1994 was a year to build on the fundamentals -- to expand the world
of communications and multimedia so that we can deliver on our commitments to
share owners, customers and employees. In a time of unprecedented change in our
industry, and unprecedented opportunity, we are doing just that.
Building on our solid base in New England and New York -- the most lucrative
telecommunications markets in the world -- NYNEX is transforming itself into a
global communications and media company. It's a transformation that opens new
markets to NYNEX and enables us to serve existing customers better. How? By
expanding the range of telecommunications, entertainment and information
services we offer, and improving the way we deliver them.
We have a great story to tell, one with several chapters -- about working to
serve more customers better, faster and more efficiently in the Northeast and
around the globe, about new technologies, new services and a new regulatory
environment, about exciting strategic partnerships and alliances, and about an
energized, prepared and committed work force. The theme of our story: building
share owner value by remaking, rebuilding and repositioning our business for
this century and the next.
CREATING VALUE THROUGH GROWTH
Our results for the year reflect growth in service demand and real progress in
improving the fundamentals of the business. Net income for 1994 was $1.25
billion, or $2.97 per share, excluding pension enhancement charges of $452.8
million, or $1.08 per share. That compares with 1993 net income of $1.24
billion, or $3.00 per share, excluding restructuring and other charges of $1.6
billion, or $3.95 a share. The 1994 pension charges are part of a previously
announced $1.3 billion in after-tax charges to be recorded as employees retire
through 1996 under our enhanced pension offer.
Operating revenues for 1994 were $13.3 billion, down slightly from $13.4 billion
reported in 1993. However, sustained growth in demand for cellular and
telecommunications services contributed to strong fourth-quarter revenue growth,
up 5 percent over the same period in 1993, excluding the effects of our exit
from the information products and services business in 1993 and revenue
reductions ordered by the New York State Public Service Commission in 1994.
While operating expenses increased 4 percent overall in 1994, they decreased 1
percent in the fourth quarter, excluding the effects of pension enhancement
costs in 1994, and restructuring charges and our exit from the information
products and services business in 1993. In fact, fourth-quarter
Telecommunications operating expenses declined 4.1 percent from the fourth
quarter of 1993, excluding the effects of pension enhancement charges and
restructuring charges. As the initial steps of process re-engineering -- our
total quality improvement efforts -- took hold, we reduced total expenses,
despite cost increases from continued growth in demand for cellular and
telecommunications services and rapid development of our international
operations.
As you read on, you'll learn more about how the changes we're making in our
processes and the markets we serve will translate into greater customer
satisfaction and steady earnings growth. In fact, everything we do at NYNEX is
aimed at retaining customers and adding new ones -- delighting them so we can
grow the business, grow the bottom line and increase share owner
3
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1994 NYNEX Annual Report
NYNEX Voice Messaging Service NYNEX PhoneSmart(R) Services
units in service features in service
1994 448,000 1994 992,599
1993 253,000 1993 527,527
1992 117,000 1992 151,485
1991 32,637
value. To achieve that, we've established four "imperatives" for success: (1) We
will grow our markets; (2) We will transform our core businesses; (3) We will
expand internationally; and (4) We will gain regulatory flexibility. Here are
highlights from each of these areas:
GROWING OUR MARKETS
A Focus on Customers
To ensure success in this competitive industry, NYNEX is working to retain
customers, to win new business from them and to expand our customer base
globally. With a sharper focus on marketing, we're doing just that -- growing
the business both in our traditional telecommunications operations and in
exciting new markets, here and abroad.
. In our core telecommunications market, NYNEX added more than half a million
new access lines in 1994 -- the strongest growth in demand in NYNEX history. And
minutes of use on our lines were up a solid 7.3 percent.
. Our products and services succeed when they give customers the freedom to
communicate when, where and how they want. For example:
We added more than 195,000 NYNEX Voice Messaging Service customers in 1994 -- a
77 percent increase over the previous year. And we've sold a total of one
million features of NYNEX PhoneSmart(R) Services, a family of products that
include Call(er) ID, Call Return, Call Trace and Repeat Dialing.
More than 55,000 customers have signed on for NYNEX VoiceDialing(SM) Service.
Developed by NYNEX Science & Technology, Inc. -- our world-class research and
development laboratory -- this remarkable new service enables customers to make
phone calls by speaking the name of the person or place they want to reach into
the handset.
We're also a leader in the evolution to faster, more flexible services that help
our business customers communicate. NYNEX Enterprise Services provides
businesses with fiber-optic-based private networks -- when, where and for as
long as they need them. Some 300 businesses have purchased Enterprise service
since it was introduced in Manhattan in 1993.
More than one million Centrex lines are in service, providing business customers
with a range of network-based telecommunications services. And we're currently
targeting small- and medium-sized businesses with NYNEX Digital Centrex Plus
Service, enabling them to reap all the benefits of Centrex service enjoyed by
large business customers.
. We've stepped up our ethnic marketing efforts, creating a multilingual
sales channel to provide focused sales and service support for these distinct,
high-growth markets. Our Spanish-speaking representatives, for example, sold
6,800 lines and 52,000 PhoneSmart Services features in 1994, for more than $6.4
million in incremental revenue.
. To enhance our marketing efforts, we're investing more than $2.2 billion a
year in our Northeast wireline network -- a targeted investment strategy to meet
today's customer needs and to create demand for new services. With more than 1.1
million miles of fiber-optic cable in service across New England and New York --
and 82 percent of our customer lines linked to digital switches -- we're
committed to building a fully digital network that helps people communicate via
voice, data or video.
4
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================================================================================
Seidenberg Succeeds Ferguson
as NYNEX Chairman and CEO
In November, the NYNEX board of directors elected Ivan Seidenberg NYNEX
president and chief executive officer as of the first of this year, and
chairman effective April 1. He succeeds Bill Ferguson, who has served as
chairman and CEO since October 1989. Ferguson, whose telecommunications
career spans 43 years, continues in his role as chairman until April and
will remain on the NYNEX board through the end of 1995.
"We're fortunate to have someone of Ivan's vision and judgment to entrust
with NYNEX's future," remarked Ferguson. "Ivan has played a pivotal role in
transforming NYNEX for the challenges ahead. I'm confident that the team
led by Ivan and Fred Salerno, our vice chairman for Finance and Business
Development, will position NYNEX for success in a new era in
telecommunications."
"It's an honor to succeed Bill as chairman," said Seidenberg, "and I'm
excited to take up the challenge of leading NYNEX at such an extraordinary
time for our industry. Bill's strong leadership has prepared us well for
these competitive times."
Also leaving the business this year is Ray Burke, who has served as NYNEX's
executive vice president, general counsel and secretary. And John Creedon,
former president of Metropolitan Life and a NYNEX director since 1983, is
retiring from the NYNEX board. "We are indebted to both Ray and John for
helping NYNEX develop and grow into a customer-focused enterprise," said
Seidenberg. "They are leaders who made a difference in their time here, and
we wish them well."
Profile: Ivan Seidenberg -- began his telecommunications career in 1966 at
New York Telephone...From 1974 to 1982, held positions at AT&T in
engineering, rates and tariffs and federal regulatory matters...Joined
NYNEX as vice president of Government Affairs in 1983...Elected vice
president of NYNEX External Affairs three years later, and subsequently
elected president of the NYNEX Worldwide Information and Cellular Services
Group...Was named a vice chairman in 1991 and president and COO in March
1994.
================================================================================
. As demand for NYNEX services grows, so does the challenge of providing
outstanding service to all of our customers. Simply put, we have to maintain
excellent service levels if we want to build market share. It's a key goal of
our process re-engineering initiatives, of our ongoing improvements to the
network infrastructure, and of our renewed commitment to execute work
flawlessly.
. Our core business will expand to include cable TV, video entertainment,
and information network and delivery services. The FCC recently approved our
applications to begin building the first stops along our information
superhighway -- video dial tone service in a number of eastern Massachusetts and
Rhode Island communities. It's the initial step in a broadband network that will
eventually serve the entire Northeast.
. A critical step in developing our high-tech network is a video dial tone
trial in Manhattan. In collaboration with Liberty Cable and Time Warner
Communications, we're carrying video signals over fiber-optic lines to 2,500
homes in three apartment complexes. The service brings up to 150 channels of
cable programming to customers' fingertips. And an interactive service trial
enables some of these customers to receive movies on demand, on-line news, home
shopping, live events and information services. Also participating in the trial
are Urban Cable and Advanced Research & Technology Inc.
. The key to success in our expanding industry is access to the right "content"
- -- information and entertainment -- to deliver over the network. That's why we
have established a strategic relationship with Viacom, the entertainment and
communications giant. Viacom controls some of the country's most valuable
entertainment brands and is one of the largest suppliers of programming for the
broadcast network, first-run and off-network syndication and cable TV markets.
. In 1994, we also joined with Bell Atlantic and Pacific Telesis to deliver
nationally branded home entertainment, information and interactive services. The
venture will develop and market packages of branded entertainment and provide
the systems needed to deliver programming over our video dial tone networks.
Former CBS Broadcast Group President Howard Stringer, who has been named to head
the new
5
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1994 NYNEX Annual Report
NYNEX Mobile Communications NYNEX CableComms
customers number of
(in thousands) homes passed
1994 905 1994 673,048
1993 575 1993 358,304
1992 391 1992 105,875
1991 308 1991 11,230
1990 259
venture, brings to the job a wealth of experience in entertainment and
information. And helping to shape the new venture is Michael Ovitz's Creative
Artists Agency (CAA) -- an organization with a proven track record navigating
the ins and outs of the entertainment industry. For customers, the new services
we develop will be as easy to use as the telephone.
'More Information. More Solutions. More Stuff.'
. The premier directory publishing business in the Northeast, NYNEX Information
Resources Company (NIRC) produced record results in 1994 and is creating new
ways to help buyers and sellers manage information to complete transactions.
NIRC is branching out with the NYNEX Interactive Yellow Pages(SM), a new on-line
directory service that customers can access over their PCs through an alliance
with Prodigy Services Company. This is the first on-line interactive shopping
service supported by display advertising.
You also can find NYNEX on the Internet. In a trial, NIRC is offering its NYNEX
NortheastAccess(R) on-line directory service over the Internet to some 7,500
university and public libraries. NortheastAccess provides instant access to
NYNEX's on-line Yellow Pages and Business-to-Business directory listings.
Cellular Strength
. Outstanding growth in our cellular business last year brought NYNEX Mobile
Communications Company's customer ranks to 905,000 -- a 68 percent increase over
1993. NYNEX Mobile is working to make wirefree communications easier and more
efficient than ever -- offering enhanced voice mail, detailed billing and NYNEX
MobileReach(SM) service, which provides users with one phone number they can use
virtually anywhere in the network, from Maine to Washington, D.C.
NYNEX Mobile also is setting the industry pace with digital "CDMA" technology --
a faster, more flexible cellular radio technology that we'll deploy this year.
And in a major blow to cellular fraud, NYNEX Mobile pioneered a personal
identification number security system that gives customers virtual "padlock"
protection for their cellular service.
. Our pending merger with Bell Atlantic's cellular business, announced last
June, more than doubles our cellular customer base to 2 million plus people --
and expands our potential reach to 55 million people from Maine to South
Carolina. The merger, which is subject to legal and regulatory approvals, should
be completed later this year.
To help us become a nationwide provider of seamless, "anytime-anywhere"
communications, our NYNEX/Bell Atlantic mobile business has joined forces with
the AirTouch/U S WEST cellular alliance -- creating a potential base of 105
million customers in 15 of the top 20 U.S. cities. Through this venture, we're
bidding for licenses in the FCC's auction for personal communications services
(PCS) licenses. We're also developing a national branding and marketing strategy
for both cellular and PCS services.
TRANSFORMING THE CORE
Re-creating Our Traditional Businesses Around Customers
. Our process re-engineering initiatives are starting to pay off. In 1993,
NYNEX began a three-year journey to redesign work processes from the ground up.
Our
6
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================================================================================
Corporate Citizenship:
Caring for the Community
NYNEX continues to play a vital role in the communities we serve through
focused philanthropic and outreach activities. We distributed approximately
$19.4 million in grants, matching gifts and voluntary recognition program
awards in 1994. Our grant-making philosophy is guided by several
priorities: improve the quality of education; promote diversity by
sponsoring cultural and community partnerships; and promote long-term
wellness by supporting health and human-services programs. Here's a
sampling:
. Development grants totaling $250,000 were awarded to the top three
finalist teams of the NYNEX Science & Technology Awards, a scholarship
program that encourages high-school students to solve community problems
using science and technology.
. NYNEX supports the "Young at Arts" programs at the Wang Center in Boston,
which makes education and outreach programs available to some 18,000
students annually. The programs are designed to enable young people to
actively participate in the arts and help increase their self-esteem
through art.
. Through our ongoing sponsorship of the Dimock Community Health Center in
Roxbury, Mass., health, education and recreation services are made
available to community teens in one accessible location. Health-care
providers, substance-abuse and HIV counselors, youth counselors and peer
leaders serve some 50 teens weekly.
. NYNEX was the premier sponsor of the New York Special Olympics in 1994.
Some 37,000 children and adults participated, and a 20,000-strong volunteer
network helped make it happen -- including some 500 NYNEX employees and
members of the Telephone Pioneers of America.
For more information about NYNEX's philanthropic programs, or for a list of
all contributions, write to, call or fax: NYNEX, Corporate Philanthropy,
1095 Avenue of the Americas, New York, NY 10036. Phone: 1(800)360-7955;
Fax: (212) 398-0951
================================================================================
objective: to deliver service that's faster, more reliable and easier for
customers to use, while boosting efficiency in our telecommunications operations
by some 30 percent. When we finish, we will have consolidated approximately 300
customer service and administrative work centers into some 50 state-of-the-art,
cross-functional "super centers." How? By using better processes, cutting-edge
information technology, bigger locations and a highly trained work force.
Process re-engineering translates into dramatic improvements in "anytime-
anywhere" service. It means service on the customer's schedule, 24 hours a day,
seven days a week. More flexible and convenient bill-paying options. Proactive
maintenance for greater reliability. Competitive pricing. Service
representatives who can respond to customers quickly and completely, whether it
means fixing a problem with a phone line, ordering a new service feature or
adjusting a bill. Our goal is one customer call to us, one satisfied customer.
Through re-engineering, it actually costs less to deliver better service: As a
result of this three-year effort, NYNEX will cut expenses significantly through
1996, while reducing our employee ranks by 16,800 people.
Reducing our work force is a difficult, but necessary, step in an increasingly
competitive marketplace. But we're doing it in an enlightened and productive way
with the help of innovative labor contracts negotiated with the Communications
Workers of America and the International Brotherhood of Electrical Workers. The
contracts, which reinvent our relationship with the unions, have been called
"pathbreaking" by U.S. Labor Secretary Robert Reich. They strike an important
balance between the need to rebuild NYNEX through re-engineering and force cuts,
and employee concerns about job security and flexibility. The contracts fund
significant new training and education initiatives that improve employees'
technical and marketing skills.
. NYNEX Information Resources Company has an ambitious goal to triple revenues
over the next decade. To achieve that, the company is re-engineering its
operations -- re-creating the business around customers with a focus on customer
satisfaction, employee satisfaction and the lowest operating costs. NIRC is
initiating three key strategies: improvements
7
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1994 NYNEX Annual Report
to its print directories and value-added services, broad international expansion
and aggressive development of interactive services.
. As we work to transform NYNEX into a 21st-century company with a strong
customer focus and a sharp competitive edge, we've hired about a dozen senior-
level managers -- marketing, retailing, advertising, information technology,
cable and entertainment professionals. Their fresh ideas and "outside"
perspectives are bringing added depth to NYNEX, and helping us succeed in the
new competitive marketplace.
. For employees, NYNEX is becoming a new kind of company with completely new
ways of getting the job done. Closer teamwork, greater accountability and
broader job responsibilities are the order of the day. Our corporate culture,
embodied in a set of principles we call "NYNEX Winning Ways," gives all of our
people a stake in building and acting on our foundation of core values: Quality,
Ethics and Caring for the Individual. It means doing things right the first
time. Conducting our business relationships with honesty and integrity.
Respecting and meeting the diverse needs of our customers. And being a
responsible corporate citizen in the communities we serve in this country and
throughout the world.
EXPANDING GLOBALLY
From our core expertise of building and managing integrated networks in our home
territory, NYNEX is expanding into promising markets overseas. There, we're
focused on high-growth areas that include Europe and the Asia/Pacific region,
where we're delighting new customers and creating significant share owner value.
. In the United Kingdom, NYNEX CableComms is designing and constructing a
broadband network that delivers a range of telecommunications and cable
television services. By the end of 1994, the CableComms network had passed
approximately 673,000 homes -- serving some 122,000 cable TV subscribers and
99,000 residential phone customers, many of whom subscribe to both services.
When completed, the network is expected to pass some 2.7 million homes in
16 franchise areas.
. Through TelecomAsia, our strategic alliance with the CP Group, we're building
a 2 million-line network in Bangkok, Thailand. Construction of this Manhattan-
sized network is ahead of schedule: With almost 1 million lines in place, we're
well on the way to meeting our five-year build commitment. Telecom Holding, a
subsidiary of TelecomAsia, was awarded a license last year to provide cable TV
services in Thailand.
Telecom Holding is pursuing a host of telecommunications ventures in the region,
including wireline service in the Philippines and long-distance, mobile radio
and videotex services in Thailand. The research and development laboratory NYNEX
Science & Technology has established in Bangkok is a key technical resource for
TelecomAsia and for all of our activities in the Pacific Rim.
. We're moving ahead with plans for FLAG, our 17,000-mile undersea "Fiber-optic
Link Around the Globe" project. NYNEX is the managing partner of FLAG, a $1.2
billion submarine cable system that will link business centers and high-growth
regions along its route from London to Tokyo. Scheduled to be completed in 1997,
the system will have landing sites in 11 countries -- carrying up to 600,000
calls simultaneously and serving as a platform for high-capacity broadband
systems.
. NYNEX Information Resources Company continues to build a solid presence in
international directory publishing markets, distributing more than 3.5 million
directories overseas. Following the success of ventures in Gibraltar, Poland and
the Czech Republic, NIRC has set up shop in Slovakia, where three directories
initially are being produced in markets comprising more than 5 million people.
NIRC also established a new subsidiary, NYNEX Worldwide Directories Company, to
sell directories outside the U.S.
. Other worldwide ventures include our efforts in Indonesia, the fourth most
populous nation in the world. NYNEX and several Indonesian companies have
completed construction of three network projects, featuring more than 200,000
access lines, and we're pursuing new wireline and wire-free opportunities there.
In Greece, NYNEX is the word when it comes to cellular service: With a 20
percent stake in STET
8
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Hellas Telecommunications S.A., we're playing key marketing, sales and customer
services roles in a cellular market that will serve a potential customer base of
more than 300,000 people in the next decade.
ACHIEVING REGULATORY FLEXIBILITY
As our industry changes, so must the laws and regulations that govern it. We
continue to aggressively pursue reforms in telecommunications policy at both the
state and federal levels, in Congress and the courts.
. NYNEX has made innovative proposals to reshape regulations in the states we
serve. We're moving from traditional "rate-of-return" regulation -- which sets a
ceiling on the profit we can earn on our investment -- to "incentive"
regulation. Incentive regulation sets pricing rules, but provides us with true
incentives and freedoms to operate more efficiently, including the ability to
retain additional revenues. We currently operate under a form of incentive
regulation in Rhode Island. Incentive regulation plans in New York and
Massachusetts are awaiting decision by the state regulatory bodies, and a
similar approach is being considered in Maine.
. Among the features in our incentive regulation filings: no cap on earnings;
long-term plans (ten years in Massachusetts and up to seven years in New York);
more flexibility to price services competitively; and service-quality targets.
With approval of incentive regulation proposals this year in Massachusetts and
New York, more than 90 percent of NYNEX's access lines will be covered by this
more progressive form of regulation.
. We continue to work toward a national telecommunications policy that would
enable us to offer a full array of communication, entertainment and information
services. We were extremely disappointed with the failure of Congress in 1994 to
pass what promised to be the most sweeping change in telecommunications law in
60 years. NYNEX has consistently been seen as a leader in the legislative
process, and we'll continue to vigorously pursue changes in public policy in
Congress.
. In December, the U.S. District Court in Portland, Maine, responded favorably
to a NYNEX suit, allowing us to provide video programming services in our own
service area. We're very pleased with the ruling, which removes a major
roadblock to NYNEX providing cable service in the Northeast -- something we're
already doing overseas.
In this converging and competitive world marketplace, we intend to be the best
at helping people communicate whenever, wherever and however they choose. That's
what NYNEX is about. And that's why we will continue to grow our markets at home
and overseas. To forge strategic alliances and partnerships that build share
owner value. To transform our core business. To retrain and re-educate our work
force. To press aggressively for regulatory reforms and legislation that address
the dramatic changes under way in our industry. To sharpen our competitive edge
and our customer focus. We're ready, willing and able to expand our vision of
communications and multimedia -- a vision of customer delight and steady
earnings growth -- for this century and the next.
/s/ William C. Ferguson
WILLIAM C. FERGUSON
Chairman
/s/ Ivan Seidenberg
IVAN SEIDENBERG
President, Chief Executive Officer
and Chairman Designate
March 20, 1995
9
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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>
Report of Management
Management of NYNEX Corporation and its subsidiaries ("NYNEX") has the
responsibility for preparing the accompanying consolidated financial statements
and for their integrity and objectivity. The statements were prepared in
accordance with generally accepted accounting principles and, in Management's
opinion, are fairly presented. The consolidated financial statements include
amounts that are based on Management's best estimates and judgments. Management
also prepared the other information in this report and is responsible for its
accuracy and consistency with the consolidated financial statements.
The consolidated financial statements have been audited by Coopers & Lybrand
L.L.P. ("Coopers & Lybrand"), independent accountants, whose appointment was
ratified by NYNEX's stockholders. Management has made available to Coopers &
Lybrand all of NYNEX's financial records and related data, as well as the
minutes of stockholders' and directors' meetings. Furthermore, Management
believes that all representations made to Coopers & Lybrand during its audit
were valid and appropriate.
Management of NYNEX has established and maintains an internal control structure
that is designed to provide reasonable assurance as to the integrity and
reliability of the consolidated financial statements, the protection of assets
from unauthorized use or disposition, and the prevention and detection of
fraudulent financial reporting. The concept of reasonable assurance recognizes
that the cost of the internal control structure should not exceed the benefits
to be derived. The internal control structure provides for appropriate division
of responsibility and is documented by written policies and procedures that are
communicated to employees with significant roles in the financial reporting
process. Management monitors the internal control structure for compliance,
considers recommendations for improvement from both the internal auditors and
Coopers & Lybrand, and updates such policies and procedures as necessary.
Monitoring includes an internal auditing function to independently assess the
effectiveness of the internal controls and recommend possible improvements
thereto. Management believes that the internal control structure of NYNEX is
adequate to accomplish the objectives discussed herein.
The Audit Committee of the Board of Directors, which is comprised of directors
who are not employees, meets periodically with Management, the internal auditors
and Coopers & Lybrand to review the manner in which they are performing their
responsibilities and to discuss matters relating to auditing, internal controls
and financial reporting. Both the internal auditors and Coopers & Lybrand
periodically meet privately with the Audit Committee and have access to the
Audit Committee at any time.
Management also recognizes its responsibility for conducting NYNEX activities
under the highest standards of personal and corporate conduct. This
responsibility is accomplished by fostering a strong ethical climate as
characterized in NYNEX's Codes of Business Conduct, publicized throughout NYNEX.
These codes of conduct address, among other things, standards of personal
conduct, potential conflicts of interest, compliance with all domestic and
foreign laws, accountability for NYNEX property, and the confidentiality of
proprietary information.
/s/ Ivan Seidenberg
Ivan Seidenberg
President, Chief Executive Officer and
Chairman Designate
/s/ Peter M. Ciccone
Peter M. Ciccone
Vice President and Comptroller
29
<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>
NYNEX Corporate Officers
William C. Ferguson
Chairman
Ivan Seidenberg
President, Chief Executive Officer and Chairman Designate
Frederic V. Salerno
Vice Chairman
Finance and Business Development
Raymond F. Burke
Executive Vice President-Law and Secretary
Alan Z. Senter
Executive Vice President and Chief Financial Officer
Morrison DeS. Webb
Executive Vice President and General Counsel
Robert T. Anderson
Vice President
Business Development
President
NYNEX Network Systems Company
Jeffrey A. Bowden
Vice President
Strategy & Corporate Assurance
Peter M. Ciccone
Vice President and Comptroller
John M. Clarke
Vice President
Law
Saul Fisher
Vice President
Law
Patrick F.X. Mulhearn
Vice President
Public Relations
Donald J. Sacco
Vice President
Human Resources
Thomas J. Tauke
Vice President
Government Affairs
Colson P. Turner
Vice President and Treasurer
Officers of Principal Operating Groups
Richard A. Jalkut
President and Group Executive
NYNEX Telecommunications
Richard W. Blackburn
President and Group Executive
NYNEX Worldwide Services Group, Inc.
Donald B. Reed
President and Group Executive
NYNEX External Affairs and Corporate Communications
Arnold J. Eckelman
Executive Vice President and Group Executive
Network Services
Robert J. Thrasher
Executive Vice President and Chief Quality Officer
Joseph C. Farina
Vice President and Group Executive
Network Services
Mel Meskin
Vice President--Finance and Treasurer
NYNEX Telecommunications
NYNEX Asset Management Company
William F. Heitmann
President
NYNEX CableComms Limited
Eugene P. Connell
President and Chief Executive Officer
NYNEX Credit Company
Richard E. Lucey
President
NYNEX Entertainment & Information Services Company
Walter I. Rickard
Chairman
NYNEX Information Resources Company
Donald MacKenzie
Chairman
President-Telephone Pioneers of America
Matthew J. Stover
President and Chief Executive Officer
NYNEX Mobile Communications Company
Cynthia J. White
Executive Vice President and Chief Operating Officer
NYNEX Science & Technology, Inc.
Casimir S. Skrzypczak
President
NYNEX Trade Finance Company
Richard W. Frankenheimer
President
Share Owner Information
Corporate Headquarters:
NYNEX Corporation
1095 Ave. of the Americas
New York, NY 10036
(212) 395-2121
1995 Annual Meeting:
NYNEX will hold its annual meeting at the Westchester County Center in White
Plains, N.Y., on May 3, 1995, at 10:30 a.m.
Share Owner Services:
Inquiries on stock-related matters, including dividend payments, stock transfers
and the NYNEX Share Owner Dividend Reinvestment and Stock Purchase Plan, as well
as requests for Form 10-K reports for NYNEX and its telephone subsidiaries,
should be directed to NYNEX's transfer agent and registrar, The First National
Bank of Boston ("Bank of Boston"):
NYNEX Corporation
c/o Bank of Boston
P.O. Box 9175
Boston, MA 02205-9175
1 (800) 358-1133
From outside the continental United States, call collect on (617) 575-2407.
Hearing-impaired share owners with access to a Telecommunications Device for
the Deaf (TDD) may dial 1 (800) 368-0328 toll free for account information.
General Information:
If you have questions or comments regarding NYNEX, or would like to receive the
NYNEX "1994 Profile and Statistics," additional copies of the Annual Report or
the Annual Report on audiocassette, direct your requests to:
NYNEX Corporation
Share Owner Communications
19th Floor
1095 Ave. of the Americas
New York, NY 10036
Investor Relations:
Institutional investors, financial analysts and portfolio managers should direct
questions to:
Allen F. Pattee
Corporate Director
Investor Relations
NYNEX Corporation
1095 Ave. of the Americas
New York, NY 10036
(212) 730-6350
(continued on back cover)
<PAGE>
Share Owner Information
(continued from previous page)
Governmental Relations:
NYNEX Government Affairs
Suite 400 West
1300 I Street, N.W.
Washington, DC 20005
(202) 336-7900
Independent Accountants:
Coopers & Lybrand L.L.P.
1301 Ave. of the Americas
New York, NY 10019
Stock Exchange Listings:
Boston Stock Exchange
Chicago Stock Exchange
New York Stock Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange
Amsterdam Stock Exchange
Basel Stock Exchange
Geneva Stock Exchange
The International Stock Exchange, London
Zurich Stock Exchange
Ticker Symbol: NYN
NYNEX is fully committed to equal employment opportunity for all employees and
applicants for employment.
We have a duty to ensure that there is no unlawful discrimination in
recruitment, hiring, termination, promotions, salary treatment or any other
condition of employment or career development, and that there is no harassment
of any employee on the basis of race, color, religion, national origin, sex,
age, marital status, sexual preference or orientation, disability, or status as
a special disabled veteran or veteran of the Vietnam era.
NYNEX Board of Directors
John Brademas
Dr. Brademas is president emeritus of New York University. He has been
a NYNEX director since 1991 and serves on the Audit Committee and the Public
Responsibility Committee.
Randolph W. Bromery
Dr. Bromery is president of Springfield College and commonwealth professor
emeritus of the University of Massachusetts at Amherst, and president of
Geoscience Engineering Corporation. He has been a NYNEX director since 1986 and
serves on the Audit Committee, Executive Committee and Committee on Benefits.
Richard L. Carrion
Mr. Carrion is chairman and chief executive officer of BanPonce Corporation, and
president and chief executive officer of Banco Popular de Puerto Rico. He was
elected a NYNEX director in February 1995.
John J. Creedon
Mr. Creedon is a consultant, and retired president and chief executive officer
of Metropolitan Life Insurance Company. A NYNEX director since 1983, he is a
member of the Executive Committee and Committee on Benefits, and chairs the
Public Responsibility Committee.
William C. Ferguson
Mr. Ferguson is chairman of NYNEX. He has been a NYNEX director since 1987 and
chairs the Executive Committee.
Stanley P. Goldstein
Mr. Goldstein is chairman and chief executive officer of Melville Corporation.
He was elected to the NYNEX board in 1990 and serves on the Audit Committee and
the Finance Committee.
Helene L. Kaplan
Mrs. Kaplan is of counsel to Skadden, Arps, Slate, Meagher & Flom, a New York
City law firm. She was elected to the NYNEX board in 1990 and is a member of the
Committee on Benefits and the Public Responsibility Committee.
Elizabeth T. Kennan
Mrs. Kennan is president of Mount Holyoke College and has been a NYNEX director
since 1984. She serves on the Nominating and Board Affairs Committee and chairs
the Audit Committee.
Edward E. Phillips
Mr. Phillips is retired chairman of New England Mutual Life Insurance Company.
He has served on the NYNEX board since 1983 and is a member of the Executive
Committee and Finance Committee and chairs the Nominating and Board Affairs
Committee.
Frederic V. Salerno
Mr. Salerno is vice chairman -- Finance and Business Development of NYNEX. He
has been a NYNEX director since 1991 and serves on the Finance Committee.
Ivan Seidenberg
Mr. Seidenberg is president, chief executive officer and chairman designate of
NYNEX. He has been a NYNEX director since 1991 and is a member of the Public
Responsibility Committee.
Walter V. Shipley
Mr. Shipley is chairman and chief executive officer of Chemical Banking
Corporation. A NYNEX board member since 1983, he serves on the Executive
Committee and Nominating and Board Affairs Committee and chairs the Finance
Committee.
John R. Stafford
Mr. Stafford is chairman, president and chief executive officer of American Home
Products Corporation. He has been a NYNEX director since 1989, is a member of
the Finance Committee and chairs the Committee on Benefits.
Design: Belk Mignogna Associates
Executive Portraits: Margaret Fox
Printing: W.E. Andrews
(C)1995 NYNEX Corporation
All rights reserved
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