Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8608
NYNEX Corporation
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 13-3180909
1095 Avenue of the Americas, New York, New York 10036
Telephone Number (212) 395-2121
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
At July 31, 1995, 427,303,932 common shares were outstanding.
<PAGE>
Form 10-Q Part I PART I - FINANCIAL INFORMATION
<TABLE>
NYNEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions, except per share amounts) (Unaudited)
<CAPTION>
Three Months Six Months
For the Period Ended June 30, 1995 1994 1995 1994
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service $ 1,680.8 $1,658.5 $ 3,342.0 $3,288.4
Long distance 255.8 269.7 513.4 550.7
Network access 906.0 844.8 1,789.0 1,709.0
Other 653.0 538.6 1,205.4 1,036.8
Total operating revenues 3,495.6 3,311.6 6,849.8 6,584.9
OPERATING EXPENSES
Maintenance and support 762.9 744.8 1,509.8 1,514.1
Depreciation and amortization 650.3 663.9 1,312.7 1,315.9
Marketing and customer services 353.6 359.2 681.6 699.4
Taxes other than income 246.0 255.9 505.5 504.9
Selling, general and
administrative 857.8 953.1 1,429.7 1,438.5
Other 228.3 205.5 440.8 387.4
Total operating expenses 3,098.9 3,182.4 5,880.1 5,860.2
Operating income 396.7 129.2 969.7 724.7
Gain on sale of stock
by subsidiary (Note (j)) 264.1 - 264.1 -
Other income (expense) - net (30.1) 7.5 (47.1) (1.6)
Interest expense 191.4 162.1 383.0 321.7
Earnings (loss) before income taxes
and extraordinary item 439.3 (25.4) 803.7 401.4
Income taxes
Federal 119.3 (53.1) 210.9 60.3
State, local and other 79.2 26.5 101.8 49.3
Total income taxes 198.5 (26.6) 312.7 109.6
Earnings before extraordinary
item 240.8 1.2 491.0 291.8
Extraordinary item for the
discontinuance of regulatory
accounting principles,
net of taxes (Note (b)) (2,919.4) - (2,919.4) -
NET INCOME (LOSS) $(2,678.6) $ 1.2 $(2,428.4) $ 291.8
Earnings per share before
extraordinary item $ .56 $ .00 $ 1.15 $ .70
Extraordinary item per share (6.84) - (6.86) -
Earnings (loss) per share $ (6.28) $ .00 $ (5.71) $ .70
Weighted average number of shares
outstanding 426.4 418.9 425.3 417.2
Dividends declared per share $ .59 $ .59 $ 1.18 $ 1.18
Retained earnings (Accumulated deficit)
Beginning of period $ 2,231.6 $2,437.4 $2,208.2 $2,388.3
Net income (loss) (2,678.6) 1.2 (2,428.4) 291.8
Dividends declared * - (247.9) (251.0) (494.2)
Other (10.0) 9.8 14.2 14.6
End of period $ (457.0) $2,200.5 $ (457.0) $2,200.5
*The second quarter 1995 dividend was declared out of Additional
paid-in capital
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Form 10-Q Part I NYNEX CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In millions)
<CAPTION>
June 30, December 31,
1995 1994
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 134.5 $ 137.5
Receivables (net of allowance of $243.6
and $226.7, respectively) 2,616.8 2,532.5
Inventories 164.0 173.3
Prepaid expenses 425.5 361.2
Deferred charges and other current
assets 571.0 593.5
Total current assets 3,911.8 3,798.0
Property, plant and equipment- at cost 35,599.7 35,467.1
Less: accumulated depreciation (18,462.2) (14,843.7)
17,137.5 20,623.4
Deferred charges and other assets 4,505.5 5,646.6
Total Assets $25,554.8 $30,068.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,360.5 $ 2,668.2
Short-term debt 2,216.7 2,128.8
Other current liabilities 857.6 1,053.5
Total current liabilities 5,434.8 5,850.5
Long-term debt 7,785.7 7,784.5
Deferred income taxes 1,617.8 3,364.7
Unamortized investment tax credits 220.1 304.4
Other long-term liabilities and
deferred credits 4,682.3 4,182.5
Total liabilities 19,740.7 21,486.6
Commitments and contingencies [Notes (e, f and i)]
Stockholders' equity:
Preferred stock - $1 par value - -
shares authorized: 70,000,000
shares issued: None
Preferred stock -
Series A Junior Participating - -
- $1 par value
shares authorized: 5,000,000
shares issued: None
Common stock - $1 par value 442.9 439.7
shares authorized: 750,000,000
shares issued:
at June 30, 1995 - 442,968,372
at December 31, 1994 - 439,669,480
Additional paid-in capital * 6,815.2 6,942.0
Retained earnings (Accumulated deficit) (457.0) 2,208.2
Treasury stock (15,842,235 and 16,102,683
shares, respectively, at cost) (634.0) (644.3)
Deferred compensation - LESOP Trust (353.0) (364.2)
Total stockholders' equity 5,814.1 8,581.4
Total Liabilities and Stockholders'
Equity $25,554.8 $30,068.0
*The second quarter 1995 dividend was declared out of Additional
paid-in capital.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Form 10-Q Part I NYNEX CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
<CAPTION>
For the Six Months Ended June 30, 1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,428.4) $ 291.8
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary item, net of taxes 2,919.4 -
Depreciation and amortization 1,312.7 1,315.9
Amortization of unearned lease income-net (43.3) (43.6)
Gain on sale of stock by subsidiary (264.1) -
Changes in operating assets and liabilities:
Receivables (84.3) (2.7)
Inventories 9.3 18.7
Prepaid expenses (64.3) (72.3)
Deferred charges and other current assets 1.5 207.4
Accounts payable (309.8) (471.0)
Other current liabilities (25.9) (24.3)
Deferred income taxes and Unamortized
investment tax credits (187.1) (294.8)
Other long-term liabilities and
deferred credits 572.9 700.6
Other-net 35.3 (76.4)
Total adjustments 3,872.3 1,257.5
Net cash provided by operating activi ties 1,443.9 1,549.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,404.3) (1,376.3)
Investment in leased assets (118.8) (14.4)
Cash received from leasing activities 55.7 34.9
Other investing activities-net (343.2) 63.0
Net cash used in investing activities (1,810.6) (1,292.8)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of commercial paper and
short-term debt 7,361.6 10,421.7
Repayment of commercial paper and
short-term debt (7,235.8)(11,166.6)
Issuance of long-term debt 84.7 718.0
Repayment of long-term debt and capital leases(108.6) (80.2)
Issuance of common stock 67.1 142.4
Dividends paid (447.9) (438.6)
Minority interest 32.3 122.4
Proceeds from sale of stock by subsidiary, net 610.3 -
Net cash provided by (used in)
financing activities 363.7 (280.9)
Net decrease in Cash and temporary
cash investments (3.0) (24.4)
Cash and temporary cash investments at
beginning of period 137.5 157.8
Cash and temporary cash investments at
end of period $ 134.5 $ 133.4
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(a) BASIS OF PRESENTATION - The consolidated financial
statements have been prepared by NYNEX Corporation ("NYNEX")
pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC") and, in the opinion of
Management, include all adjustments necessary for a fair
presentation of the financial information for each period shown.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Management
believes that the disclosures made are adequate to make the
information presented not misleading. Certain information in the
consolidated financial statements for 1994 has been reclassified
to conform to the current year's presentation. The results for
interim periods are not necessarily indicative of the results for
the full year. These consolidated financial statements should be
read in conjunction with the consolidated financial statements
and notes thereto incorporated by reference in the NYNEX 1994
Annual Report on Form 10-K and the current year's previously
issued Quarterly Report on Form 10-Q. In the second quarter of
1995, NYNEX discontinued using generally accepted accounting
principles applicable to regulated entities for the operations of
New York Telephone Company and New England Telephone and
Telegraph Company (collectively, the "telephone subsidiaries")
(see Note (b)).
(b) DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES - In the
second quarter of 1995, NYNEX discontinued accounting for the
operations of the telephone subsidiaries in accordance with the
provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation"
("Statement No. 71"). As a result, NYNEX recorded an
extraordinary non-cash charge of $2.9 billion, or $6.84 per
share, net of income taxes of $1.6 billion.
The operations of the telephone subsidiaries no longer met the
criteria for application of Statement No. 71 due to a number of
factors including: significant changes in regulation, including
the achievement of price regulation rather than rate-of-return
regulation in New York, Massachusetts and Maine, representing a
significant portion of NYNEX's operations, and the ongoing
efforts to achieve price regulation in the remaining
jurisdictions, an intensifying level of competition, and the
increasingly rapid pace of technological change. Under Statement
No. 71, NYNEX had accounted for the effects of rate actions by
federal and state regulatory commissions by establishing certain
regulatory assets and liabilities, including the depreciation of
its telephone plant and equipment using asset lives approved by
regulators and the deferral of certain costs and obligations
based on approvals received from regulators. NYNEX had
continually assessed its position and the recoverability of its
telecommunications assets with respect to Statement No. 71.
As a result of the discontinuance of Statement No. 71, NYNEX has
implemented Statement of Financial Accounting Standards No. 101,
"Regulated Enterprises - Accounting for the Discontinuation of
Application of FASB Statement No. 71" ("Statement No. 101").
NYNEX has adjusted its telephone plant and equipment through an
increase in accumulated depreciation, to reflect the difference
between recorded depreciation and the amount of depreciation that
would have
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(b) DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES (CONT'D)
been recorded had NYNEX not been subject to rate regulation. As a
result of the increase in accumulated depreciation, gross plant
was written off where fully depreciated. Non-plant regulatory
assets and liabilities were eliminated from the balance sheet.
The after-tax extraordinary charge recorded consists of
$2.2 billion for the adjustment to telephone plant and equipment
and $0.7 billion for the write-off of non-plant regulatory assets
and liabilities.
The net adjustment to telephone plant and equipment was a
decrease of $3.6 billion ($2.2 billion after-tax). This decrease
was supported by a depreciation analysis, which identified
inadequate depreciation reserve levels which NYNEX believes
resulted principally from the cumulative under-depreciation of
telephone plant and equipment as a result of the regulatory
process. An impairment analysis was performed and did not
identify any additional amounts not recoverable from future
operations. Investment tax credits ("ITCs") are deferred and
amortized over the estimated service lives of the related
telephone plant and equipment. ITC amortization was accelerated
as a result of the reduction in asset lives of the associated
telephone plant and equipment.
<TABLE>
The major components of non-plant regulatory net assets which
were written off as a result of the discontinued application of
Statement No. 71 are as follows:
<CAPTION>
(In millions) Pretax After-tax
<S> <C> <C>
Compensated absences $ 173.2 $109.4
Deferred pension costs 381.1 239.5
Refinancing costs 255.6 166.5
Deferred taxes - 55.7
Other 130.8 85.6
Total $ 940.7 $656.7
</TABLE>
Upon the adoption of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," the effects of required
adjustments to deferred tax balances were deferred on the balance
sheet as regulatory assets and liabilities. These deferrals were
amortized during the period in which the related deferred taxes
were recognized in the ratemaking process. During the second
quarter of 1995, tax-related regulatory net assets of
$55.7 million were eliminated.
Upon adoption of Statement No. 101, NYNEX began using estimated
asset lives for certain categories of telephone plant and
equipment that are shorter than those approved by regulators.
The shorter asset lives result from NYNEX's
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(b) DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPLES (CONT'D)
expectations as to the revenue-producing lives of the assets. A
comparison of average asset lives before and after the discontinuance
of Statement No. 71, for the most significantly affected categories
of telephone plant and equipment, is as follows:
<TABLE>
<CAPTION>
Average lives (in years)
Composite
Regulator-Approved Economic
Asset Lives Asset Lives
<S> <C> <C>
Digital Switching 16.5 12.0
Circuit - Other 10.5 8.0
Aerial Metallic Cable 21.0 17.0
Underground Metallic
Cable 25.0 15.0
Buried Metallic Cable 24.0 17.0
Fiber 26.0 20.0
</TABLE>
As a result of the discontinued application of Statement No. 71,
regulatory accounting principles no longer apply to the
operations of the telephone subsidiaries for financial accounting
and reporting purposes. NYNEX no longer recognizes regulatory
assets and liabilities and the related amortization. The
application of Statement No. 101 does not change the telephone
subsidiaries' accounting and reporting for regulatory purposes.
(c) CASH AND TEMPORARY CASH INVESTMENTS - NYNEX's cash
management policy is to make funds available in banks when checks
are presented. At June 30, 1995, NYNEX had recorded in Accounts
payable checks outstanding but not yet presented for payment of
$105.5 million.
(d) ADOPTION OF FINANCIAL ACCOUNTING STANDARDS - Effective
January 1, 1995, NYNEX adopted Statement of Financial Accounting
Standards No. 116, "Accounting for Contributions Received and
Contributions Made" ("Statement No. 116"). The effect of
implementing Statement No. 116 on NYNEX's results of operations
and financial position was insignificant.
(e) REVENUES SUBJECT TO POSSIBLE REFUND - Several state and
federal regulatory matters, including affiliate transaction
issues in New York Telephone Company's ("New York Telephone")
1990 intrastate rate case ($164.5 million), may possibly require
the refund of a portion of the revenues collected in the current
and prior periods. As of June 30, 1995, the aggregate amount of
such revenues that was estimated to be subject to possible refund
was approximately $226.2 million, plus related interest. The
outcome of each pending matter, as well as the time frame within
which each will be resolved, is not presently determinable.
(f) LITIGATION AND OTHER CONTINGENCIES - It is probable that
local tax claims aggregating approximately $230 million in tax
and $170 million in associated interest will be asserted against
New York Telephone for the period 1984 through the second quarter
of 1995. The claims relate to the taxability of New York
Telephone's interstate and intrastate network access revenues.
The current status is that these matters have been identified as
possible audit adjustments by the taxing authority, and New York
Telephone is presenting its arguments against those adjustments.
While New York
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(f) LITIGATION AND OTHER CONTINGENCIES (CONT'D)
Telephone's counsel cannot give assurance as to the outcome,
counsel believes that New York Telephone has strong legal
positions in these matters.
Various other legal actions and regulatory proceedings are
pending that may affect NYNEX, including matters involving
Racketeer Influenced and Corrupt Organizations Act, antitrust,
tort, contract and tax deficiency claims.
While counsel cannot give assurance as to the outcome of any of
these matters, in the opinion of Management based upon the advice
of counsel, the ultimate resolution of these matters in future
periods is not expected to have a material effect on NYNEX's
financial position but could have a material effect on operating
results.
<TABLE>
(g) SUPPLEMENTAL INFORMATION - The following information is
provided in accordance with Statement of Financial Accounting
Standards No. 95, "Statement of Cash Flows":
<CAPTION>
For the Six Months Ended
June 30,
(In millions) 1995 1994
<S> <C> <C>
Income tax payments $234.7 $260.8
Interest payments $345.4 $281.8
Additions to property, plant and
equipment under capital lease obligations $ 0.1 $ 10.3
Common Stock issued for Dividend Reinvestment and
Stock Purchase Plan and stock compensation plans $ 57.1 $ 61.1
</TABLE>
(h) SEGMENT INFORMATION - The following tables set forth summary
financial information by business segment. Total intersegment
sales for the second quarter of 1995 and 1994 were $97.4 and
$98.7 million, respectively, and for the six months ended
June 30, 1995 and 1994 were $185.9 and $195.7 million,
respectively, principally in the telecommunications segment. The
financial services segment had total outstanding debt of $1,507.7
and $679.7 million at June 30, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
(In millions)
UNAFFILIATED REVENUES:
For the For the
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Telecommunications $2,974.9 $2,859.4 $5,858.3 $5,728.5
Cellular 210.5 177.8 399.8 318.1
Publishing 243.2 229.5 473.7 444.6
Financial services 24.2 22.8 45.7 50.6
Other diversified operations 42.8 22.1 72.3 43.1
Total Consolidated
Operating Revenues $3,495.6 $3,311.6 $6,849.8 $6,584.9
</TABLE>
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(h) SEGMENT INFORMATION (CONT'D)
<TABLE>
<CAPTION>
(In millions) For the For the
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
OPERATING INCOME:
Telecommunications $420.4 $145.3 $1,020.7 $757.7
Cellular 48.9 13.1 63.6 23.1
Publishing 17.7 25.7 30.5 41.0
Financial services 19.1 17.5 34.7 38.9
Other diversified operations (41.9) (32.8) (81.0) (53.0)
Total operating income by segment 464.2 168.8 1,068.5 807.7
Adjustments/Eliminations 0.4 0.4 0.3 (2.1)
Corporate expenses (67.9) (40.0) (99.1) (80.9)
Operating Income $396.7 $129.2 $ 969.7 $724.7
</TABLE>
Cellular operating income includes certain amounts that are
subsequently paid out to minority shareholders. Minority
interest expense for the cellular segment for the second quarter
of 1995 and 1994 was $18.6 and $12.5 million, respectively, and
for the six months ended June 30, 1995 and 1994 was $27.5 and
$26.1 million, respectively.
<TABLE>
<CAPTION>
June 30, June 30,
(In millions) 1995 1994
<S> <C> <C>
IDENTIFIABLE ASSETS:
Telecommunications $19,690.8 $24,750.5
Cellular 1,265.6 751.0
Publishing 587.5 550.0
Financial services 1,694.7 1,505.8
Other diversified operations 3,215.1 1,868.8
Total identifiable assets by segment 26,453.7 29,426.1
Adjustments/Eliminations (2,343.8) (1,429.4)
Investment in unconsolidated subsidiary 27.6 29.5
Corporate assets 1,417.3 1,401.6
Total Assets $25,554.8 $29,427.8
</TABLE>
(i) FINANCIAL COMMITMENTS AND GUARANTEES - As of June 30, 1995,
NYNEX, the managing sponsor of FLAG Limited ("FLAG"), held
approximately a 39% equity interest and a 41% funding obligation
in the venture which was created to construct a $1.5 billion
submarine cable system from the United Kingdom to Japan. Upon
finalizing the financing arrangements as of that date, NYNEX had
invested approximately $28 million in the venture. Under the
terms of the FLAG project documentation and the related financing
agreements, NYNEX's
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(i) FINANCIAL COMMITMENTS AND GUARANTEES (CONT'D)
obligation to furnish its pro rata share of funding would require
additional cash contributions of approximately $200 million to
FLAG. The contributions are anticipated to be complete by the
end of 1997.
A $950 million limited recourse debt facility will be made
available to the project by a number of major lending
institutions. Under the terms of the financing, the funding FLAG
shareholders have entered into contingent sponsor support
agreements which could require additional payments in an
aggregate amount of $500 million by such shareholders on a pro
rata basis upon the occurrence of certain limited events of
default. These events of default represent risks of a type that
equity shareholders typically are required to assume in
construction projects, and which, after due diligence, the FLAG
shareholders consider to be unlikely to occur. The maximum
contingent payment each funding shareholder may be required to
make may be reduced in the future on a pro rata basis based
primarily on the remaining amount of FLAG's outstanding debt
which, in turn, is dependent upon the level of sales.
NYNEX's allocable percentage of the contingent sponsor support
commitment is 51%, up to a maximum of $255 million. This
includes an additional 10% share that NYNEX assumed on behalf of
another shareholder in return for a fee. In addition, NYNEX has
backstopped, for a fee, the guarantee of the parent corporation
of a third shareholder of its contingent sponsor support
obligation in an amount not to exceed $95 million. This backstop
obligation would be triggered only upon a failure by such parent
corporation to fulfill the obligations under its primary
guarantee, if required to do so upon the default of its
subsidiary to make any payment under the aforementioned
contingent sponsor support agreement. This contingent obligation
of NYNEX is itself supported by a reimbursement agreement between
NYNEX and the shareholder and further supported by a direct
guarantee by that shareholder's parent corporation in favor of
NYNEX.
NYNEX also maintains a 33% equity interest in the Tele-TV
Partnerships (the "Partnerships") which were formed primarily to
develop and obtain a nationally-branded portfolio of programming
and other products and services for transmission over both
wireline and wireless networks. Bell Atlantic Corporation ("Bell
Atlantic") and Pacific Telesis Group are equal partners with
NYNEX in this venture. Prior to June 30, 1995, NYNEX had
invested cash totaling approximately $15 million into the
Partnerships. As of June 30, 1995, under the terms of the
Partnership agreements, NYNEX is obligated to make additional
cash contributions on a pro rata basis totaling approximately
$105 million. These infusions are anticipated to be complete by
the end of 1997.
As of June 30, 1995, New York Telephone had deferred $166 million
of revenues under the approved regulatory plan (see State Regulatory)
associated with commitments for fair competition, universal service,
service quality and infrastructure improvements, as well as for a
service penalty obligation. These revenues will be released as
commitments are met under the plan.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(j) SALE OF STOCK BY SUBSIDIARY - During February 1995, two
entities were formed: NYNEX CableComms Group PLC ("UK
CableComms"), a public limited liability company incorporated
under the laws of England and Wales, and NYNEX CableComms Inc.
("US CableComms"), a Delaware Corporation (known collectively as
"CableComms"). Both were wholly owned subsidiaries of NYNEX and
are separate and distinct legal entities. The sole assets of
UK CableComms and US CableComms are 90% and 10%, respectively, of
the outstanding stock of NYNEX CableComms Holdings, Inc. (UK
Holdings) which holds, through various subsidiaries and
partnerships, interests in cable television and
telecommunications franchises, assets and operations in the
United Kingdom. The shares of UK Holdings are held by
CableComms.
An initial public offering ("IPO") was completed in June 1995 of
305 million equity units of UK CableComms and US CableComms.
These units are traded as "stapled units" and are comprised of
one ordinary share of UK CableComms and one share of common stock
of US CableComms ("the Combined Offering"). Of the 305 million
units issued, 170,222,000 were issued as units at a price of 137
pence per unit in the United Kingdom, and 13,477,800 were issued
as American Depository Shares ("ADSs") at $21.81 per ADS in the
United States, each ADS comprising 10 units. The Combined
Offering represented 33% of the total units outstanding, with
NYNEX retaining the balance. Net proceeds from the offering were
approximately $610 million. CableComms will use the proceeds to
repay outstanding revolving loans under credit facilities, to
fund a portion of the cost of construction of its network, and
for operating cash flow and interest.
It is NYNEX's policy to recognize as income any gains or losses
related to the sale of stock by an investee. NYNEX recognized an
after-tax gain on the IPO of $155 million in the second quarter
of 1995, net of $109 million in deferred taxes, in recognition of
the net increase in the value of NYNEX's investment in
CableComms.
(k) SUBSEQUENT EVENTS - Effective July 1, 1995, NYNEX and Bell
Atlantic completed the combination of substantially all of their
domestic cellular properties by contributing them to a
partnership, Bell Atlantic NYNEX Mobile, to own and operate these
properties. The combination represents the consummation of the
transaction that was agreed to and announced in June 1994. Bell
Atlantic owns approximately 63 percent of Bell Atlantic NYNEX
Mobile and NYNEX owns approximately 37 percent. The partnership
is controlled jointly by NYNEX and Bell Atlantic.
NYNEX contributed certain cellular assets and liabilities of
NYNEX Mobile Communications Company, a wholly-owned subsidiary of
NYNEX, in exchange for an equity interest in Bell Atlantic NYNEX
Mobile. Subject to post-closing adjustments, on July 1, 1995,
NYNEX deconsolidated approximately $895 million of assets and
approximately $221 million of liabilities and recorded an equity
method investment in the partnership.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(k) SUBSEQUENT EVENTS (CONT'D)
As a condition to the completion of the combination, in July,
NYNEX sold certain of its cellular properties overlapping with
Bell Atlantic's cellular properties to SNET Cellular, Inc. and
recorded a pretax gain of approximately $70 million to be
included in Other income (expense) - net in the third quarter of
1995. This gain will be partially offset by costs associated
with establishing the partnership.
Subsequent to June 30, 1995, NYNEX purchased a 15 percent
interest and made an initial investment of approximately
$24.0 million in Bayan Telecommunications Holdings Corporation
("Bayan"), a newly formed holding company whose subsidiaries have
been awarded licenses by the National Telecommunications
Commission of the Philippines to provide telecommunications
services in certain regions of the Philippines. NYNEX has
committed to invest an additional $24.0 million in Bayan over the
next three years.
On August 1, 1995, the U.S. Court of Appeals for the District of
Columbia Circuit found that decisions of the Federal Communications
Commission ("FCC") had understated the amount of damages to be
paid by the telephone subsidiaries in connection with overearnings
complaints for the period 1987-1988 and by New York Telephone for the
period 1989-1990. The telephone subsidiaries intend to petition the
Court for rehearing.
It is probable, however, that as a result of the Court's decisions,
the telephone subsidiaries will be required to refund revenues plus
interest. For the period 1987-1988, the refund is approximately
$12.8 million. Taking into account prior accruals related to this
matter, the net effect of the Court's decision will be an additional
reduction of approximately $9.1 million in revenues. For 1989-1990,
the refund is approximately $9.7 million.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NYNEX reported a net loss for the three months and six months
ended June 30, 1995 of $2.7 billion, or $6.28 per share, and
$2.4 billion, or $5.71 per share, respectively. Net income for
the three months and six months ended June 30, 1994 was
$1.2 million, or $.00 per share, and $291.8 million, or $.70 per
share, respectively.
The net loss for the three months ended June 30, 1995 of
$2.7 billion, or $6.28 per share, includes an after-tax
extraordinary charge of $2.9 billion, or $6.84 per share, for the
discontinuance of Statement No. 71. Results also include an
after-tax gain of $155.1 million, or $.36 per share, as a result
of an IPO of NYNEX CableComms stock, and after-tax charges of
$261.3 million, or $.61 per share, for non-recurring charges and
for pension enhancements. Approximately 650 management and 500
nonmanagement employees elected to leave NYNEX under retirement
incentives during the quarter. Results for the three months
ended June 30, 1994 included an after-tax charge of
$291.5 million, or $.70 per share, for pension enhancements for
approximately 2,100 management and 1,900 nonmanagement employees
who elected to leave NYNEX during the second quarter of 1994.
Operating revenues increased $184.0 million, or 5.6%, over the
second quarter of 1994, primarily due to volume growth. NYNEX
experienced a 51% increase in cellular customers, a 3.2% growth
in access lines and a 9.0% increase in switched access usage over
the second quarter of last year. Telecommunications revenues
increased 4.0%, to $3.0 billion, due primarily to increased
customer demand. In addition, there was a $32.5 million net
increase from the release to New York Telephone of revenues
previously set aside pursuant to an order by the New York State
Public Service Commission ("NYSPSC") (see State Regulatory).
Operating expenses decreased $83.5 million, or 2.6%, from the
second quarter of 1994. Excluding pretax pension enhancement
charges of $165.9 million and $449.3 million in the second
quarters of 1995 and 1994, respectively, and certain non-
recurring charges of $199.0 million in the second quarter of
1995, operating expenses were virtually flat. Force reductions
and process re-engineering continued, offsetting the expense
increases from the growth in domestic and international
nontelephone businesses. The components of the pretax pension
enhancement charges are $113.1 million ($72.3 million after-tax)
for pension enhancements, and $52.8 million ($33.9 million after-
tax) for associated postretirement medical costs. The non-
recurring charges of approximately $199.0 million resulted from
accruals related to various self-insurance programs, legal and
regulatory contingencies, operating tax provisions and revised
benefit charges. These charges reflect events that occurred this
quarter and additional information made available through revised
estimates and analyses completed during the quarter.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operating income, excluding the pension enhancement charges and
non-recurring charges, increased $183.1 million, or 31.7%, and
operating margin for the second quarter improved 4.3 percentage
points to 21.79% from 17.47%. This improvement resulted from
essentially no growth in operating expenses, compared to the
increase in operating revenues of 5.6%.
SECOND QUARTER OF 1995 AS COMPARED TO SECOND QUARTER OF 1994
Operating revenues
Operating revenues for the quarter ended June 30, 1995 increased
$184.0 million, or 5.6%, over the same period last year. The
change in revenues consists of the following:
<TABLE>
<CAPTION>
(In millions)
For the Three Months Ended
June 30, June 30,
1995 1994
<S> <C> <C>
Local service $1,680.8 $1,658.5
Long distance 255.8 269.7
Network access 906.0 844.8
Other 653.0 538.6
Total Consolidated Operating Revenues $3,495.6 $3,311.6
</TABLE>
Local service revenues increased $22.3 million, or 1.3%,
primarily due to a net $41 million increase in demand driven by a
3.2% increase in access lines and sales of calling features.
This increase was partially offset by a $10 million decrease
attributable to potential customer billing claims at New York
Telephone, a $4 million decrease resulting from the deferral of
revenues in 1995 for subsequent refund to Vermont customers and a
$4 million decrease as required by an order of the Maine Public
Utilities Commission ("MPUC") (see State Regulatory).
Long distance revenues decreased $13.9 million, or 5.2%,
primarily due to decreased demand for message toll service,
private line and wide area telecommunications services as a
result of increased competition and customer shifts to lower
priced services offered by the telephone subsidiaries, and a
$5 million decrease in rates at New England Telephone.
Network access revenues increased $61.2 million, or 7.2%. There
were increases in demand for both switched and special access,
partially offset by a reduction in interstate rates. There was a
9.0% increase in switched access usage over the second quarter of
last year. Certain competitive losses in long distance revenues
are being mostly offset by increases in network access revenues,
primarily at New England Telephone.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other revenues increased $114.4 million, or 21.2%. Approximately
$32.5 million of revenues that would previously have been "set
aside" were recognized at New York Telephone in the second
quarter of 1995 as a result of an NYSPSC order approving a
proposed Regulatory Plan ("Plan"). New York Telephone had
deferred $38 million per quarter since the first quarter of 1994.
Approximately $166 million of revenues "set aside" ($122 million
in 1994, $38 million in the first quarter of 1995, and $6 million
in the second quarter of 1995) remain deferred and will be
released as New York Telephone's commitments are met under the
Plan. These "set aside" revenues are not expected to have a material
effect on earnings for the remainder of the year. If New York Telephone
is unable to meet certain of these commitments, the NYSPSC has stipulated
in its order that New York Telephone will be subject to financial penalties.
Future quarters will also reflect the cessation of setting aside revenues of
$38 million per quarter, partially offset by price decreases taking effect
on September 1, 1995. There was also a $4.5 million increase at New York
Telephone from revenues earned under a service improvement plan
implemented in 1994. An additional $27 million of revenues "set
aside" under the service improvement plan will continue to be
deferred. (See State Regulatory.) In addition, there was an
increase of $13 million due to the elimination of the deferral of
intrastate revenues as a result of the discontinuance of
regulatory accounting principles at New York Telephone (see Note
(b)).
Revenues in the cellular segment increased $32.7 million, as the
customer base for mobile telecommunications continued to expand.
NYNEX CableComms revenues increased $14.7 million due to
increases in the subscriber base and business line growth.
Revenues in the publishing segment increased $13.7 million due
primarily to increased Yellow Pages advertising revenues, driven
by increased prices, volume growth and the publication of
international directories.
Operating expenses
Operating expenses for the second quarter were $3.1 billion, a
decrease of $83.5 million, or 2.6%, from the second quarter of
1994. 1995 second quarter operating expenses included
$165.9 million for pension enhancements and $199.0 million in non-
recurring charges for accruals related to various self-insurance
programs, legal and regulatory contingencies, operating tax
provisions and revised benefit charges. These charges reflect
events that occurred this quarter and additional information made
available through revised estimates and analyses completed during
the quarter. 1994 second quarter operating expenses included
$449.3 million for pension enhancements. Excluding these pension
enhancements and non-recurring charges, consolidated operating
expenses were virtually flat. Excluding pension enhancements and
non-recurring charges, at the telephone subsidiaries and
Telesector Resources Group, Inc. (collectively, the
"telecommunications group") operating expenses decreased
$37.0 million, or 1.6%, and at NYNEX's subsidiaries other than
the telecommunications group operating expenses increased
$38.0 million, or 10.1%.
At the telecommunications group, operating expenses, excluding
pension enhancement charges in both periods, decreased
$134.1 million from the second
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
quarter of 1994. There was a $155.9 million increase in non-
employee costs primarily as a result of $141.0 million of non-
recurring charges for accruals related to various self-insurance
programs, regulatory contingencies and operating tax provisions.
These charges reflect events that occurred this quarter and
additional information made available through revised estimates
and analyses completed during the quarter. Employee costs,
consisting primarily of wages, payroll taxes, and employee
benefits, increased $12.1 million due principally to non-recurring
charges of $27.0 million related to revised charges for
postemployment benefits and a $3.0 million revised benefit
charge for non-qualified pension plans. These increases were
partially offset by the net effect of the reduction in the work
force and salary rate increases. The decrease in depreciation
and amortization included a $22.2 million decrease primarily due
to an adjustment of plant balances partially offset by the effect
of shorter asset lives as a result of the discontinuance of
regulatory accounting principles (see Note (b)). It is expected
that the smaller depreciable base partially offset by the use of
shorter lives will decrease depreciation expense in the remaining
quarters of 1995 and that depreciation expense will increase in
the future as new telephone plant is added. Taxes other than
income decreased $11.3 million primarily due to gross receipts
taxes and property taxes at New York Telephone.
At NYNEX's subsidiaries other than the telecommunications group,
excluding pension enhancement charges in both periods, operating
expenses increased $66.0 million over the second quarter of 1994.
This increase was due primarily to $28.0 million of non-recurring
accruals for certain legal contingencies and revised benefit
charges. There was also a $28.5 million increase in expenses due
to the expansion of international cable television and
telecommunications operations.
Gain on sale of stock by subsidiary
An IPO of the ordinary shares of UK CableComms and US CableComms
was completed in June 1995. The Combined Offering represented
33% of the total units outstanding, with NYNEX retaining the
balance. Net proceeds from the offering were approximately $610
million. NYNEX recognized a pretax gain of $264.1 million on the
IPO in recognition of the net increase in the value of NYNEX's
investment in CableComms (see Note (j)).
Other Income (Expense) - Net
Other income (expense) - net for the second quarter of 1995
decreased $37.6 million from the second quarter of 1994. The
decrease was principally due to a $17 million increase in
minority interest expense, $9 million of amortization of
transaction costs related to nontelephone subsidiary financing
and an $11 million one-time payment to NYNEX Mobile
Communications Company ("NYNEX Mobile") in June of 1994 from its
New York partners related to restructure of the New York
partnership.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest expense
Interest expense for the second quarter of 1995 increased
$29.3 million, or 18.1%, over the second quarter of 1994 due
primarily to higher average interest rates of 7.6% compared to
6.4% in the second quarter of 1994. The higher interest rates
are due to both higher short-term rates and a greater average mix
of long-term debt to total debt (77% compared to 68% in the
second quarter of 1994). While the debt mix changed, total debt
remained essentially flat.
Income taxes
Income taxes for the second quarter of 1995 increased
$225.1 million over the same period last year, reflecting higher
pretax income and a 6% increase in the effective tax rate. The
effective tax rate increased primarily due to a $30.0 million
provision for various tax issues recorded in the second quarter
of 1995 and a $21 million reduction in the deferred tax valuation
allowance in the second quarter of 1994 as a result of expected
future capital gains related to cellular partnership interests.
FIRST SIX MONTHS OF 1995 AS COMPARED TO FIRST SIX MONTHS OF 1994
Operating revenues
Operating revenues for the six months ended June 30, 1995
increased $264.9 million, or 4.0%, from the same period last
year. The change in revenues consists of the following:
<TABLE>
<CAPTION>
(In millions) For the Six Months Ended
June 30, June 30,
1995 1994
<S> <C> <C>
Local service $3,342.0 $3,288.4
Long distance 513.4 550.7
Network access 1,789.0 1,709.0
Other 1,205.4 1,036.8
Total Consolidated Operating Revenues $6,849.8 $6,584.9
Local service revenues increased $53.6 million, or 1.6%,
primarily due to a net $72 million increase in demand driven by a
3.2% increase in access lines and sales of calling features and
an $8 million increase in rates primarily attributable to the
Massachusetts rates restructuring. These increases were
partially offset by a $10 million decrease attributable to
potential customer billing claims at New York Telephone, an
$8 million decrease resulting from the deferral of revenues in
1995 for a subsequent refund to Vermont customers, a $5 million
decrease due to the 1994 reversal of deferred revenues that were
in excess of the required credit to customers pursuant to the
1993 Rhode Island price regulation trial and a $4 million
decrease as required by an order of the MPUC (see State
Regulatory).
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Long distance revenues decreased $37.3 million, or 6.8%,
primarily due to decreased demand for message toll service,
private line and wide area telecommunications services as a
result of increased competition and customer shifts to lower
priced services offered by the telephone subsidiaries, and a
$15 million decrease in rates primarily attributable to the
Massachusetts rates restructuring.
Network access revenues increased $80.0 million, or 4.7%. There
were increases in demand for both switched and special access,
partially offset by a reduction in interstate rates. There was a
7.4% increase in switched access usage over the same period last
year. Certain competitive losses in long distance revenues are
being mostly offset by increases in network access revenues,
primarily at New England Telephone.
Other revenues increased $168.6 million, or 16.3%. There was an
$81.7 million increase in revenues in the cellular segment, as
the customer base for mobile telecommunications continued to
expand. NYNEX CableComms revenues increased $29.7 million due to
increases in the subscriber base and business line growth.
Approximately $32.5 million of revenues that would previously
have been "set aside" were recognized at New York Telephone in
the second quarter of 1995 as a result of an NYSPSC order
approving the Plan. New York Telephone had deferred $38 million
per quarter since the first quarter of 1994. Approximately
$166 million of revenues "set aside" ($122 million in 1994,
$38 million in the first quarter of 1995, and $6 million in the
second quarter of 1995) remain deferred and will be released as
New York Telephone's commitments are met under the Plan. These
"set aside" revenues are not expected to have a material effect
on earnings for the remainder of the year. If New York Telephone
is unable to meet certain of these commitments, the NYSPSC has
stipulated in its order that New York Telephone will be subject to
financial penalties. Future quarters will also reflect the
cessation of setting aside revenues of $38 million per quarter,
partially offset by price decreases taking effect on September 1, 1995.
There was also a $4.5 million increase at New York Telephone from
revenues earned under a service improvement plan implemented in 1994. An
additional $27 million of revenues "set aside" under the service
improvement plan will continue to be deferred. (See State
Regulatory.) In addition, there was an increase of $13 million
due to the elimination of the deferral of intrastate revenues as
a result of the discontinuance of regulatory accounting
principles at New York Telephone (see Note (b)).
Operating expenses
Operating expenses for the first six months of 1995 were
$5.9 billion, an increase of $19.9 million, or 0.3%, over the
first six months of 1994. 1995 operating expenses included
$249.7 million for pension enhancements and $199.0 million in non-
recurring charges for accruals related to various self-insurance
programs, legal and regulatory contingencies, operating tax
provisions and revised benefit charges. These charges reflect
events that occurred this quarter and additional information made
available through revised estimates and analyses completed during
the quarter. 1994 operating
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
expenses included $449.3 million for pension enhancements.
Excluding these pension enhancements and non-recurring charges,
consolidated operating expenses increased $20.6 million. Excluding pension
enhancements and non-recurring charges, at the telecommunications
group operating expenses decreased $83.4 million, or 1.8%, and at
NYNEX's subsidiaries other than the telecommunications group
operating expenses increased $104.0 million, or 14.7%.
At the telecommunications group, operating expenses, excluding
pension enhancement charges in both periods, increased $87.6
million over the first six months of 1994. There was a
$133.6 million increase in non-employee costs primarily as a
result of $141.0 million of non-recurring charges for accruals
related to various self-insurance programs, regulatory
contingencies and operating tax provisions. These charges
reflect events that occurred this quarter and additional
information made available through revised estimates and analyses
completed during the quarter. Employee costs, consisting
primarily of wages, payroll taxes, and employee benefits,
decreased $21.0 million due principally to a reduction in the
work force, partially offset by salary rate increases, a
$27.0 million increase related to revised charges for
postemployment benefits and a $3.0 million revised benefit charge
for non-qualified pension plans. The decrease in depreciation
and amortization included a $22.2 million decrease primarily due
to an adjustment of plant balances partially offset by the effect
of shorter asset lives as a result of the discontinuance of
regulatory accounting principles (see Note (b)). It is expected
that the smaller depreciable base partially offset by the use of
shorter lives will decrease depreciation expense in the remaining
quarters of 1995 and that depreciation expense will increase in
the future as new telephone plant is added. Taxes other than
income decreased $2.0 million primarily due to gross
receipts taxes at New York Telephone.
At NYNEX's subsidiaries other than the telecommunications group,
excluding pension enhancement charges in both periods, operating
expenses increased $131.9 million, over the first six
months of 1994. This increase was due primarily to a
$55.5 million increase in expenses due to the expansion of
international cable television and telecommunications operations
and to $28.0 million of non-recurring accruals for certain legal
contingencies and revised benefit charges. In addition, there
was a $39.2 million increase in cellular expenses as a result of
continued growth in the customer base, an increase in bad debt
and fraud costs, and increased depreciation and amortization due
to the expansion of cellular operations.
Gain on sale of stock by subsidiary
An IPO of the ordinary shares of UK CableComms and US CableComms
was completed in June 1995. The Combined Offering represented
33% of the total units outstanding, with NYNEX retaining the
balance. Net proceeds of the offering were approximately $610 million.
NYNEX recognized a pretax gain of $264.1 million on the IPO in
recognition of the net increase in the value of NYNEX's
investment in CableComms (see Note (j)).
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other Income (Expense) - Net
Other income (expense) - net for the first six months of 1995 had
a negative impact of $45.5 million from the first six months of
1994, principally due to a $22 million increase in minority
interest expense, $9 million of amortization of transaction costs
related to nontelephone subsidiary financing, and an $11 million
one-time payment in June of 1994 to NYNEX Mobile from its New
York partners related to restructure of the New York partnership.
Interest expense
Interest expense for the first six months of 1995 increased
$61.3 million, or 19.1%, over the first six months of 1994 due
primarily to higher average interest rates of 7.6% compared to 6.3% in
1994. The higher interest rates are due to both higher short-
term rates and a greater average mix of long-term debt to total
debt (77% compared to 66% in 1994). While the debt mix changed,
total debt remained essentially flat.
Income taxes
Income taxes for the first six months of 1995 increased
$203.1 million over the same period last year, reflecting higher
pretax income and a 4% increase in the effective tax rate. The
effective tax rate increased primarily due to a $30.0 million
provision for various tax issues recorded in the second quarter
of 1995 and a $33 million reduction in the deferred tax valuation
allowance in the first six months of 1994 as a result of capital
losses generated by the exit from the information products and
services business and expected future capital gains related to
cellular partnership interests.
Extraordinary item
The discontinued application of Statement No. 71 required NYNEX,
for financial accounting purposes, to adjust telephone plant and
equipment and to eliminate non-plant regulatory assets and
liabilities from the balance sheet. This change resulted in an
after-tax charge of $2.9 billion, consisting of $2.2 billion to
adjust the carrying amount of telephone plant and equipment and
$0.7 billion to write off non-plant regulatory assets and
liabilities. As a result of the discontinuance of regulatory
accounting principles, NYNEX utilized shorter asset lives for
certain categories of telephone plant and equipment than those
approved by regulators. It is expected that the smaller
depreciable base, partially offset by the use of shorter lives,
will decrease depreciation expense in the remaining quarters of
1995. It is expected that depreciation expense will increase in
the future as new telephone plant is added. The elimination of
the amortization of net regulatory assets and the effects of
certain changes in accounting policies are not expected to have a
significant impact on financial results in future periods. (See
Note (b) for additional information on the discontinuance of
regulatory accounting principles.)
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CURRENT STATUS OF BUSINESS RESTRUCTURING
Reserve Utilization in 1995
The restructuring reserve balance at June 30, 1995, which does
not include the liability recorded at year-end for postretirement
medical benefits associated with employees' leaving NYNEX under
the business restructuring, was approximately $600 million. In
the first six months of 1995, NYNEX utilized 1993 restructuring
reserves of $183 million in the following categories:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Severance:
Management $45
Nonmanagement 7
Total severance $ 52
Process Re-engineering:
Systems redesign:
Customer contact 30
Customer provisioning 21
Customer operations 16
Customer support 17
Total systems redesign $84
Work center consolidation 4
Branding 2
Relocation -
Training 2
Re-engineering implementation 24
Total process re-engineering 116
Sale/discontinuance of information
products and services businesses 15
Nontelephone subsidiaries' restructuring -
Total $183
</TABLE>
Cost Savings
During the six months of 1995, NYNEX experienced a reduction in
wages of approximately $180 million as a result of employees'
leaving under retirement incentives.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Force Reduction Plans
When business restructuring charges were recorded in 1993, NYNEX
anticipated that 16,800 positions (4,200 management and 12,600
nonmanagement) would be eliminated through process re-engineering
initiatives. In the first quarter of 1994, NYNEX announced the
offering of pension enhancements and anticipated that the planned
work force reductions as a result of re-engineering could be
achieved through the offering of pension enhancements. At the
present time, NYNEX expects to achieve a targeted reduction
between approximately 17,000 and 18,000 positions through process
re-engineering; it appears that the management reductions will be
higher than originally planned due to single enterprise
management staff reduction efforts and nonmanagement reductions
will be less due to volume of business growth. NYNEX also
expects the targeted number of employees who will elect to take
the pension enhancements to approximate the number of position
reductions through process re-engineering, but expects that the
number of management employees electing will be higher and
nonmanagement will be lower than originally anticipated. Based
on employee acceptance of pension enhancements to date, NYNEX is
reassessing the assumptions used in calculating the estimated
additional charges to be recorded but at present still
anticipates the additional charges to be in the range of the
previously-announced estimate of approximately $1.3 billion.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS
Operating activities: Net cash provided by operating activities
was $1,443.9 and $1,549.3 million at June 30, 1995 and 1994,
respectively, a decrease of $105.4 million from the first six
months of 1994. 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
$73 and $37 million were expended in the first six months of 1995
and 1994, respectively. Pension enhancement charges in the first
six months of 1995 and 1994 did not materially affect operating
cash flows because increased cash outflows due to the pension
enhancement charges are being incurred primarily by the NYNEX
Pension Plans. In addition, there was an increase in Receivables
due to the timing of billing and collections at the telephone
subsidiaries.
Investing activities: Net cash used in investing activities was
$1,810.6 and $1,292.8 million at June 30, 1995 and 1994,
respectively, an increase of $517.8 million over the first six
months of 1994. Cash used in other investing activities
increased $406.2 million primarily due to an increase in NYNEX's
investments in 1995, including $254 million in PCS Primeco (see
LIQUIDITY below) and additional investments in cellular
properties and FLAG, and the effect of cash received in 1994 from
the exit from the information products and services business. In
addition, investment in leased assets increased $104.4 million
over 1994 due almost entirely to new leveraged leases at NYNEX
Credit Company. Capital expenditures increased $28.0 million due
to continued construction of the cable/telecommunications network
in the
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
United Kingdom and the addition of mobile cell sites, partially
offset by a decrease in capital expenditures at the
telecommunications group.
Financing activities: Net cash provided by (used in) financing
activities was $363.7 and ($280.9) million at June 30, 1995 and
1994, respectively, an increase of $644.6 million over the first
six months of 1994. NYNEX received $610 million of proceeds as a
result of the IPO of NYNEX CableComms' equity (see Note (j)).
In the first six months of 1995, net cash used in investing
activities of $1,810.6 million exceeded net cash provided by
operating activities of $1,443.9 million by $366.7 million. This
difference was funded primarily by the IPO proceeds, commercial
paper, and equity. Commercial paper levels increased due to
additional borrowings to fund operations and equity investments,
partially offset by repayments made using a portion of the
proceeds from the IPO. Equity increased approximately
$124.2 million in the first six months of 1995 as NYNEX issued
new shares of common stock for employee savings plans, the
Dividend Reinvestment and Stock Purchase Plan ("DRISPP"), and
stock compensation plans. Dividends paid in 1995 were
$447.9 million. Financing cash flows in the first six months of
1995 included net funds of $48.3 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.
Liquidity
At June 30, 1995, NYNEX had $950 million of unissued, unsecured
debt and equity securities registered with the SEC. The proceeds
from the sale of securities would be used to provide funds to
NYNEX and/or NYNEX's nontelephone subsidiaries for their general
corporate purposes.
At June 30, 1995, NYNEX Capital Funding Company had $637 million
of unissued medium-term debt securities registered with the SEC.
When issued, these securities will be guaranteed by NYNEX. The
proceeds from the sale of these securities would be used to
provide financing for NYNEX and/or NYNEX's nontelephone
subsidiaries.
At June 30, 1995, New England Telephone and New York Telephone
had $500 and $250 million, respectively, of unissued, unsecured
debt securities registered with the SEC. Pursuant to the
indentures for certain of its debentures, New York Telephone has
covenanted that it will not issue additional funded debt
securities ranking equally with or prior to such debentures
unless it has maintained an earnings coverage of 1.75 for
interest charges, excluding the effect of any extraordinary
items, for a period of any 12 consecutive months out of the 15
month period prior to the date of the proposed issuance. As a
result of the 1993 business restructuring charges and the 1994
pension enhancements, New York Telephone did not meet the
earnings coverage requirement at June 30, 1994. At June 30,
1995, New York Telephone meets the requirement.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NYNEX, Bell Atlantic, AirTouch Communications Inc. and U S WEST
Inc. have formed a venture to provide national wireless
communications services. The venture is comprised of two
partnerships, one of which, PCS Primeco, participated in the FCC
auction of personal communications services ("PCS")
licenses and bid a total of approximately $1.1 billion for
licenses in eleven cities, of which NYNEX's portion was
approximately $267 million. The bid was paid upon grant of the
licenses and final review of bidder qualifications by the FCC in
June of 1995. NYNEX's portion of the bid was funded through the
issuance of commercial paper.
REGULATORY AND OTHER MATTERS
State Regulatory
New York: On August 1, 1995, the NYSPSC approved the Plan, as
modified by the NYSPSC in an order dated June 16, 1995, that will
change the manner in which New York Telephone is regulated by the
NYSPSC over the next five to seven years. The Plan is a
performance-based plan that will replace rate of return
regulation with a form of price regulation and incentives to
improve service. There will be no restriction on New York
Telephone's earnings. 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, and will reduce average prices of toll and
intraLATA carrier access services. During its term, the Plan
will allow certain prices to be adjusted to take into account an
inflation index in excess of four percent annually and costs
associated with government mandates and other defined "exogenous"
events. 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 an aggregate reduction
of $1.1 billion or $1.9 billion, respectively, in revenues based
on current volumes of business.
The NYSPSC's modifications to the Plan include: (a) more
stringent rebate provisions and some minor changes in service
quality targets; (b) greater reductions in New York Telephone's
average prices for intraLATA carrier access services in years
three through five of the Plan; (c) an accelerated schedule for
the provision of intraLATA presubscription; (d) an opportunity
for New York Telephone to earn the remaining $26.5 million of the
$31 million in revenues "set aside" in 1994 and based on a
service improvement plan; and (e) a change to the effective date
of the Plan from January 1, 1995 to September 1, 1995.
Revenues previously "set aside" were released to New York
Telephone in exchange for the extensive commitments New York
Telephone accepts under the Plan, which relate to fair
competition, universal service, service quality and
infrastructure improvements. After accounting for the effects of
those commitments as well as New York Telephone's 1994 service
penalty obligation, $32.5 million in such revenues was recognized
in the second quarter of 1995. As commitments are met,
additional revenues previously "set aside" will be released (see
Other revenues).
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Maine: On May 15, 1995, the MPUC issued Orders in its
investigation of alternatives to traditional rate of return
regulation for New England Telephone and in a related earnings
investigation. The MPUC adopted a price cap plan for a five-year
term, with the provision for a five-year extension after review
by the MPUC. There will be no restriction on New England
Telephone's earnings. Overall average prices and specific rate
elements for most services will be limited by a price cap formula
of inflation
minus a productivity factor plus or minus certain exogenous cost
changes. The productivity factor adopted by the MPUC is more
stringent than that recommended by New England Telephone.
New England Telephone is to make its first annual price cap
filing on December 1, 1996. The MPUC also established
a service quality index with penalties to apply if service
quality categories are missed. Penalties would take the form of
customer rebates and are subject to annual limits of $1 million
per service quality category and $10 million overall.
In the related earnings investigation, the MPUC ordered that
New England Telephone's revenues be reduced by $14.4 million
annually. The MPUC stated that New England Telephone may use up
to $4 million of the reduction "to reduce rates and/or provide
additional services or equipment to libraries and schools." The
MPUC also ordered a one-time customer credit of $2.8 million.
New England Telephone filed tariffs on June 1, 1995 to implement
the customer credit and $10.4 million of the overall reduction.
On July 31, 1995, New England Telephone filed its proposal with
respect to providing up to $4 million to Maine libraries and
schools.
Massachusetts: On May 12, 1995, the Massachusetts Department of
Public Utilities ("MDPU") issued an order approving with some
modifications the Alternative Regulatory Plan
proposed by New England Telephone to govern its Massachusetts
intrastate operations. The principal components are as follows:
(1)New England Telephone will be regulated under a price
framework through August 2001.
(2)Pricing rules will limit New England Telephone's ability to
increase both overall average prices and specific rate
elements for most services, 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 that affect New England Telephone's
annual revenues by at least $3 million. The productivity
factor adopted by the MDPU is more stringent than that
recommended by New England Telephone.
The MPDU also established a quality of service index and tied
New England Telephone's inability to achieve service quality
standards to the level of the productivity factor. New
England Telephone's inability to meet the performance levels
in any given month will result in an increase in the
productivity offset by one-twelfth of one percent for
purposes of the annual price cap filing.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(3)There will be no restriction on New England Telephone's
earnings.
(4)Certain residence exchange rates will be capped through
August 2001.
(5)There will be an increase of $2.50 monthly in the credit on
exchange services for Lifeline customers.
(6)There will be rate reductions for switched access services.
The MDPU found, without judging the reasonableness of the
investments, that New England Telephone could proceed with its
investment commitments for the public telecommunications network,
including commencing the deployment of a broadband network in
Massachusetts.
On July 3, 1995, New England Telephone submitted its initial
price cap filing in compliance with the MDPU's Order. Rates
proposed in that filing, which result in an annual reduction of
approximately $32.8 million, will become effective on September
15, 1995, pending MDPU approval. Rate changes in the compliance
filing relate to switched access services, residence optional
calling plans, business local usage, and conduit attachment fees.
An additional reduction of $5.3 million is associated with New
England Telephone's monthly increase of $2.50 in the Lifeline
Service credit that took effect on June 11, 1995, as directed by
the MDPU's Order.
The MDPU's decision has been appealed to the Supreme Judicial
Court of Massachusetts by AT&T Communications of New England, MCI
Telecommunications Corporation and New England Cable Television
Association. The Court has granted New England Telephone's
motion to intervene in each of the proceedings.
On July 6, 1995, hearings commenced in the MDPU's investigation
concerning intraLATA and local exchange competition in
Massachusetts.
New Hampshire: On June 30, 1995, the New Hampshire Public
Utilities Commission approved New England Telephone's proposed
toll rate reduction targeted at small and medium volume usage
customers, effective July 31, 1995. The annual revenue effect of
the toll rate reduction is estimated to be approximately $6.8
million.
Rhode Island: On June 27, 1995, the Rhode Island Public Utilities
Commission issued an initial order in the competition proceeding,
expressing an overall policy favoring local competition,
asserting jurisdiction over potential local competitors and
requiring seamless interconnection of networks. A schedule for
further proceedings has not yet been finalized.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Vermont: On May 17, 1995, the Vermont Public Service Board
("VPSB") approved, with minor modifications, New England
Telephone's rate design proposal and refund methodology for the
VPSB's previously ordered $15 million reduction in
rates, which is retroactive to December 29, 1993. The new rates
took effect on July 15, 1995. New England Telephone began
issuing refunds to customers in July 1995. Total refunds will
equal approximately $23 million, including interest.
As previously reported (see NYNEX's Quarterly Report on Form 10-Q
for the period ended March 31, 1995), New England Telephone has
appealed portions of the VPSB's order on the rate reduction and
in the companion price regulation case to the Vermont Supreme
Court. On June 9, 1995, the Court, on New England Telephone's
motion, remanded two issues to the VPSB for further
consideration.
The schedule for briefing and argument before the Court has been
suspended pending the VPSB's ruling on those issues.
On July 21, 1995, the VPSB began hearings in its proceeding on
competition. Hearings in Phase I of the estimated three-year
proceeding will address public policy issues and rules involving
unbundling, cost study methodologies and the definition of
universal service. A decision in Phase I is expected by the end
of 1995.
Federal Regulatory
Price caps
The telephone subsidiaries filed tariffs in May 1995 to implement
the fifth annual update to the price cap rates, including the
adjustments ordered by the FCC on March 30, 1995, in its interim
changes to the price cap rules for local exchange carriers. The
tariffs, which became effective on August 1, 1995, will reduce the
telephone subsidiaries' interstate access rates by approximately
$75.1 million for the tariff period ending June 30, 1996.
Other Federal Regulatory Matters
The fifth annual update to the price cap rates included tariff
revisions to recover approximately $21 million of exogenous
costs resulting from the implementation of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". Collection of
these revenues is subject to possible refund pending resolution
of the FCC's Common Carrier Bureau investigation (see NYNEX's
Annual Report on Form 10-K for the year ended December 31,
1994).
New York Telephone implemented the Universal Service Preservation
Plan ("USPP") rate structure, approved by the FCC on May 4,
1995, in tariff filings that became effective on August 1, 1995.
It is anticipated that the initial rate changes made pursuant to
the USPP will not reduce overall access revenues.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On July 14, 1995, New York Telephone concluded its trial of video
dialtone service in New York City. The trial had commenced in
January 1994.
Other Matters
Effective July 1, 1995, NYNEX and Bell Atlantic completed the
combination of substantially all of their domestic cellular
properties in a joint venture partnership ("Bell Atlantic NYNEX
Mobile"). As of July 1, 1995, NYNEX has deconsolidated NYNEX
Mobile, a wholly-owned subsidiary of NYNEX, and accounts for its
investment under the equity method. (See Note (k) for additional
information.)
<PAGE>
Form 10-Q Part II
NYNEX CORPORATION
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
<TABLE>
The Annual Meeting of Share Owners of NYNEX Corporation
("NYNEX") was held on May 3, 1995. The Following
Directors were elected to the Board by the indicated
votes:
<CAPTION>
For % * Withheld % *
<S> <C> <C> <C> <C>
R. L. Carrion 346,800,580 97.5 9,075,477 2.5
S. P. Goldstein 347,694,176 97.7 8,181,881 2.3
E. E. Phillips 347,013,640 97.5 8,862,417 2.5
W. V. Shipley 347,762,468 97.7 8,113,589 2.3
* % of shares voted
</TABLE>
<TABLE>
The following Directors had terms of office as Directors
continuing after the date of the Annual Meeting:
<CAPTION>
<S> <C>
J. Brademas E.T. Kennan
R.W. Bromery F.V. Salerno
W.C. Ferguson I.G. Seidenberg
H.L. Kaplan J.R. Stafford
</TABLE>
<TABLE>
The appointment of the firm of Coopers & Lybrand as
independent auditors was ratified by the indicated
votes:
<CAPTION>
% of Shares Voted
<S> <C> <C>
For: 349,022,083 shares 98.1%
Against: 4,360,855 shares 1.2%
Abstain: 2,493,119 shares 0.7%
</TABLE>
<TABLE>
1995 Amendments to Stock Option Plans were
ratified by the indicated votes:
<CAPTION>
% of Shares Voted
<S> <C> <C>
For: 288,089,048 shares 81.0%
Against: 60,819,114 shares 17.1%
Abstain: 6,967,266 shares 1.9%
</TABLE>
<PAGE>
Form 10-Q Part II
NYNEX CORPORATION
PART II - OTHER INFORMATION
<TABLE>
The NYNEX 1995 Executive Officer Short Term Incentive Plan was
ratified by the indicated votes:
<CAPTION>
% of Shares Voted
<S> <C> <C>
For: 301,134,450 shares 84.6%
Against: 47,572,042 shares 13.4%
Abstain: 7,168,936 shares 2.0%
</TABLE>
In addition, the following matters were submitted to a
vote of Share Owners and the votes tabulated as
indicated:
Share Owner Proposals
<TABLE>
1. To require the repeal of Board Classification
<CAPTION>
% of Shares Voted
<S> <C> <C>
For: 120,217,178 shares 37.3%
Against: 194,557,710 shares 60.3%
Abstain: 7,918,085 shares 2.4%
Non-Vote: 33,183,084 shares
</TABLE>
<TABLE>
2. To require a listing of corporate contributions in the Annual
Report
<CAPTION>
% of Shares Voted
<S> <C> <C>
For: 35,845,357 shares 11.1%
Against: 277,548,239 shares 86.0%
Abstain: 9,299,376 shares 2.9%
Non-Vote: 33,183,085 shares
</TABLE>
<PAGE>
Form 10-Q Part II
NYNEX CORPORATION
PART II - OTHER INFORMATION
<TABLE>
3. To require that the number of director nominees be increased
<CAPTION>
% of Shares Voted
<S> <C> <C>
For: 25,106,371 shares 7.9%
Against: 286,963,951 shares 88.9%
Abstain: 10,622,650 shares 3.2%
Non-Vote: 33,183,085 shares
</TABLE>
<TABLE>
<CAPTION>
4. To require the elimination of director pensions
% of Shares Voted
<S> <C> <C>
For: 85,312,936 shares 26.4%
Against: 228,400,429 shares 70.8%
Abstain: 8,979,607 shares 2.8%
Non-Vote: 33,183,085 shares
</TABLE>
ITEM 5. Other Information
Operations Under the Modification of Final Judgment ("MFJ")
On April 28, 1995, the United States District Court for
the District of Columbia ("MFJ Court") issued a decision
granting the regional holding companies' ("RHCs") joint
motion for a waiver of the MFJ permitting the RHCs to
provide interLATA wireless telecommunications services.
The MFJ Court attached a number of restrictions and
conditions that limit the extent and manner in which the
RHCs may provide such services. NYNEX, through Bell
Atlantic NYNEX Mobile, is proceeding to comply with the
requirements of the decision in order that it may begin
to provide the services authorized, while at the same
time it has sought clarification of the decision from
the MFJ Court and has appealed the decision to the
United States Court of Appeals for the District of
Columbia Circuit.
<PAGE>
Form 10-Q Part II
NYNEX CORPORATION
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number
(27) Financial Data Schedule
(b) Reports on Form 8-K.
NYNEX's Current Report on Form 8-K, date of report
May 12, 1995 and filed May 24, 1995, reporting on Item 5.
NYNEX's Current Report on Form 8-K, date of report June
1, 1995 and filed June 8, 1995, reporting on Item 5.
<PAGE>
Form 10-Q
NYNEX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NYNEX CORPORATION
P. M. Ciccone
P. M. Ciccone
Vice President and Comptroller
(Principal Accounting Officer)
August 8, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000732714
<NAME> NYNEX CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 135
<SECURITIES> 0
<RECEIVABLES> 2,617
<ALLOWANCES> 244
<INVENTORY> 164
<CURRENT-ASSETS> 3,912
<PP&E> 35,600
<DEPRECIATION> 18,462
<TOTAL-ASSETS> 25,555
<CURRENT-LIABILITIES> 5,435
<BONDS> 7,786
<COMMON> 443
0
0
<OTHER-SE> 5,371
<TOTAL-LIABILITY-AND-EQUITY> 25,555
<SALES> 0
<TOTAL-REVENUES> 6,850
<CGS> 0
<TOTAL-COSTS> 5,880
<OTHER-EXPENSES> 47
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 383
<INCOME-PRETAX> 804
<INCOME-TAX> 313
<INCOME-CONTINUING> 491
<DISCONTINUED> 0
<EXTRAORDINARY> (2,919)
<CHANGES> 0
<NET-INCOME> (2,428)
<EPS-PRIMARY> (5.71)
<EPS-DILUTED> (5.71)
</TABLE>
