Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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 April 30, 1996, 436,779,492 common shares were outstanding.
<PAGE>
Form 10-Q Part I Part I - FINANCIAL INFORMATION
------------------------------
NYNEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions, except per share amounts) (Unaudited)
For the Three Months Ended March 31, 1996 1995
- ---------------------------------------------------------------------------
OPERATING REVENUES
Local services $1,669.0 $1,661.2
Long distance 274.5 257.6
Network access 863.7 883.0
Other 446.8 552.4
-------- --------
Total operating revenues 3,254.0 3,354.2
-------- --------
OPERATING EXPENSES
Maintenance and support 807.9 746.9
Depreciation and amortization 640.3 662.4
Marketing and customer services 343.4 328.0
Taxes other than income 214.1 259.5
Selling, general and administrative 649.8 571.9
Other 161.0 212.5
-------- --------
Total operating expenses 2,816.5 2,781.2
-------- --------
Operating income 437.5 573.0
Other income (expense) - net 21.5 (25.4)
Interest expense 165.1 191.6
Income (loss) from long-term investments 36.4 8.4
-------- -------
Earnings before income taxes and cumulative
effect of change in accounting principle 330.3 364.4
Income taxes
Federal 94.7 91.6
State, local and other 21.8 22.6
-------- --------
Total income taxes 116.5 114.2
-------- --------
Earnings before cumulative effect
of change in accounting principle 213.8 250.2
Cumulative effect of change in
accounting for directory publishing
income, net of taxes (Note(b)) 131.0 -
-------- ------
NET INCOME $ 344.8 $ 250.2
-------- --------
Earnings per share before cumulative
effect of change in accounting
principle $ .49 $ .59
-------- --------
Cumulative effect, per share,
of change in accounting
principle $ .30 $ -
-------- --------
Earnings per share $ .79 $ .59
-------- --------
Weighted average number of
shares outstanding 434.5 424.7
-------- --------
Dividends declared per share $ .59 $ .59
-------- --------
Retained earnings
Beginning of period $ -- $2,208.2
Net income 344.8 250.2
Dividends declared (255.7) (251.0)
Other (17.3) 24.2
-------- --------
End of period $ 71.8 $2,231.6
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions) (Unaudited)
March 31, December 31,
1996 1995
ASSETS
Current assets:
Cash and temporary cash investments $ 101.4 $ 93.2
Receivables (net of allowance of $243.6
and $221.6, respectively) 2,868.5 2,636.2
Inventories 141.6 141.3
Prepaid expenses 316.7 360.2
Deferred charges and other current assets 335.3 450.2
--------- ---------
Total current assets 3,763.5 3,681.1
--------- ---------
Property, plant and equipment - at cost 36,161.5 35,734.6
Less: accumulated depreciation (19,222.6) (18,679.3)
--------- ---------
16,938.9 17,055.3
--------- ---------
Long-term investments 3,353.0 3,286.2
Deferred charges and other assets 1,979.8 1,873.3
--------- ---------
Total Assets $ 26,035.2 $ 25,895.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,660.7 $ 2,902.2
Short-term debt 447.2 506.6
Other current liabilities 448.3 577.4
--------- ---------
Total current liabilities 3,556.2 3,986.2
--------- ---------
Long-term debt 9,094.8 9,336.9
Deferred income taxes 1,349.1 1,332.4
Unamortized investment tax credits 191.1 198.8
Other long-term liabilities and
deferred credits 3,960.0 3,885.0
Minority interest, including
a portion subject to redemption
requirements (Note (d)) 1,573.2 1,077.4
Commitments and contingencies
(Notes (c), (f) and (g))
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 450.5 447.2
shares authorized: 750,000,000
shares issued:
at March 31, 1996 - 450,526,815
at December 31, 1995 - 447,174,181
Additional paid-in capital * 6,717.9 6,566.9
Retained earnings 71.8 -
Treasury stock (14,760,318 and
14,756,356 shares,
respectively, at cost) (591.3) (591.1)
Deferred compensation - LESOP Trust (338.1) (343.8)
--------- ---------
Total stockholders' equity 6,310.8 6,079.2
--------- ---------
Total Liabilities and Stockholders' Equity $26,035.2 $25,895.9
========= =========
* The second and third quarter 1995 dividends were declared out of Additional
paid-in capital.
See accompanying notes to consolidated financial statements.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
For the Three Months Ended March 31, 1996 1995
- -------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 344.8 $ 250.2
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 640.3 662.4
Amortization of unearned lease income-net (22.6) (20.3)
Deferred income taxes - net (36.2) (41.5)
Deferred tax credits - net (12.8) (10.5)
Changes in operating assets and liabilities:
Receivables (232.4) 6.2
Inventories (0.2) (15.0)
Prepaid expenses 43.4 (99.8)
Deferred charges and other current assets 115.0 107.0
Accounts payable (233.8) (215.8)
Other current liabilities (129.1) (132.7)
Other-net 178.7 154.4
-------- --------
Total adjustments 310.3 394.4
-------- --------
Net cash provided by operating activities 655.1 644.6
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (633.1) (686.1)
Investment in leased assets (23.3) (16.5)
Cash received from leasing activities 27.8 37.3
Other investing activities-net (70.3) (65.1)
-------- --------
Net cash used in investing activities (698.9) (730.4)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of commercial paper and short-term debt 5,801.2 3,238.4
Repayment of commercial paper and short-term debt (6,042.9) (2,986.3)
Repayment of long-term debt and capital leases (64.7) (43.5)
Issuance of common stock 111.9 28.8
Dividends paid (238.6) (223.3)
Minority interest 485.1 48.3
-------- --------
Net cash provided by financing activities 52.0 62.4
-------- --------
Net increase (decrease) in Cash and temporary
cash investments 8.2 (23.4)
Cash and temporary cash investments at
beginning of period 93.2 137.5
-------- --------
Cash and temporary cash investments at
end of period $ 101.4 $ 114.1
======== ========
See accompanying notes to consolidated financial statements.
<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 1995 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
NYNEX's 1995 Annual Report on Form 10-K.
(b) CHANGE IN ACCOUNTING PRINCIPLE - Effective January 1, 1996, NYNEX
Information Resources Company ("Information Resources"), a wholly owned
subsidiary of NYNEX, changed the recognition of its directory publishing revenue
and production expenses from the "amortized" method to the "point of
publication" method. Under the point of publication method, revenues and product
expenses will be recognized when the directories are published rather than over
the lives of the directories (generally one year) as was the case under the
amortized method. NYNEX believes the change to the point of publication method
is preferable because it is the method that is generally followed by publishing
companies and reflects more precisely the operations of the business. The
initial effect of the change to the point of publication method is reported as a
cumulative effect of a change in accounting principle which resulted in a
one-time, non-cash gain of $131.0 million, or $.30 per share, in the first
quarter of 1996. The impact of applying the point of publication method during
the first quarter of 1996 resulted in a $3.6 million, or $.01 per share,
decrease to net income.
Pro forma results, assuming the point of publication method had been applied
during the first quarter of 1995, are as follows:
Three Months Ended
March 31, 1995
Pro forma As Reported
Net Income (In millions) $247.7 $250.2
Earnings Per Share $ .58 $ .59
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(c) FINANCIAL COMMITMENTS AND GUARANTEES - As of March 31, 1996, New York
Telephone Company ("New York Telephone"), a wholly-owned subsidiary of NYNEX,
had deferred $168 million of revenues ($141 million under a New York State
Public Service Commission ("NYSPSC") approved regulatory plan associated with
commitments for fair competition, universal service, service quality and
infrastructure improvements, and $27 million for a service improvement plan
obligation). These deferred revenues will be recognized as commitments are met
or obligations are satisfied under the plans. If New York Telephone is unable to
meet certain of these commitments, the NYSPSC has the authority to require New
York Telephone to refund these revenues to the customers. During the first
quarter of 1996, $20 million was recognized in connection with intraLATA
presubscription ("ILP") commitments that were met in 1996.
(d) MINORITY INTEREST - Consistent with the terms and conditions of the December
1995 transaction, during March 1996, NYNEX monetized its investment in Viacom
Inc. ("Viacom") Series B Cumulative Preferred Stock by an additional $500
million. As a result, NYNEX has monetized a total of $600 million which
represents approximately 50% of NYNEX's investment in Viacom. The additional
$500 million of proceeds from this transaction were used to further reduce
outstanding commercial paper. The additional proceeds received by Kipling
Associates L.L.C. (a 50% owned and controlled NYNEX subsidiary) from Mandalay
Investors L.L.C. (a third-party owned and controlled entity) are reflected in
"Minority Interest, including a portion subject to redemption requirements."
(e) SUPPLEMENTAL CASH FLOW INFORMATION - The following information is provided
in accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows":
For the Three Months Ended
March 31,
(In millions) 1996 1995
---- ----
Income tax payments - net $ 23.0 $ 25.7
Interest payments $ 174.3 $162.0
Non-cash transactions:
Common Stock issued for Dividend
Reinvestment and Stock Purchase
Plan and stock compensation
plans $ 31.2 $ 30.6
Commercial paper borrowings classified
as Long-term debt $1,697.8 -
(f) REVENUES SUBJECT TO POSSIBLE REFUND - Several state and federal regulatory
matters may possibly require New York Telephone and New England Telephone and
Telegraph Company ("New England Telephone") (collectively, the "telephone
subsidiaries") to refund a portion of the revenues collected in the current and
prior periods. As of March 31, 1996, the aggregate amount of such revenues that
was estimated to be subject to possible refund was approximately $274.6 million,
plus related interest, of which approximately $200.0 million is attributable to
affiliate transaction issues in New York Telephone's
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1990 intrastate rate case. The outcome of each pending matter, as well as the
time frame within which each will be resolved, is not presently determinable.
(g) LITIGATION AND OTHER CONTINGENCIES - Various legal actions and regulatory
proceedings are pending that may affect NYNEX. 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.
(h) SUBSEQUENT EVENT - On April 22, 1996, NYNEX and Bell Atlantic Corporation
("Bell Atlantic") announced a proposed merger of equals pursuant to a definitive
merger agreement dated April 21, 1996 that provides for the formation of a new
company to be named Bell Atlantic Corporation. Under the terms of the agreement,
NYNEX shareholders will receive one share in the new company for each NYNEX
share owned and Bell Atlantic shareholders will receive 1.302 shares in the new
company for each Bell Atlantic share owned. The merger, which is expected to
qualify as a pooling of interests for accounting purposes, is subject to a
number of conditions, including regulatory approvals, receipt of opinions that
the merger will be tax free, and the approval of the shareholders of both NYNEX
and Bell Atlantic. The transaction is expected to close within twelve months.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER OF 1996 AS COMPARED TO FIRST QUARTER 1995
Net income
Net income for the first quarter of 1996 was $344.8 million, or $.79 per share.
Net income for the first quarter of 1995 was $250.2 million, or $.59 per share.
Net income for the first quarter of 1996 includes a gain of $131.0 million, or
$.30 per share, for the cumulative effect of a change in accounting for
directory publishing income (see Note (b)) and a gain of $45.8 million, or $.11
per share, from the sale of NYNEX's interest in Vanstar Corporation ("Vanstar").
Net income for the first quarter of 1996 also includes charges of $193.5
million, or $.45 per share, for certain special charges related to various
self-insurance programs, legal, regulatory and other obligations and
contingencies, and for pension enhancements. Net income for the first quarter of
1995 included a charge of $53.8 million, or $.13 per share, for pension
enhancements.
Excluding the above items, net income for the first quarter of 1996 would have
been $361.5 million, or $.83 per share, an improvement of $57.5 million, or
18.9% over adjusted net income for the first quarter of 1995.
Operating revenues
Operating revenues for the first quarter of 1996 were $3.3 billion, a decrease
of $100.2 million, or 3.0%, from the first quarter of 1995.
Included in operating revenues for the first quarter of 1996 were special
charges of $55.0 million related to customer claims and a $14.0 million refund
ordered by the NYSPSC pertaining to intrastate gross receipts tax collected by
New York Telephone on behalf of interexchange carriers. Included in operating
revenues for the first quarter of 1995 were revenues of NYNEX Mobile
Communications Company ("NYNEX Mobile"), which was deconsolidated as a result of
the Bell Atlantic NYNEX Mobile ("BANM") cellular partnership formed on July 1,
1995, amounting to $189.3 million. Also included in operating revenues for the
first quarter of 1995 were $16.8 million ($3.5 million intrastate and $13.3
million interstate) of revenues from interexchange carriers associated with
gross receipts tax collected on behalf of the taxing authority. (New York
Telephone is no longer required to collect gross receipts tax from interexchange
carriers and to remit to the taxing authority.)
Excluding the items discussed above, operating revenues would have improved
$174.9 million, or 5.6%, over adjusted operating revenues for the first quarter
of 1995. Revenues from New York Telephone, New England Telephone and Telesector
Resources Group, Inc. (collectively, the "telecommunications
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
group") would have improved by 5.1% to $3.0 billion. Revenues from NYNEX's other
subsidiaries (the "nontelephone subsidiaries") would have improved 9.7% to
$308.9 million.
The adjusted operating revenue improvement of $174.9 million, or 5.6%, includes
the following categories:
Local service revenues improved $25.3 million, or 1.5%. The $25.3 million
improvement results primarily from the net of (i) a $52 million increase
primarily resulting from increased demand, driven by growth in access lines and
sales of calling features and (ii) $26 million in price and required rate
reductions in New York and Massachusetts.
Long distance revenues improved $16.9 million, or 6.6%. The $16.9 million
improvement results primarily from the net of (i) increased demand for message
toll service and (ii) price and required rate reductions in Maine, New York and
Massachusetts, and decreased demand for private line and wide area
telecommunications services as a result of customer shifts to lower priced
services offered by the telephone subsidiaries and increased competition.
Certain decreases in long distance revenues, resulting from competition, are
being partially offset by increases in network access revenues.
Network access revenues improved $49.0 million, or 5.6%. The $49.0 million
improvement results primarily from the net of (i) a $63 million increase in
interstate demand and an $18 million increase in intrastate demand, and (ii) a
$27 million reduction in interstate and intrastate rates.
Other revenues improved $83.7 million, or 23.1%. The $83.7 million improvement
results primarily from the net of (i) a $38 million increase due to the
cessation of "setting aside" revenues at New York Telephone as a result of an
NYSPSC order approving a performance-based regulatory plan (the "Plan")
effective second quarter of 1995, $20 million of revenue recognized in
connection with ILP commitments that were met in 1996 and a $23 million
improvement in NYNEX CableComms revenues due to significant increases in cable
television customers and in residence and business telecommunications lines and
(ii) a $17 million decrease due to an accrual for anticipated service
obligations under a service improvement plan (see State Regulatory).
Operating expenses
Operating expenses for the first quarter of 1996 were $2.8 billion, an increase
of $35.3 million, or 1.3%, over the first quarter of 1995.
Included in operating expenses for the first quarter of 1996 were pension
enhancement charges of $107.8 million, a $14.0 million intrastate gross receipts
tax refund (see Operating revenues above) and special charges of $110.0 million
related to various self-insurance programs and legal and regulatory
contingencies. Included in operating expenses for the first quarter of 1995 were
pension enhancement charges of $83.8 million, $16.8
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
million of gross receipts tax collected and remitted to the taxing authority
(see Operating revenues above) and NYNEX Mobile expenses amounting to $174.6
million.
Excluding the items discussed above, operating expenses would have increased
$106.7 million, or 4.3%, over adjusted operating expenses for the first quarter
of 1995. Telecommunications group operating expenses would have increased $58.1
million, or 2.5% and the nontelephone subsidiaries' operating expenses would
have increased $48.6 million, or 22.0%.
At the telecommunications group, the $58.1 million adjusted increase results
primarily from a $33 million increase in employee related costs resulting from
higher salaries and wages partially offset by work force reductions and lower
benefit costs and a $7 million increase in advertising and marketing costs. At
the nontelephone subsidiaries, the $48.6 million adjusted increase results
primarily from an increase in NYNEX CableComms expenses due to significant
increases in cable television customers and in residence and business
telecommunications lines.
The components of the pension enhancement charges for first quarter of 1996 and
1995 are as follows:
For the Three Months Ended
March 31,
(In millions) 1996* 1995*
------------------ -----------------
Pretax After-Tax Pretax After-Tax
Pension enhancement charges $ 87.4 $54.1 $71.6 $45.9
Postretirement medical costs 20.4 12.4 12.2 7.9
------ ----- ----- -----
$107.8 $66.5 $83.8 $53.8
====== ===== ===== =====
* 1996 - 380 management and 580 nonmanagement employees
1995 - 500 management and 400 nonmanagement employees
Operating income
Operating income for the first quarter of 1996 was $437.5 million, a decrease of
$135.5 million, or 23.6%, from the first quarter of 1995.
Operating income, after adjusting for the items discussed above in Operating
revenues and Operating expenses, would have been $710.3 million, an improvement
of $68.2 million, or 10.6%, over adjusted operating income for the first quarter
of 1995. Operating margin for the first quarter of 1996 would have improved 1.0
percentage point to 21.4% from 20.4% adjusted. This improvement resulted from
improved productivity as adjusted expense growth of 4.3% was outpaced by
adjusted revenue growth of 5.6%.
<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 first quarter of 1996 improved $46.9 million
over the first quarter of 1995. The $46.9 million improvement results primarily
from a $66 million gain on the sale of NYNEX's interest in Vanstar and a $10
million unrealized "mark to market" adjustment partially offset by $31 million
of costs associated with the formation of the BANM cellular partnership and a $9
million reclassification of capitalized interest to Interest expense associated
with the discontinuance of regulatory accounting principles (Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation").
Interest expense
Interest expense for the first quarter of 1996 decreased $26.5 million, or
13.8%, from the first quarter of 1995, primarily due to the aforementioned
reclassification of capitalized interest from Other income (expense) - net and a
decrease resulting from interest charges on the revenues "set aside" as required
by the NYSPSC in 1995. In addition, total debt decreased from $10.1 billion at
the end of the first quarter of 1995 to $9.5 billion at the end of the first
quarter 1996; however, average interest rates remained essentially flat at 6.9%.
Income (loss) from long-term investments
Income (loss) from long-term investments for the first quarter of 1996 improved
$28.0 million over first quarter of 1995. The $28.0 million improvement results
primarily from the net of (i) equity income from the BANM cellular partnership
and (ii) losses from investments in the Tele-TV Partnerships and PrimeCo
Personal Communications, L.P. ("PrimeCo").
Income taxes
Income taxes for the first quarter of 1996 increased $2.3 million, or 2.0%, over
the first quarter of 1995 primarily attributable to a four percentage point
increase in the effective tax rate for the first quarter of 1996 over the first
quarter of 1995 primarily resulting from $19 million of research tax credits
recorded in the first quarter of 1995.
Cumulative effect of change in accounting principle
Effective January 1, 1996, Information Resources, a wholly owned subsidiary of
NYNEX, changed the recognition of its directory publishing revenue and
production expenses from the "amortized" method to the "point of publication"
method. Under the point of publication method, revenues and product expenses
will be recognized when the directories are published rather than over the lives
of the directories (generally one year) as was the case under the amortized
method. NYNEX believes the change to the point of publication method is
preferable because it is the method that is generally followed by publishing
companies and reflects more precisely the operations of the
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
business. The initial effect of the change to the point of publication method is
reported as a cumulative effect of a change in accounting principle which
resulted in a one-time, non-cash gain of $131.0 million, or $.30 per share, in
the first quarter of 1996. The impact of applying the point of publication
method during the first quarter of 1996 resulted in a $3.6 million, or $.01 per
share, decrease to net income.
The pro forma amounts, assuming the point of publication method had been applied
during the first quarter of 1995, are as follows:
Three Months Ended
March 31, 1995
Pro forma As Reported
Net Income (In millions) $247.7 $250.2
Earnings Per Share $ .58 $ .59
While the application of the point of publication method is not expected to have
a material impact on total 1996 and pro forma 1995 results, the impact of the
change is likely to materially effect the quarterly results due to the nature of
the change.
SUBSEQUENT EVENT
On April 22, 1996, NYNEX and Bell Atlantic announced a proposed merger of equals
pursuant to a definitive merger agreement dated April 21, 1996 that provides for
the formation of a new company to be named Bell Atlantic Corporation. Under the
terms of the agreement, NYNEX shareholders will receive one share in the new
company for each NYNEX share owned and Bell Atlantic shareholders will receive
1.302 shares in the new company for each Bell Atlantic share owned. The merger,
which is expected to qualify as a pooling of interests for accounting purposes,
is subject to a number of conditions, including regulatory approvals, receipt of
opinions that the merger will be tax free, and the approval of the shareholders
of both NYNEX and Bell Atlantic. The transaction is expected to close within
twelve months.
It is expected that the new combined company will recognize recurring expense
savings of approximately $600 million annually by the third year following the
closing as a result of consolidating operating systems and other administrative
functions and reducing work force levels. Of these savings, $300 million is
expected to be achieved in the first year following the completion of the merger
with an additional $150 million in each of the two succeeding years. Transition
and integration charges of approximately $500 million are anticipated in the
first year following the completion of the merger. An additional $200 to $400
million in charges are anticipated over the two succeeding years. Annual capital
expenditures for the new combined company should reflect approximately $250 to
$300 million of incremental purchasing efficiencies.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information contained above with respect to the expected financial impact of the
proposed merger is forward-looking. These statements represent NYNEX's and Bell
Atlantic's reasonable judgment with respect to future events and are subject to
risks and uncertainties that could cause actual results to differ materially.
Such factors include: materially adverse changes in economic conditions in the
markets served by NYNEX and Bell Atlantic; substantial delay in the expected
closing of the merger; and a significant change in the timing of when NYNEX and
Bell Atlantic expect to be permitted to offer long distance services within
their regions.
CURRENT STATUS OF BUSINESS RESTRUCTURING
Reserve Utilization in 1996
The restructuring reserve balance at March 31, 1996, which does not include the
liability for postretirement medical benefits associated with employees' leaving
NYNEX under the business restructuring, was approximately $283.4 million.
Summarized below are the components of $96 million of reserves utilized during
the first quarter of 1996:
(In millions)
Severance $ 26
Process Re-engineering:
Systems redesign:
Customer contact $13
Customer provisioning -
Customer operations 14
Customer support 2
---
Total systems redesign $ 29
Work center consolidation 1
Branding -
Relocation -
Training 2
Re-engineering implementation -
---
Total process re-engineering 32
Sale/discontinuance of information
products and services businesses 5
Nontelephone subsidiaries' restructuring 33
----
Total $ 96
====
Cost Savings
Since the inception of process re-engineering and the special pension
enhancement program in 1994, approximately 13,000 employees have accepted the
retirement incentives. On an annualized basis, this will equate to an average
reduction in wages and benefits of approximately $700 million. A portion of
these cost savings will be offset by the effects of wage and price inflation,
growth in volume of business and higher costs attributable to service
improvements.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows
Operating activities: Net cash provided by operating activities was $655.1 and
$644.6 million for the first quarter of 1996 and 1995, respectively, an increase
of $10.5 million. There was a $94.6 million improvement in net income and a
$22.1 million decrease in depreciation and amortization primarily due to the
deconsolidation of NYNEX Mobile. Changes in operating assets and liabilities
used $437.1 million of cash flows in the first quarter of 1996, primarily as a
result of increased accounts receivable and decreased trade payables. Costs
associated with re-engineering activities reserved for in 1993 resulted in cash
outlays of $20 million and $34 million in the first quarter of 1996 and 1995,
respectively. Pension enhancement charges in the first quarter of 1996 and 1995
did not materially affect operating cash flows because the cash outflows will be
incurred primarily by the NYNEX Pension Plans in future years.
Investing activities: Net cash used in investing activities was $698.9 million
and $730.4 million for the first quarter of 1996 and 1995, respectively, a
decrease of $31.5 million.
Capital expenditures were $633.1 million in the first quarter of 1996, a
decrease of $53.0 million, from the first quarter of 1995, primarily due to the
deconsolidation of NYNEX Mobile and decreased purchases of computer equipment at
Telesector Resources Group, Inc. The largest component of capital expenditures
continues to be for the telecommunications group. These capital expenditures are
funded through cash generated from operations. Buildout of the cable
television/telecommunications network in the United Kingdom continued.
Other investing activities: In the first quarter of 1996, net cash flows from
other investing activities were $5.2 million higher than the first quarter of
1995. During the first quarter of 1996, cash inflow resulted from the sale of
NYNEX's interest in Vanstar which was offset by additional investments in
PrimeCo, the Tele-TV Partnerships, FLAG Limited, P.T. Excelcomindo Pratama, and
an initial investment in Infoseek.
Financing activities: Net cash provided by financing activities was $52.0
million and $62.4 million for the first quarter of 1996 and 1995, respectively,
a decrease of $10.4 million. Total debt decreased $301.5 million from December
31, 1995. As a result, the debt ratio decreased to 60.1% as of March 31, 1996,
compared with 61.8% as of December 31, 1995. The proceeds from the monetization
of a portion of NYNEX's investment in Viacom Preferred Stock (see Note (d)) were
used to reduce commercial paper. On April 1, 1996, $55 million of New York
Telephone's 3.375%, Series I Refunding Mortgage Bonds matured. Proceeds
necessary to repay these borrowings were raised through the issuance of
commercial paper.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Issuance of common stock: During the first quarter of 1996 NYNEX continued to
issue common stock for employee savings plans, the Dividend Reinvestment and
Stock Purchase Plan ("DRISPP"), stock compensation plans and employee stock
option plans resulting in an increase in equity of approximately $143 million.
The noncash issuance of stock, primarily for dividends in connection with
DRISPP, was $31 million. The dividends for common stock remained unchanged at
$.59 per share in the first quarter of 1996.
Minority interest: Financing cash flows in the first quarter of 1996 included
net funds of $485.1 million primarily provided by the Viacom monetization
proceeds (see below).
Liquidity
Viacom: Consistent with the terms and conditions of the December 1995
transaction, during March 1996, NYNEX monetized its investment in Viacom Series
B Cumulative Preferred Stock by an additional $500 million. As a result, NYNEX
has monetized a total of $600 million which represents approximately 50% of
NYNEX's investment in Viacom. The additional $500 million of proceeds from this
transaction were used to further reduce outstanding commercial paper. The
additional proceeds received by Kipling Associates L.L.C. (a 50% owned and
controlled NYNEX subsidiary) from Mandalay Investors L.L.C. (a third-party owned
and controlled entity) are reflected in "Minority Interest, including a portion
subject to redemption requirements."
At March 31, 1996, 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 for general corporate purposes. At March
31, 1996, NYNEX Capital Funding Company ("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 March 31, 1996, New England Telephone and New York Telephone
had $500 and $250 million, respectively, of unissued, unsecured debt securities
registered with the SEC.
Following the announcement of the definitive merger agreement between NYNEX and
Bell Atlantic, the credit rating agencies reaffirmed the current ratings of
NYNEX (including NYNEX Credit Company and CFC), New York Telephone and New
England Telephone and, in certain cases, negative outlooks were changed to
credit watch positive. Management believes that the bond ratings are indicative
of strong credit support for timely principal and interest payments in the
foreseeable future.
$1.7 billion of outstanding commercial paper borrowings was classified as
Long-term debt at March 31, 1996 under the unsecured revolving credit facility
entered into on November 10, 1995 with Chemical Bank as the administrative
agent. With this facility, NYNEX has the ability (and intent) to refinance the
commercial paper borrowings on a long-term basis.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REGULATORY ENVIRONMENT
State Regulatory
New York
Competition II Proceeding: In response to an NYSPSC request for comments, in
April 1996, Sprint Corporation ("Sprint") filed comments objecting to New York
Telephone's implementation of ILP and seeking the imposition of sanctions or
penalties on New York Telephone. New York Telephone has submitted a response
opposing Sprint's contentions.
In December 1995, MCI Telecommunications Corporation ("MCI") commenced a
proceeding in the New York Supreme Court challenging the NYSPSC's reciprocal
compensation scheme for interconnection between carriers. MCI, the NYSPSC and
New York Telephone have entered into a stipulation that removes the case from
the court's active calendar. The NYSPSC has agreed to address the effect, if
any, of the Telecommunications Act of 1996 ("1996 Act") upon the challenged rate
structure.
In the NYSPSC's proceeding examining the terms and conditions for resale of New
York Telephone services, to be effective in October 1996, the NYSPSC is also
considering issues with respect to the unbundling of network elements, as
prescribed by the 1996 Act.
New York Telephone has filed with the NYSPSC a proposal to accelerate the
implementation of ILP in analog central offices, for completion by October 1996.
Incentive Plan: The Plan approved by the NYSPSC in 1995 establishes service
quality targets with stringent rebate provisions if New York Telephone is unable
to meet some or all of the targets. Based on service performance results through
March 31, 1996, it is probable that New York Telephone will be required to issue
rebates to customers (see Other revenues). A reasonable estimate of the amount
or range of any annual rebate cannot be made, pending NYSPSC action regarding
the waiver of certain service results for the period in question and pending
service performance results for the balance of Plan Year 1, which ends August
31, 1996.
New Hampshire
In April 1996, the New Hampshire Public Utilities Commission ("NHPUC") initiated
proceedings for the purpose of implementing ILP by October 1996. New England
Telephone and other local exchange carriers ("LECs") are required to file
implementation plans with the NHPUC by the end of May.
Hearings are scheduled to begin in June.
In April 1996, the NHPUC solicited comments on proposed draft rules to govern
the authorization of local exchange competition. The NHPUC announced that draft
rules will be filed with the state legislature in June. By statute, the
rulemaking process must be completed by year-end.
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Federal Regulatory
Telecommunications Act of 1996: During 1996, the Federal Communications
Commission ("FCC") will conduct a number of rulemaking proceedings in order to
implement the 1996 Act. In March 1996, the FCC issued Notices of Proposed
Rulemaking to implement the Universal Service provisions and the Open Video
System provisions of the 1996 Act. In April 1996, the FCC issued a Notice of
Proposed Rulemaking to implement the interconnection obligations imposed on LECs
by the 1996 Act. While the outcome of these rulemakings cannot be predicted,
they are likely to have a significant impact on the telephone subsidiaries' rate
structures, rate levels, and revenues. However, NYNEX believes that, while it
will face significantly increased risks in its traditional markets, there will
be significant opportunities in its many new markets.
In April 1996, NYNEX entered into a two-year long distance resale agreement with
Sprint Communications Company, L.P. NYNEX has filed a Section 214 application
with the FCC to provide out-of-region international long distance service and
expects to begin providing that service this summer. NYNEX also expects to begin
offering long distance service this summer in six states, pending regulatory
approvals: Arizona, California, Florida, Georgia, Illinois, and Texas.
The 1996 Act requires Regional Bell Operating Companies to meet a checklist of
items that open their local networks and markets to competition before being
permitted to offer in-region long distance service. NYNEX expects to be
operationally ready to begin offering long distance service in New York by
October 1996, in Massachusetts by June 1997, and in the rest of the states
within its region by December 1997.
Price Cap Plan: The FCC expects to issue an order in the latter part of 1996 in
its Proposed Rulemaking regarding the productivity factor used by LECs in the
FCC price cap formula. The Proposed Rulemaking will consider changes in the
determination of the productivity factor, the recognition of exogenous costs,
the extent of carrier sharing, and the formula for calculating the price cap
index for certain services.
In March 1996, the U.S. Court of Appeals for the District of Columbia Circuit
denied petitions filed by New York Telephone and New England Telephone and
several other LECs for review of the FCC decision that had required each LEC to
(a) "reinitialize" its price cap index to reflect a higher productivity factor,
and (b) recalculate its price cap index on a prospective basis to exclude cost
increases due to changes in the accounting treatment of other postemployment
benefit expenses.
Other Federal Regulatory: In January 1996, the FCC issued a Notice of Proposed
Rulemaking addressing the charges made for interconnection between LECs and
wireless carriers. Currently, such charges are established by contracts under
the jurisdiction of the state regulatory commissions, some of which are also
reflected in state tariffs. The FCC requested comment on its tentative
<PAGE>
Form 10-Q Part I
NYNEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
conclusion to require, pending the conclusion of its Proposed Rulemaking,
reciprocal "bill-and-keep" compensation arrangements under which the originating
carrier would no longer pay the terminating carrier for access. Adoption of the
proposed procedure would have a negative effect on the revenues of the LECs,
including the telephone subsidiaries. The telephone subsidiaries have filed
comments opposing the imposition of "bill-and-keep" arrangements, but supporting
reciprocal payments. Reciprocal payment arrangements have been in place in New
York since September 1995, and New England Telephone has begun the negotiation
of reciprocal agreements with wireless carriers in its states.
<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
(4)(a) Rights Agreement, dated as of October 19, 1989, between NYNEX
and American Transtech Inc. (Exhibit No. 1 to the Registrant's
Current Report on Form 8-K, Date of Report October 20, 1989,
File No. 1-8608)
First Amendment to Rights Agreement, dated April 21, 1996,
between NYNEX and First National Bank of Boston, as successor
rights agent
(12) Computation of Ratio of Earnings to Fixed Charges
(18) Letter regarding Change in Accounting Principle
(27) Financial Data Schedule
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the registrant during the
quarter for which this report is filed.
<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
/s/ A. Z. Senter
A. Z. Senter
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
May 10, 1996
Exhibit (4)(a)
FIRST AMENDMENT TO RIGHTS AGREEMENT
FIRST AMENDMENT, DATED APRIL 21, 1996, TO RIGHTS AGREEMENT, dated as of
October 19, 1989, between NYNEX Corporation, a Delaware corporation (the
"Company"), and First National Bank of Boston, a Delaware corporation, as
successor right agent (the "Rights Agent").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company has entered into an
Agreement and Plan of Merger among Seaboard Merger Company, the Company and Bell
Atlantic Corporation (the "Merger Agreement"); and
WHEREAS, the Board of Directors of the Company has approved, authorized
and adopted the Merger Agreement and the transactions contemplated thereby, and
recommended to the stockholders of the Company the approval and adoption of the
Merger Agreement and the merger contemplated thereby; and
WHEREAS, the Board of Directors of the Company has determined that in
connection with the Merger Agreement and the transactions contemplated thereby,
it is desirable to amend the Rights Agreement, between the Company and the
Rights Agent, dated October 19, 1989, as amended, (the "Rights Agreement") as
set forth herein; and
WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company and
the Rights Agent desire to amend the Rights Agreement as set below.
NOW, THEREFORE, the Rights Agreement is amended as follows:
1. Amendment.
Immediately prior to Section 4 of the Rights Agreement the following
section shall be inserted:
"Section 3.1 Exempt Transaction. Notwithstanding any provision of
this Rights Agreement to the contrary, (i) no Distribution Date,
Stock Acquisition Date or Triggering Event shall be deemed to have
occurred, none of Seaboard Merger Company, Bell Atlantic Corporation
or any of their Subsidiaries (collectively, the "Acquisition Group")
shall be deemed to have become an Acquiring Person and (ii) no holder
of Rights shall be entitled to exercise such Rights under, or be
entitled to any rights or benefits pursuant to Section 7(a), 11(a),
13(a) (including but not limited to those rights set forth in Section
13(a)(ii)), or any other provision of this Rights Agreement, solely
by reason of (x) the approval, execution and delivery of the Merger
Agreement by the parties thereto, (y) the approval of the Merger
Agreement by the stockholders of the parties thereto, or (z) the
consummation of the transactions contemplated by the Merger
Agreement; provided that in the event that one or more members of the
Acquisition Group (excluding Seaboard Merger Company for this
purpose) collectively become the Beneficial Owner of 10% or more of
the Common Stock then outstanding in any manner other than as set
forth in the Merger Agreement the provisions of this sentence (other
than this proviso) shall not be applicable."
2. Effectiveness. This Amendment shall be deemed effective as of the
date first set forth above. Except as amended hereby, the Rights Agreement shall
remain in full force and effect and shall be otherwise unaffected hereby.
3. Miscellaneous. This Amendment shall be deemed to be a contract made
under the laws of the State of Delaware and for all purposes shall be governed
by and construed in accordance with the laws of such state applicable to
contracts to be made and performed entirely within such state. This Amendment
may be executed in any number of counterparts, each of such counterparts shall
for all purposes be deemed to be an original, and all such counterparts shall
together constitute but one and the same instrument. If any term, provision,
convenant or restriction of this Amendment is held by a court of competent
jurisdiction or other authority to be invalid, illegal, or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Amendment
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
EXECUTED as of the date first set forth above.
NYNEX CORPORATION
/s/ Ivan Seidenberg
Ivan Seidenberg
Chairman and Chief Executive
Officer
FIRST NATIONAL BANK OF BOSTON
/s/ Virginia L. Knowlton
Virginia L. Knowlton
Authorized Signer
Exhibit (12)
NYNEX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions)
<TABLE>
<CAPTION>
For the
Three Months
Ended
March 31, For the Year Ended December 31,
1996 1995 1994 1993 1992 1991
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Earnings
Earnings before Interest
Expense, Extraordinary
Item and Cumulative
Effect of Change in
Accounting Principle $ 378.9 $1,803.4 $1,466.4 $ 387.1 $1,995.8 $1,326.8
Federal, State and Local
Income Taxes 116.5 640.9 303.7 (172.7) 570.4 192.1
Estimated Interest Portion
of Rental Expense 24.2 117.3 109.0 117.3 126.2 127.9
Priority Distributions 14.7 47.1 29.9 15.2 - -
------- -------- -------- ------- -------- --------
Total Earnings $ 534.3 $2,608.7 $1,909.0 $ 346.9 $2,692.4 $1,646.8
======= ======== ======== ======= ======== ========
Fixed Charges
Total Interest Expense $ 165.1 $ 733.9 $ 673.8 $ 659.5 $ 684.6 $ 726.0
Estimated Interest Portion
of Rental Expense 24.2 117.3 109.0 117.3 126.2 127.9
Priority Distributions 14.7 47.1 29.9 15.2 - -
-------- -------- ------- ------- ------- -------
Total Fixed Charges $ 204.0 $ 898.3 $ 812.7 $ 792.0 $ 810.8 $ 853.9
======== ======== ======= ======= ======= =======
Ratio of Earnings to Fixed Charges* 2.62 2.90 2.35 .44 3.32 1.93
======== ======== ======= ======= ======= =======
</TABLE>
* Earnings were inadequate to cover Fixed Charges by $445.1 million for the
year ended December 31, 1993 as a result of $2.1 billion of fourth quarter
1993 business restructuring charges ($1.4 billion after-tax).
Exhibit (18)
May 8, 1996
NYNEX Corporation
1095 Avenue of the Americas
New York, New York 10036
We are providing this letter to you for inclusion as an exhibit to your Form
10-Q filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in accounting from the
"amortization" revenue recognition method to the "point of publication" method
contained in NYNEX Corporation's Form 10-Q for the quarter ended March 31, 1996.
Based on our reading of the data and discussions with Company officials of the
business judgment and business planning factors relating to the change, we
believe management's justification is reasonable. Accordingly, in reliance on
management's determination regarding elements of business judgment and business
planning, we concur that the newly adopted accounting principle described above
is preferable in NYNEX Corporation's circumstances to the method previously
applied.
We have not audited any of the financial statements of NYNEX Corporation as of
any date or for any period subsequent to December 31, 1995, nor have we audited
the application of the accounting change in accounting principle disclosed in
Form 10-Q of NYNEX Corporation for the three months ended March 31, 1996;
accordingly, our comments are subject to revision on completion of an audit of
the financial statements that include the accounting change.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
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<NAME> NYNEX CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 101
<SECURITIES> 0
<RECEIVABLES> 3,112
<ALLOWANCES> 244
<INVENTORY> 142
<CURRENT-ASSETS> 3,764
<PP&E> 36,162
<DEPRECIATION> 19,223
<TOTAL-ASSETS> 26,035
<CURRENT-LIABILITIES> 3,556
<BONDS> 9,095
0
0
<COMMON> 451
<OTHER-SE> 5,860
<TOTAL-LIABILITY-AND-EQUITY> 26,035
<SALES> 0
<TOTAL-REVENUES> 3,254
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<TOTAL-COSTS> 2,817
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<INTEREST-EXPENSE> 165
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