<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-6964
BELL ATLANTIC - VIRGINIA, INC.
A Virginia Corporation I.R.S. Employer Identification No. 54-0167060
600 East Main Street, Richmond, Virginia 23219
Telephone Number (804) 225-6300
----------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
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
----- -----
<PAGE>
Bell Atlantic - Virginia, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service............ $ 238,522 $227,660 $ 701,301 $ 664,605
Network access........... 149,144 139,090 426,812 400,542
Toll service............. 32,145 33,074 98,754 95,737
Directory advertising,
billing services and
other (including $2,219,
$4,151, $10,772 and
$12,395 from affiliates) 75,488 74,163 228,086 217,680
Provision for
uncollectibles.......... (3,466) (3,393) (11,913) (12,621)
--------- --------- ---------- ----------
491,833 470,594 1,443,040 1,365,943
--------- --------- ---------- ----------
OPERATING EXPENSES
Employee costs,
including benefits
and taxes............... 125,630 99,142 323,035 290,174
Depreciation and
amortization............ 100,925 94,029 296,526 285,107
Taxes other than income.. 14,237 13,145 42,024 40,063
Other (including
$88,223, $79,730,
$254,689 and $227,158 to
affiliates)............. 143,539 146,210 403,973 392,782
--------- --------- ---------- ----------
384,331 352,526 1,065,558 1,008,126
--------- --------- ---------- ----------
NET OPERATING REVENUES..... 107,502 118,068 377,482 357,817
--------- --------- ---------- ----------
OPERATING INCOME TAXES
Federal.................. 28,589 28,987 99,770 87,263
State.................... 5,021 7,684 21,052 22,898
--------- --------- ---------- ----------
33,610 36,671 120,822 110,161
--------- --------- ---------- ----------
OPERATING INCOME........... 73,892 81,397 256,660 247,656
--------- --------- ---------- ----------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction..... 254 835 1,817 2,765
Miscellaneous - net...... (551) (1,586) (1,816) (3,041)
--------- --------- ---------- ----------
(297) (751) 1 (276)
--------- --------- ---------- ----------
INTEREST EXPENSE
(including $681, $45,
$1,657 and $556 to
affiliate)............... 16,315 18,751 51,069 56,108
--------- --------- ---------- ----------
INCOME BEFORE
EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF
CHANGE IN
ACCOUNTING PRINCIPLE..... 57,280 61,895 205,592 191,272
EXTRAORDINARY ITEMS
Discontinuation of
Regulatory
Accounting Principles,
Net of Tax............. (308,580) --- (308,580) ---
Early Extinguishment of
Debt,
Net of Tax.............. --- (8,164) --- (9,734)
CUMULATIVE EFFECT OF
CHANGE IN
ACCOUNTING PRINCIPLE
Postemployment Benefits,
Net of Tax.............. --- --- --- (9,205)
--------- --------- ---------- ----------
NET INCOME (LOSS).......... $(251,300) $ 53,731 $ (102,988) $ 172,333
========= ========= ========== ==========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - Virginia, Inc.
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS (Continued)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ----------------------
1994 1993 1994 1993
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REINVESTED EARNINGS
At beginning of period.. $ 475,173 $442,137 $ 438,860 $ 431,875
Add: net income (loss).. (251,300) 53,731 (102,988) 172,333
--------- -------- ---------- ----------
223,873 495,868 335,872 604,208
Deduct: dividends....... 64,575 54,756 176,574 163,087
other changes... (43) 176 (43) 185
--------- -------- ---------- ----------
At end of period........ $ 159,341 $440,936 $ 159,341 $ 440,936
========= ======== ========== ==========
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - Virginia, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $15,610 and $16,537....... $ 297,544 $ 301,493
Parent and affiliates........................ 36,660 32,673
Other........................................ 23,644 12,585
Material and supplies.......................... 8,215 9,454
Prepaid expenses............................... 69,516 36,833
Deferred income taxes.......................... 15,134 14,021
Other.......................................... 300 3,267
---------- ----------
451,013 410,326
---------- ----------
PLANT, PROPERTY AND EQUIPMENT.................... 5,090,960 4,895,782
Less accumulated depreciation.................. 2,467,540 1,778,043
---------- ----------
2,623,420 3,117,739
---------- ----------
OTHER ASSETS..................................... 53,395 259,076
---------- ----------
TOTAL ASSETS..................................... $3,127,828 $3,787,141
========== ==========
</TABLE>
See Notes to Financial Statements.
-3-
<PAGE>
Bell Atlantic - Virginia, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Affiliate................................... $ 22,440 $ 19,755
Other....................................... 703 1,202
Accounts payable:
Parent and affiliates....................... 143,990 120,678
Other....................................... 168,682 203,571
Accrued expenses:
Taxes....................................... 25,523 22,640
Other....................................... 95,789 99,212
Advance billings and customer deposits....... 67,908 60,049
---------- ----------
525,035 527,107
---------- ----------
LONG-TERM DEBT................................. 937,870 935,293
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS................... 399,341 364,421
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 133,061 344,177
Unamortized investment tax credits........... 31,330 77,521
Other........................................ 68,165 226,077
---------- ----------
232,556 647,775
---------- ----------
SHAREOWNER'S INVESTMENT
Common stock - one share, without
par value, owned by parent.................. 873,685 873,685
Reinvested earnings.......................... 159,341 438,860
---------- ----------
1,033,026 1,312,545
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $3,127,828 $3,787,141
========== ==========
</TABLE>
See Notes to Financial Statements.
-4-
<PAGE>
Bell Atlantic - Virginia, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1994 1993
--------- ---------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ..... $ 475,491 $ 476,658
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment.... (285,401) (245,875)
Net change in note receivable from affiliate.. --- (6,495)
Other, net.................................... (1,516) 464
-------- --------
Net cash used in investing activities........... (286,917) (251,906)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings...................... --- 297,708
Principal repayments of capital lease
obligations.................................. (708) (1,344)
Early extinguishment of debt and related
call premium................................. --- (310,970)
Net change in note payable to affiliate....... 2,685 (36,354)
Dividends paid................................ (176,574) (163,087)
Net change in outstanding checks drawn
on controlled disbursement accounts.......... (13,977) (8,049)
-------- --------
Net cash used in financing activities........... (188,574) (222,096)
-------- --------
NET CHANGE IN CASH ............................. --- 2,656
CASH, BEGINNING OF PERIOD ...................... --- ---
--------- ---------
CASH, END OF PERIOD ............................ $ --- $ 2,656
========= =========
</TABLE>
See Notes to Financial Statements.
-5-
<PAGE>
Bell Atlantic - Virginia, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
Bell Atlantic - Virginia, Inc. (formerly The Chesapeake and Potomac Telephone
Company of Virginia) (the Company) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). The December 31, 1993 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. In the
opinion of management, these financial statements include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the results of operations, financial position and cash flows. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
Effective August 1, 1994, the Company no longer reports using generally accepted
accounting principles applicable to regulated entities (see Note 3).
(2) Dividend
On November 1, 1994, the Company declared and paid a dividend in the amount of
$62,642,000 to Bell Atlantic Corporation.
(3) Discontinuation of Regulatory Accounting Principles
In the third quarter of 1994, the Company determined that it was no longer
eligible for continued application of the accounting required by Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (Statement No. 71). In connection with the decision to
discontinue regulatory accounting principles under Statement No. 71, the Company
recorded a non-cash, after-tax extraordinary charge of $308,580,000, which is
net of an income tax benefit of $234,288,000.
The Company's determination that it was no longer eligible for continued
application of the accounting required by Statement No. 71 was based on the
belief that the convergence of competition, technological change (including the
Company's recent technology deployment plans), recent and potential regulatory,
legislative and judicial actions, and other factors are creating fully open and
competitive markets. In such markets, the Company believes it can no longer be
assured that prices can be maintained at levels that will recover the net
carrying amount of existing telephone plant and equipment, which has been
depreciated over relatively long regulator-prescribed lives. In addition,
changes from cost-based regulation to a form of incentive regulation contributed
to the determination that the continued application of Statement No. 71 is
inappropriate.
The components of the charge recognized as a result of the discontinued
application of Statement No. 71 follow:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
Pre-tax After-tax
-------- ---------
<S> <C> <C>
Increase in plant and equipment depreciation reserve.. $528,703 $323,038
Accelerated investment tax credit amortization........ --- (23,778)
Tax-related regulatory asset and liability elimination --- 666
Other regulatory asset and liability elimination...... 14,165 8,654
-------- --------
Total................................................. $542,868 $308,580
======== ========
</TABLE>
-6-
<PAGE>
Bell Atlantic - Virginia, Inc.
The accumulated depreciation reserve was increased by $528,703,000. This
increase was supported by both an impairment analysis which identified
estimated amounts not recoverable from future discounted cash flows, and a
depreciation study which identified inadequate depreciation reserve levels which
the Company believes resulted principally from the cumulative underdepreciation
of plant as a result of the regulatory process. 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.
Upon 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 and amortized at the time the related deferred taxes were recognized
in the ratemaking process. As of August 1, 1994, tax-related regulatory assets
of $126,471,000 and tax-related regulatory liabilities of $125,805,000 were
eliminated. The elimination of other regulatory assets and liabilities relate
principally to deferred vacation pay costs which were being amortized as they
were recognized in the ratemaking process.
On August 1, 1994, for financial reporting purposes, the Company began using
estimated asset lives for certain categories of plant and equipment that are
shorter than those approved by regulators prior to the discontinued application
of Statement No. 71. The shorter asset lives result from the Company's
expectations as to the revenue-producing lives of the assets. A comparison of
the regulator-approved asset lives to the shorter new asset lives for
the most significantly impacted categories of plant and equipment follows:
<TABLE>
<CAPTION>
Average Lives (in years)
-------------------------------
Regulator-Approved New
Asset Lives Asset Lives
------------------ -----------
<S> <C> <C>
Digital Switch 17.5 12
Digital Circuit 11.5 9
Conduit 55 50
Copper Cable 21 - 25 14.5 - 17
Fiber Cable 30 20 - 25
</TABLE>
As a result of the discontinued application of Statement No. 71, regulatory
accounting principles no longer apply to the Company for financial accounting
and reporting purposes. The Company no longer recognizes regulatory assets and
liabilities and the related amortization. Additionally, the Company reports
depreciation expense based on economic asset lives and reports capitalized
interest costs as a cost of telephone plant and equipment and a reduction in
interest expense, in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost." Prior to the
discontinued application of Statement No. 71, the Company recorded an allowance
for funds used during construction which included both interest and equity
return components and was recorded as a cost of plant and an item of other
income. The Company's accounting and reporting for regulatory purposes are not
affected by the discontinued application of Statement No. 71.
(4) Postemployment Benefits
In the third quarter of 1994, the Company recorded a pretax charge of
$23,976,000, in accordance with Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future, including those employees who will be
separated through 1997 as a result of a recently announced workforce reduction
initiative.
(5) Restatement
Results of operations for the nine months ended September 30, 1993 were
restated in the fourth quarter of 1993 to reflect the cumulative effect of the
adoption of Statement No. 112, effective January 1, 1993.
-7-
<PAGE>
Bell Atlantic - Virginia, Inc.
(6) Reclassifications - Statement of Cash Flows
Certain amounts included in Net Cash Provided by Operating Activities and Cash
Flows from Investing Activities in the Statement of Cash Flows for the nine
months ended September 30, 1993 have been reclassified to conform to the current
year's classifications.
-8-
<PAGE>
Bell Atlantic - Virginia, Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
At September 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Network Access Lines in Service:
Residence.............................. 1,844 1,792
Business............................... 1,033 975
Public................................. 41 41
----- -----
2,918 2,808
===== =====
<CAPTION>
Nine months ended
September 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate............................. 7,242,826 6,598,124
Intrastate............................. 1,982,742 1,812,231
--------- ---------
9,225,568 8,410,355
========= =========
<CAPTION>
Nine months ended
September 30,
-----------------
1994 1993
-------- -------
<S> <C> <C>
Toll Messages:
Message Telecommunication Services..... 108,931 104,043
Optional Calling Plans................. 10,633 8,792
Unidirectional Long-Distance Services.. 4,767 4,478
------- -------
124,331 117,313
======= =======
</TABLE>
-9-
<PAGE>
Bell Atlantic - Virginia, Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
The Company reported a loss of $102,988,000 for the nine months ended
September 30, 1994, compared to net income of $172,333,000 for the corresponding
period last year.
Results for the nine months ended September 30, 1994 included a non-cash,
after-tax extraordinary charge of $308,580,000 in connection with the Company's
decision to discontinue application of regulatory accounting principles required
by Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (Statement No. 71).
The discontinued application of Statement No. 71 required the Company, for
financial reporting purposes, to eliminate its regulatory assets and
liabilities, resulting in an after-tax charge of $9,320,000. In addition, the
Company recorded an after-tax charge of $299,260,000, net of related investment
tax credits of $23,778,000, to adjust the carrying amount of its telephone plant
and equipment.
As a result of the discontinued application of Statement No. 71, the Company
utilizes shorter asset lives for certain categories of plant and equipment than
those approved by regulators prior to the discontinued application of Statement
No. 71. It is expected that the use of the shorter asset lives will not
significantly change depreciation expense in the fourth quarter of 1994, for
financial reporting purposes, from the amount that would have been recorded
using asset lives prescribed by regulators prior to the discontinued
application of Statement No. 71. The elimination of the amortization of net
regulatory assets and the effect of changes in certain accounting policies are
not expected to have a significant impact on financial results in future
periods. The Company's accounting and reporting for regulatory purposes are not
affected by the discontinued application of Statement No. 71. See Note 3 to the
Financial Statements for additional information on the discontinuation of
regulatory accounting principles.
In the third quarter of 1994, the Company recorded a pretax charge of
$23,976,000, in accordance with Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future, including those who will be separated
through 1997 as a result of a recently announced workforce reduction initiative.
These workforce reductions will be made possible by improved provisioning
systems and customer service processes, increased spans of control, and
consolidation and centralization of administrative and staff groups (see Note 4
to the Financial Statements). Management currently expects the wage and salary
savings associated with the workforce reduction to significantly offset the
ongoing expense impact for separation benefits accrued under these separation
pay plans for 1995 through 1997. Management also expects to recognize
additional costs to enhance systems and consolidate work activities, which will
be charged to operating expense as incurred.
-10-
<PAGE>
Bell Atlantic - Virginia, Inc.
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994 increased
$77,097,000 or 5.6% from the corresponding period last year. The increase in
total operating revenues was comprised of the following:
<TABLE>
<CAPTION>
Increase/(Decrease)
(Dollars in Thousands)
-----------------------
<S> <C>
Local service....................... $36,696
Network access...................... 26,270
Toll service........................ 3,017
Directory advertising, billing
services and other................ 10,406
Less: Provision for uncollectibles.. (708)
-------
$77,097
=======
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$36,696,000 or 5.5%, compared to the same period in 1993. The increase resulted
primarily from growth in network access lines and higher demand for value-added
central office services such as Custom Calling and Caller ID. Access lines in
service at September 30, 1994 increased 3.9% from September 30, 1993 (see
Selected Operating Data on page 9).
Network access revenues are received from interexchange carriers (IXCs) for
their use of the Company's local exchange facilities in providing long-distance
services to IXCs' customers and from end-user subscribers. Switched access
revenues are derived from usage-based charges paid by IXCs for access to the
Company's network. Special access revenues arise from access charges paid by
customers who have private lines, and end-user access revenues are earned from
local exchange carrier customers who pay for access to the network.
Network access revenues increased $26,270,000 or 6.6%, compared to the same
period in 1993. Access minutes of use were 9.7% higher than the first nine
months of 1993 (see Selected Operating Data on page 9), due to the effects of a
recovering economy and inclement weather conditions in the region during the
first quarter of 1994. The increase in network access revenues was principally
due to customer demand as reflected by growth in access minutes of use, as well
as increased access lines in service. In addition to volume growth, network
access revenues increased due to lower support payments to the National Exchange
Carrier Association (NECA) interstate common line pool and increased revenues
recognized through an interstate revenue sharing arrangement with affiliated
companies. These revenue increases were partially offset by the effect of an
interstate rate reduction filed by the Company with the Federal Communications
Commission (FCC), which became effective on July 2, 1993. In its April 1, 1994
tariff filing, the Company filed revised rates which became effective July 1,
1994. The 1994 revised rates, net of lower support obligations to the NECA
interstate common line pool, are not expected to significantly change current
levels of interstate access revenues.
Toll service revenues are generated from interexchange usage services such as
Message Telecommunication Services (MTS), including optional calling plans,
Unidirectional Services (Wide Area Toll Service (WATS) and 800 services) and
private line services. Toll service revenues increased $3,017,000 or 3.2%,
compared to the same period in 1993. Total toll message volumes were 6.0%
higher than the first nine months of 1993 due to the effects of a recovering
economy and harsh weather conditions in the first quarter of 1994 (see Selected
Operating Data on page 9). Growth-related message toll service revenue
increases were partially offset by the repricing of calling plan options and a
decline in unidirectional message revenues, as competitive pressures continue to
impact these services.
Directory advertising, billing services and other revenues include amounts
earned from directory advertising, billing and collection services provided to
IXCs, premises services such as inside wire installation and maintenance, rent
of Company facilities by affiliates and non-affiliates, and certain nonregulated
enhanced network services.
Directory advertising, billing services and other revenues increased
$10,406,000 or 4.8%, compared to the same period in 1993, principally due to
higher revenues from
-11-
<PAGE>
directory advertising, customer premises services and enhanced network services.
The increase in directory advertising resulted primarily from higher prices for
yellow pages advertising. Premises services revenues increased due to an
increase in large business service contracts while higher volumes for voice
messaging services, including Answer Call, increased nonregulated enhanced
network service revenues. These revenue increases were offset in part by lower
facilities rental revenues.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was .8% for the first nine months of 1994 and .9% for the same period
last year.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1994 increased
$57,432,000 or 5.7% from the corresponding period last year. The increase in
total operating expenses was comprised of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
<S> <C>
Employee costs................. $32,861
Depreciation and amortization.. 11,419
Taxes other than income........ 1,961
Other.......................... 11,191
-------
$57,432
=======
</TABLE>
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by the Company. Similar costs
incurred by employees of Bell Atlantic Network Services, Inc. (NSI), who provide
centralized services on a contract basis, are allocated to the Company and are
included in other operating expenses.
Employee costs increased $32,861,000 or 11.3% over the corresponding period in
1993. The increase was principally due to a charge of $18,474,000 to recognize,
in accordance with Statement No. 112, the Company's proportionate share of
benefit costs for the separation of employees who are entitled to benefits under
preexisting Bell Atlantic separation pay plans. Third quarter 1994 employee
costs also included approximately $503,000 for the ongoing accrual of separation
benefit costs under these separation pay plans. Benefit costs associated with
the separation of employees of NSI were allocated to the Company and are
included in other operating expenses. Additionally, the employee costs were
higher due to a combination of salary and wage increases, increased overtime,
and higher healthcare benefit costs for active and retired employees. Higher
repair and maintenance activity caused by unusually severe weather conditions
experienced in 1994 contributed to the overall increase in employee costs.
Depreciation and amortization expense increased $11,419,000 or 4.0% compared
with the same period in 1993. The increase was principally due to growth in
telephone plant. The Company's discontinued application of Statement No. 71 has
resulted in the use of shorter asset lives for certain categories of plant and
equipment than those approved by regulators prior to August 1, 1994. The shorter
estimated asset lives reflect the Company's expectations as to the revenue-
producing lives of the assets (see Note 3 to the Financial Statements). The use
of the shorter asset lives did not significantly impact depreciation expense in
the third quarter of 1994, for financial reporting purposes. It is expected that
the use of shorter asset lives will not significantly change depreciation
expense in the fourth quarter of 1994, for financial reporting purposes, from
the amount that would have been recorded using asset lives prescribed by
regulators prior to the discontinued application of Statement No. 71.
Future depreciation represcriptions by regulators will not affect depreciation
expense for financial reporting purposes.
Taxes other than income increased $1,961,000 or 4.9%, compared to the same
period in 1993, due to an increase in property taxes as a result of higher
property assessments.
Other operating expenses consist primarily of contracted services including
centralized service expenses allocated from NSI, rent, network software costs,
and other general and administrative expenses. Other operating expenses
increased $11,191,000 or
-12-
<PAGE>
Bell Atlantic - Virginia, Inc.
2.8%, compared to the same period in 1993. The increase was principally due to
higher costs allocated from NSI primarily as a result of higher employee costs,
affiliate rent expense and employee-related expenses incurred in that
organization, including $5,502,000 for the Company's allocated share of a charge
for separation benefit costs recognized under Statement No. 112. Also
contributing to the increase were higher materials expense resulting from the
completion of a Network Operations Center in Fairfax, Virginia, and higher
contract labor costs. These increases were offset in part by the effect of
adjustments to billing agreements with certain affiliated companies recorded in
1993, the effect of one-time accruals for certain liabilities recorded in 1993,
and decreased software costs.
OPERATING INCOME TAXES
The provision for income taxes increased $10,661,000 or 9.7%, compared to the
same period in 1993. The Company's effective income tax rate for the nine month
period ended September 30, 1994 was 36.9%, compared to 36.1% for the same period
in 1993. The increase in the effective tax rate was principally the result of
the reduction in amortization of investment tax credits as a result of the
discontinued application of Statement No. 71, and the effect of a one-time net
benefit recorded in the third quarter of 1993 to adjust deferred tax assets for
the increase in the federal corporate income tax rate from 34% to 35%.
OTHER INCOME AND EXPENSE
Other income was $1,000 for the nine months ended September 30, 1994, compared
to other expense of $276,000 for the same period in 1993. This change was
primarily the result of a loss recorded in the third quarter of 1993 on the sale
of a central office building, offset by reduced income related to the allowance
for funds used during construction.
Prior to the discontinued application of Statement No. 71, the Company
recorded an allowance for funds used during construction as a cost of plant and
an item of other income. As prescribed by regulators, the allowance for funds
used during construction included both interest and equity return components.
Effective August 1, 1994, interest costs on telephone plant under construction
are capitalized in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost," and reported as
a cost of telephone plant and a reduction to interest expense. The amount of
allowance for funds used during construction that was recorded as other income
prior to August 1, 1994 was $1,817,000 in 1994 and $3,580,000 for the twelve
month period ended December 31, 1993.
INTEREST EXPENSE
Interest expense decreased $5,039,000 or 9.0%, compared to the same period in
1993. This decrease was principally due to the effect of long-term debt
refinancings in 1993. Interest expense was further reduced by the recognition
of $1,163,000 in capitalized interest costs, effective with the discontinued
application of Statement No. 71.
EXTRAORDINARY ITEM
As discussed in Note 3 to the Financial Statements, in connection with the
Company's decision to discontinue application of regulatory accounting
principles under Statement No. 71, the Company recorded a non-cash, after-tax
extraordinary charge of $308,580,000, net of an income tax benefit of
$234,288,000, in the third quarter of 1994.
COMPETITIVE ENVIRONMENT
The communications industry continues to undergo fundamental changes which may
have a significant impact on future financial performance of telecommunications
companies. These changes are driven by a number of factors, including the
accelerated pace of technological innovation, the convergence of
telecommunications, cable television, information services and entertainment
businesses, and a regulatory environment in which many traditional regulatory
barriers are being lowered and competition permitted or encouraged.
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<PAGE>
Bell Atlantic - Virginia, Inc.
Communications services and equipment and the number of competitors offering
such services are continuing to expand. The Company's telecommunications
business is currently subject to competition from numerous sources, including
competitive access providers for network access services and competing cellular
telephone companies. An increasing amount of this competition is from large
companies which have substantial capital, technological and marketing resources,
many of which do not face the same regulatory constraints as the Company. Other
sources of competition are cable television systems, shared tenant services and
other non-carrier systems which are capable of partially or completely bypassing
the Company's local network.
The entry of well-financed competitors, such as large long-distance carriers
and other local exchange service competitors, has the potential to adversely
affect multiple revenue streams of the Company, including local exchange,
network access, and toll services in the market segments and geographical areas
in which the competitors operate. The amount of revenue reductions will depend
on the competitors' success in marketing these services, and the conditions of
interconnection established by regulators. The potential impact is expected to
be offset, to some extent, by revenues from interconnection charges to be paid
to the Company by these competitors.
The Company continues to focus its efforts on being more competitive and
seeking growth opportunities. The Company's responses to competitive challenges
include an increased emphasis on meeting customer requirements through the rapid
introduction of new products and services, the delivery of increased customer
value, and the development of customer loyalty programs. In addition, the
Company continues to strive for increased pricing flexibility through efforts to
reprice and repackage existing services, to reduce its cost structure and
workforce through consolidation, re-engineering and streamlining initiatives,
and to achieve an improved regulatory and legislative environment. Other
important competitive responses, including the development of broadband
networks, will improve the Company's ability to take advantage of the growth
opportunities created by technological advances and the convergence of the
communications, information services and entertainment industries.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. The FCC had ordered local exchange carriers
(LECs), including the Company, to provide physical collocation in the Company's
central offices to competitors for the purpose of providing special
and switched access transport services. The FCC also granted additional, but
limited, pricing flexibility for these services so that the LECs can better
respond to the competition that will result. However, in June 1994, the U.S.
Court of Appeals for the District of Columbia Circuit vacated the FCC's special
access collocation order insofar as it required physical collocation and
remanded for further proceedings in which the FCC could consider whether, and to
what extent, virtual collocation should be imposed. In July 1994, the FCC voted
to require LECs to offer competitors virtual collocation, with the LECs having
the option to offer physical collocation. Tariffs for virtual collocation for
special access were filed on September 1, 1994 and will become effective on
December 15, 1994. The appeal of the switched access collocation order is being
held in abeyance. The FCC has informed the U.S. Court of Appeals that it will
not further litigate the June 1994 special access decision. The Company does
not expect the net revenue impact of virtual collocation to be material.
As reported in the Company's 1993 Form 10-K (Part I, Item 1 - Business), the
FCC initiated Computer Inquiry III in 1985 to re-examine its regulations
requiring that "enhanced services" (e.g., voice messaging services, electronic
mail, videotext gateway, protocol conversion) be offered only through a
structurally separated subsidiary. In 1986, the FCC eliminated this requirement,
permitting the Company to offer enhanced services, subject to compliance with a
series of nonstructural safeguards. These safeguards include detailed cost
accounting, protection of customer information, public disclosure of technical
interfaces and certain reporting requirements.
In June 1990, the U.S. Court of Appeals for the Ninth Circuit (Court of
Appeals) vacated and remanded the Computer Inquiry III decisions to the FCC. In
December 1991, the FCC adopted an order which reinstated relief from the
separate subsidiary
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<PAGE>
Bell Atlantic - Virginia, Inc.
requirement upon a company's compliance with the FCC's Computer III Open Network
Architecture (ONA) requirements and strengthened some of the nonstructural
safeguards. In March 1992, the Company certified to the FCC that it had
complied with all initial ONA obligations, and the FCC granted the Company
structural relief in June 1992.
In October 1994, the Court of Appeals vacated the 1991 order and remanded the
matter to the FCC for further proceedings. As the Court of Appeals has not yet
issued a mandate giving formal effect to its decision, the Company continues to
offer enhanced services pending further action by the Court of Appeals or the
FCC.
State Regulation
----------------
The communications services of the Company are subject to regulation by the
Virginia State Corporation Commission (SCC) with respect to intrastate rates and
services and other matters.
Under legislation passed in the 1993 session of the Virginia General Assembly,
the SCC is no longer statutorily required to regulate telephone companies on the
basis of rate of return regulation; for example, the SCC is free to adopt a
price cap form of regulation. On February 8, 1994, the Company filed a proposal
to have its non-competitive services regulated on a price cap basis; competitive
services would not be regulated. Public hearings on the Company's proposal were
held by the SCC ending May 5, 1994.
In October 1994, the SCC approved a new regulation plan, effective January 1,
1995, which allows the Company to replace traditional cost-based regulation with
a plan that relies on price constraints. The new plan, which eliminates
regulation of profits, includes a temporary moratorium on rate increases for
basic local telephone service until 2001, eliminates the monthly charge for
touch-tone service and expands universal telephone service to the poor. The
Company must notify the SCC by December 1, 1994, if it intends to adopt the new
regulatory plan.
OTHER MATTERS
Environmental Issues
--------------------
The Company is subject to a number of environmental proceedings as a result of
its operations and shared liability provisions in the Plan of Reorganization
related to the Modification of Final Judgment. Certain of these environmental
matters relate to a Superfund site for which the Company has received a request
for information. The Company is also responsible for the remediation of sites
with underground fuel storage tanks and other expenses associated with
environmental compliance.
The Company continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. The Company's recorded liability reflects those
specific issues where remediation activities are currently deemed to be probable
and where the cost of remediation is estimable. Management believes that the
aggregate amount of any potential liability would not have a material effect on
the Company's financial condition or results of operations.
FINANCIAL CONDITION
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements, including network
expansion and modernization, and payment of dividends. Management expects that
presently foreseeable capital requirements will be financed primarily through
internally generated funds, although additional long-term debt may be needed to
fund development activities and to maintain the Company's capital structure
within management's guidelines.
The Company's debt ratio was 48.2% at September 30, 1994, compared to 42.1% at
December 31, 1993. The debt ratio was significantly impacted by the equity
reduction associated with the discontinued application of Statement No. 71.
As of September 30, 1994, the Company had $100,000,000 remaining under a shelf
registration statement filed with the Securities and Exchange Commission.
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<PAGE>
Bell Atlantic - Virginia, Inc.
As a result of the discontinued application of Statement No. 71, the
Balance Sheet at September 30, 1994 reflects significant changes due to the
elimination of regulatory assets and liabilities, the revaluation of plant and
equipment and the accelerated amortization of investment tax credits (see Note 3
to the Financial Statements).
-16-
<PAGE>
Bell Atlantic - Virginia, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For background concerning the Company's contingent liabilities under
the Plan of Reorganization governing the divestiture by AT&T Corp.
(formerly American Telephone and Telegraph Company) of certain assets
of the former Bell System Operating Companies with respect to private
actions relating to pre-divestiture events, including pending antitrust
cases, see Item 3 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the quarter
ended September 30, 1994.
-17-
<PAGE>
Bell Atlantic - Virginia, Inc.
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.
BELL ATLANTIC - VIRGINIA, INC.
Date: November 10, 1994 By /s/ O. Riley Young, Jr.
--------------------------------------
O. Riley Young, Jr.
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 7, 1994.
-18-
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<PAGE>
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This schedule contains summary financial information extracted from Financial
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