<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 1-7757
BELL ATLANTIC - DELAWARE, INC.
A Delaware Corporation I.R.S. Employer Identification No. 23-0523775
901 Tatnall Street, Wilmington, Delaware 19801
Telephone Number (302) 576-5420
----------------
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 - Delaware, 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.................... $ 29,890 $28,119 $ 87,559 $ 80,358
Network access................... 17,582 16,422 49,289 48,122
Toll service..................... 8,325 9,507 27,612 27,628
Directory advertising, billing
services and other (including
$262, $98, $583 and $416 from
affiliates)..................... 11,266 10,351 33,089 30,715
Provision for uncollectibles..... (744) (600) (2,482) (1,800)
-------- ------- -------- --------
66,319 63,799 195,067 185,023
-------- ------- -------- --------
OPERATING EXPENSES
Employee costs, including
benefits and taxes.............. 17,466 14,516 45,756 41,691
Depreciation and amortization.... 18,572 10,162 39,902 30,492
Other (including $11,347,
$10,284, $32,551 and $30,806 to
affiliates).................... 20,785 19,186 60,253 58,250
-------- ------- -------- --------
56,823 43,864 145,911 130,433
-------- ------- -------- --------
NET OPERATING REVENUES............. 9,496 19,935 49,156 54,590
-------- ------- -------- --------
OPERATING INCOME TAXES
Federal.......................... 1,763 5,345 12,488 14,231
State............................ 611 1,711 4,031 4,701
-------- ------- -------- --------
2,374 7,056 16,519 18,932
-------- ------- -------- --------
OPERATING INCOME................... 7,122 12,879 32,637 35,658
-------- ------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction............. 36 49 216 115
Miscellaneous - net.............. (240) (147) (417) (326)
-------- ------- -------- --------
(204) (98) (201) (211)
-------- ------- -------- --------
INTEREST EXPENSE (including $230,
$13, $441 and $89 to affiliate)... 2,031 2,286 6,095 6,610
-------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.............. 4,887 10,495 26,341 28,837
EXTRAORDINARY ITEM
Discontinuation of Regulatory
Accounting Principles, Net of
Tax (36,926) --- (36,926) ---
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Postemployment Benefits, Net of
Tax --- --- --- (877)
-------- ------- -------- --------
NET INCOME (LOSS).................. $(32,039) $10,495 $(10,585) $ 27,960
======== ======= ======== ========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - Delaware, 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.. $ 54,929 $55,263 $ 54,235 $52,773
Add: net income (loss).. (32,039) 10,495 (10,585) 27,960
-------- ------- -------- -------
22,890 65,758 43,650 80,733
Deduct: dividends....... 9,765 10,000 30,525 24,900
other changes... --- 78 --- 153
-------- ------- -------- -------
At end of period........ $ 13,125 $55,680 $ 13,125 $55,680
======== ======= ======== =======
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - Delaware, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash........................................... $ --- $ 313
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $2,847 and $2,767......... 32,699 23,091
Affiliates................................... 4,871 3,651
Other........................................ 878 376
Material and supplies.......................... 1,234 1,490
Prepaid expenses............................... 22,046 6,498
Deferred income taxes.......................... 7 2,545
Other.......................................... 494 335
-------- --------
62,229 38,299
-------- --------
PLANT, PROPERTY AND EQUIPMENT.................... 683,217 655,812
Less accumulated depreciation.................. 336,295 241,595
-------- --------
346,922 414,217
-------- --------
OTHER ASSETS..................................... 2,288 16,666
-------- --------
TOTAL ASSETS..................................... $411,439 $469,182
======== ========
</TABLE>
See Notes to Financial Statements.
-3-
<PAGE>
Bell Atlantic - Delaware, 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................................... $ 21,673 $ 4,263
Accounts payable:
Parent and affiliates....................... 24,024 15,185
Other....................................... 23,723 20,845
Accrued expenses:
Taxes....................................... 1,692 2,561
Other....................................... 11,474 8,872
Advance billings and customer deposits....... 13,233 15,896
---------- --------
95,819 67,622
---------- --------
LONG-TERM DEBT................................. 101,118 98,991
---------- --------
EMPLOYEE BENEFIT OBLIGATIONS................... 48,367 43,793
---------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 19,127 45,294
Unamortized investment tax credits........... 4,394 10,367
Other........................................ 11,047 30,438
---------- --------
34,568 86,099
---------- --------
SHAREOWNER'S INVESTMENT
Common stock, $25 par value per share........ 118,442 118,442
Authorized shares: 5,262,280
Outstanding shares: 4,737,686
Reinvested earnings.......................... 13,125 54,235
---------- --------
131,567 172,677
---------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $ 411,439 $469,182
========== ========
</TABLE>
See Notes to Financial Statements.
-4-
<PAGE>
Bell Atlantic - Delaware, 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 ...... $48,674 $46,417
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment.... (43,805) (29,404)
Net change in note receivable from affiliate.. --- 2,882
Other, net.................................... 982 428
------- -------
Net cash used in investing activities........... (42,823) (26,094)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in note payable to affiliate....... 17,410 4,209
Dividends paid................................ (30,525) (24,900)
Net change in outstanding checks drawn
on controlled disbursement accounts.......... 6,951 (24)
------- -------
Net cash used in financing activities........... (6,164) (20,715)
------- -------
NET CHANGE IN CASH ............................. (313) (392)
CASH, BEGINNING OF PERIOD ...................... 313 392
------- -------
CASH, END OF PERIOD ............................ $ --- $ ---
======= =======
</TABLE>
See Notes to Financial Statements.
-5-
<PAGE>
Bell Atlantic - Delaware, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
Bell Atlantic - Delaware, Inc. (formerly The Diamond State Telephone Company)
(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
$7,700,000 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 $36,926,000, which is net
of an income tax benefit of $35,952,000.
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.. $69,113 $41,015
Accelerated investment tax credit amortization........ --- (3,097)
Tax-related regulatory asset and liability elimination --- (3,226)
Other regulatory asset and liability elimination...... 3,765 2,234
------- -------
Total................................................. $72,878 $36,926
======= =======
</TABLE>
The accumulated depreciation reserve was increased by $69,113,000. 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
-6-
<PAGE>
Bell Atlantic - Delaware, Inc.
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 $12,289,000 and tax-related regulatory liabilities of $15,515,000 were
eliminated. The elimination of other regulatory assets and liabilities relate
principally to deferred debt refinancing and 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 12
Digital Circuit 11 9
Copper Cable 22 - 26 16 - 19
Fiber Cable 25 - 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
$2,974,000, 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.
(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.
-7-
<PAGE>
Bell Atlantic - Delaware, Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
At September 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Network Access Lines in Service:
Residence.............................. 303 296
Business............................... 160 150
Public................................. 6 6
---- ----
469 452
==== ====
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1994 1993
---------- ---------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate .............................. 1,144,559 1,032,393
Intrastate .............................. 36,345 19,892
--------- ---------
1,180,904 1,052,285
========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
1994 1993
-------- -------
<S> <C> <C>
Toll Messages:
Message Telecommunication Services..... 38,981 35,780
Unidirectional Long-Distance Services.. 5,574 5,844
------ -------
44,555 41,624
====== =======
</TABLE>
-8-
<PAGE>
Bell Atlantic - Delaware, 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 $10,585,000 for the nine months ended September
30, 1994, compared to net income of $27,960,000 for the corresponding period
last year.
Results for the nine months ended September 30, 1994 included a non-cash,
after-tax extraordinary charge of $36,926,000 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 credit of $992,000. In addition, the
Company recorded an after-tax charge of $37,918,000, net of related investment
tax credits of $3,097,000, 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, over 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
liabilities 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
$2,974,000, 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.
-9-
<PAGE>
Bell Atlantic - Delaware, Inc.
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994 increased
$10,044,000 or 5.4% 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....................... $ 7,201
Network access...................... 1,167
Toll service........................ (16)
Directory advertising, billing
services and other................ 2,374
Less: Provision for uncollectibles.. 682
-------
$10,044
=======
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$7,201,000 or 9.0%, compared to the same period in 1993. The increase in local
service revenues was principally due to a rate increase, effective March 1993,
authorized by the Delaware Public Service Commission in Docket No. 92-47. In
addition, growth in network access lines and higher demand for value-added
central office services such as Custom Calling and Caller ID also contributed to
this increase. Access lines in service at September 30, 1994 increased 3.8%
from September 30, 1993 (see Selected Operating Data on page 8).
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 $1,167,000 or 2.4%, compared to the same
period in 1993. Access minutes of use were 12.2% higher than the first nine
months of 1993 (see Selected Operating Data on page 8), 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 is 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. These revenue increases
were substantially offset by a reduction of revenues recognized through an
interstate revenue sharing arrangement with affiliated companies and 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), Unidirectional Services (Wide Area
Toll Service (WATS) and 800 services) and private line services. Toll service
revenues decreased $16,000 compared to the same period in 1993. MTS message
volumes were 8.9% higher, while unidirectional long-distance messages decreased
4.6%, compared to the first nine months of 1993 (see Selected Operating Data on
page 8). The reduction in toll service revenue was mainly due to the repricing
of calling plan options and a reduction in private line and unidirectional
services revenues, as competitive pressures continue to impact these services.
These decreases were offset by growth in MTS message volumes due to the effects
of a recovering economy and harsh weather conditions in the first quarter of
1994.
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 enhanced
network services.
-10-
<PAGE>
Bell Atlantic - Delaware, Inc.
Directory advertising, billing services and other revenues increased
$2,374,000 or 7.7%, compared to the same period in 1993. The increase was
primarily due to increased revenues from directory advertising, billing services
and enhanced network services. The increase in directory advertising resulted
primarily from higher prices for yellow pages advertising. Higher demand for
billing services and voice messaging services, as well as the effect of a rate
increase for Residence Answer Call service, effective February 1, 1994, also
increased revenues.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was 1.3% for the first nine months of 1994 and 1.0% for the same
period last year.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1994 increased
$15,478,000 or 11.9% 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................. $ 4,065
Depreciation and amortization.. 9,410
Other.......................... 2,003
-------
$15,478
=======
</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 $4,065,000 or 9.8% over the corresponding period in
1993. The increase was principally due to a charge of $2,277,000 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 $62,000 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 $9,410,000 or 30.9% compared
with the same period in 1993. The increase was principally due to the effect of
increased rates of depreciation and growth in telephone plant. During the
second quarter of 1994, the Company reached an agreement with the FCC to
increase interstate depreciation expense by approximately $3,900,000 annually
for regulatory reporting purposes, effective August 1, 1994, retroactive to
January 1, 1994. Coincident with the interstate depreciation expense increase,
the Company also increased intrastate depreciation expense, for regulatory
reporting purposes, by approximately $8,600,000 annually, retroactive to January
1, 1994. For financial reporting purposes, depreciation expense in the third
quarter of 1994 increased by approximately $6,800,000, representing the
retroactive portion of the additional depreciation expense described above,
which was recorded prior to the discontinued application of Statement No. 71.
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 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
-11-
<PAGE>
Bell Atlantic - Delaware, Inc.
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.
Other operating expenses consist primarily of contracted services including
centralized service expenses allocated from NSI, rent, network software costs,
operating taxes other than income, and other general and administrative
expenses. Other operating expenses increased $2,003,000 or 3.4%, compared to
the same period in 1993. The increase in other operating expenses was due to
increased non-affiliate contract services, software development costs associated
with the enhancement of the Company's network, and higher supplies costs and
operating taxes other than income. Also contributing to the increase was a
charge of $697,000 for the Company's allocated share of separation benefit costs
recognized under Statement No. 112, and the effect of adjustments to billing
agreements with certain affiliates. These increases were partially offset by
the effect of one-time accruals for certain liabilities recorded in 1993 and
lower costs for contracted services allocated from NSI.
OPERATING INCOME TAXES
The provision for income taxes decreased $2,413,000 or 12.7%, compared to the
same period in 1993. The Company's effective income tax rate was 38.6% for the
nine month period ended September 30, 1994, compared to 39.3% for the same
period in 1993. The decrease in the effective tax rate was principally the
result of adjustments to deferred tax balances partially offset by the reduction
in amortization of investment tax credits as a result of the discontinued
application of Statement No. 71.
OTHER INCOME AND EXPENSE
Other income and expense remained substantially unchanged compared to the same
period in 1993.
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 $216,000 in 1994 and $185,000 for the twelve month
period ended December 31, 1993. The impact of this change was more than offset
by increased income recognized for the allowance for funds used during
construction resulting from higher levels of plant under construction prior to
August 1, 1994.
INTEREST EXPENSE
Interest expense decreased $515,000 or 7.8%, compared to the same period in
1993. This decrease is due to the effect of long-term debt refinancings in
December 1993. Interest expense was further reduced by the recognition of
$105,000 in capitalized interest costs, effective with the discontinued
application of Statement No. 71. These increases were offset in part by
additional expense resulting from higher levels of average short-term debt.
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 $36,926,000, net of an income tax benefit of $35,952,000
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,
-12-
<PAGE>
Bell Atlantic - Delaware, Inc.
information services and entertainment businesses, and a regulatory environment
in which many traditional regulatory barriers are being lowered and competition
permitted or encouraged.
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 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.
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Bell Atlantic - Delaware, Inc.
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 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 the 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
Delaware Public Service Commission (the PSC) with respect to intrastate rates
and services and other matters.
On March 24, 1994, the Company elected to be regulated under the alternative
regulation provisions of the Delaware Telecommunications Technology Investment
Act of 1993 (the Delaware Telecommunications Act). The Delaware
Telecommunications Act modified telecommunications industry regulation for
intrastate services and allows the Company to be regulated under an alternative
regulation plan instead of traditional rate base rate of return regulation. The
Delaware Telecommunications Act provides that the prices of "Basic Telephone
Services" will remain regulated and cannot change in any one year by more than
the rate of inflation, less 3%, the prices of "Discretionary Services", which
are required to be on file with the PSC, cannot increase more than 15% per year
per service after an initial one-year cap, and the prices of "Competitive
Services" will not be subject to tariff. On said date, the Company filed a
technology deployment plan consistent with such legislation pursuant to which it
committed to (i) an investment of a minimum of $250 million during the first
five years of the plan, (ii) make fiber-optic facilities available to public
schools, major medical facilities and state government offices, (iii) make
digital switching available to all customers by 1998, and (iv) connect all of
its central offices with fiber optic cable by the end of the five year plan.
The Delaware Telecommunications Act also provides protections to ensure that
competitors will not be unfairly disadvantaged, including a prohibition on
cross-subsidization, imputation rules, services unbundling and resale service
availability requirements, and a review by the PSC during the fifth year of the
plan. The PSC has initiated a rulemaking docket to develop regulations for the
implementation of the Delaware Telecommunications Act. On June 21, 1994, the
PSC authorized a special negotiation phase of this docket, facilitated by a
mediator, to develop proposed rules which will be mutually agreeable to all
parties. Although the mediation did not produce rules to which the parties
could agree, the parties did agree to certain recommendations which the mediator
was empowered to make to the PSC. On October 18, 1994, the PSC approved the
mediator's recommendation to require the PSC Staff to prepare a revised set of
proposed rules for implementation of the Delaware Telecommunications Act which
accommodates the interests of the parties to the extent possible. The revised
rules are to be filed with the Commission on or before December 19, 1994, after
which time a schedule will be determined to govern the remainder of this
proceeding.
The PSC has also initiated a proceeding to determine whether to require
presubscription and dialing parity ("1+ dialing") for intrastate toll
competitors of the Company. Management believes that intrastate
presubscription, if implemented without adequate compensation and regulatory
relief, could have a material effect on the Company's financial condition and
results of operations. On May 19, 1994, the Company filed an appeal in this
proceeding in Kent County Superior Court, appealing a PSC decision which denied
a motion to disqualify a consulting firm retained by the PSC. On October 4,
1994, Kent County Superior Court dismissed the Company's motion to disqualify
the consulting firm retained by the PSC on the grounds that judicial review at
this time would be premature. The Company expects a PSC decision in this
proceeding during the first quarter of 1995.
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<PAGE>
Bell Atlantic - Delaware, Inc.
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 Superfund and other sites for which the Company has been
designated as a potentially responsible party by the U.S. Environmental
Protection Agency or is a third party defendant. 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 48.3% at September 30, 1994, compared to 37.4% at
December 31, 1993. The debt ratio was significantly impacted by the equity
reduction associated with the discontinued application of Statement No. 71.
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).
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Bell Atlantic - Delaware, 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.
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<PAGE>
Bell Atlantic - Delaware, 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 - DELAWARE, INC.
Date: November 10, 1994 By /s/ John J. Parker
--------------------------------------
John J. Parker
Controller and Treasurer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 7, 1994.
-17-
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