<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 June 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 INCOME AND REINVESTED EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service........................ $29,080 $26,314 $ 57,669 $ 52,239
Network access....................... 15,735 16,061 31,707 31,700
Toll service......................... 9,576 9,128 19,287 18,121
Directory advertising, billing
services and other (including
$179, $158, $321 and $318 from
affiliates)......................... 11,143 10,198 21,823 20,364
Provision for uncollectibles......... (776) (600) (1,738) (1,200)
------- ------- -------- --------
64,758 61,101 128,748 121,224
------- ------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits
and taxes........................... 14,079 13,688 28,290 27,175
Depreciation and amortization........ 10,774 10,321 21,330 20,330
Other (including $10,706, $10,441,
$21,204 and $20,522 to affiliates).. 20,790 18,341 39,468 39,064
------- ------- -------- --------
45,643 42,350 89,088 86,569
------- ------- -------- --------
NET OPERATING REVENUES................. 19,115 18,751 39,660 34,655
------- ------- -------- --------
OPERATING INCOME TAXES
Federal.............................. 5,052 4,848 10,725 8,886
State................................ 1,630 1,617 3,420 2,990
------- ------- -------- --------
6,682 6,465 14,145 11,876
------- ------- -------- --------
OPERATING INCOME....................... 12,433 12,286 25,515 22,779
------- ------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction................. 99 40 180 66
Miscellaneous - net.................. (92) (86) (177) (179)
------- ------- -------- --------
7 (46) 3 (113)
------- ------- -------- --------
INTEREST EXPENSE (including $164,
$47, $211 and $76 to affiliate)....... 2,160 2,177 4,064 4,324
------- ------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE........ 10,280 10,063 21,454 18,342
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Postemployment Benefits, Net of Tax.. --- --- --- (877)
------- ------- -------- --------
NET INCOME............................. $10,280 $10,063 $ 21,454 $ 17,465
======= ======= ======== ========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - Delaware, Inc.
STATEMENTS OF INCOME AND REINVESTED EARNINGS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REINVESTED EARNINGS
At beginning of period.. $55,349 $52,418 $54,235 $52,773
Add: net income......... 10,280 10,063 21,454 17,465
------- ------- ------- -------
65,629 62,481 75,689 70,238
Deduct: dividends....... 10,700 7,200 20,760 14,900
other changes... --- 18 --- 75
------- ------- ------- -------
At end of period........ $54,929 $55,263 $54,929 $55,263
======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - Delaware, Inc.
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
------
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
CURRENT ASSETS
<S> <C> <C>
Cash........................................... $ --- $ 313
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $2,988 and $2,767......... 30,925 23,091
Affiliates................................... 1,870 3,651
Other........................................ 1,309 376
Material and supplies.......................... 1,572 1,490
Prepaid expenses............................... 18,522 6,498
Deferred income taxes.......................... 452 2,545
Other.......................................... 571 335
-------- --------
55,221 38,299
-------- --------
PLANT, PROPERTY AND EQUIPMENT.................... 673,739 655,812
Less accumulated depreciation.................. 258,255 241,595
-------- --------
415,484 414,217
-------- --------
OTHER ASSETS..................................... 17,441 16,666
-------- --------
TOTAL ASSETS..................................... $488,146 $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>
JUNE 30, DECEMBER 31,
1994 1993
----------- ------------
CURRENT LIABILITIES
<S> <C> <C>
Debt maturing within one year:
Affiliate................................... $ 23,458 $ 4,263
Accounts payable:
Parent and affiliates....................... 19,763 15,185
Other....................................... 20,055 20,845
Accrued expenses:
Taxes....................................... 453 2,561
Other....................................... 9,544 8,872
Advance billings and customer deposits....... 14,321 15,896
---------- --------
87,594 67,622
---------- --------
LONG-TERM DEBT................................. 99,040 98,991
---------- --------
EMPLOYEE BENEFIT OBLIGATIONS................... 45,033 43,793
---------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 44,184 45,294
Unamortized investment tax credits........... 9,836 10,367
Other........................................ 29,088 30,438
---------- --------
83,108 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.......................... 54,929 54,235
---------- --------
173,371 172,677
---------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $ 488,146 $469,182
========== ========
</TABLE>
See Notes to Financial Statements.
-4-
<PAGE>
Bell Atlantic - Delaware, Inc.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1994 1993
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ $23,311 $28,122
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment...... (23,834) (18,215)
Net change in note receivable from affiliate.... --- 2,882
Other, net...................................... 338 (42)
------- -------
Net cash used in investing activities............. (23,496) (15,375)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in note payable to affiliate......... 19,195 1,972
Dividends paid.................................. (20,760) (14,900)
Net change in outstanding checks drawn
on controlled disbursement accounts............ 1,437 ---
------- -------
Net cash used in financing activities............. (128) (12,928)
------- -------
NET CHANGE IN CASH ............................... (313) (181)
CASH, BEGINNING OF PERIOD ........................ 313 392
------- -------
CASH, END OF PERIOD .............................. $ --- $ 211
======= =======
</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.
(2) DIVIDEND
On August 1, 1994, the Company declared and paid a dividend in the amount of
$9,765,000 to Bell Atlantic Corporation.
(3) SUBSEQUENT EVENTS
Discontinued Application of Statement No. 71
--------------------------------------------
The Company has historically accounted for the economic effects of regulation
in accordance with the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" (Statement
No. 71). Under Statement No. 71, as a result of actions of regulators, the
Company has depreciated telephone plant using lives prescribed by regulators and
deferred certain costs or recognized certain liabilities (regulatory assets and
liabilities).
On August 15, 1994, the Company's parent, Bell Atlantic Corporation (Bell
Atlantic), announced that it has determined that it is no longer eligible for
continued application of the accounting required by Statement No. 71. The
Company believes 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 will
create 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 price
regulation (including the Company's recent election to be regulated under the
provisions of the Delaware Telecommunications Technology Investment Act of 1993)
contributed to the determination that the continued application of Statement No.
71 is inappropriate.
The discontinued application of Statement No. 71 requires the Company, for
external financial reporting purposes, to eliminate its regulatory assets and
liabilities and adjust the carrying amount of its telephone plant to the extent
that it determines that such amounts either are overstated as a result of the
regulatory process, or are not recoverable. Accordingly, as of August 1, 1994,
the Company will recognize a non-cash, after-tax extraordinary charge of
approximately $36 million to adjust the net carrying amount of telephone plant
and equipment and eliminate net regulatory liabilities. The adjustment to the
net carrying amount of telephone plant and equipment will increase the reserve
for accumulated depreciation by approximately $68 million. The Company's
accounting and reporting for regulatory purposes are not affected by the
discontinued application of Statement No. 71.
As of August 1, 1994, for external financial reporting purposes, the Company
will utilize estimated asset lives for certain categories of plant and equipment
that are
-6-
<PAGE>
Bell Atlantic - Delaware, Inc.
shorter than those currently approved by regulators. The shorter estimated
asset lives result from the Company's current expectations as to the revenue-
producing lives of the assets. A comparison of the current regulator-approved
asset lives and the associated shorter estimated asset lives for the most
significantly impacted categories of plant and equipment follows:
<TABLE>
<CAPTION>
Average Lives (in years)
-------------------------------
Regulator-Approved Estimated
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>
Employee Benefits
-----------------
On August 15, 1994, Bell Atlantic also announced that it will record a charge
in the third quarter of 1994, as required by Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"
(Statement No. 112), to recognize the benefit costs for the separation of
employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
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. The Company will record a pretax charge of
between $2 million and $5 million to recognize its share of the benefit costs
under the separation pay plans.
(4) RESTATEMENT OF 1993 FINANCIAL STATEMENTS
Results of operations for the six months ended June 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 - Delaware, Inc.
SELECTED OPERATING DATA
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
1994 1993
----- ----
<S> <C> <C>
Network Access Lines in Service:
Residence.............................. 302 295
Business............................... 158 150
Public................................. 6 6
---- ----
466 451
==== ====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate............................. 738,948 675,937
Intrastate............................. 18,594 10,589
------- -------
757,542 686,526
======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Toll Messages:
Message Telecommunication Services..... 25,820 23,212
Unidirectional Long-Distance Services.. 3,581 3,800
------ -------
29,401 27,012
====== =======
</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
Net income for the six months ended June 30, 1994 increased $3,989,000 or
22.8% from the corresponding period last year. Results for the six months ended
June 30, 1993 reflect an after-tax charge of $877,000 for the adoption of
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits".
OPERATING REVENUES
Operating revenues for the six months ended June 30, 1994 increased $7,524,000
or 6.2% from the corresponding period last year. The increase in total
operating revenues was comprised of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
<S> <C>
Local service....................... $5,430
Network access...................... 7
Toll service........................ 1,166
Directory advertising, billing
services and other................ 1,459
Less: Provision for uncollectibles.. 538
------
$7,524
======
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$5,430,000 or 10.4%, compared to the same period in 1993. The increase is
attributed to higher revenues resulting from a rate increase, effective in March
1993, as 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 June 30, 1994
increased 3.3% from June 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 remained virtually unchanged from the corresponding
period in 1993. Access minutes of use were 10.3% higher than the first six
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. Growth in network access revenues is 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. This revenue growth was
substantially offset by the reduction of revenues recognized through an
interstate revenue sharing arrangement with affiliated companies and 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. These 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 earned 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 increased $1,166,000
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<PAGE>
Bell Atlantic - Delaware, Inc.
or 6.4%, compared to the same period in 1993. MTS message volumes were 11.2%
higher, while unidirectional long-distance messages decreased 5.8%, compared to
the first six months of 1993 (see Selected Operating Data on page 8). The growth
in MTS message volumes was 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.
Directory advertising, billing services and other revenues increased
$1,459,000 or 7.2%, compared to the same period in 1993. The increase is
primarily due to increased revenues from directory advertising and enhanced
network services. The increase in directory advertising resulted from higher
nonstandard business and residence listings, as well as higher rates for yellow
pages advertising. Revenues from enhanced network services increased due to
higher demand for voice messaging services, as well as the effect of a rate
increase for Residence Answer Call service, effective February 1, 1994. Also
contributing to these revenue increases was additional billing and collection
revenue resulting from an increase in message processing services.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was 1.3% for the first six months of 1994 and 1.0% for the same period
last year.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1994 increased $2,519,000
or 2.9% 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................. $1,115
Depreciation and amortization.. 1,000
Other.......................... 404
------
$2,519
======
</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 $1,115,000 or
4.1%, compared to the same period in 1993, 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 experienced
in the first quarter of 1994 caused by unusually severe winter storm conditions
throughout the region also contributed to the increase in employee costs.
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it will record a charge in the third quarter of 1994, as required by
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," to recognize the benefit costs for the separation of
employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
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. The Company will record a pretax charge of
between $2 million and $5 million to recognize its share of the benefit costs
under the separation pay plans. Costs of enhancing systems and consolidating
work activities will be charged to expense as incurred.
-10-
<PAGE>
Bell Atlantic - Delaware, Inc.
Depreciation and amortization expense increased $1,000,000 or 4.9%, compared
to the same period in 1993. The increase was principally due to higher
depreciation expense resulting from growth in the level of depreciable plant.
In the second quarter of 1994, the Company reached a tentative 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 will also increase intrastate depreciation expense
for regulatory reporting purposes by approximately $8,600,000 annually,
retroactive to January 1, 1994.
For external financial reporting purposes, depreciation expense in the third
quarter of 1994 will increase by approximately $7,700,000, representing the
retroactive portion of the additional depreciation expense described above,
which will be recorded prior to the discontinued application of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (Statement No. 71) (see Other Matters on page 13).
Subsequent to the discontinued application of Statement No. 71, the Company
expects that the use of shorter asset lives when applied to the reduced net
asset base will not significantly impact depreciation expense, for external
financial reporting purposes, for the remainder of 1994.
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 $404,000 or 1.0%, compared to the
same period in 1993. The increase in other operating expenses was due to an
increase in software development costs associated with the enhancement of the
Company's network, and higher material and supplies costs, rent expense and
operating taxes other than income. These increases were substantially 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 increased $2,269,000 or 19.1%, compared to the
same period in 1993. The Company's effective income tax rate was 39.8% for the
six months ended June 30, 1994, compared to 39.1% for the same period in 1993.
The increase in the effective tax rate was principally the result of federal tax
legislation enacted in 1993, which increased the federal corporate tax rate from
34% to 35%.
INTEREST EXPENSE
Interest expense decreased $260,000 or 6.0%, compared to the same period in
1993. This decrease is due to the effect of long-term debt refinancings in
December 1993, offset in part by additional expense resulting from higher levels
of average short-term debt.
COMPETITIVE ENVIRONMENT
The communications industry is currently undergoing 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.
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
potential 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.
-11-
<PAGE>
Bell Atlantic - Delaware, Inc.
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, local
access, and long-distance 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 becoming 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 competitive 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.
On May 19, 1994, Bell Atlantic Corporation announced the specifics underlying
its full service network deployment program to make broadband, interactive,
multimedia services available to up to 8.5 million homes throughout the Bell
Atlantic region by the end of the year 2000. The Company will use a variety of
technologies, on a market by market basis, depending on customer demand and cost
considerations.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. Effective February 1994, the FCC ordered local
exchange carriers (LECs), including the Company, to allow competing carriers to
interconnect to the local exchange network for the purpose of providing switched
access transport services. The terms and conditions of this ruling are similar
to those for special access collocation ordered during 1992. The principal goal
of the FCC's collocation rulings is to encourage competition for these 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. The Company does not expect the net revenue impact of special access
collocation to be material. Revenue losses from switched access collocation,
however, are expected to be larger than from special access collocation. Bell
Atlantic and certain other parties appealed both the special and switched access
collocation orders. 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 are required to
be 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.
In February 1994, the FCC initiated a rulemaking proceeding to determine the
effectiveness of the price cap rules and decide what changes, if any, should be
made to those rules. Under proposed rulemaking, the FCC identified for
examination three broad sets of issues including those related to the basic
goals of price regulation, the operation of price caps and the transition of
local exchange services to a fully competitive market. This rulemaking is
expected to be concluded by the end of 1994. Any changes to the current price
cap plan are expected to be effective January 1, 1995 or shortly thereafter. At
this time, the Company cannot estimate the financial impact, if any, that would
result if the FCC revised its current price cap rules.
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Bell Atlantic - Delaware, Inc.
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" 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. A deadline of September 30, 1994, has been established for the
substantial completion of these efforts.
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. The Company is appealing a PSC
decision which denied a motion to disqualify a consulting firm retained by the
PSC. The Company has also requested that all activity in this proceeding be
stayed while this appeal is pending.
OTHER MATTERS
Subsequent Event - Discontinued Application of Statement No. 71
---------------------------------------------------------------
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it has determined that it is 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). The discontinued application of Statement No. 71 requires the Company, for
external financial reporting purposes, to eliminate its regulatory assets and
liabilities and adjust the carrying amount of its telephone plant to the extent
that it determines that such amounts either are overstated as a result of the
regulatory process, or are not recoverable. Accordingly, as of August 1, 1994,
the Company will recognize a non-cash, after-tax extraordinary charge of
approximately $36 million to adjust the net carrying amount of telephone plant
and equipment and eliminate net regulatory liabilities. The adjustment to the
net carrying amount of telephone plant and equipment will increase the reserve
for accumulated depreciation by approximately $68 million. The Company expects
to report a loss for the third quarter and year as a result of the extraordinary
charge for the discontinued application of Statement No. 71.
As of August 1, 1994, for external financial reporting purposes, the Company
will utilize estimated asset lives for certain categories of plant and equipment
that are shorter than those currently approved by regulators (see Note 3 to the
Financial
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Bell Atlantic - Delaware, Inc.
Statements). It is expected that the use of the shorter asset lives when
applied to the reduced net asset base will not significantly impact depreciation
expense for external financial reporting purposes for the remainder of 1994.
The ongoing impact on operating expense resulting from the elimination of the
amortization of net regulatory liabilities is not expected to be significant in
future periods. The Company's accounting and reporting for regulatory purposes
are not affected by the discontinued application of Statement No. 71.
Environmental Issues
--------------------
The Company is subject to a number of environmental matters 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 sites for which the Company has been designated as a
potentially responsible party by the U.S. Environmental Protection Agency.
Designation as a potentially responsible party subjects the named company to
potential liability for costs relating to cleanup of the affected sites. 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 41.4% at June 30, 1994, compared to 37.4% at
December 31, 1993.
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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
Corporation (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
(b) There were no Current Reports on Form 8-K filed during the quarter
ended June 30, 1994.
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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: August 15, 1994 By /s/ John J. Parker
--------------------------------------
John J. Parker
Controller and Treasurer
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