<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 No. 1-8606
BELL ATLANTIC CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2259884
- ------------------------ -------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
1717 Arch Street
Philadelphia, Pennsylvania 19103
- --------------------------- -------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number,
including area code: 215-963-6000
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At October 31, 1994, 436,210,747 shares of the registrant's Common Stock were
outstanding, after deducting 184,882 shares held in treasury.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
<S> <C>
Part I. Financial Information
1. Financial Statements
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 1994 and 1993.... 2-3
Condensed Consolidated Balance Sheets
September 30, 1994 and December 31, 1993........................... 4-5
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1994 and 1993.............. 6
Notes to Condensed Consolidated Financial Statements................ 7-10
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 11-23
Part II. Other Information
1. Legal Proceedings................................................... 24
6. Exhibits and Reports on Form 8-K.................................... 24
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------
1994 1993
-------- --------
<S> <C> <C>
OPERATING REVENUES
Communications and Related Services
Network Services
Local service........................................ $ 1,324.1 $1,276.7
Network access....................................... 836.8 788.9
Toll service......................................... 376.5 388.6
Directory advertising, billing services and other.... 432.5 435.4
Provision for uncollectibles......................... (40.0) (39.3)
Other Communications and Related Services............. 444.7 330.8
Financial, Real Estate, and Other Services............. 40.7 108.5
--------- --------
3,415.3 3,289.6
--------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes........... 1,236.2 1,036.6
Depreciation and amortization.......................... 674.7 657.1
Other.................................................. 913.4 875.2
--------- --------
2,824.3 2,568.9
--------- --------
OPERATING INCOME....................................... 591.0 720.7
Other Income and Expense, Net.......................... 2.5 25.2
Interest Expense, excluding Financial Services......... 153.6 151.4
--------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEMS................................... 439.9 594.5
Provision for Income Taxes............................. 164.2 207.8
--------- --------
INCOME BEFORE EXTRAORDINARY ITEMS...................... 275.7 386.7
--------- --------
EXTRAORDINARY ITEMS
Discontinuation of Regulatory Accounting Principles,
Net of Tax............................................ (2,150.0) --
Early Extinguishment of Debt, Net of Tax............... -- (8.2)
--------- --------
(2,150.0) (8.2)
--------- --------
NET INCOME (LOSS)...................................... $(1,874.3) $ 378.5
========= ========
PER COMMON SHARE
- ----------------
INCOME BEFORE EXTRAORDINARY ITEMS...................... $ .63 $ .89
EXTRAORDINARY ITEMS.................................... (4.92) (.02)
--------- --------
NET INCOME (LOSS)...................................... $ (4.29) $ .87
========= ========
Dividends declared..................................... $ .69 $ .67
========= ========
Weighted Average Number of Common Shares and
Equivalent Shares Outstanding (in millions)........... 437.3 436.4
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
1994 1993
------ ------
<S> <C> <C>
OPERATING REVENUES
Communications and Related Services
Network Services
Local service........................................ $ 3,922.9 $3,773.6
Network access....................................... 2,424.4 2,307.4
Toll service......................................... 1,189.6 1,164.6
Directory advertising, billing services and other.... 1,303.4 1,281.2
Provision for uncollectibles......................... (122.3) (116.5)
Other Communications and Related Services............. 1,248.0 930.0
Financial, Real Estate, and Other Services............. 216.6 332.7
--------- --------
10,182.6 9,673.0
--------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes........... 3,312.9 3,008.6
Depreciation and amortization.......................... 1,972.4 1,895.3
Other.................................................. 2,760.0 2,578.7
--------- --------
8,045.3 7,482.6
--------- --------
OPERATING INCOME....................................... 2,137.3 2,190.4
Other Income and Expense, Net.......................... 69.1 59.0
Interest Expense, excluding Financial Services......... 437.4 470.8
--------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES,
EXTRAORDINARY ITEMS, AND CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES...................... 1,769.0 1,778.6
Provision for Income Taxes............................. 682.0 634.2
--------- --------
INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES............ 1,087.0 1,144.4
--------- --------
EXTRAORDINARY ITEMS
Discontinuation of Regulatory Accounting Principles,
Net of Tax............................................ (2,150.0) --
Early Extinguishment of Debt, Net of Tax............... (6.7) (54.3)
--------- --------
(2,156.7) (54.3)
--------- --------
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
Income Taxes........................................... -- 65.2
Postemployment Benefits, Net of Tax.................... -- (85.0)
--------- --------
-- (19.8)
--------- --------
NET INCOME (LOSS)...................................... $(1,069.7) $1,070.3
========= ========
PER COMMON SHARE
- ----------------
INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES............ $ 2.49 $ 2.62
EXTRAORDINARY ITEMS.................................... (4.94) (.12)
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES.. -- (.04)
--------- --------
NET INCOME (LOSS)...................................... $ (2.45) $ 2.46
========= ========
Dividends declared..................................... $ 2.07 $ 2.01
========= ========
Weighted Average Number of Common Shares and
Equivalent Shares Outstanding (in millions)........... 437.3 435.9
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................... $ 226.1 $ 146.1
Short-term investments............................. -- 8.5
Accounts receivable, net of allowances of $179.9
and $192.6........................................ 2,342.1 2,135.7
Notes and finance lease receivables, net........... 267.0 626.6
Inventories........................................ 265.0 250.9
Prepaid expenses................................... 586.2 452.4
Deferred charges and other......................... 231.6 250.6
--------- ---------
3,918.0 3,870.8
--------- ---------
PLANT, PROPERTY AND EQUIPMENT...................... 33,439.6 32,329.9
Less accumulated depreciation...................... 16,728.6 11,964.0
--------- ---------
16,711.0 20,365.9
--------- ---------
EQUIPMENT UNDER OPERATING LEASES, NET.............. 26.9 199.3
NOTES AND FINANCE LEASE RECEIVABLES, NET........... 1,172.4 1,888.4
INVESTMENTS IN AFFILIATES.......................... 1,950.9 1,394.7
OTHER ASSETS....................................... 738.7 1,825.1
--------- ---------
TOTAL ASSETS....................................... $24,517.9 $29,544.2
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions)
LIABILITIES AND SHAREOWNERS' INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year.... $ 2,333.3 $ 2,677.3
Accounts payable................. 1,883.5 2,134.9
Accrued expenses................. 352.1 434.9
Other............................ 907.8 876.8
--------- ---------
5,476.7 6,123.9
--------- ---------
LONG-TERM DEBT................... 6,924.8 7,206.2
--------- ---------
EMPLOYEE BENEFIT OBLIGATIONS..... 3,744.1 3,396.0
--------- ---------
DEFERRED CREDITS AND OTHER
LIABILITIES
Deferred income taxes............ 1,347.2 2,913.5
Unamortized investment tax
credits......................... 185.4 447.2
Other............................ 408.1 1,233.0
--------- ---------
1,940.7 4,593.7
--------- ---------
PREFERRED STOCK OF SUBSIDIARY.... 85.0 --
--------- ---------
SHAREOWNERS' INVESTMENT
Preferred and Preference stock
($1 par value; none issued)..... -- --
Common stock ($1 par value;
436,348,717 shares and
436,130,185 shares issued)...... 436.3 436.1
Common stock issuable
(139,348 shares and 142,068
shares)......................... .1 .1
Contributed capital.............. 5,427.3 5,415.2
Reinvested earnings.............. 1,128.3 3,093.6
Foreign currency translation
adjustment...................... (38.0) (83.9)
--------- ---------
6,954.0 8,861.1
Less common stock in treasury,
at cost......................... 9.2 2.4
Less deferred
compensation-employee stock
ownership plans................. 598.2 634.3
--------- ---------
6,346.6 8,224.4
--------- ---------
TOTAL LIABILITIES AND
SHAREOWNERS' INVESTMENT......... $24,517.9 $29,544.2
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1994 1993
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................ $(1,069.7) $ 1,070.3
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,972.4 1,895.3
Extraordinary items, net of tax........................ 2,156.7 54.3
Cumulative effect of changes in accounting principles,
net of tax............................................ -- 19.8
Other items, net....................................... (36.6) (37.0)
Changes in certain assets and liabilities, net of
effects from acquisition/disposition of businesses.... (478.0) 42.8
--------- ---------
Net cash provided by operating activities................ 2,544.8 3,045.5
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments..................... 8.5 34.0
Additions to plant, property and equipment............... (1,677.1) (1,528.6)
Proceeds from sale of plant, property and equipment...... 8.6 2.4
Additions to equipment under operating leases............ (5.9) (54.0)
Proceeds from sale of equipment under operating leases... 17.5 33.8
Additions to notes and finance lease receivables......... (735.5) (1,329.5)
Proceeds from sales related to notes and finance lease
receivables............................................. 19.7 148.4
Principal payments received under notes and finance lease
receivables............................................. 697.3 1,155.1
Acquisition of businesses, less cash acquired............ (34.6) (127.1)
Investment in Grupo Iusacell, S.A. de C.V. .............. (524.0) --
Proceeds from sale of ownership interest in
Telecom Corporation of New Zealand Limited.............. -- 253.7
Proceeds from Telecom Corporation of New Zealand Limited
capital reduction plan.................................. 67.4 --
Investment in joint ventures............................. (30.6) --
Proceeds from disposition of businesses.................. 1,273.2 --
Other, net............................................... (41.1) (21.2)
--------- ---------
Net cash used in investing activities.................... (956.6) (1,433.0)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings................................. 249.6 1,999.1
Principal repayments of borrowings and capital
lease obligations....................................... (547.8) (587.0)
Early extinguishment of debt and related call
premium................................................. (362.0) (1,617.3)
Net change in short-term borrowings with original
maturities of three months or less...................... (3.0) (454.4)
Dividends paid........................................... (894.1) (864.5)
Proceeds from sale of common stock....................... 6.7 27.6
Purchase of common stock for treasury.................... (8.7) --
Net change in outstanding checks drawn on controlled
disbursement accounts................................... (33.9) (140.9)
Proceeds from sale of preferred stock by subsidiary...... 85.0 --
--------- ---------
Net cash used in financing activities.................... (1,508.2) (1,637.4)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 80.0 (24.9)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 146.1 296.0
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 226.1 $ 271.1
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
---------------------
The accompanying financial statements are unaudited and have been prepared by
Bell Atlantic Corporation (Bell Atlantic or 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's telephone subsidiaries included in the
consolidated financial statements no longer report using generally accepted
accounting principles applicable to regulated entities (Note 3).
2. Shareowners' Investment
-----------------------
<TABLE>
<CAPTION>
(Dollars in Millions)
--------------------------------------------------------------------------------------
Foreign
Common Currency Deferred
Common Stock Contributed Reinvested Translation Treasury Compensation
Stock Issuable Capital Earnings Adjustment Stock ESOPs
------ -------- ----------- ---------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993........... $436.1 $ .1 $5,415.2 $ 3,093.6 $(83.9) $2.4 $634.3
Loss................................. (1,069.7)
Dividends declared on common stock... (902.9)
Acquisitions......................... (1.2)
Purchase of common stock for
treasury........................... 8.7
Common stock distributed in
connection with stock incentive
plans.............................. .2 12.1 (.7) (.7)
Foreign currency translation
adjustment, net.................... 45.9
Reduction of ESOP obligations........ (36.1)
Tax benefit of dividends
paid to ESOPs...................... 8.0
------ ---- -------- --------- ------ ---- ------
Balance, September 30, 1994.......... $436.3 $ .1 $5,427.3 $ 1,128.3 $(38.0) $9.2 $598.2
====== ==== ======== ========= ====== ==== ======
</TABLE>
During the nine months ended September 30, 1994, the Company repurchased 173,729
shares of its common stock for treasury, and issued 25,506 treasury shares
pursuant to acquisition agreements and 13,300 treasury shares in connection with
stock incentive plans.
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 $2,150.0 million, which
is net of an income tax benefit of $1,498.4 million.
7
<PAGE>
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 various forms of incentive regulation in
all jurisdictions 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 Millions)
----------------------
Pre-tax After-tax
--------- -----------
<S> <C> <C>
Increase in plant and equipment depreciation reserve.... $3,463.0 $2,128.9
Accelerated investment tax credit amortization.......... -- (136.2)
Tax-related regulatory asset and liability elimination.. -- 42.5
Other regulatory asset and liability elimination........ 185.4 114.8
-------- --------
Total................................................... $3,648.4 $2,150.0
======== ========
</TABLE>
The accumulated depreciation reserve was increased by $3,463.0 million. 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 $757.2 million and tax-related regulatory liabilities of $714.7 million 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 discontinuance 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 17-19 12
Digital Circuit 11-13 9-11
Conduit 50-60 50
Copper Cable 20-30 14-19
Fiber Cable 20-30 20-25
</TABLE>
8
<PAGE>
As a result of the discontinued application of Statement No. 71, regulatory
accounting principles no longer apply to the telephone subsidiaries for
financial accounting and reporting purposes. The telephone subsidiaries no
longer recognize regulatory assets and liabilities and the related amortization.
Additionally, the telephone subsidiaries report depreciation expense based on
economic asset lives and report capitalized interest cost 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 telephone subsidiaries 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
telephone subsidiaries' accounting and reporting for regulatory purposes are not
affected by the discontinued application of Statement No. 71.
4. Long-Term Debt - Bell Atlantic Financial Services, Inc.
-------------------------------------------------------
Debt securities of Bell Atlantic Financial Services, Inc. (FSI) (aggregating
$700.1 million at September 30, 1994) have the benefit of a Support Agreement
dated October 1, 1992 between Bell Atlantic and FSI, under which Bell Atlantic
has committed to make payments of interest, premium, if any, and principal on
the FSI debt in the event of FSI's failure to pay. The Support Agreement
provides that the holders of FSI debt shall not have recourse to the stock or
assets of Bell Atlantic's telephone subsidiaries. However, in addition to
dividends paid to Bell Atlantic by any of its consolidated subsidiaries, assets
of Bell Atlantic that are not subject to such exclusion are available as
recourse to holders of FSI debt. The carrying value of the available assets
reflected in the consolidated financial statements of Bell Atlantic was
approximately $5 billion at September 30, 1994.
5. Extraordinary Item - Early Extinguishment of Debt
-------------------------------------------------
Costs associated with the early extinguishment of debentures called by the
Company's telephone subsidiaries reduced net income by $8.2 million (net of an
income tax benefit of $5.0 million) for the three months ended September 30,
1993, and by $6.7 million (net of an income tax benefit of $3.6 million) and
$54.3 million (net of an income tax benefit of $33.9 million) for the nine
months ended September 30, 1994 and 1993, respectively.
6. Postemployment Benefits
-----------------------
In the third quarter of 1994, the Company recorded a pretax charge of $161.9
million, in accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits," to recognize benefit costs
for the separation of employees who are entitled to benefits under preexisting
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. The Company expects to separate a total of
5,600 management and associate employees through 1997. The separation benefit
costs associated with this workforce reduction are included in this charge.
7. Disposition of Businesses
-------------------------
On April 30, 1994, the Company sold the assets of Bell Atlantic TriCon Leasing
Corporation (TriCon), except for leveraged lease and project finance portfolios,
to GFC Financial Corporation (GFC). The sale price consisted of $344.2 million
in cash and $840.7 million in notes receivable, plus the assumption of $81.8
million of liabilities by the purchaser. In addition, the Company retained
$586.7 million of debt instruments of TriCon and received an equal amount of
notes receivable from GFC. The principal and interest payments on the retained
debt matches the principal and interest payments receivable on the notes from
GFC. The Company reported a pretax gain of $38.5 million as a result of this
transaction.
In the third quarter of 1994, the Company recorded pretax charges aggregating
$35.4 million in connection with its decision to dispose of a subsidiary that
sells and distributes liquefied petroleum gas and a foreign cellular operation.
9
<PAGE>
8. Sale of Preferred Stock by Subsidiary
-------------------------------------
On June 2, 1994, Bell Atlantic New Zealand Holdings, Inc. (BANZHI), a subsidiary
of the Company, issued 850,000 shares of Series A Preferred Stock at a price per
share of $100 with a dividend rate of $7.08 per share per annum, pursuant to a
private placement. The preferred stock is subject to mandatory redemption on May
1, 2004 at a redemption price per share of $100. BANZHI and another subsidiary
of the Company indirectly own the Company's investment in Telecom Corporation of
New Zealand Limited.
9. Joint Venture Agreement and Wireless Partnerships
-------------------------------------------------
On June 29, 1994, the Company and NYNEX Corporation executed a Joint Venture
Formation Agreement, which sets forth the terms and conditions under which the
parties intend to combine their domestic cellular properties and bid jointly in
the forthcoming Federal Communications Commission auctions for personal
communications service (PCS) licenses. The Joint Venture Formation Agreement was
filed as an exhibit to the Company's Current Report on Form 8-K, dated June 30,
1994. The transaction is subject to receipt of regulatory approvals and various
other conditions to closing. The parties expect to close the transaction in the
second quarter of 1995.
On October 20, 1994, the Company, NYNEX Corporation, AirTouch Communications,
and U S West Inc. formed two partnerships. The first is a partnership to bid for
licenses in the upcoming PCS auctions and to provide PCS services. A second
partnership will develop a national branding and marketing strategy and
standardized features for cellular and PCS services. The cellular properties of
Bell Atlantic/NYNEX will not be merged with the properties of AirTouch/U S West.
10. Investment in Grupo Iusacell, S.A. de C.V.
------------------------------------------
In August 1994, Bell Atlantic purchased shares of Grupo Iusacell, S.A. de C.V.
(Iusacell) owned by the Peralta family for an aggregate purchase price of $524.0
million, thereby increasing the Company's investment in Iusacell to $1,044.0
million (an approximate 42% economic interest). Substantially all of the
Company's investment in Iusacell is in excess of the recorded value of the
proportionate share of the underlying net assets and is being amortized by the
straight-line method over a period of 25 years. Shares held by Bell Atlantic
represent approximately 44% of the voting rights pertaining to Iusacell stock.
11. 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 of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits," effective January 1, 1993.
12. Reclassifications
-----------------
Certain reclassifications of prior years' data have been made to conform to 1994
classifications.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
- ---------------------
RESULTS OF OPERATIONS (Dollars in Millions)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1994 1993 1994 1993
--------- ------- -------- ---------
<S> <C> <C> <C> <C>
Income before Extraordinary Items and Cumulative
Effect of Changes in Accounting Principles................ $ 275.7 $ 386.7 $1,087.0 $1,144.4
Extraordinary Items
Discontinuation of Regulatory Accounting Principles,
net of tax.............................................. (2,150.0) ---- (2,150.0) ----
Early Extinguishment of Debt, net of tax.................. ---- (8.2) (6.7) (54.3)
Cumulative Effect of Changes in Accounting Principles
Income Taxes.............................................. ---- ---- ---- 65.2
Postemployment Benefits, net of tax....................... ---- ---- ---- (85.0)
--------- ------- --------- --------
Net Income (Loss)........................................... $(1,874.3) $ 378.5 $(1,069.7) $1,070.3
========= ======= ========= ========
</TABLE>
- -------------------------------------------------------------------------------
The Company reported a loss for the three months and nine months ended September
30, 1994 of $1,874.3 million and $1,069.7 million, respectively, and a loss per
share of $4.29 and $2.45, respectively.
Results for the third quarter and year-to-date 1994 include a non-cash, after-
tax extraordinary charge of $2,150.0 million, or $4.92 per share, 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 $157.3 million. In addition,
the Company recorded an after-tax charge of $1,992.7 million, net of related
investment tax credits of $136.2 million, 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 increase
depreciation expense for the fourth quarter of 1994 by approximately $20
million, 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 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 telephone subsidiaries' accounting and reporting for regulatory
purposes are not affected by the discontinued application of Statement No. 71.
See Note 3 to the Condensed Consolidated Financial Statements for additional
information on the discontinuation of regulatory accounting principles.
11
<PAGE>
In the third quarter of 1994, the Company recorded a pretax charge of $161.9
million ($99.5 million after-tax), or $.23 per share, in accordance with
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (Statement No. 112), to recognize benefit costs for the
separation of employees who are entitled to benefits under preexisting
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. The Company expects to separate a total of
5,600 management and associate employees through 1997. The separation benefit
costs associated with this workforce reduction are included in the charge.
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
6 to the Condensed Consolidated 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 in 1995 through 1997. Management also
expects to recognize additional costs to enhance systems and consolidate work
activities which will be charged to expense as incurred.
During the third quarter of 1994, the Company recorded pretax charges
aggregating $35.4 million ($22.3 million after-tax), or $.05 per share, in
connection with its decision to dispose of two non-strategic businesses. These
dispositions are not expected to have a significant impact on results of
operations in the future. In the second quarter of 1994, the Company sold the
assets of Bell Atlantic TriCon Leasing Corporation (except for the leveraged
lease and project finance portfolios), resulting in a pretax gain of $38.5
million ($20.4 million after-tax) (see Note 7 to the Condensed Consolidated
Financial Statements). Future periods will no longer include a significant
portion of revenues and expenses from this leasing business. Revenues and
expenses related to the portion of the portfolio that was sold were $245.3
million and $191.6 million, respectively, for the year ended December 31, 1993,
and $71.6 million and $60.7 million, respectively, for the four month period
ended April 30, 1994.
Additionally, the Company's investment in Grupo Iusacell, S.A. de C.V.
(Iusacell) resulted in charges of $.03 per share in the third quarter of 1994
and $.09 per share in the first nine months of 1994 resulting from the effects
of carrying costs, and equity and foreign exchange losses associated with the
Iusacell investment.
These and other items affecting the comparison of operating results are
discussed in the following sections.
12
<PAGE>
OPERATING REVENUES - Period ended September 30, 1994 compared to period ended
September 30, 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease)
(Dollars in Millions)
Three Months Nine Months
------------ -----------
<S> <C> <C>
Communications and Related Services
Network Services
Local service...................................... $ 47.4 $ 149.3
Network access..................................... 47.9 117.0
Toll service....................................... (12.1) 25.0
Directory advertising, billing services and other.. (2.9) 22.2
Provision for uncollectibles....................... (.7) (5.8)
Other Communications and Related Services............ 113.9 318.0
Financial, Real Estate, and Other Services............. (67.8) (116.1)
-------- --------
$ 125.7 $ 509.6
======== ========
</TABLE>
- -------------------------------------------------------------------------------
Total operating revenues for the third quarter of 1994 increased $125.7 million
or 3.8%, while year-to-date operating revenues increased $509.6 million or 5.3%
from the corresponding periods last year.
Local service revenues are earned by the telephone subsidiaries from the
provision of local exchange, local private line, and public telephone services.
Local service revenues for the third quarter and first nine months of 1994
increased $47.4 million or 3.7%, and $149.3 million or 4.0%, respectively,
compared with the same periods in 1993. The increases 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 2.8% from September 30, 1993. Revenues from value-
added central office services offered by the telephone subsidiaries increased
approximately $15 million or 14.1% in the third quarter of 1994 and
approximately $47 million or 15.2% in the first nine months of 1994 over the
same periods last year.
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 $47.9 million or 6.1% and $117.0 million or
5.1%, respectively, over the corresponding third quarter and first nine months
of the prior year. Access minutes of use for the three and nine month periods
ended September 30, 1994 were higher than the corresponding periods of 1993 by
9.0% and 9.2%. The increases in network access revenues are due principally to
higher customer demand as reflected by growth in access minutes of use, as well
as increased network access lines in service. Revenues for the three and nine
month periods of 1994 were further increased by lower support payments to the
National Exchange Carrier Association (NECA) interstate common line pool. These
revenue increases were partially offset by the effect of an interstate rate
reduction filed by the Company
13
<PAGE>
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 on 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 decreased $12.1 million or 3.1% from the third quarter of
1993 and increased $25.0 million or 2.1% over the first nine months of 1993.
Toll message volumes (including messages from optional calling plans) for the
three and nine month periods ended September 30, 1994 grew 1.1% and 3.1%,
respectively, over the comparable periods last year. Revenues in the third
quarter of 1994 decreased, reflecting a lower rate of growth in toll message
volumes due to increased competition, including the July 1, 1994 commencement of
intraLATA toll competition in Bell Atlantic - New Jersey, and the effect of
repricing calling plan options in response to competitive pressures. Volume-
related revenue growth during the nine month period was boosted by the effect of
harsh weather conditions during the first quarter of 1994. Competitive
pressures continue to result in declines in revenues from WATS, interstate and
corridor services, and private line services in the third quarter and first nine
months of 1994.
Other Network Services revenues include amounts earned from directory
advertising, billing and collection services provided to IXCs, premises services
such as inside wire installation and maintenance, and certain nonregulated
enhanced network services. Other Network Services revenues decreased $2.9
million or .7% and increased $22.2 million or 1.7% compared with the
corresponding quarter and first nine months of 1993. Directory advertising
revenues were $7.5 million or 2.9% and $23.2 million or 3.0% higher than the
corresponding periods of the prior year. Revenues from voice messaging
services, including Answer Call, were approximately $5 million higher in the
third quarter of 1994 and approximately $15 million higher year-to-date as
compared with the corresponding periods last year. Premises services revenues
further increased other revenues during the three and nine month periods of
1994. These revenue increases were more than offset in the third quarter and
partially offset year-to-date by the effect of billing adjustments in both the
prior and current years and lower facilities rental revenues.
The provision for uncollectibles increased $.7 million or 1.8% for the three
month period ended September 30, 1994, and $5.8 million or 5.0% year-to-date
over the comparable periods in 1993. The year-to-date increase includes a $9.9
million charge related to prior year fraudulent calling card toll calls made
through IXCs.
Other Communications and Related Services includes revenues from the Company's
domestic and international operations in wireless communications, computer
maintenance, software development and support, systems integration, and
telecommunications consulting. Revenues from these sources grew $113.9 million
or 34.4% over the third quarter of 1993 and $318.0 million or 34.2% over the
corresponding first nine months. The continued growth of the Company's cellular
customer base was the primary reason for increases in cellular operations
revenues of $66.6 million or 33.1% and $206.2 million or 37.5% over the
respective three and nine month periods of the prior year. Strong growth in
revenues in the Company's wireless businesses is expected to continue
in 1995. Volume-related increases in the Company's third-party computer
maintenance business of $19.7 million or 19.1% and $59.7 million or 20.2% in the
third quarter and first nine months of 1994, respectively, also contributed to
the increase in revenues. Revenue growth of approximately $29 million and $58
million from systems integration operations in the third quarter and
year-to-date 1994, respectively, was partially offset by lower revenues in the
software development businesses due to the disposition of two business units at
the end of 1993 and the disposition of a third subsidiary in May 1994.
14
<PAGE>
Due to the restructuring of the New York SMSA Limited Partnership agreement
between Bell Atlantic Mobile Systems (BAMS) and NYNEX Mobile Communications
Company on May 1, 1994, Other Communications and Related Services revenues no
longer include cellular revenues associated with BAMS' reseller operation in the
New York-Northern New Jersey SMSA. Beginning in May 1994, these operations are
accounted for using the equity method. This change did not have a significant
impact on operating revenues.
Financial, Real Estate, and Other Services includes revenues from the Company's
domestic and international operations in diversified leasing, computer leasing,
real estate, and liquefied petroleum gas distribution. The three and nine month
revenues decreased $67.8 million or 62.5% and $116.1 million or 34.9%,
respectively, over the same periods in 1993, primarily as a result of the April
1994 sale of the majority of the leasing portfolio owned by TriCon. The Company
is no longer providing new leasing services and expects this decreasing revenue
trend to continue throughout 1994 and 1995.
OPERATING EXPENSES - Period ended September 30, 1994 compared to period ended
September 30, 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions)
Three Months Nine Months
------------ -----------
<S> <C> <C>
Employee costs.................. $199.6 $304.3
Depreciation and amortization... 17.6 77.1
Other operating expenses........ 38.2 181.3
------ ------
$255.4 $562.7
====== ======
</TABLE>
- -------------------------------------------------------------------------------
Total operating expenses for the third quarter and first nine months of 1994
increased $255.4 million or 9.9% and $562.7 million or 7.5%, respectively, from
the corresponding periods last year.
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes. Employee costs increased $199.6 million or
19.3% and $304.3 million or 10.1% in the third quarter of 1994 and year-to-date,
respectively, over the corresponding periods in 1993. These increases were
principally due to the aforementioned charge of $161.9 million to recognize, in
accordance with Statement No. 112, benefit costs for the separation of
employees who are entitled to benefits under preexisting separation pay plans.
Third quarter 1994 employee costs also included approximately $4 million for the
ongoing accrual of separation benefit costs under these separation pay plans.
Additionally, the third quarter and year-to-date employee costs were higher due
to a combination of salary and wage increases, increased overtime, and an
increase in the number of employees at the wireless and computer maintenance
subsidiaries. Higher repair and maintenance activity caused by unusually severe
weather conditions experienced in 1994 throughout the region contributed to the
overall increase in employee costs in the third quarter and first nine months of
the year. These expense increases were offset in part by lower workforce levels
at the telephone subsidiaries and the effect of the disposition of several
nonregulated subsidiaries during 1994.
Depreciation and amortization expense increased $17.6 million or 2.7% and $77.1
million or 4.1% compared with the third quarter and the nine month periods in
1993, respectively. These increases were due principally to growth in telephone
and cellular plant and increased rates of depreciation at the
15
<PAGE>
telephone subsidiaries, including depreciation increases resulting from the
Company's aforementioned discontinued application of Statement No. 71, effective
August 1, 1994. The Company is using shorter asset lives for certain
categories of plant and equipment which reflect the Company's expectations as to
the revenue-producing lives of the assets (see Note 3 to the Condensed
Consolidated Financial Statements). The use of the shorter asset lives
increased depreciation expense in the third quarter of 1994, for financial
reporting purposes, by approximately $15 million. The Company expects
depreciation expense to increase in the fourth quarter of 1994 by approximately
$20 million, 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. Future depreciation
represcriptions by regulators will not affect depreciation expense for financial
reporting purposes. The expense increases were partially offset by a reduction
in depreciation and amortization expense at the financial services companies due
to the decreased emphasis on computer leasing and the April 1994 sale of a
substantial portion of TriCon's assets.
Other operating expenses increased $38.2 million or 4.4% and $181.3 million or
7.0%, respectively, during the three and nine month periods ended September 30,
1994, as compared with the same periods in the prior year. These increases
resulted principally from higher volumes of business at the Company's network
services, cellular, computer maintenance and systems integration subsidiaries,
and increased expenses for video services development. Additionally, in the
first quarter of 1994, the Company recorded a charge of approximately
$13 million for legal, consulting and investment banking fees incurred in
connection with the proposed merger between the Company, Tele-Communications,
Inc. and Liberty Media Corporation, which was abandoned. The total effect of
these increases was partially offset by lower expenses in the software
development businesses due to the disposition of several business units, and
lower expenses in the financial services businesses due principally to the April
1994 sale of TriCon.
In connection with the aforementioned restructuring of the New York SMSA Limited
Partnership agreement between BAMS and NYNEX Mobile Communications Company on
May 1, 1994, other operating expenses no longer include cellular expenses
associated with BAMS' reseller operation in the New York-Northern New Jersey
SMSA. Beginning in May 1994, these operations are accounted for using the
equity method. This change did not have a significant impact on operating
expenses.
OTHER INCOME AND EXPENSE, NET
- -----------------------------
Other income and expense includes equity income and losses and goodwill
amortization related to the Company's investments in unconsolidated businesses,
interest and dividend income, and gains and losses from the disposition of non-
operating assets and investments. The Company reported other income and expense
for the three and nine month periods ended September 30, 1994 of $2.5 million
and $69.1 million, respectively. In 1993, other income and expense for the
comparable periods was $25.2 million and $59.0 million, respectively.
Other income and expense in the third quarter of 1994 includes pretax charges of
$35.4 million in connection with the Company's decision to dispose of two non-
strategic businesses and approximately $25 million of interest income related to
notes receivable held by the Company in connection with the sale of TriCon (see
Note 7 to the Condensed Consolidated Financial Statements.) The second quarter
of 1994 included a pretax gain of $38.5 million related to the sale of TriCon.
Other income and expense also reflects certain charges associated with the
Company's Iusacell investment and improved operating results from the Company's
unconsolidated investment in Telecom Corporation of New Zealand Limited
(Telecom).
16
<PAGE>
Other income and expense for the first nine months of 1993 included a pretax
charge of $25.8 million associated with the disposition of certain non-strategic
businesses, a pretax gain of $63.0 million for the sale of a portion of the
Telecom investment, and a pretax charge of approximately $42 million
representing the Company's share of non-recurring charges taken by Telecom.
Prior to the discontinued application of Statement No. 71, the telephone
subsidiaries 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 $16.0 million in 1994 and
$22.4 million for the twelve month period ended December 31, 1993. The amount
of capitalized interest cost recorded by the telephone subsidiaries as a
reduction to interest expense in the third quarter of 1994 was $5.9 million.
INTEREST EXPENSE, EXCLUDING FINANCIAL SERVICES
- ----------------------------------------------
Interest expense increased $2.2 million or 1.5% and decreased $33.4 million or
7.1% compared with the third quarter and nine month periods in 1993,
respectively. The third quarter of 1994 includes approximately $19 million of
interest expense associated with the $586.7 million of TriCon debt (see Note 7
to the Condensed Consolidated Financial Statements), which was previously
recognized as an operating expense of the Company's former leasing operation.
Additionally, the 1994 third quarter and nine months included interest expense
of $5.0 million and $11.0 million, respectively, associated with the Company's
investment in Iusacell. These increases were substantially offset in the third
quarter and more than offset for the year by lower interest costs due to the
effect of long-term debt refinancings at the telephone and real estate
subsidiaries and a reduction in the Telecom acquisition-related debt. Interest
expense in the third quarter and year-to-date 1994 was further reduced by the
recognition of $5.9 million in capitalized interest costs at the telephone
subsidiaries, effective with the discontinued application of Statement No. 71.
INCOME TAXES
- ------------
The provision for income taxes decreased $43.6 million or 21.0% for the three
month period ended September 30, 1994 and increased $47.8 million or 7.5% for
the nine month period ended September 30, 1994 compared with the same periods
in 1993.
The Company's effective income tax rates were 37.3% and 38.6% for the three and
nine month periods ended September 30, 1994 compared with 35.0% and 35.7% for
the corresponding periods last year. The higher effective tax rates in 1994 were
principally the result of recording an adjustment to deferred state income taxes
on the remaining leveraged lease portfolio of TriCon, the reduction in
amortization of investment tax credits at the telephone subsidiaries 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%.
17
<PAGE>
EXTRAORDINARY ITEMS
- -------------------
As discussed in Note 3 to the Condensed Consolidated Financial Statements, in
connection with the Company's decision to discontinue regulatory accounting
principles under Statement No. 71, the Company recorded a non-cash, after-tax
extraordinary charge of $2,150.0 million, net of an income tax benefit of
$1,498.4 million, in the third quarter of 1994.
During the first nine months of 1994, one of the telephone subsidiaries called
$250 million of long-term debentures, which were refinanced at more favorable
interest rates. As a result of the early retirement of this debt, the Company
incurred after-tax charges of $6.7 million. For the nine months ended September
30, 1993, the Company incurred charges of $54.3 million for the early retirement
of debt. The debt refinancing in 1994 is expected to reduce interest costs on
the refinanced debt by approximately $5 million annually.
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.
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 in most
jurisdictions for intraLATA toll services) and competing cellular telephone
companies. As described in State Regulation, competitors are also planning to
provide and resell local exchange telecommunications services to business
customers. 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 telephone subsidiaries' 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 telephone subsidiaries, 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 the regulatory commissions.
The potential impact is expected to be offset, to some extent, by revenues from
interconnection charges to be paid to the telephone subsidiaries by these
competitors.
The Company continues to focus its efforts on becoming more competitive and
seeking growth opportunities in businesses where it possesses core competencies.
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
18
<PAGE>
workforce through consolidation, re-engineering and streamlining initiatives,
and to achieve an improved regulatory and legislative environment. Several of
the Company's recent initiatives to take advantage of the growth opportunities
created by technological advances and the convergence of the telecommunications,
information services and entertainment industries are described below.
In June 1994, the Company and NYNEX Corporation (NYNEX) executed a Joint Venture
Formation Agreement, which sets forth the terms and conditions under which the
parties intend to combine their domestic cellular properties and bid jointly in
the forthcoming FCC auctions for personal communications services (PCS)
licenses. The Joint Venture Formation Agreement was filed as an exhibit to the
Company's Current Report on Form 8-K, dated June 30, 1994. The transaction is
subject to receipt of regulatory approvals and various other conditions to
closing. The parties expect to close the transaction in the second quarter of
1995.
On October 20, 1994, the Company, NYNEX, Airtouch Communications and U S West
Inc. formed two partnerships. The first is a partnership to bid for licenses in
the upcoming PCS auctions and to provide PCS services. A second partnership will
develop a national branding and marketing strategy and standardized features for
cellular and PCS services. The cellular properties of Bell Atlantic/NYNEX will
not be merged with the properties of Airtouch/U S West.
On October 31, 1994, the Company, NYNEX and Pacific Telesis Group (PacTel)
announced the formation of two new companies: a media company which will
license, package, acquire and develop entertainment and information services;
and a technology and integration company which will provide the systems
necessary to deliver these services. The Company, NYNEX and PacTel will each
contribute approximately $100 million in cash or assets to the new venture over
the next three years. Creative Artists Agency, Inc. has entered into a
consulting arrangement with the media company to provide assistance in acquiring
programming and in developing branding and marketing strategy.
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 telephone
subsidiaries' central offices to the LECs' 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
19
<PAGE>
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's telephone
subsidiaries 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 requirement upon a company's compliance with the FCC's Computer
Inquiry III Open Network Architecture (ONA) requirements and strengthened some
of the nonstructural safeguards. In March 1992, the telephone subsidiaries
certified to the FCC that they had complied with all initial ONA obligations,
and the FCC granted them 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's telephone
subsidiaries continue to offer enhanced services pending further action by the
Court of Appeals or the FCC.
State Regulation
----------------
State regulatory commissions are also addressing issues pertaining to
competition for local exchange, local access and intraLATA toll services,
alternative regulation plans and rates of return. Six of the Company's seven
state jurisdictions have operated under alternative regulation plans instead of
traditional rate of return regulation. The seventh telephone subsidiary, Bell
Atlantic - Pennsylvania, Inc., received approval on June 28, 1994 to implement
an alternative regulation plan, which replaces rate base rate of return
regulation and allows Bell Atlantic - Pennsylvania, Inc. to operate under a pure
price cap plan with no sharing provisions. The Company's telephone subsidiaries
continue to seek the most favorable regulatory plans from their state
commissions to keep pace with the rapid changes occurring in the
telecommunications industry. In October 1994, the Virginia State Corporation
Commission (SCC) approved a new regulation plan that would eliminate regulation
of profits, with provisions that would cap basic local telephone service until
the year 2001, eliminate monthly touch-tone charges and expand eligibility for
lifeline telephone service. Bell Atlantic - Virginia, Inc. must notify the SCC
by December 1, 1994, if it intends to adopt the new regulation plan, which would
become effective January 1, 1995. The West Virginia Public Service Commission is
considering an extension of its Incentive Regulation Plan which would phase out
the touch-tone rate and lower other local exchange rates. A decision is expected
in the fourth quarter of 1994.
Large competitors are seeking authority, or are likely to seek authority, from
state commissions to offer competing local exchange services, such as dial tone
and local usage in selected local telephone service areas of the telephone
subsidiaries. The Maryland Public Service Commission has approved applications
from MFS-Intelenet of Maryland, Inc., a subsidiary of MFS Communications
Company, Inc., and from MCI Metro ATS, a wholly owned subsidiary of MCI, to
provide and resell local exchange service to business customers in areas served
by Bell Atlantic - Maryland. In May 1994, SBC Media Ventures, Inc., an
affiliate of Southwestern Bell Corporation, filed an application to provide
local exchange service in Montgomery County, Maryland. A decision on this case
is expected in 1995. In November 1994, Teleport Communications filed an
application to provide local exchange service to business customers in the
Baltimore, Maryland metropolitan area. Bell Atlantic - Maryland, Inc. expects
some loss of market
20
<PAGE>
share as a result of these competitors offering local exchange services.
Competitors are also seeking authority from regulators to provide local exchange
service in other of the Company's state jurisdictions, including Bell Atlantic -
Pennsylvania, Inc.
The ability of IXCs to offer intrastate intraLATA toll service is subject to
state regulation. Currently, such competition is permitted in six of the
Company's seven state jurisdictions. In the seventh state jurisdiction, the
Virginia SCC is considering whether, and under what terms, to permit intraLATA
toll competition in Virginia. In Pennsylvania, the Public Utility Commission
commenced an investigation to determine whether presubscription for intraLATA
toll service should be authorized. A similar investigation is currently being
conducted by the Public Service Commission in Delaware. The New Jersey Board of
Public Utilities and the West Virginia Public Service Commission are also
expected to initiate intraLATA toll presubscription proceedings. Increased
competition from IXCs has resulted in a continued decline in telephone
subsidiary toll revenues, such as WATS and private line services, as the IXCs
have the ability to offer both intraLATA and interLATA toll services. The
Company expects the level of intraLATA competition to increase. The telephone
subsidiaries' ability to offset such competition will depend, in part, upon the
terms and conditions under which presubscription for intraLATA toll service may
be authorized.
OTHER MATTERS
Environmental Issues
--------------------
The Company is subject to a number of environmental proceedings as a result of
the operations of its subsidiaries 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 telephone
subsidiaries have been designated as potentially responsible parties by the U.S.
Environmental Protection Agency or by third-party defendants. 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 liabilities reflect 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.
Subsequent Event
----------------
On November 2, 1994, the Company entered into a definitive agreement to sell
substantially all of the assets of one of its leasing subsidiaries, Bell
Atlantic Systems Leasing International, Inc., including the Company's 50%
ownership interest in Pacific Atlantic Systems Leasing, Inc. This sale is
expected to close in the fourth quarter of 1994 and is not expected to have a
material effect on the Company's results of operations in 1994 or in future
periods.
21
<PAGE>
FINANCIAL CONDITION
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements, including network
expansion and modernization, business development, and the payment of dividends.
Management expects that presently foreseeable capital requirements will be
financed primarily through internally generated funds, although additional long-
term debt or equity financing may be needed to fund development activities and
to maintain the Company's capital structure within management's guidelines. The
Company determines the appropriateness of the level of its dividend payments on
a periodic basis by considering such factors as long-term growth opportunities,
internal requirements of the Company and the expectations of shareowners.
As of September 30, 1994, the Company and its subsidiaries had in excess of $2.1
billion of unused bank lines of credit and shelf registrations for the issuance
of up to $2.0 billion of unsecured debt securities.
During the first nine months of 1994, the Company's primary source of funds
continued to be cash generated from operations. Cash provided from operations
of $2.54 billion for the nine months ended September 30, 1994 decreased $500.7
million versus the corresponding period last year due chiefly to cash payments
in the first nine months of 1994 related to significant purchases made late in
the fourth quarter of 1993 and higher quarterly estimated income tax payments in
1994.
Cash proceeds from investing activities in the first nine months of 1994
included $1,265.0 million from the April 1994 sale of TriCon. Additionally, the
Company received $67.4 million resulting from a special capital reduction plan
by Telecom in which 20% of Telecom's outstanding shares were canceled on a pro
rata basis and shareholders received one New Zealand Dollar for each share
canceled. Telecom's capital reduction did not change the Company's percentage
ownership of Telecom.
The primary use of capital resources in the first nine months of 1994 continued
to be capital expenditures and the payment of dividends. The Company invested
$1,412.4 million in the telephone subsidiaries' network during the nine months
ended September 30, 1994. Through September 30, 1994, the Company had invested
approximately $31 million as a member of the Omnitel-Pronto Italia consortium
that was awarded the second cellular license in Italy in March 1994.
In August 1994, Bell Atlantic purchased Iusacell shares owned by the Peralta
family for an aggregate purchase price of $524.0 million, thereby increasing
the Company's investment in Iusacell to $1,044.0 million (an approximate 42%
economic interest). Substantially all of the Company's investment in Iusacell
is in excess of the recorded value of the proportionate share of the underlying
net assets and is being amortized by the straight-line method over a period of
25 years. Shares held by Bell Atlantic represent approximately 44% of the
voting rights pertaining to Iusacell stock.
On June 2, 1994, Bell Atlantic New Zealand Holdings, Inc. (BANZHI), a subsidiary
of the Company, issued 850,000 shares of Series A Preferred Stock at a price per
share of $100, with a dividend rate of $7.08 per share per annum, pursuant to a
private placement resulting in a cash inflow from financing activities of $85.0
million. The preferred stock is subject to mandatory redemption on May 1, 2004
at a redemption price per share of $100. BANZHI and another subsidiary of the
Company indirectly own the Company's investment in Telecom.
In the nine months ended September 30, 1994, the Company reduced long-term debt
(including capital leases) and short-term debt by $625.4 million. The Company's
debt ratio was 59.3% at September 30, 1994, compared to 54.6% at December 31,
1993. The debt ratio was significantly impacted by the equity reduction
associated with the discontinued application of Statement No. 71. Excluding
this effect, the
22
<PAGE>
debt ratio would have been 52.1% at September 30, 1994, reflecting a decrease
that is principally attributable to the reduction of debt associated with the
TriCon sale. The debt offerings of the Bell Atlantic subsidiaries continue to
be accorded high ratings by primary rating agencies.
As a result of the discontinued application of Statement No. 71, the Condensed
Consolidated 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 Condensed Consolidated Financial Statements).
23
<PAGE>
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
11 Computation of Per Common Share Earnings.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Report on Form 8-K filed during the quarter ended September 30, 1994:
A Current Report on Form 8-K, dated July 21, 1994, was filed regarding the
Company's second quarter 1994 financial results. This report contained
unaudited condensed consolidated statements of income for the three and six
month periods ended June 30, 1994 and 1993.
24
<PAGE>
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 CORPORATION
Date: November 10, 1994 By /s/William O. Albertini
------------------------
William O. Albertini
Vice President and
Chief Financial Officer
(Principal Financial Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 7, 1994.
25
<PAGE>
Exhibit 11
1 of 2
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Per Common Share Earnings
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended
September 30,
----------------------------
1994 1993
------------- -------------
<S> <C> <C>
Income before extraordinary items.................. $ 275.7 $ 386.7
Extraordinary items................................ (2,150.0) (8.2)
------------ ------------
Net income (loss).................................. $ (1,874.3) $ 378.5
============ ============
Earnings (Loss) Per Common Share
- --------------------------------
Weighted average shares outstanding................ 436,286,739 435,110,010
Incremental shares from assumed exercise of stock
options and payment of performance share awards.. 1,016,494 1,256,712
------------ ------------
Total shares....................................... 437,303,233 436,366,722
============ ============
Income before extraordinary items.................. $ .63 $ .89
Extraordinary items................................ (4.92) (.02)
------------ ------------
Net income (loss).................................. $ (4.29) $ .87
============ ============
Fully Diluted Earnings (Loss) Per Common Share*
- ----------------------------------------------
Weighted average shares outstanding................ 436,286,739 435,110,010
Incremental shares from assumed exercise of stock
options and payment of performance share awards.. 1,016,494 1,401,922
------------ ------------
Total shares....................................... 437,303,233 436,511,932
============ ============
Income before extraordinary items.................. $ .63 $ .89
Extraordinary items................................ (4.92) (.02)
------------ ------------
Net income (loss).................................. $ (4.29) $ .87
============ ============
</TABLE>
*Fully diluted earnings per share calculation is presented in accordance with
Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph
14 of Accounting Principles Board Opinion No. 15 because it results in dilution
of less than 3%.
<PAGE>
Exhibit 11
2 of 2
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Per Common Share Earnings
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
Income before extraordinary items and cumulative
effect of changes in accounting principles..... $ 1,087.0 $ 1,144.4
Extraordinary items.............................. (2,156.7) (54.3)
Cumulative effect of changes in accounting
principles...................................... -- (19.8)
------------ ------------
Net income (loss)................................ $ (1,069.7) $ 1,070.3
============ ============
Earnings (Loss) Per Common Share
- --------------------------------
Weighted average shares outstanding.............. 436,277,798 434,793,065
Incremental shares from assumed exercise of stock
options and payment of performance share awards 984,909 1,120,688
------------ ------------
Total shares..................................... 437,262,707 435,913,753
============ ============
Income before extraordinary items and cumulative
effect of changes in accounting principles..... $ 2.49 $ 2.62
Extraordinary items.............................. (4.94) (.12)
Cumulative effect of changes in accounting
principles...................................... -- (.04)
------------ ------------
Net income (loss)................................ $ (2.45) $ 2.46
============ ============
Fully Diluted Earnings (Loss) Per Common Share*
- ----------------------------------------------
Weighted average shares outstanding.............. 436,277,798 434,793,065
Incremental shares from assumed exercise of stock
options and payment of performance share awards 1,057,664 1,289,379
------------ ------------
Total shares..................................... 437,335,462 436,082,444
============ ============
Income before extraordinary items and cumulative
effect of changes in accounting principles..... $ 2.49 $ 2.62
Extraordinary items.............................. (4.94) (.12)
Cumulative effect of changes in accounting
principles...................................... -- (.04)
------------ ------------
Net income (loss)................................ $ (2.45) $ 2.46
============ ============
</TABLE>
*Fully diluted earnings per share calculation is presented in accordance with
Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph
14 of Accounting Principles Board Opinion No. 15 because it results in dilution
of less than 3%.
<PAGE>
Exhibit 12
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine months ended
September 30, 1994
-------------------
<S> <C>
Income before provision for income taxes and
extraordinary items.......................................... $1,769.0
Equity in income of less than majority-owned subsidiaries..... (62.0)
Dividends from less than majority-owned subsidiaries.......... 48.2
Interest expense, including interest on capital
lease obligations............................................ 477.0
Portion of rent expense representative of the
interest factor.............................................. 76.4
--------
Income, as adjusted........................................... $2,308.6
========
Fixed charges:
Interest expense, including interest on capital
lease obligations............................................ $ 477.0
Portion of rent expense representative of the
interest factor.............................................. 76.4
Interest capitalized on construction.......................... 9.9
Preferred stock dividend requirement.......................... 3.2
--------
Fixed charges................................................. $ 566.5
========
Ratio of Earnings to Fixed Charges............................ 4.08
========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Financial Statements filed pursuant to Item 1 of Part I of this Form 10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-START> Jan-01-1994
<PERIOD-END> Sep-30-1994
<CASH> 226
<SECURITIES> 0
<RECEIVABLES> 2,522
<ALLOWANCES> 180
<INVENTORY> 265
<CURRENT-ASSETS> 3,918
<PP&E> 33,440
<DEPRECIATION> 16,729
<TOTAL-ASSETS> 24,518
<CURRENT-LIABILITIES> 5,477
<BONDS> 6,925
<COMMON> 436
0
0
<OTHER-SE> 5,910
<TOTAL-LIABILITY-AND-EQUITY> 24,518
<SALES> 0
<TOTAL-REVENUES> 10,183
<CGS> 0
<TOTAL-COSTS> 8,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 122
<INTEREST-EXPENSE> 437
<INCOME-PRETAX> 1,796
<INCOME-TAX> 682
<INCOME-CONTINUING> 1,087
<DISCONTINUED> 0
<EXTRAORDINARY> (2,157)
<CHANGES> 0
<NET-INCOME> (1,070)
<EPS-PRIMARY> (2.45)
<EPS-DILUTED> (2.45)
</TABLE>
