<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 1-8606
BELL ATLANTIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2259884
(State of incorporation) (I.R.S. Employer
Identification No.)
1095 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 395-2121
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock, $.10 par value............. New York, Philadelphia, Boston,
Chicago and Pacific Stock Exchanges
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
At February 28, 1998, the aggregate market value of the registrant's voting
stock held by non-affiliates was approximately $69,664,000,000.
At February 28, 1998, 1,553,014,028 shares of the registrant's Common Stock
were outstanding, after deducting 23,232,296 shares held in treasury (adjusted
to reflect a two-for-one split on June 1, 1998).
Document incorporated by reference:
Portions of the registrant's Proxy Statement dated March 16, 1998 prepared in
connection with the Annual Meeting of Shareowners (Part III).
Items 5, 6, 7 and 8 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 are amended to reflect the two-for-one split of the
Company's common stock declared by the Board of Directors on May 1, 1998 and
payable on June 29, 1998 to shareowners of record on June 1, 1998.
<PAGE>
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The principal market for trading in the common stock of the Company is the
New York Stock Exchange. The common stock is also listed in the United States on
the Boston, Chicago, Pacific, and Philadelphia stock exchanges. As of December
31, 1997, there were 1,233,500 shareowners of record.
High and low stock prices, as reported on the New York Stock Exchange
composite tape of transactions, and dividend data are as follows:
<TABLE>
<CAPTION>
Market Price* Cash
------------------ Dividend
High Low Declared*
-------- -------- --------
<S> <C> <C> <C> <C>
1997: First Quarter........................ $35 11/16 $29 5/8 $.37
Second Quarter....................... 39 1/8 28 3/8 .37
Third Quarter........................ 40 13/16 34 .385
Fourth Quarter....................... 45 7/8 37 3/8 .385
1996: First Quarter........................ $37 7/16 $30 9/16 $.36**
Second Quarter....................... 33 7/8 29 1/2 .36
Third Quarter........................ 32 27 9/16 .36
Fourth Quarter....................... 34 29 1/4 .36
</TABLE>
*Adjusted to reflect a two-for-one stock split on June 1, 1998.
**Includes a payment of $.0025 per common share for redemption of rights
under the Company's Shareholder Rights Plan.
1
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
1997/(a)/ 1996/(b)/ 1995/(c)/ 1994/(c)/ 1993/(d)/
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Operating revenues $30,193.9 $29,155.2 $27,926.8 $27,098.0 $26,553.4
Operating income 5,341.5 6,078.6 5,417.4 4,522.4 3,204.6
Income before extraordinary items
and cumulative effect of changes
in accounting principles 2,454.9 3,128.9 2,826.1 2,224.9 1,320.7
Per common share--basic 1.58 2.02 1.85 1.47 .88
Per common share--diluted 1.56 2.00 1.84 1.46 .87
Net income (loss) 2,454.9 3,402.0 (96.8) 68.2 (593.2)
Per common share--basic 1.58 2.20 (.06) .05 (.39)
Per common share--diluted 1.56 2.18 (.06) .04 (.39)
Cash dividends declared per common share/(e)/ 1.51 1.44 1.40 1.38 1.34
FINANCIAL POSITION
Total assets $53,964.1 $53,361.1 $50,623.1 $54,020.2 $58,844.8
Long-term debt 13,265.2 15,286.0 15,744.1 14,590.2 14,144.0
Employee benefit obligations 10,004.4 9,588.0 9,388.4 8,980.2 7,666.4
Minority interest, including a portion
subject to redemption requirements 911.2 2,014.2 1,221.1 648.0 213.7
Preferred stock of subsidiary 200.5 145.0 145.0 85.0 --
Shareowners' investment 12,789.1 12,976.4 11,213.6 13,063.5 15,010.5
</TABLE>
Selected Financial Data prior to 1997 has been restated to reflect the
merger of Bell Atlantic Corporation and NYNEX Corporation completed on
August 14, 1997 and accounted for as a pooling of interests. All per share
amounts have been adjusted to reflect a two-for-one stock split on June 1,
1998.
(a) 1997 data include merger-related costs and other special items (see Note 1
and Management's Discussion and Analysis).
(b) 1996 data include retirement incentive costs (see Note 16), and the
adoption of a change in accounting for directory publishing (see Note 3).
(c) 1995 and 1994 data include retirement incentive costs (see Note 16), and an
extraordinary charge for the discontinuation of regulatory accounting
principles (see Note 4).
(d) 1993 data include restructuring costs and the adoption of changes in
accounting for income taxes and postemployment benefits.
(e) Cash dividends declared per common share represent the historical dividends
of Bell Atlantic Corporation. Cash dividends declared in 1996 include a
payment of $.0025 per common share for redemption of all rights granted
under our Shareholder Rights Plan.
2
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Tables shown Dollars in Millions)
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
The year 1997 marked a period of significant change for our company. We
completed the merger with NYNEX Corporation (NYNEX) on August 14, 1997, creating
one of the world's largest telecommunications companies. The merger was
accounted for as a pooling of interests, meaning that for accounting and
financial reporting purposes the companies are treated as if they had always
been combined. Therefore, we have restated our financial information for all
dates and periods prior to the merger. The financial statements presented
reflect the new presentation used by our company. You should read Note 1 to the
consolidated financial statements for additional information on the merger
transaction.
All per share amounts have been adjusted to reflect a two-for-one stock split on
June 1, 1998.
We reported net income of $2,454.9 million or basic earnings per share (EPS) of
$1.58 and diluted EPS of $1.56 in 1997, compared to net income of $3,402.0
million or basic EPS of $2.20 and diluted EPS of $2.18 in 1996, and a net loss
of $96.8 million or basic and diluted loss per share of $.06 in 1995.
Basic earnings per share are calculated by dividing net income by the weighted-
average number of common shares outstanding during the period. Diluted earnings
per share are calculated based on the assumption that potential common shares,
such as stock options, were also outstanding during the reporting period.
Our reported results for all three years were affected by special items. After
adjusting for such items, net income was $3,846.8 million or $2.48 basic EPS and
$2.45 diluted EPS in 1997, $3,474.2 million or $2.25 basic EPS and $2.23 diluted
EPS in 1996, and $3,120.7 million or $2.04 basic EPS and $2.03 diluted EPS in
1995. The most significant of these items are discussed below. Per share amounts
referred to in the following discussion are diluted EPS.
YEAR 1997
Merger-related Costs
During 1997, we recognized merger-related costs of approximately $519 million
($381 million after-tax or $.24 per share), consisting of $200 million of direct
incremental costs, $223 million for employee severance costs and $96 million of
transition and integration costs. Direct incremental costs consist of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs represent benefit costs for the separation by the end
of 1999 of approximately 3,100 management employees who are entitled to benefits
under pre-existing separation pay plans. Transition and integration costs
consist of costs associated with integrating the operations of Bell Atlantic and
NYNEX, and we expect over the three years following the closing of the merger
that such costs will aggregate between $400 million to $500 million (pre-tax).
Other Charges and Special Items
During 1997, we recorded pre-tax charges of approximately $1,041 million ($686
million after-tax or $.44 per share) in connection with consolidating operations
and combining organizations and for special items arising during the year. These
charges were principally associated with certain video investments and
operations, the write-down of obsolete fixed assets, the consolidation of
certain redundant real estate properties, contingencies for various regulatory,
legal and tax matters and other miscellaneous items. Other special items
recognized during 1997 included gains on the sales of our ownership interests in
several businesses, a net tax benefit related to a change in state tax law and
other tax issues, and charges associated with our equity share of formation
costs incurred by Cable & Wireless Communications PLC (CWC).
We also incurred pre-tax costs of approximately $513 million ($325 million
after-tax or $.21 per share) associated with our current retirement incentive
program.
YEAR 1996
In 1996, we incurred pre-tax charges of approximately $315 million ($198 million
after-tax or $.13 per share) for regulatory issues, a net loss on the
disposition of certain nonstrategic investments and other matters arising during
the year.
We also incurred pre-tax costs of approximately $236 million ($147 million
after-tax or $.09 per share) associated with the retirement incentive program.
Effective January 1, 1996, we changed our method of accounting for directory
publishing revenues and expenses. We adopted the point-of-publication method,
meaning that we now recognize directory revenues and expenses upon publication
rather than over the lives of the directories. We recorded an after-tax increase
in income of $273.1 million, or $.18 per share, in 1996, representing the
cumulative effect of this accounting change.
YEAR 1995
In 1995, we incurred pre-tax charges of approximately $228 million ($172 million
after-tax or $.11 per share) for regulatory and other issues, and we recognized
a net pre-tax gain of approximately $336 million ($204 million after-tax or $.13
per share) on the sale of certain cellular properties and other asset
dispositions.
We also incurred pre-tax costs of approximately $514 million ($327 million
after-tax or $.21 per share) associated with the retirement incentive program.
3
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
In the second quarter of 1995, we recognized an extraordinary charge of $2,919.4
million, or $1.90 per share, in connection with our decision to discontinue the
use of regulatory accounting principles for two of our operating telephone
subsidiaries (New York Telephone and New England Telephone) under Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation" (see Note 4 to the consolidated financial
statements). Results for 1995 also included an extraordinary charge
of $3.5 million for the early extinguishment of debt.
ACCOUNTING FOR INVESTMENTS
Grupo Iusacell, S.A. de C.V.
In February 1997, we consummated a restructuring of our investment in Grupo
Iusacell, S.A. de C.V. (Iusacell), a Mexican wireless company, to permit us to
assume control of the Board of Directors and management of Iusacell. As a result
of the restructuring, we changed the accounting for our Iusacell investment from
the equity method to full consolidation in the first quarter of 1997.
United Kingdom Operations
In the second quarter of 1997, we transferred our interests in cable television
and telecommunications operations in the United Kingdom to CWC in exchange for
an 18.5% ownership interest in CWC. This transaction was accounted for as a
nonmonetary exchange of similar productive assets and, as a result, no gain or
loss was recorded. Prior to the transfer, we included the accounts of these
operations in our consolidated financial statements. We account for our
investment in CWC under the equity method.
See Note 6 to the consolidated financial statements for additional information
on the Iusacell restructuring and CWC transaction.
These and other items affecting the comparison of our results of operations for
the years ended December 31, 1997, 1996 and 1995 are discussed in the following
sections.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OPERATING REVENUES
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Local services $13,113.2 $12,559.1 $12,115.3
Network access services 7,158.6 7,112.6 6,952.2
Long distance services 2,190.1 2,373.6 2,474.3
Ancillary services 1,845.4 1,738.0 1,450.8
Directory and
information services 2,298.0 2,224.3 2,050.8
Wireless services 3,328.5 2,713.6 2,147.8
Other services 260.1 434.0 735.6
-------------------------------------
TOTAL OPERATING REVENUES $30,193.9 $29,155.2 $27,926.8
=====================================
Local Services Revenues
Increase
- --------------------------------------------------------------------------------
1997-1996 $ 554.1 4.4%
1996-1995 $ 443.8 3.7%
- --------------------------------------------------------------------------------
Local services revenues are earned by our operating telephone subsidiaries from
the provision of local exchange, local private line, public telephone (pay
phone) and value-added services. Value-added services are a family of services
which expand the utilization of the network. These services include products
such as Caller ID, Call Waiting and Return Call.
Higher usage of our network facilities was the primary reason for the increase
in local services revenues in 1997 and 1996. This growth was generated by an
increase in access lines in service of 3.7% in 1997 and 3.6% in 1996, and
stronger business message volumes. Access line growth reflects primarily higher
demand for Centrex services and an increase in additional residential lines.
Higher revenues from private line and switched data services also contributed to
the revenue growth in both years.
Revenue growth in 1997 and 1996 was boosted by increased revenues from value-
added services. This increase was principally the result of higher customer
demand and usage.
Revenue growth from volume increases was partially offset in 1996 by rate
reductions primarily in New York and Massachusetts, and by the effect of service
rebates paid to customers in New York.
For a discussion of the Telecommunications Act of 1996 (the Act) and its impact
on the local exchange market, see "Other Factors That May Affect Future
Results."
4
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
Network Access Services Revenues
Increase
- --------------------------------------------------------------------------------
1997-1996 $ 46.0 .6%
1996-1995 $160.4 2.3%
- --------------------------------------------------------------------------------
Network access services revenues are earned from carriers for their use of our
local exchange facilities in providing usage services to their customers, and
from end-user subscribers. Switched access revenues are derived from fixed and
usage-based charges paid by carriers for access to our network. Special access
revenues arise from access charges paid by carriers and end-users who have
private networks. End-user access revenues are earned from our customers who pay
for access to our network.
Network access services revenues increased in 1997 and 1996 because of higher
customer demand as reflected by growth in access minutes of use of 7.3% in 1997
and 9.6% in 1996. Growth in access revenues in 1997 and 1996 also reflects
higher network usage by alternative providers of intraLATA toll services. This
revenue growth was negatively affected in both years by price reductions as
mandated by federal and state price cap and incentive plans.
The Federal Communications Commission (FCC) regulates the rates that we charge
long distance carriers and end-user subscribers for interstate access services.
We are required to file new access rates with the FCC each year, under the rules
of its Interim Price Cap Plan. We implemented required price decreases for
interstate access services totaling approximately $380 million on an annual
basis for the period August 1995 through June 1996 and $63 million on an annual
basis for the period July 1996 through June 1997. Effective July 1, 1997, we
implemented annual price decreases on interstate access services of
approximately $430 million. An additional price reduction of $49.5 million was
implemented in December 1997, following the resolution of certain issues
previously under review by the FCC. The rates included in our 1997 filings will
be in effect through June 1998. In addition, effective January 1, 1998, our
operating telephone subsidiaries adjusted their annual rates by approximately
$200 million to recover contributions that they will owe to the new universal
service fund. These revenues will be entirely offset by the contribution amount,
which will be included in Other Operating Expenses.
Revenues were also affected by reductions of approximately $174 million in 1997
and $132 million in 1996 for contingencies associated with regulatory matters.
For a further discussion of FCC rulemakings concerning price caps, access
charges and universal service, see "Other Factors That May Affect Future
Results--Recent Developments--FCC Orders."
Long Distance Services Revenues
(Decrease)
- --------------------------------------------------------------------------------
1997-1996 $(183.5) (7.7)%
1996-1995 $(100.7) (4.1)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made outside a
customer's local calling area, but within the same service area of our operating
telephone subsidiaries (intraLATA toll). Other long distance services that we
provide include 800 services, Wide Area Telephone Service (WATS), corridor
services and long distance services outside of our region.
Company-initiated price reductions and increased competition for intraLATA toll,
WATS and private line services both contributed substantially to the reduction
in long distance services revenues in 1997 and 1996. We continue to implement
price reductions on certain long distance services as part of our response to
competition. Competition for intraLATA toll services decreased revenues to a
greater degree in 1997 as a result of the introduction of presubscription in
many states throughout our region. Revenue reductions from presubscription were
partially offset by increased network access services revenues for usage of our
network from alternative providers of intraLATA toll services. Higher calling
volumes generated by an increase in access lines in service also mitigated
revenue decreases.
By December 1997, all of our operating telephone subsidiaries had implemented
intraLATA presubscription, except in Maryland, Massachusetts and Virginia. We
expect to offer intraLATA presubscription coincident with our offering of long
distance services in those states, or by February 8, 1999, as required by the
Act. We believe that competition for long distance services, including
competitive pricing and customer selection of alternative providers of intraLATA
toll services in the states currently offering presubscription, will continue to
affect revenue trends. You should read "Other Factors That May Affect Future
Results--Competition--IntraLATA Toll Services" for a further discussion of
presubscription.
5
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
Ancillary Services Revenues
Increase
- --------------------------------------------------------------------------------
1997-1996 $107.4 6.2%
1996-1995 $287.2 19.8%
- --------------------------------------------------------------------------------
Our company provides ancillary services which include systems integration
services, equipment and construction services for other telecommunications
carriers, billing and collection services for long distance carriers, customer
premises equipment (CPE) services, facilities rental services and voice
messaging.
The growth in ancillary services revenues in 1997 and 1996 included higher
revenues as a result of new contracts with business customers for systems
integration services and higher demand for CPE and voice messaging services,
principally Home Voice Mail. We also recognized additional revenues in both
years as a result of the introduction of customer late payment charges by our
operating telephone subsidiaries.
Revenue growth in 1996 was also affected by the impact of state regulatory
issues in 1996 and 1995, resulting in a year-over-year revenue increase of
approximately $137 million. In 1997, the effect of these state regulatory issues
reduced revenue growth by approximately $64 million, as compared to 1996.
Directory and Information Services Revenues
Increase
- --------------------------------------------------------------------------------
1997-1996 $ 73.7 3.3%
1996-1995 $173.5 8.5%
- --------------------------------------------------------------------------------
We earn directory and information services revenues primarily from local
advertising and marketing services provided to businesses in our White and
Yellow Pages directories within our region, international directory services,
and electronic publishing services. We also provide database services and
directory marketing services outside of our region. Revenues from our Internet
services businesses are also included in this revenue category.
As previously described in the "Overview" section, we changed our method of
accounting for directory publishing revenues and expenses in 1996. The effect of
this change caused an increase in revenues of approximately $125 million in
1996. Excluding the effect of this accounting change, 1996 directory and
information services revenues grew 2.4% over 1995.
Revenue growth in both 1997 and 1996 was principally attributable to volume
increases and higher rates charged for directory publishing services. The year
1997 also reflects improved revenue growth from our Internet services.
Wireless Services Revenues
Increase
- --------------------------------------------------------------------------------
1997-1996 $614.9 22.7%
1996-1995 $565.8 26.3%
- --------------------------------------------------------------------------------
Wireless services include revenues generated from our consolidated subsidiaries
that provide cellular and paging communications services, including Bell
Atlantic Mobile, domestically, and Iusacell in Mexico. As described earlier, as
a result of the restructuring of our Iusacell investment, we account for this
investment as a fully consolidated subsidiary beginning in 1997, while in 1996
and 1995 we accounted for this investment under the equity method.
Growth in our domestic cellular customer base of 21.4% in 1997 and 31.3% in 1996
was the primary reason for the increase in wireless services revenues in both
years. Customer growth in both years, particularly in 1997, was affected by
competition from new wireless carriers. Revenue growth resulting from our
increased customer base was partially offset by a decline in average revenue per
subscriber as a result of increased penetration of the lower usage customer
market, and in 1997, competitive pricing factors. The consolidation of
approximately $228 million of Iusacell's operating revenues also contributed to
revenue growth in 1997.
Other Services Revenues
(Decrease)
- --------------------------------------------------------------------------------
1997-1996 $(173.9) (40.1)%
1996-1995 $(301.6) (41.0)%
- --------------------------------------------------------------------------------
Other services include revenues from our telecommunications consulting, real
estate and financing businesses. As described earlier, we account for our CWC
investment under the equity method, beginning in the second quarter of 1997.
Prior to this transaction, our cable television and telecommunications
operations in the United Kingdom were accounted for as a fully consolidated
subsidiary.
<PAGE>
The decline in other services revenues in 1997 was caused primarily by the
effect of the CWC transaction and by the sale of our real estate properties
business in the second quarter of the year. Revenues in 1996 declined
principally as a result of the sale of our domestic computer maintenance
subsidiary in October 1995.
6
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Employee costs $ 9,047.2 $ 8,703.9 $ 8,811.3
Depreciation
and amortization 5,864.4 5,379.0 5,326.1
Taxes other than income 1,606.9 1,499.9 1,589.3
Other operating expenses 8,333.9 7,493.8 6,782.7
---------------------------------------
Total Operating Expenses $24,852.4 $23,076.6 $22,509.4
=======================================
For purposes of our discussion, reference to the network subsidiaries includes
our operating telephone subsidiaries, subsidiaries that provide centralized
services and support, and network-related subsidiaries providing systems
integration, CPE distribution, inside wiring, long distance, and directory and
information services.
Employee Costs
Increase (Decrease)
- --------------------------------------------------------------------------------
1997-1996 $ 343.3 3.9 %
1996-1995 $(107.4) (1.2)%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes.
Employee costs increased in 1997 as a result of merger-related costs recorded in
the third quarter. As described earlier, we recognized approximately $223
million in benefit costs for the separation by the end of 1999 of approximately
3,100 management employees who are entitled to benefits under pre-existing
separation pay plans. We also recorded approximately $53 million of direct
incremental merger-related costs associated with compensation arrangements. The
1997 expense increase also reflects higher costs of approximately $277 million
in connection with our retirement incentive program. For a further discussion of
retirement incentives, see below.
Other items contributing to the increase in employee costs in 1997, but to a
lesser extent, were annual salary and wage increases and the effect of increased
work force levels principally as a result of higher business volumes at our
network and domestic wireless subsidiaries. Work force levels grew by
approximately 3,800 or 2.8% from the prior year, with approximately 2,600 of the
increase attributable to our wireless subsidiaries. The effect of consolidating
our Iusacell investment also contributed to the expense increase in 1997.
These increases were partially offset by reductions due to lower overtime pay
for repair and maintenance activity at our network subsidiaries and the effect
of accounting for our CWC investment under the equity method.
In addition, pension and benefit costs were lower in 1997 due to a number of
factors, including changes in actuarial assumption, favorable returns on plan
assets, lower than expected medical claims experience and plan amendments
including the conversion of a pension plan to a cash balance plan. Effective
January 1, 1998, we established common pension and saving plans benefit
provisions for all management employees. As a result, continuing NYNEX
management employees will receive the same benefit levels as previously given
under Bell Atlantic management plans. This change included the conversion of the
NYNEX management pension plan to a cash balance plan. The change to the cash
balance plan is expected to result in lower pension costs in 1998.
The reduction in employee costs in 1996 was principally caused by lower
retirement incentive costs of approximately $278 million, as compared to 1995.
This expense decrease was partially offset by the effect of annual salary and
wage increases, higher work force levels and increased overtime pay for repair
and maintenance activity.
Retirement Incentives
In 1993, we announced a restructuring plan which included an accrual of
approximately $1.1 billion (pre-tax) for severance and postretirement medical
benefits under a force reduction plan. Beginning in 1994, retirement incentives
have been offered as a voluntary means of implementing substantially all of the
work force reductions planned in 1993.
We estimated that additional costs of approximately $2.2 billion would be
incurred as employees elected to leave the business through 1998 under the
retirement incentive program rather than through the severance provisions of the
1993 force reduction plan. This determination was based on the expectation that
the total number of employees who would elect to leave under the current
retirement incentive program through its completion in 1998 would be in the
range of 19,000 to 21,000, consisting of approximately 9,000 to 10,000
management and 10,000 to 11,000 associate employees.
Since the inception of the retirement incentive program, additional costs
totaled approximately $1,957 million (pre-tax) as of December 31, 1997,
consisting of $513 million in 1997, $236 million in 1996, $514 million in 1995
and $694 million in 1994. As of December 31, 1997, employees who have left the
business under the retirement incentive program totaled 19,275, consisting of
9,329 management and 9,946 associate employees. The retirement incentive program
covering management employees ended on March 31, 1997 and the program covering
associate employees is scheduled to end in August 1998. In the first quarter of
1998, we expect between 1,700 to 1,800 associate employees to elect to leave
under the retirement incentive program, resulting in an estimated pre-tax charge
in the range of $250 million to $300 million.
Based on the experience of employee take rates under the program and
management's most recent assessment of work volume and productivity trends, we
are currently considering and discussing with the unions possible changes in the
program for associate employees. We now expect that, if the current program is
fully implemented, the total number of employees electing to leave under the
program, and the associated additional charges, would be substantially greater
than previously estimated.
7
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
As of December 31, 1997, the remaining reserves associated with the 1993
restructuring plan were approximately $39 million for employee severance and $54
million for postretirement medical benefits. Other reserves established in the
1993 restructuring plan related to process re-engineering, exit costs and asset
write-offs. The utilization of these other reserves amounted to approximately $5
million in 1997, $134 million in 1996 and $328 million in 1995. See Note 16 to
the consolidated financial statements for additional information on retirement
incentives.
Depreciation and Amortization
Increase
- --------------------------------------------------------------------------------
1997-1996 $ 485.4 9.0%
1996-1995 $ 52.9 1.0%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in 1997 primarily as a result of
the recording of approximately $297 million for the write-down of obsolete fixed
assets in the third quarter of 1997. Depreciation expense was also higher in
1997 due to growth in depreciable plant and changes in the mix of plant assets
at our network and domestic wireless subsidiaries. The effect of consolidating
our Iusacell investment also contributed to the expense increase in 1997. These
expense increases were partially offset by lower rates of depreciation and the
effect of the CWC transaction.
The increase in depreciation and amortization expense in 1996 was principally
caused by higher depreciable plant balances at our network and domestic wireless
subsidiaries. This expense increase was substantially offset by lower rates of
depreciation and the effect of the sale of our domestic computer maintenance
subsidiary in October 1995.
Taxes Other Than Income
Increase (Decrease)
- --------------------------------------------------------------------------------
1997-1996 $ 107.0 7.1 %
1996-1995 $ (89.4) (5.6)%
- --------------------------------------------------------------------------------
Taxes other than income consist principally of taxes for gross receipts,
property, capital stock and business licenses.
The increase in taxes other than income in 1997 was substantially due to charges
recorded in the third quarter of 1997 for state and local tax contingencies of
approximately $55 million and for taxes incurred as part of direct incremental
merger-related costs of approximately $25 million.
Taxes other than income declined in 1996 principally as a result of a tax
settlement recorded in 1995, and the effect of a change in the gross receipts
tax law in New York in 1995.
Other Operating Expenses
Increase
- --------------------------------------------------------------------------------
1997-1996 $ 840.1 11.2%
1996-1995 $ 711.1 10.5%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services, rent, network software
costs, the provision for uncollectible accounts receivable and other costs.
The rise in other operating expenses in 1997 was largely due to the recording of
merger-related costs and other special items aggregating approximately $634
million in the twelve-month period. The charges contributing to the increases
in other operating expenses included; direct incremental merger-related costs of
$122 million, transition merger-related costs of $90 million, video-related
charges of $69 million, costs to consolidate certain redundant real estate
properties of $55 million, charges for regulatory, legal and other contingencies
of $126 million and other miscellaneous expense items of $172 million.
Other operating expenses in 1997 also included increased costs at our network
subsidiaries to comply with certain requirements of the Act to permit our
eventual entry into the in-region long distance business. Costs associated with
opening our network to competitors, including local number portability, totaled
approximately $290 million in 1997 and $125 million in 1996. In 1997, we also
recognized higher interconnection payments to competitive local exchange and
wireless carriers to terminate calls on their networks, higher expenses as a
result of increased business volumes at our domestic wireless and systems
integration subsidiaries and higher costs associated with entering new
businesses such as out-of-region long distance and Internet services. The effect
of consolidating Iusacell also contributed to the expense growth in 1997.
Expense increases in 1997 were offset, in part, by the effect of the CWC
transaction and lower network software purchases.
Other operating expenses were higher in 1996, as compared to 1995, largely due
to additional costs incurred at the network subsidiaries to upgrade network
software, enhance billing and operating systems, market and advertise services
and comply with certain aspects of the Act. The change in accounting for
directory publishing expenses in 1996 and costs associated with entering the
out-of-region long distance and Internet businesses also caused an increase in
other operating expenses in 1996. Other operating expenses also included higher
volume business costs at our domestic wireless and systems integration
subsidiaries. Expense increases in 1996 were partially offset by the effect of
the sale of our domestic computer maintenance business in late 1995 and the
effect of lower charges associated with regulatory issues and certain asset and
investment dispositions.
We expect to continue to incur costs associated with compliance with the Act in
1998 at about the same level as in 1997.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS continued
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Income (Loss) from Unconsolidated Businesses
Increase (Decrease)
- --------------------------------------------------------------------------------
1997-1996 $(138.3)
1996-1995 $ 36.3
- --------------------------------------------------------------------------------
Income (loss) from unconsolidated businesses includes income and losses from
investments accounted for under the equity method and goodwill amortization
related to these investments. As described earlier, beginning in the second
quarter of 1997 we account for our investment in CWC under the equity method,
and in the first quarter of 1997 we fully consolidated our investment in
Iusacell.
We recognized a loss from unconsolidated businesses in 1997 principally as a
result of special charges of approximately $162 million related to certain video
investments and operations. In 1997, we determined that we would no longer
pursue a multichannel, multipoint, distribution system (MMDS) as part of our
video strategy. As a result, we recognized liabilities for purchase commitments
associated with the MMDS technology and costs associated with closing the
operations of our Tele-TV partnership because this operation is no longer needed
to support our current video strategy. We also wrote down our remaining
investment in CAI Wireless Systems, Inc.
The year 1997 also included $59.3 million for our equity share of formation
costs incurred by CWC and higher equity losses associated with our investment in
a personal communications services (PCS) joint venture, PrimeCo Personal
Communications, L.P. (PrimeCo). In November 1996, PrimeCo launched commercial
service in 16 major cities throughout the country, expanding its PCS service to
28 cities by the end of 1997. The change between 1997 and 1996 was also affected
by a pre-tax gain of approximately $66 million recognized in the first quarter
of 1996 on the disposition of a nonstrategic investment.
These factors were offset, in part, by pre-tax gains on the sales of our
ownership interests in several businesses, including approximately $42 million
related to the disposition of our interest in Sky Network Television Limited of
New Zealand, $54 million on the sale of our 33% stake in an Italian wireline
venture, Infostrada, and $46 million, net of reserves, on the sale of our two-
sevenths interest in Bell Communications Research, Inc. (Bellcore). We also
recognized a small gain on the sale of Iusacell's interest in an Ecuadorian
cellular company in 1997.
Results for 1997 were positively affected by the consolidation of our Iusacell
investment and improved operating results from our investments in Omnitel Pronto
Italia S.p.A. (Omnitel), an international wireless investment, and FLAG Ltd.
(FLAG), a company, in which we are the managing sponsor, that has completed
construction of an undersea fiberoptic cable system between Europe and Asia and
launched its commercial service in the fourth quarter of 1997.
Income from unconsolidated businesses in 1996 was higher than in 1995,
principally due to the recognition of a pre-tax gain on the sale of a
nonstrategic investment and lower equity losses from our Iusacell investment,
reflecting net foreign exchange gains and a reduction in the amortization of
goodwill. These increases were partially offset by higher equity losses
associated with our investments in several joint ventures, including PrimeCo and
Omnitel.
Other Income and (Expense), Net
Increase (Decrease)
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1997-1996 $ 96.3
1996-1995 $(503.9)
- --------------------------------------------------------------------------------
Other income and (expense), net, consists primarily of interest and dividend
income, minority interest in net income (loss) of consolidated businesses, and
gains and losses on non-operating assets and investments.
The principal items affecting the change in other income and expense in 1997
were the effects of accounting for our equity investment in CWC and the
consolidation of our Iusacell investment, as described earlier.
The change in other income and expense in 1996 was primarily attributable to a
pre-tax gain of approximately $384 million recorded in 1995 on the sale of
certain cellular properties and a change in the method of recording capitalized
interest costs by two of our operating telephone subsidiaries. In connection
with the discontinued application of SFAS No. 71 in 1995, these operating
telephone subsidiaries began recognizing capitalized interest costs as a
reduction to interest expense beginning in 1996. Previously, these subsidiaries
recorded an allowance for funds used during construction as an item of other
income.
<PAGE>
Interest Expense
Increase (Decrease)
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1997-1996 $ 148.0 13.7 %
1996-1995 $(182.6) (14.4)%
- --------------------------------------------------------------------------------
Interest expense increased in 1997 principally as a result of higher borrowing
levels at our network and wireless subsidiaries. A reduction in capitalized
interest costs associated with our PrimeCo investment and the effect of the
Iusacell consolidation also contributed to the rise in interest expense in the
year.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS continued
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We were able to reduce our interest expense in 1996 as a result of lower rates
of interest and lower average borrowing levels during the year. The
aforementioned change in the method of recording capitalized interest costs by
two of our operating telephone subsidiaries also contributed to the reduction in
interest expense in 1996.
See Note 9 to the consolidated financial statements for additional information
about our debt portfolio.
Effective Income Tax Rates
Years Ended December 31,
- --------------------------------------------------------------------------------
1997 38.4%
1996 36.3%
1995 37.7%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a percentage
of income before provision for income taxes, extraordinary items and cumulative
effect of change in accounting principle.
The higher effective income tax rate in 1997 resulted from the effect of certain
merger-related costs and special charges for which there were no corresponding
tax benefits. Adjustments to the valuation allowance resulting from our re-
evaluation of tax planning strategies in light of the merger also contributed to
the higher effective income tax rate in 1997. These factors were partially
offset by the effect of a change in the New Jersey state tax law, which resulted
in the recognition of a deferred state income tax benefit of approximately $75
million in the third quarter of 1997.
In 1997, a New Jersey law was enacted that repealed the gross receipts tax
applicable to telephone companies and extended the net-income-based corporate
business tax to include telephone companies. This change is not expected to have
a material effect on future results of operations.
The effective income tax rate was lower in 1996, as compared to 1995, due
principally to changes in foreign investee results for which there were no
corresponding tax benefits or expense. The 1996 rate also reflects prior period
adjustments, including research and development credits. The 1995 rate reflects
a provision for various state tax issues recorded in 1995. The effect of these
factors was partially offset by the reduction in the amortization of investment
tax credits and the elimination of the benefit of the income tax rate
differential applied to reversing timing differences, both as a result of the
discontinued application of regulatory accounting principles by two of our
operating telephone subsidiaries in June 1995.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is provided in Note 17 to the consolidated
financial statements.
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FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN):
Operating activities $ 8,858.7 $ 8,780.8 $ 7,894.4
Investing activities (7,338.6) (7,574.0) (6,564.1)
Financing activities (1,446.7) (1,420.3) (1,147.8)
--------------------------------------
We use the net cash generated from our operations and from external financing to
fund capital expenditures for network expansion and modernization, pay
dividends, and invest in new businesses. While current liabilities exceeded
current assets at December 31, 1997 and 1996, our sources of funds, primarily
from operations and, to the extent necessary, from readily available external
financing arrangements, are sufficient to meet ongoing operating and investing
requirements. We expect that presently foreseeable capital requirements will
continue to be financed primarily through internally generated funds. Additional
debt or equity financing may be needed to fund additional development activities
or to maintain our capital structure to ensure our financial flexibility.
CASH FLOWS FROM OPERATING ACTIVITIES
Our primary source of funds continued to be cash generated from operations.
Improved cash flows from operating activities during 1997 resulted mainly from
improved operating income before certain charges in connection with the merger
and with consolidating operations and combining organizations. Cash flows from
operations improved in 1996 due principally to growth in operating income and
timing differences in the payment of accounts payable and accrued taxes.
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures continued to be our primary use of cash resources. Our
capital expenditures consisted principally of investments in our network
subsidiaries. We invested approximately $5.5 billion in 1997 and $4.9 billion in
each of 1996 and 1995 to support our network businesses in order to facilitate
the introduction of new products and services, enhance responsiveness to
competitive challenges and increase the operating efficiency and productivity of
the network. We expect capital expenditures in 1998 to aggregate to
approximately $7.0 billion, including approximately $6.0 billion to be invested
in our network subsidiaries.
We continue to make substantial investments in our unconsolidated businesses.
During 1997, we invested $833.0 million in unconsolidated businesses including
approximately $426 million in PrimeCo to fund its operations and the continued
build-out of its PCS network, $138 million in FLAG and $269 million in leasing
and other partnerships. Cash investing activities in unconsolidated businesses
in 1996 totaled $1,071.2 million, which included investments of approximately
$257 million in PrimeCo, $315 million in
10
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS continued
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Omnitel, primarily to increase our ownership interest, $224 million in other
international telecommunications investments and $275 million in leasing and
other partnerships. Cash investments in unconsolidated businesses in 1995
consisted principally of approximately $612 million in PrimeCo to fund the
initial purchase of PCS licenses, $170 million in international
telecommunications investments and $258 million in leasing and other
partnerships.
Our short-term investments consist principally of cash equivalents held in trust
accounts for the payment of certain employee benefits. During 1997 and 1996, we
invested $843.6 million and $418.1 million in short-term investments,
principally in trusts to pre-fund vacation pay and associate health and welfare
benefits. In 1997, we increased our pre-funding of benefits trusts to cover
employees of the former NYNEX companies. Proceeds from the sales of short-term
investments were $426.9 million in 1997, compared to $132.5 million in 1996.
During 1997, we received cash proceeds totaling $546.5 million from the sales of
our real estate properties and our interests in Bellcore, Infostrada, Sky
Network Television Limited of New Zealand and other joint ventures.
In 1996, we received cash proceeds of approximately $128 million from the sales
of nonstrategic investments. Cash proceeds from dispositions of businesses in
1995 consisted principally of approximately $453 million from the sale of
certain cellular properties and approximately $250 million in connection with
the sales of our computer maintenance business and our interests in certain
European computer maintenance operations.
During 1997, we received cash proceeds of $153.3 million from Telecom
Corporation of New Zealand's (TCNZ) share repurchase plan. TCNZ completed its
repurchase plan in December 1997. As a result of the repurchase plan, we
increased our ownership interest in TCNZ from 24.82% to 24.95%, the maximum
permitted level.
CASH FLOWS USED IN FINANCING ACTIVITIES
As in prior years, dividend payments were a significant use of capital
resources. We determine the appropriateness of the level of our dividend
payments on a periodic basis by considering such factors as long-term growth
opportunities, internal cash requirements and the expectations of our
shareowners. In September 1997, we announced a quarterly dividend payment of
$.385 per share, an annual rate of $1.54 per share, as contemplated in the
merger with NYNEX. The new dividend payment is equivalent to what former NYNEX
shareowners would have received from the NYNEX quarterly dividend of $.295 per
share. Cash dividends declared in the first and second quarters of 1997 were
$.37 per share. In 1996, cash dividends were $.36 per share each quarter, or
$1.44 for the year; dividends declared in 1996 included $.0025 per common share
for redemption of all rights granted under our Shareholder Rights Plan. In 1995,
cash dividends were $.35 per share each quarter, or $1.40 for the year.
We increased our long-term debt (including capital lease obligations) and short-
term debt by approximately $1,438 million from December 31, 1996, compared to a
reduction in debt of approximately $197 million from 1995 to 1996. The increase
in 1997 was principally attributable to an increase in telephone plant
construction, new investments in PrimeCo and other wireless subsidiaries, and
the consolidation of our Iusacell investment. Additional pre-funding of employee
benefits trusts also contributed to the increase in debt levels. The effects of
these capital expenditures and the pre-funding of benefits trusts were partially
offset by proceeds from the TCNZ share repurchase plan and from sales of our
real estate properties and other investments.
In January 1998, one of our operating telephone subsidiaries issued $250.0
million of debentures, and in February 1998 the proceeds were used to redeem
$200.0 million of bonds and to reduce short-term debt levels.
Our debt ratio was 60.5% as of December 31, 1997, compared to 58.3% as of
December 31, 1996 and 62.1% as of December 31, 1995.
At December 31, 1996, we classified approximately $1.8 billion of commercial
paper borrowings as Long-Term Debt as a result of our intent to refinance these
borrowings on a long-term basis using an unsecured revolving credit facility.
This revolving credit facility was canceled in 1997. As a result, all commercial
paper was classified as Debt Maturing Within One Year in 1997.
As of December 31, 1997, we had unused bank lines of credit in excess of $4.8
billion and our subsidiaries have shelf registrations for the issuance of up to
$2.7 billion of unsecured debt securities. We also had $509.7 million in
borrowings outstanding under bank lines of credit at December 31, 1997. We have
established a $1.0 billion Euro Medium-Term Note Program for the issuance of
debt securities through a subsidiary. The debt securities of our subsidiaries
continue to be accorded high ratings by primary rating agencies.
In the second quarter of 1997, we reduced our Series B Preferred Stock of
Subsidiary by 100,000 shares through the purchase of the stock by a wholly owned
subsidiary for $10.0 million. In December 1997, our subsidiary Bell Atlantic New
Zealand Holdings, Inc. (BANZHI) issued 650,000 shares of Series C Variable Term
Preferred Stock at $100 per share with an initial annual dividend rate of 4.40%.
In 1995, BANZHI issued 600,000 shares of Series B Preferred Stock at a share
price of $100 with an annual dividend rate of $5.80 per share. Preferred share
sales resulted in cash inflows of $65.5 million in 1997 and $59.5 million in
1995.
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
As a result of the consolidation of our Iusacell investment in the first quarter
of 1997 and the transfer of our interests in United Kingdom operations to CWC
for an equity interest in CWC in the second quarter of 1997, our consolidated
balance sheet at December 31, 1997 reflects increases and decreases in certain
categories of assets and liabilities; however, these transactions had no
material effect on our financial condition.
In February 1998, we issued approximately $2.5 billion in exchangeable notes.
The notes have a maturity of five years and may be exchangeable into shares of
TCNZ, with the exchange price established at a premium to the TCNZ share price
at the time of the offering. The notes are noncallable for a period of at least
three years, and are not exchangeable by investors for an initial period of 18
months. Upon exchange by investors, we retain the option to settle in cash or by
delivery of shares. Proceeds from the offering are being used for general
corporate purposes, including the repayment of a portion of our short-term debt.
This transaction is not expected to have a material effect on our financial
condition or results of operations in 1998.
MARKET RISK
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes, foreign currency
exchange rate fluctuations and changes in corporate tax rates. We employ risk
management strategies including the use of derivatives such as interest rate
swap agreements, interest rate caps and floors, foreign currency forwards and
options, and basis swap agreements to manage these exposures. We do not hold
derivatives for trading purposes. The analysis below presents the hypothetical
changes in fair values related to our financial instruments held as of December
31, 1997, which are subject to these market risks.
Interest Rate Risk Management
Our objective in managing interest rate risk is to maintain a mix of fixed and
variable rate debt that will lower our overall borrowing costs within reasonable
risk parameters. Our short-term commercial paper and bank loans expose our
earnings to changes in short-term interest rates since interest rates on these
obligations are either variable or fixed for such a short period of time as to
effectively become variable. Interest rate swaps are used to convert a portion
of our debt portfolio from a variable rate to a fixed rate or from a fixed rate
to a variable rate. We have also entered into interest rate swap agreements to
hedge the value of certain international investments. These swap agreements
generally have both interest rate and foreign currency components. The interest
rate components typically require us to pay a floating rate of interest and
receive a fixed rate.
As of December 31, 1997, the fair value of our long-term debt and interest rate
derivatives was approximately $14.4 billion. The aggregate hypothetical fair
value of these financial instruments assuming a 100-basis-point upward parallel
shift in the yield curve is estimated to be $13.6 billion. The aggregate
hypothetical fair value of these financial instruments assuming a 100-basis-
point downward parallel shift in the yield curve is estimated to be $15.2
billion. The fair values of our commercial paper and bank loans are not
significantly affected by changes in market interest rates.
Foreign Exchange Risk Management
Our objective in managing foreign exchange risk is to protect against earnings
and cash flow volatility resulting from changes in foreign exchange rates.
Short-term transactions in foreign currency and foreign currency commitments
expose us to changes in foreign exchange rates. We have entered into forward
contracts to limit this risk by making the terms of the forward exchange
contracts comparable with the terms of the related foreign currency
transactions.
At December 31, 1997, our primary exposure with respect to these transactions
was to U.S. dollar/Italian lira, U.S. dollar/German mark and U.S. dollar/
Dutch guilder exchange rates.
Certain other foreign currency transactions were entered into to hedge the value
of certain international investments. As noted in the "Interest Rate Risk
Management" section above, certain of our interest rate swap agreements also
contain a foreign currency component whereby the final principal exchange is
designated in a foreign currency. At December 31, 1997, we had exposure to U.S.
dollar/British pound and U.S. dollar/Thai baht exchange rates. In addition,
our equity investment in the Philippines holds debt denominated in a currency
other than the Filipino peso and recognizes foreign currency gains or losses
when translating those liabilities. Our equity income related to this investment
is subject to fluctuations in the U.S. dollar/Filipino peso exchange rate.
We are subject to risk from changes in foreign exchange rates for our equity
investees which use a foreign currency as their functional currency and are
translated to U.S. dollars. Such changes result in cumulative translation
adjustments which are included in Shareowners' Investment. At December 31, 1997,
we had translation exposure to various foreign currencies with the most
significant being the New Zealand dollar, Italian lira and British pound.
<PAGE>
The aggregate hypothetical change in the fair values of our foreign currency
derivatives and cost investments from a 10% increase or 10% decrease in the
value of the U.S. dollar against the various currencies that we are exposed to
at December 31, 1997 was not material. This calculation does not include
potential changes in the value of our international
12
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS continued
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investments accounted for under the equity method. As of December 31, 1997,
those international investments totaled approximately $1.8 billion.
The fair values of our investments accounted for under the cost method may also
be at risk from adverse changes in foreign exchange rates. We currently hold an
international portfolio of telecommunication-related infrastructure projects
that includes cost investments in Thailand and Indonesia. During the past
several months, Asian financial markets have experienced a high degree of
volatility, which has had a negative effect on the fair values of these
international investments. However, we believe that the declines from recorded
book values are temporary and that the spot currency markets are not a clear and
reliable indicator of the rates which the local economies may support in the
future. While we expect to recover our investments in these countries, we will
continue to monitor the Asian financial markets closely and manage our
investments in order to maximize our future results, all within the parameters
of established risk management processes. The ultimate impact of these market
uncertainties will be dependent upon future events, including the level of
volatility in these markets, the duration of these unsettled market conditions
and the state of the underlying economies in the affected countries. Should we
determine the downturn of financial markets in these countries to be other than
temporary, the impact could be material to our financial condition and results
of operations.
Other Risk Management
Earnings generated from our leveraged lease portfolio may be affected by changes
in corporate tax rates. In order to hedge a portion of this risk, we entered
into several basis swap agreements which provide for the receipt of a variable
interest rate (LIBOR-based) in exchange for a rate calculated based on a tax-
exempt market index (J.J. Kenney). We account for these swaps at fair value and
record changes in unrealized gains and losses in our statement of income.
It is our policy to enter into interest rate, foreign currency and other
transactions only to the extent necessary to achieve the desired objectives of
our management in limiting our exposures to the various market risks discussed
above. We do not hedge all of our market risk exposures in a manner that would
completely eliminate the impact of changes in interest rates and foreign
exchange rates on our net income. We do not expect that our results of
operations or liquidity will be materially affected by these risk management
strategies.
The notional amounts of our derivative contracts are used only to calculate
contractual payments to be exchanged and are not a measure of our credit risk or
our future cash requirements. Credit risk related to derivatives is limited to
nonperformance by counterparties to our contracts. We manage that credit risk by
limiting our exposure to any one financial institution and by monitoring our
counterparties' credit ratings. We believe that the risk of loss due to
nonperformance by counterparties is remote and that any losses would not be
material to our financial condition or results of operations.
In addition, we are typically exposed to other types of risk in the course of
our business such as political risks to assets located in foreign countries.
Credit risks and other potential risks have not been included in the above
analysis.
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OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------------------------------------------------
BELL ATLANTIC -- NYNEX MERGER
The merger of Bell Atlantic and NYNEX was completed on August 14, 1997. We are
targeting recurring expense savings of approximately $450 million in 1998, $750
million by 1999 and $1.1 billion by 2000 and approximately $300 million a year
in capital savings as a result of the merger by consolidating and integrating
networks and operating systems, eliminating approximately 3,100 management
positions, centralizing procurement, reducing the need for contract services,
consolidating real estate, combining information systems and eliminating
duplicative operations. We also expect to add approximately $400 million a year
in revenues from our current product portfolio by using our best marketing and
advertising practices. We are targeting 1998 earnings growth within the 10% to
12% range, excluding merger-related transition and integration costs.
TELECOMMUNICATIONS INDUSTRY CHANGES
The telecommunications industry is undergoing substantial changes as a result of
the Act, other public policy changes and technological advances. These changes
are bringing increased competitive pressures in our current businesses, but will
also open new markets to us.
<PAGE>
The Act became law on February 8, 1996 and replaced the Modification of Final
Judgment (MFJ). In general, the Act includes provisions that open local exchange
markets to competition and permit Bell Operating Companies (BOCs) or their
affiliates, including Bell Atlantic, to provide interLATA (long distance)
services and to engage in manufacturing previously prohibited by the MFJ. Under
the Act, our ability to provide in-region long distance service is largely
dependent on satisfying certain conditions. The requirements include a 14-point
"competitive checklist" of steps we must take which will help competitors offer
local service through resale, the purchase of unbundled network elements or
through their own networks. We must also demonstrate to the FCC that our entry
into the in-region long distance market would be in the public interest.
13
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MANAGEMENT'S DISCUSSION AND ANALYSIS continued
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A U. S. District Court recently found that the line-of-business restrictions in
the Act, including the requirement that BOCs alone comply with a competitive
checklist before being allowed to provide long distance, are unconstitutional
because they apply only to BOCs. The court has stayed its order pending appeals
by the U. S. Department of Justice (DOJ) and other parties. Although we believe
that the court's decision will be upheld on appeal, we are continuing to work
through the regulatory process at both the state and federal levels in order to
be in a position to enter the in-region long distance market in 1998. We expect
to petition the FCC for permission to enter the in-region long distance market
in New York early in the second half of this year and in one or more other
states by the end of the year. We anticipate entering the in-region long
distance market in at least one jurisdiction during the second half of 1998, but
there can be no assurance that any approval will be forthcoming in time to
permit us to do so. The timing of our long distance entry in each of our 14
jurisdictions depends on the receipt of FCC approval and on the ultimate outcome
of the appeals of the district court's decision.
A U. S. Court of Appeals has found that the FCC unlawfully attempted to preempt
state authority in implementing key provisions of the Act and that several
provisions of the FCC's rules that we challenged are inconsistent with the
statutory requirements. In particular, it affirmed that the states have
exclusive jurisdiction over the pricing provisions of local interconnection and
resale arrangements, that the FCC cannot lawfully allow competitors to "pick and
choose" isolated terms out of negotiated interconnection agreements, and that
the FCC cannot require incumbent local exchange carriers to provide competitors
a pre-assembled network platform at network element prices or to combine
unbundled network elements for competitors. The U. S. Supreme Court has agreed
to hear appeals by the DOJ and other parties of that decision.
We are unable to predict definitively the impact that the Act will ultimately
have on our business, results of operations or financial condition. The
financial impact will depend on several factors, including the timing, extent
and success of competition in our markets, the timing and outcome of the various
appeals, and the timing, extent and success of our pursuit of new opportunities
resulting from the Act.
We anticipate that these industry changes, together with the rapid growth,
enormous size and global scope of these markets, will attract new entrants and
encourage existing competitors to broaden their offerings. Current and potential
competitors in telecommunication services include long distance companies, other
local telephone companies, cable companies, wireless service providers, foreign
telecommunications providers, electric utilities, Internet service providers and
other companies that offer network services. Many of these companies have a
strong market presence, brand recognition and existing customer relationships,
all of which contribute to intensifying competition and may affect our future
revenue growth. In addition, a number of major industry participants have
announced mergers, acquisitions and joint ventures which could substantially
affect the development and nature of some or all of our markets. You should also
read the "Competition" section for additional information.
RECENT DEVELOPMENTS -- FCC ORDERS
In 1997, the FCC adopted orders to reform the interstate access charge system,
to modify its price cap system and to implement the "universal service"
requirements of the Act.
Access Charges
Interstate access charges are the rates long distance carriers pay for use and
availability of the operating telephone subsidiaries' facilities for the
origination and termination of interstate service. The FCC's order adopted
changes to the access tariff structures in order to permit the operating
telephone subsidiaries to recover a greater portion of their interstate costs
through rates that reflect the manner in which those costs are incurred. The FCC
required a phased restructuring of access charges, beginning in January 1998, so
that the operating telephone subsidiaries' nonusage-sensitive costs will be
recovered from long distance carriers and end-users through flat rate charges,
and usage-sensitive costs will be recovered from long distance carriers through
usage-based rates. In addition, the FCC will require establishment of different
levels of usage-based charges for originating and for terminating interstate
traffic.
A portion of the operating telephone subsidiaries' interstate costs are also
recovered through flat monthly charges to subscribers (subscriber line charges).
Under the FCC's order, subscriber line charges for primary residential and
single line businesses will remain unchanged initially, but such charges for
additional residential lines and multi-line businesses will rise.
The FCC has begun an investigation of the tariffs filed by the operating
telephone subsidiaries and other local exchange carriers to implement this new
rate structure. We are unable to predict the results of this investigation.
<PAGE>
Price Caps
The FCC also adopted modifications to its price cap rules which affect access
rate levels. Under those rules, each year our price cap index is adjusted
downward by a fixed percentage intended to reflect increases in productivity
(Productivity Factor) and adjusted upward by an allowance for inflation (the
GDP-PI). In the twelve month period ended June 30, 1996, our Productivity Factor
was 5.3%. The FCC created a single Productivity Factor of 6.5% for all price cap
companies, eliminated requirements to share a portion of future
14
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
interstate earnings in excess of the authorized rate of return with customers
and required that rates be set as if the higher Productivity Factor had been in
effect since July 1996. Any local exchange company that earns an interstate rate
of return below 10.25% in a calendar year will be permitted to increase its
interstate rates in the following year. The FCC also ordered elimination of
recovery for amortized costs associated with our implementation of equal access
to all long distance carriers and removal of certain general overhead costs that
it concluded were associated with other unregulated services.
The FCC is expected to adopt an order in 1998 to address the conditions under
which the FCC would relax or remove existing access rate structure requirements
and price cap restrictions as increased local market competition develops. We
are unable to predict the results of this further proceeding.
Universal Service
The FCC also adopted rules implementing the "universal service" provision of the
Act, which was designed to ensure that a basket of designated services is widely
available and affordable to all customers, including low-income customers and
customers in areas that are expensive to serve. The FCC's universal service
support in 1998 will approximate $1.5 billion for high-cost areas. The support
amount thereafter cannot yet be determined. The FCC, in conjunction with the
Federal-State Joint Board on Universal Service, will adopt a methodology for
determining high-cost areas for nonrural carriers, and the proper amount of
federal universal service support for high-cost areas. A new federal high-cost
universal service support mechanism will become effective in 1999.
The FCC also adopted rules to implement the Act's requirements to provide
discounted telecommunications services to schools and libraries and to ensure
that not-for-profit rural health care providers have access to such services at
rates comparable to those charged their urban counterparts. All
telecommunications carriers must contribute funding for these universal service
programs.
The federal universal service funding needs as of January 1, 1998 require each
of our operating telephone subsidiaries to contribute approximately 2% of its
interstate retail revenues for high-cost and low-income subsidies. Each of our
operating telephone subsidiaries will also be contributing a portion of its
total interstate retail revenues for schools, libraries and not-for-profit
health care. Our operating telephone subsidiaries will recover these
contributions through interstate charges to long distance carriers and end-
users. Effective in 1998, our domestic wireless subsidiary will also be required
to contribute to these universal service programs and will recover the cost of
its contributions from end-users.
COMPETITION
IntraLATA Toll Services
IntraLATA toll calls originate and terminate within the same LATA, but generally
cover a greater distance than a local call. These services are generally
regulated by state regulatory commissions rather than federal authorities. All
of our state regulatory commissions (except in the District of Columbia, where
intraLATA toll service is not provided) permit other carriers to offer intraLATA
toll services within the state.
Until the implementation of presubscription, intraLATA toll calls were completed
by our operating telephone subsidiaries unless the customer dialed a code to
access a competing carrier. Presubscription changes this dialing method and
enables customers to make these toll calls using another carrier without having
to dial an access code.
The Act generally prohibits, with certain exceptions, a state from requiring
presubscription until the earlier of such time as the BOC is authorized to
provide long distance services originating in the state or three years from the
effective date of the Act.
New York Telephone Company substantially completed implementation of intraLATA
presubscription in the first quarter of 1996, and fully completed intraLATA
presubscription implementation by September 1996. By December 1997, our
operating telephone subsidiaries in Delaware, Maine, New Hampshire, New Jersey,
Pennsylvania, Rhode Island, Vermont and West Virginia had also implemented
presubscription. We expect to offer intraLATA presubscription in Maryland,
Massachusetts and Virginia coincident with our offering of long distance
services in those states, or by February 8, 1999, as required by the Act.
Implementation of presubscription for intraLATA toll services has begun to have
a material negative effect on intraLATA toll service revenues in those
jurisdictions where, as noted above, presubscription has been implemented before
we are permitted to offer long distance services. The adverse impact on
intraLATA toll services revenues is expected to be partially offset by an
increase in intraLATA access revenues.
Local Exchange Services
Local exchange services have historically been subject to regulation by state
regulatory commissions. Applications from competitors to provide and resell
local exchange services have been approved in all of our state jurisdictions.
The Act is expected to significantly increase the level of competition in all of
our local exchange markets.
15
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENT
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," (SOP 98-1). The Company is required to
adopt SOP 98-1 effective January 1, 1999, although earlier adoption is
permitted. SOP 98-1 provides, among other things, guidance for determining
whether computer software is for internal use and when costs related to such
software should be expensed as incurred or capitalized and amortized. The
Company is currently evaluating the provisions of SOP 98-1 and has not yet
determined what the impact of adopting this statement will have on its future
results of operations or financial position.
YEAR "2000" SYSTEMS MODIFICATIONS
We have initiated a comprehensive program to evaluate and address the impact of
the year 2000 on our operations in order to ensure that our network and computer
systems recognize calendar year 2000. This program includes steps to (a)
identify each item or element that will require date code remediation, (b)
establish a plan for remediation or replacement, (c) implement the fix, (d) test
the remediated product and (e) provide management with assurance of a seamless
transition to the year 2000. The identification and planning phases are
substantially complete and remediation and testing are in process. We expect to
complete the major portion of our internal date remediation activity in 1998.
For the years 1998 and 1999, we expect to incur total pre-tax expenses of
approximately $200 million to $300 million associated with both internal and
external staffing resources for the necessary planning, remediation and testing
and other expenses to prepare our systems for the year 2000. However, a portion
of these expenses will not be incremental, but rather will represent the
redeployment of existing information technology resources. Estimated expenses
include (a) anticipated license fees for replacement software that will
generally provide increased functionality as well as year 2000 compliance, and
(b) direct remediation costs to provide priority to year 2000 compliance during
the next two years. The cost of planning and initial remediation incurred
through 1997 has not been significant. Certain other costs, which will be
capitalized, represent ongoing investment in systems upgrades, the timing of
which is being accelerated in order to facilitate year 2000 compliance. These
cost estimates have been included in our earnings targets.
We expect to complete this effort on a timely basis without disruption to our
customers or operations.
CAUTIONARY STATEMENT CONCERNING FORWARD -- LOOKING STATEMENTS
Information contained above in this Management's Discussion and Analysis and
elsewhere in this Annual Report with respect to expected financial results and
future events and trends is forward-looking, based on our estimates and
assumptions and subject to risks and uncertainties. For those statements, we
claim the protection of the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995.
The following important factors could affect the future results of our company
and could cause those results to differ materially from those expressed in the
forward-looking statements: (i) materially adverse changes in economic
conditions in the markets served by us or by companies in which we have
substantial investments, or changes in available technology; (ii) the final
outcome of FCC rulemakings, and judicial review of those rulemakings, with
respect to the access and interconnection that we must provide other carriers
under the Act; (iii) the final outcome of FCC rulemakings with respect to access
charge reform and universal service; (iv) future state regulatory actions in our
operating areas; (v) the extent, timing and success of competition from others
in the local telephone and intraLATA toll service markets; (vi) the timing and
profitability of our entry into the in-region long distance market and (vii) the
success and expense of the remediation efforts of the company and its suppliers
in achieving year 2000 compliance.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
We, the management of Bell Atlantic Corporation, are responsible for the
consolidated financial statements and the information and representations
contained in this report. We believe the financial statements have been prepared
in conformity with generally accepted accounting principles and the information
in this report is consistent with those statements.
To meet our responsibility for the preparation of reliable financial statements,
we maintain a strong internal control structure. It includes the appropriate
control environment, accounting systems and control procedures. The internal
control structure is designed to provide reasonable assurance that assets are
safeguarded from unauthorized use, that transactions are properly recorded and
executed under our authorizations, and that the financial records permit the
preparation of reliable financial statements. There are, however, inherent
limitations that should be recognized in considering the assurances provided by
the internal control structure. The concept of reasonable assurance recognizes
that the costs of the internal control structure should not exceed the benefits
to be derived. The internal control structure is reviewed and evaluated on a
regular basis. Compliance is monitored by our internal auditors through an
annual plan of internal audits.
The Board of Directors has the responsibility to review the financial
statements. This is done by its Audit Committee, which is composed of four
outside directors. The Audit Committee meets periodically with management and
the Board of Directors. It also meets with representatives of the internal
auditors and independent accountants and reviews the work of each to ensure that
their respective responsibilities are being carried out and to discuss related
matters. Both the internal auditors and independent accountants have direct
access to the Audit Committee.
/s/ Raymond W. Smith
Raymond W. Smith
Chairman of the Board
and Chief Executive Officer
/s/ Frederic V. Salerno
Frederic V. Salerno
Senior Executive Vice President
and Chief Financial Officer/
Strategy and Business Development
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF
BELL ATLANTIC CORPORATION:
We have audited the accompanying consolidated balance sheets of Bell Atlantic
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareowners' investment, and cash
flows for each of the three years in the period ended December 31, 1997. The
consolidated financial statements give retroactive effect to the merger of Bell
Atlantic Corporation and NYNEX Corporation on August 14, 1997, which has been
accounted for as a pooling of interests, as described in Note 1 to the
consolidated financial statements. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bell Atlantic
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in 1996, the
Company changed its method of accounting for directory publishing revenues and
expenses. Also, as discussed in Notes 2 and 4 to the consolidated financial
statements, in the second quarter of 1995, the Company discontinued accounting
for the operations of certain telephone subsidiaries in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation."
/s/ Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York
February 9, 1998 (except for
the share and per share data
adjusted to reflect the stock
split referred to in Note 13,
for which the date is June 25,
1998)
17
<PAGE>
Bell Atlantic Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES $30,193.9 $29,155.2 $27,926.8
OPERATING EXPENSES
Employee costs, including benefits and taxes 9,047.2 8,703.9 8,811.3
Depreciation and amortization 5,864.4 5,379.0 5,326.1
Taxes other than income 1,606.9 1,499.9 1,589.3
Other operating expenses 8,333.9 7,493.8 6,782.7
--------------------------------------
24,852.4 23,076.6 22,509.4
--------------------------------------
OPERATING INCOME 5,341.5 6,078.6 5,417.4
Income (loss) from unconsolidated businesses (124.1) 14.2 (22.1)
Other income and (expense), net (3.3) (99.6) 404.3
Interest expense 1,230.0 1,082.0 1,264.6
--------------------------------------
Income before provision for income taxes,
extraordinary items, and cumulative effect
of change in accounting principle 3,984.1 4,911.2 4,535.0
Provision for income taxes 1,529.2 1,782.3 1,708.9
--------------------------------------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,454.9 3,128.9 2,826.1
Extraordinary items
Discontinuation of regulatory accounting
principles, net of tax -- -- (2,919.4)
Extinguishment of debt, net of tax -- -- (3.5)
--------------------------------------
-- -- (2,922.9)
--------------------------------------
Cumulative effect of change in accounting principle
Directory publishing, net of tax -- 273.1 --
--------------------------------------
NET INCOME (LOSS) $ 2,454.9 $ 3,402.0 $ (96.8)
======================================
BASIC EARNINGS PER COMMON SHARE:*
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 1.58 $ 2.02 $ 1.85
Extraordinary items -- -- (1.91)
Cumulative effect of change in accounting principle -- .18 --
--------------------------------------
NET INCOME (LOSS) $ 1.58 $ 2.20 $ (.06)
======================================
Weighted-average shares outstanding (in millions) 1,551.8 1,546.6 1,528.7
======================================
DILUTED EARNINGS PER COMMON SHARE:*
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 1.56 $ 2.00 $ 1.84
Extraordinary items -- -- (1.90)
Cumulative effect of change in accounting principle -- .18 --
--------------------------------------
NET INCOME (LOSS) $ 1.56 $ 2.18 $ (.06)
======================================
Weighted-average shares--diluted (in millions) 1,571.1 1,560.2 1,536.5
======================================
</TABLE>
*Adjusted to reflect a two-for-one stock split on June 1, 1998.
See Notes to Consolidated Financial Statements.
18
<PAGE>
Bell Atlantic Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
At December 31, 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 322.8 $ 249.4
Short-term investments 720.6 300.5
Accounts receivable, net of allowances of $611.9 and $566.7 6,340.8 6,168.9
Inventories 550.3 478.4
Prepaid expenses 634.0 716.3
Other 432.3 543.3
------------------------
9,000.8 8,456.8
------------------------
Plant, property and equipment 77,437.2 75,679.5
Less accumulated depreciation 42,397.8 39,544.7
------------------------
35,039.4 36,134.8
------------------------
Investments in unconsolidated businesses 5,144.2 4,922.2
Other assets 4,779.7 3,847.3
------------------------
Total assets $53,964.1 $53,361.1
========================
LIABILITIES AND SHAREOWNERS' INVESTMENT
Current liabilities
Debt maturing within one year $ 6,342.8 $ 2,884.2
Accounts payable and accrued liabilities 5,966.4 6,160.6
Other 1,355.0 1,305.1
------------------------
13,664.2 10,349.9
------------------------
Long-term debt 13,265.2 15,286.0
------------------------
Employee benefit obligations 10,004.4 9,588.0
------------------------
Deferred credits and other liabilities
Deferred income taxes 2,106.2 1,846.9
Unamortized investment tax credits 250.7 288.8
Other 772.6 865.9
------------------------
3,129.5 3,001.6
------------------------
Minority interest, including a portion subject
to redemption requirements 911.2 2,014.2
------------------------
Preferred stock of subsidiary 200.5 145.0
------------------------
Commitments and contingencies (Notes 6, 7 and 8)
Shareowners' investment
Series preferred stock ($.10 par value; none issued) -- --
Common stock ($.10 par value; 1,576,052,790 shares and
1,574,000,508 shares issued)* 157.6 157.4
Contributed capital* 13,176.8 13,216.3
Reinvested earnings 1,261.7 1,279.8
Foreign currency translation adjustment (553.4) (319.4)
------------------------
14,042.7 14,334.1
Less common stock in treasury, at cost 590.5 589.3
Less deferred compensation-employee stock ownership plans 663.1 768.4
------------------------
12,789.1 12,976.4
------------------------
Total liabilities and shareowners' investment $53,964.1 $53,361.1
========================
</TABLE>
*Adjusted to reflect a two-for-one stock split on June 1, 1998.
See Notes to Consolidated Financial Statements.
19
<PAGE>
Bell Atlantic Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' INVESTMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts, and Shares in Thousands)
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK*
Balance at beginning of year 1,574,001 $ 157.4 1,543,360 $ 154.3 872,812 $ 872.8
Pooling of interests with NYNEX Corporation -- -- -- -- 650,598 (720.5)
------------------------------------------------------------------------------
Balance at beginning of year, restated 1,574,001 157.4 1,543,360 154.3 1,523,410 152.3
Shares issued:
Employee plans 2,044 .2 9,084 .9 11,230 1.1
Shareowner plans 8 -- 2,968 .3 4,334 .4
Acquisition agreements -- -- -- -- 750 .1
Common shares issued to subsidiary -- -- 18,796 1.9 3,636 .4
Shares retired -- -- (207) -- -- --
------------------------------------------------------------------------------
Balance at end of year 1,576,053 157.6 1,574,001 157.4 1,543,360 154.3
------------------------------------------------------------------------------
CONTRIBUTED CAPITAL*
Balance at beginning of year 13,216.3 12,375.8 4,992.0
Pooling of interests with NYNEX Corporation -- -- 7,457.9
------------------------------------------------------------------------------
Balance at beginning of year, restated 13,216.3 12,375.8 12,449.9
Shares issued:
Employee plans (22.2) 263.1 305.5
Shareowner plans -- 94.0 118.7
Acquisition agreements (.3) -- 13.6
Sale of stock by subsidiary -- -- 155.2
Dividends -- (.2) (761.5)
Common shares issued to subsidiary -- 489.0 94.4
Other (17.0) (5.4) --
------------------------------------------------------------------------------
Balance at end of year 13,176.8 13,216.3 12,375.8
------------------------------------------------------------------------------
REINVESTED EARNINGS
Balance at beginning of year 1,279.8 184.6 1,144.4
Pooling of interests with NYNEX Corporation -- -- 605.8
------------------------------------------------------------------------------
Balance at beginning of year, restated 1,279.8 184.6 1,750.2
Net income (loss) 2,454.9 3,402.0 (96.8)
Dividends declared and redemption of stock
rights ($1.51, $1.44, and $1.40 per share) (2,363.4) (2,295.7) (1,473.4)
Shares issued:
Employee plans (121.0) (19.4) (11.8)
Tax benefit of dividends paid to ESOPs 12.9 14.8 16.4
Other (1.5) (6.5) --
------------------------------------------------------------------------------
Balance at end of year 1,261.7 1,279.8 184.6
------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at beginning of year (319.4) (541.3) (330.8)
Pooling of interests with NYNEX Corporation -- -- 3.2
------------------------------------------------------------------------------
Balance at beginning of year, restated (319.4) (541.3) (327.6)
Translation adjustments (net of tax benefit
of $1.8, $4.7, and $1.1) (234.0) 221.9 (213.7)
------------------------------------------------------------------------------
Balance at end of year (553.4) (319.4) (541.3)
------------------------------------------------------------------------------
TREASURY STOCK*
Balance at beginning of year 22,540 589.3 3,762 97.9 440 11.0
Pooling of interests with NYNEX Corporation -- -- -- -- -- --
------------------------------------------------------------------------------
Balance at beginning of year, restated 22,540 589.3 3,762 97.9 440 11.0
Shares purchased 24,148 919.8 3,578 118.3 422 11.2
Shares distributed:
Employee plans (23,260) (899.0) (3,386) (111.6) (86) (2.1)
Shareowner plans (52) (1.8) (2) (.1) (468) (11.6)
Acquisition agreements (424) (17.8) -- -- (182) (5.4)
Common shares held by subsidiary -- -- 18,796 490.9 3,636 94.8
Shares retired -- -- (208) (6.1) -- --
------------------------------------------------------------------------------
Balance at end of year 22,952 590.5 22,540 589.3 3,762 97.9
------------------------------------------------------------------------------
DEFERRED COMPENSATION-ESOPs
Balance at beginning of year 768.4 861.9 586.2
Pooling of interests with NYNEX Corporation -- -- 364.2
------------------------------------------------------------------------------
Balance at beginning of year, restated 768.4 861.9 950.4
Amortization (105.3) (93.5) (88.5)
------------------------------------------------------------------------------
Balance at end of year 663.1 768.4 861.9
------------------------------------------------------------------------------
TOTAL SHAREOWNERS' INVESTMENT $ 12,789.1 $ 12,976.4 $ 11,213.6
==============================================================================
</TABLE>
*Adjusted to reflect a two-for-one stock split on June 1, 1998.
See Notes to Consolidated Financial Statements.
20
<PAGE>
Bell Atlantic Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions)
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,454.9 $ 3,402.0 $ (96.8)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 5,864.4 5,379.0 5,326.1
Extraordinary items, net of tax -- -- 2,922.9
Cumulative effect of change in accounting principle, net of tax -- (273.1) --
Gain on sale of cellular properties, net of tax -- -- (244.2)
Income (loss) from unconsolidated businesses 124.1 (14.2) 22.1
Dividends received from unconsolidated businesses 192.1 194.8 179.0
Amortization of unearned lease income (110.3) (100.6) (92.1)
Deferred income taxes, net 236.9 284.2 (13.8)
Investment tax credits (38.1) (57.3) (70.5)
Other items, net 88.2 274.1 48.0
Changes in certain assets and liabilities, net of effects from
acquisition/disposition of businesses:
Accounts receivable (139.5) (184.0) (591.0)
Inventories (73.8) (116.1) (70.8)
Other assets 65.2 (244.8) (241.0)
Accounts payable and accrued liabilities (93.3) 382.6 290.3
Employee benefit obligations 415.5 206.5 425.5
Other liabilities (127.6) (352.3) 100.7
------------------------------------------
Net cash provided by operating activities 8,858.7 8,780.8 7,894.4
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (843.6) (418.1) (135.0)
Proceeds from sale of short-term investments 426.9 132.5 136.9
Additions to plant, property and equipment (6,637.7) (6,394.7) (6,304.7)
Proceeds from sale of plant, property and equipment 5.5 15.4 4.9
Investment in leased assets (161.6) (201.3) (245.4)
Proceeds from leasing activities 83.0 99.9 179.0
Proceeds from notes receivable 63.1 213.3 264.5
Acquisition of businesses, less cash acquired (61.8) (10.0) (41.4)
Proceeds from Telecom Corporation of New Zealand Limited
share repurchase plan 153.3 -- --
Investments in unconsolidated businesses, net (833.0) (1,071.2) (1,040.5)
Proceeds from disposition of businesses 546.5 127.8 701.4
Other, net (79.2) (67.6) (83.8)
------------------------------------------
Net cash used in investing activities (7,338.6) (7,574.0) (6,564.1)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 633.0 109.4 429.0
Principal repayments of borrowings and capital lease obligations (901.4) (375.8) (583.8)
Early extinguishment of debt -- -- (200.0)
Net change in short-term borrowings with
original maturities of three months or less 1,580.3 77.1 (89.0)
Dividends paid and redemption of stock rights (2,340.4) (2,204.1) (2,117.4)
Proceeds from sale of common stock 710.7 328.3 299.6
Purchase of common stock for treasury (919.8) (118.3) (11.2)
Minority interest (.1) 687.8 289.2
Reduction in preferred stock of subsidiary (10.0) -- --
Proceeds from sale of preferred stock by subsidiary 65.5 -- 59.5
Proceeds from sale of stock by subsidiary -- -- 610.3
Net change in outstanding checks drawn
on controlled disbursement accounts (264.5) 75.3 166.0
------------------------------------------
Net cash used in financing activities (1,446.7) (1,420.3) (1,147.8)
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 73.4 (213.5) 182.5
Cash and cash equivalents, beginning of year 249.4 462.9 280.4
------------------------------------------
Cash and cash equivalents, end of year $ 322.8 $ 249.4 $ 462.9
==========================================
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
1. BELL ATLANTIC -- NYNEX MERGER
-----------------------------------------------------------------------------
On August 14, 1997, Bell Atlantic Corporation and NYNEX Corporation completed a
merger of equals under a definitive merger agreement entered into on April 21,
1996 and amended on July 2, 1996. The stockholders of each company approved the
merger at special meetings held in November 1996.
In this Annual Report, Bell Atlantic Corporation is referred to as "we" or "Bell
Atlantic." Reference to Bell Atlantic is also made in connection with
information about Bell Atlantic prior to the merger. NYNEX Corporation is
referred to as "NYNEX."
Under the terms of the amended agreement, NYNEX became a wholly owned subsidiary
of Bell Atlantic. NYNEX stockholders received 0.768 of a share of Bell Atlantic
common stock for each share of NYNEX common stock that they owned. This resulted
in the issuance of 700.4 million shares of Bell Atlantic common stock.
NYNEX provides a full range of communications services in the northeastern
United States and in high growth markets around the world. NYNEX has expertise
in telecommunications, wireless communications, directory publishing and
information services.
The merger qualified as a tax-free reorganization and has been accounted for as
a pooling of interests. Under this method of accounting, the companies are
treated as if they had always been combined for accounting and financial
reporting purposes and, therefore, we have restated our financial information
for all dates and periods prior to the merger.
The combined results reflect certain reclassifications to conform to the
presentation used by Bell Atlantic and certain adjustments to conform accounting
methodologies between Bell Atlantic and NYNEX. Results of operations for certain
periods prior to the merger have been combined and conformed as follows:
<TABLE>
<CAPTION>
(Dollars in Millions)
Years Ended December 31,
Six months ended --------------------------------------
June 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Operating revenues:
Bell Atlantic $ 6,854.6 $13,081.4 $13,429.5
NYNEX 6,815.1 13,453.8 13,406.9
Reclassifications (a) .1 .7 --
Cellular consolidation (b) 1,454.5 2,619.3 1,090.4
-------------------------------------------------------------
Combined $15,124.3 $29,155.2 $27,926.8
=============================================================
Net income (loss):
Bell Atlantic $ 1,014.5 $ 1,881.5 $ 1,858.3
NYNEX 540.1 1,477.0 (1,849.9)
Cellular consolidation (b) 3.3 (7.6) (10.5)
SFAS No. 106 adjustment (c) 39.1 62.4 79.0
Gain on sale of stock by subsidiary (d) -- -- (155.2)
Other (e) (2.0) (11.3) (18.5)
-------------------------------------------------------------
Combined $ 1,595.0 $ 3,402.0 $ (96.8)
=============================================================
</TABLE>
(a) Reclassifications have been made to conform to our post-merger
presentation.
(b) An adjustment has been made to conform accounting methodologies and to
consolidate the accounts of cellular operations that were jointly
controlled by NYNEX and Bell Atlantic prior to the merger and accounted for
by both companies using the equity method.
(c) An adjustment has been made to reflect the adoption by NYNEX of the
immediate recognition of the transition benefit obligation under Statement
of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," effective January 1,
1993, to conform to the method used by Bell Atlantic.
(d) An adjustment has been made to reflect the initial public offering of stock
by a subsidiary of NYNEX as a capital transaction to conform to the
accounting methodology that we adopted for recording such transactions.
(e) Other adjustments have been made to conform the accounting policies of the
companies, and to record the related tax effects of these adjustments.
22
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 1 continued
MERGER-RELATED COSTS
In the third quarter of 1997 we recorded merger-related pre-tax costs of
approximately $200 million ($182 million after-tax) for direct incremental costs
and approximately $223 million ($140 million after-tax) for employee severance
costs.
Direct incremental costs consist of expenses associated with completing the
merger transaction such as professional and regulatory fees, compensation
arrangements and shareowner-related costs. Employee severance costs, as recorded
under SFAS No. 112, "Employers' Accounting for Postemployment Benefits,"
represent the benefit costs for the separation by the end of 1999 of
approximately 3,100 management employees who are entitled to benefits under pre-
existing separation pay plans.
-----------------------------------------------------------------------------
2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------------------
DESCRIPTION OF BUSINESS
The merger of Bell Atlantic and NYNEX creates a telecommunications company that
operates in a region stretching from Maine to Virginia (Maine, New Hampshire,
Vermont, Massachusetts, Rhode Island, Connecticut, New York, Pennsylvania, New
Jersey, Maryland, Delaware, District of Columbia, West Virginia and Virginia).
Our nine operating telephone subsidiaries provide local telephone services
including voice and data transport, enhanced and custom calling features,
network access, directory assistance, private lines and public telephones. We
also provide systems integration, customer premises equipment distribution,
directory and electronic publishing and financing services. We currently offer
long distance services in selected areas outside of our geographic region.
We provide domestic wireless services in 25 states and have international
wireless investments in Latin America, Europe and the Pacific Rim.
We have other international investments in telecommunications companies in New
Zealand, Thailand and the Philippines. We own an interest in an integrated
telecommunications and television entertainment service company in the United
Kingdom, and we are the managing sponsor of a company that has constructed an
undersea fiberoptic cable between Europe and Asia.
We operate predominantly in a single industry segment -- communications and
related services.
The telecommunications industry is undergoing substantial changes as a result of
the Telecommunications Act of 1996, other public policy changes and
technological advances. These changes are likely to bring increased competitive
pressures, but will also open new markets to us, such as long distance services
in our geographic region, upon completion of certain requirements of the
Telecommunications Act of 1996.
CONSOLIDATION
The consolidated financial statements include our controlled or majority-owned
subsidiaries. Investments in businesses in which we do not have control, but
have the ability to exercise significant influence over operating and financial
policies, are accounted for using the equity method. Investments in which we do
not have the ability to exercise significant influence over operating and
financial policies are accounted for under the cost method. All significant
intercompany accounts and transactions have been eliminated.
Grupo Iusacell, S.A. de C.V.
In February 1997, we consummated a restructuring of our investment in Grupo
Iusacell, S.A. de C.V. (Iusacell), a Mexican wireless company, to permit us to
assume control of the Board of Directors and management of Iusacell (see Note
6). As a result of the restructuring, we changed the accounting for our Iusacell
investment from the equity method to full consolidation.
United Kingdom Operations
In the second quarter of 1997, we transferred our interests in cable television
and telecommunications operations in the United Kingdom to Cable & Wireless
Communications PLC (CWC) in exchange for an 18.5% ownership interest in CWC (see
Note 6). Prior to the transfer, we included the accounts of these operations in
our consolidated financial statements. We account for our investment in CWC
under the equity method.
USE OF ESTIMATES
We prepare our financial statements under generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts or certain disclosures. Actual results could differ
from those estimates.
REVENUE RECOGNITION
Our operating telephone subsidiaries recognize revenues when services are
rendered based on usage of our local exchange network and facilities. Our other
subsidiaries recognize revenues when products are delivered or services are
rendered to customers.
MAINTENANCE AND REPAIRS
We charge the cost of maintenance and repairs, including the cost of replacing
minor items not constituting substantial betterments, to Operating Expenses.
EARNINGS PER COMMON SHARE
All earnings per share computations and presentations are in accordance with
SFAS No. 128, "Earnings per Share." Per share amounts have been adjusted to
reflect a two-for-one stock split on June 1, 1998.
23
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 2 continued
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with a maturity of 90 days or less
when purchased to be cash equivalents, except cash equivalents held as short-
term investments. Cash equivalents are stated at cost, which approximates market
value.
SHORT-TERM INVESTMENTS
Our short-term investments consist primarily of cash equivalents held in trust
to pay for certain employee benefits. Short-term investments are stated at cost,
which approximates market value.
INVENTORIES
We include in inventory new and reusable materials of the operating telephone
subsidiaries which are stated principally at average original cost, except that
specific costs are used in the case of large individual items. Inventories of
our other subsidiaries are stated at the lower of cost (determined principally
on either an average or first-in, first-out basis) or market.
PLANT AND DEPRECIATION
We state plant, property and equipment at cost. Our operating telephone
subsidiaries' depreciation expense is principally based on the composite group
remaining life method and straight-line composite rates. This method provides
for the recognition of the cost of the remaining net investment in telephone
plant, less anticipated net salvage value, over the remaining asset lives. This
method requires the periodic revision of depreciation rates.
Our operating telephone subsidiaries discontinued accounting for their
operations under SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," in August 1994 (Pennsylvania, New Jersey, Maryland, Delaware,
District of Columbia, West Virginia and Virginia) and June 1995 (New York and
New England) (see Note 4). For financial reporting purposes, we no longer use
asset lives set by regulators. As a result, we began using shorter estimated
asset lives for certain categories of plant and equipment.
The asset lives used by our operating telephone subsidiaries are presented in
the following table:
Average Lives (in years)
- --------------------------------------------------------------------------------
Buildings 15-60
Central office equipment 4-12
Cable, wiring and conduit 8-65
Other equipment 5-40
When we replace or retire depreciable telephone plant, we deduct the carrying
amount of such plant from the respective accounts and charge accumulated
depreciation. Gains or losses on disposition are amortized with the remaining
net investment in telephone plant.
Plant, property and equipment of our other subsidiaries is depreciated on a
straight-line basis over the following estimated useful lives: buildings, 20 to
60 years; and other equipment, 5 to 40 years.
When the depreciable assets of our other subsidiaries are retired or otherwise
disposed of, the related cost and accumulated depreciation are deducted from the
plant accounts, and any gains or losses on disposition are recognized in income.
COMPUTER SOFTWARE COSTS
Our operating telephone subsidiaries capitalize initial right-to-use fees for
central office switching equipment, including initial operating system and
initial application software costs. For noncentral office equipment, only the
initial operating system software is capitalized. Subsequent additions,
modifications, or upgrades of initial software programs, whether operating or
application packages, are expensed as incurred.
CAPITALIZATION OF INTEREST COSTS
We capitalize interest associated with the acquisition or construction of plant
assets. Capitalized interest is reported as a cost of plant and a reduction in
interest cost. Before we discontinued accounting under SFAS No. 71, our
operating telephone subsidiaries recorded an allowance for funds used during
construction, which included both interest and equity return components, as a
cost of plant and as an item of other income.
GOODWILL
Goodwill is the excess of the acquisition cost of businesses over the fair value
of the identifiable net assets acquired. We amortize goodwill on a straight-line
basis over periods not exceeding 40 years. We assess the impairment of goodwill
related to our consolidated subsidiaries under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. A determination of impairment (if any) is made based on
estimates of future cash flows.
FOREIGN CURRENCY TRANSLATION
The functional currency for nearly all of our foreign operations is the local
currency. For these foreign entities, we translate income statement amounts at
average exchange rates for the period, and we translate assets and liabilities
at end-of-period exchange rates. We present these translation adjustments as a
separate component of Shareowners' Investment. We report exchange gains and
losses on intercompany foreign currency transactions of a long-term nature in
Shareowners' Investment. Other exchange gains and losses are reported in income.
When a foreign entity operates in a highly inflationary economy, we use the U.S.
dollar as the functional currency rather than the local currency. We translate
nonmonetary assets and
24
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 2 continued
liabilities and related expenses into U.S. dollars at historical exchange rates.
We translate all other income statement amounts using average exchange rates for
the period. Monetary assets and liabilities are translated at end-of-period
exchange rates, and any gains or losses are reported in income. Effective
October 1, 1996, we consider Iusacell to operate in a highly inflationary
economy.
DERIVATIVE INSTRUMENTS
We have entered into derivative transactions to manage our exposure to
fluctuations in foreign exchange rates, interest rates and corporate tax rates.
We have implemented strategies using a variety of derivatives including foreign
currency forwards and options, foreign currency swaps, interest rate swap
agreements, interest rate caps and floors and basis swap agreements.
Fair Value Method
We use the fair value method of accounting for our foreign currency derivatives,
which requires us to record these derivatives at fair value in our consolidated
balance sheets with changes in value recorded in income or Shareowners'
Investment. Depending upon the nature of the derivative instruments, the fair
value of these instruments may be recorded in Current Assets, Other Assets,
Current Liabilities and Deferred Credits and Other Liabilities in our
consolidated balance sheets.
Gains and losses and related discounts or premiums arising from foreign currency
derivatives, which hedge our net investments in consolidated foreign
subsidiaries and investments in foreign entities accounted for under the equity
method, are included in Shareowners' Investment as foreign currency translation
adjustments and reflected in income upon sale or substantial liquidation of the
investment. Certain of these derivatives also include an interest element, which
is recorded in Interest Expense over the lives of the contracts. Gains and
losses from derivatives which hedge our short-term transactions and cost
investments are included in Other Income and Expense, Net, and discounts or
premiums on these contracts are included in income over the lives of the
contracts. Gains and losses from derivatives hedging identifiable foreign
currency commitments are deferred and reflected as adjustments to the related
transactions. If the foreign currency commitment is no longer likely to occur,
the gain or loss is recognized immediately in income.
We have entered into basis swap agreements which protect a portion of our
leveraged lease portfolio from the effects of increases in corporate tax rates.
We account for our basis swap agreements using the fair value method of
accounting. Under this method, these agreements are carried at fair value and
included in Other Assets or Deferred Credits and Other Liabilities in our
consolidated balance sheets. Changes in the unrealized gain or loss are included
in Other Income and Expense, Net.
Accrual Method
Interest rate swap agreements and interest rate caps and floors that qualify as
hedges are accounted for under the accrual method. An instrument qualifies as a
hedge if it effectively modifies and/or hedges the interest rate characteristics
of the underlying fixed or variable interest rate debt. Under the accrual
method, no amounts are recognized in our consolidated balance sheets related to
the principal balances. The interest differential to be paid or received, which
is accrued as interest rates change, and premiums related to caps and floors are
recognized as adjustments to Interest Expense over the lives of the agreements.
These interest accruals are recorded in Current Assets and Current Liabilities
in our consolidated balance sheets. If we terminate an agreement, the gain or
loss is recorded as an adjustment to the basis of the underlying liability and
amortized over the remaining original life of the agreement. If the underlying
liability matures or is extinguished and the related derivative is not
terminated, that derivative would no longer qualify for accrual accounting and
would then be accounted for at fair value, with changes in that value included
in income.
SALE OF STOCK BY SUBSIDIARY
Changes in our ownership percentage in a subsidiary caused by issuances of the
subsidiary's stock are recognized in consolidation as adjustments to Contributed
Capital.
INCOME TAXES
Bell Atlantic and its domestic subsidiaries file a consolidated federal income
tax return. For periods prior to the merger, NYNEX filed its own consolidated
federal income tax return.
Our operating telephone subsidiaries use the deferral method of accounting for
investment tax credits earned prior to the repeal of investment tax credits by
the Tax Reform Act of 1986. We also defer certain transitional credits earned
after the repeal. These credits are being amortized as a reduction to the
Provision for Income Taxes over the estimated service lives of the related
assets.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
STOCK-BASED COMPENSATION
We account for stock-based employee compensation plans under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Effective January 1, 1996, we adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
25
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 2 continued
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income, requiring its components to be
reported in a financial statement that is displayed with the same prominence as
other financial statements. We will adopt this standard in the first quarter of
1998. The adoption of SFAS No. 130 will have no impact on our consolidated
results of operations, financial condition or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for reporting financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
shareowners. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Operating segments
are defined as components of an enterprise about which separate financial
information is available and evaluated regularly by the chief operating decision
makers in deciding how to allocate resources and in assessing performance. We
are required to disclose this information for the first time when we publish our
1998 annual report, but earlier adoption of the statement is permitted. We are
in the process of evaluating the segment disclosures for purposes of reporting
under SFAS No. 131. The adoption of SFAS No. 131 will have no impact on our
consolidated results of operations, financial condition or cash flows.
-----------------------------------------------------------------------------
3. CHANGE IN ACCOUNTING PRINCIPLE -- DIRECTORY PUBLISHING
-----------------------------------------------------------------------------
Effective January 1, 1996, we changed our method of accounting for directory
publishing revenues and expenses from the amortized method to the point-of-
publication method. Under the point-of-publication method, revenues and expenses
are recognized when the directories are published rather than over the lives of
the directories, as under the amortized method. We believe the point-of-
publication method is preferable because it is the method generally followed by
publishing companies.
This accounting change resulted in a one-time, noncash increase in net income of
$273.1 million (net of income tax of $179.0 million), or $.18 per share on both
a basic and diluted basis, which is reported as a cumulative effect of a change
in accounting principle at January 1, 1996. On an annual basis, the financial
impact of applying this method in 1996 was not significant, and it would not
have been significant had it been applied in 1995.
-----------------------------------------------------------------------------
4. DISCONTINUATION OF REGULATORY ACCOUNTING PRINCIPLES
-----------------------------------------------------------------------------
In August 1994, our operating telephone subsidiaries in Pennsylvania, New
Jersey, Maryland, Delaware, District of Columbia, West Virginia and Virginia
discontinued the use of regulatory accounting principles under SFAS No. 71. As a
result, we recorded a noncash, extraordinary charge of $2,150.0 million, which
is net of an income tax benefit of $1,498.4 million.
In June 1995, our operating telephone subsidiaries in New York and New England
also discontinued the use of regulatory accounting principles under SFAS No. 71.
For these subsidiaries, we recorded a noncash, extraordinary charge of $2,919.4
million, which is net of an income tax benefit of $1,617.6 million.
The extraordinary charges consisted principally of adjustments to telephone
plant and equipment through an increase to accumulated depreciation of $2,306.9
million in 1995 and $2,128.9 million in 1994 to reflect the difference between
recorded depreciation and the amount of depreciation that would have been
recorded had the operating telephone subsidiaries not been subject to rate
regulation. Investment tax credit amortization of $44.2 million in 1995 and
$136.2 million in 1994 was accelerated as a result of the reduction in asset
lives of the associated telephone plant and equipment. We also eliminated
nonplant regulatory assets and liabilities of $656.7 million in 1995 and $157.3
million in 1994, principally related to deferred debt refinancing, vacation pay
and pension costs, which were being amortized as they were recognized in the
ratemaking process.
-----------------------------------------------------------------------------
5. PLANT, PROPERTY AND EQUIPMENT
-----------------------------------------------------------------------------
The following table displays the details of plant, property and equipment which
is stated at cost:
(Dollars in Millions)
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Land $ 405.7 $ 440.3
Buildings 6,284.8 6,284.4
Central office equipment 29,167.2 27,226.8
Cable, wiring and conduit 26,759.0 25,780.1
Other equipment 12,323.4 11,126.8
Other 1,228.1 3,131.8
Construction-in-progress 1,269.0 1,689.3
-----------------------------------
77,437.2 75,679.5
Accumulated depreciation (42,397.8) (39,544.7)
-----------------------------------
Total $ 35,039.4 $ 36,134.8
===================================
Plant, property and equipment at December 31, 1997 and 1996 includes real estate
property and equipment under operating leases, or held for lease, of $52.8
million and $365.4 million, and accumulated depreciation of $14.8 million and
$101.0 million.
26
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
6. INVESTMENTS IN UNCONSOLIDATED BUSINESSES
-----------------------------------------------------------------------------
Our investments in unconsolidated businesses are comprised of the following:
<TABLE>
<CAPTION>
(Dollars in Millions)
1997 1996
At December 31, Ownership Investment Ownership Investment
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity investees:
PrimeCo Personal Communications, L.P. 50.00% $ 919.9 50.00% $ 725.8
Cable & Wireless Communications PLC 18.50 665.8 -- --
Telecom Corporation of New Zealand Limited 24.95 417.7 24.82 689.2
Omnitel Pronto Italia S.p.A. 17.45 313.2 17.45 331.5
Grupo Iusacell, S.A. de C.V. -- -- 41.90 333.1
FLAG Ltd. 37.87 236.6 37.87 67.5
Other various 714.7 various 794.1
-------- --------
Total equity investees 3,267.9 2,941.2
Cost investees various 1,876.3 various 1,981.0
-------- --------
Total $5,144.2 $4,922.2
======== ========
</TABLE>
PRIMECO PERSONAL COMMUNICATIONS, L.P.
PrimeCo Personal Communications, L.P. (PrimeCo) is a partnership between Bell
Atlantic, AirTouch Communications and U S West Media Group which provides
personal communications services (PCS) in 28 major cities across the United
States. PrimeCo began offering services to customers in November 1996. Under the
terms of the partnership agreement, PrimeCo entered into a leveraged lease
financing arrangement for certain equipment. This leveraged lease financing
obligation has been guaranteed by the partners in the joint venture. Our share
of this guarantee is approximately $151 million. In 1997, we invested
approximately $426 million in PrimeCo to fund its operations and the continued
build-out of its PCS network.
CABLE & WIRELESS COMMUNICATIONS PLC
In the second quarter of 1997, we transferred our interests in cable television
and telecommunications operations in the United Kingdom to Cable & Wireless
Communications PLC (CWC) in exchange for an 18.5% ownership interest in CWC.
This transaction was accounted for as a nonmonetary exchange of similar
productive assets and, as a result, no gain or loss was recorded. We account for
our investment in CWC under the equity method because we have significant
influence over CWC's operating and financial policies. Prior to the transfer, we
included the accounts of these operations in our consolidated financial
statements.
An entity holding our United Kingdom operations completed an Initial Public
Offering (IPO) of 305 million equity units in June 1995 for approximately $610
million. We recorded an increase to Contributed Capital on the IPO of $155.2
million, net of deferred taxes of $109.0 million, in recognition of the net
increase in our interests in the United Kingdom operations.
TELECOM CORPORATION OF NEW ZEALAND LIMITED
Telecom Corporation of New Zealand Limited (TCNZ) is that country's principal
provider of telecommunications services. At the date of acquisition of our
interest in 1990, goodwill was approximately $285 million. We are amortizing
this amount on a straight-line basis over a period of 40 years.
During 1997, we sold portions of our stock investment to TCNZ in connection with
its share repurchase plan, resulting in cash proceeds of approximately $153
million. These transactions reduced our investment and increased our ownership
interest in TCNZ. Our investment in TCNZ was also reduced by approximately $100
million as of December 31, 1997 as a result of foreign currency translation
losses. We recorded these losses as a component of Shareowners' Investment.
In connection with our investment in TCNZ, in February 1998 we issued
approximately $2.5 billion in notes which may be exchangeable into shares of
TCNZ stock. The notes have a maturity of five years, are noncallable for a
period of at least three years, and are not exchangeable by investors for an
initial period of 18 months. Upon exchange by investors, we retain the option to
settle in cash or by delivery of shares.
OMNITEL PRONTO ITALIA S.p.A.
Omnitel Pronto Italia S.p.A. (Omnitel) operates a cellular mobile telephone
network in Italy. We account for this investment under the equity method because
we have significant influence over Omnitel's operating and financial policies.
Approximately $250 million of our investment represents goodwill, which is being
amortized on a straight-line basis over a period of 25 years.
27
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 6 continued
GRUPO IUSACELL, S.A. de C.V.
Grupo Iusacell, S.A. de C.V. (Iusacell) is the second largest telecommunications
company in Mexico. At acquisition, goodwill amounted to approximately $760
million, which is being amortized on a straight-line basis over a period of 25
years. In February 1997, we consummated a restructuring of our investment to
permit us to assume control of the Board of Directors and management of
Iusacell. Under the terms of the restructuring, we exchanged certain Series B
and D shares of Iusacell stock for Series A shares, enabling us to elect a
majority of the Board of Directors. This exchange of shares did not affect our
economic ownership percentage of Iusacell. We also paid a premium of $50.0
million to the principal shareowner. We also converted approximately $33 million
of subordinated debt into Series A shares, thereby increasing our economic
ownership from 41.9% to 42.1%, and we are obligated until September 30, 1999 to
provide Iusacell up to $150 million in subordinated convertible financing as
Iusacell may require from time to time. As a result of the restructuring, we
changed the accounting for our Iusacell investment from the equity method to
full consolidation in the first quarter of 1997.
FLAG LTD.
Fiberoptic Link Around the Globe Ltd. (FLAG) is an undersea fiberoptic cable
system, providing digital communications links between Europe and Asia. We are
the managing sponsor of FLAG and hold approximately a 38% equity interest in the
venture and a 41% funding obligation. In 1997, we invested approximately $138
million in FLAG to fund the construction of its network. FLAG launched
commercial service in the fourth quarter of 1997.
FLAG has borrowed $615.1 million as of December 31, 1997 under a limited
recourse debt facility which provides for maximum available borrowings of $950.0
million. Under the terms of this facility, we and the other funding shareholders
of FLAG had entered into a contingent sponsor support agreement which could
require aggregate payments to the lenders of $500.0 million upon the occurrence
of certain limited events of default by FLAG. Our share of this guarantee
totaled $350.0 million at December 31, 1997, which included obligations we had
assumed on behalf of other shareholders in return for a fee.
In the first quarter of 1998, FLAG refinanced its existing debt through an
$800.0 million credit facility. As a result of this refinancing, we are now
released from our obligations under the contingent sponsor support agreement.
OTHER EQUITY INVESTEES
We also have global wireless investments in the Czech Republic, Slovakia and
Greece. These investments are in joint ventures to build and operate cellular
networks in these countries. We have an investment in a company in the
Philippines which provides telecommunications services in certain regions of
that country. Other investments include real estate partnerships, publishing
joint ventures, and several other domestic and international joint ventures.
In 1997, we sold our ownership interests in several businesses resulting in pre-
tax gains of approximately $54 million for Infostrada, an Italian wireline joint
venture; $42 million for Sky Network Television Limited of New Zealand; and $46
million for Bell Communications Research, Inc. (Bellcore).
Included in Operating Expenses are amounts billed by Bellcore. Such expenses
were $191.2 million in 1997, $182.0 million in 1996 and $197.5 million in 1995
for various network planning, engineering and software development projects.
Dividends received from equity investees amounted to $132.1 million in 1997,
$134.8 million in 1996 and $115.6 million in 1995.
COST INVESTEES
In 1993, we invested $1.2 billion in Viacom Inc. (Viacom) for 24 million shares
of Viacom Series B Cumulative Preferred Stock, carrying an annual dividend of
5%. The stock is convertible into shares of Viacom Class B nonvoting common
stock at a price of $70 per share. For additional information on our investment
in Viacom, see Note 11.
Other cost investments consist principally of a wireless investment in Indonesia
and a telecommunications investment in Thailand.
Dividends received from cost investees amounted to $60.0 million in 1997, $60.0
million in 1996 and $63.4 million in 1995.
28
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
7. LEASING ARRANGEMENTS
-----------------------------------------------------------------------------
AS LESSOR
We are the lessor in leveraged and direct financing lease agreements under which
commercial aircraft, rail equipment, industrial equipment, power generating
facilities, real estate, and telecommunications and other equipment are leased
for remaining terms of 2 to 39 years. Minimum lease payments receivable
represent unpaid rentals, less principal and interest on third-party nonrecourse
debt relating to leveraged lease transactions. Since we have no general
liability for this debt, the related principal and interest have been offset
against the minimum lease payments receivable. Minimum lease payments receivable
are subordinate to the debt and the debt holders have a security interest in the
leased equipment.
Finance lease receivables, which are included in Current Assets - Other and
Noncurrent Assets - Other Assets in our consolidated balance sheets, are
comprised of the following:
<TABLE>
<CAPTION>
(Dollars in Millions)
At December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Direct Direct
Leveraged Finance Leveraged Finance
Leases Leases Total Leases Leases Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Minimum lease payments receivable $ 2,674.6 $223.5 $ 2,898.1 $ 2,436.9 $268.6 $ 2,705.5
Estimated residual value 1,969.7 36.2 2,005.9 1,925.6 36.3 1,961.9
Unearned income (1,874.7) (70.7) (1,945.4) (1,806.1) (87.2) (1,893.3)
---------------------------------------------------------------------------
$ 2,769.6 $189.0 2,958.6 $ 2,556.4 $217.7 2,774.1
===================== ========================
Allowance for doubtful accounts (24.9) (23.8)
---------- ----------
Finance lease receivables, net $ 2,933.7 $ 2,750.3
========== ==========
Current $ 39.2 $ 36.9
========== ==========
Noncurrent $ 2,894.5 $ 2,713.4
========== ==========
</TABLE>
Accumulated deferred taxes arising from leveraged leases, which are included in
Deferred Income Taxes, amounted to $2,233.8 million at December 31, 1997 and
$1,976.4 million at December 31, 1996.
The following table is a summary of the components of income from leveraged
leases:
(Dollars in Millions)
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Pre-tax lease income $ 97.4 $ 87.5 $ 91.8
Income tax expense 30.7 22.1 29.3
Investment tax credits 2.9 3.5 3.9
----------------------------------------
This table displays the future minimum lease payments to be received from
noncancelable leases, net of nonrecourse loan payments related to leveraged and
direct financing leases in excess of debt service requirements, for the periods
shown at December 31, 1997:
(Dollars in Millions)
Capital Operating
Years Leases Leases
- --------------------------------------------------------------------------------
1998 $ 100.3 $ 3.5
1999 74.7 3.4
2000 63.5 3.2
2001 66.3 2.9
2002 93.7 3.1
Thereafter 2,499.6 .9
-----------------------------------
Total $ 2,898.1 $ 17.0
===================================
29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 7 continued
AS LESSEE
We lease certain facilities and equipment for use in our operations under both
capital and operating leases. Total rent expense under operating leases amounted
to $572.6 million in 1997, $531.9 million in 1996 and $531.3 million in 1995. In
1997, 1996 and 1995, we incurred initial capital lease obligations of $11.4
million, $16.4 million and $14.3 million.
Capital lease amounts included in plant, property and equipment are as follows:
(Dollars in Millions)
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Capital leases $ 307.2 $ 304.7
Accumulated amortization (163.5) (147.8)
------------------------------
Total $ 143.7 $ 156.9
==============================
This table displays the aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 1997:
(Dollars in Millions)
Capital Operating
Years Leases Leases
- --------------------------------------------------------------------------------
1998 $ 44.0 $ 294.3
1999 35.2 262.9
2000 44.9 232.6
2001 31.5 197.0
2002 25.6 179.9
Thereafter 492.5 1,522.6
------------------------------
Total minimum rental
commitments 673.7 $2,689.3
=========
Less interest and
executory costs 503.4
-------
Present value of minimum
lease payments 170.3
Less current installments 20.6
-------
Long-term obligation
at December 31, 1997 $149.7
=======
As of December 31, 1997, the total minimum sublease rentals to be received in
the future under noncancelable operating subleases was $273.6 million.
-----------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
-----------------------------------------------------------------------------
In connection with certain incentive plan commitments with state regulatory
commissions, we have deferred revenues which will be recognized as the
commitments are met or obligations are satisfied under the plans. In addition,
several state and federal regulatory proceedings may require our operating
telephone subsidiaries to refund a portion of the revenues collected in the
current and prior periods. There are also various legal actions pending to which
we are a party. We have established reserves for specific liabilities in
connection with regulatory and legal matters which we currently deem to be
probable and estimable.
We do not expect that the ultimate resolution of pending regulatory and legal
matters in future periods will have a material effect on our financial
condition, but it could have a material effect on results of operations.
-----------------------------------------------------------------------------
9. DEBT
-----------------------------------------------------------------------------
DEBT MATURING WITHIN ONE YEAR
The following table displays the details of debt maturing within one year:
(Dollars in Millions)
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Notes payable:
Commercial paper $5,067.7 $1,611.0
Bank loans 509.7 480.8
Long-term debt maturing
within one year 765.4 792.4
--------------------------------
Total debt maturing
within one year $6,342.8 $2,884.2
================================
Weighted-average interest
rates for notes payable
outstanding at year-end 5.9% 5.7%
--------------------------------
Capital expenditures, primarily construction of telephone plant, are partially
financed, pending long-term financing, through bank loans and the issuance of
commercial paper payable within 12 months.
At December 31, 1997, we had in excess of $4.8 billion of unused bank lines of
credit. The availability of these lines, for which there are no formal
compensating balances, is at the discretion of each bank. Certain of these lines
of credit contain requirements for the payment of commitment fees. Substantially
all of the assets of Iusacell, totaling approximately $500 million at December
31, 1997, are subject to lien under a credit facility with certain bank lenders.
30
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 9 continued
LONG-TERM DEBT
This table shows our outstanding long-term debt obligations:
<TABLE>
<CAPTION>
(Dollars in Millions)
At December 31, Interest Rates Maturities 1997 1996
- -------------------------------------------------------------------------------------------- ----------
<S> <C> <C> <C> <C>
Telephone subsidiaries' debentures 4.375% - 7.00% 1998 - 2033 $ 3,867.0 $ 3,867.0
7.125% - 7.75% 2002 - 2033 2,705.0 2,705.0
7.85% - 9.375% 2010 - 2031 2,179.0 2,179.0
-------------------------------------------- ----------
8,751.0 8,751.0
Notes payable 5.05% - 12.42% 1998 - 2012 3,516.6 3,564.7
Refunding mortgage bonds 4.25% - 7.75% 1998 - 2011 985.0 1,045.0
Mortgage and installment notes 10.50% - 11.00% 1998 - 2003 22.5 59.8
Commercial paper and bank loans -- 1,773.7
Employee stock ownership plan loans:
Bell Atlantic Corporation senior notes 8.17% 2000 313.4 412.2
NYNEX Corporation debentures 9.55% 2010 327.3 348.6
Capital lease obligations --
average rate 10.8% and 10.7% 170.3 188.4
Unamortized discount and premium, net (55.5) (65.0)
----------- ----------
Total long-term debt, including
current maturities 14,030.6 16,078.4
Less maturing within one year 765.4 792.4
----------- ----------
Total long-term debt $13,265.2 $15,286.0
=========== ==========
</TABLE>
The telephone subsidiaries' debentures outstanding at December 31, 1997 include
$2,317.0 million that are callable. The call prices range from 103.15% to
100.00% of face value, depending upon the remaining term to maturity of the
issue. All of our refunding mortgage bonds, totaling $985.0 million are also
callable as of December 31, 1997. In addition, our long-term debt includes
$735.0 million that will become redeemable for limited periods at the option of
the holders. Of this amount, $385.0 million becomes redeemable in 1999 and
$175.0 million in 2002. One debenture totaling $175.0 million becomes redeemable
in 2000 and again in 2002. The redemption prices will be 100.0% of face value
plus accrued interest.
Maturities of long-term debt outstanding at December 31, 1997, excluding capital
lease obligations and unamortized discount and premium, are $744.8 million in
1998, $1,287.2 million in 1999, $892.0 million in 2000, $372.7 million in 2001,
$840.0 million in 2002 and $9,779.1 million thereafter. These amounts include
the redeemable debt at the earliest possible redemption dates.
Our medium-term notes are issued by Bell Atlantic Financial Services, Inc.
(FSI), a wholly owned subsidiary. FSI debt securities (aggregating $503.6
million at December 31, 1997) have the benefit of a Support Agreement dated
October 1, 1992 between Bell Atlantic and FSI under which Bell Atlantic will
make payments of interest, premium (if any) and principal on the FSI debt should
FSI fail to pay. The holders of FSI debt do not have recourse to the stock or
assets of our operating telephone subsidiaries, however, they have recourse to
dividends paid to Bell Atlantic by any of our consolidated subsidiaries as well
as assets not covered by the exclusion. The carrying value of the available
assets reflected in our consolidated financial statements was approximately
$13.7 billion at December 31, 1997. A similar Support Agreement dated February
1, 1998 between Bell Atlantic and FSI also provides guarantees for the payment
of interest, premium (if any), principal and the cash value of exchange property
on approximately $2.5 billion of exchangeable notes that we issued in connection
with our investment in TCNZ (see Note 6). The holders of these notes also have
recourse to the $13.7 billion of assets previously mentioned. Substantially all
of the assets of New York Telephone Company, totaling approximately $12.6
billion at December 31, 1997, are subject to lien under New York Telephone
Company's refunding mortgage bond indenture.
At December 31, 1996, we had a $2.0 billion unsecured revolving credit facility
under which we were permitted to use the proceeds for various corporate
purposes, including support of outstanding commercial paper and bank loans.
Since we had both the intent and the ability to refinance a portion of our
commercial paper and bank loans on a long-term basis using the credit facility,
$1,773.7 million of outstanding commercial paper and bank loans were included in
Long-Term Debt at December 31, 1996. This revolving credit facility was canceled
in 1997. As a result, all commercial paper was classified as Debt Maturing
Within One Year in 1997.
We recorded extraordinary charges associated with the early extinguishment of
debentures. These charges reduced net income by $3.5 million (net of an income
tax benefit of $2.5 million) in 1995. On January 13, 1998, New York Telephone
Company issued $250.0 million of 6.125% debentures due on
31
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 9 continued
January 15, 2010. The proceeds of this issuance were used in February 1998 to
redeem $200.0 million of refunding mortgage bonds due in 2006 and to reduce
short-term debt levels. In connection with this redemption, we will record an
extraordinary charge of $1.5 million in the first quarter of 1998.
Information on our Employee Stock Ownership Plan Loans is provided in Note 16.
----------------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS
----------------------------------------------------------------------------
DERIVATIVES
We limit our use of derivatives to managing risk that could negatively impact
our financing and operating flexibility, making cash flows more stable over the
long run and achieving savings over other means of financing. Our risk
management strategy is designed to protect against adverse changes in foreign
exchange rates, interest rates and corporate tax rates, and to otherwise
facilitate our financing strategies. We use several types of derivatives in
managing these risks, including foreign currency forwards and options, interest
rate swap agreements, interest rate caps and floors, and basis swap agreements.
Derivative agreements are linked to specific liabilities or assets and hedge the
related economic exposures. We do not hold derivatives for trading purposes. In
1997 and 1996, we recognized income of $17.3 million and $12.7 million before
taxes in our statements of income related to all of our risk management
activities.
INTEREST RATE RISK MANAGEMENT
The following table provides additional information about our interest rate swap
agreements, interest rate caps and floors, and basis swap agreements. Certain of
our interest rate swap agreements (included below as "Foreign Currency/Interest
Rate Swaps") also contain a foreign exchange component which has been described
in the "Foreign Exchange Risk Management" section below. We use these interest
rate swap agreements to hedge the value of certain international investments.
The agreements generally require us to receive payments based on fixed interest
rates and make payments based on variable interest rates. The structured note
swap agreements convert several structured medium-term notes to conventional
fixed rate liabilities while reducing financing costs. The effective fixed
interest rates on these notes averaged 6.1% and 6.2% at December 31, 1997 and
1996. Other interest rate swap agreements, which sometimes incorporate options,
and interest rate caps and floors are all used to adjust the interest rate
profile of our debt portfolio and allow us to achieve a targeted mix of floating
and fixed rate debt. The basis swap agreements hedge a portion of our leveraged
lease portfolio against adverse changes in corporate tax rates. The agreements
require us to receive payments based on an interest rate index (LIBOR-based) and
make payments based on a tax-exempt market index (J.J.Kenney). We account for
these basis swap agreements at fair value and recognized income of $4.2 million
and $20.2 million in 1997 and 1996 related to mark-to-market adjustments.
The notional amounts shown below are used to calculate interest payments to be
exchanged. These amounts are not actually paid or received, nor are they a
measure of our potential gains or losses from market risks. They do not
represent our exposure in the event of nonperformance by a counterparty or our
future cash requirements. Our financial instruments are grouped below based on
the nature of the hedging activity.
<TABLE>
<CAPTION>
(Dollars in Millions)
Weighted-Average Rate
Notional ----------------------
At December 31, Amount Maturities Receive Pay
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST RATE SWAP AGREEMENTS:
Foreign Currency/Interest Rate Swaps:
1997 $ 375.4 1998-2002 4.5% 6.2%
1996 928.4 1997-2002 3.3 5.9
Other Interest Rate Swaps:
Pay fixed
1997 $ 260.0 1999-2005 5.7% 5.9%
1996 221.2 1997-2005 5.7 6.0
Pay variable
1997 $ 783.7 1999-2006 6.6% 6.1%
1996 530.7 1997-2004 6.5 6.4
STRUCTURED NOTE SWAP AGREEMENTS:
1997 $ 60.0 1999
1996 105.0 1997-2004
INTEREST RATE CAP/FLOOR AGREEMENTS:
1997 $ 262.0 1999-2001
1996 140.0 1999-2001
BASIS SWAP AGREEMENTS:
1997 $1,001.0 2003-2004
1996 1,001.0 2003-2004
</TABLE>
FOREIGN EXCHANGE RISK MANAGEMENT
Our foreign exchange risk management includes the use of foreign currency
forward contracts, options and foreign currency swaps. Forward contracts and
options call for the sale or purchase, or the option to sell or purchase,
certain foreign currencies on a specified future date. These contracts are
typically used to hedge short-term foreign currency transactions and
commitments. The total notional amounts of our foreign currency forward
contracts and option contracts were $14.5 million and $352.1 million at December
31, 1997 and 1996, all of which had maturities of six months or less. Certain of
the interest rate swap agreements noted above contain both a foreign currency
and an interest rate component. The agreements require the exchange of payments
based on specified interest rates in addition to the exchange of currencies at
the maturity of the contract. The required payments for both components are
based on the notional
32
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 10 continued
amounts of the contracts which have been included in the table above. Foreign
currency swaps, with a notional value of $60.0 million and a scheduled maturity
of 2003, were outstanding at December 31, 1996. These swaps also contained both
a foreign currency and an interest rate component. These foreign currency swaps,
which were terminated in 1997, required quarterly payments in U.S. dollars and
receipts in British pounds.
Our net equity position in unconsolidated foreign businesses as reported in our
consolidated balance sheets totaled $1,784.2 million and $1,611.3 million at
December 31, 1997 and 1996. Our most significant investments at December 31,
1997 had operations in New Zealand, the United Kingdom, Italy and Bermuda. We
have not hedged our accounting translation exposure to foreign currency
fluctuations relative to these investments except for our United Kingdom
investment, which is partially hedged. Our equity income is subject to exchange
rate fluctuations when our equity investee has balances denominated in a
currency other than the investees' functional currency. We recognized $(30.1)
million, $6.8 million and $(29.0) million related to such fluctuations in Income
(Loss) From Unconsolidated Businesses for the years ended December 31, 1997,
1996 and 1995. We continually monitor the relationship between gains and losses
recognized on all of our foreign currency contracts and on the underlying
transactions being hedged to mitigate market risk.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject us to concentrations of credit risk consist
primarily of temporary cash investments, short-term investments, trade
receivables, certain notes receivable, preferred stock, and derivative
contracts. Our policy is to place our temporary cash investments with major
financial institutions. Counterparties to our derivative contracts are also
major financial institutions and organized exchanges. The financial institutions
have all been accorded high ratings by primary rating agencies. We limit the
dollar amount of contracts entered into with any one financial institution and
monitor our counterparties' credit ratings. We generally do not give or receive
collateral on swap agreements due to our credit rating and those of our
counterparties. While we may be exposed to credit losses due to the
nonperformance of our counterparties, we consider the risk remote and do not
expect the settlement of these transactions to have a material effect on our
results of operations or financial condition.
Concentrations of credit risk with respect to trade receivables other than those
from AT&T are limited due to the large number of customers. For the years ended
December 31, 1997, 1996 and 1995, revenues generated from services provided to
AT&T (primarily network access and billing and collection) were $2,632.3
million, $2,570.3 million and $2,791.3 million.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The tables below provide additional information about our material financial
instruments:
Financial Instrument Valuation Method
- --------------------------------------------------------------------------------
Cash and cash equivalents Carrying amounts
and short-term investments
Debt (excluding capital leases) Market quotes for similar terms
and maturities or future cash
flows discounted at current rates
Cost investments in Future cash flows discounted
unconsolidated businesses at current rates, market
and notes receivable quotes for similar instruments or
other valuation models
Interest rate swap and other Gains or losses to terminate
agreements agreements or amounts paid
to replicate agreements at
current rates
Foreign currency forward Market quotes or gains or losses
and option contracts to terminate agreements
(Dollars in Millions)
1997 1996
-----------------------------------------------------
Carrying Fair Carrying Fair
At December 31, Amount Value Amount Value
- --------------------------------------------------------------------------------
Debt $19,437.7 $19,988.9 $17,981.8 $18,150.7
Cost investments
in unconsolidated
businesses 1,693.0 1,464.6 1,785.3 1,968.5
Notes receivable, net 32.9 33.2 93.6 93.8
Interest rate swap
and other agreements:
Assets 26.3 31.8 11.8 23.0
Liabilities 24.8 31.8 39.5 53.3
Foreign currency
forward and
option contracts:*
Assets .2 -- 19.9 19.9
Liabilities .2 .2 2.3 2.3
-----------------------------------------------------
* No position in any individual foreign currency exceeded $.2 million at
December 31, 1997 and $19.8 million at December 31, 1996. The carrying amounts
shown for derivatives include deferred gains and losses.
Our investment in Viacom, which is included in "Cost investments in
unconsolidated businesses" in the table above, is in a preferred stock which is
not publicly traded, and therefore the fair value indicated above includes
amounts calculated using certain theoretical convertible valuation models. These
models, however, do not ascribe or attribute any value to any strategic aspect
of the investment. We were unable to determine the fair value of other
investments, with carrying values of $183.3 million and $195.7 million at
December 31, 1997 and 1996, without incurring excessive costs.
33
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
----------------------------------------------------------------------------
11. MINORITY INTEREST
----------------------------------------------------------------------------
(Dollars in Millions)
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Portion subject to
redemption requirements $ 618.3 $1,504.4
Portion nonredeemable 292.9 509.8
-------------------------------------
$ 911.2 $2,014.2
=====================================
UNITED KINGDOM OPERATIONS
As a result of the transfer of our interests in cable television and
telecommunications operations in the United Kingdom to CWC in the second quarter
of 1997, we now account for this investment under the equity method (see Note
6). Prior to this transaction, we included the accounts of these operations in
our consolidated financial statements. The change in Minority Interest from 1996
to 1997 is principally due to this transaction.
VIACOM MONETIZATION TRANSACTION
In connection with our investment in Viacom preferred stock (see Note 6), we
entered into nonrecourse contracts whereby we raised capital based on the value
of our investment in Viacom ("monetized" our investment) and realized proceeds
of $100.0 million in 1995 and $500.0 million in 1996. In order to accomplish
this transaction, a fully consolidated subsidiary was created to manage and
protect certain assets for sale or distribution at a later date. In order to
induce an outside party to contribute cash in exchange for an interest in this
subsidiary, we contributed certain financial assets as collateral. These assets
included 12 million shares of Viacom preferred stock with a book value of $600.0
million and 22.4 million shares of our common stock. The outside party's
contribution included $600.0 million in cash for an interest in the subsidiary
which is reflected in Minority Interest in our consolidated balance sheets. The
common stock held by the subsidiary is reflected as an issuance of common shares
in 1995 and 1996 in our consolidated statement of changes in shareowners'
investment and as Treasury Stock in our consolidated balance sheets.
The term of the monetization transaction is five years (ending December 31,
2000) at which time the outside party's interest in the subsidiary will be
redeemed through the liquidation of the subsidiary's assets. We may, upon
meeting certain funding requirements, elect to purchase the outside party's
interest or terminate the transaction and cause the liquidation of all the
assets.
Absent certain defaults or other defined events, only we have the option to
unwind and liquidate the existing structure. The outside party has certain
consent rights that could, under certain circumstances, limit our rights to
acquire, sell, refinance or distribute the assets of our subsidiary or affect
certain other fundamental changes in situations other than in the ordinary
course of business. However, such rights are not expected to affect the
management and control of these assets. In addition, absent certain defaults or
other events, we have the right to refinance the transaction, purchase the
outside party's interest and thereafter acquire, sell, refinance or distribute
any remaining assets.
The outside party has certain rights to consent to or prohibit certain actions
by our subsidiary, including changes in the basic structure, operations or
assets. However, the outside party is not involved in managing the assets and
only has recourse (absent certain defaults) for income or return of capital
derived from the assets. The outside party does not have redemption rights but
can cause liquidation upon the occurrence of a breach by us or our subsidiary of
our undertakings, or the occurrence of certain other defined events.
OTHER MINORITY INTERESTS
Minority interest for 1997 and 1996 also included the minority interests in
certain partnerships consolidated by Bell Atlantic Mobile. The minority
partners' interest in Iusacell is reflected in 1997 as a result of consolidating
our Iusacell investment in 1997 (see Note 6).
----------------------------------------------------------------------------
12. PREFERRED STOCK OF SUBSIDIARY
----------------------------------------------------------------------------
Our subsidiary Bell Atlantic New Zealand Holdings, Inc. (BANZHI) has the
authority to issue 5,000,000 shares of Serial Preferred Stock. BANZHI has issued
three series of preferred stock. BANZHI and another subsidiary indirectly own
our investment in Telecom Corporation of New Zealand Limited.
In 1994, BANZHI issued 850,000 shares of Series A Preferred Stock at $100 per
share with an annual dividend rate of $7.08 per share. In 1995, 600,000 shares
of Series B Preferred Stock were issued at $100 per share with an annual
dividend rate of $5.80 per share. At December 31, 1997, 95,000 shares ($9.5
million) of Series B Preferred Stock were held by a wholly owned subsidiary.
Both series are subject to mandatory redemption on May 1, 2004 at a redemption
price per share of $100, together with any accrued and unpaid dividends.
In 1997, 650,000 shares of Series C Variable Term Preferred Stock were issued at
$100 per share. At December 31, 1997, these shares had an initial annual
dividend rate of 4.40%.
34
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
----------------------------------------------------------------------------
13. SHAREOWNERS' INVESTMENT
----------------------------------------------------------------------------
Our certificate of incorporation provides authority for the issuance of up to
250 million shares of Series Preferred Stock, $.10 par value, in one or more
series, with such designations, preferences, rights, qualifications, limitations
and restrictions as the Board of Directors may determine.
We are authorized to issue up to 2.25 billion shares of common stock.
On May 1, 1998, the Board of Directors declared a two-for-one split of Bell
Atlantic common stock, effected in the form of a 100% stock dividend to
shareholders of record on June 1, 1998. On June 29, 1998, shareholders of record
received an additional share of common stock for each share of common stock held
at the record date. We retained the par value of $.10 per share for all shares
of common stock. All share and per share data have been adjusted to give
retroactive recognition of this common stock split.
On January 23, 1996, the Board of Directors adopted a resolution ordering the
redemption of all rights granted under our Shareholder Rights Plan, approved by
the Board in 1989.
Shareholders of record as of April 10, 1996 were paid the redemption price of
$.01 per Right ($.0025 per share after adjusting for stock splits) on May 1,
1996.
A portion of NYNEX's 1995 dividends was declared from Contributed Capital.
During 1995, we issued 185,796 shares of common stock to complete the terms of
an acquisition of a cellular telephone system in 1992. Prior to delivery, these
shares were carried in our consolidated balance sheets as Common Stock Issuable.
----------------------------------------------------------------------------
14. EARNINGS PER SHARE
----------------------------------------------------------------------------
Basic earnings per common share are based on the weighted-average number of
shares outstanding during the year. Diluted earnings per common share include
the dilutive effect of shares issuable under our stock-based compensation plans,
which represent the only potential dilutive common shares.
The number of shares included in the diluted earnings per share computation for
potential common shares issuable under stock-based compensation plans was 19.3
million in 1997, 13.6 million in 1996 and 7.8 million in 1995.
Stock options to purchase 0.1 million, 29.9 million and 0.1 million shares of
common stock were outstanding at December 31, 1997, 1996 and 1995, which were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares.
----------------------------------------------------------------------------
15. STOCK INCENTIVE PLANS
----------------------------------------------------------------------------
We have stock-based compensation plans that include fixed stock option and
performance-based share plans. We apply APB Opinion No. 25 and related
interpretations in accounting for our plans. We have adopted the disclosure-only
provisions of SFAS No. 123. We recognize no compensation expense for our fixed
stock option plans. Compensation expense charged to income for our performance-
based share plans was $23.4 million in 1997, $10.6 million in 1996 and $8.7
million in 1995. If we had elected to recognize compensation expense based on
the fair value at the grant dates for 1995 and subsequent fixed and performance-
based plan awards consistent with the provisions of SFAS No. 123, net income and
earnings per share would have been changed to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ 2,454.9 $ 3,402.0 $ (96.8)
Pro forma 2,393.6 3,355.8 (117.8)
Basic earnings (loss) per share As reported $ 1.58 $ 2.20 $ (.06)
Pro forma 1.54 2.17 (.08)
Diluted earnings (loss) per share As reported $ 1.56 $ 2.18 $ (.06)
Pro forma 1.52 2.15 (.08)
-------------------------------------------------
</TABLE>
These results may not be representative of the effects on pro forma net income
for future years.
35
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 15 continued
We determined the pro forma amounts using the Black-Scholes option-pricing model
based on the following weighted-average assumptions:
1997 1996 1995
- --------------------------------------------------------------------------------
Dividend yield 4.86% 4.72% 5.75%
Expected volatility 14.87% 15.16% 15.62%
Risk-free interest rate 6.35% 5.42% 7.61%
Expected lives (in years) 5 5 5
------------------------------------------------
The weighted-average value of options granted was $4.30 per option during 1997,
$2.96 per option during 1996 and $2.91 per option during 1995.
The NYNEX stock options outstanding and exercisable at the date of the merger
were converted to Bell Atlantic stock options. The NYNEX option activity and
share prices have been restated, for all years presented, to Bell Atlantic
shares using the exchange ratio of 0.768 Bell Atlantic common stock to one share
of NYNEX common stock. Our stock incentive plans are described below:
FIXED STOCK OPTION PLANS
We have fixed stock option plans for key management employees under which
options to purchase Bell Atlantic common stock are granted at a price equal to
the market price of the stock at the date of grant.
Under the 1985 Incentive Stock Option Plan (ISO Plan), key employees may be
granted incentive and/or nonqualified stock options to purchase shares of common
stock and certain key employees may receive reload options upon tendering shares
of common stock to exercise options. In 1994, we adopted the Options Plus Plan.
Under this plan, we granted nonqualified stock options to approximately 800
managers below the rank of officer in place of a portion of each such manager's
annual cash bonus in 1994 and 1995. The Options Plus Plan was then discontinued.
The Stock Compensation Plan for Outside Directors entitles each outside director
to receive up to 5,000 stock options per year. Options are exercisable after
three years or less and the maximum term is ten years.
Fixed stock option plans covering key management employees of the former NYNEX
companies include the 1990 and the 1995 Stock Option Plans. The 1990 Stock
Option Plan, which expired on December 31, 1994, permitted the grant of options
through December 1994 to purchase shares of common stock. In January 1995, NYNEX
established the 1995 Stock Option Plan which permits the grant of options no
later than December 31, 1999 to purchase shares of common stock. Options under
the 1995 Stock Option Plan are exercisable after three years or less and the
maximum term is ten years.
In 1992, NYNEX established stock option plans for associates and for management
employees other than those eligible to participate in the other stock option
plans. These employees were granted options, with the number of options granted
varying according to employee level, to purchase a fixed number of shares of
common stock at the market price of the stock on the grant date. Options under
this plan are exercisable after two years or less and the maximum term is ten
years.
This table is a summary of the status of the fixed stock option plans:
Weighted-
Average
Stock Options Exercise Price
- --------------------------------------------------------------------------------
Outstanding,
December 31, 1994 65,624,458 $22.40
Granted 12,466,246 24.85
Exercised (8,131,022) 24.30
Canceled/forfeited (1,243,758) 25.76
--------------
Outstanding,
December 31, 1995 68,715,924 24.93
Granted 31,866,368 33.28
Exercised (8,889,406) 24.65
Canceled/forfeited (1,099,888) 31.51
--------------
Outstanding,
December 31, 1996 90,592,998 27.93
Granted 15,670,210 33.10
Exercised (26,238,090) 26.40
Canceled/forfeited (885,184) 29.39
--------------
Outstanding,
December 31, 1997 79,139,934 29.28
==============
Options exercisable,
December 31:
1995 45,287,884 24.84
1996 56,482,864 27.68
1997 63,650,570 28.27
36
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 15 continued
The following table summarizes information about fixed stock options outstanding
as of December 31, 1997:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
-------------------------------------------------------- -------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$15.00-19.99 39,416 .7years $17.74 39,416 $17.74
20.00-24.99 13,272,684 4.6 23.10 13,272,684 23.10
25.00-29.99 24,565,982 6.5 25.99 23,510,228 25.94
30.00-34.99 39,217,660 8.4 32.96 26,701,254 32.86
35.00-39.99 1,725,752 9.6 37.78 126,988 36.64
40.00-44.99 270,226 9.8 42.02
45.00-49.99 48,214 10.0 45.23
- ------------------------------------------ -----------
Total 79,139,934 7.2 29.28 63,650,570 28.27
========================================== ===========
</TABLE>
PERFORMANCE-BASED SHARE PLANS
Our performance-based share plans provide for the granting of awards to certain
key employees, including employees of the former NYNEX companies in the form of
Bell Atlantic common stock. Employees receive the distribution of shares or cash
at the end of the applicable performance measurement period or the employees
elect to defer the distribution of the awards for one or more years. Awards are
based on the total return of Bell Atlantic common stock in comparison to the
total return on the stock of a number of other telecommunications companies and
other strategic performance indicators. Authority to make new grants expired in
December 1994. Final awards were credited to pre-merger employees of Bell
Atlantic in January 1996 and to employees of the former NYNEX companies in March
1994.
We also have deferred compensation plans that allow certain employees and
members of the Board of Directors to defer all or a portion of their
compensation. Some of these plans provide for returns based on the performance
of, and eventual settlement in, Bell Atlantic common stock. Compensation expense
for all of these plans is recorded based on the fair market value of the shares
as they are credited to participants' accounts.
Effective January 1, 1998, the Income Deferral Plan replaces all performance-
based share plans, including the deferred compensation plans, and expands the
award distribution options for these employees.
This table is a summary of the status of the share portion of our performance-
based share plans:
Shares
- --------------------------------------------------------------------------------
Outstanding,
December 31, 1994 2,188,330
Additional shares credited 174,774
Shares distributed (386,998)
Canceled/forfeited (43,268)
-------------
Outstanding,
December 31, 1995 1,932,838
Additional shares credited 121,398
Shares distributed (341,834)
Canceled/forfeited (460,116)
-------------
Outstanding,
December 31, 1996 1,252,286
Additional shares credited 163,780
Shares distributed (210,084)
Canceled/forfeited (106,292)
-------------
Outstanding,
December 31, 1997 1,099,690
=============
A total of 180,560,000 shares may be distributed under the fixed stock option
plans and the performance-based share plans. As of December 31, 1997 and 1996, a
total of 69,615,880 and 72,633,060 shares of common stock were available for the
granting of stock options under the fixed stock option plans and for
distributions of shares under the performance-based share plans.
In addition to plans described above, Iusacell maintains a separate stock option
plan for its key employees in which it awards options to acquire Iusacell common
stock. The effect of this plan on our consolidated results of operations was not
significant.
37
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
----------------------------------------------------------------------------
16. EMPLOYEE BENEFITS
----------------------------------------------------------------------------
In 1997, following the completion of the merger, we continued to maintain
separate benefit plans for employees of the former NYNEX companies. The assets
of the Bell Atlantic and NYNEX pension and savings plans have been commingled in
a master trust. The following disclosures present financial information for the
combined Bell Atlantic and NYNEX benefit plans using weighted-average
assumptions to calculate benefit costs and obligations. The actuarial
assumptions used are based on financial market interest rates, past experience,
and management's best estimate of future benefit changes and economic
conditions. Changes in these assumptions may impact future benefit costs and
obligations.
Effective January 1, 1998, we established common pension and savings plans
benefit provisions for all management employees. As a result, continuing NYNEX
management employees will receive the same benefit levels as previously given
under Bell Atlantic management plans. Pension and other postretirement benefits
for our associate employees (approximately 70% of our work force) are subject to
collective bargaining agreements, and no changes were bargained in 1997.
Modifications in associate benefits have been bargained from time to time, and
we may also periodically amend the benefits in the management plans. Substantive
commitments for future amendments are reflected in the pension costs and benefit
obligations.
PENSION PLANS
We sponsor noncontributory defined benefit pension plans covering substantially
all of our management and associate employees. Benefits for associate employees
are determined by a flat dollar amount per year of service according to job
classification. Management employees are covered under cash balance plans with
pension benefits determined by compensation credits related to age and service
and interest credits on individual account balances. The cash balance plan
covering the NYNEX management employees was adopted on September 5, 1997, with
an effective date of December 31, 1997. The cash balance plan covering all other
management employees became effective on December 31, 1995. Prior to this
change, the pension benefit for management employees was based on a stated
percentage of adjusted career average earnings.
Under the cash balance plan, each management employee's opening account balance
was determined by converting the accrued pension benefit as of the effective
date to a lump-sum amount based on the prior plan's provisions. The lump-sum
value was then multiplied by a transition factor based on age and service to
arrive at the opening balance.
Our objective in funding the plans is to accumulate funds at a relatively stable
level over participants' working lives so that benefits are fully funded at
retirement. Plan assets consist principally of investments in domestic and
foreign corporate equity securities, U.S. and foreign government and corporate
debt securities and real estate.
A summary of the components of pension cost is as follows:
(Dollars in Millions)
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 355.8 $ 398.6 $ 343.8
Interest cost 1,877.3 1,831.2 1,808.4
Actual return on
plan assets (6,202.7) (4,215.4) (5,638.5)
Net amortization
and deferral 3,575.6 1,827.0 3,292.1
--------------------------------------
Net periodic
pension income (394.0) (158.6) (194.2)
Retirement incentive
cost, net 397.1 216.3 422.3
Other gains, net -- -- (103.9)
--------------------------------------
Total pension cost $ 3.1 $ 57.7 $ 124.2
======================================
The change in net periodic pension income from year to year was caused by a
number of variables, including changes in actuarial assumptions (see table
below), favorable returns on plan assets and plan amendments. We recognized
retirement incentive costs in 1997, 1996 and 1995 as a result of work force
reductions primarily through retirement incentives offered to management and
associate employees of the former NYNEX companies. The costs were comprised of
special termination benefits charges of $687.7 million in 1997, $481.3 million
in 1996 and $723.5 million in 1995. These amounts were partially offset by
curtailment gains of $221.8 million in 1997, $174.4 million in 1996 and $222.7
million in 1995 and by severance reserves of $68.8 million in 1997, $90.6
million in 1996 and $78.5 million in 1995. The severance reserves were
established in 1993 and transferred to the pension liability as employees
accepted the retirement incentive offer. Other gains represent net curtailment
gains associated with the termination of pension benefits for certain employees
in 1995.
38
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 16 continued
The following table shows the pension plans' funded status reconciled with
amounts in our consolidated balance sheets:
(Dollars in Millions)
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Benefits based on service to date
and present salary levels
Vested $23,889.3 $21,389.6
Nonvested 1,923.3 2,192.7
------------------------
Accumulated benefit obligation 25,812.6 23,582.3
Additional benefits related
to estimated future salary levels 919.4 1,353.4
------------------------
Projected benefit obligation 26,732.0 24,935.7
------------------------
Fair value of plan assets 35,253.0 31,075.5
------------------------
Plan assets in excess of
projected benefit obligation (8,521.0) (6,139.8)
Unrecognized net gain 9,521.4 7,025.4
Unamortized prior service cost 1,493.1 1,465.9
Unamortized net transition asset 439.0 520.9
Additional minimum liability
for nonqualified plans 42.2 24.7
------------------------
Accrued pension obligation $ 2,974.7 $ 2,897.1
========================
We used the following weighted-average assumptions to calculate pension costs
and benefit obligations:
At December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate 7.25% 7.75% 7.25%
Rate of future increases
in compensation levels 4.00 4.40 4.40
------------------------------------
In addition, the expected long-term rate of return on plan assets used to
calculate pension costs for 1997, 1996 and 1995 was 8.90%, 8.60% and 8.60%.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Our postretirement health and life insurance benefit plans cover substantially
all of our management and associate employees. Postretirement health benefit
costs are based on comprehensive medical and dental plan provisions.
Postretirement life insurance costs are based on annual basic pay at retirement.
In 1996, we restructured certain postretirement health and life insurance
obligations and assets to create a single plan. The remaining postretirement
benefits continue to be provided by separate plans. The restructure did not
affect plan benefits or postretirement benefit costs or obligations.
We fund the postretirement health and life insurance benefits of current and
future retirees. Plan assets consist principally of investments in domestic and
foreign corporate equity securities and U.S. Government and corporate debt
securities.
Postretirement benefit cost includes the following components:
(Dollars in Millions)
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 98.4 $ 122.5 $ 107.8
Interest cost 626.3 653.0 682.8
Actual return on
plan assets (673.3) (358.3) (525.3)
Net amortization
and deferral 433.9 207.1 423.4
--------------------------------
Net periodic
postretirement
benefit cost 485.3 624.3 688.7
Retirement incentive
cost, net 89.5 4.4 71.6
Other gains, net - - (17.2)
--------------------------------
Total postretirement
benefit cost $ 574.8 $ 628.7 $ 743.1
================================
The change in net periodic postretirement benefit cost from year to year was
caused by a number of variables, including changes in actuarial assumptions (see
table below), changes in plan provisions, favorable medical claims experience
and favorable returns on plan assets. We recognized retirement incentive costs
in 1997, 1996 and 1995 as a result of work force reductions primarily through
retirement incentives offered to management and associate employees of the
former NYNEX companies. The costs were comprised of special termination benefit
charges of $60.0 million in 1997, $39.8 million in 1996 and $72.9 million in
1995 and curtailment losses of $139.5 million in 1997, $95.7 million in 1996 and
$45.0 million in 1995. These amounts were partially offset by postretirement
medical benefit reserves of $110.0 million in 1997, $131.1 million in 1996 and
$46.3 million in 1995. The postretirement medical reserves were established in
1993 and transferred to the postretirement benefit liability as employees
accepted the retirement incentive offer. Other gains represent net curtailment
gains associated with the termination of postretirement benefits for certain
employees in 1995.
39
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 16 continued
The following table shows the postretirement benefit plans' funded status
reconciled with the amounts recognized in our consolidated balance sheets:
(Dollars in Millions)
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation (APBO):
Retirees $ 6,018.2 $ 5,683.7
Fully eligible plan
participants 884.7 877.3
Other active plan
participants 1,949.3 2,056.2
----------------------------
Total APBO 8,852.2 8,617.2
----------------------------
Fair value of plan assets 3,824.6 3,209.9
----------------------------
APBO in excess of plan assets 5,027.6 5,407.3
Unrecognized net gain 1,512.1 1,061.7
Unamortized prior service cost (192.3) (224.7)
----------------------------
Accrued postretirement
benefit obligation $ 6,347.4 $ 6,244.3
============================
Total APBO by plan:
Health and welfare $ 7,957.9 $ 7,815.1
Life insurance 894.3 802.1
----------------------------
Total $ 8,852.2 $ 8,617.2
============================
Fair value of plan
assets by plan:
Health and welfare $ 3,003.7 $ 2,516.4
Life insurance 820.9 693.5
----------------------------
Total $ 3,824.6 $ 3,209.9
============================
We used the following weighted-average assumptions to calculate the
postretirement benefit costs and benefit obligations:
At December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate 7.25% 7.75% 7.25%
Rate of future increases in
compensation levels 4.00 4.40 4.40
Medical cost trend rate:
For the year ending 6.50 8.30 10.30
Ultimate (year 2001 for 1997,
2008 for 1996 and 1995) 5.00 4.75 4.75
Dental cost trend rate:
For the year ending 3.50 3.75 4.00
Ultimate (year 2002) 3.00 3.50 3.50
--------------------------------
In addition, the expected long-term rate of return on plan assets used to
calculate postretirement benefit costs for 1997, 1996 and 1995 was 8.70%, 8.35%
and 8.35%. The medical cost trend rate significantly affects the reported
postretirement benefit costs and benefit obligations. A one-percentage-point
increase in the assumed health care cost trend rates for each future year would
have increased 1997 postretirement benefit costs by $59.3 million and would have
increased the accumulated postretirement benefit obligation as of December 31,
1997 by $649.6 million.
RETIREMENT INCENTIVES
In 1993, we announced a restructuring plan which included an accrual of
approximately $1.1 billion (pre-tax) for severance and postretirement medical
benefits under a force reduction plan. Beginning in 1994, retirement incentives
have been offered as a voluntary means of implementing substantially all of the
work force reductions planned in 1993.
Since the inception of the retirement incentive program, additional costs
totaled approximately $1,957 million (pre-tax) as of December 31, 1997,
comprised of $513 million in 1997, $236 million in 1996, $514 million in 1995
and $694 million in 1994. These costs include the pension and postretirement
benefit amounts shown in the tables above, as well as vacation pay costs and
other items. As described above, the retirement incentive costs have been
reduced by severance and postretirement medical benefits reserves established in
1993 and transferred to the pension and postretirement benefits liabilities as
employees accepted the retirement incentive offer. As of December 31, 1997, the
remaining reserves associated with the 1993 restructuring plan were
approximately $39 million for employee severance and $54 million for
postretirement medical benefits.
As of December 31, 1997, employees who have left the business under the
retirement incentive program totaled 19,275, consisting of 9,329 management
employees and 9,946 associate employees. The retirement incentive program
covering management employees ended on March 31, 1997 and the program covering
associate employees is scheduled to end in August 1998.
SAVINGS PLANS AND EMPLOYEE STOCK OWNERSHIP PLANS
We sponsor savings plans to provide opportunities for eligible employees to save
for retirement on a tax-deferred basis and to encourage employees to acquire and
maintain an equity interest in our company. Under these plans, we match a
certain percentage of eligible employee contributions with shares of our common
stock. We maintain three leveraged employee stock ownership plans (ESOPs). In
1989, two leveraged ESOPs were established to purchase our common stock and fund
our matching contribution. In 1990, NYNEX established a leveraged ESOP to fund
matching contributions to management employees and purchased shares of NYNEX
common stock. At the date of the merger, NYNEX common stock outstanding was
converted to Bell Atlantic shares using an exchange ratio of 0.768 of a share of
Bell Atlantic common stock to one share of NYNEX common stock.
40
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 16 continued
The leveraged ESOP trusts established in 1989 were funded by the issuance of
$790.0 million in ESOP Senior Notes. The annual interest rate on the ESOP Senior
Notes is 8.17%. The ESOP Senior Notes are payable in semiannual installments,
which began on January 1, 1990 and end in the year 2000. The NYNEX leveraged
ESOP trust was established through a company loan of $450 million, the proceeds
of which were used to purchase common shares of NYNEX stock held in treasury.
NYNEX issued and guaranteed $450 million of 9.55% Debentures, the proceeds of
which were principally used to repurchase common shares in the open market. The
Debentures require annual payments of principal and are due on May 1, 2010.
Interest payments are due semiannually. The leveraged ESOP trusts repay the
debt, including interest, with funds from our contributions to the ESOP trusts,
as well as dividends received on unallocated and allocated shares of common
stock.
The obligations of the leveraged ESOP trusts, which we guarantee, are recorded
as Long-term Debt and the offsetting deferred compensation is classified as a
reduction of Shareowners' Investment. As the ESOP trusts make principal
payments, we reduce the long-term debt balance. The deferred compensation
balance is reduced by the amount of employee compensation recognized as the ESOP
shares are allocated to participants.
Common stock is allocated from the leveraged ESOP trusts based on the proportion
of principal and interest paid on ESOP debt in a year to the remaining principal
and interest due over the term of the debt. At December 31, 1997, the number of
unallocated and allocated shares of common stock was 22.3 million and 27.8
million. All leveraged ESOP shares are included in earnings per share
computations.
We recognize leveraged ESOP cost based on the modified shares allocated method
for the leveraged ESOP trusts that held securities before December 15, 1989 and
the shares allocated method for the leveraged ESOP trust that held securities
after December 15, 1989.
ESOP cost and trust activity consist of the following:
(Dollars in Millions)
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Compensation $105.4 $ 93.5 $ 88.4
Interest incurred 57.0 69.4 84.4
Dividends (36.9) (42.1) (47.0)
Other trust earnings and
expenses, net (.5) (.2) (.5)
------------------------------------
Net leveraged ESOP cost 125.0 120.6 125.3
Additional (reduced)
ESOP cost (2.3) 14.6 19.2
------------------------------------
Total ESOP cost $122.7 $135.2 $144.5
====================================
Dividends received for
debt service $ 66.7 $ 68.3 $ 69.7
====================================
Total company
contributions to leveraged
ESOP trusts $136.5 $141.8 $152.3
====================================
In addition to the ESOPs described above, we maintain savings plans for
associate employees of the former NYNEX companies and certain other
subsidiaries. Compensation expense associated with these savings plans was $71.1
million in 1997, $69.1 million in 1996 and $62.8 million in 1995.
----------------------------------------------------------------------------
17. Income Taxes
----------------------------------------------------------------------------
The components of income tax expense from continuing operations are presented in
the following table:
(Dollars in Millions)
Years Ended December 31, 1997 1996 1995*
- --------------------------------------------------------------------------------
Current:
Federal $1,207.4 $1,450.2 $1,602.3
State and local 222.2 195.4 234.8
---------------------------------------------
Total 1,429.6 1,645.6 1,837.1
---------------------------------------------
Deferred:
Federal 279.2 235.9 (65.1)
State and local (42.3) 48.3 51.3
---------------------------------------------
Total 236.9 284.2 (13.8)
---------------------------------------------
Investment tax credits (38.1) (57.3) (70.5)
Other credits (99.2) (90.2) (43.9)
---------------------------------------------
Total income tax expense $1,529.2 $1,782.3 $1,708.9
=============================================
* Does not include the effect of investment tax credit amortization that was
accelerated in connection with the discontinued application of SFAS No. 71.
41
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 17 continued
During 1997, two states in our operating region enacted significant changes in
their tax laws. In New Jersey, a law was enacted that repealed the gross
receipts tax applicable to telephone companies and extended the net-income-based
corporate business tax to include telephone companies. This resulted in a
decrease in deferred state income tax expense of $75.4 million. In Maryland, a
law was enacted that changed the determination of taxable income. This resulted
in an increase in deferred state income tax expense of $8.3 million.
The following table shows the principal reasons for the difference between the
effective income tax rate and the statutory federal income tax rate:
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Statutory federal
income tax rate 35.0% 35.0% 35.0%
Investment tax credits (.6) (.8) (1.1)
Rate differential applied to
reversing timing differences -- -- (.2)
State income taxes, net of
federal tax benefits 2.6 3.1 3.9
Other, net 1.4 (1.0) .1
----------------------------------
Effective income tax rate 38.4% 36.3% 37.7%
==================================
Deferred taxes arise because of differences in the book and tax bases of certain
assets and liabilities. Significant components of deferred tax liabilities
(assets) are shown in the following table:
(Dollars in Millions)
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 3,564.5 $ 3,646.8
Leveraged leases 2,225.3 2,022.0
Partnership investments 329.9 244.0
Other 1,044.2 1,024.3
---------------------------------
7,163.9 6,937.1
---------------------------------
Deferred tax assets:
Employee benefits (4,065.0) (4,021.1)
Investment tax credits (94.3) (103.9)
Allowance for uncollectible
accounts receivable (117.4) (90.6)
Other (1,114.8) (1,060.1)
---------------------------------
(5,391.5) (5,275.7)
---------------------------------
Valuation allowance 79.4 44.8
---------------------------------
Net deferred tax liability $ 1,851.8 $ 1,706.2
=================================
Deferred tax assets include approximately $3,125.8 million at December 31, 1997
and $2,740.2 million at December 31, 1996 related to postretirement benefit
costs recognized under SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." This deferred tax asset will gradually be
realized over the estimated lives of current retirees and employees.
The valuation allowance primarily represents tax benefits of capital loss
carryforwards, certain state NOL carryforwards and other deferred tax assets
which may expire unutilized. During 1997, the valuation allowance increased
$34.6 million. This increase was primarily a result of a change in tax planning
strategies.
----------------------------------------------------------------------------
18. ADDITIONAL FINANCIAL INFORMATION
----------------------------------------------------------------------------
The tables below provide additional financial information related to our
consolidated financial statements:
INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
(Dollars in Millions)
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense incurred, net of amounts capitalized $1,275.2 $1,124.1 $1,305.0
Capitalized interest 81.0 128.5 73.2
Advertising expense 397.0 357.5 314.8
-----------------------------------------------------
</TABLE>
Interest expense incurred includes $45.2 million in 1997, $42.1 million in 1996
and $40.4 million in 1995 related to our lease financing business. Such interest
expense is classified as Other Operating Expenses.
42
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Note 18 continued
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
(Dollars in Millions)
At December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued liabilities:
Accounts payable $ 3,575.4 $ 3,513.1
Accrued expenses 1,089.7 1,357.6
Accrued vacation pay 618.1 611.7
Accrued salaries and wages 279.9 236.7
Interest payable 245.8 230.0
Accrued taxes 157.5 211.5
-------------------------------------
Total $ 5,966.4 $ 6,160.6
=====================================
Other current liabilities:
Advance billings and customer deposits $ 643.0 $ 638.3
Dividend payable 597.8 574.8
Other 114.2 92.0
-------------------------------------
Total $ 1,355.0 $ 1,305.1
=====================================
</TABLE>
CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(Dollars in Millions)
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes, net of amounts refunded $ 1,402.8 $ 1,667.9 $ 1,668.1
Interest, net of amounts capitalized 1,215.4 1,162.5 1,307.5
Noncash investing and financing activities:
Acquisition of plant under capital leases 11.4 16.4 14.3
Acquisition of plant through mortgage assumption -- 16.0 --
Common stock issued for performance-based share plans 10.0 13.1 8.1
Common stock issued for dividend reinvestment plan -- 79.2 106.1
Common stock issued and debt assumed for acquisitions 21.9 -- 19.0
Noncash investment in unconsolidated businesses -- 9.0 --
Contribution of net assets to unconsolidated businesses 681.8 -- 16.4
Accrued contributions to partnerships 73.0 220.1 139.8
----------------------------------------------------------
</TABLE>
----------------------------------------------------------------------------
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
--------------------------------------------------------------------------------------------------
Income (Loss) Before Cumulative Effect of Change
in Accounting Principle
Operating Operating --------------------------------------------------- Net
Quarter Ended Revenues Income Amount Per Share-Basic** Per Share-Diluted** Income (Loss)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997:
March 31 $ 7,416.5 $ 1,458.5 $ 698.2 $ .45 $ .45 $ 698.2
June 30 7,707.8 1,847.9 896.8 .58 .57 896.8
September 30* 7,373.9 421.0 (80.1) (.05) (.05) (80.1)
December 31 7,695.7 1,614.1 940.0 .61 .60 940.0
--------------------------------------------------------------------------------------------------
1996:
March 31 $ 7,044.0 $ 1,346.2 $ 690.0 $ .44 $ .44 $ 963.1
June 30 7,329.4 1,599.2 829.8 .54 .53 829.8
September 30 7,376.6 1,667.2 871.8 .56 .56 871.8
December 31 7,405.2 1,466.0 737.3 .48 .47 737.3
--------------------------------------------------------------------------------------------------
</TABLE>
* Results of operations for the third quarter of 1997 include merger-related
costs (see Note 1).
**Per share amounts have been adjusted to reflect a two-for-one stock split on
June 1, 1998.
We restated results of operations for 1996 and the first and second quarters
of 1997 as a result of our merger with NYNEX which was accounted for as a
pooling of interests (see Note 1).
Income before cumulative effect of change in accounting principle per common
share is computed independently for each quarter and the sum of the quarters
may not equal the annual amount.
43
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Mel Meskin
---------------
Mel Meskin
Vice President - Comptroller
Date: June 29, 1998
44
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Bell Atlantic Corporation on Form S-3 (File No. 333-48083), Form S-3 (File No.
33-30642), Form S-3 (File No. 33-8451), Form S-8 (File No. 33-10377), Form S-8
(File No. 33-10378), Form S-8 (File No. 33-58681), Form S-8 (File No. 33-58683),
Form S-8 (File No. 333-00409), Form S-3 (File No. 33-36551), Form S-3 (File No.
33-49085), Form S-3 File No. (33-62393), Form S-4 (File No. 333-11573), Form S-8
(File No. 333-33747), Form S-8 (File No. 333-41593), Form S-8 (File No. 333-
42801), and Form S-8 (File No. 333-45985), of our reports dated February 9, 1998
(except for the share and per share data adjusted to reflect the stock split
referred to in Note 13, for which the date is June 25, 1998), on our audits of
the consolidated financial statements and financial statement schedule of the
Company and its subsidiaries as of December 31, 1997 and December 31, 1996, and
for each of the three years in the period ended December 31, 1997, which reports
are incorporated by reference or included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York
June 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,043
<SECURITIES> 0
<RECEIVABLES> 6,953
<ALLOWANCES> 612
<INVENTORY> 550
<CURRENT-ASSETS> 9,001
<PP&E> 77,437
<DEPRECIATION> 42,398
<TOTAL-ASSETS> 53,964
<CURRENT-LIABILITIES> 13,664
<BONDS> 13,265
0
0
<COMMON> 158<F1>
<OTHER-SE> 12,631<F1>
<TOTAL-LIABILITY-AND-EQUITY> 53,964
<SALES> 0
<TOTAL-REVENUES> 30,194
<CGS> 0
<TOTAL-COSTS> 24,852
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,230
<INCOME-PRETAX> 3,984
<INCOME-TAX> 1,529
<INCOME-CONTINUING> 2,455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,455
<EPS-PRIMARY> 1.58<F1>
<EPS-DILUTED> 1.56<F1>
<FN>
<F1> ADJUSTED TO REFLECT A TWO-FOR-ONE STOCK SPLIT ON JUNE 1, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 550<F1>
<SECURITIES> 0
<RECEIVABLES> 6,736<F1>
<ALLOWANCES> 567<F1>
<INVENTORY> 478<F1>
<CURRENT-ASSETS> 8,457<F1>
<PP&E> 75,680<F1>
<DEPRECIATION> 39,545<F1>
<TOTAL-ASSETS> 53,361<F1>
<CURRENT-LIABILITIES> 10,350<F1>
<BONDS> 15,286<F1>
0
0
<COMMON> 157<F1><F3>
<OTHER-SE> 12,819<F1><F3>
<TOTAL-LIABILITY-AND-EQUITY> 53,361<F1>
<SALES> 0
<TOTAL-REVENUES> 29,155<F1>
<CGS> 0
<TOTAL-COSTS> 23,077<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,082<F1>
<INCOME-PRETAX> 4,911<F1>
<INCOME-TAX> 1,782<F1>
<INCOME-CONTINUING> 3,129<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 273<F1>
<NET-INCOME> 3,402<F1>
<EPS-PRIMARY> 2.20<F2><F3>
<EPS-DILUTED> 2.18<F2><F3>
<FN>
<F1>RESTATED TO REFLECT THE MERGER OF BELL ATLANTIC CORPORATION AND NYNEX
CORPORATION COMPLETED ON AUGUST 14, 1997 AND ACCOUNTED FOR AS A POOLING OF
INTERESTS.
<F2>RESTATED TO REFLECT THE MERGER (FOOTNOTE F1) AND THE ADOPTION OF FINANCIAL
ACCOUNTING STANDARDS BOARD STATEMENT NO. 128, "EARNINGS PER SHARE."
<F3> ADJUSTED TO REFLECT A TWO-FOR-ONE STOCK SPLIT ON JUNE 1, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 474<F1>
<SECURITIES> 0
<RECEIVABLES> 5,707<F1>
<ALLOWANCES> 475<F1>
<INVENTORY> 362<F1>
<CURRENT-ASSETS> 7,963<F1>
<PP&E> 72,034<F1>
<DEPRECIATION> 37,164<F1>
<TOTAL-ASSETS> 50,623<F1>
<CURRENT-LIABILITIES> 9,916<F1>
<BONDS> 15,744<F1>
0
0
<COMMON> 154<F1><F3>
<OTHER-SE> 11,060<F1><F3>
<TOTAL-LIABILITY-AND-EQUITY> 50,623<F1>
<SALES> 0
<TOTAL-REVENUES> 27,927<F1>
<CGS> 0
<TOTAL-COSTS> 22,509<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,265<F1>
<INCOME-PRETAX> 4,535<F1>
<INCOME-TAX> 1,709<F1>
<INCOME-CONTINUING> 2,826<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> (2,923)<F1>
<CHANGES> 0
<NET-INCOME> (97)<F1>
<EPS-PRIMARY> (.06)<F2><F3>
<EPS-DILUTED> (.06)<F2><F3>
<FN>
<F1>RESTATED TO REFLECT THE MERGER OF BELL ATLANTIC CORPORATION AND NYNEX
CORPORATION COMPLETED ON AUGUST 14, 1997 AND ACCOUNTED FOR AS A POOLING OF
INTERESTS.
<F2>RESTATED TO REFLECT THE MERGER (FOOTNOTE F1) AND THE ADOPTION OF FINANCIAL
ACCOUNTING STANDARDS BOARD STATEMENT NO. 128, "EARNINGS PER SHARE."
<F3> ADJUSTED TO REFLECT A TWO-FOR-ONE STOCK SPLIT ON JUNE 1, 1998.
</FN>
</TABLE>
