EXHIBIT 13
Bell Atlantic Corporation and Subsidiaries 2
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Selected Financial and Operating Data
-------------------------------------
(Dollars in Millions, Except Per Share Amounts)
-------------------------------------------------------------------------
1994(b) 1993(c) 1992 1991(d) 1990
--------------------------------------------------------------------------------------------------------------------------------
For the Year
Operating Revenues(a) $ 13,791.4 $ 13,145.6 $ 12,836.0 $ 12,659.7 $ 12,649.8
Operating Income $ 2,804.6 $ 2,797.6 $ 2,506.2 $ 2,525.3 $ 2,614.3
Income Before Extraordinary Items
and Cumulative Effect of Changes
in Accounting Principles $ 1,401.9 $ 1,481.6 $ 1,382.2 $ 1,229.9 $ 1,230.5
Net Income (Loss) $ (754.8) $ 1,403.4 $ 1,340.6 $ (324.4) $ 1,230.5
Per Common Share
Income Before Extraordinary Items
and Cumulative Effect of Changes
in Accounting Principles $ 3.21 $ 3.39 $ 3.23 $ 2.91 $ 2.92
Net Income (Loss) $ (1.73) $ 3.22 $ 3.13 $ (.72) $ 2.92
Cash Dividends Declared $ 2.76 $ 2.68 $ 2.60 $ 2.52 $ 2.36
At Year-End
Total Assets $ 24,271.8 $ 29,544.2 $ 28,099.5 $ 28,305.8 $ 28,391.8
Long-Term Debt $ 6,805.7 $ 7,206.2 $ 7,348.2 $ 7,984.0 $ 8,928.5
Employee Benefit Obligations $ 3,773.8 $ 3,396.0 $ 3,058.7 $ 2,985.1 $ 216.0
Preferred Stock of Subsidiary $ 85.0 - - - -
Shareowners' Investment $ 6,081.3 $ 8,224.4 $ 7,816.3 $ 7,367.6 $ 8,531.5
Debt Ratio 59.4% 54.6% 56.3% 59.5% 57.5%
Book Value Per Common Share $ 13.94 $ 18.85 $ 18.00 $ 17.12 $ 19.96
Network Access Lines (in thousands) 19,168 18,645 18,181 17,750 17,484
Number of Employees 72,300 73,600 71,400 76,900 82,700
Other Data
Return on Average Common Equity (9.8)% 17.3% 17.4% (4.4)% 14.4%
Additions to Plant, Property and Equipment $ 2,699.0 $ 2,519.0 $ 2,546.8 $ 2,644.1 $ 2,692.1
--------------------------------------------------------------------------------------------------------------------------------
(a) Certain amounts have been reclassified to conform to 1994
classifications.
(b) 1994 includes an extraordinary charge for the discontinuation of
regulatory accounting principles at the telephone subsidiaries.
(c) 1993 includes the adoption of changes in accounting for income taxes and
postemployment benefits.
(d) 1991 includes the adoption of a change in accounting for postretirement
benefits other than pensions.
Bell Atlantic Corporation and Subsidiaries 6
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
--------------------------------------------------------------------------
---------------------
Results of Operations
---------------------
(Dollars in Millions, Except Per Share Amounts)
-------------------------------------------------------------------------
For the Years Ended December 31 1994 1993 1992
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Income Before Extraordinary Items and Cumulative
Effect of Changes in Accounting Principles $ 1,401.9 $ 1,481.6 $ 1,382.2
Extraordinary Items
Discontinuation of regulatory accounting
principles, net of tax (2,150.0) - -
Early extinguishment of debt, net of tax (6.7) (58.4) (41.6)
Cumulative Effect of Changes in Accounting Principles
Income taxes - 65.2 -
Postemployment benefits, net of tax - (85.0) -
------------------------------------------------------------------------
Net Income (Loss) $ (754.8) $ 1,403.4 $ 1,340.6
========================================================================
Per Common Share:
Income Before Extraordinary Items and Cumulative $ 3.21 $ 3.39 $ 3.23
Effect of Changes in Accounting Principles
Extraordinary Items (4.94) (.13) (.10)
Cumulative Effect of Changes in Accounting Principles - (.04) -
------------------------------------------------------------------------
Net Income (Loss) $ (1.73) $ 3.22 $ 3.13
========================================================================
The Company reported a loss in 1994 of $754.8 million or $1.73 per share,
compared to net income of $1,403.4 million or $3.22 per share in 1993 and net
income of $1,340.6 million or $3.13 per share in 1992.
Results for 1994 included a noncash, after-tax extraordinary charge of
$2,150.0 million, or $4.92 per share, in connection with the Company's
decision to discontinue application of regulatory accounting principles
required by Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" (Statement No. 71).
The discontinued application of Statement No. 71 required the Company, for
financial reporting purposes, to eliminate its regulatory assets and
liabilities, resulting in an after-tax charge of $157.3 million. In addition,
the Company recorded an after-tax charge of $1,992.7 million, net of related
investment tax credits of $136.2 million, to adjust the carrying amount of
its telephone plant and equipment. On August 1, 1994, the Company began using
shorter asset lives to depreciate its telephone plant and equipment. The
shorter asset lives resulted in additional depreciation expense of
approximately $37 million over the amount that would have been recorded using
asset lives prescribed by regulators at the time of the discontinued
application of Statement No. 71. See Notes 1, 2 and 3 to the Consolidated
Financial Statements for additional information on the discontinuation of
regulatory accounting principles.
Results for each of the three years included extraordinary charges for the
early extinguishment of debt, net of tax, of $6.7 million, $58.4 million, and
$41.6 million in 1994, 1993, and 1992, respectively. Results for 1993
included the cumulative effects of adopting Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"
(Statement No. 112) and Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
In the third quarter of 1994, the Company recorded a pretax charge of
$161.9 million ($99.5 million after-tax), or $.23 per share, in accordance with
Statement No. 112, to recognize benefit costs for the separation of employees
who are entitled to benefits under preexisting separation pay plans. The charge,
which was actuarially determined, represents benefits earned through July 1,
1994 for employees who are expected to receive separation payments in the
future. The Company separated approximately 400 management and associate
employees in 1994 and expects to separate an additional 5,200 employees through
1997, pursuant to initiatives announced in August 1994. The separation benefit
costs associated with this workforce reduction are included in the charge. These
workforce reductions will be made possible by changes in provisioning systems
and customer service processes, increased spans of control, and consolidation
and centralization of administrative and staff groups. Costs to enhance systems
and consolidate work activities will be
7
charged to expense as incurred. The Company will continue to evaluate ways to
streamline and restructure its operations and reduce its workforce to improve
its future cost structure.
The results for 1994 also included pretax charges aggregating $38.9
million ($25.8 million after-tax) in connection with the disposition of a
subsidiary that sells and distributes liquefied petroleum gas and a foreign
cellular operation. The effect of these dispositions will not have a significant
impact on results of operations in the future. In 1994, the Company sold the
assets of Bell Atlantic TriCon Leasing Corporation (TriCon), except for the
leveraged lease and project finance portfolios, resulting in a pretax gain of
$42.0 million ($22.7 million after-tax). Revenues and expenses related to the
portion of the portfolio that was sold were $245.3 million and $191.6 million,
respectively, for the year ended December 31, 1993, and $71.6 million and $60.7
million, respectively, for the four-month period ended April 30, 1994.
The Company's investment in Grupo Iusacell, S.A. de C.V. (Iusacell) reduced
earnings by $.19 per share in 1994 and $.01 per share in 1993. The loss resulted
from the recognition of carrying costs, goodwill amortization, and equity
losses.
These and other items affecting the comparison of operating results are
discussed in the following sections.
-------------------
Operating Revenues
-------------------
(Dollars in Millions)
--------------------------------------------------------------------------
For the Years Ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------
Transport Services
Local service $ 4,312.4 $ 4,187.4 $ 4,046.4
Network access 3,237.6 3,070.9 2,953.1
Toll service 1,555.5 1,558.0 1,556.2
Ancillary Services
Directory advertising 1,082.0 1,049.0 1,021.8
Other 441.9 363.3 361.5
Value-added Services 1,284.4 1,193.6 1,127.9
Wireless Services 1,059.8 785.5 602.6
Other Services 817.8 937.9 1,166.5
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Total $ 13,791.4 $ 13,145.6 $ 12,836.0
==========================================================================
---------------------------------------
Transport Services Operating Statistics
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Percentage Increase (Decrease)
-----------------------------
1994 1993* 1992 1994 vs 1993 1993 vs 1992
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Access Lines in Service (In thousands, at year-end )
Residence 12,324 12,072 11,856 2.1% 1.8%
Business 6,565 6,293 6,042 4.3 4.2
Public 279 280 283 (.4) (1.1)
--------------------------------------
19,168 18,645 18,181 2.8 2.6
======================================
Access Minutes of Use (In millions)
Interstate 56,555 52,541 49,982 7.6 5.1
Intrastate 14,309 12,539 10,916 14.1 14.9
--------------------------------------
70,864 65,080 60,898 8.9 6.9
======================================
Toll Messages (In millions)
Intrastate 3,333 3,275 3,189 1.8 2.7
Interstate 175 170 160 2.9 6.3
--------------------------------------
3,508 3,445 3,349 1.8 2.9
======================================
* 1993 reflects the restatement of access minutes of use.
8
Local Service Revenues
Dollars in Millions Increase
=================================================================
1994 - 1993 $ 125.0 3.0%
-----------------------------------------------------------------
1993 - 1992 $ 141.0 3.5%
=================================================================
Local service revenues are earned by the telephone subsidiaries from the
provision of local exchange, local private line and public telephone services.
Local service revenues increased in 1994 and 1993 due primarily to growth
in the number of access lines in service of 2.8% and 2.6%, respectively, as well
as higher usage of basic calling services by both business and residence
customers.
Network Access Revenues
Dollars in Millions Increase
=================================================================
1994 - 1993 $ 166.7 5.4%
-----------------------------------------------------------------
1993 - 1992 $ 117.8 4.0%
=================================================================
Network access revenues are received from interexchange carriers (IXCs) for
their use of the Company's local exchange facilities in providing long-distance
services to IXCs' customers and from end-user subscribers. Switched access
service revenues are derived from usage-based charges paid by IXCs for access to
the Company's network. Special access revenues arise from access charges paid by
customers who have private lines, and end-user access revenues are earned from
local exchange carrier customers who pay for access to the network.
Network access revenues increased in 1994 and 1993 principally due to
higher customer demand for access services as reflected by growth in access
minutes of use of 8.9% and 6.9%, respectively, as well as growth in revenues
from end-user charges attributable to increasing access lines in service.
Volume-related increases in both years were partially offset by the effect of
price reductions.
Toll Service Revenues
Dollars in Millions Increase (Decrease)
====================================================================
1994 - 1993 $ (2.5) (.2)%
--------------------------------------------------------------------
1993 - 1992 $ 1.8 .1%
====================================================================
Toll service revenues are earned from calls made outside a customer's local
calling area, but within the same service area boundaries of the Company's
telephone subsidiaries, commonly referred to as "LATAs." Other toll services
include 800 services, Wide Area Telephone Service (WATS), and corridor services
(between Northern New Jersey and New York City and between Southern New Jersey
and Philadelphia.)
Toll service revenues grew in the first half of 1994 by $37.0 million, but
declined by $39.5 million during the second half of 1994 over comparable periods
in 1993. Growth in the first half of the year was primarily the result of the
recovering economy and harsh weather conditions. The decline in revenues in the
second half of the year reflects increased competition throughout the region,
including the July 1, 1994 commencement of intraLATA toll competition in New
Jersey. The Company also implemented price reductions on certain toll services
as part of its competitive response and extended local calling service areas in
Virginia, both of which contributed to the decline in revenues in the second
half of 1994. Price reductions and competition for WATS, private line and
interstate toll services resulted in a revenue decline for the year of $20.9
million. The Company expects that competition for toll services will continue to
intensify in 1995 (see State Regulation section).
Toll service revenues increased slightly in 1993 due to growth in toll
message volumes of 2.9%. Volume-related revenue increases were partially
offset by declines in revenues from WATS and private line services,
principally due to competitive pressures. Revenue growth was further offset
by the effects of rate reductions at one of the telephone subsidiaries.
Directory Advertising Revenues
Dollars in Millions Increase
================================================================
1994 - 1993 $ 33.0 3.1%
----------------------------------------------------------------
1993 - 1992 $ 27.2 2.7%
================================================================
Directory advertising revenues are earned primarily from local advertising
and marketing services provided to businesses in White and Yellow Page
directories published throughout the region. Other directory advertising
services include database and foreign directory marketing.
Growth in directory advertising revenues in 1994 and 1993 was principally
due to higher rates charged for these services. Volume growth continues to be
impacted by competition from other directory companies, as well as other
advertising media.
Other Ancillary Services Revenues
Dollars in Millions Increase
=================================================================
1994 - 1993 $ 78.6 21.6%
-----------------------------------------------------------------
1993 - 1992 $ 1.8 .5%
=================================================================
Other ancillary services include systems integration services, billing and
collection services provided to IXCs, and facilities rental services.
9
Other ancillary services revenues increased in 1994 principally due to an
increase in the number of contracts for systems integration services provided
to the federal government and business customers.
The increase in other ancillary services revenues in 1993 resulted from
higher volumes of systems integration services. This revenue increase was
substantially offset by a decrease in billing and collection revenues as a
result of reductions in services provided under long-term contracts with
certain IXCs and the effect of favorable claims adjustments recorded in 1992,
which reduced year-over-year growth in reported revenues.
Value-added Services Revenues
Dollars in Millions Increase
================================================================
1994 - 1993 $ 90.8 7.6%
----------------------------------------------------------------
1993 - 1992 $ 65.7 5.8%
================================================================
Value-added services represent a family of enhanced services including Call
Waiting, Return Call, Caller ID, Answer Call, and Voice Mail. These services
also include customer premises services such as inside wire installation and
maintenance and other central office services and features.
Continued growth in the network customer base (access lines) and higher
demand by residence customers for value-added central office and voice
messaging services offered by the telephone subsidiaries increased
value-added services revenues in 1994 and 1993. Value-added services revenues
in both years were positively impacted by increased demand and higher rates
for inside wire installation and maintenance services. These revenue
increases were offset, in part, by lower revenues generated from certain
maturing central office services and features. The Virginia State Corporation
Commission approved a new regulatory plan for Bell Atlantic - Virginia,
effective January 1, 1995 (see State Regulation section). This plan includes
the elimination of touch-tone service charges, which is expected to reduce
revenues by approximately $25 million annually.
Wireless Services Revenues
Dollars in Millions Increase
==================================================================
1994 - 1993 $ 274.3 34.9%
------------------------------------------------------------------
1993 - 1992 $ 182.9 30.4%
==================================================================
Wireless services include revenues generated from Bell Atlantic Mobile
(BAM) and its affiliates that provide domestic cellular and paging
communications services.
The continued growth in the Company's cellular customer base of 57.9% in
1994 and 48.8% in 1993 was the primary reason for the increase in wireless
revenues in both years.
On May 1, 1994, the New York SMSA Limited Partnership agreement between BAM
and NYNEX Mobile Communications Company was restructured. Beginning in May 1994,
wireless revenues no longer include cellular revenues associated with BAM's
reseller operation in the northern New Jersey area. These reseller revenues for
the four- and twelve-month periods ended April 30, 1994 and December 31, 1993
were $30.0 million and $66.1 million, respectively. Cellular revenues, excluding
these reseller amounts, were $1,014.9 million in 1994 and $707.3 million in
1993, an increase of $307.6 million or 43.5%.
See Wireless Joint Venture section for a discussion of the proposed merger
of the domestic cellular properties of Bell Atlantic and NYNEX Corporation.
Other Services Revenues
Dollars in Millions (Decrease)
===============================================================
1994 - 1993 $(120.1) (12.8)%
---------------------------------------------------------------
1993 - 1992 $(228.6) (19.6)%
===============================================================
Other services include revenues from the Company's computer maintenance,
software development and support, telecommunications consulting, video
services, real estate, diversified and computer leasing, and liquefied
petroleum gas distribution businesses.
The decrease in other services revenues in 1994 is due primarily to the
April 1994 sale of a majority of the leasing portfolio owned by TriCon and the
disposition of Bell Atlantic Systems Leasing International, Inc. in November of
1994 (see Note 5 to the Consolidated Financial Statements). The Company is no
longer providing new leasing services and expects the decreasing revenue trend
to continue. The reduction in revenues in 1994 also reflects the impact of the
disposition of the Company's software development and liquefied petroleum gas
distribution businesses at the end of 1993 and during 1994. These revenue
decreases were partially offset by growth in revenues of approximately 21% from
the Company's third-party computer maintenance business, principally due to
higher volumes resulting from new contracts.
Other services revenues decreased in 1993 due primarily to the effect of
the transfer, effective December 31, 1992, of the Bell Atlanticom Systems, Inc.
(Atlanticom) business to a partnership in which the Company owns a minority
interest. The Company's decreased emphasis on computer leasing and real estate
operations further contributed to the decrease in other services revenues.
Volume-related increases in the Company's third-party computer maintenance
business partially offset these revenue decreases.
10
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Operating Expenses
-------------------
(Dollars in Millions)
----------------------------------------------------------------------
For the Years Ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
Employee costs, including benefits and taxes $ 4,333.1 $ 4,027.6 $ 3,941.5
Depreciation and amortization 2,652.1 2,545.1 2,417.4
Other operating expenses 4,001.6 3,775.3 3,970.9
---------------------------------------------------------------------
Total $ 10,986.8 $ 10,348.0 $ 10,329.8
=====================================================================
Employee Costs
Dollars in Millions Increase
===============================================================
1994 - 1993 $ 305.5 7.6%
----------------------------------------------------------------
1993 - 1992 $ 86.1 2.2%
================================================================
Employee costs consist of salaries, wages, and other employee compensation,
employee benefits and payroll taxes.
The increase in employee costs in 1994 is largely attributable to the
aforementioned charge of $161.9 million to recognize benefit costs for the
separation of employees. The third and fourth quarters of 1994 also included
approximately $11 million representing the ongoing recognition of costs under
separation pay plans. In addition, employee costs increased due to salary and
wage increases, increased overtime pay, and an increase in the number of
employees at the wireless, computer maintenance, and video services
subsidiaries. Higher repair and maintenance activity caused by unusually
severe weather conditions experienced during the year contributed to the
overall increase in employee costs. These expense increases were offset, in
part, by lower workforce levels at the network services subsidiaries and the
effect of the disposition of several nonregulated subsidiaries at the end of
1993 and during 1994.
In 1993, higher costs from salary and wage increases and overtime at the
telephone subsidiaries were offset, in part, by savings of approximately $160
million resulting from workforce reduction programs implemented in 1992 at
the network services subsidiaries. Workforce increases at certain
nonregulated subsidiaries also contributed to higher employee costs. The
effect of these workforce increases were offset, in part, by a reduction in
workforce resulting from the transfer of the Atlanticom business to a
partnership.
Depreciation and Amortization
Dollars in Millions Increase
=================================================================
1994 - 1993 $ 107.0 4.2%
-----------------------------------------------------------------
1993 - 1992 $ 127.7 5.3%
=================================================================
Depreciation and amortization expense increased in 1994 due principally to
growth in telephone and cellular plant and increased rates of depreciation at
the telephone subsidiaries, including depreciation increases resulting from the
Company's aforementioned discontinued application of Statement No. 71. On August
1, 1994, the Company began using shorter asset lives for certain categories of
telephone plant and equipment which reflect the Company's expectations as to the
revenue-producing lives of the assets. The use of the shorter asset lives
increased depreciation in 1994 by approximately $37 million, for financial
reporting purposes, over the amount that would have been recorded using asset
lives prescribed by regulators at the time of the discontinued application of
Statement No. 71. Future depreciation represcriptions by regulators will not
affect depreciation expense recognized for financial reporting purposes. These
expense increases were partially offset by a reduction in depreciation and
amortization expense at the Company's leasing subsidiaries as a result of the
partial disposition of these businesses during 1994.
Depreciation and amortization expense increased in 1993 due primarily to
approximately $135 million of additional expense resulting from represcribed
depreciation rates at three of the telephone subsidiaries. Also contributing
to the increase was growth in the level of depreciable plant at the telephone
and cellular subsidiaries in 1993. Partially offsetting these increases was a
reduction in depreciation and amortization expense at the leasing and real
estate subsidiaries due to the decreased emphasis of these operations.
11
Other Operating Expenses
Dollars in Millions Increase (Decrease)
=================================================================
1994 - 1993 $ 226.3 6.0%
-----------------------------------------------------------------
1993 - 1992 $(195.6) (4.9)%
=================================================================
Other operating expenses consist primarily of contracted services, rent,
network software costs, provision for uncollectible accounts receivable and
other costs.
Other operating expenses increased in 1994 principally from higher volumes
of business at the Company's network services, wireless, computer maintenance,
and systems integration subsidiaries. In addition, the Company incurred higher
expenses for video services development. The total effect of these increases was
partially offset by the effect of the disposition of several nonregulated
subsidiaries at the end of 1993 and during 1994, and reimbursements of
approximately $50 million of previously recognized costs as a result of the
decision by other Bell Communications Research, Inc. (Bellcore) owners to
participate in the Advanced Intelligent Network (AIN) project. This project
previously had been supported entirely by the Company.
The decrease in other operating expenses in 1993 is largely attributable to
a decrease of approximately $184 million resulting from the transfer of the
Atlanticom business to a partnership. The decrease also included the effect of
the recognition in 1992 of approximately $47 million of one-time costs
associated with the Company's merger with Metro Mobile CTS, Inc. (Metro Mobile).
Equity in Income of Affiliates
Dollars in Millions (Decrease)
===========================================================
1994 - 1993 $(7.2) (14.9)%
-----------------------------------------------------------
1993 - 1992 $(4.1) (7.8)%
===========================================================
Equity in income of affiliates includes equity income and losses and
goodwill amortization related to the Company's investments in unconsolidated
businesses.
Equity in income of affiliates decreased in 1994 due principally to the
effects of goodwill amortization and equity losses of approximately $62
million associated with the Company's investment in Iusacell. The equity loss
in Iusacell includes a fourth quarter 1994 charge of approximately $19
million for the Company's estimated proportionate share of the impact of the
Mexican peso devaluation on Iusacell's net liabilities, primarily debt,
denominated in U.S. dollars. The Iusacell equity loss was substantially
offset by improved operating results from the Company's investment in Telecom
Corporation of New Zealand Limited (Telecom) and the effect of non-recurring
charges recorded by Telecom in 1993. The Company's equity in income of
Iusacell will continue to be impacted by changes in the Mexican peso exchange
rate.
In 1993, improved operating results from the Company's unconsolidated
investments in wireless partnerships and Telecom were more than offset by a
pretax charge of approximately $42 million, representing the Company's share
of non-recurring charges taken by Telecom.
Other Income and Expense, Net
For the Years Ended December 31 Dollars in Millions
==================================================================
1994 $ 23.2
------------------------------------------------------------------
1993 $ 39.8
------------------------------------------------------------------
1992 $162.0
==================================================================
Other income and expense, net principally includes interest and dividend
income, and gains and losses from the disposition of subsidiaries and
non-operating assets and investments.
Other income and expense, net in 1994 included pretax gains and losses
related to the dispositions of TriCon, a liquefied petroleum gas distribution
business, and a foreign cellular operation. In addition, the Company recorded
approximately $33 million of interest income related to notes receivable held
by the Company in connection with the TriCon sale (see Note 5 to the
Consolidated Financial Statements). The discontinued recognition of an
allowance for funds used during construction resulting from the discontinued
application of Statement No. 71 reduced other income by approximately $12
million in 1994.
Other income and expense, net in 1993 included a pretax gain of
approximately $65 million related to the private sale of a portion of the
Company's investment in Telecom, and a pretax charge of approximately $26
million associated with the planned disposition of the Company's software
development businesses.
Other income and expense, net in 1992 included gains on the sales of shares
of HCA-Hospital Corporation of America and real estate, and interest income
recognized in connection with the favorable settlement of various federal income
tax matters related to prior periods.
Interest Expense
Dollars in Millions (Decrease)
==================================================================
1994 - 1993 $ (30.0) (4.9)%
------------------------------------------------------------------
1993 - 1992 $ (82.8) (11.9)%
==================================================================
Interest expense decreased in 1994 due to the effects of long-term debt
refinancings and lower levels of debt. Interest expense was further reduced by
the recognition of $15.3 million in capitalized interest costs at the telephone
subsidiaries, subsequent to the discontinued application of Statement No. 71.
Partially offsetting these decreases were the effect of rising interest rates
during the year and the recognition of $27.0 million of interest
12
expense related to retained TriCon debt instruments. The principal and interest
payments on the retained debt match the principal and interest received on a
note receivable from the purchaser (see Note 5 to the Consolidated Financial
Statements). Additionally, 1994 included interest expense of approximately $19
million related to the debt incurred to purchase the Company's investment in
Iusacell.
Interest expense decreased in 1993 principally due to the effects of
long-term debt refinancings and lower short-term interest rates. Decreases
also resulted from lower interest costs associated with the Telecom
investment, as proceeds from the sale of Telecom shares in 1993 were used to
reduce a portion of the acquisition-related debt.
Provision for Income Taxes
Dollars in Millions Increase
==============================================================
1994 - 1993 $ 92.9 11.7%
--------------------------------------------------------------
1993 - 1992 $ 148.5 23.1%
==============================================================
Effective Income Tax Rates
For the Years Ended December 31
==============================================================
1994 38.7%
--------------------------------------------------------------
1993 34.8%
--------------------------------------------------------------
1992 31.8%
==============================================================
The Company's effective income tax rate was higher in 1994 due principally
to the reduction in the amortization of investment tax credits and the
elimination of the benefit of the rate differential applied to reversing timing
differences at the telephone subsidiaries as a result of the discontinued
application of Statement No. 71.
The 1993 effective income tax rate reflects the effect of federal tax
legislation enacted in 1993, which increased the federal corporate tax rate
from 34% to 35%. The lower effective income tax rate in 1992 resulted from
certain adjustments to deferred taxes.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is provided in Note 14 to the Consolidated
Financial Statements.
---------------------------------------
Competitive and Regulatory Environment
---------------------------------------
The communications industry continues to undergo fundamental changes which
may have a significant impact on future financial performance of
telecommunications companies. These changes are being driven by a number of
factors, including the accelerated pace of technological innovation, the
convergence of the telecommunications, cable television, information services
and entertainment businesses and a regulatory environment in which
traditional barriers are being lowered or eliminated and competition
permitted or encouraged.
The Company's telecommunications business is subject to competition from
numerous sources. An increasing amount of this competition is from companies
that have substantial capital, technological and marketing resources, many of
which do not face the same regulatory constraints as the Company. The entry
of well-financed competitors has the potential to adversely affect multiple
revenue streams of the telephone subsidiaries, including toll, local exchange
and network access services in the market segments and geographical areas in
which the competitors operate. The amount of revenue reductions will depend,
in part, on the competitors' success in marketing these services, and the
conditions established by regulatory authorities. The potential impact is
expected to be offset, to some extent, by revenues from interconnection charges
to be paid to the telephone subsidiaries by these competitors.
The Company continues to respond to competitive challenges by intensely
focusing on meeting customer requirements and by reducing its cost structure
through efficiency and productivity initiatives. In addition, the Company
continues to seek growth opportunities in businesses where it possesses core
competencies. Several examples of the Company's recent initiatives to address
competition are described below.
In the network services business, the Company announced plans in August
1994 to separate approximately 5,600 employees by the end of 1997.
To expand its presence in the wireless business, the Company agreed to
merge its domestic cellular operations with those of NYNEX Corporation. This
merger is expected to be completed in mid-1995. Bell Atlantic and NYNEX also
formed partnerships with U S WEST, Inc. and AirTouch Communications to bid
jointly in the FCC's auctions of licenses to provide personal communications
services and to develop a national branding and marketing strategy and wireless
communications services standards.
To expedite its entry into the video services market and reduce business
risks, Bell Atlantic formed two new jointly-owned partnerships with NYNEX and
Pacific Telesis Group. A media company will license, acquire, and develop
entertainment and information services, and a technol-
13
ogy and integration company will provide the systems necessary to deliver these
services over the partnerships' networks. Over the next three years, each of the
partners will contribute approximately $100 million in cash or assets to the new
joint ventures.
Federal Regulation
Legislation is expected to be introduced in the current session of the
United States Congress that would remove barriers to entry in the local exchange
markets and would permit local exchange carriers, such as the Company, to
provide interLATA services. The impact of the enactment of such legislation on
the Company's future financial performance will depend on a number of factors,
including the degree of parity under which competition is permitted in the local
and long-distance markets.
In February 1994, the FCC initiated a rulemaking proceeding to determine
the effectiveness of the price cap rules affecting local exchange carriers,
including the Company, and to decide what changes, if any, should be made to
those rules. This rulemaking is expected to be concluded in the first half of
1995.
Recent FCC rulings have sought to expand competition for special and
switched access services. The FCC ordered local exchange carriers, including the
Company, to provide virtual collocation in the telephone subsidiaries' central
offices to competitors, with the option of offering physical collocation, for
the purpose of providing special and switched access transport services. The
Company does not expect the net revenue impact of collocation to be material.
State Regulation
The ability of IXCs to offer intrastate intraLATA toll services is subject
to state regulation. Such competition is permitted in all of the Company's state
jurisdictions, except Virginia. The Virginia State Corporation Commission is
considering whether, and under what terms, to permit such competition. Increased
competition from IXCs in 1994 resulted in a continued decline in several
components of the telephone subsidiaries' toll service revenues. State
regulatory commissions in Pennsylvania, New Jersey, West Virginia, and Delaware
have initiated proceedings to determine whether, and under what conditions, to
authorize presubscription for intraLATA toll services. The Company expects the
level of intraLATA toll service competition to increase in 1995. The telephone
subsidiaries' ability to offset such competition will depend, in part, upon the
terms and conditions under which presubscription for intraLATA toll services may
be authorized.
In 1994, several competitors sought authority from state regulatory
commissions to provide and resell local exchange telecommunications services
in areas served by the Company's telephone subsidiaries. The Maryland Public
Service Commission has approved applications from MFS-Intelenet of Maryland,
Inc., a subsidiary of MFS Communications Company, Inc., and from MCI Metro
ATS, a subsidiary of MCI, to provide and resell local exchange services to
business customers in Maryland. Similar applications are pending from
competitors in Maryland, New Jersey, and Pennsylvania.
The Company's telephone subsidiaries continue to seek the most favorable
regulatory plans from their state commissions to keep pace with the rapid
changes occurring in the telecommunications industry. The following is a
summary of significant state regulatory developments in 1994.
Bell Atlantic - Pennsylvania received approval in June of 1994 to implement
an alternative regulation plan, which replaces rate base rate of return
regulation and allows Bell Atlantic - Pennsylvania to operate under a pure price
cap plan with no sharing provisions. In March 1994, Bell Atlantic - Delaware
elected to be regulated under a new law pursuant to which the prices of
competitive services will not be regulated, rate increases for discretionary
services will be limited to 15% annually, basic local service rate increases
will be limited to inflation minus 3%, and profits will not be regulated. In
December 1994, the West Virginia Public Service Commission extended the
incentive regulation plan applicable to West Virginia, which phases out the
touch-tone rate and lowers other basic local service rates. The Virginia State
Corporation Commission approved a new regulation plan for Bell Atlantic -
Virginia, effective January 1, 1995, which eliminates regulation of profits,
with provisions that cap basic local service rates until the year 2001,
eliminate monthly touch-tone charges, and expand eligibility for lifeline
telephone service.
--------------
Other Matters
--------------
Environmental Issues
The Company is subject to a number of environmental proceedings as a result
of the operations of its subsidiaries and shared liability provisions in the
Plan of Reorganization related to the Modification of Final Judgment. Certain of
these environmental matters relate to Superfund sites for which the Company's
subsidiaries have been designated as potentially responsible parties by the U.S.
Environmental Protection Agency or joined as third-party defendants in pending
Superfund litigation. Such designation or joinder subjects the named company to
potential liability for costs relating to cleanup of the
14
affected sites. The Company is also responsible for the remediation of sites
with underground fuel storage tanks and other expenses associated with
environmental compliance.
The Company continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. The Company's recorded liabilities reflect those
specific issues where remediation activities are currently deemed to be
probable and where the cost of remediation is estimable. Management believes
that the aggregate amount of any additional potential liability would not
have a material effect on the Company's results of operations or financial
condition.
Wireless Joint Venture
Following completion of the proposed merger of the domestic cellular
properties of Bell Atlantic and NYNEX Corporation, which is expected to close
in mid-1995 (see Note 16 to the Consolidated Financial Statements), the
cellular operations of the Company will no longer be included in operating
revenues and expenses. The joint venture will be controlled equally by both
parties and, therefore, will be accounted for by the Company under the equity
method. Revenues and operating income related to the Company's cellular
operations were $1,044.9 million and $112.2 million in 1994, and $773.4
million and $43.9 million in 1993, respectively.
--------------------
Financial Condition
--------------------
(Dollars in Millions)
------------------------------------------------------
For the Years Ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------
Cash Flows From (Used In):
Operating Activities $3,752.6 $ 4,154.8 $ 3,924.5
Investing Activities (1,669.8) (2,953.5) (2,004.5)
Financing Activities (2,086.0) (1,351.2) (1,755.7)
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements, including network
expansion and modernization, business development, and the payment of
dividends. Management expects that presently foreseeable capital requirements
will be financed primarily through internally generated funds. Additional
long-term debt and equity financing may be needed to fund development
activities and to maintain the Company's capital structure within
management's guidelines. The Company determines the appropriateness of the level
of its dividend payments on a periodic basis by considering such factors as
long-term growth opportunities, internal requirements of the Company, and the
expectations of shareowners.
The use of derivatives by the Company is limited to managing risk that
could endanger the financing and operating flexibility of the Company, making
cash flows more stable over the long run, and achieving savings over traditional
means of financing. Derivative agreements are tied to a specific liability or
asset and hedge the related economic exposures. The use of these hedging
agreements has not had a material impact on the Company's financial condition or
results of operations. The Company does not use derivatives for speculative
purposes and has not hedged its accounting translation exposure to foreign
currency fluctuations relative to its net position in foreign subsidiaries.
Additional information with respect to hedging agreements is provided in Note 9
to the Consolidated Financial Statements.
As of December 31, 1994, the Company and its subsidiaries had in excess of
$1.9 billion of unused bank lines of credit and shelf registrations for the
issuance of up to $2.0 billion of unsecured debt securities. The Company and
its subsidiaries had $666.9 million in borrowings outstanding under bank
lines of credit at December 31, 1994.
During 1994, as in prior years, the Company's primary source of funds
continued to be cash generated from operations. Cash provided from operations
in 1994 decreased versus 1993 due principally to higher income tax payments
in 1994.
Cash proceeds from investing activities in 1994 included $1,323.8 million
from the April 1994 sale of TriCon and $123.0 million from the disposition of
certain nonregulated subsidiaries. Additionally, the Company received $67.4
million under a special capital reduction plan implemented by Telecom in
which 20% of Telecom's outstanding shares were canceled and shareowners
received one New Zealand Dollar for each share canceled. Telecom's capital
reduction did not change the Company's percentage ownership of Telecom. In
1993, the sale of a portion of the Company's interest in Telecom provided
15
cash proceeds from investing activities of $253.7 million. In 1992, sales of
shares of HCA-Hospital Corporation of America and real estate, and the
disposition of businesses provided net cash proceeds from investing
activities of approximately $393 million.
The primary use of capital resources continued to be capital expenditures
and the payment of dividends. The Company invested approximately $2.2 billion in
1994, $2.1 billion in 1993, and $2.2 billion in 1992 in the telephone
subsidiaries' network.
During 1994, Bell Atlantic purchased additional Iusacell shares for $524.0
million, thereby increasing the Company's total investment in Iusacell to
$1,044.0 million, and used $37.5 million for the acquisition of a cellular
property and a minority interest in a directory business. The Company also
invested approximately $31 million in 1994 as a member of the Omnitel-Pronto
Italia consortium that was awarded the second cellular license in Italy in
March 1994. In 1993, the Company used $710.0 million of cash in connection
with the initial investment in Iusacell, and the acquisition of two directory
sales companies and certain other investments.
On June 2, 1994, Bell Atlantic New Zealand Holdings, Inc., a subsidiary of
the Company, issued 850,000 shares of Series A Preferred Stock at a price per
share of $100, with a dividend rate of $7.08 per share per annum, pursuant to
a private placement resulting in a cash inflow from financing activities of
$85.0 million. The preferred stock is subject to mandatory redemption on May
1, 2004 at a redemption price per share of $100.
The Company reduced long-term debt (including capital leases) and short-
term debt by $990.2 million in 1994, $168.2 million in 1993, and $764.4 million
in 1992. Approximately $250 million, $1.7 billion, and $1.8 billion of debt in
1994, 1993, and 1992, respectively, was refinanced at more favorable interest
rates. The Company's debt ratio was 59.4% as of December 31, 1994, compared to
54.6% as of December 31, 1993 and 56.3% as of December 31, 1992. The 1994 debt
ratio was impacted significantly by the equity reduction associated with the
discontinued application of Statement No. 71. Excluding this effect, the debt
ratio would have been 51.9% at December 31, 1994. The debt securities of the
Bell Atlantic telephone subsidiaries continue to be accorded high ratings by
primary rating agencies.
As a result of the discontinued application of Statement No. 71, the
Consolidated Balance Sheet at December 31, 1994 reflects significant changes
due to the elimination of regulatory assets and liabilities, the revaluation
of plant and equipment, and the accelerated amortization of investment tax
credits (see Note 2 to the Consolidated Financial Statements). The Company's
investment in Iusacell at December 31, 1994 has been reduced by approximately
$330 million for foreign currency translation losses which are reported as
foreign currency translation adjustments in Shareowners' Investment.
17
----------------------------------
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, 1994 and 1993, and the
related consolidated statements of operations and cash flows for each of the
three years in the period ended December 31, 1994. 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, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, the
Company discontinued accounting for the operations of its telephone subsidiaries
in accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," effective August 1,
1994. Also, as discussed in Notes 1, 13 and 14 to the consolidated financial
statements, the Company changed its method of accounting for income taxes and
postemployment benefits in 1993.
/s/ Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 6, 1995
Bell Atlantic Corporation and Subsidiaries 18
--------------------------------------
Consolidated Statements of Operations
--------------------------------------
(Dollars in Millions, Except Per Share Amounts)
-----------------------------------------------------------------
For the Years Ended December 31 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $13,791.4 $13,145.6 $12,836.0
Operating Expenses
Employee costs, including benefits and taxes 4,333.1 4,027.6 3,941.5
Depreciation and amortization 2,652.1 2,545.1 2,417.4
Other 4,001.6 3,775.3 3,970.9
-----------------------------------------------------------------
10,986.8 10,348.0 10,329.8
-----------------------------------------------------------------
Operating Income 2,804.6 2,797.6 2,506.2
Equity in Income of Affiliates 41.1 48.3 52.4
Other Income and Expense, Net 23.2 39.8 162.0
Interest Expense 582.1 612.1 694.9
-----------------------------------------------------------------
Income Before Provision for Income Taxes,
Extraordinary Items, and Cumulative Effect
of Changes in Accounting Principles 2,286.8 2,273.6 2,025.7
Provision for Income Taxes 884.9 792.0 643.5
-----------------------------------------------------------------
Income Before Extraordinary Items and
Cumulative Effect of Changes in
Accounting Principles 1,401.9 1,481.6 1,382.2
-----------------------------------------------------------------
Extraordinary Items
Discontinuation of regulatory accounting
principles, net of tax (2,150.0) - -
Early extinguishment of debt, net of tax (6.7) (58.4) (41.6)
-----------------------------------------------------------------
(2,156.7) (58.4) (41.6)
-----------------------------------------------------------------
Cumulative Effect of Changes in
Accounting Principles
Income taxes - 65.2 -
Postemployment benefits, net of tax - (85.0) -
-----------------------------------------------------------------
- (19.8) -
-----------------------------------------------------------------
Net Income (Loss) $ (754.8) $ 1,403.4 $ 1,340.6
=================================================================
Per Common Share:
Income Before Extraordinary Items and
Cumulative Effect of Changes in
Accounting Principles $ 3.21 $ 3.39 $ 3.23
Extraordinary Items (4.94) (.13) (.10)
Cumulative Effect of Changes in
Accounting Principles - (.04) -
-----------------------------------------------------------------
Net Income (Loss) $ (1.73) $ 3.22 $ 3.13
=================================================================
Weighted Average Number of Common Shares
and Equivalent Shares Outstanding (in millions) 437.2 436.3 433.0
=================================================================
See Notes to Consolidated Financial Statements.
Bell Atlantic Corporation and Subsidiaries 19
----------------------------
Consolidated Balance Sheets
----------------------------
(Dollars in Millions, Except Per Share Amounts)
---------------------------------------------------------
December 31, 1994 1993
------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 142.9 $ 146.1
Short-term investments - 8.5
Accounts receivable, net of allowances of $188.9 and $192.6 2,328.1 2,135.7
Inventories 274.6 250.9
Prepaid expenses 545.5 452.4
Other 492.2 877.2
---------------------------------------------------------
3,783.3 3,870.8
---------------------------------------------------------
Plant, Property and Equipment 33,745.8 33,181.6
Less accumulated depreciation 16,807.7 12,616.4
---------------------------------------------------------
16,938.1 20,565.2
---------------------------------------------------------
Investments in Affiliates 1,576.8 1,394.7
Other Assets 1,973.6 3,713.5
---------------------------------------------------------
Total Assets $24,271.8 $29,544.2
=========================================================
Liabilities and Shareowners' Investment
Current Liabilities
Debt maturing within one year $ 2,087.6 $ 2,677.3
Accounts payable 2,220.2 2,134.9
Accrued taxes 137.2 190.9
Advance billings and customer deposits 450.7 443.0
Accrued vacation pay 251.5 244.0
Dividend payable 301.0 292.2
Other 128.5 141.6
---------------------------------------------------------
5,576.7 6,123.9
---------------------------------------------------------
Long-Term Debt 6,805.7 7,206.2
---------------------------------------------------------
Employee Benefit Obligations 3,773.8 3,396.0
---------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income taxes 1,305.7 2,913.5
Unamortized investment tax credits 176.7 447.2
Other 466.9 1,233.0
---------------------------------------------------------
1,949.3 4,593.7
---------------------------------------------------------
Preferred Stock of Subsidiary 85.0 -
---------------------------------------------------------
Commitments (Notes 7, 11 and 16)
Shareowners' Investment
Preferred and Preference stock ($1 par value; none issued) - -
Common stock ($1 par value; 436,405,646 shares and
436,130,185 shares issued) 436.4 436.1
Common stock issuable (92,899 shares and 142,068 shares) .1 .1
Contributed capital 5,428.4 5,415.2
Reinvested earnings 1,144.4 3,093.6
Foreign currency translation adjustment (330.8) (83.9)
---------------------------------------------------------
6,678.5 8,861.1
Less common stock in treasury, at cost 11.0 2.4
Less deferred compensation-employee stock ownership plans 586.2 634.3
---------------------------------------------------------
6,081.3 8,224.4
---------------------------------------------------------
Total Liabilities and Shareowners' Investment $24,271.8 $29,544.2
=========================================================
See Notes to Consolidated Financial Statements.
Bell Atlantic Corporation and Subsidiaries 20
--------------------------------------
Consolidated Statements of Cash Flows
--------------------------------------
(Dollars in Millions)
-------------------------------------------------------------------
For the Years Ended December 31 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) $ (754.8) $ 1,403.4 $ 1,340.6
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,652.1 2,545.1 2,417.4
Extraordinary items, net of tax 2,156.7 58.4 41.6
Cumulative effect of changes in accounting
principles, net of tax - 19.8 -
Other items, net 1.2 (96.2) (56.5)
Changes in certain assets and liabilities, net of effects
from acquisition/disposition of businesses:
Accounts receivable (208.3) (87.8) (13.8)
Inventories (80.8) (31.7) (35.0)
Other assets (235.3) 3.8 157.0
Accounts payable and accrued taxes 53.9 328.2 (56.3)
Deferred income taxes, net (270.5) (105.8) (26.1)
Unamortized investment tax credits (49.4) (66.2) (80.0)
Employee benefit obligations 382.8 193.3 63.6
Other liabilities 105.0 (9.5) 172.0
-------------------------------------------------------------------
Net cash provided by operating activities 3,752.6 4,154.8 3,924.5
-------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of short-term investments (10.0) (8.5) (159.3)
Proceeds from sale of short-term investments 18.5 34.0 241.3
Additions to plant, property and equipment (2,648.3) (2,517.4) (2,560.4)
Proceeds from sale of plant, property and equipment 102.1 47.4 426.9
Investment in finance lease and notes receivable (741.6) (1,862.5) (1,467.0)
Proceeds from finance lease and notes receivable 721.8 1,801.2 1,474.7
Acquisition of businesses, less cash acquired (37.5) (146.9) (.3)
Investment in Grupo Iusacell, S.A. de C.V. (524.0) (520.0) -
Proceeds from sale of ownership interest in
Telecom Corporation of New Zealand Limited - 253.7 -
Proceeds from Telecom Corporation of
New Zealand Limited capital reduction plan 67.4 - -
Investment in joint ventures (46.0) (43.1) (17.0)
Proceeds from disposition of businesses 1,446.8 - 26.5
Proceeds from sale of investment - - 58.9
Other, net (19.0) 8.6 (28.8)
-------------------------------------------------------------------
Net cash used in investing activities (1,669.8) (2,953.5) (2,004.5)
-------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from borrowings 249.6 2,148.1 1,340.7
Principal repayments of borrowings and
capital lease obligations (621.1) (949.0) (1,875.5)
Early extinguishment of debt (350.0) (1,575.0) (987.5)
Net change in short-term borrowings with
original maturities of three months or less (287.6) 186.7 700.4
Dividends paid (1,195.1) (1,156.5) (1,069.7)
Proceeds from sale of common stock 6.9 33.7 122.1
Purchase of common stock for treasury (8.7) - (.1)
Net change in outstanding checks drawn
on controlled disbursement accounts 35.0 (39.2) 13.9
Proceeds from sale of preferred stock by subsidiary 85.0 - -
-------------------------------------------------------------------
Net cash used in financing activities (2,086.0) (1,351.2) (1,755.7)
-------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3.2) (149.9) 164.3
Cash and cash equivalents, beginning of year 146.1 296.0 131.7
-------------------------------------------------------------------
Cash and cash equivalents, end of year $ 142.9 $ 146.1 $ 296.0
===================================================================
See Notes to Consolidated Financial Statements.
Bell Atlantic Corporation and Subsidiaries 21
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
------------------------------------------------
1 Summary of Significant Accounting Policies
------------------------------------------------
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Bell Atlantic
Corporation (Bell Atlantic) and its majority-owned subsidiaries (together with
Bell Atlantic, the Company). Investments in businesses in which the Company does
not have control, but has the ability to exercise significant influence over
operating and financial policies, are accounted for using the equity method.
Other investments are accounted for by the cost method. All significant
intercompany accounts and transactions have been eliminated.
As a result of the disposition of a significant portion of its lease
financing and other non-strategic businesses in 1994 (see Note 5), the
Company operates predominantly in a single industry segment - communications
and related services.
Effective August 1, 1994, the telephone subsidiaries discontinued
accounting for their operations under the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (Statement No. 71) (see Note 2).
Revenue Recognition
Revenues are recognized as earned on the accrual basis.
The telephone subsidiaries recognize revenues when services are rendered
based on usage of the Company's local exchange network and facilities. Other
subsidiaries recognize revenues when products are delivered or services are
rendered to customers. Cellular operations revenues include access and usage,
equipment, and gross roamer revenues into and out of the Company's markets.
Revenues recognized from leasing transactions are recorded in accordance
with Statement of Financial Accounting Standards No. 13, "Accounting for
Leases."
Direct finance lease receivables consist of the gross minimum lease
payments receivable under the leases plus the estimated residual value of the
leased property less the unearned income. Unearned income represents the excess
of the gross minimum lease payments receivable plus the estimated residual value
over the cost of the equipment leased. Unearned income is amortized to income
over the term of the lease by methods that provide an approximately level rate
of return on the net investment in the lease.
Leveraged lease receivables consist of the aggregate minimum rentals
receivable under the leases, net of related nonrecourse debt, plus the
estimated residual value of the leased property less unearned income. The
unearned income represents the estimated pretax lease income and unamortized
investment tax credits.
Accumulated deferred income taxes arising from leveraged leases are
deducted from leveraged lease receivables to determine the net investment in
leveraged leases. Unearned income is recognized at a rate that will distribute
income to years in which the net investment in the leveraged lease is positive.
Operating lease income is recognized in equal monthly amounts over the term
of the lease.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90
days or less when purchased to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Short-term Investments
Short-term investments consist of investments that mature 91 days to 12
months from the date of purchase. Short-term investments are stated at cost,
which approximates market value.
Inventories
New and reusable materials of the telephone subsidiaries are carried in
inventory, principally at average original cost, except that specific costs
are used in the case of large individual items. Inventories of other
subsidiaries are carried at the lower of cost (determined principally on
either an average or first-in, first-out basis) or market.
Prepaid Directory
Costs of directory production and advertising sales are principally
deferred until the directory is published. Such costs are amortized to expense
and the related advertising revenues are recognized over the average life of the
directory, which is generally 12 months.
Plant and Depreciation
The telephone subsidiaries' provision for depreciation is based principally
on the composite group remaining life method of depreciation and straight-line
composite rates. This method provides for the recovery of the remaining net
investment in telephone plant, less anticipated net salvage value, over the
remaining asset lives. In connection with the discontinued application of
Statement No. 71, the Company began recording depreciation expense based on
22
expected revenue-producing asset lives. The following asset lives were used,
effective August 1, 1994: buildings, 18 to 40 years; central office equipment, 4
to 12 years; cable, wiring, and conduit, 14 to 50 years; and other equipment, 6
to 38 years. Previously, depreciation expense of the telephone subsidiaries was
based on asset lives that were authorized by regulatory commissions (see Note 3)
and included regulator-approved amortization of certain classes of telephone
plant.
When depreciable plant of the telephone subsidiaries is replaced or
retired, the amounts at which such plant has been carried in plant, property and
equipment are removed from the respective accounts and charged to accumulated
depreciation, and any gains or losses on disposition are amortized over the
remaining asset lives of the remaining net investment in telephone plant.
Plant, property and equipment of other subsidiaries is depreciated
principally on a straight-line basis over the following estimated useful
lives: buildings, 15 to 40 years; and other equipment, 2 to 15 years. When
the depreciable assets of these subsidiaries are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from
the respective accounts, and any gains or losses on disposition are
recognized in income.
Equipment under operating leases is depreciated to estimated residual
value, principally by using a sum-of-the-years-digits method.
Maintenance and Repairs
The cost of maintenance and repairs, including the cost of replacing minor
items not constituting substantial betterments, is charged to operating
expense.
Capitalized Interest Cost
Upon the discontinued application of Statement No. 71, effective August 1,
1994, the telephone subsidiaries began reporting capitalized interest as a
cost of telephone plant and equipment and a reduction in interest expense, in
accordance with the provisions of Statement of Financial Accounting Standards
No. 34, "Capitalization of Interest Cost" (Statement No. 34). The Company's
other subsidiaries account for capitalized interest in accordance with
Statement No. 34 provisions.
Prior to the discontinued application of Statement No. 71, the telephone
subsidiaries recorded an allowance for funds used during construction, which
included both interest and equity return components, as a cost of plant and
as an item of other income.
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the fair value of net assets of
businesses acquired is amortized by the straight-line method over periods not
exceeding 40 years. The carrying amount is reviewed whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable and a determination of impairment (if any) is made based on
estimates of future cash flows of the businesses acquired.
Foreign Currency
Assets and liabilities of foreign subsidiaries and equity investees are
translated into U.S. dollars at exchange rates in effect at the end of the
reporting period. Foreign entity revenues and expenses are translated into
U.S. dollars at the average rates that prevailed during the period. The
resultant net translation gains and losses are reported as foreign currency
translation adjustments in Shareowners' Investment.
Exchange gains and losses on transactions of the Company and its equity
investees denominated in a currency other than their functional currency are
generally included in results of operations as incurred.
Exchange gains and losses on intercompany foreign currency transactions of
a long-term investment nature are reported as foreign currency translation
adjustments in Shareowners' Investment.
Hedging Instruments
The Company periodically enters into hedging agreements to reduce its
exposure to fluctuations in foreign exchange rates and interest rates.
Forward exchange contracts are generally used to hedge the exposure to
currency fluctuations on certain short-term transactions denominated in a
currency other than the entities' functional currency. Gains and losses on
these contracts generally offset the foreign exchange gains and losses on the
underlying hedged transactions and are included in results of operations. The
discount or premium on these contracts is included in results of operations
over the life of the contract.
Gains and losses and related discounts or premiums arising from financial
instruments that hedge foreign balances of a long-term investment nature are
included as foreign currency translation adjustments in Shareowners'
Investment.
Hedging instruments are sometimes used to manage the exposure to currency
fluctuations associated with identifiable foreign currency commitments. Gains
and losses from these instruments are deferred and reflected as adjustments
of the related transactions.
23
The Company periodically enters into interest rate hedge agreements which
involve the exchange of fixed and variable interest rate payments over the
life of the agreement without exchange of the underlying principal amounts.
The differential to be paid or received under these agreements is accrued as
interest rates change and is recognized as an adjustment to interest expense
over the life of the agreements.
Employee Benefits
Pension Plans
Substantially all employees of the Company are covered under
noncontributory defined benefit pension plans.
Amounts contributed to the Company's pension plans are actuarially
determined, principally under the aggregate cost actuarial method, and are
subject to applicable federal income tax regulations.
Postretirement Benefits Other Than Pensions
Substantially all employees of the Company are covered under postretirement
health and life insurance benefit plans.
Amounts contributed to 501(c)(9) trusts and 401(h) accounts under
applicable federal income tax regulations to pay certain postretirement benefits
are actuarially determined, principally under the aggregate cost actuarial
method.
Postemployment Benefits
The Company provides employees with postemployment benefits such as
disability benefits, workers' compensation, and severance pay.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits," which requires accrual accounting for the estimated cost of
benefits provided to former or inactive employees after employment but before
retirement. Prior to 1993, the cost of these benefits was primarily charged
to expense as the benefits were paid.
Savings Plans and Employee Stock Ownership Plans
The Company maintains savings plans which cover substantially all of its
employees. A substantial portion of the Company's matching contribution is
provided through employee stock ownership plans (ESOPs). The Company
recognizes expense based on accounting rules applicable to companies with
ESOP trusts that held securities prior to December 15, 1989. Under this
method, the Company recognizes 80 percent of the cumulative expense that
would have been recognized under the shares allocated method.
The obligations of the ESOP trusts, which are guaranteed by the Company,
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, the Company reduces 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.
Income Taxes
Bell Atlantic Corporation and its domestic subsidiaries file a consolidated
federal income tax return.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement No.
109), which requires the determination of deferred taxes using the asset and
liability method. Under the asset and liability method, deferred taxes are
provided on book and tax basis differences and deferred tax balances are
adjusted to reflect enacted changes in income tax rates.
Prior to 1993, the Company accounted for income taxes based on the
provisions of Accounting Principles Board Opinion No. 11, "Accounting for Income
Taxes" (APB No. 11). Under APB No. 11, deferred taxes were generally provided to
reflect the effect of timing differences on the recognition of revenue and
expense determined for financial and income tax reporting purposes.
The Tax Reform Act of 1986 repealed the investment tax credit (ITC) as of
January 1, 1986, subject to certain transitional rules. ITCs of the telephone
subsidiaries were deferred and are being amortized as a reduction to income
tax expense over the estimated service lives of the related assets.
Earnings Per Common Share
Earnings per common share calculations are based on the weighted average
number of shares and equivalent shares outstanding during the year.
Prior to January 1, 1993, for purposes of computing earnings per common
share, net income attributable to common shares included the income tax
benefit resulting from dividends paid on shares held by the Company's ESOPs.
As a result of implementing Statement No. 109, the Company no longer includes
the income tax benefit resulting from dividends paid on unallocated shares
held by ESOPs in net income attributable to common shares for purposes of
computing earnings per share. Pursuant to the provisions of Statement No.
109, the income tax benefit resulting from dividends paid on allocated shares
is included in net income.
Reclassifications
Certain reclassifications of prior years' data have been made to conform to
1994 classifications.
24
---------------------------------------------------------
2 Discontinuation of Regulatory Accounting Principles
---------------------------------------------------------
In the third quarter of 1994, the Company determined that it was no longer
eligible for continued application of the accounting required by Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (Statement No. 71). In connection with the decision to
discontinue regulatory accounting principles under Statement No. 71, the Company
recorded a noncash, after-tax extraordinary charge of $2,150.0 million, which is
net of an income tax benefit of $1,498.4 million.
The Company's determination that it was no longer eligible for continued
application of the accounting required by Statement No. 71 was based on the
belief that the convergence of competition, technological change (including
the Company's technology deployment plans), actual and potential regulatory,
legislative and judicial actions, and other factors are creating fully open
and competitive markets. In such markets, the Company does not believe it can
be assured that prices can be maintained at levels that will recover the net
carrying amount of existing telephone plant and equipment, which has been
depreciated over relatively long regulator-prescribed lives. In addition,
changes from cost-based regulation to various forms of incentive regulation
in all jurisdictions contributed to the determination that the continued
application of Statement No. 71 is inappropriate.
The components of the charge recognized as a result of the discontinued
application of Statement No. 71 follow:
(Dollars in Millions)
------------------------------------
Pre-tax After-tax
----------------------------------------------------------------------------
Increase in plant and
equipment depreciation
reserve $ 3,463.0 $ 2,128.9
Accelerated investment
tax credit amortization - (136.2)
Tax-related regulatory asset
and liability elimination - 42.5
Other regulatory asset
and liability elimination 185.4 114.8
------------------------------------
Total $ 3,648.4 $ 2,150.0
====================================
The increase in the accumulated depreciation reserve of $3,463.0 million
was supported by both an impairment analysis, which identified estimated amounts
not recoverable from future discounted cash flows, and a depreciation study,
which identified inadequate depreciation reserve levels which the Company
believes resulted principally from the cumulative underdepreciation of plant as
a result of the regulatory process. Investment tax credit amortization was
accelerated as a result of the reduction in remaining asset lives of the
associated telephone plant and equipment.
Upon adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the effects of required adjustments to deferred
tax balances were deferred on the balance sheet as regulatory assets and
liabilities and amortized at the time the related deferred taxes were recognized
in the ratemaking process. As of August 1, 1994, tax-related regulatory assets
of $757.2 million and tax-related regulatory liabilities of $714.7 million were
eliminated. The elimination of other regulatory assets and liabilities relates
principally to deferred debt refinancing and vacation pay costs, which were
being amortized as they were recognized in the ratemaking process.
-----------------------------------
3 Plant, Property and Equipment
-----------------------------------
Plant, property and equipment, which is stated at cost, is summarized as
follows at December 31:
(Dollars in Millions)
--------------------------------
1994 1993
--------------------------------------------------------------------
Land $ 273.5 $ 262.0
Buildings 2,741.7 2,606.7
Central office equipment 12,261.8 11,905.5
Cable, wiring, and conduit 12,074.9 11,635.4
Other equipment 4,976.2 5,391.2
Other 510.6 696.2
Construction-in-progress 907.1 684.6
--------------------------------
33,745.8 33,181.6
Accumulated depreciation (16,807.7) (12,616.4)
--------------------------------
Total $ 16,938.1 $ 20,565.2
================================
The increase in accumulated depreciation in 1994 included $3,463.0 million
attributable to the adjustment to the carrying value of telephone plant and
equipment resulting from the discontinued application of Statement No. 71
(see Note 2). The components of the adjustment to the accumulated
depreciation reserve are summarized as follows:
(Dollars in Millions)
---------------------------------------------------------------------
Buildings $ 194.4
Central office equipment 1,252.0
Cable, wiring, and conduit 1,625.6
Other equipment 391.0
-----------
Total $ 3,463.0
===========
25
In connection with the discontinued application of Statement No. 71,
effective August 1, 1994, for financial reporting purposes, the Company began
using estimated asset lives for certain categories of plant and equipment that
are shorter than those approved by regulators prior to the discontinuance of
Statement No. 71. The shorter lives result from the Company's expectation as to
the revenue-producing lives of the assets. A comparison of the regulator-
approved asset lives to the shorter new asset lives for the most significantly
impacted categories of plant and equipment of the telephone subsidiaries
follows:
----------------------------
Regulator-
Approved New
Average Lives (in years) Asset Lives Asset Lives
----------------------------------------------------------------------
Buildings 18-60 18-40
Digital switch 17-19 12
Digital circuit 11-13 9-11
Conduit 50-60 50
Copper cable 20-30 14-19
Fiber cable 20-30 20-25
----------------------------
-------------------------------
4 Investments in Affiliates
-------------------------------
The Company's investments in affiliates, which are accounted for
principally under the equity method, consist of the following at December 31:
(Dollars in Millions)
-------------------------------------------------------------
1994 1993
------------------------------ --------------------------
Ownership Investment Ownership Investment
-----------------------------------------------------------------------------------------------------------------
Telecom Corporation of New Zealand Limited 24.8% $ 625.6 24.8% $ 610.2
Grupo Iusacell, S.A. de C.V. 41.9% 646.4 23.2% 517.0
Other Various 304.8 Various 267.5
-------------------------------------------------------------
Total $1,576.8 $1,394.7
=============================================================
Telecom Corporation of New Zealand Limited (Telecom) is the principal
provider of telecommunications services in that country. At the date of
acquisition in 1990, the Company's interest in Telecom exceeded the recorded
value of the proportionate share of the underlying net assets by
approximately $285 million. This amount is being amortized by the
straight-line method over a period of 40 years. During 1993, the Company
recorded an after-tax gain of $44.7 million as a result of the sale of
Telecom stock.
Through the purchase of stock in 1993 and 1994 totaling $1,044.0 million,
the Company acquired an economic interest in Grupo Iusacell, S.A. de C.V.
(Iusacell), the second largest telecommunications company in Mexico. Shares held
by Bell Atlantic represent approximately 44% of the voting rights pertaining to
Iusacell stock. At acquisition, the cumulative investment in Iusacell exceeded
the recorded value of the underlying net assets by approximately $760 million.
This amount is being amortized by the straight-line method over a period of 25
years. The Company's investment in Iusacell has been reduced by approximately
$330 million for foreign currency translation losses which are reported as
foreign currency translation adjustments in Shareowners' Investment.
The Company's other investments consist principally of cellular mobile
communications and real estate partnerships, a one-seventh interest in Bell
Communications Research, Inc. (Bellcore), and several other domestic and
international joint ventures.
26
-------------------------------
5 Disposition of Businesses
-------------------------------
Lease Financing
In the second quarter of 1994, the Company sold the assets of Bell Atlantic
TriCon Leasing Corporation (TriCon), except for leveraged lease and project
finance portfolios, to GFC Financial Corporation (GFC). The sale price consisted
of $344.2 million in cash and $835.9 million in notes receivable, plus the
assumption of $81.8 million of liabilities by GFC. In addition, the Company
retained $586.7 million of debt instruments of TriCon and received a note of an
equal amount from GFC. The principal and interest payments on the retained debt
match the principal and interest payments received on the note from GFC. At
December 31, 1994, the remaining balance of a note receivable from GFC was
$435.0 million. The Company recorded a pretax gain of $42.0 million as a result
of this transaction.
In the fourth quarter of 1994, the Company sold substantially all of the
assets of a leasing subsidiary, Bell Atlantic Systems Leasing International,
Inc., including the Company's 50% ownership interest in Pacific Atlantic
Systems Leasing, Inc. This sale did not have a material effect on the
Company's results of operations or financial position.
Other
In 1994, the Company recorded pretax charges aggregating $38.9 million in
connection with the disposition of a subsidiary that sells and distributes
liquefied petroleum gas and a foreign cellular operation.
------------------------------------
6 Leasing Arrangements as Lessor
------------------------------------
During 1994, the Company sold substantially all of its lease financing
business, except for leveraged lease and project finance portfolios (see Note
5). The Company is no longer providing new leasing services.
Finance lease receivables, net, which are included in Other (current
assets) and Other Assets (noncurrent assets) in the Consolidated Balance Sheets,
consist of the following components at December 31:
(Dollars in Millions)
--------------------------------------------------------------------------
1994 1993
---------------------------------- ------------------------------------
Direct Direct
Leveraged Finance Leveraged Finance
Leases Leases Total Leases Leases Total
----------------------------------------------------------------------------------------------------------------------------
Minimum lease payments receivable $ 852.3 $ 41.6 $ 893.9 $ 879.9 $ 736.1 $ 1,616.0
Estimated residual value 548.7 5.6 554.3 584.1 136.9 721.0
Unearned income (505.0) (18.1) (523.1) (542.8) (156.8) (699.6)
--------------------------------------------------------------------------
$ 896.0 $ 29.1 925.1 $ 921.2 $ 716.2 1,637.4
====================== ======================
Allowance for doubtful accounts - (48.9)
--------- ------------
Finance lease receivables, net $ 925.1 $ 1,588.5
========= ============
Current $ 35.8 $ 271.1
========= ============
Noncurrent $ 889.3 $ 1,317.4
========= ============
27
Minimum lease payments receivable for the leveraged leases are shown net of
principal and interest on the associated nonrecourse debt. Accumulated deferred
taxes arising from leveraged leases, which are included in deferred income
taxes, amounted to $779.5 million and $799.8 million at December 31, 1994 and
1993, respectively.
Plant, property and equipment at December 31, 1994 and 1993 includes real
estate property under operating leases, or held for lease, of $313.4 million
and $434.3 million, less accumulated depreciation of $71.0 million and $67.9
million, respectively, and equipment under operating leases of $27.5 million
and $851.7 million, less accumulated depreciation of $14.5 million and $652.4
million, respectively.
Future minimum lease payments to be received from noncancelable leases, net
of nonrecourse loan payments related to leveraged leases, for the periods shown
are as follows at December 31, 1994:
(Dollars in Millions)
-------------------------------------
Years Capital Leases Operating Leases
-------------------------------------------------------------------------------
1995 $ 19.1 $ 32.5
1996 8.4 30.5
1997 12.0 26.5
1998 17.0 21.6
1999 16.6 12.3
Thereafter 820.8 17.1
-------------------------------------
Total $ 893.9 $ 140.5
=====================================
------------------------------------
7 Leasing Arrangements as Lessee
------------------------------------
The Company has entered into both capital and operating leases for
facilities and equipment used in operations. Plant, property and equipment
included capital leases of $171.6 million and $221.2 million and related
accumulated amortization of $82.8 million and $112.7 million at December 31,
1994 and 1993, respectively. In 1994, 1993, and 1992, the Company incurred
initial capital lease obligations of $11.9 million, $13.6 million, and $15.2
million, respectively.
Total rent expense amounted to $285.5 million in 1994, $307.8 million in
1993, and $295.7 million in 1992.
At December 31, 1994, the aggregate minimum rental commitments under
noncancelable leases for the periods shown are as follows:
(Dollars in Millions)
-------------------------------------
Years Capital Leases Operating Leases
-------------------------------------------------------------------------------
1995 $ 24.5 $ 109.6
1996 24.8 104.1
1997 20.7 97.1
1998 18.1 86.7
1999 16.7 78.2
Thereafter 103.8 797.6
-------------------------------------
Total 208.6 $ 1,273.3
================
Less imputed interest
and executory costs 88.5
--------------
Present value of net
minimum lease
payments 120.1
Less current installments 11.3
--------------
Long-term obligation
at December 31, 1994 $ 108.8
==============
As of December 31, 1994, the total minimum sublease rentals to be received
in the future under noncancelable operating subleases was $89.5 million.
28
----------
8 Debt
----------
Long-Term
Long-term debt consists of the following at December 31:
(Dollars in Millions)
-------------------------------------------------------------------
Interest Rates Maturities 1994 1993
---------------------------------------------------------------------------------------------------------------------------------
Telephone subsidiaries' debentures 3.25% - 7.00% 1995-2025 $ 2,222.0 $ 1,972.0
7.125% - 7.75% 2002-2033 1,955.0 2,105.0
7.85% - 8.75% 2009-2031 1,280.0 1,480.0
-------------------------------------------------------------------
5,457.0 5,557.0
Notes payable 4.025% - 12.42% 1995-2005 1,175.7 1,733.0
Mortgage and installment notes 5.53% - 11.00% 1995-2011 18.1 33.4
Employee Stock Ownership Plan loans - senior notes 8.17% 2000 571.3 633.7
Capital lease obligations - average rate 10.6% and 10.6% 120.1 125.8
Unamortized discount and premium, net (34.1) (116.0)
--------------------------
Total long-term debt, including current maturities 7,308.1 7,966.9
Less maturing within one year 502.4 760.7
--------------------------
Total long-term debt $ 6,805.7 $ 7,206.2
==========================
Maturities of long-term debt outstanding at December 31, 1994, excluding
unamortized discount and premium and capital lease obligations, are: $491.1
million due in 1995, $303.2 million due in 1996, $279.4 million due in 1997,
$340.6 million due in 1998, $291.4 million due in 1999, and $5,516.4 million
thereafter.
Telephone subsidiaries' debentures outstanding at December 31, 1994 include
$1,822.0 million that are callable. The call prices range from 104.0% to 100.0%
of face value, depending upon the remaining term to maturity of the issue. In
addition, the telephone subsidiaries' debentures include $640.0 million that
will become redeemable for a limited period at the option of the holders between
the years 1996 and 2002. The redemption prices will be 100.0% of face value plus
accrued interest.
Notes payable include $435.0 million of retained debt instruments of
TriCon, of which $221.2 million was classified as current and $213.8 million as
noncurrent at December 31, 1994 (see Note 5).
Installment notes in the amount of $6.3 million at December 31, 1994 were
collateralized by finance lease receivables and equipment. Mortgage notes in the
amount of $11.8 million at December 31, 1994 were collateralized by land and
buildings.
Included in notes payable are medium-term notes issued by Bell Atlantic
Financial Services, Inc. (FSI), a wholly owned subsidiary that provides
financing for Bell Atlantic and certain of its subsidiaries. FSI debt securities
(aggregating $700.1 million at December 31, 1994) have the benefit of a Support
Agreement dated October 1, 1992 between Bell Atlantic and FSI, under which Bell
Atlantic has committed to make payments of interest, premium, if any, and
principal on the FSI debt in the event of FSI's failure to pay. The Support
Agreement provides that the holders of FSI debt shall not have recourse to the
stock or assets of Bell Atlantic's telephone subsidiaries. However, in addition
to dividends paid to Bell Atlantic by any of its consolidated subsidiaries,
assets of Bell Atlantic that are not subject to such exclusion are available as
recourse to holders of FSI debt. The carrying value of the available assets
reflected in the consolidated financial statements of Bell Atlantic was
approximately $5 billion at December 31, 1994.
See Note 13 for information on the Employee Stock Ownership Plan Loans.
The Company has recorded extraordinary charges associated with the early
extinguishment of debentures called by the Company's telephone subsidiaries
prior to the balance sheet date. These charges reduced net income by $6.7
million (net of an income tax benefit of $3.6 million) in 1994, $58.4 million
(net of an income tax benefit of $36.2 million) in 1993, and $41.6 million (net
of an income tax benefit of $25.2 million) in 1992.
29
Debt Maturing Within One Year
Debt maturing within one year consists of the following at December 31:
(Dollars in Millions)
--------------------------
1994 1993
------------------------------------------------------------------------
Notes payable:
Bank loans $ 666.9 $ 582.0
Commercial paper 918.3 1,334.6
Long-term debt maturing
within one year 502.4 760.7
--------------------------
Total $2,087.6 $2,677.3
==========================
Weighted average interest
rates for notes payable
outstanding at year-end 6.0% 3.5%
--------------------------
Construction of telephone plant and the operations of the Company's real
estate and cellular subsidiaries are partially financed, pending long-term
financing, through bank loans and the issuance of commercial paper payable
within 12 months.
At December 31, 1994, the Company had in excess of $1.9 billion of unused
bank lines of credit. The availability of these lines, for which there are no
formal compensating balances or commitment fee agreements, is at the discretion
of each bank.
---------------------------
9 Financial Instruments
---------------------------
Derivatives
The use of derivatives by the Company is limited to managing risk that
could endanger the financing and operating flexibility of the Company, making
cash flows more stable over the long run and achieving savings over traditional
means of financing. Derivative agreements are tied to a specific liability or
asset and hedge the related economic exposures. The use of these hedging
agreements has not had a material impact on the Company's financial condition or
results of operations. The Company does not use derivatives for speculative
purposes and has not hedged its accounting translation exposure to foreign
currency fluctuations relative to its net position in foreign subsidiaries.
Interest Rate Hedge Agreements
The Company periodically enters into interest rate hedge agreements to
reduce interest rate risks and costs inherent in its debt portfolio. These
agreements involve the exchange of fixed and variable interest rate payments
periodically over the life of the agreement without exchange of the underlying
principal amounts.
The notional amounts outstanding, maturity dates, and the weighted average
receive and pay rates of interest rate hedge agreements by type are as follows:
(Dollars in Millions)
--------------------------------------------------------------------
Weighted Average Rate
Notional ---------------------
Amount Maturities Receive Pay
---------------------------------------------------------------------------------------------------------------------------
December 31, 1994: Variable to Fixed $ 70.0 1995 to 1999 5.4% 5.6%
December 31, 1993: Variable to Fixed $ 185.0 1994 to 1999 6.6% 4.1%
---------------------------------------------------------------------------------------------------------------------------
The notional amounts are used to calculate contractual payments to be
exchanged and are not actually paid or received.
Interest rate hedge agreements have not significantly impacted the
Company's relative proportion of variable and fixed interest expense.
At December 31, 1993, interest rate hedge agreements on direct finance
lease receivable transfer agreements, which had the effect of fixing interest
rates on floating rate direct finance lease receivable transfer agreements
amounted to $414.4 million. Due to the sale of TriCon (see Note 5), the Company
no longer has interest rate hedge agreements on finance lease receivables.
30
The Company has entered into forward interest rate hedge agreements with a
notional amount of $50.3 million in connection with a specific lease. Maturities
on the forward agreements range from February to May of the year 2000.
Foreign Exchange Contracts
The Company enters into foreign exchange hedging agreements to reduce its
exposure to fluctuations in foreign exchange rates that will directly impact
cash flows.
Foreign exchange hedging agreements have generally been limited to forward
contracts to exchange the U.S. dollar for a foreign currency at some future
date, usually within 30 days. Exchange gains and losses on these contracts
substantially offset the foreign exchange gains and losses on the underlying
hedged transactions in 1994 and 1993.
At December 31, 1994, the outstanding face amounts of these contracts
totaled $27.6 million, representing commitments to sell seven foreign currencies
with no currency exceeding $16.1 million, and $5.6 million, representing
commitments to buy six foreign currencies with no currency exceeding $2.1
million. Substantially all contracts expire on or before January 27, 1995. The
gain or loss on the individual contracts at December 31, 1994 was substantially
offset by the gain or loss on the underlying hedged balances. Exposure to
foreign currency gains or losses as a result of these transactions was not
material to the Company's results of operations or financial condition.
At December 31, 1993, the outstanding face amounts of these contracts
totaled $38.0 million, representing commitments to sell ten foreign currencies
with no currency exceeding $15.8 million, and $24.2 million, representing
commitments to buy six foreign currencies with no currency exceeding $14.3
million. The gain or loss on the individual contracts at December 31, 1993 was
substantially offset by the gain or loss on the underlying hedged balances.
Exposure to foreign currency gains or losses as a result of these transactions
was not material to the Company's results of operations or financial condition.
At December 31, 1994, Bell Atlantic and its consolidated subsidiaries do
not have material cash flow exposures to foreign currency fluctuations resulting
from monetary assets and liabilities, firm commitments, or highly anticipated
cash flow exposures denominated in a currency other than the Company's
functional currency that are not hedged.
The Company's net equity position in its principal unconsolidated foreign
subsidiaries at December 31, 1994 was $1,335.7 million and $1,167.6 million at
December 31, 1993. These subsidiaries have operations primarily in New Zealand
and Mexico. The Company has not hedged its accounting translation exposure to
foreign currency fluctuations relative to this net equity position since it does
not represent actual cash flow exposure.
Certain unconsolidated foreign subsidiaries accounted for using the equity
method have net liabilities, primarily debt, denominated in a currency other
than the investees' functional currency. The Company is subject to fluctuations
in its equity income from these subsidiaries related to foreign currency gains
and losses on such net liabilities. Foreign currency losses on such net
liabilities included in equity income totaled $21.5 million for the year ended
December 31, 1994.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments,
trade receivables, certain notes receivable, interest rate hedge agreements and
forward exchange contracts.
The Company places its temporary cash investments with high-credit-quality
financial institutions and, by policy, limits the amount of credit exposure to
any one financial institution. Concentrations of credit risk with respect to
trade receivables other than those from AT&T are limited due to the large number
of customers in the Company's customer base. For the years ended December 31,
1994, 1993, and 1992, revenues generated from services provided to AT&T,
primarily network access, billing and collection, and sharing of network
facilities, were $1,352.6 million, $1,368.4 million, and $1,518.0 million,
respectively. At December 31, 1994 and 1993, Accounts receivable, net, included
$153.0 million and $162.4 million, respectively, from AT&T. At December 31,
1994, the Company had an uncollateralized note receivable from GFC of $435.0
million in connection with the disposition of TriCon (see Note 5).
Counterparties to the interest rate hedge agreements are major financial
institutions. Counterparties to the forward exchange agreements are major
international financial institutions. The Company continually monitors its
positions and the credit ratings of its counterparties, and limits the amount of
contracts with any one party. The Company believes the risk of incurring losses
related to credit risk is remote and any losses would not be material to results
of operations or financial condition. The Company also continually monitors the
performance of the underlying risks being hedged to ensure correlation with the
hedging vehicle.
31
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
Cash and Cash Equivalents, Short-Term Investments, Accounts Receivable, Accounts
Payable, Accrued Liabilities and Forward Exchange Contracts
The carrying amount approximates fair value.
Debt Maturing Within One Year and Long-Term Debt
Fair value is estimated based on the quoted market prices for the same or
similar issues or is based on the net present value of the expected future cash
flows using current interest rates.
Notes Receivable
Fair value is based on the present value of the future expected cash flows
using current interest rates or on quoted market prices for similar instruments,
if available.
Interest Rate Hedge Agreements
Fair value is the estimated amount that the Company would have to pay or
receive to terminate the hedge agreements as of December 31, 1994 and 1993,
taking into account the current interest rates and the creditworthiness of the
counterparties.
The estimated fair values of the Company's financial instruments are as
follows at December 31:
(Dollars in Millions)
------------------------------------------------------------
1994 1993
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------------------------------------------------------------------------------
Financial Instruments on the Balance Sheets:
Debt maturing within one year, excluding capital
lease obligations $ 2,076.3 $ 2,080.9 $ 2,666.5 $ 2,696.3
Long-term debt, excluding unamortized discount
and premium and capital lease obligations 6,731.0 6,161.5 7,207.2 7,512.0
Notes receivable, net 482.7 478.4 926.5 924.5
Financial Instruments with Off-Balance-Sheet Risk:
Unrealized gain (loss) on interest rate hedge agreements - 1.8 - (4.8)
------------------------------------------------------------
-------------------------------------------
10 Sale of Preferred Stock by Subsidiary
-------------------------------------------
On June 2, 1994, Bell Atlantic New Zealand Holdings, Inc. (BANZHI), a
subsidiary of the Company, issued 850,000 shares of Series A Preferred Stock at
a price per share of $100 with a dividend rate of $7.08 per share per annum,
pursuant to a private placement. The preferred stock is subject to mandatory
redemption on May 1, 2004 at a redemption price per share of $100. BANZHI and
another subsidiary of the Company indirectly own the Company's investment in
Telecom Corporation of New Zealand Limited.
32
-----------------------------
11 Shareowners' Investment
-----------------------------
Common Stock Common Stock Issuable Contri-
Shares (in Shares (in buted Reinvested
(Dollars in Millions, Except Per Share Amounts) Thousands) Amount Thousands) Amount Capital Earnings
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 433,818 $433.8 - $ - $5,327.0 $ 2,600.3
Net income 1,340.6
Dividends declared ($2.60 per share) (1,102.3)
Purchase of common stock
Common stock issued:
Employee plans (3.5)
Shareowner plans (6.8)
Acquisition agreements 337 .4 186 .2 23.0
Foreign currency translation adjustment, net
of tax benefit of $5.3
Reduction of ESOP obligations
Tax benefit of dividends paid to ESOPs 14.8
Metro Mobile CTS, Inc. premerger
acquisition activities 17.0
Other .2
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 434,155 434.2 186 .2 5,356.9 2,853.4
Net income 1,403.4
Dividends declared ($2.68 per share) (1,166.6)
Common stock issued:
Employee plans 844 .7 47.0 (8.2)
Shareowner plans 200 .2 11.6
Acquisition agreements 47 .1 (44) (.1) .6
Former Metro Mobile
CTS, Inc. shareowners 884 .9 (.9)
Foreign currency translation adjustment, net
of tax benefit of $6.3
Reduction of ESOP obligations
Tax benefit of dividends paid to ESOPs 11.6
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 436,130 436.1 142 .1 5,415.2 3,093.6
Loss (754.8)
Dividends declared ($2.76 per share) (1,203.9)
Purchase of common stock
Common stock issued:
Employee plans 230 .2 13.2 (.9)
Acquisition agreements 46 .1 (49) -
Foreign currency translation adjustment, net
of tax benefit of $.9
Reduction of ESOP obligations
Tax benefit of dividends paid to ESOPs 10.4
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 436,406 $436.4 93 $ .1 $5,428.4 $ 1,144.4
===========================================================================================================================
Foreign Deferred
Currency Treasury Stock Compen-
Translation Shares (in sation-
(Dollars in Millions, Except Per Share Amounts) Adjustment Thousands) Amount ESOPs
----------------------------------------------------------------------------------------------------
Balance at December 31, 1991 $(100.5) 3,442 $ 171.6 $721.4
Net income
Dividends declared ($2.60 per share)
Purchase of common stock 3 .1
Common stock issued:
Employee plans (1,216) (59.7)
Shareowner plans (2,043) (102.9)
Acquisition agreements
Foreign currency translation adjustment, net
of tax benefit of $5.3 (39.6)
Reduction of ESOP obligations (42.2)
Tax benefit of dividends paid to ESOPs
Metro Mobile CTS, Inc. premerger
acquisition activities
Other
----------------------------------------------------------------------------------------------------
Balance at December 31, 1992 (140.1) 186 9.1 679.2
Net income
Dividends declared ($2.68 per share)
Common stock issued:
Employee plans (66) (3.3)
Shareowner plans
Acquisition agreements (70) (3.4)
Former Metro Mobile
CTS, Inc. shareowners
Foreign currency translation adjustment, net
of tax benefit of $6.3 56.2
Reduction of ESOP obligations (44.9)
Tax benefit of dividends paid to ESOPs
----------------------------------------------------------------------------------------------------
Balance at December 31, 1993 (83.9) 50 2.4 634.3
Loss
Dividends declared ($2.76 per share)
Purchase of common stock 209 10.5
Common stock issued:
Employee plans (13) (.7)
Acquisition agreements (26) (1.2)
Foreign currency translation adjustment, net
of tax benefit of $.9 (246.9)
Reduction of ESOP obligations (48.1)
Tax benefit of dividends paid to ESOPs
----------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $(330.8) 220 $ 11.0 $586.2
====================================================================================================
Bell Atlantic Corporation is authorized to issue up to 12.5 million shares
each of Preferred and Preference stock and 1.5 billion shares of common stock.
A cellular telephone acquisition closed during 1992 requires the Company to
deliver 92,899 shares of its common stock in 1995.
In 1993, the Company issued 883,832 shares of common stock to settle
certain litigation arising from the merger in 1992 with Metro Mobile CTS, Inc.,
which was accounted for as a pooling of interests. This distribution represents
additional merger consideration to the former Metro Mobile shareholders and was
reflected as a credit to the common stock account with a corresponding charge to
contributed capital.
Pursuant to pooling-of-interests accounting, Metro Mobile CTS, Inc. 1992
premerger acquisition activities, which resulted from the acquisition of
cellular telephone properties in exchange for Metro Mobile Class B common stock,
have been accounted for as additional contributed capital.
33
Under a Shareholder Rights Plan adopted in 1989, one right is attached to
each outstanding share of common stock. When exercisable, each right entitles
the holder to purchase one one-hundredth of a share of Series A Junior
Participating Preference Stock at an exercise price of $250, subject to
adjustment. The rights become exercisable and will trade separately from the
common stock 10 days after a person or group acquires, or announces a tender
offer for, 15% or more of the Company's outstanding common stock. In the event
any person or group acquires 15% or more of the Company's common stock (except
pursuant to certain transactions previously approved by the Board of Directors),
each holder of a right other than such person or group will have the right to
receive, upon payment of the exercise price, common stock of the Company with a
market value of two times the exercise price. In the event that the Company is
acquired in a merger or other business combination, or certain events occur,
each right entitles the holder to purchase shares of common stock of the
surviving company having a market value of twice the exercise price of the
right. Until the rights become exercisable, they may be redeemed by the Company
at a price of one cent per right. The rights expire on April 10, 1999.
-------------------------
12 Stock Incentive Plans
-------------------------
Under the stock option and performance share components of the Bell
Atlantic Stock Incentive Plan, a total of 25,000,000 shares of common stock may
be distributed upon the exercise of stock options under the 1985 Incentive Stock
Option Plan (the "ISO Plan"), and as a result of awards under the Performance
Share Plan (the "Shares Plan").
Under the ISO Plan, key employees may be granted incentive stock options,
and/or nonqualified stock options, to purchase shares of Bell Atlantic's common
stock at prices not less than the fair market value of the stock on the date of
the option grant. Under the ISO Plan, certain key employees may receive reload
options upon tendering shares of Bell Atlantic stock to exercise options. In
1991 and prior years, stock appreciation rights ("SARs") were granted to certain
officers in tandem with stock options under the ISO Plan. No SARs have been
granted since 1991.
In 1994, the Bell Atlantic "Options Plus" Plan was adopted. Nonqualified
stock options were granted under that plan in 1994 to approximately 800 managers
below the rank of officer, in place of a portion of each such manager's annual
cash bonus incentive.
The Shares Plan provides for the granting of awards to certain key
employees, in the form of shares of Bell Atlantic common stock. A key employee
may receive the distributions of shares at the end of the applicable performance
measurement period or the employee may elect to defer the distribution of the
awards for one or more years. Awards are based on the total return of Bell
Atlantic stock in comparison to the total return on the stock of a number of
other telecommunications companies. Authority to make new grants under the
Shares Plan expired in December 1994. Final awards will be distributed in
January 1996.
Stock options, SARs and performance share awards under plans maintained by
Bell Atlantic and its subsidiaries are as follows:
----------------------------------------------------------
Weighted
Average Price
of Stock Performance
Stock Options SARs Options Share Awards
-------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1991 1,704,705 38,518 $ 49.01 1,428,881
Granted 993,008 - 47.04 119,026
Exercised/Distributed (117,677) - 35.00 (403,288)
Canceled (167,834) (23,116) 51.91 (142,873)
--------------------------------------------------------------------------------- --------------
Outstanding at December 31, 1992 2,412,202 15,402 48.68 1,001,746
Granted 930,219 - 53.45 91,258
Exercised/Distributed (664,753) - 47.77 (280,049)
Canceled (95,100) (2,742) 52.08 (76,576)
--------------------------------------------------------------------------------- --------------
Outstanding at December 31, 1993 2,582,568 12,660 50.50 736,379
Granted 5,474,520 - 54.72 61,999
Exercised/Distributed (177,796) - 46.86 (145,804)
Canceled (315,318) - 54.68 (23,125)
--------------------------------------------------------------------------------- --------------
Outstanding at December 31, 1994 7,563,974 12,660 53.47 629,449
================================================================================= ==============
34
At December 31, 1994, stock options to purchase 2,352,386 shares of common
stock were exercisable under the ISO Plan, and none were exercisable under
Options Plus. A total of 14,003,993 and 8,114,064 shares of common stock were
available for the granting of stock options under the ISO Plan and for
distributions of shares under the Shares Plan, as of December 31, 1994 and 1993,
respectively. There is no established limit on the number of options granted
pursuant to Options Plus. Compensation expense related to the stock incentive
plans described above amounted to $14.9 million in 1994, $18.6 million in 1993,
and $17.0 million in 1992. At December 31, 1994, employees had deferred receipt
of 288,775 shares which had previously been awarded under the Shares Plan.
-----------------------
13 Employee Benefits
-----------------------
Pension Plans
Substantially all of the Company's management and associate employees are
covered under noncontributory defined benefit pension plans. The pension benefit
formula is based on a flat dollar amount per year of service according to job
classification under the associate plan and a stated percentage of adjusted
career average earnings under the plans for management employees. The Company's
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.
Pension cost is composed of the following:
(Dollars in Millions)
---------------------------------------
Years Ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------
Benefits earned during the year $ 196.4 $ 162.7 $ 171.3
Interest on projected benefit obligation 821.1 818.9 786.8
Actual return on plan assets (27.6) (1,731.7) (514.9)
Deferral of difference between actual
and assumed returned on plan assets (817.7) 898.3 (309.6)
Net amortization (24.2) .9 (10.3)
Special termination benefits - - 45.0
---------------------------------------
Pension cost $ 148.0 $ 149.1 $ 168.3
=======================================
Pension cost as a percentage of salaries
and wages 4.5% 4.9% 5.7%
---------------------------------------
Pension cost in 1994 was substantially unchanged over 1993. Pension cost
increases resulting from assumption changes, primarily a decrease in the
discount rate from 7.75% to 7.25%, were offset by favorable asset performance in
1993 and plan changes.
The decrease in pension cost in 1993 compared to 1992 is due to the net
effect of the elimination of one-time charges associated with special
termination benefits that were recognized in the preceding year, favorable
investment experience, and changes in plan demographics due to retirement and
severance programs.
35
The following table sets forth the plans' funded status and amounts
recognized in the Company's Consolidated Balance Sheets as of December 31:
(Dollars in Millions)
------------------------
1994 1993
---------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Benefits based on service to date and present salary levels
Vested $ 7,387.2 $ 7,993.1
Nonvested 1,674.8 2,176.1
------------------------
Accumulated benefit obligation 9,062.0 10,169.2
Additional benefits related to estimated future salary levels 1,061.6 1,293.9
------------------------
Projected benefit obligation 10,123.6 11,463.1
------------------------
Fair value of plan assets 11,470.1 12,368.7
------------------------
Plan assets in excess of projected benefit obligation (1,346.5) (905.6)
Unrecognized net gain 1,818.9 1,173.5
Unamortized prior service cost 109.0 121.5
Unamortized net transition asset 192.1 211.6
Additional minimum liability for nonqualified plans 37.0 52.5
------------------------
Accrued pension obligation $ 810.5 $ 653.5
========================
Assumptions used in the actuarial computations for pension benefits are as
follows at December 31:
--------------------------
1994 1993 1992
--------------------------------------------------------------------------------
Discount rate 8.25% 7.25% 7.75%
Rate of future increases in compensation levels 5.25% 5.25% 5.25%
--------------------------
The expected long-term rate of return on plan assets was 8.25% for 1994,
1993, and 1992. The vested benefit obligation represents the actuarial present
value of vested benefits to which employees are currently entitled based on the
employees' expected dates of separation or retirement.
The Company has in the past entered into collective bargaining agreements
with the unions representing certain employees and expects to do so in the
future. Pension benefits have been included in these agreements and improvements
in benefits have been made from time to time. Additionally, the Company has
amended the benefit formula under pension plans maintained for its management
employees. Expectations with respect to future amendments to the Company's
pension plans have been reflected in determining the Company's pension cost
under Statement of Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions" (Statement No. 87). Since the projected benefit obligation, as
calculated under Statement No. 87, relies on assumptions concerning future
events, a comparison of the projected benefit obligation to the fair value of
plan assets at December 31, 1994 and 1993 may not be meaningful.
Postretirement Benefits Other Than Pensions
Substantially all of the Company's management and associate employees are
covered under postretirement health and life insurance benefit plans. The
determination of benefit cost for postretirement health benefit plans is based
on comprehensive hospital, medical, surgical, and dental benefit plan
provisions. The postretirement life insurance benefit formula used in the
determination of postretirement benefit cost is primarily based on annual basic
pay at retirement. The Company funds 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.
36
Postretirement benefit cost is composed of the following:
(Dollars in Millions)
---------------------------------
Years Ended December 31 1994 1993 1992
-------------------------------------------------------------------------------
Benefits earned during the year $ 81.6 $ 73.3 $ 64.1
Interest on accumulated postretirement
benefit obligation 298.0 302.1 266.9
Actual return on plan assets 12.4 (163.7) (57.1)
Net amortization and deferral (89.0) 102.7 (1.1)
---------------------------------
Postretirement benefit cost $ 303.0 $ 314.4 $ 272.8
=================================
Postretirement benefit cost decreased in 1994 as a result of favorable
claims and demographic experience offset, in part, by cost increases resulting
from assumption changes, primarily a decrease in the discount rate from 7.75% to
7.25%.
As a result of the 1992 collective bargaining agreements, the Company
amended the postretirement medical benefit plan for associate employees and
certain associate retirees of the network services subsidiaries. The increase in
1993 postretirement benefit cost was primarily due to the change in benefit
levels and claims experience. Also contributing to the increase were changes in
actuarial assumptions and demographic experience.
The following table sets forth the plans' funded status and the amounts
recognized in the Company's Consolidated Balance Sheets as of December 31:
(Dollars in Millions)
---------------------------
1994 1993
--------------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation attributable to:
Retirees $ 2,143.6 $ 2,513.0
Fully eligible plan participants 313.5 320.1
Other active plan participants 1,340.6 1,536.1
---------------------------
Total accumulated postretirement benefit obligation 3,797.7 4,369.2
---------------------------
Fair vlaue of plan assets 1,279.7 1,277.8
---------------------------
Accumulated postretirement benefit obligation in
excess of plan assets 2,518.0 3,091.4
Unrecognized net gain (loss) 214.7 (427.3)
Unamortized prior service cost (60.3) (72.7)
---------------------------
Accrued postretirement benefit obligation $ 2,672.4 $ 2,591.4
===========================
Total accumulated postretirement benefit
obligation by plan:
Health $ 3,367.8 $ 3,899.9
Life insurance 429.9 469.3
---------------------------
$ 3,797.7 $ 4,369.2
===========================
Fair value of plan assets by plan:
Health $ 705.6 $ 676.9
Life insurance 574.1 600.9
---------------------------
$ 1,279.7 $ 1,277.8
===========================
37
Assumptions used in the actuarial computations for postretirement benefits
are as follows at December 31:
---------------------------------
1994 1993 1992
-------------------------------------------------------------------------------------
Discount rate 8.25% 7.25% 7.75%
Rate of future increases in compensation levels 5.25 5.25 5.25
Medical cost trend rate:
Year ending 12.00 13.00 14.50
Ultimate (year 2003) 5.00 5.00 5.00
Dental cost trend rate 4.00 4.00 4.00
---------------------------------
The expected long-term rate of return on plan assets was 8.25% for 1994,
1993, and 1992. A one-percentage-point increase in the assumed health care cost
trend rates for each future year would have increased the aggregate of the
service and interest cost components of 1994 net periodic postretirement benefit
cost by $51.4 million and would have increased the accumulated postretirement
benefit obligation as of December 31, 1994 by $419.5 million.
Postretirement benefits other than pensions have been included in
collective bargaining agreements and have been modified from time to time. The
Company has periodically modified benefits under plans maintained for its
management employees. Expectations with respect to future amendments to the
Company's postretirement benefit plans have been reflected in determining the
Company's postretirement benefit cost under Statement of Financial Accounting
Standards No. 106, "Accounting for Postretirement Benefits Other Than Pensions."
Postemployment Benefits
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" (Statement No. 112). Statement No. 112 requires accrual accounting for
the estimated cost of benefits provided to former or inactive employees after
employment but before retirement. The cumulative effect at January 1, 1993 of
adopting Statement No. 112 reduced net income by $85.0 million, net of a
deferred income tax benefit of $50.6 million. The adoption of Statement No. 112
did not have a significant effect on the Company's ongoing level of operating
expense.
In the third quarter of 1994, the Company recorded a pretax charge of
$161.9 million, in accordance with Statement No. 112, to recognize benefit costs
for the separation of employees who are entitled to benefits under preexisting
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future. The Company separated approximately 400
management and associate employees in 1994 and expects to separate an additional
5,200 employees through 1997, pursuant to initiatives announced in August 1994.
The separation benefit costs associated with this workforce reduction are
included in the charge.
Savings Plans and Employee Stock Ownership Plans
The Company has established savings plans to provide opportunities for
eligible employees to save for retirement on a tax-deferred basis and encourage
employees to acquire and maintain an equity interest in the Company. Under these
plans, the Company matches a certain percentage of eligible employee
contributions with shares of the Company's common stock. Two leveraged employee
stock ownership plans (ESOPs) were established to purchase the Company's common
stock and fund the Company's matching contribution. Common stock is allocated
from the 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, 1994, the number of unallocated and allocated shares
of common stock was 9,999,125 and 7,021,123, respectively. All ESOP shares are
included in earnings per share computations.
The ESOP trusts were funded by the issuance of $790.0 million in ESOP
Senior Notes. Effective January 1, 1993, the annual interest rate on the ESOP
Senior Notes was reduced from 8.25% to 8.17%. The ESOP Senior Notes are payable
in semiannual installments, which began on January 1, 1990 and end in the year
2000. The ESOP trusts repay the notes, including interest, with funds from the
Company's contributions to the ESOP trusts, as well as dividends received on
unallocated shares of common stock and interest earned on the cash balances of
the ESOP trusts.
38
Total ESOP cost and trust activity consist of the following:
(Dollars in Millions)
----------------------------------------
Years Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------
Compensation $ 48.1 $ 45.0 $ 42.2
Interest incurred 48.0 52.9 57.7
Dividends (29.8) (33.3) (35.7)
Other trust earnings and expenses, net (.3) .1 .1
----------------------------------------
Net leveraged ESOP cost 66.0 64.7 64.3
Additional ESOP cost 7.1 .9 26.0
----------------------------------------
Total ESOP cost $ 73.1 $ 65.6 $ 90.3
========================================
Dividends received for debt service $ 44.1 $ 43.4 $ 43.4
========================================
Total company contributions to trusts $ 78.4 $ 80.3 $ 88.1
========================================
------------------
14 Income Taxes
------------------
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement No. 109).
Statement No. 109 requires the determination of deferred taxes using the asset
and liability method. Under the asset and liability method, deferred taxes are
provided on book and tax basis differences and deferred tax balances are
adjusted to reflect enacted changes in income tax rates. Prior to 1993, the
Company accounted for income taxes based on the provisions of Accounting
Principles Board Opinion No. 11.
Statement No. 109 has been adopted on a prospective basis and amounts
presented for prior years have not been restated. As of January 1, 1993, the
Company recorded a tax benefit of $65.2 million, which has been reflected in the
Consolidated Statement of Operations as the cumulative effect of a change in
accounting principle. This tax benefit is principally attributable to net
operating loss (NOL) carryforwards of the Metro Mobile CTS, Inc. (Metro Mobile)
subsidiaries that the Company expects to realize based on projections of future
taxable income.
Upon adoption of Statement No. 109, the effects of required adjustments to
deferred tax balances of the telephone subsidiaries, which would be recognized
in the future for regulatory purposes, were deferred on the balance sheet as
regulatory assets and liabilities, in accordance with Statement No. 71. At
January 1, 1993, the telephone subsidiaries recorded income tax-related
regulatory assets totaling $976.6 million in Other Assets and income tax-related
regulatory liabilities totaling $1,043.8 million in Deferred Credits and Other
Liabilities - Other. During 1993, these regulatory assets were increased by
$23.9 million and regulatory liabilities were reduced by $94.1 million for the
effect of the federal income tax rate increase from 34% to 35%, effective
January 1, 1993.
The income tax-related regulatory assets and liabilities were eliminated as
a result of the discontinued application of Statement No. 71, effective August
1, 1994 (see Note 2).
The components of income tax expense from continuing operations are as
follows:
(Dollars in Millions)
----------------------------------------
Years Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------
Current:
Federal $1,010.8 $ 814.0 $614.9
State and local 194.0 150.0 134.7
----------------------------------------
Total 1,204.8 964.0 749.6
----------------------------------------
Deferred:
Federal (278.0) (107.9) (35.5)
State and local 7.5 2.1 9.4
----------------------------------------
Total (270.5) (105.8) (26.1)
----------------------------------------
934.3 858.2 723.5
----------------------------------------
Investment tax credits (49.4) (66.2) (80.0)
----------------------------------------
Total income tax expense $ 884.9 $ 792.0 $643.5
========================================
39
In 1994, state income tax rate changes resulted in an increase to deferred
tax expense of $8.5 million. As a result of the increase in the federal
corporate income tax rate from 34% to 35%, effective January 1, 1993, the
Company recorded a net charge to the tax provision of approximately $3 million
in 1993.
The provision for income taxes varies from the amount computed by applying
the statutory federal income tax rate to income before provision for income
taxes. The difference is attributable to the following factors:
----------------------------------------
Years Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 34.0%
Investment tax credits (2.2) (2.6) (3.3)
State income taxes, net of federal tax
benefits 5.4 3.9 4.2
Benefit of rate differential applied to
reversing timing differences (1.0) (2.6) (3.3)
Reversal of previously capitalized
taxes and payroll-related construction
costs .9 1.5 .6
Other, net .6 (.4) (.4)
----------------------------------------
Effective income tax rate 38.7% 34.8% 31.8%
========================================
Significant components of deferred tax liabilities (assets) are as follows
at December 31:
(Dollars in Millions)
----------------------------------------
1994 1993
--------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 2,171.6 $ 3,817.1
Leasing activities 869.8 901.8
Other 418.9 327.7
----------------------------------------
3,460.3 5,046.6
----------------------------------------
Deferred tax assets:
Employee benefits (1,553.1) (1,384.7)
Investment tax credits (69.3) (284.9)
Net operating loss carryforwards:
Federal (105.8) (111.5)
State (22.5) (60.4)
Advance payments (51.5) (61.4)
Other (548.6) (435.2)
----------------------------------------
(2,350.8) (2,338.1)
----------------------------------------
Valuation allowance 22.4 74.8
----------------------------------------
Net deferred tax liability $ 1,131.9 $ 2,783.3
========================================
Deferred tax assets include approximately $1,083 million and $1,033 million
at December 31, 1994 and 1993, respectively, related to postretirement benefit
costs recognized in accordance with Statement No. 106. This deferred tax asset
will gradually be realized over the estimated lives of current retirees and
employees.
At December 31, 1994, NOL carryforwards for federal income tax purposes
were $302.3 million. The NOL carryforwards, which expire from 1998 to 2006,
relate principally to the Metro Mobile subsidiaries. Federal tax law restricts
the future utilization of the Metro Mobile NOL carryforwards, permitting them to
offset only the taxable income earned by the Metro Mobile subconsolidated group.
At December 31, 1994, NOL carryforwards for state income tax purposes were
$270.2 million (excluding amounts attributable to leveraged leases) and expire
from 1995 to 2009.
Based on projections of future taxable income, the Company expects to
realize future tax benefits of federal and state NOL carryforwards in the amount
of $112.2 million.
40
The valuation allowance required under Statement No. 109 primarily
represents tax benefits of certain state NOL carryforwards and other deferred
state tax assets, which may expire unutilized. During 1994, the valuation
allowance decreased $52.4 million as a result of the disposition of certain
nonregulated subsidiaries, and the write-off of state NOL's that will expire
prior to utilization.
For the year ended December 31, 1992, a deferred income tax benefit
resulted from timing differences in the recognition of revenue and expense for
financial and income tax accounting purposes. The sources of these timing
differences and the tax effects of each were as follows:
(Dollars in Millions)
---------------------
1992
--------------------------------------------------------------------------------
Leveraged lease transactions $ 58.4
Accelerated depreciation (3.4)
Direct financing and operating
lease transactions (26.5)
Alternative Minimum Tax 41.8
Employee benefits (41.8)
Other, net (54.6)
-------
Total $(26.1)
=======
---------------------------------------------------------------
15 Supplemental Cash Flow and Additional Financial Information
---------------------------------------------------------------
(Dollars in Millions)
----------------------------------------
Years Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized $ 569.1 $ 680.5 $ 797.7
Income taxes, net of amounts refunded 1,283.7 844.8 752.6
Noncash investing and financing activities:
Note receivable on sale of business 435.0 - -
Note receivable on sale of asset 39.0 - -
Acquistion of plant under capital
leases 11.9 13.6 15.2
Common stock issued for incentive plans 5.3 24.0 30.4
Common stock issued for acquisitions 1.5 4.2 15.9
Contribution of assets to joint venture 1.6 .2 8.4
ADDITIONAL FINANCIAL INFORMATION:
Interest expense incurred, net of
amounts capitalized 624.6 719.6 828.7
Capitalized interest 19.1 3.8 5.1
-------------------------------------
Interest expense incurred includes $42.5 million in 1994, $107.5 million in
1993, and $133.8 million in 1992 related to the Company's lease financing
business. Such interest expense is classified as other operating expenses.
Income taxes, as well as payroll, gross receipts, property, capital stock
and other taxes, totaled $1,758.6 million for 1994.
Included in operating expenses are amounts billed by Bell Communications
Research, Inc. (Bellcore). Such expenses for 1994, 1993, and 1992 were $99.8
million, $143.2 million, and $194.3 million, respectively, for various network
planning, engineering, and software development projects. Bellcore expenses in
1994 include reimbursements of approximately $50 million from other Bellcore
owners in connection with their decision to participate in the Advanced
Intelligent Network (AIN) project. This project previously had been supported
entirely by the Company.
During 1994, 1993, and 1992, the Company received dividends from
unconsolidated equity investees of $101.0 million, $73.4 million, and $64.4
million, respectively.
41
------------------------------
16 Joint Venture Agreements
------------------------------
Wireless Joint Ventures
In June 1994, the Company and NYNEX Corporation executed a Joint Venture
Formation Agreement, which sets forth the terms and conditions under which the
parties intend to combine their domestic cellular properties. Bell Atlantic will
own 62.35% of the joint venture company and NYNEX will own 37.65%. This joint
venture will be controlled equally by both companies. This transaction, which is
subject to regulatory approvals and various other conditions to closing, is
expected to close in mid-1995.
In October 1994, the Company, NYNEX, AirTouch Communications and U S WEST,
Inc. formed two partnerships to provide nationwide wireless communications
services. The first partnership is bidding in the Federal Communications
Commission auction for licenses to provide personal communications services
(PCS). The second partnership will develop a national brand and provide
coordination and centralization of various functions for the companies' cellular
and PCS businesses. The cellular properties of Bell Atlantic/NYNEX will not be
merged with those of AirTouch/U S WEST.
Video Services Joint Ventures
Also in October 1994, the Company, NYNEX and Pacific Telesis Group formed
two jointly-owned partnerships to deliver nationally branded home entertainment,
information and interactive services. The media company will license, acquire
and develop entertainment and information services. Creative Artists Agency,
Inc. has entered into a consulting arrangement with the media company to develop
a branding and marketing strategy and to provide assistance in acquiring
programming. The technology and integration company will provide the systems
necessary to deliver these services over the partnerships' networks. Over the
next three years, each of the partners will contribute approximately $100
million in cash or assets to the new joint ventures.
----------------------------------
17 Quarterly Financial Information
----------------------------------
(Dollars in Millions, Except Per Share Amounts)
----------------------------------------------------------------------------------------------
Income Before
Income Before Extraordinary Items
Extraordinary Items and Cumulative
and Cumulative Effect of Changes in
Operating Operating Effect of Changes in Accounting Principles
Quarter Ended Revenues Income Accounting Principles Per Common Share Net Income (Loss)
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1994:
March 31 $3,419.6 $748.8 $395.9 $.91 $ 389.2
June 30 3,430.0 797.5 415.4 .95 415.4
September 30* 3,455.3 591.0 275.7 .63 (1,874.3)
December 31 3,486.5 667.3 314.9 .72 314.9
1993:
March 31** $3,201.3 $717.5 $372.2 $.85 $ 329.2
June 30 3,259.3 752.2 385.5 .88 362.6
September 30 3,328.9 720.7 386.7 .89 378.5
December 31 3,356.1 607.2 337.2 .77 333.1
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* The loss for the third quarter of 1994 includes an extraordinary charge of
$2,150.0 million, net of an income tax benefit of $1,498.4 million, related
to the discontinuation of regulatory accounting principles by the Company's
telephone subsidiaries (see Note 2).
** Net income for the first quarter of 1993 includes a tax benefit of $65.2
million related to the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (see Note 14). In addition,
net income for the first quarter of 1993 includes a charge of $85.0 million,
net of a deferred income tax benefit of $50.6 million, related to the
adoption of Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" (see Note 13).