UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7368
BELL ATLANTIC - WASHINGTON, D.C., INC.
A New York Corporation I.R.S. Employer Identification No. 53-0046277
1710 H Street, N.W., Washington, D.C. 20006
Telephone Number (202) 392-9900
---------------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Bell Atlantic - Washington, D.C., Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Thousands)
Three months ended
March 31,
---------------------
1997 1996
-------- --------
OPERATING REVENUES (including $25,707
and $19,215 from affiliates)....................... $149,646 $137,379
-------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes....... 24,787 28,328
Depreciation and amortization...................... 38,449 33,368
Other (including $38,191 and $38,253 to affiliates) 60,879 56,231
-------- --------
124,115 117,927
-------- --------
OPERATING INCOME........................................ 25,531 19,452
OTHER EXPENSE, NET...................................... 256 94
INTEREST EXPENSE (including $653
and $878 to affiliate)............................. 4,877 4,920
-------- --------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle 20,398 14,438
PROVISION FOR INCOME TAXES.............................. 8,433 5,741
-------- --------
Income Before Cumulative Effect of Change
in Accounting Principle............................ 11,965 8,697
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax................... --- 286
-------- --------
NET INCOME.............................................. $ 11,965 $ 8,983
======== ========
REINVESTED EARNINGS
At beginning of period............................. $ 52,691 $ 3,786
Add: net income................................... 11,965 8,983
-------- --------
64,656 12,769
Deduct: other changes............................. 2,370 91
-------- --------
At end of period................................... $ 62,286 $ 12,678
======== ========
See Notes to Financial Statements.
1
Bell Atlantic - Washington, D.C., Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS
------
March 31, December 31,
1997 1996
---------- ------------
CURRENT ASSETS
Short-term investments.......................... $ 9,773 $ 8,973
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $9,220 and $11,495.. 146,758 149,777
Affiliates................................. 17,168 17,779
Material and supplies........................... 1,534 1,707
Prepaid expenses................................ 4,265 10,968
Deferred income taxes........................... 3,149 1,112
---------- ----------
182,647 190,316
---------- ----------
PLANT, PROPERTY AND EQUIPMENT................... 1,551,734 1,521,071
Less accumulated depreciation................... 771,263 731,585
---------- ----------
780,471 789,486
---------- ----------
OTHER ASSETS.................................... 7,616 13,940
---------- ----------
TOTAL ASSETS.................................... $ 970,734 $ 993,742
========== ==========
See Notes to Financial Statements.
2
Bell Atlantic - Washington, D.C., Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
March 31, December 31,
1997 1996
--------- ------------
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate...................... $ 44,907 $ 48,210
Other.......................................... 20,100 98
Accounts payable and accrued liabilities:
Affiliates..................................... 101,517 114,626
Other.......................................... 76,578 89,959
Advance billings and customer deposits.............. 10,585 9,328
--------- ---------
253,687 262,221
--------- ---------
LONG-TERM DEBT...................................... 227,737 247,735
--------- ---------
EMPLOYEE BENEFIT OBLIGATIONS........................ 140,377 146,522
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................... 30,410 28,921
Unamortized investment tax credits.................. 4,034 4,169
Other............................................... 31,686 30,966
--------- ---------
66,130 64,056
--------- ---------
SHAREOWNER'S INVESTMENT
Common stock - one share, owned by parent, at
stated value................................... 191,968 191,968
Capital surplus..................................... 28,549 28,549
Reinvested earnings................................. 62,286 52,691
--------- ---------
282,803 273,208
--------- ---------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT....... $ 970,734 $ 993,742
========= =========
See Notes to Financial Statements.
3
Bell Atlantic - Washington, D.C., Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three months ended
March 31,
----------------------
1997 1996
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... $ 35,047 $ 48,474
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments................ (800) (4,000)
Additions to plant, property and equipment.......... (34,786) (18,065)
Other, net.......................................... 5,302 684
-------- --------
Net cash used in investing activities............... (30,284) (21,381)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayment of borrowings and capital
lease obligations.............................. (15) (321)
Net change in note payable to affiliate............. (3,303) (24,139)
Net change in outstanding checks drawn
on controlled disbursement accounts............ (1,445) (2,633)
-------- --------
Net cash used in financing activities............... (4,763) (27,093)
-------- --------
NET CHANGE IN CASH.................................. --- ---
CASH, BEGINNING OF PERIOD........................... --- ---
-------- --------
CASH, END OF PERIOD................................. $ --- $ ---
======== ========
See Notes to Financial Statements.
4
Bell Atlantic - Washington, D.C., Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The Company has prepared the accompanying unaudited financial statements
based upon Securities and Exchange Commission rules that permit reduced
disclosure for interim periods. Management believes that these financial
statements reflect all adjustments which are necessary for a fair presentation
of the Company's results of operations and financial position, which consist of
only normal recurring accruals. For a more complete discussion of significant
accounting policies and certain other information, refer to the financial
statements filed with the Company's 1996 Form 10-K.
2. TRANSFER OF DIRECTORY PUBLISHING ACTIVITIES
On January 1, 1997, the Company transferred, at net book value without gain
or loss, certain assets and liabilities associated with its directory publishing
activities to a newly formed, wholly owned subsidiary. The stock of the
subsidiary was immediately distributed to Bell Atlantic. The transfer of such
assets and liabilities was completed as part of Bell Atlantic and the Company's
response to the requirements of the Telecommunications Act of 1996, which
prohibits the Company from engaging in electronic publishing or joint sales and
marketing of electronic products.
Net assets transferred by the Company totaled approximately $2,300,000, and
consisted of deferred directory production costs (included in prepaid expenses),
fixed assets, and related deferred tax liabilities.
Revenues and direct expenses related to the Company's directory publishing
activities transferred were approximately $10,000 and $1,200,000, respectively,
for the three month period ended March 31, 1996. The Company does not
separately identify indirect expenses attributable to the directory publishing
activities, including expenses related to billing and data management and
processing services, legal, external affairs, depreciation, interest expense and
any corresponding tax expense.
3. PROPOSED BELL ATLANTIC - NYNEX MERGER
Bell Atlantic Corporation (Bell Atlantic) and NYNEX Corporation announced a
proposed merger of equals under a definitive merger agreement entered into on
April 21, 1996 and amended on July 2, 1996. At special meetings held in
November 1996, stockholders of both companies approved the merger. The
completion of the merger is subject to a number of conditions, including certain
regulatory reviews, all but one of which have been completed, and receipt of
opinions that the merger will be tax free. Bell Atlantic expects to close the
merger in the second quarter of 1997.
5
Bell Atlantic - Washington, D.C., Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income of $11,965,000 for the three month period
ended March 31, 1997, compared to net income of $8,983,000 for the same period
in 1996.
Effective January 1, 1997, the Company transferred, at net book value
without gain or loss, certain assets and liabilities associated with its
directory publishing activities to a newly formed, wholly owned subsidiary. See
"Factors That May Impact Future Results - Federal Legislation - Directory
Publishing Activities" on pages 11 and 12 for further discussion of this issue.
In addition, the Company changed its method of accounting for directory
publishing revenues and expenses, effective January 1, 1996. The Company
adopted the point-of-publication method, which requires directory revenues and
expenses to be recognized upon publication rather than over the lives of the
directories. The Company recorded an after-tax increase in income of $286,000
in the first quarter of 1996, representing the cumulative effect of this
accounting change. As a result of this change, results of operations for the
first three quarters of 1996 have been restated.
Other items affecting the comparison of the Company's results of operations
for the three month periods ended March 31, 1997 and 1996 are discussed in the
following sections. This Management's Discussion and Analysis should also be
read in conjunction with the Company's 1996 Annual Report on Form 10-K.
OPERATING REVENUES
- ------------------
(Dollars in Thousands)
Three Month Period Ended March 31 1997 1996
- --------------------------------------------------------------------------------
Transport Services
Local service................................ $ 58,867 $ 61,130
Network access............................... 36,735 30,767
Toll service................................. 909 973
Ancillary Services
Directory publishing......................... 686 628
Other........................................ 26,633 20,220
Value-added Services............................. 25,816 23,661
-------- --------
Total............................................ $149,646 $137,379
======== ========
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Bell Atlantic - Washington, D.C., Inc.
TRANSPORT SERVICES OPERATING STATISTICS
- ---------------------------------------
Percentage
Increase
1997 1996 (Decrease)
- ------------------------------------------------------------------------------
At March 31
- -----------
Access Lines in Service (in thousands)
Residence................................... 291 289 0.1%
Business.................................... 596 580 2.8
Public...................................... 10 10 ---
--- ---
897 879 2.0
=== ===
Three Month Period Ended March 31
- ---------------------------------
Access Minutes of Use (in millions)
Interstate.................................. 691 703 (1.7)
=== ===
Toll Messages (in thousands)
Interstate.................................. 898 939 (4.4)
=== ===
LOCAL SERVICE REVENUES
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Three Months $(2,263) (3.7)%
- --------------------------------------------------------------------------------
Local service revenues are earned by the Company from the provision of
local exchange, local private line and public telephone (pay phone) services.
Local service revenues decreased in the first quarter of 1997 due to the
effects of rate reductions on certain local services for business customers and
lower message volumes. The decrease in message volumes reflects the impact of
storm-driven usage in the first quarter of 1996. Growth in access lines in
service of 2.0% in 1997 boosted basic local service revenues and partially
offset these decreases.
For a discussion of the Telecommunications Act of 1996, which will open the
local exchange market to competition, see "Factors That May Impact Future
Results" beginning on page 11.
NETWORK ACCESS REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Three Months $5,968 19.4%
- --------------------------------------------------------------------------------
Network access revenues are earned from long distance carriers for their
use of the Company's local exchange facilities in providing long distance
services to their customers, and from end-user subscribers. Switched access
revenues are derived from usage-based charges paid by long distance carriers for
access to the Company's network. Special access revenues arise from access
charges paid by long distance carriers and end-users who have private networks.
End-user access revenues are earned from local exchange carrier customers who
pay for access to the network.
Network access revenues increased due to expansion of the business market,
particularly for high capacity services, and the effect of price increases on
certain end-user access services beginning in July 1996. Access minutes of use
declined by 1.7% in 1997, primarily as a result of increased calling volumes
during the first quarter of 1996 caused by severe winter storms.
For a discussion of Federal Communications Commission (FCC) rulemakings
concerning access charges, price caps and universal service, see "Factors That
May Impact Future Results - Recent Developments - FCC Orders" beginning on page
12.
7
Bell Atlantic - Washington, D.C., Inc.
TOLL SERVICE REVENUES
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Three Months $(64) (6.6)%
- --------------------------------------------------------------------------------
Toll service revenues are earned primarily from calls made outside a
customer's local calling area, but within the same service area of the Company,
referred to as Local Access and Transport Areas (LATAs).
The reduction in toll service revenues in the first quarter of 1997 was
principally caused by a decline in toll message volumes of 4.4%. The decrease
in toll messages was almost entirely due to the effect of storm-driven usage
experienced in the first quarter of 1996.
DIRECTORY PUBLISHING REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Three Months $58 9.2%
- --------------------------------------------------------------------------------
As described earlier, the Company transferred certain assets and
liabilities associated with its directory publishing activities to a newly
formed, wholly owned subsidiary, effective January 1, 1997. As a result,
revenues associated with directory publishing activities transferred are no
longer earned by the Company. The Company's directory publishing revenues in
1997 are earned primarily from fees for non-publication of telephone numbers,
multiple white page listings and usage of directory listings. See "Factors That
May Impact Future Results - Federal Legislation - Directory Publishing
Activities" on pages 11 and 12 for further discussion of this issue.
The increase in directory publishing revenues in the first quarter of 1997
was primarily due to revenues received from an affiliate for the use of
directory listings.
OTHER ANCILLARY SERVICES REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Three Months $6,413 31.7%
- --------------------------------------------------------------------------------
Other ancillary services include billing and collection services provided
to long distance carriers, facilities rental services provided to affiliates and
non-affiliates, and sales of materials and supplies to affiliates.
The increase in other ancillary services revenues in the first quarter of
1997 was primarily due to higher facilities rental revenues from affiliates.
VALUE-ADDED SERVICES REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Three Months $2,155 9.1%
- --------------------------------------------------------------------------------
Value-added services represent a family of services which expand the
utilization of the network. These services include products such as voice
messaging services, Caller ID, Call Waiting, and Return Call, as well as more
mature products such as Touch-Tone and other customer premises wiring and
maintenance services.
Value-added services revenues increased in the first quarter of 1997 due to
higher revenues from customer premises wiring services, primarily for the
federal government. This increase was partially offset by a decrease in Touch-
Tone service charges in 1997. Effective in January 1997, business Touch-Tone
service charges were reduced by 50%, relative to 1996 rates, resulting in an
annual decrease of approximately $2,200,000 in value-added services revenues.
8
Bell Atlantic - Washington, D.C., Inc.
OPERATING EXPENSES
- ------------------
(Dollars in Thousands)
Three Month Period Ended March 31 1997 1996
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes.. $ 24,787 $ 28,328
Depreciation and amortization................. 38,449 33,368
Other operating expenses...................... 60,879 56,231
-------- --------
Total......................................... $124,115 $117,927
======== ========
EMPLOYEE COSTS
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Three Months $(3,541) (12.5)%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by the Company. Similar costs
incurred by employees of Bell Atlantic Network Services, Inc. (NSI), who provide
centralized services on a contract basis, are allocated to the Company and are
included in other operating expenses.
The decrease in employee costs was primarily as a result of lower benefit
costs. The reduction in benefit costs was caused by a number of factors,
including an increase in the discount rate used to develop pension and
postretirement benefit costs, favorable pension plan asset returns and lower
than expected medical claims. The Company expects the lower level of benefit
costs to continue for the remainder of 1997. The effect of lower work force
levels in the first quarter of 1997 further reduced employee costs. These cost
reductions were partially offset by annual salary and wage increases, as well as
increased overtime pay principally as a result of higher business volumes.
DEPRECIATION AND AMORTIZATION
1997-1996 Increase
- --------------------------------------------------------------------------------
Three Months $5,081 15.2%
- --------------------------------------------------------------------------------
The Company uses the composite group remaining life method to depreciate
plant assets. Under this method, the Company periodically revises depreciation
rates based on a number of factors. The composite depreciation rate was 10.3%
for the three month period ended March 31, 1997, compared to 9.7% for the same
period in 1996.
Depreciation and amortization increased in the first quarter of 1997
principally due to growth in depreciable telephone plant. The effect of higher
rates of depreciation and amortization also contributed to the increase.
OTHER OPERATING EXPENSES
1997-1996 Increase
- --------------------------------------------------------------------------------
Three Months $4,648 8.3%
- --------------------------------------------------------------------------------
Other operating expenses consist primarily of contract services including
centralized services expenses allocated from NSI, rent, network software costs,
operating taxes other than income, provision for uncollectible accounts
receivable, and other costs.
As a result of the transfer of directory publishing activities, certain
direct and allocated expenses related to the activities transferred are no
longer incurred by the Company. See "Factors That May Impact Future Results -
Federal Legislation - Directory Publishing Activities" on pages 11 and 12 for
further discussion of this issue.
The increase in other operating expenses was largely attributable to higher
costs for materials and contracted services. These increases were partially
offset by the transfer of directory publishing activities and a reduction in
write-offs of uncollectible
9
Bell Atlantic - Washington, D.C., Inc.
accounts receivable associated with the Company's billing and collection
services. The increase in other operating expenses was further offset by lower
centralized services expenses allocated from NSI. The decline in centralized
services expenses was primarily due to lower benefit costs and lower software
and systems costs, partially offset by higher rent expense and advertising
costs.
OTHER EXPENSE, NET
1997-1996 Increase
- --------------------------------------------------------------------------------
Three Months $162
- --------------------------------------------------------------------------------
The change in other expense, net, was attributable to a decrease in certain
nonoperating income in the first quarter of 1997.
INTEREST EXPENSE
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Three Months $(43) (.9)%
- --------------------------------------------------------------------------------
Interest expense decreased principally due to lower levels of average
short-term debt and lower expense related to capitalized leases in the first
quarter of 1997. These decreases were substantially offset by a reduction in
capitalized interest costs.
EFFECTIVE INCOME TAX RATES
Three Months Ended March 31
- --------------------------------------------------------------------------------
1997 41.3%
- --------------------------------------------------------------------------------
1996 39.8%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before provision for income taxes and cumulative effect of
change in accounting principle. The Company's effective income tax rate was
higher in the first quarter of 1997 principally as a result of a reduction in
the recognition of tax credits.
FINANCIAL CONDITION
- -------------------
The Company uses the net cash generated from operations and from external
financing to fund capital expenditures for network expansion and modernization.
While current liabilities exceeded current assets at both March 31, 1997 and
December 31, 1996, the Company's sources of funds, primarily from operations
and, to the extent necessary, from readily available financing arrangements with
an affiliate, are sufficient to meet ongoing operating requirements. Management
expects that presently foreseeable capital requirements will continue to be
financed primarily through internally generated funds. Additional long-term debt
may be needed to fund development activities or to maintain the Company's
capital structure to ensure financial flexibility.
As of March 31, 1997, the Company had $80,093,000 of an unused line of
credit with an affiliate, Bell Atlantic Network Funding Corporation. In
addition, the Company has $60,000,000 remaining under a shelf registration
statement filed with the Securities and Exchange Commission for the issuance of
unsecured debt securities.
The Company's debt ratio was 50.9% as of March 31, 1997, compared to 56.2%
as of March 31, 1996 and 52.0% as of December 31, 1996.
10
Bell Atlantic - Washington, D.C., Inc.
FACTORS THAT MAY IMPACT FUTURE RESULTS
- --------------------------------------
The telecommunications industry is undergoing substantial changes as a
result of the Telecommunications Act of 1996 (the Act), other public policy
changes and technological advances. These changes are likely to bring increased
competitive pressures in the Company's current business, but will also open new
markets to Bell Atlantic.
The Act became law on February 8, 1996 and replaced the Modification of
Final Judgment (MFJ). In general, the Act includes provisions that open local
exchange markets to competition and permit Bell Atlantic to provide interLATA
(long distance) services and to engage in manufacturing. However, the ability of
Bell Atlantic to engage in these new businesses, previously prohibited by the
MFJ, is largely dependent on satisfying certain conditions contained in the Act.
Among the requirements with which the Company must comply is a 14-point
"competitive checklist" which includes steps the Company must take which will
help competitors offer local service, either through resale, through the
purchase of unbundled network elements, or through their own networks. The
Company must also demonstrate to the FCC that its entry into the long distance
market would be in the public interest.
A U.S. Court of Appeals has currently stayed the effectiveness of the
uniform national pricing rules adopted by the FCC and the FCC rule that
permitted competitors to "pick and choose" isolated terms out of negotiated
interconnection agreements. Private negotiations and state arbitrations are
continuing while the stay is in effect, pending the Court's final decision.
Pursuant to the Act, the Company filed its "Statement of Generally
Available Terms and Conditions for Interconnection, Unbundled Network Elements,
Ancillary Services and Resale of Telecommunications Services" with the District
of Columbia Public Service Commission (PSC).
The Company is unable to predict definitively the impact that the Act will
have on its business, results of operations or financial condition. The
financial impact will depend on several factors, including the timing, extent
and success of competition in the Company's markets, and the timing, extent and
success of Bell Atlantic's pursuit of new business opportunities resulting from
the Act. These factors will in turn depend, in part, on the final outcome of
several FCC rulemakings and the outcome of state interconnection proceedings
(see also "Recent Developments - FCC Orders" below).
The Company anticipates that these industry changes, together with the
rapid growth, enormous size and global scope of these markets, will attract new
entrants and encourage existing competitors to broaden their offerings. Current
and potential competitors in telecommunication services include long distance
companies, other local telephone companies, cable companies, wireless service
providers, and other companies that offer network services. Some of these
companies have a strong market presence, brand recognition and existing customer
relationships, all of which contribute to intensifying competition and may
affect the Company's future revenue growth. See the "Competition" section below
for additional information.
Directory Publishing Activities
On January 1, 1997, the Company transferred, at net book value without gain
or loss, certain assets and liabilities associated with its directory publishing
activities to a newly formed, wholly owned subsidiary. The stock of the
subsidiary was immediately distributed to Bell Atlantic. The transfer of such
assets and liabilities was completed as part of Bell Atlantic and the Company's
response to the requirements of the Act, which prohibits the Company from
engaging in electronic publishing or joint sales and marketing of electronic
products.
Net assets transferred by the Company totaled approximately $2,300,000, and
consisted of deferred directory production costs (included in prepaid expenses),
fixed assets, and related deferred tax liabilities.
Revenues and direct expenses related to the Company's directory publishing
activities transferred were approximately $10,000 and $1,200,000, respectively,
for the three month period ended March 31, 1996. The Company does not
separately identify indirect expenses attributable to the directory publishing
activities, including expenses related to billing and data management and
processing services, legal, external affairs, depreciation, interest expense and
any corresponding tax expense.
Beginning in 1997, revenues from directory publishing activities
transferred will no longer be earned, and the related expenses will no longer be
incurred, by the Company. Certain other revenues, primarily fees for non-
publication of telephone numbers and multiple white page listings will continue
to be earned by the Company. Additionally, contracts between the
11
Bell Atlantic - Washington, D.C., Inc.
Company and another affiliate of Bell Atlantic for billing and collection
services related to the directory activities, use of directory listings, and
rental charges will create new revenue sources for the Company. As a result of
the transfer, past operating results are not indicative of future operating
results of the Company.
Recent Developments - FCC Orders
On May 7, 1997, the FCC adopted orders to reform the interstate access
charge system, to modify its price cap system and to implement the "universal
service" requirements of the Act. The Company is unable to assess fully the
potential impact of these new rules until the FCC releases the full text of its
access reform and price cap orders later in May. Based on the information
currently available, however, the Company does not believe that these
proceedings will result in a material adverse impact on its results of
operations or financial condition.
Access Charges
Access charges are the rates long distance carriers pay for use and
availability of the Company's facilities for the origination and termination of
interstate interLATA service. On May 7, 1997, the FCC adopted changes to the
tariff structures it has prescribed for such charges in order to permit the
Company to recover its costs through rates which reflect the manner in which
those costs are incurred. As of January 1, 1998, the FCC will require, in
general, that interstate costs of the Company which do not vary based on usage
be recovered from long distance carriers through flat rate charges, and those
interstate costs that do vary based on usage be recovered from long distance
carriers through usage based rates. In addition, the FCC will require
establishment of separate usage based charges for originating and for
terminating interstate interLATA traffic.
A portion of the Company's interstate costs are also recovered through flat
monthly charges to subscribers (subscriber line charges). Under the FCC's
order, subscriber line charges for primary residential and single line
businesses will remain unchanged, but such charges for additional residential
lines and multi-line businesses will rise.
The restructuring of access charges in January 1998 is expected to be
revenue neutral to the Company.
The FCC is expected to adopt an order later this year that would address
the conditions under which the FCC would relax or remove existing access rate
structure requirements and price cap restrictions as increased local market
competition develops. The Company is unable to predict the results of this
further proceeding.
Price Caps
The FCC also adopted modifications to its price cap rules that will affect
access rate levels. Under the current price cap rules effective through June
30, 1997, the Company's price cap index is adjusted by an inflation index (GDP-
PI) less a fixed percentage, either 4.0%, 4.7% or 5.3% as the Company may elect,
which is intended to reflect increases in productivity (Productivity Factor).
For the current period ending June 30, 1997, the Company has chosen the 5.3%
Productivity Factor.
The FCC has adopted new rules, effective July 1, 1997, that will create a
single Productivity Factor for all price cap companies of 6.5%, with no
requirements to share a portion of future interstate earnings, and will set
rates as if the higher factor had been in effect since July 1996. Any local
exchange company that earns a rate of return on its interstate services of less
than 10.25% in any calendar year will be permitted to increase its interstate
rates in the following year. The FCC also ordered elimination of recovery for
amortized costs associated with reconfiguration of the Company's network to
provide equal access to facilities for all long distance carriers.
Universal Service
The FCC also adopted rules designed to preserve "universal service" by
ensuring that local exchange service remains reasonably available to all
residential customers, including low-income customers and customers in areas
that are expensive to serve. The FCC will maintain existing levels of universal
service support for such high cost areas pending completion of further FCC
proceedings. By the end of 1997, the FCC, in conjunction with the Federal-State
Joint Board on Universal Service, will determine whether to increase the size of
the federal universal service fund for high cost areas, and how to assess the
appropriate level of federal financial support required to continue to ensure
affordable local telephone service. Any new high cost universal service support
mechanism will become effective January 1, 1999.
12
Bell Atlantic - Washington, D.C., Inc.
The FCC also adopted rules to implement the Act's requirements to provide
discounted telecommunications services to schools and libraries, beginning
January 1, 1998, and to ensure that not-for-profit rural health care providers
have access to such services at rates comparable to those charged their urban
counterparts.
All telecommunications carriers will be required to contribute funding for
these universal service programs. The federal universal service funding needs
as of January 1, 1998 will require each carrier to contribute approximately 1 to
2% of its revenues. The Company, however, will be permitted to recover its
universal service contributions through higher interstate charges to long
distance carriers and end users.
Competition
Local Exchange Services
Local exchange services have historically been subject to regulation by the
PSC. In September 1996, the D.C. Telecommunications Competition Act of 1996 was
signed into law. The legislation encourages the PSC to facilitate competitors'
entry into the Washington, D.C. telecommunications market and requires the PSC
to interpret the law in a manner consistent with the federal telecommunications
legislation. Since the third quarter of 1996, certificates to provide local
exchange services in competition with the Company have been granted by the PSC.
Other applications for certificates are currently pending.
The PSC has established a proceeding to address various local competition
issues including network unbundling, universal service and wholesale rates.
Hearings regarding these issues have been scheduled for June 1997.
Both the Telecommunications Act of 1996 and the D.C. Telecommunications
Competition Act of 1996 are expected to significantly increase the level of
competition in the Company's local exchange market.
Other State Regulatory Matters
The communications services of the Company are subject to regulation by the
PSC with respect to intrastate rates and certain other matters.
In November 1996, the PSC approved a price cap plan for intra-Washington,
D.C. services provided by the Company. The plan (1) is for four years, through
December 31, 1999; (2) divides services into three categories: basic,
discretionary, and competitive; (3) caps certain basic residential rates for the
term of the plan and allows other basic rates to change with the rate of
inflation (GDP-PI) minus 3%; (4) allows discretionary service rates to increase
by up to 15% annually; (5) eliminates price limits on competitive service rates;
(6) reduces residential rates by $3.2 million in 1996, and business rates by
$2.2 million in 1997 and $3.2 million in 1998; (7) establishes a trust fund to
finance advanced telecommunications services in the District's public schools,
libraries, and community centers; and (8) eliminates the regulation of profits.
OTHER MATTERS
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Proposed Bell Atlantic - NYNEX Merger
Bell Atlantic and NYNEX Corporation announced a proposed merger of equals
under a definitive merger agreement entered into on April 21, 1996 and amended
on July 2, 1996. In November 1996, stockholders of both companies approved the
merger. The completion of the merger is subject to a number of other conditions,
including certain regulatory reviews, all but one of which have been completed.
Bell Atlantic expects to close the merger in the second quarter of 1997.
As a result of the merger, Bell Atlantic will incur special transition and
integration costs of approximately $500 million in the first twelve months
following the completion of the merger and an additional $200 million to $400
million over the two succeeding years, in connection with completing the
transaction and integrating the operations of Bell Atlantic and NYNEX. The
transition costs consist principally of professional and registration fees,
systems modification costs, costs associated with the elimination and
consolidation of duplicate facilities, and employee severance and relocation
costs. Of these costs, the Company expects to incur a portion of a one-time
charge for employee severance costs in the quarter in which the merger is
completed. The total severance charge for Bell Atlantic is currently estimated
to be in the range of $200 million to $300 million. The amount of
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Bell Atlantic - Washington, D.C., Inc.
the charge will vary depending on a number of factors including: (i) the number
of employees that will be terminated under severance arrangements, (ii) the
timing of employee terminations, and (iii) changes, if any, to severance plan
provisions. It is anticipated that the Company will bear a portion of the
remaining transition and integration costs.
Bell Atlantic also expects to recognize recurring expense savings of
approximately $600 million annually by the third year following completion of
the merger as a result of consolidating operating systems and other
administrative functions and reducing management positions. Incremental savings
in annual capital expenditures for Bell Atlantic should grow to approximately
$250 million to $300 million, including efficiencies relating to purchasing,
marketing trials and equipment testing. It is anticipated that the Company will
recognize a portion of these savings.
Cautionary Statement Concerning Forward-Looking Statements
Information contained above with respect to the expected financial impact
of the proposed merger, and other statements in this Management's Discussion and
Analysis regarding expected future events and financial results are forward-
looking and subject to risks and uncertainties. For those statements, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
The following important factors could affect the future results of the
Company and could cause those results to differ materially from those expressed
in the forward-looking statements: (i) materially adverse changes in economic
conditions in the markets served by the Company; (ii) a significant delay in the
expected closing of the merger; (iii) the final outcome of FCC rulemakings with
respect to interconnection agreements, access charge reform, price caps and
universal service; (iv) the timing of presubscription for toll services; (v)
future state regulatory actions in the Company's operating area; and (vi) the
extent, timing and success of competition from others in the local telephone and
toll service markets.
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Bell Atlantic - Washington, D.C., Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For background concerning the Company's contingent liabilities under
the Plan of Reorganization governing the divestiture by AT&T Corp.
(formerly American Telephone and Telegraph Company) of certain assets
of the former Bell System operating companies with respect to private
actions relating to pre-divestiture events, see Item 3 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the
quarter ended March 31, 1997.
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Bell Atlantic - Washington, D.C., Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BELL ATLANTIC - WASHINGTON, D.C., INC.
Date: May 9, 1997 By /s/ Sheila D. Shears
-----------------------------
Sheila D. Shears
Controller and Treasurer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 8, 1997.
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