<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
--------------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 1-6393
BELL ATLANTIC - PENNSYLVANIA, INC.
A Pennsylvania Corporation I.R.S. Employer Identification No. 23-0397860
One Parkway, Philadelphia, Pennsylvania 19102
Telephone Number (215) 466-9900
--------------------
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
----- -----
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $12.9, $19.8, $25.6
and $39.9 from affiliates) ......................... $ 878.9 $ 861.1 $1,757.5 $1,703.3
------- ------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes........ 179.8 182.5 368.5 365.9
Depreciation and amortization....................... 169.2 167.2 337.7 332.4
Other (including $179.4, $165.9, $352.1
and $324.5 to affiliates)...................... 303.8 292.0 602.2 568.3
------- ------- -------- --------
652.8 641.7 1,308.4 1,266.6
------- ------- -------- --------
OPERATING INCOME......................................... 226.1 219.4 449.1 436.7
OTHER INCOME (EXPENSE), NET.............................. (.8) 1.5 (1.8) .9
INTEREST EXPENSE (including $3.5, $2.0, $5.7
and $2.6 to affiliate).............................. 29.0 32.2 56.5 61.2
------- ------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES................. 196.3 188.7 390.8 376.4
PROVISION FOR INCOME TAXES............................... 81.8 80.6 161.2 159.1
------- ------- -------- --------
NET INCOME............................................... $ 114.5 $ 108.1 $ 229.6 $ 217.3
======= ======= ======== ========
ACCUMULATED DEFICIT
At beginning of period.............................. $(235.0) $(194.5) $ (211.5) $ (210.6)
Add: net income.................................... 114.5 108.1 229.6 217.3
------- ------- -------- --------
(120.5) (86.4) 18.1 6.7
Deduct: dividends.................................. 138.6 110.0 276.9 203.1
other changes.............................. --- --- .3 ---
------- ------- -------- --------
At end of period.................................... $(259.1) $(196.4) $ (259.1) $ (196.4)
======= ======= ======== ========
</TABLE>
See Notes to Financial Statements.
1
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Bell Atlantic - Pennsylvania, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments............................. $ 21.5 $ ---
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $61.7 and $61.3........ 580.4 584.9
Affiliates.................................... 17.1 22.0
Material and supplies.............................. 20.1 16.1
Prepaid expenses................................... 194.2 143.9
Deferred income taxes.............................. 40.4 47.4
Other.............................................. 1.7 3.2
-------- --------
875.4 817.5
-------- --------
PLANT, PROPERTY AND EQUIPMENT...................... 9,312.5 9,274.5
Less accumulated depreciation...................... 5,334.5 5,144.5
-------- --------
3,978.0 4,130.0
-------- --------
OTHER ASSETS....................................... 44.8 67.1
-------- --------
TOTAL ASSETS....................................... $4,898.2 $5,014.6
======== ========
</TABLE>
See Notes to Financial Statements.
2
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Bell Atlantic - Pennsylvania, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Amount)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate..................... $ 257.3 $ 197.0
Other......................................... 1.2 36.1
Accounts payable and accrued liabilities:
Affiliates.................................... 296.1 274.1
Other......................................... 434.1 531.2
Advance billings and customer deposits............. 94.0 93.6
----------- ----------
1,082.7 1,132.0
----------- ----------
LONG-TERM DEBT..................................... 1,432.0 1,432.2
----------- ----------
EMPLOYEE BENEFIT OBLIGATIONS....................... 803.2 811.1
----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.............................. 47.6 73.9
Unamortized investment tax credits................. 40.2 43.6
Other.............................................. 156.2 137.9
----------- ----------
244.0 255.4
----------- ----------
SHAREOWNER'S INVESTMENT
Common stock - $20 par value per share............. 1,594.7 1,594.7
Authorized shares: 80,210,000
Outstanding shares: 79,732,681
Contributed capital................................ .7 .7
Accumulated deficit................................ (259.1) (211.5)
----------- ----------
1,336.3 1,383.9
----------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT...... $ 4,898.2 $ 5,014.6
=========== ==========
</TABLE>
See Notes to Financial Statements.
3
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Bell Atlantic - Pennsylvania, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES............ $ 449.9 $ 441.8
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments................. (21.5) (25.2)
Additions to plant, property and equipment........... (207.4) (344.5)
Other, net........................................... 22.0 3.4
------- -------
Net cash used in investing activities................ (206.9) (366.3)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital
lease obligations............................... (35.5) (.5)
Net change in note payable to affiliate.............. 60.3 141.7
Dividends paid....................................... (276.9) (203.1)
Net change in outstanding checks drawn
on controlled disbursement accounts............. 9.1 (13.6)
------- -------
Net cash used in financing activities................ (243.0) (75.5)
------- -------
NET CHANGE IN CASH................................... --- ---
CASH, BEGINNING OF PERIOD............................ --- ---
------- -------
CASH, END OF PERIOD.................................. $ --- $ ---
======= =======
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying financial statements are unaudited and have been prepared
by Bell Atlantic - Pennsylvania, Inc. (the Company) pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The December 31,
1995 balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles. In
the opinion of management, these financial statements include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the results of operations, financial position and cash flows. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
2. Dividend
On August 1, 1996, the Company declared and paid a dividend in the amount
of $119.1 million to Bell Atlantic Corporation (Bell Atlantic).
3. Reclassifications
Certain reclassifications of the prior year's data have been made to
conform to 1996 classifications.
4. Proposed Bell Atlantic - NYNEX Merger
Bell Atlantic and NYNEX Corporation have announced a proposed merger of
equals pursuant to a definitive merger agreement entered into on April 21, 1996,
and amended on July 2, 1996. Under the terms of the amended agreement, a newly-
formed subsidiary will merge with and into NYNEX, with NYNEX becoming a
subsidiary of Bell Atlantic, and each share of NYNEX common stock will be
converted into 0.768 shares of Bell Atlantic common stock. The merger, which is
expected to qualify as a pooling of interests for accounting purposes, is
subject to a number of conditions, including regulatory approvals, receipt of
opinions that the merger will be tax free, and the approval of the shareholders
of both Bell Atlantic and NYNEX. The transaction is expected to close by April
1997.
5
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Bell Atlantic - Pennsylvania, 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 for the first six months of 1996 of $229.6
million, compared to net income of $217.3 million for the same period in 1995.
Items affecting the comparison of operating results between the six month
periods ended June 30, 1996 and 1995 are discussed in the following sections.
<TABLE>
<CAPTION>
OPERATING REVENUES
- ------------------
(Dollars in Millions)
For the Six Month Period Ended June 30 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Transport Services
Local service......................... $ 646.8 $ 609.3
Network access........................ 476.8 467.6
Toll service.......................... 215.5 223.4
Ancillary Services
Directory publishing.................. 168.7 162.4
Other................................. 73.6 77.8
Value-added Services...................... 176.1 162.8
-------- --------
Total..................................... $1,757.5 $1,703.3
======== ========
<CAPTION>
TRANSPORT SERVICES OPERATING STATISTICS
- ---------------------------------------
Percentage
Increase
1996 1995 (Decrease)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
At June 30
- ----------
Access Lines in Service (In thousands)
Residence............................ 3,862 3,771 2.4%
Business............................. 1,982 1,884 5.2
Public............................... 76 77 (1.3)
------ ------
5,920 5,732 3.3
====== ======
For the Six Month Period Ended June 30
- --------------------------------------
Access Minutes of Use (In millions)
Interstate........................... 8,181 7,279 12.4
Intrastate........................... 2,914 2,403 21.3
------ ------
11,095 9,682 14.6
====== ======
Toll Messages (In millions)
Intrastate........................... 420 398 5.5
Interstate........................... 18 18 ---
------ ------
438 416 5.3
====== ======
</TABLE>
6
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Bell Atlantic - Pennsylvania, Inc.
LOCAL SERVICE REVENUES
1996-1995 Increase
- --------------------------------------------------------------------------------
Six Months $37.5 6.2%
- --------------------------------------------------------------------------------
Local service revenues are earned by the Company from the provision of
local exchange, local private line and public telephone services.
Higher network usage increased local service revenues during the first six
months of 1996. The increase in calling volumes principally resulted from growth
in the number of access lines in service, which increased 3.3% from June 30,
1995, primarily reflecting higher demand in the business market. Revenues in the
first six months of 1996 were also higher as a result of price increases
associated with the Company's revenue neutral rate change filing, which became
effective on October 9, 1995. Under this filing, the Company increased certain
local service rates by $19.5 million on an annual basis. These rate increases
are expected to be entirely offset by price reductions in toll service revenues.
NETWORK ACCESS REVENUES
1996-1995 Increase
- --------------------------------------------------------------------------------
Six Months $9.2 2.0%
- --------------------------------------------------------------------------------
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
IXCs 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 higher customer demand for access
services, as reflected by growth in access minutes of use of 14.6% over the same
period in 1995. Revenue growth from volume increases was substantially offset by
the net effect of price reductions under the Federal Communications Commission's
(FCC) Price Cap Plans, which became effective during 1995, and lower revenues
from affiliated companies pursuant to an interstate revenue sharing agreement.
It is expected that network access revenues in the second half of 1996
relative to the same period last year should be positively impacted by continued
strong volume growth and the net rate increases effective on July 20, 1996. See
also "Factors That May Impact Future Results - FCC Interim Price Cap Plan" below
for a discussion of Bell Atlantic's FCC price cap filing, which became effective
on July 20, 1996.
TOLL SERVICE REVENUES
1996-1995 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(7.9) (3.5)%
- --------------------------------------------------------------------------------
Toll service revenues are earned from calls made outside a customer's local
calling area, but within the same service area of the Company, commonly referred
to as Local Access and Transport Areas (LATAs). Other toll services include 800
services, Wide Area Telephone Service (WATS) and corridor services (between
southern New Jersey and Philadelphia).
The reduction in toll service revenues was caused by company-initiated
price reductions on certain toll services and increased competition for
intraLATA toll and WATS services. A revenue neutral rate change filing, which
became effective October 9, 1995, is expected to reduce toll service revenues by
$19.5 million annually primarily through a discount plan offering and rate
reductions on certain toll services. The impact on toll service revenues
resulting from the revenue neutral rate change filing is expected to be entirely
offset by rate increases in local service revenues. These revenue decreases were
offset, in part, by increased network usage, partially attributable to severe
winter storms in early 1996. Toll message volumes increased by 5.3% over the
first six months of 1995.
7
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
The Company expects competition for toll services to continue. See "Factors
That May Impact Future Results" below for a further discussion of toll service
revenue issues.
DIRECTORY PUBLISHING REVENUES
1996-1995 Increase
- --------------------------------------------------------------------------------
Six Months $6.3 3.9%
- --------------------------------------------------------------------------------
Directory publishing revenues are earned primarily from local advertising
and marketing services provided to businesses in White and Yellow Pages
directories. Other directory publishing services include database and foreign
directory marketing.
Growth in directory publishing revenues was principally due to higher rates
charged for these services. Advertising volumes continue to be negatively
impacted by competition from other directory companies as well as other
advertising media.
OTHER ANCILLARY SERVICES REVENUES
1996-1995 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(4.2) (5.4)%
- --------------------------------------------------------------------------------
Other ancillary services include billing and collection services provided
to IXCs, facilities rental services provided to affiliates and non-affiliates,
and sales of materials and supplies to affiliates.
Other ancillary services revenues decreased due to lower facilities rental
revenues and a reduction in billing and collection services revenues, primarily
as a result of the elimination of certain services from a contract with an IXC.
VALUE-ADDED SERVICES REVENUES
1996-1995 Increase
- --------------------------------------------------------------------------------
Six Months $13.3 8.2%
- --------------------------------------------------------------------------------
Value-added services represent a family of services which expand the
utilization of the network. These services include recent products such as voice
messaging services, Caller ID and Return Call as well as more mature products
such as Centrex, Touch-Tone, and other customer premises wiring and maintenance
services.
The increase in value-added services revenues during the first six months
of 1996 was primarily attributable to continued growth in the network customer
base and higher demand for certain central office and voice messaging services.
8
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Bell Atlantic - Pennsylvania, Inc.
<TABLE>
<CAPTION>
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
For the Six Month Period Ended June 30 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes...... $ 368.5 $ 365.9
Depreciation and amortization..................... 337.7 332.4
Other operating expenses.......................... 602.2 568.3
-------- --------
Total............................................. $1,308.4 $1,266.6
======== ========
</TABLE>
EMPLOYEE COSTS
1996-1995 Increase
- --------------------------------------------------------------------------------
Six Months $2.6 .7%
- --------------------------------------------------------------------------------
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 increase in employee costs was primarily due to annual salary and wage
increases, as well as increased overtime pay and repair and maintenance activity
principally due to higher business volumes and severe weather conditions in the
first quarter of 1996. These cost increases were substantially offset by savings
associated with lower work force levels in 1996.
DEPRECIATION AND AMORTIZATION
1996-1995 Increase
- --------------------------------------------------------------------------------
Six Months $5.3 1.6%
- --------------------------------------------------------------------------------
Depreciation and amortization increased principally due to growth in
depreciable telephone plant. The increase was partially offset by the effect of
lower depreciation rates. The composite depreciation rate was 7.3% for the first
six months of 1996, compared to 7.4% for the six month period ended June 30,
1995.
OTHER OPERATING EXPENSES
1996-1995 Increase
- --------------------------------------------------------------------------------
Six Months $33.9 6.0%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from NSI, rent, network software costs, operating
taxes other than income, the provision for uncollectible accounts receivable and
other costs.
The increase in other operating expenses was largely attributable to higher
centralized services expenses allocated from NSI. This increase was due, in
part, to higher employee costs incurred in that organization as a result of the
transfer of employees from the network operations subsidiaries to NSI in
December 1995. Additional operating costs incurred to enhance billing and
operating systems, consolidate work activities and market value-added services
also contributed to the increase in centralized services expenses during the
first six months of 1996. Other operating expenses were also higher due to
additional costs to upgrade network software and comply with the
Telecommunications Act of 1996. These increases were partially offset by a
reduction in the provision for uncollectible accounts receivable.
9
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
OTHER INCOME (EXPENSE), NET
1996-1995 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(2.7)
- --------------------------------------------------------------------------------
The change in other income (expense), net was attributable to a combination
of higher nonoperating costs and lower interest income in the first six months
of 1996.
INTEREST EXPENSE
1996-1995 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(4.7) (7.7)%
- --------------------------------------------------------------------------------
Interest expense decreased principally due to lower interest rates on
refinanced long-term debt. This decrease was partially offset by additional
interest expense resulting from higher levels of average short-term debt in the
first six months of 1996.
PROVISION FOR INCOME TAXES
1996-1995 Increase
- --------------------------------------------------------------------------------
Six Months $2.1 1.3%
- --------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATES
For the Six Months Ended June 30
- --------------------------------------------------------------------------------
1996 41.2%
- --------------------------------------------------------------------------------
1995 42.3%
- --------------------------------------------------------------------------------
The Company's effective income tax rate was lower in the first six months
of 1996 due to a reduction in the state income tax rate, which was implemented
in the second quarter of 1995.
FACTORS THAT MAY IMPACT FUTURE RESULTS
- --------------------------------------
Federal Legislation
The Telecommunications Act of 1996 (the Act) became effective on February
8, 1996 and replaces the Modification of Final Judgment (MFJ). In general, the
Act includes provisions that would open the local exchange market to competition
and would permit local exchange carriers, such as the Company, upon meeting
certain conditions, to provide interLATA services (long distance) and video
programming and to engage in manufacturing. However, the ability of the Company
to engage in businesses previously prohibited by the MFJ is largely dependent on
satisfying certain conditions contained in the Act and regulations promulgated
thereunder. The following is a brief discussion regarding certain provisions of
the Act.
With regard to the rules governing competition in the interLATA market, the
Act takes a two-fold approach. Effective February 8, 1996, Bell Atlantic's
operating telephone subsidiaries and affiliates are permitted to apply for
approval to offer interLATA services outside of the geographic region in which
they currently operate as a local exchange carrier. As of July 31, 1996, a
subsidiary of Bell Atlantic has been marketing such services in three states
outside its region and plans to offer such services in several other states. In
addition, Bell Atlantic's wireless businesses are now permitted to offer
interLATA services without having to comply with the conditions imposed in
waivers granted under the MFJ.
Secondly, within Bell Atlantic's geographic region, each of the operating
telephone subsidiaries, including the Company, must demonstrate to the FCC that
they have satisfied certain requirements in order to be permitted to offer
interLATA services within its jurisdiction. Among the requirements with which
the Company must comply is a 14-point "competitive checklist" which is aimed
10
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
at ensuring that competitors have the ability to offer competitive local
service, either through resale, the purchase of unbundled network elements, or
through their own networks. The Company must also demonstrate to the FCC that
its entry into the interLATA market would be in the public interest.
The Act also imposes specific requirements that are intended to promote
competition in the local exchange markets. These requirements (collectively
known as interconnection requirements) include the duty to: (i) provide
interconnection to any other carrier for the transmission and routing of
telephone exchange service at any technically feasible point; (ii) provide
unbundled access to network elements at any technically feasible point; (iii)
provide retail services at wholesale prices for resale; (iv) establish
reciprocal compensation arrangements for the origination and termination of
telecommunications; and (v) provide physical collocation. The specific terms
under which the carriers interconnect are to be negotiated between those
carriers.
On August 1, 1996, the FCC adopted an order establishing guidelines for
implementation of the interconnection requirements set forth in the Act. The
FCC's guidelines set the parameters for rules and regulations that state
commissions have established, or will establish, to govern interconnection
agreements that are reached through state arbitrations, when negotiations fail.
The FCC stated that it plans to issue regulations regarding universal service
obligations and access charges in a subsequent order.
No definitive prediction can be made as to the specific impact of the Act
on the business or financial condition of the Company. The financial impact on
the Company will be dependent on several factors, including the timing, extent
and success of competition in the Company's markets, the timing, extent and
success of the Company's pursuit of new business opportunities resulting from
the Act and the provisions of the regulations to be issued by the FCC.
Competition
IntraLATA Toll Services
Competition to offer intrastate intraLATA toll services is currently
permitted in the Company's jurisdiction. Increased competition from IXCs has
resulted in a decline in several components of the Company's toll service
revenues.
Currently, intraLATA toll calls are completed by the Company unless the
customer dials a five-digit access code. Presubscription for intraLATA toll
services would enable customers to make intraLATA toll calls using another
carrier without having to dial the five-digit access code.
In general, the Act prohibits a state from requiring presubscription or
"dialing parity" until the earlier of such time as an operating telephone
company in the state is authorized to provide long distance services within the
state or three years from the effective date of the Act. This prohibition does
not apply to a final order requiring an operating telephone company to implement
presubscription that was issued on or prior to December 19, 1995.
During 1995, the Pennsylvania Public Utility Commission (PUC) conducted
proceedings to determine whether, and under what conditions, to authorize
presubscription. On December 14, 1995, the PUC issued an order directing the
implementation of presubscription within eighteen months of that order. However,
the order stated that a reasonable effort should be made to coordinate
implementation of presubscription with the Company's entry into the interLATA
market in Pennsylvania.
Implementation of presubscription for intraLATA toll services could have a
material negative impact on toll service revenues, especially if the Company is
not permitted contemporaneously to offer interLATA services. The ability to
offset the impact of presubscription will depend, in part, upon how quickly the
Company meets the requirements of the "competitive checklist."
Local Exchange Services
The ability to offer local exchange services has historically been subject
to regulation by the PUC. Since 1995, five applications from competitors to
provide local exchange services have been approved by the PUC. The Act is
expected to significantly increase the level of competition in the Company's
local exchange market. However, increased competition in the local exchange
market will facilitate FCC approval of the Company's entry into the interLATA
markets.
FCC Interim Price Cap Plan
As required by the FCC's Interim Price Cap Plan, Bell Atlantic filed its
Annual Access Tariff Filing of Interstate Rates on April 2, 1996 and amended the
filing on June 27, 1996. In the filing, Bell Atlantic selected the 5.3%
Productivity Factor for the July 1996 to June 1997 tariff period.
11
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Companies selecting the 5.3% Productivity Factor are not required to share
earnings in excess of allowed rates of return. The reduction in the price cap
index resulting from the 5.3% Productivity Factor was more than offset by the
reversal of prior year exogenous rate reductions and the FCC's partial annulment
of ratemaking requirements related to the Company's adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The rates included in the June 27,
1996 filing resulted in actual price increases for the Company totaling
approximately $6 million on an annual basis, which became effective on July 20,
1996.
In 1995, Bell Atlantic filed an appeal with the Court of Appeals for the
D.C. Circuit for review of the FCC's Interim Price Cap Plan. On March 29, 1996,
the U.S. Court of Appeals denied Bell Atlantic's petition.
Before the 1997 Annual Access Tariff Filing, Bell Atlantic expects the FCC
to replace the Interim Price Cap Plan for interstate access charges with a
revised price cap plan.
OTHER MATTERS
- -------------
Environmental Issues
The Company is subject to a number of environmental proceedings as a result
of its operations and the shared liability provisions in the Plan of
Reorganization related to the MFJ. Certain of these environmental matters relate
to Superfund sites for which the Company has been designated as a potentially
responsible party by the U.S. Environmental Protection Agency or joined as a
third-party defendant in pending Superfund litigation. Such designation or
joinder subjects the Company to potential liability for costs relating to
cleanup of the affected sites. The Company is also responsible for the
remediation of sites with underground fuel storage tanks and other expenses
associated with environmental compliance.
The Company continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. The Company's recorded liabilities reflect those
specific situations 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.
Proposed Bell Atlantic - NYNEX Merger
Bell Atlantic and NYNEX Corporation have announced a proposed merger of
equals pursuant to a definitive merger agreement entered into on April 21, 1996,
and amended on July 2, 1996. Under the terms of the amended agreement, a newly-
formed subsidiary will merge with and into NYNEX, with NYNEX becoming a
subsidiary of Bell Atlantic, and each share of NYNEX common stock will be
converted into 0.768 shares of Bell Atlantic common stock. The merger, which is
expected to qualify as a pooling of interests for accounting purposes, is
subject to a number of conditions, including regulatory approvals, receipt of
opinions that the merger will be tax free, and the approval of the shareholders
of both Bell Atlantic and NYNEX. The transaction is expected to close by April
1997.
FINANCIAL CONDITION
- -------------------
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements, including network
expansion and modernization and the payment of dividends. Management expects
that presently foreseeable capital requirements will be financed primarily
through internally generated funds. Additional long-term debt may be needed to
fund development activities and to maintain the Company's capital structure
within management's guidelines.
As of June 30, 1996, the Company had $141.3 million of an unused line of
credit with an affiliate, Bell Atlantic Network Funding Corporation. In
addition, the Company had $300.0 million 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 55.9% at June 30, 1996, compared to 54.6% at
December 31, 1995.
On August 1, 1996, the Company declared and paid a dividend in the amount
of $119.1 million to Bell Atlantic Corporation.
12
<PAGE>
Bell Atlantic - Pennsylvania, 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, including pending
antitrust cases, see Item 3 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) Report on Form 8-K filed during the quarter ended June 30, 1996:
A Current Report on Form 8-K, dated April 21, 1996, was filed
regarding (i) the Agreement and Plan of Merger, dated as of April
21, 1996, by and among Bell Atlantic Corporation, NYNEX
Corporation and Seaboard Merger Company, and (ii) the Joint Press
Release, dated April 22, 1996, issued by Bell Atlantic
Corporation and NYNEX Corporation.
13
<PAGE>
Bell Atlantic - Pennsylvania, 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 - PENNSYLVANIA, INC.
Date: August 8, 1996 By /s/ William C. Tomlinson
--------------------------------
William C. Tomlinson
Chief Financial Officer
and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 5, 1996.
14
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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SHEET AS OF JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
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