<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, 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 1-6393
BELL ATLANTIC - PENNSYLVANIA, INC.
A Pennsylvania Corporation I.R.S. Employer Identification No. 23-0397860
1717 Arch Street, 32nd Fl., Philadelphia, Pennsylvania 19103
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 INCOME AND ACCUMULATED DEFICIT
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $11.6, $12.8, $22.8
and $25.7 from affiliates)......................................... $ 836.7 $ 873.2 $1,661.3 $1,745.5
-------- -------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes....................... 161.6 179.8 326.1 368.5
Depreciation and amortization...................................... 167.2 169.2 331.6 337.7
Other (including $174.8, $182.1, $342.8 and
$357.4 to affiliates)......................................... 287.6 311.8 572.2 605.4
-------- -------- -------- --------
616.4 660.8 1,229.9 1,311.6
-------- -------- -------- --------
OPERATING INCOME........................................................ 220.3 212.4 431.4 433.9
OTHER INCOME AND EXPENSE, NET........................................... .5 (.8) (.4) (1.8)
INTEREST EXPENSE (including $4.1, $3.5, $7.3
and $5.7 to affiliate)............................................. 29.1 29.0 57.0 56.5
-------- -------- -------- --------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle................ 191.7 182.6 374.0 375.6
PROVISION FOR INCOME TAXES.............................................. 76.2 76.1 149.8 154.9
-------- -------- -------- --------
Income Before Cumulative Effect of Change
in Accounting Principle............................................ 115.5 106.5 224.2 220.7
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax................................... --- --- --- 49.6
-------- -------- -------- --------
NET INCOME.............................................................. $ 115.5 $ 106.5 $ 224.2 $ 270.3
======== ======== ======== ========
ACCUMULATED DEFICIT
At beginning of period............................................. $ (300.6) $ (186.3) $ (251.1) $ (211.5)
Add: net income................................................... 115.5 106.5 224.2 270.3
-------- -------- -------- --------
(185.1) (79.8) (26.9) 58.8
Deduct: dividends................................................. 102.3 138.6 236.1 276.9
other changes............................................. .9 --- 25.3 .3
-------- -------- -------- --------
At end of period................................................... $ (288.3) $ (218.4) $ (288.3) $ (218.4)
======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments....................... $ 47.7 $ 73.3
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $56.4 and $65.1.. 619.3 740.8
Affiliates.............................. 10.6 9.4
Material and supplies........................ 20.7 15.8
Prepaid expenses............................. 68.0 70.4
Deferred income taxes........................ 52.7 37.0
Other........................................ 2.8 4.7
-------- --------
821.8 951.4
-------- --------
PLANT, PROPERTY AND EQUIPMENT................ 9,608.9 9,416.8
Less accumulated depreciation................ 5,605.5 5,404.4
-------- --------
4,003.4 4,012.4
-------- --------
OTHER ASSETS................................. 54.2 56.8
-------- --------
TOTAL ASSETS................................. $4,879.4 $5,020.6
======== ========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
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,
1997 1996
-------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate ................ $ 278.2 $ 215.1
Other..................................... 176.3 176.2
Accounts payable and accrued liabilities:
Affiliates................................ 293.7 357.8
Other..................................... 456.9 524.1
Advance billings and customer deposits......... 71.8 71.5
-------- --------
1,276.9 1,344.7
-------- --------
LONG-TERM DEBT................................. 1,256.1 1,256.6
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS................... 777.3 802.4
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.......................... 76.1 82.1
Unamortized investment tax credits............. 34.5 36.9
Other.......................................... 151.4 153.6
-------- --------
262.0 272.6
-------- --------
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............................ (288.3) (251.1)
-------- --------
1,307.1 1,344.3
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $4,879.4 $5,020.6
======== ========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES........... $ 487.0 $ 449.9
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments................ 25.6 (21.5)
Additions to plant, property and equipment.......... (341.8) (207.4)
Other, net.......................................... 14.2 22.0
-------- --------
Net cash used in investing activities............... (302.0) (206.9)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital
lease obligations.............................. (.6) (35.5)
Net change in note payable to affiliate............. 63.1 60.3
Dividends paid...................................... (236.1) (276.9)
Net change in outstanding checks drawn
on controlled disbursement accounts............ (11.4) 9.1
-------- --------
Net cash used in financing activities............... (185.0) (243.0)
-------- --------
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 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. DIVIDEND
On August 1, 1997, the Company declared and paid a dividend in the amount
of $114.9 million to Bell Atlantic Corporation (Bell Atlantic).
3. 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 $24 million,
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 $143 million and $62 million,
respectively, for the six month period ended June 30, 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.
4. 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. At special meetings held in November 1996, stockholders of both
companies approved the merger. The completion of the merger is subject to the
Federal Communications Commission's approval, which is expected to be received
shortly.
5
<PAGE>
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 of $224.2 million for the six month period
ended June 30, 1997, compared to net income of $270.3 million for the same
period in 1996.
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 $24 million,
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 $143 million and $62 million,
respectively, for the six month period ended June 30, 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.
Effective January 1, 1997, revenues from directory publishing activities
transferred are no longer earned, and the related expenses are no longer
incurred, by the Company. Certain other revenues, primarily fees for non-
publication of telephone numbers and multiple white page listings continue to be
earned by the Company. Additionally, contracts between the Company and another
affiliate of Bell Atlantic for billing and collection services related to the
directory activities, use of directory listings, and rental charges have created
new revenue sources for the Company.
Cumulative Effect of Change in Accounting - Directory Publishing
- --------------------------------------------------------------------------------
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 $49.6 million in the first
quarter of 1996, representing the cumulative effect of this accounting change.
Results of operations for the first three quarters of 1996 were restated to
reflect the impact of this change.
- --------------------------------------------------------------------------------
Certain other items affecting the comparison of the Company's results of
operations for the six month periods ended June 30, 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.
6
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
<TABLE>
<CAPTION>
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Six Month Period Ended June 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Transport services
Local service.......................... $ 676.6 $ 646.8
Network access......................... 497.0 476.8
Toll service........................... 208.4 215.5
Ancillary services
Directory publishing................... 15.1 156.7
Other.................................. 70.4 73.6
Value-added services....................... 193.8 176.1
-------- --------
Total...................................... $1,661.3 $1,745.5
======== ========
</TABLE>
<TABLE>
<CAPTION>
TRANSPORT SERVICES OPERATING STATISTICS
- ---------------------------------------
Percentage
Increase
1997 1996 (Decrease)
- --------------------------------------------------------------------------------
At June 30
- ----------
<S> <C> <C> <C>
Access Lines in Service (in thousands)*
Residence.............................. 3,962 3,862 2.6%
Business............................... 2,067 1,990 3.9
Public................................. 75 76 (1.3)
------ ------
6,104 5,928 3.0
====== ======
Six Month Period Ended June 30
- ------------------------------
Access Minutes of Use (in millions)
Interstate............................. 8,280 8,181 1.2
Intrastate............................. 2,982 2,914 2.3
------ ------
11,262 11,095 1.5
====== ======
Toll Messages (in millions)
Intrastate............................. 417 420 (.7)
Interstate............................. 17 18 (5.6)
------ ------
434 438 (.9)
====== ======
</TABLE>
* 1996 reflects a restatement of access lines in service
LOCAL SERVICE REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $29.8 4.6%
- --------------------------------------------------------------------------------
Local service revenues are earned by the Company from the provision of
local exchange, local private line and public telephone (pay phone) services.
Higher usage of the Company's network facilities was the primary reason for
the increase in local service revenues in the first six months of 1997. This
growth was generated by an increase in access lines in service of 3.0% from June
30, 1996. This access line growth primarily reflects higher demand for Centrex
services and an increase in second residential lines. Higher revenues from
private line and switched data services also contributed to the revenue growth
in 1997.
7
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Local service revenues in 1997 were also higher as a result of the impact
of the Company's rate rebalancing plan, which is a revenue neutral filing that
provides for increases in certain revenue categories with offsetting decreases
in other revenue categories. A specific component of this plan, which became
effective on May 1, 1997, increased revenues from the dial-tone charge by
approximately $10 million (included in local service revenues) with a
corresponding reduction in revenues from the elimination of the Touch-Tone line
charge (included in value-added services revenues).
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 12.
NETWORK ACCESS REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $20.2 4.2%
- --------------------------------------------------------------------------------
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 in the first six months of 1997
principally due to higher customer demand as reflected by growth in access
minutes of use of 1.5% from June 30, 1996. Volume growth was boosted by the
expansion of the business market, particularly for high capacity services.
Higher end-user revenues attributable to an increase in access lines in service
also contributed to revenue growth in 1997. This volume-related growth was
partially offset by net price reductions, principally for intrastate switched
access services. Reported growth in access minutes of use and revenues was
negatively affected by increased calling volumes during the first quarter of
1996 caused by severe winter storms.
Effective July 1, 1997, the Company implemented price decreases of
approximately $58.3 million on an annual basis for interstate services, in
connection with the Federal Communications Commission's (FCC) price cap plan.
It is expected that these price decreases will be partially offset by volume
increases. For a further discussion of FCC rulemakings concerning price caps,
access charges and universal service, see "Factors That May Impact Future
Results - Recent Developments - FCC Orders" beginning on page 13.
TOLL SERVICE REVENUES
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(7.1) (3.3)%
- --------------------------------------------------------------------------------
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 a Local Access and Transport Area (LATA). Other toll services
include 800 services, Wide Area Telephone Service (WATS), and corridor services
(between LATAs in southern New Jersey and Philadelphia).
The impact of increased competition for intraLATA toll, WATS and private
line services on toll message volumes and company-initiated price reductions
both contributed to the reduction in toll service revenues in 1997. Toll message
volumes, which declined by .9% in 1997 as compared to 1996, were also negatively
affected by storm-driven usage in the first quarter of 1996. The Company's price
reductions, which included expanded toll calling plans, were implemented as part
of its response to competition.
The Company believes that competition for toll services, including the
introduction of presubscription for intraLATA toll services in the third quarter
of 1997, will continue to impact future revenue trends. See "Factors That May
Impact Future Results - Competition - IntraLATA Toll Services" on page 14 for a
further discussion of presubscription.
8
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
DIRECTORY PUBLISHING REVENUES
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(141.6) (90.4)%
- --------------------------------------------------------------------------------
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.
The decrease in directory publishing revenues in the first six months of
1997 was principally due to the transfer of directory publishing activities.
OTHER ANCILLARY SERVICES REVENUES
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(3.2) (4.3)%
- --------------------------------------------------------------------------------
The Company provides other ancillary services which include billing and
collection services for long distance carriers, facilities rental services for
affiliates and non-affiliates, and sales of materials and supplies to
affiliates.
The reduction in other ancillary services revenues in the first six months
of 1997 was principally caused by lower facilities rental revenues from
affiliates. An increase in billing and collection revenues in 1997 partially
offset this decrease in other ancillary services revenues.
VALUE-ADDED SERVICES REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $17.7 10.1%
- --------------------------------------------------------------------------------
Value-added services are 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 and customer premises wiring and maintenance services.
Revenue growth from value-added services is principally the result of
increased marketing and promotional efforts which have stimulated customer
demand and usage. Demand for these services also has been fueled by the
introduction of new and enhanced optional features. Revenues in 1997 were
reduced by the impact of the Company's rate rebalancing plan, as described
earlier.
9
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
<TABLE>
<CAPTION>
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Six Month Period Ended June 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes.. $ 326.1 $ 368.5
Depreciation and amortization................. 331.6 337.7
Other operating expenses...................... 572.2 605.4
-------- --------
Total......................................... $1,229.9 $1,311.6
======== ========
</TABLE>
EMPLOYEE COSTS
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(42.4) (11.5)%
- --------------------------------------------------------------------------------
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 due to 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 through
the third quarter of 1997. A decline in the level of employee costs incurred for
repair and maintenance activity also contributed to the expense reduction in
1997. This decline was partially due to the impact of the severe weather
experienced in the first quarter of 1996 which caused a higher level of costs to
be expensed during that period. These cost reductions were partially offset by
annual salary and wage increases and by higher overtime pay and the effect of
increased work force levels principally as a result of higher business volumes.
DEPRECIATION AND AMORTIZATION
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(6.1) (1.8)%
- --------------------------------------------------------------------------------
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 7.1% for
the six month period ended June 30, 1997 compared to 7.4% for the same period in
1996.
Depreciation and amortization decreased in the first six months of 1997
principally due to the effect of lower rates of depreciation and amortization.
This decrease was offset, in part, by growth in depreciable telephone plant.
OTHER OPERATING EXPENSES
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(33.2) (5.5)%
- --------------------------------------------------------------------------------
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.
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.
10
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
The decrease in other operating expenses was largely attributable to the
transfer of directory publishing activities and the timing of network software
purchases. These decreases were partially offset by higher costs for rent and
contract services. The decrease in other operating expenses was further offset
by higher centralized services expenses allocated from NSI. The rise in
centralized services expenses was primarily due to higher rent expense and
higher marketing and advertising costs, partially offset by lower benefit costs
and lower software and systems costs.
OTHER INCOME AND EXPENSE, NET
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $1.4
- --------------------------------------------------------------------------------
The change in other income and expense, net, was attributable to additional
interest income primarily resulting from the purchase of short-term investments
in December 1996 to prefund a trust for the payment of certain employee
benefits.
INTEREST EXPENSE
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $.5 .9%
- --------------------------------------------------------------------------------
Interest expense increased principally due to higher levels of average
short-term debt in the first six months of 1997. This increase was substantially
offset by higher capitalized interest costs resulting from higher levels of
telephone plant under construction.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30
- --------------------------------------------------------------------------------
1997 40.1%
- --------------------------------------------------------------------------------
1996 41.2%
- --------------------------------------------------------------------------------
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
lower in the first six months of 1997 principally due to prior period
adjustments recorded in 1997.
FINANCIAL CONDITION
- -------------------
The Company uses the net cash generated from operations and from external
financing to fund capital expenditures for network expansion and modernization,
and pay dividends. While current liabilities exceeded current assets at both
June 30, 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 debt may be needed to fund development activities or to maintain the
Company's capital structure to ensure financial flexibility.
The Company limits the use of interest rate hedge agreements to managing
risk that could jeopardize its financing and operating flexibility, making cash
flows more stable over the long run, and achieving savings over other means of
financing. The interest rate hedge agreements are tied to specific liabilities
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 hold derivatives for trading purposes.
The notional amounts of the Company's interest rate hedge agreements are
used to calculate contractual payments to be exchanged and are not a measure of
its credit risk or future cash requirements. Credit risk related to these
agreements is limited to
11
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
nonperformance by counterparties to the contracts. The Company manages that
credit risk by limiting its exposure to any one financial institution and by
monitoring its counterparties' credit ratings. The Company believes the risk of
loss due to nonperformance by counterparties is remote and that any losses would
not be material to its financial condition or results of operations.
As of June 30, 1997, the Company had $221.8 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 56.7% as of June 30, 1997, compared to 55.1%
as of June 30, 1996 and 55.1% as of December 31, 1996.
On August 1, 1997, the Company declared and paid a dividend in the amount
of $114.9 million to Bell Atlantic.
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 recently found that the FCC unlawfully attempted to
preempt state authority in implementing key provisions of the Act. It also found
that several particularly objectionable provisions of the FCC's rules were
inconsistent with the statutory requirements. In particular, it affirmed that
states have exclusive jurisdiction over the pricing of interconnection elements
and that the FCC could not lawfully allow competitors to "pick and choose"
isolated terms out of negotiated interconnection agreements. This decision
should not delay the advent of local competition, since, under the previous stay
of the FCC's rules, a number of interconnection agreements have been concluded
and the Pennsylvania Public Utility Commission (PUC) has adopted pricing and
other standards for local interconnection.
Pursuant to the Act, in December 1996, 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
PUC. In March 1997, the PUC permitted this filing to become effective. On July
10, 1997, the PUC voted to adopt permanent rates for all unbundled network
elements required by the Act and resolved many additional technical and
operational issues.
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.
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.
12
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
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. While there are additional decisions pending
on Universal Service and Access Reform, based on the decisions to date 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.
Price Caps
The FCC also adopted modifications to its price cap rules that affect
access rate levels. Under the FCC's price cap rules, the Company's price cap
index is adjusted annually by an inflation index (GDP-PI) less a fixed
percentage intended to reflect increases in productivity (Productivity Factor).
In the prior year, the Company's Productivity Factor was 5.3%. Effective July 1,
1997, the FCC created a single Productivity Factor for all price cap companies
of 6.5%, and eliminated requirements to share a portion of future interstate
earnings. The FCC required that rates be set as if the higher Productivity
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.
On June 30, 1997, Bell Atlantic made its Annual Access Tariff Filing of
Interstate Rates, which became effective on July 1, 1997. The rates included in
the filing resulted in annual price decreases for the Company totaling
approximately $58.3 million, of which $13.7 million is a result of one-time
adjustments which will only be in effect until July 1998.
The FCC is expected to adopt an order later this year to address the
conditions under which the FCC would relax or remove existing access rate
structure requirements and price cap restrictions as increased local market
competition develops. The Company is unable to predict the results of this
further proceeding.
Universal Service
The FCC also adopted rules designed to preserve "universal service" by
ensuring that a basket of designated services are widely available and
affordable to all customers, including low-income customers and customers in
areas that are expensive to serve. The FCC's universal service support will
approximate $1.5 billion for high cost areas pending completion of further FCC
proceedings. By the third quarter of 1998, the FCC, in conjunction with the
Federal-State Joint Board on Universal Service, will determine the methodology
for determining high cost areas for non-rural carriers, the proper amount of
federal universal service support 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.
13
<PAGE>
Bell Atlantic - Pennsylvania, 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 the Company to contribute approximately 1% to 2%
of its revenues for high cost and low income subsidies. The Company will also be
contributing about 5% for schools, libraries and not-for-profit health care. The
Company will, however, be afforded the opportunity to recover its universal
service contributions through higher interstate charges to long distance
carriers and end users.
Competition
IntraLATA Toll Services
IntraLATA toll services are calls that originate and terminate within the
same LATA, but cover a greater distance than a local call. These services are
generally regulated by the PUC rather than federal authorities. The PUC permits
other carriers to offer intrastate intraLATA toll services in the Company's
jurisdiction.
On July 31, 1997, the Company implemented presubscription as required by
the PUC. Presubscription enables customers to make intraLATA toll calls using a
competing carrier without having to dial an access code. Prior to the
implementation of presubscription, these toll calls were completed by the
Company unless the customer dialed a code to access another carrier.
Implementation of presubscription for intraLATA toll services could have a
material negative effect on toll service revenues, especially since Bell
Atlantic is not permitted to offer long distance services at this time. Bell
Atlantic expects to petition the FCC for permission to enter the in-region long
distance market in one or more states in its jurisdiction in 1997. Bell Atlantic
is unable to predict when it will receive such permission. The adverse impact on
toll service revenues is expected to be partially offset by an increase in
intraLATA access revenues.
Local Exchange Services
Local exchange services have historically been subject to regulation by the
PUC. Since 1995, applications from competitors to provide and resell 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.
Other State Regulatory Matters
The communications services of the Company are subject to regulation by the
PUC with respect to intrastate rates and services and certain other matters.
Effective January 1, 1997, the Company reduced rates by $12.9 million,
pursuant to its third annual price adjustment filing under the Company's
Alternative Regulation Plan. The rate reductions include residence local
unlimited calling ($3.9 million), business touch-tone trunks and transmitting
service ($2.7 million), and Carrier Common Line access rate ($6.3 million).
In 1996, the PUC approved, with certain modifications, the Company's plan
to rebalance and restructure rates on a revenue neutral basis. This plan
provides for increases to specific revenue categories with offsetting decreases
in other categories. The Company implemented new rates in January, May and June
1997.
14
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
OTHER MATTERS
- -------------
Proposed Bell Atlantic - NYNEX Merger
Bell Atlantic and NYNEX Corporation (NYNEX) 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 the FCC's approval, which is expected to be received
shortly. In connection with the FCC's review of the proposed merger, Bell
Atlantic and NYNEX submitted a list of commitments they will follow to assure
competition in their local exchange markets. The Company does not expect these
commitments to have a material impact on its results of operations or financial
condition.
As a result of the merger, Bell Atlantic will incur special transition and
integration costs in connection with completing the transaction and integrating
the operations of Bell Atlantic and NYNEX. It is anticipated that the Company
will bear a portion of the transition and integration costs.
Bell Atlantic also expects to recognize recurring expense savings following
completion of the merger as a result of consolidating operating systems and
other administrative functions and reducing management positions. 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 further
delay in the expected closing of the merger; (iii) the final outcome of FCC
rulemakings with respect to interconnection agreements, access charge reform and
universal service; (iv) future state regulatory actions in the Company's
operating area; and (v) the extent, timing and success of competition from
others in the local telephone and toll service markets.
15
<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, 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 June 30, 1997.
16
<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, 1997 By /s/ Edwin F. Hall
--------------------------------
Edwin F. Hall
Chief Financial Officer
and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 5, 1997.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AN THE BALANCE SHEET
AS OF JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 48
<SECURITIES> 0
<RECEIVABLES> 676
<ALLOWANCES> 56
<INVENTORY> 21
<CURRENT-ASSETS> 822
<PP&E> 9,609
<DEPRECIATION> 5,606
<TOTAL-ASSETS> 4,879
<CURRENT-LIABILITIES> 1,277
<BONDS> 1,256
0
0
<COMMON> 1,595
<OTHER-SE> (288)
<TOTAL-LIABILITY-AND-EQUITY> 4,879
<SALES> 0
<TOTAL-REVENUES> 1,661
<CGS> 0
<TOTAL-COSTS> 1,230
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> 374
<INCOME-TAX> 150
<INCOME-CONTINUING> 224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
