<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, 1994
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 1-3488
BELL ATLANTIC - NEW JERSEY, INC.
A New Jersey Corporation I.R.S. Employer Identification No. 22-1151770
540 Broad Street, Newark, New Jersey 07101
Telephone Number (201) 649-9900
----------------
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 - New Jersey, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service........................ $295.5 $280.9 $ 577.9 $ 555.1
Network access....................... 220.8 210.8 443.6 423.1
Toll service......................... 190.5 179.6 383.0 360.5
Directory advertising, billing
services and other (including
$15.4, $12.1, $30.2 and $24.5
from affiliates).................... 147.3 144.3 292.7 287.9
Provision for uncollectibles......... (12.1) (12.0) (31.1) (25.1)
------ ------ -------- --------
842.0 803.6 1,666.1 1,601.5
------ ------ -------- --------
OPERATING EXPENSES
Employee costs, including benefits
and taxes........................... 196.7 187.7 395.8 374.7
Depreciation and amortization........ 153.8 142.2 304.2 275.6
Taxes other than income.............. 47.5 46.4 94.9 92.6
Other (including $137.2, $122.0,
$269.4 and $246.3 to affiliates).... 217.8 202.9 435.5 429.5
------ ------ -------- --------
615.8 579.2 1,230.4 1,172.4
------ ------ -------- --------
NET OPERATING REVENUES................. 226.2 224.4 435.7 429.1
------ ------ -------- --------
FEDERAL OPERATING INCOME TAXES......... 65.5 61.3 122.9 117.8
------ ------ -------- --------
OPERATING INCOME....................... 160.7 163.1 312.8 311.3
------ ------ -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction................. 3.6 3.0 7.1 6.0
Miscellaneous - net.................. (1.3) 8.1 (2.9) 7.1
------ ------ -------- --------
2.3 11.1 4.2 13.1
------ ------ -------- --------
INTEREST EXPENSE (including $1.7,
$1.2, $2.5 and $1.5 to affiliate)..... 25.6 30.5 52.5 57.7
------ ------ -------- --------
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE............... 137.4 143.7 264.5 266.7
EXTRAORDINARY ITEM
Early Extinguishment of Debt,
Net of Tax.......................... --- --- (6.7) (3.8)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Postemployment Benefits, Net of Tax --- --- --- (30.0)
------ ------ -------- --------
NET INCOME............................. $137.4 $143.7 $ 257.8 $ 232.9
====== ====== ======== ========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - New Jersey, Inc.
STATEMENTS OF INCOME AND REINVESTED EARNINGS (Continued)
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1994 1993 1994 1993
-------- -------- -------- -------
<S> <C> <C> <C> <C>
REINVESTED EARNINGS
At beginning of period.. $778.8 $734.2 $ 750.1 $739.4
Add: net income......... 137.4 143.7 257.8 232.9
------ ------ -------- ------
916.2 877.9 1,007.9 972.3
Deduct: dividends....... 105.0 112.2 196.7 206.6
------ ------ -------- ------
At end of period........ $811.2 $765.7 $ 811.2 $765.7
====== ====== ======== ======
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - New Jersey, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Note from affiliate............................ $ --- $ 9.4
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $37.9 and $57.7........... 586.4 562.3
Parent and affiliates........................ 26.8 24.8
Other........................................ 23.5 24.9
Material and supplies.......................... 16.0 17.1
Prepaid expenses............................... 219.0 137.2
Deferred income taxes.......................... 31.2 9.9
Other.......................................... 12.5 12.4
-------- --------
915.4 798.0
-------- --------
PLANT, PROPERTY AND EQUIPMENT.................... 8,567.6 8,378.1
Less accumulated depreciation.................. 3,554.6 3,295.3
-------- --------
5,013.0 5,082.8
-------- --------
OTHER ASSETS..................................... 174.8 168.4
-------- --------
TOTAL ASSETS..................................... $6,103.2 $6,049.2
======== ========
</TABLE>
See Notes to Financial Statements.
-3-
<PAGE>
Bell Atlantic - New Jersey, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Affiliate................................... $ 137.6 $ ---
Other....................................... 3.6 103.8
Accounts payable:
Parent and affiliates....................... 208.8 194.3
Other....................................... 263.0 354.5
Accrued expenses:
Taxes....................................... 64.0 27.0
Other....................................... 115.5 133.9
Advance billings and customer deposits....... 152.5 155.6
-------- --------
945.0 969.1
-------- --------
LONG-TERM DEBT................................. 1,294.9 1,294.7
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS................... 759.5 744.5
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 379.6 380.0
Unamortized investment tax credits........... 114.9 125.1
Other........................................ 416.9 404.5
-------- --------
911.4 909.6
-------- --------
SHAREOWNER'S INVESTMENT
Common stock, one share, without par value,
owned by parent............................. 1,381.2 1,381.2
Reinvested earnings.......................... 811.2 750.1
-------- --------
2,192.4 2,131.3
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $6,103.2 $6,049.2
======== ========
</TABLE>
See Notes to Financial Statements.
-4-
<PAGE>
Bell Atlantic - New Jersey, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1994 1993
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ $ 412.8 $ 492.8
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment.... (227.8) (229.6)
Net change in note receivable from affiliate.. 9.4 ---
Other, net.................................... 1.2 (5.3)
------ ------
Net cash used in investing activities........... (217.2) (234.9)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings...................... 249.5 99.1
Principal repayments of borrowings and
capital lease obligations.................... (1.9) (36.5)
Early extinguishment of debt and related
call premium................................. (362.0) (104.6)
Net change in note payable to affiliate....... 137.5 85.7
Dividends paid................................ (196.7) (206.6)
Net change in outstanding checks drawn
on controlled disbursement accounts.......... (22.0) (90.6)
------ ------
Net cash used in financing activities........... (195.6) (253.5)
------ ------
NET CHANGE IN CASH ............................. --- 4.4
CASH, BEGINNING OF PERIOD ...................... --- ---
------- -------
CASH, END OF PERIOD ............................ $ --- $ 4.4
======= =======
</TABLE>
See Notes to Financial Statements.
-5-
<PAGE>
Bell Atlantic - New Jersey, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying financial statements are unaudited and have been prepared
by Bell Atlantic - New Jersey, Inc. (formerly New Jersey Bell Telephone Company)
(the Company) pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). The December 31, 1993 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, 1993.
(2) Dividend
On August 1, 1994, the Company declared and paid a dividend in the amount of
$133.0 million to Bell Atlantic Corporation.
(3) Long-Term Debt
On February 14, 1994, the Company sold $250.0 million of Ten Year 5 7/8%
Debentures, due February 1, 2004, through a public offering. The debentures are
not redeemable by the Company prior to maturity. The net proceeds from this
issuance were used on March 2, 1994, to redeem $150.0 million of Forty Year 7
3/4% Debentures due in 2013, and $100.0 million of Forty Year 8% Debentures due
in 2016. The Company redeemed the $150.0 million 7 3/4% debentures at a call
price of 102.8% of the principal amount, plus accrued interest from March 1,
1994, and the $100.0 million 8% debentures at a call price of 104.1% of the
principal amount, plus accrued interest from September 15, 1993. As a result of
the early extinguishment of these debentures, which were called on January 31,
1994, the Company recorded a charge of $10.3 million, before an income tax
benefit of $3.6 million, in the first quarter of 1994.
(4) Subsequent Events
Discontinued Application of Statement No. 71
--------------------------------------------
The Company has historically accounted for the economic effects of
regulation in accordance with the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (Statement No. 71). Under Statement No. 71, as a result of actions
of regulators, the Company has depreciated telephone plant using lives
prescribed by regulators and deferred certain costs or recognized certain
liabilities (regulatory assets and liabilities).
On August 15, 1994, the Company's parent, Bell Atlantic Corporation (Bell
Atlantic), announced that it has determined that it is no longer eligible for
continued application of the accounting required by Statement No. 71. The
Company believes that the convergence of competition, technological change
(including the Company's recent technology deployment plans), recent and
potential regulatory, legislative and judicial actions and other factors will
create fully open and competitive markets. In such markets, the Company
believes it can no longer be assured that prices can be maintained at levels
that will recover the net carrying amount of existing telephone plant and
equipment, which has been depreciated over relatively long regulator-prescribed
lives.
The discontinued application of Statement No. 71 requires the Company, for
financial reporting purposes, to eliminate its regulatory assets and liabilities
and adjust the carrying amount of its telephone plant to the extent that it
determines that such amounts either are overstated as a result of the regulatory
process, or are not
-6-
<PAGE>
Bell Atlantic - New Jersey, Inc.
recoverable. Accordingly, as of August 1, 1994, the Company will recognize a
non-cash, after-tax extraordinary charge of approximately $574 million to adjust
the net carrying amount of telephone plant and equipment and an after-tax
extraordinary charge of approximately $16 million to eliminate net regulatory
assets. The adjustment to the net carrying amount of telephone plant and
equipment will increase the reserve for accumulated depreciation by
approximately $946 million. The Company's accounting and reporting for
regulatory purposes are not affected by the discontinued application of
Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter than those in effect under current regulation. The shorter
estimated asset lives result from the Company's current expectations as to the
revenue-producing lives of the assets. A comparison of the current regulatory
asset lives and the associated shorter estimated asset lives for the most
significantly impacted categories of plant and equipment follows:
<TABLE>
<CAPTION>
Average Lives (in years)
------------------------
Regulatory Estimated
Asset Lives Asset Lives
----------- -----------
<S> <C> <C>
Digital Switch 17.5 - 19 12
Digital Circuit 13 9
Conduit 60 50
Copper Cable 22 - 30 16 - 17
Fiber Cable 25 - 30 20 - 25
</TABLE>
Employee Benefits
-----------------
On August 15, 1994, Bell Atlantic also announced that it will record a
charge in the third quarter of 1994, as required by Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" (Statement No. 112), to recognize the benefit costs for the separation
of employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce reductions
will be made possible by improved provisioning systems and customer service
processes, increased spans of control, and consolidation and centralization of
administrative and staff groups. The Company will record a pretax charge of
between $40 million and $50 million to recognize its share of the benefit costs
under the separation pay plans.
(5) Restatement of 1993 Financial Statements
Results of operations for the six months ended June 30, 1993 were restated
in the fourth quarter of 1993 to reflect the cumulative effect of the adoption
of Statement No. 112, effective January 1, 1993.
(6) Reclassifications - Statements of Cash Flows
Certain amounts included in Net Cash Provided by Operating Activities and
Cash Flows from Investing Activities in the Statement of Cash Flows for the six
months ended June 30, 1993 have been reclassified to conform to the current
year's classifications.
-7-
<PAGE>
Bell Atlantic - New Jersey, Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
At June 30,
---------------------
1994 1993
---------- ----------
<S> <C> <C>
Network Access Lines in Service:
Residence.............................. 3,477 3,401
Business............................... 1,676 1,606
Public................................. 95 94
----- -----
5,248 5,101
===== =====
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1994 1993
---------- ----------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate............................. 8,723,873 8,134,145
Intrastate............................. 1,866,984 1,723,411
---------- ---------
10,590,857 9,857,556
========== =========
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1994 1993
---------- ----------
<S> <C> <C>
Toll Messages:
Message Telecommunication Services..... 909,681 863,199
Optional Calling Plans................. 91,638 79,693
Unidirectional Long-Distance Services.. 126,712 126,159
* Corridor............................... 36,383 33,236
--------- ---------
1,164,414 1,102,287
========= =========
</TABLE>
* Corridor messages for the six months ended June 30, 1993 have been
restated to conform to 1994 presentation.
-8-
<PAGE>
Bell Atlantic - New Jersey, 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
Net income for the six months ended June 30, 1994 increased $24.9 million or
10.7% from the corresponding period last year. Results for 1994 reflect a $6.7
million extraordinary charge, net of tax, for the early extinguishment of debt.
Results for 1993 reflect an after-tax charge of $30.0 million for the adoption
of Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" and a $3.8 million extraordinary charge, net of
tax, for the early extinguishment of debt.
OPERATING REVENUES
Operating revenues for the six months ended June 30, 1994 increased $64.6
million or 4.0% from the corresponding period last year. The increase in total
operating revenues was comprised of the following:
<TABLE>
<CAPTION>
(Dollars in Millions)
---------------------
<S> <C>
Local service ......................... $22.8
Network access ........................ 20.5
Toll service .......................... 22.5
Directory advertising, billing
services and other ................... 4.8
Less: Provision for uncollectibles.... 6.0
-----
$64.6
=====
</TABLE>
Local service revenues are earned from the provision of local exchange,
local private line, and public telephone services. Local service revenues
increased $22.8 million or 4.1% compared to the same period in 1993. The
increase resulted primarily from growth in network access lines and higher
demand for value-added central office services such as Custom Calling and Caller
ID. Access lines in service at June 30, 1994 increased 2.9% from June 30, 1993
(see Selected Operating Data on page 8).
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
revenues are derived from usage-based charges paid by IXCs for access to the
Company's network. Special access revenues arise from access charges paid by
customers who have private lines, and end-user access revenues are earned from
local exchange carrier customers who pay for access to the network.
Network access revenues increased $20.5 million or 4.8% compared to the same
period in 1993. Access minutes of use were 7.4% higher than the first six
months of 1993 (see Selected Operating Data on page 8), due to the effects of a
recovering economy and inclement weather conditions in the region during the
first quarter of 1994. The increase in network access revenues is due to
customer demand as reflected by growth in access minutes of use, as well as
increased access lines in service. In addition to volume growth, network access
revenues increased due to lower support payments to the National Exchange
Carrier Association (NECA) interstate common line pool and increased revenues
recognized through an interstate revenue sharing arrangement with affiliated
companies. Network access revenue increases were offset in part by the effect
of an interstate rate reduction filed by the Company with the Federal
Communications Commission (FCC), which became effective on July 2, 1993. In its
April 1, 1994 tariff filing, the Company filed revised rates which became
effective July 1, 1994. These revised rates, net of lower support obligations
to the NECA interstate common line pool, are not expected to significantly
change current levels of interstate access revenues.
Toll service revenues are earned from interexchange usage services such as
Message Telecommunication Services (MTS), including optional calling plans,
Unidirectional Services (Wide Area Toll Service (WATS) and 800 services),
Corridor Services between
-9-
<PAGE>
Bell Atlantic - New Jersey, Inc.
northern New Jersey and New York City and southern New Jersey and southeastern
Pennsylvania, and private line services. Toll service revenues increased $22.5
million or 6.2%, compared to the same period in 1993. Total toll message
volumes were 5.6% higher than the first six months of 1993 due to the effects of
a recovering economy and harsh weather conditions during the first quarter of
1994 (see Selected Operating Data on page 8). Volume-driven growth in MTS,
Unidirectional and Corridor services were slightly offset by a decline in
revenues from private line services, principally due to competitive pressures.
Directory advertising, billing services and other revenues include amounts
earned from directory advertising, billing and collection services provided to
IXCs, premises services such as inside wire installation and maintenance,
intraLATA toll compensation from IXCs, rent of Company facilities by affiliates
and non-affiliates, and certain nonregulated enhanced network services.
Directory advertising, billing services and other revenues increased $4.8
million or 1.7% compared to the same period in 1993, principally due to the
effect of a change in customer billing which resulted in accelerated revenue
recognition in the current period, and higher yellow page directory advertising.
Higher volumes for premises services and voice messaging services, primarily
Answer Call, also increased revenues. These revenue increases were partially
offset by a decrease in intraLATA toll compensation due to the effects of
favorable claim adjustments recorded in 1993 and the elimination of certain
services in 1994 from compensation arrangements under a new agreement with IXCs.
Billing and collection revenues also decreased, compared with the first six
months of 1993.
The provision for uncollectibles, expressed as a percentage of total
operating revenues, was 1.8% in the first six months of 1994 and 1.5% for the
same period last year. The increase over the corresponding period last year
includes a $9.9 million charge in the first quarter of 1994 related to prior
year fraudulent calling card toll calls made through IXCs. This increase was
partially offset by the effect of a reserve adjustment recorded in the first
quarter of 1993.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1994 increased $58.0
million or 4.9% from the corresponding period last year. The increase in total
operating expenses was comprised of the following:
<TABLE>
<CAPTION>
(Dollars in Millions)
---------------------
<S> <C>
Employee costs ....................... $21.1
Depreciation and amortization ........ 28.6
Other ................................ 8.3
-----
$58.0
=====
</TABLE>
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. Employee costs increased $21.1 million or
5.6% compared to the same period in 1993 due to a combination of salary and wage
increases and increased overtime. Higher repair and maintenance activity
experienced in the first quarter of 1994 caused by unusually severe winter
conditions throughout the region contributed to the increase in employee costs.
On August 15, 1994, the Company's parent, Bell Atlantic Corporation,
announced that it will record a charge in the third quarter of 1994, as required
by Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits," to recognize the benefit costs for the separation
of employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce reductions
will be made possible by improved provisioning systems and
-10-
<PAGE>
Bell Atlantic - New Jersey, Inc.
customer service processes, increased spans of control, and consolidation and
centralization of administrative and staff groups. The Company will record a
pretax charge of between $40 million and $50 million to recognize its share of
the benefit costs under the separation pay plans. Costs of enhancing systems
and consolidating work activities will be charged to expense as incurred.
Depreciation and amortization expense increased $28.6 million or 10.4%
compared to the same period in 1993 due primarily to additional expense
resulting from an increase in depreciation rates in June 1993, under the Plan
for Alternative Regulation (PAR). The new intrastate depreciation rates were
implemented in September 1993, retroactive to January 1, 1993. Also
contributing to the increase was growth in the level of depreciable plant.
Other operating expenses consist primarily of contracted services including
centralized service expenses allocated from NSI, rent, network software costs,
operating taxes other than income, and other general and administrative
expenses. Other operating expenses increased $8.3 million or 1.6% compared to
the same period in 1993. The increase was principally due to higher costs
allocated from NSI primarily as a result of higher employee costs, contracted
services, and employee-related expenses incurred in that organization. Also
contributing to the increase were higher costs for materials and supplies, and
contracted services from non-affiliates, attributable in part to the winter
storms. In addition, the first six months of 1994 included added expense for
property and gross receipts taxes. These increases were partially offset by a
reduction in write-offs during the first half of 1994 associated with
uncollectible accounts with the Company's billing and collection services and
decreased software development costs related to the enhancement of the Company's
network.
FEDERAL OPERATING INCOME TAXES
The provision for income taxes increased $5.1 million or 4.3% compared to
the same period in 1993. The Company's effective income tax rate was 31.7% in
the first six months of 1994, compared to 30.2% for the same period in 1993. The
increase in the effective tax rate for the first six months of 1994 was
principally the result of federal tax legislation enacted in the third quarter
of 1993, which increased the federal corporate tax rate from 34% to 35%, and
certain adjustments to the provision for deferred income taxes, partially offset
by an increase in investment tax credit amortization.
INTEREST EXPENSE
Interest expense decreased $5.2 million or 9.0% compared to the same period
in 1993, principally due to the effects of long-term debt refinancings in 1994
and 1993, and a reduction in capital lease interest expense. These decreases
were partially offset by an increase in short-term interest expense due
primarily to higher levels of average short-term debt.
EXTRAORDINARY ITEM
During the first quarter of 1994, the Company called $250.0 million of long-
term debentures which were refinanced at more favorable interest rates. As a
result of these early retirements, the Company incurred after-tax charges of
$6.7 million in 1994. This debt refinancing will reduce interest costs on the
refinanced debt by approximately $5 million annually.
COMPETITIVE ENVIRONMENT
The communications industry is currently undergoing fundamental changes
which may have a significant impact on future financial performance of
telecommunications companies. These changes are driven by a number of factors,
including the accelerated pace of technological innovation, the convergence of
telecommunications, cable television, information services and entertainment
businesses, and a regulatory environment in which many traditional regulatory
barriers are being lowered and competition permitted or encouraged.
Communications services and equipment and the number of competitors offering
such services are continuing to expand. The Company's telecommunications
business is
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<PAGE>
Bell Atlantic - New Jersey, Inc.
currently subject to competition from numerous sources, including competitive
access providers for network access services and competing cellular telephone
companies. An increasing amount of this competition is from large companies
which have substantial capital, technological and marketing resources, many of
which do not face the same regulatory constraints as the Company. Other
potential sources of competition are cable television systems, shared tenant
services and other non-carrier systems which are capable of partially or
completely bypassing the Company's local network.
The entry of well-financed competitors, such as large long-distance
carriers, has the potential to adversely affect multiple revenue streams of the
Company, including local access and long-distance services in the market
segments and geographical areas in which the competitors operate. The amount of
revenue reductions will depend on the competitors' success in marketing these
services, and the conditions of interconnection established by regulators. The
potential impact is expected to be offset, to some extent, by revenues from
interconnection charges to be paid to the Company by these competitors.
The Company continues to focus its efforts on becoming more competitive and
seeking growth opportunities. The Company's responses to competitive challenges
include an increased emphasis on meeting customer requirements through the rapid
introduction of new products and services, the delivery of increased customer
value, and the development of customer loyalty programs. In addition, the
Company continues to strive for increased pricing flexibility, to reduce its
cost structure and workforce through consolidation, re-engineering and
streamlining initiatives, and to achieve regulatory parity with its competitors.
Other important competitive responses, including the development of broadband
networks, will improve the Company's ability to take advantage of the growth
opportunities created by technological advances and the convergence of the
communications, information services and entertainment industries.
On May 19, 1994, Bell Atlantic Corporation announced the specifics
underlying its full service network deployment program to make broadband,
interactive, multimedia services available to up to 8.5 million homes throughout
the Bell Atlantic region by the end of the year 2000. The Company will use a
variety of technologies, on a market by market basis, depending on customer
demand and cost considerations.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. Effective February 1994, the FCC ordered local
exchange carriers (LECs), including the Company, to allow competing carriers to
interconnect to the local exchange network for the purpose of providing switched
access transport services. The terms and conditions of this ruling are similar
to those for special access collocation ordered during 1992. The principal goal
of the FCC's collocation rulings is to encourage competition for these services.
The FCC also granted additional, but limited, pricing flexibility for these
services so that the LECs can better respond to the competition that will
result. The Company does not expect the net revenue impact of special access
collocation to be material. Revenue losses from switched access collocation,
however, are expected to be larger than from special access collocation. Bell
Atlantic and certain other parties appealed both the special and switched access
collocation orders. In June 1994, the U.S. Court of Appeals for the District of
Columbia Circuit vacated the FCC's special access collocation order insofar as
it required physical collocation and remanded for further proceedings in which
the FCC could consider whether, and to what extent, virtual collocation should
be imposed. In July 1994, the FCC voted to require LECs to offer competitors
virtual collocation, with the LECs having the option to offer physical
collocation. Tariffs for virtual collocation for special access are required to
be filed on September 1, 1994 and will become effective on December 15, 1994.
The appeal of the switched access collocation order is being held in abeyance.
The FCC has informed the U.S. Court of Appeals that it will not further litigate
the June 1994 special access decision.
In February 1994, the FCC initiated a rulemaking proceeding to determine the
effectiveness of the price cap rules and decide what changes, if any, should be
made to those rules. Under proposed rulemaking, the FCC identified for
examination three broad sets of issues including those related to the basic
goals of price regulation, the
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Bell Atlantic - New Jersey, Inc.
operation of price caps and the transition of local exchange services to a fully
competitive market. This rulemaking is expected to be concluded by the end of
1994. Any changes to the current price cap plan are expected to be effective
January 1, 1995 or shortly thereafter. At this time, the Company cannot
estimate the financial impact, if any, that would result if the FCC revised its
current price cap rules.
In the second quarter of 1994, the Company filed with the FCC a request to
increase interstate depreciation expense for regulatory reporting purposes by
approximately $30 million annually. Pursuant to the PAR, the Company also has
filed for an increase in intrastate depreciation expense for regulatory
reporting purposes. The Company currently estimates that the annual intrastate
impact will be approximately $58 million when its report on 1994 intrastate
depreciation rates is completed. Booking will occur following FCC approval and
the completion of the 1994 intrastate depreciation report.
State Regulation
----------------
The communications services of the Company are subject to regulation by the
Board of Public Utilities (BPU) (formerly Board of Regulatory Commissioners)
with respect to intrastate rates and services and other matters.
In 1993, the BPU initiated a proceeding to consider whether to continue its
existing policy that prohibits intraLATA toll service competition. The Company
does not oppose competition in principle, but urged the BPU to implement certain
required fundamental regulatory changes necessary for competition to be fair and
effective. Parties participating in the proceeding included, among others,
AT&T, MCI, Sprint Communications Company, L.P. and MFS Communications Company,
Inc., all of which urged the BPU to revise its current policy and permit
competition. A comment phase of the proceeding was completed in October 1993.
Evidentiary hearings scheduled for April and May, 1994 were canceled when the
parties reached an agreement to settle the case. The settlement, which has been
approved by the BPU, permits IXCs to compete for the provision of intraLATA toll
services on an access code basis (e.g., customers could dial 10XXX to use an
IXC), beginning July 1, 1994, and gives the Company substantial flexibility in
the pricing and marketing of the services it offers to enable it to compete with
the IXCs. In September 1994, the BPU will commence a further proceeding to
examine issues of intraLATA toll service competition including whether
presubscription should be authorized, and if so, under what terms and
conditions, and to address the issue of subsidies embodied in the Company's
rates. The target date for an order in that proceeding is December 31, 1995.
OTHER MATTERS
Subsequent Event - Discontinued Application of Statement No. 71
---------------------------------------------------------------
On August 15, 1994, the Company's parent, Bell Atlantic Corporation,
announced that it has determined that it is no longer eligible for continued
application of the accounting required by Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(Statement No. 71). The discontinued application of Statement No. 71 requires
the Company, for financial reporting purposes, to eliminate its regulatory
assets and liabilities and adjust the carrying amount of its telephone plant to
the extent that it determines that such amounts either are overstated as a
result of the regulatory process, or are not recoverable. Accordingly, as of
August 1, 1994, the Company will recognize a non-cash, after-tax extraordinary
charge of approximately $574 million to adjust the net carrying amount of
telephone plant and equipment and an after-tax extraordinary charge of
approximately $16 million to eliminate net regulatory assets. The adjustment to
the net carrying amount of telephone plant and equipment will increase the
reserve for accumulated depreciation by approximately $946 million. The Company
expects to report a loss for the third quarter and year as a result of the
extraordinary charge for the discontinued application of Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter than those currently approved by regulators (see Note 4 to the
Financial Statements). It is expected that the use of the shorter asset lives
when applied to the reduced net asset base will result in increased depreciation
expense for financial reporting purposes of approximately $27 million for the
remainder of 1994. The ongoing impact on
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Bell Atlantic - New Jersey, Inc.
operating expense resulting from the elimination of the amortization of net
regulatory assets is not expected to be significant in future periods. The
Company's accounting and reporting for regulatory purposes are not affected by
the discontinued application of Statement No. 71.
Environmental Issues
--------------------
The Company is subject to a number of environmental matters as a result of
its operations and shared liability provisions in the Plan of Reorganization,
related to the Modification of Final Judgment. Certain of these environmental
matters relate to Superfund sites for which the Company has been designated as a
potentially responsible party by the U.S. Environmental Protection Agency.
Designation as a potentially responsible party subjects the named 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 liability reflects those
specific issues where remediation activities are currently deemed to be probable
and where the cost of remediation is estimable. Management believes that the
aggregate amount of any potential liability would not have a material effect on
the Company's financial condition or results of operations.
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 payment of dividends. Management expects that
presently foreseeable capital requirements will be financed primarily through
internally generated funds, although additional long-term debt may be needed to
fund development activities and to maintain the Company's capital structure
within management's guidelines.
The Company's debt ratio was 39.6% at both June 30, 1994 and December 31,
1993.
As of June 30, 1994, the Company had $50.0 million remaining under a shelf
registration statement filed with the Securities and Exchange Commission.
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Bell Atlantic - New Jersey, 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
Corporation (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, 1993.
Item 6. Exhibits and Reports on Form 8-K
(b) There were no Current Reports on Form 8-K, filed during the quarter
ended June 30, 1994.
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Bell Atlantic - New Jersey, 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 - NEW JERSEY, INC.
Date: August 15, 1994 By /s/ Michael J. Losch
--------------------------------------
Michael J. Losch
Controller and Treasurer
and Chief Financial Officer
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