<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 September 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 OPERATIONS AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1994 1993 1994 1993
------- ------ -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service............ $ 294.4 $282.6 $ 872.3 $ 837.7
Network access........... 232.9 215.7 676.5 638.8
Toll service............. 175.9 180.0 558.9 540.5
Directory advertising,
billing services and
other (including $13.8,
$12.9, $44.0 and $37.4
from affiliates)........ 145.2 148.2 437.9 436.1
Provision for
uncollectibles.......... (17.7) (14.6) (48.8) (39.7)
------- ------ -------- --------
830.7 811.9 2,496.8 2,413.4
------- ------ -------- --------
OPERATING EXPENSES
Employee costs, including
benefits and taxes...... 240.7 195.6 636.5 570.3
Depreciation and
amortization............ 162.2 169.6 466.4 445.2
Taxes other than income.. 48.1 45.7 143.0 138.3
Other (including $140.6,
$124.1, $410.0 and
$370.4 to affiliates) .. 239.9 207.9 675.4 637.4
------- ------ -------- --------
690.9 618.8 1,921.3 1,791.2
------- ------ -------- --------
NET OPERATING REVENUES..... 139.8 193.1 575.5 622.2
------- ------ -------- --------
FEDERAL OPERATING INCOME
TAXES..................... 38.0 51.1 160.9 168.9
------- ------ -------- --------
OPERATING INCOME........... 101.8 142.0 414.6 453.3
------- ------ -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction..... 1.3 2.7 8.4 8.7
Miscellaneous - net...... (1.1) .1 (4.0) 7.2
------- ------ -------- --------
0.2 2.8 4.4 15.9
------- ------ -------- --------
INTEREST EXPENSE
(including $1.4, $1.0,
$3.9 and $2.5 to
affiliate)................ 24.0 28.3 76.5 86.0
------- ------ -------- --------
INCOME BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE...... 78.0 116.5 342.5 383.2
EXTRAORDINARY ITEMS
Discontinuation of
Regulatory Accounting
Principles, Net of Tax.. (589.7) --- (589.7) ---
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 (LOSS).......... $(511.7) $116.5 $ (253.9) $ 349.4
======= ====== ======== ========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - New Jersey, Inc.
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS (Continued)
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
1994 1993 1994 1993
-------- ------- ------- --------
<S> <C> <C> <C> <C>
REINVESTED EARNINGS
At beginning of period.. $ 811.2 $765.7 $ 750.1 $ 739.4
Add: net income (loss).. (511.7) 116.5 (253.9) 349.4
-------- ------ ------- --------
299.5 882.2 496.2 1,088.8
Deduct: dividends....... 133.0 119.2 329.7 325.8
other changes... (0.1) .3 (0.1) .3
-------- ------ ------- --------
At end of period........ $ 166.6 $762.7 $ 166.6 $ 762.7
======== ====== ======= ========
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - New Jersey, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
ASSETS
------
September 30, December 31,
1994 1993
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Note receivable from affiliate................. $ --- $ 9.4
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $49.3 and $57.7........... 590.2 562.3
Parent and affiliates........................ 25.3 24.8
Other........................................ 23.8 24.9
Material and supplies.......................... 14.2 17.1
Prepaid expenses............................... 195.9 137.2
Deferred income taxes.......................... 26.8 9.9
Other.......................................... 4.1 12.4
-------- --------
880.3 798.0
-------- --------
PLANT, PROPERTY AND EQUIPMENT.................... 8,640.9 8,378.1
Less accumulated depreciation.................. 4,588.6 3,295.3
-------- --------
4,052.3 5,082.8
-------- --------
OTHER ASSETS..................................... 34.0 168.4
-------- --------
TOTAL ASSETS..................................... $4,966.6 $6,049.2
======== ========
</TABLE>
See Notes to Financial Statements.
-3-
<PAGE>
Bell Atlantic - New Jersey, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
September 30, December 31,
1994 1993
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Affiliate............................. $ 132.6 $ ---
Other................................. 3.8 103.8
Accounts payable:
Parent and affiliates................. 222.6 194.3
Other................................. 280.7 354.5
Accrued expenses:
Taxes................................. 38.8 27.0
Other................................. 144.7 133.9
Advance billings and customer deposits. 152.8 155.6
-------- --------
976.0 969.1
-------- --------
LONG-TERM DEBT........................... 1,327.2 1,294.7
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS............. 808.9 744.5
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.................. 32.2 380.0
Unamortized investment tax credits..... 48.6 125.1
Other.................................. 225.9 404.5
-------- --------
306.7 909.6
-------- --------
SHAREOWNER'S INVESTMENT
Common stock, one share, without par
value, owned by parent................ 1,381.2 1,381.2
Reinvested earnings.................... 166.6 750.1
-------- --------
1,547.8 2,131.3
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S
INVESTMENT.............................. $4,966.6 $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>
Nine months ended
September 30,
---------------------
1994 1993
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ $ 688.3 $ 819.3
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and
equipment...................................... (378.2) (377.6)
Net change in note receivable from
affiliate...................................... 9.4 ---
Other, net...................................... 5.9 (11.7)
------- -------
Net cash used in investing activities............. (362.9) (389.3)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings........................ 249.5 99.1
Principal repayments of borrowings
and capital lease obligations.................. (3.0) (37.0)
Early extinguishment of debt and
related call premium........................... (362.0) (104.6)
Net change in note payable to affiliate......... 132.6 37.6
Dividends paid.................................. (329.7) (325.8)
Net change in outstanding checks drawn
on controlled disbursement accounts............ (12.8) (90.6)
------- -------
Net cash used in financing activities............. (325.4) (421.3)
------- -------
NET CHANGE IN CASH ............................... --- 8.7
CASH, BEGINNING OF PERIOD ........................ --- ---
------- -------
CASH, END OF PERIOD .............................. $ --- $ 8.7
======= =======
</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. Effective August 1, 1994, the Company no longer
reports using generally accepted accounting principles applicable to regulated
entities (see Note 3).
(2) Dividend
On November 1, 1994, the Company declared and paid a dividend in the amount of
$105.0 million to Bell Atlantic Corporation.
(3) Discontinuation of Regulatory Accounting Principles
In the third quarter of 1994, the Company determined that it was no longer
eligible for continued application of the accounting required by Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (Statement No. 71). In connection with the decision to
discontinue regulatory accounting principles under Statement No. 71, the Company
recorded a non-cash, after-tax extraordinary charge of $589.7 million, which is
net of an income tax benefit of $423.2 million.
The Company's determination that it was no longer eligible for continued
application of the accounting required by Statement No. 71 was based on the
belief that the convergence of competition, technological change (including the
Company's recent technology deployment plans), recent and potential regulatory,
legislative and judicial actions, and other factors are creating 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 components of the charge recognized as a result of the discontinued
application of Statement No. 71 follow:
<TABLE>
<CAPTION>
(Dollars in Millions)
----------------------
Pre-tax After-tax
--------- -----------
<S> <C> <C>
Increase in plant and equipment depreciation reserve... $ 946.1 $615.0
Accelerated investment tax credit amortization......... --- (41.1)
Tax-related regulatory asset and liability elimination. --- (27.6)
Other regulatory asset and liability elimination....... 66.8 43.4
-------- ------
Total.................................................. $1,012.9 $589.7
======== ======
</TABLE>
The accumulated depreciation reserve was increased by $946.1 million. This
increase was supported by both an impairment analysis which identified estimated
amounts not recoverable from future discounted cash flows, and a depreciation
study which identified inadequate depreciation reserve levels which the Company
believes resulted principally from the cumulative underdepreciation of plant as
a result of the regulatory process. Investment tax credits (ITCs) are deferred
and amortized over the estimated service lives of the related
-6-
<PAGE>
Bell Atlantic - New Jersey, Inc.
telephone plant and equipment. ITC amortization was accelerated as a result of
the reduction in asset lives of the associated telephone plant and equipment.
Upon adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the effects of required adjustments to deferred
tax balances were deferred on the balance sheet as regulatory assets and
liabilities and amortized at the time the related deferred taxes were recognized
in the ratemaking process. As of August 1, 1994, tax-related regulatory assets
of $117.5 million and tax-related regulatory liabilities of $145.1 million were
eliminated. The elimination of other regulatory assets and liabilities relate
principally to deferred debt refinancing and vacation pay costs which were being
amortized as they were recognized in the ratemaking process.
On August 1, 1994, for financial reporting purposes, the Company began using
estimated asset lives for certain categories of plant and equipment that are
shorter than those in effect prior to the discontinued application of Statement
No. 71. The shorter asset lives result from the Company's expectations as to the
revenue-producing lives of the assets. A comparison of the regulatory asset
lives to the shorter new asset lives for the most significantly impacted
categories of plant and equipment follows:
<TABLE>
<CAPTION>
Average Lives (in years)
-------------------------------
Regulatory New
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>
As a result of the discontinued application of Statement No. 71, regulatory
accounting principles no longer apply to the Company for financial accounting
and reporting purposes. The Company no longer recognizes regulatory assets and
liabilities and the related amortization. Additionally, the Company reports
depreciation expense based on economic asset lives and reports capitalized
interest costs as a cost of telephone plant and equipment and a reduction in
interest expense, in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost." Prior to the
discontinued application of Statement No. 71, the Company recorded an allowance
for funds used during construction which included both interest and equity
return components and was recorded as a cost of plant and an item of other
income. The Company's accounting and reporting for regulatory purposes are not
affected by the discontinued application of Statement No. 71.
(4) 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.
(5) Postemployment Benefits
In the third quarter of 1994, the Company recorded a pretax charge of $44.9
million, in accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees
-7-
<PAGE>
Bell Atlantic - New Jersey, Inc.
who are expected to receive separation payments in the future, including those
employees who will be separated through 1997 as a result of a recently announced
workforce reduction initiative.
(6) Restatement
Results of operations for the nine months ended September 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.
(7) 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 nine
months ended September 30, 1993 have been reclassified to conform to the current
year's classifications.
-8-
<PAGE>
Bell Atlantic - New Jersey, Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
At September 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Network Access Lines in Service:
Residence.............................. 3,491 3,416
Business............................... 1,695 1,624
Public................................. 95 95
----- -----
5,281 5,135
===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate............................. 13,183,791 12,294,716
Intrastate............................. 2,904,658 2,644,109
---------- ----------
16,088,449 14,938,825
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
Toll Messages:
Message Telecommunication Services..... 1,351,533 1,293,052
Optional Calling Plans................. 126,145 116,915
Unidirectional Long-Distance Services.. 188,754 192,704
* Corridor............................... 53,110 50,823
--------- ---------
1,719,542 1,653,494
========= =========
</TABLE>
* Corridor messages for the nine months ended September 30, 1993 have
been restated.
-9-
<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
The Company reported a loss of $253.9 million for the nine months ended
September 30, 1994, compared to net income of $349.4 million for the
corresponding period last year.
Results for the nine months ended September 30, 1994 included a non-cash,
after-tax extraordinary charge of $589.7 million in connection with the
Company's decision to discontinue application of regulatory accounting
principles required by Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (Statement No. 71).
The discontinued application of Statement No. 71 required the Company, for
financial reporting purposes, to eliminate its regulatory assets and
liabilities, resulting in an after-tax charge of $15.8 million. In addition,
the Company recorded an after-tax charge of $573.9 million, net of related
investment tax credits of $41.1 million, to adjust the carrying amount of its
telephone plant and equipment.
As a result of the discontinued application of Statement No. 71, the
Company utilizes shorter asset lives for certain categories of plant and
equipment than those in effect prior to the discontinued application of
Statement No. 71. It is expected that the use of the shorter asset lives will
increase depreciation expense in the fourth quarter of 1994 by approximately $10
million, for financial reporting purposes, over the amount that would have been
recorded using asset lives in effect prior to the discontinued application of
Statement No. 71. The elimination of the amortization of net regulatory assets
and the effect of changes in certain accounting policies are not expected to
have a significant impact on financial results in future periods. The Company's
accounting and reporting for regulatory purposes are not affected by the
discontinued application of Statement No. 71. See Note 3 to the Financial
Statements for additional information on the discontinuation of regulatory
accounting principles.
In the third quarter of 1994, the Company recorded a pretax charge of $44.9
million, in accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future, including those who will be separated through
1997 as a result of a 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 (see Note 5 to the Financial
Statements). Management currently expects the wage and salary savings
associated with the workforce reduction to significantly offset the ongoing
expense impact for separation benefits accrued under these separation pay plans
for 1995 through 1997. Management also expects to recognize additional costs to
enhance systems and consolidate work activities, which will be charged to
operating expense as incurred.
-10-
<PAGE>
Bell Atlantic - New Jersey, Inc.
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994 increased
$83.4 million or 3.5% 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 ......................... $34.6
Network access ........................ 37.7
Toll service .......................... 18.4
Directory advertising, billing
services and other ................... 1.8
Less: Provision for uncollectibles ... 9.1
-----
$83.4
=====
</TABLE>
Local service revenues are earned from the provision of local exchange,
local private line, and public telephone services. Local service revenues
increased $34.6 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 September 30, 1994 increased 2.8% from September
30, 1993 (see Selected Operating Data on page 9).
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 $37.7 million or 5.9% compared to the
same period in 1993. Access minutes of use were 7.7% higher than the first nine
months of 1993 (see Selected Operating Data on page 9), 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 principally
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. These revenue increases were partially offset 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. The 1994 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 generated 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 northern New Jersey and New York City and southern New
Jersey and southeastern Pennsylvania, and private line services. Toll service
revenues increased $18.4 million or 3.4%, compared to the same period in 1993.
Toll message volumes were 4.0% higher compared to the first nine months of 1993
(see Selected Operating Data on page 9). The growth in toll message volume was
due to the effects of a recovering economy and harsh weather conditions during
the first quarter of 1994. The rate of growth in toll revenues was curtailed in
the third quarter of 1994 as a result of the July 1, 1994 commencement of
intraLATA toll competition and repricing of calling plan options, as competitive
pressures continue to impact these services (see State Regulation on page 15).
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.
-11-
<PAGE>
Bell Atlantic - New Jersey, Inc.
Directory advertising, billing services and other revenues increased $1.8
million or .4% compared to the same period in 1993. The increase was
principally due to increased revenues from directory advertising, customer
premises services and enhanced network services. The increase in directory
advertising resulted primarily from a change in customer billing resulting in
accelerated revenue recognition in 1994, and higher yellow page advertising.
Higher demand for premises services and voice messaging services, including
Answer Call, also increased revenues. These revenue increases were partially
offset by a reduction in intraLATA toll compensation which ceased July 1, 1994
with the commencement of intraLATA toll competition. Revenue from rental of
facilities and billing and collection decreased, compared with the first nine
months of 1993.
The provision for uncollectibles, expressed as a percentage of total
operating revenues, was 1.9% in the first nine months of 1994 and 1.6% 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 nine months ended September 30, 1994 increased
$130.1 million or 7.3% 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 ....................... $ 66.2
Depreciation and amortization ........ 21.2
Taxes other than income .............. 4.7
Other ................................ 38.0
------
$130.1
======
</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 $66.2 million or 11.6% over the corresponding
period in 1993. The increase was principally due to a charge of $35.4 million to
recognize, in accordance with Statement No. 112, the Company's proportionate
share of benefit costs for the separation of employees who are entitled to
benefits under preexisting Bell Atlantic separation pay plans. Third quarter
1994 employee costs also included approximately $1 million for the ongoing
accrual of separation benefit costs under these separation pay plans. Benefit
costs associated with the separation of employees of NSI were allocated to the
Company and are included in other operating expenses. Additionally, the employee
costs were higher due to a combination of salary and wage increases and
increased overtime. Higher repair and maintenance activity caused by unusually
severe weather conditions experienced in 1994 contributed to the overall
increase in employee costs. These expense increases were offset in part by the
effect of lower force levels during 1994.
Depreciation and amortization expense increased $21.2 million or 4.8%
compared with the same period in 1993. The increase was principally due to
growth in telephone plant and increased rates of depreciation, including
depreciation increases resulting from the Company's aforementioned discontinued
application of Statement No. 71, effective August 1, 1994. The Company is using
shorter asset lives for certain categories of plant and equipment which reflect
the Company's expectations as to the revenue-producing lives of the assets (see
Note 3 to the Financial Statements). The use of the shorter asset lives
increased depreciation expense in the third quarter of 1994, for financial
reporting purposes, by approximately $7 million. The Company expects
depreciation expense to increase in the fourth quarter of 1994 by approximately
$10 million, for financial reporting purposes, over the amount that would have
been recorded using asset lives in effect prior to the discontinued application
of Statement No. 71. Future depreciation rate changes for regulatory purposes
will not affect depreciation expense for financial reporting purposes.
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Bell Atlantic - New Jersey, Inc.
Taxes other than income increased $4.7 million or 3.4%, compared to the same
period in 1993. This increase is primarily due to an increase in property taxes
and higher gross receipts taxes resulting from an increase in operating
revenues.
Other operating expenses consist primarily of contracted services including
centralized service expenses allocated from NSI, rent, network software costs,
and other general and administrative expenses. Other operating expenses
increased $38.0 million or 6.0% 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, affiliate rent expense, and employee-related
expenses incurred in that organization, including $9.5 million for the Company's
allocated share of a charge for separation benefit costs recognized under
Statement No. 112. Also contributing to the increase were higher costs for
contracted services from non-affiliates and materials and supplies, attributable
in part to the unusually severe weather conditions in 1994. These increases were
partially offset by a reduction in uncollectibles during 1994 related to the
Company's billing and collection services and decreased software costs.
FEDERAL OPERATING INCOME TAXES
The provision for income taxes decreased $8.0 million or 4.7% compared to the
same period in 1993. The Company's effective income tax rate was 31.9% in the
first nine months of 1994, compared to 30.4% for the same period in 1993. The
increase in the effective tax rate was principally the result of the reduction
in amortization of investment tax credits as a result of the discontinued
application of Statement No. 71, and the effect of a one-time net benefit
recorded in the third quarter of 1993 to adjust deferred tax assets for the
increase in the federal corporate income tax rate from 34% to 35%.
OTHER INCOME AND EXPENSE
Other income was $4.4 million for the nine months ended September 30, 1994 and
$15.9 million for the same period in 1993. This decrease was primarily due to
the effect of an accrual reversal recorded in 1993 in connection with the
favorable settlement of a tax issue, and reduced income related to the allowance
for funds used during construction.
Prior to the discontinued application of Statement No. 71, the Company
recorded an allowance for funds used during construction as a cost of plant and
an item of other income. As prescribed by regulators, the allowance for funds
used during construction included both interest and equity return components.
Effective August 1, 1994, interest costs on telephone plant under construction
are capitalized in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost," and reported as
a cost of telephone plant and a reduction to interest expense. The amount of
allowance for funds used during construction that was recorded as other income
prior to August 1, 1994 was $8.4 million in 1994 and $11.3 million for the
twelve month period ended December 31, 1993.
INTEREST EXPENSE
Interest expense decreased $9.5 million or 11.0% 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. Interest expense
was further reduced by the recognition of $1.6 million in capitalized interest
costs, effective with the discontinued application of Statement No. 71. These
decreases were partially offset by additional expense resulting from higher
levels of average short-term debt.
EXTRAORDINARY ITEMS
As discussed in Note 3 to the Financial Statements, in connection with the
Company's decision to discontinue application of regulatory accounting
principles under Statement No. 71, the Company recorded a non-cash, after-tax
extraordinary charge of $589.7 million, net of an income tax benefit of $423.2
million, in the third quarter of 1994.
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
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Bell Atlantic - New Jersey, Inc.
debt refinancing will reduce interest costs on the refinanced debt by
approximately $5 million annually.
COMPETITIVE ENVIRONMENT
The communications industry continues to undergo fundamental changes which may
have a significant impact on future financial performance of telecommunications
companies. These changes are 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 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
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 network access and toll 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 being 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.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. The FCC had ordered local exchange carriers
(LECs), including the Company, to provide physical collocation in the Company's
central offices to competitors for the purpose of providing special
and switched access transport 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. However, 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 were 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. The Company does
not expect the net revenue impact of virtual collocation to be material.
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Bell Atlantic - New Jersey, Inc.
As reported in the Company's 1993 Form 10-K (Part I, Item 1 - Business), the
FCC initiated Computer Inquiry III in 1985 to re-examine its regulations
requiring that "enhanced services" (e.g., voice messaging services, electronic
mail, videotext gateway, protocol conversion) be offered only through a
structurally separated subsidiary. In 1986, the FCC eliminated this requirement,
permitting the Company to offer enhanced services, subject to compliance with a
series of nonstructural safeguards. These safeguards include detailed cost
accounting, protection of customer information, public disclosure of technical
interfaces and certain reporting requirements.
In June 1990, the U.S. Court of Appeals for the Ninth Circuit (Court of
Appeals) vacated and remanded the Computer Inquiry III decisions to the FCC. In
December 1991, the FCC adopted an order which reinstated relief from the
separate subsidiary requirement upon a company's compliance with the FCC's
Computer III Open Network Architecture (ONA) requirements and strengthened some
of the nonstructural safeguards. In March 1992, the Company certified to the FCC
that it had complied with all initial ONA obligations, and the FCC granted the
Company structural relief in June 1992.
In October 1994, the Court of Appeals vacated the 1991 order and remanded the
matter to the FCC for further proceedings. As the Court of Appeals has not yet
issued a mandate giving formal effect to the decision, the Company continues to
offer enhanced services pending further action by the Court of Appeals or the
FCC.
In the second quarter of 1994, the Company filed with both the FCC and the
Board of Public Utilities (BPU) requests to increase depreciation expense for
regulatory reporting purposes. The Company currently expects that the annual
interstate impact will be approximately $30 million and the annual intrastate
impact will be approximately $58 million.
State Regulation
----------------
The communications services of the Company are subject to regulation by the
BPU with respect to intrastate rates and services and other matters.
In 1993, the BPU initiated a proceeding to consider whether to continue its
policy that prohibited 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 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 was 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. The
BPU is expected to commence a further proceeding in the fourth quarter of 1994
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
Environmental Issues
--------------------
The Company is subject to a number of environmental proceedings 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 and other sites for which the Company has received a
request for information or is a third party defendant. 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
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Bell Atlantic - New Jersey, Inc.
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 48.6% at September 30, 1994, compared to 39.6% at
December 31, 1993. The debt ratio was significantly impacted by the equity
reduction associated with the discontinued application of Statement No. 71.
As of September 30, 1994, the Company had $50.0 million remaining under a
shelf registration statement filed with the Securities and Exchange Commission.
As a result of the discontinued application of Statement No. 71, the Balance
Sheet at September 30, 1994 reflects significant changes due to the elimination
of regulatory assets and liabilities, the revaluation of plant and equipment and
the accelerated amortization of investment tax credits (see Note 3 to the
Financial Statements).
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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 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, 1993.
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 September 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: November 10, 1994 By /s/ Michael J. Losch
--------------------------------------
Michael J. Losch
Controller and Treasurer
and Chief Financial Officer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 7, 1994.
-18-
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