<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 1-3488
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,
--------------------- ----------------------
1997 1996 1997 1996
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $27.1, $18.2, $56.9
and $34.1 from affiliates)................................................. $942.6 $881.5 $1,866.6 $1,761.8
------- ------ -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes............................... 171.0 186.5 343.7 373.4
Depreciation and amortization.............................................. 176.9 163.7 352.3 322.3
Other (including $183.7, $181.8, $364.1 and $351.8 to affiliates).......... 332.8 309.6 646.4 613.9
------- ------ -------- --------
680.7 659.8 1,342.4 1,309.6
------- ------ -------- --------
OPERATING INCOME................................................................ 261.9 221.7 524.2 452.2
OTHER INCOME AND EXPENSE, NET................................................... .6 (1.1) (1.4) (2.7)
INTEREST EXPENSE (including $4.0, $4.2, $7.1
and $7.2 to affiliate)..................................................... 25.3 24.5 49.7 47.3
------- ------ -------- --------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle........................ 237.2 196.1 473.1 402.2
PROVISION FOR INCOME TAXES...................................................... 79.4 65.8 161.7 136.5
------- ------ -------- --------
Income Before Cumulative Effect of Change
in Accounting Principle.................................................... 157.8 130.3 311.4 265.7
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Directory Publishing, Net of Tax........................................... --- --- --- 45.1
------- ------ -------- --------
NET INCOME...................................................................... $ 157.8 $130.3 $ 311.4 $ 310.8
======= ====== ======== ========
REINVESTED EARNINGS
At beginning of period..................................................... $ 293.3 $209.4 $ 226.4 $ 178.5
Add: net income........................................................... 157.8 130.3 311.4 310.8
------- ------ -------- --------
451.1 339.7 537.8 489.3
Deduct: dividends......................................................... 157.5 131.2 244.0 280.2
other changes..................................................... .5 .2 .7 .8
------- ------ -------- --------
At end of period........................................................... $ 293.1 $208.3 $ 293.1 $ 208.3
======= ====== ======== ========
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
Bell Atlantic - New Jersey, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments.............................. $ 51.2 $ 76.8
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $81.1 and $79.6......... 752.9 739.2
Affiliates..................................... 14.4 18.8
Material and supplies............................... 28.7 18.0
Prepaid expenses.................................... 184.2 162.2
Other............................................... 9.1 5.4
-------- --------
1,040.5 1,020.4
-------- --------
PLANT, PROPERTY AND EQUIPMENT....................... 9,532.1 9,356.7
Less accumulated depreciation....................... 5,400.8 5,216.6
-------- --------
4,131.3 4,140.1
-------- --------
OTHER ASSETS........................................ 52.5 66.0
-------- --------
TOTAL ASSETS........................................ $5,224.3 $5,226.5
======== ========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
Bell Atlantic - New Jersey, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
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......................... $ 308.5 $ 261.7
Other............................................. 5.1 4.7
Accounts payable and accrued liabilities:
Affiliates........................................ 318.7 344.9
Other............................................. 471.6 545.4
Other liabilities...................................... 139.7 140.3
-------- --------
1,243.6 1,297.0
-------- --------
LONG-TERM DEBT......................................... 1,288.7 1,291.3
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS........................... 804.4 823.9
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.................................. 19.6 1.8
Unamortized investment tax credits..................... 30.7 33.2
Other ................................................. 163.0 171.7
-------- --------
213.3 206.7
-------- --------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value,
owned by parent................................... 1,381.2 1,381.2
Reinvested earnings.................................... 293.1 226.4
-------- --------
1,674.3 1,607.6
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.......... $5,224.3 $5,226.5
======== ========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Bell Atlantic - New Jersey, 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.......... $ 530.7 $ 537.8
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments............... 25.6 (21.1)
Additions to plant, property and equipment......... (355.3) (332.4)
Other, net......................................... 11.7 12.3
-------- --------
Net cash used in investing activities.............. (318.0) (341.2)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations.. (2.3) (2.2)
Net change in note payable to affiliate............ 46.8 91.5
Dividends paid..................................... (244.0) (280.2)
Net change in outstanding checks drawn
on controlled disbursement accounts........... (13.2) (5.7)
-------- --------
Net cash used in financing activities.............. (212.7) (196.6)
-------- --------
NET CHANGE IN CASH................................. --- ---
CASH, BEGINNING OF PERIOD.......................... --- ---
-------- --------
CASH, END OF PERIOD................................ $ --- $ ---
======== ========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Bell Atlantic - New Jersey, 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 $157.5 million to Bell Atlantic Corporation (Bell Atlantic).
3. 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.
4. SUBSEQUENT EVENT - REPEAL OF GROSS RECEIPTS TAX
On July 14, 1997, the State of New Jersey enacted a law which repeals the
gross receipts tax and extends the Corporate Business Tax, a tax based on net
income, to telecommunication utilities including local exchange carriers. The
law is effective January 1, 1998. The Company anticipates that its future
annual income tax liability will be approximately equal to its current annual
gross receipts tax liability and therefore, the impact of the new law will not
be material to ongoing results of operations. As required under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," the
effect of this tax law change on deferred tax assets/liabilities must be
included in income from continuing operations for the period that includes the
enactment date. This one-time adjustment of deferred income taxes will generate
an estimated $70 million to $80 million state income tax benefit (net of federal
income tax expense), which will be recorded in the third quarter of 1997.
5
<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 net income of $311.4 million for the six month period
ended June 30, 1997, compared to net income of $310.8 million for the same
period in 1996.
Effective January 1, 1996, the Company changed its method of accounting for
directory publishing revenues and expenses. 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 $45.1 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.
<TABLE>
<CAPTION>
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Six Month Period Ended June 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Transport services
Local service.............................. $ 497.9 $ 450.6
Network access............................. 538.4 507.4
Toll service............................... 325.8 357.6
Ancillary services
Directory publishing....................... 165.9 159.0
Other...................................... 69.3 51.0
Value-added services........................... 269.3 236.2
-------- --------
Total.......................................... $1,866.6 $1,761.8
======== ========
</TABLE>
6
<PAGE>
Bell Atlantic - New Jersey, Inc.
<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...................................... 3,800 3,654 4.0%
Business....................................... 2,013 1,884 6.8
Public......................................... 95 93 2.2
------ ------
5,908 5,631 4.9
====== ======
Six Month Period Ended June 30
- ------------------------------
Access Minutes of Use (in millions)
Interstate..................................... 10,788 9,965 8.3
Intrastate..................................... 3,038 2,703 12.4
------ ------
13,826 12,668 9.1
====== ======
Toll Messages (in millions)
Intrastate..................................... 1,103 1,108 (.5)
Interstate..................................... 25 30 (16.7)
------ ------
1,128 1,138 (.9)
====== ======
</TABLE>
* 1996 reflects a restatement of access lines in service
LOCAL SERVICE REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $47.3 10.5%
- --------------------------------------------------------------------------------
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 4.9% 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 and stronger business message volumes
also contributed to the revenue growth in 1997. Revenues in 1997 were also
higher as a result of price increases and reduced allowances for certain
directory assistance services associated with the Company's revenue neutral rate
change filing, which became effective on July 1, 1996. The filing provided for
increases in local service and other ancillary services revenues of
approximately $18 million and $8 million, respectively, with a corresponding
decrease in toll service revenues of approximately $26 million on an annual
basis.
For a discussion of the Telecommunications Act of 1996, which will open the
local exchange market to competition, see "Factors That May Impact Future
Results" beginning on page 11.
NETWORK ACCESS REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $31.0 6.1%
- --------------------------------------------------------------------------------
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
7
<PAGE>
Bell Atlantic - New Jersey, Inc.
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 9.1% 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 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 $70.6 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 12.
TOLL SERVICE REVENUES
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(31.8) (8.9)%
- --------------------------------------------------------------------------------
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 and between LATAs in
northern New Jersey and New York City).
The impact of increased competition for intraLATA toll, WATS and private
line services on toll message volumes, company-initiated price reductions and a
discount offering on certain toll services all contributed to the reduction in
toll services revenues in 1997. Toll message volumes declined .9% in the first
half of 1997 as compared to the same period in 1996. The effect on revenues and
toll message volumes from competition for toll services was principally due to
the introduction of presubscription in May 1997. Reported revenues and toll
messages were also negatively affected by storm-driven usage in the first
quarter of 1996. The price reductions and the discount offering, which are
expected to reduce toll service revenues by approximately $26 million annually,
were implemented in connection with the Company's aforementioned revenue neutral
rate change filing.
The Company believes that competition for toll services, including the
effects of presubscription for intraLATA toll services, will continue to impact
future revenue trends. See "Factors That May Impact Future Results - Competition
- - IntraLATA Toll Services" on page 13 for a further discussion of
presubscription.
DIRECTORY PUBLISHING REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $6.9 4.3%
- --------------------------------------------------------------------------------
Directory publishing revenues are earned primarily from local advertising
and marketing services provided to businesses in White and Yellow Pages
directories. The Company also provides database services and directory marketing
services outside of its region.
The increase in directory publishing revenues was principally due to a
slight increase in advertising volumes in the first six months of 1997. Revenues
earned from an affiliate for usage of directory listings also contributed to the
growth in directory publishing revenues.
8
<PAGE>
Bell Atlantic - New Jersey, Inc.
OTHER ANCILLARY SERVICES REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $18.3 35.9%
- --------------------------------------------------------------------------------
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.
Other ancillary services revenues increased primarily due to higher
facilities rental revenues and the introduction of customer late payment charges
pursuant to the Company's aforementioned revenue neutral rate change filing. The
customer late payment charges are expected to increase other ancillary services
revenues by approximately $8 million annually.
VALUE-ADDED SERVICES REVENUES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $33.1 14.0%
- --------------------------------------------------------------------------------
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 such as Touch-Tone 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.
<TABLE>
<CAPTION>
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Six Month Period Ended June 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes.. $ 343.7 $ 373.4
Depreciation and amortization................. 352.3 322.3
Other operating expenses...................... 646.4 613.9
-------- --------
Total......................................... $1,342.4 $1,309.6
======== ========
</TABLE>
EMPLOYEE COSTS
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(29.7) (8.0)%
- --------------------------------------------------------------------------------
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 increased overtime pay principally as a
result of higher business volumes.
9
<PAGE>
Bell Atlantic - New Jersey, Inc.
DEPRECIATION AND AMORTIZATION
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $30.0 9.3%
- --------------------------------------------------------------------------------
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 7.6% for
the six month period ended June 30, 1997 compared to 7.4% for the same period in
1996.
Depreciation and amortization increased in the first six months of 1997
principally due to growth in depreciable telephone plant. The effect of higher
rates of depreciation and amortization also contributed to the expense increase.
OTHER OPERATING EXPENSES
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $32.5 5.3%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from NSI, rent, network software costs, operating
taxes other than income, the provision for uncollectible accounts receivable,
and other costs.
The increase in other operating expenses was largely attributable to higher
costs for materials, directory publishing activities and contract services.
These increases were partially offset by the timing of network software
purchases.
OTHER INCOME AND EXPENSE, NET
1997-1996 Increase
- --------------------------------------------------------------------------------
Six Months $1.3
- --------------------------------------------------------------------------------
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 $2.4 5.1%
- --------------------------------------------------------------------------------
Interest expense increased principally due to a reduction in capitalized
interest costs resulting from lower levels of telephone plant under
construction.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30
- --------------------------------------------------------------------------------
1997 34.2%
- --------------------------------------------------------------------------------
1996 33.9%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before provision for income taxes and cumulative effect of
change in accounting principle. The Company's effective income tax rate was
higher in the first six months of 1997 principally due to the effect of prior
period adjustments recorded in 1996.
On July 14, 1997, the State of New Jersey enacted a law which repeals the
gross receipts tax and extends the Corporate Business Tax, a tax based on net
income, to telecommunication utilities including local exchange carriers. The
law is effective
10
<PAGE>
Bell Atlantic - New Jersey, Inc.
January 1, 1998. The Company anticipates that its future annual income tax
liability will be approximately equal to its current annual gross receipts tax
liability and therefore, the impact of the new law will not be material to
ongoing results of operations. As required under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," the effect of this
tax law change on deferred tax assets/liabilities must be included in income
from continuing operations for the period that includes the enactment date. This
one-time adjustment of deferred income taxes will generate an estimated $70
million to $80 million state income tax benefit (net of federal income tax
expense), which will be recorded in the third quarter of 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.
As of June 30, 1997, the Company had $163.6 million of an unused line of
credit with an affiliate, Bell Atlantic Network Funding Corporation. In
addition, the Company had $50.0 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 48.9% as of June 30, 1997, compared to 50.4%
as of June 30, 1996 and 49.2% as of December 31, 1996.
On August 1, 1997, the Company declared and paid a dividend in the amount
of $157.5 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 Board of Public Utilities (BPU) has proceeded to adopt
certain pricing and other standards for local interconnection.
Pursuant to the Act, the Company filed its "Statement of Generally
Available Terms and Conditions for Interconnection, Unbundled Network Elements,
Ancillary Services and Resale of Telecommunications Services" with the BPU. At
its meeting on July 17, 1997, the BPU orally announced certain key rates, terms
and conditions for Interconnection and the Wholesale Discount rate. The BPU's
written order, which has yet to be issued, will include a detailed list of rates
for additional unbundled network
11
<PAGE>
Bell Atlantic - New Jersey, Inc.
elements. The BPU approved rates will be incorporated into existing agreements
which included provisions that called for interim rates to be replaced with
permanent rates once the BPU concluded its proceeding.
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.
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 $70.6 million, of which $17.1 million is a result of one-time
adjustments which will only be in effect until July 1998.
12
<PAGE>
Bell Atlantic - New Jersey, Inc.
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.
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 BPU rather than federal authorities. The BPU permits
other carriers to offer intrastate intraLATA toll services in the Company's
jurisdiction.
On May 5, 1997, the Company implemented presubscription as required by the
BPU. 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.
During 1995, the BPU conducted proceedings to determine whether, and under
what conditions, to authorize presubscription. On December 14, 1995, the BPU
issued an order finding that implementation of presubscription for intraLATA
toll services in New Jersey would be in the public interest and proposed rules
for implementation. On January 8, 1997, the BPU approved a rule that required
implementation of presubscription by May 5, 1997. The Company challenged the
BPU's rule on the grounds that it was inconsistent with the Act; however, on
April 18, 1997, the federal court denied the challenge and dismissed the
complaint.
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
BPU. Applications from competitors to provide local exchange services have been
approved by the BPU. The Act is expected to significantly increase the level of
competition in the Company's local exchange market.
13
<PAGE>
Bell Atlantic - New Jersey, Inc.
Other State Regulatory Matters
The communications services of the Company are subject to regulation by the
BPU with respect to certain intrastate rates and services and certain other
matters.
On April 21, 1997, the BPU completed a review of the Company's performance
of its obligation under the Plan for Alternative Form of Regulation (NJPAR) to
accelerate deployment of certain network technologies. The BPU confirmed that
the Company has kept its commitments under the NJPAR regarding provisioning of
technologies and it approved a proposal to make available further accelerated
deployment of approximately $55 million in a statewide network capable of
providing high speed data and video transport and $25 million in certain related
equipment for use in elementary and secondary schools and public libraries.
Pursuant to the stipulation which was approved, the Company will make available
discounted rates for provisioning of services to schools and libraries. The BPU
also approved the elimination of a provision of the NJPAR which would have
allowed certain formula based rate adjustments for Protected and Other Rate
Regulated Services through 1999. A temporary Lifeline Program to fund
approximately 225,000 low income residents of New Jersey will also be made
available, based on the BPU's approval of the proposal, until the BPU makes a
decision regarding Universal Service.
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.
14
<PAGE>
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, 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.
15
<PAGE>
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 8, 1997 By /s/ Edwin F. Hall
----------------------------------
Edwin F. Hall
Chief Financial Officer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 5, 1997.
16
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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