<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 1-8606
BELL ATLANTIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2259884
(State of incorporation) (I.R.S. Employer
Identification No.)
1717 Arch Street 19103
Philadelphia, Pennsylvania (Zip Code)
(Address of principal executive offices)
Registrant's telephone number (215) 963-6000
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
----- -----
At June 30, 1997, 437,476,506 shares of the registrant's Common Stock were
outstanding, after deducting 339,761 shares held in treasury.
================================================================================
<PAGE>
- -----------------
Table of Contents
- -----------------
<TABLE>
<CAPTION>
Item No. Page
Part I. Financial Information
- --------------------------------------------------------------------------------
<S> <C>
1. Financial Statements
Condensed Consolidated Statements of Income
For the three and six months ended June 30, 1997 and 1996......... 2-3
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996............................... 4-5
Condensed Consolidated Statement of Changes in Shareowners' Investment
For the six months ended June 30, 1997............................ 6
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 1997 and 1996................... 7
Notes to Condensed Consolidated Financial Statements................ 8-9
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 10-22
Part II. Other Information
- --------------------------------------------------------------------------------
1. Legal Proceedings..................................................... 23
4. Submission of Matters to a Vote of Security Holders................... 23
6. Exhibits and Reports on Form 8-K...................................... 24
</TABLE>
1
<PAGE>
- ------------------------------
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements
- --------------------------------------------------------------------------------
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended
June 30,
---------------------
1997 1996
--------- ----------
<S> <C> <C>
OPERATING REVENUES..................................... $3,440.7 $3,223.6
-------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes........... 963.1 981.8
Depreciation and amortization.......................... 685.0 638.8
Other.................................................. 893.8 850.6
-------- --------
2,541.9 2,471.2
-------- --------
OPERATING INCOME....................................... 898.8 752.4
Income from Unconsolidated Businesses.................. 59.3 94.3
Other Income and Expense, Net.......................... (3.5) (2.1)
Interest Expense....................................... 131.4 119.8
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES............... 823.2 724.8
Provision for Income Taxes............................. 324.3 261.1
-------- --------
NET INCOME............................................. $ 498.9 $ 463.7
======== ========
PER COMMON SHARE
- --------------------------------------------------------------------------------
NET INCOME............................................. $ 1.14 $ 1.05
======== ========
Cash Dividends Declared................................ $ .74 $ .72
======== ========
Weighted Average Number of Common Shares and
Equivalent Shares Outstanding (in millions)........... 439.5 439.6
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1997 1996
-------- ----------
<S> <C> <C>
OPERATING REVENUES...................................... $6,854.6 $6,443.5
-------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes............ 1,917.6 1,964.2
Depreciation and amortization........................... 1,356.4 1,267.7
Other................................................... 1,785.3 1,659.0
-------- --------
5,059.3 4,890.9
-------- --------
OPERATING INCOME........................................ 1,795.3 1,552.6
Income from Unconsolidated Businesses................... 106.9 165.9
Other Income and Expense, Net........................... 20.6 (4.4)
Interest Expense........................................ 268.9 240.6
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.... 1,653.9 1,473.5
Provision for Income Taxes.............................. 639.4 545.1
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE......................... 1,014.5 928.4
Cumulative effect of change in accounting principle
Directory publishing, net of tax....................... -- 142.1
-------- --------
NET INCOME.............................................. $1,014.5 $1,070.5
======== ========
PER COMMON SHARE
- --------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE......................... $ 2.31 $ 2.11
Cumulative effect of change in accounting principle..... -- .32
-------- --------
NET INCOME.............................................. $ 2.31 $ 2.43
======== ========
Cash Dividends Declared................................. $ 1.48 $ 1.44*
======== ========
Weighted Average Number of Common Shares and
Equivalent Shares Outstanding (in millions)............ 439.7 439.9
======== ========
</TABLE>
*Includes payment of $.005 per common share for redemption of rights under our
Shareholder Rights Plan.
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions)
- ------
Assets
- ------
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.............................. $ 103.9 $ 152.5
Short-term investments................................. 213.0 271.7
Accounts receivable, net of allowances of $263.0 and
$248.3................................................ 2,873.5 2,846.8
Inventories............................................ 191.4 148.7
Prepaid expenses....................................... 413.8 402.0
Other.................................................. 154.8 126.3
------------ ------------
3,950.4 3,948.0
------------ ------------
PLANT, PROPERTY AND EQUIPMENT.......................... 35,629.6 34,758.4
Less accumulated depreciation.......................... 19,702.6 18,842.7
------------ ------------
15,927.0 15,915.7
------------ ------------
INVESTMENTS IN UNCONSOLIDATED BUSINESSES............... 3,469.2 3,766.8
OTHER ASSETS........................................... 1,631.8 1,225.7
------------ ------------
TOTAL ASSETS........................................... $ 24,978.4 $ 24,856.2
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
- ---------------------------------------
Liabilities and Shareowners' Investment
- ---------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year....................... $ 2,273.8 $ 2,137.3
Accounts payable and accrued liabilities............ 2,567.0 2,902.7
Other............................................... 685.6 662.8
--------- ---------
5,526.4 5,702.8
--------- ---------
LONG-TERM DEBT...................................... 5,816.4 5,960.2
--------- ---------
EMPLOYEE BENEFIT OBLIGATIONS........................ 3,828.2 3,887.4
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................... 1,310.1 1,229.9
Unamortized investment tax credits.................. 113.7 123.0
Other............................................... 489.8 385.1
--------- ---------
1,913.6 1,738.0
--------- ---------
PREFERRED STOCK OF SUBSIDIARY....................... 135.0 145.0
--------- ---------
SHAREOWNERS' INVESTMENT
Preferred and Preference stock ($1 par value; none
issued)............................................ -- --
Common stock ($1 par value; 437,816,267 shares and
437,816,267 shares issued)......................... 437.8 437.8
Contributed capital................................. 5,519.5 5,510.9
Reinvested earnings................................. 2,718.4 2,381.9
Foreign currency translation adjustment............. (485.5) (458.5)
--------- ---------
8,190.2 7,872.1
Less common stock in treasury, at cost.............. 26.1 3.6
Less deferred compensation-employee stock ownership
plans.............................................. 405.3 445.7
--------- ---------
7,758.8 7,422.8
--------- ---------
TOTAL LIABILITIES AND SHAREOWNERS' INVESTMENT....... $24,978.4 $24,856.2
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareowners' Investment
(Unaudited)
(Dollars in Millions and Shares in Thousands)
<TABLE>
<CAPTION>
Six months ended
June 30, 1997
------------------
Shares Amount
------- --------
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period................. 437,816 $ 437.8
------- --------
CONTRIBUTED CAPITAL
Balance at beginning of period......................... 5,510.9
Shares distributed:
Employee plans........................................ 8.6
--------
Balance at end of period............................... 5,519.5
--------
REINVESTED EARNINGS
Balance at beginning of period......................... 2,381.9
Net income............................................. 1,014.5
Dividends declared..................................... (647.6)
Shares distributed:
Employee plans........................................ (34.4)
Tax benefit of dividends paid to ESOPs................. 3.4
Other.................................................. .6
--------
Balance at end of period............................... 2,718.4
--------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at beginning of period......................... (458.5)
Translation adjustments, net........................... (27.0)
--------
Balance at end of period............................... (485.5)
--------
TREASURY STOCK
Balance at beginning of period......................... 54 3.6
Shares purchased....................................... 2,303 158.6
Shares distributed:
Employee plans........................................ (1,991) (134.4)
Shareowner plans...................................... (26) (1.7)
------- --------
Balance at end of period............................... 340 26.1
------- --------
DEFERRED COMPENSATION--ESOPs
Balance at beginning of period......................... 445.7
Amortization........................................... (40.4)
--------
Balance at end of period............................... 405.3
--------
TOTAL SHAREOWNERS' INVESTMENT.......................... $7,758.8
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 1,014.5 $ 1,070.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 1,356.4 1,267.7
Cumulative effect of change in
accounting principle, net of tax.................... -- (142.1)
Income from unconsolidated businesses................. (106.9) (165.9)
Dividends received from unconsolidated businesses..... 65.4 60.9
Other items, net...................................... 34.8 35.7
Changes in certain assets and liabilities, net of
effects from acquisition/disposition of businesses.. (421.5) (242.6)
--------- ---------
Net cash provided by operating activities................ 1,942.7 1,884.2
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments..................... 62.7 (97.5)
Additions to plant, property and equipment............... (1,324.6) (972.6)
Proceeds from sale of plant, property and equipment...... .5 4.4
Investment in notes receivable........................... (17.9) (.3)
Proceeds from notes receivable........................... 26.6 68.1
Acquisition of businesses, less cash acquired............ -- (2.2)
Proceeds from Telecom Corporation of New Zealand Limited
share repurchase plan.................................. 82.0 --
Investments in unconsolidated businesses, net............ (100.6) (122.4)
Proceeds from disposition of businesses.................. 271.5 --
Other, net............................................... (52.3) 6.7
--------- ---------
Net cash used in investing activities.................... (1,052.1) (1,115.8)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital lease
obligations............................................. (45.6) (137.0)
Net change in short-term borrowings with original
maturities of three months or less...................... (117.4) (230.5)
Dividends paid........................................... (639.1) (621.6)
Proceeds from sale of common stock....................... 107.0 58.2
Purchase of common stock for treasury.................... (158.6) (79.1)
Reduction in preferred stock of subsidiary............... (10.0) --
Net change in outstanding checks drawn on controlled
disbursement accounts................................... (75.5) (51.5)
--------- ---------
Net cash used in financing activities.................... (939.2) (1,061.5)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS.................... (48.6) (293.1)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 152.5 356.8
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 103.9 $ 63.7
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
- --------------------------------------------------------------------------------
We have prepared the accompanying unaudited condensed consolidated financial
statements based upon Securities and Exchange Commission rules that permit
reduced disclosure for interim periods. We believe that these financial
statements reflect all adjustments which are necessary for a fair presentation
of our results of operations and financial position, which consist of only
normal recurring accruals. For a more complete discussion of our significant
accounting policies and certain other information, you should refer to the
financial statements filed with our 1996 Form 10-K.
2. Grupo Iusacell, S.A. de C.V. Restructuring
- --------------------------------------------------------------------------------
In February 1997, we consummated a restructuring of our investment in Grupo
Iusacell, S.A. de C.V. (Iusacell), a Mexican wireless company, to permit us to
assume control of the Board of Directors and management of Iusacell. Under the
terms of the restructuring, we exchanged certain Series B and D shares of
Iusacell stock for Series A shares, enabling us to elect a majority of the Board
of Directors. We also paid a premium of $50.0 million to the current majority
owner. This exchange of shares did not affect our economic ownership percentage
of Iusacell. We also converted approximately $33 million of subordinated debt
into Series A shares, thereby, increasing our economic ownership from 41.9% to
42.1%, and we are obligated to provide Iusacell up to $150 million in
subordinated convertible financing as Iusacell may require from time to time.
As a result of the restructuring, we changed the accounting for our Iusacell
investment from the equity method to full consolidation in the first quarter of
1997.
3. Long-Term Debt--Bell Atlantic Financial Services, Inc.
- --------------------------------------------------------------------------------
Our medium-term notes are issued by Bell Atlantic Financial Services, Inc.
(FSI), a wholly owned subsidiary. FSI debt securities (aggregating $633.6
million at June 30, 1997) have the benefit of a Support Agreement dated October
1, 1992 between Bell Atlantic Corporation and FSI under which Bell Atlantic
Corporation will make payments of interest, premium (if any) and principal on
the FSI debt should FSI fail to pay. The holders of FSI debt do not have
recourse to the stock or assets of our operating telephone subsidiaries;
however, they have recourse to dividends paid to Bell Atlantic Corporation by
any of our consolidated subsidiaries as well as assets not covered by the
exclusion. The carrying value of the available assets reflected in our
condensed consolidated financial statements was approximately $5.4 billion at
June 30, 1997.
4. New Accounting Standard--Earnings per Share
- --------------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which will
replace the current rules for earnings per share computations, presentation and
disclosure. Under the new standard, basic earnings per share excludes dilution
and is computed by dividing income available to common shareowners by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. SFAS No. 128 requires a dual presentation of basic and
diluted earnings per share on the face of the income statement.
We will be required to adopt SFAS No. 128 in the fourth quarter of this year
and, as required by the standard, we will restate all prior period earnings per
share data. Our new earnings per share amounts are not expected to be
materially different from those computed under the present accounting standard.
5. Reclassifications
- --------------------------------------------------------------------------------
We have reclassified certain amounts from prior year's data to conform with the
1997 presentation.
8
<PAGE>
6. 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. Under the terms of the amended agreement, NYNEX will
become a subsidiary of Bell Atlantic. NYNEX stockholders will receive 0.768 of a
share of Bell Atlantic common stock for each share of NYNEX common stock that
they own. Bell Atlantic stockholders will continue to own their existing shares
after the merger.
The merger is expected to qualify as a "pooling of interests," which means
that, for accounting and financial reporting purposes, the companies will be
treated as if they had always been combined. 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 within the next several weeks.
After the closing of the merger, we will file, as part of a Current Report on
Form 8-K, unaudited pro forma combined condensed financial statements which give
effect to the merger using the pooling-of-interests method of accounting.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
(Tables shown in Dollars in Millions, Except Per Share Amounts)
Description of Business
- --------------------------------------------------------------------------------
Bell Atlantic Corporation is a diversified telecommunications company. For ease
of reference, Bell Atlantic Corporation will be referred to as "we" or "our" in
this discussion. Our operating telephone subsidiaries provide local
telecommunications and advanced services to customers in the mid-Atlantic region
of the United States (Pennsylvania, New Jersey, Delaware, Virginia, Maryland,
West Virginia and the District of Columbia). These services include the
provision of voice and data transport, enhanced and custom calling features,
network access, directory assistance, private lines, and public telephones. We
also provide systems integration, customer premises equipment (CPE)
distribution, and directory publishing services. We also own an interest in a
telecommunications company in New Zealand.
Our wireless business includes domestic and international investments.
Through several joint ventures, we provide cellular and personal communications
services throughout most of the United States. We also have invested in
wireless businesses in Mexico, Italy, Slovakia and the Czech Republic.
In February 1997, we consummated a restructuring of our wireless investment in
Mexico, Grupo Iusacell, S.A. de C.V. (Iusacell), to permit us to assume control
of the Board of Directors and management of Iusacell. See Note 2 to the
condensed consolidated financial statements on page 8 for a further discussion
of the Iusacell restructuring.
As a result of the restructuring, we changed the accounting for our Iusacell
investment from the equity method to full consolidation in the first quarter of
1997. Iusacell's results of operations for 1997 are reflected in our operating
revenues and expenses, while for 1996 Iusacell's net results are reported as a
component of Income from Unconsolidated Businesses. These comparative
differences are more fully described in the sections included under "Results of
Operations."
Proposed Merger of Bell Atlantic and NYNEX
- --------------------------------------------------------------------------------
In 1996, we announced a definitive agreement to merge with NYNEX Corporation
(NYNEX). We expect to close the merger within the next several weeks.
This Management's Discussion and Analysis is based on our own historical
financial results and includes certain forward-looking statements. You should
be aware that our discussion does not, in general, reflect the impact that the
proposed merger will have on future financial performance of the post-merger
company. Further discussion of the proposed merger is provided in the "Other
Matters--Proposed Bell Atlantic--NYNEX Merger" section on page 22.
Restructure of CAI Investment
- --------------------------------------------------------------------------------
In March 1995, we and NYNEX collectively invested approximately $100 million in
certain securities issued by CAI Wireless Systems, Inc. (CAI), a wireless cable
television company that utilizes multichannel, multipoint distribution system
technology. In April 1997, we and NYNEX restructured our investments in CAI
through amended agreements which provide for, among other things, a mutual
exchange of releases, an agreement to share certain patent and intellectual
property rights related to the companies' digital wireless venture, and a
renegotiated repurchase option for CAI. As a result of this restructuring, we
recorded a charge of $15.0 million to earnings to reduce to fair value our
investment in CAI.
Sale of Commercial Real Estate Properties
- --------------------------------------------------------------------------------
In a series of related transactions completed in the second quarter of 1997, we
sold a significant portion of our commercial real estate properties. The
transactions generated approximately $250 million in cash and did not have a
material impact on net income.
10
<PAGE>
Cumulative Effect of Change in Accounting--Directory Publishing
- --------------------------------------------------------------------------------
Effective January 1, 1996, we changed our method of accounting for directory
publishing revenues and expenses. We adopted the point-of-publication method,
meaning that we now recognize directory revenues and expenses upon publication
rather than over the lives of the directories. We recorded an after-tax
increase in income of $142.1 million, or $.32 per share, in the first quarter of
1996, representing the cumulative effect of this accounting change. This change
required us to restate our results of operations for the first three quarters of
1996.
- --------------------------------------------------------------------------------
Certain other items affecting the comparison of our results of operations for
the three and 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 our 1996 Annual Report to shareowners.
- ---------------------
Results of Operations
- ---------------------
Our financial results for the three and six month periods ended June 30, 1997,
as compared to the same periods in 1996, are summarized as follows:
<TABLE>
<CAPTION>
Three months Six months % Change
------------------ ------------------ --------------------------
1997 1996 1997 1996 Quarter Year-to-Date
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $3,440.7 $3,223.6 $6,854.6 $6,443.5 6.7% 6.4%
Operating expenses 2,541.9 2,471.2 5,059.3 4,890.9 2.9 3.4
Income before cumulative effect of
change in accounting principle 498.9 463.7 1,014.5 928.4 7.6 9.3
Net income 498.9 463.7 1,014.5 1,070.5 7.6 (5.2)
Per Common Share
Income before cumulative effect of
change in accounting principle $1.14 $1.05 $2.31 $2.11 8.6% 9.5%
Net income 1.14 1.05 2.31 2.43 8.6 (4.9)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------
Transport Services Operating Statistics
- ---------------------------------------
<TABLE>
<CAPTION>
1997 1996 % Change
- -----------------------------------------------------------------------------------------------------------
At June 30
- ----------
<S> <C> <C> <C>
Access Lines in Service (in thousands)*
Residence 13,213 12,770 3.5%
Business 7,481 7,123 5.0
Public 278 276 0.7
-----------------------
Total Access Lines in Service 20,972 20,169 4.0
=======================
<CAPTION>
Three months Six months % Change
-------------- -------------- ----------------------
1997 1996 1997 1996 Quarter Year-to-Date
- -----------------------------------------------------------------------------------------------------------
For the Period Ended June 30
- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Access Minutes of Use (in millions)
Interstate 17,396 16,276 34,103 32,404 6.9% 5.2%
Intrastate 4,928 4,439 9,543 9,012 11.0 5.9
----------------------------------------
Total Access Minutes of Use 22,324 20,715 43,646 41,416 7.8 5.4
========================================
Toll Messages (in millions)
Intrastate 845.2 828.9 1,668.1 1,683.1 2.0% (0.9)%
Interstate 40.0 41.2 79.0 83.8 (2.9) (5.7)
----------------------------------------
Total Toll Messages 885.2 870.1 1,747.1 1,766.9 1.7 (1.1)
========================================
</TABLE>
* 1996 reflects a restatement of access lines in service
11
<PAGE>
- ------------------
Operating Revenues
- ------------------
<TABLE>
<CAPTION>
Three months Six months % Change
----------------- -------------------- -----------------------
For the Period Ended June 30 1997 1996 1997 1996 Quarter Year-to-Date
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Transport services
Local service $1,256.9 $1,179.4 $2,445.6 $2,319.1 6.6% 5.5%
Network access 908.5 867.8 1,825.6 1,745.7 4.7 4.6
Toll services 328.2 350.1 664.1 719.7 (6.3) (7.7)
Ancillary services
Directory publishing 265.1 252.9 570.6 551.4 4.8 3.5
Other 186.8 157.4 344.5 295.7 18.7 16.5
Value-added services 427.0 386.4 862.0 758.3 10.5 13.7
Other services 68.2 29.6 142.2 53.6 130.4 165.3
-------------------------------------------
Total Operating Revenues $3,440.7 $3,223.6 $6,854.6 $6,443.5 6.7 6.4
===========================================
</TABLE>
Local Service Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Second Quarter $77.5 6.6%
- --------------------------------------------------------------------------------
Six Months $126.5 5.5%
- --------------------------------------------------------------------------------
Local service revenues are earned by our operating telephone subsidiaries from
the provision of local exchange, local private line and public telephone (pay
phone) services.
Higher usage of our network facilities was the primary reason for the increase
in local service revenues in the second quarter of 1997 and the six month period
ended June 30, 1997. This growth was generated by an increase in access lines
in service of 4.0% from June 30, 1996. This access line growth reflects
primarily higher demand for Centrex services and an increase in second
residential lines. Higher revenues from private line and switched data services
also contributed to the revenue growth in 1997. Revenue growth in the three and
six month periods was also boosted by stronger business message volumes reported
in the second quarter of 1997.
Revenues were also increased in both of the 1997 periods by the impact of the
Pennsylvania rate rebalancing plan, which is a revenue neutral filing that
provides for increases in certain revenue categories with offsetting decreases
in other revenue categories. A specific component of this plan, which became
effective on May 1, 1997, increased revenues from the dial-tone charge by
approximately $10 million (included in local service revenues) with a
corresponding reduction in revenues from the elimination of the Touch-Tone line
charge (included in value-added services revenues).
For a discussion of the Telecommunications Act of 1996, which will open the
local exchange market to competition, see "Factors That May Impact Future
Results" beginning on page 19.
Network Access Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Second Quarter $40.7 4.7%
- --------------------------------------------------------------------------------
Six Months $79.9 4.6%
- --------------------------------------------------------------------------------
Network access revenues are earned from long distance carriers for their use of
our 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 our
network. Special access revenues arise from access charges paid by long
distance carriers and end-users who have private networks. End-user access
revenues are earned from local exchange carrier customers who pay for access to
our network.
12
<PAGE>
Network access revenues increased in the second quarter of 1997 and year-to-
date primarily due to higher customer demand as reflected by growth in access
minutes of use of 7.8% in the three month period and 5.4% in the six month
period over the same periods in 1996. Volume growth was boosted by 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 both periods of 1997. This volume-related
growth was partially offset by net price reductions, principally for intrastate
switched access services. Reported year-to-date 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, we implemented price decreases of approximately $230
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 20.
Toll Service Revenues
- --------------------------------------------------------------------------------
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Second Quarter $(21.9) (6.3)%
- --------------------------------------------------------------------------------
Six Months $(55.6) (7.7)%
- --------------------------------------------------------------------------------
Toll service revenues are earned primarily from calls made outside a customer's
local calling area, but within the same service area of our operating telephone
subsidiaries, referred to as a Local Access and Transport Area ("LATA"). Other
toll services that we provide include 800 services, Wide Area Telephone Service
(WATS), and corridor services (between LATAs in Northern New Jersey and New York
City and between LATAs in Southern New Jersey and Philadelphia).
The impact of increased competition for intraLATA toll, WATS and private line
services on toll message volumes and company-initiated price reductions both
contributed equally to the reduction in toll service revenues in 1997. The
effect on revenues from competition for toll services increased in the second
quarter of 1997 as a result of the introduction of presubscription in New Jersey
in May 1997. We implemented price reductions on certain toll services as part
of our response to competition.
Our toll message volumes changed only slightly in 1997 as compared to the
prior year. In the second quarter of 1997, toll message volumes grew 1.7%;
however, volumes declined 1.1% year-to-date. Reported year-to-date growth in
toll messages and revenues was also negatively affected by storm-driven usage in
the first quarter of 1996.
We believe that competition for toll services, including the introduction of
presubscription in several of our operating telephone subsidiaries, which began
in the second quarter of 1997, will continue to impact future revenue trends.
You should read "Factors That May Impact Future Results--Competition--IntraLATA
Toll Services" on page 21 for a further discussion of presubscription.
Directory Publishing Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Second Quarter $12.2 4.8%
- --------------------------------------------------------------------------------
Six Months $19.2 3.5%
- --------------------------------------------------------------------------------
We earn directory publishing revenues primarily from local advertising and
marketing services provided to businesses in our White and Yellow Pages
directories, which are published throughout the region in which our telephone
subsidiaries operate. We also provide database services and directory marketing
services outside of our region.
Revenue growth from our directory operations was principally due to higher
rates charged for directory services.
13
<PAGE>
Other Ancillary Services Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Second Quarter $29.4 18.7%
- --------------------------------------------------------------------------------
Six Months $48.8 16.5%
- --------------------------------------------------------------------------------
Our company provides other ancillary services which include systems integration
services, plant and construction services for other telecommunications carriers,
billing and collection services for long distance carriers, CPE distribution,
facilities rental services, and video and information services.
Higher other ancillary services revenues in both the three and six month
periods were principally the result of new contracts with business customers for
systems integration services. We also recognized higher revenues in 1997 as a
result of the introduction of customer late payment charges by several of our
operating telephone subsidiaries during 1996.
Value-added Services Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Second Quarter $40.6 10.5%
- --------------------------------------------------------------------------------
Six months $103.7 13.7%
- --------------------------------------------------------------------------------
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 our value-added services is principally the result of
increased marketing and promotional efforts which have stimulated customer
demand and usage. Demand for these services also has been fueled by the
introduction of new and enhanced optional features. Revenues for the three and
six month periods of 1997 were reduced by the impact of the Pennsylvania rate
rebalancing plan, as described earlier.
Other Services Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Second Quarter $38.6 130.4%
- --------------------------------------------------------------------------------
Six Months $88.6 165.3%
- --------------------------------------------------------------------------------
Other services include revenues from our international wireless,
telecommunications consulting, and real estate businesses. As described
earlier, as a result of the restructuring of our Iusacell investment, we now
account for this investment as a fully consolidated subsidiary. In the prior
year, we accounted for this investment under the equity method.
The increase in other services revenues in both of the 1997 periods was
attributable to the recognition of Iusacell's operating revenues for the first
half of 1997. These increases were partially offset by lower revenues resulting
from the de-emphasis of certain nonstrategic businesses.
- ------------------
Operating Expenses
- ------------------
<TABLE>
<CAPTION>
Three months Six months % Change
--------------- --------------- -----------------------
For the Period Ended June 30 1997 1996 1997 1996 Quarter Year-to-Date
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employee costs $ 963.1 $ 981.8 $1,917.6 $1,964.2 (1.9)% (2.4)%
Depreciation and amortization 685.0 638.8 1,356.4 1,267.7 7.2 7.0
Other operating expenses 893.8 850.6 1,785.3 1,659.0 5.1 7.6
------------------------------------------
Total Operating Expenses $2,541.9 $2,471.2 $5,059.3 $4,890.9 2.9 3.4
==========================================
</TABLE>
14
<PAGE>
Employee Costs
- --------------------------------------------------------------------------------
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Second Quarter $(18.7) (1.9)%
- --------------------------------------------------------------------------------
Six Months $(46.6) (2.4)%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes.
Our network subsidiaries, which include our operating telephone subsidiaries,
a subsidiary that provides centralized services and support, and network-related
subsidiaries providing systems integration, CPE distribution, inside wiring,
long distance, and entertainment and information services, incurred lower
employee costs of $24.6 million or 2.5% in the second quarter of 1997 and $62.3
million or 3.2% year-to-date compared with the same periods in 1996.
Network employee costs declined in both periods of 1997 primarily as a result
of 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. We expect the lower level of benefit costs to
continue through the third quarter of 1997. This cost reduction was offset, in
part, by annual salary and wage increases and by higher overtime pay and the
effect of increased work force levels principally as a result of higher business
volumes. Work force levels at the network subsidiaries grew 6.9% from June 30,
1996.
Employee costs at our nonregulated subsidiaries increased $5.9 million in the
second quarter of 1997 and $15.7 million year-to-date, or more than 100% in
both periods, compared to the prior year. These increases were principally due
to the effect of consolidating our Iusacell investment, as described earlier.
Depreciation and Amortization
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Second Quarter $46.2 7.2%
- --------------------------------------------------------------------------------
Six Months $88.7 7.0%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the three and six months of
1997 over the same periods in 1996 principally as a result of growth in
depreciable telephone plant, changes in the mix of plant assets and the
consolidation of our Iusacell investment. These increases were partially offset
by the impact of slightly lower depreciation rates.
We use the composite group remaining life method to depreciate our telephone
plant assets. Under this method, we periodically revise depreciation rates
based on a number of factors. The composite depreciation rate for our operating
telephone subsidiaries was 7.6% for the six month period ended June 30, 1997
compared to 7.7% for the same period in 1996.
Other Operating Expenses
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Second Quarter $43.2 5.1%
- --------------------------------------------------------------------------------
Six Months $126.3 7.6%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services, rent, network software
costs, the provision for uncollectible accounts receivable, and other costs.
The rise in other operating expenses in the three and six month periods of
1997 was largely due to increased costs at our operating telephone subsidiaries
to market and advertise services and to comply with certain requirements of the
Telecommunications Act of 1996 to permit our eventual entry into the in-region
long distance business. We also reported higher expenses as a result of the
consolidation of our Iusacell investment and higher business volumes at our
systems integration services and plant and construction subsidiaries. Other
items affecting both periods of 1997, but to a lesser extent, were higher costs
associated with entering new businesses, primarily Internet and out-of-region
long distance services.
15
<PAGE>
These expense increases were partially offset by the timing of network
software purchases at our operating telephone subsidiaries and by the effect of
certain accrual adjustments recorded at our nonregulated subsidiaries in both
1997 and 1996.
We expect to continue to incur costs associated with our entry into Internet
and out-of-region long distance businesses, and with compliance with the
Telecommunications Act of 1996, for the remainder of 1997. We also anticipate
that we will incur additional costs associated with business initiatives in
fixed wireless and long distance at Iusacell.
Income from Unconsolidated Businesses
- --------------------------------------------------------------------------------
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Second Quarter $(35.0) (37.1)%
- --------------------------------------------------------------------------------
Six Months $(59.0) (35.6)%
- --------------------------------------------------------------------------------
Income from unconsolidated businesses includes equity income and losses and
goodwill amortization related to these investments. As described earlier,
beginning in the first quarter of 1997, we fully consolidated our investment in
Iusacell. In the prior year, we accounted for this investment under the equity
method.
The reductions in income from unconsolidated businesses were principally
attributable to higher equity losses and goodwill amortization associated with
our investments in several ventures, including a personal communications
services (PCS) joint venture, PrimeCo Personal Communications, L.P. (PrimeCo),
and an international wireless joint venture, Omnitel Pronto Italia S.p.A.
(Omnitel). In November 1996, PrimeCo launched commercial service in 16 major
cities throughout the country. In December 1996, we increased our ownership
interest in Omnitel from 11.67% to 17.45%.
The charge in the second quarter of 1997 associated with the write-down of our
CAI investment, as discussed earlier, and lower equity income from our
investment in Telecom Corporation of New Zealand Limited (Telecom) also
contributed to the reduction in income from unconsolidated businesses in the
second quarter and six month periods of 1997.
These decreases were partially offset by increased income from our investment
in Bell Atlantic NYNEX Mobile.
We expect that our earnings in 1997, as compared to 1996, will continue to be
reduced by losses associated with our share of PrimeCo's business and the effect
of our increased ownership interest in Omnitel.
Other Income and Expense, Net
- --------------------------------------------------------------------------------
1997-1996 Increase /(Decrease)
- --------------------------------------------------------------------------------
Second Quarter $(1.4)
- --------------------------------------------------------------------------------
Six Months $25.0
- --------------------------------------------------------------------------------
Other income and expense, net, consists primarily of interest and dividend
income, minority interest in net income (loss) of consolidated subsidiaries, and
gains and losses from the disposition of subsidiaries and non-operating assets
and investments.
The principal item affecting the change in other income and expense, net, in
both periods of 1997 was the recognition of Iusacell's net loss credited to
minority interest. The increases were more than offset in the second quarter of
1997 and partially offset in the first half of 1997 by an accrual recorded at
one of our nonregulated subsidiaries. Other individual items recorded in the
second quarter and six month periods were not material.
16
<PAGE>
Interest Expense
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Second Quarter $11.6 9.7%
- --------------------------------------------------------------------------------
Six Months $28.3 11.8%
- --------------------------------------------------------------------------------
Interest expense increased in the three and six month periods of 1997
principally as a result of consolidating our Iusacell investment. Higher
borrowing levels associated with our increased ownership interest in Omnitel and
a reduction in capitalized interest costs associated with our PrimeCo investment
also contributed to the rise in interest expense.
Effective Income Tax Rates
- --------------------------------------------------------------------------------
For the Three Months Ended June 30
- --------------------------------------------------------------------------------
1997 39.4%
- --------------------------------------------------------------------------------
1996 36.0%
- --------------------------------------------------------------------------------
For the Six Months Ended June 30
- --------------------------------------------------------------------------------
1997 38.7%
- --------------------------------------------------------------------------------
1996 37.0%
- --------------------------------------------------------------------------------
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 increase in the effective income tax rate for the
three and six month periods ended June 30, 1997 resulted from the effects of a
change in the Maryland state income tax law as it applies to certain
telecommunications companies, an increase in foreign income tax expense, and
changes in certain foreign results for which there are no corresponding tax
benefits or expense. These items were partially offset by net adjustments to
deferred income tax balances at certain subsidiaries.
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. We anticipate that our future annual New
Jersey income tax liability will be approximately equal to our current annual
New Jersey 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
- -------------------
<TABLE>
<CAPTION>
Six Months Ended June 30 1997 1996 Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From (Used In):
Operating activities $1,942.7 $1,884.2 $58.5
Investing activities (1,052.1) (1,115.8) 63.7
Financing activities (939.2) (1,061.5) 122.3
- -------------------------------------------------------------------------------
</TABLE>
We use the net cash generated from our operations and from external financing to
fund capital expenditures for network expansion and modernization, pay
dividends, and invest in new businesses. While current liabilities exceeded
current assets at both June 30, 1997 and 1996, our sources of funds, primarily
from operations and, to the extent necessary, from readily available external
financing arrangements, are sufficient to meet ongoing operating requirements.
We expect that presently foreseeable capital requirements will continue to be
financed primarily through internally generated funds. Additional debt or equity
financing may be needed to fund additional development activities or to maintain
our capital structure to ensure our financial flexibility.
17
<PAGE>
We limit our use of derivatives to managing risk that could jeopardize our
financing and operating flexibility, making cash flows more stable over the long
run, and achieving savings over other means of financing. Derivative agreements
are tied to specific liabilities or assets and hedge the related economic
exposures. The use of these hedging agreements has not had a material impact on
our financial condition or results of operations. We do not hold derivatives
for trading purposes.
The notional amounts of our derivative contracts are used to calculate
contractual payments to be exchanged and are not a measure of our credit risk or
our future cash requirements. Credit risk related to derivatives is limited to
nonperformance by counterparties to our contracts. We manage that credit risk
by limiting our exposure to any one financial institution and by monitoring our
counterparties' credit ratings. We believe the risk of loss due to
nonperformance by counterparties is remote and that any losses would not be
material to our financial condition or results of operations.
Cash Flows From Operating Activities
- --------------------------------------------------------------------------------
Our primary source of funds continued to be cash generated from operations. Cash
flows from operations were higher in the first half of 1997, as compared to the
same period in 1996, principally as a result of improved operating income. This
increase was largely offset by timing differences in the payment of accrued
liabilities and the impact of lower benefit costs on employee benefit
obligations.
Cash Flows Used in Investing Activities
- --------------------------------------------------------------------------------
Capital expenditures continued to be our primary use of capital resources. We
invested approximately $1,290 million in the first half of 1997, as compared to
$940 million in the first half of 1996, to support our network businesses in
order to facilitate the introduction of new products and services, enhance
responsiveness to competitive challenges, and increase the operating efficiency
and productivity of the network. The increase in telephone plant expenditures
is principally due to the timing of construction plans.
During the first six months of 1997, we invested approximately $100 million in
unconsolidated businesses, substantially all in PrimeCo to fund the continued
build-out of their PCS network. Cash investing activities in the first six
months of 1996 included additional investments of approximately $63 million in
PrimeCo, $22 million in Omnitel and $37 million in other partnerships.
Our short-term investments include cash equivalents held in trust accounts for
the payment of certain employee benefits. During the first half of 1997, we
invested $140.0 million in a vacation pay trust, compared to $130.0 million in
the first half of 1996. Proceeds from our short-term investments were $202.7
million year-to-date 1997, compared to $32.5 million year-to-date 1996.
In the second quarter of 1997, we received cash proceeds of $271.5 million
from the sales of our real estate properties and our interest in a joint
venture.
During the first half of 1997, we received cash proceeds of $82.0 million from
Telecom's share repurchase plan. In connection with that plan, we anticipate
that Telecom will continue to repurchase a portion of our stock investment, to
the extent necessary to keep our percentage ownership interest in Telecom from
exceeding the maximum permitted level of 24.95%. Telecom's plan is expected to
result in total cash proceeds to us of approximately $155 million to $165
million.
Cash Flows Used in Financing Activities
- --------------------------------------------------------------------------------
As in prior years, dividend payments were a significant use of capital
resources. We determine the appropriateness of the level of our dividend
payments on a periodic basis by considering such factors as long-term growth
opportunities, internal cash requirements, and the expectations of our
shareowners. In the definitive merger agreement with NYNEX, we agreed, pending
closing of the merger, that our quarterly dividend payments would not exceed
$.72 per share through the February 1, 1997 payment date or $.74 per share
beginning with the May 1, 1997 payment date. Our dividend following the
completion of the merger is expected to be, initially, $3.08 per share on an
annualized basis.
18
<PAGE>
We reduced our long-term debt (including capital lease obligations) and short-
term debt by $7.3 million from December 31, 1996. This reduction was
principally attributable to the proceeds received from the sales of our real
estate properties and our interest in a joint venture, and the Telecom share
repurchase plan. The effect of these receipts was substantially offset by the
consolidation of our Iusacell investment and funding for expenditures associated
with our PrimeCo investment and telephone plant construction. Our debt ratio
was 51.0% as of June 30, 1997, compared to 52.6% as of June 30, 1996 and 52.2%
as of December 31, 1996.
In the second quarter of 1997, we reduced our Series B Preferred Stock of
subsidiary by 100,000 shares through the purchase of the stock by a wholly owned
subsidiary for $10.0 million.
As of June 30 1997, we had unused bank lines of credit in excess of $1.8
billion. Our subsidiaries have shelf registrations for the issuance of up to
$1.9 billion of unsecured debt securities. The debt securities of our
subsidiaries continue to be accorded high ratings by primary rating agencies.
As a result of the consolidation of our Iusacell investment in the first
quarter of 1997, our condensed consolidated balance sheet at June 30, 1997
reflects increases and decreases in certain categories of assets and
liabilities; however, the consolidation had no material effect on our financial
condition.
- --------------------------------------
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 our current businesses, but will also open new markets to us.
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 Operating Companies, such as our
company, to provide interLATA (long distance) services and to engage in
manufacturing. However, our ability 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 we must
comply in order to provide in-region long distance services is a 14-point
"competitive checklist" which includes steps we must take which will help
competitors offer local service, either through resale, through the purchase of
unbundled network elements, or through their own networks. We must also
demonstrate to the FCC that our entry into the long distance market within the
states served by our operating telephone subsidiaries 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 states have proceeded to adopt pricing and other standards for local
interconnection.
We are unable to predict definitively the impact that the Act will have on our
business, results of operations or financial condition. The financial impact
will depend on several factors, including the timing, extent and success of
competition in our markets, and the timing, extent and success of our pursuit of
new opportunities resulting from the Act.
We anticipate 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 our future revenue growth. You should read the "Competition" section
below for additional information.
19
<PAGE>
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 we do not
believe that these proceedings will result in a material adverse impact on our
results of operations or financial condition.
Access Charges
Access charges are the rates long distance carriers pay for use and availability
of the operating telephone subsidiaries' 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 operating telephone subsidiaries to recover their 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 operating
telephone subsidiaries 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 operating telephone subsidiaries' 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 our operating telephone subsidiaries.
Price Caps
The FCC also adopted modifications to its price cap rules that affect access
rate levels. Under the FCC's price cap rules, our 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,
Bell Atlantic'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 operating telephone subsidiaries' networks to provide
equal access to facilities for all long distance carriers.
On June 30, 1997, we made our 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 totaling approximately $230 million, of which
$54.5 million is a result of one-time adjustments which will only be in effect
until July 1998.
The FCC is expected to adopt an order later this year to address the
conditions under which the FCC would relax or remove existing access rate
structure requirements and price cap restrictions as increased local market
competition develops. We are 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.
20
<PAGE>
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 each of our operating telephone subsidiaries
to contribute approximately 1% to 2% of its revenues for high cost and low
income subsidies. We will also be contributing about 5% for schools, libraries
and not-for-profit health care. We will, however, be afforded the opportunity
to recover our 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 state regulatory commissions rather than federal
authorities. All of our state regulatory commissions (except in the District of
Columbia, where intraLATA toll service is not provided) permit other carriers to
offer intraLATA toll services within the state.
Currently, intraLATA toll calls in these states (except New Jersey) are
completed by our operating telephone subsidiaries unless the customer dials a
code to access a competing carrier. This dialing method is changed by
"presubscription," which would enable customers to make these toll calls using
another carrier without having to dial an access code.
The Act addressed the issue of presubscription by prohibiting a state from
requiring presubscription or "dialing parity" until the earlier of such time as
the Bell Operating Company is authorized to provide long distance services
originating in the state or three years from the effective date of the Act.
This prohibition does not apply to a final order requiring presubscription that
was issued on or prior to December 19, 1995 or to states consisting of a single
LATA.
In several states, the regulatory commissions have adopted orders requiring
our operating telephone subsidiaries to provide intraLATA presubscription in
1997. Bell Atlantic - New Jersey implemented presubscription on May 5, 1997 as
required by order of the Board of Public Utilities. The Pennsylvania Public
Utility Commission ordered presubscription by July 31, 1997. The Public Service
Commission in West Virginia ordered presubscription by August 15, 1997. On
April 8, 1997, the Delaware Public Service Commission (DPSC) extended
implementation of presubscription from July 31, 1997 to September 15, 1997. In
June 1997, we filed suit in federal district court in Delaware challenging the
DPSC's order, on the grounds that Delaware is not a single LATA state, and
asserted that presubscription should not be implemented in Delaware until long
distance authority is granted by the FCC. A temporary restraining order was
issued by the court preventing the DPSC from requiring us to provide customers
with notice of the implementation of presubscription, and we expect this case to
be decided before the September 15, 1997 implementation date. We expect to
offer intraLATA presubscription in Virginia and Maryland coincident with our
offering of long distance services in those states, as required by the Act.
Implementation of presubscription for intraLATA toll services could have a
material negative effect on toll service revenues, especially in those
jurisdictions where presubscription is implemented before we are permitted to
offer long distance services. We expect to petition the FCC for permission to
enter the in-region long distance market in one or more states in 1997. We are
unable to predict when we 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 state
regulatory commissions. Applications from competitors to provide and resell
local exchange services have been approved in all of our state jurisdictions.
The Act is expected to significantly increase the level of competition in all of
our local exchange markets.
21
<PAGE>
- -------------
Other Matters
- -------------
Proposed Bell Atlantic--NYNEX Merger
- --------------------------------------------------------------------------------
Bell Atlantic and NYNEX announced a proposed merger of equals under a definitive
merger agreement entered into on April 21, 1996 and amended on July 2, 1996.
Under the terms of the amended agreement, NYNEX will become a subsidiary of Bell
Atlantic. NYNEX stockholders will receive 0.768 of a share of Bell Atlantic
common stock for each share of NYNEX common stock that they own. Bell Atlantic
stockholders will continue to own their existing shares after the merger.
We expect that the merger will qualify as a "pooling of interests," which
means that, for accounting and financial reporting purposes, the companies will
be treated as if they had always been combined. 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 within the next several
weeks. 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 our local exchange markets. We do not expect these commitments
to have a material impact on our results of operations or financial condition.
After the closing of the merger, we will file, as part of a Current Report on
Form 8-K, unaudited pro forma combined condensed financial statements which give
effect to the merger using the pooling-of-interests method.
Future operating revenues, expenses and net income of the post-merger company
may not follow the same historical trends, or reflect the same dependence on
economic and competitive factors, as presented above in our discussion of our
own historical results of operations and financial condition.
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, we claim
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 our 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) the timing of presubscription for toll services; (v)
future state regulatory actions in the company's operating areas; (vi) the
extent, timing and success of competition from others in the local telephone and
toll service markets; and (vii) the timing of entry and profitability of the
company in the long distance market.
22
<PAGE>
- ---------------------------
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 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
The Company's 1997 Annual Meeting of Shareowners was held on May 2, 1997. At
the meeting, the following items were submitted to a vote of shareowners.
(a) The following nominees were elected to serve on the Board of
Directors:
<TABLE>
<CAPTION>
Name of Nominee Votes Cast For Votes Withheld
--------------- -------------- --------------
<S> <C> <C>
William W. Adams 344,210,148 7,202,051
William O. Albertini 344,161,177 7,251,022
Lawrence T. Babbio, Jr. 344,124,074 7,288,125
Thomas E. Bolger 343,783,342 7,628,857
Frank C. Carlucci 343,420,539 7,991,660
James G. Cullen 344,132,665 7,279,534
James H. Gilliam, Jr. 344,173,910 7,238,289
Thomas H. Kean 343,993,026 7,419,173
John F. Maypole 344,211,558 7,200,641
Joseph Neubauer 344,237,109 7,175,090
Thomas H. O'Brien 344,210,599 7,201,600
Eckhard Pfeiffer 344,211,661 7,200,538
Rozanne L. Ridgway 344,078,925 7,333,274
Raymond W. Smith 342,744,735 8,667,464
Shirley Young 344,033,105 7,379,094
</TABLE>
(b) The appointment of Coopers & Lybrand L.L.P. as independent accountants
of the Company for 1997 was ratified with 345,628,242 votes for, 3,411,185
votes against, and 2,372,772 abstentions.
(c) A shareowner proposal regarding additional disclosure of executive
officer compensation was defeated with 41,189,118 votes for, 251,338,011
votes against, 9,394,974 abstentions, and 49,490,096 broker non-votes.
(d) A shareowner proposal regarding cumulative voting was defeated with
65,611,011 votes for, 214,467,334 votes against, 21,843,852 abstentions,
and 49,490,002 broker non-votes.
(e) A shareowner proposal regarding executive incentive compensation was
defeated with 43,056,763 votes for, 249,524,902 votes against, 9,340,531
abstentions, and 49,490,003 broker non-votes.
With respect to items (b) through (e), abstentions and broker non-votes are not
counted in the vote totals in accordance with the Company's by-laws and,
therefore, have no effect on the vote.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) Exhibits:
Exhibit Number
11 Computation of Per Common Share Earnings.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1997:
A Current Report on Form 8-K, dated April 17, 1997, was filed regarding the
Company's first quarter 1997 financial results.
24
<PAGE>
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 CORPORATION
Date: July 24, 1997 By /s/ William O. Albertini
------------------------
William O. Albertini
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF JULY 23, 1997.
25
<PAGE>
Exhibit 11
1 of 2
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Per Common Share Earnings
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net income...................................... $ 498.9 $ 463.7
============ ============
Earnings Per Common Share
Weighted average shares outstanding............. 437,469,281 437,751,400
Incremental shares from assumed exercise of
stock options and payment of deferred
performance share awards....................... 2,029,270 1,804,543
------------ ------------
Total shares.................................... 439,498,551 439,555,943
============ ============
Net income...................................... $ 1.14 $ 1.05
============ ============
Fully Diluted Earnings Per Common Share*
Weighted average shares outstanding............. 437,469,281 437,751,400
Incremental shares from assumed exercise of
stock options and payment of deferred
performance share awards....................... 3,512,438 1,909,055
------------ ------------
Total shares.................................... 440,981,719 439,660,455
============ ============
Net income...................................... $ 1.13 $ 1.05
============ ============
</TABLE>
* Fully diluted earnings per share calculation is presented in accordance with
Regulation S-K item 601(b)(11) although not required by footnote 2 to
paragraph 14 of Accounting Principles Board Opinion No. 15 because it results
in dilution of less than 3%.
<PAGE>
Exhibit 11
2 of 2
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Per Common Share Earnings
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Income before cumulative effect of
change in accounting principle...................... $ 1,014.5 $ 928.4
Cumulative effect of change in accounting principle.. -- 142.1
------------ ------------
Net income........................................... $ 1,014.5 $ 1,070.5
============ ============
Earnings Per Common Share
Weighted average shares outstanding.................. 437,617,277 437,724,359
Incremental shares from assumed exercise of stock
options and payment of deferred performance share
awards.............................................. 2,057,049 2,164,240
------------ ------------
Total shares......................................... 439,674,326 439,888,599
============ ============
Income before cumulative effect of
change in accounting principle...................... $ 2.31 $ 2.11
Cumulative effect of change in accounting
principle........................................... -- .32
------------ ------------
Net income........................................... $ 2.31 $ 2.43
============ ============
Fully Diluted Earnings Per Common Share*
Weighted average shares outstanding.................. 437,617,277 437,724,359
Incremental shares from assumed exercise
of stock options and payment of deferred
performance share awards............................ 2,816,431 2,216,496
------------ ------------
Total shares......................................... 440,433,708 439,940,855
============ ============
Income before cumulative effect of
change in accounting principle...................... $ 2.30 $ 2.11
Cumulative effect of change in accounting
principle........................................... -- .32
------------ ------------
Net income........................................... $ 2.30 $ 2.43
============ ============
</TABLE>
* Fully diluted earnings per share calculation is presented in accordance with
Regulation S-K item 601(b)(11) although not required by footnote 2 to
paragraph 14 of Accounting Principles Board Opinion No. 15 because it
results in dilution of less than 3%.
<PAGE>
Exhibit 12
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
<TABLE>
<CAPTION>
Six months ended
June 30, 1997
----------------
<S> <C>
Income before provision for income taxes.................... $ 1,653.9
Equity in income of less than majority-owned subsidiaries... (106.9)
Dividends from less than majority-owned subsidiaries........ 65.4
Interest expense, including interest on capital lease
obligations................................................ 272.0
Portion of rent expense representative of the interest
factor..................................................... 48.7
---------
Income, as adjusted......................................... $ 1,933.1
=========
Fixed charges:
Interest expense, including interest on capital lease
obligations................................................ $ 272.0
Portion of rent expense representative of the interest
factor..................................................... 48.7
Capitalized interest........................................ 13.7
Preferred stock dividend.................................... 7.7
---------
Fixed charges............................................... $ 342.1
=========
Ratio of Earnings to Fixed Charges.......................... 5.65
=========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 317
<SECURITIES> 0
<RECEIVABLES> 3,137
<ALLOWANCES> 263
<INVENTORY> 191
<CURRENT-ASSETS> 3,950
<PP&E> 35,630
<DEPRECIATION> 19,703
<TOTAL-ASSETS> 24,978
<CURRENT-LIABILITIES> 5,526
<BONDS> 5,816
0
0
<COMMON> 438
<OTHER-SE> 7,321
<TOTAL-LIABILITY-AND-EQUITY> 24,978
<SALES> 0
<TOTAL-REVENUES> 6,855
<CGS> 0
<TOTAL-COSTS> 5,059
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 269
<INCOME-PRETAX> 1,654
<INCOME-TAX> 639
<INCOME-CONTINUING> 1,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,015
<EPS-PRIMARY> 2.31
<EPS-DILUTED> 0
</TABLE>
