<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 March 31, 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 March 31, 1997, 437,766,677 shares of the registrant's Common Stock were
outstanding, after deducting 49,590 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 months ended March 31, 1997 and 1996.............. 1
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996............................ 2-3
Condensed Consolidated Statement of Changes in Shareowners'
Investment
For the three months ended March 31, 1997....................... 4
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 1997 and 1996.............. 5
Notes to Condensed Consolidated Financial Statements.............. 6-8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9-20
Part II. Other Information
- ---------------------------------------------------------------------------------
1. Legal Proceedings...................................................... 20
6. Exhibits and Reports on Form 8-K....................................... 20
</TABLE>
<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
March 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING REVENUES.................................... $3,413.9 $3,219.9
-------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes.......... 954.5 982.4
Depreciation and amortization......................... 671.4 628.9
Other................................................. 891.5 808.4
-------- --------
2,517.4 2,419.7
-------- --------
OPERATING INCOME...................................... 896.5 800.2
Income from Unconsolidated Businesses................. 47.6 71.6
Other Income and Expense, Net......................... 24.1 (2.3)
Interest Expense...................................... 137.5 120.8
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.. 830.7 748.7
Provision for Income Taxes............................ 315.1 284.0
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE....................... 515.6 464.7
Cumulative effect of change in accounting principle
Directory publishing, net of tax..................... -- 142.1
-------- --------
NET INCOME............................................ $ 515.6 $ 606.8
======== ========
PER COMMON SHARE
- ----------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE....................... $ 1.17 $ 1.06
Cumulative effect of change in accounting principle... -- .32
-------- --------
NET INCOME............................................ $ 1.17 $ 1.38
======== ========
Cash Dividends Declared............................... $ .74 $ .72*
======== ========
Weighted Average Number of Common Shares and
Equivalent Shares Outstanding (in millions).......... 439.9 440.2
======== ========
</TABLE>
*Includes payment of $.005 per common share for redemption of rights under our
Shareholder Rights Plan.
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions)
- ------
Assets
- ------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.............................. $ 144.8 $ 152.5
Short-term investments................................. 332.4 271.7
Accounts receivable, net of allowances of $271.4 and
$248.3................................................ 2,796.3 2,846.8
Inventories............................................ 175.0 148.7
Prepaid expenses....................................... 418.5 402.0
Other.................................................. 188.1 126.3
------------ ------------
4,055.1 3,948.0
------------ ------------
PLANT, PROPERTY AND EQUIPMENT.......................... 35,461.8 34,758.4
Less accumulated depreciation.......................... 19,322.0 18,842.7
------------ ------------
16,139.8 15,915.7
------------ ------------
INVESTMENTS IN UNCONSOLIDATED BUSINESSES............... 3,432.8 3,766.8
OTHER ASSETS........................................... 1,588.5 1,225.7
------------ ------------
TOTAL ASSETS........................................... $ 25,216.2 $ 24,856.2
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
- ---------------------------------------
Liabilities and Shareowners' Investment
- ---------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year....................... $ 2,263.7 $ 2,137.3
Accounts payable and accrued liabilities............ 2,853.9 2,902.7
Other............................................... 685.0 662.8
------------ ------------
5,802.6 5,702.8
------------ ------------
LONG-TERM DEBT...................................... 5,943.0 5,960.2
------------ ------------
EMPLOYEE BENEFIT OBLIGATIONS........................ 3,867.1 3,887.4
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................... 1,263.5 1,229.9
Unamortized investment tax credits.................. 118.3 123.0
Other............................................... 468.5 385.1
------------ ------------
1,850.3 1,738.0
------------ ------------
PREFERRED STOCK OF SUBSIDIARY....................... 145.0 145.0
------------ ------------
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................................. 5,510.9 5,510.9
Reinvested earnings................................. 2,563.5 2,381.9
Foreign currency translation adjustment............. (475.2) (458.5)
------------ ------------
8,037.0 7,872.1
Less common stock in treasury, at cost.............. 3.3 3.6
Less deferred compensation-employee stock ownership
plans.............................................. 425.5 445.7
------------ ------------
7,608.2 7,422.8
------------ ------------
TOTAL LIABILITIES AND SHAREOWNERS' INVESTMENT....... $ 25,216.2 $ 24,856.2
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareowners' Investment
(Unaudited)
(Dollars in Millions and Shares in Thousands)
<TABLE>
<CAPTION>
Three months ended
March 31, 1997
--------------------
Shares Amount
-------- ----------
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period................... 437,816 $ 437.8
------- --------
CONTRIBUTED CAPITAL
Balance at beginning and end of period................... 5,510.9
--------
REINVESTED EARNINGS
Balance at beginning of period........................... 2,381.9
Net income............................................... 515.6
Dividends declared....................................... (323.9)
Shares distributed:
Employee plans.......................................... (13.2)
Tax benefit of dividends paid to ESOPs................... 1.8
Other.................................................... 1.3
--------
Balance at end of period................................. 2,563.5
--------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at beginning of period........................... (458.5)
Translation adjustments, net............................. (16.7)
--------
Balance at end of period................................. (475.2)
--------
TREASURY STOCK
Balance at beginning of period........................... 54 3.6
Shares purchased......................................... 820 56.2
Shares distributed:
Employee plans.......................................... (802) (55.0)
Shareowner plans........................................ (22) (1.5)
------- --------
Balance at end of period................................. 50 3.3
------- --------
DEFERRED COMPENSATION--ESOPs
Balance at beginning of period........................... 445.7
Amortization............................................. (20.2)
--------
Balance at end of period................................. 425.5
--------
TOTAL SHAREOWNERS' INVESTMENT............................ $7,608.2
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 515.6 $ 606.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 671.4 628.9
Cumulative effect of change in
accounting principle, net of tax...................... -- (142.1)
Income from unconsolidated businesses................... (47.6) (71.6)
Dividends received from unconsolidated businesses....... 31.7 29.6
Other items, net........................................ 22.2 16.7
Changes in certain assets and liabilities, net of
effects from acquisition/disposition of businesses.... (10.5) 101.7
-------- --------
Net cash provided by operating activities.................. 1,182.8 1,170.0
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments....................... (47.8) (130.0)
Additions to plant, property and equipment................. (617.2) (459.4)
Proceeds from sale of plant, property and equipment........ .1 .2
Investment in notes receivable............................. (9.6) (.3)
Proceeds from notes receivable............................. 1.0 33.5
Acquisition of businesses, less cash acquired.............. -- (2.2)
Proceeds from Telecom Corporation of New Zealand Limited
share repurchase plan.................................... 21.9 --
Investments in unconsolidated businesses, net.............. (38.4) (64.3)
Other, net................................................. (62.5) 18.8
-------- --------
Net cash used in investing activities...................... (752.5) (603.7)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital lease
obligations............................................... (11.4) (84.5)
Net change in short-term borrowings with original
maturities of three months or less........................ (21.7) (381.7)
Dividends paid............................................. (315.2) (306.5)
Proceeds from sale of common stock......................... 41.3 43.5
Purchase of common stock for treasury...................... (56.1) (66.3)
Net change in outstanding checks drawn on controlled
disbursement accounts..................................... (74.9) (70.8)
-------- --------
Net cash used in financing activities...................... (438.0) (866.3)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS...................... (7.7) (300.0)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 152.5 356.8
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 144.8 $ 56.8
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<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, and we may be required to provide
Iusacell up to $150 million in financing. 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 March 31, 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 $5.6 billion at
March 31, 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.
6
<PAGE>
6. 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.
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 a number of conditions, including certain
regulatory reviews, all but one of which have been completed, and receipt of
opinions that the merger will be tax free. We expect to close the merger in the
second quarter of 1997.
We have provided the following unaudited pro forma combined condensed
financial statements which give effect to the merger using the pooling-of-
interests method of accounting. These financial statements include certain
reclassifications to conform to the presentation that will be used by the post-
merger company, and certain pro forma adjustments that conform the companies'
methods of accounting. It is possible that additional adjustments or
reclassifications could be made in the future as the historical financial
statements are restated under the pooling of interests method of accounting.
Accordingly, the restated historical financial statements of the merged company
may differ from the Pro Forma Combined Condensed Statement of Income and the Pro
Forma Combined Condensed Balance Sheet for the quarter ended March 31, 1997, and
the Pro Forma Combined Condensed Statements of Income for the years ended
December 31, 1996, 1995 and 1994 and the Pro Forma Combined Condensed Balance
Sheet at December 31, 1996, as presented in our 1996 Annual Report to
shareowners. Any such additional adjustments or reclassifications are not
expected to be significant.
This information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred had the merger been consummated at the dates indicated, nor is it
necessarily indicative of future operating results or financial position of the
post-merger company.
- ------------------------------------------------
Pro Forma Combined Condensed Statement of Income
- ------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amount)
Three months ended
March 31, 1997
----------------------
<S> <C>
Operating revenues........................ $ 7,417.1
Operating expenses........................ 5,957.0
---------
Operating income.......................... 1,460.1
Loss from unconsolidated businesses....... (34.7)
Other income and expense, net............. 4.7
Interest expense.......................... 329.5
Provision for income taxes................ 404.2
---------
Net income................................ $ 696.4
=========
Net income per common share............... $ .90
=========
Weighted average number of common shares
outstanding (in millions)................ 775.8
=========
</TABLE>
7
<PAGE>
- ------------------------------------------
Pro Forma Combined Condensed Balance Sheet
- ------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions)
At March 31, 1997
----------------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents............................ $ 257.7
Short-term investments............................... 350.8
Accounts receivable, net............................. 6,005.1
Other................................................ 1,869.5
----------
8,483.1
----------
Plant, property and equipment.......................... 77,043.0
Less accumulated depreciation........................ 40,551.9
----------
36,491.1
----------
Investments in unconsolidated businesses............... 4,553.1
----------
Other assets........................................... 4,336.6
----------
TOTAL ASSETS........................................... $ 53,863.9
==========
LIABILITIES AND SHAREOWNERS' INVESTMENT
Current liabilities
Debt maturing within one year........................ $ 5,518.7
Accounts payable and accrued liabilities............. 5,321.0
Other................................................ 1,252.2
----------
12,091.9
----------
Long-term debt......................................... 13,504.8
----------
Employee benefit obligations........................... 10,276.7
----------
Deferred credits and other liabilities................. 2,841.4
----------
Minority interest, including a portion subject to
redemption requirements............................... 2,104.4
----------
Preferred stock of subsidiary.......................... 145.0
----------
Shareowners' investment
Common stock......................................... 78.7
Contributed capital.................................. 13,284.5
Reinvested earnings.................................. 1,289.3
Foreign currency translation adjustment.............. (419.8)
----------
14,232.7
Less common stock in treasury, at cost............... 592.2
Less deferred compensation-employee stock ownership
plans............................................... 740.8
----------
12,899.7
----------
TOTAL LIABILITIES AND SHAREOWNERS' INVESTMENT.......... $ 53,863.9
==========
</TABLE>
It is anticipated that a one-time pretax charge of approximately $200 million
for direct incremental merger-related costs will be recorded in the quarter in
which the merger is completed. In the March 31, 1997 pro forma combined
condensed balance sheet, unpaid merger-related costs have been reflected as an
increase to accounts payable and accrued liabilities, with a deferred tax
benefit included in other assets. On an after-tax basis, these costs have been
reflected as a reduction in reinvested earnings.
8
<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 6 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 following "Results of
Operations."
Proposed Merger of Bell Atlantic and NYNEX
- --------------------------------------------------------------------------------
In 1996, we announced a definitive agreement to merge with NYNEX Corporation.
We expect to close the merger in the second quarter of 1997.
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. Information about the proposed merger is provided in the "Other
Matters--Proposed Bell Atlantic--NYNEX Merger" section on page 19, and in Note 6
to the condensed consolidated financial statements on pages 7 and 8.
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.
Other items affecting the comparison of our results of operations for the
three month periods ended March 31, 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.
9
<PAGE>
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
<TABLE>
<CAPTION>
Our financial results for the first quarter of 1997 as compared to the first
quarter of 1996 are summarized as follows:
Three months ended March 31 1997 1996 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $3,413.9 $3,219.9 $194.0 6.0%
Operating expenses 2,517.4 2,419.7 97.7 4.0
Income before cumulative effect of
change in accounting principle 515.6 464.7 50.9 11.0
Net income 515.6 606.8 (91.2) (15.0)
Per Common Share
Income before cumulative effect of
change in accounting principle 1.17 1.06 .11 10.4
Net income 1.17 1.38 (.21) (15.2)
- --------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------
Transport Services Operating Statistics
- ---------------------------------------
<TABLE>
<CAPTION>
1997 1996 % Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
At March 31
- -----------
Access Lines in Service (in thousands)*
Residence 13,135 12,747 3.0%
Business 7,407 7,023 5.5
Public 275 275 --
------------------
Total Access Lines in Service 20,817 20,045 3.9
==================
Three Months ended March 31
- ---------------------------
Access Minutes of Use (in millions)
Interstate 16,707 16,128 3.6
Intrastate 4,615 4,573 0.9
------------------
Total Access Minutes of Use 21,322 20,701 3.0
==================
Toll Messages (in millions)
Intrastate 822.9 854.2 (3.7)
Interstate 39.0 42.6 (8.5)
------------------
Total Toll Messages 861.9 896.8 (3.9)
==================
</TABLE>
* 1996 reflects a restatement of access lines in service
- ------------------
Operating Revenues
- ------------------
<TABLE>
<CAPTION>
Three Months ended March 31 1997 1996 % Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Transport Services
Local service $1,188.7 $1,139.7 4.3%
Network access 917.1 877.9 4.5
Toll service 335.9 369.6 (9.1)
Ancillary Services
Directory publishing 305.5 298.5 2.3
Other 157.7 138.3 14.0
Valued-added Services 435.0 371.9 17.0
Other Services 74.0 24.0 208.3
------------------
Total Operating Revenues $3,413.9 $3,219.9 6.0
==================
</TABLE>
10
<PAGE>
Local Service Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
First Quarter $49.0 4.3%
- --------------------------------------------------------------------------------
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 first quarter of 1997. This growth was
generated by an increase in access lines in service of 3.9% from March 31, 1996.
Stronger 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 the first quarter of 1997.
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 16.
Network Access Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
First Quarter $39.2 4.5%
- --------------------------------------------------------------------------------
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.
Network access revenues increased in the first quarter of 1997 primarily due
to higher customer demand as reflected by growth in access minutes of use of
3.0% from March 31, 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 the first quarter of 1997. This volume-related growth was
partially offset by net price reductions, principally for intrastate switched
access services. Reported growth in access minutes of use and revenues was
negatively affected by increased calling volumes during the first quarter of
1996 caused by severe winter storms.
For a discussion of Federal Communications Commission (FCC) rulemakings
concerning access charges, price caps and universal service, see "Factors That
May Impact Future Results--Recent Developments--FCC Orders" beginning on page
17.
Toll Service Revenues
- --------------------------------------------------------------------------------
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(33.7) (9.1)%
- --------------------------------------------------------------------------------
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 Local Access and Transport Areas
("LATAs"). 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 reduction in toll service revenues in the first quarter of 1997 was caused
by a decline in toll message volumes of 3.9%, company-initiated price
reductions, and extended local calling areas. The decrease in toll messages was
almost entirely due to the effect of storm-driven usage experienced in the first
quarter of 1996. Price reductions were implemented on certain toll services as
part of our response to competition.
We believe that competition for toll services, including the introduction of
presubscription in several of our operating telephone subsidiaries beginning in
the second quarter of 1997, will continue to impact future revenue growth. You
should read "Factors That May Impact Future Results--Competition--IntraLATA Toll
Services" on page 18 for a further discussion of presubscription.
11
<PAGE>
Directory Publishing Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
First Quarter $7.0 2.3%
- --------------------------------------------------------------------------------
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.
Other Ancillary Services Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
First Quarter $19.4 14.0%
- --------------------------------------------------------------------------------
Our company provides other ancillary services which include systems
integration services, plant and construction services provided to other
telecommunications carriers, billing and collection services provided to long
distance carriers, CPE distribution, facilities rental services, and video and
information services.
In the first quarter of 1997, other ancillary services revenue growth was
boosted by higher business volumes resulting from contracts with business
customers for systems integration and plant and construction 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
- --------------------------------------------------------------------------------
First Quarter $63.1 17.0%
- --------------------------------------------------------------------------------
Value-added services represent 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 other customer premises wiring and
maintenance services.
Improved 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.
Other Services Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
First Quarter $50.0 208.3%
- --------------------------------------------------------------------------------
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 that 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 was almost entirely attributable to
the recognition of Iusacell's revenues for the first quarter 1997.
12
<PAGE>
- ------------------
Operating Expenses
- ------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months ended March 31 1997 1996 % Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee Costs $ 954.5 $ 982.4 (2.8)%
Depreciation and Amortization 671.4 628.9 6.8
Other Operating Expenses 891.5 808.4 10.3
---------------------
Total Operating Expenses $2,517.4 $2,419.7 4.0
=====================
</TABLE>
Employee Costs
- --------------------------------------------------------------------------------
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(27.9) (2.8)%
- --------------------------------------------------------------------------------
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 $37.7 million or 3.9% in the first quarter of 1997 compared
with the same period last year.
Network employee costs declined in the first quarter 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 for the remainder of 1997. This cost reduction was offset, in
part, by annual salary and wage increases, higher overtime pay principally as a
result of higher business volumes, and the effect of increased work force levels
primarily at the network-related subsidiaries.
Employee costs at our nonregulated subsidiaries increased $9.8 million or more
than 100% in the first quarter 1997 compared to the same period last year. This
increase was principally due to the effect of consolidating our Iusacell
investment, as described earlier.
Depreciation and Amortization
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
First Quarter $42.5 6.8%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first quarter of 1997
over the same period 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.
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 three month period ended March 31, 1997
compared to 7.7% for the same period in 1996. The change in depreciation rates
did not have a significant impact on depreciation and amortization expense in
the first quarter of 1997.
Other Operating Expenses
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
First Quarter $83.1 10.3%
- --------------------------------------------------------------------------------
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 first quarter 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 at our other
subsidiaries as a result of the consolidation of our Iusacell investment, higher
13
<PAGE>
business volumes and entry into new businesses, primarily Internet and out-of-
region long distance services. These expense increases were partially offset by
lower software and system costs at our operating telephone subsidiaries.
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. If we are permitted entry into
the in-region long distance business during 1997, operating expenses associated
with entering this business will escalate.
Income from Unconsolidated Businesses
- --------------------------------------------------------------------------------
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(24.0) (33.5)%
- --------------------------------------------------------------------------------
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 consolidate our investment in
Iusacell. In the prior year, we accounted for this investment under the equity
method.
The reduction in income from unconsolidated businesses was 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%.
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 first quarter of 1997. This reduction was
principally due to the recognition of our share of a loss on the planned
disposition of one of Telecom's partnership investments.
These decreases were partially offset by the effect of the consolidation of
our Iusacell investment, effective in the first quarter of 1997.
We expect that our earnings in 1997, as compared to 1996, will continue to be
reduced by increased 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
- --------------------------------------------------------------------------------
First Quarter $26.4
- --------------------------------------------------------------------------------
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 change in other income and expense, net, is principally due to the
recognition of Iusacell's net loss credited to minority interest and the effect
of reversing an accrual recorded in 1996.
Interest Expense
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
First Quarter $16.7 13.8%
- --------------------------------------------------------------------------------
Interest expense increased in the first quarter 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.
14
<PAGE>
Provision for Income Taxes
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
First Quarter $31.1 11.0%
- --------------------------------------------------------------------------------
The increase in the provision for income taxes is principally attributable to
growth in pre-tax income. The effective income tax rate, which is the provision
for income taxes as a percentage of income before provision for income taxes and
cumulative effect of change in accounting principle, was 37.9% for both three-
month periods ended March 31, 1997 and 1996.
- -------------------
FINANCIAL CONDITION
- -------------------
<TABLE>
<CAPTION>
Three Months ended March 31 1997 1996 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From (Used In):
Operating activities $1,182.8 $1,170.0 $ 12.8
Investing activities (752.5) (603.7) (148.8)
Financing activities (438.0) (866.3) 428.3
- --------------------------------------------------------------------------------
</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 March 31, 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 long-term debt
or equity financing may be needed to fund additional development activities or
to maintain our capital structure to ensure our financial flexibility.
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 was higher in the first quarter of 1997, as compared
to the same period in 1996, principally as a result of improved operating
income, largely offset by timing differences in the payment of accrued taxes and
other liabilities.
Cash Flows Used in Investing Activities
- --------------------------------------------------------------------------------
Capital expenditures continued to be our primary use of capital resources. We
invested approximately $595 million during the first quarter of 1997, as
compared to $440 million in the first quarter 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 quarter of 1997, we invested $38.4 million in unconsolidated
businesses, principally in PrimeCo to fund the build-out of a PCS network.
15
<PAGE>
Our short-term investments include cash equivalents held in trust accounts for
the payment of certain employee benefits. During the first quarter of 1997, we
invested $140.0 million in a vacation pay trust, compared to $130.0 million in
the first quarter of 1996.
During the first quarter of 1997, we received cash proceeds of $21.9 million
from Telecom's share repurchase plan. In connection with that plan, we
anticipate that Telecom will 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.
We increased our long-term debt (including capital lease obligations) and
short-term debt by $109.2 million from December 31, 1996, principally due to the
consolidation of our Iusacell investment. Our debt ratio was 51.9% as of March
31, 1997, compared to 52.9% as of March 31, 1996 and 52.2% as of December 31,
1996.
As of March 31, 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 March 31, 1997
reflects increases and decreases in certain categories of assets and
liabilities; however, the transaction 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 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
would be in the public interest.
A U. S. Court of Appeals has currently stayed the effectiveness of the uniform
national pricing rules adopted by the FCC and the FCC rule that permitted
competitors to "pick and choose" isolated terms out of negotiated
interconnection agreements. Private negotiations and state arbitrations are
continuing while the stay is in effect, pending the Court's final decision.
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 business opportunities resulting from the Act. These factors will in turn
depend, in part, on the final outcome of several FCC rulemakings and the outcome
of state interconnection proceedings (see also "Recent Developments FCC Orders"
below).
16
<PAGE>
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.
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. We are unable to assess fully the potential impact of
these new rules until the FCC releases the full text of its access reform and
price cap orders later in May. Based on the information currently available,
however, 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 IXCs 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.
The FCC is expected to adopt an order later this year that would 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.
Price Caps
The FCC also adopted modifications to its price cap rules that will affect
access rate levels. Under the current price cap rules effective through June 30,
1997, our price cap index is adjusted by an inflation index (GDP-PI) less a
fixed percentage, either 4.0%, 4.7% or 5.3% as we may elect, which is intended
to reflect increases in productivity ("Productivity Factor"). For the current
period ending June 30, 1997, we have chosen the 5.3% Productivity Factor.
The FCC has adopted new rules, effective July 1, 1997, that will create a
single Productivity Factor for all price cap companies of 6.5%, with no
requirements to share a portion of future interstate earnings, and will set
rates as if the higher 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.
Universal Service
The FCC also adopted rules designed to preserve "universal service" by
ensuring that local exchange service remains reasonably available to all
residential customers, including low-income customers and customers in areas
that are expensive to serve. The FCC will maintain existing levels of universal
service support of $1.5 billion for
17
<PAGE>
such high cost areas pending completion of further FCC proceedings. By the end
of 1997, the FCC, in conjunction with the Federal-State Joint Board on Universal
Service, will determine whether to increase the size of this federal universal
service fund 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 each carrier to contribute approximately 1 to 2%
of its revenues. We will, however, be permitted 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
within 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 (BPU). We had challenged the
BPU's rule on the grounds that it was inconsistent with the Act; however, on
April 18, 1997, the federal court denied our challenge and dismissed the
complaint. The Pennsylvania regulatory commission ordered presubscription by
July 31, 1997, but has stated that a reasonable effort should be made to
coordinate implementation of presubscription with our entry into the long
distance market in Pennsylvania. The state regulatory commission in West
Virginia ordered presubscription by August 15, 1997. On April 8, 1997, the
Delaware Public Service Commission extended implementation of presubscription
from July 31, 1997 to September 15, 1997, although we believe this date is
inconsistent with the Act. We expect to offer intraLATA presubscription in our
other state jurisdictions 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 if we are not permitted to offer long distance services at
the same time.
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.
18
<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 a number of other conditions, including certain regulatory reviews, all but
one of which have been completed.
As a result of the merger, Bell Atlantic will incur special transition and
integration costs of approximately $500 million in the first twelve months
following the completion of the merger and an additional $200 million to $400
million over the two succeeding years, in connection with completing the
transaction and integrating the operations of Bell Atlantic and NYNEX. The
transition costs consist principally of professional and registration fees,
systems modification costs, costs associated with the elimination and
consolidation of duplicate facilities, and employee severance and relocation
costs.
It is expected that the post-merger company will recognize recurring expense
savings of approximately $600 million annually by the third year following
completion of the merger as a result of consolidating operating systems and
other administrative functions and reducing management positions. Approximately
$300 million in savings are expected to be achieved in the first twelve months
following the completion of the merger, with an additional $150 million in each
of the two succeeding years. Incremental savings in annual capital expenditures
for the company should grow to approximately $250 million to $300 million,
including efficiencies relating to purchasing, marketing trials and equipment
testing.
We have established a target range for long-term earnings per share growth,
following completion of the merger and excluding the transition and integration
costs described above, of 10 to 12%.
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. You should also
refer to Note 6 of our condensed consolidated financial statements on pages 7
and 8 for pro forma information on the merger.
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 current
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 transaction,
we are presently updating our assessment of the fair value of our investment in
CAI and anticipate a modest charge to earnings in the second quarter of 1997.
Sale of Commercial Real Estate Properties
- --------------------------------------------------------------------------------
In April 1997, we sold a significant portion of our commercial real estate
properties and expect to complete in the second quarter of 1997 agreements of
sale with respect to additional properties. The transactions will generate
approximately $300 million in cash and will not have a material impact on net
income.
19
<PAGE>
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 delay in the
expected closing of the merger; (iii) the final outcome of FCC rulemakings with
respect to interconnection agreements, access charge reform, price caps, 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.
- ---------------------------
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.
In January 1991 the Company, its Chief Executive Officer and its former Chief
Financial Officer were named as defendants in several identical class action
complaints. These complaints, which were consolidated in a single proceeding in
the United States District Court for the Eastern District of Pennsylvania and
have subsequently been amended, allege that, during a class period from June 14,
1990 through January 22, 1991, the plaintiffs purchased shares of Bell Atlantic
stock at inflated prices as a result of the defendant's alleged failure to
disclose material information regarding certain aspects of the Company's
financial performance and prospects. The trial court's 1991 decision granting
defendants' motion to dismiss this action was reversed by the United States
Court of Appeals for the Third Circuit upon appeal by the plaintiffs. In April
1997, the trial court granted summary judgment in favor of all defendants on the
federal securities law claims and dismissed the pendent state law claims without
prejudice. Plaintiffs have again appealed to the Court of Appeals.
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 March 31, 1997:
A Current Report on Form 8-K, dated January 21, 1997, was filed regarding the
Company's 1996 financial results.
20
<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: May 9, 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 MAY 8, 1997.
21
<PAGE>
Exhibit 11
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Per Common Share Earnings
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Income before cumulative effect of
change in accounting principle ............ $ 515.6 $ 464.7
Cumulative effect of change in accounting
principle ................................. -- 142.1
------------ ------------
Net income ................................. $ 515.6 $ 606.8
============ ============
Earnings Per Common Share
Weighted average shares outstanding ........ 437,766,916 437,697,319
Incremental shares from assumed exercise of
stock options and payment of performance
share awards .............................. 2,086,194 2,523,938
------------ ------------
Total shares ............................... 439,853,110 440,221,257
============ ============
Income before cumulative effect of
change in accounting principle ............ $ 1.17 $ 1.06
Cumulative effect of change in accounting
principle ................................. -- .32
------------ ------------
Net income ................................. $ 1.17 $ 1.38
============ ============
Fully Diluted Earnings Per Common Share*
Weighted average shares outstanding ........ 437,766,916 437,697,319
Incremental shares from assumed exercise
of stock options and payment of performance
share awards .............................. 2,086,194 2,523,938
------------ ------------
Total shares ............................... 439,853,110 440,221,257
============ ============
Income before cumulative effect of
change in accounting principle ............ $ 1.17 $ 1.06
Cumulative effect of change in accounting
principle ................................. -- .32
------------ ------------
Net income ................................. $ 1.17 $ 1.38
============ ============
</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>
Three months ended
March 31, 1997
------------------
<S> <C>
Income before provision for income taxes.................. $ 830.7
Equity in income of less than majority-owned subsidiaries. (47.6)
Dividends from less than majority-owned subsidiaries...... 31.7
Interest expense, including interest on capital lease
obligations.............................................. 138.9
Portion of rent expense representative of the interest
factor................................................... 22.8
-------
Income, as adjusted....................................... $ 976.5
=======
Fixed charges:
Interest expense, including interest on capital lease
obligations.............................................. $ 138.9
Portion of rent expense representative of the interest
factor................................................... 22.8
Capitalized interest...................................... 6.9
Preferred stock dividend.................................. 3.8
-------
Fixed charges............................................. $ 172.4
=======
Ratio of Earnings to Fixed Charges........................ 5.66
=======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 477
<SECURITIES> 0
<RECEIVABLES> 3,068
<ALLOWANCES> 271
<INVENTORY> 175
<CURRENT-ASSETS> 4,055
<PP&E> 35,462
<DEPRECIATION> 19,322
<TOTAL-ASSETS> 25,216
<CURRENT-LIABILITIES> 5,803
<BONDS> 5,943
0
0
<COMMON> 438
<OTHER-SE> 7,170
<TOTAL-LIABILITY-AND-EQUITY> 25,216
<SALES> 0
<TOTAL-REVENUES> 3,414
<CGS> 0
<TOTAL-COSTS> 2,517
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138
<INCOME-PRETAX> 831
<INCOME-TAX> 315
<INCOME-CONTINUING> 516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 0
</TABLE>
