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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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.)
1095 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER (212) 395-2121
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 September 30, 1999, 1,552,785,938 shares of the registrant's Common Stock
were outstanding, after deducting 23,460,387 shares held in treasury.
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Table of Contents
Item No.
Part I. Financial Information Page
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1. Financial Statements
Condensed Consolidated Statements of Income
For the three and nine months ended September 30, 1999 and 1998 2-3
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 4-5
Condensed Consolidated Statement of Changes in Shareowners' Investment
For the nine months ended September 30, 1999 6
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8-16
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17-37
3. Quantitative and Qualitative Disclosures About Market Risk 37
Part II. Other Information
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6. Exhibits and Reports on Form 8-K 38
1
Part I - Financial Information
Item 1. Financial Statements
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Bell Atlantic Corporation and Subsidiaries
(Dollars in Millions, Except Per Share Amounts) (Unaudited) Three Months Ended September 30,
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $8,304 $7,910
OPERATING EXPENSES
Employee costs, including benefits and taxes 2,083 2,792
Depreciation and amortization 1,557 1,470
Other operating expenses 2,546 2,518
--------------------------------
6,186 6,780
--------------------------------
OPERATING INCOME 2,118 1,130
Income (loss) from unconsolidated businesses 53 (459)
Other income and (expense), net 12 43
Interest expense 309 359
--------------------------------
Income before provision for income taxes and extraordinary item 1,874 355
Provision for income taxes 700 362
--------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,174 (7)
Extraordinary item
Early extinguishment of debt, net of tax -- (1)
--------------------------------
NET INCOME (LOSS) $1,174 $ (8)
================================
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ .76 $ (.01)
Extraordinary item -- --
--------------------------------
Net Income (Loss) $ .76 $ (.01)
================================
Weighted-average shares outstanding (in millions) 1,553 1,553
================================
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ .74 $ (.01)
Extraordinary item -- --
--------------------------------
Net Income (Loss) $ .74 $ (.01)
================================
Weighted-average shares - diluted (in millions) 1,585 1,553
================================
Dividends declared per common share $ .385 $ .385
================================
See Notes to Condensed Consolidated Financial Statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Bell Atlantic Corporation and Subsidiaries
(Dollars in Millions, Except Per Share Amounts) (Unaudited) Nine Months Ended September 30,
1999 1998
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OPERATING REVENUES $24,566 $23,489
OPERATING EXPENSES
Employee costs, including benefits and taxes 6,152 7,212
Depreciation and amortization 4,602 4,326
Other operating expenses 7,469 7,156
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18,223 18,694
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OPERATING INCOME 6,343 4,795
Income (loss) from unconsolidated businesses 124 (462)
Other income and (expense), net 35 99
Interest expense 939 1,032
--------------------------------
Income before provision for income taxes and extraordinary item 5,563 3,400
Provision for income taxes 2,074 1,470
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INCOME BEFORE EXTRAORDINARY ITEM 3,489 1,930
Extraordinary item
Early extinguishment of debt, net of tax (6) (24)
--------------------------------
NET INCOME 3,483 1,906
Redemption of investee preferred stock -- (2)
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NET INCOME AVAILABLE TO COMMON SHAREOWNERS $ 3,483 $ 1,904
================================
BASIC EARNINGS PER COMMON SHARE:
Income available to common shareowners before extraordinary item $ 2.25 $ 1.24
Extraordinary item (.01) (.01)
--------------------------------
Net Income Available to Common Shareowners $ 2.24 $ 1.23
================================
Weighted-average shares outstanding (in millions) 1,553 1,553
================================
DILUTED EARNINGS PER COMMON SHARE:
Income available to common shareowners before extraordinary item $ 2.21 $ 1.22
Extraordinary item (.01) (.01)
--------------------------------
Net Income Available to Common Shareowners $ 2.20 $ 1.21
================================
Weighted-average shares - diluted (in millions) 1,583 1,577
================================
Dividends declared per common share $ 1.155 $ 1.155
================================
See Notes to Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
Bell Atlantic Corporation and Subsidiaries
Assets
(Dollars in Millions) (Unaudited) September 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 264 $ 237
Short-term investments 35 786
Accounts receivable, net of allowances of $607 and $593 6,929 6,560
Inventories 624 566
Prepaid expenses 710 522
Other 335 411
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8,897 9,082
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PLANT, PROPERTY AND EQUIPMENT 87,739 83,064
Less accumulated depreciation 49,380 46,248
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38,359 36,816
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INVESTMENTS IN UNCONSOLIDATED BUSINESSES 5,919 4,276
OTHER ASSETS 5,847 4,970
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TOTAL ASSETS $59,022 $55,144
==============================
See Notes to Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED BALANCE SHEETS
Bell Atlantic Corporation and Subsidiaries
Liabilities and Shareowners' Investment
(Dollars in Millions, Except Per Share Amounts) (Unaudited) September 30, December 31,
1999 1998
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CURRENT LIABILITIES
Debt maturing within one year $ 3,286 $ 2,988
Accounts payable and accrued liabilities 6,550 6,105
Other 1,533 1,438
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11,369 10,531
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LONG-TERM DEBT 17,463 17,646
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EMPLOYEE BENEFIT OBLIGATIONS 9,661 10,384
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 3,469 2,254
Unamortized investment tax credits 203 222
Other 697 551
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4,369 3,027
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MINORITY INTEREST, INCLUDING A PORTION SUBJECT TO
REDEMPTION REQUIREMENTS 450 330
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PREFERRED STOCK OF SUBSIDIARY 201 201
------------------------------
SHAREOWNERS' INVESTMENT
Series preferred stock ($.10 par value; none issued) -- --
Common stock ($.10 par value; 1,576,246,325 shares and
1,576,246,325 shares issued) 158 158
Contributed capital 13,533 13,368
Reinvested earnings 2,757 1,371
Accumulated other comprehensive income (loss) 174 (714)
------------------------------
16,622 14,183
Less common stock in treasury, at cost 632 593
Less deferred compensation - employee stock ownership plans 481 565
------------------------------
15,509 13,025
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TOTAL LIABILITIES AND SHAREOWNERS' INVESTMENT $59,022 $55,144
==============================
See Notes to Condensed Consolidated Financial Statements.
5
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREOWNERS' INVESTMENT
Bell Atlantic Corporation and Subsidiaries
(Dollars in Millions and Shares in Thousands) (Unaudited) Nine Months Ended September 30,1999
Shares Amount
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COMMON STOCK
Balance at beginning and end of period 1,576,246 $ 158
------------------------------------
CONTRIBUTED CAPITAL
Balance at beginning of period 13,368
Shares distributed:
Employee plans 121
Sale of stock by subsidiary 44
-----------------
Balance at end of period 13,533
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REINVESTED EARNINGS
Balance at beginning of period 1,371
Net income 3,483
Dividends declared (1,793)
Shares distributed:
Employee plans (311)
Tax benefit of dividends paid to ESOPs 7
-----------------
Balance at end of period 2,757
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period (714)
Foreign currency translation adjustments, net of tax (64)
Unrealized gains on securities, net of tax 952
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Balance at end of period 174
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TREASURY STOCK
Balance at beginning of period 22,887 593
Shares purchased 10,757 633
Shares distributed:
Employee plans (10,170) (593)
Shareowner plans (14) (1)
------------------------------------
Balance at end of period 23,460 632
------------------------------------
DEFERRED COMPENSATION - ESOPs
Balance at beginning of period 565
Amortization (84)
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Balance at end of period 481
-----------------
TOTAL SHAREOWNERS' INVESTMENT $15,509
=================
See Notes to Condensed Consolidated Financial Statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Bell Atlantic Corporation and Subsidiaries
(Dollars in Millions) (Unaudited) Nine Months Ended September 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,483 $ 1,906
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,602 4,326
Extraordinary item, net of tax 6 24
Loss (income) from unconsolidated businesses (124) 462
Dividends received from unconsolidated businesses 84 129
Amortization of unearned lease income (110) (87)
Deferred income taxes, net 632 (19)
Investment tax credits (19) (22)
Other items, net 122 232
Changes in certain assets and liabilities, net of effects from
acquisition/disposition of businesses (1,271) 399
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Net cash provided by operating activities 7,405 7,350
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CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 742 560
Additions to plant, property and equipment (5,816) (5,421)
Investments in unconsolidated businesses, net (872) (529)
Proceeds from disposition of businesses 612 21
Other investing activities, net (128) (39)
----------------------------------
Net cash used in investing activities (5,462) (5,408)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 278 6,105
Principal repayments of borrowings and capital lease obligations (716) (506)
Early extinguishment of debt (257) (650)
Net change in short-term borrowings with original
maturities of three months or less 456 (4,562)
Proceeds from financing of cellular assets 380 --
Dividends paid (1,801) (1,784)
Proceeds from sale of common stock 283 424
Purchase of common stock for treasury (633) (784)
Other financing activities, net 94 113
----------------------------------
Net cash used in financing activities (1,916) (1,644)
----------------------------------
Increase in cash and cash equivalents 27 298
Cash and cash equivalents, beginning of period 237 323
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Cash and cash equivalents, end of period $ 264 $ 621
==================================
See Notes to Condensed Consolidated Financial Statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Bell Atlantic Corporation and Subsidiaries
(Unaudited)
1. Basis of Presentation
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The accompanying unaudited condensed consolidated financial statements have been
prepared based upon Securities and Exchange Commission rules that permit reduced
disclosure for interim periods. These financial statements reflect all
adjustments that are necessary for a fair presentation of results of operations
and financial condition for the interim periods shown including normal recurring
accruals. The results for the interim periods are not necessarily indicative of
results for the full year. For a more complete discussion of significant
accounting policies and certain other information, you should refer to the
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 1998.
We have reclassified certain amounts from the prior year's data to conform to
the 1999 presentation.
2. New Accounting Standards
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Costs of Computer Software
Effective January 1, 1999, we adopted Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under SOP No. 98-1, we capitalize the cost of internal-use
software which has a useful life in excess of one year. Subsequent additions,
modifications or upgrades to internal-use software are capitalized only to the
extent that they allow the software to perform a task it previously did not
perform. Software maintenance and training costs are expensed in the period in
which they are incurred. Also, we capitalize interest associated with the
development of internal-use software. The effect of adopting SOP No. 98-1 was an
increase in net income of approximately $175 million for the nine months ended
September 30, 1999.
Costs of Start-Up Activities
Effective January 1, 1999, we adopted SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." Under this accounting standard, we expense costs of start-
up activities as incurred, including pre-operating, pre-opening and other
organizational costs. The adoption of SOP No. 98-5 did not have a material
effect on our results of operations or financial condition because our policy
has been generally to expense all start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year.
Under the amended pronouncement, Bell Atlantic must adopt SFAS No. 133 no later
than January 1, 2001. We are currently evaluating the provisions of SFAS No.
133. The impact of adoption will be determined by several factors, including the
specific hedging instruments in place and their relationships to hedged items,
as well as market conditions at the date of adoption. We have not estimated the
effect of adoption as we believe that such a determination will not be
meaningful until closer to the adoption date.
3. Commitments and Contingencies
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In connection with certain state regulatory incentive plan commitments, we have
deferred revenues, which will be recognized as the commitments are met or
obligations are satisfied under the plans. In addition, several state and
federal regulatory proceedings may require our operating telephone subsidiaries
to refund a portion of the revenues collected in the current and prior periods.
There are also various legal actions pending to which we are a party. We have
established reserves for specific liabilities in connection with regulatory and
legal matters that we currently deem to be probable and estimable.
We do not expect that the ultimate resolution of pending regulatory and legal
matters in future periods will have a material effect on our financial
condition, but it could have a material effect on our results of operations.
8
4. Grupo Iusacell, S.A. de C.V.
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Grupo Iusacell, S.A. de C.V. (Iusacell), a Mexican wireless company that we
control and consolidate, and its principal shareholders entered into an
agreement (the 1998 Restructuring Agreement) to reorganize ownership of the
company. This reorganization provided for the formation of a new holding
company, Nuevo Grupo Iusacell, S.A. de C.V. (New Iusacell), with two classes of
shares, one of which would be traded publicly. The intention of the
reorganization was to raise capital, increase the availability of debt
financing, and increase the liquidity of Iusacell's publicly traded shares.
As contemplated in the reorganization plan, during 1998 and 1999, Iusacell
borrowed $133 million from us, as a bridge loan, under a $150 million
subordinated convertible debt facility that expired in June 1999 (the Facility).
In accordance with the Facility and the 1998 Restructuring Agreement, we
converted the debt into additional Series A shares at a price of $.70 per share.
We also sold a portion of those shares to the Peralta Group, the other principal
shareholder of Iusacell, for $.70 per share and received proceeds of
approximately $15 million in 1999. As a result of these interim steps of the
reorganization plan, our ownership of Iusacell temporarily increased to 47.2%.
On August 4, 1999, the reorganization plan was finalized when New Iusacell
concluded an exchange and rights offering to existing Iusacell shareholders.
These offerings permitted shareholders to exchange their shares in Iusacell for
shares in New Iusacell and to subscribe to additional shares of New Iusacell
based on their current ownership. In addition, New Iusacell launched primary and
secondary share offerings. We and the Peralta Group participated in the
secondary share offering. We received approximately $73 million of proceeds from
the secondary share offering and New Iusacell received approximately $31 million
of proceeds from the primary share and rights offerings. As a result of the
reorganization, we have recorded an adjustment to increase our contributed
capital by $43 million which recognizes the ultimate change in our ownership
percentage resulting from these transactions. As of September 30, 1999, we own
40.2% of New Iusacell, and we continue to control and consolidate New Iusacell.
We had previously announced that we are engaged in discussions regarding a
possible combination or alliance encompassing the current properties of New
Iusacell and cellular properties in Northern Mexico. This venture may result in
a new prominent shareholder in the New Iusacell business.
The Peralta Group can require us to purchase from it approximately 517 million
New Iusacell shares for $.75 per share, or approximately $388 million in the
aggregate, by giving notice of exercise between November 15 and December 15,
2001.
5. Marketable Securities
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We have investments in marketable securities, primarily common stocks, which are
considered "available-for-sale" under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." These investments have been
included in our balance sheet in Investments in Unconsolidated Businesses and
Short-term Investments.
Under SFAS No. 115, available-for-sale securities are required to be carried at
their fair value, with unrealized gains and losses (net of income taxes)
recorded in Accumulated Other Comprehensive Income (Loss) in our statement of
changes in shareowners' investment. The fair values of our investments in
marketable securities are determined based on market quotations.
The table below shows certain summarized information related to these
investments.
Gross Gross
Unrealized Unrealized
(Dollars in Millions) Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1999
Investments in unconsolidated businesses $369 $1,469 $-- $1,838
Short-term investments 36 -- (1) 35
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$405 $1,469 $(1) $1,873
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AT DECEMBER 31, 1998
Investments in unconsolidated businesses $ 1 $ 6 $-- $ 7
Short-term investments 23 -- (1) 22
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$ 24 $ 6 $(1) $ 29
==============================================================
Our investments in unconsolidated businesses increased from December 31, 1998 as
a result of a change in the method of accounting for our Telecom Corporation of
New Zealand Limited (TCNZ) investment, as described in Note 11. Certain other
investments that we hold are not carried at their fair values because those
values are not readily determinable. We have, however, adjusted the carrying
values of these securities in situations where we believe declines in value
below cost were other than temporary. The carrying values for these investments
were $184 million at September 30, 1999 and $771 million at December 31, 1998.
The decrease from December 31, 1998 was principally due to the disposition of
our remaining investment in Viacom Inc. in January 1999.
9
6. Debt
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Exchangeable Notes
Our long-term debt includes two series of exchangeable notes that were issued in
1998 by our wholly owned subsidiary, Bell Atlantic Financial Services, Inc.
(FSI). First, FSI issued $2,455 million of 5.75% senior exchangeable notes due
on April 1, 2003, which are exchangeable on or after September 1, 1999 at the
option of the holder into shares of Telecom Corporation of New Zealand Limited
(TCNZ exchangeable notes). Upon exchange by investors, we retain the option to
settle in cash or by delivery of TCNZ shares. The exchange price was established
at a 20% premium to the TCNZ share price at the pricing date of the offering.
As of September 30, 1999, no notes have been delivered for exchange.
Second, FSI issued $3,180 million of 4.25% senior exchangeable notes due on
September 15, 2005, which are exchangeable on or after July 1, 2002 at the
option of the holder into shares of Cable & Wireless Communications plc (CWC
exchangeable notes). Upon exchange by investors, we retain the option to settle
in cash or by delivery of CWC shares. The CWC exchangeable notes were issued at
a discount and at September 30, 1999 had a carrying value of $3,214 million.
The exchange price was established at a 28% premium to the CWC share price at
the pricing date of the offering.
The respective exchangeable notes must be marked to market if the fair value of
the underlying TCNZ shares rises to a level greater than 120% of the share price
at the pricing date of the offering, or the fair value of the underlying CWC
shares rises to a level greater than 128% of the share price at the pricing date
of the offering. If either event should occur, we are required to increase the
applicable exchangeable note liability by the amount of the increase in the
share price over the exchange price. This mark-to-market transaction would
reduce income by the amount of the increase in the exchangeable note liability.
If the share price subsequently declines, the liability would be reduced (but
not to less than its amortized carrying value) and income would be increased. At
September 30, 1999, the fair values of the underlying TCNZ shares and CWC shares
did not exceed the recorded values of the debt liability and, therefore, no
mark-to-market adjustments were recorded to our financial statements.
A proposed restructuring of our investment in CWC, as discussed in Note 11,
would change the securities to be delivered upon exchange for the CWC
exchangeable notes. Under this restructuring, we would receive shares of two
companies acquiring the businesses of CWC in exchange for our CWC shares.
Support Agreements
The TCNZ exchangeable notes have the benefit of a Support Agreement dated
February 1, 1998, and the CWC exchangeable notes have the benefit of a Support
Agreement dated August 26, 1998, both of which are between Bell Atlantic and
FSI. In each of the Support Agreements, Bell Atlantic guarantees the payment of
interest, premium (if any), principal and cash value of exchange property
related to the notes should FSI fail to pay. Another Support Agreement between
Bell Atlantic and FSI dated October 1, 1992, guarantees payment of interest,
premium (if any) and principal on FSI's medium-term notes (aggregating $192
million at September 30, 1999) should FSI fail to pay. The holders of FSI debt
do not have recourse to the stock or assets of our operating telephone
subsidiaries or TCNZ; however, they do have recourse to dividends paid to Bell
Atlantic 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 $16 billion at
September 30, 1999.
Issuance and Early Extinguishment of Long-Term Debt
In April 1999, our operating telephone subsidiary New England Telephone and
Telegraph Company issued $200 million of 5.875% notes due on April 15, 2009.
The proceeds from the issuance were used to redeem $200 million of 7.375% notes
due on October 15, 2007. We recorded an extraordinary charge of $1 million
(net of an income tax benefit of $1 million) related to this redemption.
In the second quarter of 1999, we also recorded an extraordinary charge of $5
million (net of an income tax benefit of $3 million) in connection with the
repurchase of $57 million in principal amount of debentures of certain of our
operating telephone subsidiaries.
10
7. Earnings Per Share
- ---------------------------------------------
The following table is a reconciliation of the numerators and denominators used
in computing earnings per share.
(Dollars and Shares in Millions, Except Per Share Amounts) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREOWNERS
Income (loss) before extraordinary item $1,174 $ (7) $3,489 $1,930
Redemption of investee preferred stock -- -- -- (2)
-------------------------------------------------------------------
Income (loss) available to common shareowners before
extraordinary item* 1,174 (7) 3,489 1,928
Extraordinary item -- (1) (6) (24)
-------------------------------------------------------------------
Net income (loss) available to common shareowners* $1,174 $ (8) $3,483 $1,904
===================================================================
BASIC EARNINGS (LOSS) PER COMMON SHARE
Weighted-average shares outstanding 1,553 1,553 1,553 1,553
-------------------------------------------------------------------
Income (loss) available to common shareowners before
extraordinary item $ .76 $ (.01) $ 2.25 $ 1.24
Extraordinary item -- -- (.01) (.01)
-------------------------------------------------------------------
Net income (loss) available to common shareowners $ .76 $ (.01) $ 2.24 $ 1.23
===================================================================
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Weighted-average shares outstanding 1,553 1,553 1,553 1,553
Effect of dilutive securities 32 -- 30 24
-------------------------------------------------------------------
Weighted-average shares - diluted 1,585 1,553 1,583 1,577
-------------------------------------------------------------------
Income (loss) available to common shareowners before
extraordinary item $ .74 $ (.01) $ 2.21 $ 1.22
Extraordinary item -- -- (.01) (.01)
-------------------------------------------------------------------
Net income (loss) available to common shareowners $ .74 $ (.01) $ 2.20 $ 1.21
===================================================================
*Income (loss) and Net income (loss) available to common shareowners is the same
for purposes of calculating basic and diluted earnings per share.
Stock options for 83 million shares for the three months ended September 30,
1998 and 1 million shares for the nine months ended September 30, 1998 were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
For the three and nine month periods ended September 30, 1999 the number of
antidilutive shares was not material.
8. Comprehensive Income
- ---------------------------------------------
Comprehensive income consists of net income and other gains and losses affecting
shareowners' equity that, under generally accepted accounting principles, are
excluded from net income. For our company, such items consist primarily of
foreign currency translation gains and losses and unrealized gains and losses on
marketable equity investments.
The components of total comprehensive income for interim periods are presented
in the following table:
(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $1,174 $ (8) $3,483 $1,906
-------------------------------------------------------------------
Other Comprehensive Income (Loss)
Foreign currency translation adjustments, net of tax 86 70 (64) (177)
Unrealized gains (losses) on securities, net of tax (72) -- 952 11
-------------------------------------------------------------------
14 70 888 (166)
-------------------------------------------------------------------
Total Comprehensive Income $1,188 $ 62 $4,371 $1,740
===================================================================
The increase in unrealized gains on securities is principally due to the change
in accounting for our investment in TCNZ from the equity method to the cost
method. As a result of this change in method of accounting, we have adjusted
our investment in TCNZ to its fair value at September 30, 1999 and recorded an
unrealized holding gain of $900 million (net of income taxes of $485 million).
You can find additional information on the change in method of accounting for
our TCNZ investment in Note 11.
11
9. Proposed Bell Atlantic - GTE Merger
- ---------------------------------------------
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
We expect the merger 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 annual meetings held in May 1999, the
shareholders of each company approved the merger. The completion of the merger
is subject to a number of conditions, including certain regulatory approvals and
receipt of opinions that the merger will be tax-free.
We are working diligently to complete the merger and are targeting completion of
the merger around the end of the first quarter of 2000. However, Bell Atlantic
and GTE must obtain the approval of a variety of state and federal regulatory
agencies and, given the inherent uncertainties of the regulatory process, the
closing of the merger may be delayed.
We have provided unaudited pro forma combined condensed statements of income for
the years ended December 31, 1998, 1997 and 1996 and a pro forma combined
condensed balance sheet at December 31, 1998 in a joint proxy statement and
prospectus filed with Securities and Exchange Commission and dated April 13,
1999. We have provided an unaudited pro forma combined condensed statement of
income for the six months ended June 30, 1999 and a pro forma combined condensed
balance sheet at June 30, 1999 in a Current Report on Form 8-K filed with the
Securities and Exchange Commission and dated August 26, 1999.
In this interim report, we present unaudited combined condensed pro forma
financial statements for the nine-month period ended September 30, 1999. These
financial statements are presented assuming that the merger will be accounted
for as a pooling of interests, and include certain reclassifications to conform
to the presentation that will be used by the combined company and certain pro
forma adjustments that conform the companies' methods of accounting. This
information is presented for illustration purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the merger had been completed at the period indicated. The
information does not necessarily indicate the future operating results or
financial position of the combined company. For a more complete discussion of
pro forma adjustments and other financial information, you should refer to the
pro forma financial information presented in the joint proxy statement and
prospectus and in the Current Report on Form 8-K dated August 26, 1999.
Pro Forma Combined Condensed Statement of Income
(Dollars in Millions, Except Per Share Amounts) (Unaudited) Nine Months Ended September 30,1999
- -----------------------------------------------------------------------------------------------------------------------------------
Operating revenues $43,161
Operating expenses 31,270
-----------------------------------
Operating income 11,891
Income from unconsolidated businesses 435
Other income and (expense), net (14)
Interest expense 1,912
Provision for income taxes 3,838
-----------------------------------
Income from continuing operations $ 6,562
===================================
Basic Earnings Per Common Share
Income from continuing operations per common share $ 2.39
Weighted-average shares outstanding (in millions) 2,740
-----------------------------------
Diluted Earnings Per Common Share
Income from continuing operations per common share $ 2.36
Weighted-average shares - diluted (in millions) 2,778
-----------------------------------
12
Pro Forma Combined Condensed Balance Sheet
(Dollars in Millions) (Unaudited) At September 30, 1999
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and temporary cash investments $ 3,871
Receivables, net 11,682
Net assets available for sale 1,752
Other current assets 2,978
-------------------------------
20,283
Plant, property and equipment, net 60,404
Investments in unconsolidated businesses 9,799
Other assets 16,486
-------------------------------
Total assets $106,972
===============================
LIABILITIES AND SHAREOWNERS' INVESTMENT
Current liabilities
Debt maturing within one year $ 10,391
Accounts payable and accrued liabilities 12,172
Other current liabilities 2,638
-------------------------------
25,201
-------------------------------
Long-term debt 31,741
-------------------------------
Employee benefit obligations 13,978
-------------------------------
Deferred credits and other liabilities 10,038
-------------------------------
Shareowners' investment
Common stock (2,767,321,285 shares) 277
Contributed capital 20,772
Reinvested earnings 6,738
Accumulated other comprehensive loss (193)
-------------------------------
27,594
Less common stock in treasury, at cost 632
Less deferred compensation - employee stock ownership plans 948
-------------------------------
26,014
-------------------------------
Total liabilities and shareowners' investment $106,972
===============================
10. Proposed Domestic Wireless Transactions
- ---------------------------------------------
Vodafone AirTouch
On September 21, 1999, we signed a definitive agreement with Vodafone AirTouch
plc (Vodafone AirTouch) to create a national wireless business (Wireless Co.)
composed of both companies' U.S. wireless assets.
Assuming that all of the assets are contributed as provided for in the
agreement, Wireless Co. will be 55% owned by Bell Atlantic and 45% owned by
Vodafone AirTouch. We will control the venture and, accordingly, consolidate the
results of Wireless Co. into our financial results. The transaction will be
accounted for as a purchase method business combination.
Wireless Co. will initially assume or incur up to $10 billion in existing and
new debt. Vodafone AirTouch has the right to require that up to $20 billion
worth of its interest in Wireless Co. be purchased by Bell Atlantic and/or
Wireless Co. between the third and seventh years following the closing of the
transaction.
The completion of this transaction is subject to a number of conditions,
including certain regulatory approvals and the approval of the shareholders of
Vodafone AirTouch. We expect the transaction to close in 6 to 12 months from
the date we signed the agreement.
Frontier Cellular
On July 20, 1999, Bell Atlantic Mobile, our domestic cellular subsidiary,
announced that it would purchase Frontier Corporation's (Frontier) interests in
wireless properties doing business under the Frontier Cellular name. Bell
Atlantic Mobile currently owns 50% of the Frontier Cellular business. The
transaction is expected to close in the fourth quarter of 1999.
13
11. Investments in Unconsolidated Businesses
- ----------------------------------------------------------
Agreement with Metromedia Fiber Network, Inc.
On October 7, 1999, we announced a strategic agreement with Metromedia Fiber
Network, Inc. (MFN), a domestic and international provider of dedicated fiber
optic networks in major metropolitan markets. Our agreement with MFN has two
parts.
First, we will acquire approximately $550 million of long-term capacity on MFN's
fiber optic networks. Of the $550 million, 10% is payable in November 1999 and
30% will be paid in each of the first three years of the contract.
Second, we will invest up to approximately $700 million to acquire up to 9.9% of
the equity of MFN through the purchase of newly issued shares at $28 per share.
We also will purchase up to approximately $975 million in debt securities
convertible at our option, upon receipt of necessary government approvals, into
common stock at a conversion price of $34 per share, increasing our potential
equity investment in MFN to about 19.9% of the company. Our investment in MFN
will be accounted for under the cost method. Certain aspects of this agreement
are subject to the approval of various regulatory authorities, which we hope to
obtain before the end of the year.
Proposed Restructure of PrimeCo Personal Communications, L.P.
On August 3, 1999, we and Vodafone AirTouch announced an agreement to
restructure our ownership interests in PrimeCo Personal Communications, L.P.
(PrimeCo), a partnership that was formed by us and Vodafone AirTouch in 1994 and
provides personal communications services in major cities across the United
States. Under the terms of that agreement, we would assume full ownership of
PrimeCo operations in five "major trading areas" (MTAs) - Richmond, VA, New
Orleans, LA and the Florida MTAs of Jacksonville, Tampa and Miami. Vodafone
AirTouch would assume full ownership of the remaining five PrimeCo MTAs -
Chicago, IL, Milwaukee, WI and the Texas MTAs of Dallas, San Antonio and
Houston.
Under the terms of the Wireless Co. agreement (see Note 10), Bell Atlantic and
Vodafone AirTouch agreed to suspend the August 3, 1999 agreement to restructure
PrimeCo ownership interests, with certain limited exceptions. As a result,
actions to allocate most PrimeCo markets would not commence prior to February
2000 or may not occur at all based upon the timing of the completion of the
proposed domestic wireless transaction with Vodafone AirTouch.
Proposed Restructure of Cable & Wireless Communications plc
On July 27, 1999, we announced an agreement with Cable & Wireless plc (Cable &
Wireless), NTL Incorporated (NTL) and Cable & Wireless Communications plc (CWC)
for the proposed restructuring of CWC. We currently have an 18.6% ownership
interest in CWC.
Under the terms of the agreement, CWC's consumer cable telephone, television and
Internet operations would be separated from its corporate, business, Internet
protocol and wholesale operations. The consumer operations would be acquired by
NTL and the other operations remain with Cable & Wireless. In exchange for our
interest in CWC, we would receive shares in the two acquiring companies,
representing approximately 11.2% of NTL and approximately 4.7% of Cable &
Wireless. Upon completion of the restructuring, our previously issued $3,180
million in CWC exchangeable notes would be exchangeable on and after July 1,
2002 for shares in NTL and Cable & Wireless in proportion to the shares received
in the restructuring. Upon exchange by investors, we retain the option to settle
in cash or by delivery of the Cable & Wireless and NTL shares.
We expect the restructuring to result in a material non-cash gain. The
transaction also may cause the exchangeable notes to be marked to market,
resulting in a charge to income. See Note 6 for additional information about the
CWC exchangeable notes.
The completion of the restructuring is subject to a number of conditions and,
assuming satisfaction of those conditions, is expected to close in the first
half of 2000.
14
Additional Investment in Omnitel Pronto Italia S.p.A.
In June 1999, we made an additional investment in Omnitel Pronto Italia S.p.A.
(Omnitel) of $635 million, which increased our ownership percentage from 19.71%
to 23.1%. Approximately $606 million of this additional investment represents
goodwill, which is being amortized on a straight-line basis over a period of 25
years.
Disaffiliation from Telecom Corporation of New Zealand Limited
Effective May 31, 1999, we took steps to disaffiliate from TCNZ. As a result,
we no longer have significant influence over TCNZ's operating and financial
policies and, therefore, have changed the accounting for our investment in TCNZ
from the equity method to the cost method. The change in the method of
accounting for this investment is not expected to have a material effect on our
future results of operations. We currently hold a 24.94% interest in TCNZ.
Coincident with our change to the cost method of accounting, our investment in
TCNZ is now subject to the provisions of SFAS No. 115. Under these provisions,
our TCNZ shares are classified as "available-for-sale" securities and,
accordingly, our TCNZ investment has been adjusted from a carrying value of $363
million to its fair value of $1,748 million at September 30, 1999. This
increased value of our investment is recorded in Investments in Unconsolidated
Businesses in our balance sheet. The unrealized holding gain of $900 million
(net of income taxes of $485 million) has been recognized in Accumulated Other
Comprehensive Income (Loss) in our statement of changes in shareowners'
investment.
12. Segment Information
- ----------------------------------------------------------
We have four reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments are a
Domestic Telecom group which provides domestic wireline telecommunications
services; a Global Wireless group which provides domestic wireless
telecommunications services and includes foreign wireless investments; a
Directory group which is responsible for our domestic and international
publishing businesses and electronic commerce services; and an Other Businesses
group which includes our international wireline telecommunications investments,
lease financing and all other businesses.
We measure and evaluate our reportable segments based on adjusted net income,
which excludes undistributed corporate expenses and special items arising during
each period. Special items are transactions that management has excluded from
the business units' results, but are included in reported consolidated earnings.
We generally account for intersegment sales of products and services and asset
transfers at current market prices.
Special items in the three and nine-month periods ended September 30, 1999
included costs associated with our 1997 merger with NYNEX Corporation. In 1998,
special items included merger-related costs, retirement incentive costs and
other charges related primarily to international investments and our video
business. Special items affected our segments as follows:
(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
DOMESTIC TELECOM
Reported net income $ 837 $ 261 $2,585 $1,697
Special items 25 544 54 744
----------------------------------------------------------------------
Adjusted net income $ 862 $ 805 $2,639 $2,441
======================================================================
WIRELESS
Reported net income (loss) $ 133 $ (97) $ 287 $ (2)
Special items -- 178 -- 178
----------------------------------------------------------------------
Adjusted net income $ 133 $ 81 $ 287 $ 176
======================================================================
DIRECTORY
Reported net income $ 146 $ 120 $ 499 $ 450
Special items 2 14 5 14
----------------------------------------------------------------------
Adjusted net income $ 148 $ 134 $ 504 $ 464
======================================================================
OTHER BUSINESSES
Reported net income (loss) $ 24 $(329) $ 86 $ (283)
Special items -- 364 -- 364
----------------------------------------------------------------------
Adjusted net income $ 24 $ 35 $ 86 $ 81
======================================================================
RECONCILING ITEMS
Reported net income $ 34 $ 37 $ 26 $ 44
Special items -- -- -- 2
----------------------------------------------------------------------
Adjusted net income $ 34 $ 37 $ 26 $ 46
======================================================================
15
The following table provides operating financial information for our four
reportable segments and a reconciliation of segment results to consolidated
results.
(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
EXTERNAL OPERATING REVENUES
Domestic telecom $6,601 $ 6,427 $19,547 $19,025
Global wireless 1,182 979 3,291 2,780
Directory 500 485 1,665 1,618
Other businesses 31 23 89 73
---------------------------------------------------------------------
Total segments - reported 8,314 7,914 24,592 23,496
Reconciling items (10) (4) (26) (7)
---------------------------------------------------------------------
Total consolidated - reported $8,304 $ 7,910 $24,566 $23,489
=====================================================================
INTERSEGMENT REVENUES
Domestic telecom $ 42 $ 31 $ 110 $ 92
Global wireless 5 5 14 12
Directory 1 1 4 4
Other businesses 3 5 11 15
---------------------------------------------------------------------
Total segments - reported 51 42 139 123
Reconciling items (51) (42) (139) (123)
---------------------------------------------------------------------
Total consolidated - reported $ -- $ -- $ -- $ --
=====================================================================
TOTAL OPERATING REVENUES
Domestic telecom $6,643 $ 6,458 $19,657 $19,117
Global wireless 1,187 984 3,305 2,792
Directory 501 486 1,669 1,622
Other businesses 34 28 100 88
---------------------------------------------------------------------
Total segments - reported 8,365 7,956 24,731 23,619
Reconciling items (61) (46) (165) (130)
---------------------------------------------------------------------
Total consolidated - reported $8,304 $ 7,910 $24,566 $23,489
=====================================================================
NET INCOME
Domestic telecom $ 862 $ 805 $ 2,639 $ 2,441
Global wireless 133 81 287 176
Directory 148 134 504 464
Other businesses 24 35 86 81
---------------------------------------------------------------------
Total segments - adjusted 1,167 1,055 3,516 3,162
Reconciling items 34 37 26 46
Special items (27) (1,100) (59) (1,302)
---------------------------------------------------------------------
Total consolidated - reported $1,174 $ (8) $ 3,483 $ 1,906
=====================================================================
(Dollars in Millions) At September 30, At December 31,
1999 1998
- --------------------------------------------------------------------------
SEGMENT ASSETS
Domestic telecom $41,681 $41,217
Global wireless 9,419 7,739
Directory 1,826 1,741
Other businesses 6,810 5,353
--------------------------------------
Total segments - reported 59,736 56,050
Reconciling items (714) (906)
--------------------------------------
Total consolidated - reported $59,022 $55,144
======================================
Reconciling items include undistributed corporate expenses, corporate assets and
intersegment eliminations. At December 31, 1998, corporate assets were comprised
primarily of our investment in Viacom Inc. This investment was disposed of in
December 1998 and January 1999. Assets for our Global Wireless segment increased
primarily due to growth in the wireless network and additional investments in
unconsolidated businesses, principally Omnitel and PrimeCo. Assets for our
Other Businesses segment increased primarily due to the change in method of
accounting for our investment in TCNZ, as described in Note 11.
16
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
OVERVIEW
Our results for the first nine months of 1999 reflect strong growth in data and
wireless services and sustained demand for basic telecommunications services.
We reported net income of $1,174 million or $.74 diluted earnings per share for
the three month period ended September 30, 1999, compared to a net loss of $8
million or $.01 diluted loss per share for the three month period ended
September 30, 1998. Reported net income for the first nine months of 1999 was
$3,483 million or $2.20 diluted earnings per share, compared to net income of
$1,906 million or $1.21 diluted earnings per share for the same period in 1998.
Our reported results for the three and nine month periods in each year were
affected by special items. After adjusting for such items, net income would
have been $1,201 million or $.76 diluted earnings per share for the third
quarter of 1999 and $1,092 million or $.69 diluted earnings per share for the
third quarter of 1998. Adjusted net income for the first nine months of the
year would have been $3,542 million or $2.24 diluted earnings per share in 1999
and $3,208 million or $2.03 diluted earnings per share in 1998. The table below
summarizes reported and adjusted results of operations for each period.
(Dollars in Millions, Except Per Share Amounts) Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Operating revenues $8,304 $7,910 $24,566 $23,489
Operating expenses 6,186 6,780 18,223 18,694
----------------------------------------------------------------------
Operating income 2,118 1,130 6,343 4,795
REPORTED NET INCOME (LOSS) 1,174 (8) 3,483 1,906
----------------------------------------------------------------------
Special items - pre-tax
Merger transition costs 45 52 97 107
Retirement incentive costs -- 747 -- 1,021
Other charges and special items -- 588 -- 588
----------------------------------------------------------------------
Total special items - pre-tax 45 1,387 97 1,716
Tax effect of special items & other tax-related items 18 287 38 414
----------------------------------------------------------------------
Total special items - after-tax 27 1,100 59 1,302
----------------------------------------------------------------------
ADJUSTED NET INCOME $1,201 $1,092 $ 3,542 $ 3,208
======================================================================
DILUTED EARNINGS (LOSS) PER SHARE - REPORTED $ .74 $(.01) $ 2.20 $1.21
DILUTED EARNINGS PER SHARE - ADJUSTED $ .76 $.69 $ 2.24 $2.03
The following table shows how special items are reflected in our condensed
consolidated statements of income for each period.
(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE COSTS
Retirement incentive costs $ -- $ 747 $ -- $1,021
Merger transition costs 18 3 32 9
Other special items -- 30 -- 30
OTHER OPERATING EXPENSES
Merger transition costs 27 49 65 98
Video-related charges -- 15 -- 15
Write-down of assets -- 40 -- 40
Other special items -- 8 -- 8
INCOME/LOSS FROM UNCONSOLIDATED BUSINESSES
Write-down of Asian investments -- 485 -- 485
Write-down of video investments -- 8 -- 8
OTHER INCOME AND EXPENSE, NET
Write-down of assets -- (45) -- (45)
INTEREST EXPENSE
Write-down of assets -- 47 -- 47
--------------------------------------------------------------------
TOTAL SPECIAL ITEMS - PRE-TAX 45 1,387 97 1,716
Tax effect of special items & other tax-related items 18 287 38 414
--------------------------------------------------------------------
TOTAL SPECIAL ITEMS - AFTER-TAX $ 27 $1,100 $ 59 $1,302
====================================================================
17
What follows is a further explanation of the nature and timing of these special
items.
Merger-related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in August
1997, we recorded pre-tax transition and integration costs of $45 million in the
third quarter of 1999 and $97 million in the first nine months of 1999. In
1998, pre-tax transition and integration costs totaled $52 million for the third
quarter and $107 million year-to-date.
Transition and integration costs represent costs associated with integrating the
operations of Bell Atlantic and NYNEX, such as systems modifications costs,
advertising and branding costs, and costs associated with the elimination and
consolidation of duplicate facilities, relocation and retraining. Transition and
integration costs are expensed as incurred.
These merger-related costs were comprised of the following amounts in the three
and nine-month periods ended September 30, 1999 and 1998.
(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
TRANSITION AND INTEGRATION COSTS
Systems modifications $43 $42 $89 $80
Advertising -- 6 -- 15
Branding 1 2 1 9
Relocation, retraining and other 1 2 7 3
-------------------------------------------------------------------
Total Transition and Integration Costs $45 $52 $97 $107
===================================================================
Retirement Incentives
In the third quarter of 1998, we recorded retirement incentive costs of $747
million (pre-tax) as a result of 5,231 associate employees electing to leave the
company under a voluntary retirement program. For the first nine months of 1998,
retirement incentive costs totaled $1,021 million, representing 7,299 associate
employees who elected to retire under the program. The costs were comprised of
special termination pension and postretirement benefit amounts, as well as
employee costs for other items. These costs were reduced by severance and
postretirement medical benefit reserves established in 1993 and transferred to
the pension and postretirement benefit liabilities as employees accepted the
retirement incentive offer. The voluntary retirement program covering associate
employees was completed in September 1998. The severance and postretirement
medical reserve balances were fully utilized at December 31, 1998.
Other Charges and Special Items
- ----------------------------------------------------------------------------
In the third quarter and nine month period ended September 30, 1998, we recorded
other charges and special items totaling $588 million in connection with the
write-down of Asian investments and obsolete or impaired assets and for other
special items during the period. These charges are comprised of the following
significant items.
Asian Investments
In the third quarter of 1998, we recorded pre-tax charges of $485 million to
adjust the carrying value of two Asian investments - TelecomAsia, a wireline
investment in Thailand, and Excelcomindo, a wireless investment in Indonesia.
We account for these investments under the cost method.
The charges were necessary because we determined that the decline in the
estimated fair values of each of these investments was other than temporary. We
determined the fair values of these investments by discounting estimated future
cash flows.
Video-related Charges
During 1998, we recorded pre-tax charges of $23 million related primarily to
wireline and other nonsatellite video initiatives. We made a strategic decision
in 1998 to focus our video efforts on satellite service offered in conjunction
with DirecTV and USSB. We communicated the decision to stop providing wireline
video services to subscribers and offered them the opportunity to subscribe to
the satellite-based video service that we introduced in 1998. In the third
quarter of 1998, we decided to dispose of these wireline video assets by sale or
abandonment, and we conducted an impairment review under the requirements of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." We based our estimate on an estimate of cash
flows expected to result from the use of the assets prior to their disposal and
the net proceeds (if any) expected to result from the disposal.
18
Other Charges and Special Items - continued
Write-down of Other Assets and Other Items
Results for the third quarter and year-to-date 1998 also included a pre-tax
charge, net of minority interest, of $42 million for the write-down of fixed
assets (primarily buildings and wireless communications equipment) and
capitalized interest associated with our Mexican wireless investment - Nuevo
Grupo Iusacell, S.A. de C.V. (Iusacell), parent of Grupo Iusacell, S.A. de C.V.
We account for our Iusacell investment as a consolidated subsidiary.
These assets relate to Iusacell's trial of fixed wireless service provided over
the 450 MHz frequency. While continuing this trial, Iusacell has been
considering whether or not to pursue its rights to acquire 450 MHz licenses for
other areas or to offer new services. Iusacell concluded that, in view of the
capability of CDMA technology and the success it had with its deployment, an
impairment existed with respect to assets related to the 450 MHz technology
since the carrying value of these assets exceeded the sum of the estimated
future cash flows associated with the assets. Iusacell is currently in
discussions with the Mexican Federal Telecommunications Commissions (COFETEL) as
to the status of Iusacell's 450 MHz frequency trial and the terms under which
Iusacell could acquire certain 450 MHz licenses. Iusacell anticipates a
resolution with the COFETEL as to the status of their 450 MHz trial and license
opportunities by the end of the first quarter of 2000. At that time, we hope to
have available the full facts to decide Iusacell's overall strategy concerning
the 450 MHz licenses.
Other items arising during the three and nine months periods ended September 30,
1998 included charges totaling $38 million principally associated with the
settlement of labor contracts in August 1998.
SEGMENTAL RESULTS OF OPERATIONS
We have four reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments are Domestic
Telecom, Global Wireless, Directory and Other Businesses. You can find
additional information about our segments in Note 12 to the condensed
consolidated financial statements.
We measure and evaluate our reportable segments based on adjusted net income,
which excludes undistributed corporate expenses and special items arising during
each period. Special items are transactions that management has excluded from
the business units' results, but are included in reported consolidated earnings.
We previously described these special items in the Overview section. Special
items affected our segments as follows:
(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
DOMESTIC TELECOM
Reported net income $ 837 $ 261 $2,585 $1,697
Special items 25 544 54 744
-----------------------------------------------------------------------
Adjusted net income $ 862 $ 805 $2,639 $2,441
=======================================================================
WIRELESS
Reported net income (loss) $ 133 $ (97) $ 287 $ (2)
Special items -- 178 -- 178
-----------------------------------------------------------------------
Adjusted net income $ 133 $ 81 $ 287 $ 176
=======================================================================
DIRECTORY
Reported net income $ 146 $ 120 $ 499 $ 450
Special items 2 14 5 14
-----------------------------------------------------------------------
Adjusted net income $ 148 $ 134 $ 504 $ 464
=======================================================================
OTHER BUSINESSES
Reported net income (loss) $ 24 $(329) $ 86 $ (283)
Special items -- 364 -- 364
-----------------------------------------------------------------------
Adjusted net income $ 24 $ 35 $ 86 $ 81
=======================================================================
RECONCILING ITEMS
Reported net income $ 34 $ 37 $ 26 $ 44
Special items -- -- -- 2
-----------------------------------------------------------------------
Adjusted net income $ 34 $ 37 $ 26 $ 46
=======================================================================
19
Domestic Telecom
Our Domestic Telecom segment consists primarily of our nine operating telephone
subsidiaries that provide local telephone services from Maine to Virginia,
including voice and data transport, enhanced and custom calling features,
network access, directory assistance, private lines and public telephones. This
segment also provides customer premises equipment distribution, systems
integration, billing and collections, and Internet access services. Domestic
Telecom represents the aggregation of our domestic wireline business units
(consumer, enterprise, general business, and network services) that focus on
specific markets to increase revenues and customer satisfaction.
Three Months Ended Nine Months Ended
(Dollars in Millions) September 30, September 30,
1999 1998 % Change 1999 1998 % Change
- -------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS - ADJUSTED BASIS
OPERATING REVENUES
Local services $3,648 $3,527 3.4% $10,752 $10,353 3.9%
Network access services 1,973 1,893 4.2 5,905 5,743 2.8
Long distance services 455 489 (7.0) 1,370 1,465 (6.5)
Ancillary services 567 549 3.3 1,630 1,556 4.8
------------------- -----------------
6,643 6,458 2.9 19,657 19,117 2.8
------------------- -----------------
OPERATING EXPENSES
Employee costs 1,846 1,806 2.2 5,441 5,491 (.9)
Depreciation and amortization 1,388 1,313 5.7 4,087 3,862 5.8
Other operating expenses 1,792 1,788 .2 5,152 5,150 --
------------------- -----------------
5,026 4,907 2.4 14,680 14,503 1.2
------------------- -----------------
OPERATING INCOME $1,617 $1,551 4.3 $ 4,977 $ 4,614 7.9
=================== =================
ADJUSTED NET INCOME $ 862 $ 805 7.1 $ 2,639 $ 2,441 8.1
OPERATING REVENUES
Local Services
Local services revenues are earned by our operating telephone subsidiaries from
the provision of local exchange, local private line, public telephone (pay
phone) and value-added services. Value-added services are a family of services
that expand the utilization of the network. These services include products such
as Caller ID, Call Waiting and Return Call.
Growth in local services revenues of $121 million or 3.4% in the third quarter
of 1999 and $399 million or 3.9% in the first nine months of 1999 was primarily
due to higher usage of our network facilities. This growth was generated, in
part, by an increase in access lines in service of 3.4%. We had 42,739,000
switched access lines in service at September 30, 1999 compared to 41,316,000
switched access lines in service at September 30, 1998 (1998 access lines have
been restated from the previously disclosed amount). Access line growth
primarily reflects higher demand for Centrex services and an increase in
additional residential lines.
Local services revenue growth in 1999 also reflects strong customer demand and
usage of our data transport and digital services such as Frame Relay, ISDN
(Integrated Services Digital Network) and SMDS (Switched Multi-megabit Data
Service). Revenues from our value-added services were boosted in 1999 by
marketing and promotional campaigns offering new service packages.
Revenue growth from these factors was partially offset by a decline in revenues
from our pay phone services due to the increasing popularity of wireless
communications. In addition, the resale of access lines and the provision of
unbundled network elements to competitive local exchange carriers reduced
revenues in 1999. Both periods of 1999 also included an accrual for a required
rebate to customers in Massachusetts under New England Telephone and Telegraph
Company's price cap plan.
Network Access Services
Network access services revenues are earned from end-user subscribers and long
distance and other competing carriers who use our local exchange facilities to
provide services to their customers. Switched access revenues are derived from
fixed and usage-based charges paid by carriers for access to our local network.
Special access revenues originate from carriers and end-users that buy dedicated
local exchange capacity to support their private networks. End-user access
revenues are earned from our customers and from resellers who purchase dial-tone
services.
20
Domestic Telecom - continued
Our network access services revenues grew $80 million or 4.2% in the third
quarter of 1999 and $162 million or 2.8% in the first nine months of 1999, as
compared to the same periods in 1998. This growth was mainly attributable to
higher customer demand, as reflected by growth in access minutes of use of 4.2%
from the third quarter of 1998 and 5.2% from the first nine months of 1998.
Volume growth also reflects a continuing expansion of the business market,
particularly for high-capacity services. In 1999, demand for special access
services increased, reflecting a greater utilization of the network. Higher
network usage by alternative providers of intraLATA toll services and higher
end-user revenues attributable to an increase in access lines in service further
contributed to revenue growth this year.
In addition, the three and nine month periods of 1999 included revenues received
from customers for the recovery of local number portability (LNP) costs. LNP
allows customers to change local exchange carriers while maintaining their
existing telephone numbers. In December 1998, the Federal Communications
Commission (FCC) issued an order permitting us to recover costs incurred for LNP
in the form of monthly end-user charges for a five-year period beginning in
February 1999. LNP charges contributed approximately $28 million to network
access services revenues in the third quarter of 1999 and approximately $58
million for the nine-month period ended September 30, 1999.
Volume-related growth was partially offset by net price reductions mandated by
federal and state price cap and incentive plans. State public utility
commissions regulate our operating telephone subsidiaries with respect to
certain intrastate rates and services and certain other matters. State rate
reductions on access services included a New York State Public Service
Commission (PSC) order that reduced revenues by $94 million annually, beginning
in the third quarter of 1998. The negative effect of state price reductions
was lessened in the third quarter of 1999 as a result of the full-year
recognition of these reductions in New York.
The FCC regulates the rates that we charge long distance carriers and end-user
subscribers for interstate access services. We are required to file new access
rates with the FCC each year. In July 1999, we implemented interstate price
decreases of approximately $235 million on an annual basis in connection with
the FCC's Price Cap Plan. These rates will be in effect through June 2000.
Interstate price decreases were $175 million on an annual basis for the period
July 1998 through June 1999. The rates also include amounts necessary to recover
our operating telephone subsidiaries' contribution to the FCC's universal
service fund and are subject to change every quarter due to potential increases
or decreases in our contribution to the universal service fund. The
subsidiaries' contributions to the universal service fund are included in Other
Operating Expenses. See "Recent Developments - FCC Regulation and Interstate
Rates - Universal Service" for additional information on universal service.
Long Distance Services
Long distance services revenues are earned primarily from calls made to points
outside a customer's local calling area, but within the same service area of our
operating telephone subsidiaries (intraLATA toll). Other long distance services
that we provide include 800 services, Wide Area Telephone Service (WATS),
corridor services and long distance services originating outside of our region.
The decline in long distance services revenues of $34 million or 7.0% in the
third quarter of 1999 and $95 million or 6.5% year-to-date was principally
caused by the competitive effects of presubscription for intraLATA toll
services. Presubscription permits customers to use an alternative provider of
their choice for intraLATA toll calls without dialing a special access code when
placing a call. Presubscription is now being offered in all states throughout
our region. In response to presubscription, we have implemented customer win-
back and retention initiatives that include toll calling discount packages and
product bundling offers. These revenue reductions were partially offset by
higher calling volumes.
You can find additional information on presubscription under "Recent
Developments - Competition - IntraLATA Toll Services."
21
Domestic Telecom - continued
Ancillary Services
Our ancillary services include billing and collections for long distance
carriers, collocation for competitive local exchange carriers, systems
integration, voice messaging, Internet access, customer premises equipment and
wiring and maintenance services.
In 1999, we recognized higher ancillary services revenues of $18 million or 3.3%
in the third quarter and $74 million or 4.8% year-to-date over the corresponding
periods last year. Revenue growth in both periods was principally due to higher
demand for such services as systems integration, billing and collections, voice
messaging, and customer premises equipment and wiring and maintenance. We also
received higher payments of revenue in 1999 from competitive local exchange
carriers for interconnection of their networks with our network.
OPERATING EXPENSES
Employee Costs
Employee costs, which consist of salaries, wages and other employee
compensation, employee benefits and payroll taxes, increased by $40 million or
2.2% in the third quarter of 1999 as compared to the same period in 1998.
Employee costs were higher in the quarterly period principally as a result of
increased overtime pay for repair and maintenance activity due to severe
rainstorms experienced throughout the region and as a result of increased salary
and wages for management and associate employees. Higher employee force levels
during the third quarter period, relative to the same period last year, also
contributed to expense growth. These cost increases were partially offset by
lower pension and benefit costs. The decline in pension and benefit costs in
1999 was due to a number of factors, principally lower pension costs as a result
of favorable pension plan investment returns and changes in plan provisions and
actuarial assumptions. These factors were partially offset by increased health
care costs caused by inflation and benefit plan improvements provided for under
new contracts with associate employees.
For the nine-month period ended September 30, 1999 employee costs declined by
$50 million or 0.9% over the corresponding period last year. Employee costs
were lower on a year-to-date basis mainly as a result of reduced pension and
benefits costs during the year. Increased salaries and wages for management and
associate employees and increased overtime pay substantially offset pension and
benefit reductions.
Employee costs were also reduced in both periods of 1999 by the effect of
capitalizing employee-related expenses associated with developing internal use
software under the new accounting standard, Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." For additional information on SOP No. 98-1, see Note 2 to the
condensed consolidated financial statements.
Depreciation and Amortization
Depreciation and amortization expense increased $75 million or 5.7% in the third
quarter of 1999 and $225 million or 5.8% in the first nine months of 1999,
principally due to growth in depreciable telephone plant and changes in the mix
of plant assets. The adoption of SOP No. 98-1 also contributed to the increase
in depreciation expense in 1999, but to a lesser extent. Under this new
accounting standard, computer software developed or obtained for internal use is
now capitalized and amortized. Previously, we expensed most of these software
purchases in the period in which they were incurred. These factors were
partially offset in both periods by the effect of lower rates of depreciation.
Other Operating Expenses
Other operating expenses remained relatively unchanged in the three and nine-
month periods ended September 30, 1999 as compared to the same periods last
year. Major components of other operating expense in both the 1999 periods
included higher costs associated with entering new businesses such as long
distance and data services and higher interconnection payments to competitive
local exchange and other carriers to terminate calls on their networks
(reciprocal compensation). We also recognized higher materials costs in the
quarterly period as a result of severe rainstorms. The nine-month period also
included higher Year 2000 readiness costs. These expense increases were largely
offset in both periods by the effect of SOP No. 98-1 and by lower spending at
our operating telephone subsidiaries for such expenditures as local number
portability and rents.
For additional information on reciprocal compensation refer to "Recent
Developments - Telecommunications Act of 1996 - Reciprocal Compensation."
22
Global Wireless
Our Global Wireless segment provides wireless telecommunications services to
customers in 24 states in the United States and includes foreign wireless
investments servicing customers in Latin America, Europe and the Pacific Rim.
Three Months Ended Nine Months Ended
(Dollars in Millions) September 30, September 30,
1999 1998 % Change 1999 1998 % Change
- -------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS - ADJUSTED BASIS
OPERATING REVENUES
Wireless services $1,187 $ 984 20.6% $3,305 $2,792 18.4%
---------------------- --------------------
OPERATING EXPENSES
Employee costs 146 144 1.4 428 405 5.7
Depreciation and amortization 159 150 6.0 483 431 12.1
Other operating expenses 612 494 23.9 1,762 1,394 26.4
---------------------- --------------------
917 788 16.4 2,673 2,230 19.9
---------------------- --------------------
OPERATING INCOME $ 270 $ 196 37.8 $ 632 $ 562 12.5
====================== ====================
INCOME (LOSS) FROM UNCONSOLIDATED
BUSINESSES $ 38 $ (14) -- $ 47 $ (81) --
ADJUSTED NET INCOME $ 133 $ 81 64.2 $ 287 $ 176 63.1
OPERATING REVENUES
Revenues earned from our consolidated wireless businesses grew by $203 million
or 20.6% in the third quarter of 1999 and $513 million or 18.4% in the first
nine months of 1999, as compared to the same periods in 1998. This revenue
growth was largely attributable to our domestic cellular subsidiary, Bell
Atlantic Mobile, which contributed $166 million to revenue growth in the third
quarter and $445 million in the first nine months of 1999. This growth was
driven by customer additions and increased usage of our domestic wireless
services. Our DigitalChoice SingleRate sm pricing plans fueled much of the
growth. Our domestic cellular customer base grew 16.2% in the first nine months
of 1999, over the same period last year. Total revenue per subscriber for our
domestic cellular operations increased 2.3% for the third quarter of 1999 and
1.1% for the first nine months of 1999 over the corresponding periods in 1998.
Revenues from Iusacell, our Mexican wireless investment, grew $43 million for
the third quarter of 1999 and $85 million year-to-date 1999, principally as a
result of subscriber growth and higher rates charged for services.
Revenue growth from our domestic and international cellular businesses was
slightly offset by the effect of the December 1998 sale of our paging business.
OPERATING EXPENSES
Employee Costs
Employee costs increased by $2 million or 1.4% for the third quarter of 1999 and
$23 million or 5.7% for the first nine months of 1999, principally as a result
of higher work force levels at Bell Atlantic Mobile. Employee costs at Iusacell
were lower in both the 1999 periods, principally due to a reduction in work
force levels.
Depreciation and Amortization
Depreciation and amortization expense increased by $9 million or 6.0% for the
third quarter of 1999 and $52 million or 12.1% for the first nine months of
1999. This increase was mainly attributable to growth in depreciable cellular
plant at Bell Atlantic Mobile. Capital expenditures for our domestic cellular
network have increased in 1999 to support greater demand in all markets.
Other Operating Expenses
For the third quarter of 1999, other operating expenses increased by $118
million or 23.9% and $368 million or 26.4% for the first nine months of 1999,
principally as a result of increased service costs at Bell Atlantic Mobile due
to the growth in the subscriber base, including additional costs of equipment,
higher roaming payments to wireless carriers, and higher sales commissions.
Higher service costs at Iusacell also contributed to expense growth in both
periods of 1999, but to a lesser extent. These factors were slightly offset by
the effect of the December 1998 sale of our paging business.
23
Global Wireless - continued
INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES
The changes in equity income (loss) from unconsolidated businesses for the three
and nine month periods ended September 30, 1999 were principally due to improved
results from our investments in Omnitel Pronto Italia S.p.A. (Omnitel), a
wireless investment in Italy, and PrimeCo Personal Communications, L.P.
(PrimeCo), a personal communications services (PCS) joint venture in the United
States. Both Omnitel's and PrimeCo's operating results were fueled by strong
subscriber growth. PrimeCo's results for the first nine months of 1999 also
included a gain on the sale of operations in Hawaii.
Directory
Our Directory segment consists of our domestic and international publishing
businesses, including print directories and Internet-based shopping guides as
well as website creation and hosting and other electronic commerce services.
This segment has operations principally in the United States and Central Europe.
Three Months Ended Nine Months Ended
(Dollars in Millions) September 30, September 30,
1999 1998 % Change 1999 1998 % Change
- -----------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS - ADJUSTED BASIS
OPERATING REVENUES
Directory services $501 $486 3.1% $1,669 $1,622 2.9%
OPERATING EXPENSES
Employee costs 78 82 (4.9) 237 251 (5.6)
Depreciation and amortization 8 9 (11.1) 27 26 3.8
Other operating expenses 160 164 (2.4) 542 548 (1.1)
------------------- -----------------
246 255 (3.5) 806 825 (2.3)
------------------- -----------------
OPERATING INCOME $255 $231 10.4 $ 863 $ 797 8.3
=================== =================
ADJUSTED NET INCOME $148 $134 10.4 $ 504 $ 464 8.6
OPERATING REVENUES
Operating revenues from our Directory segment improved by $15 million or 3.1% in
the third quarter of 1999 and $47 million or 2.9% in the first nine months of
1999, as compared to the same periods in 1998. This revenue growth was
principally due to increased prices for certain directory services. Higher
business volumes including revenue from new Internet-based shopping directory
and electronic commerce services also contributed to revenue growth in the both
periods of 1999, but to a lesser extent.
OPERATING EXPENSES
Third quarter 1999 total operating expenses declined $9 million or 3.5% and nine
month 1999 total operating expenses declined $19 million or 2.3% from the
corresponding periods in 1998. These decreases were largely attributable to
lower work force levels. Lower spending for maintenance, repair and other costs
of services also contributed to the decline in operating costs in 1999.
24
Other Businesses
Our Other Businesses segment includes international wireline telecommunications
investments in Europe and the Pacific Rim, lease financing and all other
businesses.
Three Months Ended Nine Months Ended
(Dollars in Millions) September 30, September 30,
1999 1998 % Change 1999 1998 % Change
- ------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS - ADJUSTED BASIS
OPERATING REVENUES
Other services $ 34 $ 28 21.4% $ 100 $ 88 13.6%
-------------------- -------------------
OPERATING EXPENSES
Employee costs 2 3 (33.3) 8 11 (27.3)
Depreciation and amortization -- 1 -- 3 3 --
Other operating expenses 23 24 (4.2) 70 82 (14.6)
-------------------- -------------------
25 28 (10.7) 81 96 (15.6)
-------------------- -------------------
OPERATING INCOME (LOSS) $ 9 $ -- -- $ 19 $ (8) --
==================== ===================
INCOME FROM UNCONSOLIDATED BUSINESSES $ 16 $ 26 (38.5) $ 59 $ 53 11.3
ADJUSTED NET INCOME $ 24 $ 35 (31.4) $ 86 $ 81 6.2
OPERATING RESULTS
Operating income results from our Other Businesses increased $9 million in the
third quarter of 1999 and $27 million in the first nine months of 1999 over the
same periods in 1998. This change was largely due to operating revenue growth
and lower operating expenses at our lease financing businesses.
Income from unconsolidated businesses decreased by $10 million in the third
quarter of 1999 and increased $6 million in the first nine months of 1999 over
the same periods in 1998. Results declined in the third quarter of 1999
principally as a result of higher equity losses from our investment in FLAG Ltd.
(FLAG), which owns an undersea fiberoptic cable system, providing digital
communications links between Europe and Asia. Results for the nine-month period
ended September 30, 1999 reflect lower equity losses of FLAG, principally due to
the effect of one-time charges recorded 1998. Our three and nine month results
were also affected by lower equity income from our investment in Cable &
Wireless Communications plc (CWC), an international cable television and
telecommunications operation in the United Kingdom.
Effective May 31, 1999, we took steps to disaffiliate from Telecom Corporation
of New Zealand Limited (TCNZ). As a result, we no longer have significant
influence over TCNZ's operating and financial policies and, therefore, have
changed the accounting for our investment in TCNZ from the equity method to the
cost method. The change in the method of accounting for this investment is not
expected to have a material effect on our future results of operations. We
currently hold a 24.94% interest in TCNZ.
Coincident with our change to the cost method of accounting, our investment in
TCNZ is now subject to the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under these provisions, our TCNZ
shares are classified as "available-for-sale" securities and, accordingly, our
TCNZ investment has been adjusted from a carrying value of $363 million to its
fair value of $1,748 million at September 30, 1999. The increased value of our
investment is recorded in Investments in Unconsolidated Businesses in our
balance sheet. The unrealized holding gain of $900 million (net of income taxes
of $485 million) has been recognized in Accumulated Other Comprehensive Income
(Loss) in our statement of changes in shareowners' investment.
25
NONOPERATING ITEMS
The following discussion of nonoperating items is based on the amounts reported
in our consolidated financial statements.
Three Months Ended Nine Months Ended
(Dollars in Millions) September 30, September 30,
1999 1998 % Change 1999 1998 % Change
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Total interest expense - reported $ 309 $ 359 (13.9)% $ 939 $ 1,032 (9.0)%
Special item - write-down of assets -- (47) -- (47)
Settlement of tax-related matters -- -- -- (46)
-------------------- -------------------
Interest expense - excluding special item
and tax settlement 309 312 (1.0) 939 939 --
Capitalized interest costs 25 24 4.2 64 67 (4.5)
-------------------- -------------------
Total interest cost on debt balances $ 334 $ 336 (.6) $ 1,003 $ 1,006 (.3)
==================== ===================
Average debt outstanding $20,762 $19,874 4.5 $20,346 $19,937 2.1
Effective interest rate 6.4% 6.8% 6.6% 6.7%
The decline in interest expense in the three and nine months ended September 30,
1999, as compared to the same periods in 1998, was principally attributable to
the effect of a special item recorded in 1998 related to the write-down of
Iusacell's fixed assets, as described earlier in the Overview section. Interest
expense for the nine-month period was also affected by added interests costs
recorded in 1998 in connection with the settlement of tax-related matters.
Excluding these items, we reduced our interest cost on debt balances in both
periods of 1999 due to several refinancings to lower rates of interest,
retirements of long-term debt by our operating telephone subsidiaries and an
overall decrease in our effective interest rate. These decreases were partially
offset by higher average debt outstanding.
Three Months Ended Nine Months Ended
(Dollars in Millions) September 30, September 30,
1999 1998 % Change 1999 1998 % Change
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE), NET
Minority interest income (expense), net $ (33) $ 5 --% $ (82) $ (56) (46.4)%
Foreign currency gains (losses), net (2) 26 -- 20 41 (51.2)
Interest income 5 11 (54.5) 25 75 (66.7)
Gains on disposition of assets/business, net 40 (1) -- 49 25 96.0
Other, net 2 2 -- 23 14 64.3
-------------------- -------------------
Total-reported $ 12 $ 43 (72.1) $ 35 $ 99 (64.6)
==================== ===================
The change in other income and expense in the three and nine months ended
September 30, 1999, as compared to the same periods in 1998, was due to changes
in several components as shown in the table above. The change in minority
interest was largely due to the recognition of minority interest expense in both
the 1999 periods related to our investment in Iusacell. In 1998, we recorded
minority interest income for Iusacell, principally resulting from the write-down
of fixed assets as described earlier. Further contributing to the change, in
1999 we no longer record a minority interest expense related to the outside
party's share of the subsidiary's earnings in connection with the sale of our
investment in Viacom Inc. (Viacom).
Foreign exchange gains were affected in 1999 as a result of the discontinuation
of highly inflationary accounting for our Iusacell subsidiary, effective January
1, 1999. As a result of this change, Iusacell now uses the Mexican peso as its
functional currency and we expect that our earnings will continue to be affected
by any foreign currency gains or losses associated with the U.S. dollar
denominated debt issued by Iusacell. Also, in 1998 we recognized higher foreign
exchange gains associated with other international investments. Finally, in the
third quarter of 1999, we recorded higher gains on the disposition of assets,
primarily due to the sale of real estate in New York. In 1998, we recorded
additional interest income in connection with the settlement of tax-related
matters.
(Dollars in Millions) Nine Months Ended September 30,
1999 1998
- ------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATES 37.3% 43.2%
The effective income tax rate is the provision for income taxes as a percentage
of income before the provision for income taxes. Our effective income tax rate
for the nine-month period ended September 30, 1999 was lower than the
corresponding period in 1998, primarily due to the write-down of certain
international investments in the third quarter of 1998 for which no tax benefit
was provided. This factor was partially offset by lower tax credits in 1999, as
well as adjustments to deferred income taxes at certain subsidiaries in 1998.
26
CONSOLIDATED FINANCIAL CONDITION
Nine Months Ended
(Dollars in Millions) September 30,
1999 1998 $ Change
- ------------------------------------------------------------------------------
Cash Flows From (Used In)
Operating activities $ 7,405 $ 7,350 $ 55
Investing activities (5,462) (5,408) (54)
Financing activities (1,916) (1,644) (272)
-----------------------------
Increase in Cash and Cash Equivalents $ 27 $ 298 $(271)
=============================
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 September 30, 1999 and 1998 and December 31, 1998, our sources
of funds, primarily from operations and, to the extent necessary, from readily
available external financing arrangements, are sufficient to meet ongoing
operating and investing 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.
Cash Flows From Operating Activities
The increase in cash flows from operating activities in 1999 was due to growth
in operating income, partially offset by changes in working capital. The change
in working capital was caused primarily by the effect of our retirement
incentive program which concluded in 1998.
Cash Flows Used In Investing Activities
Capital expenditures continued to be our primary use of capital resources. The
majority of the capital expenditures was for our Domestic Telecom business, to
facilitate the introduction of new products and services, enhance responsiveness
to competitive challenges, and increase the operating efficiency and
productivity of the network. We invested approximately $4,968 million in our
Domestic Telecom business in the first nine months of 1999, compared to $4,766
million in the first nine months of 1998. We also invested approximately $848
million in our Wireless, Directory and Other Businesses in the first nine months
of 1999, compared to $655 million during the same period last year. In 1999, we
expect total capital expenditures to be in the range of $8.3 billion to $8.5
billion.
We invested $872 million in unconsolidated businesses during the first nine
months of 1999 and $529 million during the same period in 1998. In June 1999,
we invested $635 million in our Omnitel investment, increasing our ownership
percentage from 19.71% to 23.1%. In April 1998, we invested $162 million in
Omnitel to increase our ownership interest from 17.45% to 19.71%. We also
invested $200 million in the first nine months of 1999 and $270 million in the
first nine months of 1998 in PrimeCo to fund the build-out and operations of its
PCS network. Other cash investments of $37 million in 1999 and $97 million in
1998 were primarily in our leasing business.
During the first nine months of 1999, we invested $43 million in short-term
investments, compared to $294 million during the same period last year. In
1998, we pre-funded a vacation pay trust for the payment of certain employee
benefits. Beginning in 1999, we no longer pre-fund the vacation pay trust.
Proceeds from the sales of all short-term investments were $785 million in the
first nine months of 1999, compared to $854 million in the corresponding period
of 1998.
In the first nine months of 1999, we received cash proceeds of $612 million in
connection with the disposition of our remaining investment in Viacom.
27
Cash Flows Used In Financing Activities
As in prior quarters, 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 each of the first, second and third quarters of 1999, we
announced a quarterly cash dividend of $.385 per share.
In March 1999, we received cash proceeds of $380 million from a financing
transaction involving cellular assets between Bell Atlantic Mobile and Crown
Castle International Corporation. A joint venture was formed for the primary
purpose of financing Bell Atlantic Mobile's investment in cellular towers. Bell
Atlantic Mobile, together with certain partnerships in which it is the managing
partner (the "managed entities"), contributed to the joint venture approximately
1,460 cellular towers in exchange for approximately $380 million in cash and an
equity interest of approximately 37.7% in the joint venture. Bell Atlantic
Mobile and the managed entities have leased back a portion of the towers, and
the joint venture will lease the remaining space to third parties. The joint
venture also plans to build new towers.
We increased our total debt (including capital lease obligations) by $115
million from December 31, 1998, primarily to fund our capital program including
investments in Omnitel and PrimeCo, partially offset by the use of cash proceeds
received from the disposition of our remaining investment in Viacom. Our debt
ratio was 57.2% as of September 30, 1999, compared to 61.5% as of September 30,
1998 and 61.3% as of December 31, 1998. The debt ratio at September 30, 1999
reflects the effect of recording an unrealized holding gain of $900 million, net
of taxes, related to our TCNZ investment, as described earlier under "Segmental
Results of Operations-Other Businesses." By the end of 1999, we expect our total
debt level to increase by approximately $2.0 billion to $2.5 billion from the
balance at December 31, 1998, subject to any modification of our investment
strategy. A significant portion of the increase is being driven by our
additional investment in Omnitel, the purchase of cellular properties, funding
of employee benefit trusts, and ongoing investment in our wireline and wireless
networks.
As of September 30, 1999, we had in excess of $4.4 billion of unused bank lines
of credit and $96 million in bank borrowings outstanding. As of September 30,
1999, our operating telephone subsidiaries and financing subsidiaries had shelf
registrations for the issuance of up to $2.9 billion of unsecured debt
securities. The debt securities of those subsidiaries continue to be accorded
high ratings by primary rating agencies. After the announcement of the Bell
Atlantic-GTE merger, the rating agencies placed the ratings of certain of our
subsidiaries under review for potential downgrade.
We also have a $2.0 billion Euro Medium Term Note Program, under which we may
issue notes that are not registered with the Securities and Exchange Commission.
The notes may be issued from time to time by our subsidiary, Bell Atlantic
Global Funding, Inc. (BAGF), and will have the benefit of a support agreement
between BAGF and Bell Atlantic. There have been no notes issued under this
program.
In the second quarter of 1999, our operating telephone subsidiary New England
Telephone and Telegraph Company issued $200 million of 5.875% notes due on April
15, 2009. The proceeds from the issuance were used to redeem $200 million of
7.375% notes due on October 15, 2007. We recorded an extraordinary charge of $1
million (net of an income tax benefit of $1 million) related to this redemption.
We also recorded an extraordinary charge of $5 million (net of an income tax
benefit of $3 million) in the second quarter of 1999 in connection with the
repurchase of $57 million in principal amount of debentures of certain of
operating telephone subsidiaries. In 1998, our wholly owned subsidiary, Bell
Atlantic Financial Services, Inc. (FSI), issued exchangeable notes totaling
$5,635 million. Proceeds of the offerings were used for repayment of a portion
of our short-term debt and other general corporate purposes. You should read
Note 6 to the condensed consolidated financial statements for additional
information on these exchangeable notes.
In connection with our investment in Iusacell, as of September 30, 1999, we
received cash proceeds totaling $119 million from the public offering of its
shares. See Note 4 for additional information on Iusacell and these share
offerings.
MARKET RISK
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes, foreign currency
exchange rate fluctuations, changes in equity investment prices and changes in
corporate tax rates. We employ risk management strategies using a variety of
derivatives including interest rate swap agreements, interest rate caps and
floors, foreign currency forwards and options and basis swap agreements. We do
not hold derivatives for trading purposes.
28
It is our policy to enter into interest rate, foreign currency and other
derivative transactions only to the extent necessary to achieve our desired
objectives in limiting our exposures to the various market risks. Our objectives
include maintaining a mix of fixed and variable rate debt to lower borrowing
costs within reasonable risk parameters, hedging the value of certain
international investments, and protecting against earnings and cash flow
volatility resulting from changes in foreign exchange rates. We do not hedge our
market risk exposure in a manner that would completely eliminate the effect of
changes in interest rates, equity prices and foreign exchange rates on our
earnings. While we do not expect that our liquidity and cash flows will be
materially affected by these risk management strategies, our net income may be
materially affected by certain market risk associated with our exchangeable
notes as discussed below.
Exchangeable Notes
In 1998, we issued exchangeable notes as described in Note 6 to the condensed
consolidated financial statements. These financial instruments expose us to
market risk, including foreign exchange rate risk, interest rate risk and equity
price risk which could affect the fair values of the notes and our future
earnings.
Market risk that could affect the fair values of the exchangeable notes
includes:
. Equity price movements, because the notes are exchangeable into shares that
are traded on the open market and routinely fluctuate in value.
. Foreign exchange rate movements, because the notes are exchangeable into
shares that are denominated in a foreign currency. The fair value of the TCNZ
exchangeable notes is affected by changes in the U.S. dollar/ New Zealand
dollar exchange rate, and the fair value of the CWC exchangeable notes is
affected by changes in the U.S. dollar/ British pound exchange rate.
. Interest rate movements, because the notes carry fixed interest rates.
Market risk that could affect our future earnings includes:
. Equity price and/or foreign exchange rate movements, because these movements
may result in our TCNZ shares rising to a level greater than 120% of the
share price at the pricing date of the offering. Similar movements may cause
the price of our CWC shares to rise to a level greater than 128% of the share
price at the pricing date of the offering. If either event should occur, we
are required to increase the applicable exchangeable note liability by the
amount of the increase in share price over the exchange price. This mark-to-
market transaction would reduce income by the amount of the increase in the
exchangeable note liability. If the share price subsequently declines, the
liability would be reduced (but not to less than its amortized carrying
value) and income would be increased. At September 30, 1999, the fair values
of the underlying TCNZ shares or CWC shares did not exceed the recorded
values of the debt liability and, therefore, no mark-to-market adjustments
were recorded to our financial statements.
Interest rate movements will not impact earnings, because the exchangeable
notes carry a fixed interest rate and there is no requirement to mark to
market the notes based on changes in interest rates.
The following sensitivity analysis measures the effect on earnings due to
changes in the underlying share prices of the TCNZ and CWC stock.
. At September 30, 1999, the exchange price for the TCNZ shares (expressed as
American Depositary Receipts) was $44.93 and the exchange price for the CWC
shares (expressed as American Depositary Shares) was $57.89.
. For each $1.00 increase in value of the TCNZ shares or the CWC shares above
the exchange price, our earnings would be reduced by approximately $55
million or $56 million, respectively. A subsequent decrease in value of the
TCNZ shares or the CWC shares would correspondingly increase earnings, but
not to exceed the amount of any previous reduction in earnings. Our earnings
are not affected so long as the TCNZ and CWC share prices remain at or below
their exchange prices.
. Our cash flows would not be affected by mark-to-market activity relating to
the exchangeable notes.
. If we decide to deliver shares in exchange for the notes, the exchangeable
note liability (including any mark-to-market adjustments) will be eliminated
and the investment will be reduced by the book value of the related number of
shares delivered. Upon settlement, the excess of the liability over the book
value of the related shares delivered will be recorded as a gain. We also
have the option to settle these liabilities with cash upon exchange.
A proposed restructuring of our investment in CWC, as discussed in Note 11 to
the condensed consolidated financial statements, would change the securities to
be delivered upon exchange for the CWC exchangeable notes. Under this
restructuring, we would receive shares of two companies acquiring the businesses
of CWC in exchange for our CWC shares.
29
Equity Price Risk
We also have equity price risk associated with our investments, primarily in
common stock, that are carried at their fair value. These investments are
subject to changes in the market prices of the securities.
Investments recorded at their fair value totaled $1,873 million at September 30,
1999 and $29 million at December 31, 1998. The increase from December 31, 1998
was primarily due to a mark-to-market adjustment of $1,385 million associated
with a change in accounting for our TCNZ investment from the equity method to
the cost method. Note 11 of our condensed consolidated financial statements
provides additional information on our TCNZ investment.
A sensitivity analysis of our investments recorded at their fair value indicated
that a 10% increase or decrease in the fair value of these securities would
result in a $187 million increase or decrease in the fair value of the
investments. A change in fair value, net of income taxes, would be recognized
in Accumulated Other Comprehensive Income (Loss) in our statement of changes in
shareowners' investment.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
Proposed Bell Atlantic - GTE Merger
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
We expect the merger 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 annual meetings held in May 1999, the
shareholders of each company approved the merger. The completion of the merger
is subject to a number of conditions, including certain regulatory approvals and
receipt of opinions that the merger will be tax-free.
We are working diligently to complete the merger and are targeting completion of
the merger around the end of the first quarter of 2000. However, Bell Atlantic
and GTE must obtain the approval of a variety of state and federal regulatory
agencies and, given the inherent uncertainties of the regulatory process, the
closing of the merger may be delayed.
Future operating revenues, expenses and net income of the combined 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 refer
to Note 9 to the condensed consolidated financial statements for pro forma
financial information for the nine-month period ended September 30, 1999.
RECENT DEVELOPMENTS
PROPOSED DOMESTIC WIRELESS TRANSACTIONS
Vodafone AirTouch
On September 21, 1999, we signed a definitive agreement with Vodafone AirTouch
plc (Vodafone AirTouch) to create a national wireless business composed of both
companies' U.S. wireless assets. The completion of this transaction is subject
to a number of conditions, including certain regulatory approvals and the
approval of the shareholders of Vodafone AirTouch. We expect the transaction to
close in 6 to 12 months from the date we signed the agreement. In the first
year following the completion of the merger between Bell Atlantic and GTE, we
estimate that the new wireless business will dilute the combined company's
earnings per share (EPS) by 3% on a cash basis and 7% on a generally accepted
accounting principles (GAAP) basis. You should also read Note 10 to the
condensed consolidated financial statements for additional information about
this proposed domestic wireless business.
Frontier Cellular
On July 20, 1999, Bell Atlantic Mobile announced that it would purchase Frontier
Corporation's (Frontier) interests in wireless properties doing business under
the Frontier Cellular name. Bell Atlantic Mobile currently owns 50% of the
Frontier Cellular business. The transaction is expected to close in the fourth
quarter of 1999.
30
Recent Developments - continued
INVESTMENTS IN UNCONSOLIDATED BUSINESSES
Agreement with Metromedia Fiber Network, Inc.
On October 7, 1999, we announced a strategic agreement with Metromedia Fiber
Network, Inc. (MFN), a domestic and international provider of dedicated fiber
optic networks in major metropolitan markets. Our agreement with MFN has two
parts.
First, we will acquire approximately $550 million of long-term capacity on MFN's
fiber optic networks. Of the $550 million, 10% is payable in November 1999 and
30% will be paid in each of the first three years of the contract.
Second, we will invest up to approximately $700 million to acquire up to 9.9% of
the equity of MFN through the purchase of newly issued shares at $28 per share.
We also will purchase up to approximately $975 million in debt securities
convertible at our option, upon receipt of necessary government approvals, into
common stock at a conversion price of $34 per share, increasing our potential
equity investment in MFN to about 19.9% of the company. Our investment in MFN
will be accounted for under the cost method. Certain aspects of this agreement
are subject to the approval of various regulatory authorities, which we hope to
obtain before the end of the year.
Proposed Restructure of PrimeCo Personal Communications, L.P.
On August 3, 1999, we and Vodafone AirTouch announced an agreement to
restructure our ownership interests in PrimeCo Personal Communications, L.P.
(PrimeCo), a partnership that was formed by us and Vodafone AirTouch in 1994 and
provides personal communications services in major cities across the United
States. Under the terms of that agreement, we would assume full ownership of
PrimeCo operations in five "major trading areas" (MTAs) - Richmond, VA, New
Orleans, LA and the Florida MTAs of Jacksonville, Tampa and Miami. Vodafone
AirTouch would assume full ownership of the remaining five PrimeCo MTAs -
Chicago, IL, Milwaukee, WI and the Texas MTAs of Dallas, San Antonio and
Houston.
Under the terms of the Wireless Co. agreement described earlier and in Note 10
to the condensed consolidated financial statements, Bell Atlantic and Vodafone
AirTouch agreed to suspend the August 3, 1999 agreement to restructure PrimeCo
ownership interests, with certain limited exceptions. As a result, actions to
allocate most PrimeCo markets would not commence prior to February 2000 or may
not occur at all based upon the timing of the completion of the proposed
domestic wireless transaction with Vodafone AirTouch.
Proposed Restructure of Cable & Wireless Communications plc
On July 27, 1999, we announced an agreement with Cable & Wireless plc (Cable &
Wireless), NTL Incorporated (NTL) and Cable & Wireless Communications plc (CWC)
for the proposed restructuring of CWC. We currently have an 18.6% ownership
interest in CWC.
Under the terms of the agreement, CWC's consumer cable telephone, television and
Internet operations would be separated from its corporate, business, Internet
protocol and wholesale operations. The consumer operations would be acquired by
NTL and the other operations remain with Cable & Wireless. In exchange for our
interest in CWC, we would receive shares in the two acquiring companies,
representing approximately 11.2% of NTL and approximately 4.7% of Cable &
Wireless. Upon completion of the restructuring, our previously issued $3,180
million in CWC exchangeable notes would be exchangeable on and after July 1,
2002 for shares in NTL and Cable & Wireless in proportion to the shares received
in the restructuring. Upon exchange by investors, we retain the option to settle
in cash or by delivery of the Cable & Wireless and NTL shares.
We expect the restructuring to result in a material non-cash gain. The
transaction also may cause the exchangeable notes to be marked to market,
resulting in a charge to income. See Note 6 to the condensed consolidated
financial statements for additional information about the CWC exchangeable
notes.
The completion of the restructuring is subject to a number of conditions and,
assuming satisfaction of those conditions, is expected to close in the first
half of 2000.
31
Recent Developments - continued
FCC REGULATION AND INTERSTATE RATES
Price Caps
In May 1999, the U.S. Court of Appeals reversed the FCC's establishment of a
6.5% productivity factor in calculating the annual price cap index applied to
our interstate access rates. The court directed the FCC to reconsider and
explain the methods used in selecting the productivity factor. The court granted
the FCC a stay of its order, however, until April 1, 2000. As a result, our
annual price cap filing effective July 1, 1999 includes the effects of the FCC's
6.5% productivity factor (see Domestic Telecom - Operating Revenues - Network
Access Services).
The FCC has adopted rules for special access services that provide for added
pricing flexibility and ultimately the removal of services from price regulation
when certain competitive thresholds are met. The order also allows certain
services, including those included in the interexchange basket of services, to
be removed from price regulation immediately. In response, we have filed to
remove services in the interexchange basket from regulation, effective October
22, 1999. This will remove services with approximately $90 million in annual
revenues from price regulation and from the operation of the productivity offset
which otherwise would require annual price reductions.
Universal Service
On July 30, 1999, the U.S. Court of Appeals reversed certain aspects of the
FCC's universal service order. The universal service fund includes a multi-
billion dollar interstate fund to link schools and libraries to the Internet and
to subsidize low income consumers and rural healthcare providers. Previously,
under the FCC's rules, all providers of interstate telecommunications services
had to contribute to the schools and libraries fund based on their total
interstate and intrastate retail revenues. The court reversed the decision to
include intrastate revenues as part of the basis for assessing contributions to
that fund. As a result of this decision, our contributions to the universal
service fund will be reduced by approximately $107 million annually beginning on
November 1, 1999, and our interstate access rates will be reduced accordingly.
STATE REGULATION
Pennsylvania
On September 30, 1999, the Pennsylvania Public Utility Commission (PUC) issued a
final decision in its "Global" proceeding on telecommunications competition
matters. The decision proposes to require our operating telephone subsidiary in
Pennsylvania, Bell Atlantic - Pennsylvania, to split into separate retail and
wholesale corporations. It proposes reductions in access charges applicable to
services provided to interexchange carriers and in both unbundled network
element rates and wholesale rates applicable to services and facilities provided
to competitive local exchange carriers. It requires Bell Atlantic -
Pennsylvania to provide combinations of unbundled network elements beyond those
required by the FCC. It reclassifies certain business services as
"competitive," but restricts the pricing freedom that that classification is
supposed to give Bell Atlantic - Pennsylvania. It sets a schedule of
prerequisites for state endorsement of a Bell Atlantic - Pennsylvania
application to the FCC for permission to offer in-region long distance service
under Section 271 of the Telecommunications Act of 1996 (1996 Act) that are
likely to delay that endorsement. Bell Atlantic - Pennsylvania has challenged
the lawfulness of this order in the Pennsylvania Supreme Court, the Commonwealth
Court of Pennsylvania and the Federal District Court.
TELECOMMUNICATIONS ACT OF 1996
In-Region Long Distance
On September 29, 1999, we filed our application with the FCC for permission to
enter the in-region long distance market in New York. This filing followed
nearly two years of proceedings before the New York PSC demonstrating that we
have satisfied the 14-point "checklist" required under the 1996 Act for entry
into the in-region long distance market. The filing also followed an extensive
seven-month third-party test of our operations support systems (OSS) in New York
conducted by KPMG Peat Marwick (KPMG) under the direction of the New York PSC.
On October 19, 1999, the Chairman of the New York PSC filed a statement fully
supporting our application. On November 1, 1999, the Department of Justice
filed its evaluation on Bell Atlantic - New York's application. The Department
of Justice stated that Bell Atlantic - New York had completed most of the
actions necessary to achieve long distance relief, but that it had two areas of
concern which "can be solved in a short time." We expect the FCC to render a
decision on our application before year-end.
32
Recent Developments - continued
KPMG has been retained by the Massachusetts Department of Telecommunications and
Energy to conduct a third-party test of our OSS in Massachusetts. The
Massachusetts test is designed to build on the KPMG test of the similar systems
in New York.
KPMG has also been retained by the Pennsylvania PUC to conduct a third-party
test of our OSS in Pennsylvania. The New Jersey Board of Public Utilities is
expected to retain KPMG to conduct a test of the New Jersey OSS that builds on
the concurrent testing of similar systems in Pennsylvania. The Virginia State
Corporation Commission has also begun an assessment of whether it should retain
KPMG for the same purpose.
Unbundling of Network Elements
The FCC recently announced its decision setting forth new unbundling
requirements. The FCC had previously identified seven elements that had to be
provided to competitors on an unbundled basis. With respect to those seven
elements, the FCC concluded that incumbent local exchange carriers, such as our
operating telephone subsidiaries, do not have to provide unbundled switching (or
combinations of elements that include switching, such as the so-called unbundled
element "platform") under certain circumstances to business customers with four
or more lines in certain offices in the top 50 Metropolitan Statistical Areas
(MSAs). It also held that incumbents do not have to provide unbundled access to
their directory assistance or operator services. The remaining elements on the
FCC's original list still must be provided.
With respect to new elements, the FCC concluded that new equipment to provide
advanced services such as Asymmetric Digital Subscriber Line (ADSL) does not
have to be unbundled. On the other hand, the FCC concluded that incumbents must
provide dark fiber as an unbundled element, and that sub-loop unbundling should
be provided. Finally, the FCC ruled that combinations of loops and transport,
known as enhanced extended loops or "EELs", must be made available under certain
circumstances, but left to a further rulemaking certain issues relating to the
use of EELs to substitute for special access services.
Reciprocal Compensation
State regulatory decisions have required us to pay "reciprocal compensation"
under the 1996 Act for the increasing volume of one-way traffic from our
customers to customers of other carriers, primarily calls to Internet service
providers. In February 1999, the FCC confirmed that such traffic is largely
interstate but concluded that it would not interfere with state regulatory
decisions requiring payment of reciprocal compensation for such traffic and that
carriers are bound by their existing interconnection agreements. The FCC
tentatively concluded that future compensation arrangements for calls to
Internet service providers should be negotiated by carriers and arbitrated, if
necessary, before the state commissions under the terms of the 1996 Act. The
FCC has initiated a proceeding to consider, alternatively, the adoption of
federal rules to govern future inter-carrier compensation arrangements for this
traffic. We have asked the U.S. Court of Appeals to review the FCC's decision
that state commissions may require payment of reciprocal compensation for this
traffic.
We are also seeking review of prior state regulatory commission decisions. The
Massachusetts Department of Telecommunications and Energy modified its earlier
decision, resulting in a reduction of our reciprocal compensation obligation.
The New Jersey Board of Public Utilities and the West Virginia Public Service
Commission have both issued favorable decisions on reciprocal compensation for
Internet-bound traffic. The New York PSC issued a decision deciding that high
volume, convergent traffic (which includes Internet-bound traffic) has different
cost characteristics and should be compensated at the lower end-office rate.
The New York PSC determined that traffic in excess of a 3:1 ratio is presumed to
be high volume, convergent traffic, although this presumption can be rebutted.
Commissions in Delaware, Maryland, Pennsylvania, Rhode Island and Virginia have
issued decisions requiring us to continue to pay reciprocal compensation on
Internet-bound traffic. We currently estimate that our reciprocal compensation
payment obligations will be approximately $400 million to $430 million in 1999.
33
COMPETITION
IntraLATA Toll Services
IntraLATA toll calls originate and terminate within the same LATA, but generally
cover a greater distance than a local call. These services are regulated by
state regulatory commissions, except where they cross state lines. All of our
state regulatory commissions permit other carriers to offer intraLATA toll
services.
Until the implementation of presubscription, intraLATA toll calls were completed
by our operating telephone companies unless the customer dialed a code to access
a competing carrier. Presubscription changed this dialing method and enabled
customers to make these toll calls using another carrier without having to dial
an access code. All of our operating telephone companies have implemented
presubscription.
Implementation of presubscription for intraLATA toll services has had a material
negative effect on intraLATA toll service revenues, which is being partially
offset by an increase in intraLATA access revenues (see Domestic Telecom -
Operating Revenues - Long Distance Services).
OTHER MATTERS
Year "2000" Update
We are now in the final stages of our program to evaluate and address the impact
of the Year 2000 date transition on our operations. This program has included
steps to:
. inventory and assess for Year 2000 compliance our equipment, software and
systems;
. determine whether to remediate, replace or retire noncompliant items, and
establish a plan to accomplish these steps;
. remediate, replace or retire the items;
. test the items, where required; and
. provide management with reporting and issues management to support a seamless
transition to the Year 2000.
STATE OF READINESS
For our operating telephone subsidiaries, centralized services entities and
general corporate operations, the program has focused on the following project
groups: Network Elements, Applications and Support Systems, and Information
Technology Infrastructure. Our goal for these operations was to have our network
and other mission critical systems Year 2000 compliant (including testing) by
June 30, 1999 and we substantially met this goal. What follows is a more
detailed breakdown of our efforts to date.
. Network Elements
Approximately 350 different types of network elements (such as central office
switches) appear in over one hundred thousand instances. When combined in
various ways and using network application systems, these elements are the
building blocks of customer services and networked information transmission
of all kinds. We originally assessed approximately 70% of these element
types, representing over 90% of all deployed network elements, as Year 2000
compliant. As of November 1, 1999, we have completed the required
repair/replacement of virtually all network elements requiring remediation.
. Application and Support Systems
Approximately 1,200 application and systems support (i) the administration
and maintenance of our network and customer service functions (network
information systems); (ii) customer care and billing functions; and (iii)
human resources, finance and general corporate functions. We originally
assessed approximately 48% of these application and support systems as either
compliant or to be retired. As of November 1, 1999, we have successfully
completed the required repair/replacement of virtually all mission critical
application and support systems.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
related network components, and software products comprise our information
technology (IT) infrastructure. Of the approximately 1,350 unique types of
elements in the inventory for the IT infrastructure, we originally assessed
approximately 73% as compliant or to be retired. As previously reported, we
have successfully completed remediation/replacement of all mission critical
elements earlier this year.
34
Year "2000" Update - continued
Our project to remediate/replace or retire mission critical systems supporting
buildings and other facilities used by the operating telephone subsidiaries,
such as HVAC, access control and alarm systems, is now complete and our effort
to remediate/replace or retire any other Bell Atlantic mission critical system
used by those subsidiaries is virtually complete. Remediation/replacement or
retirement of nonmission critical systems, where applicable, and supplemental
testing and verification/correction activities, for both mission critical and
non mission critical systems, are likely to continue throughout the balance of
1999.
For our other controlled or majority-owned subsidiaries, including Bell Atlantic
Mobile, our Iusacell subsidiary and our directory companies, the inventory,
assessment and remediation/replacement efforts for mission critical systems is
substantially complete, and testing activities continue.
THIRD PARTY ISSUES
. Vendors
In general, our product vendors have made available either Year 2000-compliant
versions of their offerings or new compliant products as replacements of
discontinued offerings. The compliance status of a given product is typically
determined using multiple sources of information, including our own internal
testing and analysis. However, in some instances certification is based on
detailed test results or similar information provided by the product vendor
and analysis by us or contractors specializing in this type of review. We are
also continuing Year 2000-related discussions with utilities and similar
services providers. Although we have received assurances and other information
suggesting that substantially all of our primary services providers have
completed or are well along in their respective Year 2000 projects, we do not
usually have sufficient access to or control over the providers' systems and
equipment to undertake verification efforts as to such systems and equipment,
and as a general matter, it would be impractical to do so. We also have
participated in interoperability testing of various mission critical network
elements, purchased from a number of vendors, through the Telco Year 2000
Forum, an industry group comprised of leading local telecommunications
services companies. We intend to monitor critical service provider activities,
as appropriate, through the remainder of 1999.
. Customers
Our customers remain keenly interested in the progress of our Year 2000
efforts, and we anticipate increased demand for information, including
detailed testing data and company-specific responses. We are providing limited
warranties of Year 2000 compliance for certain new telecommunications services
and other offerings, but we do not expect any resulting warranty costs to be
material. We are also analyzing and addressing Year 2000 issues in customer
premise equipment (CPE), including CPE that we have sold or maintained. In
general, the customer is responsible for CPE. However, customers could
attribute a Year 2000 malfunction of their CPE, whether or not sold or
maintained by us, to a failure of our network service. While network issues
regarding E-911/911 are included in the "State of Readiness" discussion above,
we also have a separate effort to identify and address Year 2000 issues for
CPE and other equipment that we maintain for Public Safety Answering Points
(PSAPs) which is used in connection with the provision of E-911/911 and
related services. Our project to repair and replace E-911/911-related CPE that
we maintain for various PSAPs to provide Year 2000 compliance of that CPE is
virtually complete.
. Interconnecting Carriers
Our network operations interconnect with domestic and international networks
of other carriers. If one of these interconnecting carrier networks should
fail or suffer adverse impact from a Year 2000 problem, our customers could
experience impairment of service. We have participated in various
internetworking testing efforts, as a member of the Association for
Telecommunications Industry Solutions (ATIS), the Cellular Telecommunications
Industry Association (CTIA) and the International Telecommunications Union
(ITU). We intend to monitor the activities of the primary interconnecting
carriers through the remainder of 1999.
35
Year "2000" Update - continued
COSTS
From the inception of our Year 2000 project through September 30, 1999, and
based on the cost tracking methods we have historically applied to this project,
we have incurred total pre-tax expenses of approximately $211 million, and we
have made capital expenditures of approximately $153 million. For 1999, we
expect total pre-tax expenses for our Year 2000 project not to exceed $125
million (approximately $89 million has been incurred through September 30, 1999)
and total capital expenditures not to exceed $100 million (approximately $73
million has been made through September 30, 1999). We anticipate that the
balance of the costs incurred for 1999 will be primarily attributable to
additional testing and verification/correction, rollover transition management,
contingency planning and repair/replacement of non-mission critical systems.
These cost estimates have been included in our earnings targets, but should not
be used as the sole gauge of progress on our Year 2000 project or as an
indication of our Year 2000 readiness.
We have investments in various joint ventures and other interests. At this time,
we do not anticipate that the impact of any Year 2000 remediation costs that
they incur will be material to our results of operations.
RISKS
The failure to correct a material Year 2000 problem could cause an interruption
or failure of certain of our normal business functions or operations, which
could have a material adverse effect on our results of operations, liquidity or
financial condition; however, we consider such a development remote. Due to the
uncertainty inherent in other Year 2000 issues that are ultimately beyond our
control, including, for example, the final Year 2000 readiness of our suppliers,
customers, interconnecting carriers, and joint venture and investment interests,
we are unable to determine at this time the likelihood of a material impact on
our results of operations, liquidity or financial condition due to such Year
2000 issues. However, we are taking appropriate prudent measures to mitigate
that risk. We anticipate that, in the event of material interruption or failure
of our service resulting from an actual or perceived Year 2000 problem within or
beyond our control, we could be subject to third-party claims.
CONTINGENCY PLANS
As a public telecommunications carrier, we have had considerable experience
successfully dealing with natural disasters and other events requiring
contingency planning and execution. Our Year 2000 contingency plans are built
upon our existing Emergency Preparedness and Disaster Recovery plans.
We will continue to fine-tune and test our corporate Year 2000 contingency plans
to help ensure that core business functions and key support processes will
continue to function without material disruption, in the event of external (e.g.
power, public transportation, water), internal or supply chain failures (i.e.
critical dependencies on another entity for information, data or services).
Individual business unit contingency plans for Year 2000 are being integrated
and coordinated under an enterprise-wide command and control structure.
RECENT ACCOUNTING PRONOUNCEMENT
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments.
The FASB amended this pronouncement in June 1999 to defer the effective date of
SFAS No. 133 for one year.
Under the amended pronouncement, Bell Atlantic must adopt SFAS No. 133 no later
than January 1, 2001. We are currently evaluating the provisions of SFAS No.
133. The impact of adoption will be determined by several factors, including
the specific hedging instruments in place and their relationships to hedged
items, as well as market conditions at the date of adoption. We have not
estimated the effect of adoption as we believe that such a determination will
not be meaningful until closer to the adoption date.
36
Other Information
At a Bell Atlantic Analyst Conference on November 8, 1999, we made the following
statements:
. We remain comfortable with current earnings estimates for 1999 of $2.99 to
$3.03 per share, excluding transition and integration costs and other special
items.
. We are targeting consolidated revenue growth for the fourth quarter of 1999
of 6%, including the benefit of revenues from cellular properties, the
purchase of which we expect to complete in the fourth quarter.
. We are targeting consolidated revenue growth on a stand alone basis
(excluding the announced transactions with GTE and Vodafone AirTouch) of 6%
in 2000.
. We are targeting 2000 earnings growth on a stand alone basis within the 10%
to 12% range, excluding special items.
. We estimate that on a stand alone basis our capital spending will increase by
$300 million to $500 million in 2000 over 1999 spending.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
In this Management's Discussion and Analysis, and elsewhere in this Quarterly
Report, we have made forward-looking statements. These statements are based on
our estimates and assumptions and are subject to risks and uncertainties.
Forward-looking statements include the information concerning our possible or
assumed future results of operations. Forward-looking statements also include
those preceded or followed by the words "anticipates," "believes," "estimates,"
"hopes" or similar expressions. 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, along with those discussed elsewhere in this
Quarterly Report, could affect future results and could cause those results to
differ materially from those expressed in the forward-looking statements:
. materially adverse changes in economic conditions in the markets served by us
or by companies in which we have substantial investments;
. material changes in available technology;
. the final outcome of federal, state, and local regulatory initiatives and
proceedings, including arbitration proceedings, and judicial review of those
initiatives and proceedings, pertaining to, among other matters, the terms of
interconnection, access charges, universal service, and unbundled network
element and resale rates;
. the extent, timing, success, and overall effects of competition from others
in the local telephone and toll service markets;
. the timing and profitability of our entry into the in-region long distance
market;
. the success and expense of our remediation efforts and those of our
suppliers, customers, joint ventures, noncontrolled investments, and
interconnecting carriers in achieving Year 2000 compliance;
. the timing of, and regulatory or other conditions associated with, the
completion of the merger with GTE and our ability to combine operations and
obtain revenue enhancements and cost savings following the merger; and
. the timing of, and regulatory or other conditions associated with, the
completion of the wireless transaction with Vodafone AirTouch, and the
ability of the new wireless enterprise to combine operations and obtain
revenue enhancements and cost savings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Information relating to market risk is included in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, in the
Financial Condition section under the caption "Market Risk."
37
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------------
(a) Exhibits:
Exhibit
Number
------
10 U. S. Wireless Alliance Agreement, dated September 21, 1999, among
Bell Atlantic Corporation and Vodafone AirTouch plc, including the
forms of the Amended and Restated Partnership Agreement and the
Investment Agreement.
12 Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1999:
A Current Report on Form 8-K, dated July 21, 1999, was filed regarding our
second quarter 1999 financial results.
A Current Report on Form 8-K, dated August 26, 1999, was filed reporting
unaudited pro forma combined condensed financial statements for GTE
Corporation and Bell Atlantic Corporation for the six-month period ended
June 30, 1999.
A Current Report on Form 8-K, dated September 12, 1999, was filed regarding
discussions with Vodafone AirTouch plc relating to the possibility of a
U.S. business relationship.
A Current Report on Form 8-K, dated September 21, 1999, was filed reporting
that we have entered into a definitive agreement with Vodafone AirTouch plc
for the creation of a new wireless business composed of the parties' U.S.
wireless assets and providing certain information with regard to the
proposed new wireless business that was given at a meeting with analysts on
September 21, 1999.
38
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: November 10, 1999 By /s/ Doreen A. Toben
----------------------------
Doreen A. Toben
Vice President - Controller
(Principal Accounting Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 5, 1999.
39
Exhibit Index
-------------
Exhibit
Number
- ------
10 U.S. Wireless Alliance Agreement, dated September 21, 1999, among Bell
Atlantic Corporation and Vodafone AirTouch plc, including the forms of
the Amended and Restated Partnership Agreement and the Investment
Agreement.
12 Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.