<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 1-6393
BELL ATLANTIC - PENNSYLVANIA, INC.
A Pennsylvania Corporation I.R.S. Employer Identification No. 23-0397860
1717 Arch Street, 32nd Fl., Philadelphia, Pennsylvania 19103
Telephone Number (215) 466-9900
_________________________
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $21.8,
$16.2, $39.7 and $32.1 from affiliates) $886.9 $852.6 $1,749.4 $1,698.5
----------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 150.3 157.8 303.8 311.7
Depreciation and amortization 184.7 175.4 366.1 346.0
Other (including $170.6, 193.3,
$327.3 and $356.8 to affiliates) 318.6 330.5 606.8 624.3
----------------------------------------
653.6 663.7 1,276.7 1,282.0
----------------------------------------
OPERATING INCOME 233.3 188.9 472.7 416.5
OTHER INCOME, NET (including $.1, $0,
$.1 and $0 from affiliates) .9 2.0 1.7 2.6
INTEREST EXPENSE (including $5.8,
$7.1, $10.9 and $11.9 to affiliate) 31.0 31.3 60.4 60.7
----------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 203.2 159.6 414.0 358.4
PROVISION FOR INCOME TAXES 83.3 67.4 169.8 149.3
----------------------------------------
NET INCOME $119.9 $ 92.2 $ 244.2 $ 209.1
========================================
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Millions)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments $ 18.7 $ 56.1
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $68.1 and $63.0 629.0 637.7
Affiliates 19.4 14.5
Material and supplies 21.9 21.7
Prepaid expenses 76.3 22.6
Deferred income taxes 73.2 61.5
Other 4.1 5.2
----------------------------------------------
842.6 819.3
----------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 10,752.2 10,447.7
Less accumulated depreciation 6,426.0 6,222.8
----------------------------------------------
4,326.2 4,224.9
----------------------------------------------
OTHER ASSETS 81.2 52.0
----------------------------------------------
TOTAL ASSETS $ 5,250.0 $ 5,096.2
==============================================
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Amount)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 509.1 $ 493.6
Other 1.6 1.2
Accounts payable and accrued liabilities:
Affiliates 277.7 320.7
Other 500.6 507.3
Advance billings and customer deposits 94.6 86.6
-----------------------------------------------
1,383.6 1,409.4
-----------------------------------------------
LONG-TERM DEBT 1,429.2 1,429.9
-----------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 633.0 685.3
-----------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 150.2 88.7
Unamortized investment tax credits 27.5 28.8
Other 113.2 112.1
-----------------------------------------------
290.9 229.6
-----------------------------------------------
SHAREOWNER'S INVESTMENT
Common stock - $20 par value per share 1,594.7 1,594.7
Authorized shares: 80,210,000
Outstanding shares: 79,732,681
Contributed capital .7 .7
Accumulated deficit (81.6) (252.9)
Accumulated other comprehensive loss (.5) (.5)
-----------------------------------------------
1,513.3 1,342.0
-----------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $5,250.0 $5,096.2
===============================================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 480.9 $ 378.0
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 37.4 20.6
Additions to plant, property and equipment (456.0) (513.1)
Other, net 8.8 5.0
------------------------------------------------
Net cash used in investing activities (409.8) (487.5)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations (.6) (.7)
Net change in note payable to affiliate 15.5 277.3
Dividends paid (72.9) (157.3)
Net change in outstanding checks drawn
on controlled disbursement accounts (13.1) (9.8)
------------------------------------------------
Net cash (used in)/provided by financing activities (71.1) 109.5
------------------------------------------------
NET CHANGE IN CASH --- ---
CASH, BEGINNING OF PERIOD --- ---
------------------------------------------------
CASH, END OF PERIOD $ --- $ ---
================================================
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Bell Atlantic - Pennsylvania, Inc. is a wholly owned subsidiary of Bell
Atlantic Corporation (Bell Atlantic). The accompanying unaudited condensed
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 position 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. Dividend
On August 2, 1999, we declared and paid a dividend in the amount of $72.9
million to Bell Atlantic.
3. New Accounting Standards
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 now capitalize interest associated with the
development of internal-use software. The effect of adopting SOP No. 98-1 for
Bell Atlantic was an increase in net income of approximately $115 million for
the six months ended June 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 we have not
historically capitalized 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, we must adopt SFAS No. 133 no later than
January 1, 2001. We are currently evaluating the provisions of SFAS No. 133 and
have not yet determined what the impact of adopting this statement will be on
our future results of operations or financial condition.
5
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
4. Shareowner's Investment
<TABLE>
<CAPTION>
Accumulated
Other
Common Contributed Accumulated Comprehensive
(Dollars in Millions) Stock Capital Deficit Loss
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $1,594.7 $.7 $(252.9) $(.5)
Net income 244.2
Dividend paid to Bell Atlantic (72.9)
----------------------------------------------------
Balance at June 30, 1999 $1,594.7 $.7 $ (81.6) $(.5)
====================================================
</TABLE>
Net income and comprehensive income were the same for the six months ended
June 30, 1999 and 1998.
5. Litigation and Other Contingencies
Various legal actions and regulatory proceedings are 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.
6. 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.
It is expected that the merger will qualify as a pooling of interests, which
means that for accounting and financial reporting purposes the companies will be
treated as if they had always been combined. 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.
Bell Atlantic and GTE are working diligently to complete the merger at the
earliest practicable date. However, the companies must obtain the approval of a
variety of state and federal regulatory agencies and, accordingly, the merger
may close in the first half of 2000.
6
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
We reported net income of $244.2 million for the six months ended June 30,
1999, compared to net income of $209.1 million for the same period in 1998.
Our results for 1999 and 1998 were affected by special items. The special
items in both periods include our allocated share of charges from Bell Atlantic
Network Services, Inc. (NSI).
The following table shows how special items are reflected in our condensed
statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Millions)
Six Months Ended June 30 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee Costs
Merger transition costs $ --- $ .1
Other Operating Expenses
Merger transition costs .1 2.0
Allocated merger transition costs 4.4 2.1
----------------------------------------
$ 4.5 $ 4.2
========================================
</TABLE>
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 $4.5
million in the first six months of 1999 and $4.2 million in the first six months
of 1998.
Transition and integration costs consist of our proportionate share of costs
associated with integrating the operations of Bell Atlantic and NYNEX, such as
systems modifications costs and advertising and branding costs. Transition and
integration costs are expensed as incurred.
OPERATING REVENUE STATISTICS
- ----------------------------
<TABLE>
<CAPTION>
1999 1998 % Change
- ------------------------------------------------------------------------------------------------------------------------------
At June 30
- ----------
<S> <C> <C> <C>
Access Lines in Service (in thousands)
Residence 4,219 4,094 3.1%
Business 2,296 2,212 3.8
Public 72 73 (1.4)
--------------------------------------
6,587 6,379 3.3
======================================
Six Months Ended June 30
- ------------------------
Access Minutes of Use (in millions) 13,247 12,442 6.5
======================================
</TABLE>
7
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Six Months Ended June 30 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Local services $ 899.9 $ 862.4
Network access services 558.0 540.6
Long distance services 147.9 163.2
Ancillary services 143.6 132.3
--------------------------------------
Total $1,749.4 $1,698.5
======================================
</TABLE>
LOCAL SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Six Months $37.5 4.3%
- --------------------------------------------------------------------------------
Local services revenues are earned 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 in 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 3.3% from June 30, 1998. 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. Revenues from our value-
added services were boosted in 1999 by marketing and promotional campaigns
offering new service packages.
Growth in local services revenues 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. Price reductions on local exchange services also
offset increases in local services revenues.
NETWORK ACCESS SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Six Months $17.4 3.2%
- --------------------------------------------------------------------------------
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 usage 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.
Network access services revenue growth in 1999 was mainly attributable to
higher customer demand, as reflected by growth in access minutes of use of 6.5%
from the same period in 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 our
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 also contributed to revenue growth in 1999.
Volume-related growth was partially offset by net price reductions mandated
by federal and state price cap plans. The Federal Communications Commission
(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 under the rules of the Price Cap Plan.
8
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
In July 1999, we implemented interstate price decreases of approximately $4
million on an annual basis in connection with the FCC's Price Cap Plan. The
rate changes include amounts necessary to recover our contributions to the FCC's
universal service fund, which are included in Other Operating Expenses. The FCC
has created a multi-billion dollar interstate fund to link schools and libraries
to the Internet and to subsidize low-income customers and rural health care
providers. Under the FCC's rules, all providers of interstate
telecommunications services must contribute to the universal service fund.
Contributions to the schools and libraries fund have been assessed based on
total interstate and intrastate retail revenues. As described in Other Matters
- - FCC Regulation and Interstate Rates - Universal Service, the U.S. Court of
Appeals recently reversed the decision to include intrastate revenues in the
calculation of contributions to the schools and libraries fund. It also reversed
the decision to require local telephone companies to recover their universal
service contributions through access charges rather than charges to their end-
user customers. Our rates are subject to change every quarter due to potential
increases or decreases in our contribution to the universal service fund. The
July 1999 rate changes include an annual increase of approximately $11 million
in the required contributions to this fund. These rates will be in effect
through June 2000. Interstate price decreases were $12 million on an annual
basis for the period July 1998 through June 1999. These rates were increased by
approximately $7 million on an annual basis for the period January 1999 through
June 1999 to reflect primarily the unification of pre-merger Bell Atlantic and
NYNEX access rates.
LONG DISTANCE SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(15.3) (9.4)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made to
points outside a customer's local calling area, but within our service area
(intraLATA toll). Other long distance services that we provide include 800
services, Wide Area Telephone Service (WATS), and corridor services (between
LATAs in Philadelphia and southern New Jersey).
The decline in long distance services revenues 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. In response to presubscription, we have implemented customer win-back and
retention initiatives that include toll calling discount packages and product
bundling offers. Price reductions implemented on certain toll services have
also contributed to the decline in long distance services revenues.
ANCILLARY SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Six Months $11.3 8.5%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation by competitive local exchange carriers, usage of
separately priced (unbundled) components of our network by competitive local
exchange carriers, voice messaging, customer premises equipment (CPE) and wiring
and maintenance services, and sales of materials and supplies to affiliates.
Ancillary services revenues also include fees paid by customers for
nonpublication of telephone numbers and multiple white page listings and fees
paid by an affiliate for usage of our directory listings.
Ancillary services revenues were higher in 1999 due to increased demand for
billing and collection services, growth in CPE and installation services
revenues and higher payments from competitive local exchange carriers for
interconnection of their network with our network and for the purchase of
unbundled network elements. These revenue increases were partially offset by
lower facilities rental revenues from affiliates and the recognition in 1998 of
revenues associated with a marketing program.
9
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Six Months Ended June 30 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes $ 303.8 $ 311.7
Depreciation and amortization 366.1 346.0
Other operating expenses 606.8 624.3
--------------------------------------
Total $1,276.7 $1,282.0
======================================
</TABLE>
EMPLOYEE COSTS
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(7.9) (2.5)%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of NSI, who provide centralized services on a contract basis, are
allocated to us and are included in Other Operating Expenses.
Employee costs decreased in the first six months of 1999 primarily as a
result of lower pension and benefit costs, a reduction in associate overtime pay
and the effect of lower work force levels. Annual salary and wage increases for
management and associate employees partially offset these cost reductions.
The decline in pension and benefit costs 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.
DEPRECIATION AND AMORTIZATION
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Six Months $20.1 5.8%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first six months of
1999 over the same period in 1998 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The
adoption of Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" also contributed to
the increase in depreciation and amortization expense in the first six months of
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 as
incurred. For additional information on SOP No. 98-1, see Note 3 to the
condensed financial statements. These expense increases were partially offset
by the effect of lower rates of depreciation.
OTHER OPERATING EXPENSES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(17.5) (2.8)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from NSI, rent, network software costs, operating
taxes other than income, the provision for uncollectible accounts receivable,
and other costs.
The decrease in other operating expenses in the first six months of 1999 was
largely attributable to the effect of adopting SOP No. 98-1 and a reduction in
centralized services expenses allocated from NSI, primarily as a result of lower
employee costs incurred by NSI. A reduction in a regulatory accrual also
lowered other operating expenses in 1999.
10
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
These decreases were partially offset by higher costs for materials and
contracted services and higher interconnection payments to competitive local
exchange and other carriers to terminate calls on their networks (reciprocal
compensation). We have been required by our state regulators to pay "reciprocal
compensation" to competitive local exchange and other carriers to terminate
calls on their networks, including an increasing volume of one-way traffic from
our customers to internet service providers that are their customers. 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 Telecommunications Act of 1996 (1996 Act).
The FCC has initiated a proceeding to consider, alternatively, the adoption of
federal rules to govern future inter-carrier compensation 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.
The Pennsylvania Public Utility Commission has issued a decision requiring us to
continue to pay reciprocal compensation on Internet-bound traffic.
OTHER INCOME, NET
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(.9) (34.6)%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to the recognition of
interest income in connection with the settlement of tax-related matters in
1998.
INTEREST EXPENSE
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(.3) (.5)%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense decreased in the first six months of 1999 over the same
period in 1998 principally due to the effects of refinancing long-term debt at a
more favorable interest rate and lower interest rates on average short-term
debt. These decreases were substantially offset by a reduction in capitalized
interest costs primarily resulting from lower levels of average telephone plant
under construction and by the recognition of additional interest costs
associated with a regulatory matter.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30
- --------------------------------------------------------------------------------
1999 41.0%
- --------------------------------------------------------------------------------
1998 41.7%
- --------------------------------------------------------------------------------
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 was lower in the first six months of 1999 principally due to
prior period adjustments recorded in 1999.
11
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
FINANCIAL CONDITION
- -------------------
We use the net cash generated from operations and from external financing to
fund capital expenditures for network expansion and modernization, and pay
dividends. While current liabilities exceeded current assets at both June 30,
1999 and 1998 and December 31, 1998, our sources of funds, primarily from
operations and, to the extent necessary, from readily available financing
arrangements with an affiliate, are sufficient to meet ongoing operating
requirements. Management expects that presently foreseeable capital
requirements will continue to be financed primarily through internally generated
funds. Additional long-term debt may be needed to fund development activities
or to maintain our capital structure to ensure financial flexibility.
As of June 30, 1999, we had $140.9 million of an unused line of credit with
an affiliate, Bell Atlantic Network Funding Corporation. In addition, we had
$175.0 million remaining under a shelf registration statement filed with the
Securities and Exchange Commission for the issuance of unsecured debt
securities. Our debt securities continue to be accorded high ratings by primary
rating agencies. Subsequent to the announcement of the Bell Atlantic - GTE
merger, rating agencies have maintained current credit ratings, but have placed
our ratings under review for potential downgrade.
Our debt ratio was 56.2% at June 30, 1999, compared to 61.4% at June 30, 1998
and 58.9% at December 31, 1998.
On August 2, 1999, we declared and paid a dividend in the amount of $72.9
million to Bell Atlantic.
OTHER MATTERS
- -------------
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 Operating Revenues - Network Access
Services).
Universal Service
On July 30, 1999, the U.S. Court of Appeals reversed certain aspects of the
FCC's universal service order. While the court generally upheld the FCC's rules
creating a fund to support service to schools and libraries, it reversed that
portion of the rules that included intrastate revenues as part of the basis for
assessing contributions to that fund. The court also reversed the portion of
the FCC's order that required local telephone companies to recover their
universal service contributions generally through increases to their interstate
access revenues, rather than through charges directly to their end-user
customers.
Recent Accounting Pronouncement - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board 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 the 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, we must adopt SFAS No. 133 no later than
January 1, 2001. We are currently evaluating the provisions of SFAS No. 133 and
have not yet determined what the impact of adopting this statement will be on
our future results of operations or financial condition.
12
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Year "2000" Update
Bell Atlantic has a comprehensive program to evaluate and address the impact
of the Year 2000 date transition on its subsidiaries' operations, including our
operations. This program includes 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 Bell Atlantic's operating telephone subsidiaries, centralized services
entities and general corporate operations, the program focuses on the
following project groups: Network Elements, Applications and Support Systems,
and Information Technology Infrastructure. Bell Atlantic's goal for these
operations was to have its network and other mission critical systems Year
2000 compliant (including testing) by June 30, 1999 and it has substantially
met this goal. What follows is a more detailed breakdown of Bell Atlantic's
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. Bell Atlantic originally assessed approximately 70% of these
element types, representing over 90% of all deployed network elements, as
Year 2000 compliant. As of July 31, 1999, Bell Atlantic has completed the
repair/replacement for approximately 99% of deployed network elements
requiring remediation. Bell Atlantic's plan is to remediate/replace or where
applicable retire, the remaining elements prior to August 31, 1999, with the
following exceptions: two element types which are planned for
remediation/replacement in September, and a single switch in New York which,
under an agreement with the New York Public Service Commission, is scheduled
to be retired later this year.
. Application and Support Systems
Bell Atlantic has approximately 1,200 application and systems that support:
(i) the administration and maintenance of its network and customer service
functions (network information systems); (ii) customer care and billing
functions; and (iii) human resources, finance and general corporate
functions. Bell Atlantic originally assessed approximately 48% of these
application and support systems as either compliant or to be retired. As of
July 31, 1999, Bell Atlantic has successfully completed repair/replacement of
more than 99% of all mission critical application and support systems. The
remaining systems are scheduled for remediation/replacement or retirement
prior to August 31, 1999, with the exception of certain accounting subsystems
scheduled for replacement in October 1999.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
related network components, and software products comprise Bell Atlantic's
information technology (IT) infrastructure. Of the approximately 1,350
unique types of elements in the inventory for the IT infrastructure, Bell
Atlantic originally assessed approximately 73% as compliant or to be retired.
As of July 31, 1999, Bell Atlantic has successfully completed
remediation/replacement of all mission critical elements.
Bell Atlantic's project to remediate/replace or retire mission critical
systems supporting buildings and other facilities used by its operating
telephone subsidiaries, such as HVAC, access control and alarm systems, is
now complete and its efforts to remediate/replace or retire any other Bell
Atlantic mission critical system used by those subsidiaries are virtually
complete, with only a small number of such systems still requiring attention.
Work on these few miscellaneous systems is expected to be completed by the
end of September. Remediation/replacement or retirement of non-mission
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.
13
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Third Party Issues
. Vendors
In general, Bell Atlantic's 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 Bell Atlantic's 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 Bell Atlantic or
contractors specializing in this type of review. Bell Atlantic is also
continuing Year 2000-related discussions with utilities and similar services
providers. Although Bell Atlantic has received assurances and other
information suggesting that substantially all of its primary services
providers have completed or are well along in their respective Year 2000
projects, Bell Atlantic does 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. Bell Atlantic has also 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. Bell Atlantic intends to
monitor critical service provider activities, as appropriate, through the
completion of their respective remediation projects.
. Customers
Bell Atlantic's customers remain keenly interested in the progress of its
Year 2000 efforts, and it anticipates increased demand for information,
including detailed testing data and company-specific responses. Bell
Atlantic is providing limited warranties of Year 2000 compliance for certain
new telecommunications services and other offerings, but it does not expect
any resulting warranty costs to be material.
. Interconnecting Carriers
Bell Atlantic's 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, Bell Atlantic's customers could experience impairment of service.
Bell Atlantic has 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). Bell Atlantic intends to
monitor the activities of the primary interconnecting carriers through the
completion of their respective remediation projects.
Costs
From the inception of Bell Atlantic's Year 2000 project through June 30,
1999, and based on the cost tracking methods it has historically applied to this
project, Bell Atlantic has incurred total pre-tax expenses of approximately $180
million, and it has made capital expenditures of approximately $116 million.
For 1999, Bell Atlantic expects to incur total pre-tax expenses for its Year
2000 project of approximately $75 million to $150 million (approximately $58
million of which was incurred through June 30, 1999) and total capital
expenditures of $75 million to $125 million (approximately $36 million of which
was incurred through June 30, 1999). Bell Atlantic anticipates 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 should not be used as the sole gauge of progress on its Year 2000
project or as an indication of Year 2000 readiness.
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of Bell Atlantic's normal business functions
or operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition; however, it considers such a
likelihood remote. Due to the uncertainty inherent in other Year 2000 issues
that are ultimately beyond Bell Atlantic's control, including, for example, the
final Year 2000 readiness of its suppliers, customers, interconnecting carriers,
and joint venture and investment interests, it is unable to determine at this
time the likelihood of a material impact on its results of operations, liquidity
or financial condition due to such Year 2000 issues. However, Bell Atlantic is
taking appropriate prudent measures to mitigate that risk. Bell Atlantic
anticipates that, in the event of material interruption or failure of its
service resulting from an actual or perceived Year 2000 problem within or beyond
its control, it could be subject to third party claims.
14
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
Contingency Plans
As a public telecommunications carrier, Bell Atlantic has had considerable
experience successfully dealing with natural disasters and other events
requiring contingency planning and execution. Bell Atlantic's Year 2000
contingency plans are built upon its existing Emergency Preparedness and
Disaster Recovery plans.
Bell Atlantic will continue to fine-tune and test its 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). Bell Atlantic's individual business unit contingency plans
for Year 2000 are being integrated and coordinated under an enterprise
wide command and control structure.
15
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule
(b) There were no Current Reports on Form 8-K filed during the
quarter ended June 30, 1999.
16
<PAGE>
Bell Atlantic - Pennsylvania, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BELL ATLANTIC - PENNSYLVANIA, INC.
Date: August 11, 1999 By /s/Edwin F. Hall
-------------------------------
Edwin F. Hall
Chief Financial Officer
and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 6, 1999.
17
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