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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 1-7757
BELL ATLANTIC - DELAWARE, INC.
A Delaware Corporation I.R.S. Employer Identification No. 23-0523775
901 Tatnall Street, Wilmington, Delaware 19801
Telephone Number (302) 576-5416
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Securities registered pursuant to Section 12(b) of the Act: See attached
Schedule A.
Securities registered pursuant to Section 12(g) of the Act: None.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION I(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
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Bell Atlantic - Delaware, Inc.
SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ---------------------------------------------- ---------------------
Forty Year 7% Debentures, due December 1, 2008 New York Stock
Exchange
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Bell Atlantic - Delaware, Inc.
TABLE OF CONTENTS
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Item No. Page
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PART I
1. Business
(Abbreviated pursuant to General Instruction I(2).) ........................................... 1
2. Properties .................................................................................... 7
3. Legal Proceedings ............................................................................. 7
4. Submission of Matters to a Vote of Security Holders ........................................... 7
(Omitted pursuant to General Instruction I(2).)
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters ......................... 8
6. Selected Financial Data
(Omitted pursuant to General Instruction I(2).) ............................................... 8
7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction I(2).) ........................................... 9
7A. Quantitative and Qualitative Disclosures About Market Risk .................................... 16
8. Financial Statements and Supplementary Data ................................................... 16
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......... 16
PART III
(Omitted pursuant to General Instruction I(2)
10. Directors and Executive Officers of the Registrant ............................................ 16
11. Executive Compensation ........................................................................ 16
12. Security Ownership of Certain Beneficial Owners and Management ................................ 16
13. Certain Relationships and Related Transactions ................................................ 16
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............................. 17
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UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 28, 2000
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Bell Atlantic - Delaware, Inc.
PART I
Item 1. Business
GENERAL
Bell Atlantic - Delaware, Inc. is incorporated under the laws of the State
of Delaware. Our principal offices are located at 901 Tatnall Street,
Wilmington, Delaware 19801 (telephone number 302-576-5416). We are a wholly
owned subsidiary of Bell Atlantic Corporation (Bell Atlantic).
We presently serve the state of Delaware and provide long distance calling
to southeastern Pennsylvania, since it is within the same Local Access and
Transport Area (LATA). A LATA is generally centered on a city or based on some
other identifiable common geography and, with certain limited exceptions, a LATA
marks the boundary within which we have been permitted by the "Modification of
Final Judgment" (MFJ) to provide telephone service.
We currently provide two basic types of telecommunications services. First,
we transport telecommunications traffic between subscribers located within the
same LATA (intraLATA service), including both local and long distance services.
Local service includes the provision of local exchange (dial-tone), local
private line and public telephone services (including dial-tone service for pay
telephones owned by us and by other pay telephone providers). Among other local
services provided are Centrex (central office-based switched telephone service
enabling the subscriber to make both intercom and outside calls) and a variety
of special and custom calling services. Long distance service includes message
toll service (calling service beyond the local calling area) within LATA
boundaries, and intraLATA Wide Area Toll Service (WATS) and 800 services (volume
discount offerings for customers with highly concentrated demand). Second, we
provide exchange access service, which links a subscriber's telephone or other
equipment to the transmission facilities of interexchange carriers which, in
turn, provide interLATA telecommunications service to their customers. We also
provide exchange access service to interexchange carriers which provide
intrastate intraLATA long distance telecommunications service, as well as local
exchange access to competitive local exchange carriers for calls within a LATA.
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 will continue to be a wholly owned subsidiary of Bell Atlantic.
It is expected that the merger will qualify as a pooling of interests,
which means that for accounting and financial 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 (all of which have been obtained except that of the Federal
Communications Commission (FCC)) and receipt of opinions that the merger will be
tax-free.
The companies are targeting completion of the merger in the second quarter
of 2000.
OPERATIONS
We are one of nine operating telephone subsidiaries owned by Bell Atlantic.
Bell Atlantic has organized certain telecommunications group functions into
business units operating across the telephone subsidiaries. The business units
focus on specific market segments. Each of the operating telephone subsidiaries,
including us, remains responsible within its respective service area for the
provision of telephone services, financial performance and regulatory matters.
We have one reportable segment, which comprises four strategic business units.
The Consumer unit markets communications services to residential customers,
as well as operator services.
The General Business unit markets communications and information services
to small and medium-sized businesses as well as pay telephone services.
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Bell Atlantic - Delaware, Inc.
The Enterprise Business unit markets communications and information
technology and services to large businesses and to departments, agencies and
offices of the executive, judicial and legislative branches of the federal and
state governments. These services include voice switching/processing services
(e.g., dedicated private lines, custom Centrex, call management, and voice
messaging), end-user networking (e.g., credit and debit card transactions and
personal computer-based conferencing, including data and video), internetworking
(establishing links between the geographically disparate networks of two or more
companies or within the same company), network optimization (disaster avoidance,
911 service, and intelligent vehicle highway systems), video services (distance
learning, telemedicine, and videoconferencing) and interactive multimedia
applications services.
The Network Services unit markets (i) switched and special access to the
telephone subsidiaries' local exchange networks, and (ii) billing and collection
services, including recording, rating, bill processing and bill rendering.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (1996 Act) became effective on February
8, 1996, and replaced the MFJ, a consent decree that arose out of an antitrust
action brought by the United States Department of Justice against AT&T. In
general, the 1996 Act includes provisions that open local exchange markets to
competition and permit Bell Operating Companies, including ours, to engage in
manufacturing and to provide long distance service under certain conditions.
The 1996 Act permits us to offer in-region long distance services (that is,
services originating in the states where we operate as a local exchange
carrier), once we have demonstrated to the FCC that we have satisfied certain
requirements. The requirements include a 14-point "competitive checklist" of
steps which we must take to help competitors offer local services through
resale, through purchase of unbundled network elements, or through their own
networks. We must also demonstrate to the FCC that our entry into the in-region
long distance market would be in the public interest.
FCC Regulation and Interstate Rates
We are subject to the jurisdiction of the FCC with respect to interstate
services and certain related matters. In 1999, the FCC continued to implement
reforms to the interstate access charge system and to implement the "universal
service" and other requirements of the 1996 Act.
Access Charges
Interstate access charges are the rates long distance carriers pay for use
and availability of our facilities for the origination and termination of
interstate service. The FCC required a phased restructuring of access charges,
which began in January 1998, so that our non-usage-sensitive costs will be
recovered from long distance carriers and end-users through flat rate charges,
and usage-sensitive costs will be recovered from long distance carriers through
usage-based rates.
In addition, the FCC has required that different levels of usage-based
charges for originating and for terminating interstate traffic be established.
The final phase of this restructuring was completed on January 1, 2000.
Price Caps
Under the FCC price cap rules that apply to interstate access rates, each
year our price cap index is adjusted downward by a fixed percentage intended to
reflect increases in productivity (productivity factor) and adjusted upward by
an allowance for inflation (GDP-PI). Our annual price cap filing, effective July
1, 1999, reflects the effects of the current productivity factor of 6.5%.
In May 1999, the U. S. Court of Appeals reversed the FCC's order that
adopted the 6.5% productivity factor. The Court concluded that the FCC had not
justified its choice of a productivity factor and 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,
the FCC is now conducting a proceeding to determine an appropriate productivity
factor in response to the Court's order.
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Bell Atlantic - Delaware, Inc.
At the same time, the FCC is considering a proposal to further restructure
access rates by an industry coalition that includes both local exchange carriers
(including us) and long distance carriers. Among other things, that proposal
would set into place a mechanism to transition to a set target of $.0055 per
minute for switched access services. Once that target rate is reached, local
exchange carriers would no longer be required to make further annual price cap
reductions to their switched access prices. To allow time to consider this
industry proposal, parties have requested that the Court further extend the stay
of its price cap decision order until June 30, 2000.
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. In order to take
advantage of this relief, however, carriers must forego the ability to take
advantage of provisions in the current rules that provide relief in the event
earnings fall below certain thresholds, and we have not filed for this relief.
The order also allows certain services, including those included in the
interexchange basket of services, to be removed from price regulation
immediately. In response, effective October 1999, we removed approximately
$13,900,000 in annual revenues of our services in the interexchange basket from
price regulation and from the operation of the productivity offset which
otherwise would require annual price reductions.
Universal Service
In July 1999, the U.S. Court of Appeals reversed certain aspects of the
FCC's order implementing the "universal service" provision of the 1996 Act. The
universal service fund includes a multi-billion dollar interstate fund to link
schools and libraries to the Internet and to subsidize high cost areas, 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 were reduced
annually beginning on November 1, 1999, and our interstate access rates will be
reduced accordingly because we will no longer have to recover these
contributions in our rates. AT&T and MCI WorldCom, Inc. have since asked the
U.S. Supreme Court to review this latter portion of the appeals court decision.
Other parties have asked the Supreme Court to review additional aspects of the
court of appeals decision.
In November 1999, the FCC adopted a new mechanism for providing universal
service support to high cost areas served by large local telephone companies.
This funding mechanism will provide additional support for local telephone
services in several states served by Bell Atlantic. State regulatory commissions
must take these funds into account in the ratemaking process.
Unbundling of Network Elements
In November 1999, the FCC 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 us, 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 as a general matter. 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 must be made available under certain
circumstances, but left to a further rulemaking that it initiated certain issues
relating to the use of these combinations to substitute for special access
services. While this rulemaking proceeds, the FCC adopted interim rules limiting
the instances in which such combinations of elements must be made available. The
FCC set a target date of June 30, 2000 to decide the further rulemaking.
In addition to the unbundling requirements released in November 1999, the
FCC released an order on December 9, 1999 in a separate proceeding requiring
incumbent local exchange companies also to unbundle and provide to competitors
the higher frequency portion of their local loop. This provides competitors with
the ability to provision data services on top of incumbent carriers' voice
services.
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Bell Atlantic - Delaware, Inc.
State Regulation of Rates and Services
The Delaware Public Service Commission (DPSC) regulates certain of our
intrastate rates and services and certain other matters.
In 1994, we elected to be regulated under the alternative regulation
provisions of the Delaware Telecommunications Technology Investment Act of 1993
(Delaware Telecommunications Act). The Delaware Telecommunications Act provides
that:
. the prices of "Basic Telephone Services" (e.g., dial-tone and local
usage) will remain regulated and cannot change in any one year by more
than the GDP-PI less 3%;
. the prices of "Discretionary Services" (e.g., Identa Ring(SM) and Call
Waiting) cannot increase more than 15% per year per service;
. the prices of "Competitive Services" (e.g., voice messaging and
message toll service) are not subject to tariff or regulation; and
. we will develop a technology deployment plan with a commitment to
invest a minimum of $250 million in Delaware's telecommunications
network during the first five years of the plan.
The Delaware Telecommunications Act also provides protections to ensure
that competitors will not be unfairly disadvantaged, including a prohibition on
cross-subsidization, imputation rules, service unbundling and resale service
availability requirements, and a review by the DPSC during the fifth year of the
plan. In March 1998, the DPSC approved our request to continue under the
Delaware Telecommunications Act until March 2002.
Reciprocal Compensation
State regulatory decisions have required certain of Bell Atlantic's
operating telephone companies to pay "reciprocal compensation" under the 1996
Act for the increasing volume of one-way traffic from their 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 U.S. Court of Appeals has
vacated and remanded the FCC's decision for a better explanation of why this
traffic is interstate.
The DPSC has issued a decision in one arbitration case to require us to
continue to pay reciprocal compensation on Internet-bound traffic. The DPSC's
decision is currently under appeal in the U.S. Court of Appeals for the Third
Circuit.
Competition
Legislative changes, including provisions of the 1996 Act discussed above
under the section "Telecommunications Act of 1996," regulatory changes and new
technology are continuing to expand the types of available communications
services and equipment and the number of competitors offering such services. We
anticipate that these industry changes, together with the rapid growth, enormous
size and global scope of these markets, will attract new entrants and encourage
existing competitors to broaden their offerings. Current and potential
competitors in telecommunication services include long distance companies, other
local telephone companies, cable companies, wireless service providers, foreign
telecommunications providers, electric utilities, Internet service providers and
other companies that offer network services. Many of these companies have a
strong market presence, brand recognition and existing customer relationships,
all of which contribute to intensifying competition and may affect our future
revenue growth.
Local Exchange Services
State regulatory commissions have historically regulated the ability to
offer local exchange services. The DPSC has approved applications from
competitors to provide and resell local exchange services.
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Bell Atlantic - Delaware, Inc.
One of the purposes of the 1996 Act was to ensure, and accelerate, the
emergence of competition in local exchange markets. Toward this end, the 1996
Act requires most existing local exchange carriers (incumbent local exchange
carriers, or ILECs), including us, to permit potential competitors (competitive
local exchange carriers, or CLECs) to:
. purchase service from the ILEC for resale to CLEC customers
. purchase unbundled network elements from the ILEC, and/or
. interconnect the CLEC network with the ILEC's network.
The 1996 Act provides for arbitration by the state public utility
commission if an ILEC and a CLEC are unable to reach agreement on the terms of
the arrangement sought by the CLEC.
Our negotiations with various CLECs, and arbitrations before the DPSC have
continued. As of January 31, 2000, we had entered into 82 agreements with CLECs,
of which 67 have been approved by the DPSC.
We expect that these agreements, and the 1996 Act, will continue to lead to
substantially increased competition in our local exchange market in 2000 and
subsequent years. We believe that this competition will be both on a facilities
basis and in the form of resale by CLECs of our service. Under the various
agreements and arbitrations discussed above, we are generally required to sell
our services to CLECs at discounts ranging from approximately 16% to 20% from
the prices we charge our retail customers.
IntraLATA Toll Services
IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call. State regulatory
commissions rather than federal authorities generally regulate these services.
The DPSC permits other carriers to offer intraLATA toll services within the
state.
Until the implementation of "presubscription," we completed intraLATA toll
calls 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. By
September 1997, we had fully implemented presubscription.
Alternative Access
A substantial portion of our revenues from business and government
customers is derived from a relatively small number of large, multiple-line
subscribers.
We face competition from alternative communications systems, constructed by
large end-users, interexchange carriers and alternative access vendors, which
are capable of originating and/or terminating calls without the use of our
plant. The FCC's orders requiring us to offer collocated interconnection for
special and switched access services have enhanced the ability of such
alternative access providers to compete with us.
Other potential sources of competition include cable television systems,
shared tenant services and other noncarrier systems which are capable of
bypassing our local plant, either partially or completely, through substitution
of special access for switched access or through concentration of
telecommunications traffic on fewer of our lines.
Wireless Services
Wireless services also constitute potential sources of competition to our
wireline telecommunications services, especially as wireless carriers continue
to lower their prices to end users. Wireless portable telephone services employ
analog and digital technology that allows customers to make and receive
telephone calls from any location using small handsets, and can also be used for
data transmission.
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Bell Atlantic - Delaware, Inc.
Public Telephone Services
We face increasing competition in the provision of pay telephone services
from other providers. In addition, the growth of wireless communications
decreases usage of public telephones.
Operator Services
Alternative operator services providers have entered into competition with
our operator services product line.
EMPLOYEES
As of December 31, 1999, we had approximately 900 employees.
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Bell Atlantic - Delaware, Inc.
Item 2. Properties
GENERAL
Our principal properties do not lend themselves to simple description by
character and location. Our investment in plant, property and equipment
consisted of the following at December 31:
1999 1998
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Outside communications plant 43% 44%
Central office equipment 42 42
Land and buildings 7 7
Furniture, vehicles and other work equipment 6 6
Other 2 1
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100% 100%
=======================
"Outside communications plant" consists primarily of aerial cable,
underground cable, conduit and wiring, and telephone poles. "Central office
equipment" consists of switching equipment, transmission equipment and related
facilities. "Land and buildings" consists of land and land improvements, and
principally central office buildings. "Furniture, vehicles and other work
equipment" consists of public telephone instruments and telephone equipment,
furniture, office equipment, motor vehicles and other work equipment. "Other"
property consists primarily of plant under construction, capital leases,
capitalized computer software costs and leasehold improvements.
Our customers are served by electronic switching systems that provide a
wide variety of services. Since December 31, 1996, our network has been fully
transitioned from an analog to a digital network, which provides the
capabilities to furnish advanced data transmission and information management
services.
CAPITAL EXPENDITURES
We have been making and expect to continue to make significant capital
expenditures to meet the demand for communications services and to further
improve such services. Capital expenditures were approximately $80 million in
1999, $87 million in 1998 and $83 million in 1997. Capital expenditures exclude
additions under capital leases. Our total investment in plant, property and
equipment was approximately $934 million at December 31, 1999, $870 million at
December 31, 1998 and $794 million at December 31, 1997, including the effect of
retirements, but before deducting accumulated depreciation.
Item 3. Legal Proceedings
There were no proceedings reportable under Item 3.
Item 4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction I(2).)
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Bell Atlantic - Delaware, Inc.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Not applicable.
Item 6. Selected Financial Data
(Omitted pursuant to General Instruction I(2).)
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Bell Atlantic - Delaware, Inc.
Item 7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction I(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements listed in the index set forth on page F-1.
The communications services we provide are subject to regulation by the
Delaware Public Service Commission (DPSC) with respect to intrastate rates and
services and certain other matters. For a further discussion of the company and
our regulatory plan, see Item 1 - "Description of Business."
RESULTS OF OPERATIONS
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We reported net income of $48,366,000 in 1999, compared to net income of
$40,600,000 in 1998.
Our results for 1999 and 1998 were affected by special items. The special
items in both years include our allocated share of charges from Bell Atlantic
Network Services, Inc. (NSI).
The following table shows how special items are reflected in our statements
of income for each year:
(Dollars in Thousands)
Years Ended December 31 1999 1998
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Employee Costs
Merger transition costs $ 148 $ 5
Other Operating Expenses
Merger transition costs 1,653 1,292
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$1,801 $1,297
==============================
Merger-related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax costs totaling $1,801,000 in 1999 and
$1,297,000 in 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.
These and other items affecting the comparison of our results of operations
for the years ended December 31, 1999 and 1998 are discussed in the following
sections.
Segmental Results of Operations
We have one reportable segment, which provides domestic wireline
telecommunications services. You can find additional information about segment
reporting in Note 15 to the financial statements.
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Bell Atlantic - Delaware, Inc.
OPERATING REVENUE STATISTICS
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1999 1998 % Change
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At Year-End
Access Lines in Service (in thousands)
Residence 372 361 3.0%
Business 218 213 2.3
Public 6 6 ---
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596 580 2.8
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For the Year
Access Minutes of Use (in millions) 2,549 2,331 9.4
==============================
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OPERATING REVENUES
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(Dollars in Thousands)
<TABLE>
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For the Years Ended December 31 1999 1998
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Local services $171,576 $160,732
Network access services 81,344 70,352
Long distance services 20,628 25,266
Ancillary services 28,077 24,844
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Total $301,625 $281,194
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LOCAL SERVICES
Increase
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1999 - 1998 $10,844 6.7%
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Local service 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.
Local service revenues increased in 1999 primarily due to higher usage of
our network facilities. Revenue growth was generated, in part, by an increase in
access lines in service of 2.8% from December 31, 1998. Local service revenue
growth in 1999 also reflects higher customer demand and usage of our data
transport and digital services, as well as the introduction of national
directory assistance services. Revenues from our value-added services were
boosted in 1999 by marketing and promotional campaigns offering new service
packages.
These increases in local service revenues were 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.
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Bell Atlantic - Delaware, Inc.
NETWORK ACCESS SERVICES
Increase
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1999 - 1998 $10,992 15.6%
- --------------------------------------------------------------------------------
Network access 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.
Network access revenue growth in 1999 was mainly attributable to higher
customer demand, as reflected by growth in access minutes of use of 9.4% in
1999. Volume growth also reflects a continuing expansion of the business market,
particularly for high capacity data 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 further
contributed to revenue growth in 1999.
In 1999, network access revenues included approximately $1,200,000 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
March 1999.
Volume-related growth was partially offset by price reductions associated
with a federal price cap filing and other regulatory decisions. 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 $500,000 on an annual basis in connection with the
FCC's Price Cap Plan. The rates included in our July 1999 filing will be in
effect through June 2000. Interstate price decreases were $600,000 on an annual
basis for the period July 1998 through June 1999. The rates include amounts
necessary to recover our 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. Our contributions to the
universal service fund are included in Other Operating Expenses.
You can find additional information on FCC rulemakings concerning access
charges, price caps and universal service in Item 1- "Description of Business,
Operations - FCC Regulation and Interstate Rates."
LONG DISTANCE SERVICES
(Decrease)
- --------------------------------------------------------------------------------
1999 - 1998 $(4,638) (18.4)%
- --------------------------------------------------------------------------------
Long distance 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 and
Wide Area Telephone Service (WATS).
IntraLATA toll calls originate and terminate with the same LATA, but
generally cover a greater distance than a local call. These services are
regulated by the DPSC, except where they cross state lines. The DPSC permits
other carriers to offer intraLATA toll services.
Until the implementation of presubscription, intraLATA toll calls were
completed by us 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. We
implemented presubscription in September 1997.
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Bell Atlantic - Delaware, Inc.
The competitive effects of presubscription for intraLATA toll services
principally caused the decline in long distance revenues. The negative effect of
presubscription on long distance revenues was partially mitigated by increased
network access services for usage of our network by these alternative providers.
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 additional
revenues generated from higher calling volumes.
ANCILLARY SERVICES
Increase
- --------------------------------------------------------------------------------
1999 - 1998 $3,233 13.0%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation for 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 increased in 1999 as a result of higher
payments received from competitive local exchange carriers for the purchase of
unbundled network elements and for interconnection of their networks with our
network. Revenue growth was also attributable to higher demand for such services
as billing and collection, voice messaging, and CPE and installation. Higher
facilities rental revenues from affiliates also contributed to the increase in
ancillary services revenues in 1999.
OPERATING EXPENSES
- ------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes $ 45,893 $ 45,001
Depreciation and amortization 66,411 63,054
Other operating expenses 99,534 95,962
----------------------------------
Total $211,838 $204,017
==================================
</TABLE>
EMPLOYEE COSTS
Increase
- --------------------------------------------------------------------------------
1999 - 1998 $892 2.0%
- --------------------------------------------------------------------------------
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 increased in 1999 primarily as a result of annual salary and
wage increases for management and associate employees and higher overtime
payments due to severe rainstorms in the second half of 1999. In 1998, we
executed a new contract with the union representing associate employees. The new
contract provides for wage and pension increases and other benefit improvements
as described below:
. The wages, pension and other benefits for our associate employees are
negotiated with a union. During 1998, we entered into a 2-year
contract with the Communications Workers of America (CWA). This
contract, which expires in August 2000, provides for wage increases of
up to 3.8% effective August 9, 1998, and up to 4% effective August 8,
1999. Over the course of this two-year contract period, pensions
increase by 11%. The contract also includes cash payments, working
condition improvements, and continuation of certain employment
security provisions.
12
<PAGE>
Bell Atlantic - Delaware, Inc.
The increases in employee costs were partially offset by lower pension and
benefit costs. The decline in pension and benefit costs was due to favorable
pension plan investment returns and changes in plan provisions and actuarial
assumptions. These factors were partially offset by savings plan benefit
improvements for certain management employees and increased health care costs
caused by inflation. A reduction in repair and maintenance activity and lower
work force levels also offset the increases in employee costs, but to a lesser
extent.
DEPRECIATION AND AMORTIZATION
Increase
- --------------------------------------------------------------------------------
1999 - 1998 $3,357 5.3%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in 1999 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 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. For additional information on SOP No. 98-1, see Note 1 to
the financial statements. These expense increases were partially offset by the
effect of lower rates of depreciation.
OTHER OPERATING EXPENSES
Increase
- --------------------------------------------------------------------------------
1999 - 1998 $3,572 3.7%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from NSI, rent, network software costs, operating
taxes other than income, the provision for uncollectible accounts receivable,
and other costs.
The increase in other operating expenses was largely attributable to higher
interconnection payments to competitive local exchange and other carriers to
terminate calls on their networks (reciprocal compensation). For additional
information on reciprocal compensation refer to Item 1 - "Description of
Business, Operations - Reciprocal Compensation." Higher costs for materials also
contributed to the increase in other operating expenses, but to a lesser extent.
The increases in other operating expenses was partially offset by the
effect of SOP No. 98-1, which reduced other operating expenses as a result of
capitalizing expenditures for internal-use software previously expensed in 1998
and prior years. A reduction in centralized services expenses allocated from
NSI, partially as a result of lower employee costs incurred by NSI, also offset
the increases in other operating expenses.
OTHER INCOME, NET
(Decrease)
- --------------------------------------------------------------------------------
1999 - 1998 $(681) (77.7)%
- --------------------------------------------------------------------------------
The change in other income, net, was mainly attributable to the effects of
a gain on the sale of our paging licenses and additional interest income in
connection with the settlement of tax-related matters in 1998.
13
<PAGE>
Bell Atlantic - Delaware, Inc.
INTEREST EXPENSE
(Decrease)
- --------------------------------------------------------------------------------
1999 - 1998 $(1,064) (11.2)%
- --------------------------------------------------------------------------------
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 1999 principally due to lower levels of
average short-term debt and the effect of refinancing long-term debt with
short-term debt at a more favorable interest rate in November 1998. These
decreases were partially offset by a reduction in capitalized interest costs
resulting primarily from lower levels of average telephone plant under
construction.
See Note 6 to the financial statements for additional information about our
debt.
EFFECTIVE INCOME TAX RATES
For the Years Ended December 31
- --------------------------------------------------------------------------------
1999 40.7%
- --------------------------------------------------------------------------------
1998 40.4%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes and extraordinary
item. Our effective income tax rate was higher in 1999 as a result of income tax
credits recorded in 1998.
You can find a reconciliation of the statutory federal income tax rate to
the effective income tax rate for each period in Note 11 to the financial
statements.
EXTRAORDINARY ITEM
In 1998, we recorded an extraordinary charge associated with the early
extinguishment of long-term debt. This charge reduced net income by $259,000
(net of an income tax benefit of $177,000). You may find more information on
this extraordinary charge in Note 6 to the financial statements.
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 December
31, 1999 and 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 December 31, 1999, we had $10,833,000 of an unused line of credit
with an affiliate, Bell Atlantic Network Funding Corporation, and $29,167,000 in
borrowings outstanding. Our debt securities continue to be accorded high ratings
by primary rating agencies. After the announcement of the Bell Atlantic-GTE
merger, the rating agencies placed the rating of our securities under review for
a potential downgrade. In January 2000, Standard & Poor's revised its regulatory
separation policy as it applies to U.S. telephone companies. Under the revised
policy, Standard & Poor's will no longer assign higher corporate credit ratings
to telephone operating subsidiaries. Rating actions by Standard & Poor's on us
reflect both the new policy and their continued CreditWatch listings, which
resulted from the pending Bell Atlantic-GTE merger.
Our debt ratio was 39.5% at December 31, 1999, compared to 45.7% at
December 31, 1998.
On February 1, 2000, we declared and paid a dividend in the amount of
$22,600,000 to Bell Atlantic.
14
<PAGE>
Bell Atlantic - Delaware, Inc.
OTHER MATTERS
- -------------
Recent Accounting Pronouncement - 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 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. We must adopt SFAS No. 133 no later than January 1, 2001.
On March 3, 2000, the FASB issued a Proposed SFAS "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which would amend SFAS
No. 133. The proposed amendments address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated debt instruments, and intercompany derivatives.
The adoption of SFAS No. 133 will have no material effect on our results of
operations or financial condition because we currently do not enter into the use
of derivative instruments or participate in hedging activities.
New Staff Accounting Bulletin - Revenue Recognition
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which currently must be adopted by June 30, 2000. SAB No. 101
provides additional guidance on revenue recognition, as well as criteria from
when revenue is generally realized and earned, and also requires the deferral of
incremental direct selling costs. We are currently assessing the impact of SAB
No. 101 on our results of operations and financial position.
Year "2000" Update
Bell Atlantic implemented a comprehensive program to evaluate and address
the impact of the Year 2000 date transition on its operations, including our
operations. Bell Atlantic did not experience any material interruption or
failure of its normal business functions or operations as a result of an actual
or perceived Year 2000 problem.
From the inception of Bell Atlantic's Year 2000 project through December
31, 1999, and based on the cost tracking methods it has historically applied to
this project, Bell Atlantic incurred total pre-tax expenses of approximately
$230 million, and it has made capital expenditures of approximately $181
million. For 1999, total pre-tax expenses for Bell Atlantic's Year 2000 project
were approximately $108 million and total capital expenditures were
approximately $101 million.
15
<PAGE>
Bell Atlantic - Delaware, Inc.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk in the normal course of our business.
The majority of our debt is fixed rate debt and we do not use derivatives. Our
short-term borrowings from an affiliate expose our earnings to changes in short-
term interest rates since the interest rate charged on such borrowings is
typically fixed for less than one month.
The following table summarizes the fair values of our long-term debt as of
December 31, 1999 and 1998. The table also provides a sensitivity analysis of
the estimated fair values of these financial instruments assuming
100-basis-point upward and downward parallel shifts in the yield curve. The
sensitivity analysis did not include the fair values of our short-term
borrowings from an affiliate since they are not significantly affected by
changes in market interest rates.
<TABLE>
<CAPTION>
December 31
---------------------------------
(Dollars in Thousands) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Fair value of long-term debt $104,159 $119,310
Fair value assuming a +100-basis-point shift 97,533 110,934
Fair value assuming a -100-basis-point shift 111,594 128,778
</TABLE>
Item 8. Financial Statements and Supplementary Data
The information required by this Item is set forth on Pages F-1
through F-21.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of Registrant
(Omitted pursuant to General Instruction I(2).)
Item 11. Executive Compensation
(Omitted pursuant to General Instruction I(2).)
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Omitted pursuant to General Instruction I(2).)
Item 13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction I(2).)
16
<PAGE>
Bell Atlantic - Delaware, Inc.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedule appearing on Page F-1.
(2) Financial Statement Schedules
See Index to Financial Statements and Financial Statement
Schedule appearing on Page F-1.
(3) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission (SEC), are incorporated
herein by reference as exhibits hereto.
3a Certificate of Incorporation of the registrant, as amended and
restated June 17, 1987. (Exhibit 3a to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1987, File
No. 1-7757.)
3a(i) Certificate of Amendment of Certificate of Incorporation,
dated August 14, 1992. (Exhibit 3a(i) to the registrant's
Annual Report on Form 10-K for the year ended December 31,
1992, File No. 1-7757.)
3a(ii) Certificate of Amendment of Certificate of Incorporation,
dated January 10, 1994 and filed January 13, 1994.
(Exhibit 3a(ii) to the registrant's Annual Report on Form
10-K for the year ended December 31, 1993, File No.
1-7757.)
3b By-Laws of the registrant, as amended December 15, 1995. (Exhibit
3b to the registrant's Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 1-7757.)
3b(i) Consent of Sole Stockholder of Bell Atlantic - Delaware,
Inc., dated December 15, 1995. (Exhibit 3b(i) to the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 1-7757.)
4 No instrument which defines the rights of holders of long-term
debt of the registrant is filed herewith pursuant to Regulation
S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such instrument
to the SEC upon request.
10a Agreement among Bell Atlantic Network Services, Inc. and the Bell
Atlantic Corporation telephone subsidiaries, dated November 7,
1983. (Exhibit 10b to Bell Atlantic Corporation Annual Report on
Form 10-K for the year ended December 31, 1993, File No. 1-8606.)
27 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed during the
quarter ended December 31, 1999.
17
<PAGE>
Bell Atlantic - Delaware, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 - Delaware, Inc.
By /s/ Edwin F. Hall
--------------------------------
Edwin F. Hall
Controller
March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Joshua W. Martin III President and March 28, 2000
- ------------------------------------- Chief Executive Officer
Joshua W. Martin III and Director
(Principal Executive Officer)
/s/ Edwin F. Hall Controller March 28, 2000
- ------------------------------------- (Principal Financial Officer)
Edwin F. Hall
/s/ Debra M. Berry Director March 28, 2000
- -------------------------------------
Debra M. Berry
/s/ Michael D. Sheehy Director March 28, 2000
- -------------------------------------
Michael D. Sheehy
</TABLE>
18
<PAGE>
Bell Atlantic - Delaware, Inc.
Index to Financial Statements and Financial Statement Schedule
Page
----
Report of Independent Accountants .............................. F-2
Statements of Income
For the years ended December 31, 1999, 1998 and 1997 ...... F-3
Balance Sheets - December 31, 1999 and 1998 .................... F-4
Statements of Shareowner's Investment
For the years ended December 31, 1999, 1998 and 1997 ...... F-6
Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997 ...... F-7
Notes to Financial Statements .................................. F-8
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1999, 1998 and 1997 ...... F-21
Financial statement schedules other than that listed above have been omitted
because such schedules are not required or applicable.
F-1
<PAGE>
Bell Atlantic - Delaware, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowner of Bell Atlantic - Delaware, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Bell
Atlantic - Delaware, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for computer software costs in accordance with AICPA
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," effective January 1, 1999.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 14, 2000
F-2
<PAGE>
Bell Atlantic - Delaware, Inc.
STATEMENTS OF INCOME
For the Years Ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES (including $4,128, $5,327
and $6,706 to affiliates) $ 301,625 $ 281,194 $ 267,153
----------------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 45,893 45,001 49,255
Depreciation and amortization 66,411 63,054 60,941
Other (including $62,185, $64,840 and $63,768 to affiliates) 99,534 95,962 89,440
----------------------------------------------
211,838 204,017 199,636
----------------------------------------------
OPERATING INCOME 89,787 77,177 67,517
OTHER INCOME, NET (including $60, $0 and $0 from affiliate) 195 876 241
INTEREST EXPENSE (including $2,532, $3,064 and $2,178 to affiliates) 8,429 9,493 9,287
----------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 81,553 68,560 58,471
PROVISION FOR INCOME TAXES 33,187 27,701 23,283
----------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 48,366 40,859 35,188
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax --- (259) ---
----------------------------------------------
NET INCOME $ 48,366 $ 40,600 $ 35,188
==============================================
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
Bell Atlantic - Delaware, Inc.
BALANCE SHEETS
(Dollars in Thousands)
ASSETS
------
<TABLE>
<CAPTION>
December 31
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments $ 4,800 $ 4,313
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $5,181 and $5,197 55,315 51,626
Affiliates 4,657 3,922
Material and supplies 1,232 1,583
Prepaid expenses 6,020 4,674
Deferred income taxes 2,132 2,732
Other 566 556
------------------------------------
74,722 69,406
------------------------------------
PLANT, PROPERTY AND EQUIPMENT 934,084 869,702
Less accumulated depreciation 512,150 457,681
------------------------------------
421,934 412,021
------------------------------------
OTHER ASSETS 10,738 3,650
------------------------------------
TOTAL ASSETS $507,394 $485,077
====================================
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
Bell Atlantic - Delaware, Inc.
BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amount)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
December 31
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 29,167 $ 43,083
Current portion of long-term debt:
Affiliate 20,000 ---
Other 50 15,046
Accounts payable and accrued liabilities:
Affiliates 22,066 27,036
Other 43,959 34,946
Advance billings and customer deposits 8,918 9,027
----------------------------------------
124,160 129,138
----------------------------------------
LONG-TERM DEBT
Note payable to affiliate --- 20,000
Other 86,319 71,345
----------------------------------------
86,319 91,345
----------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 38,323 42,683
----------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 37,833 27,837
Unamortized investment tax credits 1,868 2,120
Other 11,011 14,034
----------------------------------------
50,712 43,991
----------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 14)
SHAREOWNER'S INVESTMENT
Common stock - $25 par value per share 118,442 118,442
Authorized shares: 5,262,280
Outstanding shares: 4,737,686
Reinvested earnings 89,493 59,656
Accumulated other comprehensive loss (55) (178)
----------------------------------------
207,880 177,920
----------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $ 507,394 $ 485,077
========================================
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
Bell Atlantic - Delaware, Inc.
STATEMENTS OF CHANGES IN SHAREOWNER'S INVESTMENT
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ 118,442 $ 118,442 $ 118,442
--------------------------------------------------
Balance at end of year 118,442 118,442 118,442
--------------------------------------------------
REINVESTED EARNINGS
Balance at beginning of year 59,656 28,153 25,150
Net income 48,366 40,600 35,188
Dividends paid to Bell Atlantic (18,600) (9,200) (28,800)
Other 71 103 (3,385)
--------------------------------------------------
Balance at end of year 89,493 59,656 28,153
--------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (178) --- ---
Minimum pension liability adjustment 123 (178) ---
--------------------------------------------------
Balance at end of year (55) (178) ---
--------------------------------------------------
TOTAL SHAREOWNER'S INVESTMENT $ 207,880 $ 177,920 $ 146,595
==================================================
COMPREHENSIVE INCOME
Net income $ 48,366 $ 40,600 $ 35,188
Minimum pension liability adjustment 123 (178) ---
--------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 48,489 $ 40,422 $ 35,188
==================================================
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
Bell Atlantic - Delaware, Inc.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 48,366 $ 40,600 $ 35,188
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 66,411 63,054 60,941
Extraordinary item, net of tax --- 259 ---
Equity income from affiliate (60) --- ---
Dividends received from equity affiliate 60 --- ---
Deferred income taxes, net 10,511 4,964 3,736
Investment tax credits (252) (307) (422)
Other items, net 101 (249) 134
Changes in certain assets and liabilities:
Accounts receivable (4,424) (3,702) 1,263
Material and supplies 351 1,524 (196)
Other assets (4,997) 1,984 (1,957)
Accounts payable and accrued liabilities 3,316 (7,724) (1,219)
Employee benefit obligations (4,133) (5,669) (2,342)
Other liabilities (3,132) 3,145 (3,468)
----------------------------------------------------
Net cash provided by operating activities 112,118 97,879 91,658
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (4,800) (6,442) (6,060)
Proceeds from sale of short-term investments 4,313 6,189 7,106
Capital expenditures (79,507) (86,854) (82,803)
Other, net 1,378 970 2,865
----------------------------------------------------
Net cash used in investing activities (78,616) (86,137) (78,892)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Early extinguishment of debt --- (15,000) ---
Principal repayments of capital lease obligations (43) (58) (50)
Net change in short-term note payable to affiliate (13,916) 11,613 16,488
Dividends paid (18,600) (9,200) (28,800)
Net change in outstanding checks drawn on controlled
disbursement accounts (943) 903 (404)
----------------------------------------------------
Net cash used in financing activities (33,502) (11,742) (12,766)
----------------------------------------------------
NET CHANGE IN CASH --- --- ---
CASH, BEGINNING OF YEAR --- --- ---
----------------------------------------------------
CASH, END OF YEAR $ --- $ --- $ ---
====================================================
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
Bell Atlantic - Delaware, Inc.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Bell Atlantic - Delaware, Inc. is a wholly owned subsidiary of Bell
Atlantic Corporation (Bell Atlantic). We presently provide local service within
Delaware. All of our operations are contained in a single Local Access and
Transport Area (LATA), which includes the state of Delaware and southeastern
Pennsylvania. We have one reportable segment which provides domestic wireline
telecommunications services. We currently provide two basic types of
telecommunications services. First, we transport telecommunications traffic
between subscribers located within the same LATA (intraLATA service), including
both local and long distance services. Local service includes voice and data
transport, enhanced and custom calling features, directory assistance, private
lines and public telephones. Long distance service includes message toll service
within LATA boundaries and intraLATA Wide Area Toll Service/800 services.
Second, we provide exchange access service, which links a subscriber's telephone
or other equipment to the transmission facilities of interexchange carriers
which, in turn, provide telecommunications service between LATAs (interLATA
service) to their customers. We also provide exchange access service to
interexchange carriers which provide intrastate intraLATA long distance
telecommunications service, as well as local exchange access to competitive
local exchange carriers for calls within a LATA. Other services we provide
include customer premises wiring and maintenance and billing and collection
services.
The telecommunications industry is undergoing substantial changes as a
result of the Telecommunications Act of 1996, other public policy changes and
technological advances. These changes are bringing increased competitive
pressures in our current businesses, but will also open new markets to Bell
Atlantic.
Basis of Presentation
We prepare our financial statements under generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts or certain disclosures. Actual results could differ
from those estimates.
We have a .27% ownership interest in SMS/800, a venture that is jointly
owned by the Bell Operating Companies. SMS/800 administers the centralized
national database system associated with toll free numbers. We use the equity
method of accounting for our investment in SMS/800.
We have reclassified certain amounts from prior periods to conform with our
current presentation.
Revenue Recognition
We recognize revenue when services are rendered based on usage of our local
exchange network and facilities.
Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, to Operating
Expenses.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or
less when purchased to be cash equivalents, except cash equivalents held as
short-term investments. Cash equivalents are stated at cost, which approximates
market value.
Short-term Investments
Our short-term investments consist of cash equivalents held in trust to pay
for certain employee benefits. Short-term investments are stated at cost, which
approximates market value.
F-8
<PAGE>
Bell Atlantic - Delaware, Inc.
Material and Supplies
We include in inventory new and reusable materials which are stated
principally at average original cost, except that specific costs are used in the
case of large individual items.
Plant and Depreciation
We state plant, property, and equipment at cost. Depreciation expense is
principally based on the composite group remaining life method and straight-line
composite rates. This method provides for the recognition of the cost of the
remaining net investment in telephone plant, less anticipated net salvage value,
over the remaining asset lives. This method requires the periodic revision of
depreciation rates. We used the following asset lives:
Average Lives (in years)
----------------------------------------------------------------------
Buildings 30
Central office equipment 5 - 10
Outside communications plant 16 - 50
Furniture, vehicles and other 3 - 15
When we replace or retire depreciable telephone plant, we deduct the
carrying amount of such plant from the respective accounts and charge
accumulated depreciation. Gains or losses on disposition are amortized with the
remaining net investment in telephone plant.
We capitalize interest associated with the acquisition or construction of
plant assets. Capitalized interest is reported as a cost of plant and a
reduction in interest cost.
Computer Software Costs
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. Capitalized computer software costs are
amortized using the straight-line method over a period of 3 to 5 years. The
effect of adopting SOP No. 98-1 for Bell Atlantic was an increase in net income
of approximately $230 million in 1999. We also capitalized approximately
$3,200,000 as an intangible asset in 1999.
Prior to 1999, we capitalized initial right-to-use fees for central office
switching equipment, including initial operating system and initial application
software costs. For noncentral office equipment, only the initial operating
system software was capitalized. Subsequent additions, modifications, or
upgrades of initial software programs, whether operating or application
packages, were expensed as incurred.
Income Taxes
Bell Atlantic and its domestic subsidiaries, including us, file a
consolidated federal income tax return.
Current and deferred tax expense is determined by applying the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes" to each subsidiary as if it were a separate taxpayer.
We use the deferral method of accounting for investment tax credits earned
prior to the repeal of investment tax credits by the Tax Reform Act of 1986. We
also defer certain transitional credits earned after the repeal. We amortize
these credits over the estimated service lives of the related assets as a
reduction to the Provision for Income Taxes.
Advertising Costs
We expense advertising costs as they are incurred.
F-9
<PAGE>
Bell Atlantic - Delaware, Inc.
Stock-Based Compensation
We participate in stock-based compensation plans sponsored by Bell
Atlantic. Bell Atlantic accounts for stock-based employee compensation plans
under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations and follows the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
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 did not
historically capitalize start-up activities.
New Accounting Standard - 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. We must adopt SFAS No. 133 no later
than January 1, 2001.
On March 3, 2000, the FASB issued a Proposed SFAS "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which would amend SFAS
No. 133. The proposed amendments address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated debt instruments, and intercompany derivatives.
The adoption of SFAS No. 133 will have no material effect on our results of
operations or financial condition because we currently do not enter into the use
of derivative instruments or participate in hedging activities.
New Staff Accounting Bulletin - Revenue Recognition
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which currently must be adopted by June 30, 2000. SAB No. 101
provides additional guidance on revenue recognition, as well as criteria from
when revenue is generally realized and earned, and also requires the deferral of
incremental direct selling costs. We are currently assessing the impact of SAB
No. 101 on our results of operations and financial position.
2. BELL ATLANTIC - NYNEX MERGER
On August 14, 1997, Bell Atlantic and NYNEX completed a merger of equals
under a definitive merger agreement entered into on April 21, 1996 and amended
on July 2, 1996. Under the terms of the amended agreement, NYNEX became a wholly
owned subsidiary of Bell Atlantic. The merger qualified as a tax-free
reorganization and has been accounted for as a pooling of interests. Under this
method of accounting, the companies are treated as if they had always been
combined for accounting and financial reporting purposes.
As a result of conforming the accounting methodologies of Bell Atlantic and
NYNEX, we recorded an after-tax charge of $419,000 to Reinvested Earnings as if
the merger had occurred as of the beginning of the earliest period presented.
Merger-Related Costs
In the third quarter of 1997, we recorded merger-related pre-tax costs of
approximately $500,000 for direct incremental costs and $1,200,000 for employee
severance costs. These costs include approximately $1,200,000
F-10
<PAGE>
Bell Atlantic - Delaware, Inc.
representing our allocated share of merger-related costs from Bell Atlantic
Network Services, Inc. (NSI), an affiliate which provides centralized services
on a contract basis. Costs allocated from NSI are included in Other Operating
Expenses.
Direct incremental costs consist of expenses associated with compensation
arrangements related to completing the merger transaction. Employee severance
costs, as recorded under SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," represent our proportionate share of benefit costs for the separation
by the end of 1999 of management employees who are entitled to benefits under
pre-existing Bell Atlantic separation pay plans. During 1997, 1998 and 1999, 3,
11 and 3 management employees were separated with severance benefits. Accrued
postemployment benefit liabilities are included in our balance sheets as a
component of Employee Benefit Obligations.
Other Initiatives
During 1997, we recorded other charges and special items totaling
approximately $3,800,000 (pre-tax) in connection with consolidating operations
and combining organizations, and for other special items arising during the
year. These charges were comprised of the following significant items.
Write-down of Assets
In the third quarter of 1997, we recorded pre-tax charges of approximately
$1,300,000 for the write-down of obsolete fixed assets. As part of the merger
integration planning, a review was conducted of the carrying values of
long-lived assets. This review included estimating remaining useful lives and
cash flows and identifying assets to be abandoned. As a result of these reviews,
we recorded a charge of approximately $1,300,000 for the write-off of assets.
These assets primarily included computers and other equipment used to transport
data for internal purposes. None of these assets are being held for disposal.
Regulatory Contingencies
In 1997, we also recorded reductions to operating revenues totaling
approximately $2,500,000 (pre-tax) for federal regulatory matters. These matters
relate to specific issues that are currently under investigation by federal
regulatory commissions. We believe that it is probable that the ultimate
resolution of these pending matters will result in refunds to our customers.
The following table provides a reconciliation of the liabilities associated
with merger-related costs and other charges and special items described above:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1998
------------------------------------------------------------------------------------------------------
Charged to
Beginning Expense or End of End of
of Year Revenue Deductions Adjustments Year Deductions Adjustments Year
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merger-Related:
Direct incremental costs $ --- $ 198 $ (198)a $ --- $ --- $ --- $--- $ ---
Severance obligation 1,565 324 (110)a 237 2,016 (82)a 313 2,247
Other Initiatives:
Write-down of fixed
assets --- 1,259 (1,259)b --- --- --- --- ---
Regulatory contingencies --- 2,525 (474)c --- 2,051 (557)d --- 1,494
------------------------------------------------------------------------------------------------------
$1,565 $4,306 $(2,041) $ 237 $4,067 $(639) $313 $3,741
------------------------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS)
1999
------------------------------------
End of
Deductions Adjustments Year
------------------------------------
<S> <C> <C> <C>
Merger-Related:
Direct incremental costs $ --- $ --- $ ---
Severance obligation (268)a (286) 1,693
Other Initiatives:
Write-down of fixed
assets --- --- ---
Regulatory contingencies --- --- 1,494
-----------------------------------
$(268) $(286) $3,187
-----------------------------------
</TABLE>
. Adjustments refer to deductions to the liability that reduced expense, or
additions to the liability that increased expense resulting from changes in
circumstances or experience in implementing the planned activities.
. Deductions refer to the utilization of the liability through payments,
asset write-offs, or refunds to customers.
a - primarily comprised of cash payments
b - primarily comprised of asset write-offs
c - comprised of refunds to customers of $237,000 and asset write-offs
of $237,000
d - primarily comprised of refunds to customers
Liabilities for regulatory contingencies will be utilized as the respective
matter is settled. The obligation for severance benefits, which has been
determined under SFAS No. 112, represents expected payments to employees who
leave the company with benefits provided under pre-existing separation pay
plans. The severance obligation is adjusted through annual costs, which are
actuarially determined based upon financial market interest rates, experience,
and management's best estimate of future benefit payments. In 1997, the
merger-related severance costs increased our existing severance obligation. At
December 31, 1999, the merger-related separations were completed and the
remaining balance represents our obligation for ongoing separations under the
pre-existing separation pay plans, in accordance with SFAS No. 112.
F-11
<PAGE>
Bell Atlantic - Delaware, Inc.
3. 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 (all of which have been obtained except that of the Federal
Communications Commission) and receipt of opinions that the merger will be
tax-free.
The companies are targeting completion of the merger in the second quarter
of 2000.
4. PLANT, PROPERTY AND EQUIPMENT
The following table displays the details of plant, property and equipment,
which is stated at cost:
December 31
--------------------------------
(Dollars in Thousands) 1999 1998
- --------------------------------------------------------------------------------
Land $ 2,669 $ 2,673
Buildings 58,909 57,138
Central office equipment 393,549 361,797
Outside communications plant 405,292 381,948
Furniture, vehicles and other work equipment 59,557 56,608
Other 3,784 1,432
Construction-in-progress 10,324 8,106
--------------------------------
934,084 869,702
Accumulated depreciation (512,150) (457,681)
--------------------------------
Total $ 421,934 $ 412,021
================================
5. LEASES
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. We did not incur any initial capital lease
obligations in 1999 and 1998. In 1997, we incurred $390,000 in initial capital
lease obligations.
Capital lease amounts included in plant, property and equipment are as
follows:
December 31
--------------------------------
(Dollars in Thousands) 1999 1998
- --------------------------------------------------------------------------------
Capital leases $ 183 $ 181
Accumulated amortization (137) (91)
--------------------------------
Total $ 46 $ 90
================================
Total rent expense amounted to $5,645,000 in 1999, $5,139,000 in 1998, and
$6,774,000 in 1997. Of these amounts, $4,429,000 in 1999, $4,090,000 in 1998,
and $5,651,000 in 1997, were lease payments to affiliated companies.
F-12
<PAGE>
Bell Atlantic - Delaware, Inc.
This table displays the aggregate minimum rental commitments under
noncancelable capital leases for the periods shown at December 31, 1999:
(Dollars in Thousands)
Years
- --------------------------------------------------------------------------------
2000 $ 58
2001 --
2002 --
2003 --
2004 --
Thereafter --
--------------
Total minimum rental commitments $ 58
Less interest and executory costs 8
--------------
Present value of minimum lease payments 50
Less current installments 50
--------------
Long-term obligation at December 31, 1999 $ --
==============
6. DEBT
Debt Maturing Within One Year
Debt maturing within one year consists of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to affiliate (BANFC) $29,167 $43,083
---------------------------
Current portion of long-term debt
Note payable to affiliate (BANSHI) 20,000 ---
Other 50 15,046
---------------------------
Total current portion of long-term debt 20,050 15,046
---------------------------
Total debt maturing within one year $49,217 $58,129
===========================
Weighted average interest rate for note payable outstanding at year-end 5.9% 5.0%
===========================
</TABLE>
We have a contractual agreement with an affiliated company, Bell Atlantic
Network Funding Corporation (BANFC), for the provision of short-term financing
and cash management services. BANFC issues commercial paper and obtains bank
loans to fund the working capital requirements of Bell Atlantic's network
services subsidiaries, including us, and invests funds in temporary investments
on their behalf. At December 31, 1999, we had $10,833,000 available under our
line of credit with BANFC.
Long-Term Debt
Long-term debt consists principally of debentures that we have issued.
Interest rates and maturities of the amounts outstanding are as follows at
December 31:
<TABLE>
<CAPTION>
Interest
Description Rate Maturity 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Ten year debenture 6 1/8% 2003 $ 20,000 $ 20,000
Forty year debenture 4 5/8 2005 7,000 7,000
Forty year debenture 7 2008 10,000 10,000
Thirty year debenture 8 3/8 2019 15,000 15,000
Thirty year debenture 7 2023 20,000 20,000
Forty year debenture 8 5/8 2031 15,000 15,000
----------------------------
87,000 87,000
Five year note payable to affiliate (BANSHI) 5.95 2000 20,000 20,000
Unamortized discount and premium, net (681) (705)
Capital lease obligations - average rate of 6.4% and 6.4% 50 96
----------------------------
Total long-term debt, including current maturities 106,369 106,391
Less maturing within one year 20,050 15,046
----------------------------
Total long-term debt $ 86,319 $ 91,345
============================
</TABLE>
F-13
<PAGE>
Bell Atlantic - Delaware, Inc.
Our long-term debt outstanding at December 31, 1999 includes $17,000,000
that is callable. The call prices range from 100.78% to 100.13% of face value,
depending upon the remaining term to maturity of the issue.
We have a promissory note payable to an affiliated company, Bell Atlantic
NSI Holdings, Inc. (BANSHI). The note bears interest at 5.95% and is due on
December 1, 2000.
In 1998, we an recorded extraordinary charge associated with the early
extinguishment of $15,000,000 of 7.75% debentures due in 2013. This charge
reduced net income by $259,000 (net of an income tax benefit of $177,000).
7. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk
consist primarily of short-term investments and trade receivables.
Concentrations of credit risk with respect to trade receivables other than those
from AT&T are limited due to the large number of customers. We generated
revenues from services provided to AT&T (primarily network access and billing
and collection) of $15,764,000 in 1999, $15,766,000 in 1998 and $17,361,000 in
1997.
Fair Values of Financial Instruments
The table below provides additional information about our material
financial instruments at December 31:
<TABLE>
<CAPTION>
Financial Instrument Valuation Method
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Note payable to affiliate (BANFC) and short-term Carrying amounts
investments
Debt (excluding capital leases) and note payable to Market quotes for similar terms and maturities or future cash
affiliate (BANSHI) flows discounted at current rates
</TABLE>
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Debt $115,486 $114,632 $129,378 $141,923
Note payable to affiliate (BANSHI) 20,000 $ 18,694 20,000 20,470
</TABLE>
8. COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting shareowner's investment that, under generally accepted accounting
principles, are excluded from net income.
The change in other comprehensive loss, net of income tax expense
(benefit), is as follows:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------
(Dollars in Thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other comprehensive income (loss):
Minimum pension liability adjustment (net of taxes of $85, $(122) and $0) $ 123 $(178) $ ---
------------------------------------------
$ 123 $(178) $ ---
==========================================
</TABLE>
Accumulated other comprehensive loss is comprised of the following:
December 31
(Dollars in Thousands) 1999 1998
- --------------------------------------------------------------------------------
Accumulated other comprehensive loss:
Minimum pension liability adjustment $ (55) $(178)
--------------------------
$ (55) $(178)
==========================
F-14
<PAGE>
Bell Atlantic - Delaware, Inc.
9. STOCK INCENTIVE PLANS
We participate in stock-based compensation plans sponsored by Bell
Atlantic. Bell Atlantic applies APB Opinion No. 25 and related interpretations
in accounting for the plans and has adopted the disclosure-only provisions of
SFAS No. 123. If Bell Atlantic had elected to recognize compensation expense
based on the fair value at the grant dates for 1997 and subsequent awards
consistent with the provisions of SFAS No. 123, our net income would have been
changed to the pro forma amounts indicated below:
(Dollars in Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Net income:
As reported $48,366 $40,600 $35,188
Pro forma 47,888 40,168 34,889
These results may not be representative of the effects on pro forma net
income for future years.
The pro forma net income amounts were determined using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
1999 1998 1997
- --------------------------------------------------------------------------------
Dividend yield 3.98% 4.59% 4.86%
Expected volatility 21.51% 18.63% 14.87%
Risk-free interest rate 4.82% 5.55% 6.35%
Expected lives (in years) 5 5 5
The weighted average value of options granted was $9.60 per option during
1999, $6.47 per option during 1998 and $4.30 per option during 1997.
10. EMPLOYEE BENEFITS
We participate in the Bell Atlantic benefit plans. Bell Atlantic maintains
noncontributory defined benefit pension plans for substantially all management
and associate employees, as well as postretirement healthcare and life insurance
plans for our retirees and their dependents. Bell Atlantic also sponsors savings
plans to provide opportunities for eligible employees to save for retirement on
a tax-deferred basis and to encourage employees to acquire and maintain an
equity interest in Bell Atlantic.
In 1998, following the completion of the merger with NYNEX, the assets of
the Bell Atlantic and NYNEX pension and savings plans were commingled in a
master trust, and effective January 1, 1998, Bell Atlantic established common
pension and savings plan benefit provisions for all management employees.
The structure of Bell Atlantic's benefit plans does not provide for the
separate determination of certain disclosures for our company. The required
information is provided on a consolidated basis in Bell Atlantic's Annual Report
on Form 10-K for the year ended December 31, 1999. What follows are our benefit
costs and obligations for 1999, 1998 and 1997. The disclosures in 1997 reflect
the historic benefit plans and actuarial assumptions in effect during those
years, as shown in the tables below.
Pension and Other Postretirement Benefits
Substantive commitments for future plan amendments are reflected in the
pension costs and benefit obligations. Pension and other postretirement benefits
for our associate employees are subject to collective bargaining agreements.
Modifications in associate benefits have been bargained from time to time, and
Bell Atlantic may also periodically amend the benefits in the management plans.
The following table provides our benefit costs for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Years ended December 31
Pension Healthcare and Life
----------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net periodic (income) benefit cost $(5,998) $(4,679) $(2,209) $ 770 $ 1,171 $ 2,241
</TABLE>
F-15
<PAGE>
Bell Atlantic - Delaware, Inc.
Amounts recognized on the balance sheets consist of:
<TABLE>
<CAPTION>
December 31
Pension Healthcare and Life
-------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee benefit obligations $ (1,961) $ (5,471) $(34,038) $(34,992)
Qualified pension asset 2,812 --- --- ---
Other assets 101 120 --- ---
Accumulated other comprehensive loss 92 300 --- ---
</TABLE>
The changes in benefit obligations from year to year were caused by a
number of factors, including changes in actuarial assumptions (see Assumptions)
and plan amendments.
Assumptions
The actuarial assumptions used are based on financial market interest
rates, past experience, and management's best estimate of future benefit changes
and economic conditions. Changes in these assumptions may impact future benefit
costs and obligations. The weighted-average assumptions used in determining
expense and benefit obligations are as follows:
<TABLE>
<CAPTION>
Pension Healthcare and Life
----------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate at end of year 8.00% 7.00% 7.25% 8.00% 7.00% 7.25%
Long-term rate of return on plan assets for the year 9.00 8.90 8.90 9.00 8.90 8.90
Rate of future increases in compensation at end of year 4.00 4.00 4.00 4.20 4.00 4.00
Medical cost trend rate at end of year 5.50 6.00 6.50
Ultimate (year 2001) 5.00 5.00 5.00
Dental cost trend rate at end of year 3.50 3.50 3.50
Ultimate (year 2002) 3.00 3.00 3.00
</TABLE>
Savings Plans and Employee Stock Ownership Plans
Substantially all of our employees are eligible to participate in savings
plans maintained by Bell Atlantic. Under these plans, a certain percentage of
eligible employee contributions are matched with shares of Bell Atlantic common
stock. We match employee contributions through two leveraged employee stock
ownership plans (ESOPs) maintained by Bell Atlantic. Bell Atlantic recognizes
leveraged ESOP cost based on the modified shares allocated method for these
leveraged ESOPs that held securities before December 15, 1989. We recognize our
proportionate share of total ESOP cost based on our matching obligation
attributable to our participating employees. We recorded total savings plan
costs of $749,000 in 1999, $624,000 in 1998 and $916,000 in 1997.
11. INCOME TAXES
The components of income tax expense are presented in the following table:
Years ended December 31
------------------------------------
(Dollars in Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Current:
Federal $ 17,931 $ 18,067 $ 15,724
State and local 4,997 4,977 4,245
-----------------------------------------
22,928 23,044 19,969
-----------------------------------------
Deferred:
Federal 8,353 3,922 2,835
State and local 2,158 1,042 901
-----------------------------------------
10,511 4,964 3,736
-----------------------------------------
33,439 28,008 23,705
Investment tax credits (252) (307) (422)
-----------------------------------------
Total income tax expense $ 33,187 $ 27,701 $ 23,283
=========================================
F-16
<PAGE>
Bell Atlantic - Delaware, Inc.
The following table shows the principal reasons for the difference between
the effective income tax rate and the statutory federal income tax rate:
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Investment tax credits (.2) (.3) (.5)
State income taxes, net of federal tax benefits 5.7 5.7 5.7
Other, net .2 -- (.4)
-----------------------------------
Effective income tax rate 40.7% 40.4% 39.8%
===================================
</TABLE>
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax
liabilities (assets) are shown in the following table:
December 31
-----------------------------
(Dollars in Thousands) 1999 1998
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 60,846 $ 57,500
Other 13,262 5,600
-----------------------------
74,108 63,100
-----------------------------
Deferred tax assets:
Employee benefits (24,914) (27,800)
Advance payments (2,192) (3,000)
Other (11,300) (7,200)
-----------------------------
(38,406) (38,000)
-----------------------------
Net deferred tax liability $ 35,702 $ 25,100
=============================
Deferred tax assets include approximately $21,800,000 at December 31, 1999
and $22,100,000 at December 31, 1998 related to postretirement benefit costs
recognized under SFAS No. 106. This deferred tax asset will gradually be
realized over the estimated lives of current retirees and employees.
12. ADDITIONAL FINANCIAL INFORMATION
The tables below provide additional financial information related to our
financial statements:
December 31
-----------------------------
(Dollars in Thousands) 1999 1998
- --------------------------------------------------------------------------------
BALANCE SHEETS:
Accounts payable and accrued liabilities:
Accounts payable - affiliates $21,826 $26,754
Accounts payable - other 32,633 24,279
Accrued vacation pay 4,248 4,104
Accrued expenses 3,915 3,783
Accrued taxes 2,136 1,732
Interest payable - other 1,027 1,048
Interest payable - affiliate 240 282
-----------------------------
$66,025 $61,982
=============================
F-17
<PAGE>
Bell Atlantic - Delaware, Inc.
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
(Dollars in Thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS:
Cash paid during the year for:
Income taxes, net of amounts refunded $22,452 $22,536 $19,039
Interest, net of amounts capitalized 8,450 8,884 7,844
STATEMENTS OF INCOME:
Interest expense incurred, net of amounts capitalized 8,429 9,493 9,287
Capitalized interest 420 944 428
Advertising expense 1,927 2,586 1,883
</TABLE>
Interest paid during the year includes $1,385,000 in 1999, $1,246,000 in
1998 and $892,000 in 1997 related to short-term financing services provided by
Bell Atlantic Network Funding Corporation (see Note 6). Interest paid also
includes $1,190,000 in 1999, 1998 and 1997 related to a note payable to Bell
Atlantic NSI Holdings, Inc. (see Note 6).
Advertising expense includes $1,775,000 in 1999, $2,279,000 in 1998 and
$1,876,000 in 1997 allocated to us by Bell Atlantic Network Services, Inc.
At December 31, 1999 and 1998, $2,519,000 and $3,462,000 of bank overdrafts
were classified as accounts payable.
13. TRANSACTIONS WITH AFFILIATES
Our financial statements include transactions with Bell Atlantic Network
Services Inc. (NSI), Bell Atlantic Network Funding Corporation (BANFC), Bell
Atlantic NSI Holdings, Inc. (BANSHI), Bell Atlantic, and various other
affiliates.
We have contractual arrangements with NSI for the provision of various
centralized services. These services are divided into two broad categories. The
first category is comprised of network related services which generally benefit
only Bell Atlantic's operating telephone subsidiaries, including us. These
services include administration, marketing, product advertising, sales,
information systems, network technology planning, labor relations, and staff
support for various network operations. The second category is comprised of
overhead and support services which generally benefit all subsidiaries of Bell
Atlantic. Such services include corporate governance and staff support in
finance, external affairs, legal and corporate secretary, media relations,
employee communications, corporate advertising, human resources, and treasury.
We receive technical and support services from Bell Communications Research,
Inc. (Bellcore), a company previously owned jointly by the regional holding
companies. In 1997, Bell Atlantic and the other Bellcore owners sold their
jointly owned investment in Bellcore. We continue to contract with Bellcore (now
known as Telcordia Technologies, Inc.) for technical and support services. The
costs of these services are billed to us through NSI and are included with
network related services in 1999 and 1998 in the table below.
We recognize interest expense in connection with contractual arrangements
with BANFC to provide short-term financing, investing and cash management
services to us, and recognize interest expense related to a promissory note held
by BANSHI (see Note 6).
Operating revenues include obligations to affiliates in connection with an
interstate revenue sharing arrangement with Bell Atlantic's operating telephone
subsidiaries. Other operating revenues and expenses include miscellaneous items
of income and expense resulting from transactions with other affiliates,
primarily rental of facilities and equipment. At December 31, 1999, we began
recording official communications services revenues from our affiliates as
revenues rather than reductions to expense as in previous periods. We have
restated prior periods to include these revenues as revenues from affiliates on
our income statement and in the table below.
On June 1, 1999, Bell Atlantic Full Services Channel, Inc., an affiliate,
sold its ownership interest in SMS/800 to us and the other operating telephone
companies of Bell Atlantic at its fair value in accordance with a Federal
Communications Commission order. SMS/800 is a venture jointly held by the Bell
Operating Companies that administers the centralized national database system
associated with toll free numbers. We paid $11,222 to receive a .22% ownership
interest in SMS/800. Our ownership percentage has increased to .27% as a result
of the merger of SBC Communications, Inc. and Ameritech Corporation. In
connection with our investment, we record equity income and receive cash
dividends.
We also paid cash dividends to our parent, Bell Atlantic.
F-18
<PAGE>
Bell Atlantic - Delaware, Inc.
Transactions with affiliates are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------
(Dollars in Thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
Interstate revenue sharing to affiliates $(13,385) $(13,385) $(13,385)
Other revenue from affiliates 9,257 8,058 6,679
-------------------------------------------
(4,128) (5,327) (6,706)
-------------------------------------------
Operating expenses:
NSI - network 18,620 27,410 30,888
NSI - other 32,778 27,593 19,666
Bellcore --- --- 2,705
Other 10,787 9,837 10,509
-------------------------------------------
62,185 64,840 63,768
-------------------------------------------
Equity income from SMS/800 60 --- ---
Interest expense:
BANFC 1,342 1,874 988
BANSHI 1,190 1,190 1,190
-------------------------------------------
2,532 3,064 2,178
-------------------------------------------
Dividends paid to Bell Atlantic 18,600 9,200 28,800
Dividends received from SMS/800 60 --- ---
</TABLE>
Outstanding balances with affiliates are reported on the balance sheets at
December 31, 1999 and 1998 as Accounts Receivable - Affiliates, Note Payable to
Affiliate, Current Portion of Long-term Debt - Affiliate, Accounts Payable and
Accrued Liabilities - Affiliates, and Long-term Debt - Affiliate.
On February 1, 2000, we declared and paid a dividend in the amount of
$22,600,000 to Bell Atlantic.
14. COMMITMENTS AND 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 which 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.
15. SEGMENT INFORMATION
We have one reportable segment, which provides domestic wireline
telecommunications services. Specifically, we provide local telephone services
including voice and data transport, enhanced and custom calling features,
network access, directory assistance, private lines and public telephones. In
addition, we provide customer premises equipment distribution and billing and
collection services. We have four strategic business units (consumer,
enterprise, general and network services) supporting our operations that have
been aggregated into one reportable segment.
F-19
<PAGE>
Bell Atlantic - Delaware, Inc.
16. QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
Income Before
Operating Operating Extraordinary
Quarter Ended Revenues Income Item Net Income
- --------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1999:
March 31 $ 71,921 $ 25,030 $ 13,612 $ 13,612
June 30 75,594 20,987 11,199 11,199
September 30 76,566 24,217 13,169 13,169
December 31 77,544 19,553 10,386 10,386
----------------------------------------------------------------
Total $301,625 $ 89,787 $ 48,366 $ 48,366
================================================================
1998:
March 31 $ 67,844 $ 18,257 $ 9,523 $ 9,523
June 30 70,247 19,312 10,295 10,295
September 30 71,418 21,573 11,517 11,517
December 31 71,685 18,035 9,524 9,265
----------------------------------------------------------------
Total $281,194 $ 77,177 $ 40,859 $ 40,600
================================================================
</TABLE>
Operating revenues for the first three quarters of 1999 and all quarters of 1998
have been restated to reflect a change in the recording of official
communications services provided to affiliates (see Note 13). As a result,
operating revenues increased $250,000 for each of the quarters ended March 31,
June 30 and September 30, 1999; and $200,000 for each of the quarters ended
March 31, June 30, September 30, and December 31, 1998. This restatement had no
impact on Operating Income, Income Before Extraordinary Item, and Net Income.
F-20
<PAGE>
Bell Atlantic - Delaware, Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions
-------------------------------
Balance at Charged to
Beginning of Charged to Other Accounts Deductions Balance at End
Description Period Expenses Note(a) Note (b) of Period
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible
Accounts Receivable:
Year 1999 $5,197 $3,010 $4,896 $7,922 $5,181
Year 1998 $5,048 $3,626 $5,561 $9,038 $5,197
Year 1997 $5,616 $3,273 $4,825 $8,666 $5,048
</TABLE>
- -------------------
(a) (1) Allowance for Uncollectible Accounts Receivable includes amounts
previously written off which were credited directly to this account when
recovered, and (2) accruals charged to accounts payable for anticipated
uncollectible charges on purchases of accounts receivable from others which
we billed.
(b) Amounts written off as uncollectible.
F-21
<PAGE>
EXHIBITS
FILED WITH ANNUAL REPORT FORM 10-K
UNDER THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Bell Atlantic - Delaware, Inc.
COMMISSION FILE NUMBER 1-7757
<PAGE>
Form 10-K for 1999
File No. 1-7757
Page 1 of 1
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission (SEC), are incorporated herein by reference as
exhibits hereto.
3a Certificate of Incorporation of the registrant, as amended and
restated June 17, 1987. (Exhibit 3a to the registrant's Annual Report
on Form 10-K for the year ended December 31, 1987, File No. 1-7757.)
3a(i) Certificate of Amendment of Certificate of Incorporation, dated
August 14, 1992. (Exhibit 3a(i) to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1992, File
No. 1-7757.)
3a(ii) Certificate of Amendment of Certificate of Incorporation, dated
January 10, 1994 and filed January 13, 1994. (Exhibit 3a(ii) to
the registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 1-7757.)
3b By-Laws of the registrant, as amended December 15, 1995. (Exhibit 3b
to the registrant's Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 1-7757.)
3b(i) Consent of Sole Stockholder of Bell Atlantic - Delaware, Inc.,
dated December 15, 1995. (Exhibit 3b(i) to the registrant's
Annual Report on Form 10-K for the year ended December 31,
1995, File No. 1-7757.)
4 No instrument which defines the rights of holders of long-term debt of
the registrant is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby
agrees to furnish a copy of any such instrument to the SEC upon
request.
10a Agreement among Bell Atlantic Network Services, Inc. and the Bell
Atlantic Corporation telephone subsidiaries, dated November 7, 1983.
(Exhibit 10b to Bell Atlantic Corporation Annual Report on Form 10-K
for the year ended December 31, 1993, File No. 1-8606.)
27 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE BALANCE SHEET
AT DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,800
<SECURITIES> 0
<RECEIVABLES> 60,496
<ALLOWANCES> 5,181
<INVENTORY> 1,232
<CURRENT-ASSETS> 74,722
<PP&E> 934,084
<DEPRECIATION> 512,150
<TOTAL-ASSETS> 507,394
<CURRENT-LIABILITIES> 124,160
<BONDS> 86,319
0
0
<COMMON> 118,442
<OTHER-SE> 89,438
<TOTAL-LIABILITY-AND-EQUITY> 507,394
<SALES> 0
<TOTAL-REVENUES> 301,625
<CGS> 0
<TOTAL-COSTS> 211,838
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,429
<INCOME-PRETAX> 81,553
<INCOME-TAX> 33,187
<INCOME-CONTINUING> 48,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,366
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
