<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 1-3488
BELL ATLANTIC - NEW JERSEY, INC.
A New Jersey Corporation I.R.S. Employer Identification No. 22-1151770
540 Broad Street, Newark, New Jersey 07101
Telephone Number (973) 649-9900
---------------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
Bell Atlantic - New Jersey, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $38.5, $29.7,
$100.4 and $90.1 from affiliates)............. $ 906.0 $ 930.9 $ 2,694.3 $ 2,797.5
------ ------ -------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes.. 151.0 180.7 493.1 524.4
Depreciation and amortization................. 183.1 219.3 538.4 571.6
Taxes other than income....................... 29.7 53.0 87.2 157.2
Other (including $194.6, $202.3,
$550.3 and $567.0 to affiliates)......... 270.7 301.6 809.0 847.1
------ ------ -------- --------
634.5 754.6 1,927.7 2,100.3
------ ------ -------- --------
OPERATING INCOME................................... 271.5 176.3 766.6 697.2
OTHER INCOME, NET.................................. 1.0 .4 3.9 2.3
INTEREST EXPENSE (including $6.6, $4.6,
$18.4 and $11.7 to affiliate)................. 26.1 26.2 78.9 75.9
------ ------ -------- -------
Income Before Provision For Income Taxes........... 246.4 150.5 691.6 623.6
PROVISION FOR INCOME TAXES......................... 100.8 (29.1) 282.7 132.6
------ ------ -------- --------
NET INCOME......................................... $ 145.6 $ 179.6 $ 408.9 $ 491.0
====== ====== ======== ========
REINVESTED EARNINGS
At beginning of period........................ $ 407.6 $ 287.2 $ 291.8 $ 220.5
Add: net income.............................. 145.6 179.6 408.9 491.0
------ ------ -------- --------
553.2 466.8 700.7 711.5
Deduct: dividends............................ 93.4 157.5 239.6 401.5
other changes.................. --- .2 1.3 .9
------ ------ -------- --------
At end of period.............................. $ 459.8 $ 309.1 $ 459.8 $ 309.1
====== ====== ======== ========
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
Bell Atlantic - New Jersey, Inc.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN MILLIONS)
ASSETS
------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------
<S> <C> <C>
CURRENT ASSETS
Short-term investments........................ $ 9.9 $ 61.0
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $83.6 and $88.4.. 717.7 812.7
Affiliates............................... 14.4 12.6
Material and supplies......................... 30.4 42.7
Prepaid expenses.............................. 118.7 155.6
Other......................................... 6.8 4.9
--------- --------
897.9 1,089.5
--------- --------
PLANT, PROPERTY AND EQUIPMENT................. 10,319.9 9,741.1
Less accumulated depreciation................. 5,971.5 5,597.0
--------- --------
4,348.4 4,144.1
--------- --------
OTHER ASSETS.................................. 77.1 176.3
--------- --------
TOTAL ASSETS.................................. $ 5,323.4 $5,409.9
========= ========
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
Bell Atlantic - New Jersey, Inc.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN MILLIONS)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate.................... $ 410.5 $ 427.4
Other........................................ 5.7 5.4
Accounts payable and accrued liabilities:
Affiliates................................... 292.5 368.0
Other........................................ 478.7 565.9
Other liabilities................................. 131.3 116.6
-------- --------
1,318.7 1,483.3
-------- --------
LONG-TERM DEBT.................................... 1,283.1 1,287.2
-------- --------
EMPLOYEE BENEFIT OBLIGATIONS...................... 717.6 791.1
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credits................ 25.7 28.3
Other............................................. 137.3 147.0
-------- --------
163.0 175.3
-------- --------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value,
owned by parent................................. 1,381.2 1,381.2
Reinvested earnings............................... 459.8 291.8
-------- --------
1,841.0 1,673.0
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT..... $5,323.4 $5,409.9
======== ========
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
Bell Atlantic - New Jersey, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
September 30,
---------------------
1998 1997
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... $ 957.9 $ 872.3
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments................ 51.1 52.8
Additions to plant, property and equipment.......... (741.6) (581.7)
Other, net.......................................... (2.8) 18.1
-------- --------
Net cash used in investing activities............... (693.3) (510.8)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations... (3.9) (3.5)
Net change in note payable to affiliate............. (16.9) 58.4
Dividends paid...................................... (239.6) (401.5)
Net change in outstanding checks drawn
on controlled disbursement accounts............ (4.2) (14.9)
-------- --------
Net cash used in financing activities............... (264.6) (361.5)
-------- --------
NET CHANGE IN CASH.................................. --- ---
CASH, BEGINNING OF PERIOD........................... --- ---
-------- --------
CASH, END OF PERIOD................................. $ --- $ ---
======== ========
See Notes to Condensed Financial Statements.
4
<PAGE>
Bell Atlantic - New Jersey, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Bell Atlantic - New Jersey, Inc. (the Company) is a wholly owned subsidiary
of Bell Atlantic Corporation (Bell Atlantic). The accompanying unaudited
condensed financial statements have been prepared based upon Securities and
Exchange Commission rules that permit reduced disclosure for interim periods.
These financial statements reflect all adjustments which are necessary for a
fair presentation of results of operations and financial position for the
interim periods shown including normal recurring accruals. The results for the
interim periods are not necessarily indicative of results for the full year.
For a more complete discussion of significant accounting policies and certain
other information, refer to the financial statements included in the Company's
1997 Form 10-K.
The Company has reclassified certain amounts from prior year's data to
conform with the 1998 presentation.
2. Dividend
On November 2, 1998, the Company declared and paid a dividend in the amount
of $114.0 million to Bell Atlantic.
3. Transfer of Directory Publishing Activities
On March 1, 1998, the Company transferred, at net book value without gain or
loss, certain assets and liabilities associated with its directory publishing
activities to a newly formed, wholly owned subsidiary. The stock of the
subsidiary was immediately distributed to Bell Atlantic. The transfer of such
assets and liabilities was completed as part of Bell Atlantic's and the
Company's response to the requirements of the Telecommunications Act of 1996,
which prohibits the Company from engaging in electronic publishing or joint
sales and marketing of electronic products.
Net assets transferred by the Company totaled approximately $2 million, and
consisted of deferred directory production costs (included in prepaid expenses),
fixed assets and related deferred tax liabilities.
Revenues related to the Company's directory publishing activities transferred
were approximately $47 million and $250 million for the nine months ended
September 30, 1998 and 1997, respectively. Direct expenses related to the
directory publishing activities transferred were approximately $18 million and
$97 million for the nine months ended September 30, 1998 and 1997, respectively.
The Company does not separately identify indirect expenses attributable to the
directory publishing activities, including expenses related to billing and data
management and processing services, legal, external affairs, depreciation,
interest expense and any corresponding tax expense.
Effective March 1, 1998, revenues from directory publishing activities
transferred are no longer earned, and the related expenses are no longer
incurred by the Company. Certain other revenues, primarily fees for
nonpublication of telephone numbers and multiple white page listings continue to
be earned by the Company. Additionally, contracts between the Company and
another affiliate of Bell Atlantic for billing and collection services related
to the directory activities, use of directory listings, and rental charges have
created new revenue sources for the Company.
4. Litigation and Other Contingencies
Various legal actions and regulatory proceedings are pending to which the
Company is a party. The Company has established reserves for liabilities in
connection with regulatory and legal matters which it currently deems to be
probable and estimable. The Company does not expect that the ultimate
resolution of these matters in future periods will have a material effect on the
Company's financial position, but it could have a material effect on results of
operations.
5
<PAGE>
Bell Atlantic - New Jersey, Inc.
5. Recent Accounting Pronouncement
Costs of Computer Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides, among
other things, guidance for determining whether computer software is for internal
use and when the cost related to such software should be expensed as incurred or
capitalized and amortized. SOP 98-1 is required to be applied prospectively and
adopted no later than January 1, 1999.
The Company currently capitalizes 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 is capitalized. Subsequent additions, modifications,
or upgrades of initial software programs, whether operating or application
packages, are expensed as incurred. Bell Atlantic estimates that the
implementation of SOP 98-1 will result in a net after-tax benefit of $200
million to $250 million to its consolidated results of operations in 1999 due to
the prospective capitalization of costs which were previously expensed as
incurred. The estimated impact on the results of operations of the Company in
1999 has not yet been determined.
6. Proposed Bell Atlantic - GTE Merger
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
It is expected that the merger will qualify as a "pooling of interests,"
which means for accounting and financial reporting purposes the companies will
be treated as if they had always been combined. The completion of the merger is
subject to a number of conditions, including certain regulatory approvals,
receipt of opinions that the merger will be tax-free, and the approval of the
shareholders of both Bell Atlantic and GTE. The companies expect to close the
merger in the second half of 1999.
6
<PAGE>
Bell Atlantic - New Jersey, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(ABBREVIATED PURSUANT TO GENERAL INSTRUCTION H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income of $408.9 million for the nine month period
ended September 30, 1998, compared to net income of $491.0 million for the same
period in 1997.
The Company's results for 1998 and 1997 were affected by the following
special items. The special charges in both years include the Company's
allocated share of charges from Bell Atlantic Network Services, Inc. (NSI).
Results for 1998 also included the effect of transferring certain assets and
liabilities of the Company's directory publishing activities to a subsidiary, as
described below.
. In 1998, the Company recorded pre-tax charges totaling approximately $12
million, consisting of $10 million for transition and integration costs
related to the merger of Bell Atlantic and NYNEX Corporation (NYNEX) and
$2 million related to the write-down of video-related equipment.
. In 1997, the Company recorded pre-tax charges totaling approximately $95
million in connection with the completion of the merger of Bell Atlantic
and NYNEX in August 1997 and other special items arising during the
period. These charges included: approximately $22 million for merger-
related costs (consisting of $18 million for employee severance costs and
$4 million for direct incremental costs); $39 million for the write-down
of obsolete fixed assets; $27 million for contingencies associated with
various regulatory and legal matters; $3 million for consolidating
certain redundant real estate properties; $3 million related to its video
operations; and $1 million for other miscellaneous expense items. A
small portion of transition and integration costs were also incurred by
the Company.
Transition and integration costs consist of the Company's proportionate
share of costs associated with integrating the operations of Bell Atlantic and
NYNEX. 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 the Company's 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.
TRANSFER OF DIRECTORY PUBLISHING ACTIVITIES
On March 1, 1998, the Company transferred, at net book value without gain
or loss, certain assets and liabilities associated with its directory publishing
activities to a newly formed, wholly owned subsidiary. The stock of the
subsidiary was immediately distributed to Bell Atlantic. The transfer of such
assets and liabilities was completed as part of Bell Atlantic's and the
Company's response to the requirements of the Telecommunications Act of 1996,
which prohibits the Company from engaging in electronic publishing or joint
sales and marketing of electronic products.
Net assets transferred by the Company totaled approximately $2 million, and
consisted of deferred directory production costs (included in prepaid expenses),
fixed assets and related deferred tax liabilities.
Revenues related to the Company's directory publishing activities
transferred were approximately $47 million and $250 million for the nine months
ended September 30, 1998 and 1997, respectively. Direct expenses related to the
directory publishing activities transferred were approximately $18 million and
$97 million for the nine months ended September 30, 1998 and 1997, respectively.
The Company does not separately identify indirect expenses attributable to the
directory publishing activities, including expenses related to billing and data
management and processing services, legal, external affairs, depreciation,
interest expense and any corresponding tax expense.
7
<PAGE>
Bell Atlantic - New Jersey, Inc.
Effective March 1, 1998, revenues from directory publishing activities
transferred are no longer earned, and the related expenses are no longer
incurred by the Company. Certain other revenues, primarily fees for
nonpublication of telephone numbers and multiple white page listings continue to
be earned by the Company. Additionally, contracts between the Company and
another affiliate of Bell Atlantic for billing and collection services related
to the directory activities, use of directory listings, and rental charges have
created new revenue sources for the Company.
These and other items affecting the comparison of the Company's results of
operations for the nine month periods ended September 30, 1998 and 1997 are
discussed in the following sections. This Management's Discussion and Analysis
should also be read in conjunction with the Company's 1997 Annual Report on Form
10-K.
OPERATING REVENUE STATISTICS
- ----------------------------
1998 1997 % Change
- --------------------------------------------------------------------------------
AT SEPTEMBER 30
- ---------------
Access Lines in Service (in thousands)*
Residence......................... 4,007 3,833 4.5%
Business.......................... 2,303 2,094 10.0
Public............................ 95 95 ---
----- -----
6,405 6,022 6.4
===== =====
NINE MONTH PERIOD ENDED SEPTEMBER 30
- ------------------------------------
Access Minutes of Use (in millions) 23,943 21,276 12.5
====== ======
* 1997 reflects a restatement of access lines in service to include Primary Rate
ISDN (Integrated Services Digital Network) channels to conform with the 1998
presentation.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Nine Month Period Ended September 30 1998 1997
- --------------------------------------------------------------------------------
Local services...................... $ 1,164.2 $ 1,080.0
Network access services............. 878.9 784.1
Long distance services.............. 384.3 472.7
Ancillary services.................. 199.7 190.5
Directory and information services.. 67.2 270.2
-------- --------
Total............................... $ 2,694.3 $ 2,797.5
======== ========
LOCAL SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $84.2 7.8%
- --------------------------------------------------------------------------------
Local services revenues are earned by the Company 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 which expand the
utilization of the network. These services include products such as Caller ID,
Call Waiting and Return Call.
Higher usage of the Company's network facilities was the primary reason for
the increase in local services revenues in the first nine months of 1998. This
growth was generated by an increase in access lines in service of 6.4% over the
same period in 1997, and higher business message volumes. Access line growth
primarily reflects higher demand for Centrex services and an increase in
additional residential lines. Higher revenues from private line and switched
data services also contributed to the revenue growth in 1998.
8
<PAGE>
Bell Atlantic - New Jersey, Inc.
The Company also recognized higher revenues from public telephone and
value-added services. Value-added services revenues grew principally due to
higher customer demand and usage, while price increases for usage of the
Company's pay phones and the implementation of new charges to carriers resulting
from pay phone deregulation in April 1997 were the principal reasons for the
improvement in public telephone services revenues. These revenue increases were
partially offset by price reductions on certain local services.
NETWORK ACCESS SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $94.8 12.1%
- --------------------------------------------------------------------------------
Network access services revenues are earned from carriers for their use of
the Company's local exchange facilities in providing usage services to their
customers. In addition, end-user subscribers pay flat rate access fees to
connect to the Company's network.
Network access services revenues grew in the first nine months of 1998
primarily as a result of higher customer demand, reflected by growth in access
minutes of use of 12.5% over the same period in 1997. Volume growth was boosted
by the expansion of the business market, particularly for high-capacity
services. Demand for special access services grew as Internet service providers
and other high-capacity users increased their utilization of the Company's
network. Higher network usage by alternative providers of intraLATA toll
services and higher end-user revenues attributable to an increase in access
lines in service also contributed to revenue growth in 1998. Network access
services revenues were also higher due to the effect of recording amounts
received from other local exchange carriers for terminating calls on the
Company's network as network access services revenues, beginning in 1998. In
1997, these amounts were recorded in another revenue category, Ancillary
Services Revenues. Revenue growth was partially offset by net price reductions
mandated by a federal price cap plan.
In July 1998, the Company implemented price decreases of approximately $14
million on an annual basis for interstate services in connection with the
Federal Communications Commission's (FCC) Price Cap Plan, compared to price
decreases of approximately $71 million under the Company's July 1997 filing. The
rates included in the 1998 filing will be in effect through June 1999. The rates
include amounts necessary to recover the Company's contribution to the FCC's new
universal service fund. The FCC has created a multi-billion dollar interstate
fund to link schools and libraries to the Internet and to subsidize low-income
consumers and rural health care providers. Under the FCC's rules, all providers
of interstate telecommunications services must contribute to the fund. The
Company's contributions to the universal service fund are included in Other
Operating Expenses.
Revenue growth in 1998 also reflects the effect of special charges recorded
in 1997 for contingencies associated with regulatory matters.
LONG DISTANCE SERVICES REVENUES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(88.4) (18.7)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made
outside a customer's local calling area, but within the same service area of the
Company (intraLATA toll). Other long distance services that the Company provides
include 800 services, Wide Area Telephone Service (WATS), and corridor services
(between LATAs in southern New Jersey and Philadelphia and between LATAs in
northern New Jersey and New York City).
Long distance services revenues declined in the first nine months of 1998
due to increased competition for intraLATA toll services as a result of the
introduction of presubscription in May 1997. Presubscription permits customers
to use an alternative provider of their choice for intraLATA toll calls without
dialing a special access code when placing a call. The adverse impact on long
distance service revenues as a result of presubscription was partially mitigated
by increased network access services revenues for usage of the Company's network
by these alternative providers.
9
<PAGE>
Bell Atlantic - New Jersey, Inc.
Increased competition for WATS and private line services and price
reductions on certain toll services as part of the Company's response to
competition also contributed to the decline in long distance services revenues
in 1998. These revenue reductions were partially offset by higher calling
volumes generated by an increase in access lines in service.
ANCILLARY SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $9.2 4.8%
- --------------------------------------------------------------------------------
The Company provides ancillary services which include billing and
collection services provided to long distance carriers and affiliates, customer
premises equipment (CPE) services, facilities rental services for affiliates and
nonaffiliates, usage of separately priced (unbundled) components of its network,
sales of materials and supplies to affiliates and voice messaging services.
Ancillary services revenues grew in the first nine months of 1998 due to a
combination of increased demand by long distance carriers and affiliates for
billing and collection services, increased market penetration for voice
messaging services, principally Home Voice Mail, and higher demand for wire
maintenance service plans.
These revenue increases were partially offset by lower material sales to
affiliates and the effect of classifying amounts received from other local
exchange carriers for terminating calls on the Company's network as Network
Access Services Revenues beginning in 1998. In 1997, these amounts were recorded
as an item of ancillary services revenues.
DIRECTORY AND INFORMATION SERVICES REVENUES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(203.0) (75.1)%
- --------------------------------------------------------------------------------
As described earlier, the Company transferred certain assets and
liabilities associated with its directory publishing activities to a newly
formed, wholly owned subsidiary, effective March 1, 1998. As a result, revenues
associated with directory publishing activities transferred are no longer earned
by the Company. Beginning March 1, 1998, the Company's directory and information
services revenues are earned primarily from fees for nonpublication of telephone
numbers and multiple white page listings, and from a contract with an affiliate
for usage of the Company's directory listings.
The decrease in directory and information services revenues in 1998 was
principally due to the effect of the transfer of directory publishing
activities.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
Nine Month Period Ended September 30 1998 1997
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes.. $ 493.1 $ 524.4
Depreciation and amortization................. 538.4 571.6
Taxes other than income....................... 87.2 157.2
Other operating expenses...................... 809.0 847.1
-------- --------
Total......................................... $1,927.7 $2,100.3
======== ========
10
<PAGE>
Bell Atlantic - New Jersey, Inc.
EMPLOYEE COSTS
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(31.3) (6.0)%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by the Company. Similar costs
incurred by employees of NSI, who provide centralized services on a contractual
basis, are allocated to the Company and are included in Other Operating
Expenses.
Employee costs decreased in the first nine months of 1998 primarily as a
result of lower pension and benefit costs. The reduction in pension and benefit
costs was caused by a number of factors, including favorable pension plan
investment returns and lower than expected retiree medical claims. A decline in
repair and maintenance activity and the effect of severance and direct
incremental merger-related costs recorded in the third quarter of 1997 also
contributed to the decrease in employee costs. These reductions were partially
offset by annual salary and wage increases for management and associate
employees, the effect of higher work force levels and an increase in overtime
pay.
Labor Contract Settlement
Associate employee wages, and pension and other benefits are determined
under contracts with unions representing associate employees of the Company. In
September 1998, the Communications Workers of America (CWA) ratified a new
2-year contract. The contract provides for wage increases of up to 3.8 percent
effective August 9, 1998, and up to 4 percent effective August 8, 1999. Pensions
will increase by 11 percent. Union-represented employees are eligible for
standard cash awards of $400 for 1998 and $500 for 1999, which can be increased
or decreased based on financial and customer care performance results. The new
contract also includes other benefit improvements and certain employment
security provisions.
On October 9, 1998, the Company reached a tentative agreement with the
International Brotherhood of Electrical Workers (IBEW) on a two-year extension
of the current contract. Under the tentative agreement, the current contract,
which expires on August 5, 2000, will be extended to August 10, 2002. Wages will
increase by 4.8 percent in April 1999, 3 percent in May 2000, and 3 percent in
May 2001. Pensions will increase by 11 percent, and there will be improvements
in a variety of other benefits and working conditions. The IBEW will submit the
contract to its members for ratification by November 20, 1998.
DEPRECIATION AND AMORTIZATION
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(33.2) (5.8)%
- --------------------------------------------------------------------------------
Depreciation and amortization expense decreased in the first nine months of
1998 over the same period in 1997 as a result of the recording of a write-down
of obsolete fixed assets in the third quarter of 1997. The effect of lower rates
of depreciation and amortization also contributed to the decrease in expense.
These decreases were partially offset by additional expense resulting from
growth in depreciable telephone plant.
TAXES OTHER THAN INCOME
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(70.0) (44.5)%
- --------------------------------------------------------------------------------
Taxes other than income consist principally of taxes for gross receipts,
property, capital stock and business licenses.
The decrease in taxes other than income was largely attributable to the
enactment of a New Jersey tax law that repealed the gross receipts tax
applicable to telephone companies and extended the net-income-based corporate
business tax to include telephone companies formerly subject to the gross
receipts tax. This state tax law change, which became effective on January 1,
1998, resulted in the reduction of gross receipts tax of approximately $55
million in the first nine months of 1998. This reduction was offset by the
recognition of state income taxes of approximately $64 million attributable to
the enactment of the law. A reduction in property taxes resulting from lower
property assessments also contributed to the decrease in taxes other than
income.
11
<PAGE>
Bell Atlantic - New Jersey, Inc.
OTHER OPERATING EXPENSES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(38.1) (4.5)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from NSI, rent, network software costs, the
provision for uncollectible accounts receivable, and other costs.
As a result of the transfer of directory publishing activities, certain
direct and allocated expenses related to the activities transferred are no
longer incurred by the Company.
The decrease in other operating expenses was largely attributable to the
transfer of directory publishing activities, as described earlier, and lower
costs for contract services. The reduction in contract services was primarily
due to the disposition of Bell Atlantic's ownership interest in Bell
Communications Research Inc. (Bellcore) in November 1997. The Company continues
to contract with Bellcore for technical and support services, but to a lesser
extent in 1998. The effect of merger-related costs and other special items
recorded in the third quarter of 1997 also contributed to the decrease in other
operating expenses. These charges were comprised of costs to consolidate certain
redundant real estate properties, video-related charges, the Company's allocated
share of employee severance costs, direct incremental and transition merger-
related costs and charges associated with the write-down of obsolete fixed
assets, and other miscellaneous expense items.
These decreases were partially offset by the Company's contribution to the
federal universal service fund described earlier, higher network software
purchases and higher centralized services expenses allocated from NSI. The rise
in centralized services expenses was primarily caused by transition and
integration costs allocated to the Company in connection with the merger of Bell
Atlantic and NYNEX Corporation, partially offset by lower pension and benefit
costs incurred by NSI. Higher costs for materials and rent and higher
interconnection charges for terminating calls on the networks of competitive
local exchange and other carriers further offset the decreases in other
operating expenses.
OTHER INCOME, NET
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $1.6 69.6%
- --------------------------------------------------------------------------------
The change in other income, net, was attributable to the recognition of
interest income in connection with the settlement of tax-related matters and the
recognition of a gain on the disposition of certain property in April 1998.
INTEREST EXPENSE
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $3.0 4.0%
- --------------------------------------------------------------------------------
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 increased principally due to the effect of higher levels
of average short-term debt. This increase was partially offset by higher
capitalized interest costs resulting from higher levels of average telephone
plant under construction.
12
<PAGE>
Bell Atlantic - New Jersey, Inc.
EFFECTIVE INCOME TAX RATES
Nine Months Ended September 30
- --------------------------------------------------------------------------------
1998 40.9%
- --------------------------------------------------------------------------------
1997 21.3%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. The Company's
effective income tax rate was higher in the first nine months of 1998 as a
result of adjustments to deferred income tax balances recorded in 1997 and the
recognition of state income taxes in 1998, both as a result of the
aforementioned change in the state tax law in New Jersey.
FINANCIAL CONDITION
- -------------------
The Company uses the net cash generated from operations and from external
financing to fund capital expenditures for network expansion and modernization,
and to pay dividends. While current liabilities exceeded current assets at both
September 30, 1998 and 1997 and December 31, 1997, the Company's 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 the Company's capital structure to ensure financial
flexibility.
As of September 30, 1998, the Company had $139.5 million of an unused line
of credit with an affiliate, Bell Atlantic Network Funding Corporation, and
$410.5 million of available borrowings outstanding. In addition, the Company had
$50.0 million remaining under a shelf registration statement filed with the
Securities and Exchange Commission for the issuance of unsecured debt
securities. The debt securities of the Company continue to be accorded high
ratings by primary rating agencies. Subsequent to the announcement of the Bell
Atlantic - GTE merger, rating agencies have maintained current credit ratings,
but have placed the ratings of the Company under review for potential downgrade.
In a subsequent and unrelated event, Moody's Investor Services changed its
methodology for rating diversified U.S. Telecommunications Companies. As a
result, the debt rating of the Company was downgraded to reflect this new rating
methodology.
The Company's debt ratio was 48.0% as of September 30, 1998, compared to
48.8% as of September 30, 1997 and 50.7% as of December 31, 1997.
On November 2, 1998, the Company declared and paid a dividend in the amount
of $114.0 million to Bell Atlantic.
13
<PAGE>
Bell Atlantic - New Jersey, Inc.
OTHER MATTERS
- -------------
Year "2000" Update
Bell Atlantic's comprehensive program to evaluate and address the impact of
the Year 2000 date transition on its operations, including those of the Company,
includes steps to (a) inventory and assess for Year 2000 compliance its
equipment, software and systems, (b) determine which items will be remediated,
replaced or retired, and establish a plan to accomplish these steps, (c)
remediate, replace or retire the items, (d) test the items, where required, and
(e) provide management with reporting and issues management to support a
seamless transition to the Year 2000.
State of Readiness
For Bell Atlantic's operating telephone subsidiaries, centralized services
entities and general corporate operations, the program focuses on the following
project groups: Network Elements, Application Systems, and Information
Technology Infrastructure. As of September 30, 1998, the inventory, assessment
and detailed planning phases for these projects have been completed or virtually
completed, and remediation/replacement/retirement and testing activities are
well underway. The inventory items that were not assessed as Year 2000 compliant
and that require action to avoid service impact are to be fixed, replaced, or
retired. Bell Atlantic's goal for these operations is to have its network and
any other mission critical systems Year 2000 compliant (including testing) by
June 30, 1999. Below is a more detailed breakdown of the efforts to date:
Network Elements - Approximately 350 different types of network elements
----------------
(such as central office switches) appearing in over one hundred thousand
instances. When combined in various ways and using network application
systems, these elements are the building blocks of customer services and
networked information transmission of all kinds. Approximately 70% of these
element types, representing over 90% of all deployed network elements, were
originally assessed as Year 2000 compliant. Of the deployed network
elements requiring remediation, approximately 38% have been repaired or
replaced as of September 30, 1998 and certification testing/evaluation is
well underway. Bell Atlantic has also made substantial progress on the
remaining network elements and is on track to make its June 30, 1999
objectives in this area.
Application Systems - Approximately 1,200 application systems supporting:
-------------------
(i) network and customer service provisioning, network and service
administration and maintenance, (ii) customer care and billing functions,
and (iii) human resources, finance and general corporate functions.
Approximately 48% of these application systems were originally assessed
compliant or to be retired. As of September 30, 1998, approximately 45% of
all application systems have successfully completed certification
testing/evaluation or have been retired. Bell Atlantic has made substantial
progress on the remaining application systems and is on track to make its
June 30, 1999 objectives in this area.
Information Technology Infrastructure - Approximately 40 mainframe, 1,000
-------------------------------------
mid-range, and 90,000 personal computers, and related network components
and software products that compose the corporation's information technology
(IT) infrastructure. There are approximately 1,350 unique types of elements
in the inventory for the IT infrastructure, of which approximately 73% were
originally assessed as compliant or to be retired. As of September 30 1998,
approximately 49% of all element types have successfully completed
certification testing/evaluation or have been retired. Bell Atlantic has
made substantial progress on the remaining items and is on track to make
its June 30, 1999 objective in this area.
For Bell Atlantic's other controlled or majority-owned subsidiaries,
including Bell Atlantic Mobile (BAM) and its Information Services Group (ISG)
companies, the inventory, assessment and planning efforts are substantially
complete, and remediation/replacement/retirement and testing activities are in
progress. BAM, ISG, and, in general, all of the other controlled or
majority-owned subsidiaries are on track to have their mission critical systems
compliant by the end of June 1999.
Bell Atlantic's Year 2000 program also includes a project to review and
remediate affected systems (including those with embedded technology) within its
buildings and other facilities, a project to assure Year 2000 compliance across
all of its internal business processes, and other specific projects directed
towards insuring it meets its Year 2000 objectives.
14
<PAGE>
Bell Atlantic - New Jersey, Inc.
Third Party Issues
Vendor Issues
-------------
In general, Bell Atlantic's product vendors have made available either Year
2000-compliant versions of their offerings or new compliant products as
replacements of discontinued offerings. In most cases, the compliance "status"
of the product in question is based on vendor-provided information, which
remains subject to Bell Atlantic's testing and verification activities. In
several instances, vendors have not met original delivery schedules, resulting
in delayed testing and deployment. At this time, Bell Atlantic does not
anticipate that such delays will have a material impact on its ability to
achieve Year 2000 compliance within its desired timeframes. Bell Atlantic is
continuing Year 2000-related discussions with utilities and similar services
providers. In general, information requests to such service providers have
yielded less meaningful information than inquiries to its product vendors. As a
result, Bell Atlantic cannot yet determine the Year 2000 readiness of most key
utilities and similar services providers or the likelihood that those providers
will successfully complete the Year 2000 transition. Bell Atlantic intends to
monitor critical service provider activities, as appropriate, through the
completion of their respective remediation projects.
Some of Bell Atlantic's vendors continue to express concerns about
providing information on the status of the Year 2000 compliance efforts for
their products or services, citing factors such as liability concerns,
logistical complexity and possible adverse customer relations. Although known
gaps in Bell Atlantic's information gathering efforts are relatively small in
comparison to the voluminous data already received, some of the information
still required relates to important items, such as test plans and detailed
results. Bell Atlantic will continue to pursue all appropriate measures with its
vendors in order to resolve information sharing issues, and anticipates that the
recently enacted Year 2000 Information and Readiness Disclosure Act will have a
positive impact on information sharing by its vendors.
Customer Issues
---------------
Bell Atlantic's customers remain keenly interested in the progress of its
Year 2000 efforts, and it anticipates increased demand for information,
including detailed testing data and company-specific responses. Bell Atlantic is
providing limited warranties of Year 2000 compliance for certain new
telecommunications services and other offerings, but it does not expect any
resulting warranty costs to be material.
Interconnecting Carriers
------------------------
Bell Atlantic's network operations interconnect with domestic and
international networks of other carriers. If one of these interconnecting
carriers should fail or suffer adverse impact from a Year 2000 problem, Bell
Atlantic's customers could experience impairment of service.
Costs
From the inception of Bell Atlantic's Year 2000 project through September
30, 1998, and based on the cost tracking methods it has historically applied,
Bell Atlantic has incurred total pre-tax expenses of approximately $95 million
($70 million of which was incurred in the nine months ended September 30, 1998),
and it has made capital expenditures of approximately $80 million (all of which
was made in the nine months ended September 30, 1998).
For the years 1998 and 1999, Bell Atlantic expects to incur total pre-tax
expenses for its Year 2000 project of approximately $200 million to $300 million
and total capital expenditures of $200 million to $250 million.
Bell Atlantic has investments in various joint ventures and other
interests. At this time, Bell Atlantic does not anticipate that the impact of
any Year 2000 remediation costs that they incur will be material to its results
of operations.
15
<PAGE>
Bell Atlantic - New Jersey, Inc.
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of Bell Atlantic's normal business functions
or operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition; however, it considers such a
likelihood remote. Due to the uncertainty inherent in other Year 2000 issues
that are ultimately beyond Bell Atlantic's control, including, for example, the
final Year 2000 readiness of its suppliers, customers, interconnecting carriers,
and joint venture and investment interests, it is unable to determine at this
time the likelihood of a material impact on its results of operations, liquidity
or financial condition, due to such Year 2000 issues. However, Bell Atlantic is
taking appropriate prudent measures to mitigate that risk. Bell Atlantic
anticipates that, in the event of any material interruptions or failures of its
service resulting from actual or perceived Year 2000 problems within or beyond
its control, it could be subject to third party claims.
Contingency Plans
As a public telecommunications carrier, Bell Atlantic has had considerable
experience successfully dealing with natural disasters and other events
requiring contingency planning and execution. As part of Bell Atlantic's efforts
to develop appropriate Year 2000 contingency plans, it is reviewing its existing
Emergency Preparedness and Disaster Recovery plans for any necessary
modifications.
Bell Atlantic has developed, where appropriate, contingency plans for
addressing delays in remediation activities. For example, delay in the
installation of a new Year 2000 compliant system could require remediation of
the existing system. It is also developing a corporate Year 2000 contingency
plan to ensure that core business functions and key support processes are in
place for uninterrupted processing and service, in the event of external (e.g.
power, public transportation, water), internal or supply chain failures (i.e.
critical dependencies on another entity for information, data or services). Bell
Atlantic anticipates that an initial draft of its corporate contingency plan
will be ready in the first quarter of 1999.
16
<PAGE>
Bell Atlantic - New Jersey, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 1998.
17
<PAGE>
Bell Atlantic - New Jersey, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BELL ATLANTIC - NEW JERSEY, INC.
Date: November 10, 1998 By /s/ Edwin F. Hall
------------------------------------
Edwin F. Hall
Chief Financial Officer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 4, 1998.
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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