<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, 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 1-3488
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
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $34.9,
$38.5, $108.0 and $100.4 from affiliates) $946.9 $906.0 $2,786.2 $2,694.3
---------------------------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 155.2 151.0 491.8 493.1
Depreciation and amortization 193.7 183.1 568.5 538.4
Other (including $156.6, $194.6
$498.6 and $550.3 to affiliates) 277.6 300.4 845.3 896.2
---------------------------------------------------------
626.5 634.5 1,905.6 1,927.7
---------------------------------------------------------
OPERATING INCOME 320.4 271.5 880.6 766.6
OTHER INCOME, NET (including $.1, $0,
$.2 and $0 from affiliate) .3 1.0 1.7 3.9
INTEREST EXPENSE (including $6.6,
$6.6, $17.8 and $18.4 to affiliate) 28.1 26.1 82.2 78.9
---------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 292.6 246.4 800.1 691.6
PROVISION FOR INCOME TAXES 119.2 100.8 325.0 282.7
---------------------------------------------------------
NET INCOME $173.4 $145.6 $ 475.1 $ 408.9
=========================================================
</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,
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments $ -- $ 57.5
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $80.4 and $84.1 730.2 717.7
Affiliates 14.7 17.7
Material and supplies 15.8 21.1
Prepaid expenses 35.2 114.7
Deferred income taxes .5 2.8
Other 8.6 7.2
----------------------------------------------------
805.0 938.7
----------------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 10,928.3 10,434.0
Less accumulated depreciation 6,410.5 6,083.9
----------------------------------------------------
4,517.8 4,350.1
----------------------------------------------------
OTHER ASSETS 222.3 141.2
----------------------------------------------------
TOTAL ASSETS $ 5,545.1 $ 5,430.0
====================================================
</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,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 470.4 $ 460.2
Other 156.2 155.9
Accounts payable and accrued liabilities:
Affiliates 263.1 313.3
Other 501.5 447.3
Other liabilities 122.7 116.7
---------------------------------------------------
1,513.9 1,493.4
---------------------------------------------------
LONG-TERM DEBT 1,128.5 1,133.0
---------------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 593.5 697.0
---------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 163.7 99.7
Unamortized investment tax credits 22.7 24.8
Other 133.7 123.3
---------------------------------------------------
320.1 247.8
---------------------------------------------------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value, owned by parent 1,381.2 1,381.2
Reinvested earnings 608.2 477.9
Accumulated other comprehensive loss (.3) (.3)
---------------------------------------------------
1,989.1 1,858.8
---------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $5,545.1 $5,430.0
===================================================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
Bell Atlantic - New Jersey, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $1,004.0 $ 957.9
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 57.5 51.1
Additions to plant, property and equipment (714.5) (741.6)
Other, net (.9) (2.8)
---------------------------------------------
Net cash used in investing activities (657.9) (693.3)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations (4.4) (3.9)
Net change in note payable to affiliate 10.2 (16.9)
Dividends paid (345.0) (239.6)
Net change in outstanding checks drawn
on controlled disbursement accounts (6.9) (4.2)
---------------------------------------------
Net cash used in financing activities (346.1) (264.6)
---------------------------------------------
NET CHANGE IN CASH --- ---
CASH, BEGINNING OF PERIOD --- ---
---------------------------------------------
CASH, END OF PERIOD $ --- $ ---
=============================================
</TABLE>
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. is a wholly owned subsidiary of Bell
Atlantic Corporation (Bell Atlantic). The accompanying unaudited condensed
financial statements have been prepared based upon Securities and Exchange
Commission rules that permit reduced disclosure for interim periods. These
financial statements reflect all adjustments that are necessary for a fair
presentation of results of operations and financial position for the interim
periods shown including normal recurring accruals. The results for the interim
periods are not necessarily indicative of results for the full year. For a more
complete discussion of significant accounting policies and certain other
information, you should refer to the financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 1998.
We have reclassified certain amounts from the prior year's data to conform to
the 1999 presentation.
2. Dividend
On November 1, 1999, we declared and paid a dividend in the amount of $98.1
million to Bell Atlantic.
3. Transfer of Directory Publishing Activities
On March 1, 1998, we transferred, at net book value without gain or loss,
certain assets and liabilities associated with our directory publishing
activities to a newly formed, wholly owned subsidiary. The stock of the newly
formed, wholly owned subsidiary was immediately distributed to Bell Atlantic.
The transfer of such assets and liabilities was completed as part of our and
Bell Atlantic's response to the requirements of the Telecommunications Act of
1996, which prohibits us from engaging in electronic publishing or joint sales
and marketing of electronic products.
Net assets that we transferred 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 directory publishing activities we transferred were
approximately $47 million for the nine months ended September 30, 1998. Direct
expenses related to the directory publishing activities we transferred were
approximately $18 million for the same period. We do 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, we no longer earned revenues from directory
publishing activities that we transferred, and we no longer incurred the related
expenses. We continue to earn certain other revenues, primarily fees for
nonpublication of telephone numbers and multiple white page listings.
Additionally, contracts between us 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 us.
4. New Accounting Standards
Costs of Computer Software
Effective January 1, 1999, we adopted Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under SOP No. 98-1, we capitalize the cost of internal-use
software which has a useful life in excess of one year. Subsequent additions,
modifications or upgrades to internal-use software are capitalized only to the
extent that they allow the software to perform a task it previously did not
perform. Software maintenance and training costs are expensed in the period in
which they are incurred. Also, we capitalize interest associated with the
development of internal-use software. The effect of adopting SOP No. 98-1 for
Bell Atlantic was an increase in net income of approximately $175 million for
the nine months ended September 30, 1999.
5
<PAGE>
Bell Atlantic - New Jersey, Inc.
Costs of Start-Up Activities
Effective January 1, 1999, we adopted SOP No. 98-5, "Reporting on the Costs
of Start-up Activities." Under this accounting standard, we expense costs of
start-up activities as incurred, including pre-operating, pre-opening and other
organizational costs. The adoption of SOP No. 98-5 did not have a material
effect on our results of operations or financial condition because we have not
historically capitalized start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that
all derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year.
Under the amended pronouncement, we must adopt SFAS No. 133 no later than
January 1, 2001. 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.
5. Shareowner's Investment
<TABLE>
<CAPTION>
Accumulated
Other
Common Reinvested Comprehensive
(Dollars in Millions) Stock Earnings Loss
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1998 $1,381.2 $ 477.9 $(.3)
Net income 475.1
Dividends paid to Bell Atlantic (345.0)
Other .2
------------------------------------------------------------
Balance at September 30, 1999 $1,381.2 $ 608.2 $(.3)
============================================================
</TABLE>
Net income and comprehensive income were the same for the nine months ended
September 30, 1999 and 1998.
6. Debt
On November 15, 1999, $150.0 million of our long-term debt, bearing interest
at 7.85% will become redeemable at the option of the holders. We received
notification on October 15, 1999, that $.1 million of this debt will be redeemed
at a redemption price equal to 100% of the face value plus accrued interest. The
loss on the redemption of this debt is not expected to be material to results of
operations or financial condition.
7. Litigation and Other Contingencies
Various legal actions and regulatory proceedings are pending to which we are
a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters that we currently deem to be probable and
estimable. We do not expect that the ultimate resolution of pending regulatory
and legal matters in future periods will have a material effect on our financial
condition, but it could have a material effect on our results of operations.
8. Proposed Bell Atlantic - GTE Merger
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
It is expected that the merger will qualify as a pooling of interests, which
means that for accounting and financial reporting purposes the companies will be
treated as if they had always been combined. At annual meetings held in May
1999, the shareholders of each company approved the merger. The completion of
the merger is subject to a number of conditions, including certain regulatory
approvals and receipt of opinions that the merger will be tax-free.
Bell Atlantic and GTE are working diligently to complete the merger and are
targeting completion of the merger around the end of the first quarter of 2000.
However, the companies must obtain the approval of a variety of state and
federal regulatory agencies and, given the inherent uncertainties of the
regulatory process, the closing of the merger may be delayed.
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
- ---------------------
We reported net income of $475.1 million for the nine months ended September
30, 1999, compared to net income of $408.9 million for the same period in 1998.
Our results for 1999 and 1998 were affected by special items. The special
items in both periods include our allocated share of charges from Bell Atlantic
Network Services, Inc. (NSI). Results for 1998 also included the effect of
transferring certain assets and liabilities of our directory publishing
activities to a subsidiary, as described below.
The following table shows how special items are reflected in our condensed
statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Millions)
Nine Months Ended September 30 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee Costs
Merger transition costs $ 1.7 $ .5
Other Operating Expenses
Merger transition costs --- 2.7
Allocated merger transition costs 7.6 6.4
Video-related charges --- 2.0
-----------------------------------
$ 9.3 $11.6
===================================
</TABLE>
Merger-related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax transition and integration costs of $9.3
million in the first nine months of 1999 and $9.6 million in the first nine
months of 1998.
Transition and integration costs consist of our proportionate share of costs
associated with integrating the operations of Bell Atlantic and NYNEX, such as
systems modifications costs and advertising and branding costs. Transition and
integration costs are expensed as incurred.
Video-related Charges
In 1998, we recorded $2.0 million related to the write-down of video-related
equipment.
Transfer of Directory Publishing Activities
On March 1, 1998, we transferred, at net book value without gain or loss,
certain assets and liabilities associated with our directory publishing
activities to a newly formed, wholly owned subsidiary. The stock of the newly
formed, wholly owned subsidiary was immediately distributed to Bell Atlantic.
The transfer of such assets and liabilities was completed as part of our and
Bell Atlantic's response to the requirements of the Telecommunications Act of
1996 (1996 Act), which prohibits us from engaging in electronic publishing or
joint sales and marketing of electronic products.
Net assets that we transferred 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 directory publishing activities we transferred were
approximately $47 million for the nine months ended September 30, 1998. Direct
expenses related to the directory publishing activities we transferred were
approximately $18 million for the same period. We do not separately identify
indirect expenses attributable to the directory publishing activities,
7
<PAGE>
Bell Atlantic - New Jersey, Inc.
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, we no longer earned revenues from directory
publishing activities that we transferred, and we no longer incurred the related
expenses. We continue to earn certain other revenues, primarily fees for
nonpublication of telephone numbers and multiple white page listings.
Additionally, contracts between us 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 us.
OPERATING REVENUE STATISTICS
- ----------------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
1999 1998 % Change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At September 30
- ---------------
Access Lines in Service (in thousands)
Residence 4,175 4,007 4.2%
Business 2,408 2,303 4.6
Public 93 95 (2.1)
------------------------------------
6,676 6,405 4.2
====================================
Nine Months Ended September 30
- ------------------------------
Access Minutes of Use (in millions) 25,723 23,943 7.4
====================================
</TABLE>
OPERATING REVENUES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Local services $1,227.9 $1,164.2
Network access services 957.1 878.9
Long distance services 375.1 384.3
Ancillary services 226.1 266.9
---------------------------------------
Total $2,786.2 $2,694.3
=======================================
</TABLE>
LOCAL SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $63.7 5.5%
- --------------------------------------------------------------------------------
Local services revenues are earned from the provision of local exchange,
local private line, public telephone (pay phone) and value-added services.
Value-added services are a family of services that expand the utilization of the
network. These services include products such as Caller ID, Call Waiting and
Return Call.
Local services 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 4.2% from September 30, 1998, and strong growth in
message volumes. Access line growth primarily reflects higher demand for
Centrex services and an increase in additional residential lines.
Local services revenue growth in 1999 also reflects strong customer demand
and usage of our data transport and digital services, as well as revenues from
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.
8
<PAGE>
Bell Atlantic - New Jersey, Inc.
These increases in local services 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.
NETWORK ACCESS SERVICES REVENUES
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $78.2 8.9%
- --------------------------------------------------------------------------------
Network access services revenues are earned from end-user subscribers and
long distance and other competing carriers who use our local exchange facilities
to provide services to their customers. Switched access revenues are derived
from fixed and usage-based charges paid by carriers for access to our local
network. Special access revenues originate from carriers and end-users that buy
dedicated local exchange capacity to support their private networks. End-user
access revenues are earned from our customers and from resellers who purchase
dial-tone services.
Network access services revenue growth in 1999 was mainly attributable to
higher customer demand, as reflected by growth in access minutes of use of 7.4%
from the same period in 1998. Volume growth also reflects a continuing
expansion of the business market, particularly for high-capacity services. In
1999, demand for special access services increased, reflecting a greater
utilization of our network. Higher network usage by alternative providers of
intraLATA toll services and higher end-user revenues attributable to an increase
in access lines in service further contributed to revenue growth this year.
In addition, revenues for 1999 include amounts received from customers for
the recovery of local number portability (LNP) costs. LNP allows customers to
change local exchange carriers while maintaining their existing telephone
numbers. In December 1998, the Federal Communications Commission (FCC) issued an
order permitting us to recover costs incurred for LNP in the form of monthly
end-user charges for a five-year period beginning in February 1999. LNP charges
contributed approximately $8 million to network access services revenues for the
nine month period ended September 30, 1999.
Volume-related growth was partially offset by net price reductions mandated
by a federal price cap plan. 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 $4 million on an annual
basis in connection with the FCC's Price Cap Plan. These rates will be in
effect through June 2000. Interstate price decreases were $14 million on an
annual basis for the period July 1998 through June 1999. The rates also 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 contribution
to the universal service fund is included in Other Operating Expenses. See
"Other Matters - FCC Regulation and Interstate Rates - Universal Service" for
additional information on universal service.
LONG DISTANCE SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(9.2) (2.4)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made to
points outside a customer's local calling area, but within our service area
(intraLATA toll). Other long distance services that we provide include 800
services, Wide Area Telephone Service (WATS), and corridor services (between
LATAs in southern New Jersey and Philadelphia and between LATAs in northern New
Jersey and New York City).
The decline in long distance services revenues was principally caused by the
competitive effects of presubscription for intraLATA toll services.
Presubscription permits customers to use an alternative provider of their choice
for intraLATA toll calls without dialing a special access code when placing a
call. In response to presubscription, we have implemented customer win-back and
retention initiatives that include toll calling discount packages and product
bundling offers. These revenue reductions were partially offset by additional
revenues generated from higher calling volumes.
9
<PAGE>
Bell Atlantic - New Jersey, Inc.
ANCILLARY SERVICES REVENUES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(40.8) (15.3)%
- --------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, collocation for competitive local
exchange carriers, usage of separately priced (unbundled) components of our
network by competitive local exchange carriers, facilities rentals to affiliates
and nonaffiliates, voice messaging, customer premises equipment (CPE) and wiring
and maintenance services, and sales of materials and supplies to affiliates.
As described earlier, we transferred certain assets and liabilities
associated with our directory publishing activities to a newly formed, wholly
owned subsidiary, effective March 1, 1998. As a result, we no longer earn
revenues associated with the directory publishing activities transferred.
Beginning March 1, 1998, our ancillary services revenues include directory
services revenues earned primarily from 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.
The decrease in ancillary services revenues in 1999 was principally due to
the effect of the transfer of directory publishing activities. The recognition
in 1998 of revenues associated with a marketing program and a decrease in
installation services revenues also contributed to the revenue decline, but to a
lesser extent.
These revenue reductions were partially offset by an increase in facilities
rental revenues from affiliates and higher payments from competitive local
exchange carriers for interconnection of their networks with our network and for
the purchase of unbundled network elements in 1999. Greater demand for voice
messaging services and billing and collection services also increased ancillary
services revenues.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes $ 491.8 $ 493.1
Depreciation and amortization 568.5 538.4
Other operating expenses 845.3 896.2
--------------------------------------
Total $1,905.6 $1,927.7
======================================
</TABLE>
EMPLOYEE COSTS
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(1.3) (.3)%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of NSI, who provide centralized services on a contract basis, are
allocated to us and are included in Other Operating Expenses.
Employee costs decreased in the first nine months of 1999 primarily as a
result of lower pension and benefit costs and the effect of lower work force
levels. The decreases in employee costs were substantially offset by annual
salary and wage increases for management and associate employees and higher
associate overtime pay for repair and maintenance activities due to severe
rainstorms in the third quarter of 1999.
The decline in pension and benefit costs was due to a number of factors,
principally, lower pension costs as a result of favorable pension plan
investment returns and changes in plan provisions and actuarial assumptions.
These factors were partially offset by increased health care costs caused by
inflation and benefit plan improvements provided for under new contracts with
associate employees.
10
<PAGE>
Bell Atlantic - New Jersey, Inc.
DEPRECIATION AND AMORTIZATION
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $30.1 5.6%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first nine months of
1999 over the same period in 1998 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The
adoption of Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" also contributed to
the increase in depreciation and amortization expense in the first nine months
of 1999, but to a lesser extent. Under this new accounting standard, computer
software developed or obtained for internal use is capitalized and amortized.
Previously, we expensed most of these software purchases as incurred. For
additional information on SOP No. 98-1, see Note 4 to the condensed financial
statements. These expense increases were partially offset by the effect of
lower rates of depreciation.
OTHER OPERATING EXPENSES
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(50.9) (5.7)%
- --------------------------------------------------------------------------------
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.
As a result of the transfer of directory publishing activities in March 1998,
we no longer incur certain direct and allocated expenses related to the
activities that we transferred.
The decrease in other operating expenses in the first nine months of 1999 was
largely attributable to lower centralized services expenses allocated from NSI,
primarily as a result of lower employee costs incurred by NSI. Other items
contributing to the decline in other operating expenses, but to a lesser extent,
were the effect of adopting SOP No. 98-1 and the transfer of directory
publishing activities.
These decreases were partially offset by higher costs for contracted services
and by 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 "Other Matters -
Telecommunications Act of 1996 - Reciprocal Compensation."
OTHER INCOME, NET
1999 - 1998 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(2.2) (56.4)%
- --------------------------------------------------------------------------------
The change in other income, net, was mainly attributable to additional
interest income in 1998 in connection with the settlement of tax-related matters
and lower interest income in 1999 from our short-term investments.
11
<PAGE>
Bell Atlantic - New Jersey, Inc.
INTEREST EXPENSE
1999 - 1998 Increase
- --------------------------------------------------------------------------------
Nine Months $3.3 4.2%
- --------------------------------------------------------------------------------
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 increased in the first nine months of 1999 over the same
period in 1998 principally due to a reduction in capitalized interest costs
primarily resulting from lower levels of average telephone plant under
construction. This increase was partially offset by the effect of lower
interest rates on average short-term debt.
EFFECTIVE INCOME TAX RATES
Nine Months Ended September 30
- --------------------------------------------------------------------------------
1999 40.6%
- --------------------------------------------------------------------------------
1998 40.9%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. Our effective income
tax rate was lower in the first nine months of 1999 principally due to
adjustments to federal and state income taxes recorded in 1999 and adjustments
to state deferred income taxes recorded in 1998.
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 September
30, 1999 and 1998 and December 31, 1998, our sources of funds, primarily from
operations and, to the extent necessary, from readily available financing
arrangements with an affiliate, are sufficient to meet ongoing operating
requirements. Management expects that presently foreseeable capital
requirements will continue to be financed primarily through internally generated
funds. Additional long-term debt may be needed to fund development activities
or to maintain our capital structure to ensure financial flexibility.
As of September 30, 1999, we had $329.6 million of an unused line of credit
with an affiliate, Bell Atlantic Network Funding Corporation. In May 1999, we
increased our shelf registration statement with the Securities and Exchange
Commission for the issuance of unsecured debt securities from $50.0 million to
$350.0 million. Our debt securities continue to be accorded high ratings by
primary rating agencies. Subsequent to the announcement of the Bell Atlantic -
GTE merger, rating agencies have maintained current credit ratings, but have
placed our ratings under review for potential downgrade.
Our debt ratio was 46.9% at September 30, 1999, compared to 48.0% at
September 30, 1998 and 48.5% at December 31, 1998.
On November 1, 1999, we declared and paid a dividend in the amount of $98.1
million to Bell Atlantic.
12
<PAGE>
Bell Atlantic - New Jersey, Inc.
OTHER MATTERS
- -------------
FCC Regulation and Interstate Rates
Price Caps
In May 1999, the U.S. Court of Appeals reversed the FCC's establishment of a
6.5% productivity factor in calculating the annual price cap index applied to
our interstate access rates. The court directed the FCC to reconsider and
explain the methods used in selecting the productivity factor. The court
granted the FCC a stay of its order, however, until April 1, 2000. As a result,
our annual price cap filing effective July 1, 1999 includes the effects of the
FCC's 6.5% productivity factor (see Operating Revenues - Network Access
Services).
The FCC has adopted rules for special access services that provide for added
pricing flexibility and ultimately the removal of services from price regulation
when certain competitive thresholds are met. The order also allows certain
services, including those included in the interexchange basket of services, to
be removed from price regulation immediately. In response, we have filed to
remove services in the interexchange basket from regulation, effective October
22, 1999. This will remove services with approximately $17 million in annual
revenues from price regulation and from the operation of the productivity offset
which otherwise would require annual price reductions.
Universal Service
On July 30, 1999, the U.S. Court of Appeals reversed certain aspects of the
FCC's universal service order. The universal service fund includes a multi-
billion dollar interstate fund to link schools and libraries to the Internet and
to subsidize low income consumers and rural healthcare provides. Previously,
under the FCC's rules, all providers of interstate telecommunications services
had to contribute to the schools and libraries fund based on their total
interstate and intrastate retail revenues. The court reversed the decision to
include intrastate revenues as part of the basis for assessing contributions to
that fund. As a result of this decision, our contributions to the universal
service fund will be reduced by approximately $13 million annually beginning on
November 1, 1999, and our interstate access rates will be reduced accordingly.
Telecommunications Act of 1996
Unbundling of Network Elements
The FCC recently announced its decision setting forth new unbundling
requirements. The FCC had previously identified seven elements that had to be
provided to competitors on an unbundled basis. With respect to those seven
elements, the FCC concluded that incumbent local exchange carriers, such as 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 ADSL does not have to be unbundled. On the other
hand, the FCC concluded that incumbents must provide dark fiber as an unbundled
element, and that sub-loop unbundling should be provided. Finally, the FCC ruled
that combinations of loops and transport, known as enhanced extended loops or
"EELs," must be made available under certain circumstances, but left to a
further rulemaking certain issues relating to the use of EELs to substitute for
special access services.
Reciprocal Compensation
Certain competitive local exchange carriers with which we have
interconnection agreements have requested payment for "reciprocal compensation"
to terminate calls on their networks, including a large volume of one-way
traffic from our customers to Internet service providers that are their
customers. In February 1999, the FCC confirmed that such traffic is largely
interstate but concluded that it would not interfere with state regulatory
decisions requiring payment of reciprocal compensation for such traffic and that
carriers are bound by their existing interconnection agreements. The FCC
tentatively concluded that future compensation arrangements for calls to
Internet service providers should be negotiated by carriers and arbitrated, if
necessary, before the state commissions under the terms of the 1996 Act. The
FCC has initiated a proceeding to consider, alternatively, the adoption of
federal rules to govern future inter-carrier compensation arrangements for this
traffic. We have asked the U.S. Court of Appeals to review the FCC's decision
that state commissions may require payment of reciprocal compensation for this
traffic. The New Jersey Board of Public Utilities recently decided that, in
view of the FCC decision, Internet-bound traffic is interstate and reciprocal
compensation does not apply.
13
<PAGE>
Bell Atlantic - New Jersey, Inc.
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.
Under the amended pronouncement, we must adopt SFAS No. 133 no later than
January 1, 2001. 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.
Year "2000" Update
Bell Atlantic is now in the final stages of its program to evaluate and
address the impact of the Year 2000 date transition on its subsidiaries'
operations, including our operations. This program has included steps to:
. inventory and assess for Year 2000 compliance our equipment, software and
systems;
. determine whether to remediate, replace or retire noncompliant items, and
establish a plan to accomplish these steps;
. remediate, replace or retire the items;
. test the items, where required; and
. provide management with reporting and issues management to support a
seamless transition to the Year 2000.
State of Readiness
For Bell Atlantic's operating telephone subsidiaries, centralized services
entities and general corporate operations, the program has focused on the
following project groups: Network Elements, Applications and Support Systems,
and Information Technology Infrastructure. Bell Atlantic's goal for these
operations was to have its network and other mission critical systems Year
2000 compliant (including testing) by June 30, 1999 and it substantially met
this goal. What follows is a more detailed breakdown of Bell Atlantic's
efforts to date.
. Network Elements
Approximately 350 different types of network elements (such as central office
switches) appear in over one hundred thousand instances. When combined in
various ways and using network application systems, these elements are the
building blocks of customer services and networked information transmission
of all kinds. Bell Atlantic originally assessed approximately 70% of these
element types, representing over 90% of all deployed network elements, as
Year 2000 compliant. As of November 1, 1999, Bell Atlantic has completed the
required repair/replacement for virtually all network elements requiring
remediation.
. Application and Support Systems
Bell Atlantic has approximately 1,200 application and systems that support:
(i) the administration and maintenance of its network and customer service
functions (network information systems); (ii) customer care and billing
functions; and (iii) human resources, finance and general corporate
functions. Bell Atlantic originally assessed approximately 48% of these
application and support systems as either compliant or to be retired. As of
November 1, 1999, Bell Atlantic has successfully completed the required
repair/replacement of virtually all mission critical application and support
systems.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
related network components, and software products comprise Bell Atlantic's
information technology (IT) infrastructure. Of the approximately 1,350
unique types of elements in the inventory for the IT infrastructure, Bell
Atlantic originally assessed approximately 73% as compliant or to be retired.
As previously reported, Bell Atlantic has successfully completed
remediation/replacement of all mission critical elements earlier this year.
Bell Atlantic's project to remediate/replace or retire mission critical
systems supporting buildings and other facilities used by its operating
telephone subsidiaries, such as HVAC, access control and alarm systems, is
now complete and its efforts to
14
<PAGE>
Bell Atlantic - New Jersey, Inc.
remediate/replace or retire any other Bell Atlantic mission critical system
used by those subsidiaries is virtually complete. Remediation/replacement or
retirement of non-mission critical systems, where applicable, and
supplemental testing and verification/correction activities, for both mission
critical and non-mission critical systems, are likely to continue throughout
the balance of 1999.
Third Party Issues
. Vendors
In general, Bell Atlantic's product vendors have made available either Year
2000-compliant versions of their offerings or new compliant products as
replacements of discontinued offerings. The compliance status of a given
product is typically determined using multiple sources of information,
including Bell Atlantic's own internal testing and analysis. However, in some
instances certification is based on detailed test results or similar
information provided by the product vendor and analysis by Bell Atlantic or
contractors specializing in this type of review. Bell Atlantic is also
continuing Year 2000-related discussions with utilities and similar services
providers. Although Bell Atlantic has received assurances and other
information suggesting that substantially all of its primary services
providers have completed or are well along in their respective Year 2000
projects, Bell Atlantic does not usually have sufficient access to or control
over the providers' systems and equipment to undertake verification efforts
as to such systems and equipment, and as a general matter, it would be
impractical to do so. Bell Atlantic has also participated in
interoperability testing of various mission critical network elements,
purchased from a number of vendors, through the Telco Year 2000 Forum, an
industry group comprised of leading local telecommunications services
companies. Bell Atlantic intends to monitor critical service provider
activities, as appropriate, through the remainder of 1999.
. Customers
Bell Atlantic's customers remain keenly interested in the progress of its
Year 2000 efforts, and it anticipates increased demand for information,
including detailed testing data and company-specific responses. Bell
Atlantic is providing limited warranties of Year 2000 compliance for certain
new telecommunications services and other offerings, but it does not expect
any resulting warranty costs to be material.
. Interconnecting Carriers
Bell Atlantic's network operations interconnect with domestic and
international networks of other carriers. If one of these interconnecting
carrier networks should fail or suffer adverse impact from a Year 2000
problem, Bell Atlantic's customers could experience impairment of service.
Bell Atlantic has participated in various internetworking testing efforts, as
a member of the Association for Telecommunications Industry Solutions (ATIS),
the Cellular Telecommunications Industry Association (CTIA) and the
International Telecommunications Union (ITU). Bell Atlantic intends to
monitor the activities of the primary interconnecting carriers through the
remainder of 1999.
Costs
From the inception of Bell Atlantic's Year 2000 project through September 30,
1999, and based on the cost tracking methods it has historically applied to this
project, Bell Atlantic has incurred total pre-tax expenses of approximately $211
million, and it has made capital expenditures of approximately $153 million.
For 1999, Bell Atlantic expects total pre-tax expenses for its Year 2000 project
not to exceed $125 million (approximately $89 million has been incurred through
September 30, 1999) and total capital expenditures not to exceed $100 million
(approximately $73 million has been made through September 30, 1999). Bell
Atlantic anticipates that the balance of the costs incurred for 1999 will be
primarily attributable to additional testing and verification/correction,
rollover transition management, contingency planning and repair/replacement of
non-mission critical systems. These cost estimates should not be used as the
sole gauge of progress on its Year 2000 project or as an indication of its Year
2000 readiness.
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of Bell Atlantic's normal business functions
or operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition; however, it considers such a
development 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
15
<PAGE>
Bell Atlantic - New Jersey, Inc.
of material interruption or failure of its service resulting from an actual or
perceived Year 2000 problem within or beyond its control, it could be subject to
third party claims.
Contingency Plans
As a public telecommunications carrier, Bell Atlantic has had considerable
experience successfully dealing with natural disasters and other events
requiring contingency planning and execution. Bell Atlantic's Year 2000
contingency plans are built upon its existing Emergency Preparedness and
Disaster Recovery plans.
Bell Atlantic will continue to fine-tune and test its corporate Year 2000
contingency plans to help ensure that core business functions and key support
processes will continue to function without material disruption, in the event of
external (e.g. power, public transportation, water), internal or supply chain
failures (i.e. critical dependencies on another entity for information, data or
services). Bell Atlantic's individual business unit contingency plans for Year
2000 are being integrated and coordinated under an enterprise wide command and
control structure.
16
<PAGE>
Bell Atlantic - New Jersey, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 1999.
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, 1999 By /s/ Edwin F. Hall
------------------------------------
Edwin F. Hall
Chief Financial Officer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 5, 1999.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 810
<ALLOWANCES> 80
<INVENTORY> 16
<CURRENT-ASSETS> 805
<PP&E> 10,928
<DEPRECIATION> 6,410
<TOTAL-ASSETS> 5,545
<CURRENT-LIABILITIES> 1,514
<BONDS> 1,129
0
0
<COMMON> 1,381
<OTHER-SE> 608
<TOTAL-LIABILITY-AND-EQUITY> 5,545
<SALES> 0
<TOTAL-REVENUES> 2,786
<CGS> 0
<TOTAL-COSTS> 1,906
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> 800
<INCOME-TAX> 325
<INCOME-CONTINUING> 475
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 475
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
