<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 1-8606
BELL ATLANTIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2259884
(State of Incorporation) (I.R.S. Employer
Identification No.)
1095 AVENUE OF THE AMERICAS 10036
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER (212) 395-2121
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
---
At September 30, 1998, 1,552,276,989 shares of the registrant's Common Stock
were outstanding, after deducting 23,969,336 shares held in treasury.
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Item No. Page
Part I. Financial Information
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
1. Financial Statements
Condensed Consolidated Statements of Income
For the three and nine months ended September 30, 1998 and 1997............................... 2-3
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997..................................................... 4-5
Condensed Consolidated Statement of Changes in Shareowners' Investment
For the nine months ended September 30, 1998.................................................. 6
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998, and 1997........................................ 7
Notes to Condensed Consolidated Financial Statements............................................ 8 -13
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................... 14-32
3. Quantitative and Qualitative Disclosures About Market Risk........................................ 32
Part II. Other Information
- ----------------------------------------------------------------------------------------------------------------------
1. Legal Proceedings................................................................................. 33
6. Exhibits and Reports on Form 8-K.................................................................. 33
</TABLE>
1
<PAGE>
- --------------------------------------------------------------------------------
Part I - Financial Information
- --------------------------------------------------------------------------------
Item 1. Financial Statements
- --------------------------------------------------------------------------------
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING REVENUES ................................................................... $ 7,909.9 $ 7,373.9
---------- ----------
OPERATING EXPENSES
Employee costs, including benefits and taxes ......................................... 2,792.0 2,337.8
Depreciation and amortization ........................................................ 1,469.8 1,724.0
Taxes other than income .............................................................. 383.3 475.2
Other ................................................................................ 2,134.7 2,415.9
---------- ---------
6,779.8 6,952.9
---------- ---------
OPERATING INCOME ..................................................................... 1,130.1 421.0
Loss from Unconsolidated Businesses .................................................. (459.9) (121.5)
Other Income and (Expense), Net ...................................................... 43.9 (13.0)
Interest Expense ..................................................................... 358.7 298.1
---------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM ............... 355.4 (11.6)
Provision for Income Taxes ........................................................... 362.6 68.5
---------- ---------
LOSS BEFORE EXTRAORDINARY ITEM ....................................................... (7.2) (80.1)
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax .......................................... (.9) ---
---------- ---------
NET LOSS.............................................................................. $ (8.1) $ (80.1)
========== ==========
BASIC LOSS PER COMMON SHARE
Loss before extraordinary item ....................................................... $ (.01) $ (.05)
Extraordinary item ................................................................... --- ---
---------- ---------
Net Loss ............................................................................. $ (.01) $ (.05)
========== ==========
Weighted-average shares outstanding (in millions) .................................... 1,552.9 1,552.8
========== ==========
DILUTED LOSS PER COMMON SHARE
Loss before extraordinary item ....................................................... $ (.01) $ (.05)
Extraordinary item ................................................................... --- ---
---------- ---------
Net Loss.............................................................................. $ (.01) $ (.05)
========== ==========
Weighted-average shares - diluted (in millions) ...................................... 1,552.9 1,552.8
========== ==========
Dividends declared per common share .................................................. $ .385 $ .385
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING REVENUES ................................................................... $ 23,488.8 $ 22,498.2
---------- ----------
OPERATING EXPENSES
Employee costs, including benefits and taxes ......................................... 7,212.4 6,956.9
Depreciation and amortization ........................................................ 4,326.1 4,459.1
Taxes other than income .............................................................. 1,134.9 1,252.4
Other ................................................................................ 6,020.7 6,102.4
---------- ----------
18,694.1 18,770.8
---------- ----------
OPERATING INCOME ..................................................................... 4,794.7 3,727.4
Loss from Unconsolidated Businesses .................................................. (462.6) (236.9)
Other Income and (Expense), Net ...................................................... 99.5 (19.5)
Interest Expense ..................................................................... 1,031.8 918.7
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM ...................... 3,399.8 2,552.3
Provision for Income Taxes ........................................................... 1,470.2 1,037.4
---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM ..................................................... 1,929.6 1,514.9
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax .......................................... (23.4) ---
---------- ----------
NET INCOME ........................................................................... 1,906.2 1,514.9
Redemption of investee preferred stock ............................................... (2.5) ---
---------- ----------
NET INCOME AVAILABLE TO COMMON SHAREOWNERS ........................................... $ 1,903.7 $ 1,514.9
========== ==========
BASIC EARNINGS PER COMMON SHARE*
Income before extraordinary item ..................................................... $ 1.24 $ .98
Extraordinary item ................................................................... (.01) ---
---------- ----------
Net Income ........................................................................... $ 1.23 $ .98
========== ==========
Weighted-average shares outstanding (in millions) .................................... 1,552.9 1,551.5
========== ==========
DILUTED EARNINGS PER COMMON SHARE*
Income before extraordinary item ..................................................... $ 1.22 $ .97
Extraordinary item ................................................................... (.01) ---
---------- ----------
Net Income ........................................................................... $ 1.21 $ .97
========== ==========
Weighted-average shares - diluted (in millions) ...................................... 1,576.8 1,567.1
========== ==========
Dividends declared per common share .................................................. $ 1.155 $ 1.125
========== ==========
</TABLE>
* For purposes of computing earnings per share amounts, income before
extraordinary item and net income have been reduced by the amount of the
premium paid on the redemption of preferred stock by an equity investee.
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions)
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .......................................................... $ 620.8 $ 322.8
Short-term investments ............................................................. 163.7 720.6
Accounts receivable, net of allowances of $616.0 and $611.9 ........................ 6,424.1 6,340.8
Inventories ........................................................................ 571.2 550.3
Prepaid expenses ................................................................... 592.1 634.0
Other .............................................................................. 535.2 432.3
----------- -----------
8,907.1 9,000.8
----------- -----------
PLANT, PROPERTY AND EQUIPMENT ...................................................... 81,714.6 77,437.2
Less accumulated depreciation ...................................................... 45,487.3 42,397.8
----------- -----------
36,227.3 35,039.4
----------- -----------
INVESTMENTS IN UNCONSOLIDATED BUSINESSES ........................................... 4,846.5 5,144.2
OTHER ASSETS ....................................................................... 5,017.4 4,779.7
----------- -----------
TOTAL ASSETS ....................................................................... $ 54,998.3 $ 53,964.1
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
- ----------------------------------------------------------
Liabilities and Shareowners' Investment
- ----------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year .................................................... $ 1,924.3 $ 6,342.8
Accounts payable and accrued liabilities ......................................... 6,254.1 5,966.4
Other ............................................................................ 1,399.3 1,355.0
----------- -----------
9,577.7 13,664.2
----------- -----------
LONG-TERM DEBT ................................................................... 18,200.9 13,265.2
----------- -----------
EMPLOYEE BENEFIT OBLIGATIONS ..................................................... 10,437.9 10,004.4
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ............................................................ 2,120.4 2,106.2
Unamortized investment tax credits ............................................... 229.0 250.7
Other ............................................................................ 697.6 772.6
----------- -----------
3,047.0 3,129.5
----------- -----------
MINORITY INTEREST, INCLUDING A PORTION SUBJECT TO
REDEMPTION REQUIREMENTS ........................................................ 930.2 911.2
----------- -----------
PREFERRED STOCK OF SUBSIDIARY .................................................... 200.5 200.5
----------- -----------
SHAREOWNERS' INVESTMENT
Series preferred stock ($.10 par value; none issued) ............................. --- ---
Common stock ($.10 par value; 1,576,246,325 shares and
1,576,052,790 shares issued) .................................................. 157.6 157.6
Contributed capital .............................................................. 13,303.7 13,176.8
Reinvested earnings .............................................................. 1,064.0 1,261.6
Accumulated other comprehensive loss ............................................. (719.8) (553.3)
----------- -----------
13,805.5 14,042.7
Less common stock in treasury, at cost ........................................... 632.7 590.5
Less deferred compensation - employee stock ownership plans ...................... 568.7 663.1
----------- -----------
12,604.1 12,789.1
----------- -----------
TOTAL LIABILITIES AND SHAREOWNERS' INVESTMENT .................................... $ 54,998.3 $ 53,964.1
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareowners' Investment
(Unaudited)
(Dollars in Millions and Shares in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------------
Shares Amount
---------- ----------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period........................................................ 1,576,053 $157.6
Shares issued:
Employee plans..................................................................... 193 ---
---------- ----------
Balance at end of period.............................................................. 1,576,246 157.6
---------- ----------
CONTRIBUTED CAPITAL
Balance at beginning of period........................................................ 13,176.8
Shares issued:
Employee plans..................................................................... 115.8
Issuance of stock by subsidiary....................................................... 11.1
----------
Balance at end of period.............................................................. 13,303.7
----------
REINVESTED EARNINGS
Balance at beginning of period........................................................ 1,261.6
Net income............................................................................ 1,906.2
Dividends declared.................................................................... (1,794.1)
Shares issued:
Employee plans..................................................................... (315.8)
Tax benefit of dividends paid to ESOPs................................................ 8.6
Redemption of investee preferred stock................................................ (2.5)
----------
Balance at end of period.............................................................. 1,064.0
----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period........................................................ (553.3)
Foreign currency translation adjustments, net of tax.................................. (177.0)
Unrealized gains on securities, net of tax............................................ 10.5
----------
Balance at end of period.............................................................. (719.8)
----------
TREASURY STOCK
Balance at beginning of period........................................................ 22,952 590.5
Shares purchased...................................................................... 16,787 784.4
Shares distributed:
Employee plans..................................................................... (15,741) (740.9)
Shareowner plans................................................................... (26) (1.2)
Acquisition agreements............................................................. (3) (.1)
---------- ----------
Balance at end of period.............................................................. 23,969 632.7
---------- ----------
DEFERRED COMPENSATION - ESOPs
Balance at beginning of period........................................................ 663.1
Amortization.......................................................................... (94.4)
----------
Balance at end of period.............................................................. 568.7
----------
TOTAL SHAREOWNERS' INVESTMENT......................................................... $ 12,604.1
==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................................... $ 1,906.2 $ 1,514.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................................... 4,326.1 4,459.1
Extraordinary item, net of tax .............................................. 23.4 ---
Loss from unconsolidated businesses ......................................... 462.6 236.9
Dividends received from unconsolidated businesses ........................... 128.6 145.9
Amortization of unearned lease income ....................................... (86.9) (80.2)
Deferred income taxes, net .................................................. (19.0) (173.3)
Investment tax credits ...................................................... (21.7) (59.9)
Other items, net ............................................................ 231.9 (39.3)
Changes in certain assets and liabilities, net of effects from
acquisition/disposition of businesses .................................... 399.2 (3.6)
----------- ----------
Net cash provided by operating activities ........................................ 7,350.4 6,000.5
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments ............................................. 560.4 175.4
Additions to plant, property and equipment ....................................... (5,421.3) (4,883.1)
Proceeds from sale of plant, property and equipment .............................. 2.8 1.6
Investment in leased assets ...................................................... (77.9) (109.2)
Proceeds from leasing activities ................................................. 139.2 62.0
Investment in notes receivable ................................................... (7.2) (32.8)
Proceeds from notes receivable ................................................... 20.8 34.1
Proceeds from Telecom Corporation of New Zealand Limited
share repurchase plan ......................................................... --- 114.6
Investments in unconsolidated businesses, net .................................... (529.0) (574.3)
Acquisition of businesses ........................................................ (61.9) ---
Proceeds from disposition of businesses .......................................... 20.8 360.6
Other, net ....................................................................... (55.0) 157.3
----------- ----------
Net cash used in investing activities ............................................ (5,408.3) (4,693.8)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings ......................................................... 6,105.1 436.0
Principal repayments of borrowings and capital lease obligations ................. (506.3) (505.7)
Early extinguishment of debt ..................................................... (650.0) ---
Net change in short-term borrowings with original
maturities of three months or less ............................................ (4,561.5) 1,031.3
Dividends paid ................................................................... (1,783.8) (1,768.3)
Proceeds from sale of common stock ............................................... 423.8 484.4
Purchase of common stock for treasury ............................................ (784.4) (564.4)
Minority interest ................................................................ --- (.1)
Reduction in preferred stock of subsidiary ....................................... --- (10.0)
Net change in outstanding checks drawn on controlled disbursement accounts ....... 113.0 (343.5)
----------- ----------
Net cash used in financing activities ............................................ (1,644.1) (1,240.3)
----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS ............................................ 298.0 66.4
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 322.8 249.4
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 620.8 $ 315.8
=========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
- --------------------------------------------------------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared based upon Securities and Exchange Commission rules that permit reduced
disclosure for interim periods. These financial statements reflect all
adjustments which are necessary for a fair presentation of results of operations
and financial condition for the interim periods shown including normal recurring
accruals. The results for the interim periods are not necessarily indicative of
results for the full year. For a more complete discussion of significant
accounting policies and certain other information, you should refer to the
financial statements included in our 1997 Annual Report to Shareowners.
In this report, Bell Atlantic Corporation and its consolidated
subsidiaries are referred to as "we" or "Bell Atlantic." Reference to Bell
Atlantic is also made in connection with information about Bell Atlantic prior
to the merger with NYNEX Corporation. NYNEX Corporation is referred to as
"NYNEX."
We have reclassified certain amounts from prior year's data to conform
with the 1998 presentation.
2. Common Stock Split
- --------------------------------------------------------------------------------
On May 1, 1998, the Board of Directors declared a two-for-one split of Bell
Atlantic common stock, effected in the form of a 100% stock dividend to
shareholders of record on June 1, 1998 and payable on June 29, 1998.
Shareholders of record received an additional share of common stock for each
share of common stock held at the record date. We retained the par value of $.10
per share for all shares of common stock. The prior period financial information
(including share and per share data) contained in this report has been adjusted
to give retroactive recognition to this common stock split.
3. Comprehensive Income
- --------------------------------------------------------------------------------
Effective January 1, 1998, we adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." The new rules
establish standards for the reporting of comprehensive income and its components
in financial statements. Comprehensive income consists of net income and other
gains and losses affecting shareowners' equity that, under generally accepted
accounting principles, are excluded from net income. For our company, such items
consist primarily of foreign currency translation gains and losses and
unrealized gains and losses on marketable equity investments. The adoption of
SFAS No. 130 did not affect our statement of income, but did affect the
presentation of our statement of changes in shareowners' investment and balance
sheet.
The components of total comprehensive income for interim periods are
presented in the following table:
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,
- --------------------- -------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (8.1) $ (80.1) $ 1,906.2 $ 1,514.9
-------- --------- ---------- ----------
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax 70.4 (35.6) (177.0) (209.1)
Unrealized gains (losses) on securities, net of tax (.8) 5.1 10.5 1.7
-------- --------- ---------- ----------
69.6 (30.5) (166.5) (207.4)
-------- --------- ---------- ----------
Total comprehensive income (loss) $ 61.5 $ (110.6) $ 1,739.7 $ 1,307.5
======== ========= ========== ==========
</TABLE>
8
<PAGE>
4. Earnings Per Share
- --------------------------------------------------------------------------------
The following table is a reconciliation of the numerators and denominators used
in computing earnings per share.
<TABLE>
<CAPTION>
Dollars and Shares in Millions, Except Per Share Amounts) Three Months Ended September 30, Nine Months Ended September 30,
- --------------------------------------------------------- -------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) Available to Common Shareowners:
Income (loss) before extraordinary item $ (7.2) $ (80.1) $ 1,929.6 $ 1,514.9
Redemption of investee preferred stock -- -- (2.5) --
------------ ------------ ------------ ---------
Income (loss) available to common shareowners* (7.2) (80.1) 1,927.1 1,514.9
Extraordinary item (.9) -- (23.4) --
------------ ------------ ------------ ---------
Net income (loss) available to common shareowners* $ (8.1) $ (80.1) $ 1,903.7 $ 1,514.9
============ ============ ============ =========
Basic Earnings (Loss) Per Common Share:
Weighted-average shares outstanding 1,552.9 1,552.8 1,552.9 1,551.5
------------ ------------ ------------ ---------
Income (loss) before extraordinary item per share - basic $ (.01) $ (.05) $ 1.24 $ .98
Extraordinary item -- -- (.01) --
------------ ------------ ------------ ---------
Earnings (loss) per share-basic $ (.01) $ (.05) $ 1.23 $ .98
============ ============= ============ =========
Diluted Earnings (Loss) Per Common Share:
Weighted-average shares outstanding 1,552.9 1,552.8 1,552.9 1,551.5
Effect of dilutive securities -- -- 23.9 15.6
------------ ------------ ------------ ---------
Weighted-average shares - diluted 1,552.9 1,552.8 1,576.8 1,567.1
------------ ------------ ------------ ---------
Income (loss) before extraordinary item per share - diluted $ (.01) $ (.05) $ 1.22 $ .97
Extraordinary item -- -- (.01) --
------------ ------------ ------------ ---------
Earnings (loss) per share-diluted $ (.01) $ (.05) $ 1.21 $ .97
============ ============ ============ =========
</TABLE>
*Income (loss) and Net income (loss) available to common shareowners is the same
for purposes of calculating basic and diluted earnings per share.
Stock options for 83.0 million and 86.7 million shares for the three month
periods ended September 30, 1998 and 1997, and 1.4 million and .9 million shares
for the nine month periods ended September 30, 1998 and 1997, were not included
in the diluted earnings (loss) per share computations because their impact would
be antidilutive.
5. Debt
- --------------------------------------------------------------------------------
In February 1998, our wholly owned subsidiary Bell Atlantic Financial Services,
Inc. (FSI) issued $2,455.0 million of 5.75% exchangeable notes (TCNZ
Exchangeable Notes) due on April 1, 2003. The notes are exchangeable into
ordinary shares of Telecom Corporation of New Zealand (TCNZ) at the option of
the holder beginning on September 1, 1999. The exchange price was established at
a 20% premium to the TCNZ share price at the pricing of the offering. Upon
exchange by investors, we retain the option to settle in cash or by delivery of
TCNZ shares. During the period from April 1, 2001 to March 31, 2002, the notes
are callable at our option at 102.3% of the principal amount, and thereafter and
prior to maturity at 101.15%. The proceeds of the offering were used for the
repayment of a portion of our short-term debt. We currently own 24.95% of TCNZ.
In August 1998, FSI issued $3,180.0 million of 4.25% exchangeable notes
(CWC Exchangeable Notes) due on September 15, 2005. The notes are exchangeable
into ordinary shares of Cable & Wireless Communications plc (CWC) at the option
of the holder beginning on July 1, 2002. The exchange price was established at a
28% premium to the CWC share price at the pricing of the offering. Upon exchange
by investors, we retain the option to settle in cash or by delivery of CWC
shares. The notes are redeemable at our option beginning September 15, 2002 at
escalating prices from 104.2% to 108.0% of the principal amount. If the notes
are not called or exchanged prior to maturity, they will be redeemable at 108.0%
of the principal amount at that time. The proceeds of the offering were used for
the repayment of a portion of our short-term debt and other general corporate
purposes. We currently own 18.5% of CWC.
9
<PAGE>
The TCNZ Exchangeable Notes have the benefit of a Support Agreement dated
February 1, 1998, and the CWC Exchangeable Notes have the benefit of a Support
Agreement dated August 26, 1998, both of which are between Bell Atlantic and
FSI. In the Support Agreements, Bell Atlantic guarantees the payment of
interest, premium (if any), principal and the cash value of exchange property
related to these notes should FSI fail to pay. Another Support Agreement between
Bell Atlantic and FSI dated October 1, 1992, guarantees payment of interest,
premium (if any) and principal on FSI's medium-term notes (aggregating $244.7
million at September 30, 1998) should FSI fail to pay. The holder's of FSI's
debt do not have recourse to the stock or assets of our operating telephone
subsidiaries or TCNZ; however, they do have recourse to dividends paid to Bell
Atlantic by any of our consolidated subsidiaries as well as assets not covered
by the exclusion. The carrying value of the available assets reflected in our
condensed consolidated financial statements was approximately $14 billion at
September 30, 1998.
Early Extinguishments of Long-Term Debt
At September 30, 1998, we had recognized extraordinary charges totaling $23.4
million (net of an income tax benefit of $12.8 million) associated with the
following early extinguishments of long-term debt.
. In January 1998, New York Telephone Company, an operating telephone
subsidiary, issued $250.0 million of 6.125% debentures due on January
15, 2010. The proceeds of this issuance were used in February 1998 to
redeem $200.0 million of 7.75% refunding mortgage bonds due in 2006.
Fiberoptic Link Around the Globe, Ltd., an affiliate accounted for
under the equity method, redeemed $615.0 million of debt at a premium
in February 1998. As a result of these redemptions, we recorded an
extraordinary charge of $16.2 million (net of an income tax benefit of
$8.8 million) in the first quarter of 1998.
. In April 1998, New York Telephone Company issued $250.0 million of
6.0% debentures due on April 15, 2008 and $100.0 million of 6.5%
debentures due on April 15, 2028. The proceeds of these issuances were
used in May 1998 to redeem $200.0 million of 7.875% debentures due in
2017 and $150.0 million of 7.5% refunding mortgage bonds due in 2009.
In June 1998, Bell Atlantic - West Virginia, Inc., another operating
telephone subsidiary, redeemed $40.0 million of 7.25% debentures due
in 2009. As a result of these redemptions, we recorded an
extraordinary charge of $6.3 million (net of an income tax benefit of
$3.3 million) in the second quarter of 1998.
. In August 1998, Bell Atlantic - Washington, D.C., Inc. redeemed $60.0
million of 7.75% debentures due in 2013. As a result of this
redemption, we recorded an extraordinary charge of $.9 million (net of
an income tax benefit of $.7 million) in the third quarter of 1998.
On October 26, 1998, Bell Atlantic - Pennsylvania, Inc. redeemed $125.0
million of 7.5% debentures due in 2013. On October 14, 1998, Bell Atlantic -
Delaware, Inc. announced that it will redeem $15.0 million of 7.75% debentures
due in 2013 on November 13, 1998. In connection with these redemptions, we will
record an extraordinary charge of approximately $2 million in the fourth quarter
of 1998.
6. Grupo Iusacell, S.A. de C.V.
- --------------------------------------------------------------------------------
Restructuring
In the third quarter of 1998, Grupo Iusacell, S.A. de C.V. (Iusacell), a Mexican
wireless company that we consolidate, and its principal shareholders entered
into an agreement (the "Restructuring Agreement") to restructure ownership of
the company. The restructuring, which will result in the formation of a new
holding company with a single class of publicly traded shares, is intended to
increase the liquidity of Iusacell's publicly traded shares and to increase the
availability of debt financing to Iusacell.
In the third quarter of 1998, Iusacell borrowed $71.5 million from us
under a $150.0 million subordinated convertible debt facility that expires in
June 1999 (the "Facility"). Under the Restructuring Agreement, we immediately
converted this debt into 102.1 million additional Class A Iusacell shares at a
price of $.70 per share. As a result of this debt conversion, our ownership of
Iusacell increased to 47% as of September 30, 1998. Under the Restructuring
Agreement, we may reduce our ownership of Iusacell to our previous 42% ownership
through a rights offering by Iusacell and a secondary public offering of a
portion of our Iusacell shares. We currently consolidate Iusacell because our
investment permits us to control the Board of Directors and management of
Iusacell. We will continue to retain management control of Iusacell through the
completion of these transactions.
10
<PAGE>
The Restructuring Agreement provides, that if Iusacell makes any further
borrowings under the Facility, we will immediately convert the Iusacell debt
into Iusacell shares at a conversion price of $.70 per share. It further
provides that the Peralta Group (the other principal shareholder of Iusacell)
will purchase from us, and we will sell to the Peralta Group, one half of any
shares received from that debt conversion for $.70 per share.
Put Options
The Peralta Group can require us to purchase from it 173,137,756 Iusacell shares
for $.96 per share, or $166.2 million in aggregate, by giving notice of exercise
between November 15 and December 15, 1998. The Peralta Group can also require us
to purchase from it 173,137,756 Iusacell shares for $1.07 per share, or $185.3
million in aggregate, by giving notice of exercise between November 15 and
December 15, 1999.
7. Investments in Unconsolidated Businesses
- --------------------------------------------------------------------------------
In the third quarter of 1998, we recorded a charge of $485.1 million to adjust
the carrying values of certain investments -- TelecomAsia, a wireline
investment in Thailand, and Excelcomindo, a wireless investment in Indonesia.
These investments are accounted for under the cost method. The charges were
necessary because we determined that the declines in the estimated fair values
of these investments were other than temporary.
In the case of TelecomAsia, we recorded a charge of $348.1 million to
adjust the carrying value of the investment to its estimated fair value. We
determined that the impairment of the investment was other than temporary after
considering the following factors:
. The continued weakness of the Thai currency as compared to historical
exchange rates will place additional financial burdens on the company
in servicing U.S. dollar-denominated debt.
. The economic instability and prospects for an extended recovery period
have resulted in weaker than expected growth in TelecomAsia's
business. This is indicated by slower than expected growth in total
subscribers, slower than expected growth in usage and smaller
increases in business subscribers. These factors resulted in reduced
expectations of future cash flows and accordingly, a reduction in the
value of our investment.
. The business plan for TelecomAsia contemplated cash flows from several
lines of business. Given TelecomAsia's inclination to focus on its
core wireline business, these other lines of business may not
contribute future cash flows at previously expected levels.
In the case of Excelcomindo, we recorded a charge of $137.0 million to
adjust the carrying value of the investment to its estimated fair value. We
determined that the impairment of the investment was other than temporary after
considering the following factors:
. The continued weakness of the Indonesian currency as compared to
historical exchange rates will create additional financial burdens on
the company in servicing U.S. dollar-denominated debt. The continuing
political unrest in Indonesia has contributed to the currency's
instability.
. The economic instability and prospects for an extended recovery period
have resulted in weaker than expected growth in Excelcomindo's
business. One significant factor has been inflexible tariff regulation
despite rising costs due to inflation. This and other factors have
resulted in reduced expectations of future cash flows and,
accordingly, a reduction in the value of our investment.
. Issues with cash flow are requiring Excelcomindo's shareholders to
evaluate the future funding of the business.
11
<PAGE>
8. Retirement Incentives
- --------------------------------------------------------------------------------
In 1993, we recorded costs totaling $1.1 billion (pre-tax) for severance and
postretirement medical benefits in connection with a force reduction plan. Since
1994, we have recorded additional costs of $3.0 billion (pre-tax) under a
related retirement incentive program through September 30, 1998. These costs
reflect 26,574 total employees who have left or have elected to leave the
business under the program, consisting of 9,329 management and 17,245 associate
employees.
The retirement incentive program covering management employees ended on
March 31, 1997 and the program covering associate employees, which was scheduled
to end on August 8, 1998, was revised under the terms of the August 1998
contract agreements with union-represented (associate) employees. Under the
revised retirement incentive program, approximately 13,800 eligible associate
employees were offered an opportunity to elect, during a 30-day period in
August-September 1998, to retire on one of several alternate dates in the last
four months of 1998 and calendar year 1999.
Through this revised retirement incentive program, approximately 5,200
employees have irrevocably accepted the August 1998 offer and will voluntarily
leave the company in stages by the end of 1999. As a result, we recorded a
pre-tax charge of $747.0 million in the third quarter of 1998 and $1,021.4
million through the first nine months of 1998. This retirement offer completes
the retirement incentive program for associate employees.
As of September 30, 1998, the employee severance and postretirement
medical reserves associated with the 1993 restructuring plan were fully
utilized.
9. Commitments and Contingencies
- --------------------------------------------------------------------------------
In connection with certain state regulatory incentive plan commitments, we have
deferred revenues which will be recognized as the commitments are met or
obligations are satisfied under the plans. In addition, several state and
federal regulatory proceedings may require our operating telephone subsidiaries
to refund a portion of the revenues collected in the current and prior periods.
There are also various legal actions pending to which we are a party. We have
established reserves for specific liabilities in connection with regulatory and
legal matters which we currently deem to be probable and estimable.
We do not expect that the ultimate resolution of pending regulatory and
legal matters in future periods will have a material effect on our financial
condition, but it could have a material effect on our results of operations.
10. Proposed Bell Atlantic - GTE Merger
- --------------------------------------------------------------------------------
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
We expect the merger to qualify as a "pooling of interests," which means
that for accounting and financial reporting purposes the companies will be
treated as if they had always been combined. 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.
12
<PAGE>
11. Recent Accounting Pronouncements
- --------------------------------------------------------------------------------
Costs of Computer Software
In March 1998, the American Institute of Certified Public Accountants (AICPA)
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.
Our operating telephone subsidiaries currently capitalize initial
right-to-use fees for central office switching equipment, including initial
operating system and initial application software costs. For other 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. We estimate that the
implementation of SOP 98-1 will result in a net after-tax benefit of $200
million to $250 million in 1999 results of operations due to the prospective
capitalization of costs which were previously expensed as incurred.
Costs of Start-up Activities
In April 1998, the AICPA also issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-up Activities" (SOP 98-5). SOP 98-5 must be adopted no
later than January 1, 1999, and requires that costs of start-up activities
including pre-operating, pre-opening and other organizational costs be expensed
as incurred. In addition, at the time of adoption the unamortized balance of any
previously deferred start-up costs must be expensed. We do not expect the
adoption of SOP 98-5 to have a material effect on our results of operations or
financial condition.
Segment Reporting
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for reporting financial information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in the interim financial reports
issued to shareowners. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available and evaluated regularly by the chief
operating decision makers in deciding how to allocate resources and in assessing
performance. We are required to disclose this information for the first time
when we publish our 1998 Annual Report to Shareowners. We are in the process of
evaluating the segment disclosures for purposes of reporting under SFAS No. 131.
The adoption of SFAS No. 131 will have no impact on our results of operations or
financial condition.
Employee Benefit Disclosures
The FASB also issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," in February 1998. This new standard does not
change the measurement or recognition of costs for pension or other
postretirement plans. It standardizes disclosures and eliminates those that are
no longer useful. We are required to provide the new disclosures for the first
time in our 1998 Annual Report to Shareowners. The adoption of SFAS No. 132 will
have no impact on our results of operations or financial condition.
Derivatives and Hedging Activities
The FASB also issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in June 1998. 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. Bell Atlantic must adopt
SFAS No. 133 no later than January 1, 2000. We are currently evaluating the
provisions of SFAS No. 133 and have not yet determined what the impact of
adopting this statement will be on our future results of operations or financial
condition.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
(Tables shown in Dollars in Millions, Except Per Share Amounts)
- -------------------------------------------------------------------------------
OVERVIEW
- -------------------------------------------------------------------------------
We reported a loss of $8.1 million, or $.01 diluted loss per share, for the
third quarter of 1998 and net income available to common shareowners of $1,903.7
million, or $1.21 diluted earnings per share, for the nine month period ended
September 30, 1998. In 1997, we reported a loss of $80.1 million, or $.05
diluted loss per share, for the third quarter and net income of $1,514.9
million, or $.97 diluted earnings per share, for the nine month period ended
September 30, 1997.
Our results for 1998 and 1997 were affected by special items recorded
during both years. After adjusting for such items, net income available to
common shareowners would have been $1,092.1 million, or $.69 diluted earnings
per share, for the third quarter of 1998, compared to $969.4 million, or $.62
diluted earnings per share, for the third quarter of 1997. When adjusted for
special items, net income for the nine month period ended September 30, 1998
would have been $3,205.8 million, or $2.03 diluted earnings per share, compared
to $2,875.9 million, or $1.84 diluted earnings per share, for the same period in
1997. Special charges for both years are summarized below and additional
information is provided in the "Results of Operations" section. Per share
amounts referred to in the following discussion are diluted earnings per share.
1998
We recorded pre-tax special charges totaling approximately $1.4 billion ($1.1
billion after-tax, or $.70 per share) in the third quarter of 1998 and
approximately $1.7 billion ($1.3 billion after-tax, or $.82 per share) in the
nine months ended September 30, 1998. These charges consisted of the following
significant items:
Third Quarter
. $777 million ($502 million after-tax or $.32 per share) associated
with the completion of our retirement incentive program and settlement
of labor contract negotiations.
. $576 million ($567 million after-tax or $.36 per share) associated
with charges to adjust the carrying values of certain Asian
investments, to write-down video-related equipment and certain
obsolete assets, and for other special items arising during the
quarter.
. $52 million ($31 million after-tax or $.02 per share) for transition
and integration costs associated with the merger of Bell Atlantic and
NYNEX Corporation (NYNEX).
Nine Months
. $1,051 million ($670 million after-tax or $.42 per share) associated
with the completion of our retirement incentive program and settlement
of labor contract negotiations.
. $576 million ($567 million after-tax or $.36 per share) associated
with charges to adjust the carrying values of certain Asian
investments, to write-down video-related equipment and certain
obsolete assets, and for other special items arising during the nine
month period.
. $107 million ($65 million after-tax or $.04 per share) for transition
and integration costs associated with the merger of Bell Atlantic and
NYNEX.
14
<PAGE>
1997
We recorded pre-tax charges in connection with the completion of the merger with
NYNEX in August 1997 and other special items totaling approximately $1.5 billion
($1.0 billion after-tax or $.67 per share) in the third quarter and
approximately $2.0 billion ($1.4 billion after-tax or $.87 per share) in the
nine month period ended September 30, 1997. These charges consisted of the
following significant items:
Third Quarter
. $1,028 million ($703 million after-tax or $.45 per share) in
connection with consolidating operations and combining the
organizations of Bell Atlantic and NYNEX and for other special items
arising during the quarter. These third quarter charges were
principally associated with certain video investments and operations,
the write-down of obsolete fixed assets, the consolidation of certain
redundant real estate properties, contingencies for various
regulatory, legal and tax matters and other miscellaneous items. Other
special items also included a gain on the sale of our ownership
interest in a non-strategic business, a net tax benefit related to a
change in state tax law and other tax issues, and charges associated
with our equity share of formation costs incurred by Cable & Wireless
Communications plc (CWC).
. $443 million ($335 million after-tax or $.22 per share) associated
with the completion of the merger with NYNEX. These costs consisted of
approximately $200 million for direct incremental costs, $223 million
for employee severance costs and $20 million for transition and
integration costs. Direct incremental costs consist of expenses
associated with completing the merger transaction such as professional
and regulatory fees, compensation arrangements and shareowner costs.
Employee severance costs, as recorded under SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," represent benefit costs for
the separation by the end of 1999 of approximately 3,100 management
employees who are entitled to benefits under pre-existing separation
pay plans. Transition and integration costs consist of costs
associated with integrating the operations of Bell Atlantic and NYNEX
following the completion of the merger of the two companies.
. $19 million ($12 million after-tax or $.01 per share) associated with
our retirement incentive program.
Nine Months
. $1,070 million ($740 million after-tax or $.47 per share) in
connection with consolidating operations and combining the
organizations of Bell Atlantic and NYNEX and for special items arising
during the nine month period.
. $443 million ($335 million after-tax or $.22 per share) associated
with the completion of the merger with NYNEX.
. $453 million ($285 million after-tax or $.18 per share) associated
with our retirement incentive program.
- --------------------------------------------------------------------------------
These and other items affecting the comparison of our results of operations for
the three and nine month periods ended September 30, 1998 and 1997 are discussed
in the following sections. You should read this Management's Discussion and
Analysis in conjunction with our 1997 Annual Report.
All prior period share and per share amounts have been adjusted to reflect a
two-for-one common stock split declared and paid in the second quarter of 1998.
15
<PAGE>
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Operating Revenues
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
For the Period Ended September 30, 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Local services $ 3,509.7 $ 3,321.5 $ 10,303.7 $ 9,773.8
Network access services 1,893.4 1,666.2 5,742.7 5,377.8
Long distance services 488.6 546.7 1,464.7 1,678.1
Ancillary services 502.3 465.8 1,425.8 1,362.7
Directory and information services 513.2 496.1 1,699.5 1,649.4
Wireless services 979.7 842.0 2,779.8 2,439.7
Other services 23.0 35.6 72.6 216.7
-------------------------------------------------------------------
Total Operating Revenues $ 7,909.9 $ 7,373.9 $ 23,488.8 $ 22,498.2
===================================================================
</TABLE>
Local Services Revenues
- --------------------------------------------------------------------------------
1998-1997 Increase
- --------------------------------------------------------------------------------
Third Quarter $188.2 5.7%
- --------------------------------------------------------------------------------
Nine Months $529.9 5.4%
- --------------------------------------------------------------------------------
Local services revenues are earned by our operating telephone subsidiaries from
the provision of local exchange, local private line, public telephone (pay
phone) and value-added services. Value-added services are a family of services
which expand the utilization of the network. These services include products
such as Caller ID, Call Waiting and Return Call.
Higher usage of our network facilities was the primary reason for the
increase in local services revenues in the third quarter and the nine month
period of 1998. This growth was generated, in part, by an increase in access
lines in service of 4.5% from September 30, 1997. We had 41,276,000 access lines
in service at September 30, 1998, compared to 39,503,000 access lines in service
at September 30, 1997. 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 the three and nine month periods of 1998.
We also recognized higher revenues in both the 1998 periods from our public
telephone and value-added services. Value-added services revenues grew
principally as a result of higher customer demand and usage, while price
increases for usage of our 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.
In addition, local services revenue growth in the nine month period was
attributable, in part, to the effect of a prior year refund to customers
resulting from the settlement of state regulatory matters. The increase in
revenues was offset entirely by a corresponding increase in Other Operating
Expenses due to the effect of a prior year reversal of an accrual.
Revenue growth from these factors in the three and nine month periods of
1998 was partially offset by price reductions on certain local services and the
elimination of Touch-Tone service charges by several of our operating telephone
subsidiaries.
16
<PAGE>
Network Access Services Revenues
- --------------------------------------------------------------------------------
1998-1997 Increase
- --------------------------------------------------------------------------------
Third Quarter $227.2 13.6%
- --------------------------------------------------------------------------------
Nine Months $364.9 6.8%
- --------------------------------------------------------------------------------
Network access services revenues are earned from carriers for their use of our
local exchange facilities in providing usage services to their customers. In
addition, end-user subscribers pay flat rate access fees to connect to our
network.
Our network access services revenues grew in the three and nine month
periods of 1998 primarily as a result of higher customer demand, reflected by
growth in access minutes of use of 8.5% in both of the three and nine month
periods over the same periods 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 our network. Higher network
usage by alternative providers of intraLATA toll services and higher end-user
revenues attributable to an increase in access lines in service also contributed
to revenue growth in 1998. Volume-related growth was partially offset by net
price reductions mandated by federal and state price cap and incentive plans.
In July 1998, we implemented price decreases of approximately $175 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 $430 million in our July 1997 filing. The rates included in our
1998 filing will be in effect through June 1999. The rates include amounts
necessary to recover the operating telephone subsidiaries' 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 subsidiaries' contributions to the universal service fund are included in
Other Operating Expenses.
Beginning in the third quarter of 1998, access charges on intrastate toll
calls in New York were reduced by $94.2 million annually due to a New York State
Public Service Commission order. This reduction is, in part, an acceleration of
access revenue reductions expected under the New York Performance Regulation
Plan and, in addition, will be partially offset by increased revenues from the
federal universal service fund.
Revenue growth in both periods of 1998 also reflects the effect of special
charges of approximately $136 million recorded in 1997 for contingencies
associated with regulatory matters.
Long Distance Services Revenues
- --------------------------------------------------------------------------------
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
Third Quarter $(58.1) (10.6)%
- --------------------------------------------------------------------------------
Nine Months $(213.4) (12.7)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made outside a
customer's local calling area but within the same service area of our operating
telephone subsidiaries (intraLATA toll). Other long distance services that we
provide include 800 services, Wide Area Telephone Service (WATS), corridor
services and long distance services outside of our region.
The reduction in long distance services revenues in the third quarter and
the nine month period of 1998 was caused principally by increased competition
for intraLATA toll services as a result of the introduction of presubscription
during 1997 in many states throughout the region, including New Jersey in May
1997, Pennsylvania in July 1997, West Virginia in August 1997 and Delaware in
September 1997. Our operating telephone subsidiaries in Maryland, Massachusetts
and Virginia expect to offer presubscription coincident with our offering of
interLATA long distance services in those states, or as ordered by their state
regulatory commissions in accordance with the Telecommunications Act of 1996. In
those states where presubscription has been implemented, customers may now 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
services revenues as a result of presubscription was partially mitigated by
increased network access services revenues for usage of our network by these
alternative providers. As a result of presubscription being available in most of
our states for more than one year, the relative effect of presubscription on
long distance revenues was lower in the third quarter of 1998.
17
<PAGE>
Price reductions on certain toll services as part of our response to
competition also contributed to the decline in long distance services revenues
in 1998. Higher calling volumes generated by an increase in access lines in
service partially offset these revenue reductions.
We believe that, for the remainder of 1998, competition for long distance
services, including competitive pricing and customer selection of alternative
providers of intraLATA toll services in the states currently offering
presubscription, will continue to reduce revenues, but to a lesser extent due to
a stabilization of presubscription losses.
Ancillary Services Revenues
- --------------------------------------------------------------------------------
1998-1997 Increase
- --------------------------------------------------------------------------------
Third Quarter $36.5 7.8%
................................................................................
Nine Months $63.1 4.6%
- --------------------------------------------------------------------------------
We provide ancillary services which include systems integration services,
equipment and construction services provided to other telecommunications
carriers, billing and collection services provided to long distance carriers,
customer premises equipment (CPE) services, facilities rental services and voice
messaging services.
Higher ancillary services revenues in both the three and nine month periods
of 1998 were principally due to increased demand by long distance carriers for
billing and collection services. Higher revenues from our systems integration
and voice messaging services also contributed to revenue growth in both periods.
The third quarter of 1998 was positively impacted by the effect of lower
accruals for, and lower payments of, service rebates to customers in New York.
Directory and Information Services Revenues
- --------------------------------------------------------------------------------
1998-1997 Increase
- --------------------------------------------------------------------------------
Third Quarter $17.1 3.4%
................................................................................
Nine Months $50.1 3.0%
- --------------------------------------------------------------------------------
We earn directory and information services revenues primarily from local
advertising and marketing services provided to businesses in our White and
Yellow Pages directories within our region, international directory services and
electronic publishing services. We also provide database services and directory
marketing services outside of our region. Revenues from our Internet services
businesses are also included in this revenue category.
Our directory and information services revenues grew in both the three and
nine month periods of 1998 mainly because of higher pricing and volumes for our
directory services and improved business volumes from our Internet services. The
effect of changes in the 1997 publication dates of certain directories partially
offset 1998 revenue growth.
Wireless Services Revenues
- --------------------------------------------------------------------------------
1998-1997 Increase
- --------------------------------------------------------------------------------
Third Quarter $137.7 16.4%
................................................................................
Nine Months $340.1 13.9%
- --------------------------------------------------------------------------------
Wireless services revenues consist of revenues generated from our consolidated
subsidiaries that provide cellular and paging communications services.
Revenue growth from our wireless businesses in both the 1998 periods was
principally due to an increase in customers and increased usage of our domestic
wireless services. Our domestic cellular customer base grew 16.8% due, in part,
to strong market growth for digital services and demand for new pricing
packages. Volume-related revenue growth from our domestic wireless subsidiary
was partially offset by the effect of competitive pricing factors in response to
competition. Higher revenues from our international wireless subsidiary in
Mexico, Grupo Iusacell, S.A. de C.V. (Iusacell), also contributed to revenue
growth in 1998.
18
<PAGE>
Other Services Revenues
- --------------------------------------------------------------------------------
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
Third Quarter $ (12.6) (35.4)%
................................................................................
Nine Months $(144.1) (66.5)%
- --------------------------------------------------------------------------------
Other services revenues include revenues from our telecommunications consulting
and financing businesses. In April 1997, we transferred our interests in cable
television and telecommunications operations in the United Kingdom to CWC in
exchange for an 18.5% ownership interest in CWC ("the CWC transaction"). We now
account for our investment in CWC under the equity method. Prior to the
transfer, we included the accounts of these operations in our consolidated
financial statements.
The decline in other services revenues in the nine month period was caused
primarily by a revenue reduction of approximately $102 million due to the effect
of the CWC transaction. Lower revenues from our financing businesses contributed
to the decline in revenues in both periods of 1998.
- ---------------------------------------------------------------------
Operating Expenses
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------ --------------------------
For the Period Ended September 30, 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee costs $ 2,792.0 $ 2,337.8 $ 7,212.4 $ 6,956.9
Depreciation and amortization 1,469.8 1,724.0 4,326.1 4,459.1
Taxes other than income 383.3 475.2 1,134.9 1,252.4
Other operating expenses 2,134.7 2,415.9 6,020.7 6,102.4
-------------------------------------------------------------
Total Operating Expenses $ 6,779.8 $ 6,952.9 $ 18,694.1 $ 18,770.8
=============================================================
</TABLE>
For purposes of the following discussion, our network subsidiaries include our
operating telephone subsidiaries, subsidiaries that provide centralized services
and support, and network-related subsidiaries providing systems integration, CPE
distribution, inside wiring, long distance, and directory and information
services.
Employee Costs
================================================================================
1998-1997 Increase
- --------------------------------------------------------------------------------
Third Quarter $ 454.2 19.4%
................................................................................
Nine Months $ 255.5 3.7%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes.
During the three and nine month periods ended September 30, 1998 and 1997,
employee costs included costs associated with our retirement incentive program.
In 1998, we recognized pre-tax retirement incentive costs of approximately $747
million in the third quarter and $1,021 million in the first nine months,
compared to approximately $19 million in the third quarter of 1997 and $453
million year-to-date 1997. In 1998, we also recorded additional employee costs
associated with the settlement of the labor contracts and the integration and
transition of Bell Atlantic and NYNEX operations. (For a further discussion of
retirement incentives and labor contracts, see below.).
In 1997, employee costs included approximately $277 million for
merger-related costs in the third quarter and approximately $289 million for
merger-related costs and other special charges recorded during the nine month
period.
Excluding the special charges described above, employee costs declined by
approximately $30 million or 1.4% in the third quarter period and $62 million or
1.0% in the nine month period. These reductions were largely attributable to
lower workforce levels primarily at the network subsidiaries, and lower pension
and benefit costs due to a number of factors, including favorable pension plan
investment returns, lower than expected retiree medical claims and plan
amendments including the conversion of a pension plan to a cash balance plan.
Effective January 1, 1998, we established common pension and savings plan
benefit provisions for all management employees. As a result, all former NYNEX
management employees receive the same benefit levels as previously given under
Bell Atlantic management benefit plans. This change included the conversion of
the NYNEX management pension plan to a cash balance plan. We expect the lower
level of benefit costs to continue for the remainder of 1998.
19
<PAGE>
These cost reductions were substantially offset by salary and wage
increases and higher overtime pay for repair and maintenance activity at our
network subsidiaries.
Labor Contract Settlement
Associate employee wages, and pension and other benefits are determined under
contracts with unions representing associate employees of the network
subsidiaries.
In September 1998, the Communications Workers of America (CWA) ratified new
2-year contracts. The contracts, covering more than 73,000 workers, provide for
wage increases of up to 3.8 percent effective August 9, 1998, and up to 4
percent effective August 8, 1999. Pension increases will range from 11 percent
to 20 percent. In addition, certain union-represented employees received a $500
cash payment in September 1998 and will receive an additional $400 cash payment
in August 1999. Employees in certain bargaining units will also receive lump sum
payments of $700 each in 2000 and 2001 if customer care performance standards
are achieved. Other bargaining units 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 contracts also include
revised terms of the retirement incentive program, other benefit improvements,
and certain employment security provisions.
In September 1998, the International Brotherhood of Electrical Workers
(IBEW) ratified new 2-year contracts, covering approximately 13,000 members in
New York and the New England states. The IBEW contracts provide for wage
increases of up to 3.8 percent effective August 9, 1998, and up to 4 percent
effective August 8, 1999. The contracts also include cash payments, improved
pension and other benefits, and certain employment security provisions, similar
to the CWA contracts described above.
On October 9, 1998, we reached a tentative agreement with the IBEW,
representing 9,000 members in New Jersey and Pennsylvania, on a two-year
extension of the current contracts. Under the tentative agreement, the current
contracts, which expire 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 contracts to its members for ratification by November 20, 1998.
Retirement Incentives
In 1993, we recorded costs totaling $1.1 billion (pre-tax) for severance and
postretirement medical benefits in connection with a force reduction plan. Since
1994, we have recorded additional costs of $3.0 billion (pre-tax) under a
related retirement incentive program through September 30, 1998. These costs
reflect 26,574 total employees who have left or have elected to leave the
business under the program, consisting of 9,329 management and 17,245 associate
employees. We had previously estimated that the total additional costs would
approximate $2.2 billion through the completion of the original retirement
incentive program in August 1998.
The retirement incentive program covering management employees ended on
March 31, 1997 and the program covering associate employees, which was scheduled
to end on August 8, 1998, was revised under the terms of the August 1998
contracts described above. Under the revised retirement incentive program,
approximately 13,800 eligible CWA associate employees were offered an
opportunity to elect, during a 30-day period in August-September 1998, to retire
on one of several alternate dates in the last four months of 1998 and calendar
year 1999. The election to retire under the program is irrevocable, except in
the event of extraordinary personal circumstances. The contracts also provide
for improvements to the terms of the ongoing pension plan, including a 15
percent pension formula increase which applies to retirements after July 1,
2000. In addition, any of the 13,800 eligible associates who remain employed
through at least January 1, 2001, will be entitled to the greater of the pension
that they would have received under the revised retirement incentive program, or
their pension under the ongoing plan as of the actual retirement date.
Through this revised retirement incentive program, approximately 5,200
employees have irrevocably accepted the August 1998 offer and will voluntarily
leave the company in stages by the end of 1999. As a result, we recorded a
pre-tax charge of $747.0 million in the third quarter of 1998 and $1,021.4
million through the first nine months of 1998. This retirement offer completes
the retirement incentive program for associate employees. As a result of
expected productivity gains, we anticipate that less than half of the employees
who took advantage of the revised program will be replaced.
20
<PAGE>
As of September 30, 1998, the employee severance and postretirement medical
reserves associated with the 1993 restructuring plan were fully utilized.
Depreciation and Amortization
- --------------------------------------------------------------------------------
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
Third Quarter $(254.2) (14.7)%
................................................................................
Nine Months $(133.0) (3.0)%
- --------------------------------------------------------------------------------
Depreciation and amortization expense decreased in the three and nine month
periods of 1998, over the same periods in 1997, principally as a result of the
effect of recording approximately $297 million in the third quarter of 1997 for
the write-down of obsolete fixed assets.
Higher depreciation expense due to growth in depreciable telephone plant
and changes in the mix of plant assets at our network and wireless subsidiaries
partially offset the effect of the prior year charges. Asset-related increases
were partially offset by lower rates of depreciation at our network
subsidiaries. The nine month period also reflects the effect of the CWC
transaction.
Taxes Other Than Income
- --------------------------------------------------------------------------------
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
Third Quarter $ (91.9) (19.3)%
................................................................................
Nine Months $(117.5) (9.4)%
- --------------------------------------------------------------------------------
Taxes other than income consist principally of taxes for gross receipts,
property, capital stock and business licenses.
The decline in taxes other than income in both the 1998 periods was
largely attributable to the effect of prior year charges of approximately $55
million for state and local tax contingencies and approximately $25 million for
direct incremental merger-related costs. The enactment of a New Jersey tax law
that replaced the gross receipts tax applicable to telephone companies with a
net-income-based corporate business tax also contributed to the decrease in both
the 1998 periods. This state tax law change, which became effective on January
1, 1998, resulted in the reduction of gross receipts tax and an increase in
state income taxes in 1998 for our operating telephone subsidiary, Bell Atlantic
- - New Jersey. These reductions were partially offset by higher tax expense at
our domestic wireless and other operating telephone subsidiaries.
Other Operating Expenses
- --------------------------------------------------------------------------------
1998-1997 (Decrease)
- --------------------------------------------------------------------------------
Third Quarter $(281.2) (11.6)%
................................................................................
Nine Months $ (81.7) (1.3)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services, rent, network software
costs, the provision for uncollectible accounts receivable, and other costs.
In 1998, other operating expenses included special charges totaling
approximately $112 million in the third quarter and approximately $161 million
year-to-date. The 1998 special charges consisted of merger-related transition
costs of approximately $49 million in the third quarter and $98 million
year-to-date. We also recorded approximately $63 million for the write-down of
video equipment and certain other assets and other miscellaneous items in both
1998 periods. We wrote-down certain video equipment that has been superseded by
our digital video offering in partnership with DirecTV and USSB, and our planned
next generation broadband network.
Other operating expenses in the third quarter of 1997 included special
charges aggregating approximately $556 million in connection with the Bell
Atlantic/NYNEX merger and other special items arising during the period. These
charges included: direct incremental merger-related costs of approximately $122
million; transition merger-related costs of approximately $20 million;
video-related charges of approximately $69 million; costs to consolidate certain
redundant real estate properties of approximately $55 million; charges for
regulatory, legal and other contingencies of approximately $126 million; and
other miscellaneous expense items of approximately $164 million.
21
<PAGE>
Excluding the special charges described above and other classification
changes, other operating expenses increased by approximately $144 million or
7.7% in the third quarter and $219 million or 3.9% year-to-date. These increases
were due, in part, to higher costs at our operating telephone subsidiaries,
primarily attributable to higher interconnection payments to competitive local
exchange and other carriers to terminate calls on their networks and additional
Year 2000 readiness costs. We also recognized additional costs in both the 1998
periods as a result of our contribution to the federal universal service fund,
as described earlier.
In addition, we incurred higher expenses in 1998 at our domestic wireless
subsidiaries largely due to higher business volumes. The year-to-date increase
also reflects the effect of a prior year reversal of an accrual for the
settlement of a state regulatory matter at one of our operating telephone
subsidiaries.
Cost increases at the operating telephone subsidiaries were partially
offset by a combination of lower network software purchases and lower costs
associated with opening our network to competitors. For the nine month period,
cost increases were also offset by the effects of the CWC transaction and the
reversal in 1998 of a prior year accrual associated with the settlement of
tax-related matters. The actual settlement of these tax-related matters was
recorded in Interest Expense in 1998.
Loss from Unconsolidated Businesses
- --------------------------------------------------------------------------------
1998-1997 (Increase)
- --------------------------------------------------------------------------------
Third Quarter $(338.4) (278.5)%
................................................................................
Nine Months $(225.7) (95.3)%
- --------------------------------------------------------------------------------
Income (loss) from unconsolidated businesses includes equity income and losses
from investments accounted for under the equity method and goodwill amortization
related to these investments. As described earlier, beginning in the second
quarter of 1997 we account for our investment in CWC under the equity method.
The increase in loss from unconsolidated businesses in both the 1998
periods was attributable to the recording of a special charge of approximately
$485 million to adjust the carrying values of certain Asian investments -
TelecomAsia, a wireline investment in Thailand, and Excelcomindo, a wireless
investment in Indonesia. These investments are accounted for under the cost
method. (For additional information on our Asian investments, see below)
The impact of this write-down was offset, in part, by the effect of 1997
special charges of approximately $133 million in the third quarter and $162
million in the nine month period primarily related to certain video investments
and operations. In 1997, we determined that we would no longer pursue a
multichannel, multipoint, distribution system (MMDS) as part of our video
strategy. As a result, we recognized liabilities for purchase commitments
associated with the MMDS technology and costs associated with closing the
operations of our Tele-TV partnership because this operation was no longer
needed to support our video strategy. We also wrote-down our remaining
investment in CAI Wireless Systems, Inc. in 1997. The third quarter and nine
month periods of 1997 also included $59.3 million for our equity share of
formation costs incurred by CWC and a pre-tax gain of approximately $41 million
on the disposition of our interest in Sky Network Television Limited of New
Zealand.
The increase in loss resulting from the write-down of our Asian
investments was also partially offset by improved operating results from our
global wireless investments, including an international wireless joint venture,
Omnitel Pronto Italia S.p.A. (Omnitel), and our personal communications services
(PCS) joint venture, PrimeCo Personal Communications, L.P. (PrimeCo), and the
positive effects resulting from the write-down of our video investments and the
disposition of certain international investments during 1997. The change in
accounting treatment for our investment in CWC also affected the nine month
period.
22
<PAGE>
Asian Investments
In the third quarter of 1998, we recorded a pre-tax charge of $485.1 million to
adjust the carrying values of our investments in TelecomAsia, a wireline
investment in Thailand, and Excelcomindo, a wireless investment in Indonesia.
The charges were necessary because we determined that the declines in the
estimated fair values of these investments were other than temporary. For a
further discussion of the factors used in determining these impairments, you
should read Note 7 to the condensed consolidated financial statements.
Based on the circumstances existing at this time, we believe that the
write-downs have reduced these investments to their estimated fair values as of
September 30, 1998. We will continue to monitor on a quarterly basis the
political, economic and financial aspects of our remaining investments in
Thailand and Indonesia as well as another investment in the Philippines. The
book value of our remaining Asian investments was approximately $195 million at
September 30, 1998. Should we determine that any declines in the fair values of
these investments are other than temporary, the impact could be material to our
results of operations.
Other Income and Expense, Net
- --------------------------------------------------------------------------------
1998-1997 Increase
- --------------------------------------------------------------------------------
Third Quarter $ 56.9
................................................................................
Nine Months $119.0
- --------------------------------------------------------------------------------
Other income and expense, net, consists primarily of interest and dividend
income, minority interest in net income (loss) of consolidated subsidiaries, and
gains and losses from the disposition of subsidiaries and non-operating assets
and investments.
The principal item affecting the change in other income and expense in
both periods of 1998 was the recognition of Iusacell's net loss credited to
minority interest. The nine month period also included the recognition of
additional interest income principally due to the settlement of tax-related
matters and higher foreign exchange gains associated with our international
investments.
Interest Expense
- --------------------------------------------------------------------------------
1998-1997 Increase
- --------------------------------------------------------------------------------
Third Quarter $ 60.6 20.3%
................................................................................
Nine Months $113.1 12.3%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital leases,
net of interest capitalized as a cost of acquiring or constructing plant assets.
The increase in interest expense in the three and nine month periods of
1998 was primarily due to a reduction in capitalized interest as a result of the
write-down of certain obsolete assets. Higher borrowing levels at our network
subsidiaries also generated additional interest costs in both periods of 1998.
The nine month period was also affected by added interest expense due to the
settlement of tax-related matters in the second quarter of 1998.
For the first nine months of 1998, the increase in interest expense was
partially offset by the effect of reversing in 1997 prior year accrued interest
costs associated with the settlement of a sales tax audit and state regulatory
issues.
23
<PAGE>
Effective Income Tax Rates
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1998 43.2%
................................................................................
1997 40.6%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a percentage
of income before the provision for income taxes and extraordinary items.
The effective income tax rate for the nine months ended September 30, 1998
was higher as compared to the same period last year due primarily to higher
state and local income taxes caused principally by the aforementioned change in
the New Jersey tax law and by the write-down of certain international
investments for which no tax benefit was provided. These rate increases were
partially offset by higher tax credits as well as adjustments to deferred income
tax balances at certain subsidiaries.
Extraordinary Item
- --------------------------------------------------------------------------------
In the three and nine month periods ended September 30, 1998, we recorded
extraordinary charges of $.9 million and $23.4 million, net of tax, associated
with the early extinguishments of long-term debt. See Note 5 to the condensed
consolidated financial statements for additional information on debt
refinancings.
- -------------------------------------------------------------------------------
FINANCIAL CONDITION
- -------------------------------------------------------------------------------
Nine Months Ended September 30, 1998 1997 Change
- --------------------------------------------------------------------------------
Cash Flows From (Used In):
Operating activities $ 7,350.4 $ 6,000.5 $ 1,349.9
Investing activities (5,408.3) (4,693.8) (714.5)
Financing activities (1,644.1) (1,240.3) (403.8)
- --------------------------------------------------------------------------------
We use the net cash generated from our operations and from external financing to
fund capital expenditures for network expansion and modernization, pay
dividends, and invest in new businesses. While current liabilities exceeded
current assets at September 30, 1998 and 1997 and at December 31, 1997, our
sources of funds, primarily from operations and, to the extent necessary, from
readily available external financing arrangements, are sufficient to meet
ongoing operating and investing requirements. We expect that presently
foreseeable capital requirements will continue to be financed primarily through
internally generated funds. Additional debt or equity financing may be needed to
fund additional development activities or to maintain our capital structure to
ensure our financial flexibility.
24
<PAGE>
Cash Flows From Operating Activities
- --------------------------------------------------------------------------------
Our primary source of funds continues to be cash generated from operations. Cash
flows from operations were higher in the first nine months of 1998, as compared
to the same period in 1997, principally as a result of improved operating income
and timing differences in the payment of accounts payable and accrued taxes.
Cash Flows Used In Investing Activities
- --------------------------------------------------------------------------------
Capital expenditures continue to be our primary use of capital resources. The
majority of the capital expenditures are to support our network businesses in
order to facilitate the introduction of new products and services, enhance
responsiveness to competitive challenges, and increase the operating efficiency
and productivity of the network. We invested $4,784.2 million in our network
subsidiaries during the first nine months of 1998, as compared to $4,034.0
million in the same period of 1997. We also invested $637.1 million in our
wireless and other businesses in the first nine months of 1998, compared to
$849.1 million during the same period last year. The increase in total capital
expenditures during the first nine months of 1998 is due to an expansion of our
capital investment program in 1998. We expect capital expenditures in 1998 to
aggregate approximately $7 billion, including approximately $6 billion to be
invested in our network subsidiaries. In 1997, capital expenditures totaled $6.6
billion, including $5.5 billion in our network subsidiaries.
During the first nine months of 1998, we increased our ownership interest
in Omnitel from 17.45% to 19.71%, through a cash payment of $162.4 million, and
we invested $270.8 million in PrimeCo to fund the build-out of its PCS network
and $95.8 million in lease financing and other partnerships. In the first nine
months of 1997, we invested $574.3 million in unconsolidated businesses,
including $304.2 million in PrimeCo, $107.0 million in lease financing
partnerships and $163.1 million in other investments.
Our Short-term Investments include principally cash equivalents held in
trust accounts for the payment of certain employee benefits. During the first
nine months of 1998, we invested $294.1 million, primarily in a vacation pay
trust, compared to $148.1 million in the corresponding period of 1997. We
increased our pre-funding in 1998 to cover employees of the former NYNEX
companies. Proceeds from the sales of all short-term investments were $854.5
million in the first nine months of 1998, compared to $323.5 million in the
corresponding period of 1997.
In the first nine months of 1998, we invested $61.9 million to purchase
cellular properties and we received cash proceeds of $20.8 million in connection
with the disposition of certain investments. In the first nine months of 1997,
we received cash proceeds of $360.6 million from the sales of real estate
properties and our interests in certain joint ventures.
During the first nine months of 1997, we received cash proceeds of $114.6
million from the Telecom Corporation of New Zealand Limited (TCNZ) repurchase
plan, which was completed in December 1997.
Cash Flows Used In Financing Activities
- --------------------------------------------------------------------------------
As in prior quarters, dividend payments were a significant use of capital
resources. We determine the appropriateness of the level of our dividend
payments on a periodic basis by considering such factors as long-term growth
opportunities, internal cash requirements, and the expectations of our
shareowners. In the third quarter of 1998, we announced a quarterly cash
dividend of $.385 per share. Year-to-date cash dividends totaled $1.155 per
share.
In February 1998, our wholly owned subsidiary Bell Atlantic Financial
Services, Inc. (FSI) issued $2,455.0 million of 5.75% exchangeable notes into
ordinary shares of TCNZ due on April 1, 2003 (TCNZ Exchangeable Notes). In
August 1998, FSI also issued $3,180.0 million of 4.25% notes exchangeable into
ordinary shares of CWC (CWC Exchangeable Notes). The CWC Exchangeable Notes will
mature on September 15, 2005. Proceeds of both offerings were used for the
repayment of a portion of our short-term debt and other general corporate
purposes. For additional information about the TCNZ and CWC Exchangeable Notes,
see Note 5 to our condensed consolidated financial statements and the "Market
Risk" section below.
25
<PAGE>
We increased our total debt (including capital lease obligations) by
$517.2 million from December 31, 1997, principally to fund an increase in our
capital investment program, higher purchases of shares to fund employee stock
option exercises, and continued investments in PrimeCo. Our debt ratio was 61.5%
as of September 30, 1998, compared to 60.5% as of September 30, 1997 and 60.5%
as of December 31, 1997. In 1998, we expect our debt level to increase slightly
over the current level at September 30, 1998, as we continue to invest in our
capital program and in our unconsolidated subsidiaries, primarily PrimeCo.
As of September 30, 1998, we had unused bank lines of credit in excess of
$5.1 billion and $129.8 million in available bank borrowings outstanding. As of
September 30, 1998, our operating telephone and finance subsidiaries had shelf
registrations for the issuance of up to $2.9 billion of unsecured debt
securities. The debt securities of those subsidiaries continue to be accorded
high ratings by primary rating agencies. Subsequent to the announcement of the
Bell Atlantic - GTE merger, the rating agencies have placed the ratings of
certain of our subsidiaries 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 ratings of four of our operating telephone subsidiaries were
downgraded and one operating telephone subsidiary was upgraded to reflect this
new rating methodology.
Financing activities in the first nine months of 1998 also included the
early extinguishment of $350.0 million of refunding mortgage bonds and $300.0
million of debentures, and the issuance of $600.0 million of debentures by
several of our operating telephone subsidiaries. On October 26, 1998, an
operating telephone subsidiary redeemed $125.0 million of 7.5% debentures due in
2013. On October 14, 1998, another operating telephone subsidiary announced that
it will redeem $15.0 million of 7.75% debentures due in 2013 on November 13,
1998. See Note 5 to our condensed consolidated financial statements for
additional information about our debt.
In connection with our investment in Iusacell, we granted to the Peralta
Group (the other principal shareholder of Iusacell) certain put rights against
us. The Peralta Group can require us to purchase from it 173,137,756 Iusacell
shares for $.96 per share, or $166.2 million in aggregate, by giving notice of
exercise between November 15 and December 15, 1998. The Peralta Group can also
require us to purchase from it 173,137,756 Iusacell shares for $1.07 per share,
or $185.3 million in aggregate, by giving notice of exercise between November 15
and December 15, 1999.
On November 9, 1998, we established a $2.0 billion Euro Medium Term Note
Program (the "Euro Program") under which we may issue notes that are not
registered with the Securities and Exchange Commission. The notes will be issued
from time to time from our subsidiary, Bell Atlantic Global Funding, Inc.
(BAGF), and will benefit from a Support Agreement between BAGF and Bell
Atlantic. No notes have been issued from the Euro Program.
Market Risk
- --------------------------------------------------------------------------------
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes, foreign currency
exchange rate fluctuations and changes in corporate tax rates. We employ risk
management strategies, including the use of derivatives such as interest rate
swap agreements, interest rate caps and floors, foreign currency forwards and
options, and basis swap agreements, to manage those exposures. We do not hold
derivatives for trading purposes.
It is our policy to enter into interest rate, foreign currency and other
transactions only to the extent necessary to achieve our desired objectives in
limiting our exposures to the various market risks discussed above. We do not
hedge our market risk exposure in a manner that would completely eliminate the
impact of changes in interest rates and foreign exchange rates on our net
income. We do not expect that our results of operations or liquidity will be
materially affected by these risk management strategies.
26
<PAGE>
Interest Rate Risk Management
The issuance of the TCNZ Exchangeable Notes in the first quarter of 1998 and the
CWC Exchangeable Notes in the third quarter of 1998, as described below,
resulted in an increase of approximately $5.6 billion in our long-term debt.
The TCNZ Exchangeable Notes have a maturity of five years, carry a fixed
interest rate of 5.75%, and are exchangeable into shares of TCNZ common stock at
the option of the holder beginning on September 1, 1999. The exchange price was
established at a 20% premium to the TCNZ share price at the pricing of the
offering. Upon exchange by investors, we retain the option to settle in cash or
by delivery of TCNZ shares.
The CWC Exchangeable Notes have a maturity of seven years, carry a fixed
interest rate of 4.25%, and are exchangeable into shares of CWC common stock at
the option of the holder beginning on July 1, 2002. The exchange price was
established at a 28% premium to the CWC share price at the pricing of the
offering. Upon exchange, we retain the option to settle in cash or by delivery
of CWC shares.
As of September 30, 1998, the fair value of our long-term debt and
interest rate derivatives was approximately $19.9 billion. The aggregate
hypothetical fair value of the portfolio assuming a 100-basis-point upward
parallel shift in the yield curve is estimated to be $18.9 billion. The
aggregate hypothetical fair value of the portfolio assuming a 100-basis-point
downward parallel shift in the yield curve is estimated to be $21.0 billion. The
fair values of our commercial paper and bank loans are not significantly
affected by changes in market interest rates.
Foreign Exchange Risk Management
The fair values of our foreign currency derivatives and investments accounted
for under the cost method continue to be subject to fluctuations in foreign
exchange rates. In addition, the fair value of the TCNZ Exchangeable Notes is
affected by changes in the U.S. dollar/New Zealand dollar exchange rate and the
fair value of the CWC Exchangeable Notes is affected by changes in the U.S.
dollar/British pound exchange rate. As of September 30, 1998, the net fair value
of our foreign currency derivatives, cost method investments, TCNZ Exchangeable
Notes and CWC Exchangeable Notes was a liability of approximately $5.5 billion.
The aggregate hypothetical decrease in the fair value of that liability
resulting from a 10% increase in the value of the U.S. dollar against the
various currencies that we are exposed to at September 30, 1998 was estimated to
be $127 million. The aggregate hypothetical increase in the fair value of that
liability resulting from a 10% decrease in the value of the U.S. dollar against
the various currencies that we are exposed to at September 30, 1998 was
estimated to be $156 million. This calculation does not include potential
changes in the value of our international investments accounted for under the
equity method. As of September 30, 1998, the carrying value of our equity method
international investments totaled approximately $1.9 billion.
As described earlier, we adjusted the carrying values of our investments
in TelecomAsia and Excelcomindo in the third quarter of 1998, resulting in a
pre-tax charge of $485.1 million. For additional information, you should read
the section "Asian Investments" on page 23 and Note 7 to our condensed
consolidated financial statements.
Other Risk Management
The fair value of the TCNZ Exchangeable Notes is affected by changes in the
price of TCNZ shares and the fair value of the CWC Exchangeable Notes is
affected by changes in the price of CWC shares. The hypothetical fair value of
the TCNZ Exchangeable Notes and the CWC Exchangeable Notes assuming a 10%
increase or decrease in the U.S. dollar value of TCNZ and CWC shares at
September 30, 1998 was estimated to be $5.7 billion and $5.5 billion,
respectively. Other than the issuances of the TCNZ Exchangeable Notes and the
CWC Exchangeable Notes, there has been no material change in our exposure to
other market risks since December 31, 1997.
The TCNZ Exchangeable Notes and the CWC Exchangeable Notes also expose us
to potential earnings impacts. Should the aggregate U.S. dollar value of the
TCNZ shares rise to greater than 120% of the share price at the pricing of the
offering or the CWC shares rise to greater than 128% of the share price at the
pricing of the offering, our earnings would be affected as a result of adjusting
the debt liability to its fair value. Our cash flows would not be affected by
changes in the price of the TCNZ or CWC shares, unless we pay the noteholders in
cash.
27
<PAGE>
- ---------------------------------------------------------------------
OTHER FACTORS THAT MAY EFFECT FUTURE RESULTS
- ---------------------------------------------------------------------
Recent Regulatory Developments
- --------------------------------------------------------------------------------
In September 1998, following an appeal by the U. S. Department of Justice
("DOJ") and other parties, the U. S. Court of Appeals reversed a District Court
decision which had found that the line-of-business restrictions in the
Telecommunications Act of 1996 ("Act") were unconstitutional. Those restrictions
include the requirement that BOCs alone must comply with a competitive checklist
before being allowed to provide long distance. We were allowed to join the case
prior to the District Court's decision. The Court of Appeals decision has been
appealed to the U. S. Supreme Court. Although we believe that the District
Court's decision will be upheld on appeal, we are continuing to work through the
regulatory process at both the state and federal levels in order to be in a
position to enter the in-region long distance market in 1999.
In April 1998, New York Telephone Company filed with the New York State
Public Service Commission (NYSPSC) a statement setting forth additional
commitments that it will make to the FCC in connection with our anticipated
application for permission to enter the in-region long distance market in New
York. Those commitments include additional operations support systems
capabilities, enhanced interconnection options to stimulate facilities-based
competitive alternatives, and detailed performance standards with prescribed
adjustments to wholesale prices if standards are not met. In addition, New York
Telephone Company will offer combinations of unbundled network elements and an
Unbundled Network Element Platform (UNE-P) to competitors wishing to provide
basic local and ISDN service to business or residential customers. New York
Telephone Company estimates that the UNE-P will provide competitors with
discounts from its retail rates of 30-40 percent on residential lines and 50-60
percent on business lines. New York Telephone Company will offer UNE-P
throughout its New York operating area, but UNE-P will not be available to
competitors for service to business customers in those parts of New York City
where there is a defined level of local competition from two or more competitive
local exchange carriers. New York Telephone Company's commitment to offer the
discounted UNE-P will be for four years in New York City and other major urban
areas and for six years in the rest of the state. Following New York Telephone
Company's filing, the then-chairman of the NYSPSC announced that, subject to New
York Telephone Company meeting its commitments, he would recommend that our
application to the FCC be approved. We expect to file our application with the
FCC near the end of this year, with the goal of entering the New York in-region
long distance market by the end of the first quarter of next year, but there can
be no assurance that any approval will be forthcoming in time to permit us to do
so. Following FCC approval of our application for New York, we expect then to
file applications with the FCC for Pennsylvania, Massachusetts, New Jersey,
Virginia and Maryland. The timing of our long distance entry in each of our 14
jurisdictions depends on the receipt of FCC approval and on the ultimate outcome
of the appeals of the District Court's decision.
In October 1998, the FCC initiated a proceeding with respect to its price
cap rules to refresh the record with respect to the productivity offset,
continuation of a "market based" approach to implement changes in access tariff
structure, and affording additional pricing flexibility for access services. In
addition, the FCC will examine the reasonableness of the 10.25% interstate rate
of return in light of apparent changes in market risks and overall cost of
capital since the establishment of this threshold in 1991.
The FCC required a phased restructuring of access charges, which began in
January 1998, so that the telephone subsidiaries' non-usage-sensitive costs will
be recovered from long distance carriers and end-users through flat rate
charges, and usage-sensitive costs will be recovered from long distance carriers
through usage-based rates. In addition, the FCC has required establishment of
different levels of usage-based charges for originating and for terminating
interstate traffic.
The FCC, in conjunction with Federal-State Joint Board on Universal
Service, will adopt a methodology for determining high-cost areas for non-rural
carriers, and the proper amount of federal universal service support for high
cost areas. A new federal high cost universal service support mechanism is
expected to become effective on July 1, 1999.
28
<PAGE>
- ----------------------------------------
OTHER MATTERS
- ----------------------------------------
Year "2000" Update
- --------------------------------------------------------------------------------
Our comprehensive program to evaluate and address the impact of the Year 2000
date transition on our operations includes steps to (a) inventory and assess for
Year 2000 compliance our 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 our 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.
Our goal for these operations is to have our network and any other mission
critical systems Year 2000 compliant (including testing) by June 30, 1999. Below
is a more detailed breakdown of our 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. We have also made substantial
progress on the remaining network elements and are on track to make our
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. We have made substantial
progress on the remaining application systems and we are on track to make
our 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 our 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. We have made
substantial progress on the remaining items and we are on track to make
our June 30, 1999 objective in this area.
For our other controlled or majority-owned subsidiaries, including Bell
Atlantic Mobile (BAM) and our 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.
Our Year 2000 program also includes a project to review and remediate
affected systems (including those with embedded technology) within our buildings
and other facilities, a project to assure Year 2000 compliance across all of our
internal business processes, and other specific projects directed towards
insuring we meet our Year 2000 objectives.
29
<PAGE>
Third Party Issues
Vendor Issues
-------------
In general, our product vendors have made available either Year
2000-compliant versions of their offerings or new compliant products as
replacements of discontinued offerings. In most cases, the compliance "status"
of the product in question is based on vendor-provided information, which
remains subject to our testing and verification activities. In several
instances, vendors have not met original delivery schedules, resulting in
delayed testing and deployment. At this time, we do not anticipate that such
delays will have a material impact on our ability to achieve Year 2000
compliance within our desired timeframes. We are 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 our product vendors. As a result, we 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. We intend to monitor critical service provider activities,
as appropriate, through the completion of their respective remediation projects.
Some of our 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 our 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. We will continue to pursue all
appropriate measures with our vendors in order to resolve information sharing
issues, and we anticipate that the recently enacted Year 2000 Information and
Readiness Disclosure Act will have a positive impact on information sharing by
our vendors.
Customer Issues
---------------
Our customers remain keenly interested in the progress of our Year 2000 efforts,
and we anticipate increased demand for information, including detailed testing
data and company-specific responses. We are providing limited warranties of Year
2000 compliance for certain new telecommunications services and other offerings,
but we do not expect any resulting warranty costs to be material. We are also
analyzing and addressing Year 2000 issues in customer premise equipment (CPE),
including CPE that we have sold or maintained. In general, the customer is
responsible for CPE. However, customers could attribute a Year 2000 malfunction
of their CPE, whether or not sold or maintained by us, to a failure of our
network service. We also have a separate effort to identify and address Year
2000 issues in CPE used in connection with the provision of 911 and related
services.
Interconnecting Carriers
------------------------
Our 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, our customers could experience
impairment of service.
Costs
From the inception of our Year 2000 project through September 30, 1998, and
based on the cost tracking methods we have historically applied, we have
incurred total pre-tax expenses of approximately $95 million ($70 million of
which was incurred in the nine months ended September 30, 1998), and we have
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 we expect to incur total pre-tax expenses for
our Year 2000 project of approximately $200 million to $300 million and total
capital expenditures of $200 million to $250 million.
We have investments in various joint ventures and other interests. At this
time, we do not anticipate that the impact of any Year 2000 remediation costs
that they incur will be material to our results of operations.
30
<PAGE>
Risks
The failure to correct a material Year 2000 problem could cause an interruption
or failure of certain of our normal business functions or operations, which
could have a material adverse effect on our results of operations, liquidity or
financial condition; however, we consider such a likelihood remote. Due to the
uncertainty inherent in other Year 2000 issues that are ultimately beyond our
control, including, for example, the final Year 2000 readiness of our suppliers,
customers, interconnecting carriers, and joint venture and investment interests,
we are unable to determine at this time the likelihood of a material impact on
our results of operations, liquidity or financial condition, due to such Year
2000 issues. However, we are taking appropriate prudent measures to mitigate
that risk. We anticipate that, in the event of any material interruptions or
failures of our service resulting from actual or perceived Year 2000 problems
within or beyond our control, we could be subject to third party claims.
Contingency Plans
As a public telecommunications carrier, we have had considerable experience
successfully dealing with natural disasters and other events requiring
contingency planning and execution. As part of our efforts to develop
appropriate Year 2000 contingency plans, we are reviewing our existing Emergency
Preparedness and Disaster Recovery plans for any necessary modifications.
We have 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.
We are 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). We anticipate
that an initial draft of our corporate contingency plan will be ready in the
first quarter of 1999.
Euro Common Currency
- --------------------------------------------------------------------------------
Beginning January 1, 1999, eleven European countries have agreed to participate
in a multi-step process to convert their existing sovereign currencies to the
Euro. The process includes a transition period of three years, during which time
either the Euro or the participating countries' own currencies will be accepted
as payment. After the transition period, the countries will issue
Euro-denominated bills and coins and will withdraw their own currencies from
circulation no later than July 1, 2002, completing the conversion process.
We have investments in companies in Italy and the Netherlands which are
participating in the Euro conversion. We do not believe that the Euro conversion
will have a material effect on these investments.
Proposed Bell Atlantic - GTE Merger
- --------------------------------------------------------------------------------
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
We expect the merger to qualify as a "pooling of interests," which means
that for accounting and financial reporting purposes the companies will be
treated as if they had always been combined. 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.
The companies have identified the following synergy targets by the third
year following completion of the merger: (i) expense savings of approximately $2
billion annually, principally related to economies of scale and other operating
efficiencies; (ii) savings in annual capital expenditures of approximately $500
million; and (iii) incremental revenues of approximately $2 billion annually,
which at an estimated operating margin of 25%, will produce approximately $500
million in incremental operating income.
31
<PAGE>
Based on cost and revenue synergy targets, we expect the transaction to be
accretive to earnings per share, excluding one-time, merger-related charges, in
the first year following the completion of the merger. It is anticipated that
the merged company will target annual earnings per share growth of 13% to 15%,
excluding one-time, merger-related charges, following the completion of the
merger.
Recent Accounting Pronouncements
- --------------------------------------------------------------------------------
For a discussion of recent accounting pronouncements and their impact on our
financial statements, you should read Note 11 to the condensed consolidated
financial statements.
Other Information
- --------------------------------------------------------------------------------
At a Bell Atlantic Analyst Conference on October 28, 1998, we made the following
statements:
1) We are comfortable with current analyst estimates of $2.70 to $2.72
per share for 1998, excluding transition and integration costs and
other special items.
2) We are targeting consolidated revenue growth of 4% in 1998 and 5% to
6% in 1999.
3) We are targeting 1999 earnings growth from our current business
operations within the 10% to 12% range, excluding transition and
integration costs.
4) We estimate that our implementation of the American Institute of
Certified Public Accountants' Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1), will result in a net after-tax benefit
of $200 million to $250 million in 1999. We intend to offset some or
all of that benefit in 1999 with incremental investments in long
distance and data market entry initiatives.
5) We estimate that, including long distance and data market entry costs
and the effects of SOP 98-1, but excluding transition and integration
costs, 1999 earnings growth will remain within the 10% to 12% range.
- -------------------------------------------------------------------------------
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
- -------------------------------------------------------------------------------
Information contained above in this Management's Discussion and Analysis with
respect to expected financial results and future events and trends is
forward-looking, based on our estimates and assumptions and subject to risks and
uncertainties. For those statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
The following important factors could affect the future results of our
company and could cause those results to differ materially from those expressed
in the forward-looking statements: (i) materially adverse changes in economic
conditions in the markets served by us or by companies in which we have
substantial investments; (ii) material changes in available technology; (iii)
the final outcome of FCC rulemakings, and judicial review of those rulemakings,
with respect to the access and interconnection that we must provide other
carriers under the Telecommunications Act of 1996; (iv) the final outcome of FCC
rulemakings with respect to access charge reform and universal service; (v)
future state regulatory actions in our operating areas; (vi) the extent, timing
and success of competition from others in the local telephone and intraLATA toll
service markets; (vii) the timing and profitability of our entry into the
in-region long distance market; (viii) the success and expense of the
remediation efforts of our company, suppliers, customers and interconnecting
carriers in achieving Year 2000 compliance; and (ix) the timing of, and
regulatory or other conditions associated with, the completion of the merger
with GTE.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------------------
Information relating to market risk is included in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, in the
Financial Condition section under the caption "Market Risk."
32
<PAGE>
- --------------------------------------------------------------------------------
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
-------
12 Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1998:
A Current Report on Form 8-K, dated July 23, 1998, was filed regarding Bell
Atlantic's second quarter 1998 financial results.
A Current Report on Form 8-K, dated July 27, 1998, was filed regarding (i)
the Agreement and Plan of merger by and among Bell Atlantic Corporation,
Beta Gamma Corporation and GTE Corporation, dated as of July 27, 1998, (ii)
the Stock Option Agreement, dated as of July 27, 1998, between Bell
Atlantic Corporation and GTE Corporation, (iii) the Stock Option Agreement,
dated as of July 27, 1998, between GTE Corporation and Bell Atlantic
Corporation, and (iv) the Joint Press Release, dated July 28, 1998, issued
by Bell Atlantic Corporation and GTE Corporation.
A Current Report on Form 8-K, dated August 3, 1998, was filed regarding
plans to issue in excess of $3 billion in notes exchangeable into ordinary
shares of Cable & Wireless Communications plc.
33
<PAGE>
Signatures
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BELL ATLANTIC CORPORATION
Date: November 10, 1998 By /s/ Mel Meskin
-------------------------------
Mel Meskin
Vice President - Comptroller
(Principal Accounting Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 4, 1998.
34
<PAGE>
EXHIBIT 12
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
----------------------
<S> <C>
Income before provision for income taxes and extraordinary item............. $ 3,399.8
Minority interest........................................................... 21.0
Loss from unconsolidated businesses......................................... 462.6
Dividends received from unconsolidated businesses........................... 128.6
Interest expense, including interest related to lease financing activities.. 1,064.2
Portion of rent expense representing interest............................... 146.1
Amortization of capitalized interest........................................ 53.2
-----------
Income, as adjusted......................................................... $ $5,275.5
===========
Fixed charges:
Interest expense, including interest related to lease financing activities.. $ 1,064.2
Portion of rent expense representing interest............................... 146.1
Capitalized interest........................................................ 67.4
Preferred stock dividend requirement........................................ 16.2
-----------
Fixed charges............................................................... $ 1,293.9
===========
Ratio of Earnings to Fixed Charges.......................................... 4.08
===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND THE CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 785
<SECURITIES> 0
<RECEIVABLES> 7,040
<ALLOWANCES> 616
<INVENTORY> 571
<CURRENT-ASSETS> 8,907
<PP&E> 81,715
<DEPRECIATION> 45,487
<TOTAL-ASSETS> 54,998
<CURRENT-LIABILITIES> 9,578
<BONDS> 18,201
0
0
<COMMON> 158
<OTHER-SE> 12,446
<TOTAL-LIABILITY-AND-EQUITY> 54,998
<SALES> 0
<TOTAL-REVENUES> 23,489
<CGS> 0
<TOTAL-COSTS> 18,694
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,032
<INCOME-PRETAX> 3,400
<INCOME-TAX> 1,470
<INCOME-CONTINUING> 1,930
<DISCONTINUED> 0
<EXTRAORDINARY> 24
<CHANGES> 0
<NET-INCOME> 1,906
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.21
</TABLE>
