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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8606
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 June 30, 1999, 1,552,728,813 shares of the registrant's Common Stock were
outstanding, after deducting 23,517,512 shares held in treasury.
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Table of Contents
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Item No.
<TABLE>
<CAPTION>
Part I. Financial Information Page
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<S> <C>
1. Financial Statements
Condensed Consolidated Statements of Income
For the three and six months ended June 30, 1999 and 1998 2-3
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 4-5
Condensed Consolidated Statement of Changes in Shareowners' Investment
For the six months ended June 30, 1999 6
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8-15
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16-33
3. Quantitative and Qualitative Disclosures About Market Risk 34
<CAPTION>
Part II. Other Information
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<S> <C>
4. Submission of Matters to a Vote of Security Holders 35
6. Exhibits and Reports on Form 8-K 36
</TABLE>
1
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Part I - Financial Information
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Item 1. Financial Statements
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Bell Atlantic Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts) (Unaudited) Three Months Ended June 30,
1999 1998
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<S> <C> <C>
OPERATING REVENUES $8,295 $7,928
OPERATING EXPENSES
Employee costs, including benefits and taxes 2,051 2,116
Depreciation and amortization 1,541 1,445
Other operating expenses 2,556 2,414
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6,148 5,975
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OPERATING INCOME 2,147 1,953
Income (loss) from unconsolidated businesses 37 (26)
Other income and (expense), net 4 42
Interest expense 315 363
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Income before provision for income taxes and extraordinary item 1,873 1,606
Provision for income taxes 700 579
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INCOME BEFORE EXTRAORDINARY ITEM 1,173 1,027
Extraordinary item
Early extinguishment of debt, net of tax (6) (6)
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NET INCOME $1,167 $1,021
==============================
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary item $ .76 $ .66
Extraordinary item (.01) --
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Net Income $ .75 $ .66
==============================
Weighted-average shares outstanding (in millions) 1,553 1,553
==============================
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item $ .75 $ .65
Extraordinary item (.01) --
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Net Income $ .74 $ .65
==============================
Weighted-average shares - diluted (in millions) 1,581 1,578
==============================
Dividends declared per common share $ .385 $ .385
==============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Bell Atlantic Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts) (Unaudited) Six Months Ended June 30,
1999 1998
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<S> <C> <C>
OPERATING REVENUES $16,262 $15,579
OPERATING EXPENSES
Employee costs, including benefits and taxes 4,069 4,420
Depreciation and amortization 3,045 2,856
Other operating expenses 4,923 4,638
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12,037 11,914
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OPERATING INCOME 4,225 3,665
Income (loss) from unconsolidated businesses 71 (3)
Other income and (expense), net 23 56
Interest expense 630 673
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Income before provision for income taxes and extraordinary item 3,689 3,045
Provision for income taxes 1,374 1,108
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INCOME BEFORE EXTRAORDINARY ITEM 2,315 1,937
Extraordinary item
Early extinguishment of debt, net of tax (6) (23)
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NET INCOME 2,309 1,914
Redemption of investee preferred stock -- (2)
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NET INCOME AVAILABLE TO COMMON SHAREOWNERS $ 2,309 $ 1,912
========================
BASIC EARNINGS PER COMMON SHARE:
Income available to common shareowners before extraordinary item $ 1.50 $ 1.24
Extraordinary item (.01) (.01)
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Net Income Available to Common Shareowners $ 1.49 $ 1.23
========================
Weighted-average shares outstanding (in millions) 1,553 1,553
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DILUTED EARNINGS PER COMMON SHARE:
Income available to common shareowners before extraordinary item $ 1.47 $ 1.22
Extraordinary item (.01) (.01)
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Net Income Available to Common Shareowners $ 1.46 $ 1.21
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Weighted-average shares - diluted (in millions) 1,582 1,578
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Dividends declared per common share $ .77 $ .77
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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CONDENSED CONSOLIDATED BALANCE SHEETS
Bell Atlantic Corporation and Subsidiaries
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Assets
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<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in Millions) (Unaudited) June 30, December 31,
1999 1998
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CURRENT ASSETS
Cash and cash equivalents $ 232 $ 237
Short-term investments 280 786
Accounts receivable, net of allowances of $634 and $593 6,722 6,560
Inventories 584 566
Prepaid expenses 658 522
Other 262 411
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8,738 9,082
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PLANT, PROPERTY AND EQUIPMENT 85,943 83,064
Less accumulated depreciation 48,157 46,248
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37,786 36,816
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INVESTMENTS IN UNCONSOLIDATED BUSINESSES 5,929 4,276
OTHER ASSETS 5,420 4,970
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TOTAL ASSETS $57,873 $55,144
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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CONDENSED CONSOLIDATED BALANCE SHEETS
Bell Atlantic Corporation and Subsidiaries
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Liabilities and Shareowners' Investment
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<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in Millions, Except Per Share Amounts) (Unaudited) June 30, December 31,
1999 1998
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CURRENT LIABILITIES
Debt maturing within one year $ 3,558 $ 2,988
Accounts payable and accrued liabilities 5,955 6,105
Other 1,479 1,438
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10,992 10,531
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LONG-TERM DEBT 17,381 17,646
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EMPLOYEE BENEFIT OBLIGATIONS 9,962 10,384
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 3,234 2,254
Unamortized investment tax credits 210 222
Other 623 551
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4,067 3,027
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MINORITY INTEREST, INCLUDING A PORTION SUBJECT TO
REDEMPTION REQUIREMENTS 338 330
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PREFERRED STOCK OF SUBSIDIARY 201 201
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SHAREOWNERS' INVESTMENT
Series preferred stock ($.10 par value; none issued) -- --
Common stock ($.10 par value; 1,576,246,325 shares and
1,576,246,325 shares issued) 158 158
Contributed capital 13,444 13,368
Reinvested earnings 2,294 1,371
Accumulated other comprehensive income (loss) 160 (714)
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16,056 14,183
Less common stock in treasury, at cost 631 593
Less deferred compensation - employee stock ownership plans 493 565
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14,932 13,025
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TOTAL LIABILITIES AND SHAREOWNERS' INVESTMENT $57,873 $55,144
==============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREOWNERS' INVESTMENT
Bell Atlantic Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in Millions and Shares in Thousands)(Unaudited) Six Months Ended June 30, 1999
Shares Amount
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<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period 1,576,246 $ 158
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CONTRIBUTED CAPITAL
Balance at beginning of period 13,368
Shares distributed:
Employee plans 75
Issuance of stock by subsidiary 1
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Balance at end of period 13,444
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REINVESTED EARNINGS
Balance at beginning of period 1,371
Net income 2,309
Dividends declared (1,196)
Shares distributed:
Employee plans (195)
Tax benefit of dividends paid to ESOPs 5
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Balance at end of period 2,294
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period (714)
Foreign currency translation adjustments, net of tax (150)
Unrealized gains on securities, net of tax 1,024
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Balance at end of period 160
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TREASURY STOCK
Balance at beginning of period 22,887 593
Shares purchased 7,096 398
Shares distributed:
Employee plans (6,451) (359)
Shareowner plans (14) (1)
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Balance at end of period 23,518 631
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DEFERRED COMPENSATION - ESOPs
Balance at beginning of period 565
Amortization (72)
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Balance at end of period 493
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TOTAL SHAREOWNERS' INVESTMENT $14,932
==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Bell Atlantic Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in Millions) (Unaudited) Six Months Ended June 30,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,309 $ 1,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,045 2,856
Extraordinary item, net of tax 6 23
Loss (income) from unconsolidated businesses (71) 3
Dividends received from unconsolidated businesses 56 88
Amortization of unearned lease income (72) (57)
Deferred income taxes, net 469 118
Investment tax credits (12) (14)
Other items, net 8 101
Changes in certain assets and liabilities, net of effects from
Acquisition/disposition of businesses (1,042) (159)
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Net cash provided by operating activities 4,696 4,873
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CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 497 300
Additions to plant, property and equipment (3,640) (3,484)
Investments in unconsolidated businesses, net (825) (414)
Proceeds from disposition of businesses 612 5
Other investing activities, net (151) 27
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Net cash used in investing activities (3,507) (3,566)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 199 2,990
Principal repayments of borrowings and capital lease obligations (161) (209)
Early extinguishment of debt (257) (590)
Net change in short-term borrowings with original
maturities of three months or less 139 (2,032)
Proceeds from financing of cellular assets 380 --
Dividends paid (1,201) (1,188)
Proceeds from sale of common stock 180 375
Purchase of common stock for treasury (398) (655)
Other financing activities, net (75) (18)
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Net cash used in financing activities (1,194) (1,327)
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Decrease in cash and cash equivalents (5) (20)
Cash and cash equivalents, beginning of period 237 323
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Cash and cash equivalents, end of period $ 232 $ 303
================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Bell Atlantic Corporation and Subsidiaries
(Unaudited)
1. Basis of Presentation
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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 that 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 Annual Report on Form 10-K for the year
ended December 31, 1998.
We have reclassified certain amounts from the prior year's data to conform to
the 1999 presentation.
2. New Accounting Standards
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Costs of Computer Software
Effective January 1, 1999, we adopted Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under SOP No. 98-1, we capitalize the cost of internal-use
software which has a useful life in excess of one year. Subsequent additions,
modifications or upgrades to internal-use software are capitalized only to the
extent that they allow the software to perform a task it previously did not
perform. Software maintenance and training costs are expensed in the period in
which they are incurred. Also, we now capitalize interest associated with the
development of internal-use software. The effect of adopting SOP No. 98-1 was an
increase in net income of approximately $115 million for the six months ended
June 30, 1999.
Costs of Start-Up Activities
Effective January 1, 1999, we adopted SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." Under this accounting standard, we expense costs of
start-up activities as incurred, including pre-operating, pre-opening and other
organizational costs. The adoption of SOP No. 98-5 did not have a material
effect on our results of operations or financial condition because our policy
has been generally to expense all start-up activities.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year.
Under the amended pronouncement, Bell Atlantic must adopt SFAS No. 133 no later
than January 1, 2001. We are currently evaluating the provisions of SFAS No. 133
and have not yet determined what the impact of adopting this statement will be
on our future results of operations or financial condition.
3. Commitments and Contingencies
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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 that we currently deem to be probable and estimable.
We do not expect that the ultimate resolution of pending regulatory and legal
matters in future periods will have a material effect on our financial
condition, but it could have a material effect on our results of operations.
8
<PAGE>
4. Investments in Unconsolidated Businesses
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Omnitel Pronto Italia, S.p.A.
In June 1999, we made an additional investment in Omnitel Pronto Italia, S.p.A.
(Omnitel) of $635 million, which increased our ownership percentage from 19.71%
to 23.1%. Approximately $606 million of this additional investment represents
goodwill, which is being amortized on a straight-line basis over a period of 25
years.
Telecom Corporation of New Zealand Limited
Effective May 31, 1999, we took steps to disaffiliate from Telecom Corporation
of New Zealand Limited (TCNZ). As a result, we no longer have significant
influence over TCNZ's operating and financial policies and, therefore, have
changed the accounting for our investment in TCNZ from the equity method to the
cost method. The change in the method of accounting for this investment is not
expected to have a material effect on our future results of operations. We
currently hold a 24.95% interest in TCNZ.
Coincident with our change to the cost method of accounting, our investment in
TCNZ is now subject to the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under these provisions, our TCNZ
shares are classified as "available-for-sale" securities and, accordingly, our
TCNZ investment has been adjusted from a carrying value of $363 million to its
fair value of $1,909 million at June 30, 1999. This increase in the value of our
investment has been recorded in Investments in Unconsolidated Businesses in our
balance sheet. The unrealized holding gain of $1,005 million (net of income
taxes of $541 million) has been recognized in Accumulated Other Comprehensive
Income (Loss) in our statement of changes in shareowners' investment.
Cable & Wireless Communications plc
On July 27, 1999, our Board of Directors approved an agreement with Cable &
Wireless plc (Cable & Wireless), NTL Incorporated (NTL) and Cable & Wireless
Communications plc (CWC) for the proposed restructuring of CWC. The completion
of the restructuring is subject to a number of conditions. Under the terms of
the agreement, CWC's consumer cable telephone, television and Internet
operations would be separated from its corporate, business, Internet protocol
and wholesale operations. The consumer operations would be acquired by NTL and
the remainder by Cable & Wireless. In exchange for our 18.6% interest in CWC, we
would receive shares in the two acquiring companies, representing approximately
11.2% of NTL and approximately 4.7% of Cable & Wireless. Upon completion of the
restructuring, our previously issued $3,180 million in CWC exchangeable notes
would be exchangeable on and after July 1, 2002 for shares in NTL and Cable &
Wireless in proportion to that received in the restructuring. Upon exchange by
investors, we retain the option to settle in cash or by delivery of the Cable &
Wireless and NTL shares. Upon completion of the restructuring, we expect this
transaction to result in a material non-cash gain. The transaction also may
cause the exchangeable notes to be marked-to-market, resulting in a charge to
income. See Note 7 for additional information about the CWC exchangeable notes.
PrimeCo Personal Communications, L.P.
On August 3, 1999, we and Vodafone AirTouch Plc announced an agreement to
restructure our ownership interests in PrimeCo Personal Communications, L.P.
(PrimeCo), a partnership that was formed by us and Vodafone AirTouch in 1994 and
provides personal communications services in major cities across the United
States.
Under the terms of the agreement, we will assume ownership of PrimeCo operations
in five "major trading areas" (MTAs) - Richmond, VA, New Orleans, LA and the
Florida markets in Jacksonville, Tampa and Miami. Vodafone AirTouch will take
over operations in five MTAs - Chicago, IL, Milwaukee, WI and the Texas markets
of Dallas, San Antonio and Houston. We expect to complete the allocation of the
PrimeCo markets in the fourth quarter of 1999 or in the first quarter of 2000.
Under a consent decree with the Department of Justice in connection with our
merger with GTE Corporation (GTE), we and GTE are required to divest of
overlapping wireless properties that we and GTE own or will own in various
geographic areas. The division of the PrimeCo markets is a significant step
toward meeting these conditions. Upon settlement, we expect this transaction to
result in a material non-cash gain. For information about our proposed merger
with GTE, see Note 11.
Separately, we and Vodafone AirTouch reached an out-of-court settlement of all
litigation currently pending before the United States District Court for the
Northern District of California, relating to our companies' TomCom limited
partnership.
9
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5. Grupo Iusacell, S.A. de C.V.
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Grupo Iusacell, S.A. de C.V. (Iusacell), a Mexican wireless company that we
consolidate, and its principal shareholders entered into an agreement (the 1998
Restructuring Agreement) to restructure ownership of the company. This
restructuring provides for the formation of a new holding company, Nuevo Grupo
Iusacell, S.A. de C.V. (New Iusacell), with two classes of shares, one of which
will trade publicly. The restructuring is intended to increase the liquidity of
Iusacell's publicly traded shares and to increase the availability of debt
financing to Iusacell.
In the first quarter of 1999, Iusacell borrowed $31 million from us under a $150
million subordinated convertible debt facility that expired in June 1999 (the
Facility). The total amount borrowed under the Facility prior to its expiration
was approximately $133 million. We immediately converted the $31 million of debt
into 44 million additional Series A shares at a price of $.70 per share as
contemplated by the 1998 Restructuring Agreement. Under this same agreement, we
sold 22 million of those shares to the Peralta Group, the other principal
shareholder of Iusacell, for $.70 per share. As a result of this debt conversion
and sale of shares to the Peralta Group, our ownership of Iusacell increased to
47.2% as of June 30, 1999.
On August 4, 1999, New Iusacell concluded an exchange and rights offering to
existing Iusacell shareholders as contemplated under the 1998 Restructuring
Agreement. These offerings permitted shareholders to exchange current shares in
Iusacell for shares in New Iusacell and to subscribe to additional shares of New
Iusacell based on their current ownership. In addition, New Iusacell launched
primary and secondary share offerings. We and the Peralta Group participated in
the secondary offering. We expect that our ownership percentage will decrease
from 47.2% to approximately 40% when the offering is completed. We will continue
to retain management control of New Iusacell following the completion of these
transactions and, therefore, continue to consolidate Iusacell's results.
6. Marketable Securities
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We have investments in marketable securities, primarily common stocks, which are
considered "available-for-sale" under SFAS No. 115. These investments have been
included in our balance sheet in Investments in Unconsolidated Businesses and
Short-term Investments.
Under SFAS No. 115, available-for-sale securities are required to be carried at
their fair value, with unrealized gains and losses (net of income taxes)
recorded in Accumulated Other Comprehensive Income (Loss) in our statement of
changes in shareowners' investment. The fair values of our investments in
marketable securities are determined based on market quotations.
The table below shows certain summarized information related to these
investments.
<TABLE>
<CAPTION>
Gross Unrealized Gross
(Dollars in Millions) Cost Gains Unrealized Fair Value
Losses
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<S> <C> <C> <C> <C>
AT JUNE 30, 1999
Investments in unconsolidated businesses $369 $1,579 $-- $1,948
Short-term investments 29 -- (1) 28
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$398 $1,579 $(1) $1,976
============================================================
AT DECEMBER 31, 1998
Investments in unconsolidated businesses $ 1 $ 6 $-- $ 7
Short-term investments 23 -- (1) 22
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$ 24 $ 6 $(1) $ 29
============================================================
</TABLE>
Our investments in unconsolidated businesses increased from December 31, 1998 as
a result of a change in the method of accounting for our TCNZ investment, as
described in Note 4.
Certain other investments that we hold are not carried at their fair values
because those values are not readily determinable. We have, however, adjusted
the carrying values of these securities in situations where we believe declines
in value below cost were other than temporary. The carrying values for these
investments were $184 million at June 30, 1999 and $771 million at December 31,
1998. The decrease from December 31, 1998 was principally due to the disposition
of our remaining investment in Viacom Inc. (Viacom) in January 1999.
10
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7. Debt
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Exchangeable Notes
Our long-term debt includes two series of exchangeable notes that were issued in
1998 by our wholly owned subsidiary, Bell Atlantic Financial Services, Inc.
(FSI). First, FSI issued $2,455 million of 5.75% senior exchangeable notes due
on April 1, 2003, which are exchangeable on or after September 1, 1999 at the
option of the holder into shares of Telecom Corporation of New Zealand (TCNZ
exchangeable notes). Upon exchange by investors, we retain the option to settle
in cash or by delivery of TCNZ shares. Second, FSI issued $3,180 million of
4.25% senior exchangeable notes due on September 15, 2005, which are
exchangeable on or after July 1, 2002 at the option of the holder into shares of
Cable & Wireless Communications plc (CWC exchangeable notes). Upon exchange by
investors, we retain the option to settle in cash or by delivery of CWC shares.
The CWC exchangeable notes were issued at a discount and at June 30, 1999 had a
carrying value of $3,206 million. The exchange prices were established at a 20%
premium to the TCNZ share price at the pricing date of the offering and at a 28%
premium to the CWC share price at the pricing date of the offering.
The exchangeable notes must be marked-to-market if the fair value of the
underlying TCNZ shares rises to a level greater than 120% of the share price at
the pricing date of the offering, or the underlying CWC shares rises to a level
greater than 128% of the share price at the pricing date of the offering. If
either event should occur, we are required to increase the applicable
exchangeable note liability by the amount of the increase in the share price
over the exchange price. This mark-to-market transaction would reduce income by
the amount of the increase in the exchangeable note liability. If the share
price subsequently declines, the liability would be reduced (but not to less
than its amortized carrying value) and income would be increased. At June 30,
1999, the fair values of the underlying TCNZ shares and CWC shares did not
exceed the recorded values of the debt liability and, therefore, no
mark-to-market adjustments were recorded to our financial statements.
A proposed restructuring of our investment in CWC, as discussed in Note 4, would
modify the securities to be exchanged for the CWC exchangeable notes. Under this
restructuring, we would receive shares of two companies acquiring the businesses
of CWC in exchange for our CWC shares.
Support Agreements
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 each of the Support Agreements, Bell Atlantic guarantees the payment of
interest, premium (if any), principal and the cash value of exchange property
related to the 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 $242
million at June 30, 1999) should FSI fail to pay. The holders of this FSI 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 $15 billion at
June 30, 1999.
Issuance and Early Extinguishment of Long-Term Debt
In April 1999, our operating telephone subsidiary New England Telephone and
Telegraph Company issued $200 million of 5.875% notes due on April 15, 2009. The
proceeds from the issuance were used to redeem $200 million of 7.375% notes due
on October 15, 2007. We recorded an extraordinary charge of $1 million (net of
an income tax benefit of $1 million) related to this redemption.
We also recorded an extraordinary charge of $5 million (net of an income tax
benefit of $3 million) in the second quarter of 1999 in connection with the
repurchase of $57 million in principal amount of debentures of certain of our
operating telephone subsidiaries.
8. Comprehensive Income
- ------------------------------------------------------------
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.
11
<PAGE>
The components of total comprehensive income for interim periods are presented
in the following table:
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME $1,167 $1,021 $2,309 $1,914
----------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments, net of
tax (132) (145) (150) (247)
Unrealized gains on securities, net of tax 1,021 4 1,024 11
----------------------------------------------------------
889 (141) 874 (236)
----------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $2,056 $ 880 $3,183 $1,678
==========================================================
</TABLE>
The increase in unrealized gains on securities is principally due to the change
in accounting for our investment in TCNZ from the equity method to the cost
method. As a result of this change in method of accounting, we adjusted our
investment in TCNZ to its fair value at June 30, 1999 and recorded an unrealized
holding gain of $1,005 million (net of income taxes of $541 million). You can
find additional information on the change in method of accounting for the TCNZ
investment in Note 4.
9. 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 Three Months Ended June 30, Six Months Ended June 30,
Amounts)
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME AVAILABLE TO COMMON SHAREOWNERS
Income before extraordinary item $1,173 $1,027 $2,315 $1,937
Redemption of investee preferred stock -- -- -- (2)
----------------------------------------------------------
Income available to common shareowners before
extraordinary item* 1,173 1,027 2,315 1,935
Extraordinary item (6) (6) (6) (23)
----------------------------------------------------------
Net income available to common shareowners* $1,167 $1,021 $2,309 $1,912
==========================================================
BASIC EARNINGS PER COMMON SHARE
Weighted-average shares outstanding 1,553 1,553 1,553 1,553
----------------------------------------------------------
Income available to common shareowners before
extraordinary item $ .76 $ .66 $ 1.50 $ 1.24
Extraordinary item (.01) -- (.01) (.01)
----------------------------------------------------------
Net income available to common shareowners $ .75 $ .66 $ 1.49 $ 1.23
==========================================================
DILUTED EARNINGS PER COMMON SHARE
Weighted-average shares outstanding 1,553 1,553 1,553 1,553
Effect of dilutive securities 28 25 29 25
----------------------------------------------------------
Weighted-average shares - diluted 1,581 1,578 1,582 1,578
----------------------------------------------------------
Income available to common shareowners before
extraordinary item $ .75 $ .65 $ 1.47 $ 1.22
Extraordinary item (.01) -- (.01) (.01)
----------------------------------------------------------
Net income available to common shareowners $ .74 $ .65 $ 1.46 $ 1.21
==========================================================
</TABLE>
*Income and Net income available to common shareowners is the same for purposes
of calculating basic and diluted earnings per share.
Stock options to purchase approximately 1 million shares of common stock were
outstanding at both June 30, 1999 and 1998 which were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares.
10. Segment Information
- ------------------------------------------------------------
We have four reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments are a
Domestic Telecom group which provides domestic wireline telecommunications
services; a Global Wireless group which provides domestic wireless
telecommunications services and includes foreign wireless investments; a
Directory group which is responsible for our domestic and international
publishing businesses and electronic commerce services; and an Other Businesses
group which includes our international wireline telecommunications investments,
lease financing and all other businesses.
12
<PAGE>
We measure and evaluate our reportable segments based on adjusted net income,
which excludes undistributed corporate expenses and special items arising during
each period. Special items are transactions that management has excluded from
the business units' results, but are included in reported consolidated earnings.
We generally account for intersegment sales of products and services and asset
transfers at current market prices. Intersegment revenues were not material in
1999 or 1998.
Special items in the three and six month periods ended June 30, 1999 and 1998
included merger-related costs. In 1998, special items also included retirement
incentive costs. Special items affected our segments as follows:
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC TELECOM
Reported net income $866 $754 $1,748 $1,436
Special items 19 49 29 200
-----------------------------------------------------------------
Adjusted net income $885 $803 $1,777 $1,636
=================================================================
DIRECTORY
Reported net income $191 $177 $ 353 $ 330
Special items 3 -- 3 --
-----------------------------------------------------------------
Adjusted net income $194 $177 $ 356 $ 330
=================================================================
RECONCILING ITEMS
Reported net income $(11) $ 3 $ (8) $ 7
Special items -- 1 -- 2
-----------------------------------------------------------------
Adjusted net income $(11) $ 4 $ (8) $ 9
=================================================================
</TABLE>
The following table provides operating financial information for our four
reportable segments and a reconciliation of segment results to consolidated
results:
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Domestic telecom $6,573 $6,391 $13,014 $12,659
Global wireless 1,124 948 2,118 1,808
Directory 615 602 1,168 1,136
Other businesses 31 28 66 60
-----------------------------------------------------------------
Total segments 8,343 7,969 16,366 15,663
Reconciling items (48) (41) (104) (84)
-----------------------------------------------------------------
Total consolidated $8,295 $7,928 $16,262 $15,579
=================================================================
NET INCOME
Domestic telecom $ 885 $ 803 $ 1,777 $ 1,636
Global wireless 98 66 154 95
Directory 194 177 356 330
Other businesses 23 21 62 46
-----------------------------------------------------------------
Total segments 1,200 1,067 2,349 2,107
Reconciling items (11) 4 (8) 9
Special items (22) (50) (32) (202)
-----------------------------------------------------------------
Total consolidated $1,167 $1,021 $ 2,309 $ 1,914
=================================================================
(Dollars in Millions) At June 30, At December 31,
1999 1998
- ----------------------------------------------------------------------------------------------
SEGMENT ASSETS
Domestic Telecom $42,017 $41,217
Global wireless 8,927 7,739
Directory 1,707 1,741
Other businesses 7,128 5,353
--------------------------------
Total segments 59,779 56,050
Reconciling items (1,906) (906)
--------------------------------
Total consolidated $57,873 $55,144
================================
</TABLE>
Reconciling items include undistributed corporate expenses, corporate assets and
intersegment eliminations. At December 31, 1998, corporate assets were comprised
primarily of our investment in Viacom. This investment was repurchased in
December 1998 and January 1999. Assets for our Global Wireless segment increased
primarily due to our additional investment in Omnitel and assets for our Other
Businesses segment increased primarily due to the change in method of accounting
for our investment in TCNZ (see Note 4).
13
<PAGE>
11. Proposed Bell Atlantic - GTE Merger
- ---------------------------------------------------------
Bell Atlantic and 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. At annual meetings held in May 1999, the
shareholders of each company approved the merger. The completion of the merger
is subject to a number of conditions, including certain regulatory approvals and
receipt of opinions that the merger will be tax-free.
We are working diligently to complete the merger at the earliest practicable
date. However, Bell Atlantic and GTE must obtain the approval of a variety of
state and federal regulatory agencies and, accordingly, the merger may close in
the first half of 2000.
We have provided unaudited pro forma combined condensed financial statements of
income for the years ended December 31, 1998, 1997 and 1996 and a pro forma
combined condensed balance sheet at December 31, 1998 in a joint proxy statement
and prospectus filed with Securities and Exchange Commission and dated April 13,
1999.
In this interim report, we present unaudited combined condensed pro forma
financial statements for the six-month period ended June 30, 1999. These
financial statements are presented assuming that the merger will be accounted
for as a pooling of interests, and include certain reclassifications to conform
to the presentation that will be used by the combined company and certain pro
forma adjustments that conform the companies' methods of accounting. This
information is presented for illustration purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the merger had been completed at the date indicated. The information
does not necessarily indicate the future operating results or financial position
of the combined company. For a more complete discussion of pro forma adjustments
and other financial information, you should refer to the pro forma financial
information presented in the joint proxy statement and prospectus.
- ---------------------------------------------------
Pro Forma Combined Condensed Statement of Income
- ---------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts) (Unaudited) Six Months Ended June 30, 1999
- ---------------------------------------------------------------------------------------------------
<S> <C>
Operating revenues $28,429
Operating expenses 21,043
-------------------------------------
Operating income 7,386
Income from unconsolidated businesses 269
Other income and (expense), net (21)
Interest expense 1,275
Provision for income taxes 2,345
-------------------------------------
Income from continuing operations $ 4,014
=====================================
Basic Earnings Per Common Share
Income from continuing operations per common share $ 1.47
Weighted-average shares outstanding (in millions) 2,738
-------------------------------------
Diluted Earnings Per Common Share
Income from continuing operations per common share $ 1.45
Weighted-average shares - diluted (in millions) 2,774
-------------------------------------
</TABLE>
14
<PAGE>
- ------------------------------------------------------
Pro Forma Combined Condensed Balance Sheet
- ------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions) (Unaudited) At June 30, 1999
- -----------------------------------------------------------------------------------------
<S>
ASSETS <C>
Current assets
Cash and temporary cash investments $ 985
Receivables, net 11,121
Other current assets 4,507
--------------------------
16,613
--------------------------
Plant, property and equipment, net 59,534
Investments in unconsolidated businesses 9,742
Other assets 15,512
--------------------------
Total assets $101,401
==========================
LIABILITIES AND SHAREOWNERS' INVESTMENT
Current liabilities
Debt maturing within one year $ 8,157
Accounts payable and accrued liabilities 10,703
Other current liabilities 2,641
--------------------------
21,501
--------------------------
Long-term debt 31,678
--------------------------
Employee benefit obligations 14,221
--------------------------
Deferred credits and other liabilities 9,432
--------------------------
Shareowners' investment
Common stock (2,767,315,652 shares) 277
Contributed capital 20,734
Reinvested earnings 5,359
Accumulated other comprehensive loss (196)
--------------------------
26,174
Less common stock in treasury, at cost 631
Less deferred compensation - employee stock ownership plans 974
--------------------------
24,569
--------------------------
Total liabilities and shareowners' investment $101,401
==========================
</TABLE>
15
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
- ---------------------------------------------
OVERVIEW
- ---------------------------------------------
Our results for the first half of 1999 reflect strong growth in data and
wireless services and sustained demand for basic telecommunications services. We
reported net income of $1,167 million or $.74 diluted earnings per share for the
three month period ended June 30, 1999, compared to net income of $1,021 million
or $.65 diluted earnings per share for the three month period ended June 30,
1998. Reported net income for the first six months of 1999 was $2,309 million or
$1.46 diluted earnings per share, compared to net income of $1,914 million or
$1.21 diluted earnings per share for the same period in 1998. Our reported
results for the three and six month periods were affected by special items.
After adjusting for such items, net income would have been $1,189 million or
$.75 diluted earnings per share for the second quarter of 1999 and $1,071
million or $.68 diluted earnings per share for the second quarter of 1998.
Adjusted net income for the first half of the year would have been $2,341
million or $1.48 diluted earnings per share in 1999 and $2,116 million or $1.34
diluted earnings per share in 1998. The table below summarizes reported and
adjusted results of operations for each period.
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts) Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $8,295 $7,928 $16,262 $15,579
Operating expenses 6,148 5,975 12,037 11,914
---------------------------------------------------------------
Operating income 2,147 1,953 4,225 3,665
REPORTED NET INCOME 1,167 1,021 2,309 1,914
---------------------------------------------------------------
Special items - pre-tax
Merger transition costs 35 46 52 54
Retirement incentive costs -- 34 -- 275
---------------------------------------------------------------
Total special items - pre-tax 35 80 52 329
Tax effect of special items 13 30 20 127
---------------------------------------------------------------
Total special items - after-tax 22 50 32 202
---------------------------------------------------------------
ADJUSTED NET INCOME $1,189 $1,071 $ 2,341 $ 2,116
===============================================================
DILUTED EARNINGS PER SHARE - REPORTED $ .74 $ .65 $ 1.46 $ 1.21
DILUTED EARNINGS PER SHARE - ADJUSTED $ .75 $ .68 $ 1.48 $ 1.34
</TABLE>
The following table shows how special items are reflected in our condensed
consolidated statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EMPLOYEE COSTS
Retirement incentive costs $-- $34 $ -- $275
Merger transition costs 12 3 14 5
OTHER OPERATING EXPENSES
Merger transition costs 23 43 38 49
---------------------------------------------------------------
TOTAL SPECIAL ITEMS - PRE-TAX 35 80 52 329
Tax effect of special items 13 30 20 127
---------------------------------------------------------------
TOTAL SPECIAL ITEMS - AFTER-TAX $22 $50 $32 $202
===============================================================
</TABLE>
- ---------------------------------------------
Retirement Incentives
- ---------------------------------------------
In the second quarter of 1998, we recorded retirement incentive costs of $34
million (pre-tax) as a result of 337 associate employees electing to leave the
company under a voluntary retirement program. For the first six months of 1998,
retirement incentive costs totaled $275 million, representing 2,068 associate
employees who elected to retire under the program. The costs were comprised of
special termination pension and postretirement benefit amounts, as well as
employee costs for other items. These costs were reduced by severance and
postretirement medical benefit reserves established in 1993 and transferred to
the pension and postretirement benefit liabilities as employees accepted the
retirement incentive offer. The voluntary retirement program covering management
employees ended in March 1997 and the program covering associate employees was
completed in September 1998. The severance and postretirement medical reserve
balances were fully utilized at December 31, 1998.
16
<PAGE>
- ---------------------------------------------
Merger-related Costs
- ---------------------------------------------
In connection with the Bell Atlantic-NYNEX merger, which was completed in August
1997, we recorded pre-tax transition and integration costs of $35 million in the
second quarter of 1999 and $52 million in the first six months of 1999. In 1998,
pre-tax transition and integration costs totaled $46 million for the second
quarter and $54 million year-to-date.
Transition and integration costs represent costs associated with integrating the
operations of Bell Atlantic and NYNEX, such as systems modifications costs,
advertising and branding costs, and costs associated with the elimination and
consolidation of duplicate facilities, relocation and training. Transition and
integration costs are expensed as incurred.
These merger-related costs were comprised of the following amounts in the three
and six-month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRANSITION AND INTEGRATION COSTS
Systems modifications $30 $32 $46 $38
Advertising -- 9 -- 9
Branding -- 5 -- 7
Relocation, retraining and other 5 -- 6 --
-----------------------------------------------------------------
Total Transition and Integration Costs $35 $46 $52 $54
=================================================================
</TABLE>
- ---------------------------------------------
SEGMENTAL RESULTS OF OPERATIONS
- ---------------------------------------------
We have four reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments are Domestic
Telecom, Global Wireless, Directory and Other Businesses. You can find
additional information about our segments in Note 10 to the condensed
consolidated financial statements.
We measure and evaluate our reportable segments based on adjusted net income,
which excludes undistributed corporate expenses and special items arising during
each period. Special items are transactions that management has excluded from
the business units' results, but are included in reported consolidated earnings.
We previously described these special items in the Overview section. Special
items affected our Domestic Telecom and Directory segments as follows:
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC TELECOM
Reported net income $866 $754 $1,748 $1,436
Special items 19 49 29 200
-----------------------------------------------------------------
Adjusted net income $885 $803 $1,777 $1,636
=================================================================
DIRECTORY
Reported net income $191 $177 $ 353 $ 330
Special items 3 -- 3 --
-----------------------------------------------------------------
Adjusted net income $194 $177 $ 356 $ 330
=================================================================
RECONCILING ITEMS
Reported net income $(11) $ 3 $ (8) $ 7
Special items -- 1 -- 2
-----------------------------------------------------------------
Adjusted net income $(11) $ 4 $ (8) $ 9
=================================================================
</TABLE>
17
<PAGE>
- ------------------------------------------
Domestic Telecom
- ------------------------------------------
Our Domestic Telecom segment consists primarily of our nine operating telephone
subsidiaries that provide local telephone services from Maine to Virginia
including voice and data transport, enhanced and custom calling features,
network access, directory assistance, private lines and public telephones. This
segment also provides customer premises equipment distribution, systems
integration, billing and collections, and Internet access services. Domestic
Telecom represents the aggregation of our domestic wireline business units
(consumer, enterprise, general business, and network services) that focus on
specific markets to increase revenues and customer satisfaction.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in Millions) June 30, June 30,
1999 1998 % Change 1999 1998 % Change
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS - ADJUSTED BASIS
OPERATING REVENUES
Local services $3,616 $3,479 3.9% $ 7,104 $ 6,826 4.1%
Network access services 1,988 1,943 2.3 3,932 3,850 2.1
Long distance services 441 474 (7.0) 915 976 (6.3)
Ancillary services 528 495 6.7 1,063 1,007 5.6
---------------------- ----------------------
6,573 6,391 2.8 13,014 12,659 2.8
---------------------- ----------------------
OPERATING EXPENSES
Employee costs 1,789 1,858 (3.7) 3,595 3,685 (2.4)
Depreciation and amortization 1,363 1,287 5.9 2,699 2,549 5.9
Other operating expenses 1,746 1,736 .6 3,360 3,362 (.1)
---------------------- ----------------------
4,898 4,881 .3 9,654 9,596 .6
---------------------- ----------------------
OPERATING INCOME $1,675 $1,510 10.9 $ 3,360 $ 3,063 9.7
====================== ======================
ADJUSTED NET INCOME $ 885 $ 803 10.2 $ 1,777 $ 1,636 8.6
---------------------- ----------------------
</TABLE>
OPERATING REVENUES
Local Services Revenues
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
that expand the utilization of the network. These services include products such
as Caller ID, Call Waiting and Return Call.
Growth in local services revenues of $137 million or 3.9% in the second quarter
of 1999 and $278 million or 4.1% in the first half of 1999 was primarily due to
higher usage of our network facilities. This growth was generated, in part, by
an increase in access lines in service of 3.8% from June 30, 1998. We had
42,413,000 switched access lines in service at June 30, 1999 compared to
40,868,000 switched access lines in service at June 30, 1998 (1998 access lines
have been restated from the previously disclosed amount). Access line growth
primarily reflects higher demand for Centrex services and an increase in
additional residential lines.
Local services revenue growth in 1999 also reflects strong customer demand and
usage of our data transport and digital services such as Frame Relay, ISDN
(Integrated Services Digital Network) and SMDS (Switched Multi-megabit Data
Service). Revenues from our value-added services were boosted in 1999 by
marketing and promotional campaigns offering new service packages.
Revenue growth from these factors was partially offset by a decline in revenues
from our pay phone services due to the increasing popularity of wireless
communications. In addition, the resale of access lines and the provision of
unbundled network elements to competitive local exchange carriers reduced
revenues in 1999. The second quarter of 1999 also included an accrual for a
required rebate to customers in connection with a regulatory decision on
reciprocal compensation in Massachusetts. You can find additional information on
reciprocal compensation under "Recent Developments - Telecommunications Act of
1996 - Reciprocal Compensation."
18
<PAGE>
- -----------------------------------------
Domestic Telecom - continued
- -----------------------------------------
Network Access Services
Network access services revenues are earned from end-user subscribers and long
distance and other competing carriers who use our local exchange facilities to
provide services to their customers. Switched access revenues are derived from
fixed and usage-based charges paid by carriers for access to our local network.
Special access revenues originate from carriers and end-users that buy dedicated
local exchange capacity to support their private networks. End-user access
revenues are earned from our customers and from resellers who purchase dial-tone
services.
Our network access services revenues grew $45 million or 2.3% in the second
quarter of 1999 and $82 million or 2.1% in the first half of 1999, as compared
to the same periods in 1998. This growth was mainly attributable to higher
customer demand, as reflected by growth in access minutes of use of 4.6% from
the second quarter of 1998 and 5.8% from the first half of 1998. Volume growth
also reflects a continuing expansion of the business market, particularly for
high-capacity services. In 1999, demand for special access services increased,
reflecting a greater utilization of the 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 this year. Volume-related growth was largely offset by net price
reductions mandated by federal and state price cap and incentive plans.
The Federal Communications Commission (FCC) regulates the rates that we charge
long distance carriers and end-user subscribers for interstate access services.
We are required to file new access rates with the FCC each year under the rules
of the Price Cap Plan. In July 1999, we implemented interstate price decreases
of approximately $235 million on an annual basis in connection with the FCC's
Price Cap Plan. The rate changes include amounts necessary to recover our
operating telephone subsidiaries' contribution to the FCC's universal service
fund. The subsidiaries' contributions to the universal service fund are included
in Other Operating Expenses. The FCC has created a multi-billion dollar
interstate fund to link schools and libraries to the Internet and to subsidize
low-income consumers and rural health care providers. Under the FCC's rules, all
providers of interstate telecommunications services must contribute to the
universal service fund. Contributions to the schools and libraries fund have
been assessed based on total interstate and intrastate retail revenues. As
described in the section "Recent Developments - FCC Regulation and Interstate
Rates - Universal Service," the U.S. Court of Appeals recently reversed the
decision to include intrastate revenues in the calculation of contributions to
the schools and libraries fund. The court also reversed the decision to require
local telephone companies to recover their universal service contributions
through access charges rather than charges to their end-user customers. Our
rates are subject to change every quarter due to potential increases or
decreases in our contribution to the universal service fund. The July 1999 rate
changes include an annual increase of approximately $78 million in the required
contributions to this fund. These rates will be in effect through June 2000.
Interstate price decreases were $175 million on an annual basis for the period
July 1998 through June 1999. Changes in required contributions to the universal
service fund increased these rates by approximately $12 million annually in
October 1998. These rates were reduced by approximately $18 million annually in
January 1999 and by approximately $4 million annually in April 1999 to reflect,
among other things, lower required contributions to the fund. These rates were
in effect through June 1999.
Beginning in the third quarter of 1998, intrastate access charges in New York
were reduced by $94 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 attributable to the
federal universal service fund.
Long Distance Services
Long distance services revenues are earned primarily from calls made to points
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 originating outside of our region.
The decline in long distance services revenues of $33 million or 7.0% in the
second quarter of 1999 and $61 million or 6.3% year-to-date was principally
caused by the competitive effects of the introduction of presubscription for
intraLATA toll services. Presubscription permits customers to use an alternative
provider of their choice for intraLATA toll calls without dialing a special
access code when placing a call. In the second quarter of 1999, three states in
our region (Massachusetts, Virginia and Maryland) began offering
presubscription. As a result, presubscription is now being offered in all of our
states throughout the region. In response to presubscription, we have
implemented customer win-back and retention initiatives that include toll
calling discount packages and product bundling offers. These revenue reductions
were partially offset by additional revenues generated from higher calling
volumes.
You can find additional information on presubscription under "Recent
Developments - Competition - IntraLATA Toll Services."
19
<PAGE>
- -----------------------------------------
Domestic Telecom - continued
- -----------------------------------------
Ancillary Services
Our ancillary services include billing and collections for long distance
carriers, collocation for competitive local exchange carriers, systems
integration, voice messaging, Internet access, customer premises equipment and
wiring and maintenance services.
In 1999, we recognized higher ancillary services revenues of $33 million or 6.7%
in the second quarter and $56 million or 5.6% year-to-date over the
corresponding periods last year. Revenue growth in both periods was principally
due to higher demand for such services as systems integration, billing and
collections, voice messaging, and customer premises equipment and wiring and
maintenance. We also received higher payments in 1999 from competitive local
exchange carriers for interconnection of their network with our network.
OPERATING EXPENSES
Employee Costs
Employee costs, which consist of salaries, wages and other employee
compensation, employee benefits and payroll taxes, declined by $69 million or
3.7% in the second quarter of 1999 and by $90 million or 2.4% in the first six
months of 1999, as compared to the same periods in 1998. These expense
reductions were attributable to lower pension and benefit costs, lower
average work force levels and a reduction in associate overtime pay for repair
and maintenance activity. Salary and wage increases for management and associate
employees partially offset these cost reductions.
The decline in pension and benefit costs in 1999 was due to a number of factors,
principally lower pension costs as a result of favorable pension plan investment
returns and changes in plan provisions and actuarial assumptions. These factors
were partially offset by increased health care costs caused by inflation and
benefit plan improvements provided for under new contracts with associate
employees.
Depreciation and Amortization
Depreciation and amortization expense increased $76 million or 5.9% in the
second quarter of 1999 and $150 million or 5.9% in the first six months of 1999,
principally due to growth in depreciable telephone plant and changes in the mix
of plant assets. The adoption of Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" also contributed to the increase in depreciation expense in 1999,
but to a lesser extent. Under this new accounting standard, computer software
developed or obtained for internal use is now capitalized and amortized.
Previously, we expensed most of these software purchases in the period in which
they were incurred. For additional information on SOP No. 98-1, see Note 2 to
the condensed consolidated financial statements. These factors were partially
offset in both periods by the effect of lower rates of depreciation.
Other Operating Expenses
Other operating expenses increased $10 million or 0.6% in the second quarter of
1999 and declined $2 million or 0.1% in the first six months of 1999.
The change in other operating expenses in both the 1999 periods was principally
caused by the effect of SOP No. 98-1 and by lower spending at our operating
telephone subsidiaries for such expenditures as local number portability and
rents. These expense reductions were offset in both periods by higher costs
associated with entering new businesses such as long distance and data services,
higher interconnection payments to competitive local exchange and other carriers
to terminate calls on their networks (reciprocal compensation), and higher Year
2000 readiness costs.
For additional information on reciprocal compensation refer to "Recent
Developments - Telecommunications Act of 1996 - Reciprocal Compensation."
20
<PAGE>
- -------------------------------------------
Global Wireless
- -------------------------------------------
Our Global Wireless segment provides wireless telecommunications services to
customers in 24 states in the United States and includes foreign wireless
investments servicing customers in Latin America, Europe and the Pacific Rim.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in Millions) June 30, June 30,
1999 1998 % Change 1999 1998 % Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
OPERATING REVENUES
Wireless services $1,124 $948 18.6% $2,118 $1,808 17.1%
-------------------- ---------------------
OPERATING EXPENSES
Employee costs 144 138 4.3 282 261 8.0
Depreciation and amortization 166 144 15.3 324 281 15.3
Other operating expenses 603 476 26.7 1,150 900 27.8
-------------------- ---------------------
913 758 20.4 1,756 1,442 21.8
-------------------- ---------------------
OPERATING INCOME $211 $190 11.1 $362 $ 366 (1.1)
==================== =====================
INCOME (LOSS) FROM UNCONSOLIDATED
BUSINESSES $ 14 $(13) -- $ 9 $(67) --
-------------------- ---------------------
NET INCOME $ 98 $66 48.5 $154 $ 95 62.1
-------------------- ---------------------
</TABLE>
OPERATING REVENUES
Revenues earned from our consolidated wireless businesses grew by $176 million
or 18.6% in the second quarter of 1999 and $310 million or 17.1% in the first
six months of 1999, as compared to the same periods in 1998. This revenue growth
was largely attributable to our domestic cellular subsidiary, Bell Atlantic
Mobile, which contributed $157 million to revenue growth in the second
quarter and $279 million in the first six months. This growth was
driven by customer additions and increased usage of our domestic wireless
services. Our Digital Choice Single Rate(SM) pricing plans fueled much of this
growth. Our domestic cellular customer base grew 15.8% in the first six months
of 1999, as compared to the same period in last year. Total revenue per
subscriber for our domestic cellular operations increased 1.6% for the second
quarter of 1999 and 0.5% for the first six months of 1999, compared to the
corresponding periods in 1998. Revenues from Grupo Iusacell, S.A. de C.V.
(Iusacell), our Mexican wireless investment, grew $26 million for the second
quarter of 1999 and $42 million for the first six months of the year,
principally as a result of subscriber growth and higher rates charged for
services.
Revenue growth from our domestic and international cellular businesses was
partially offset by the effect of the December 1998 sale of our paging business.
OPERATING EXPENSES
Employee Costs
Employee costs increased by $6 million or 4.3% for the second quarter of 1999
and $21 million or 8.0% for the first six months of 1999, principally as a
result of higher work force levels at Bell Atlantic Mobile. Employee costs at
Iusacell were slightly higher in both the 1999 periods, principally due to
increased benefit payments.
Depreciation and Amortization
Depreciation and amortization expense increased by $22 million or 15.3% for the
second quarter of 1999 and $43 million or 15.3% for the first six months of
1999. This increase was mainly attributable to growth in depreciable cellular
plant at both Bell Atlantic Mobile and Iusacell. Capital expenditures for our
cellular network have increased in 1999 to support increased demand in all
markets.
Other Operating Expenses
For the second quarter of 1999, other operating expenses increased by $127
million or 26.7% and $250 million or 27.8% for the first six months of 1999,
principally as a result of increased service costs at Bell Atlantic Mobile due
to the growth in the subscriber base, including additional costs of equipment,
higher roaming payments to wireless carriers, and higher sales commissions.
Higher service costs at Iusacell also contributed to expense growth for both
periods of 1999, but to a lesser extent. These factors were partially offset by
the effect of the December 1998 sale of our paging business.
21
<PAGE>
- -------------------------------------------------
Global Wireless - continued
- -------------------------------------------------
INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES
The changes in equity income (loss) from unconsolidated businesses for the three
and six month periods ended June 30, 1999 were principally due to improved
results from our investments in Omnitel Pronto Italia S.p.A. (Omnitel), a
wireless investment in Italy, and PrimeCo Personal Communications, L.P.
(PrimeCo), a personal communications services (PCS) joint venture in the United
States. Both Omnitel's and PrimeCo's operating results were fueled by strong
subscriber growth. PrimeCo's results for the first half of 1999 also included a
gain on the sale of operations in Hawaii.
In March 1999, Bell Atlantic Mobile formed a joint venture with Crown Castle
International Corporation for the primary purpose of financing its investment in
cellular towers. Bell Atlantic Mobile, together with certain partnerships in
which it is the managing partner (the managed entities), contributed to the
joint venture approximately 1,460 cellular towers in exchange for approximately
$380 million in cash and an equity interest of approximately 37.7% in the joint
venture. Bell Atlantic Mobile and the managed entities have leased back a
portion of the towers, and the joint venture will lease the remaining space to
third parties. The joint venture also plans to build new towers.
- -------------------------------------------------
Directory
- -------------------------------------------------
Our Directory segment consists of our domestic and international publishing
businesses, including print directories and Internet-based shopping guides as
well as website creation and hosting and other electronic commerce services.
This segment has operations principally in the United States and Central Europe.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in Millions) June 30, June 30,
1999 1998 % Change 1999 1998 % Change
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS - ADJUSTED
BASIS
OPERATING REVENUES
Directory services $615 $602 2.2% $1,168 $1,136 2.8%
------------------- ---------------------
OPERATING EXPENSES
Employee costs 79 82 (3.7) 159 169 (5.9)
Depreciation and amortization 10 9 11.1 19 17 11.8
Other operating expenses 192 203 (5.4) 382 384 (.5)
------------------- ---------------------
281 294 (4.4) 560 570 (1.8)
------------------- ---------------------
OPERATING INCOME $334 $308 8.4 $608 $566 7.4
=================== =====================
ADJUSTED NET INCOME $194 $177 9.6 $356 $330 7.9
</TABLE>
OPERATING REVENUES
Operating revenues from our Directory segment improved by $13 million or 2.2% in
the second quarter of 1999 and $32 million or 2.8% in the first six months of
1999 as compared to the same periods in 1998. This revenue growth was
principally due to increased prices for certain directory services. Higher
business volumes including revenue from new Internet-based shopping directory
and electronic commerce services also contributed to revenue growth in the both
periods of 1999, but to a lesser extent.
OPERATING EXPENSES
Second quarter 1999 total operating expenses declined $13 million or 4.4% and
six month 1999 total operating expenses declined $10 million or 1.8% from the
corresponding periods in 1998. These decreases were largely attributable to a
reduction in other operating expenses due to lower spending for software and
other costs of services. Lower work force levels also contributed to the decline
in operating costs in 1999. These expense reductions were slightly offset by
higher depreciation and amortization expense due to growth in depreciable plant.
22
<PAGE>
- -----------------------------------------
Other Businesses
- -----------------------------------------
Our Other Businesses segment includes international wireline telecommunications
investments in Europe and the Pacific Rim, lease financing and all other
businesses.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in Millions) June 30, June 30,
1999 1998 % Change 1999 1998 % Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
OPERATING REVENUES
Other services $31 $ 28 10.7% $66 $60 10.0%
-------------------- ---------------------
OPERATING EXPENSES
Employee costs 3 3 -- 6 8 (25.0)
Depreciation and amortization 3 1 -- 3 2 50.0
Other operating expenses 23 29 (20.7) 47 58 (19.0)
-------------------- ---------------------
29 33 (12.1) 56 68 (17.6)
-------------------- ---------------------
OPERATING INCOME (LOSS) $ 2 $ (5) -- $10 $(8) --
==================== =====================
INCOME (LOSS) FROM
UNCONSOLIDATED BUSINESSES $16 $ (8) -- $43 $27 59.3
NET INCOME $23 $ 21 9.5 $62 $46 34.8
</TABLE>
OPERATING RESULTS
Operating income results from our Other Businesses increased $7 million in the
second quarter of 1999 and $18 million in the first six months of 1999 over the
same periods in 1998. This change was largely due to improved operating revenue
growth and lower operating expenses at our lease financing businesses.
Income from unconsolidated businesses increased by $24 million in the second
quarter of 1999 and $16 million in the first six months of 1999 over the same
periods in 1998, primarily as a result of higher equity income from our
investment in FLAG Ltd., which owns and operates an undersea fiberoptic cable
system, providing digital communications links between Europe and Asia. This
increase was partially offset by higher equity losses from our investment in
Cable & Wireless Communications plc, an international cable television and
telecommunications operation in the United Kingdom.
Effective May 31, 1999, we took steps to disaffiliate from Telecom Corporation
of New Zealand Limited (TCNZ). As a result, we no longer have significant
influence over TCNZ's operating and financial policies and, therefore, have
changed the accounting for our investment in TCNZ from the equity method to the
cost method. The change in the method of accounting for this investment is not
expected to have a material effect on our future results of operations. We
currently hold a 24.95% interest in TCNZ.
Coincident with our change to the cost method of accounting, our investment in
TCNZ is now subject to the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under these provisions, our TCNZ
shares are classified as "available-for-sale" securities and, accordingly, our
TCNZ investment has been adjusted from a carrying value of $363 million to its
fair value of $1,909 million at June 30, 1999. This increase in the value of our
investment has been recorded in Investments in Unconsolidated Businesses in our
balance sheet. The unrealized holding gain of $1,005 million (net of income
taxes of $541 million) has been recognized in Accumulated Other Comprehensive
Income(Loss) in our statement of changes in shareowners' investment.
23
<PAGE>
- ----------------------------------------
NONOPERATING ITEMS
- ----------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in Millions) June 30, June 30,
1999 1998 % Change 1999 1998 % Change
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EXPENSE
Interest expense from continuing operations $ 315 $ 317 (.6)% $ 630 $ 627 .5%
Capitalized interest costs 18 23 (21.7) 39 43 (9.3)
-------------------- -------------------
Total interest costs on debt balances 333 340 (2.1) 669 670 (.1)
Settlement of tax-related matters -- 46 -- -- 46 --
-------------------- -------------------
Total interest costs $ 333 $ 386 (13.7) $ 669 $ 716 (6.6)
==================== ===================
Average debt outstanding $20,240 $19,934 1.5 $20,193 $19,962 1.2
Effective interest rate 6.6% 6.8% 6.6% 6.7%
</TABLE>
The decline in interest costs in the three and six months ended June 30, 1999,
as compared to the same periods in 1998, was principally attributable to added
interest costs in 1998 related to the settlement of tax-related matters. The
effect of several refinancings to lower rates of interest, retirements of
long-term debt by our operating telephone subsidiaries and an overall decrease
in our effective interest rate also reduced interest costs in 1999. These
decreases were partially offset by higher average debt outstanding and a
reduction in capitalized interest costs.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in Millions) June 30, June 30,
1999 1998 % Change 1999 1998 % Change
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OTHER INCOME AND (EXPENSE), NET
Minority interest $(27) $(31) 12.9% $(49) $(61) 19.7%
Foreign currency gains, net 4 14 (71.4) 22 15 46.7
Interest income 8 38 (78.9) 20 64 (68.8)
Gains on disposition of assets/business, net 8 14 (42.9) 9 26 (65.4)
Other, net 11 7 57.1 21 12 75.0
------------------- ------------------
Total $ 4 $ 42 (90.5) $ 23 $ 56 (58.9)
=================== ==================
</TABLE>
The change in other income and expense in the three and six months ended June
30, 1999, as compared to the same periods in 1998, was due to changes in several
components as shown in the table above. First, foreign exchange gains were
affected in 1999 as a result of the discontinuation of highly inflationary
accounting for our Iusacell subsidiary, effective January 1, 1999. As a result
of this change, Iusacell now uses the Mexican peso as its functional currency
and we expect that our earnings will continue to be affected by any foreign
currency gains or losses associated with the U.S. dollar denominated debt issued
by Iusacell.
The change in minority interest was mainly due to the repurchase of an outside
party's interest in one of our fully consolidated subsidiaries in connection
with the sale of our investment in Viacom Inc. (Viacom). As a result of this
transaction, we no longer record a minority interest expense related to the
outside party's share of the subsidiary's earnings.
Finally, in 1998, we recorded additional interest income in connection with the
settlement of tax-related matters and we recorded gains on the sales of a
leveraged lease and real estate.
Three Months Ended Six Months Ended
(Dollars in Millions) June 30, June 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATES 37.4% 36.1% 37.2% 36.4%
The effective income tax rate is the provision for income taxes as a percentage
of income before the provision for income taxes. Our effective income tax rates
for the three and six month periods ended June 30, 1999 were higher than the
corresponding periods in 1998 principally as a result of lower tax credits in
1999, as well as adjustments to deferred income taxes at certain subsidiaries in
1998.
24
<PAGE>
- ----------------------------------------------
CONSOLIDATED FINANCIAL CONDITION
- ----------------------------------------------
Six Months Ended
(Dollars in Millions) June 30,
1999 1998 $ Change
- --------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN)
Operating activities $ 4,696 $ 4,873 $(177)
Investing activities (3,507) (3,566) 59
Financing activities (1,194) (1,327) 133
-------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS $ (5) $ (20) $ 15
=====================================
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 June 30, 1999 and 1998 and December 31, 1998, 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.
- ----------------------------------------------
Cash Flows From Operating Activities
- ----------------------------------------------
Our primary source of funds continued to be cash generated from operations. The
change in cash from operations primarily reflects an increase in working capital
requirements, partially offset by improved operating income.
- ----------------------------------------------
Cash Flows Used In Investing Activities
- ----------------------------------------------
Capital expenditures continued to be our primary use of capital resources. The
majority of the capital expenditures was for our Domestic Telecom business, 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 approximately $3,074 million in our
Domestic Telecom business in the first half of 1999, compared to $3,081 million
in the first half of 1998. We also invested approximately $566 million in our
Wireless, Directory and Other Businesses in the first half of 1999, compared to
$403 million during the same period last year. We expect capital expenditures in
1999 to be in the range of $8.3 billion to $8.5 billion, including $7.4 billion
to $7.5 billion in our Domestic Telecom business. This estimate includes
approximately $500 million related to the implementation of the new accounting
standard on costs of computer software, SOP No. 98-1. You can find additional
information on SOP No. 98-1 in Note 2 to the condensed consolidated financial
statements. In 1998, capital expenditures totaled approximately $7.4 billion,
including $6.4 billion in our Domestic Telecom business.
We invested $825 million in unconsolidated businesses during the first six
months of 1999 and $414 million during the same period in 1998. In June 1999, we
invested $635 million in our Omnitel investment, increasing our ownership
percentage from 19.71% to 23.1%, and in April 1998, we invested $162 million in
Omnitel to increase our ownership interest from 17.45% to 19.71%. We also
invested $177 million in the first half of 1999 and $194 million in the first
half of 1998 in PrimeCo to fund the build-out and operations of its PCS network.
During the first half of 1999, we invested $6 million in short-term investments,
compared to $266 million in the first half of 1998. In 1998, we pre-funded a
vacation pay trust for the payment of certain employee benefits. Beginning in
1999, we no longer pre-fund the vacation pay trust. Proceeds from the sales of
all short-term investments were $503 million in the first six months of 1999,
compared to $566 million in the corresponding period of 1998.
In the first half of 1999, we received cash proceeds of $612 million in
connection with the disposition of our remaining investment in Viacom.
25
<PAGE>
- ----------------------------------------------
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 each of the first and second quarters of 1999, we announced a
quarterly cash dividend of $.385 per share.
In March 1999, we received cash proceeds of $380 million from a financing
transaction involving cellular assets between Bell Atlantic Mobile and Crown
Castle International Corporation, as described earlier under "Segmental Results
of Operations-Global Wireless."
We increased our total debt (including capital lease obligations) by $305
million from December 31, 1998, primarily to fund our capital program including
investments in Omnitel and PrimeCo partially offset by the use of cash proceeds
received from the disposition of our remaining investment in Viacom and from
financing of cellular assets. Our debt ratio was 58.4% as of June 30, 1999,
compared to 60.1% as of June 30, 1998 and 61.3% as of December 31, 1998. The
debt ratio at June 30, 1999 reflects the effect of recording an unrealized
holding gain of $1,005 million related to our TCNZ investment, as described
earlier under "Segmental Results of Operations-Other Businesses." By the end of
1999, we expect our total debt level to increase by approximately $1.5 billion
from the balance at December 31, 1998, subject to any modification of our
investment strategy. This expected increase would be driven mainly by our
additional investment in Omnitel and the purchase of cellular properties.
As of June 30, 1999, we had in excess of $4.3 billion of unused bank lines of
credit and $297 million in bank borrowings outstanding. As of June 30, 1999, our
operating telephone subsidiaries and financing 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. After the announcement of the Bell
Atlantic-GTE merger, the rating agencies placed the ratings of certain of our
subsidiaries under review for potential downgrade.
We also have a $2.0 billion Euro Medium Term Note Program, under which we may
issue notes that are not registered with the Securities and Exchange Commission.
The notes may be issued from time to time by our subsidiary, Bell Atlantic
Global Funding, Inc. (BAGF), and will have the benefit of a support agreement
between BAGF and Bell Atlantic. There have been no notes issued under this
program.
In April 1999, our operating telephone subsidiary New England Telephone and
Telegraph Company issued $200 million of 5.875% notes due on April 15, 2009. The
proceeds from the issuance were used to redeem $200 million of 7.375% notes due
on October 15, 2007. We recorded an extraordinary charge of $1 million (net of
an income tax benefit of $1 million) related to this redemption. We also
recorded an extraordinary charge of $5 million (net of an income tax benefit of
$3 million) in the second quarter of 1999 in connection with the repurchase of
$57 million in principal amount of debentures of our certain of operating
telephone subsidiaries.
- ----------------------------------------------
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, changes in equity investment prices and changes in
corporate tax rates. We employ risk management strategies using a variety of
derivatives including interest rate swap agreements, interest rate caps and
floors, foreign currency forwards and options and basis swap agreements. We do
not hold derivatives for trading purposes.
It is our policy to enter into interest rate, foreign currency and other
derivative transactions only to the extent necessary to achieve our desired
objectives in limiting our exposures to the various market risks. Our objectives
include maintaining a mix of fixed and variable rate debt to lower borrowing
costs within reasonable risk parameters, hedging the value of certain
international investments, and protecting against earnings and cash flow
volatility resulting from changes in foreign exchange rates. We do not hedge our
market risk exposure in a manner that would completely eliminate the effect of
changes in interest rates, equity prices and foreign exchange rates on our
earnings. While we do not expect that our liquidity and cash flows will be
materially affected by these risk management strategies, our net income may be
materially affected by certain market risk associated with the exchangeable
notes discussed below.
26
<PAGE>
- ----------------------------------------------
Exchangeable Notes
- ----------------------------------------------
In 1998, we issued exchangeable notes as described in Note 7 to the condensed
consolidated financial statements. These financial instruments expose us to
market risk, including foreign exchange rate risk, interest rate risk and equity
price risk, which could affect the fair values of the notes and our future
earnings.
Market risk that could affect the fair values of the exchangeable notes
includes:
. Equity price movements, because the notes are exchangeable into shares that
are traded on the open market and routinely fluctuate in value.
. Foreign exchange rate movements, because the notes are exchangeable into
shares that are denominated in a foreign currency. 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.
. Interest rate movements, because the notes carry fixed interest rates.
Market risk that could affect our future earnings includes:
. Equity price and/or foreign exchange rate movements, because these
movements may result in our TCNZ shares rising to a level greater than 120%
of the share price at the pricing date of the offering. Similar movements
may cause the price of our CWC shares to rise to a level greater than 128%
of the share price at the pricing date of the offering. If either event
should occur, we are required to increase the applicable exchangeable note
liability by the amount of the increase in share price over the exchange
price. This mark-to-market transaction would reduce income by the amount of
the increase in the exchangeable note liability. If the share price
subsequently declines, the liability would be reduced (but not to less than
its amortized carrying value) and income would be increased. At June 30,
1999, the fair values of the underlying TCNZ shares or CWC shares did not
exceed the recorded values of the debt liability and, therefore, no
mark-to-market adjustments were recorded to our financial statements.
Interest rate movements will not impact earnings, because the exchangeable
notes carry a fixed interest rate and there is no requirement to
mark-to-market the notes based on changes in interest rates.
The following sensitivity analysis measures the effect on earnings due to
changes in the underlying share prices of the TCNZ and CWC stock.
. At June 30, 1999, the exchange price for the TCNZ shares (expressed as
American Depositary Receipts) was $44.93 and the exchange price for the CWC
shares (expressed as American Depositary Shares) was $57.75.
. For each $1.00 increase in value of the TCNZ shares or the CWC shares above
the exchange price, our earnings would be reduced by approximately $55
million or $56 million, respectively. A subsequent decrease in value of the
TCNZ shares or the CWC shares would correspondingly increase earnings, but
not to exceed the amount of any previous reduction in earnings. Our
earnings are not affected so long as the TCNZ and CWC share prices remain
at or below their exchange prices.
. Our cash flows would not be affected by mark-to-market activity relating to
the exchangeable notes.
. If we decide to deliver shares in exchange for the notes, the exchangeable
note liability (including any mark-to-market adjustments) will be
eliminated and the investment will be reduced by the book value of the
related number of shares delivered. Upon settlement, the excess of the
liability over the book value of the related shares delivered will be
recorded as a gain. We also have the option to settle these liabilities
with cash upon exchange.
A proposed restructuring of our investment in CWC, as discussed in Note 4 to the
condensed consolidated financial statements, would modify the securities to be
exchanged for the CWC exchangeable notes. Under this restructuring, we would
receive shares of two companies acquiring the businesses of CWC in exchange for
our CWC shares.
27
<PAGE>
- ----------------------------------------------
Equity Price Risk
- ----------------------------------------------
We also have equity price risk associated with our investments, primarily in
common stock, that are carried at their fair value. These investments are
subject to changes in the market prices of the securities that they hold.
Investments recorded at their fair value totaled $1,976 million at June 30, 1999
and $29 million at December 31, 1998. The increase from December 31, 1998 was
due to a mark-to-market adjustment of $1,546 million associated with a change in
accounting for our TCNZ investment from the equity method to the cost method.
Note 4 of our condensed consolidated financial statements provides additional
information on our TCNZ investment.
A sensitivity analysis of our investments recorded at their fair value indicated
that a 10% increase or decrease in the fair value of these securities would
result in a $198 million increase or decrease in the fair value of the
investments. A change in fair value, net of income taxes, would be recognized in
Accumulated Other Comprehensive Income (Loss) in our statement of changes in
shareowners' investment.
- ----------------------------------------------
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
Proposed Bell Atlantic - GTE Merger
- ----------------------------------------------
Bell Atlantic and GTE Corporation 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. In May 1999, shareholders of both companies
approved the merger.
We are working diligently to complete the merger at the earliest practicable
date. However, Bell Atlantic and GTE must obtain the approval of a variety of
state and federal regulatory agencies and, accordingly, the merger may close in
the first half of 2000.
Future operating revenues, expenses and net income of the combined company may
not follow the same historical trends, or reflect the same dependence on
economic and competitive factors, as presented above in our discussion of our
own historical results of operations and financial condition. You should refer
to Note 11 to the condensed consolidated financial statements for pro forma
financial information for the six month period ended June 30, 1999.
- ----------------------------------------------
Recent Developments
- ----------------------------------------------
FCC REGULATION AND INTERSTATE RATES
Price Caps
In May 1999, the U.S. Court of Appeals reversed the FCC's establishment of a
6.5% productivity factor in calculating the annual price cap index applied to
our interstate access rates. The court directed the FCC to reconsider and
explain the methods used in selecting the productivity factor. The court granted
the FCC a stay of its order, however, until April 1, 2000. As a result, our
annual price cap filing effective July 1, 1999 includes the effects of the FCC's
6.5% productivity factor (see Domestic Telecom - Operating Revenues - Network
Access Services).
Universal Service
On July 30, 1999, the U.S. Court of Appeals reversed certain aspects of the
FCC's universal service order. While the court generally upheld the FCC's rules
creating a fund to support service to schools and libraries, it reversed that
portion of the rules that included intrastate revenues as part of the basis for
assessing contributions to that fund. The court also reversed the portion of the
FCC's order that required local telephone companies to recover their universal
service contributions generally through increases in their interstate access
revenues, rather than through charges directly to their end-user customers.
28
<PAGE>
- ----------------------------------------------
Recent Developments - continued
- ----------------------------------------------
TELECOMMUNICATIONS ACT OF 1996
In-Region Long Distance
In April 1999, our operating telephone subsidiary in New York made a filing with
the New York State Public Service Commission (NYSPSC) demonstrating that we have
satisfied the 14-point "checklist" required under the Telecommunications Act of
1996 (1996 Act) for entry into the in-region long distance market. The filing
followed an extensive seven-month third party test of our operations support
systems (OSS) in New York conducted by KPMG Peat Marwick under the direction of
the NYSPSC. In June and July 1999, the NYSPSC conducted technical conferences to
complete its review of our OSS and our compliance with the other items of the
checklist. Following oral argument before the Chairman of the NYSPSC, we expect
to file an application with the FCC for permission to enter the in-region long
distance market in New York.
Reciprocal Compensation
State regulatory decisions have required us to pay "reciprocal compensation"
under the 1996 Act for the increasing volume of one-way traffic from our
customers to customers of other carriers, primarily calls to Internet service
providers. In February 1999, the FCC confirmed that such traffic is largely
interstate but concluded that it would not interfere with state regulatory
decisions requiring payment of reciprocal compensation for such traffic and that
carriers are bound by their existing interconnection agreements. The FCC
tentatively concluded that future compensation arrangements for calls to
Internet service providers should be negotiated by carriers and arbitrated, if
necessary, before the state commissions under the terms of the 1996 Act. The FCC
has initiated a proceeding to consider, alternatively, the adoption of federal
rules to govern future inter-carrier compensation arrangements for this traffic.
We have asked the U.S. Court of Appeals to review the FCC's decision that state
commissions may require payment of reciprocal compensation for this traffic.
We are also seeking review of prior state regulatory commission decisions. The
Massachusetts Department of Telecommunications and Energy has modified its
earlier decision, resulting in a reduction of our reciprocal compensation
obligation. The New Jersey Board of Public Utilities has recently issued a
favorable decision on reciprocal compensation for Internet-bound traffic. The
NYSPSC also is expected to issue a favorable decision shortly. Commissions in
Delaware, Maryland, Pennsylvania, Rhode Island and Virginia have issued
decisions requiring us to continue to pay reciprocal compensation on Internet-
bound traffic. We currently estimate that our reciprocal compensation payment
obligations will be approximately $350 million to $400 million in 1999.
COMPETITION
IntraLATA Toll Services
IntraLATA toll calls originate and terminate within the same LATA, but generally
cover a greater distance than a local call. These services are generally
regulated by state regulatory commissions rather than federal authorities. All
of our state regulatory commissions permit other carriers to offer intraLATA
toll services.
Until the implementation of presubscription, intraLATA toll calls were completed
by our operating telephone companies unless the customer dialed a code to access
a competing carrier. Presubscription changes this dialing method and enables
customers to make these toll calls using another carrier without having to dial
an access code.
Our operating telephone company in New York completed intraLATA presubscription
implementation in 1996. During 1997, our operating telephone companies in
Delaware, Maine, New Hampshire, New Jersey, Pennsylvania, Rhode Island, Vermont
and West Virginia implemented presubscription. We began offering intraLATA
presubscription in Massachusetts in April 1999, in Maryland and Virginia in May
1999 and in the District of Columbia in July 1999.
Implementation of presubscription for intraLATA toll services has had a material
negative effect on intraLATA toll service revenues, which is being partially
offset by an increase in intraLATA access revenues (see Domestic Telecom
Operating Revenues - Long Distance Services).
29
<PAGE>
- ----------------------------------------------
OTHER MATTERS
- ----------------------------------------------
Year "2000" Update
- ----------------------------------------------
We have a comprehensive program to evaluate and address the impact of the Year
2000 date transition on our operations. This program includes steps to:
. inventory and assess for Year 2000 compliance our equipment, software and
systems;
. determine whether to remediate, replace or retire noncompliant items, and
establish a plan to accomplish these steps;
. remediate, replace or retire the items;
. test the items, where required; and
. provide management with reporting and issues management to support a
seamless transition to the Year 2000.
STATE OF READINESS
For our operating telephone subsidiaries, centralized services entities and
general corporate operations, the program focuses on the following project
groups: Network Elements, Applications and Support Systems, and Information
Technology Infrastructure. Our goal for these operations was to have our network
and other mission critical systems Year 2000 compliant (including testing) by
June 30, 1999 and we have substantially met this goal. What follows is a more
detailed breakdown of our efforts to date.
. Network Elements
Approximately 350 different types of network elements (such as central
office switches) appear in over one hundred thousand instances. When
combined in various ways and using network application systems, these
elements are the building blocks of customer services and networked
information transmission of all kinds. We originally assessed approximately
70% of these element types, representing over 90% of all deployed network
elements, as Year 2000 compliant. As of July 31, 1999, we have completed
the repair/replacement for approximately 99% of deployed network elements
requiring remediation. Our plan is to remediate/replace or where applicable
retire, the remaining elements prior to August 31, 1999, with the following
exceptions: two element types which are planned for remediation/replacement
in September, and a single switch in New York which, under an agreement
with the New York Public Service Commission, is scheduled to be retired
later this year.
. Application and Support Systems
Approximately 1,200 application and systems support (i) the administration
and maintenance of our network and customer service functions (network
information systems); (ii) customer care and billing functions; and (iii)
human resources, finance and general corporate functions. We originally
assessed approximately 48% of these application and support systems as
either compliant or to be retired. As of July 31, 1999, we have
successfully completed repair/replacement of more than 99% of all mission
critical application and support systems. The remaining systems are
scheduled for remediation/replacement or retirement prior to August 31,
1999, with the exception of certain accounting subsystems scheduled for
replacement in October 1999.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
related network components, and software products comprise our information
technology (IT) infrastructure. Of the approximately 1,350 unique types of
elements in the inventory for the IT infrastructure, we originally assessed
approximately 73% as compliant or to be retired. As of July 31, 1999, we
have successfully completed remediation/replacement of all mission critical
elements.
Our project to remediate/replace or retire mission critical systems supporting
buildings and other facilities used by the operating telephone subsidiaries,
such as HVAC, access control and alarm systems, is now complete and our effort
to remediate/replace or retire any other Bell Atlantic mission critical system
used by those subsidiaries are virtually complete, with only a small number of
such systems still requiring attention. Work on these few miscellaneous systems
is expected to be completed by the end of September. Remediation/replacement or
retirement of non-mission critical systems, where applicable, and supplemental
testing and verification/correction activities, for both mission critical and
non-mission critical systems, are likely to continue throughout the balance of
1999.
30
<PAGE>
- -------------------------------------------------------------------------------
Year "2000" Update - continued
- -------------------------------------------------------------------------------
For our other controlled or majority-owned subsidiaries, including Bell Atlantic
Mobile and our directory companies, the inventory, assessment and
remediation/replacement efforts for mission critical systems is substantially
complete, and testing activities continue. Our Iusacell subsidiary expects that
required modification, replacement and retirement of substantially all of its
mission critical systems will be completed by September 30, 1999, with testing
continuing throughout 1999.
THIRD PARTY ISSUES
. Vendors
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. The compliance "status" of a given
product is typically determined using multiple sources of information,
including our own internal testing and analysis. However, in some instances
certification is based on detailed test results or similar information
provided by the product vendor and analysis by us or contractors
specializing in this type of review. We are also continuing Year 2000-
related discussions with utilities and similar services providers. Although
we have received assurances and other information suggesting that
substantially all of our primary services providers have completed or are
well along in their respective Year 2000 projects, we do not usually have
sufficient access to or control over the providers' systems and equipment
to undertake verification efforts as to such systems and equipment, and as
a general matter, it would be impractical to do so. We have also
participated in interoperability testing of various mission critical
network elements, purchased from a number of vendors, through the Telco
Year 2000 Forum, an industry group comprised of leading local
telecommunications services companies. We intend to monitor critical
service provider activities, as appropriate, through the completion of
their respective remediation projects.
. Customers
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. While network issues regarding E-911/911
are included in the telephone operating subsidiaries State of Readiness
discussion, we also have a separate effort to identify and address Year
2000 issues for CPE and other equipment that we maintain for Public Safety
Answering Points (PSAPs) and is used in connection with the provision of
E-911/911 and related services. Our project to repair and replace
E-911/911-related CPE that we maintain for various PSAPs, to provide Year
2000 compliance of that CPE, is virtually complete.
. Interconnecting Carriers
Our network operations interconnect with domestic and international
networks of other carriers. If one of these interconnecting carrier
networks should fail or suffer adverse impact from a Year 2000 problem, our
customers could experience impairment of service. We have participated in
various internetworking testing efforts, as a member of the Association for
Telecommunications Industry Solutions (ATIS), the Cellular
Telecommunications Industry Association (CTIA) and the International
Telecommunications Union (ITU). We intend to monitor the activities of the
primary interconnecting carriers through the completion of their respective
remediation projects.
31
<PAGE>
- ----------------------------------------------
Year "2000" Update - continued
- ----------------------------------------------
COSTS
From the inception of our Year 2000 project through June 30, 1999, and based on
the cost tracking methods we have historically applied to this project, we have
incurred total pre-tax expenses of approximately $180 million, and we have made
capital expenditures of approximately $116 million. For 1999, we expect to incur
total pre-tax expenses for our Year 2000 project of approximately $75 million to
$150 million (approximately $58 million of which was incurred through June 30,
1999) and total capital expenditures of $75 million to $125 million
(approximately $36 million of which was incurred through June 30, 1999). We
anticipate that the balance of the costs incurred for 1999 will be primarily
attributable to additional testing and verification/correction, rollover
transition management, contingency planning and repair/replacement of
non-mission critical systems. These cost estimates have been included in our
earnings targets, but should not be used as the sole gauge of progress on our
Year 2000 project or as an indication of Year 2000 readiness.
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.
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 material interruption or failure
of our service resulting from an actual or perceived Year 2000 problem 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. Our Year 2000 contingency plans are built
upon our existing Emergency Preparedness and Disaster Recovery plans.
We will continue to fine-tune and test our corporate Year 2000 contingency plans
to help ensure that core business functions and key support processes will
continue to function without material disruption, in the event of external (e.g.
power, public transportation, water), internal or supply chain failures (i.e.
critical dependencies on another entity for information, data or services).
Individual business unit contingency plans for Year 2000 are being integrated
and coordinated under an enterprise wide command and control structure.
- ----------------------------------------------
Recent Accounting Pronouncement
- ----------------------------------------------
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments.
The FASB amended this pronouncement in June 1999 to defer the effective date of
SFAS No. 133 for one year.
Under the amended pronouncement, Bell Atlantic must adopt SFAS No. 133 no later
than January 1, 2001. We are currently evaluating the provisions of SFAS No. 133
and have not yet determined what the impact of adopting this statement will be
on our future results of operations or financial condition.
32
<PAGE>
- ---------------------------------------------------------------
Subsequent Events
- ---------------------------------------------------------------
Cable & Wireless Communications plc
On July 27, 1999, our Board of Directors approved an agreement with Cable &
Wireless plc (Cable & Wireless), NTL Incorporated (NTL) and Cable & Wireless
Communications plc (CWC) for the proposed restructuring of CWC. The completion
of the restructuring is subject to a number of conditions. Under the terms of
the agreement, CWC's consumer cable telephone, television and Internet
operations would be separated from its corporate, business, Internet protocol
and wholesale operations. The consumer operations would be acquired by NTL and
the remainder by Cable & Wireless. In exchange for our 18.6% interest in CWC, we
would receive shares in the two acquiring companies, representing approximately
11.2% of NTL and approximately 4.7% of Cable & Wireless. Upon completion of the
restructuring, our previously issued $3,180 million in CWC exchangeable notes
would be exchangeable on and after July 1, 2002 for shares in NTL and Cable &
Wireless in proportion to that received in the restructuring. Upon exchange by
investors, we retain the option to settle in cash or by delivery of the Cable &
Wireless and NTL shares. Upon completion of the restructuring, we expect this
transaction to result in a material non-cash gain. The transaction also may
cause the exchangeable notes to be marked-to-market, resulting in a charge to
income.
PrimeCo Personal Communications, L.P.
On August 3, 1999, we and Vodafone AirTouch Plc announced an agreement to
restructure our ownership interests in PrimeCo, a partnership that was formed by
us and Vodafone AirTouch in 1994 and provides personal communications services
in major cities across the United States.
Under the terms of the agreement, we will assume ownership of PrimeCo operations
in five "major trading areas" (MTAs) - Richmond, VA, New Orleans, LA and the
Florida markets in Jacksonville, Tampa and Miami. Vodafone AirTouch will take
over operations in five MTAs - Chicago, IL, Milwaukee, WI and the Texas markets
of Dallas, San Antonio and Houston. We expect to complete the allocation of the
PrimeCo markets in the fourth quarter of 1999 or in the first quarter of 2000.
Under a consent decree with the Department of Justice in connection with our
merger with GTE, we and GTE are required to divest of overlapping wireless
properties that we and GTE own or will own in various geographic areas. The
division of the PrimeCo markets is a significant step toward meeting these
conditions. Upon settlement, we expect this transaction to result in a material
non-cash gain.
Separately, we and Vodafone AirTouch reached an out-of-court settlement of all
litigation currently pending before the United States District Court for the
Northern District of California, relating to our companies' TomCom limited
partnership.
- ---------------------------------------------------------------
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
- ---------------------------------------------------------------
In this Management's Discussion and Analysis, and elsewhere in this Quarterly
Report, we have made forward-looking statements. These statements are based on
our estimates and assumptions and are subject to risks and uncertainties.
Forward-looking statements include the information concerning our possible or
assumed future results of operations. Forward-looking statements also include
those preceded or followed by the words "anticipates," "believes," "estimates,"
"hopes" or similar expressions. 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, along with those discussed elsewhere in this
Quarterly Report, could affect future results and could cause those results to
differ materially from those expressed in the forward-looking statements:
. materially adverse changes in economic conditions in the markets served by
us or by companies in which we have substantial investments;
. material changes in available technology;
. the final outcome of federal, state, and local regulatory initiatives and
proceedings, including arbitration proceedings, and judicial review of
those initiatives and proceedings, pertaining to, among other matters, the
terms of interconnection, access charges, universal service, and unbundled
network element and resale rates;
. the extent, timing, success, and overall effects of competition from others
in the local telephone and toll service markets;
. the timing and profitability of our entry into the in-region long distance
market;
. the success and expense of our remediation efforts and those of our
suppliers, customers, joint ventures, noncontrolled investments, and
interconnecting carriers in achieving Year 2000 compliance; and
. the timing of, and regulatory or other conditions associated with, the
completion of the merger with GTE and our ability to combine operations and
obtain revenue enhancements and cost savings following the merger.
33
<PAGE>
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."
34
<PAGE>
- ----------------------------------------------
Part II - Other Information
- ----------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------------
Our 1999 Annual Meeting of Shareholders was held on May 19, 1999. At the
meeting, the following items were submitted to a vote of shareholders.
(a) The following nominees were elected to serve on the Board of Directors:
Name of Nominee Votes Cast For Votes Withheld
---------------------------------------------------------------------------
Lawrence T. Babbio, Jr. 1,229,798,323 25,779,630
Richard L. Carrion 1,231,121,268 24,456,685
James G. Cullen 1,230,612,797 24,965,156
Lodewijk J. R. de Vink 1,231,073,320 24,504,633
James H. Gilliam, Jr. 1,230,619,389 24,958,564
Stanley P. Goldstein 1,229,397,346 26,180,607
Helene L. Kaplan 1,230,504,013 25,073,940
Thomas H. Kean 1,228,702,233 26,875,720
Elizabeth T. Kennan 1,229,167,221 26,410,732
John F. Maypole 1,231,590,052 23,987,901
Joseph Neubauer 1,230,895,090 24,682,863
Thomas H. O'Brien 1,231,149,216 24,428,737
Eckhard Pfeiffer 1,202,963,880 52,614,073
Hugh B. Price 1,230,664,447 24,913,506
Rozanne L. Ridgway 1,230,664,574 24,913,379
Frederic V. Salerno 1,229,603,764 25,974,189
Ivan G. Seidenberg 1,229,964,502 25,613,451
Walter V. Shipley 1,231,103,489 24,474,464
John R. Stafford 1,231,393,652 24,184,301
Morrison DeS. Webb 1,231,280,225 24,297,728
Shirley Young 1,230,831,813 24,746,140
(b) The shareholders approved the issuance of Bell Atlantic shares under an
Agreement and Plan of merger, dated as of July 27, 1998, with GTE
Corporation, and related transactions, including the amendment and
restatement of Bell Atlantic's certificate of incorporation. The vote was
1,047,762,098 for and 17,625,304 against, with 6,916,057 shares abstaining
and 183,274,494 broker non-votes.
(c) The appointment of PricewaterhouseCoopers LLP as independent accountants
for 1999 was ratified with 1,234,965,016 votes for, 11,428,656 votes
against, and 9,184,281 abstentions.
(d) A management proposal to approve an amendment to the Bell Atlantic
Incentive Stock Option Plan was approved with 1,117,851,975 votes for,
115,682,629 votes against, and 22,043,349 abstentions.
(e) A shareholder proposal regarding additional disclosure of executive
compensation was defeated with 131,954,849 votes for, 913,466,315 votes
against, 26,882,295 abstentions, and 183,274,494 broker non-votes.
(f) A shareholder proposal regarding executive incentive compensation was
defeated with 129,672,650 votes for, 912,185,969 votes against, 30,444,840
abstentions, and 183,274,494 broker non-votes.
(g) A shareholder proposal regarding executive severance agreements was
defeated with 306,423,575 votes for, 724,206,620 votes against, 41,673,264
abstentions, and 183,274,494 broker non-votes.
(h) A shareholder proposal regarding composition of the Board of Directors was
defeated with 190,282,027 votes for, 833,785,053 votes against, 48,236,379
abstentions, and 183,274,494 broker non-votes.
(i) A shareholder proposal regarding Director stock ownership was defeated with
132,915,182 votes for, 906,832,660 votes against, 32,555,617 abstentions,
and 183,274,494 broker non-votes.
35
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------------
(a) Exhibits:
Exhibit
Number
------
10oo Deleted. See Exhibit 10w to Form 10-K for the year ended
December 31, 1998, for agreement signed by Patrick F.X.
Mulhearn and Thomas J. Tauke.
12 Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1999:
A Current Report on Form 8-K, dated April 22, 1999, was filed regarding our
first quarter 1999 financial results.
A Current Report on Form 8-K, dated April 28, 1999, was filed regarding
certain information about our proposed merger with GTE that was provided at
a meeting with investors on April 28, 1999.
A Current Report on Form 8-K, dated May 7, 1999, was filed regarding the
completion of the U.S. Department of Justice's review of our proposed
merger with GTE and the companies' agreement to a consent decree to dispose
of overlapping wireless properties.
36
<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: August 11, 1999 By /s/ Doreen A. Toben
------------------------------
Doreen A. Toben
Vice President - Controller
(Principal Accounting Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 6, 1999.
37
<PAGE>
Exhibit Index
-------------
Exhibit
Number
- ------
10oo Deleted. See Exhibit 10w to Form 10-K for the year ended December 31,
1998, for agreement signed by Patrick F.X. Mulhearn and Thomas J.
Tauke.
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
38
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Bell Atlantic Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in Millions) Six Months Ended June 30, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Income before provision for income taxes and extraordinary item $3,689
Minority interest 49
Income from unconsolidated businesses (71)
Dividends received from unconsolidated businesses 56
Interest expense, including interest related to lease financing activities 641
Portion of rent expense representing interest 93
Amortization of capitalized interest 13
-------------------------------
Income, as adjusted $4,470
===============================
Fixed charges:
Interest expense, including interest related to lease financing activities $ 641
Portion of rent expense representing interest 93
Capitalized interest 39
Preferred stock dividend requirement 10
-------------------------------
Fixed charges $ 783
===============================
Ratio of Earnings to Fixed Charges 5.71
===============================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30,
1999 AND THE CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 484
<SECURITIES> 28
<RECEIVABLES> 7,356
<ALLOWANCES> 634
<INVENTORY> 584
<CURRENT-ASSETS> 8,738
<PP&E> 85,943
<DEPRECIATION> 48,157
<TOTAL-ASSETS> 57,873
<CURRENT-LIABILITIES> 10,992
<BONDS> 17,381
0
0
<COMMON> 158
<OTHER-SE> 14,774
<TOTAL-LIABILITY-AND-EQUITY> 57,873
<SALES> 0
<TOTAL-REVENUES> 16,262
<CGS> 0
<TOTAL-COSTS> 12,037
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 630
<INCOME-PRETAX> 3,689
<INCOME-TAX> 1,374
<INCOME-CONTINUING> 2,315
<DISCONTINUED> 0
<EXTRAORDINARY> (6)
<CHANGES> 0
<NET-INCOME> 2,309
<EPS-BASIC> 1.49
<EPS-DILUTED> 1.46
</TABLE>
