UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7368
BELL ATLANTIC - WASHINGTON, D.C., INC.
A New York Corporation I.R.S. Employer Identification No. 53-0046277
1710 H Street, N.W., Washington, D.C. 20006
Telephone Number (202) 392-9900
-------------------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Bell Atlantic - Washington, D.C., Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Thousands)
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
OPERATING REVENUES (including $32,543, $29,799,
$103,419 and $85,301 from affiliates) ................... $ 155,400 $ 150,316 $ 476,850 $ 459,375
--------- --------- --------- ---------
OPERATING EXPENSES
Employee costs, including benefits and taxes ............ 20,185 26,152 62,287 75,289
Depreciation and amortization ........................... 39,432 50,177 115,273 127,731
Taxes other than income ................................. 11,579 11,026 33,798 33,093
Other (including $38,450, $37,481,
$109,948 and $114,749 to affiliates) ............... 47,994 57,078 140,583 160,684
--------- --------- --------- ---------
119,190 144,433 351,941 396,797
--------- --------- --------- ---------
OPERATING INCOME ............................................. 36,210 5,883 124,909 62,578
OTHER INCOME, NET ............................................ 95 72 14,434 409
INTEREST EXPENSE (including $541, $344,
$1,327 and $1,457 to affiliate) ......................... 4,039 4,603 12,884 14,123
--------- --------- --------- ---------
Income Before Provision for Income Taxes ..................... 32,266 1,352 126,459 48,864
PROVISION FOR INCOME TAXES ................................... 13,326 502 52,073 19,465
--------- --------- --------- ---------
Income Before Extraordinary Item ............................. 18,940 850 74,386 29,399
Extraordinary Item
Early extinguishment of debt, net of tax ................ (983) --- (983) ---
--------- --------- --------- ---------
NET INCOME ................................................... $ 17,957 $ 850 $ 73,403 $ 29,399
========= ========= ========= =========
REINVESTED EARNINGS
At beginning of period .................................. $ 145,994 $ 77,661 $ 94,547 $ 51,646
Add: net income ........................................ 17,957 850 73,403 29,399
--------- --------- --------- ---------
163,951 78,511 167,950 81,045
Deduct: dividends ....................................... 4,000 --- 8,000 ---
other changes ................................... --- 29 (1) 2,563
--------- --------- --------- ---------
At end of period ........................................ $ 159,951 $ 78,482 $ 159,951 $ 78,482
========= ========= ========= =========
See Notes to Condensed Financial Statements.
1
Bell Atlantic - Washington, D.C., Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS
------
September 30, December 31,
1998 1997
------------- ------------
CURRENT ASSETS
Short-term investments .................................... $ 1,057 $ 7,134
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $8,379 and $7,721 ............. 145,737 132,936
Affiliates ........................................... 20,167 18,253
Material and supplies ..................................... 1,277 1,929
Prepaid expenses .......................................... 6,134 3,962
Deferred income taxes ..................................... 3,184 3,872
Other ..................................................... -- 2
---------- ----------
177,556 168,088
---------- ----------
PLANT, PROPERTY AND EQUIPMENT ............................. 1,748,030 1,652,123
Less accumulated depreciation ............................. 921,682 849,599
---------- ----------
826,348 802,524
---------- ----------
OTHER ASSETS .............................................. 9,378 17,206
---------- ----------
TOTAL ASSETS .............................................. $1,013,282 $ 987,818
========== ==========
See Notes to Condensed Financial Statements.
2
Bell Atlantic - Washington, D.C., Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
September 30, December 31,
1998 1997
------------- ------------
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate ............................... $ 103,895 $ 9,526
Other ................................................... 24 20,512
Accounts payable and accrued liabilities:
Affiliates .............................................. 96,415 113,404
Other ................................................... 64,547 102,722
Advance billings and customer deposits ........................ 12,196 9,464
---------- ----------
277,077 255,628
---------- ----------
LONG-TERM DEBT ................................................ 168,185 227,769
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS .................................. 122,285 134,434
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ......................................... 42,704 29,585
Unamortized investment tax credits ............................ 3,409 3,626
Other ......................................................... 19,154 21,712
---------- ----------
65,267 54,923
---------- ----------
SHAREOWNER'S INVESTMENT
Common stock - one share, owned by parent, at stated value .... 191,968 191,968
Capital surplus ............................................... 28,549 28,549
Reinvested earnings ........................................... 159,951 94,547
---------- ----------
380,468 315,064
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT ................. $1,013,282 $ 987,818
========== ==========
See Notes to Condensed Financial Statements.
3
Bell Atlantic - Washington, D.C., Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Nine months ended
September 30,
----------------------------
1998 1997
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... $ 128,492 $ 128,164
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments ......................... 6,077 6,205
Additions to plant, property and equipment ................... (152,030) (121,986)
Other, net ................................................... 12,110 7,648
--------- ---------
Net cash used in investing activities ........................ (133,843) (108,133)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital
lease obligations ....................................... (20,146) (62)
Early extinguishment of debt ................................. (60,000) ---
Net change in note payable to affiliate ...................... 94,369 (20,020)
Dividends paid ............................................... (8,000) ---
Net change in outstanding checks drawn
on controlled disbursement accounts ..................... (872) 51
--------- ---------
Net cash provided by/(used in) financing activities .......... 5,351 (20,031)
--------- ---------
NET CHANGE IN CASH ........................................... --- ---
CASH, BEGINNING OF PERIOD .................................... --- ---
--------- ---------
CASH, END OF PERIOD .......................................... $ --- $ ---
========= =========
See Notes to Condensed Financial Statements.
4
Bell Atlantic - Washington, D.C., Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Bell Atlantic - Washington, D.C., Inc. (the Company) is a wholly owned
subsidiary of Bell Atlantic Corporation (Bell Atlantic). The accompanying
unaudited condensed financial statements have been prepared based upon
Securities and Exchange Commission rules that permit reduced disclosure for
interim periods. These financial statements reflect all adjustments which are
necessary for a fair presentation of results of operations and financial
position for the interim periods shown including normal recurring accruals. The
results for the interim periods are not necessarily indicative of results for
the full year. For a more complete discussion of significant accounting policies
and certain other information, refer to the financial statements included in the
Company's 1997 Form 10-K.
The Company has reclassified certain amounts from prior year's data to
conform with the 1998 presentation.
2. Dividend
On November 2, 1998, the Company declared and paid a dividend in the amount
of $18,000,000 to Bell Atlantic.
3. Debt
In the third quarter of 1998, the Company recorded an extraordinary charge
associated with the early extinguishment of $60,000,000 of 7.75% debentures due
in 2013. This charge reduced net income by $983,000 (net of an income tax
benefit of $692,000).
4. Litigation and Other Contingencies
Various legal actions and regulatory proceedings are pending to which the
Company is a party. The Company has established reserves for liabilities in
connection with regulatory and legal matters which it currently deems to be
probable and estimable. The Company does not expect that the ultimate resolution
of these matters in future periods will have a material effect on the Company's
financial position, but it could have a material effect on results of
operations.
5. Recent Accounting Pronouncement
Costs of Computer Software
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides,
among other things, guidance for determining whether computer software is for
internal use and when the cost related to such software should be expensed as
incurred or capitalized and amortized. SOP 98-1 is required to be applied
prospectively and adopted no later than January 1, 1999.
The Company currently capitalizes initial right-to-use fees for central
office switching equipment, including initial operating system and initial
application software costs. For noncentral office equipment, only the initial
operating system software is capitalized. Subsequent additions, modifications,
or upgrades of initial software programs, whether operating or application
packages, are expensed as incurred. Bell Atlantic estimates that the
implementation of SOP 98-1 will result in a net after-tax benefit of $200
million to $250 million to its consolidated results of operations in 1999 due to
the prospective capitalization of costs which were previously expensed as
incurred. The estimated impact on the results of operations of the Company in
1999 has not yet been determined.
5
Bell Atlantic - Washington, D.C., Inc.
6. Proposed Bell Atlantic - GTE Merger
Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of
equals under a definitive merger agreement dated as of July 27, 1998. Under the
terms of the agreement, GTE shareholders will receive 1.22 shares of Bell
Atlantic common stock for each share of GTE common stock that they own. Bell
Atlantic shareholders will continue to own their existing shares after the
merger.
It is expected that the merger will qualify as a "pooling of interests,"
which means for accounting and financial reporting purposes the companies will
be treated as if they had always been combined. The completion of the merger is
subject to a number of conditions, including certain regulatory approvals,
receipt of opinions that the merger will be tax-free, and the approval of the
shareholders of both Bell Atlantic and GTE. The companies expect to close the
merger in the second half of 1999.
6
Bell Atlantic - Washington, D.C., Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income of $73,403,000 for the nine month period
ended September 30, 1998, compared to net income of $29,399,000 for the same
period in 1997.
In the first nine months of 1998, the Company recorded an extraordinary
charge associated with the early extinguishment of long-term debt. This charge
reduced net income by $983,000 (net of an income tax benefit of $692,000) (see
Note 3 to the condensed financial statements).
The Company's results for 1998 and 1997 were affected by the following
special items. The special charges in both years include the Company's allocated
share of charges from Bell Atlantic Network Services, Inc. (NSI).
. In 1998, the Company recorded pre-tax charges totaling approximately
$1,300,000 for transition and integration costs related to the merger
of Bell Atlantic and NYNEX Corporation (NYNEX).
. In 1997, the Company recorded pre-tax charges totaling approximately
$22,200,000 in connection with the completion of the merger of Bell
Atlantic and NYNEX in August 1997 and other special items arising
during the period. These charges included: approximately $4,400,000
for merger-related costs (consisting of $3,400,000 for employee
severance costs and $1,000,000 for direct incremental costs);
$10,500,000 for the write-down of obsolete fixed assets; $4,100,000
for contingencies associated with various regulatory and legal
matters; and $3,200,000 for other miscellaneous expense items. A small
portion of transition and integration costs were also incurred by the
Company.
Transition and integration costs consist of the Company's proportionate
share of costs associated with integrating the operations of Bell Atlantic and
NYNEX. Direct incremental costs consist of expenses associated with compensation
arrangements related to completing the merger transaction. Employee severance
costs, as recorded under SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," represent the Company's proportionate share of benefit costs for the
separation by the end of 1999 of management employees who are entitled to
benefits under pre-existing Bell Atlantic separation pay plans.
These and other items affecting the comparison of the Company's results of
operations for the nine month periods ended September 30, 1998 and 1997 are
discussed in the following sections. This Management's Discussion and Analysis
should also be read in conjunction with the Company's 1997 Annual Report on Form
10-K.
OPERATING REVENUE STATISTICS
- ----------------------------
1998 1997 % Change
- --------------------------------------------------------------------------------
At September 30
- ---------------
Access Lines in Service (in thousands)*
Residence ................................. 299 293 2.0%
Business .................................. 625 609 2.6
Public .................................... 10 10 ---
----- -----
934 912 2.4
===== =====
Nine Month Period Ended September 30
- ------------------------------------
Access Minutes of Use (in millions) .......... 2,246 2,173 3.4
===== =====
* 1997 reflects a restatement of access lines in service to include Primary Rate
ISDN (Integrated Services Digital Network) channels to conform with the 1998
presentation.
7
Bell Atlantic - Washington, D.C., Inc.
OPERATING REVENUES
- ------------------
(Dollars in Thousands)
Nine Month Period Ended September 30 1998 1997
- --------------------------------------------------------------------------------
Local services ................................. $ 222,397 $ 223,454
Network access services ........................ 107,257 101,537
Long distance services ......................... 3,104 3,058
Ancillary services ............................. 142,044 129,272
Directory and information services ............. 2,048 2,054
--------- ---------
Total .......................................... $ 476,850 $ 459,375
========= =========
LOCAL SERVICES REVENUES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(1,057) (.5)%
- --------------------------------------------------------------------------------
Local services revenues are earned by the Company from the provision of
local exchange, local private line, public telephone (pay phone) and value-added
services. Value-added services are a family of services which expand the
utilization of the network. These services include products such as Caller ID,
Call Waiting and Return Call.
Local services revenues declined in the first nine months of 1998 due to
price reductions on certain local services and the elimination of business
Touch-Tone service charges, effective January 1, 1998. Lower message volumes
also contributed to the decline in local services revenues.
Revenue decreases were substantially offset by growth in value-added and
private line services resulting from higher customer demand and usage. The
Company also recognized higher revenues from public telephone services in the
first nine months of 1998 as a result of price increases and the implementation
of new charges to carriers resulting from pay phone deregulation in April 1997.
Higher usage of the Company's network facilities, as generated by a 2.4%
increase in access lines in service over the same period in 1997, also offset
reductions in local services revenues.
NETWORK ACCESS SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $5,720 5.6%
- --------------------------------------------------------------------------------
Network access services revenues are earned from carriers for their use of
the Company's local exchange facilities in providing usage services to their
customers. In addition, end-user subscribers pay flat rate access fees to
connect to the Company's network.
Network access services revenues grew in the first nine months of 1998
primarily as a result of higher customer demand, reflected by growth in access
minutes of use of 3.4% over the same period in 1997. Volume growth was boosted
by the expansion of the business market, particularly for high-capacity
services. Demand for special access services grew as Internet service providers
and other high-capacity users increased their utilization of the Company's
network. Higher end-user revenues attributable to an increase in access lines in
service also contributed to revenue growth in 1998. Volume-related growth was
partially offset by net price reductions mandated by a federal price cap plan.
In July 1998, the Company implemented price decreases of approximately
$2,200,000 on an annual basis for interstate services in connection with the
Federal Communications Commission's (FCC) Price Cap Plan, compared to price
decreases of approximately $10,700,000 under the Company's July 1997 filing. The
rates included in the 1998 filing will be in effect through June 1999. The rates
include amounts necessary to recover the Company's contribution to the FCC's new
universal service fund. The FCC has created a multi-billion dollar interstate
fund to link schools and libraries to the Internet and to subsidize low-income
consumers and rural health care providers. Under the FCC's rules, all providers
of interstate
8
Bell Atlantic - Washington, D.C., Inc.
telecommunications services must contribute to the fund. The Company's
contributions to the universal service fund are included in Other Operating
Expenses.
Revenue growth in 1998 also reflects the effect of special charges recorded
in 1997 for contingencies associated with regulatory matters.
LONG DISTANCE SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $46 1.5%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made
outside a customer's local calling area, but within the same service area of the
Company (intraLATA toll).
The increase in long distance services revenues in the first nine months of
1998 was caused by growth in toll message volumes from September 30, 1997.
ANCILLARY SERVICES REVENUES
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $12,772 9.9%
- --------------------------------------------------------------------------------
The Company provides ancillary services which include billing and
collection services provided to long distance carriers and affiliates, customer
premises equipment (CPE) services, facilities rental services for affiliates and
nonaffiliates, usage of separately priced (unbundled) components of its network,
sales of materials and supplies to affiliates and voice messaging services.
The increase in ancillary services revenues in the first nine months of
1998 was primarily as a result of higher facilities rental revenues from
affiliates. Rental revenues were higher in 1998 due to the centralization of
data processing services of certain affiliates in a facility owned by the
Company. Higher revenues resulting from increased demand by long distance
carriers and affiliates for billing and collection services also contributed to
revenue growth in 1998.
These revenue increases were partially offset by a reduction in revenues
for CPE services earned from federal government contract billing.
DIRECTORY AND INFORMATION SERVICES REVENUES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(6) (.3)%
- --------------------------------------------------------------------------------
Directory and information services revenues are earned primarily from fees
for nonpublication of telephone numbers and multiple white page listings, and
from a contract with an affiliate for usage of the Company's directory listings.
The principal reason for the decrease in directory and information
services revenues in 1998 was reduced demand for multiple white page listings.
This decrease was substantially offset by higher fees received from an affiliate
for use of the Company's directory listings.
9
Bell Atlantic - Washington, D.C., Inc.
OPERATING EXPENSES
- ------------------
(Dollars in Thousands)
Nine Month Period Ended September 30 1998 1997
- --------------------------------------------------------------------------------
Employee costs, including benefits and taxes ...... $ 62,287 $ 75,289
Depreciation and amortization ..................... 115,273 127,731
Taxes other than income ........................... 33,798 33,093
Other operating expenses .......................... 140,583 160,684
-------- --------
Total ............................................. $351,941 $396,797
======== ========
EMPLOYEE COSTS
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(13,002) (17.3)%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by the Company. Similar costs
incurred by employees of NSI, who provide centralized services on a contractual
basis, are allocated to the Company and are included in Other Operating
Expenses.
Employee costs decreased in the first nine months of 1998 primarily as a
result of lower pension and benefit costs. The reduction in pension and benefit
costs was caused by a number of factors, including favorable pension plan
investment returns and lower than expected retiree medical claims. The effect of
lower work force levels and the effect of additional costs billed to affiliates
associated with a centralized repair and maintenance center also contributed to
the decline in expense. Employee costs were further decreased by the effect of
severance and direct incremental merger-related costs recorded in the third
quarter of 1997. These reductions were offset, in part, by annual salary and
wage increases for management and associate employees.
Labor Contract Settlement
Associate employee wages, and pension and other benefits are determined
under a contract with the union representing associate employees of the Company.
In September 1998, the Communications Workers of America (CWA) ratified a new 2-
year contract. The contract provides for wage increases of up to 3.8 percent
effective August 9, 1998, and up to 4 percent effective August 8, 1999. Pensions
will increase by 11 percent. Union-represented employees are eligible for
standard cash awards of $400 for 1998 and $500 for 1999, which can be increased
or decreased based on financial and customer care performance results. The new
contract also includes other benefit improvements and certain employment
security provisions.
DEPRECIATION AND AMORTIZATION
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(12,458) (9.8)%
- --------------------------------------------------------------------------------
Depreciation and amortization expense decreased in the first nine months of
1998 over the same period in 1997 as a result of the recording of a write-down
of obsolete fixed assets in the third quarter of 1997. The effect of lower rates
of depreciation and amortization also contributed to the decrease in expense.
These decreases were partially offset by additional expense resulting from
growth in depreciable telephone plant.
10
Bell Atlantic - Washington, D.C., Inc.
TAXES OTHER THAN INCOME
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $705 2.1%
- --------------------------------------------------------------------------------
Taxes other than income consist principally of taxes for gross receipts,
property, capital stock and business licenses.
The increase in taxes other than income was primarily attributable to
additional expense resulting from higher assessments for worker's compensation,
sales and use tax and personal property taxes.
OTHER OPERATING EXPENSES
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(20,101) (12.5)%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from NSI, rent, network software costs, the
provision for uncollectible accounts receivable, and other costs.
The decrease in other operating expenses was attributable to a reduction in
the provision for uncollectibles accounts receivable and lower costs for
materials and contract services. The decrease in contract services was due, in
part, to the disposition of Bell Atlantic's ownership interest in Bell
Communications Research Inc. (Bellcore) in November 1997. The Company continues
to contract with Bellcore for technical and support services, but to a lesser
extent in 1998. The effect of additional costs billed to affiliates associated
with a centralized repair and maintenance center and the effect of
merger-related costs and other special items recorded in the third quarter of
1997 also contributed to the decrease in other operating expenses. The 1997
charges were comprised of the Company's allocated share of employee severance
costs, direct incremental and transition merger-related costs and charges
associated with the write-down of obsolete fixed assets, and other miscellaneous
expense items.
The decreases in other operating expenses were offset, in part, by the
Company's contribution to the federal universal service fund described earlier,
and higher interconnection charges for terminating calls on the networks of
competitive local exchange and other carriers.
OTHER INCOME, NET
1998 - 1997 Increase
- --------------------------------------------------------------------------------
Nine Months $14,025
- --------------------------------------------------------------------------------
The change in other income, net, was primarily due to a gain recognized on
the disposition of certain property in June 1998.
INTEREST EXPENSE
1998 - 1997 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(1,239) (8.8)%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense decreased primarily as a result of lower levels of average
short-term debt in the first half of 1998.
11
Bell Atlantic - Washington, D.C., Inc.
EFFECTIVE INCOME TAX RATES
Nine Months Ended September 30
- --------------------------------------------------------------------------------
1998 41.2%
- --------------------------------------------------------------------------------
1997 39.8%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes and extraordinary
item. The Company's effective income tax rate was higher in the first nine
months of 1998 principally due to higher tax credits recorded in 1997.
FINANCIAL CONDITION
- -------------------
The Company uses the net cash generated from operations and from external
financing to fund capital expenditures for network expansion and modernization,
and to pay dividends. While current liabilities exceeded current assets at both
September 30, 1998 and 1997 and December 31, 1997, the Company's sources of
funds, primarily from operations and, to the extent necessary, from readily
available financing arrangements with an affiliate, are sufficient to meet
ongoing operating requirements. Management expects that presently foreseeable
capital requirements will continue to be financed primarily through internally
generated funds. Additional long-term debt may be needed to fund development
activities or to maintain the Company's capital structure to ensure financial
flexibility.
As of September 30, 1998, the Company had $21,105,000 of an unused line of
credit with an affiliate, Bell Atlantic Network Funding Corporation and
$103,895,000 of available borrowings outstanding. In addition, the Company had
$60,000,000 remaining under a shelf registration statement filed with the
Securities and Exchange Commission for the issuance of unsecured debt
securities. In October 1998, the Company increased the amount of the shelf
registration statement to $100,000,000. The debt securities of the Company
continue to be accorded high ratings by primary rating agencies. Subsequent to
the announcement of the Bell Atlantic - GTE merger, rating agencies have
maintained current credit ratings, but have placed the ratings of the Company
under review for potential downgrade. In a subsequent and unrelated event,
Moody's Investor Services changed its methodology for rating diversified U.S.
Telecommunications Companies. As a result, the debt rating of the Company was
upgraded to reflect this new rating methodology.
The Company's debt ratio was 41.7% as of September 30, 1998, compared to
48.0% as of September 30, 1997 and 45.0% as of December 31, 1997.
On November 2, 1998, the Company declared and paid a dividend in the amount
of $18,000,000 to Bell Atlantic.
12
Bell Atlantic - Washington, D.C., Inc.
OTHER MATTERS
- -------------
Year "2000" Update
Bell Atlantic's comprehensive program to evaluate and address the impact of
the Year 2000 date transition on its operations, including those of the Company,
includes steps to (a) inventory and assess for Year 2000 compliance its
equipment, software and systems, (b) determine which items will be remediated,
replaced or retired, and establish a plan to accomplish these steps, (c)
remediate, replace or retire the items, (d) test the items, where required, and
(e) provide management with reporting and issues management to support a
seamless transition to the Year 2000.
State of Readiness
For Bell Atlantic's operating telephone subsidiaries, centralized services
entities and general corporate operations, the program focuses on the following
project groups: Network Elements, Application Systems, and Information
Technology Infrastructure. As of September 30, 1998, the inventory, assessment
and detailed planning phases for these projects have been completed or virtually
completed, and remediation/replacement/retirement and testing activities are
well underway. The inventory items that were not assessed as Year 2000 compliant
and that require action to avoid service impact are to be fixed, replaced, or
retired. Bell Atlantic's goal for these operations is to have its network and
any other mission critical systems Year 2000 compliant (including testing) by
June 30, 1999. Below is a more detailed breakdown of the efforts to date:
Network Elements - Approximately 350 different types of network elements
----------------
(such as central office switches) appearing in over one hundred thousand
instances. When combined in various ways and using network application
systems, these elements are the building blocks of customer services and
networked information transmission of all kinds. Approximately 70% of these
element types, representing over 90% of all deployed network elements, were
originally assessed as Year 2000 compliant. Of the deployed network
elements requiring remediation, approximately 38% have been repaired or
replaced as of September 30, 1998 and certification testing/evaluation is
well underway. Bell Atlantic has also made substantial progress on the
remaining network elements and is on track to make its June 30, 1999
objectives in this area.
Application Systems - Approximately 1,200 application systems supporting:
-------------------
(i) network and customer service provisioning, network and service
administration and maintenance, (ii) customer care and billing functions,
and (iii) human resources, finance and general corporate functions.
Approximately 48% of these application systems were originally assessed
compliant or to be retired. As of September 30, 1998, approximately 45% of
all application systems have successfully completed certification
testing/evaluation or have been retired. Bell Atlantic has made substantial
progress on the remaining application systems and is on track to make its
June 30, 1999 objectives in this area.
Information Technology Infrastructure - Approximately 40 mainframe, 1,000
-------------------------------------
mid-range, and 90,000 personal computers, and related network components
and software products that compose the corporation's information technology
(IT) infrastructure. There are approximately 1,350 unique types of elements
in the inventory for the IT infrastructure, of which approximately 73% were
originally assessed as compliant or to be retired. As of September 30 1998,
approximately 49% of all element types have successfully completed
certification testing/evaluation or have been retired. Bell Atlantic has
made substantial progress on the remaining items and is on track to make
its June 30, 1999 objective in this area.
For Bell Atlantic's other controlled or majority-owned subsidiaries,
including Bell Atlantic Mobile (BAM) and its Information Services Group (ISG)
companies, the inventory, assessment and planning efforts are substantially
complete, and remediation/replacement/retirement and testing activities are in
progress. BAM, ISG, and, in general, all of the other controlled or
majority-owned subsidiaries are on track to have their mission critical systems
compliant by the end of June 1999.
Bell Atlantic's Year 2000 program also includes a project to review and
remediate affected systems (including those with embedded technology) within its
buildings and other facilities, a project to assure Year 2000 compliance across
all of its internal business processes, and other specific projects directed
towards insuring it meets its Year 2000 objectives.
13
Bell Atlantic - Washington, D.C., Inc.
Third Party Issues
Vendor Issues
-------------
In general, Bell Atlantic's product vendors have made available either Year
2000-compliant versions of their offerings or new compliant products as
replacements of discontinued offerings. In most cases, the compliance "status"
of the product in question is based on vendor-provided information, which
remains subject to Bell Atlantic's testing and verification activities. In
several instances, vendors have not met original delivery schedules, resulting
in delayed testing and deployment. At this time, Bell Atlantic does not
anticipate that such delays will have a material impact on its ability to
achieve Year 2000 compliance within its desired timeframes. Bell Atlantic is
continuing Year 2000-related discussions with utilities and similar services
providers. In general, information requests to such service providers have
yielded less meaningful information than inquiries to its product vendors. As a
result, Bell Atlantic cannot yet determine the Year 2000 readiness of most key
utilities and similar services providers or the likelihood that those providers
will successfully complete the Year 2000 transition. Bell Atlantic intends to
monitor critical service provider activities, as appropriate, through the
completion of their respective remediation projects.
Some of Bell Atlantic's vendors continue to express concerns about
providing information on the status of the Year 2000 compliance efforts for
their products or services, citing factors such as liability concerns,
logistical complexity and possible adverse customer relations. Although known
gaps in Bell Atlantic's information gathering efforts are relatively small in
comparison to the voluminous data already received, some of the information
still required relates to important items, such as test plans and detailed
results. Bell Atlantic will continue to pursue all appropriate measures with its
vendors in order to resolve information sharing issues, and anticipates that the
recently enacted Year 2000 Information and Readiness Disclosure Act will have a
positive impact on information sharing by its vendors.
Customer Issues
---------------
Bell Atlantic's customers remain keenly interested in the progress of its
Year 2000 efforts, and it anticipates increased demand for information,
including detailed testing data and company-specific responses. Bell Atlantic is
providing limited warranties of Year 2000 compliance for certain new
telecommunications services and other offerings, but it does not expect any
resulting warranty costs to be material.
Interconnecting Carriers
------------------------
Bell Atlantic's network operations interconnect with domestic and
international networks of other carriers. If one of these interconnecting
carriers should fail or suffer adverse impact from a Year 2000 problem, Bell
Atlantic's customers could experience impairment of service.
Costs
From the inception of Bell Atlantic's Year 2000 project through September
30, 1998, and based on the cost tracking methods it has historically applied,
Bell Atlantic has incurred total pre-tax expenses of approximately $95 million
($70 million of which was incurred in the nine months ended September 30, 1998),
and it has made capital expenditures of approximately $80 million (all of which
was made in the nine months ended September 30, 1998).
For the years 1998 and 1999, Bell Atlantic expects to incur total pre-tax
expenses for its Year 2000 project of approximately $200 million to $300 million
and total capital expenditures of $200 million to $250 million.
Bell Atlantic has investments in various joint ventures and other
interests. At this time, Bell Atlantic does not anticipate that the impact of
any Year 2000 remediation costs that they incur will be material to its results
of operations.
14
Bell Atlantic - Washington, D.C., Inc.
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of Bell Atlantic's normal business functions
or operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition; however, it considers such a
likelihood remote. Due to the uncertainty inherent in other Year 2000 issues
that are ultimately beyond Bell Atlantic's control, including, for example, the
final Year 2000 readiness of its suppliers, customers, interconnecting carriers,
and joint venture and investment interests, it is unable to determine at this
time the likelihood of a material impact on its results of operations, liquidity
or financial condition, due to such Year 2000 issues. However, Bell Atlantic is
taking appropriate prudent measures to mitigate that risk. Bell Atlantic
anticipates that, in the event of any material interruptions or failures of its
service resulting from actual or perceived Year 2000 problems within or beyond
its control, it could be subject to third party claims.
Contingency Plans
As a public telecommunications carrier, Bell Atlantic has had considerable
experience successfully dealing with natural disasters and other events
requiring contingency planning and execution. As part of Bell Atlantic's efforts
to develop appropriate Year 2000 contingency plans, it is reviewing its existing
Emergency Preparedness and Disaster Recovery plans for any necessary
modifications.
Bell Atlantic has developed, where appropriate, contingency plans for
addressing delays in remediation activities. For example, delay in the
installation of a new Year 2000 compliant system could require remediation of
the existing system. It is also developing a corporate Year 2000 contingency
plan to ensure that core business functions and key support processes are in
place for uninterrupted processing and service, in the event of external (e.g.
power, public transportation, water), internal or supply chain failures (i.e.
critical dependencies on another entity for information, data or services). Bell
Atlantic anticipates that an initial draft of its corporate contingency plan
will be ready in the first quarter of 1999.
15
Bell Atlantic - Washington, D.C., Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 1998.
16
Bell Atlantic - Washington, D.C., Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BELL ATLANTIC - WASHINGTON, D.C., INC.
Date: November 10, 1998 By /s/ Edwin F. Hall
------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 4, 1998.
17