<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 1-7368
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
----- -----
<PAGE>
Bell Atlantic - Washington, D.C., Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES
(including $35,300 and $33,738 from affiliates) $162,443 $155,755
-----------------------------------------
OPERATING EXPENSES
Employee costs, including benefits and taxes 20,160 20,722
Depreciation and amortization 44,467 37,516
Other (including $33,100 and $37,256 to affiliates) 54,045 58,150
-----------------------------------------
118,672 116,388
-----------------------------------------
OPERATING INCOME 43,771 39,367
OTHER INCOME, NET 523 324
INTEREST EXPENSE
(including $1,429 and $429 to affiliate) 4,241 4,479
-----------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 40,053 35,212
PROVISION FOR INCOME TAXES 16,550 14,413
-----------------------------------------
NET INCOME $23,503 $ 20,799
=========================================
</TABLE>
See Notes to Condensed Financial Statements.
1
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Bell Atlantic - Washington, D.C., Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS
------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------
CURRENT ASSETS
<S> <C> <C>
Short-term investments $ 4,460 $ 6,690
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $6,528 and $7,688 134,261 157,946
Affiliates 19,994 20,979
Material and supplies 661 1,131
Prepaid expenses 5,177 3,045
Deferred income taxes 3,729 3,484
Other 10 ---
--------------------------------------------
168,292 193,275
--------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 1,841,930 1,783,372
Less accumulated depreciation 987,874 943,000
--------------------------------------------
854,056 840,372
OTHER ASSETS 13,241 6,511
--------------------------------------------
TOTAL ASSETS $1,035,589 $1,040,158
============================================
</TABLE>
See Notes to Condensed Financial Statements.
2
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Bell Atlantic - Washington, D.C., Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 103,491 $ 99,458
Other 9 14
Accounts payable and accrued liabilities:
Affiliates 91,293 104,976
Other 87,461 80,007
Advance billings and customer deposits 13,711 14,551
-----------------------------------------------
295,965 299,006
-----------------------------------------------
LONG-TERM DEBT 164,302 168,200
-----------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 113,743 118,139
-----------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 53,875 49,813
Unamortized investment tax credits 3,277 3,336
Other 13,601 14,741
-----------------------------------------------
70,753 67,890
-----------------------------------------------
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 170,355 166,452
Accumulated other comprehensive loss (46) (46)
-----------------------------------------------
390,826 386,923
-----------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $1,035,589 $1,040,158
===============================================
</TABLE>
See Notes to Condensed Financial Statements.
3
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Bell Atlantic - Washington, D.C., Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 77,398 $ 36,590
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 2,230 (841)
Additions to plant, property and equipment (61,148) (38,483)
Other, net 2,042 3,115
-------------------------------------------
Net cash used in investing activities (56,876) (36,209)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayment of borrowings and capital lease obligations (5) (20,136)
Net change in note payable to affiliate 4,033 19,347
Dividend paid (19,600) ---
Net change in outstanding checks drawn
on controlled disbursement accounts (4,950) 408
-------------------------------------------
Net cash used in financing activities (20,522) (381)
-------------------------------------------
NET CHANGE IN CASH --- ---
CASH, BEGINNING OF PERIOD --- ---
-------------------------------------------
CASH, END OF PERIOD $ --- $ ---
===========================================
</TABLE>
See Notes to Condensed Financial Statements.
4
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Bell Atlantic - Washington, D.C., Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Bell Atlantic - Washington, D.C., Inc. is a wholly owned subsidiary of Bell
Atlantic Corporation (Bell Atlantic). The accompanying unaudited condensed
financial statements have been prepared based upon Securities and Exchange
Commission rules that permit reduced disclosure for interim periods. These
financial statements reflect all adjustments that are necessary for a fair
presentation of results of operations and financial position for the interim
periods shown including normal recurring accruals. The results for the interim
periods are not necessarily indicative of results for the full year. For a more
complete discussion of significant accounting policies and certain other
information, you should refer to the financial statements included in our 1998
Annual Report on Form 10-K.
We have reclassified certain amounts from prior year's data to conform to the
1999 presentation.
2. Dividend
On May 3, 1999, we declared and paid a dividend in the amount of $9,700,000
to Bell Atlantic.
3. New Accounting Standards
Costs of Computer Software
Effective January 1, 1999, we adopted Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under SOP No. 98-1, we capitalize the cost of internal-use
software which has a useful life in excess of one year. Such costs sometimes
include payroll-related costs for internally developed software. 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 currently
does 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.
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.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board 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. We must
adopt SFAS No. 133 no later than January 1, 2000. The adoption of SFAS No. 133
will have no material effect on our results of operations or financial condition
because we currently do not enter into the use of derivative instruments or
participate in hedging activities.
5
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Bell Atlantic - Washington, D.C., Inc.
4. Shareowner's Investment
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Reinvested Comprehensive
(Dollars in Thousands) Stock Surplus Earnings Loss
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $191,968 $28,549 $166,452 $(46)
Net income 23,503
Dividend paid to Bell Atlantic (19,600)
-------------------------------------------------------
Balance at March 31, 1999 $191,968 $28,549 $170,355 $(46)
=======================================================
</TABLE>
Net income and comprehensive income were the same for the three months ended
March 31, 1999 and 1998.
5. Litigation and Other Contingencies
Various legal actions and regulatory proceedings are pending to which we are
a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters that we currently deem to be probable and
estimable. We do not expect that the ultimate resolution of pending regulatory
and legal matters in future periods will have a material effect on our financial
condition, but it could have a material effect on our results of operations.
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 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. Special meetings to vote on the
merger will be held on May 18, 1999 for GTE shareholders and on May 19, 1999 for
Bell Atlantic shareholders.
Bell Atlantic and GTE are working diligently to complete the merger by the
end of 1999. However, the companies 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.
6
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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
- ---------------------
We reported net income of $23,503,000 for the three month period ended March
31, 1999, compared to net income of $20,799,000 for the same period in 1998.
Our results for 1999 and 1998 were affected by special items. The special
items in both periods include our allocated share of charges from Bell Atlantic
Network Services, Inc. (NSI).
The following table shows how special items are reflected in our condensed
statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three Months Ended March 31 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Other Operating Expenses
Merger transition costs $ --- $ 28
Allocated merger transition costs 310 52
-----------------------------
$ 310 $ 80
=============================
</TABLE>
Merger-related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax transition and integration costs of $310,000 in
the first quarter of 1999 and $80,000 in the first quarter of 1998.
Transition and integration costs consist of our proportionate share of costs
associated with integrating the operations of Bell Atlantic and NYNEX, such as
systems modifications costs and advertising and branding costs. Transition and
integration costs are expensed as incurred.
OPERATING REVENUE STATISTICS
- ----------------------------
<TABLE>
<CAPTION>
1999 1998 % Change
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At March 31
- -----------
Access Lines in Service (in thousands)
Residence 304 298 2.0%
Business 631 618 2.1
Public 10 10 ---
-------------------------------
945 926 2.1
===============================
Three Months Ended March 31
- ---------------------------
Access Minutes of Use (in millions) 745 721 3.3
===============================
</TABLE>
7
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Bell Atlantic - Washington, D.C., Inc.
OPERATING REVENUES
- ------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Local services $ 70,290 $ 71,969
Network access services 39,913 35,716
Long distance services 1,121 1,007
Ancillary services 51,119 47,063
------------------------------------
Total $162,443 $155,755
====================================
</TABLE>
LOCAL SERVICES REVENUES
1999 - 1998 (Decrease)
- -------------------------------------------------------------------------------
First Quarter $(1,679) (2.3)%
- -------------------------------------------------------------------------------
Local services revenues are earned from the provision of local exchange,
local private line, public telephone (pay phone) and value-added services.
Value-added services are a family of services that expand the utilization of
the network. These services include products such as Caller ID, Call Waiting
and Return Call.
Our local services revenues declined in the first quarter of 1999 due to
price reductions on local exchange and public telephone services. The price
reductions on local exchange services were made in response to the District of
Columbia Public Service Commission's price cap plan.
These revenue reductions were partially offset by growth in local services
revenues in 1999 due to higher usage of our network facilities. This growth was
generated by an increase in access lines in service of 2.1% from March 31, 1998.
Access line growth primarily reflects higher demand for Centrex services and an
increase in additional residential lines. Local services revenue growth in the
first quarter of 1999 also reflects strong customer demand and usage of our data
transport and digital services.
NETWORK ACCESS SERVICES REVENUES
1999 - 1998 Increase
- -------------------------------------------------------------------------------
First Quarter $4,197 11.8%
- -------------------------------------------------------------------------------
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 usage services to their customers. Switched access revenues are
derived from fixed and usage-based charges paid by carriers for access to our
local network. Special access revenues originate from carriers and end-users
that buy dedicated local exchange capacity to support their private networks.
End-user access revenues are earned from our customers and from resellers who
purchase dial-tone services.
Network access services revenue growth in the first quarter of 1999 was
mainly attributable to volume growth. In the first three months of 1999, demand
for special access services was higher, reflecting a greater utilization of our
network by Internet service providers and other high-capacity users and access
minutes of use grew 3.3% from the first quarter of 1998. Higher end-user
revenues attributable to an increase in access lines in service also contributed
to revenue growth in the first quarter of 1999.
Volume-related growth was partially offset by net price reductions mandated
by a federal price cap plan. 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.
8
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Bell Atlantic - Washington, D.C., Inc.
In July 1998, we implemented interstate price decreases of approximately
$2,200,000 on an annual basis. These rates included amounts necessary to recover
our contribution to the FCC's 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 customers and rural health care providers.
Under the FCC's rules, all providers of interstate telecommunications services
must contribute to the fund. Our contributions to the universal service fund are
included in Other Operating Expenses. Our rates are subject to change every
quarter due to potential increases or decreases in our contribution to the
universal service fund. Changes in required contributions to that fund increased
rates by approximately $100,000 on an annual basis in October 1998 and decreased
rates by approximately $100,000 annually in April 1999. Rates were increased by
approximately $1,300,000 on an annual basis in January 1999 to reflect primarily
the unification of pre-merger Bell Atlantic and NYNEX access rates. These rates
will be in effect through June 1999.
LONG DISTANCE SERVICES REVENUES
1999 - 1998 Increase
- -------------------------------------------------------------------------------
First Quarter $114 11.3%
- -------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made to
points outside a customer's local calling area, but within our service area
(intraLATA toll).
The increase in long distance services revenues in the first quarter of 1999
was principally caused by growth in toll message volumes from March 31, 1998.
ANCILLARY SERVICES REVENUES
1999 - 1998 Increase
- -------------------------------------------------------------------------------
First Quarter $4,056 8.6%
- -------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation and usage of separately priced (unbundled) components
of our network by competitive local exchange carriers, voice messaging, customer
premises equipment (CPE) and wiring and maintenance services, and sales of
materials and supplies to affiliates. Ancillary services revenues also includes
fees paid by customers for nonpublication of telephone numbers and multiple
white page listings and fees paid by an affiliate for usage of our directory
listings.
Ancillary services revenues were higher in the first quarter of 1999 as a
result of increased CPE services provided to federal government customers.
These revenue increases were partially offset by the recognition in 1998 of
revenues associated with a marketing program.
9
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Bell Atlantic - Washington, D.C., Inc.
OPERATING EXPENSES
- ------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Employee costs, including benefits and taxes $ 20,160 $ 20,722
Depreciation and amortization 44,467 37,516
Other operating expenses 54,045 58,150
------------------------------------
Total $118,672 $116,388
====================================
</TABLE>
EMPLOYEE COSTS
1999 - 1998 (Decrease)
- -------------------------------------------------------------------------------
First Quarter $(562) (2.7)%
- -------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of NSI, who provide centralized services on a contract basis, are
allocated to us and are included in Other Operating Expenses.
Employee costs decreased in the first quarter of 1999 primarily as a result
of lower work force levels and lower pension and benefit costs. The reduction
in pension and benefit costs was due to a number of factors, including lower
pension costs as a result of favorable pension plan investment returns and
changes in plan provisions and actuarial assumptions. These factors were
offset, in part, by higher savings plan contributions and benefit plan
improvements provided for under new contracts with associate employees.
These cost reductions were partially offset by annual salary and wage
increases for management and associate employees.
DEPRECIATION AND AMORTIZATION
1999 - 1998 Increase
- -------------------------------------------------------------------------------
First Quarter $6,951 18.5%
- -------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first quarter of 1999
over the same period in 1998 principally as a result of growth in depreciable
telephone plant, changes in the mix of plant assets and the effect of higher
rates of depreciation and amortization. The adoption of Statement of Position
(SOP) No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" also contributed to the increase in depreciation and
amortization expense in the first quarter of 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 as incurred. For additional information on SOP No. 98-
1, see Note 3 to the condensed financial statements.
OTHER OPERATING EXPENSES
1999 - 1998 (Decrease)
- -------------------------------------------------------------------------------
First Quarter $(4,105) (7.1)%
- -------------------------------------------------------------------------------
Other operating expenses consist of contract services including centralized
services expenses allocated from NSI, rent, network software costs, operating
taxes other than income, the provision for uncollectible accounts receivable,
and other costs.
The decrease in other operating expenses in the first quarter of 1999 was
largely attributable to a reduction in centralized services expenses allocated
from NSI primarily as a result of lower employee costs incurred by NSI. Other
items contributing to the decrease in other operating expenses were a gain on
the retirement of a leased asset and the adoption of SOP No. 98-1. Lower
purchases of routine maintenance software further contributed to the decline in
other operating expenses.
10
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Bell Atlantic - Washington, D.C., Inc.
These decreases were offset, in part, by higher interconnection (reciprocal
compensation) payments to competitive local exchange and other carriers to
terminate calls on their networks. Competitive local exchange and other carriers
have charged us with "reciprocal compensation" payments to terminate calls on
their networks, including a large volume of one-way traffic from our customers
to internet service providers that are their customers. On February 26, 1999,
the FCC confirmed that such traffic is interstate and interexchange in nature
and not subject to the reciprocal compensation requirements of the
Telecommunications Act of 1996. We are evaluating the implications of the FCC's
order. The FCC also has initiated a proceeding to consider adopting rules
governing inter-carrier compensation for this traffic in the future.
OTHER INCOME, NET
1999 - 1998 Increase
- -------------------------------------------------------------------------------
First Quarter $199 61.4%
- -------------------------------------------------------------------------------
The change in other income, net, was attributable to additional interest
income in the first quarter of 1999 associated with the sale of property in
1998. This increase was partially offset by the effect of interest income
recognized in the first quarter of 1998 associated with the settlement of a
payroll tax issue.
INTEREST EXPENSE
1999 - 1998 (Decrease)
- -------------------------------------------------------------------------------
First Quarter $(238) (5.3)%
- -------------------------------------------------------------------------------
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 in the first quarter of 1999 over the same period
in 1998 principally due to effect of refinancing long-term debt with short-term
debt at a more favorable interest rate in August 1998.
EFFECTIVE INCOME TAX RATES
Three Months Ended March 31
- -------------------------------------------------------------------------------
1999 41.3%
- -------------------------------------------------------------------------------
1998 40.9%
- -------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. Our effective
income tax rate was higher in the first quarter of 1999 principally due to
income tax credits recorded in 1998.
FINANCIAL CONDITION
- -------------------
We use the net cash generated from operations and from external financing to
fund capital expenditures for network expansion and modernization, and pay
dividends. While current liabilities exceeded current assets at both March 31,
1999 and 1998 and December 31, 1998, our sources of funds, primarily from
operations and, to the extent necessary, from readily available financing
arrangements with an affiliate, are sufficient to meet ongoing operating
requirements. Management expects that presently foreseeable capital requirements
will continue to be financed primarily through internally generated funds.
Additional long-term debt may be needed to fund development activities or to
maintain our capital structure to ensure financial flexibility.
As of March 31, 1999, we had $146,509,000 of an unused line of credit with an
affiliate, Bell Atlantic Network Funding Corporation. In addition, we had
$100,000,000 remaining under a shelf registration statement filed with the
Securities and Exchange Commission for the issuance of unsecured debt
securities. Our debt securities continue to be accorded high ratings by primary
rating agencies. Subsequent to the announcement of the Bell Atlantic - GTE
merger, rating agencies have maintained current credit ratings, but have placed
our ratings under review for potential downgrade.
11
<PAGE>
Bell Atlantic - Washington, D.C., Inc.
Our debt ratio was 40.7% at March 31, 1999, compared to 43.3% at March 31,
1998 and 40.9% at December 31, 1998.
On May 3, 1999, we declared and paid a dividend in the amount of $9,700,000
to Bell Atlantic.
OTHER MATTERS
- -------------
Recent Accounting Pronouncement - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of the derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. We must
adopt SFAS No. 133 no later than January 1, 2000. The adoption of SFAS No. 133
will have no material effect on our results of operations or financial condition
because we currently do not enter into the use of derivative instruments or
participate in hedging activities.
Year "2000" Update
Bell Atlantic has a comprehensive program to evaluate and address the impact
of the Year 2000 date transition on its subsidiaries' operations, including 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 Bell Atlantic's 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. At this time, Bell Atlantic has
virtually completed the inventory, assessment and detailed planning phases
for these projects. Remediation/replacement/retirement and testing activities
are well underway. Bell Atlantic plans to fix, replace or retire those items
that were not Year 2000 compliant and that require action to avoid service
impact. Bell Atlantic's goal for these operations is to have its network and
other mission critical systems Year 2000 compliant (including testing) by
June 30, 1999. Bell Atlantic is on schedule to achieve this goal for
substantially all of its network and other mission critical systems. What
follows is a more detailed breakdown of Bell Atlantic's efforts to date.
. Network Elements
Approximately 350 different types of network elements (such as central office
switches) appear in over one hundred thousand instances. When combined in
various ways and using network application systems, these elements are the
building blocks of customer services and networked information transmission
of all kinds. Bell Atlantic originally assessed approximately 70% of these
element types, representing over 90% of all deployed network elements, as
Year 2000 compliant. Late in 1998, through additional testing and
verification, it determined that certain network elements, originally
represented as having no Year 2000-related service impact, were likely to
cause service issues unless remediated. As a result, Bell Atlantic had an
increase in the overall number of network elements requiring repair.
Notwithstanding the additional work effort, as of March 31, 1999, Bell
Atlantic had repaired or replaced approximately 60% of the deployed network
elements requiring remediation, and certification testing/evaluation is well
underway. Bell Atlantic also has made substantial progress on the remaining
network elements. Although Bell Atlantic is generally on track to achieve
its June 30, 1999 goal for network elements, it is possible that the
timeframe for compliance of a small number of network elements may extend
into July or August, without any impact on customer service or its
operations.
12
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Bell Atlantic - Washington, D.C., Inc.
. Application and Support Systems
Bell Atlantic has approximately 1,200 application and systems support: (i)
the administration and maintenance of its network and customer service
functions (network information systems); (ii) customer care and billing
functions; and (iii) human resources, finance and general corporate
functions. Bell Atlantic originally assessed approximately 48% of these
application systems as either compliant or to be retired. As of March 31,
1999, Bell Atlantic has successfully completed certification
testing/evaluation of approximately 73% of all application systems. Bell
Atlantic also has made substantial progress on the remaining application
systems. Although Bell Atlantic is generally on track to achieve its June
30, 1999 goal for applications and support systems, it is possible that the
timeframe for compliance of a small number of applications and support
systems may extend into July or August, without any impact on customer
service or its operations.
. Information Technology Infrastructure
Approximately 40 mainframe, 1,000 mid-range, and 90,000 personal computers,
related network components and software products comprise Bell Atlantic's
information technology (IT) infrastructure. Of the approximately 1,350
unique types of elements in the inventory for the IT infrastructure, Bell
Atlantic originally assessed approximately 73% as compliant or to be retired.
As of March 31, 1999, Bell Atlantic has successfully completed certification
testing/evaluation of approximately 95% of all mission critical element
types. Bell Atlantic has made substantial progress on the remaining items
and is on track to achieve its June 30, 1999 goal.
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.
Third Party Issues
. Vendors
In general, Bell Atlantic's product vendors have made available either
Year 2000-compliant versions of their offerings or new compliant products
as replacements of discontinued offerings. In some cases, the compliance
"status" of the product in question is based on vendor-provided
information, which remains subject to Bell Atlantic 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
services providers have yielded less meaningful information than inquiries
to its product vendors, and Bell Atlantic does not yet have sufficient
information to determine whether key utilities and similar service
providers will successfully complete the Year 2000 transition. However,
Bell Atlantic is now beginning to engage in more productive discussions
with large utilities servicing its facilities and it is hopeful that these
discussions will provide additional assurance of Year 2000 compliance for
those entities. At the present time, Bell Atlantic remains unable to
determine the Year 2000 readiness of most key utilities and similar
service 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.
. Customers
Bell Atlantic's customers remain keenly interested in the progress of its
Year 2000 efforts, and it anticipates increased demand for information,
including detailed testing data and company-specific responses. Bell
Atlantic is providing limited warranties of Year 2000 compliance for
certain new telecommunications services and other offerings, but it does
not expect any resulting warranty costs to be material.
. Interconnecting Carriers
Bell Atlantic's network operations interconnect with domestic and
international networks of other carriers. If one of these interconnecting
carriers should fail or suffer adverse impact from a Year 2000 problem,
Bell Atlantic's customers could experience impairment of service.
13
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Bell Atlantic - Washington, D.C., Inc.
Costs
From the inception of Bell Atlantic's Year 2000 project through March 31,
1999, and based on the cost tracking methods it has historically applied to this
project, Bell Atlantic has incurred total pre-tax expenses of approximately $138
million, and it has made capital expenditures of approximately $89 million. For
1999, Bell Atlantic expects to incur total pre-tax expenses for its Year 2000
project of approximately $75 million to $150 million (approximately $16 million
of which was incurred through March 31, 1999) and total capital expenditures of
$75 million to $125 million (approximately $9 million of which was incurred
through March 31, 1999).
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.
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
our 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 has prepared an initial draft of its corporate Year 2000
contingency plan and it is continuing to refine and enhance that plan.
14
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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 March 31, 1999.
15
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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: May 12, 1999 By /s/ Edwin F. Hall
----------------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 6, 1999.
16
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