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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 March 31, 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
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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
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Bell Atlantic - Washington, D.C., Inc.
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Part I - Financial Information
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Item 1. Financial Statements
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CONDENSED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Thousands)
Three months ended
March 31,
------------------
1998 1997
-------- --------
OPERATING REVENUES
(including $33,738 and $28,725 from affiliates)...... $155,755 $149,662
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OPERATING EXPENSES
Employee costs, including benefits and taxes......... 20,722 24,787
Depreciation and amortization........................ 37,516 38,449
Taxes other than income.............................. 11,176 11,575
Other (including $37,256 and $38,231 to affiliates).. 46,974 49,617
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116,388 124,428
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OPERATING INCOME.......................................... 39,367 25,234
OTHER INCOME, NET......................................... 324 41
INTEREST EXPENSE
(including $429 and $653 to affiliate)............... 4,479 4,877
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Income Before Provision for Income Taxes.................. 35,212 20,398
PROVISION FOR INCOME TAXES................................ 14,413 8,433
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NET INCOME................................................ $ 20,799 $ 11,965
======== ========
REINVESTED EARNINGS
At beginning of period............................... $ 94,547 $ 51,646
Add: net income...................................... 20,799 11,965
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115,346 63,611
Deduct: other changes................................ --- 2,370
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At end of period..................................... $115,346 $ 61,241
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See Notes to Condensed Financial Statements.
1
Bell Atlantic - Washington, D.C., Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
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Assets
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March 31, December 31,
1998 1997
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CURRENT ASSETS
Short-term investments............................... $ 7,975 $ 7,134
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $8,827 and $7,721........ 126,539 132,936
Affiliates...................................... 18,731 18,253
Material and supplies................................ 1,413 1,929
Prepaid expenses..................................... 5,997 3,962
Deferred income taxes................................ 3,471 3,872
Other................................................ --- 2
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164,126 168,088
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PLANT, PROPERTY AND EQUIPMENT........................ 1,678,550 1,652,123
Less accumulated depreciation........................ 878,996 849,599
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799,554 802,524
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OTHER ASSETS......................................... 15,463 17,206
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TOTAL ASSETS......................................... $ 979,143 $ 987,818
========== ==========
See Notes to Condensed Financial Statements.
2
Bell Atlantic - Washington, D.C., Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
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Liabilities and Shareowner's Investment
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March 31, December 31,
1998 1997
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CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate..................... $ 28,873 $ 9,526
Other......................................... 43 20,512
Accounts payable and accrued liabilities:
Affiliates.................................... 104,424 113,404
Other......................................... 81,012 102,722
Advance billings and customer deposits............. 11,327 9,464
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225,679 255,628
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LONG-TERM DEBT..................................... 227,784 227,769
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EMPLOYEE BENEFIT OBLIGATIONS....................... 131,049 134,434
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.............................. 34,513 29,585
Unamortized investment tax credits................. 3,554 3,626
Other.............................................. 20,701 21,712
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58,768 54,923
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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................................ 115,346 94,547
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335,863 315,064
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TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT...... $979,143 $987,818
======== ========
See Notes to Condensed Financial Statements.
3
Bell Atlantic - Washington, D.C., Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three months ended
March 31,
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1998 1997
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NET CASH PROVIDED BY OPERATING ACTIVITIES......... $ 36,590 $ 35,047
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CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments.............. (841) (800)
Additions to plant, property and equipment........ (38,483) (34,786)
Other, net........................................ 3,115 5,302
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Net cash used in investing activities............. (36,209) (30,284)
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayment of borrowings and capital
lease obligations............................ (20,136) (15)
Net change in note payable to affiliate........... 19,347 (3,303)
Net change in outstanding checks drawn
on controlled disbursement accounts.......... 408 (1,445)
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Net cash used in financing activities............. (381) (4,763)
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NET CHANGE IN CASH................................ --- ---
CASH, BEGINNING OF PERIOD......................... --- ---
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CASH, END OF PERIOD............................... $ --- $ ---
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See Notes to Condensed Financial Statements.
4
Bell Atlantic - Washington, D.C., Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
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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
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On May 1, 1998, the Company declared and paid a dividend in the amount of
$4,000,000 to Bell Atlantic.
3. Litigation and Other Contingencies
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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.
4. Recent Accounting Pronouncement
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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). The Company is required to
adopt SOP 98-1 effective January 1, 1999, although earlier adoption is
permitted. 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. The
Company is currently evaluating the provisions of SOP 98-1 and has not yet
determined what the impact of adopting this statement will be on its future
results of operations or financial position.
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Bell Atlantic - Washington, D.C., Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
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(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
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RESULTS OF OPERATIONS
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The Company reported net income of $20,799,000 for the three month period
ended March 31, 1998, compared to net income of $11,965,000 for the same period
in 1997.
Items affecting the comparison of the Company's results of operations for
the three month periods ended March 31, 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.
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Operating Revenue Statistics
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1998 1997 % Change
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At March 31
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Access Lines in Service (in thousands)*
Residence............................. 298 291 2.4%
Business.............................. 618 607 1.8
Public................................ 10 10 ---
--- ---
926 908 2.0
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Three Month Period Ended March 31
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Access Minutes of Use (in millions)...... 721 691 4.3
=== ===
* 1997 reflects a restatement of access lines in service to include Primary Rate
ISDN (Integrated Services Digital Network) channels.
OPERATING REVENUES
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(Dollars in Thousands)
Three Month Period Ended March 31 1998 1997
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Local services............................. $ 71,969 $ 71,607
Network access services.................... 35,716 36,735
Long distance services..................... 1,007 909
Ancillary services......................... 46,377 39,725
Directory and information services......... 686 686
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Total...................................... $155,755 $149,662
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Bell Atlantic - Washington, D.C., Inc.
LOCAL SERVICES REVENUES
1998-1997 Increase
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First Quarter $362 .5%
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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.
Higher usage of the Company's network facilities was the primary reason for
the increase in local services revenues in the first quarter of 1998. The
growth was generated by stronger business message volumes and an increase in
access lines in service of 2.0% from March 31, 1997. Access line growth
reflects primarily higher demand for Centrex services and an increase in
additional residential lines. Higher revenues from private line and switched
data services also contributed to revenue growth in the first quarter of 1998.
Revenue growth from volume increases was substantially offset by price
reductions on certain local services, including dial tone charges, pursuant to
the Company's Price Cap Plan.
Higher demand for value-added services was more than offset by the
elimination of business Touch-Tone service charges, effective January 1, 1998.
The elimination of these Touch-Tone service charges is expected to reduce annual
revenues by approximately $2,300,000.
NETWORK ACCESS SERVICES REVENUES
1998-1997 (Decrease)
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First Quarter $(1,019) (2.8)%
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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 decreased in the first quarter of 1998
primarily due to net price reductions mandated by a federal price cap plan.
Price decreases of approximately $10,700,000 annually were implemented under the
Federal Communications Commission's (FCC) Interim Price Cap Plan, effective July
1, 1997. An additional price reduction of $700,000 was implemented in December
1997, following the resolution of certain issues previously under review by the
FCC. The rates included in the 1997 filings will be in effect through June
1998. In addition, effective January 1, 1998, the Company increased its annual
rates to recover the contributions that it owes to the new universal service
fund. These revenues are being entirely offset by the universal service fund
contribution amount, which is included in Other Operating Expenses. Under an
FCC order, all providers of telecommunications services must contribute to a
universal service fund. The new rules create a multi-billion dollar interstate
fund for linking schools and libraries to the Internet and subsidizing low-
income consumers and rural health care providers. Finally, the Company
increased certain end-user subscriber line rates, effective January 1, 1998, as
ordered by the FCC.
The decrease in network access services revenues was partially offset by
higher customer demand as reflected by growth in access minutes of use of 4.3%
from March 31, 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. Growth in access revenues
also reflects higher network usage by alternative providers of intraLATA toll
services. In addition, higher end-user revenues attributable to an increase in
access lines in service contributed to revenue growth in the first quarter of
1998.
7
Bell Atlantic - Washington, D.C., Inc.
LONG DISTANCE SERVICES REVENUES
1998-1997 Increase
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First Quarter $98 10.8%
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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 quarter of
1998 was principally caused by growth in toll message volumes of 4.5% from March
31, 1997.
ANCILLARY SERVICES REVENUES
1998-1997 Increase
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First Quarter $6,652 16.7%
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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, sales of materials and supplies to affiliates and voice messaging
services.
The increase in ancillary services revenues in the first quarter of 1998
was primarily as a result of higher facilities rental revenues from affiliates.
This increase was caused by centralizing data processing services of certain
affiliates in a facility owned by the Company. Ancillary services revenues also
grew as a result of increased demand by long distance carriers and affiliates
for billing and collection services.
DIRECTORY AND INFORMATION SERVICES REVENUES
1998-1997 Increase/(Decrease)
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First Quarter $--- ---
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Directory and information services revenues are earned primarily from fees
for nonpublication of telephone numbers, multiple white page listings and usage
of directory listings.
There was no change in directory and information services revenues in the
first quarter of 1998 as compared to the same period in 1997.
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Bell Atlantic - Washington, D.C., Inc.
OPERATING EXPENSES
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(Dollars in Thousands)
Three Month Period Ended March 31 1998 1997
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Employee costs, including benefits and taxes.. $ 20,722 $ 24,787
Depreciation and amortization................. 37,516 38,449
Taxes other than income....................... 11,176 11,575
Other operating expenses...................... 46,974 49,617
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Total......................................... $116,388 $124,428
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EMPLOYEE COSTS
1998-1997 (Decrease)
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First Quarter $(4,065) (16.4)%
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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 Bell Atlantic Network Services, Inc. (NSI), who provide
centralized services on a contract basis, are allocated to the Company and are
included in Other Operating Expenses.
Employee costs decreased in the first quarter 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 changes in actuarial assumptions,
favorable pension plan asset returns and lower than expected medical claims.
Lower overtime pay, 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 employee costs. These
cost reductions were offset, in part, by the effect of annual salary and wage
increases for management and associate employees.
Associate employee wages and pension and other employee benefits are
determined under a contract ratified by the Communications Workers of America
(CWA), the union representing associate employees of the Company. The contract
with the CWA will expire in August 1998.
DEPRECIATION AND AMORTIZATION
1998-1997 (Decrease)
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First Quarter $(933) (2.4)%
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Depreciation and amortization expense decreased in the first quarter of
1998 over the same period in 1997 principally due to the effect of lower rates
of depreciation and amortization. This decrease was partially offset by
additional expense resulting from growth in depreciable telephone plant.
TAXES OTHER THAN INCOME
1998-1997 (Decrease)
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First Quarter $(399) (3.4)%
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Taxes other than income consist principally of taxes for gross receipts,
property, capital stock and business licenses.
The decrease in taxes other than income was primarily attributable to lower
gross receipts taxes resulting from the reversal of a liability in the first
quarter of 1997.
9
Bell Atlantic - Washington, D.C., Inc.
OTHER OPERATING EXPENSES
1998-1997 (Decrease)
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First Quarter $(2,643) (5.3)%
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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 largely attributable to lower
costs for materials and contract services. The reduction 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. The Company also recognized lower centralized services expenses
allocated from NSI primarily as a result of lower pension and benefit costs
incurred by NSI. The reduction in centralized services expenses was partially
offset by transition and integration costs allocated to the Company in
connection with the merger of Bell Atlantic and NYNEX Corporation.
These decreases were partially offset by the Company's contribution to the
federal universal service fund, as described earlier, and higher costs for
uncollectible accounts receivable associated with the Company's billing and
collection services principally due to the effect of a reversal of a liability
in 1997.
OTHER INCOME, NET
1998-1997 Increase
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First Quarter $283 690.2%
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The change in other income, net, was attributable to additional interest
income primarily resulting from the settlement of a payroll tax issue in the
first quarter of 1998.
INTEREST EXPENSE
1998-1997 (Decrease)
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First Quarter $(398) (8.2)%
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Interest expense decreased in the first quarter of 1998 principally as a
result of lower levels of average short-term debt.
EFFECTIVE INCOME TAX RATES
Three Months Ended March 31
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1998 40.9%
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1997 41.3%
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The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. The Company's
effective income tax rate was lower in the first quarter of 1998 principally due
to higher tax credits recorded in 1998.
10
Bell Atlantic - Washington, D.C., Inc.
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 pay dividends. While current liabilities exceeded current assets at both
March 31, 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 March 31, 1998, the Company had $96,100,000 of an unused line of
credit with an affiliate, Bell Atlantic Network Funding Corporation. In
addition, the Company has $60,000,000 remaining under a shelf registration
statement filed with the Securities and Exchange Commission for the issuance of
unsecured debt securities.
The Company's debt ratio was 43.3% as of March 31, 1998, compared to 51.0%
as of March 31, 1997 and 45.0% as of December 31, 1997.
On May 1, 1998, the Company declared and paid a dividend in the amount of
$4,000,000 to Bell Atlantic.
11
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, 1998.
12
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 11, 1998 By /s/ Edwin F. Hall
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Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 5, 1998.
13