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, 2000
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
VERIZON WASHINGTON, DC INC.
(Former Name: 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 VERIZON COMMUNICATIONS INC., 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
----- -----
Verizon Washington, DC Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------------------------------
(Dollars in Thousands) (Unaudited) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
(including $39,447, $35,458, $117,027 and
$104,563 from affiliates) $172,788 $170,815 $520,522 $497,364
------------------------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $40,123,
$33,194, $116,179 and $102,742 to affiliates) 83,767 84,348 254,890 247,119
Depreciation and amortization 45,085 43,469 133,546 132,503
------------------------------------------------------------------------
128,852 127,817 388,436 379,622
------------------------------------------------------------------------
OPERATING INCOME 43,936 42,998 132,086 117,742
OTHER INCOME, NET
(including $46, $10, $250 and $33 from affiliate) 274 45 1,651 637
INTEREST EXPENSE
(including $2,182, $1,390, $5,144 and $4,122
to affiliate) 4,439 3,981 12,030 12,301
------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 39,771 39,062 121,707 106,078
PROVISION FOR INCOME TAXES 16,421 15,935 52,291 43,528
-------------------------------------------------------------------------
NET INCOME $ 23,350 $ 23,127 $ 69,416 $ 62,550
=========================================================================
See Notes to Condensed Financial Statements.
1
Verizon Washington, DC Inc.
CONDENSED BALANCE SHEETS
ASSETS
------
(Dollars in Thousands) September 30, 2000 December 31, 1999
- --------------------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS
Cash $ --- $ 703
Short-term investments --- 7,400
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $10,418 and $6,802 154,687 136,333
Affiliates 21,219 32,320
Material and supplies 2,863 804
Prepaid expenses 16,213 4,460
Deferred income taxes 6,363 2,951
Other 802 ---
-------------------------------
202,147 184,971
-------------------------------
PLANT, PROPERTY AND EQUIPMENT 1,985,783 1,898,332
Less accumulated depreciation 1,077,422 1,028,915
-------------------------------
908,361 869,417
OTHER ASSETS 18,068 16,590
-------------------------------
TOTAL ASSETS $1,128,576 $1,070,978
===============================
See Notes to Condensed Financial Statements.
2
Verizon Washington, DC Inc.
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
(Dollars in Thousands) September 30, 2000 December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 148,228 $ 80,379
Accounts payable and accrued liabilities:
Affiliates 55,248 87,412
Other 110,870 103,836
Advance billings and customer deposits 13,217 10,979
---------------------------------------------
327,563 282,606
---------------------------------------------
LONG-TERM DEBT 164,329 164,315
---------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 90,117 103,223
---------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 91,104 71,131
Unamortized investment tax credits 2,947 3,099
Other 20,825 25,429
---------------------------------------------
114,876 99,659
---------------------------------------------
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 211,326 200,810
Accumulated other comprehensive loss (152) (152)
---------------------------------------------
431,691 421,175
---------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $1,128,576 $1,070,978
=============================================
See Notes to Condensed Financial Statements.
3
Verizon Washington, DC Inc.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
---------------------------------
(Dollars in Thousands) (Unaudited) 2000 1999
- ----------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 166,463 $ 193,305
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 7,400 6,690
Capital expenditures (188,189) (155,461)
Other, net 3,236 6,138
---------------------------------
Net cash used in investing activities (177,553) (142,633)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations --- (15)
Net change in note payable to affiliate 67,849 (8,189)
Dividends paid (58,900) (39,000)
Net change in outstanding checks drawn
on controlled disbursement accounts 1,438 (3,468)
---------------------------------
Net cash provided by/(used in)
financing activities 10,387 (50,672)
---------------------------------
NET CHANGE IN CASH (703) ---
CASH, BEGINNING OF PERIOD 703 ---
---------------------------------
CASH, END OF PERIOD $ --- $ ---
=================================
See Notes to Condensed Financial Statements.
4
Verizon Washington, DC Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon Washington, DC Inc., formerly Bell Atlantic - Washington, D.C.,
Inc., is a wholly owned subsidiary of Verizon Communications Inc. (Verizon
Communications). The accompanying unaudited condensed financial statements have
been prepared based upon Securities and Exchange Commission (SEC) rules that
permit reduced disclosure for interim periods. These financial statements
include certain reclassifications in presentation as a result of the merger of
Bell Atlantic Corporation (Bell Atlantic) and GTE Corporation (GTE) (see Note
2). 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 and other items (see
Note 2). 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 1999 Annual Report on Form 10-K.
2. Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under
a definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. In September
2000, Bell Atlantic changed its name to Verizon Communications Inc. The merger
qualified as a tax-free reorganization and has been accounted for as a pooling
of interests. Under this method of accounting, Bell Atlantic and GTE are treated
as if they had always been combined for accounting and financial reporting
purposes.
Merger-Related and Severance Costs
Results of operations for the nine months ended September 30, 2000 included
merger-related pre-tax costs totaling approximately $6,620,000, consisting of
$3,273,000 for direct incremental costs and $3,347,000 for employee severance
costs. These costs include approximately $5,702,000 representing our allocated
share of merger-related costs from Verizon Services Corp. (Verizon Services), an
affiliate that provides centralized services on a contract basis. Costs
allocated from Verizon Services are included in Operations and Support Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
represent our proportionate share of benefit costs for the separation of
management employees who are entitled to benefits under pre-existing Verizon
Communications separation pay plans. The separations are expected to occur as a
result of consolidations and process enhancements. Accrued postemployment
benefit liabilities for those employees are included in our balance sheet as a
component of Accounts Payable and Accrued Liabilities -Other.
Transition Costs
In addition to the direct merger-related and severance costs, over the next
several years, we expect to incur transition costs related to the merger. These
costs will be incurred to integrate systems, consolidate real estate and
relocate employees. These costs will include our allocated share of
merger-related costs from Verizon Services. They also include advertising and
other costs to establish the Verizon brand. Transition costs are expensed as
incurred. During the nine month period ended September 30, 2000, we incurred
$625,000 of transition costs which were allocated to us by Verizon Services.
Other Related Actions
During the second quarter of 2000, we also recorded a $49,000 charge for
other actions in relation to the merger or other strategic decisions. This
charge included the write-off of duplicate assets.
3. Dividend
On November 1, 2000, we declared and paid a dividend in the amount of
$15,900,000 to Verizon Communications.
5
Verizon Washington, DC Inc.
4. Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or other
comprehensive income, depending on the designated use and effectiveness of the
instruments.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No.
138, which we will adopt on January 1, 2001. The impact of adoption will be
affected by several factors, including the specific hedging instruments in place
and their relationships to hedged items, as well as market conditions at the
date of adoption.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition and, in certain circumstances, requires the
deferral of incremental costs. We will adopt SAB No. 101 in the fourth quarter
of 2000, retroactive to January 1, 2000. We are currently assessing the impact
of adopting SAB No. 101.
5. Shareowner's Investment
Reinvested Accumulated Other
(Dollars in Thousands) (Unaudited) Common Stock Capital Surplus Earnings Comprehensive Loss
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $191,968 $28,549 $200,810 $(152)
Net income 69,416
Dividends paid to parent (58,900)
------------------------------------------------------------------
Balance at September 30, 2000 $191,968 $28,549 $211,326 $(152)
==================================================================
Net income and comprehensive income were the same for the nine months ended
September 30, 2000 and 1999.
6. Commitments and 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.
Federal and state regulatory conditions to the Bell Atlantic - GTE merger
include certain commitments to, among other things, promote competition and the
widespread deployment of advanced services, while helping ensure that consumers
continue to receive high-quality, low cost telephone services. In some cases,
there are significant penalties associated with not meeting these commitments.
The cost of satisfying these commitments could have a significant impact on net
income in future periods. As previously disclosed, the cost of satisfying these
commitments is likely to impact the net income of Verizon Communications on a
consolidated basis in 2000 by approximately $275 to $325 million, based on
preliminary estimates. The estimated impact on each operating telephone
subsidiary, including the Company, is currently being assessed.
6
Verizon Washington, DC 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 $69,416,000 for the nine months ended September
30, 2000, compared to net income of $62,550,000 for the same period in 1999.
Our results for 2000 and 1999 were affected by special items. The special
items in both periods include our allocated share of charges from Verizon
Services Corp. (Verizon Services), an affiliate that provides centralized
services on a contract basis.
The following table shows how special items are reflected in our condensed
statements of income for each period:
(Dollars in Thousands)
Nine Months Ended September 30, 2000 1999
- ---------------------------------------------------------------------------------------------------
Operations and Support Expenses
Bell Atlantic-GTE merger direct incremental costs $ 3,273 $ ---
Bell Atlantic-GTE merger severance costs 3,347 ---
Bell Atlantic-GTE merger transition costs 625 ---
Bell Atlantic-GTE merger other related actions 49 ---
Bell Atlantic-NYNEX merger transition costs --- 1,380
Other charges and special items 6,755 ---
-----------------------------------
Net impact on pre-tax income $ 14,049 $ 1,380
===================================
What follows is a further explanation of the nature of these special items.
Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under
a definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. In September
2000, Bell Atlantic changed its name to Verizon Communications Inc. (Verizon
Communications). The merger qualified as a tax-free reorganization and has been
accounted for as a pooling of interests. Under this method of accounting, Bell
Atlantic and GTE are treated as if they had always been combined for accounting
and financial reporting purposes.
Merger-Related and Severance Costs
Results of operations for the nine months ended September 30, 2000 included
merger-related pre-tax costs totaling approximately $6,620,000, consisting of
$3,273,000 for direct incremental costs and $3,347,000 for employee severance
costs. These costs include approximately $5,702,000 representing our allocated
share of merger-related costs from Verizon Services. Costs allocated from
Verizon Services are included in Operations and Support Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
represent our proportionate share of benefit costs for the separation of
management employees who are entitled to benefits under pre-existing Verizon
Communications separation pay plans. The separations are expected to occur as a
result of consolidations and process enhancements. Accrued postemployment
benefit liabilities for those employees are included in our balance sheet as a
component of Accounts Payable and Accrued Liabilities-Other.
Transition Costs
In addition to the direct merger-related and severance costs, over the next
several years, we expect to incur transition costs related to the merger. These
costs will be incurred to integrate systems, consolidate real estate and
relocate employees. These
7
Verizon Washington, DC Inc.
costs will include our allocated share of merger-related costs from Verizon
Services. They also include advertising and other costs to establish the Verizon
brand. Transition costs are expensed as incurred. During the nine month period
ended September 30, 2000, we incurred $625,000 of transition costs which were
allocated to us by Verizon Services.
Other Related Actions
During the second quarter of 2000, we also recorded a $49,000 charge for
other actions in relation to the merger or other strategic decisions. This
charge included the write-off of duplicate assets.
Other Charges and Special Items
In the second quarter of 2000, we recorded other charges and special items
totaling approximately $6,755,000. These charges included costs for the
write-off of accounts receivable and other miscellaneous items.
Bell Atlantic - NYNEX Merger
Merger-Related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax merger-related transition costs of $1,380,000
in the first nine months of 1999. These costs included approximately $1,195,000,
representing our allocated share of transition costs from Verizon Services.
Transition costs consisted of our proportionate share of costs associated
with integrating the operations of Bell Atlantic and NYNEX, such as systems
modification costs and advertising and branding costs. Transition costs were
expensed as incurred.
These and other items affecting the comparison of our results of operations
for the nine month periods ended September 30, 2000 and 1999 are discussed in
the following sections.
OPERATING REVENUE STATISTICS
- ----------------------------
2000 1999 % Change
- --------------------------------------------------------------------------------
At September 30,
Access Lines in Service (in thousands)*
Residence 307 306 .3%
Business 692 681 1.6
Public 10 10 ---
-----------------------------------
1,009 997 1.2
===================================
Nine Months Ended September 30,
Access Minutes of Use (in millions) 2,348 2,322 1.1
===================================
* 1999 reflects a restatement of access lines in service
OPERATING REVENUES
- ------------------
(Dollars in Thousands)
Nine Months Ended September 30, 2000 1999
- --------------------------------------------------------------------------------
Local services $244,804 $236,367
Network access services 143,243 127,177
Long distance services 2,224 3,179
Other services 130,251 130,641
---------------------------------
Total $520,522 $497,364
=================================
8
Verizon Washington, DC Inc.
LOCAL SERVICES
2000 - 1999 Increase
- --------------------------------------------------------------------------------
Nine Months $8,437 3.6%
- --------------------------------------------------------------------------------
Local service revenues are earned from the provision of local exchange,
local private line, wire maintenance, voice messaging and value-added services.
Value-added services are a family of services that expand the utilization of the
network, including products such as Caller ID, Call Waiting and Return Call.
Local services also includes wholesale revenues from unbundled network element
(UNE) platforms, certain data transport revenues, and wireless interconnection
revenues.
Local service revenues increased in the first nine months of 2000 primarily
due to higher customer demand and usage of our value-added services, as well as
our data transport and digital services. Growth in local service revenues was
partially offset by the effect of lower business and residence message volumes.
The effect of an 18-day work stoppage, as described below under "Operating
Expenses - Operations and Support - Labor Agreements," adversely affected local
service revenue growth due to the delay in the installation of new services and
as a result of customers not having full access to demand-based services.
NETWORK ACCESS SERVICES
2000 - 1999 Increase
- --------------------------------------------------------------------------------
Nine Months $16,066 12.6%
- --------------------------------------------------------------------------------
Network access revenues are earned from end-user subscribers and from 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 revenue growth in the first nine months of 2000 was mainly
attributable to increased demand for special access services, reflecting a
greater utilization of our network. Higher customer demand was also reflected by
growth in access minutes of use of 1.1% from the same period in 1999.
Volume-related growth was largely offset by price reductions associated
with federal and state price cap filings and other regulatory decisions,
including the implementation of the Coalition for Affordable Local and Long
Distance Service (CALLS) plan, effective July 1, 2000. For more information on
federal access rates, see "Other Matters - FCC Regulation and Interstate Rates."
LONG DISTANCE SERVICES
2000 - 1999 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(955) (30.0)%
- --------------------------------------------------------------------------------
Long distance revenues are earned primarily from calls made to points
outside a customer's local calling area, but within our service area (intraLATA
toll). IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call.
The decline in long distance revenues in the first nine months of 2000 was
principally caused by the competitive effects of presubscription, which enables
customers to make intraLATA toll calls using a competing carrier without having
to dial an access code.
9
Verizon Washington, DC Inc.
OTHER SERVICES
2000 - 1999 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(390) (.3)%
- --------------------------------------------------------------------------------
Our other services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation for competitive local exchange carriers, usage of
separately priced (unbundled) components of our network by competitive local
exchange carriers, public (coin) telephone, customer premises equipment (CPE),
and sales of materials and supplies to affiliates. Other services revenues also
include 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.
Other services revenues decreased in the first nine months of 2000
primarily due to a reduction in CPE services provided to government customers.
This decrease was substantially offset by an increase in facilities rental
revenue from affiliates and higher payments received from competitive local
exchange carriers for interconnection of their networks with our network.
OPERATING EXPENSES
- ------------------
(Dollars in Thousands)
OPERATIONS AND SUPPORT
2000 - 1999 Increase
- --------------------------------------------------------------------------------
Nine Months $7,771 3.1%
- --------------------------------------------------------------------------------
Operations and support expenses consist of employee costs and other
operating expenses. Employee costs consist of salaries, wages and other employee
compensation, employee benefits and payroll taxes. Other operating expenses
consist of contract services including centralized services expenses allocated
from Verizon Services, rent, network software costs, operating taxes other than
income, the provision for uncollectible accounts receivable, and other costs.
The increase in operations and support expenses was primarily attributable
to merger-related costs and other special items recorded in 2000. These charges
consisted of $7,294,000 for merger-related costs and $6,755,000 for other
special items. Operations and support expenses were further increased by
additional costs associated with higher centralized service expenses allocated
from Verizon Services and higher operating taxes other than income. Other items
contributing to the increase in operations and support expenses, but to a lesser
extent, were higher associate overtime pay and the effect of higher work force
levels.
These increases were partially offset by lower material costs, a decline in
pension and benefit costs, and the effects of the work stoppage. The decline in
pension and benefit costs was due to favorable pension plan investment returns
and changes in actuarial assumptions. These factors were partially offset by
changes in certain plan provisions, including a previously reported amendment to
our management cash balance plan and a special lump sum pension payment to
management and associate retirees.
Labor Agreements
Associate employee wages, and pension and other benefits are determined
under a contract with the union representing our associate employees. On
August 5, 2000, the collective bargaining agreement with the union representing
our associate employees expired, and the union initiated a work stoppage.
On August 23, 2000, Verizon Communications reached a tentative agreement
with the Communications Workers of America (CWA) on a new 3-year contract
covering our employees. The contract provides for annual wage increases of
4 percent, 3 percent and 5 percent, beginning in August 2000. Customer service
representatives will receive an additional 4 percent wage increase effective
immediately. Pension benefits for active employees will increase by 5 percent on
July 1, 2001, 5 percent on July 1, 2002 and 4 percent on July 1, 2003. The
contract resolves certain local issues, including overtime and work rules,
raised by the CWA and also includes team-based incentive awards for meeting
higher service, performance and other standards, increased funding for work and
family programs, improvements to health and other benefits and certain
provisions relating to access to work
10
Verizon Washington, DC Inc.
and employment security. In addition, prior to year-end, all union-represented
employees will be granted options to purchase 100 shares of Verizon
Communications' common stock.
The labor agreement with the CWA has been ratified by the union membership.
DEPRECIATION AND AMORTIZATION
2000 - 1999 Increase
- --------------------------------------------------------------------------------
Nine Months $1,043 .8%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first nine months
of 2000 over the same period in 1999 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The growth
in telephone plant was largely attributable to increased capital expenditures
for software and hardware to support the expansion of our network. These factors
were substantially offset by the effect of lower rates of depreciation and
amortization.
OTHER INCOME, NET
2000 - 1999 Increase
- --------------------------------------------------------------------------------
Nine Months $1,014 159.2%
- --------------------------------------------------------------------------------
The change in other income, net, was primarily attributable to additional
interest income associated with the settlement of a tax-related matter in the
first nine months of 2000. Other items contributing to the change, but to a
lesser extent, were an increase in the income recognized from our investment in
SMS/800 under the equity method and nonperformance fees received from a vendor.
INTEREST EXPENSE
2000 - 1999 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(271) (2.2)%
- --------------------------------------------------------------------------------
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 nine months of 2000 over the same
period in 1999 primarily as a result of higher capitalized interest costs
resulting from higher levels of average telephone plant under construction. This
increase was partially offset by the effect of higher levels of average
short-term debt with an affiliate and higher interest rates associated with this
debt.
EFFECTIVE INCOME TAX RATES
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2000 43.0%
- --------------------------------------------------------------------------------
1999 41.0%
- --------------------------------------------------------------------------------
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 nine months of 2000 principally due to
non-recurring deferred income tax expenses recorded in the first nine months of
2000.
11
Verizon Washington, DC Inc.
OTHER MATTERS
- -------------
FCC Regulation and Interstate Rates
On May 31, 2000, the FCC approved the industry proposal to restructure
access charges (known as the "CALLS plan"). Under the terms of the plan, direct
end-user access charges are increased while access charges to long distance
carriers are reduced. While the plan continues the 6.5% (less inflation) annual
reductions for most interstate access charges, it provides for a price freeze
when switched access transport prices reach $0.0055 per-minute. In addition, in
conjunction with provisions that will allow carriers to deaverage their
subscriber line charges by geographic zones, the plan establishes a new $650
million universal service fund to support interstate access rates. Of that
amount, Verizon Communications expects approximately $320 million to be used to
support interstate access services in its service territory. The price
restructuring portions of the plan are mandatory for all large local exchange
carriers, including Verizon Communications' telephone operating companies, such
as us. The price level portions of the plan are mandatory only in the initial
year of the plan. By September 14, 2000, carriers were to decide whether to
participate in the remaining four years of the plan, or whether to submit cost
studies as the basis of future price caps.
Consistent with the new access plan, Verizon Communications filed tariff
adjustments to take effect on July 1, 2000 (with modifications effective
August 11, 2000). As a result of these tariff adjustments, former GTE carriers
in ten states, and former Bell Atlantic carriers in seven states reached the
$0.0055 benchmark and by opting into the full five year CALLS plan, Verizon
Communications would not be subject to further annual interstate switched access
price reductions for the remaining life of the plan.
As of September 14, 2000, Verizon Communications formally opted to
participate in the full five-year term of the FCC-adopted industry plan to
restructure access rates known as the CALLS plan. As a result of this decision,
price caps on Verizon Communications' interstate access charges will be set
according to the terms of the CALLS plan.
Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or other
comprehensive income, depending on the designated use and effectiveness of the
instruments.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized foreign-currency-
denominated assets and liabilities, and intercompany derivatives.
We are currently evaluating the provisions of SFAS No. 133 and SFAS
No. 138, which we will adopt on January 1, 2001. The impact of adoption will be
affected by several factors, including the specific hedging instruments in place
and their relationships to hedged items, as well as market conditions at the
date of adoption.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition and, in certain circumstances, requires the
deferral of incremental costs. We will adopt SAB No. 101 in the fourth quarter
of 2000, retroactive to January 1, 2000. We are currently assessing the impact
of adopting SAB No. 101.
12
Verizon Washington, DC 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) Current Reports on Form 8-K filed during the quarter ended
September 30, 2000:
A Current Report on Form 8-K, dated August 23, 2000, was filed
regarding a tentative agreement on a new three-year contract
with the Communications Workers of America in the Mid-Atlantic
region.
A Current Report on Form 8-K, dated September 7, 2000, was
filed in connection with a change in our independent
accountants.
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Verizon Washington, DC 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.
VERIZON WASHINGTON, DC INC.
Date: November 14, 2000 By /s/ Edwin F. Hall
----------------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 8, 2000.
14
EXHIBIT INDEX
Exhibit Number
27 Financial Data Schedule.