UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
--------------------------
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
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
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION I(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.
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I
1. Business
(Abbreviated pursuant to General Instruction I(2).).............................................. 1
2. Properties ...................................................................................... 6
3. Legal Proceedings ............................................................................... 6
4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction I(2).) ................................................. 6
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters ........................... 7
6. Selected Financial Data
(Omitted pursuant to General Instruction I(2).) ................................................. 7
7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction I(2).) ............................................. 8
7A. Quantitative and Qualitative Disclosures About Market Risk ...................................... 14
8. Financial Statements and Supplementary Data ..................................................... 14
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............ 14
PART III
(Omitted pursuant to General Instruction I(2).):
10. Directors and Executive Officers of the Registrant .............................................. 15
11. Executive Compensation .......................................................................... 15
12. Security Ownership of Certain Beneficial Owners and Management .................................. 15
13. Certain Relationships and Related Transactions .................................................. 15
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................ 16
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 27, 2001.
Verizon Washington, DC Inc.
PART I
Item 1. Business
GENERAL
Verizon Washington, DC Inc. is incorporated under the laws of the State of
New York. Our principal offices are located at 1710 H Street, N.W., Washington
D.C. 20006 (telephone number 202-392-9900). We are a wholly owned subsidiary of
Verizon Communications Inc. (Verizon).
We presently serve a territory consisting of a single Local Access and
Transport Area (LATA). A LATA is generally centered on a city or based on some
other identifiable common geography and, with certain limited exceptions, a LATA
marks the boundary within which we have been permitted by the "Modification of
Final Judgment" (MFJ) to provide telephone service.
We currently provide two basic types of telecommunications services.
First, we transport telecommunications traffic between subscribers located
within the same LATA (intraLATA service), including both local and long distance
services. Local service includes the provision of local exchange (dial-tone),
local private line and directory assistance services. Among other local services
provided are Centrex (central office-based switched telephone service enabling
the subscriber to make both intercom and outside calls) and a variety of special
and custom calling services. Long distance service includes message toll service
(calling service beyond the local calling area) within LATA boundaries. Second,
we provide exchange access service, which links a subscriber's telephone or
other equipment to the transmission facilities of interexchange carriers, which,
in turn, provide telecommunications service between LATAs (interLATA service) to
their customers. Other services we provide include customer premises wiring and
maintenance, billing and collection and pay telephone services.
BELL ATLANTIC-GTE MERGER
On June 30, 2000, Bell Atlantic Corporation (Bell Atlantic) and GTE
Corporation (GTE) completed a merger under a definitive merger agreement dated
as of July 27, 1998 and began doing business as Verizon. The merger qualified as
a tax-free reorganization and has been accounted for as a pooling-of-interests
business combination.
OPERATIONS
We are one of 16 public operating telephone companies owned by Verizon.
Verizon has organized certain telecommunications group functions into marketing
units operating across its operating telephone subsidiaries. The units focus on
specific market segments. Each of the operating telephone subsidiaries,
including the company, remains responsible within its respective service area
for the provision of telephone services, financial performance and regulatory
matters. Verizon's five strategic marketing units are comprised of the
following:
The Enterprise unit markets communications and information technology and
services to large businesses and to departments, agencies and offices of the
executive, judicial and legislative branches of the federal and state
government. These services include voice switching/processing services (e.g.,
dedicated private lines, custom Centrex, call management, and voice messaging),
end-user networking (e.g., credit and debit card transactions and personal
computer-based conferencing, including data and video), internetworking
(establishing links between the geographically disparate networks of two or more
companies or within the same company), network optimization (disaster avoidance,
911 service, and intelligent vehicle highway systems) and other communications
services such as distance learning, telemedicine, videoconferencing and
interactive multimedia applications. The Enterprise unit also includes Verizon's
Data Solutions Group which provides data transmission and network integration
services (integrating multiple geographically disparate networks into one
system) and Verizon's Strategic Markets unit which operates as a provider of
network monitoring services and telecommunications equipment sales to medium and
large businesses.
The Retail unit markets communications and information services to
residential customers and to small and medium-sized businesses within our
territory. This unit also provides operator and pay telephone services. The
Retail unit includes Verizon Avenue, a subsidiary of Verizon that markets to
customers located in multi-tenant buildings and Teleproducts, a subsidiary of
Verizon that markets customer premises equipment to the end-user.
1
Verizon Washington, DC Inc.
The Wholesale unit markets (i) switched and special access to the
telephone subsidiaries' local exchange networks, and (ii) billing and collection
services, including recording, rating, bill processing, bill rendering, CLEC
services and wireless interconnection. This unit also includes various technical
planning groups that provide strategic technology and network planning, new
service creation, and emerging business management.
The Advanced Services unit markets Verizon's long distance, data and
Internet access services. In certain states, Verizon's long distance
subsidiaries operate as a reseller of national and international long-distance
services and provide service in all 50 states to residential and business
customers, including long distance services, calling cards, 800 services and
operator services to its customers. Verizon's Global Networks unit is building a
next generation long distance network using ATM (asynchronous transfer mode)
technology.
The National Operations unit markets Verizon's Communications and
Construction services that supply installation and repair labor and manages
Verizon's Supply unit that is responsible for the procurement and management of
inventory and supplies for the operating telephone companies, as well as other
subsidiaries. The Supply unit also sells material and logistic services to third
parties.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (1996 Act) became effective on February
8, 1996, and replaced the MFJ, a consent decree that arose out of an antitrust
action brought by the United States Department of Justice against AT&T. In
general, the 1996 Act includes provisions that open local exchange markets to
competition and permit Bell Operating Companies, including ours, to engage in
manufacturing and to provide long distance service under prescribed conditions.
Under the 1996 Act, our ability to offer in-region long distance services
(that is, services originating in the states where we operate as a local
exchange carrier) is largely dependent on satisfying prescribed requirements.
The requirements include a 14-point "competitive checklist" of steps which we
must take to help competitors offer local services through resale, through
purchase of unbundled network elements (UNEs), or through their own networks. We
must also demonstrate to the Federal Communications Commission (FCC) that entry
into the in-region long distance market would be in the public interest.
We are unable to predict definitively the impact that the 1996 Act will
ultimately have on our business, results of operations, or financial condition.
The financial impact will depend on several factors, including the timing,
extent and success of competition in our markets, the timing and outcome of
various regulatory proceedings and any appeals, and the timing, extent and
success of our pursuit of new opportunities resulting from the 1996 Act.
In-Region Long Distance
In connection with the third-party testing in Verizon Virginia Inc.
conducted by the accounting and consulting firm of KPMG, KPMG is also conducting
a comparability assessment to advise the District of Columbia Public Service
Commission (DCPSC) on the extent to which the operations support systems in
Virginia and the Company's are the same.
FCC Regulation and Interstate Rates
We are subject to the jurisdiction of the FCC with respect to interstate
services and related matters. In 2000, the FCC continued to implement reforms to
the interstate access charge system and to implement the "universal service" and
other requirements of the 1996 Act.
Access Charges
Interstate access charges are the rates long distance carriers pay for use
and availability of our facilities for the origination and termination of
interstate service. The FCC required a phased restructuring of access charges,
from January 1998 until January 2000, pursuant to which we recover
non-usage-sensitive costs from long distance carriers and end-users through flat
rate charges, and usage-sensitive costs from long distance carriers through
usage-based rates.
On May 31, 2000, the FCC adopted a plan advanced by members of the
industry (The Coalition for Affordable Local and Long Distance Service, or
"CALLS") as a comprehensive five-year plan for regulation of interstate access
charges. The CALLS plan has three main components. First, it establishes a
portable interstate access universal service support of $650 million for the
industry. Of that amount, Verizon expects approximately $340 million to be used
to support interstate access services in the operating telephone subsidiaries'
service territory. This explicit support replaces implicit support embedded in
interstate access charges. Second, the plan simplifies the patchwork of common
line charges into one subscriber line
2
Verizon Washington, DC Inc.
charge (SLC) and provides for de-averaging of the SLC by zones and class of
customers in a manner that will not undermine comparable and affordable
universal service. Third, the plan sets into place a mechanism to transition to
a set target of $.0055 per minute for switched access services. Once that target
rate is reached, local exchange carriers are no longer required to make further
annual price cap reductions to their switched access prices.
As of September 14, 2000, Verizon formally elected to participate in the
full five-year term of the CALLS plan. As a result of this decision, price caps
on our interstate access charges will be set according to the conditions of the
FCC order on the CALLS plan. Under 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 service
prices reach $0.0055 per-minute. As a result of tariff adjustments which became
effective in August 2000, we reached the $0.0055 benchmark.
The FCC has adopted rules for special access services that provide for
pricing flexibility and ultimately the removal of services from price regulation
when competitive thresholds are met. In order to use these rules, carriers must
forego the ability to take advantage of provisions in the current rules that
provide relief in the event earnings fall below prescribed thresholds. In
November and December 2000, Verizon made filings to obtain this added pricing
flexibility. On March 14, 2001, the FCC released an Order in which it approved
pricing flexibility for 46 Metropolitan Statistical Areas (MSAs) and three
states (Delaware, Vermont and Maryland) served by Verizon. In ten of the MSAs
and the state of Delaware, the services were awarded complete pricing
flexibility and were removed from price regulation. Partial pricing flexibility
was granted in the remaining MSAs and the two other states.
Universal Service
As a result of a July 1999 decision of the U.S. Court of Appeals,
Verizon's contributions to the universal service fund were reduced by
approximately $107 million annually beginning on November 1, 1999, and
interstate access rates were reduced accordingly because we will no longer have
to recover these contributions in our rates. Last year, the petitions asking the
U.S. Supreme Court to review the court of appeals decision were either withdrawn
or rejected.
In November 1999, the FCC adopted a new mechanism for providing universal
service support to high cost areas served by large local telephone companies.
This funding mechanism provides additional support for local telephone services
in several states served by Verizon. This system has been supplemented by the
new FCC access charge plan described above.
On October 18, 2000, Verizon asked the U.S. Supreme Court to dismiss its
pending review of the FCC's use of a theoretical model as one factor to
determine the appropriate size of federal support for a fund for intrastate high
cost areas. The review was no longer necessary because, subsequent to Verizon's
petition to the U.S. Supreme Court, the FCC expressly disclaimed supervisory
authority over the states' universal service activities.
The FCC is currently considering two modifications to its universal
service programs, both relating to support for rural carriers. The first, a
proposal by an appointed policy task force, would provide additional support for
intrastate services provided by rural carriers. The second, a proposal by a
coalition of rural carriers, would make explicit support for interstate access
services provided by rural carriers. The FCC is likely to address both these
proposals in 2001.
Unbundling of Network Elements
In November 1999, the FCC announced its decision setting forth new
unbundling requirements, eliminating elements that it had previously required to
be unbundled, limiting the obligation to provide others and adding new elements.
Appeals from this decision are pending.
In addition to the unbundling requirements released in November 1999, the
FCC released an order in a separate proceeding in December 1999, requiring
incumbent local exchange companies also to unbundle and provide to competitors
the higher frequency portion of their local loop. This provides competitors with
the ability to provision data services on top of incumbent carriers' voice
services. Appeals from this order are also pending.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit found that
some aspects of the FCC's requirements for pricing UNEs were inconsistent with
the 1996 Act. In particular, it found that the FCC was wrong to require
incumbent carriers to base these prices not on their real costs but on the
imaginary costs of the most efficient equipment and the most
3
Verizon Washington, DC Inc.
efficient network configuration. The court upheld the FCC's decision that UNEs
be priced based on a forward-looking cost model which ignores actual historical
costs. The U.S. Supreme Court has accepted this decision for review in a case to
be heard in the fall term of 2001. That portion of the court of appeals'
decision has been stayed pending that review.
Compensation for Internet Traffic
In March 2000, the Washington, D.C. Circuit Court of Appeals reversed and
remanded the FCC's February 1999 order that concluded that calls to the Internet
through Internet service providers (ISPs) do not terminate at the ISP but are
single interstate calls. The court found that the FCC had inadequately explained
why these Internet calls were not two calls. Under the FCC's decision, it was
left to carrier agreements and state regulators to determine which traffic is
subject to reciprocal compensation. The FCC is currently considering a new order
to address the issue in light of the court remand.
State Regulation of Rates and Services
The DCPSC regulates our intrastate rates and services and other matters.
In 1996, the DCPSC approved a price cap plan for intra-Washington, D.C.
services provided by our company. In 1999, the DCPSC modified the plan and
extended it through the end of 2001. Key provisions of the plan, as extended,
include:
. a term of two additional years, through December 31, 2001;
. retention of three service categories: basic, discretionary and competitive;
. caps on some basic residential rates for the extended term of the plan and
elimination of the prior rate adjustment formula (GDP-PI minus 3%);
. discretionary service rate increases of up to 15% annually;
. elimination of price limits on competitive service rates;
. elimination of the regulation of profits;
. guaranteed $4.3 million reduction in basic rates during the next two years;
and
. contribution of $1.5 million to the Infrastructure Trust Fund.
Competition
Legislative changes, including provisions of the 1996 Act discussed above
under the section "Telecommunications Act of 1996," regulatory changes and new
technology are continuing to expand the types of available communications
services and equipment and the number of competitors offering such services. We
anticipate that these industry changes, together with the rapid growth, enormous
size and global scope of these markets, will attract new entrants and encourage
existing competitors to broaden their offerings. Current and potential
competitors in telecommunication services include long distance companies, other
local telephone companies, cable companies, wireless service providers, foreign
telecommunications providers, electric utilities, Internet service providers and
other companies that offer network services. Many of these companies have a
strong market presence, brand recognition and existing customer relationships,
all of which contribute to intensifying competition and may affect our future
revenue growth. In addition, a number of major industry participants have
announced mergers, acquisitions and joint ventures which could substantially
affect the development and nature of some or all of our markets.
Local Exchange Services
The ability to offer local exchange services has historically been subject
to regulation by state regulatory commissions. Applications from competitors to
provide and resell local exchange services have been approved in the
jurisdiction in which we operate. The 1996 Act has significantly increased the
level of competition in our local exchange markets.
One of the purposes of the 1996 Act was to ensure, and accelerate, the
emergence of competition in local exchange markets. Toward this end, the 1996
Act requires most existing local exchange carriers (incumbent local exchange
carriers, or ILECs), including our company, to permit potential competitors
(competitive local exchange carriers, or CLECs) to:
. purchase service from the ILEC for resale to CLEC customers
. purchase unbundled network elements from the ILEC, and/or
. interconnect the CLEC's network with the ILEC's network.
The 1996 Act provides for arbitration by the state public utility
commission if an ILEC and a CLEC are unable to reach agreement on the terms of
the arrangement sought by the CLEC.
4
Verizon Washington, DC Inc.
Our negotiations with various CLECs, and arbitrations before our state
regulator, have continued. We expect that these agreements, and the 1996 Act,
will continue to lead to substantially increased competition in our local
exchange markets in 2001 and subsequent years. We believe that this competition
will be both on a facilities basis and in the form of resale by CLECs of our
service. Under the various agreements and arbitrations discussed above, we are
generally required to sell our services to CLECs at discounts from the prices we
charge our retail customers.
IntraLATA Toll Services
IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call. State regulatory
commissions rather than federal authorities generally regulate these services.
The state regulatory commission permits other carriers to offer intraLATA toll
services within our service territory.
Until the implementation of "presubscription," we completed intraLATA toll
calls unless the customer dialed a code to access a competing carrier.
Presubscription changed this dialing method and enabled customers to make these
toll calls using another carrier without having to dial an access code. We
implemented presubscription in July 1999.
Implementation of presubscription for intraLATA toll services has had a
material negative effect on intraLATA toll service revenues. However, the
negative effect has been partially mitigated by an increase in intraLATA network
access.
Alternative Access
A substantial portion of our revenues from business and government
customers is derived from a relatively small number of large, multiple-line
subscribers.
We face competition from alternative communications systems, constructed
by large end-users, interexchange carriers and alternative access vendors, which
are capable of originating and/or terminating calls without the use of our
plant. The FCC's orders requiring us to offer collocated interconnection for
special and switched access services have enhanced the ability of such
alternative access providers to compete with us.
Other potential sources of competition include cable television systems,
shared tenant services and other noncarrier systems which are capable of
bypassing our local plant, either partially or completely, through substitution
of special access for switched access or through concentration of
telecommunications traffic on fewer of our lines.
Wireless Services
Wireless services also constitute potential sources of competition to our
wireline telecommunications services, especially as wireless carriers continue
to lower their prices to end-users. Wireless telephone services employ analog
and digital technology that allows customers to make and receive telephone calls
from any location using small handsets, and can also be used for data
transmission.
Public Telephone Services
We face increasing competition in the provision of pay telephone services
from other providers. In addition, the growth of wireless communications
decreases usage of public telephones.
Operator Services
Alternative operator services providers have entered into competition with
our operator services product line.
EMPLOYEES
As of December 31, 2000, we had approximately 1,500 employees.
5
Verizon Washington, DC Inc.
Item 2. Properties
GENERAL
Our principal properties do not lend themselves to simple description by
character and location. Our investment in plant, property and equipment
consisted of the following at December 31:
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Central office equipment 44% 44%
Outside communications plant 17 17
Land and buildings 12 13
Furniture, vehicles and other work equipment 24 24
Other 3 2
----------------------------------
100% 100%
==================================
"Central office equipment" consists of switching equipment, transmission
equipment and related facilities. "Outside communications plant" consists
primarily of aerial cable, underground cable, conduit and wiring, and telephone
poles. "Land and buildings" consists of land and land improvements, and
principally central office buildings. "Furniture, vehicles and other work
equipment" consists of public telephone instruments and telephone equipment,
furniture, office equipment, motor vehicles and other work equipment. "Other"
property consists primarily of plant under construction, capitalized computer
software costs and leasehold improvements.
All of our properties, located in Washington, DC, are generally in good
operating condition and are adequate to satisfy the needs of our business.
Our customers are served by electronic switching systems that provide a
wide variety of services. Our network is in a transition from an analog to a
digital network, which provides the capabilities to furnish advanced data
transmission and information management services. At December 31, 2000,
approximately 92% of the access lines were served by digital capability.
CAPITAL EXPENDITURES
We have been making and expect to continue to make significant capital
expenditures to meet the demand for communications services and to further
improve such services. Capital expenditures were approximately $275 million in
2000, $205 million in 1999 and $194 million in 1998. Capital expenditures
exclude additions under capital lease. Our total investment in plant, property
and equipment was approximately $2.0 billion at December 31, 2000, $1.9 billion
at December 31, 1999, and $1.8 billion at December 31, 1998, including the
effect of retirements, but before deducting accumulated depreciation.
Item 3. Legal Proceedings
There are no proceedings reportable under Item 3.
Item 4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction I(2).)
6
Verizon Washington, DC Inc.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Not applicable.
Item 6. Selected Financial Data
(Omitted pursuant to General Instruction I(2).)
7
Verizon Washington, DC Inc.
Item 7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction I(2).)
This discussion should be read in conjunction with the Financial
Statements and Notes to Financial Statements listed in the index set forth on
page F-1.
The communications services we provide are subject to regulation by the
District of Columbia Public Service Commission (DCPSC) with respect to
intrastate rates and services and certain other matters. For a further
discussion of the company and our regulatory plan, see Item 1 - "Description of
Business."
RESULTS OF OPERATIONS
- ---------------------
We reported net income of $89,067,000 in 2000, compared to net income of
$83,040,000 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)
Years Ended December 31, 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 1,691 ---
Bell Atlantic-GTE merger related costs 49 ---
Bell Atlantic-NYNEX merger transition costs --- 3,017
Other charges and special items 6,755 ---
--------------------------------------
Net impact on pre-tax income $15,115 $ 3,017
======================================
What follows is a further explanation of the nature of these special
items.
Completion of Mergers
On June 30, 2000, Bell Atlantic and GTE completed a merger 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. With the
closing of the merger, the combined company began doing business as Verizon
Communications. The merger qualified as a tax-free reorganization and has been
accounted for as a pooling-of-interests business combination. Under this method
of accounting, Bell Atlantic and GTE are treated as if they had always been
combined for accounting and financial reporting purposes.
In August 1997, Bell Atlantic and NYNEX completed a merger of equals under
a definitive merger agreement entered into on April 21, 1996 and amended on July
2, 1996. Under the terms of the amended agreement, NYNEX became a wholly owned
subsidiary of Bell Atlantic. The merger qualified as a tax-free reorganization
and has been accounted for as a pooling-of-interests.
Merger-Related Charges
Direct Incremental Costs
Direct incremental costs related to the Bell Atlantic-GTE merger of
$3,273,000 (including $3,097,000 allocated from Verizon Services) include
compensation, professional services and other costs. Compensation includes
retention payments to employees that were contingent on the close of the merger.
Professional services include investment banking, legal, accounting, consulting
and other advisory fees incurred to obtain federal and state regulatory
approvals and take other actions necessary to complete the merger. Other
includes costs incurred to obtain shareholder approval of the merger, register
securities and communicate with shareholders, employees and regulatory
authorities regarding merger issues. Substantially all of the Bell Atlantic-GTE
merger direct incremental costs have been paid as of December 31, 2000.
8
Verizon Washington, DC Inc.
Employee Severance Costs
Employee severance costs related to the Bell Atlantic-GTE merger of
$3,347,000 (including $2,605,000 allocated from Verizon Services), as recorded
under SFAS No. 112, "Employers' Accounting for Postemployment Benefits,"
represent the benefit costs for the separation of management employees who are
entitled to benefits under pre-existing separation plans. The separations either
have or are expected to occur as a result of consolidations and process
enhancements within our company. Accrued postemployment benefit liabilities for
those employees are included in our balance sheets as a component of Accounts
Payable and Accrued Liabilities - Other.
Transition Costs
In addition to the direct merger-related and severance costs discussed
above, from the date of the Bell Atlantic-GTE merger, we expect to incur
transition costs over the next several years related to the Bell Atlantic-GTE
merger. These costs will be incurred to integrate systems, consolidate real
estate, relocate employees and meet certain regulatory conditions of the merger.
They also include costs for advertising and other costs to establish the Verizon
brand. Transition costs related to the Bell Atlantic-GTE merger were $1,691,000
in 2000 (including $1,682,000 allocated from Verizon Services).
In connection with the Bell Atlantic-NYNEX merger, we recorded transition
costs of $3,017,000 in 1999 (including $2,832,000 allocated from Verizon
Services) associated with integrating the operations of Bell Atlantic and NYNEX.
Other Initiatives
During the second quarter of 2000, we also recorded a $49,000 charge for
other actions in relation to the Bell Atlantic-GTE merger. This charge was
related to 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.
These and other items affecting the comparison of our results of
operations for the years ended December 31, 2000 and 1999 are discussed in the
following sections.
Results of Operations
We have one reportable segment, which provides domestic wireline
telecommunications services. You can find additional information about segment
reporting in Note 14 to the financial statements.
OPERATING REVENUE STATISTICS
- ----------------------------
2000 1999 % Change
- ---------------------------------------------------------------------------------------------------------------------------
At Year-End
Access Lines in Service (in thousands)*
Residence 310 308 0.6%
Business 715 682 4.8
Public 9 10 (10.0)
-------------------------------
1,034 1,000 3.4
===============================
For the Year
Access Minutes of Use (in millions) 3,128 3,112 0.5%
===============================
* 1999 reflects a restatement of access lines in service
9
Verizon Washington, DC Inc.
OPERATING REVENUES
- ------------------
(Dollars in Thousands)
Years Ended December 31 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Local services $324,172 $315,390
Network access services 198,056 172,588
Long distance services 2,833 3,979
Other services 175,009 176,285
--------------------------------
Total $700,070 $668,242
================================
LOCAL SERVICES
Increase
- --------------------------------------------------------------------------------
2000 - 1999 $8,782 2.8%
- --------------------------------------------------------------------------------
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 include wholesale revenues from unbundled network element
(UNE) platforms, certain data transport revenues, and wireless interconnection
revenues.
Local service revenues increased in 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.
NETWORK ACCESS SERVICES
Increase
- --------------------------------------------------------------------------------
2000 - 1999 $25,468 14.8%
- --------------------------------------------------------------------------------
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 2000 was mainly attributable to
increased demand for special access services, reflecting a greater utilization
of our network. Network access revenues also included the effect of a reversal
of an accrual from a prior period as the result of the favorable resolution of a
regulatory matter.
Volume-related growth was partially offset by price reductions associated
with federal price cap filings and other regulatory decisions. The FCC regulates
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. In July 2000, we implemented the Coalition for Affordable Local
and Long Distance Service (CALLS) plan. Rates included in the July 2000 CALLS
plan will be in effect through June 2001. You can find additional information on
FCC rulemakings concerning federal access rates, universal service and
unbundling network elements in Item 1- "Description of Business, Operations -
FCC Regulation and Interstate Rates."
10
Verizon Washington, DC Inc.
LONG DISTANCE SERVICES
(Decrease)
- --------------------------------------------------------------------------------
2000 - 1999 $(1,146) (28.8)%
- --------------------------------------------------------------------------------
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. We also provide 800
services.
The decline in long distance revenues in 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.
OTHER SERVICES
(Decrease)
- --------------------------------------------------------------------------------
2000 - 1999 $(1,276) (.7)%
- --------------------------------------------------------------------------------
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 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
Increase
- --------------------------------------------------------------------------------
2000 - 1999 $10,955 3.3%
- --------------------------------------------------------------------------------
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. Operations and
support expenses were further increased by additional costs associated with
higher centralized service expenses allocated from Verizon Services, increased
repair and maintenance activity, 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 and a
decline in pension and benefit costs. The decline in pension and benefit costs
was chiefly due to favorable pension plan investment returns and changes in
actuarial assumptions. These factors were partially offset by changes in certain
plan provisions, increased health care costs caused by inflation, as well as
benefit improvements provided for under a new contract with certain employees.
In 2000, Verizon Communications executed a new contract with the union
representing our employees. The contract provides for annual wage
11
Verizon Washington, DC Inc.
increases of 4 percent, 3 percent and 5 percent, beginning in August 2000.
Customer service representatives received an additional 4 percent wage increase.
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 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 overtime, access to
work and employment security. In addition, all union-represented employees were
granted options to purchase 100 shares of Verizon Communications' common stock.
DEPRECIATION AND AMORTIZATION
Increase
- --------------------------------------------------------------------------------
2000 - 1999 $5,366 3.1%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in 2000 principally due to
growth in depreciable telephone plant as a result of increased capital
expenditures for higher growth services. This increase was substantially offset
by the effect of lower rates of depreciation and amortization.
OTHER INCOME, NET
(Decrease)
- --------------------------------------------------------------------------------
2000 - 1999 $(73) (9.8)%
- --------------------------------------------------------------------------------
The change in other income, net, was primarily attributable to losses
recognized from our investment in Verizon Advanced Data, Inc. under the equity
method. This change was substantially offset by additional interest income
associated with the settlement of tax-related matters in 2000.
INTEREST EXPENSE
Increase
- --------------------------------------------------------------------------------
2000 - 1999 $1,242 7.7%
- --------------------------------------------------------------------------------
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 increased in 2000 primarily as a result of higher levels
of average short-term debt with an affiliate and higher interest rates
associated with this debt. This increase was partially offset by higher
capitalized interest costs resulting from higher levels of average telephone
plant under construction.
See Note 5 to the financial statements for additional information about
our debt.
EFFECTIVE INCOME TAX RATES
For the Years Ended December 31
- --------------------------------------------------------------------------------
2000 42.6%
- --------------------------------------------------------------------------------
1999 41.1%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes and extraordinary
item. Our effective income tax rate was higher in 2000 principally due to equity
losses associated with our investment in Verizon Advanced Data Inc. for which we
do not recognize income tax benefits and non-recurring deferred income tax
expenses recorded in 2000.
You can find a reconciliation of the statutory federal income tax rate to
the effective income tax rate for each period in Note 10 to the financial
statements.
12
Verizon Washington, DC Inc.
OTHER MATTERS
- -------------
Recent Accounting Pronouncements - 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 in our balance sheet. Changes in the fair values
of derivative instruments not used as hedges will be recognized in earnings
immediately. Changes in the fair values of derivative instruments used
effectively as hedges will be recognized either in earnings for hedges of
changes in fair value or in Other Comprehensive Income (Loss) for hedges of
changes in cash flows. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
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.
Effective January 1, 2001, we will adopt SFAS No. 133 and SFAS No. 138.
The initial impact of adoption on our financial statements will not be material.
The ongoing effect of adoption on our financial statements will be determined
each quarter by several factors, including the specific hedging instruments in
place and their relationships to hedged items, as well as market conditions at
the end of each period.
13
Verizon Washington, DC Inc.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk in the normal course of our business.
The majority of our debt is fixed rate debt and we did not have any derivatives
as of December 31, 2000 and 1999. Our short-term borrowings from an affiliate
expose our earnings to changes in short-term interest rates since the interest
rate charged on such borrowings is typically fixed for less than one month.
The following table summarizes the fair values of our long-term debt as of
December 31, 2000 and 1999. The table also provides a sensitivity analysis of
the estimated fair values of these financial instruments assuming
100-basis-point upward and downward parallel shifts in the yield curve. The
sensitivity analysis did not include the fair values of our short-term
borrowings from an affiliate since they are not significantly affected by
changes in market interest rates.
December 31
------------------------------
(Dollars in Thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------
Fair value of long-term debt $160,520 $156,103
Fair value assuming a +100-basis-point shift 150,298 145,408
Fair value assuming a -100-basis-point shift 168,742 166,101
Item 8. Financial Statements and Supplementary Data
The information required by this Item is set forth on Pages F-1
through F-21.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required by this item regarding a change in
accountants is included in a Current Report on Form 8-K dated
September 7, 2000.
14
Verizon Washington, DC Inc.
PART III
Item 10. Directors and Executive Officers of Registrant
(Omitted pursuant to General Instruction I(2).)
Item 11. Executive Compensation
(Omitted pursuant to General Instruction I(2).)
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Omitted pursuant to General Instruction I(2).)
Item 13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction I(2).)
15
Verizon Washington, DC Inc.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedule appearing on Page F-1.
(2) Financial Statement Schedules
See Index to Financial Statements and Financial Statement
Schedule appearing on Page F-1.
(3) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission (SEC), are incorporated
herein by reference as exhibits hereto.
3a Restated Certificate of Incorporation of the registrant, as
amended September 14, 1990. (Exhibit 3a to the registrant's
Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-7368.)
3a(i) Certificate of Amendment of the registrant's
Certificate of Incorporation, dated January 12, 1994
and filed January 13, 1994. (Exhibit 3a(i) to the
registrant's Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 1-7368.)
3a(ii) Certificate of Amendment of the Restated Certificate
of Incorporation, filed August 1, 2000. (Exhibit
3a(ii) to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, File
No. 1-7368.)
3b By-Laws of the registrant, as amended December 15, 1995.
(Exhibit 3b to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1995, File No. 1-7368.)
3b(i) Consent of Sole Stockholder of Verizon Washington,
DC Inc., dated December 15, 1995. (Exhibit 3b(i) to
the registrant's Annual Report on Form 10-K for the
year ended December 31, 1995, File No. 1-7368.)
4 No instrument which defines the rights of holders of long-
term debt of the registrant is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, the registrant hereby agrees to furnish a copy
of any such instrument to the SEC upon request.
10a Agreement among Verizon Services Corp. and the Verizon
Communications Inc. telephone subsidiaries, dated
November 7, 1983. (Exhibit 10b to Verizon Communications
Inc. Annual Report on Form 10-K for the year ended December
31, 1993, File No. 1-8606.)
23a Consent of Independent Auditors.
23b Consent of Independent Accountants.
(b) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed during the
quarter ended December 31, 2000.
16
Verizon Washington, DC Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 2001 By /s/ Edwin F. Hall
------------------------
Edwin F. Hall
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ Marie C Johns President and March 30, 2001
- -------------------------------------- Chief Executive Officer
Marie C Johns and Director
(Principal Executive Officer)
/s/ Edwin F. Hall Controller March 30, 2001
- ---------------------------------------- (Principal Financial Officer)
Edwin F. Hall
/s/ Sherry F. Bellamy Director March 30, 2001
- ------------------------------------
Sherry F. Bellamy
/s/ Phoebe B. Dixon Director March 30, 2001
- -------------------------------------
Phoebe B. Dixon
/s/ David A. Hill Director March 30, 2001
- -----------------------------------------
David A. Hill
/s/ William Ferinde Director March 30, 2001
- --------------------------------------
William Ferinde
/s/ Mark J. Mathis Director March 30, 2001
- ---------------------------------------
Mark J. Mathis
/s/ Nadeen R. VanTuyle Director March 30, 2001
- ----------------------------------
Nadeen R. VanTuyle
17
Verizon Washington, DC Inc.
Index to Financial Statements and Financial Statement Schedule
Page
----
Report of Independent Auditors - Ernst & Young LLP........................................ F-2
Report of Independent Accountants - PricewaterhouseCoopers LLP............................ F-3
Statements of Income
For the years ended December 31, 2000, 1999 and 1998 ................................ F-4
Balance Sheets - December 31, 2000 and 1999 .............................................. F-5
Statements of Changes in Shareowner's Investment
For the years ended December 31, 2000, 1999 and 1998.................................. F-7
Statements of Cash Flows
For the years ended December 31, 2000, 1999 and 1998................................. F-8
Notes to Financial Statements ............................................................ F-9
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 2000, 1999 and 1998 ............................... F-21
Financial statement schedules other than that listed above have been omitted
because such schedules are not required or applicable.
F-1
Verizon Washington, DC Inc.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowner
Verizon Washington, DC Inc.
We have audited the accompanying balance sheet of Verizon Washington, DC Inc.
(the Company) as of December 31, 2000 and the related statements of income,
shareowner's investment, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Verizon Washington, DC Inc. at
December 31, 2000, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
New York, New York
February 1, 2001
F-2
Verizon Washington, DC Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowner of
Verizon Washington, DC Inc.
In our opinion, the 1999 and 1998 financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Verizon Washington, DC Inc. at December 31, 1999, and the results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the 1999 and 1998
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. We have not
audited the financial statements of Verizon Washington, DC Inc. for any period
subsequent to December 31, 1999.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for computer software costs in accordance with AICPA
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" effective January 1, 1999.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 14, 2000
F-3
Verizon Washington, DC Inc.
STATEMENTS OF INCOME
For the Years Ended December 31
(Dollars in Thousands)
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES (including $156,418, $141,788
and $140,340 from affiliates) $700,070 $668,242 $647,038
---------------------------------------------
OPERATING EXPENSES
Operations and support (including $155,504, $147,590 and
$147,045 to affiliates) 347,400 336,445 308,977
Depreciation and amortization 180,832 175,466 155,025
---------------------------------------------
528,232 511,911 464,002
---------------------------------------------
OPERATING INCOME 171,838 156,331 183,036
OTHER INCOME, NET (including $(933), $134 and
$4 from affiliates) 671 744 1,899
INTEREST EXPENSE (including $8,126, $5,307 and
$2,667 to affiliate) 17,319 16,077 17,116
---------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 155,190 140,998 167,819
PROVISION FOR INCOME TAXES 66,123 57,958 69,055
---------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 89,067 83,040 98,764
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax --- --- (983)
---------------------------------------------
NET INCOME $ 89,067 $ 83,040 $ 97,781
=============================================
See Notes to Financial Statements.
F-4
Verizon Washington, DC Inc.
BALANCE SHEETS
(Dollars in Thousands)
ASSETS
------
December 31
------------------------------------
2000 1999
- --------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ --- $ 703
Short-term investments 8,358 7,400
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $11,361 and $6,802 169,238 136,333
Affiliates 30,029 32,320
Material and supplies 2,745 804
Prepaid expenses 3,769 4,460
Deferred income taxes 4,224 2,951
Other 13,347 ---
------------------------------------
231,710 184,971
------------------------------------
PLANT, PROPERTY AND EQUIPMENT 2,042,627 1,898,332
Less accumulated depreciation 1,101,187 1,028,915
------------------------------------
941,440 869,417
------------------------------------
PREPAID PENSION ASSET 9,584 ---
------------------------------------
OTHER ASSETS 64,563 16,590
------------------------------------
TOTAL ASSETS $1,247,297 $1,070,978
====================================
See Notes to Financial Statements.
F-5
Verizon Washington, DC Inc.
BALANCE SHEETS
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
December 31
-----------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 214,767 $ 80,379
Accounts payable and accrued liabilities:
Affiliates 60,596 87,412
Other 127,521 103,836
Other current liabilities 24,509 10,979
-----------------------------------------
427,393 282,606
-----------------------------------------
LONG-TERM DEBT 164,334 164,315
-----------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 88,899 103,223
-----------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 89,168 71,131
Unamortized investment tax credits 2,896 3,099
Other 38,926 25,429
-----------------------------------------
130,990 99,659
-----------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 13)
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 215,164 200,810
Accumulated other comprehensive loss --- (152)
-----------------------------------------
435,681 421,175
-----------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $1,247,297 $1,070,978
=========================================
See Notes to Financial Statements.
F-6
Verizon Washington, DC Inc.
STATEMENTS OF CHANGES IN SHAREOWNER'S INVESTMENT
For the Years Ended December 31
(Dollars in Thousands)
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of year $191,968 $191,968 $191,968
--------------------------------------------------------
Balance at end of year 191,968 191,968 191,968
--------------------------------------------------------
CAPITAL SURPLUS
Balance at beginning of year 28,549 28,549 28,549
--------------------------------------------------------
Balance at end of year 28,549 28,549 28,549
--------------------------------------------------------
REINVESTED EARNINGS
Balance at beginning of year 200,810 166,452 94,547
Net income 89,067 83,040 97,781
Dividends paid to Verizon Communications (74,800) (48,700) (26,000)
Other 87 18 124
--------------------------------------------------------
Balance at end of year 215,164 200,810 166,452
--------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (152) (46) ---
Minimum pension liability adjustment 152 (106) (46)
--------------------------------------------------------
Balance at end of year --- (152) (46)
--------------------------------------------------------
TOTAL SHAREOWNER'S INVESTMENT $435,681 $421,175 $386,923
========================================================
COMPREHENSIVE INCOME
Net income $ 89,067 $ 83,040 $ 97,781
Minimum pension liability adjustment 152 (106) (46)
--------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 89,219 $ 82,934 $ 97,735
========================================================
See Notes to Financial Statements.
F-7
Verizon Washington, DC Inc.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31
(Dollars in Thousands)
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 89,067 $ 83,040 $ 97,781
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 180,832 175,466 155,025
Extraordinary item, net of tax --- --- 983
Employee retirement benefits (22,019) (10,771) (8,951)
Deferred income taxes, net 23,468 21,689 19,567
Provision for uncollectible accounts 11,222 3,777 4,314
Equity loss/(income) from affiliate 933 (126) ---
Dividends received from equity affiliate 155 126 ---
Changes in current assets and liabilities:
Accounts receivable (41,836) 6,495 (32,050)
Material and supplies (1,941) 327 798
Other assets (12,656) (2,871) 919
Accounts payable and accrued liabilities (1,815) 2,807 (19,932)
Other current liabilities 13,530 (3,572) 5,087
Other items, net (20,377) 7,692 (17,868)
--------------------------------------------------
Net cash provided by operating activities 218,563 284,079 205,673
--------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (8,358) (7,400) (9,861)
Proceeds from sale of short-term investments 7,400 6,690 10,305
Capital expenditures (275,081) (205,466) (193,696)
Other, net (7,100) (6,684) ---
--------------------------------------------------
Net cash used in investing activities (283,139) (212,860) (193,252)
--------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Early extinguishment of debt --- --- (60,000)
Principal repayments of borrowings and capital lease obligations --- (15) (20,145)
Net change in note payable to affiliate 134,388 (19,079) 89,932
Dividends paid (74,800) (48,700) (26,000)
Net change in outstanding checks drawn on controlled
disbursement accounts 4,285 (2,722) 3,792
--------------------------------------------------
Net cash provided by/(used in) financing activities 63,873 (70,516) (12,421)
--------------------------------------------------
NET CHANGE IN CASH (703) 703 ---
CASH, BEGINNING OF YEAR 703 --- ---
--------------------------------------------------
CASH, END OF YEAR $ --- $ 703 $ ---
==================================================
See Notes to Financial Statements.
F-8
Verizon Washington, DC Inc.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Verizon Washington, DC Inc. is a wholly owned subsidiary of Verizon
Communications Inc. (Verizon Communications). We presently serve a territory
consisting of a single Local Access and Transport Area (LATA) in Washington,
D.C. We have one reportable segment which provides domestic wireline
telecommunications services. We currently provide two basic types of
telecommunications services. First, we transport telecommunications traffic
between subscribers located within the same LATA (intraLATA service), including
both local and long distance services. Local service includes voice and data
transport, enhanced and custom calling features, directory assistance and
private lines. Long distance service includes message toll service within LATA
boundaries. Second, we provide exchange access service, which links a
subscriber's telephone or other equipment to the transmission facilities of
interexchange carriers which, in turn, provide telecommunications service
between LATAs (interLATA service) to their customers. Other services we provide
include customer premises wiring and maintenance, billing and collection and pay
telephone services.
Basis of Presentation
We prepare our financial statements under generally accepted accounting
principles which require management to make estimates and assumptions that
affect reported amounts and disclosures. Actual results could differ from those
estimates.
We have a .53% ownership interest in SMS/800, a venture that is jointly
owned by the Bell Operating Companies. SMS/800 administers the centralized
national database system associated with toll free numbers. We use the equity
method of accounting for our investment in SMS/800.
Our investment in Verizon Advanced Data Inc. (VADI), an affiliated company
which provides new exchange access services, is accounted for using the equity
method of accounting. At December 31, 2000, our ownership interest in VADI was
5.5%.
We have reclassified certain amounts from prior periods to conform with
our current presentation.
Revenue Recognition
We recognize revenue when services are rendered based on usage of our
local exchange network and facilities. For other products and services, revenues
are generally recognized when services are rendered or products are delivered to
customers.
We adopted the provisions of the Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," in the fourth quarter, retroactive to January 1, 2000, as required
by the SEC. As a result of the adoption of SAB No. 101, we now defer
nonrecurring service activation revenues and costs and amortize them over the
expected term of the customer relationship. Previously, these revenues and costs
were recognized when the activation service was performed. This change in
accounting did not have a material impact on our results of operations for 2000.
Our balance sheet at December 31, 2000 includes deferred activation costs as a
component of Current assets - other ($12,387,000) and Other Assets ($22,021,000)
and deferred activation revenues as a component of Current liabilities - other
($12,387,000) and Deferred credits and other liabilities - other ($22,021,000).
Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, to Operations
and Support Expenses.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or
less when purchased to be cash equivalents, except cash equivalents held as
short-term investments. Cash equivalents are stated at cost, which approximates
market value.
F-9
Verizon Washington, DC Inc.
Short-term Investments
Our short-term investments consist of cash equivalents held in trust to
pay for certain employee benefits. Short-term investments are stated at cost,
which approximates market value.
Material and Supplies
We include in inventory new and reusable materials which are stated
principally at average original cost, except that specific costs are used in the
case of large individual items.
Plant and Depreciation
We state plant, property, and equipment at historical cost. Depreciation
expense is principally based on the composite group remaining life method and
straight-line composite rates. This method provides for the recognition of the
cost of the remaining net investment in telephone plant, less anticipated net
salvage value, over the remaining asset lives. This method requires the periodic
revision of depreciation rates. We used the following asset lives:
Average Lives (in years)
----------------------------------------------------------------------
Buildings 30
Central office equipment 5 - 10
Outside communications plant 16 - 50
Furniture, vehicles and other 3 - 12
When we replace or retire depreciable telephone plant, we deduct the
carrying amount of such plant from the respective accounts and charge
accumulated depreciation.
We capitalize interest associated with the acquisition or construction of
plant assets. Capitalized interest is reported as a cost of plant and a
reduction in interest expense.
Computer Software Costs
We capitalize the cost of internal-use software which has a useful life in
excess of one year in accordance with Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Also, we capitalize
interest associated with the development of internal-use software. Capitalized
computer software costs are amortized using the straight-line method over a
period of 3 to 5 years. The effect of adopting SOP No. 98-1 for Verizon
Communications was an increase in net income of approximately $560 million in
1999.
Prior to adopting SOP No. 98-1, we capitalized initial right-to-use fees
for central office switching equipment, including initial operating system and
initial application software costs. For non-central office equipment, only the
initial operating system software was capitalized. Subsequent additions,
modifications, or upgrades of initial software programs, whether operating or
application packages, were expensed as incurred.
Income Taxes
Verizon Communications and its domestic subsidiaries, including us, file a
consolidated federal income tax return.
Current and deferred tax expense is determined by applying the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes" to each subsidiary as if it were a separate taxpayer.
We use the deferral method of accounting for investment tax credits earned
prior to the repeal of investment tax credits by the Tax Reform Act of 1986. We
also defer certain transitional credits earned after the repeal. We amortize
these credits over the estimated service lives of the related assets as a
reduction to the Provision for Income Taxes.
Advertising Costs
We expense advertising costs as they are incurred.
F-10
Verizon Washington, DC Inc.
Stock-Based Compensation
We participate in stock-based employee compensation plans sponsored by
Verizon Communications. Verizon Communications accounts for stock-based employee
compensation plans under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations and
follows the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
Employee Benefit Plans
We participate in the Verizon Communications benefit plans. Under these
plans, pension and postretirement health care and life insurance benefits earned
during the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits.
Recent Accounting Pronouncements - 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 in our balance sheet. Changes in the fair values
of derivative instruments not used as hedges will be recognized in earnings
immediately. Changes in the fair values of derivative instruments used
effectively as hedges will be recognized either in earnings for hedges of
changes in fair value or in Other Comprehensive Income (Loss) for hedges of
changes in cash flows. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
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.
Effective January 1, 2001, we will adopt SFAS No. 133 and SFAS No. 138.
The initial impact of adoption on our financial statements will not be material.
The ongoing effect of adoption on our financial statements will be determined
each quarter by several factors, including the specific hedging instruments in
place and their relationships to hedged items, as well as market conditions at
the end of each period.
2. COMPLETION OF MERGERS
On June 30, 2000, Bell Atlantic and GTE completed a merger 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. With the
closing of the merger, the combined company began doing business as Verizon
Communications. The merger qualified as a tax-free reorganization and has been
accounted for as a pooling-of-interests business combination. Under this method
of accounting, Bell Atlantic and GTE are treated as if they had always been
combined for accounting and financial reporting purposes.
In August 1997, Bell Atlantic and NYNEX completed a merger of equals under
a definitive merger agreement entered into on April 21, 1996 and amended on July
2, 1996. Under the terms of the amended agreement, NYNEX became a wholly owned
subsidiary of Bell Atlantic. The merger qualified as a tax-free reorganization
and has been accounted for as a pooling-of-interests.
The following table summarizes the one-time charges incurred for each
merger. Amounts for 2000 pertain to the Bell Atlantic-GTE merger. Transition
costs for 1999 and 1998 pertain to the Bell Atlantic-NYNEX merger.
(Dollars in Thousands)
Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Direct incremental costs $3,273 $ --- $ ---
Employee severance costs 3,347 --- ---
Transition costs 1,691 3,017 2,578
---------------------------------------------
Total Merger-Related Costs $8,311 $3,017 $2,578
=============================================
F-11
Verizon Washington, DC Inc.
The following table provides a reconciliation of the liabilities
associated with Bell Atlantic-GTE merger-related costs, Bell Atlantic-NYNEX
merger-related costs and other charges and special items described below:
(Dollars in Thousands)
1998 1999 2000
--------------------------------------------------------------------------------------------------
Asset Asset Charged Asset
Begin- Write- Write- to Write-
ning offs End offs End Expense offs End
of Pay- and of Pay- and of or Pay- and of
Year ments Other Year ments Other Year Revenue ments Other Year
--------------------------------------------------------------------------------------------------
Merger-Related
Direct incremental costs $ --- $ --- $ --- $ --- $ --- $ --- $ --- $3,273 $(3,273) $ --- $ ---
Employee severance costs 3,439 (994) 623 3,068 (419) (427) 2,222 3,347 (2,766) (172) 2,631
Other Initiatives
Write-off of duplicate
assets --- --- --- --- --- --- --- 49 --- --- 49
Other charges and
special items 3,447 (943) --- 2,504 --- --- 2,504 --- --- (2,504) ---
--------------------------------------------------------------------------------------------------
$6,886 $(1,937) $ 623 $5,572 $(419) $(427) $4,726 $6,669 $(6,039) $(2,676) $2,680
--------------------------------------------------------------------------------------------------
Merger-Related Charges
Direct Incremental Costs
Direct incremental costs related to the Bell Atlantic-GTE merger of
$3,273,000 (including $3,097,000 allocated from Verizon Services) include
compensation, professional services and other costs. Compensation includes
retention payments to employees that were contingent on the close of the merger.
Professional services include investment banking, legal, accounting, consulting
and other advisory fees incurred to obtain federal and state regulatory
approvals and take other actions necessary to complete the merger. Other
includes costs incurred to obtain shareholder approval of the merger, register
securities and communicate with shareholders, employees and regulatory
authorities regarding merger issues. Substantially all of the Bell Atlantic-GTE
merger direct incremental costs have been paid as of December 31, 2000.
Employee Severance Costs
Employee severance costs related to the Bell Atlantic-GTE merger of
$3,347,000 (including $2,605,000 allocated from Verizon Services), as recorded
under SFAS No. 112, "Employers' Accounting for Postemployment Benefits,"
represent the benefit costs for the separation of management employees who are
entitled to benefits under pre-existing separation plans. The separations either
have or are expected to occur as a result of consolidations and process
enhancements within our company. Accrued postemployment benefit liabilities for
those employees are included in our balance sheets as a component of Accounts
Payable and Accrued Liabilities - Other.
In 1997, employee severance costs related to the Bell Atlantic-NYNEX
merger were approximately $3,400,000 (including approximately $2,300,000
allocated from Verizon Services), as recorded under SFAS No. 112 and relate to
the separation of management employees during 1999, 1998 and 1997. Accrued
postemployment benefit liabilities were included in our balance sheets as a
component of Employee Benefit Obligations at December 31, 1999. There is no
remaining severance liability as of December 31, 2000.
Transition Costs
In addition to the direct merger-related and severance costs discussed
above, from the date of the Bell Atlantic-GTE merger, we expect to incur
transition costs over the next several years related to the Bell Atlantic-GTE
merger. These costs will be incurred to integrate systems, consolidate real
estate, relocate employees and meet certain regulatory conditions of the
merger. They also include costs for advertising and other costs to establish
the Verizon brand. Transition costs related to the Bell Atlantic-GTE merger were
$1,691,000 in 2000 (including $1,682,000 allocated from Verizon Services).
In connection with the Bell Atlantic-NYNEX merger, we recorded transition
costs of $3,017,000 in 1999 (including $2,832,000 allocated from Verizon
Services) and $2,578,000 in 1998 (including $2,138,000 allocated from Verizon
Services) associated with integrating the operations of Bell Atlantic and NYNEX.
Other Initiatives
During the second quarter of 2000, we also recorded a $49,000 charge for
other actions in relation to the Bell Atlantic-GTE merger. This charge was
related to the write-off of duplicate assets.
During 1997, we recorded other charges and special items totaling
approximately $17,900,000 (pre-tax) in connection with consolidating operations
and combining organizations, and for other special items arising during the
year. These charges were comprised of the following significant items.
F-12
Verizon Washington, DC Inc.
Write-down of Assets
In the third quarter of 1997, we recorded pre-tax charges of approximately
$10,500,000 for the write-down of obsolete fixed assets. As part of the Bell
Atlantic-NYNEX merger integration planning, a review was conducted of the
carrying values of long-lived assets. This review included estimating remaining
useful lives and cash flows and identifying assets to be abandoned. As a result
of these reviews, we recorded a charge of approximately $10,500,000 for the
write-off of assets. These assets primarily included computers and other
equipment used to transport data for internal purposes. None of these assets are
being held for disposal.
Regulatory Contingencies and Other Special Items
In 1997, we also recorded reductions to operating revenues and charges to
operating expenses totaling approximately $7,400,000 (pre-tax), which consisted
of the following:
. Revenue reductions consisted of approximately $4,200,000 for federal
regulatory matters. These matters relate to specific issues that are
currently under investigation by federal regulatory commissions. We
believe that it is probable that the ultimate resolution of these
pending matters will result in refunds to our customers.
. Charges to operating expenses totaled approximately $3,200,000 for
other post-merger initiatives.
3. PLANT, PROPERTY AND EQUIPMENT
The following table displays the details of plant, property and equipment,
which is stated at cost:
December 31
---------------------------------
(Dollars in Thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------
Land $ 12,946 $ 12,942
Buildings 228,100 221,407
Central office equipment 908,659 833,356
Outside communications plant 343,175 331,931
Furniture, vehicles and other work equipment 482,611 455,684
Other 21,483 9,621
Construction-in-progress 45,653 33,391
---------------------------------
2,042,627 1,898,332
Accumulated depreciation (1,101,187) (1,028,915)
---------------------------------
Total $ 941,440 $ 869,417
=================================
4. LEASES
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. We did not incur any initial capital lease
obligations in 2000, 1999 and 1998. At December 31, 2000 and 1999, we had no
capital lease amounts included in plant, property and equipment.
Total rent expense amounted to $9,548,000 in 2000, $8,472,000 in 1999 and
$8,380,000 in 1998. Of these amounts, $8,589,000 in 2000, $7,616,000 in 1999 and
$7,101,000 in 1998 were lease payments to affiliated companies.
This table displays the aggregate minimum rental commitments under
noncancelable operating leases for the periods shown at December 31, 2000:
(Dollars in Thousands)
Years
- --------------------------------------------------------------------------------------------------------
2001 $367
2002 8
2003 ---
2004 ---
2005 ---
Thereafter ---
--------------------------
Total minimum rental commitments $375
==========================
F-13
Verizon Washington, DC Inc.
5. DEBT
Debt Maturing Within One Year
Debt maturing within one year consists of the following at December 31:
(Dollars in Thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Note payable to affiliate (VNFC) $214,767 $80,379
Long-term debt maturing within one year --- ---
--------------------------
Total debt maturing within one year $214,767 $80,379
==========================
Weighted average interest rate for note payable outstanding at year-end 6.6% 5.9%
==========================
We have a contractual agreement with an affiliated company, Verizon
Network Funding Corporation (VNFC), for the provision of short-term financing
and cash management services. VNFC issues commercial paper and obtains bank
loans to fund the working capital requirements of Verizon Communications'
network services subsidiaries, including us, and invests funds in temporary
investments on their behalf.
Long-Term Debt
Long-term debt consists principally of debentures that we have issued.
Interest rates and maturities of the amounts outstanding are as follows at
December 31:
Interest
Description Rate Maturity 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Forty year debenture 5 5/8% 2006 $ 25,000 $ 25,000
Forty year debenture 7 2009 50,000 50,000
Thirty year debenture 7 3/4 2023 90,000 90,000
--------------------------
165,000 165,000
Unamortized discount and premium, net (666) (685)
--------------------------
Total long-term debt, including current maturities 164,334 164,315
Less maturing within one year --- ---
--------------------------
Total long-term debt $164,334 $164,315
==========================
Our long-term debt outstanding at December 31, 2000 includes $75,000,000
that is callable. The call prices range from 100.60% to 100.17% of face value,
depending upon the remaining term to maturity of the issue.
In 1998, we recorded an extraordinary charge associated with the early
extinguishment of $60,000,000 of 7.75% debentures due in 2013. This charge
reduced net income by $983,000 (net of an income tax benefit of $692,000).
F-14
Verizon Washington, DC Inc.
6. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk
consist primarily of short-term investments and trade receivables.
Concentrations of credit risk with respect to trade receivables other than those
from AT&T are limited due to the large number of customers. We generated
revenues from services provided to AT&T (primarily network access and billing
and collection) of $30,322,000 in 2000, $29,237,000 in 1999 and $30,698,000 in
1998.
Fair Value of Financial Instruments
The table below provides additional information about our material
financial instruments at December 31:
Financial Instrument Valuation Method
- --------------------------------------------------------------------------------------------------------------
Note payable to affiliate (VNFC) and short-term Carrying amounts
investments
Debt (excluding capital leases) Future cash flows discounted at current rates
2000 1999
------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Debt $379,101 $375,287 $244,694 $236,482
7. COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting shareowner's investment that, under generally accepted accounting
principles, are excluded from net income.
The change in other comprehensive loss, net of income tax expense
(benefit), is as follows:
Years ended December 31
---------------------------------------
(Dollars in Thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss:
Minimum pension liability adjustment (net of income taxes of $106, $(74) and $(32)) $152 $ (106) $ (46)
---------------------------------------
$152 $ (106) $ (46)
=======================================
Accumulated other comprehensive loss is comprised of the following:
December 31
------------------------------
(Dollars in Thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss:
Minimum pension liability adjustment $ --- $(152)
------------------------------
$ --- $(152)
==============================
F-15
Verizon Washington, DC Inc.
8. STOCK INCENTIVE PLANS
We participate in stock-based compensation plans sponsored by Verizon
Communications. Verizon Communications applies APB Opinion No. 25 and related
interpretations in accounting for the plans and has adopted the disclosure-only
provisions of SFAS No. 123. If Verizon Communications had elected to recognize
compensation expense based on the fair value at the grant dates for 1998 and
subsequent awards consistent with the provisions of SFAS No. 123, our net income
would have been changed to the pro forma amounts indicated below:
Years ended December 31
-----------------------------------
(Dollars in Thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net income:
As reported $89,067 $83,040 $97,781
Pro forma 87,945 82,236 96,649
The pro forma net income amounts were determined using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Dividend yield 3.3% 3.4% 3.9%
Expected volatility 27.5% 20.0% 18.4%
Risk-free interest rate 6.2% 5.3% 5.6%
Expected lives (in years) 6 6 6
The weighted average value of options granted was $13.09 per option during
2000, $11.58 per option during 1999 and $7.36 per option during 1998.
9. EMPLOYEE BENEFITS
We participate in the Verizon Communications benefit plans. Verizon
Communications maintains noncontributory defined benefit pension plans for
substantially all employees. The postretirement healthcare and life insurance
plans for our retirees and their dependents are both contributory and
noncontributory and include a limit on the company's share of cost for recent
and future retirees. We also sponsor defined contribution savings plans to
provide opportunities for eligible employees to save for retirement on a
tax-deferred basis and to encourage employees to acquire and maintain an equity
interest in Verizon Communications.
The structure of Verizon Communications' benefit plans does not provide
for the separate determination of certain disclosures for our company. The
required information is provided on a consolidated basis in Verizon
Communications' Annual Report on Form 10-K for the year ended December 31, 2000.
Pension and Other Postretirement Benefits
Pension and other postretirement benefits for the majority of our
employees are subject to collective bargaining agreements. Modifications in
benefits have been bargained from time to time, and Verizon Communications may
also periodically amend the benefits in the management plans.
Benefit Cost
Years ended December 31
- --------------------------------------------------------------------------------------------------------------------------
Pension Healthcare and Life
---------------------------------------------------------------------
(Dollars in Thousands) 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net periodic benefit (income) cost $(19,184) $(9,225) $(7,887) $(2,947) $(1,749) $(921)
Amounts recognized on the balance sheets consist of:
December 31
- --------------------------------------------------------------------------------------------------------------------------
Pension Healthcare and Life
---------------------------------------------------------------------
(Dollars in Thousands) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Prepaid pension asset $ 9,584 --- --- ---
Employee benefit obligations (1,871) $(12,118) $(80,380) $(85,113)
Other assets --- 79 --- ---
Accumulated other comprehensive loss --- 258 --- ---
F-16
Verizon Washington, DC Inc.
The changes in benefit obligations from year to year were caused by a
number of factors, including changes in actuarial assumptions (see Assumptions)
and plan amendments.
Assumptions
The actuarial assumptions used are based on market interest rates, past
experience, and management's best estimate of future economic conditions.
Changes in these assumptions may impact future benefit costs and obligations.
The weighted-average assumptions used in determining expense and benefit
obligations are as follows:
---------------------------------------------------------------------
Pension Healthcare and Life
---------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Discount rate at end of year 7.75% 8.00% 7.00% 7.75% 8.00% 7.00%
Long-term rate of return on plan assets for the year 9.25 9.00 8.90 9.25 9.00 8.90
Rate of future increases in compensation at end of year 5.00 4.00 4.00 4.00 4.20 4.00
Medical cost trend rate at end of year 5.00 5.50 6.00
Ultimate (year 2001) 5.00 5.00 5.00
Dental cost trend rate at end of year 3.50 3.50 3.50
Ultimate (year 2002) 3.00 3.00 3.00
Savings Plans and Employee Stock Ownership Plans
Substantially all of our employees are eligible to participate in savings
plans maintained by Verizon Communications. Verizon Communications maintains two
leveraged employee stock ownership plans (ESOPs) for its employees of the former
Bell Atlantic Companies. Under these plans, a certain percentage of eligible
employee contributions are matched with shares of Verizon Communications' common
stock. Verizon Communications recognizes leveraged ESOP cost based on the
modified shares allocated method for these leveraged ESOPs that held securities
before December 15, 1989. We recognize our proportionate share of total ESOP
cost based on our matching obligation attributable to our participating
employees. We recorded total savings plan costs of $1,687,000 in 2000,
$1,116,000 in 1999 and $964,000 in 1998.
10. INCOME TAXES
The components of income tax expense are presented in the following table:
Years ended December 31
---------------------------------------
(Dollars in Thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Current:
Federal $31,759 $27,522 $37,941
State and local 10,896 8,747 11,547
---------------------------------------
42,655 36,269 49,488
---------------------------------------
Deferred:
Federal 18,936 17,023 15,089
State and local 4,735 4,903 4,768
---------------------------------------
23,671 21,926 19,857
---------------------------------------
66,326 58,195 69,345
Investment tax credits (203) (237) (290)
---------------------------------------
Total income tax expense $66,123 $57,958 $69,055
=======================================
The following table shows the primary reasons for the difference between
the effective income tax rate and the statutory federal income tax rate:
Years ended December 31
---------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Investment tax credits (.1) (.1) (.1)
State income taxes, net of federal tax benefits 6.6 6.3 6.3
Other, net 1.1 (.1) (.1)
---------------------------------------
Effective income tax rate 42.6% 41.1% 41.1%
=======================================
F-17
Verizon Washington, DC Inc.
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax
liabilities (assets) are shown in the following table:
December 31
----------------------------
(Dollars in Thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $128,300 $139,300
Other 18,500 15,000
----------------------------
146,800 154,300
----------------------------
Deferred tax assets:
Employee benefits (36,700) (60,700)
Allowance for uncollectibles (16,200) (5,700)
Other (9,000) (19,700)
----------------------------
(61,900) (86,100)
----------------------------
Net deferred tax liability $ 84,900 $ 68,200
============================
Deferred tax assets include approximately $52,400,000 at December 31, 2000
and $58,300,000 at December 31, 1999 related to postretirement benefit costs
recognized under SFAS No. 106. This deferred tax asset will gradually be
realized over the estimated lives of current retirees and employees.
11. ADDITIONAL FINANCIAL INFORMATION
The tables below provide additional financial information related to our
financial statements:
December 31
----------------------------
(Dollars in Thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS:
Accounts payable and accrued liabilities:
Accounts payable - affiliates $ 59,421 $ 87,000
Accounts payable - other 103,281 82,375
Accrued vacation pay 6,528 6,439
Accrued taxes 6,471 5,600
Accrued expenses 6,108 5,000
Interest payable - other 5,133 4,422
Interest payable - affiliate 1,175 412
----------------------------
$188,117 $191,248
============================
Other current liabilities:
Advance billings and customer deposits $ 12,122 $ 10,979
Other 12,387 ---
----------------------------
$ 24,509 $ 10,979
============== =============
Years ended December 31
-------------------------------------------
(Dollars in Thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS:
Cash paid during the year for:
Income taxes, net of amounts refunded $42,899 $41,981 $43,634
Interest, net of amounts capitalized 15,803 16,758 17,703
STATEMENTS OF INCOME:
Interest expense incurred, net of amounts capitalized 17,319 16,077 17,116
Capitalized interest 2,811 1,302 1,041
Advertising expense 1,215 3,902 3,860
Advertising expense includes $1,215,000 in 2000, $3,899,000 in 1999 and
$3,744,000 in 1998 allocated to us by Verizon Services Corp.
At December 31, 2000 and 1999, $9,411,000 and $5,126,000 of bank
overdrafts were classified as accounts payable.
F-18
Verizon Washington, DC Inc.
12. TRANSACTIONS WITH AFFILIATES
Our financial statements include transactions with Verizon Services Corp.
(Verizon Services), Verizon Network Funding Corporation (VNFC), Verizon
Communications, and various other affiliates.
We have contractual arrangements with Verizon Services for the provision
of various centralized services. These services are divided into two broad
categories. The first category is comprised of network related services which
generally benefit only Verizon Communications' operating telephone subsidiaries,
including us. These services include administration, marketing, product
advertising, sales, information systems, network technology planning, labor
relations, and staff support for various network operations. The second category
is comprised of overhead and support services which generally benefit all
subsidiaries of Verizon Communications. Such services include corporate
governance and staff support in finance, external affairs, legal and corporate
secretary, media relations, employee communications, corporate advertising,
human resources, and treasury. Costs may be either directly assigned to one
subsidiary or allocated to more than one subsidiary based on functional reviews
of the work performed.
We recognize interest expense and income in connection with contractual
arrangements with VNFC to provide short-term financing, investing and cash
management services to us (see Note 6).
Operating revenues include amounts from affiliates in connection with an
interstate revenue sharing arrangement with Verizon Communications' operating
telephone subsidiaries. Other operating revenues and expenses include
miscellaneous items of income and expense resulting from transactions with other
affiliates, primarily rental of facilities and equipment.
In December 2000, we transferred our advanced data assets, with a net book
value of approximately $10,700,000, for a 5.5% indirect ownership interest in
Verizon Advanced Data Inc. (VADI). VADI is an affiliated company which provides
new exchange access services. In connection with our investment, we record
equity income/(losses).
In June 1999, Bell Atlantic Full Services Channel, Inc., an affiliate,
sold its ownership interest in SMS/800 to us and the other operating telephone
companies of Verizon Communications at its fair value in accordance with a
Federal Communications Commission order. SMS/800 is a venture jointly held by
the Bell Operating Companies that administers the centralized national database
system associated with toll free numbers. We paid $21,575 to receive a .42%
ownership interest in SMS/800. Our ownership percentage has increased to .53% as
a result of the merger of SBC Communications, Inc. and Ameritech Corporation. In
connection with our investment, we record equity income and receive cash
dividends.
We also paid cash dividends to our parent, Verizon Communications.
Transactions with affiliates are summarized as follows:
Years ended December 31
-------------- -------------- -------------
(Dollars in Thousands) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
Operating revenues:
Interstate revenue sharing from affiliates $ 2,550 $ 2,550 $ 2,550
Other revenue from affiliates 153,868 139,238 137,790
-------------------------------------------
156,418 141,788 140,340
-------------------------------------------
Operating expenses:
Verizon Services - network 59,343 56,303 72,644
Verizon Services - other 74,213 64,070 53,188
Other 21,948 27,217 21,213
-------------------------------------------
155,504 147,590 147,045
-------------------------------------------
Other income:
Equity income from SMS/800 315 126 ---
Equity loss from VADI (1,248) --- ---
Interest income from VNFC --- 8 4
-------------------------------------------
(933) 134 4
-------------------------------------------
Interest expense to VNFC 8,126 5,307 2,667
Dividends paid to Verizon Communications 74,800 48,700 26,000
Dividends received from SMS/800 155 126 ---
F-19
Verizon Washington, DC Inc.
Outstanding balances with affiliates are reported on the balance sheets at
December 31, 2000 and 1999 as Accounts Receivable - Affiliates, Note Payable to
Affiliate, and Accounts Payable and Accrued Liabilities - Affiliates.
On February 1, 2001, we declared and paid a dividend in the amount of
$16,000,000 to Verizon Communications.
13. 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 which 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.
Several federal regulatory matters may require us to refund a portion of
the revenues collected in the current and prior periods. The outcome of each
pending matter, as well as the time frame within which each will be resolved, is
not presently determinable.
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 to 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.
14. SEGMENT INFORMATION
We have one reportable segment, which provides domestic wireline
telecommunications services. Specifically, we provide local telephone services
including voice and data transport, enhanced and custom calling features,
network access, directory assistance and private lines. In addition, we provide
customer premises equipment distribution, billing and collection and pay
telephone services.
F-20
Verizon Washington, DC Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands)
Additions
------------------------------------
Balance at Charged to
Beginning of Charged to Other Accounts Deductions Balance at End
Description Period Expenses Note (a) Note (b) of Period
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for Uncollectible
Accounts Receivable:
Year 2000 $6,802 $11,227 $6,286 $12,954 $11,361
Year 1999 $7,688 $ 3,368 $6,709 $10,963 $ 6,802
Year 1998 $7,721 $ 4,126 $7,712 $11,871 $ 7,688
Merger-Related Costs:
Year 2000 $4,726 $ 6,669 $ --- $ 8,715 $ 2,680
Year 1999 $5,572 $ --- $ --- $ 846 $ 4,726
Year 1998 $6,886 $ --- $ --- $ 1,314 $ 5,572
(a) (1) Allowance for Uncollectible Accounts Receivable includes amounts
previously written off which were credited directly to this account
when recovered, and (2) accruals charged to accounts payable for
anticipated uncollectible charges on purchases of accounts receivable
from others which we billed.
(b) Amounts written off as uncollectible, utilized or paid.
F-21
Form 10-K for 2000
File No. 1-7368
Page 1 of 1
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the Securities
and Exchange Commission (SEC), are incorporated herein by reference as
exhibits hereto.
3a Restated Certificate of Incorporation of the registrant, as
amended September 14, 1990. (Exhibit 3a to the registrant's
Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-7368.)
3a(i) Certificate of Amendment of the registrant's
Certificate of Incorporation, dated January 12,
1994 and filed January 13, 1994. (Exhibit 3a(i)
to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1993, File No.
1-7368.)
3a(ii) Certificate of Amendment of the Restated
Certificate of Incorporation, filed August 1,
2000. (Exhibit 3a(ii) to the registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, File No. 1-7368.)
3b By-Laws of the registrant, as amended December 15, 1996.
(Exhibit 3b to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1995, File No. 1-7368.)
3b(i) Consent of the Sole Stockholder of Verizon
Washington, DC Inc., dated December 15, 1996.
(Exhibit 3b(i) to the registrant's Annual Report
on Form 10-K for the year ended December 31,
1995, File No. 1-7368.)
4 No instrument which defines the rights of holders of
long-term debt of the registrant is filed herewith pursuant
to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, the registrant hereby agrees to furnish a copy
of any such instrument to the SEC upon request.
10a Agreement among Verizon Services Corp. and the Verizon
Communications Inc. telephone subsidiaries, dated November
7, 1983. (Exhibit 10b to Verizon Communications Inc. Annual
Report on Form 10-K for the year ended December 31, 1993,
File No. 1-8606.)
23a Consent of Independent Auditors.
23b Consent of Independent Accountants.