UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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
_________________________
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Verizon Washington, DC Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME
Three Months Ended March 31,
------------------------------------------
(Dollars in Thousands) (Unaudited) 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
(including $45,666 and $37,712 from affiliates) $178,783 $174,008
------------------------------------------
OPERATING EXPENSES
Operations and support (including $30,519 and $31,398 to affiliates) 74,648 79,805
Depreciation and amortization 45,832 44,026
------------------------------------------
120,480 123,831
------------------------------------------
OPERATING INCOME 58,303 50,177
OTHER INCOME AND (EXPENSE), NET
(including $(8,836) and $15 from affiliates) (8,678) 933
INTEREST EXPENSE
(including $3,557 and $1,115 to affiliate) 5,649 3,535
------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 43,976 47,575
PROVISION FOR INCOME TAXES 21,876 19,652
------------------------------------------
NET INCOME $ 22,100 $ 27,923
==========================================
See Notes to Condensed Financial Statements.
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Verizon Washington, DC Inc.
CONDENSED BALANCE SHEETS
ASSETS
------
(Dollars in Thousands) (Unaudited) March 31, 2001 December 31, 2000
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Short-term investments $ 5,572 $ 8,358
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $11,556 and $11,361 182,574 169,238
Affiliates 33,977 30,029
Material and supplies 2,204 2,745
Prepaid expenses 6,551 3,769
Deferred income taxes 4,491 4,224
Other 13,312 13,347
-----------------------------------------------
248,681 231,710
-----------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 2,070,892 2,042,627
Less accumulated depreciation 1,103,235 1,101,187
-----------------------------------------------
967,657 941,440
-----------------------------------------------
PREPAID PENSION ASSET 14,068 9,584
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OTHER ASSETS 51,694 64,563
-----------------------------------------------
TOTAL ASSETS $1,282,100 $1,247,297
===============================================
See Notes to Condensed Financial Statements.
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Verizon Washington, DC Inc.
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
(Dollars in Thousands) (Unaudited) March 31, 2001 December 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 250,036 $ 214,767
Accounts payable and accrued liabilities:
Affiliates 53,594 60,596
Other 110,914 127,521
Other liabilities 26,756 24,509
---------------------------------------------
441,300 427,393
---------------------------------------------
LONG-TERM DEBT 164,339 164,334
---------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 88,039 88,899
---------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 100,672 89,168
Unamortized investment tax credits 2,794 2,896
Other 43,175 38,926
---------------------------------------------
146,641 130,990
---------------------------------------------
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 221,264 215,164
---------------------------------------------
441,781 435,681
---------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $1,282,100 $1,247,297
=============================================
See Notes to Condensed Financial Statements.
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Verizon Washington, DC Inc.
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
--------------------------------------
(Dollars in Thousands) (Unaudited) 2001 2000
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 54,071 $ 68,602
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 2,786 2,467
Capital expenditures (70,676) (59,655)
Other, net (833) (7,394)
--------------------------------------
Net cash used in investing activities (68,723) (64,582)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in note payable to affiliate 35,269 21,333
Dividend paid (16,000) (27,100)
Net change in outstanding checks drawn
on controlled disbursement accounts (4,617) 1,044
--------------------------------------
Net cash provided by/(used in) financing activities 14,652 (4,723)
--------------------------------------
NET CHANGE IN CASH --- (703)
CASH, BEGINNING OF PERIOD --- 703
--------------------------------------
CASH, END OF PERIOD $ --- $ ---
======================================
See Notes to Condensed Financial Statements.
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Verizon Washington, DC Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon Washington, DC, Inc. is a wholly owned subsidiary of Verizon
Communications Inc. (Verizon Communications). The accompanying unaudited
condensed financial statements have been prepared based upon Securities and
Exchange Commission (SEC) rules that permit reduced disclosure for interim
periods. These financial statements reflect all adjustments that are necessary
for a fair presentation of results of operations and financial position for the
interim periods shown including normal recurring accruals. The results for the
interim periods are not necessarily indicative of results for the full year. For
a more complete discussion of significant accounting policies and certain other
information, you should refer to the financial statements included in our 2000
Annual Report on Form 10-K.
We have reclassified certain amounts from prior year's data to conform to
the 2001 presentation.
2. 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 defer nonrecurring service activation revenues and costs and amortize
them over the expected term of the customer relationship. The deferred costs are
equal to the activation fee revenue and any excess cost is expensed immediately.
The deferred costs represent incremental direct costs associated with certain
nonrecurring fees, such as service activation and installation fees.
3. Long-Lived Assets
We assess the impairment of long-lived assets under Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. A determination of impairment (if any) is made based on estimates
of future cash flows.
4. Dividend
On May 1, 2001, we declared and paid a dividend in the amount of
$18,000,000 to Verizon Communications.
5. Derivatives and Hedging Activities
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133
requires that all derivatives, including derivatives embedded in other financial
instruments, be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments not qualifying as hedges under SFAS No. 133 or any ineffective
portion of hedges are recognized in earnings in the current period. Changes in
the fair values of derivative instruments used effectively as hedges are
recognized in earnings, along with changes in the fair value of the hedged item.
Changes in the fair value of the effective portions of cash flow hedges are
reported in other comprehensive income (loss), and recognized in earnings when
the hedged item is recognized in earnings. We presently do not have any
derivative instruments or hedging activities and, consequently, SFAS No. 133 did
not have an impact on our financial statements.
6. Shareowner's Investment
Reinvested
(Dollars in Thousands) Common Stock Capital Surplus Earnings
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $191,968 $28,549 $215,164
Net income 22,100
Dividend declared to Verizon Communications (16,000)
-----------------------------------------------------------
Balance at March 31, 2001 $191,968 $28,549 $221,264
===========================================================
Net income and comprehensive income were the same for the three months
ended March 31, 2001 and 2000.
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Verizon Washington, DC Inc.
7. Commitments and Contingencies
Various legal actions and regulatory proceedings are pending to which we
are a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters that we currently deem to be probable and
estimable. We do not expect that the ultimate resolution of pending regulatory
and legal matters in future periods will have a material effect on our financial
condition, but it could have a material effect on our results of operations.
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.
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Verizon Washington, DC Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial
Statements and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
We reported net income of $22,100,000 for the three month period ended
March 31, 2001, compared to net income of $27,923,000 for the same period in
2000. Our results were affected by merger-related costs recorded in the first
quarter of 2001, as described below.
Merger-related Costs
In connection with the Bell Atlantic-GTE merger, which was completed in
June 2000, we recorded pre-tax transition costs of $956,000 in the first quarter
of 2001 (including $687,000 allocated from Verizon Services Corp.). These costs
were recorded in Operations and Support Expense. Verizon Services Corp. is a
wholly owned subsidiary of Verizon Communications Inc. (Verizon Communications)
that provides various centralized services on behalf of Verizon Communications'
subsidiaries.
Transition costs consisted of costs to integrate systems, consolidate real
estate, relocate employees and meet certain regulatory conditions of the merger.
They also included costs for advertising and other costs to establish the
Verizon brand. Transition costs were expensed as incurred.
OPERATING REVENUE STATISTICS
- ----------------------------
2001 2000 % Change
- ---------------------------------------------------------------------------------------------------------------------
At March 31,
Access Lines in Service (in thousands)*
Residence 310 310 ---%
Business 706 682 3.5
Public 9 10 (10.0)
----------------------------------
1,025 1,002 2.3
==================================
Three Months Ended March 31,
Minutes of Use from Carriers and CLECs (in millions) 797 799 (.3)
==================================
* 2000 reflects a restatement of access lines in service
OPERATING REVENUES
- ------------------
(Dollars in Thousands)
Three Months Ended March 31,
-----------------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Local services $ 90,299 $ 84,231
Network access services 44,517 46,873
Long distance services 595 818
Other services 43,372 42,086
-----------------------------------------
Total $178,783 $174,008
=========================================
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Verizon Washington, DC Inc.
LOCAL SERVICES
2001 - 2000 Increase
- --------------------------------------------------------------------------------
First Quarter $6,068 7.2%
- --------------------------------------------------------------------------------
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. The
provision of local exchange services not only includes retail revenues, but also
includes local wholesale revenues from unbundled network elements (UNEs),
interconnection revenues from local exchange carriers, certain data transport
revenues and wireless interconnection revenues.
Local service revenues increased in the first quarter of 2001 primarily
due to higher payments received from competitive local exchange carriers for the
purchase of unbundled network elements and for interconnection of their networks
with our network. Local service revenue growth in the first quarter of 2001 also
reflects higher usage of our network facilities. This revenue growth was
generated, in part, by an increase in access lines in service of 2.3% from March
31, 2000. Growth in local service revenues was partially offset by the effect of
lower revenues from business and residence message volumes.
NETWORK ACCESS SERVICES
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(2,356) (5.0)%
- --------------------------------------------------------------------------------
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 revenues declined in the first quarter of 2001 primarily
due to lower end-user revenues and price reductions associated with a federal
price cap filing and other regulatory decisions. The Federal Communications
Commission (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. These revenue
decreases were partially offset by higher customer demand for our special access
services.
LONG DISTANCE SERVICES
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(223) (27.3)%
- --------------------------------------------------------------------------------
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.
Long distance service revenues declined in the first quarter of 2001
primarily due to competition and the effects of toll calling discount packages
and product bundling offers of our intraLATA toll services.
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Verizon Washington, DC Inc.
OTHER SERVICES
2001 - 2000 Increase
- --------------------------------------------------------------------------------
First Quarter $1,286 3.1%
- --------------------------------------------------------------------------------
Our other services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, public (coin) telephone, customer premises equipment (CPE), and
sales of materials and supplies to affiliates. Other service 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 service revenues increased in the first quarter of 2001 due to
higher facilities rental revenues received from affiliates and higher revenues
from our billing and collection services. These increases were partially offset
by a reduction in revenues received from CPE services provided to government
customers.
OPERATING EXPENSES
- ------------------
(Dollars in Thousands)
OPERATIONS AND SUPPORT
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(5,157) (6.5)%
- --------------------------------------------------------------------------------
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 Corp., rent, network software costs, operating taxes other
than income, the provision for uncollectible accounts receivable, reciprocal
compensation, and other costs.
The decrease in operations and support expenses was primarily attributable
to lower material costs and lower operating taxes other than income. Operations
and support expenses were further decreased by lower interconnection and related
costs associated with reciprocal compensation arrangements with competitive
local exchange and other carriers to terminate calls on their network. These
decreases were partially offset by higher centralized service expenses allocated
from Verizon Services Corp. and other affiliates and the recognition in the
first quarter of 2001 of transition costs related to the Bell Atlantic - GTE
merger.
We continue to incur expenditures related to reciprocal compensation
arrangements with competitive local exchange carriers and other carriers to
terminate calls on their network. In March 2000, the United States Court of
Appeals for the District of Columbia Circuit reversed and remanded the FCC's
February 1999 order that concluded that calls to the Internet through Internet
service providers (ISP) do not terminate at the ISP but are single interstate
calls. The FCC had concluded that calls to the Internet are not therefore
subject to reciprocal compensation under section 251(b)(5) of the
Telecommunications Act, but left it to state regulatory commissions to determine
whether local interconnection agreements entered into with competing carriers
required the payment of compensation on such calls.
On April 27, 2001, the FCC released an order responding to the court's
remand. The FCC found that Internet-bound traffic is interstate and subject to
the FCC's jurisdiction. Moreover, the FCC again found that Internet-bound
traffic is not subject to reciprocal compensation under section 251(b)(5) of the
Telecommunications Act. Instead, the FCC established federal rates that decline
from $0.0015 to $0.0007 over a three year period. The FCC order also sets caps
on the total minutes that may be subject to any intercarrier compensation and
requires that incumbent local exchange carriers must offer to pay reciprocal
compensation for local traffic at the same rate as they are required to pay on
Internet-bound traffic.
DEPRECIATION AND AMORTIZATION
2001 - 2000 Increase
- --------------------------------------------------------------------------------
First Quarter $1,806 4.1%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first quarter of
2001 principally due to growth in depreciable telephone plant as a result of
increased capital expenditures for higher growth services and increased software
amortization costs. These factors were partially offset by the effect of lower
rates of depreciation and amortization.
OTHER INCOME AND (EXPENSE), NET
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
First Quarter $(9,611) ---%
- --------------------------------------------------------------------------------
The change in other income and (expense), net, was primarily attributable
to equity losses recognized from our investment in Verizon Advanced Data Inc.
(VADI). VADI is a wholly owned subsidiary of Verizon Communications that
provides new exchange access services. At March 31, 2001, our ownership interest
in VADI was 5.5%.
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Verizon Washington, DC Inc.
INTEREST EXPENSE
2001 - 2000 Increase
- --------------------------------------------------------------------------------
First Quarter $2,114 59.8%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense increased in the first quarter of 2001, over the same
period in 2000, primarily as a result of higher levels of average short-term
debt with an affiliate. This increase was partially offset by higher capitalized
interest costs resulting from higher levels of average telephone plant under
construction.
EFFECTIVE INCOME TAX RATES
Three Months Ended March 31,
- --------------------------------------------------------------------------------
2001 49.7%
- --------------------------------------------------------------------------------
2000 41.3%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. Our effective income
tax rate was higher in the first quarter of 2001, principally due to equity
losses associated with our investment in VADI, for which we do not recognize
income tax benefits.
10
Verizon Washington, DC Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(b) There were no Current Reports on Form 8-K filed during the
quarter ended March 31, 2001.
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Verizon Washington, DC Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Verizon Washington, DC, Inc.
Date: May 15, 2001 By /s/ Edwin F. Hall
--------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 7, 2001.
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