UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, Nine Months Ended September 30,
--------------------------------------------------------------------
(Dollars in Thousands) (Unaudited) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
(including $35,725, $39,447, $124,603 and $117,027
from affiliates) $ 172,524 $ 172,788 $ 527,940 $ 520,522
--------------------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $35,938, $40,123,$104,531
and $116,179 to affiliates) 81,219 83,767 236,617 254,890
Depreciation and amortization 46,871 45,085 138,862 133,546
--------------------------------------------------------------------
128,090 128,852 375,479 388,436
--------------------------------------------------------------------
OPERATING INCOME 44,434 43,936 152,461 132,086
OTHER INCOME AND (EXPENSE), NET
(including $(2,566), $46, $(12,154) and $250 from affiliates) (2,441) 274 (12,077) 1,651
INTEREST EXPENSE
(including $2,521, $2,182, $9,236 and $5,144 to affiliate) 4,809 4,439 15,460 12,030
--------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 37,184 39,771 124,924 121,707
PROVISION FOR INCOME TAXES 16,480 16,421 56,867 52,291
--------------------------------------------------------------------
NET INCOME $ 20,704 $ 23,350 $ 68,057 $ 69,416
====================================================================
See Notes to Condensed Financial Statements.
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Verizon Washington, DC Inc.
CONDENSED BALANCE SHEETS
ASSETS
------
(Dollars in Thousands) September 30, 2001 December 31, 2000
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS
Short-term investments $ -- $ 8,358
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $11,277 and $11,361 182,210 169,238
Affiliates 48,127 30,029
Material and supplies 13,870 2,745
Prepaid expenses 7,121 3,769
Deferred income taxes 5,409 4,224
Other 13,447 13,347
-----------------------------------------
270,184 231,710
-----------------------------------------
PLANT, PROPERTY AND EQUIPMENT 2,124,736 2,042,627
Less accumulated depreciation 1,173,378 1,101,187
-----------------------------------------
951,358 941,440
-----------------------------------------
PREPAID PENSION ASSET 36,305 9,584
-----------------------------------------
OTHER ASSETS 47,056 64,563
-----------------------------------------
TOTAL ASSETS $1,304,903 $1,247,297
=========================================
See Notes to Condensed Financial Statements.
2
Verizon Washington, DC Inc.
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
(Dollars in Thousands) September 30, 2001 December 31, 2000
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 255,019 $ 214,767
Accounts payable and accrued liabilities:
Affiliates 63,901 60,596
Other 101,396 127,521
Other liabilities 30,057 24,509
----------------------------------------
450,373 427,393
----------------------------------------
LONG-TERM DEBT 164,348 164,334
----------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 89,404 88,899
----------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 112,978 89,168
Unamortized investment tax credits 2,792 2,896
Other 33,270 38,926
----------------------------------------
149,040 130,990
----------------------------------------
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 231,221 215,164
----------------------------------------
451,738 435,681
----------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $1,304,903 $1,247,297
========================================
See Notes to Condensed Financial Statements.
3
Verizon Washington, DC Inc.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------------
(Dollars in Thousands) (Unaudited) 2001 2000
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 149,991 $ 166,463
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 8,358 7,400
Capital expenditures (145,783) (172,490)
Other, net (813) (12,463)
-------------------------------------
Net cash used in investing activities (138,238) (177,553)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in note payable to affiliate 40,252 67,849
Dividends paid (52,000) (58,900)
Net change in outstanding checks drawn
on controlled disbursement accounts (5) 1,438
-------------------------------------
Net cash (used in)/provided by financing activities (11,753) 10,387
-------------------------------------
NET CHANGE IN CASH -- (703)
CASH, BEGINNING OF PERIOD -- 703
-------------------------------------
CASH, END OF PERIOD $ -- $ --
=====================================
See Notes to Condensed Financial Statements.
4
Verizon Washington, DC Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon Washington, DC Inc. 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. The
balance sheet at December 31, 2000 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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 November 1, 2001, we declared and paid a dividend in the amount of
$23,000,000 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 fair value 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. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets."
SFAS No. 141, which applies to business combinations occurring after June
30, 2001, requires that the purchase method of accounting be used and includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in the combination.
5
Verizon Washington, DC Inc.
SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121. The new statement also applies to goodwill and indefinite-lived intangible
assets of investments accounted for under the equity method of accounting.
Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
We are required to adopt SFAS No. 142 effective January 1, 2002. We are
currently evaluating our intangible assets to determine the impact, if any, the
adoption of SFAS No. 142 will have on our results of operations or financial
position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard provides the accounting for the cost of
legal obligations associated with the retirement of long-lived assets. SFAS No.
143 requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
capitalize that amount as a part of the book value of the long-lived asset. That
cost is then depreciated over the remaining life of the underlying long-lived
asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are
currently evaluating the impact this new standard will have on our future
results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144. This standard supersedes SFAS
No. 121 and the provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," with regard to reporting the effects of a disposal of
a segment of a business. SFAS No. 144 establishes a single accounting model for
assets to be disposed of by sale and addresses several SFAS No. 121
implementation issues. We are required to adopt SFAS No. 144 effective January
1, 2002. We do not expect the impact of the adoption of SFAS No. 144 to have a
material effect on our results of operations or financial position.
7. Merger Charges
In connection with the merger of Bell Atlantic and GTE on June 30, 2000, we
incurred charges associated with employee severance of $3,347,000 pre-tax.
Employee severance costs, as recorded under SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," represent the benefit costs for the separation of
management employees who were entitled to benefits under pre-existing separation
plans. During the second quarter of 2000, in connection with the merger, we also
recorded a pre-tax charge of $3,273,000 for direct, incremental merger-related
costs, including compensation, professional services and other direct costs.
In addition, we recorded pre-tax merger-related transition costs of
$3,861,000 in the first nine months of 2001 and $625,000 in the first nine
months of 2000. 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 since the date of the
merger totaled $5,552,000 million. Transition costs are expensed as incurred.
During the second quarter of 2000, we also recorded a $49,000 pre-tax charge for
other actions in relation to the Bell Atlantic-GTE merger. This charge was
related to the write-off of duplicate assets.
8. 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 68,057
Dividends declared to Verizon Communications (52,000)
--------------------------------------------------------
Balance at September 30, 2001 $191,968 $28,549 $231,221
========================================================
Net income and comprehensive income were the same for the nine months ended
September 30, 2001 and 2000.
6
Verizon Washington, DC Inc.
9. Commitments and Contingencies
Various legal actions and regulatory proceedings are pending to which we
are a party and claims which, if asserted, may lead to other legal actions. 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 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 matter will be resolved, is
not presently determinable.
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.
7
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 $68,057,000 for the nine month period ended
September 30, 2001, compared to net income of $69,416,000 for the same period in
2000.
The tragedies of the terrorist attacks on September 11, 2001 principally
affected the Verizon Communications Inc. (Verizon Communications) operations
either in, or adjacent to, the World Trade Center complex in New York City. The
events of September 11th did not have a significant effect on our results of
operations or financial condition.
Our results for 2001 and 2000 were affected by special items. The special
items in both periods include our allocated share of charges from affiliates
that provide various centralized services on behalf of Verizon Communications'
subsidiaries.
The following table shows how special items are reflected in our condensed
statements of income for each period:
(Dollars in Thousands)
Nine Months Ended September 30 2001 2000
- ----------------------------------------------------------------------------------------------------
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 3,861 625
Bell Atlantic-GTE merger related costs -- 49
Other charges and special items -- 6,755
-----------------------------------
Net impact on pre-tax income $3,861 $14,049
===================================
What follows is a further explanation of the nature of these special items.
Merger Charges
In connection with the merger of Bell Atlantic and GTE on June 30, 2000, we
incurred charges associated with employee severance of $3,347,000 pre-tax.
Employee severance costs, as recorded under SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," represent the benefit costs for the separation of
management employees who were entitled to benefits under pre-existing separation
plans. During the second quarter of 2000, in connection with the merger, we also
recorded a pre-tax charge of $3,273,000 for direct, incremental merger-related
costs, including compensation, professional services and other direct costs.
In addition, we recorded pre-tax merger-related transition costs of
$3,861,000 in the first nine months of 2001 and $625,000 in the first nine
months of 2000. 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 are expensed as incurred.
During the second quarter of 2000, we also recorded a $49,000 pre-tax 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 nine month periods ended September 30, 2001 and 2000 are discussed in
the following sections.
8
Verizon Washington, DC Inc.
OPERATING REVENUES
- ------------------
(Dollars in Thousands)
Nine Months Ended September 30, 2001 2000
- --------------------------------------------------------------------------------
Local services $254,992 $254,795
Network access services 151,512 143,243
Long distance services 1,797 2,224
Other services 119,639 120,260
--------------------------------
Total $527,940 $520,522
================================
LOCAL SERVICES
2001 - 2000 Increase
- --------------------------------------------------------------------------------
Nine Months $197 .1%
- --------------------------------------------------------------------------------
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 competitive local exchange carriers, certain data
transport revenues and wireless interconnection revenues.
Local service revenues increased in the first nine months of 2001 primarily
due to higher payments received from competitive local exchange carriers for the
purchase of unbundled network elements.
The increase in local service revenues was substantially offset by the
effect of lower customer demand and usage of our basic wireline services, as
reflected by a decline in our switched access lines in service from September
30, 2000. This decrease primarily reflects the impact of an economic slowdown
and competition. In addition, the effect of technology substitution is
increasing, as more customers are choosing wireless and Internet services in
place of certain basic wireline and private line services. Lower revenue from
our value-added services further offset the increase in local service revenues.
NETWORK ACCESS SERVICES
2001 - 2000 Increase
- --------------------------------------------------------------------------------
Nine Months $8,269 5.8%
- --------------------------------------------------------------------------------
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 the first nine months of 2001 was mainly
attributable to higher customer demand for special access services, particularly
for high-capacity, high-speed digital services.
This increase was partially offset by price reductions associated with a
federal price cap filing and other regulatory decisions. The District of
Columbia Public Service Commission regulates us with respect to certain
intrastate rates and services. 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 were in effect through June 2001. Effective July 3, 2001, we
implemented further rate reductions in accordance with the plan. The impact of
the slowing economy also affected network access revenues in 2001.
9
Verizon Washington, DC Inc.
LONG DISTANCE SERVICES
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(427) (19.2)%
- --------------------------------------------------------------------------------
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 nine months of 2001
primarily due to competition and the effects of toll calling discount packages
and product bundling offers of our intraLATA toll services.
OTHER SERVICES
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(621) (.5)%
- --------------------------------------------------------------------------------
Our other services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, public (pay) 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 decreased in the first nine months of 2001 primarily
due to lower revenues received from CPE services provided to government
customers and a decline in public telephone revenues, as more customers
substituted wireless communications for pay phone services. These decreases were
substantially offset by higher facilities rental revenues received from
affiliates.
OPERATING EXPENSES
- ------------------
(Dollars in Thousands)
OPERATIONS AND SUPPORT
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(18,273) (7.2)%
- --------------------------------------------------------------------------------
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 affiliates, 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 the effect of merger-related costs and other special items recorded in 2000
and 2001, as described in the Results of Operations section. Operations and
support expenses were further reduced by business integration activities,
effective cost control measures and reduced employee overtime pay. These
decreases were partially offset by annual salary and wage increases for
management and non-management employees.
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.
10
Verizon Washington, DC Inc.
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 per minute 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
- --------------------------------------------------------------------------------
Nine Months $5,316 4.0%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first nine months of
2001 principally due to growth in depreciable telephone plant and increased
software amortization costs. These factors were partially offset by the effect
of lower rates of depreciation.
OTHER INCOME AND (EXPENSE), NET
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Nine Months $(13,728)
- --------------------------------------------------------------------------------
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 September 30, 2001, our ownership
interest in VADI was 5.48%.
INTEREST EXPENSE
2001 - 2000 Increase
- --------------------------------------------------------------------------------
Nine Months $3,430 28.5%
- --------------------------------------------------------------------------------
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 nine months 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 and the effect of lower rates of interest.
EFFECTIVE INCOME TAX RATES
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2001 45.5%
- --------------------------------------------------------------------------------
2000 43.0%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. Our effective income
tax rate was higher in the first nine months of 2001 principally due to equity
losses associated with our investment in VADI, for which we do not recognize
income tax benefits.
11
Verizon Washington, DC Inc.
OTHER MATTERS
- -------------
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets."
SFAS No. 141, which applies to business combinations occurring after June
30, 2001, requires that the purchase method of accounting be used and includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in the combination.
SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121. The new statement also applies to goodwill and indefinite-lived intangible
assets of investments accounted for under the equity method of accounting.
Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
We are required to adopt SFAS No. 142 effective January 1, 2002. We are
currently evaluating our intangible assets to determine the impact, if any, the
adoption of SFAS No. 142 will have on our results of operations or financial
position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard provides the accounting for the cost of
legal obligations associated with the retirement of long-lived assets. SFAS No.
143 requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
capitalize that amount as a part of the book value of the long-lived asset. That
cost is then depreciated over the remaining life of the underlying long-lived
asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are
currently evaluating the impact this new standard will have on our future
results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144. This standard supersedes SFAS
No. 121 and the provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," with regard to reporting the effects of a disposal of
a segment of a business. SFAS No. 144 establishes a single accounting model for
assets to be disposed of by sale and addresses several SFAS No. 121
implementation issues. We are required to adopt SFAS No. 144 effective January
1, 2002. We do not expect the impact of the adoption of SFAS No. 144 to have a
material effect on our results of operations or financial position.
12
Verizon Washington, DC Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
------
12 Computation of Ratio of Earnings to Fixed Charges.
(b) There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 2001.
13
Verizon Washington, DC Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Verizon Washington, DC Inc.
Date: November 13, 2001 By /s/ Edwin F. Hall
---------------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 8, 2001.
14
Verizon Washington, DC Inc.
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
12 Computation of Ratio of Earnings to Fixed Charges.
15