<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7757
VERIZON DELAWARE INC.
(Former Name: Bell Atlantic - Delaware, Inc.)
A Delaware Corporation I.R.S. Employer Identification No. 23-0523775
901 Tatnall Street, Wilmington, Delaware 19801
Telephone Number (302) 576-5416
_________________________
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF VERIZON COMMUNICATIONS INC., MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
<PAGE>
Verizon Delaware Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------------------------------
(Dollars in Thousands) (Unaudited) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
(including $472, $1,051, $2,955 and
$3,202 to affiliates) $79,415 $76,566 $233,923 $224,081
----------------------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $17,774, $14,319
$50,523 and $45,133 to affiliates) 41,540 35,553 123,717 104,461
Depreciation and amortization 18,576 16,796 54,551 49,386
----------------------------------------------------------------------
60,116 52,349 178,268 153,847
----------------------------------------------------------------------
OPERATING INCOME 19,299 24,217 55,655 70,234
OTHER INCOME, NET
(including $24, $0, $130 and $7 from
affiliate) 99 34 650 140
INTEREST EXPENSE
(including $1,176, $575, $3,053 and $1,909 to
affiliates) 2,592 2,057 7,291 6,327
----------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 16,806 22,194 49,014 64,047
PROVISION FOR INCOME TAXES 6,819 9,025 20,383 26,067
----------------------------------------------------------------------
NET INCOME $ 9,987 $13,169 $28,631 $37,980
======================================================================
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
Verizon Delaware Inc.
CONDENSED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
(Dollars in Thousands) September 30, 2000 December 31, 1999
-----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Short-term investments $ --- $ 4,800
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $6,434 and $5,181 51,504 55,315
Affiliates 5,079 4,657
Material and supplies 2,270 1,232
Prepaid expenses 8,867 6,020
Deferred income taxes 2,180 2,132
Other 723 566
--------------------------------------------
70,623 74,722
--------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 994,917 934,084
Less accumulated depreciation 559,797 512,150
--------------------------------------------
435,120 421,934
--------------------------------------------
OTHER ASSETS 26,687 10,738
--------------------------------------------
TOTAL ASSETS $532,430 $507,394
============================================
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
Verizon Delaware Inc.
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amount) September 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $29,426 $29,167
Current portion of long-term debt:
Affiliate 20,000 20,000
Other 13 50
Accounts payable and accrued liabilities:
Affiliates 22,313 22,066
Other 48,943 43,959
Advance billings and customer deposits 9,545 8,918
---------------------------------------------
130,240 124,160
---------------------------------------------
LONG-TERM DEBT
Note payable to affiliate 30,000 ---
Other 86,338 86,319
---------------------------------------------
116,338 86,319
---------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 38,563 38,323
---------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 43,924 37,833
Unamortized investment tax credits 1,723 1,868
Other 9,131 11,011
---------------------------------------------
54,778 50,712
---------------------------------------------
SHAREOWNER'S INVESTMENT
Common stock, $25 par value per share 118,442 118,442
Authorized shares: 5,262,280
Outstanding shares: 4,737,686
Reinvested earnings 74,124 89,493
Accumulated other comprehensive loss (55) (55)
---------------------------------------------
192,511 207,880
---------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $532,430 $507,394
=============================================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
Verizon Delaware Inc.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
(Dollars in Thousands) (Unaudited) 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $81,288 $86,457
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 4,800 4,313
Capital expenditures (67,656) (55,864)
Other, net (6,061) 1,564
---------------------------------------
Net cash used in investing activities (68,917) (49,987)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations (33) (31)
Net change in short-term note payable to affiliate 259 (23,425)
Proceeds from medium-term note payable to affiliate 30,000 ---
Dividends paid (44,000) (12,400)
Net change in outstanding checks drawn
on controlled disbursement accounts 1,403 (614)
---------------------------------------
Net cash used in financing activities (12,371) (36,470)
---------------------------------------
NET CHANGE IN CASH --- ---
CASH, BEGINNING OF PERIOD --- ---
---------------------------------------
CASH, END OF PERIOD $ --- $ ---
=======================================
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
Verizon Delaware Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon Delaware Inc., formerly Bell Atlantic - Delaware, Inc., is a wholly
owned subsidiary of Verizon Communications Inc. (Verizon Communications). The
accompanying unaudited condensed financial statements have been prepared based
upon Securities and Exchange Commission (SEC) rules that permit reduced
disclosure for interim periods. These financial statements include certain
reclassifications in presentation as a result of the merger of Bell Atlantic
Corporation (Bell Atlantic) and GTE Corporation (GTE) (see Note 2). These
financial statements reflect all adjustments that are necessary for a fair
presentation of results of operations and financial position for the interim
periods shown including normal recurring accruals and other items (see Note 2).
The results for the interim periods are not necessarily indicative of results
for the full year. For a more complete discussion of significant accounting
policies and certain other information, you should refer to the financial
statements included in our 1999 Annual Report on Form 10-K.
2. Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under
a definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. In September
2000, Bell Atlantic changed its name to Verizon Communications Inc. The merger
qualified as a tax-free reorganization and has been accounted for as a pooling
of interests. Under this method of accounting, Bell Atlantic and GTE are treated
as if they had always been combined for accounting and financial reporting
purposes.
Merger-Related and Severance Costs
Results of operations for the nine months ended September 30, 2000 included
merger-related pre-tax costs totaling approximately $3,235,000 consisting of
$1,736,000 for direct incremental costs and $1,499,000 for employee severance
costs. These costs include approximately $2,689,000 representing our allocated
share of merger-related costs from Verizon Services Corp. (Verizon Services), an
affiliate that provides centralized services on a contract basis. Costs
allocated from Verizon Services are included in Operations and Support Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
represent our proportionate share of benefit costs for the separation of
management employees who are entitled to benefits under pre-existing Verizon
Communications separation pay plans. The separations are expected to occur as a
result of consolidations and process enhancements. Accrued postemployment
benefit liabilities for those employees are included in our balance sheet as a
component of Accounts Payable and Accrued Liabilities -Other.
Transition Costs
In addition to the direct merger-related and severance costs, over the next
several years, we expect to incur transition costs related to the merger. These
costs will be incurred to integrate systems, consolidate real estate and
relocate employees. These costs will include our allocated share of
merger-related costs from Verizon Services. They also include advertising and
other costs to establish the Verizon brand. Transition costs are expensed as
incurred. During the nine month period ended September 30, 2000, we incurred
$329,000 of transition costs. These costs include approximately $320,000,
representing our allocated share of transition costs from Verizon Services.
Other Related Actions
During the second quarter of 2000, we also recorded a $27,000 charge for
other actions in relation to the merger or other strategic decisions. This
charge included the write-off of duplicate assets.
3. Dividend
On November 1, 2000, we declared and paid a dividend in the amount of
$2,000,000 to Verizon Communications.
5
<PAGE>
Verizon Delaware Inc.
4. Debt
On March 30, 2000, we issued a medium-term note for $30,000,000 to an
affiliated company, Verizon NSI Holdings Inc. The note carries a floating
interest rate with an initial rate of 6.40%, which will be reset each quarter.
The note matures on March 30, 2003.
5. Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or other
comprehensive income, depending on the designated use and effectiveness of the
instruments.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No.
138, which we will adopt on January 1, 2001. The impact of adoption will be
affected by several factors, including the specific hedging instruments in place
and their relationships to hedged items, as well as market conditions at the
date of adoption.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition and, in certain circumstances, requires the
deferral of incremental costs. We will adopt SAB No. 101 in the fourth quarter
of 2000, retroactive to January 1, 2000. We are currently assessing the impact
of adopting SAB No. 101.
6. Shareowner's Investment
<TABLE>
<CAPTION>
Reinvested Accumulated Other
(Dollars in Thousands) (Unaudited) Common Stock Earnings Comprehensive Loss
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1999 $118,442 $89,493 $(55)
Net income 28,631
Dividends paid to parent (44,000)
-------------------------------------------------------------------------------
Balance at September 30, 2000 $118,442 $74,124 $(55)
===============================================================================
</TABLE>
Net income and comprehensive income were the same for the nine months ended
September 30, 2000 and 1999.
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.
Federal and state regulatory conditions to the Bell Atlantic - GTE merger
include certain commitments to, among other things, promote competition and the
widespread deployment of advanced services, while helping ensure that consumers
continue to receive high-quality, low cost telephone services. In some cases,
there are significant penalties associated with not meeting these commitments.
The cost of satisfying these commitments could have a significant impact on net
income in future periods. As previously disclosed, the cost of satisfying these
commitments is likely to impact the net income of Verizon Communications on a
consolidated basis in 2000 by approximately $275 to $325 million, based on
preliminary estimates. The estimated impact on each operating telephone
subsidiary, including the Company, is currently being assessed.
6
<PAGE>
Verizon Delaware 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 $28,631,000 for the nine months ended September
30, 2000, compared to net income of $37,980,000 for the same period in 1999.
Our results for 2000 and 1999 were affected by special items. The special
items in both periods include our allocated share of charges from Verizon
Services Corp. (Verizon Services), an affiliate that provides centralized
services on a contract basis.
The following table shows how special items are reflected in our condensed
statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Nine Months Ended September 30, 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues
Regulatory contingency $ 62 $ ---
---------------------------------------
Operations and Support Expenses
Bell Atlantic-GTE merger direct incremental costs 1,736 ---
Bell Atlantic-GTE merger severance costs 1,499 ---
Bell Atlantic-GTE merger transition costs 329 ---
Bell Atlantic-GTE merger other related actions 27 ---
Bell Atlantic-NYNEX merger transition costs --- 752
Other charges and special items 1,398 ---
---------------------------------------
4,989 752
---------------------------------------
Interest Expense
Regulatory contingency 22 ---
---------------------------------------
Net impact on pre-tax income $5,073 $ 752
=======================================
</TABLE>
What follows is a further explanation of the nature of these special items.
Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under
a definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. In September
2000, Bell Atlantic changed its name to Verizon Communications Inc. (Verizon
Communications). The merger qualified as a tax-free reorganization and has been
accounted for as a pooling of interests. Under this method of accounting, Bell
Atlantic and GTE are treated as if they had always been combined for accounting
and financial reporting purposes.
Merger-Related and Severance Costs
Results of operations for the nine months ended September 30, 2000 included
merger-related pre-tax costs totaling approximately $3,235,000, consisting of
$1,736,000 for direct incremental costs and $1,499,000 for employee severance
costs. These costs include approximately $2,689,000 representing our allocated
share of merger-related costs from Verizon Services. Costs allocated from
Verizon Services are included in Operations and Support Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
represent our proportionate share of benefit costs for the separation of
management employees who are entitled to benefits under pre-existing Verizon
Communications separation pay plans. The separations are expected to occur as a
result of consolidations and process enhancements. Accrued
7
<PAGE>
Verizon Delaware Inc.
postemployment benefit liabilities for those employees are included in our
balance sheet as a component of Accounts Payable and Accrued Liabilities -
Other.
Transition Costs
In addition to the direct merger-related and severance costs, over the next
several years, we expect to incur transition costs related to the merger. These
costs will be incurred to integrate systems, consolidate real estate and
relocate employees. These costs will include our allocated share of
merger-related costs from Verizon Services. They also include advertising and
other costs to establish the Verizon brand. Transition costs are expensed as
incurred. During the nine month period ended September 30, 2000, we incurred
$329,000 of transition costs. These costs include approximately $320,000,
representing our allocated share of transition costs from Verizon Services.
Other Related Actions
During the second quarter of 2000, we also recorded a $27,000 charge for
other actions in relation to the merger or other strategic decisions. This
charge included the write-off of duplicate assets.
Other Charges and Special Items
Regulatory Contingency
In the second quarter of 2000, we recognized a charge for a regulatory
matter totaling $84,000. We recorded a reduction to operating revenue in the
amount of $62,000 and a charge to interest expense of $22,000. This matter
relates to a specific issue currently under investigation by the Federal
Communications Commission (FCC). We believe that it is probable that the
ultimate resolution of this matter will result in refunds to our customers,
including interest.
Other Items
In the second quarter of 2000, we recorded other charges and special items
totaling approximately $1,398,000. These charges included costs for the
write-off of accounts receivable and other miscellaneous items.
Bell Atlantic - NYNEX Merger
Merger-Related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax merger-related transition costs of $752,000 in
the first six months of 1999. These costs included approximately $606,000,
representing our allocated share of transition costs from Verizon Services.
Transition costs consisted of our proportionate share of costs associated
with integrating the operations of Bell Atlantic and NYNEX, such as systems
modification costs and advertising and branding costs. Transition costs were
expensed as incurred.
These and other items affecting the comparison of our results of operations
for the nine month periods ended September 30, 2000 and 1999 are discussed in
the following sections.
8
<PAGE>
Verizon Delaware Inc.
OPERATING REVENUE STATISTICS
<TABLE>
<CAPTION>
2000 1999 % Change
--------------------------------------------------------------------------------
<S> <C> <C> <C>
At September 30,
Access Lines in Service (in thousands)*
Residence 378 370 2.2%
Business 225 222 1.4
Public 6 6 ---
------------------------------------
609 598 1.8
====================================
Nine Months Ended September 30,
Access Minutes of Use (in millions) 1,890 1,904 (.7)
====================================
</TABLE>
* 1999 reflects a restatement of access lines in service
OPERATING REVENUES
------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Local services $137,486 $133,685
Network access services 65,335 59,396
Long distance services 12,583 15,939
Other services 18,519 15,061
------------------------------------
Total $233,923 $224,081
====================================
</TABLE>
LOCAL SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $3,801 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 includes wholesale revenues from unbundled network element
(UNE) platforms, certain data transport revenues, and wireless interconnection
revenues.
Local service revenues increased in the first nine months of 2000 primarily
due to higher customer demand and usage of our data transport and digital
services. Local service revenue was further increased by higher customer demand
and usage of our value-added services, as well as our national directory
assistance and wire maintenance services. Local service revenue growth also
reflects higher usage of our network facilities. This growth was generated, in
part, by an increase in access lines in service of 1.8% from September 30, 1999.
The effect of an 18-day work stoppage, as described below under "Operating
Expenses - Operations and Support - Labor Agreements," adversely affected local
service revenue growth due to the delay in the installation of new services and
as a result of customers not having full access to demand-based services.
NETWORK ACCESS SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $5,939 10.0%
--------------------------------------------------------------------------------
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.
9
<PAGE>
Verizon Delaware Inc.
Network access revenue growth in the first nine months of 2000 was mainly
attributable to increased demand for special access services, reflecting a
greater utilization of our network, and volume growth resulting from the
continuing expansion of the business market, particularly for high capacity data
services. Higher network usage by alternative providers of intraLATA toll
services and higher end-user revenues further contributed to revenue growth this
year.
In addition, network access revenues included higher revenues received from
customers for the recovery of local number portability (LNP) costs. LNP allows
customers to change local exchange carriers while maintaining their existing
telephone numbers. In December 1998, the FCC issued an order permitting us to
recover costs incurred for LNP in the form of monthly end-user charges for a
five-year period beginning in March 1999.
Volume-related growth was largely offset by price reductions associated
with federal price cap filings and other regulatory decisions, including the
implementation of the Coalition for Affordable Local and Long Distance Service
(CALLS) plan, effective July 1, 2000. For more information on federal access
rates, see "Other Matters - FCC Regulation and Interstate Rates." In addition,
revenue was reduced by a special charge for a contingency associated with a
regulatory matter, as described in the Results of Operations section.
LONG DISTANCE SERVICES
2000 - 1999 (Decrease)
--------------------------------------------------------------------------------
Nine months $(3,356) (21.1)%
--------------------------------------------------------------------------------
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. These services are
regulated by the Delaware Public Service Commission (DPSC) except where they
cross state lines. Other long distance services that we provide include 800
services and Wide Area Telephone Service (WATS).
The decline in long distance revenues in the first nine months of 2000 was
principally caused by the competitive effects of presubscription, which enables
customers to make intraLATA toll calls using a competing carrier without having
to dial an access code. The negative effect of presubscription on long distance
revenues was partially mitigated by increased network access services for usage
of our network by alternative service providers. In response to presubscription,
we have implemented customer win-back and retention initiatives that include
toll calling discount packages and product bundling offers. This decline in long
distance revenue was offset, in part, by additional revenues generated by higher
calling volumes.
OTHER SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $3,458 23.0%
--------------------------------------------------------------------------------
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 increased in the first nine months of 2000
primarily as a result of higher payments received from competitive local
exchange carriers for interconnection of their networks with our network and for
the purchase of unbundled network elements.
10
<PAGE>
Verizon Delaware Inc.
OPERATING EXPENSES
------------------
(Dollars in Thousands)
OPERATIONS AND SUPPORT
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $19,256 18.4%
--------------------------------------------------------------------------------
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 largely attributable to
a combination of higher costs for contract services and rent, higher
interconnection and related costs associated with reciprocal compensation
arrangements with competitive local exchange and other carriers to terminate
calls on their network, and higher costs billed to us by an affiliate.
Operations and support expenses were further increased by merger-related costs
and other special items recorded in 2000. These charges consisted of $3,591,000
for merger-related costs and $1,398,000 for other special items. Annual salary
and wage increases for management and associate employees and the effect of
higher work force levels also contributed to the increase in expense.
These increases were partially offset by a decline in pension and benefit
costs and the effects of the work stoppage. The decline in pension and benefit
costs was due to favorable pension plan investment returns and changes in
actuarial assumptions. These factors were partially offset by changes in certain
plan provisions, including a previously reported amendment to our management
cash balance plan and a special lump sum pension payment to management and
associate retirees.
Labor Agreements
Associate employee wages, and pension and other benefits are determined
under a contract with the union representing our associate employees. On August
5, 2000, the collective bargaining agreement with the union representing our
associate employees expired, and the union initiated a work stoppage.
On August 23, 2000, Verizon Communications reached a tentative agreement
with the Communications Workers of America (CWA) on a new 3-year contract
covering our employees. The contract provides for annual wage increases of 4
percent, 3 percent and 5 percent, beginning in August 2000. Customer service
representatives will receive an additional 4 percent wage increase effective
immediately. Pension benefits for active employees will increase by 5 percent on
July 1, 2001, 5 percent on July 1, 2002 and 4 percent on July 1, 2003. The
contract resolves certain local issues, including overtime and work rules,
raised by the CWA and also includes team-based incentive awards for meeting
higher service, performance and other standards, increased funding for work and
family programs, improvements to health and other benefits and certain
provisions relating to access to work and employment security. In addition,
prior to year-end, all union-represented employees will be granted options to
purchase 100 shares of Verizon Communications' common stock.
The labor agreement with the CWA has been ratified by the union membership.
DEPRECIATION AND AMORTIZATION
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $5,165 10.5%
--------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first nine months of
2000 over the same period in 1999 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The growth
in telephone plant was largely attributable to increased capital expenditures
for software and hardware to support the expansion of our network. These factors
were partially offset by the effect of lower rates of depreciation and
amortization.
11
<PAGE>
Verizon Delaware Inc.
OTHER INCOME, NET
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $510 364.3%
--------------------------------------------------------------------------------
The change in other income, net, was primarily attributable to additional
interest income associated with the settlement of a tax-related matter in the
first nine months of 2000. Other items contributing to the change, but to a
lesser extent, were an increase in the income recognized from our investment in
SMS/800 under the equity method and higher interest income on our short-term
investments.
INTEREST EXPENSE
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $964 15.2%
--------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense increased in the first nine months of 2000 over the same
period in 1999 primarily due to higher average debt levels and higher interest
rates. Interest expense was also impacted by additional interest costs
associated with a regulatory contingency, as described in the Results of
Operations section. These factors were partially offset by higher capitalized
interest costs resulting from higher levels of average telephone plan under
construction.
EFFECTIVE INCOME TAX RATES
Nine Months Ended September 30,
--------------------------------------------------------------------------------
2000 41.6%
--------------------------------------------------------------------------------
1999 40.7%
--------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. Our effective income
tax rate was higher in the first nine months of 2000 principally due to
non-recurring deferred income tax expenses recorded in the first nine months of
2000.
OTHER MATTERS
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FCC Regulation and Interstate Rates
On May 31, 2000, the FCC approved the industry proposal to restructure
access charges (known as the "CALLS plan"). Under the terms of the plan, direct
end-user access charges are increased while access charges to long distance
carriers are reduced. While the plan continues the 6.5% (less inflation) annual
reductions for most interstate access charges, it provides for a price freeze
when switched access transport prices reach $0.0055 per-minute. In addition, in
conjunction with provisions that will allow carriers to deaverage their
subscriber line charges by geographic zones, the plan establishes a new $650
million universal service fund to support interstate access rates. Of that
amount, Verizon Communications expects approximately $320 million to be used to
support interstate access services in its service territory. The price
restructuring portions of the plan are mandatory for all large local exchange
carriers, including Verizon Communications' telephone operating companies, such
as us. The price level portions of the plan are mandatory only in the initial
year of the plan. By September 14, 2000, carriers were to decide whether to
participate in the remaining four years of the plan, or whether to submit cost
studies as the basis of future price caps.
Consistent with the new access plan, Verizon Communications filed tariff
adjustments to take effect on July 1, 2000 (with modifications effective August
11, 2000). As a result of these tariff adjustments, former GTE carriers in ten
states, and former Bell Atlantic carriers in seven states reached the $0.0055
benchmark and by opting into the full five year CALLS plan, Verizon
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Verizon Delaware Inc.
Communications would not be subject to further annual interstate switched access
price reductions for the remaining life of the plan.
As of September 14, 2000, Verizon Communications formally opted to
participate in the full five-year term of the FCC-adopted industry plan to
restructure access rates known as the CALLS plan. As a result of this decision,
price caps on Verizon Communications' interstate access charges will be set
according to the terms of the CALLS plan.
Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or other
comprehensive income, depending on the designated use and effectiveness of the
instruments.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No.
138, which we will adopt on January 1, 2001. The impact of adoption will be
affected by several factors, including the specific hedging instruments in place
and their relationships to hedged items, as well as market conditions at the
date of adoption.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition and, in certain circumstances, requires the
deferral of incremental costs. We will adopt SAB No. 101 in the fourth quarter
of 2000, retroactive to January 1, 2000. We are currently assessing the impact
of adopting SAB No. 101.
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Verizon Delaware Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) Current Reports on Form 8-K filed during the quarter ended
September 30, 2000.
A Current Report on Form 8-K, dated August 23, 2000, was filed
regarding a tentative agreement on a new three-year contract with
the Communications Workers of America in the Mid-Atlantic region.
A Current Report on Form 8-K, dated September 7, 2000, was filed in
connection with a change in our independent accountants.
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Verizon Delaware 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 DELAWARE INC.
Date: November 14, 2000 By /s/ Edwin F. Hall
---------------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 8, 2000.
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Verizon Delaware Inc.
EXHIBIT INDEX
Exhibit Number
27 Financial Data Schedule.