<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: June 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 1-3090
VERIZON FLORIDA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
FLORIDA 59-0397520
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code 972-507-5000
GTE FLORIDA INCORPORATED
(Former name, former address and former fiscal year,
if changed since last report)
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF GTE CORPORATION, A WHOLLY-OWNED
SUBSIDIARY OF BELL ATLANTIC CORPORATION (D/B/A VERIZON COMMUNICATIONS), 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 [ ]
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERIZON FLORIDA INC.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 211.7 $ 199.2 $ 421.7 $ 399.2
Network access services 152.7 155.5 304.1 306.7
Other services and sales 46.9 89.5 92.6 135.1
------------ ------------ ------------ -------------
Total revenues and sales 411.3 444.2 818.4 841.0
------------ ------------ ------------ -------------
OPERATING COSTS AND EXPENSES
Operations and support 240.2 238.8 463.2 465.7
Depreciation and amortization 92.2 85.3 183.0 179.8
------------ ------------ ------------ -------------
Total operating costs and expenses 332.4 324.1 646.2 645.5
------------ ------------ ------------ -------------
OPERATING INCOME 78.9 120.1 172.2 195.5
OTHER EXPENSE
Interest - net 17.8 12.1 35.0 28.8
------------ ------------ ------------ -------------
INCOME BEFORE INCOME TAXES 61.1 108.0 137.2 166.7
Income taxes 28.8 42.1 58.4 65.0
------------ ------------ ------------ -------------
NET INCOME $ 32.3 $ 65.9 $ 78.8 $ 101.7
============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
1
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VERIZON FLORIDA INC.
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 93.5 $ 127.6
Receivables, less allowances of
$28.4 million and $34.0 million 289.9 404.7
Accounts receivable from affiliates 11.8 15.1
Notes receivable from affiliates 390.8 1,422.8
Inventories and supplies 22.3 17.5
Prepayments and other 21.4 50.8
------------ ------------
Total current assets 829.7 2,038.5
------------ ------------
Property, plant and equipment, at cost 4,900.7 4,784.7
Accumulated depreciation (2,989.2) (2,873.3)
------------ ------------
Total property, plant and equipment, net 1,911.5 1,911.4
------------ ------------
Prepaid pension costs 364.9 293.9
Other assets 15.1 10.7
------------ ------------
Total assets $ 3,121.2 $ 4,254.5
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
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VERIZON FLORIDA INC.
Condensed Consolidated Balance Sheets (Unaudited) - Continued
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Dollars in Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term obligations, including current maturities $ 160.6 $ 1,730.5
Notes payable to affiliate 420.3 3.6
Accounts payable 52.9 59.4
Affiliate payables 107.0 77.9
Taxes payable 79.9 38.3
Dividends payable 45.0 64.1
Other 147.0 122.9
------------ ------------
Total current liabilities 1,012.7 2,096.7
------------ ------------
Long-term debt 892.2 892.1
Deferred income taxes 226.3 228.0
Employee benefit plans and other 229.2 226.0
------------ ------------
Total liabilities 2,360.4 3,442.8
------------ ------------
Shareholders' equity
Preferred stock -- 21.2
Common stock (23,400,000 shares issued) 585.0 585.0
Additional paid-in capital 175.8 57.6
Retained earnings -- 147.9
------------ ------------
Total shareholders' equity 760.8 811.7
------------ ------------
Total liabilities and shareholders' equity $ 3,121.2 $ 4,254.5
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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VERIZON FLORIDA INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
2000 1999
------------ ------------
(Dollars in Millions)
<S> <C> <C>
OPERATIONS
Net cash from operations $ 414.4 $ 258.5
------------ ------------
INVESTING
Capital expenditures (177.9) (166.3)
Other - net (0.1) 0.3
------------ ------------
Net cash used in investing (178.0) (166.0)
------------ ------------
FINANCING
Long-term debt retired, including premiums paid
on early retirement (21.9) --
Dividends (127.4) (70.5)
Decrease in short-term obligations,
excluding current maturities (1,569.9) (458.9)
Net change in affiliate notes 1,448.7 431.0
------------ ------------
Net cash used in financing (270.5) (98.4)
------------ ------------
Decrease in cash and cash equivalents (34.1) (5.9)
Cash and cash equivalents:
Beginning of period 127.6 113.5
------------ ------------
End of period $ 93.5 $ 107.6
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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VERIZON FLORIDA INC.
Consolidated Statement of Shareholders' Equity (Unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
------------ ------------ ------------ ------------- -------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Shareholders' equity, December 31, 1999 $ 21.2 $ 585.0 $ 57.6 $ 147.9 $ 811.7
Net income 78.8 78.8
Redemption of preferred stock (21.2) (0.8) (22.0)
Tax benefit from exercise of stock options 0.5 0.5
Dividends declared (108.2) (108.2)
Capital contributions from Parent 117.7 117.7
Dividend paid to Parent (117.7) (117.7)
------------ ------------ ------------ ------------- -------------
Shareholders' equity, June 30, 2000 $ -- $ 585.0 $ 175.8 $ -- $ 760.8
============ ============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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VERIZON FLORIDA INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
Verizon Florida Inc. (the Company), formerly GTE Florida Incorporated, is a
wholly-owned subsidiary of GTE Corporation (GTE), which is a wholly-owned
subsidiary of Bell Atlantic Corporation (d/b/a Verizon Communications). The
accompanying unaudited condensed consolidated 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 (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, please refer to the consolidated financial statements
included in the Company's 1999 Annual Report on Form 10-K.
NOTE 2. BELL ATLANTIC - GTE MERGER
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a
definitive merger agreement dated July 27, 1998. Under the terms of the
agreement, GTE became a wholly-owned subsidiary of Bell Atlantic. With the
closing of the merger, the combined company began doing business as Verizon
Communications. The merger has been accounted for as a pooling of interests.
Merger-Related and Severance Costs
Results of operations for June 30, 2000 includes merger-related pre-tax costs
totaling approximately $47.2 million consisting of direct incremental costs and
employee severance costs. These costs include the Company's allocated share of
merger-related costs from Verizon Services Group (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 the Company's 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 SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," represent the Company's proportionate share of
benefit costs for the separation of management employees who are entitled to
benefits under preexisting 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 the Company's balance sheets as a component of "Employee benefit
plans and other."
Conforming Accounting Adjustments
Results of operations also include adjustments that were required to conform the
Company's accounting policies and presentation to that of Verizon
Communications. As a result of these adjustments, operating income was increased
by $3.5 million for each of the six month periods ended June 30, 2000 and 1999.
NOTE 3. DIVIDEND
On July 30, 2000, the Company declared and paid a dividend in the amount of
$45.0 million to Verizon Communications.
Prior to the closing of the GTE merger with Bell Atlantic, dividends that
equaled the retained earnings balance reflected on the Company's financial
statements were declared and paid to GTE. Upon the payment of these dividends, a
capital contribution in the same amount was made by GTE to the Company.
6
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VERIZON FLORIDA INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
NOTE 4. PREFERRED STOCK
In March 2000, the Company redeemed all 847,800 outstanding shares of preferred
stock and paid premiums of $0.8 million pretax on the early redemption.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
FASB Accounting Standards - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 the Company's balance sheet. Changes in the fair values of
derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments.
The FASB amended this pronouncement in June 1999 to defer the effective date of
SFAS No. 133 for one year. The Company must adopt SFAS No. 133 no later than
January 1, 2001.
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. SFAS No. 138 also amends SFAS No.
133 for decisions made by the FASB relating to the Derivatives Implementation
Group process.
The Company is currently evaluating the provisions of SFAS No. 133 and No. 138.
The impact of adoption will be determined 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.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation." Interpretation No. 44 was issued in
order to clarify certain issues arising from Accounting Principles Board (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees," which was previously
issued in October 1972. Interpretation No. 44 is effective July 1, 2000, but
certain conclusions cover specific events that occur either after December 15,
1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition of an
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
Interpretation No. 44 will not have a material impact on the Company's results
of operations or financial position.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which must be adopted by the
fourth quarter of 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria for when revenue is generally realized and
earned, and also requires the deferral of incremental direct selling costs. The
Company is currently assessing the impact of SAB No. 101 on its results of
operations and financial position.
NOTE 6. DIRECTORY PUBLISHING REVENUES
Consistent with industry practice, effective January 1, 2000, the Company
changed its method of recognizing directory publishing revenues. Verizon
Directories Corp., a wholly-owned subsidiary of GTE, publishes telephone
7
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VERIZON FLORIDA INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
directories for which it receives advertising revenue. Under the previous method
of revenue recognition, approximately 60% of the advertising revenue for
directories published in the Company's operating areas was recognized as revenue
by the Company. The remaining 40% was recognized as revenue by Verizon
Directories Corp. Under the new method, Verizon Directories Corp. now recognizes
100% of the directory publishing revenues. The Company, in-turn, bills Verizon
Directories Corp. for customer listing information and billing and collection
services. As a result, the Company's other services and sales revenues and
operating income for the six months ended June 30, 2000 decreased $41.1 million
and $38.3 million, respectively, compared to the first half of 1999.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and environmental, safety and health matters. Management believes
that the ultimate resolution of these matters will not have a materially adverse
effect on the results of operations or the financial position of the Company.
Federal and state regulatory conditions to the 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 the net
income in future periods. Over the remainder of 2000, based on preliminary
estimates, the cost of satisfying these commitments is likely to impact the net
income of Verizon Communications on a consolidated basis by approximately $275
to $325 million. The estimated impact on each operating telephone subsidiary
is still being assessed.
NOTE 8. SEGMENT REPORTING
The Company has two reportable segments, Telephone Operations and GTE Funding
Incorporated (GTE Funding). The Telephone Operations segment primarily provides
wireline communication services to local markets. The GTE Funding segment
provides short-term financing and investment vehicles and cash management
services for the Company and six other of GTE's domestic telephone operating
subsidiaries, each of which is contractually obligated to repay all amounts
borrowed from GTE Funding.
GTE Funding has no reportable revenue or net income. Its interest expense is
approximately equal to the interest income received on affiliate notes between
GTE Funding and the various domestic telephone operating subsidiaries.
The following table represents segment income statement results for the six
months ended June 30 and balance sheet results as of June 30, 2000 and December
31, 1999, respectively:
2000 1999
------------ -----------
(Dollars in Millions)
TELEPHONE OPERATIONS:
Total external revenues $ 818.4 $ 841.0
Operating income 172.9 203.0
Depreciation and amortization 183.0 179.8
Interest expense 35.7 36.3
Capital expenditures 177.9 166.3
Total assets 2,591.1 2,694.2
GTE FUNDING:
Operating loss $ (0.7) $ (7.5)
Interest expense 46.3 35.7
Interest income 47.0 43.2
Total assets (a) 1,581.5 1,732.3
CONSOLIDATED REVENUES $ 818.4 $ 841.0
CONSOLIDATED OPERATING INCOME 172.2 195.5
CONSOLIDATED ASSETS 3,121.2 4,254.5
(a) Assets consist primarily of cash and cash equivalents and notes receivable
from affiliates.
8
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VERIZON FLORIDA INC.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 2000 decreased $22.9 million, or
23%, compared to the same period in 1999, primarily due to a decrease in other
services and sales revenues, partially offset by an increase in local services
revenues and a corresponding decrease in income taxes.
The Company's results for 2000 and 1999 were affected by special items. The
special items in both periods include the Company's allocated share of charges
from Verizon Services Group (Verizon Services), an affiliate that provides
Centralized services on a contract basis.
The following table shows how special items are reflected in the Company's
condensed statements of income for each period:
(Dollars in Millions)
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
Revenues and Sales
Regulatory Contingency $ 2.5 $ --
-----------------------------
Operations and Support Expenses
Bell Atlantic-GTE merger costs 47.2 --
Conforming accounting adjustments (3.5) (3.5)
-----------------------------
43.7 (3.5)
-----------------------------
Interest Expense 0.3 --
-----------------------------
Total $ 46.5 $ (3.5)
=============================
What follows is a further explanation of the nature of these special items.
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. With the
closing of the merger, the combined company began doing business as Verizon
Communications. The merger has been accounted for as a pooling of interests.
Merger-Related and Severance Costs
Results of operations for June 30, 2000 includes merger-related pre-tax costs
totaling approximately $47.2 million consisting of direct incremental costs and
employee severance costs.
Direct incremental costs consist of the Company's 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 SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," represent the Company's proportionate share of
benefit costs for the separation of management employees who are entitled to
benefits under preexisting Verizon Communications separation pay plans. The
separations are expected to occur as a result of consolidations and process
enhancements. Accrued postemployment benefit liabilities for
9
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VERIZON FLORIDA INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
those employees are included in the Company's balance sheets as a component of
"Employee benefit plans and other."
Conforming Accounting Adjustments
Results of operations also include adjustments that were required to conform the
Company's accounting policies and presentation to that of Verizon
Communications. As a result of these adjustments, operating income was increased
by $3.5 million for each of the six month periods ended June 30, 2000 and 1999.
Regulatory Contingency
In the second quarter of 2000, the Company recognized a charge for a regulatory
matter totalling $2.8 million. The Company recorded a reduction to operating
revenue in the amount of $2.5 million and a charge to interest expense of $0.3
million. This matter relates to a specific issue currently under investigation
by federal regulatory commissions. The Company believes that it is probable that
the ultimate resolution of this matter will result in refunds to customers,
including interest.
<TABLE>
<CAPTION>
REVENUES AND SALES
(Dollars in Millions) Six Months Ended
June 30,
------------------------- Increase Percent
2000 1999 (Decrease) Change
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Local services $ 421.7 $ 399.2 $ 22.5 6%
Network access services 304.1 306.7 (2.6) (1)%
Other services and sales 92.6 135.1 (42.5) (31)%
---------- ---------- ----------
Total revenues and sales $ 818.4 $ 841.0 $ (22.6) (3)%
========== ========== ==========
</TABLE>
Local Services Revenues
Local services 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.
Cellular service providers also pay access charges for cellular calls
transported by the Company. Access lines increased 3% generating additional
revenues of $5.7 million from basic local services, CentraNet(R) services,
Integrated Services Digital Network and Digital Channel Services for the six
months ended June 30, 2000. Revenues from enhanced customer calling services,
such as SmartCall(R) and CLASS services, contributed additional revenue of $6.0
million. In addition, wire maintenance and service revenues generated $9.2
million in revenue growth.
Network Access Services Revenues
Network access services revenues are earned from end-user subscribers and long
distance and other competing carriers who use the Company's 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 the 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 customers and from resellers
who purchase dial-tone services. The decrease was mainly due to the impact of
mandated interstate and intrastate access price reductions and rate element
adjustments of $22.0 million. In addition, accruals for certain regulatory
matters caused an unfavorable variance of $10.9 million. In addition, revenues
were reduced by a second quarter 2000 special charge for a contingency
associated with a regulatory matter. (see "Results of Operations").
The decreases were partially offset by 5% growth in minutes of use which
generated revenue increases of $7.7 million for the six months ending June 30,
2000 compared to the same period in
10
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VERIZON FLORIDA INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
1999. Special access revenues grew by $23.7 million as a result of greater
demand for increased bandwidth services by high-capacity users
Other Services and Sales Revenues
Other services and sales revenues include such services as inventory management
and purchasing services, customer premises equipment sales, public telephone and
billing and collection provided to affiliates and third parties. In addition,
other services and sales revenues include revenues from toll services which are
earned primarily from calls made outside a customer's local calling area but
within the same LATA (intraLATA). The decrease in other services and sales
revenues for the six-month period ended June 30, 2000, compared to the same
period in 1999 was primarily the result of the impact of a change in the
recognition of directory publishing revenues resulting in a decrease of $41.1
million (for further information see "OTHER DEVELOPMENTS - Directory Publishing
Revenues").
<TABLE>
<CAPTION>
OPERATING COSTS AND EXPENSES
(Dollars in Millions)
June 30,
------------------------- Increase Percent
2000 1999 (Decrease) Change
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operations and support $ 463.2 $ 465.7 $ (2.5) (1)%
Depreciation and amortization 183.0 179.8 3.2 2%
---------- ---------- ----------
Total operating costs and expenses $ 646.2 $ 645.5 $ 0.7 --
========== ========== ==========
</TABLE>
Operations and support expenses, representing employee costs and other operating
expenses, decreased $2.5 million for the first six months ended June 2000,
compared to the same period in 1999. The decrease was primarily due to the
recognition of a pretax gain of $50.8 million associated with lump-sum
settlements of pension obligations for former employees electing deferred vested
pension cash-outs and for current employees who met certain eligibility
requirements. A charge of $16.2 million in the first quarter of 1999, associated
with an employee-reduction program, also contributed to the decrease in
operations and support costs. Substantially offsetting these decreases was a
second quarter 2000 special charge of $47.2 million for severance and
direct incremental merger-related costs (see "RESULTS OF OPERATIONS"). Also
offsetting the decreases were higher costs associated with customer and access
line growth and costs for new initiatives, such as digital subscriber line (DSL)
service, which increased expenses by $19.9 million, and an increase in access
charges of $3.2 million which is primarily due to increased competitive local
exchange carrier (CLEC) activities.
The increase in depreciation and amortization expense in the first six months of
2000 compared to the same period in 1999 reflects the continuing investment in
the network to support access line growth due to higher demand from Internet
Service Providers (ISPs) and additional customer lines. Partially offsetting the
increase in depreciation and amortization expense were reductions
resulting from adjustments made to conform the accounting policies of Bell
Atlantic and GTE as a result of the merger (see "Results of Operations").
OTHER INCOME STATEMENT ITEMS
Interest-net increased 22% or $6.2 million for the six months ended June 30,
2000, compared to the same period in 1999, primarily due to higher average debt
levels.
Income tax expense decreased 10% or $6.6 million for the six months ended June
30, 2000 compared to the same period in 1999 primarily due to a decrease in
pretax income.
11
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VERIZON FLORIDA INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
INTERSTATE REGULATORY DEVELOPMENTS
FCC Regulation and Interstate Rates
On May 31, 2000, the Federal Communications Commission (FCC) approved the
industry proposal to restructure access charges (known as the "CALLS plan").
Both Bell Atlantic Corporation and GTE Corporation had been part of the industry
group that had originally made the proposal for this five year plan to the FCC.
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 Verizon's service
territory. The price restructuring portions of the plan are mandatory for all
large local exchange carriers, including Verizon Communications' telephone
operating companies. The price level portions of the plan are mandatory only in
the initial year of the plan. Carriers have until September 14, 2000 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, should Verizon Communications opt into the full five year CALLS
plan, they will not be subject to further annual interstate switched access
price reductions for the remaining life of the plan.
12
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VERIZON FLORIDA INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
INTRASTATE REGULATORY DEVELOPMENTS
UNE Pricing
In May 1999, the Florida Public Service Commission (FPSC) opened a generic
proceeding in two phases to address costs and prices for Unbundled Network
Elements (UNEs). In December 1999, the Company and other industry parties signed
two stipulation agreements in the UNE proceeding. The first stipulation set the
ground rules for which UNEs should be considered for deaveraging and the
associated cost studies. The second stipulation grouped wire centers for each
ILEC into three zones, and proposed interim deaveraged UNE rates for each zone
based on the 1998 USF cost study filing, effective May 2000.
In Phase II of this proceeding, the Company filed recurring and nonrecurring
cost studies for UNEs, including UNE combinations, dark fiber, and subloops. The
FPSC has scheduled two hearings during the third quarter of 2000. This case may
be effected by the recent U.S. Court of Appeals decision invalidating certain
FCC pricing guidelines.
Terminating Compensation
In July 1999, the FPSC issued an order requiring the Company to pay Intermedia
Communications, Inc. (ICI) local reciprocal compensation for ISP traffic. The
Company filed an action in August 1999 challenging the order in U.S. District
Court and also appealed to the Supreme Court of Florida. The FPSC has
established a generic docket dealing with terminating compensation and hearings
are scheduled for January 2001.
Collocation
A general proceeding has been established to set up state rules for collocation.
The FPSC issued an order in May 2000 and is scheduled to rule on petitions for
reconsideration of its order during the third quarter of 2000.
13
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VERIZON FLORIDA INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
OTHER DEVELOPMENTS
Directory Publishing Revenues
Consistent with industry practice, effective January 1, 2000, the Company
changed its method of recognizing directory publishing revenues. Verizon
Directories Corp., a wholly-owned subsidiary of GTE, publishes telephone
directories for which it receives advertising revenue. Under the previous method
of revenue recognition, approximately 60% of the advertising revenue for
directories published in the Company's operating areas was recognized as revenue
by the Company. The remaining 40% was recognized as revenue by Verizon
Directories Corp. Under the new method, Verizon Directories Corp. now recognizes
100% of the directory publishing revenues. The Company, in-turn, bills Verizon
Directories Corp. for customer listing information and billing and collection
services. As a result, the Company's other services and sales revenues and
operating income for the six months ended June 30, 2000 decreased $41.1 million
and $38.3 million, respectively, compared to the first half of 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB Accounting Standards - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 the Company's balance sheet. Changes in the fair values of
derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments.
The FASB amended this pronouncement in June 1999 to defer the effective date of
SFAS No. 133 for one year. The Company must adopt SFAS No. 133 no later than
January 1, 2001.
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. SFAS No. 138 also amends SFAS No.
133 for decisions made by the FASB relating to the Derivatives Implementation
Group process.
The Company is currently evaluating the provisions of SFAS No. 133 and No. 138.
The impact of adoption will be determined 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.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation." Interpretation No. 44 was issued in
order to clarify certain issues arising from Accounting Principles Board (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees," which was previously
issued in October 1972. Interpretation No. 44 is effective July 1, 2000, but
certain conclusions cover specific events that occur either after December 15,
1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition of an
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
Interpretation No. 44 will not have a material impact on the Company's results
of operations or financial position.
14
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VERIZON FLORIDA INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which must be adopted by the
fourth quarter of 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria for when revenue is generally realized and
earned, and also requires the deferral of incremental direct selling costs. The
Company is currently assessing the impact of SAB No. 101 on its results of
operations and financial position.
15
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PART II. OTHER INFORMATION
VERIZON FLORIDA INC.
Item 1. Legal Proceedings
There are no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Amended Articles of Incorporation (Exhibit 3.1 of the
September 30, 1995 Form 10-Q, incorporated herein by
reference)
3.3 Amended Articles of Incorporation of Verizon Florida Inc.,
filed with the Secretary of the State of Florida on
June 30, 2000
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K dated June 30, 2000 under
Item 1, "Changes in Control of Registrant."
16
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SIGNATURE
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 FLORIDA INC.
---------------------------
(Registrant)
Date: August 14, 2000 /s/ Edwin F. Hall
--------------------- ---------------------------
Edwin F. Hall
Controllor
(Principal Accounting Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 10, 2000.
17
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.3 Amended Articles of Incorporation of Verizon Florida Inc.,
filed with the Secretary of the State of Florida on
June 30, 2000
27 Financial Data Schedule
