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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: 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 2-36292
VERIZON SOUTH INC.
(Former Name: GTE South Incorporated)
<TABLE>
<S> <C>
VIRGINIA 56-0656680
(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
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF GTE CORPORATION, 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 [ ]
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERIZON SOUTH INC.
Condensed Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 422.3 $ 413.9 $ 1,172.4 $ 1,227.3
------------ ------------ ------------ ------------
OPERATING EXPENSES
Operations and support 191.6 178.5 585.7 545.5
Depreciation and amortization 80.0 74.4 237.4 223.4
------------ ------------ ------------ ------------
Total operating expenses 271.6 252.9 823.1 768.9
------------ ------------ ------------ ------------
OPERATING INCOME 150.7 161.0 349.3 458.4
OTHER (INCOME) EXPENSE
Interest income (0.3) (0.1) (0.3) (0.1)
Interest expense 16.0 18.1 81.4 51.6
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 135.0 143.0 268.2 406.9
Income taxes 48.0 55.9 105.1 159.2
------------ ------------ ------------ ------------
NET INCOME $ 87.0 $ 87.1 $ 163.1 $ 247.7
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
1
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VERIZON SOUTH INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
----------------- ------------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 0.3 $ 13.4
Accounts receivable, less allowances of $19.8
and $18.6 262.6 297.5
Accounts receivable from affiliates 5.8 19.6
Inventories and supplies 24.8 22.1
Prepayments and other 63.5 64.4
----------------- ------------
Total current assets 357.0 417.0
----------------- ------------
Property, plant and equipment, at cost 4,818.4 4,616.2
Accumulated depreciation (3,023.7) (2,897.0)
----------------- ------------
Total property, plant and equipment, net 1,794.7 1,719.2
----------------- ------------
Prepaid pension costs 336.3 245.0
Other assets 1.2 1.1
----------------- ------------
Total assets $ 2,489.2 $ 2,382.3
================= ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
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VERIZON SOUTH INC.
Condensed Balance Sheets - Continued
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
----------------- ------------
(Dollars in Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 8.4 $ 4.3
Notes payable to affiliates 109.4 138.2
Accounts payable 65.8 90.8
Affiliate payables 64.3 56.2
Dividends payable -- 89.0
Accrued payroll costs 42.4 29.7
Other 149.2 95.9
----------------- ------------
Total current liabilities 439.5 504.1
----------------- ------------
Long-term debt 789.3 793.1
Employee benefit plans 161.8 159.4
Deferred income taxes 177.9 150.6
Regulatory and other liabilities 243.5 132.3
----------------- ------------
Total liabilities 1,812.0 1,739.5
----------------- ------------
Shareholders' equity
Preferred stock -- 0.4
Common stock (21,000,000 shares issued
and outstanding) 525.0 525.0
Additional paid-in capital 63.3 63.0
Retained earnings 88.9 54.4
----------------- ------------
Total shareholders' equity 677.2 642.8
----------------- ------------
Total liabilities and shareholders' equity $ 2,489.2 $ 2,382.3
================= ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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VERIZON SOUTH INC.
Condensed Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
------------ ------------
(Dollars in Millions)
<S> <C> <C>
OPERATING
Net cash provided by operations $ 544.6 $ 432.3
------------ ------------
INVESTING
Capital expenditures (309.4) (261.7)
Other - net (0.3) 1.4
------------ ------------
Net cash used in investing (309.7) (260.3)
------------ ------------
FINANCING
Preferred stock retired,
including premium paid on early redemption (0.4) --
Dividends paid (218.0) (201.2)
Net change in affiliate notes (29.6) 17.7
------------ ------------
Net cash used in financing (248.0) (183.5)
------------ ------------
Decrease in cash and cash equivalents (13.1) (11.5)
Cash and cash equivalents:
Beginning of period 13.4 12.8
------------ ------------
End of period $ 0.3 $ 1.3
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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VERIZON SOUTH INC.
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 $ 0.4 $ 525.0 $ 63.0 $ 54.4 $ 642.8
Net income 163.1 163.1
Redemption of preferred stock (0.4) (0.4)
Tax benefit from exercise of stock options 0.3 0.3
Dividends declared (129.0) (129.0)
Other 0.4 0.4
------------ ------------ ------------ ------------- ------------
Shareholders' equity, September 30, 2000 $ -- $ 525.0 $ 63.3 $ 88.9 $ 677.2
============ ============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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VERIZON SOUTH INC.
Notes to Condensed Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
Verizon South Inc. (the Company), formerly GTE South Incorporated, is a
wholly-owned subsidiary of GTE Corporation (GTE), which 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 (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 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 as of July 27, 1998 (the Merger). 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 nine months ended September 30, 2000 included
merger-related pre-tax costs totaling approximately $41.8 million, consisting of
$16.1 million for direct incremental costs and $25.7 million for 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 Statement of Financial Accounting
Standards (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 Verizon
Communications pre-existing separation pay plans, as well as an accrual of
ongoing SFAS No. 112 obligations for GTE employees. 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 condensed balance sheets as components of "Other current liabilities"
and "Employee benefit plans."
Conforming Accounting Adjustments
Results of operations also included adjustments that were required to conform
the Company's accounting methods and presentation to that of Verizon
Communications. As a result of these adjustments, operating income increased
$3.3 million and $5.0 million for the nine month periods ended September 30,
2000 and 1999, respectively.
6
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VERIZON SOUTH INC.
Notes to Condensed Financial Statements (Unaudited) - Continued
Other Related Actions
During the second quarter of 2000, the Company also recorded $101.5 million pre-
tax for other actions in relation to the Merger or other strategic decisions,
including a state regulatory matter.
NOTE 3. COMPREHENSIVE INCOME
Net income and comprehensive income were the same for the nine months ended
September 30, 2000 and 1999.
NOTE 4. PREFERRED STOCK
In March 2000, the Company redeemed all 4,119 outstanding shares of preferred
stock and paid premiums of less than $0.1 million on the early redemption.
NOTE 5. NET ASSETS HELD FOR SALE
During December 1999, the Company entered into an agreement to sell
approximately 7,000 switched access lines located in Illinois to Citizens
Utilities Company. This agreement consummates the Company's previously announced
1998 plan to sell selected access lines located in Illinois. This sale is
contingent upon final agreement and regulatory approval and is expected to close
during 2000. The associated net assets, which approximate $3.5 million and $4.0
million at September 30, 2000 and December 31, 1999, respectively, consist of
property, plant and equipment, and have been classified as "Prepayments and
other" in the condensed balance sheets. The Company intends to continue to
operate all of these assets until sold. Given the decision to sell, no
depreciation expense was recorded for these assets during 1999 or 2000 in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Depreciation expense was
lowered by $0.2 million and $0.6 million for the three and nine months ended
September 30, 2000 and $0.1 million and $0.6 million for the three and nine
months ended September 30, 1999, respectively. No charges were recorded for the
access lines to be sold because their estimated fair values were in excess of
their carrying values. The access line agreement represents less than 1% of the
switched access lines that the Company had in service at the end of 1999, and
contributed less than 1% to 1999 revenues and less than 1% of operating income.
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
directories for which it receives advertising revenue. Under the Company's
previous method of revenue recognition, approximately 60% of the advertising
revenue for directories published by Verizon Directories Corp. in the Company's
operating areas was recognized as revenue. The remaining 40% was recognized as
revenue by Verizon Directories Corp. Under the new method of revenue
recognition, 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 revenues and operating income for the nine months
ended September 30, 2000 decreased $27.4 million and $24.2 million,
respectively, compared to the same period in 1999.
7
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VERIZON SOUTH INC.
Notes to Condensed Financial Statements (Unaudited) - Continued
NOTE 7. 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 the 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.
The Company is currently evaluating the provisions of SFAS No. 133 and SFAS No.
138, which it 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. The Company will adopt SAB No. 101 in the fourth
quarter of 2000, retroactive to January 1, 2000. The Company is currently
assessing the impact of adopting SAB No. 101.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Various legal actions and regulatory proceedings are pending to which the
Company is a party. The Company has established reserves for specific
liabilities in connection with regulatory and legal matters that management
currently deems to be probable and estimable. The Company does not expect that
the ultimate resolution of pending regulatory and legal matters in future
periods will have a material effect on the Company's financial condition, but it
could have a material effect on the Company's results of operations.
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 customers 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 net income of Verizon Communications in 2000 on
a consolidated basis 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.
8
<PAGE>
VERIZON SOUTH 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 decreased by $84.6 million or 34% for the nine months ended September
30, 2000, compared to the same period in 1999.
The Company's operating 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 to the Company 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)
Nine Months Ended September 30, 2000 1999
--------------------------------------------------------------------------------
Operating Revenues
Bell Atlantic - GTE merger other related actions $ 71.3 $ --
------------------------
Operating Expenses
Bell Atlantic-GTE merger costs 41.8 --
Bell Atlantic-GTE conforming accounting adjustments (3.3) (5.0)
Bell Atlantic-GTE merger other related actions 0.4 --
------------------------
38.9 (5.0)
------------------------
Interest Expense
Bell Atlantic-GTE merger other related actions 29.8 --
------------------------
Total impact on pre-tax income 140.0 (5.0)
========================
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 (the Merger). 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 nine months ended September 30, 2000 included
merger-related pre-tax costs totaling approximately $41.8 million, consisting of
$16.1 million for direct incremental costs and $25.7 million for employee
severance costs. These costs include the Company's allocated share of
merger-related costs from Verizon Services. Costs allocated from Verizon
Services are included in Operations and support expenses.
9
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VERIZON SOUTH INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
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 Statement of Financial Accounting
Standards (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 Verizon
Communications pre-existing separation pay plans, as well as an accrual of
ongoing SFAS No.112 obligations for GTE employees. 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 condensed balance sheets as components of "Other current liabilities"
and "Employee benefit plans."
Conforming Accounting Adjustments
Results of operations also include adjustments that were required to conform the
Company's accounting methods and presentation to that of Verizon Communications.
As a result of these adjustments, operating income increased $3.3 million and
$5.0 million for the nine month periods ended September 30, 2000 and 1999,
respectively.
Other Related Actions
During the second quarter of 2000, the Company also recorded $101.5 million
pre-tax for other actions in relation to the Merger or other
strategic decisions, including a state regulatory matter.
<TABLE>
<CAPTION>
OPERATING REVENUES
(Dollars in Millions) Nine Months Ended
September 30,
--------------------------- Increase Percent
2000 1999 (Decrease) Change
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Local services $ 506.0 $ 545.4 $ (39.4) (7)%
Network access services 521.2 514.6 6.6 1%
Other services 145.2 167.3 (22.1) (13)%
---------- ----------- ----------
Total operating revenues $ 1,172.4 $ 1,227.3 $ (54.9) (5)%
========== =========== ==========
</TABLE>
Local Services
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. The decrease in local services revenues was
primarily due to second quarter 2000 special charges for certain regulatory
matters (see "Results of Operations"). This decrease was partially offset by
growth in access lines of 4%, which generated additional revenues from basic
local services, CentraNet(R) services, Integrated Services Digital Network and
Digital Channel Services for the nine months ended September 30, 2000.
10
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VERIZON SOUTH INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
The decrease was also partially offset by increased demand for enhanced custom
calling features, such as SmartCall(R) services.
Network Access Services
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 growth in network access revenues was due
primarily to increased customer demand, as reflected by growth of 4% in access
minutes of use from September 30, 1999. Special access revenues grew as a
result of greater demand for increased bandwidth services by high-capacity
users. These increases were partially offset by the impact of mandated
interstate and intrastate access price reductions and other regulatory decisions
including the implementation of the Coalition for Affordable Local and Long
Distance Service (CALLS) plan, effective July 1, 2000.
Other Services
Other services revenues include such services as customer premises equipment
sales, public telephone and billing and collection provided to affiliates and
third parties. In addition, other services revenues include revenues from toll
services which are earned primarily from calls made outside a customer's local
calling area but with in the same LATA (Local Access Transport Area) -
(intraLATA). Other services revenues decreased for the nine months ended
September 30, 2000, as compared to the same period in 1999, primarily due to the
impact of a change in the recognition of directory publishing revenues which
resulted in a decrease in revenues of $27.4 million (for further information
See "OTHER DEVELOPMENTS - Directory Publishing Revenues").
<TABLE>
<CAPTION>
OPERATING EXPENSES
(Dollars in Millions) Nine Months Ended
September 30,
-------------------------------- Percent
2000 1999 Increase Change
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Operations and support $ 585.7 $ 545.5 $ 40.2 7%
Depreciation and amortization 237.4 223.4 14.0 6%
------------- ------------- -------------
Total operating expenses $ 823.1 $ 768.9 $ 54.2 7%
============= ============= =============
</TABLE>
Operations and Support
Operations and support expenses consist of employee costs and other operating
expenses. Employee costs consist of salaries, wages and other 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. Operations and
support expenses increased $40.2 million for the nine months ended September 30,
2000, compared to the same period in 1999 due to higher access charges paid to
competitive local exchange carriers (CLEC). A second quarter 2000 special charge
for $41.8 million for severance and direct incremental merger-related costs as
well as the impact of other merger-related actions contributed further to the
increase (see "RESULTS OF OPERATIONS"). Partially offsetting the increases was
the recognition of a pre-tax gain of $26.7 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 in the first quarter of 1999, associated with an
employee-reduction program, also decreased operations and support expenses in
2000.
Depreciation and Amortization
The increase in depreciation and amortization expense in the first nine months
of 2000, compared to the same period in 1999, reflects the continuing investment
in the Company's network. Partially affecting the increase in depreciation
11
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VERIZON SOUTH INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
and amortization expense were adjustments made to conform the accounting
policies of Bell Atlantic and GTE as a result of the Merger (see "RESULTS OF
OPERATIONS").
INTEREST EXPENSE
Interest expense increased $29.8 million for the nine months ended September 30,
2000 primarily due to an accrual for additional interest costs associated with
certain regulatory matters (see "RESULTS OF OPERATIONS").
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").
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. 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
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.
OTHER DEVELOPMENTS
Net Assets Held for Sale
During December 1999, the Company entered into an agreement to sell
approximately 7,000 switched access lines located in Illinois to Citizens
Utilities Company. This agreement consummates the Company's previously announced
1998 plan to sell selected access lines located in Illinois. This sale is
contingent upon final agreement and regulatory approval and is expected to close
during 2000. The associated net assets, which approximate $3.5 million and $4.0
million at September 30, 2000 and December 31, 1999, respectively, consist of
property, plant and equipment, and have been classified as "Prepayments and
other" in the condensed balance sheets. The Company intends to continue to
operate all of these assets until sold. Given the decision to sell, no
depreciation expense was recorded for these assets during 1999 or 2000 in
accordance with SFAS No. 121, "Accounting for the Impairment of
12
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VERIZON SOUTH INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Depreciation
expense was lowered by $0.2 million and $0.6 million for the three and nine
months ended September 30, 2000 and $0.1 million and $0.6 million for the three
and nine months ended September 30, 1999, respectively. No charges were recorded
for the access lines to be sold because their estimated fair values were in
excess of their carrying values. The access line agreement represents less than
1% of the switched access lines that the Company had in service at the end of
1999, and contributed less than 1% to 1999 revenues and less than 1% of
operating income.
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 Company's
previous method of revenue recognition, approximately 60% of the advertising
revenue for directories published by Verizon Directories Corp. in the Company's
operating areas was recognized as revenue. The remaining 40% was recognized as
revenue by Verizon Directories Corp. Under the new method of revenue
recognition, 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 revenues and operating income for the nine months
ended September 30, 2000 decreased $27.4 million and $24.2 million,
respectively, compared to the same period in 1999.
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 the 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.
The Company is currently evaluating the provisions of SFAS No. 133 and SFAS No.
138, which it 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. The Company will adopt SAB No. 101 in the fourth
quarter of 2000, retroactive to January 1, 2000. The Company is currently
assessing the impact of adopting SAB No. 101.
13
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VERIZON SOUTH 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) Exhibit:
Exhibit Number
27 Financial Data Schedule
(b) Current Report on Form 8-K filed during the quarter ended September
30, 2000:
A Current Report on Form 8-K dated September 7, 2000 was filed in
connection with a change in the Company's independent accountants.
14
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VERIZON SOUTH INC.
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 South Inc.
-------------------------
(Registrant)
Date: November 14, 2000 /s/ Edwin F. Hall
----------------------- -------------------------
Edwin F. Hall
Controller
(Principal Accounting Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 8, 2000.
15
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VERIZON SOUTH INC.
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
