<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 2-33059
VERIZON HAWAII INC.
(Former Name: GTE Hawaiian Telephone Company Incorporated)
HAWAII 99-0049500
(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)
Registrant's telephone number, including area code 972-507-5000
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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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERIZON HAWAII 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 $ 78.0 $ 74.8 $ 154.7 $ 147.5
Network access services 43.2 47.0 85.1 92.7
Other services and sales 39.7 66.2 76.7 104.3
------------ ------------- ------------- -------------
Total revenues and sales 160.9 188.0 316.5 344.5
------------ ------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Operations and support 66.2 87.4 163.0 187.1
Depreciation and amortization 31.4 29.6 62.3 61.0
------------ ------------- ------------- -------------
Total operating costs and expenses 97.6 117.0 225.3 248.1
------------ ------------- ------------- -------------
OPERATING INCOME 63.3 71.0 91.2 96.4
OTHER (INCOME) EXPENSE
Interest - net 9.5 9.3 18.4 18.5
Other - net (0.4) (0.1) (0.1) (0.8)
------------ ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 54.2 61.8 72.9 78.7
Income taxes 21.5 21.2 28.0 26.1
------------ ------------- ------------- -------------
NET INCOME $ 32.7 $ 40.6 $ 44.9 $ 52.6
============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
VERIZON HAWAII 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 $ 3.6 $ 2.3
Receivables, less allowances of $5.8 million and $4.2 million 111.9 156.1
Affiliate receivables 7.8 14.5
Inventories and supplies 10.1 5.5
Prepayments and other 6.1 16.1
-------------- --------------
Total current assets 139.5 194.5
-------------- --------------
Property, plant and equipment, at cost 2,066.0 2,045.4
Accumulated depreciation (1,259.7) (1,222.9)
-------------- --------------
Total property, plant and equipment, net 806.3 822.5
-------------- --------------
Prepaid pension costs 374.0 308.3
Other assets 26.5 19.3
-------------- --------------
Total assets $ 1,346.3 $ 1,344.6
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
VERIZON HAWAII INC.
Condensed Consolidated Balance Sheets (Unaudited) - Continued
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- ----------------
(Dollars in Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt $ 3.0 $ 3.0
Note payable to affiliate 38.0 101.7
Accounts payable 28.8 47.8
Affiliate payables and accruals 74.9 26.1
Advanced billings and customer deposits 24.0 14.2
Dividends payable 12.0 17.0
Accrued interest 12.6 12.5
Other 46.8 32.2
-------------- -------------
Total current liabilities 240.1 254.5
-------------- -------------
Long-term debt 460.2 461.6
Deferred income taxes 229.6 211.9
Employee benefit plans and other 22.7 29.1
-------------- -------------
Total liabilities 952.6 957.1
-------------- -------------
Shareholder's equity
Common stock (10,000,000 shares issued) 250.0 250.0
Additional paid-in capital 125.5 93.3
Retained earnings 18.2 44.2
-------------- -------------
Total shareholder's equity 393.7 387.5
-------------- -------------
Total liabilities and shareholder's equity $ 1,346.3 $ 1,344.6
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
VERIZON HAWAII INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
-----------------------------
2000 1999
------------- ------------
(Dollars in Millions)
OPERATIONS
Net cash from operations $ 155.2 $ 113.0
------------- ------------
INVESTING
Capital expenditures (45.0) (39.1)
Other - net -- 0.5
------------- ------------
Net cash used in investing (45.0) (38.6)
------------- ------------
FINANCING
Long-term debt retired (1.2) (4.8)
Dividends (44.0) (69.5)
Net change in affiliate notes (63.7) --
------------- ------------
Net cash used in financing (108.9) (74.3)
------------- ------------
Increase in cash and cash equivalents 1.3 0.1
Cash and cash equivalents:
Beginning of period 2.3 1.3
------------- ------------
End of period $ 3.6 $ 1.4
============= ============
The accompanying notes are an integral part of these statements.
4
<PAGE>
VERIZON HAWAII INC.
Consolidated Statement of Shareholder's Equity (Unaudited)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
------------- -------------- ------------- --------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Shareholder's equity, December 31, 1999 $ 250.0 $ 93.3 $ 44.2 $ 387.5
Net income 44.9 44.9
Tax benefit from exercise of stock options 0.2 0.2
Dividends declared (39.0) (39.0)
Capital contributions from Parent 32.0 32.0
Dividend paid to Parent (32.0) (32.0)
Other 0.1 0.1
------------- -------------- ------------- --------------
Shareholder's equity, June 30, 2000 $ 250.0 $ 125.5 $ 18.2 $ 393.7
============= ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
VERIZON HAWAII INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
Verizon Hawaii Inc. (the Company), formerly GTE Hawaiian Telephone Company
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 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 include merger-related pre-tax costs
totaling approximately $17.8 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 $1.4 million and $1.5 million for the six months ended June 30, 2000 and
1999, respectively.
NOTE 3. DIVIDEND
On July 30, 2000, the Company declared and paid a dividend in the amount of
$12.0 million to Verizon Communications.
Prior to the closing of the GTE merger with Bell Atlantic, a $32 million
dividend was declared and paid to GTE. Upon the payment of this dividend, a
capital contribution in the same amount was made by GTE to the Company.
6
<PAGE>
VERIZON HAWAII INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
NOTE 4. 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 $27.3 million
and $23.7 million, respectively, compared to the first half of 1999.
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
7
<PAGE>
VERIZON HAWAII INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
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. 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.
8
<PAGE>
VERIZON HAWAII 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 $7.7 million or 15% for the six months ended June 30, 2000
compared to the same period in 1999, primarily due to a decline in other
services and sales revenues, partially offset by a decrease in operations and
support costs and expenses.
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 $ 1.0 $ --
----------- ------------
Operations and Support Expenses
Bell Atlantic-GTE merger costs 17.8 --
Conforming accounting adjustments (1.4) (1.5)
----------- ------------
16.4 (1.5)
----------- ------------
Total $ 17.4 $ (1.5)
=========== ============
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 include merger-related pre-tax costs
totaling approximately $17.8 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 those employees are
included in the Company's balance sheets as a component of "Employee benefit
plans and other."
9
<PAGE>
VERIZON HAWAII INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q.)
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 $1.4 million and $1.5 million for the six months ended June 30, 2000 and
1999, respectively.
Regulatory Contingency
In the second quarter of 2000, the Company recognized a charge for a regulatory
matter totaling $1.0 million. The Company recorded a reduction to operating
revenue in the amount of $1.0 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 $ 154.7 $ 147.5 $ 7.2 5%
Network access services 85.1 92.7 (7.6) (8)%
Other services and sales 76.7 104.3 (27.6) (26)%
----------- ----------- ------------
Total revenues and sales $ 316.5 $ 344.5 $ (28.0) (8)%
=========== =========== ============
</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 Verizon Hawaii Inc. (the Company). Local services revenues
increased in the first half of 2000 compared to the first half of 1999 primarily
due to an increase in operator and directory assistance services of $5.4
million. Demand for enhanced custom calling features, such as SmartCall(R)
services, also contributed $1.5 million to the year-to-date increase in local
services revenues.
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 overall decrease in network services
revenues was driven by mandated interstate and intrastate access price
reductions and rate element adjustments of $11.0 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"). Minutes of
use increased 5%, generating additional revenues of $1.6 million for the six
months ending June 30, 2000 compared to the same period in 1999. Special access
revenues grew by $2.3 million as a result of greater demand for increased
bandwidth services by high-capacity users.
10
<PAGE>
VERIZON HAWAII INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q.)
Other Services and Sales
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 (Local Access Transport Area) - (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 a change
in the recognition of directory publishing revenues resulting in a decrease of
$27.3 million (for further information see "OTHER DEVELOPMENTS - Directory
Publishing Revenues").
<TABLE>
<CAPTION>
OPERATING COSTS AND EXPENSES
(Dollars in Millions) Six Months Ended
June 30,
-------------------------- Increase Percent
2000 1999 (Decrease) Change
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Operations and support $ 163.0 $ 187.1 $ (24.1) (13)%
Depreciation and amortization 62.3 61.0 1.3 2%
----------- ----------- ------------
Total operating costs and expenses $ 225.3 $ 248.1 $ (22.8) (9)%
=========== =========== ============
</TABLE>
Operations and support expenses, representing employee costs and other operating
expenses, decreased in the first six months ended June 30, 2000 compared to the
same period in 1999 primarily due to the recognition of a pretax gain of $23.6
million associated with lump-sum settlements of pension obligations for
employees who met certain eligibility requirements. A charge of $7.2 million in
the first quarter of 1999, associated with an employee-reduction program, also
contributed to the decrease. The termination of overseas sales contracts for
nonregulated telecommunications services and equipment resulted in further
decreases of $3.3 million. Partially offsetting these decreases was a second
quarter 2000 special charge of $17.8 million for severance and direct
incremental merger-related costs (see "RESULTS OF OPERATIONS").
Depreciation and amortization expense increased due to continued investment in
the network necessary to support the access line growth from higher demand by
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
Despite a decrease in pretax income, income tax expense increased 7% or $1.9
million for the six months ended June 30, 2000 compared to the same period in
1999 primarily due to tax adjustments.
11
<PAGE>
VERIZON HAWAII INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q.)
INTERSTATE REGULATORY DEVELOPEMENTS
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 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 Communicaitons 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
<PAGE>
VERIZON HAWAII 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 revenue and
operating income for the six months ended June 30, 2000 decreased $27.3 million
and $23.7 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
13
<PAGE>
VERIZON HAWAII INC.
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q.)
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.
14
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PART II. OTHER INFORMATION
VERIZON HAWAII INC.
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Articles of Incorporation and Bylaws (Exhibit 3.2 of the
1987 Form 10-K, incorporated herein by reference)
3.3 Articles of Amendment to Change Corporate Name filed with
the Department of Commerce and Consumer Affairs of the
State of Hawaii on July 5, 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."
15
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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 Hawaii Inc.
--------------------------
(Registrant)
Date: August 14, 2000 /s/ Edwin F. Hall
------------------------ --------------------------
Edwin F. Hall
Controller
(Principal Accounting Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 10, 2000.
16
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.3 Articles of Amendment to Change Corporate Name,
filed with the Department of Commerce and
Consumer Affairs of the State of Hawaii on July 5,
2000
27 Financial Data Schedule
