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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 2-33059
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 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 HAWAII INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Dollars in Millions)
OPERATING REVENUES $ 162.5 $ 161.6 $ 479.0 $ 506.1
------------ ----------- ------------ ------------
OPERATING EXPENSES
Operations and support 80.1 90.5 243.2 277.5
Depreciation and amortization 31.4 29.3 93.6 90.4
------------ ----------- ------------ ------------
Total operating expenses 111.5 119.8 336.8 367.9
------------ ----------- ------------ ------------
OPERATING INCOME 51.0 41.8 142.2 138.2
OTHER (INCOME) EXPENSE
Interest income (1.0) (0.6) (2.2) (2.1)
Interest expense 9.5 9.8 29.1 29.8
Other - net -- (0.6) (0.2) (1.4)
------------ ----------- ------------ ------------
INCOME BEFORE INCOME TAXES 42.5 33.2 115.5 111.9
Income taxes 14.0 11.1 42.0 37.2
------------ ----------- ------------ ------------
NET INCOME $ 28.5 $ 22.1 $ 73.5 $ 74.7
============ =========== ============ ============
The accompanying notes are an integral part of these statements.
1
VERIZON HAWAII INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2000 1999
--------------- --------------
(Dollars in Millions)
ASSETS
Current assets
Cash and cash equivalents $ 3.4 $ 2.3
Accounts receivable, less allowances of $5.5
and $4.2 108.9 156.1
Accounts receivable from affiliates 7.7 14.5
Inventories and supplies 11.4 5.5
Prepayments and other 2.5 16.1
------------- ------------
Total current assets 133.9 194.5
------------- ------------
Property, plant and equipment, at cost 2,076.0 2,045.4
Accumulated depreciation (1,267.7) (1,222.9)
------------- ------------
Total property, plant and equipment, net 808.3 822.5
------------- ------------
Prepaid pension costs 399.8 308.3
Other assets 29.4 19.3
------------- ------------
Total assets $ 1,371.4 $ 1,344.6
============= ============
The accompanying notes are an integral part of these statements.
2
VERIZON HAWAII INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets - Continued
(Unaudited)
September 30, December 31,
2000 1999
-------------- -------------
(Dollars in Millions)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt $ 3.0 $ 3.0
Notes payable to affiliate 97.5 101.7
Accounts payable 39.8 47.8
Affiliate payables 17.2 26.1
Advance billings and customer deposits 20.6 14.2
Dividends payable 24.0 17.0
Other 41.8 44.7
------------- ------------
Total current liabilities 243.9 254.5
------------- ------------
Long-term debt 459.4 461.6
Deferred income taxes 238.8 206.1
Employee benefit plans and other 23.5 29.1
------------- ------------
Total liabilities 965.6 951.3
------------- ------------
Shareholder's equity
Common stock (10,000,000 shares issued
and outstanding) 250.0 250.0
Additional paid-in capital 127.5 93.3
Retained earnings 28.3 50.0
------------- ------------
Total shareholder's equity 405.8 393.3
------------- ------------
Total liabilities and shareholder's equity $ 1,371.4 $ 1,344.6
============= ============
The accompanying notes are an integral part of these statements.
3
VERIZON HAWAII INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
-----------------------------
2000 1999
------------ ------------
(Dollars in Millions)
OPERATING
Net cash provided by operations $ 141.4 $ 144.9
------------ ------------
INVESTING
Capital expenditures (78.3) (66.3)
Other - net -- 0.6
------------ ------------
Net cash used in investing (78.3) (65.7)
------------ ------------
FINANCING
Long-term debt retired (1.7) (5.3)
Dividends paid (56.0) (74.5)
Increase (decrease) in short-term obligations,
excluding current maturities (4.3) 5.5
------------ ------------
Net cash used in financing (62.0) (74.3)
------------ ------------
Increase in cash and cash equivalents 1.1 4.9
Cash and cash equivalents:
Beginning of period 2.3 1.3
------------ ------------
End of period $ 3.4 $ 6.2
============ ============
The accompanying notes are an integral part of these statements.
4
VERIZON HAWAII INC. AND SUBSIDIARIES
Consolidated Statement of Shareholder's Equity (Unaudited)
Additional
Common Paid-In Retained
Stock Capital Earnings Total
----------- ------------ ------------ -------------
(Dollars in Millions)
Shareholder's equity, December 31, 1999 $ 250.0 $ 93.3 $ 50.0 $ 393.3
Net income 73.5 73.5
Tax benefit from exercise of stock options 0.3 0.3
Dividends declared (63.0) (63.0)
Capital contribution in connection with merger 33.9 33.9
Dividend declared in connection with merger (32.0) (32.0)
Other (0.2) (0.2)
----------- ------------ ------------ -------------
Shareholder's equity, September 30, 2000 $ 250.0 $ 127.5 $ 28.3 $ 405.8
=========== ============ ============ =============
The accompanying notes are an integral part of these statements.
5
VERIZON HAWAII INC. AND SUBSIDIARIES
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 Verizon Communications Inc. (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 (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 $17.8 million, consisting of
$7.2 million for direct incremental costs and $10.6 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 consolidated balance sheet as components of "Other current
liabilities" and "Employee benefit plans and other."
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
$1.4 million and $2.2 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 $0.2 million pre-
tax for other actions in relation to the Merger or other strategic decisions.
6
VERIZON HAWAII INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
NOTE 3. COMPREHENSIVE INCOME
Net income and comprehensive income were the same for the nine months ended
September 30, 2000 and 1999.
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 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 $34.5 million and $30.0 million,
respectively, compared to the same period in 1999.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on 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 6. 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
7
VERIZON HAWAII INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
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
VERIZON HAWAII INC. AND SUBSIDIARIES
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 $1.2 million or 2% for the nine months ended September 30,
2000, compared to the same period in 1999.
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)
Nine Months Ended September 30, 2000 1999
- --------------------------------------------------------------------------------------------------
Operating Revenues
Other charges and special items $ 1.0 $ --
--------------------------------
Operating Expenses
Bell Atlantic-GTE merger costs 17.8 --
Bell Atlantic-GTE conforming accounting adjustments (1.4) (2.2)
Bell Atlantic-GTE merger other related actions 0.2 --
--------------------------------
16.6 (2.2)
--------------------------------
Total impact on pre-tax income $ 17.6 $ (2.2)
================================
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 $17.8 million, consisting of
$7.2 million for direct incremental costs and $10.6 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
VERIZON HAWAII INC. AND SUBSIDIARIES
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 consolidated balance sheet as components of "Employee
benefit plans and other" and "Other current liabilities."
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
$1.4 million and $2.2 million for the nine month periods ending September 30,
2000 and 1999, respectively.
Other Related Actions
During the second quarter of 2000, the Company also recorded $0.2 million pre-
tax for other actions in relation to the Merger or other strategic decisions.
Other Charges and Special Items
In the second quarter of 2000, the Company also recorded other charges and
special items totaling $1.0 million pre-tax.
OPERATING REVENUES
(Dollars in Millions) Nine Months Ended
September 30,
----------------------------- Increase Percent
2000 1999 (Decrease) Change
------------ ------------ ---------- ----------
Local services $ 232.9 $ 222.2 $ 10.7 5%
Network access services 129.1 135.1 (6.0) (4)%
Other services 117.0 148.8 (31.8) (21)%
------------ ------------ ----------
Total operating revenues $ 479.0 $ 506.1 $ (27.1) (5)%
============ ============ ==========
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. Local services revenues increased for the nine
months ended September 30, 2000 primarily due to an increase in operator and
directory assistance services. In addition, demand for enhanced custom calling
features, such as SmartCall(R) services, contributed to the year-to-date
increase in local services revenues.
10
VERIZON HAWAII INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
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 overall decrease in network services
revenues was driven by mandated interstate and intrastate access price
reductions and other regulatory decisions including the implementation of the
Coalition for Affordable Local and Long Distance Services (CALLS) plan effective
July 1, 2000. A 7% growth in access minutes, resulting from increased customer
demand, generated additional revenues which partially offset the decrease.
Additionally, special access revenues grew as a result of greater demand for
increased bandwidth services by high-capacity users.
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 within the same LATA (Local Access Transport Area) -
(intraLATA). The decrease in other services revenues for the nine-month period
ended September 30, 2000, compared to the same period in 1999 was primarily the
result of a change in the recognition of directory publishing revenues which
resulted in a decrease in revenues of $34.5 million (for further information see
"OTHER DEVELOPMENTS- Directory Publishing Revenues"). Revenue was further
decreased by a special charge recorded in 2000 (see "Results of Operations").
OPERATING EXPENSES
(Dollars in Millions) Nine Months Ended
September 30,
----------------------------- Increase Percent
2000 1999 (Decrease) Change
------------ ------------ ---------- ----------
Operations and support $ 243.2 $ 277.5 $ (34.3) (12)%
Depreciation and amortization 93.6 90.4 3.2 4%
------------ ------------ ----------
Total operating expenses $ 336.8 $ 367.9 $ (31.1) (8)%
============ ============ ==========
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 decreased for the nine months ended September 30, 2000 compared
to the same period in 1999, primarily due to a pre-tax gain of $23.6 million
associated with lump-sum settlements of pension obligations for employees who
met certain eligibility requirements. A special charge in the first quarter of
1999, associated with an employee-reduction program, also contributed to the
comparative decrease during the current period. The termination of overseas
sales contracts for nonregulated telecommunications services and equipment
resulted in further decreases. Partially offsetting these decreases was a second
quarter 2000 charge of $17.8 million for severance and direct incremental merger
related costs, as well as the impact of other merger related actions (see
"RESULTS OF OPERATIONS").
Depreciation and Amortization
Depreciation and amortization expense increased primarily due to continued
investment in the Company's network. Partially affecting the increase in
depreciation 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 decreased $0.7 million or 2% for the nine months ended
September 30, 2000, compared to the same period in 1999, primarily due to lower
average debt balances.
11
VERIZON HAWAII INC. AND SUBSIDIARIES
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").
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 rate 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
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 $34.5 million and $30.0 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
12
VERIZON HAWAII INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Results of Operations - Continued
(Abbreviated pursuant to General Instruction H(2) of Form 10-Q)
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
VERIZON HAWAII INC. AND SUBSIDIARIES
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
VERIZON HAWAII INC. AND SUBSIDIARIES
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: 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
VERIZON HAWAII INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
------------- -----------------------------------------------------------
27 Financial Data Schedule