UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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.
A Hawaii Corporation I.R.S. Employer Identification No. 99-0049500
1095 Avenue of the Americas, Room 3868, New York, New York 10036
Telephone Number (212) 395-2121
_____________________
THE REGISTRANT 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
--- ---
Verizon Hawaii Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, Six Months Ended June 30,
-----------------------------------------------------------------
(Dollars in Millions) (Unaudited) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
(including $.1, $.1, $.1 and $.1 from affiliates) $141.5 $160.9 $285.4 $316.5
-----------------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $15.6, $19.2, $30.8 and
$39.7 to affiliates) 77.3 66.2 155.2 163.0
Depreciation and amortization 28.4 31.4 57.3 62.3
-----------------------------------------------------------------
105.7 97.6 212.5 225.3
-----------------------------------------------------------------
OPERATING INCOME 35.8 63.3 72.9 91.2
OTHER INCOME AND (EXPENSE), NET
(including $(.6), $.2, $(.5) and $.9 from affiliates) (.6) .6 (.5) 1.3
INTEREST EXPENSE
(including $2.9, $2.0, $4.2 and $4.2 to affiliate) 10.2 9.7 18.8 19.6
-----------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 25.0 54.2 53.6 72.9
PROVISION FOR INCOME TAXES 10.2 21.5 21.0 28.0
-----------------------------------------------------------------
NET INCOME $ 14.8 $ 32.7 $ 32.6 $ 44.9
=================================================================
See Notes to Condensed Consolidated Financial Statements.
1
Verizon Hawaii Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
(Dollars in Millions) June 30, 2001 December 31, 2000
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS
Cash $ 3.4 $ 1.5
Short-term investments 11.6 19.9
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $6.1 and $6.9 101.4 82.1
Affiliates 11.1 10.6
Material and supplies 12.3 8.5
Prepaid expenses 1.6 1.6
Deferred income taxes 11.3 8.8
Other 10.3 6.2
---------------------------------------------
163.0 139.2
---------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 1,919.5 1,996.9
Less accumulated depreciation 1,209.2 1,221.9
---------------------------------------------
710.3 775.0
---------------------------------------------
PREPAID PENSION ASSET 444.5 421.2
---------------------------------------------
INVESTMENTS IN UNCONSOLIDATED BUSINESSES 47.0 44.3
---------------------------------------------
OTHER ASSETS 24.0 47.1
---------------------------------------------
TOTAL ASSETS $1,388.8 $1,426.8
=============================================
See Notes to Condensed Consolidated Financial Statements.
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Verizon Hawaii Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
(Dollars in Millions) June 30, 2001 December 31, 2000
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 164.7 $ 97.4
Other 1.1 1.2
Accounts payable and accrued liabilities:
Affiliates 15.8 19.7
Other 73.5 122.6
Other liabilities 29.2 33.6
--------------------------------------------
284.3 274.5
--------------------------------------------
LONG-TERM DEBT 428.9 429.2
--------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 39.3 17.2
--------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 227.0 218.0
Unamortized investment tax credits 30.2 33.3
Other 18.1 46.9
--------------------------------------------
275.3 298.2
--------------------------------------------
SHAREOWNER'S INVESTMENT
Common stock $25 par value per share 250.0 250.0
Authorized shares: 18,000,000
Outstanding shares: 10,000,000
Contributed capital 95.7 125.6
Reinvested earnings 15.3 32.1
--------------------------------------------
361.0 407.7
--------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $1,388.8 $1,426.8
============================================
See Notes to Condensed Consolidated Financial Statements.
3
Verizon Hawaii Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
---------------------------------------------
(Dollars in Millions) (Unaudited) 2001 2000
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 16.9 $ 155.2
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 8.3 ---
Capital expenditures (38.9) (45.0)
Net change in notes receivable from affiliate --- ---
Other, net 5.5 ---
-------------------------------------------
Net cash used in investing activities (25.1) (45.0)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital lease obligations (.2) (1.2)
Net change in note payable to affiliate 67.3 (63.7)
Dividends paid (57.0) (44.0)
-------------------------------------------
Net cash provided by/(used in) financing activities 10.1 (108.9)
-------------------------------------------
NET CHANGE IN CASH 1.9 1.3
CASH, BEGINNING OF PERIOD 1.5 2.3
-------------------------------------------
CASH, END OF PERIOD $ 3.4 $ 3.6
===========================================
See Notes to Condensed Consolidated Financial Statements.
4
Verizon Hawaii Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon Hawaii Inc. 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
rules that permit reduced disclosure for interim periods. 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. The results for the interim periods are not
necessarily indicative of results for the full year. The balance sheet at
December 31, 2000 has been derived from the audited financial statements at that
date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. For
a more complete discussion of significant accounting policies and certain other
information, you should refer to the financial statements included in our 2000
Annual Report on Form 10-K.
We have reclassified certain amounts from prior year's data to conform to
the 2001 presentation.
2. Description of Business
During 2000, we owned three wholly owned subsidiaries: GTE Hawaiian Tel
Insurance Company Incorporated, Verizon Hawaii International Inc. and The
Micronesian Telecommunications Corporation (MTC). GTE Hawaiian Tel Insurance
Company Incorporated, a wholly owned captive insurance company, provides auto
liability, general liability and workers' compensation insurance to us on a
direct basis. Verizon Hawaii International Inc. provides interstate and
international telecommunications services in Hawaii and telecommunication
services in Guam. GTE Far East (Services) Limited, which is a wholly owned
subsidiary of Verizon Hawaii International Inc., provides international
telecommunications services in Japan. MTC, which is headquartered in Saipan in
the Commonwealth of the Northern Mariana Islands (CNMI), provides local
telecommunications services on the islands of Saipan, Tinian and Rota. In
addition, GTE Pacifica Incorporated (Pacifica), which is a wholly owned
subsidiary of MTC, provides interstate and international telecommunications
services in the CNMI and Guam.
On December 19, 2000, we exchanged 100% of our share ownership in MTC for
4.03065 shares of GTE International Telecommunications Incorporated (GITI), an
affiliate of Verizon Communications. Our minority interest in GITI is valued at
cost which is the net book value of the MTC shares exchanged. On the same date,
Verizon Hawaii International Inc. sold 100% of its shares, or 1,215,930 shares,
of GTE Far East (Services) Limited to GITI for one dollar. Assets exchanged or
sold totaled $56.6 million. No gains or losses were realized from these
transactions.
On March 2, 2001, we declared and transferred, as a dividend of $29.5
million, 100% of our ownership in Verizon Hawaii International Inc. to our
parent, GTE. The transfer was valued at cost, which was the net book value of
the Verizon Hawaii International Inc. shares at March 2, 2001. No gain or loss
was realized from this transaction.
3. Revenue Recognition
We recognize revenue when services are rendered based on usage of our
local exchange network and facilities. For other products and services, revenues
are generally recognized when services are rendered or products are delivered to
customers.
We defer nonrecurring service activation revenues and costs and amortize
them over the expected term of the customer relationship. The deferred costs are
equal to the activation fee revenue and any excess cost is expensed immediately.
The deferred costs represent incremental direct costs associated with certain
nonrecurring fees, such as service activation and installation fees.
4. Long-Lived Assets
We assess the impairment of long-lived assets under Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. A determination of impairment (if any) is made based on estimates
of future cash flows.
5
Verizon Hawaii Inc.
5. Dividend
On August 1, 2001, we declared and paid a dividend in the amount of $29.0
million to GTE.
6. Derivatives and Hedging Activities
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133
requires that all derivatives, including derivatives embedded in other financial
instruments, be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments not qualifying as hedges under SFAS No. 133 or any ineffective
portion of hedges are recognized in earnings in the current period. Changes in
the fair values of derivative instruments used effectively as fair value hedges
are recognized in earnings, along with changes in the fair value of the hedged
item. Changes in the fair value of the effective portions of cash flow hedges
are reported in other comprehensive income (loss), and recognized in earnings
when the hedged item is recognized in earnings. We presently do not have any
derivative instruments or hedging activities and, consequently, SFAS No. 133 did
not have an impact on our financial statements.
7. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets."
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121. Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 121. We are required to adopt SFAS No. 142 effective January 1, 2002.
We are currently evaluating our intangible assets in relation to the provisions
of SFAS No. 142 to determine the impact, if any, the adoption of SFAS No. 142
will have on our results of operations or financial position.
8. Merger Charges
In connection with the merger of Bell Atlantic and GTE on June 30, 2000,
we incurred charges associated with employee severance of $10.6 million pre-tax.
Employee severance costs, as recorded under SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," represent the benefit costs for the separation of
management employees who were entitled to benefits under pre-existing separation
plans, as well as an accrual for ongoing SFAS No. 112 obligations for former GTE
employees. During the second quarter of 2000, in connection with the merger, we
also recorded a pre-tax charge of $7.2 million for direct, incremental
merger-related costs, including compensation, professional services and other
direct costs.
In addition, we recorded pre-tax merger-related transition costs of $3.3
million in the first six months of 2001. Transition costs consisted of costs to
integrate systems, consolidate real estate, relocate employees and meet certain
regulatory conditions of the merger. They also included costs for advertising
and other costs to establish the Verizon brand. Transition costs since the date
of the merger totaled $5.2 million. Transition costs are expensed as incurred.
Results of operations for the first six months of 2000 also included
adjustments that were required to conform our accounting methods and
presentation to that of Verizon Communications. These conforming adjustments are
differences in capitalization policies. As a result of these adjustments,
operating income increased $1.4 million for the six month period ended June 30,
2000.
6
Verizon Hawaii Inc.
9. Shareowner's Investment
Common Contributed Reinvested
(Dollars in Millions) Stock Capital Earnings
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $250.0 $125.6 $ 32.1
Net income 32.6
Dividends declared (57.0)
Affiliate asset dividend (29.5)
Other (.4) 7.6
-----------------------------------------------------------
Balance at June 30, 2001 $250.0 $ 95.7 $ 15.3
===========================================================
Net income and comprehensive income were the same for the six months ended
June 30, 2001 and 2000.
On March 2, 2001, we declared and transferred, as a dividend of $29.5
million, 100% of our ownership in Verizon Hawaii International Inc. to our
parent GTE (see Note 2).
10. Transactions with Affiliate
In May 2001, we transferred our advanced data assets, with a net book
value of approximately $3 million, for a .44% indirect ownership interest in
Verizon Advanced Data Inc. (VADI). VADI is an affiliated company which provides
new exchange access services. In connection with our investment, we record
equity income/losses.
11. Commitments and Contingencies
Various legal actions and regulatory proceedings are pending to which we
are a party and claims which, if asserted, may lead to other legal actions. We
have established reserves for specific liabilities in connection with regulatory
and legal matters which we currently deem to be probable and estimable. We do
not expect that the ultimate resolution of pending regulatory and legal matters
in future periods will have a material effect on our financial condition, but
it could have a material effect on our results of operations.
Several regulatory matters may require us to refund a portion of the
revenues collected in the current and prior periods. The outcome of each pending
matter, as well as the time frame within which each matter will be resolved, is
not presently determinable.
Regulatory conditions to the Bell Atlantic - GTE merger include certain
commitments to, among other things, promote competition and the widespread
deployment of advanced services, while helping to ensure that consumers continue
to receive high-quality, low cost telephone services. In some cases, there are
significant penalties associated with not meeting these commitments. The cost of
satisfying these commitments could have a significant impact on net income in
future periods.
7
Verizon Hawaii Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial
Statements and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
We reported net income of $32.6 million for the six month period ended
June 30, 2001, compared to net income of $44.9 million for the same period in
2000.
Our results for 2001 and 2000 were affected by special items. The special
items in both periods include our allocated share of charges from affiliates
that provide various centralized services on behalf of Verizon Communications
Inc. subsidiaries. Our results were further affected by a transfer of certain
assets to Verizon affiliates.
The following table shows how special items are reflected in our condensed
consolidated statements of income for each period:
(Dollars in Millions)
Six Months Ended June 30, 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Other charges and special items $ --- $ 1.0
----------------------------------------
Operations and Support Expenses
Bell Atlantic-GTE merger direct incremental costs --- 7.2
Bell Atlantic-GTE merger severance costs --- 10.6
Bell Atlantic-GTE merger transition costs 3.3 ---
Other charges and special items --- .2
----------------------------------------
3.3 18.0
----------------------------------------
Depreciation and Amortization Expenses
Bell Atlantic- GTE merger accounting conformity adjustments --- (1.4)
----------------------------------------
Net impact on pre-tax income $ 3.3 $17.6
========================================
What follows is a further explanation of the nature of these special
items.
Transfer of Assets
On December 19, 2000, we exchanged 100% of our share ownership in The
Micronesian Telecommunications Corporation (MTC) for 4.03065 shares of GTE
International Telecommunications Incorporated (GITI), an affiliate. Our minority
interest in GITI was valued at cost, which was the net book value of the MTC
shares exchanged. On the same date, our wholly owned subsidiary, Verizon Hawaii
International Inc., sold 100% of its shares, or 1,215,930 shares, of GTE Far
East (Services) Limited to GITI for one dollar. Operating revenues and operating
expenses contributed by these subsidiaries were approximately $18.4 million and
$16.4 million, respectively, for the six months ended June 30, 2000. Assets
exchanged or sold totaled $56.6 million. No gains or losses were realized from
these transactions.
On March 2, 2001, we declared and transferred, as a dividend of $29.5
million, 100% of our ownership in Verizon Hawaii International Inc. to our
parent GTE Corporation. The transfer was valued at cost, which was the net book
value of the Verizon Hawaii International Inc. shares at March 2, 2001.
Operating revenues and operating expenses contributed by Verizon Hawaii
International Inc. were approximately $23.4 million and $16.0 million,
respectively, for the six months ended June 30, 2000. No gain or loss was
realized from this transaction.
As a result of these transactions, past operating results are no longer
indicative of future operating results. You may find additional information
about these subsidiaries in Note 2 to the Condensed Consolidated Financial
Statements.
8
Verizon Hawaii Inc.
Merger Charges
In connection with the merger of Bell Atlantic and GTE on June 30, 2000,
we incurred charges associated with employee severance of $10.6 million pre-tax.
Employee severance costs, as recorded under SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," represent the benefit costs for the separation of
management employees who were entitled to benefits under pre-existing separation
plans, as well as an accrual for ongoing SFAS No. 112 obligations for former GTE
employees. During the second quarter of 2000, in connection with the merger, we
also recorded a pre-tax charge of $7.2 million for direct, incremental
merger-related costs, including compensation, professional services and other
direct costs.
In addition, we recorded pre-tax merger-related transition costs of $3.3
million in the first six months of 2001. Transition costs consisted of costs to
integrate systems, consolidate real estate, relocate employees and meet certain
regulatory conditions of the merger. They also included costs for advertising
and other costs to establish the Verizon brand. Transition costs are expensed as
incurred.
Results of operations for the first six months of 2000 also included
adjustments that were required to conform our accounting methods and
presentation to that of Verizon Communications. These conforming adjustments are
differences in capitalization policies. As a result of these adjustments,
operating income increased $1.4 million for the six month period ended June 30,
2000.
Other Charges and Special Items
In the second quarter of 2000, we also recorded other charges and special
items totaling approximately $1.2 million pre-tax.
These and other items affecting the comparison of our results of
operations for the six month period ended June 30, 2001 and 2000 are discussed
in the following sections.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Six Months Ended June 30, 2001 2000
- -----------------------------------------------------------------------------------------
Local services $152.6 $155.1
Network access services 83.1 85.0
Long distance services 10.3 28.4
Other services 39.4 48.0
-----------------------------------------
Total $285.4 $316.5
=========================================
LOCAL SERVICES
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(2.5) (1.6)%
- --------------------------------------------------------------------------------
Local service revenues are earned from the provision of local exchange,
local private line, wire maintenance, voice messaging and value-added services.
Value-added services are a family of services that expand the utilization of the
network, including products such as Caller ID, Call Waiting and Return Call. The
provision of local exchange services not only includes retail revenues, but also
includes local wholesale revenues from unbundled network elements (UNEs),
interconnection revenues from competitive local exchange carriers, certain data
transport revenues and wireless interconnection revenues.
The decrease in local service revenues was principally due to the transfer
of assets, as described in Results of Operations. Local service revenues also
reflect the impact of an economic slowdown during the first half of 2001. These
decreases were partially offset by higher payments received from competitive
local exchange carriers for interconnection of their networks with our network.
9
Verizon Hawaii Inc.
NETWORK ACCESS SERVICES
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(1.9) (2.2)%
- --------------------------------------------------------------------------------
Network access revenues are earned from end-user subscribers and from
long distance and other competing carriers who use our local exchange facilities
to provide usage services to their customers. Switched access revenues are
derived from fixed and usage-based charges paid by carriers for access to our
local network. Special access revenues originate from carriers and end-users
that buy dedicated local exchange capacity to support their private networks.
End-user access revenues are earned from our customers and from resellers who
purchase dial-tone services.
The decrease in network access revenues was principally driven by
mandated price reductions on certain intrastate and interstate access services.
The Federal Communications Commission (FCC) regulates rates that we charge long
distance carriers and end-user subscribers for interstate access services. We
are required to file new access rates with the FCC each year. In July 2000, we
implemented the Coalition for Affordable Local and Long Distance Service (CALLS)
plan. Rates included in the July 2000 CALLS plan were in effect through June
2001. The impact of the slowing economy also affected network access revenues in
2001.
These decreases were partially offset by increased demand for special
access services. This growth reflects a continuing expansion of the business
market, particularly for high-capacity, high-speed digital services.
LONG DISTANCE SERVICES
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(18.1) (63.7)%
- --------------------------------------------------------------------------------
Long distance revenues are earned primarily from calls made from
international calls and from calls made to points outside a customer's local
calling area, but within our service area (intraLATA toll). IntraLATA toll calls
originate and terminate within the same LATA, but generally cover a greater
distance than a local call. These services are regulated by state regulatory
commissions except where they cross state lines. Other long distance services
that we provide include 800 services and Wide Area Telephone Services (WATS).
The decrease in long distance revenues was principally due to the
aforementioned transfer of assets.
OTHER SERVICES
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(8.6) (17.9)%
- --------------------------------------------------------------------------------
Our other services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, public (pay) telephone and customer premises equipment (CPE).
Other service revenues also include fees paid by customers for non-publication
of telephone numbers and multiple white page listings and fees paid by an
affiliate for usage of our directory listings.
The decrease in other service revenues was principally due to the
aforementioned transfer of assets.
10
Verizon Hawaii Inc.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
OPERATIONS AND SUPPORT
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(7.8) (4.8)%
- --------------------------------------------------------------------------------
Operations and support expenses consist of employee costs and other
operating expenses. Employee costs consist of salaries, wages and other employee
compensation, employee benefits and payroll taxes. Other operating expenses
consist of contract services including centralized services expenses allocated
from affiliates, rent, network software costs, operating taxes other than
income, the provision for uncollectible accounts receivable, reciprocal
compensation, and other costs.
The transfer of assets, as discussed in Results of Operations, was the
primary reason for the reduction in operations and support expenses. The effect
of merger-related costs and other special items recorded in 2000 and 2001, as
described in the Results of Operations section also contributed to the expense
reduction. The first six months of 2001 also reflects a reduction in directory
publishing expenses allocated from an affiliate. Operating costs have also
decreased due to business integration activities and declining work force
levels.
These decreases were partially offset by the effect of pre-tax gains
recorded in the first half of 2000 associated with lump-sum settlements of
pension obligations for certain active and former employees.
We continue to incur expenditures related to reciprocal compensation
arrangements with competitive local exchange carriers and other carriers to
terminate calls on their network. In March 2000, the United States Court of
Appeals for the District of Columbia Circuit reversed and remanded the FCC's
February 1999 order that concluded that calls to the Internet through Internet
service providers (ISP) do not terminate at the ISP but are single interstate
calls. The FCC had concluded that calls to the Internet are not therefore
subject to reciprocal compensation under section 251(b)(5) of the
Telecommunications Act, but left it to state regulatory commissions to determine
whether local interconnection agreements entered into with competing carriers
required the payment of compensation on such calls.
On April 27, 2001, the FCC released an order responding to the court's
remand. The FCC found that Internet-bound traffic is interstate and subject to
the FCC's jurisdiction. Moreover, the FCC again found that Internet-bound
traffic is not subject to reciprocal compensation under section 251(b)(5) of the
Telecommunications Act. Instead, the FCC established federal rates that decline
from $0.0015 to $0.0007 over a three year period. The FCC order also sets caps
on the total minutes that may be subject to any intercarrier compensation and
requires that incumbent local exchange carriers must offer to pay reciprocal
compensation for local traffic at the same rate as they are required to pay on
Internet-bound traffic.
DEPRECIATION AND AMORTIZATION
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(5.0) (8.0)%
- --------------------------------------------------------------------------------
The decline in depreciation and amortization expense was primarily
attributable to the transfer of assets. Partially affecting the change in
depreciation and amortization expense were adjustments made to conform the
accounting policies of Bell Atlantic and GTE as a result of the merger, as
described in Results of Operations.
11
Verizon Hawaii Inc.
OTHER INCOME AND (EXPENSE), NET
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(1.8) ---%
- --------------------------------------------------------------------------------
The change in other income and (expense), net, is primarily attributable
to the aforementioned transfer of assets.
INTEREST EXPENSE
2001 - 2000 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(.8) (4.1)%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense decreased in the first six months of 2001, compared to
the same period in 2000, primarily due to overall lower levels of average
borrowings.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30,
- --------------------------------------------------------------------------------
2001 39.2%
- --------------------------------------------------------------------------------
2000 38.4%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before provision for income taxes. Our effective income tax
rate was higher for the six months ended June 30, 2001, compared to the same
period in 2000. This increase was, primarily due to a decrease in the portion of
income from non-taxable operations as a result of the transfer of assets and the
effect of equity losses associated with our investment in VADI, for which we do
not recognize income tax benefits. These factors were partially offset by a
decrease in non-recurring income tax expense.
OTHER MATTERS
- -------------
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets."
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Intangible assets that do not have indefinite lives
will continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121. We are required to adopt SFAS No.
142 effective January 1, 2002. We are currently evaluating our intangible assets
in relation to the provisions of SFAS No. 142 to determine the impact, if any,
the adoption of SFAS No. 142 will have on our results of operations or financial
position.
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Verizon Hawaii 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
(b) There were no Current Reports on Form 8-K filed during the
quarter ended June 30, 2001.
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Verizon Hawaii Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Verizon Hawaii Inc.
Date: August 13, 2001 By /s/ Edwin F. Hall
-------------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 8, 2001.
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