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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
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(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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6417
VERIZON CALIFORNIA INC.
A California Corporation I.R.S. Employer Identification No. 95-0510200
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 California 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) 2002 2001 2002 2001
- -------------------------------------------------------------- ---------------------------------------------------------
OPERATING REVENUES
(including $69.6, $62.8, $140.5 and $99.4 from affiliates) $825.4 $872.6 $1,642.9 $1,704.9
--------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $118.1, $104.1, $227.3 and
$186.4 to affiliates) 408.0 359.0 763.5 689.6
Depreciation and amortization 157.3 162.7 315.8 323.5
--------------------------------------------------------
565.3 521.7 1,079.3 1,013.1
--------------------------------------------------------
OPERATING INCOME 260.1 350.9 563.6 691.8
OTHER INCOME, NET
(including $0, $0, $.1 and $.2 from affiliates) .4 --- .7 .2
INTEREST EXPENSE
(including $4.3, $12.9, $8.6 and $20.1 to affiliates) 33.0 43.5 65.8 79.3
--------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 227.5 307.4 498.5 612.7
PROVISION FOR INCOME TAXES 92.4 125.4 202.6 250.4
--------------------------------------------------------
NET INCOME $135.1 $182.0 $ 295.9 $ 362.3
========================================================
See Notes to Condensed Consolidated Financial Statements.
1
Verizon California Inc.
Verizon California Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
(Dollars in Millions) June 30, 2002 December 31, 2001
----------------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS
Cash $ 1.4 $ 1.4
Short-term investments 36.3 105.8
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $86.8 and $47.0 550.4 598.6
Affiliates 51.3 45.5
Material and supplies 58.7 49.6
Prepaid expenses 1.5 1.3
Deferred income taxes 85.6 75.3
Other 80.8 83.3
-----------------------------------------
866.0 960.8
-----------------------------------------
PLANT, PROPERTY AND EQUIPMENT 11,410.8 11,264.7
Less accumulated depreciation 7,601.8 7,386.4
-----------------------------------------
3,809.0 3,878.3
-----------------------------------------
PREPAID PENSION ASSET 1,949.6 1,849.2
-----------------------------------------
OTHER ASSETS 184.6 187.4
-----------------------------------------
TOTAL ASSETS $ 6,809.2 $ 6,875.7
=========================================
See Notes to Condensed Consolidated Financial Statements.
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Verizon California Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
(Dollars in Millions, Except Per Share Amount) June 30, 2002 December 31, 2001
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES
Debt maturing within one year:
Notes payable to affiliates $ 764.0 $ 723.3
Other 2.5 2.5
Accounts payable and accrued liabilities:
Affiliates 157.3 145.0
Other 300.9 478.9
Other liabilities 289.2 273.0
--------------------------------------
1,513.9 1,622.7
--------------------------------------
LONG-TERM DEBT 1,659.4 1,659.1
--------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 308.2 308.3
--------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 1,160.0 1,099.7
Unamortized investment tax credits 1.9 2.6
Other 177.8 186.3
--------------------------------------
1,339.7 1,288.6
--------------------------------------
SHAREOWNER'S INVESTMENT
Common stock $20 par value per share 1,400.0 1,400.0
Authorized shares: 100,000,000
Outstanding shares: 70,000,000
Contributed capital 337.4 337.3
Reinvested earnings 250.6 259.7
--------------------------------------
1,988.0 1,997.0
--------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $6,809.2 $6,875.7
======================================
See Notes to Condensed Consolidated Financial Statements.
3
Verizon California Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-------------------------------------------
(Dollars in Millions) (Unaudited) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 436.0 $ 602.7
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 69.5 32.5
Capital expenditures (241.2) (322.1)
Other, net --- 1.8
-------------------------------------------
Net cash used in investing activities (171.7) (287.8)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings --- (300.0)
Change in notes payable to affiliates 40.7 332.2
Dividends paid (305.0) (332.0)
-------------------------------------------
Net cash used in financing activities (264.3) (299.8)
-------------------------------------------
NET CHANGE IN CASH --- 15.1
CASH, BEGINNING OF PERIOD 1.4 2.5
-------------------------------------------
CASH, END OF PERIOD $ 1.4 $ 17.6
===========================================
See Notes to Condensed Consolidated Financial Statements.
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Verizon California Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon California 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, 2001 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 2001 Annual Report on Form 10-K.
We have reclassified certain amounts from prior year's data to conform to
the 2002 presentation.
2. Adoption of New Accounting Standards
Goodwill and Other Intangible Assets
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." 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 prescribed 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."
The goodwill impairment test under SFAS No. 142 requires a two-step approach,
which is performed at the reporting unit level, as defined in SFAS No. 142. Step
one identifies potential impairments by comparing the fair value of the
reporting unit to its carrying amount. Step two, which is only performed if
there is a potential impairment, compares the carrying amount of the reporting
unit's goodwill to its implied value, as defined in SFAS No. 142. If the
carrying amount of the reporting unit's goodwill exceeds the implied fair value
of that goodwill, an impairment loss is recognized for an amount equal to that
excess. Intangible assets that do not have indefinite lives are amortized over
their useful lives and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption
of SFAS No. 142 did not impact our results of operations or financial position
because we had no goodwill or other intangible assets at December 31, 2001 and
2000.
Impairment or Disposal of Long-Lived Assets
Effective January 1, 2002, we adopted SFAS No. 144. This standard
supersedes SFAS No. 121 and the provisions of Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," with regard to reporting the effects of a
disposal of a segment of a business. SFAS No. 144 establishes a single
accounting model for assets to be disposed of by sale and addresses several SFAS
No. 121 implementation issues. The adoption of SFAS No. 144 did not have a
material effect on our results of operations or financial position.
3. Recent Accounting Pronouncements
Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This standard provides
the accounting for the cost of legal obligations associated with the retirement
of long-lived assets. SFAS No. 143 requires that companies recognize the fair
value of a liability for asset retirement obligations in the period in which the
obligations are incurred and capitalize that amount as a part of the book value
of the long-lived asset. That cost is then depreciated over the remaining life
of the underlying long-lived asset. We are required to adopt SFAS No. 143
effective January 1, 2003. We are currently evaluating the impact this new
standard will have on our future results of operations or financial position.
5
Verizon California Inc.
Debt Extinguishment
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, eliminates the requirement that
all gains and losses on the extinguishment of debt must be classified as
extraordinary items on the income statement, thereby permitting the
classification of such gains and losses as extraordinary items only if the
criteria of APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," are met. We are required to
adopt this provision of SFAS No. 145 no later than January 1, 2003 and upon
adoption we will reclassify in our statements of income previously reported
extraordinary charges for the early extinguishment of debt to income from
continuing operations.
Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." EITF Issue No.
94-3 required accrual of liabilities related to exit and disposal activities at
a plan (commitment) date. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. The provisions of this standard are effective for exit or disposal
activities that are initiated after December 31, 2002.
4. Dividend
On August 1, 2002, we declared and paid a dividend from Reinvested Earnings
in the amount of $170.0 million to GTE.
5. Shareowner's Investment
Contributed Reinvested
(Dollars in Millions) Common Stock Capital Earnings
- --------------------------------------------------------------------------------------------
Balance at December 31, 2001 $1,400.0 $337.3 $ 259.7
Net income 295.9
Dividends declared to GTE (305.0)
Other .1
-----------------------------------------------------
Balance at June 30, 2002 $1,400.0 $337.4 $ 250.6
=====================================================
Net income and comprehensive income were the same for the six months ended
June 30, 2002 and 2001.
6. Commitments and Contingencies
State regulatory conditions to the Bell Atlantic - GTE merger require us to
contribute $2.5 million to a community fund in each of the years 2003 through
2010.
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 that 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 to customers 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 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.
6
Verizon California Inc.
7. Employee Severance and Other Items
In connection with the Bell Atlantic-GTE merger on June 30, 2000, we
incurred charges associated with employee severance of $51.5 million. These
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 of ongoing SFAS No. 112 obligations for GTE employees. As of
June 30, 2002, the severances in connection with the Bell Atlantic-GTE merger
are complete.
During the fourth quarter of 2001, we recorded a charge of $9.1 million for
the voluntary and involuntary separation of employees in accordance with SFAS
No. 112. During the second quarter of 2002, we recorded a charge of $9.8 million
in accordance with SFAS No. 112 associated with employee severance. As of June
30, 2002, a total of approximately 290 employees have been separated under the
2001 and 2002 severance programs. The remaining severance liability relating to
these programs is $8.4 million, which includes future payments to employees
separated as of June 30, 2002. We expect to complete the severance programs
within a year of when the charge was recorded.
In addition, during the second quarter of 2002, we recorded an impairment
charge of $26.1 million driven by our financial statement exposure of WorldCom
Inc.
7
Verizon California 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 Condensed
Consolidated Financial Statements and Condensed Consolidated Notes to Financial
Statements.
RESULTS OF OPERATIONS
- ---------------------
We reported net income of $295.9 million for the six month period ended
June 30, 2002, compared to net income of $362.3 million for the same period in
2001. Our reported results for the first half of 2002 included the following
special items:
Employee Severance and Other Items
During the second quarter of 2002, we recorded a charge of $9.8 million in
accordance with Statement of Financial Accounting Standards (SFAS) No. 112,
"Employers' Accounting for Postemployment Benefits," associated with employee
severance.
In addition, during the second quarter of 2002, we recorded an impairment
charge of $26.1 million driven by our financial statement exposure of WorldCom
Inc.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Six Months Ended June 30,
-----------------------------------------
2002 2001
- ------------------------------------------------------------------------------------
Local services $ 801.8 $ 818.4
Network access services 620.3 646.8
Long distance services 65.8 75.2
Other services 155.0 164.5
-----------------------------------------
Total $1,642.9 $1,704.9
=========================================
We recognize service revenues based upon usage of our local exchange
network and facilities and contract fees. We recognize product and other service
revenues when the products are delivered and accepted by the customers and when
services are provided in accordance with contract terms.
LOCAL SERVICES
2002 - 2001 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(16.6) (2.0)%
- --------------------------------------------------------------------------------
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 (CLECs),
certain data transport revenues and wireless interconnection revenues.
Local service revenues decreased in the first six months of 2002 primarily
due to the effect of lower demand and usage of some basic wireline services, as
reflected by a decline in our switched access lines in service of 1.9% from June
30, 2001. This decrease primarily reflects the impact of the economic slowdown
and competition. A rate decrease for wireless interconnection services and
technology substitution further decreased local service revenue growth in the
first half of 2002. These decreases were partially offset by higher customer
demand and usage of our value-added services and higher billings to CLECs for
interconnection of their network with our network and the purchase of UNEs.
8
Verizon California Inc.
NETWORK ACCESS SERVICES
2002 - 2001 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(26.5) (4.1)%
- --------------------------------------------------------------------------------
Network access service 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.
Network access service revenue decreased in the first six months of 2002
primarily due to mandated price reductions on interstate and intrastate access
services and other regulatory decisions. In addition, growth in switched access
service revenue declined in the first half of 2002 due to the impact of the
slowing economy, as reflected by a decline in minutes of use from carriers and
CLECs. These decreases were partially offset by higher customer demand for
special access services, particularly for high capacity, high-speed digital
services.
LONG DISTANCE SERVICES
2002 - 2001 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(9.4) (12.5)%
- --------------------------------------------------------------------------------
Long distance revenues are earned primarily 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 Service (WATS). We also earn revenue from private line and operator
services associated with long distance calls.
Long distance service revenues declined in the first six months of 2002
primarily due to the effects of competition, technology substitution and the
slowing economy.
OTHER SERVICES
2002 - 2001 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(9.5) (5.8)%
- --------------------------------------------------------------------------------
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, fees paid by an affiliate
for usage of our directory listings and fees paid by an affiliate for the
provision of sales agent services.
Other service revenues decreased in the first six months of 2002 primarily
due to lower revenue from CPE sales. These decreases were partially offset by an
increase in revenue from affiliate sales and services.
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Verizon California Inc.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
OPERATIONS AND SUPPORT
2002 - 2001 Increase
- --------------------------------------------------------------------------------
Six Months $73.9 10.7%
- --------------------------------------------------------------------------------
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 increase in operations and support expenses was primarily attributable
to higher centralized services expenses allocated to us by Verizon Services, as
well as an increase in the provision for uncollectible accounts receivable.
Higher interconnection and related costs associated with reciprocal compensation
arrangements and employee severance costs recorded in the second quarter of 2002
also contributed to the increase in operations and support expenses. The effect
of declining workforce levels partially offset the increase in operations and
support expenses for the six months ended June 30, 2002.
DEPRECIATION AND AMORTIZATION
2002 - 2001 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(7.7) (2.4)%
- --------------------------------------------------------------------------------
Depreciation expense is principally based on the composite group remaining
life method and straight-line composite rates. This method provides for the
recognition of the cost of the remaining net investment in telephone plant, less
anticipated net salvage value, over the remaining asset lives. This method
requires the periodic revision of depreciation rates.
Depreciation and amortization expense decreased in the first six months of
2002 primarily due to the effect of lower rates of depreciation. This decrease
was partially offset by growth in depreciable telephone plant and, to a lesser
extent, increased software amortization costs.
OTHER RESULTS
- -------------
(Dollars in Millions)
OTHER INCOME, NET
2002 - 2001 Increase
- --------------------------------------------------------------------------------
Six Months $.5 250.0%
- --------------------------------------------------------------------------------
Other income, net includes equity income (losses), interest income and
other nonoperating income and expense items.
The increase in other income, net, was primarily attributable to an
increase in interest income from short-term investments.
10
Verizon California Inc.
INTEREST EXPENSE
2002 - 2001 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(13.5) (17.0)%
- --------------------------------------------------------------------------------
Interest expense includes costs associated with borrowing and capital
leases, net of capitalized interest costs. We capitalize interest associated
with the acquisition or construction of plant assets. Capitalized interest is
reported as a cost of plant and a reduction in interest expense.
Interest expense decreased in the first six months of 2002, over the same
period in 2001, primarily due to lower interest rates on short-term debt with an
affiliate.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30,
- --------------------------------------------------------------------------------
2002 40.6%
- --------------------------------------------------------------------------------
2001 40.9%
- --------------------------------------------------------------------------------
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 lower for the six months ended June 30, 2002, compared to the same
period in 2001, primarily due to a decrease in non-recurring income tax expense,
partially offset by a decrease in investment tax credit amortization.
OTHER MATTERS
- -------------
Recent Accounting Pronouncements
Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This standard provides
the accounting for the cost of legal obligations associated with the retirement
of long-lived assets. SFAS No. 143 requires that companies recognize the fair
value of a liability for asset retirement obligations in the period in which the
obligations are incurred and capitalize that amount as a part of the book value
of the long-lived asset. That cost is then depreciated over the remaining life
of the underlying long-lived asset. We are required to adopt SFAS No. 143
effective January 1, 2003. We are currently evaluating the impact this new
standard will have on our future results of operations or financial position.
Debt Extinguishment
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, eliminates the requirement that
all gains and losses on the extinguishment of debt must be classified as
extraordinary items on the income statement, thereby permitting the
classification of such gains and losses as extraordinary items only if the
criteria of APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," are met. We are required to
adopt this provision of SFAS No. 145 no later than January 1, 2003 and upon
adoption we will reclassify in our statements of income previously reported
extraordinary charges for the early extinguishment of debt to income from
continuing operations.
Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." EITF Issue No.
94-3 required accrual of liabilities related to exit and disposal activities at
a plan (commitment) date. SFAS No. 146 requires that a liability for a cost
11
Verizon California Inc.
associated with an exit or disposal activity be recognized when the liability is
incurred. The provisions of this standard are effective for exit or disposal
activities that are initiated after December 31, 2002.
Compensation for Internet Traffic
We continue to incur expenditures related to reciprocal compensation
arrangements with CLECs and other carriers to terminate calls on their network.
On April 27, 2001, the Federal Communications Commission (FCC) released an
order addressing intercarrier compensation for dial-up connections for
Internet-bound traffic. 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 1996 Act. Instead, the FCC established federal rates per minute
for this traffic that decline from $0.0015 to $0.0007 over a three-year period.
The FCC order also sets caps on the total minutes of this traffic 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. On May 3,
2002 the U.S. Court of Appeals for the D.C. Circuit remanded the April 27, 2001
FCC order for further proceedings. It did not vacate the interim pricing rules
established in that order and they remain in effect.
Several parties, including Pac-West Telecomm and Focal Communications Corp.
have requested rehearing, asking the court to vacate the underlying order. A
decision on the rehearing petitions remains pending, and the FCC's underlying
order remains in effect.
12
Verizon California Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
------
3.1 Amended and Restated Articles of Incorporation of
Verizon California Inc.
3.2 Amended and Restated Bylaws of Verizon California Inc.
12 Computation of Ratio of Earnings to Fixed Charges.
(b) There were no Current Reports on Form 8-K filed during the quarter
ended June 30, 2002.
13
Verizon California 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 California Inc.
Date: August 14, 2002 By /s/ Edwin F. Hall
--------------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 7, 2002.
14
EXHIBIT INDEX
Exhibit
Number
------
3.1 Amended and Restated Articles of Incorporation of
Verizon California Inc.
3.2 Amended and Restated Bylaws of Verizon California Inc.
12 Computation of Ratio of Earnings to Fixed Charges.