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 March 31, 2003 |
|||
| 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 1-6393
VERIZON PENNSYLVANIA INC.
| A Pennsylvania Corporation |
I.R.S. Employer Identification No. 23-0397860 |
1717 Arch Street, Philadelphia, Pennsylvania 19103
Telephone Number (215) 466-9900
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Verizon Pennsylvania Inc.
| Page | ||||
| PART I |
Financial Information |
|||
| Item 1. |
Financial Statements |
|||
| Three Months Ended March 31, 2003 and 2002 |
1 | |||
| March 31, 2003 and December 31, 2002 |
2 | |||
| Three Months Ended March 31, 2003 and 2002 |
4 | |||
| 5 | ||||
| Item 2. |
Management’s Discussion and Analysis of Results of Operations |
8 | ||
| Item 4. |
15 | |||
| PART II |
Other Information |
|||
| Item 6. |
16 | |||
| 17 | ||||
| 18 | ||||
| 20 | ||||
Verizon Pennsylvania Inc.
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
CONDENSED STATEMENTS OF INCOME
| Three Months Ended March 31, |
|||||||
| (Dollars in Millions) (Unaudited) |
2003 |
2002 |
|||||
| Operating Revenues (including $56.2 and $63.5 from affiliates) |
$ |
881.4 |
$ |
882.8 |
| ||
| Operating Expenses (including $190.0 and $149.2 to affiliates) |
|||||||
| Cost of services and sales (exclusive of items shown below) |
|
258.7 |
|
235.2 |
| ||
| Selling, general and administrative expense |
|
177.7 |
|
167.2 |
| ||
| Depreciation and amortization |
|
199.6 |
|
218.2 |
| ||
| Total Operating Expenses |
|
636.0 |
|
620.6 |
| ||
| Operating Income |
|
245.4 |
|
262.2 |
| ||
| Other income and (expense), net (including $0 and $(23.9) from affiliates) |
|
.6 |
|
(24.9 |
) | ||
| Interest expense (including $1.2 and $.6 to affiliate) |
|
29.2 |
|
33.9 |
| ||
| Income before provision for income taxes and cumulative effect of change in accounting principle |
|
216.8 |
|
203.4 |
| ||
| Provision for income taxes |
|
89.3 |
|
94.5 |
| ||
| Income Before Cumulative Effect of Change In Accounting Principle |
|
127.5 |
|
108.9 |
| ||
| Cumulative effect of change in accounting principle, net of tax |
|
176.0 |
|
— |
| ||
| Net Income |
$ |
303.5 |
$ |
108.9 |
| ||
See Notes to Condensed Financial Statements.
1
Verizon Pennsylvania Inc.
CONDENSED BALANCE SHEETS
ASSETS
| (Dollars in Millions) |
March 31, 2003 |
December 31, 2002 | ||||
| (Unaudited) |
||||||
| Current assets |
||||||
| Short-term investments |
$ |
71.7 |
$ |
106.3 | ||
| Accounts receivable: |
||||||
| Trade and other, net of allowances for uncollectibles of $189.1 and $187.4 |
|
562.4 |
|
601.7 | ||
| Affiliates |
|
82.9 |
|
88.2 | ||
| Material and supplies |
|
16.1 |
|
16.3 | ||
| Prepaid expenses |
|
86.0 |
|
49.8 | ||
| Deferred income taxes |
|
95.2 |
|
92.1 | ||
| Other |
|
99.7 |
|
96.9 | ||
|
|
1,014.0 |
|
1,051.3 | |||
| Plant, property and equipment |
|
13,062.1 |
|
13,019.8 | ||
| Less accumulated depreciation |
|
8,171.6 |
|
8,333.3 | ||
|
|
4,890.5 |
|
4,686.5 | |||
| Intangible assets, net |
|
109.7 |
|
114.9 | ||
| Prepaid pension asset |
|
698.9 |
|
650.6 | ||
| Other assets |
|
279.5 |
|
282.2 | ||
| Total assets |
$ |
6,992.6 |
$ |
6,785.5 | ||
See Notes to Condensed Financial Statements.
2
Verizon Pennsylvania Inc.
LIABILITIES AND SHAREOWNER’S INVESTMENT
| (Dollars in Millions, Except Per Share Amount) |
March 31, |
December 31, | ||||
| (Unaudited) |
||||||
| Current liabilities |
||||||
| Debt maturing within one year: |
||||||
| Note payable to affiliate |
$ |
351.9 |
$ |
279.9 | ||
| Other |
|
.5 |
|
150.5 | ||
| Accounts payable and accrued liabilities: |
||||||
| Affiliates |
|
188.4 |
|
231.7 | ||
| Other |
|
483.2 |
|
504.1 | ||
| Other current liabilities |
|
192.2 |
|
191.4 | ||
|
|
1,216.2 |
|
1,357.6 | |||
| Long-term debt |
|
1,958.0 |
|
1,961.4 | ||
| Employee benefit obligations |
|
670.9 |
|
665.3 | ||
| Deferred credits and other liabilities |
||||||
| Deferred income taxes |
|
740.5 |
|
590.3 | ||
| Unamortized investment tax credits |
|
21.2 |
|
21.5 | ||
| Other |
|
197.8 |
|
188.9 | ||
|
|
959.5 |
|
800.7 | |||
| Shareowner’s investment |
||||||
| Common stock – $20 par value per share |
||||||
| Authorized shares: 80,210,000 |
|
1,594.7 |
|
1,594.7 | ||
| Outstanding shares: 79,732,681 |
||||||
| Contributed capital |
|
221.4 |
|
221.4 | ||
| Reinvested earnings |
|
371.9 |
|
184.4 | ||
|
|
2,188.0 |
|
2,000.5 | |||
| Total liabilities and shareowner’s investment |
$ |
6,992.6 |
$ |
6,785.5 | ||
See Notes to Condensed Financial Statements.
3
Verizon Pennsylvania Inc.
CONDENSED STATEMENTS OF CASH FLOWS
| Three Months Ended March 31, |
||||||||
| (Dollars in Millions) (Unaudited) |
2003 |
2002 |
||||||
| Net Cash Provided by Operating Activities |
$ |
259.1 |
|
$ |
212.4 |
| ||
| Cash Flows from Investing Activities |
||||||||
| Capital expenditures (including capitalized network and non-network software) |
|
(96.9 |
) |
|
(98.9 |
) | ||
| Net change in short-term investments |
|
34.6 |
|
|
37.2 |
| ||
| Other, net |
|
— |
|
|
(.1 |
) | ||
| Net cash used in investing activities |
|
(62.3 |
) |
|
(61.8 |
) | ||
| Cash Flows from Financing Activities |
||||||||
| Early extinguishment of debt |
|
— |
|
|
(225.0 |
) | ||
| Principal repayments of borrowings and capital lease obligations |
|
(150.2 |
) |
|
(.2 |
) | ||
| Change in note payable to affiliate |
|
72.0 |
|
|
167.1 |
| ||
| Dividends paid |
|
(116.0 |
) |
|
(82.0 |
) | ||
| Net change in outstanding checks drawn on controlled disbursement accounts |
|
(2.6 |
) |
|
(10.5 |
) | ||
| Net cash used in financing activities |
|
(196.8 |
) |
|
(150.6 |
) | ||
| Net change in cash |
|
— |
|
|
— |
| ||
| Cash, beginning of period |
|
— |
|
|
— |
| ||
| Cash, end of period |
$ |
— |
|
$ |
— |
| ||
See Notes to Condensed Financial Statements.
4
Verizon Pennsylvania Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon Pennsylvania Inc. is a wholly owned subsidiary of Verizon Communications Inc. (Verizon). The accompanying unaudited condensed financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. These financial statements 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, 2002 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 2002 Annual Report on Form 10-K.
We have reclassified certain amounts from prior year’s data to conform to the 2003 presentation.
2. Adoption of New Accounting Standards
Stock-Based Compensation
We participate in employee compensation plans sponsored by Verizon with awards of Verizon common stock. Prior to 2003, Verizon accounted for stock-based employee compensation under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and followed the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” In accordance with APB Opinion No. 25, no stock-based employee compensation expense for our fixed stock option plans is reflected in our 2002 net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
Effective January 1, 2003, Verizon adopted the fair value recognition provisions of SFAS No. 123, using the prospective method (as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”) to all new awards granted, modified or settled after January 1, 2003. Under the prospective method, employee compensation expense in the first year will be recognized for new awards granted, modified, or settled. The options generally vest over a term of three years, therefore the expense related to stock-based employee compensation included in the determination of net income for the first quarter of 2003 is less than what would have been recorded if the fair value method was also applied to previously issued awards. The following table illustrates the effect on net income if the fair value method had been applied to all outstanding and unvested options in each period:
| Three Months Ended March 31, |
||||||||
| (Dollars in Millions) |
2003 |
2002 |
||||||
| Net income, as reported |
$ |
303.5 |
|
$ |
108.9 |
| ||
| Add: Stock option-related employee compensation expense included | ||||||||