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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 1-3435
VERIZON NEW YORK INC.
A New York Corporation I.R.S. Employer Identification No. 13-5275510
1095 Avenue of the Americas, 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 New York 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 $139.9, $125.0, $308.1 and $274.9 from affiliates) $2,006.6 $2,174.2 $4,017.1 $4,309.1
--------------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $393.4, $386.8, $707.0 and
$717.0 to affiliates) 1,624.7 1,473.5 2,895.3 2,795.7
Depreciation and amortization 479.6 449.0 948.3 882.9
--------------------------------------------------------------
2,104.3 1,922.5 3,843.6 3,678.6
--------------------------------------------------------------
OPERATING INCOME (LOSS) (97.7) 251.7 173.5 630.5
OTHER INCOME, NET
(including $13.8, $25.6, $57.8 and $49.0 from affiliates) 20.8 29.4 64.9 62.0
INTEREST EXPENSE
(including $14.2, $32.1, $32.9 and $75.7 to affiliates) 87.0 88.2 156.1 186.8
--------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES AND EXTRAORDINARY ITEM (163.9) 192.9 82.3 505.7
PROVISION (BENEFIT) FOR INCOME TAXES (60.7) 61.9 11.7 168.2
--------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (103.2) 131.0 70.6 337.5
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax -- -- (.1) --
--------------------------------------------------------------
NET INCOME (LOSS) $ (103.2) $ 131.0 $ 70.5 $ 337.5
==============================================================
See Notes to Condensed Consolidated Financial Statements.
1
Verizon New York Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
(Dollars in Millions) June 30, 2002 December 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS
Short-term investments $ 187.0 $ 533.6
Note receivable from affiliate 221.0 279.4
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $455.9 and $430.9 1,413.7 1,764.2
Affiliates 324.3 274.0
Material and supplies 68.2 73.2
Prepaid expenses 137.3 229.0
Deferred income taxes 172.2 173.2
Other 234.2 199.4
-------------------------------------------------
2,757.9 3,526.0
-------------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 28,169.3 27,520.6
Less accumulated depreciation 16,390.1 15,814.6
-------------------------------------------------
11,779.2 11,706.0
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PREPAID PENSION ASSET 181.6 --
-------------------------------------------------
OTHER ASSETS 912.1 906.0
-------------------------------------------------
TOTAL ASSETS $15,630.8 $16,138.0
=================================================
See Notes to Condensed Consolidated Financial Statements.
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Verizon New York Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
(Dollars in Millions) June 30, 2002 December 31, 2001
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 2,102.3 $ 3,982.6
Other 1.0 2.6
Accounts payable and accrued liabilities:
Affiliates 1,289.5 1,199.0
Other 1,591.7 1,675.6
Other liabilities 404.0 374.5
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5,388.5 7,234.3
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LONG-TERM DEBT 4,481.4 3,193.6
-------------------------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 2,889.8 2,751.5
-------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 54.5 20.1
Unamortized investment tax credits 38.8 40.9
Other 411.1 528.1
-------------------------------------------------------
504.4 589.1
-------------------------------------------------------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value 1.0 1.0
Additional paid-in capital 1,091.6 1,070.9
Reinvested earnings 1,274.1 1,297.6
-------------------------------------------------------
2,366.7 2,369.5
-------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $15,630.8 $16,138.0
=======================================================
See Notes to Condensed Consolidated Financial Statements.
3
Verizon New York Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
--------------------------------------
(Dollars in Millions) (Unaudited) 2002 2001
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 996.0 $ 1,518.7
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 346.6 228.3
Capital expenditures (642.3) (1,445.1)
Reintegration of assets from affiliate (192.3) --
Change in note receivable from affiliate 58.4 998.1
Other, net (13.3) (13.3)
--------------------------------------
Net cash used in investing activities (442.9) (232.0)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 1,479.3 --
Early extinguishment of debt (205.0) --
Principal repayments of capital lease obligations (.8) (1.6)
Change in note payable to affiliate (1,880.3) (1,085.0)
Dividends paid (32.0) (145.0)
Net change in outstanding checks drawn
on controlled disbursement accounts 85.7 (55.1)
--------------------------------------
Net cash used in financing activities (553.1) (1,286.7)
--------------------------------------
NET CHANGE IN CASH -- --
CASH, BEGINNING OF PERIOD -- --
--------------------------------------
CASH, END OF PERIOD $ -- $ --
======================================
See Notes to Condensed Consolidated Financial Statements.
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Verizon New York Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon New York Inc. and its wholly owned subsidiary, Empire City Subway
Company, are wholly owned subsidiaries of NYNEX Corporation (NYNEX), 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 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 consolidated 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. Accounting for the Impact of the September 11, 2001 Terrorist Attacks
The primary financial statement impact of the September 11, 2001 terrorist
attacks pertains to our plant, equipment and administrative office space located
either in, or adjacent to the World Trade Center complex in New York City, and
the associated service restoration efforts. During the period following
September 11th, we focused primarily on service restoration in the World Trade
Center area. We have recorded pretax charges, net of estimated insurance
recoveries, of approximately $240 million through the period ended June 30,
2002, related to losses and service disruption and restoration costs.
Verizon Communications' insurance policies are limited to losses of $1
billion for each occurrence and include a deductible of $1 million. As a result,
we recognized an estimated insurance recovery of approximately $360 million, of
which approximately $177 million was received as of June 30, 2002. The costs and
estimated insurance recovery were recorded in accordance with Emerging Issues
Task Force (EITF) Issue No. 01-10, "Accounting for the Impact of the Terrorist
Attacks of September 11, 2001."
3. 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 142 did not impact our results of operations or financial position
because we had no goodwill or indefinite-lived intangible assets at December 31,
2001 and 2000.
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Verizon New York Inc.
Our other intangible assets consist of non-network software as follows:
As of June 30, 2002 As of December 31, 2001
----------------------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(Dollars in Millions) Amount Amortization Amount Amortization
- -------------------------------------------------------------------------------------------------------------------
Non-network software (3 to 7 years) $364.2 $119.7 $350.0 $91.4
Intangible assets amortization expense was $14.3 million for the three
months ended June 30, 2002 and $28.3 million for the six months ended June 30,
2002. It is estimated to be $29.0 million for the remainder of 2002, $57.9
million in 2003, $54.2 million in 2004, $38.5 million in 2005 and $32.6 million
in 2006, related to our non-network software.
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.
4. 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 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.
5. Dividend
On June 6, 2002, we declared a dividend in the amount of $78.0 million
from Reinvested Earnings. The dividend was paid to NYNEX on August 1, 2002.
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Verizon New York Inc.
6. Debt
During March 2002, we recorded extraordinary charges associated with the
early extinguishment of long-term debt, which reduced net income by $86,700 (net
of income tax benefits of $46,700). These debt extinguishments consisted of the
following:
. $130.0 million of 4 5/8% debentures due on January 1, 2004
. $75.0 million of 6% debentures due on September 1, 2007
In addition, we issued debentures totaling $1.5 billion, ($1.0 billion of
6 7/8% debentures due on April 1, 2012 and $500.0 million of 7 3/8% debentures
due on April 1, 2032) at a discount. Proceeds from these sales of $1,479.3
million were used to repay or refinance existing indebtedness and for general
corporate purposes.
7. Shareowner's Investment
Additional
Common Paid-in Reinvested
(Dollars in Millions) Stock Capital Earnings
- ------------------------------------------------------------------------------------------
Balance at December 31, 2001 $1.0 $1,070.9 $1,297.6
Net income 70.5
Dividends declared to NYNEX (94.0)
Other 20.7
-------------------------------------------------
Balance at June 30, 2002 $1.0 $1,091.6 $1,274.1
=================================================
Net income and comprehensive income were the same for the six months ended
June 30, 2002 and 2001.
8. 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 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.
7
Verizon New York Inc.
9. 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 $48.8 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
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 $222.0 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 $375.8
million associated with employee severance and related pension enhancements. The
charge included severance benefits of $187.8 million as recorded under SFAS No.
112 and related pension enhancements of $188.0 million as recorded under SFAS
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Pension Plans and for Termination Benefits." As of June 30, 2002, a total of
approximately 2,350 employees have been separated under the 2001 and 2002
severance programs, excluding a significant number of voluntary separations that
were not processed by June 30, 2002. The remaining severance liability relating
to these programs is $347.4 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 $10.4 million driven by our financial statement exposure of WorldCom
Inc.
10. Transfer of Assets from Affiliate
In April 2002, we repurchased certain advanced data assets that were sold
for cash to Verizon Ventures III Inc. (Ventures III), an affiliated company,
during 2000 and 2001 to satisfy a condition of the Federal Communication
Commission's (FCC) approval of the Bell Atlantic - GTE merger, which required
the provision of advanced data services through a separate affiliate.
In September 2001, the FCC issued an order eliminating this merger
condition and we subsequently obtained approval from our regulatory commission
for the reintegration of these assets with our operations. The reintegrated
assets were purchased from Ventures III for $192.3 million in cash. This
reintegration did not have a material effect on our results of operations or
financial condition.
8
Verizon New York 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 $70.5 million for the six month period ended
June 30, 2002, compared to net income of $337.5 million for the same period in
2001. Our reported results for first half of 2002 included the following special
items:
Accounting for the Impact of the September 11, 2001 Terrorist Attacks
The primary financial statement impact of the September 11, 2001 terrorist
attacks pertains to our plant, equipment and administrative office space located
either in, or adjacent to the World Trade Center complex in New York City, and
the associated service restoration efforts. During the period following
September 11th, we focused primarily on service restoration in the World Trade
Center area. We have recorded pretax charges, net of estimated insurance
recoveries, of approximately $240 million through the period ended June 30,
2002, related to losses and service disruption and restoration costs.
Verizon Communications' insurance policies are limited to losses of $1
billion for each occurrence and include a deductible of $1 million. As a result,
we recognized an estimated insurance recovery of approximately $360 million, of
which approximately $177 million was received as of June 30, 2002. The costs and
estimated insurance recovery were recorded in accordance with Emerging Issues
Task Force (EITF) Issue No. 01-10, "Accounting for the Impact of the Terrorist
Attacks of September 11, 2001."
In August 2002, President Bush signed the Supplemental Appropriations bill
passed earlier this year by the U.S. House of Representatives and the U.S.
Senate. The Supplemental Appropriations bill includes $5.5 billion in New York
recovery funding. Of that amount, $750 million has been allocated to cover the
uninsured losses of two major utilities, which includes Verizon Communications,
incurred in connection with the September 11th terrorist attacks. These funds
will be distributed as federal grants through the Lower Manhattan Development
Corporation following a thorough application process.
Employee Severance and Other Items
During the second quarter of 2002, we recorded a charge of $375.8 million
associated with employee severance and related pension enhancements. The charge
included severance benefits of $187.8 million as recorded under Statement of
Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for
Postemployment Benefits," and related pension enhancements of $188.0 million as
recorded under SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Pension Plans and for Termination Benefits."
In addition, during the second quarter of 2002, we recorded an impairment
charge of $10.4 million driven by our financial statement exposure of WorldCom
Inc.
Also, in the second quarter of 2002, we reversed a prior year accrual in
connection with our new Alternative Regulation Plan resulting in a reduction in
operating expenses of approximately $75 million.
Verizon Ventures III
In April 2002, we repurchased certain advanced data assets that were sold
for cash to Verizon Ventures III Inc. (Ventures III), an affiliated company,
during 2000 and 2001 to satisfy a condition of the Federal Communication
Commission's (FCC) approval of the Bell Atlantic - GTE merger, which required
the provision of advanced data services through a separate affiliate. In
September 2001, the FCC issued an order eliminating this merger condition and we
subsequently obtained approval from our regulatory commission for the
reintegration of these assets with our operations. The reintegrated assets were
purchased from Ventures III for $192.3 million in cash.
This reintegration principally affected our comparison of Network access
services revenues and Operations and support expenses, as described below.
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Verizon New York Inc.
OPERATING REVENUES
- ------------------
(Dollars in Millions)
Six Months Ended June 30,
---------------------------------
2002 2001
- --------------------------------------------------------------------------------
Local services $2,517.5 $2,669.9
Network access services 1,163.3 1,141.3
Long distance services 85.4 98.1
Other services 250.9 399.8
---------------------------------
Total $4,017.1 $4,309.1
=================================
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 $(152.4) (5.7)%
- --------------------------------------------------------------------------------
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.
The decline in local service revenues in the first six months of 2002 was
primarily due to lower demand and usage of our basic wireline services, as
reflected by a decrease in our switched access lines in service of 4.1% from
June 30, 2001. This decrease primarily reflects the impact of the economic
slowdown and competition. Technology substitution has also affected local
service revenue growth, as indicated by lower demand for residential access
lines. In addition, the net effect of mandated price reductions on UNEs,
partially offset by rate increases for basic retail services as prescribed under
the new Alternative Regulation Plan further contributed to the decline in local
service revenues for the six months ended June 30, 2002.
For additional information on new Alternative Regulation Plan, see "Other
Matters - State Regulation."
NETWORK ACCESS SERVICES
2002 - 2001 Increase
- --------------------------------------------------------------------------------
Six Months $22.0 1.9%
- --------------------------------------------------------------------------------
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 growth in the first six months of 2002 was
mainly attributable to higher customer demand for special access services,
particularly for high-capacity, high-speed digital services. In addition, the
reversal of an accrual in the second quarter of 2002 in connection with our new
Alternative Regulation Plan and the reintegration of Ventures III also
contributed to the increase in network access service revenues. These increases
were substantially offset by price reductions associated with federal price cap
filings and other regulatory decisions and by a one-time billing settlement with
a carrier. The impact of the slowing economy also affected network access
service revenue growth in the first half of 2002, as reflected by a decline in
minutes of use from carriers and CLECs.
10
Verizon New York Inc.
LONG DISTANCE SERVICES
2002 - 2001 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(12.7) (12.9)%
- --------------------------------------------------------------------------------
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 the New York State Public Service Commission (NYSPSC) and the
Connecticut Department of Public Utility Control (CDPUC), except where they
cross state lines. Other long distance services that we provide include 800
services, Wide Area Telephone Service (WATS), private line services and corridor
services (between LATAs in New York City and northern New Jersey).
Long distance service revenues declined in the first six months of 2002
primarily due to competition and the effects of toll calling discount packages
and product bundling offers of our intraLATA toll services. Technology
substitution and lower access line growth due to the slowing economy also
affected long distance service revenue growth in the first half of 2002.
OTHER SERVICES
2002 - 2001 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(148.9) (37.2)%
- --------------------------------------------------------------------------------
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).
Amounts recognized in connection with obligations and commitments for regulatory
matters, if any, are also included in this revenue category. Other service
revenues also include payments from an affiliate, Verizon Yellow Pages Company
(Yellow Pages), for earnings related to its directory activities in New York. We
also earn revenues from Yellow Pages for the use of our name in soliciting
directory advertising and in publishing and distributing directories and from
customers for nonpublication of telephone numbers and multiple white page
listings.
Other service revenues decreased in the first six months of 2002 primarily
due to the effect of a one-time reclassification in 2001 associated with
regulatory-related activities. In addition, lower revenues from our pay phone
services as a result of the increasing popularity of wireless communication and
a decrease in affiliated billing and collections further decreased other
services revenue in the first half of 2002.
OPERATING EXPENSES
- ------------------
(Dollars in Millions)
OPERATIONS AND SUPPORT
2002 - 2001 Increase
- --------------------------------------------------------------------------------
Six Months $99.6 3.6%
- --------------------------------------------------------------------------------
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 employee severance and related pension enhancement costs recorded in the
second quarter of 2002, as well as an increase in the provision for
uncollectible accounts receivable. Additional costs related to the terrorists
attacks on September 11, 2001, salary and wage increases for employees and the
reintegration of Ventures III also contributed to the increase in operations and
support expenses. These increases were partially offset by effective cost
control measures, the effect of a one-time reclassification in 2001 associated
with regulatory-related
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Verizon New York Inc.
activities and lower employee costs associated with declining workforce levels.
The reversal of an accrual in the second quarter of 2002 in connection with our
new Alternative Regulation Plan and lower employee overtime pay further offset
the increase in operations and support expenses for the six months ended June
30, 2002.
DEPRECIATION AND AMORTIZATION
2002 - 2001 Increase
- --------------------------------------------------------------------------------
Six Months $65.4 7.4%
- --------------------------------------------------------------------------------
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 increased in the first six months of
2002 primarily due to growth in depreciable telephone plant and, to a lesser
extent, increased software amortization costs. These increases were partially
offset by the effect of lower rates of depreciation.
OTHER RESULTS
- -------------
(Dollars in Millions)
OTHER INCOME, NET
2002 - 2001 Increase
- --------------------------------------------------------------------------------
Six Months $2.9 4.7%
- --------------------------------------------------------------------------------
Other income, net includes equity income (losses), interest income and
other nonoperating income and expense items. We have an investment in Verizon
Services Group, which we account for under the equity method. Verizon Services
Group operates in conjunction with Verizon Services Corp. and Verizon Corporate
Services Group Inc. (collectively known as Verizon Services) to provide various
centralized services on behalf of the subsidiaries of Verizon Communications
Inc.
The increase in other income, net, was primarily attributable to higher
equity income recognized from our investment in Verizon Services Group. This
increase was partially offset by lower interest income from our note receivable
with an affiliate principally as a result of lower interest rates and, to a
lesser extent, by lower interest income from our short-term investments.
INTEREST EXPENSE
2002 - 2001 (Decrease)
- --------------------------------------------------------------------------------
Six Months $(30.7) (16.4)%
- --------------------------------------------------------------------------------
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 as a result of lower interest rates on short-term debt
with an affiliate. This decrease was partially offset by the effect of higher
levels of long-term debt.
12
Verizon New York Inc.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30,
- --------------------------------------------------------------------------------
2002 14.2%
- --------------------------------------------------------------------------------
2001 33.3%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision (benefit) for income taxes
as a percentage of income (loss) before provision for income taxes and
extraordinary item. 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 the
effects of lower pre-tax income and an increase in non-taxable equity income
from our investment in Verizon Services Group during the first six months of
2002.
EARLY EXTINGUISHMENT OF DEBT
During March 2002, we recorded extraordinary charges associated with the
early extinguishment of long-term debt, which reduced net income by $86,700 (net
of income tax benefits of $46,700).
See Note 6 to the Condensed Consolidated Financial Statements.
OTHER MATTERS
- -------------
State Regulation
On January 28, 2002, the NYSPSC issued an order mandating reductions in
the rates that we may charge our local exchange competitors for access to UNEs.
Assuming current volumes, the revenue impact of the reductions is estimated to
be $200 million per year, although this amount may change if volumes change.
Separately, the NYSPSC approved a new alternative regulation plan, which
became effective on March 1, 2002. Under the new two year plan, we are permitted
to exercise rate flexibility up to 3% of our total intrastate revenues annually,
or approximately $160 million.
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.
13
Verizon New York Inc.
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 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.
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 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.
14
Verizon New York 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
------
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.
15
Verizon New York 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 New York Inc.
Date: August 14, 2002 By /s/ Edwin F. Hall
------------------------------------
Edwin F. Hall
Chief Financial Officer and
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 7, 2002.
16
EXHIBIT INDEX
Exhibit
Number
------
12 Computation of Ratio of Earnings to Fixed Charges.