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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 September 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 ¨

1

 
PART I—FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
VERIZON NEW YORK INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
    
Three Months Ended September 30,
     
Nine Months Ended September 30,
  
(Dollars in Millions) (Unaudited)
   
2002
   
2001
     
2002
     
2001
  
OPERATING REVENUES (including $117.4, $119.3, $425.5 and $394.2 from affiliates)
   
$
1,958.1
   
$
2,021.0
 
   
$
5,975.2
 
   
$
6,330.1
 
    
  
  
  
Operations and support expense (exclusive of items shown below) (including $391.3, $318.5, $1,098.3 and $1,035.5 to affiliates)
   
 
1,418.7
   
 
1,505.1
 
   
 
4,314.0
 
   
 
4,300.8
 
Depreciation and amortization
   
 
453.1
   
 
456.9
 
   
 
1,401.4
 
   
 
1,339.8
 
    
  
  
  
    
 
1,871.8
   
 
1,962.0
 
   
 
5,715.4
 
   
 
5,640.6
 
    
  
  
  
OPERATING INCOME
   
 
86.3
   
 
59.0
 
   
 
259.8
 
   
 
689.5
 
OTHER INCOME, NET (including $7.7, $18.5, $65.5 and $67.5 from affiliates)
   
 
9.5
   
 
62.2
 
   
 
74.4
 
   
 
124.2
 
INTEREST EXPENSE (including $12.3, $22.1, $45.2 and $97.8 to affiliates)
   
 
86.7
   
 
72.7
 
   
 
242.8
 
   
 
259.5
 
    
  
  
  
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM
   
 
9.1
   
 
48.5
 
   
 
91.4
 
   
 
554.2
 
PROVISION FOR INCOME TAXES
   
 
1.6
   
 
8.9
 
   
 
13.3
 
   
 
177.1
 
    
  
  
  
INCOME BEFORE EXTRAORDINARY ITEM
   
 
7.5
   
 
39.6
 
   
 
78.1
 
   
 
377.1
 
EXTRAORDINARY ITEM Early extinguishment of debt, net of tax
   
 
—  
   
 
(7.7
)
   
 
(.1
)
   
 
(7.7
)
    
  
  
  
NET INCOME
   
$
7.5
   
$
31.9
 
   
$
78.0
 
   
$
369.4
 
    
  
  
  
 
See Notes to Condensed Consolidated Financial Statements.

2

 
VERIZON NEW YORK INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Dollars in Millions)
   
September 30, 2002
   
December 31, 2001
    
(Unaudited)
     
ASSETS
              
CURRENT ASSETS
              
Short-term investments
   
$
14.3
   
$
533.6
Note receivable from affiliate
   
 
112.6
   
 
279.4
Accounts receivable:
              
Trade and other, net of allowances for uncollectibles of $453.7 and $430.9
   
 
1,404.8
   
 
1,764.2
Affiliates
   
 
279.2
   
 
274.0
Material and supplies
   
 
54.4
   
 
73.2
Prepaid expenses
   
 
97.8
   
 
229.0
Deferred income taxes
   
 
151.7
   
 
173.2
Other
   
 
207.6
   
 
199.4
    
  
    
 
2,322.4
   
 
3,526.0
    
  
PLANT, PROPERTY AND EQUIPMENT
   
 
28,289.2
   
 
27,520.6
Less accumulated depreciation
   
 
16,586.5
   
 
15,814.6
    
  
    
 
11,702.7
   
 
11,706.0
    
  
OTHER ASSETS
   
 
1,100.7
   
 
906.0
    
  
TOTAL ASSETS
   
$
15,125.8
   
$
16,138.0
    
  
 
See Notes to Condensed Consolidated Financial Statements.

3

VERIZON NEW YORK INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Dollars in Millions)
   
September 30, 2002
   
December 31, 2001
    
(Unaudited)
     
LIABILITIES AND SHAREOWNER’S INVESTMENT
              
CURRENT LIABILITIES
              
Debt maturing within one year:
              
Notes payable to affiliates
   
$
1,848.0
   
$
3,982.6
Other
   
 
200.8
   
 
2.6
Accounts payable and accrued liabilities:
              
Affiliates
   
 
1,161.0
   
 
1,199.0
Other
   
 
1,450.8
   
 
1,675.6
Other liabilities
   
 
392.4
   
 
374.5
    
  
    
 
5,053.0
   
 
7,234.3
    
  
LONG-TERM DEBT
   
 
4,282.2
   
 
3,193.6
    
  
EMPLOYEE BENEFIT OBLIGATIONS
   
 
2,909.2
   
 
2,751.5
    
  
DEFERRED CREDITS AND OTHER LIABILITIES
              
Deferred income taxes
   
 
132.5
   
 
20.1
Unamortized investment tax credits
   
 
37.8
   
 
40.9
Other
   
 
360.4
   
 
528.1
    
  
    
 
530.7
   
 
589.1
    
  
SHAREOWNER’S INVESTMENT
              
Common stock—one share, without par value
   
 
1.0
   
 
1.0
Additional paid-in capital
   
 
1,092.1
   
 
1,070.9
Reinvested earnings
   
 
1,257.6
   
 
1,297.6
    
  
    
 
2,350.7
   
 
2,369.5
    
  
TOTAL LIABILITIES AND SHAREOWNER’S INVESTMENT
   
$
15,125.8
   
$
16,138.0
    
  
 
See Notes to Condensed Consolidated Financial Statements.

4

 
VERIZON NEW YORK INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    
Nine Months Ended
September 30,
  
(Dollars in Millions) (Unaudited)
   
2002
     
2001
  
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
$
1,378.6
 
   
$
1,904.8
 
    
  
CASH FLOWS FROM INVESTING ACTIVITIES
                  
Net change in short-term investments
   
 
519.3
 
   
 
341.7
 
Capital expenditures
   
 
(920.7
)
   
 
(1,713.4
)
Reintegration of assets from affiliate
   
 
(192.3
)
   
 
—  
 
Change in note receivable from affiliate
   
 
166.8
 
   
 
819.6
 
Other, net
   
 
(13.4
)
   
 
(28.8
)
    
  
Net cash used in investing activities
   
 
(440.3
)
   
 
(580.9
)
    
  
CASH FLOWS FROM FINANCING ACTIVITIES
                  
Proceeds from borrowings
   
 
1,479.3
 
   
 
—  
 
Early extinguishment of debt
   
 
(205.0
)
   
 
(227.9
)
Principal repayments of capital lease obligations
   
 
(1.1
)
   
 
(3.5
)
Change in notes payable to affiliates
   
 
(2,134.6
)
   
 
(839.6
)
Distributions of additional paid-in capital
   
 
—  
 
   
 
(145.0
)
Dividends paid
   
 
(110.0
)
   
 
(25.0
)
Net change in outstanding checks drawn on controlled disbursement accounts
   
 
33.1
 
   
 
(82.9
)
    
  
Net cash used in financing activities
   
 
(938.3
)
   
 
(1,323.9
)
    
  
NET CHANGE IN CASH
   
 
—  
 
   
 
—  
 
CASH, BEGINNING OF PERIOD
   
 
—  
 
   
 
—  
 
    
  
CASH, END OF PERIOD
   
$
—  
 
   
$
—  
 
    
  
 
See Notes to Condensed Consolidated Financial Statements.

5

 
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 in Operations and Support Expense, net of estimated insurance recoveries, of approximately $250 million through the period ended September 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 $276 million was received as of September 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 No. 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.

6

 
VERIZON NEW YORK INC.
 
Our other intangible assets consist of non-network software as follows:
 
    
As of September 30, 2002
   
As of December 31, 2001
    
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
     
Accumulated
Amortization
    
(Dollars in Millions)
Non-network software (3 to 7 years)
   
$
364.2
   
$
134.3
   
$
350.0
     
$
91.4
 
Intangible assets amortization expense was $14.6 million for the three months ended September 30, 2002 and $42.9 million for the nine months ended September 30, 2002. Amortization expense is estimated to be $14.5 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 No. 30 are met. We are required to adopt this provision of SFAS No. 145 effective 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 September 5, 2002, we declared a dividend in the amount of $24.0 million. The dividend was paid to NYNEX on November 1, 2002.

7

 
VERIZON NEW YORK INC.
 
6.    Debt
 
In 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.
 
In July 2001, we redeemed $167.9 million of 9 3/8% debentures due on July 15, 2031 and $60.0 million of 4 5/8% refunding mortgage bonds due on January 1, 2002. We recorded an extraordinary loss of $7.7 million (net of an income tax benefit of $4.1 million) related to these redemptions.
 
7.    Shareowner’s Investment
 
    
Common
Stock
   
Additional
Paid-in
Capital
   
Reinvested
Earnings
  
    
(Dollars in Millions)