<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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.
(Former Name: New York Telephone Company)
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, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION (D/B/A
VERIZON COMMUNICATIONS), 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
----- -----
<PAGE>
Verizon New York Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------------------
(Dollars in Millions) (Unaudited) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
(including $160.1, $127.0, $222.3 and
$172.8 from affiliates) $2,179.7 $2,158.3 $4,260.3 $4,205.9
---------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $413.4, $342.3
$745.4 and $632.9 to affiliates) 1,585.5 1,290.5 2,914.0 2,552.0
Depreciation and amortization 398.7 378.0 794.5 748.7
---------------------------------------------------------
1,984.2 1,668.5 3,708.5 3,300.7
---------------------------------------------------------
OPERATING INCOME 195.5 489.8 551.8 905.2
OTHER INCOME, NET
(including $21.3, $11.1, $34.3 and
$20.2 from affiliates) 25.7 13.4 43.0 25.0
INTEREST EXPENSE
(including $37.0, $16.5, $64.5 and
$34.3 to affiliates) 97.0 78.3 182.4 160.3
---------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 124.2 424.9 412.4 769.9
PROVISION FOR INCOME TAXES 41.5 143.9 140.2 261.4
---------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 82.7 281.0 272.2 508.5
EXTRAORDINARY ITEM
Early extinguishment of debt, net of tax --- (2.7) --- (2.7)
---------------------------------------------------------
NET INCOME $ 82.7 $ 278.3 $ 272.2 $ 505.8
=========================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
Verizon New York Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
(Dollars in Millions) (Unaudited) June 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------------
CURRENT ASSETS
<S> <C> <C>
Cash $ --- $ 78.3
Short-term investments 112.3 337.0
Note receivable from affiliate 1,186.7 251.3
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $195.7 and $131.6 1,466.9 1,556.4
Affiliates 196.5 176.2
Material and supplies 47.0 104.7
Prepaid expenses 87.2 114.7
Other 68.6 72.1
----------------------------------
3,165.2 2,690.7
----------------------------------
PLANT, PROPERTY AND EQUIPMENT 24,873.0 24,108.0
Less accumulated depreciation 13,996.8 13,570.6
----------------------------------
10,876.2 10,537.4
----------------------------------
DEFERRED INCOME TAXES 392.3 483.9
----------------------------------
OTHER ASSETS 546.6 384.8
----------------------------------
TOTAL ASSETS $14,980.3 $14,096.8
==================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
Verizon New York Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions) (Unaudited) June 30, 2000 December 31, 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliates $ 2,880.3 $ 1,961.6
Other 3.0 72.9
Accounts payable and accrued liabilities:
Affiliates 1,141.2 1,155.8
Other 1,304.0 1,200.9
Other liabilities 290.0 333.2
-----------------------------------
5,618.5 4,724.4
-----------------------------------
LONG-TERM DEBT 3,616.7 3,617.0
-----------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 3,234.2 3,446.3
-----------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 15.8 14.3
Unamortized investment tax credits 71.5 74.4
Other 185.8 189.6
-----------------------------------
273.1 278.3
-----------------------------------
SHAREOWNER'S INVESTMENT
Common stock-one share, without par value 1.0 1.0
Additional paid-in capital 1,241.5 1,299.7
Reinvested earnings 997.4 732.2
Accumulated other comprehensive loss (2.1) (2.1)
-----------------------------------
2,237.8 2,030.8
-----------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $14,980.3 $14,096.8
===================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
Verizon New York Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
<S> <C> <C>
(Dollars in Millions) (Unaudited) 2000 1999
-------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,111.2 $1,366.9
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 224.7 233.3
Capital expenditures (1,084.6) (888.9)
Net change in note receivable from affiliate (935.4) (53.6)
Other, net (156.1) (46.5)
----------------------------
Net cash used in investing activities (1,951.4) (755.7)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Early extinguishment of debt --- (32.1)
Principal repayments of borrowings and capital lease obligations (71.4) (1.3)
Net change in note payable to affiliate 918.7 (439.7)
Distributions of additional paid-in capital (91.1) (163.4)
Net change in outstanding checks drawn
on controlled disbursement accounts 5.7 (7.2)
----------------------------
Net cash provided by/(used in) financing activities 761.9 (643.7)
----------------------------
NET CHANGE IN CASH (78.3) (32.5)
CASH, BEGINNING OF PERIOD 78.3 50.4
----------------------------
CASH, END OF PERIOD $ --- $ 17.9
============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
Verizon New York Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon New York Inc., formerly New York Telephone Company, and its wholly
owned subsidiary, Empire City Subway Company (Limited) are wholly owned
subsidiaries of NYNEX Corporation (NYNEX), which is a wholly owned subsidiary of
Bell Atlantic Corporation (d/b/a/ 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 include certain
reclassifications in presentation as a result of the merger of Bell Atlantic
Corporation (Bell Atlantic) and GTE Corporation (GTE) (see Note 2). 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 and other items (see Note 2).
The results for the interim periods are not necessarily indicative of results
for the full year. For a more complete discussion of significant accounting
policies and certain other information, you should refer to the consolidated
financial statements included in our 1999 Annual Report on Form 10-K.
2. Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the
closing of the merger, the combined company began doing business as Verizon
Communications. The merger has been accounted for as a pooling of interests.
Merger-Related and Severance Costs
Results of operations for June 30, 2000 included merger-related pre-tax
costs totaling approximately $100.1 million consisting of $45.9 million for
direct incremental costs, $48.8 million for employee severance costs and $5.4
million for transition costs. These costs include approximately $77.6 million
representing our allocated share of merger-related costs from Verizon Services
Corp. (Verizon Services), an affiliate which provides centralized services on a
contract basis. Costs allocated from Verizon Services are included in Operations
and Support - Other Operating Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," represent our proportionate share of benefit costs
for the separation of management employees who are entitled to benefits under
pre-existing Verizon Communications separation pay plans. The separations are
expected to occur as a result of consolidations and process enhancements.
Accrued postemployment benefit liabilities for those employees are included in
our balance sheet as a component of Employee Benefit Obligations. Transition
costs consist of our proportionate share of costs associated with integrating
the operations of Bell Atlantic and GTE. Transition costs are expensed as
incurred.
3. Dividend
On June 1, 2000, we declared a dividend in the amount of $29.1 million from
Additional Paid-in-Capital. The dividend was paid to NYNEX on August 1, 2000.
4. Recent Accounting Pronouncements
FASB Accounting Standards - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that
all derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year. We must adopt SFAS No. 133 no later than January 1, 2001.
5
<PAGE>
Verizon New York Inc.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized foreign-currency-
denominated assets and liabilities, and intercompany derivatives. SFAS No. 138
also amends SFAS No. 133 for decisions made by the FASB relating to the
Derivatives Implementation Group process.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No. 138.
The impact of adoption will be determined by several factors, including the
specific hedging instruments in place and their relationships to hedged items,
as well as market conditions at the date of adoption.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation." Interpretation No. 44 was
issued in order to clarify certain issues arising from Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," which was
previously issued in October 1972. Interpretation No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur either after
December 15, 1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
Interpretation No. 44 will not have a material impact on our results of
operations or financial position.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which must be adopted by the
fourth quarter of 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria for when revenue is generally realized and
earned, and also requires the deferral of incremental direct selling costs. We
are currently assessing the impact of SAB No. 101 on our results of operations
and financial position.
5. Shareowner's Investment
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Reinvested Comprehensive
(Dollars in Millions) Stock Capital Earnings Loss
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $1.0 $1,299.7 $732.2 $(2.1)
Net income 272.2
Distributions of additional paid-in capital
declared to parent (58.2)
Other (7.0)
-------------------------------------------------
Balance at June 30, 2000 $1.0 $1,241.5 $997.4 $(2.1)
=================================================
</TABLE>
Net income and comprehensive income were the same for the six months ended
June 30, 2000 and 1999.
6
<PAGE>
Verizon New York Inc.
6. Commitments and Contingencies
Various legal actions and regulatory proceedings are pending to which we are
a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters which we currently deem to be probable and
estimable. We do not expect that the ultimate resolution of pending regulatory
and legal matters in future periods will have a material effect on our financial
condition, but could have a material effect on our results of operations.
Several state and federal regulatory matters may require us to refund a
portion of the revenues collected in the current and prior periods. The outcome
of each pending matter, as well as the time frame within which each matter will
be resolved, is not presently determinable.
Federal and state regulatory conditions to the merger include certain
commitments to, among other things, promote competition and the widespread
deployment of advanced services, while helping 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. Over the remainder of 2000, based on preliminary estimates, the
cost of satisfying these commitments is likely to impact the net income of
Verizon Communications on a consolidated basis by approximately $275 to $325
million. The estimated impact on each operating telephone subsidiary is still
being assessed.
7
<PAGE>
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 Consolidated
Financial Statements and Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
---------------------
We reported net income of $272.2 million for the six month period ended June
30, 2000, compared to net income of $505.8 million for the same period in 1999.
Our results for 2000 and 1999 were affected by special items. The special
items in both periods included our allocated share of charges from Verizon
Services Corp. (Verizon Services).
The following table shows how special items are reflected in our condensed
consolidated statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Millions)
Six Months Ended June 30, 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues
Regulatory contingencies $ 20.6 $ ---
----------------------
Operations and Support Expenses
Bell Atlantic-GTE merger direct incremental costs .9 ---
Bell Atlantic-GTE merger severance costs 21.6 ---
Allocated Bell Atlantic-GTE merger direct incremental, severance
and transition costs 77.6 ---
Bell Atlantic-NYNEX merger transition costs --- 4.7
Allocated Bell Atlantic-NYNEX merger transition costs --- 13.3
Other charges and special items 156.5 ---
----------------------
256.6 18.0
----------------------
Interest Expense
Regulatory contingencies 9.9 ---
----------------------
Total $287.1 $18.0
======================
</TABLE>
What follows is a further explanation of the nature of these special items.
Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the
closing of the merger, the combined company began doing business as Verizon
Communications. The merger has been accounted for as a pooling of interests.
Merger-Related and Severance Costs
Results of operations for June 30, 2000 included merger-related pre-tax
costs totaling approximately $100.1 million consisting of $45.9 million for
direct incremental costs, $48.8 million for employee severance costs and $5.4
million for transition costs. These costs include approximately $77.6 million
representing our allocated share of merger-related costs from Verizon Services,
an affiliate which provides centralized services on a contract basis. Costs
allocated from Verizon Services are included in Operations and Support - Other
Operating Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," represent our proportionate share of benefit costs
for the separation of management employees who are entitled to benefits under
pre-existing Verizon Communications
8
<PAGE>
Verizon New York Inc.
separation pay plans. The separations are expected to occur as a result of
consolidations and process enhancements. Transition costs consist of our
proportionate share of costs associated with integrating the operations of Bell
Atlantic and GTE. Transition costs are expensed as incurred.
Regulatory Contingencies
In the second quarter of 2000, we recognized charges for regulatory matters
totaling $30.5 million. We recorded reductions to operating revenue in the
amount of $20.6 million and charges to interest expense of $9.9 million. These
matters relate to specific issues currently under investigation by federal
regulatory commissions. We believe that it is probable that the ultimate
resolution of these matters will result in refunds to our customers, including
interest.
Other Charges and Special Items
In the second quarter of 2000, we recorded other charges and special items
totaling approximately $156.5 million in connection with consolidating
operations and combining organizations and for other nonrecurring items arising
in the quarter. These charges included costs for the write-off of accounts
receivable, inventory adjustments, legal contingencies and other miscellaneous
items.
Bell Atlantic - NYNEX Merger
Merger-Related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax merger-related transition costs of $18.0
million the first six months of 1999.
Transition costs consisted of our proportionate share of costs associated
with integrating the operations of Bell Atlantic and NYNEX, such as systems
modifications costs and advertising and branding costs. Transition costs were
expensed as incurred.
These and other items affecting the comparison of our results of operations
for the six month periods ended June 30, 2000 and 1999 are discussed in the
following sections.
OPERATING REVENUE STATISTICS
----------------------------
<TABLE>
<S> <C> <C> <C>
2000 1999 % Change
--------------------------------------------------------------------------------------------------
At June 30,
Access Lines in Service (in thousands)*
Residence 7,817 7,649 2.2%
Business 4,359 4,325 0.8
Public 164 166 (1.2)
----------------
12,340 12,140 1.6
================
Six Months Ended June 30,
Access Minutes of Use (in millions) 22,971 23,670 (3.0)
================
</TABLE>
*1999 reflects a restatement of access lines in service
OPERATING REVENUES
------------------
(Dollars in Millions)
<TABLE>
<S> <C> <C>
Six Months Ended June 30, 2000 1999
----------------------------------------------------------------------------------------------------------------
Local services $2,641.9 $2,616.2
Network access services 1,134.7 1,148.7
Long distance services 109.9 119.3
Ancillary services 373.8 321.7
--------------------
Total $4,260.3 $4,205.9
====================
</TABLE>
9
<PAGE>
Verizon New York Inc.
LOCAL SERVICES
2000- 1999 Increase
-------------------------------------------------------------------------------
Six months $25.7 1.0%
-------------------------------------------------------------------------------
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.
Local services also includes wholesale revenues from unbundled network element
(UNE) platforms, certain data transport revenues, and wireless interconnection
revenues.
Local service revenues increased in the first six months of 2000 primarily
due to a favorable resolution of a state regulatory matter and higher usage of
our network facilities. Revenue growth was generated, in part, by an increase
in access lines in service of 1.6% from June 30, 1999.
Growth in local service revenues was partially offset by the effect of
resold and UNE platform access lines, lower business and residence message
volumes, and price reductions on certain local exchange services. Lower revenues
from the collection of gross receipts taxes caused by a decline in the number of
customers subject to the tax and a reduction in the gross receipts tax rate also
offset the growth in local service revenues. Revenue was further reduced by a
special charge of $10.0 million for a contingency associated with a regulatory
matter, as described in the Results of Operations section.
NETWORK ACCESS SERVICES
2000 - 1999 (Decrease)
--------------------------------------------------------------------------------
Six months $(14.0) (1.2%)
--------------------------------------------------------------------------------
Network access revenues are earned from end-user subscribers and from long
distance and other competing carriers who use our local exchange facilities to
provide 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 revenues declined in the first six months of 2000 principally
due to price reductions associated with federal and state price cap filings and
other regulatory decisions. The FCC regulates the rates that we charge long
distance carriers and end-user subscribers for interstate access services. We
are required to file new access rates with the FCC each year. In July 1999, we
implemented interstate price decreases of approximately $123 million on an
annual basis in connection with the FCC's Price Cap Plan. The rates included in
our July 1999 filing were in effect through June 2000. Interstate price
decreases were $78 million on an annual basis for the period July 1998 through
June 1999. The rates include amounts necessary to recover our contribution to
the FCC's universal service fund which are subject to adjustment every quarter
due to potential increases or decreases in our contribution to the fund. Our
contributions to the universal service fund are included in Other Operating
Expenses. As a result of a U.S. Court of Appeals decision last year, our
contributions to the universal service fund were reduced by approximately $37
million annually beginning November 1, 1999, and our interstate access rates
were reduced accordingly because we will no longer have to recover these
contributions in our rates.
Other items contributing to the decline in network access revenue, but to a
lesser extent, were a reduction in customer demand, as reflected by a decrease
in access minutes of use of 3.0% from the same period in 1999, and lower end-
user revenues. Revenue was also reduced by a special charge of $10.6 million for
a contingency associated with a regulatory matter, as described in the Results
of Operations section.
The decline in network access revenue was partially offset by increased
demand for special access services and higher network usage by alternative
providers of intraLATA toll services. In addition, network access revenues
included higher revenues received from customers for the recovery of local
number portability (LNP) costs. LNP allows customers to change local exchange
carriers while maintaining their existing telephone numbers. In December 1998,
the Federal Communications Commission (FCC) issued an order permitting us to
recover costs incurred for LNP in the form of monthly end-user charges for a
five-year period beginning in March 1999.
10
<PAGE>
Verizon New York Inc.
LONG DISTANCE SERVICES
2000 - 1999 (Decrease)
--------------------------------------------------------------------------------
Six months $(9.4) (7.9)%
--------------------------------------------------------------------------------
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).
The decline in long distance revenues in the first six months of 2000 was
principally caused by the competitive effects of presubscription, which enables
customers to make intraLATA toll calls using a competing carrier without having
to dial an access code. The negative effect of presubscription on long distance
revenues was partially mitigated by increased network access services for usage
of our network by alternative service providers. In response to
presubscription, we have implemented customer win-back and retention initiatives
that include toll calling discount packages and product bundling offers. The
decline in long distance revenue was partially offset by price increases
implemented on certain toll services and by growth in revenue from private line
services.
ANCILLARY SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $52.1 16.2%
--------------------------------------------------------------------------------
Our ancillary services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation for competitive local exchange carriers, usage of
separately priced (unbundled) components of our network by competitive local
exchange carriers, public (coin) 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.
Ancillary services revenues also include payments from an affiliate, Verizon
Yellow Pages Company (Yellow Pages), for earnings related to its directory
activities in New York based on a regulated rate of return. 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.
Ancillary services revenues increased in the first six months of 2000
primarily due to higher payments received from competitive local exchange
carriers for interconnection of their networks with our network. This increase
was partially offset by an accrual for certain state regulatory matters which
was recorded in the first six months of 2000.
11
<PAGE>
Verizon New York Inc.
OPERATING EXPENSES
------------------
(Dollars in Millions)
<TABLE>
<S> <C> <C>
Six Months Ended June 30, 2000 1999
-----------------------------------------------------------------------------------------------------------------
Operations and support:
Employee costs, including benefits and taxes $1,127.6 $1,095.9
Other operating expenses 1,786.4 1,456.1
---------------------
Total operations and support 2,914.0 2,552.0
---------------------
Depreciation and amortization 794.5 748.7
Total $3,708.5 $3,300.7
=====================
</TABLE>
EMPLOYEE COSTS
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $31.7 2.9%
--------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of Verizon Services and NYNEX, who provide centralized services on
a contract basis, are allocated to us and are included in Other Operating
Expenses.
Employee costs increased in the first six months of 2000 primarily as a
result of higher overtime payments, merger-related costs recorded in the second
quarter of 2000, annual salary and wage increases for management and associate
employees and an increase in repair and maintenance activity. As described in
the Results of Operations section, we recognized approximately $21.6 million in
benefit costs for the separation of employees who are entitled to benefits under
pre-existing Verizon Communications separation pay plans. We also recorded
approximately $.9 million for direct incremental merger-related costs associated
with compensation arrangements. Merger-related costs associated with Verizon
Services were allocated to us and are included in Other Operating Expenses.
Higher work force levels also contributed to the increase, but to a lesser
extent.
These increases were partially offset by lower pension and benefit costs.
The decline in pension and benefit costs was due to favorable pension plan
investment returns and changes in actuarial assumptions. These factors were
partially offset by changes in certain plan provisions, including a previously
reported amendment to our management cash balance plan and a special lump sum
pension payment to management and associate retirees.
Associate employees wages, pension and other benefits are determined under
contracts with unions representing our associate employees. On August 6, 2000,
collective bargaining agreements with unions representing our employees expired,
and the unions initiated a work stoppage. As of 8:00 a.m. on August 14, 2000, we
continued to negotiate new agreements with the unions.
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Verizon New York Inc.
OTHER OPERATING EXPENSES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $330.3 22.7%
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Other operating expenses consist of contract services including centralized
services expenses allocated from NYNEX and Verizon Services, rent, network
software costs, operating taxes other than income, the provision for
uncollectible accounts receivable, and other costs.
The increase in other operating expenses was largely attributable to the
effect of merger-related costs and other special items recorded in the second
quarter of 2000. These charges totaled $234.1 million and were comprised of our
allocated share of $27.2 million for employee severance, $45.0 million for
direct incremental and $5.4 million for transition merger-related costs incurred
by Verizon Services, and $156.5 million for other miscellaneous expense items.
Other miscellaneous expense items included $73.8 million for write-offs of
accounts receivable, $57.5 million for inventory adjustments, $16.1 million for
legal contingencies and $9.1 million for other items. Also contributing to the
increase in other operating expenses were higher combined centralized services
expenses allocated from Telesector Resources, NYNEX and Verizon Services and
higher interconnection and related costs associated with reciprocal compensation
arrangements with competitive local exchange and other carriers to terminate
calls on their networks. The effect of a reversal in 1999 of an accrual for a
tax-related matter further contributed to the increase in other operating
expenses.
These increases were offset, in part, by lower gross receipts tax and the
effect of billing additional costs to an affiliate.
DEPRECIATION AND AMORTIZATION
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $45.8 6.1%
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Depreciation and amortization expense increased in the first six months of
2000 over the same period in 1999 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The growth
in telephone plant was largely attributable to increased capital expenditures
for software and hardware to support the expansion of our network. These
factors were partially offset by the effect of lower rates of depreciation and
amortization.
OTHER INCOME, NET
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $18.0 72.0%
--------------------------------------------------------------------------------
The change in other income, net, was primarily attributable to additional
interest income associated with a note receivable from an affiliate.
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Verizon New York Inc.
INTEREST EXPENSE
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $22.1 13.8%
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Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense increased in the first six months of 2000 over the same
period in 1999 primarily due to higher levels of average short-term debt with an
affiliate and higher interest rates associated with this debt. Interest expense
was also impacted by additional interest costs of $9.9 million associated with
regulatory contingencies, as described in the Results of Operations section.
These factors were partially offset by higher capitalized interest costs
resulting from higher levels of average telephone plant under construction.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30,
--------------------------------------------------------------------------------
2000 34.0%
--------------------------------------------------------------------------------
1999 34.0%
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The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes and extraordinary
item. Our effective income tax rate was unchanged from the first six months of
1999.
OTHER MATTERS
-------------
FCC Regulation and Interstate Rates
On May 31, 2000, the FCC approved the industry proposal to restructure
access charges (known as the "CALLS plan"). Under the terms of the plan, direct
end-user access charges are increased while access charges to long distance
carriers are reduced. While the plan continues the 6.5% (less inflation) annual
reductions for most interstate access charges, it provides for a price freeze
when switched access transport prices reach $0.0055 per-minute. In addition, in
conjunction with provisions that will allow carriers to deaverage their
subscriber line charges by geographic zones, the plan establishes a new $650
million universal service fund to support interstate access rates. Of that
amount, Verizon Communications expects approximately $320 million to be used to
support interstate access services in its service territory. The price
restructuring portions of the plan are mandatory for all large local exchange
carriers, including Verizon Communications' telephone operating companies, such
as us. The price level portions of the plan are mandatory only in the initial
year of the plan. Carriers have until September 14, 2000 to decide whether to
participate in the remaining four years of the plan, or whether to submit cost
studies as the basis of future price caps.
Consistent with the new access plan, Verizon Communications filed tariff
adjustments to take effect on July 1, 2000 (with modifications effective August
11, 2000). As a result of these tariff adjustments, former GTE carriers in ten
states, and former Bell Atlantic carriers in seven states reached the $0.0055
benchmark and, should Verizon Communications opt into the full five year CALLS
plan, they will not be subject to further annual interstate switched access
price reductions for the remaining life of the plan.
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Verizon New York Inc.
Recent Accounting Pronouncements
FASB Accounting Standards - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that
all derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year. We must adopt SFAS No. 133 no later than January 1, 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized foreign-currency-
denominated assets and liabilities, and intercompany derivatives. SFAS No. 138
also amend SFAS No. 133 for decisions made by the FASB relating to the
Derivatives Implementation Group process.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No. 138.
The impact of adoption will be determined by several factors, including the
specific hedging instruments in place and their relationships to hedged items,
as well as market conditions at the date of adoption.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation." Interpretation No. 44 was
issued in order to clarify certain issues arising from Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," which was
previously issued in October 1972. Interpretation No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur either after
December 15, 1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
Interpretation No. 44 will not have a material impact on our results of
operations or financial position.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which must be adopted by the
fourth quarter of 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria for when revenue is generally realized and
earned, and also requires the deferral of incremental direct selling costs. We
are currently assessing the impact of SAB No. 101 on our results of operations
and financial position.
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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
3a Certificate of Incorporation of New York Telephone
Company, as amended and restated December 2, 1987
(Exhibit No. 3(a) to the registrant's filing on Form SE
dated March 24, 1988, File No. 1-3435).
3a(i) Certificate of Amendment of Certificate of
Incorporation filed August 1, 2000.
27 Financial Data Schedule.
(b) Current Report on Form 8-K filed during the quarter ended
June 30, 2000:
A Current Report on Form 8-K, dated June 30, 2000, was filed
regarding the consummation of the merger of Bell Atlantic
Corporation and GTE Corporation.
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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, 2000 By /s/ Edwin F. Hall
---------------------------------------
Edwin F. Hall
Chief Financial Officer
and Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 10, 2000.
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EXHIBIT INDEX
Exhibit Number
3a(i) Certificate of Amendment of Certificate of
Incorporation filed August 1, 2000.
27 Financial Data Schedule.
