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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950109-01-000760.txt : 20010326
<SEC-HEADER>0000950109-01-000760.hdr.sgml : 20010326
ACCESSION NUMBER: 0000950109-01-000760
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 18
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010323
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: VERIZON COMMUNICATIONS INC
CENTRAL INDEX KEY: 0000732712
STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813]
IRS NUMBER: 232259884
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-08606
FILM NUMBER: 1577869
BUSINESS ADDRESS:
STREET 1: 1095 AVE OF THE AMERICAS
CITY: NEW YORK
STATE: NY
ZIP: 10036
BUSINESS PHONE: 2123952121
MAIL ADDRESS:
STREET 1: 1717 ARCH ST 47TH FL
CITY: PHILADELPHIA
STATE: PA
ZIP: 19103
FORMER COMPANY:
FORMER CONFORMED NAME: BELL ATLANTIC CORP
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>VERIZON COMMUNICATIONS INC. FORM 10-K405
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 1-8606
Verizon Communications Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2259884
(State of incorporation) (I.R.S. Employer
Identification No.)
1095 Avenue of the Americas
New York, New York 10036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 395-2121
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $.10 par value............ New York, Philadelphia, Boston,
Chicago and Pacific Stock Exchanges
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
At January 31, 2001, the aggregate market value of the registrant's voting stock
held by nonaffiliates was approximately $146,218,000,000.
At January 31, 2001, 2,703,559,950 shares of the registrant's Common Stock were
outstanding, after deducting 48,090,534 shares held in treasury.
Documents incorporated by reference:
Portions of the registrant's Proxy Statement prepared in connection with the
2001 Annual Meeting of Shareholders (Part III).
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
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PART I
<S> <C>
1. Business......................................................................................... 1
2. Properties....................................................................................... 19
3. Legal Proceedings................................................................................ 20
4. Submission of Matters to a Vote of Security Holders.............................................. 20
Executive Officers of the Registrant.................................................................. 20
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters........................ 21
6. Selected Financial Data.......................................................................... 21
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 21
7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 21
8. Financial Statements and Supplementary Data...................................................... 21
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 21
PART III
10. Directors and Executive Officers of the Registrant............................................... 22
11. Executive Compensation........................................................................... 22
12. Security Ownership of Certain Beneficial Owners and Management................................... 22
13. Certain Relationships and Related Transactions................................................... 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................. 23
</TABLE>
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 14, 2001
<PAGE>
PART I
Item 1. Business
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General
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Verizon Communications Inc. is one of the world's leading providers of
communications services. Verizon Communications was formerly known as Bell
Atlantic Corporation, which was incorporated in 1983 under the laws of the State
of Delaware. We began doing business as Verizon Communications on June 30, 2000,
when Bell Atlantic Corporation merged with GTE Corporation in a transaction
accounted for as a pooling-of-interests business combination. Verizon has more
than 260,000 employees and nearly $65 billion of revenues reported in 2000. Our
principal executive offices are located at 1095 Avenue of the Americas, New
York, New York 10036 (telephone number 212-395-2121).
Our subsidiaries are the largest providers of wireline and wireless
communications in the United States, with nearly 109 million access line
equivalents and more than 27.5 million wireless customers. Our global presence
extends to over 40 countries in the Americas, Europe, Asia and the Pacific.
Verizon Communications' principal operating subsidiaries are: Verizon California
Inc., Verizon Delaware Inc., Verizon Florida Inc., Verizon Hawaii Inc., Verizon
Maryland Inc., Verizon New England Inc., Verizon New Jersey Inc., Verizon New
York Inc., Verizon North Inc., Verizon Northwest Inc., Verizon Pennsylvania
Inc., Verizon South Inc., GTE Southwest Incorporated (d/b/a Verizon Southwest),
Verizon Virginia Inc., Verizon Washington, DC Inc., Verizon West Virginia Inc.
and Verizon Wireless.
We have four reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments and their
principal activities consist of the following:
Domestic Telecom Domestic wireline communications services, principally
representing our 16 operating telephone subsidiaries that
provide local telephone services in over 30 states. These
services include voice and data transport, enhanced and
custom calling features, network access, directory
assistance, private lines and public telephones. This
segment also provides customer premises equipment
distribution, data solutions and systems integration,
billing and collections, Internet access services, research
and development and inventory management services. In
addition, this segment includes our long distance services.
Domestic Wireless Domestic wireless products and services including cellular,
Personal Communications Services (PCS), paging services and
equipment sales.
International International wireline and wireless communications
operations, investments and management contracts in the
Americas, Europe, Asia and the Pacific.
Information Domestic and international publishing businesses, including
Services print and electronic directories and Internet-based shopping
guides, as well as website creation and other electronic
commerce services. This segment has operations principally
in North America, Europe, Asia and Latin America.
You can find segment financial information in Note 19 to the consolidated
financial statements.
1
<PAGE>
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Domestic Telecom
- --------------------------------------------------------------------------------
OPERATIONS
Our Domestic Telecom segment, primarily comprised of our 16 operating telephone
subsidiaries, provides approximately 68% of 2000 total operating revenues. Our
telephone operations presently serve a territory consisting of approximately 109
million access line equivalents in 31 states and the District of Columbia. This
segment, serving 33 million households in 67 of the top 100 markets, provides
mainly two types of telecommunications services:
Exchange telecommunications service is the transmission of telecommunications
among customers located within a local calling area within a local access and
transport area (LATA). Examples of exchange telecommunications services include
switched local residential and business services, local private line voice and
data services and Centrex services. We also provide toll services within a LATA
(intraLATA long distance) and toll services outside a LATA (interLATA long
distance) services.
Exchange access service links a customer's premises and the transmission
facilities of other telecommunications carriers, generally interLATA carriers.
Examples of exchange access services include switched access and special access
services.
We have organized our Domestic Telecom segment into five marketing units
operating across our telephone subsidiaries. The units focus on specific
markets. We are not dependent on any single customer. Our telephone operations
remain responsible within their respective service areas for the provision of
telephone services, financial performance and regulatory matters.
The Enterprise unit markets communications and information technology and
services to large businesses and to departments, agencies and offices of the
executive, judicial and legislative branches of the federal and state
governments. These services include voice switching/processing services (e.g.,
dedicated private lines, custom Centrex, call management and voice messaging),
end-user networking (e.g., credit and debit card transactions and personal
computer-based conferencing, including data and video), internetworking
(establishing links between the geographically disparate networks of two or more
companies or within the same company), network optimization (disaster avoidance,
911 service and intelligent vehicle highway systems) and other communications
services such as distance learning, telemedicine, videoconferencing and
interactive multimedia applications. The Enterprise unit also includes our Data
Solutions Group which provides data transmission and network integration
services (integrating multiple geographically disparate networks into one
system) and our Strategic Markets unit which operates as a provider of network
monitoring services and telecommunications equipment sales to medium and large
businesses. Revenues in 2000 were approximately $7.6 billion, representing
approximately 18% of Domestic Telecom's aggregate revenues.
The Retail unit markets communications and information services to residential
customers and to small and medium-sized businesses within our territory. This
unit also provides operator and pay telephone services. The Retail unit includes
Verizon Avenue, a subsidiary that markets to customers located in multi-tenant
buildings and Teleproducts, a subsidiary that markets customer premises
equipment to the end-user. Revenues in 2000 were approximately $22.7 billion,
representing approximately 52% of Domestic Telecom's aggregate revenues. These
revenues were derived primarily from the provision of telephone services to
residential users.
The Wholesale unit markets (i) switched and special access to the telephone
subsidiaries' local exchange networks and (ii) billing and collection services,
including recording, rating, bill processing and bill rendering. Revenues in
2000 were approximately $10.4 billion, representing approximately 24% of
Domestic Telecom's aggregate revenues. Approximately 70% of total Wholesale
service revenues were derived from interexchange carriers. Most of the remaining
revenues came from business customers and government agencies with their own
special access network connections, wireless companies and other local exchange
carriers which resell network connections to their own customers. This unit also
includes various technical planning groups that provide strategic technology and
network planning, new service creation and emerging business management.
2
<PAGE>
The Advanced Services unit markets our long distance, data and Internet access
services. Some of our long distance subsidiaries operate as a reseller of
national and international long distance services and provide service in all 50
states to residential and business customers, including long distance services,
calling cards, 800/888 services and operator services to its customers. Our
Global Networks unit is building a next generation long distance network using
ATM (asynchronous transfer mode) technology. Under the Telecommunications Act of
1996 (1996 Act), our ability to offer in-region long distance services (that is,
services originating in the states where the former Bell Atlantic operating
telephone subsidiaries operate as local exchange carriers) is largely dependent
on satisfying prescribed requirements. In the first quarter of 2000, we entered
the in-region long distance market in New York. We are also seeking approval of
in-region long distance in several other states throughout our region. Revenues
in 2000 were approximately $1.9 billion, representing approximately 4% of
Domestic Telecom aggregate revenues. These revenues were derived primarily from
the provision of long distance and from our reseller.
The National Operations unit markets our Communications and Construction
services that supply installation and repair labor and manages our Supply unit
that is responsible for the procurement and management of inventory and supplies
for our telephone operations, as well as other subsidiaries. Our Supply unit
also sells material and logistic services to third parties. Revenues in 2000
(after eliminations and combined with all other Domestic Telecom revenues) were
approximately $700 million, representing approximately 2% of Domestic Telecom
aggregate revenues.
TELECOMMUNICATIONS ACT OF 1996
The 1996 Act became effective on February 8, 1996, and, with respect to the
former Bell Atlantic operating telephone subsidiaries, replaced the Modification
of Final Judgment, a consent decree that arose out of an antitrust action
brought by the United States Department of Justice against AT&T. In general, the
1996 Act includes provisions that open local exchange markets to competition and
permit Bell Operating Companies or their affiliates, including our former Bell
Atlantic operating telephone subsidiaries, to engage in manufacturing and to
provide long distance service under prescribed conditions.
Under the 1996 Act, our ability to offer in-region long distance services is
largely dependent on satisfying prescribed requirements. The requirements
include a 14-point "competitive checklist" of steps which we must take to help
competitors offer local services through resale, through purchase of unbundled
network elements (UNEs), or through their own networks. We must also demonstrate
to the Federal Communications Commission (FCC) that entry into the in-region
long distance market would be in the public interest.
We are unable to predict definitively the impact that the 1996 Act will
ultimately have on our business, results of operations or financial condition.
The financial impact will depend on several factors, including the timing,
extent and success of competition in our markets, the timing and outcome of
various regulatory proceedings and any appeals and the timing, extent and
success of our pursuit of new opportunities resulting from the 1996 Act.
In-Region Long Distance
On December 22, 1999, the FCC released an order approving our application for
permission to enter the in-region long distance market in New York. The FCC
concluded that Verizon New York (formerly New York Telephone Company) has
satisfied the 14-point "competitive checklist" required under the 1996 Act for
entry into the in-region long distance market, and that our entry into the long
distance business in New York would benefit the public interest. Following the
FCC's decision, AT&T and Covad Communications appealed the FCC's order and
sought a stay. The appeal and stay request were both denied by the U.S. Court of
Appeals.
After an intensive review of our compliance with the long distance provisions of
the 1996 Act by the Massachusetts Department of Telecommunications and Energy,
on September 22, 2000, Verizon Massachusetts filed an application for long
distance authority with the FCC. On December 18, 2000, we withdrew our
application in order to address issues relating to the provision of digital
subscriber line (DSL) capable loops to other carriers in Massachusetts. We
refiled our application on January 16, 2001, with additional data concerning our
DSL capable loop performance for other carriers. Under the 1996 Act, the FCC's
decision is due on or before April 16, 2001.
On January 8, 2001, Verizon Pennsylvania filed with the Pennsylvania Public
Utility Commission (PPUC) a notice requesting state review of our compliance
with the long distance provisions of the 1996 Act in preparation for a filing
with the FCC. The PPUC has set a schedule that may allow completion of the state
review, and filing of an application at the FCC, during the second quarter of
2001.
3
<PAGE>
Like the New York, Massachusetts and Pennsylvania commissions before them, the
New Jersey Board of Public Utilities is conducting a test of the Verizon New
Jersey operations support systems (OSS). This test builds on the recently
concluded third party testing of similar systems by the accounting and
consulting firm KPMG in Pennsylvania. The Virginia State Corporation Commission
has also retained KPMG for the same purpose. In connection with the KPMG testing
in Virginia, KPMG is conducting a comparability assessment to advise the
District of Columbia, Maryland and West Virginia commissions on the extent to
which the systems in Virginia and their jurisdictions are the same.
FCC REGULATION AND INTERSTATE RATES
Our operating telephone subsidiaries are subject to the jurisdiction of the FCC
with respect to interstate services and related matters. In 2000, the FCC
continued to implement reforms to the interstate access charge system and to
implement the "universal service" and other requirements of the 1996 Act.
Access Charges
Interstate access charges are the rates long distance carriers pay for use and
availability of our operating telephone subsidiaries' facilities for the
origination and termination of interstate service. The FCC required a phased
restructuring of access charges, from January 1998 until January 2000, pursuant
to which our operating telephone subsidiaries recover non-usage-sensitive costs
from long distance carriers and end-users through flat rate charges, and
usage-sensitive costs from long distance carriers through usage-based rates.
On May 31, 2000, the FCC adopted a plan advanced by members of the industry (The
Coalition for Affordable Local and Long Distance Service, or "CALLS") as a
comprehensive five-year plan for regulation of interstate access charges. The
CALLS plan has three main components. First, it establishes a portable
interstate access universal service support of $650 million for the industry. Of
that amount, we expect approximately $340 million to be used to support
interstate access services in our service territory. This explicit support
replaces implicit support embedded in interstate access charges. Second, the
plan simplifies the patchwork of common line charges into one subscriber line
charge (SLC) and provides for de-averaging of the SLC by zones and class of
customers in a manner that will not undermine comparable and affordable
universal service. Third, the plan sets into place a mechanism to transition to
a set target of $.0055 per minute for switched access services. Once that target
rate is reached, local exchange carriers are no longer required to make further
annual price cap reductions to their switched access prices.
As of September 14, 2000, we formally elected to participate in the full
five-year term of the CALLS plan. As a result of this decision, price caps on
our interstate access charges will be set according to the conditions of the FCC
order on the CALLS plan. Under 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 service
prices reach $0.0055 per-minute. As a result of tariff adjustments which became
effective in August 2000, our telephone operations in ten states in the former
GTE territory and seven states in the former Bell Atlantic territory reached the
$0.0055 benchmark.
The FCC has adopted rules for special access services that provide for pricing
flexibility and ultimately the removal of services from price regulation when
competitive thresholds are met. In order to use these rules, carriers must
forego the ability to take advantage of provisions in the current rules that
provide relief in the event earnings fall below prescribed thresholds. In
November and December 2000, we made filings to obtain this added pricing
flexibility. This flexibility includes the ability to remove from price cap
regulation those interstate special access services in Metropolitan Statistical
Areas (MSAs) that meet the competitive thresholds. Of the 57 MSAs in the former
Bell Atlantic area, 35 are included in the petition to remove price cap
regulation for special access and dedicated transport. In addition, the petition
identifies 10 MSAs where the stricter standards for special access connections
to end-user customers are also met. The later petition, addressing the former
GTE areas, seeks removal from price cap regulation for three additional MSAs.
The FCC is expected to act on these filings in March 2001 for the filing for the
former Bell Atlantic areas, and in April 2001 for the former GTE areas.
Universal Service
As a result of a July 1999 decision of the U.S. Court of Appeals, our
contributions to the universal service fund were reduced by approximately $107
million annually beginning on November 1, 1999, and our interstate access rates
4
<PAGE>
were reduced accordingly because we will no longer have to recover these
contributions in our rates. Last year, the petitions asking the U.S. Supreme
Court to review the court of appeals decision were either withdrawn or rejected.
In November 1999, the FCC adopted a new mechanism for providing universal
service support to high cost areas served by large local telephone companies.
This funding mechanism provides additional support for local telephone services
in several states served by Verizon. This system has been supplemented by the
new FCC access charge plan described above.
On October 18, 2000, we asked the U.S. Supreme Court to dismiss its pending
review of the FCC's use of a theoretical model as one factor to determine the
appropriate size of federal support for a fund for intrastate high cost areas.
The review was no longer necessary because, subsequent to our petition to the
U.S. Supreme Court, the FCC expressly disclaimed supervisory authority over the
states' universal service activities.
The FCC is currently considering two modifications to its universal service
programs, both relating to support for rural carriers. The first, a proposal by
an appointed policy task force, would provide additional support for intrastate
services provided by rural carriers. The second, a proposal by a coalition of
rural carriers, would make explicit support for interstate access services
provided by rural carriers. The FCC is likely to address both these proposals in
2001.
Unbundling of Network Elements
In November 1999, the FCC announced its decision setting forth new unbundling
requirements, eliminating elements that it had previously required to be
unbundled, limiting the obligation to provide others and adding new elements.
Appeals from this decision are pending.
In addition to the unbundling requirements released in November 1999, the FCC
released an order in a separate proceeding in December 1999, requiring incumbent
local exchange companies also to unbundle and provide to competitors the higher
frequency portion of their local loop. This provides competitors with the
ability to provision data services on top of incumbent carriers' voice services.
Appeals from this order are also pending.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit found that some
aspects of the FCC's requirements for pricing UNEs were inconsistent with the
1996 Act. In particular, it found that the FCC was wrong to require incumbent
carriers to base these prices not on their real costs but on the imaginary costs
of the most efficient equipment and the most efficient network configuration.
The court upheld the FCC's decision that UNEs be priced based on a
forward-looking cost model which ignores actual historical costs. The U.S.
Supreme Court has accepted this decision for review in a case to be heard in the
fall term of 2001. That portion of the court of appeals' decision has been
stayed pending that review.
Compensation for Internet Traffic
In March 2000, the Washington, D.C. Circuit Court of Appeals reversed and
remanded the FCC's February 1999 order that concluded that calls to the Internet
through Internet service providers (ISPs) do not terminate at the ISP but are
single interstate calls. The court found that the FCC had inadequately explained
why these Internet calls were not two calls. Under the FCC's decision, it was
left to carrier agreements and state regulators to determine which traffic is
subject to reciprocal compensation. The FCC is currently considering a new order
to address the issue in light of the court remand.
STATE REGULATION OF RATES AND SERVICES
State public utility commissions regulate our telephone operations with respect
to intrastate rates and services and other matters. In many jurisdictions the
telephone subsidiaries have been able to replace rate of return regulation with
price regulation plans.
Verizon California Inc.
Arizona
Verizon California's operations in Arizona are subject to rate of return
regulation.
5
<PAGE>
California
Verizon California's operations in California have operated under the New
Regulatory Framework (NRF) since 1990. The NRF allows for a gradual transition
to less regulation on a service-by-service basis. The NRF is reviewed every
three years and currently has the following features:
. Earnings Ceiling: The ceiling is suspended.
. Price Cap Index: By setting inflation equal to productivity, the California
Public Utility Commission (CPUC) has suspended the price cap index. Limited
exogenous changes (changes unique to or specifically targeted at a company
that are beyond its control; for example, telecommunications tax changes)
are allowed.
. Price Flexibility: Services fall into three categories.
Category I services cannot be changed without CPUC approval.
Category II services are partially competitive and can be adjusted within a
ceiling/floor range. The current price (effectively the ceiling) cannot
be increased without a formal application.
Category III services are considered competitive and can be increased or
decreased on short notice.
. New Services: New services can be classified as Category II or III. If
introduced as Category III, Verizon California must demonstrate
insignificant market power.
The CPUC will review NRF features during 2001.
Nevada
Verizon California's operations in Nevada are subject to rate of return
regulation.
Verizon Delaware Inc.
Since 1994, Verizon Delaware has been regulated under the alternative regulation
provisions of the Delaware Telecommunications Technology Investment Act of 1993
(Delaware Telecommunications Act). The Delaware Telecommunications Act provides
the following:
. The prices of "Basic Telephone Services" (e.g., dial tone and local usage)
will remain regulated and cannot change in any one year by more than the
Gross Domestic Product - Price Index (GDP- PI) less 3%.
. The prices of "Discretionary Services" (e.g., Identa Ring(SM) and Call
Waiting) cannot increase more than 15% per year per service.
. The prices of "Competitive Services" (e.g., voice messaging and message
toll service) are not subject to tariff or regulation.
. Verizon Delaware will develop a technology deployment plan with a
commitment to invest a minimum of $250 million in Delaware's
telecommunications network during the first five years of the plan.
The Delaware Telecommunications Act also provides protections to ensure that
competitors will not be unfairly disadvantaged, including a prohibition on
cross-subsidization, imputation rules, service unbundling and resale service
availability requirements, and a review by the Delaware Public Service
Commission during the fifth year of the plan. In March 1998, the Delaware Public
Service Commission approved Verizon Delaware's request to continue under the
Delaware Telecommunications Act until March 2002.
Verizon Florida Inc.
Florida statutes govern the price cap plan. Beginning January 1, 2001, Verizon
Florida can raise basic local rates on 30 days notice once in any 12-month
period not to exceed the GDP-PI less one percent. Beginning January 1, 2001,
Verizon Florida may increase intrastate access rates by the increase in the
GDP-PI or 3% per year, whichever is less, provided intrastate access rates have
reached parity with interstate rates. Verizon Florida may increase rates for
non-basic services but increases for any category cannot exceed 6% in any
12-month period unless another company is providing service in a given exchange,
at which time Verizon Florida can increase its price up to 20% in a 12-month
period. Earnings are not regulated.
6
<PAGE>
Verizon Hawaii Inc.
Verizon Hawaii's telephone operations are subject to rate of return regulation.
Verizon Maryland Inc.
In 1996, the Public Service Commission of Maryland approved a price cap plan for
regulating the intrastate services provided by Verizon Maryland. Under the plan,
services are divided into six categories: Access; Basic-Residential;
Basic-Business; Discretionary; Competitive; and Miscellaneous. Rates for Access,
Basic-Residential, Basic-Business and Discretionary Services can be increased or
decreased annually under a formula that is based upon changes in the GDP-PI
minus a productivity offset based upon changes in the rate of inflation as
reflected in the Consumer Price Index (CPI). Rates for Competitive Services may
be increased without regulatory limits. Regulation of profits is eliminated.
Verizon New England Inc.
Maine
In 1995, the Maine Public Utilities Commission (MPUC) adopted a five-year price
cap plan for Verizon New England, with the provision for a five-year extension
after review by the MPUC. Overall average prices and specific rate elements for
most services are limited by a price cap formula of inflation minus a
productivity factor plus or minus limited exogenous cost changes. There is no
restriction on Verizon New England's earnings. The MPUC also established a
service quality index with penalties in the form of customer rebates to apply if
service quality categories are not met.
In the fall of 2000, the MPUC initiated a proceeding to develop a new price cap
plan. The proposed new plan would eliminate the productivity factor, but would
require reductions in access charges. The matter will be litigated before the
MPUC during the course of 2001 and a new plan will likely be adopted before the
end of the year.
Massachusetts
In 1995, the Massachusetts Department of Telecommunications and Energy approved
a price regulation plan for Verizon New England, with no restriction on
earnings. Some residence exchange rates are capped. Pricing rules limit Verizon
New England's ability to increase prices for most services, including a ceiling
on the weighted average price of all tariffed services based on a formula of
inflation minus a productivity factor plus or minus limited exogenous changes.
In addition, Verizon New England's service quality performance levels in any
given month could result in an increase in the productivity offset by
one-twelfth of one percent for purposes of the annual price cap filing.
The current plan expires in August 2001. Verizon New England plans to file a
proposed new plan during the first quarter of 2001 with the expectation that a
new plan will be adopted by the end of the year.
New Hampshire
Verizon New England's operations in New Hampshire are currently subject to rate
of return regulation.
Rhode Island
In 1996, the Rhode Island Public Utilities Commission (RIPUC) approved an
incentive regulation plan for Verizon New England. The plan has no set term or
expiration, although there are opportunities for annual review by the RIPUC, and
there is no earnings cap or sharing mechanism. Other features of the plan
include more stringent service quality requirements, including a financial
penalty, and no increase in residence or business basic exchange rates through
1999. On August 30, 2000, the RIPUC approved a new incentive regulation plan for
Verizon New England, with no restriction on earnings. The new plan essentially
continues the plan adopted in 1996 with adjustments to service quality
standards, increases in Lifeline credits, funding for data network access for
schools and libraries and a residential rate freeze for the term of the new
plan, which expires December 31, 2001.
Vermont
In 2000, the Vermont Public Service Board approved a five-year incentive
regulation plan that will provide Verizon New England with increased flexibility
to introduce and price new products and services. The plan also removes most
restrictions on Verizon New England's earnings from Vermont operations during
the life of the plan and contains no productivity adjustment. The plan limits
Verizon New England's ability to raise prices on existing products and services,
and requires revenue reductions of $16.5 million at the outset of the plan, $6.5
million during the first year of the plan and approximately $6.0 million over
the subsequent years of the plan. The plan also requires some service quality
improvements subject to financial penalty.
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Verizon New Jersey Inc.
The 1992 New Jersey Telecommunications Act classifies telecommunications
services as "Competitive" or "Protected." "Protected telephone services" include
basic residence and business local service, touch-tone, access services and the
ordering, installation and restoration of these services. Verizon New Jersey
provides "Protected telephone services" and other services, including vertical
services (Rate-Regulated Services), under a Plan for Alternative Form of
Regulation, which is now scheduled to expire on December 31, 2001.
There is no cap on earnings for Rate-Regulated Services. Under the terms of the
plan, Verizon New Jersey shares equally with ratepayers earnings above a 13.7%
return on equity for Rate-Regulated Services.
Verizon New Jersey withdrew an earlier proposal before the New Jersey Board of
Public Utilities to reclassify services from "Protected" to "Competitive."
Verizon New Jersey filed a new proposed Plan for Alternative Form of Regulation
which proposes to leave basic rates unchanged, eliminate earnings sharing and
treat multi-line business services as "Competitive. " The proceeding to decide
upon a new plan should be completed by the end of 2001.
Verizon New York Inc.
The New York State Public Service Commission (NYSPSC) has regulated Verizon New
York under the Performance Incentive Plan since 1995. The plan is
performance-based, replacing rate of return regulation with a form of price
regulation and incentives to improve service, and does not restrict Verizon New
York's earnings. The plan will expire in 2002 and a proceeding to develop a new
plan was initiated by the NYSPSC in January 2001.
The current plan:
. caps prices at current rates for "basic" services such as residence and
business exchange access, residence and business local calling and Lifeline
Service;
. establishes price reduction commitments for a number of services, including
toll and intraLATA carrier access services;
. adjusts prices annually based on prescribed costs associated with NYSPSC
mandates and other defined exogenous events; and
. establishes service quality targets with stringent rebate provisions if
Verizon New York is unable to meet some or all of the targets.
Verizon New York's operations in Connecticut have been subject to rate of return
regulation. In February 2001, the Department of Public Utility Control adopted
an incentive regulation plan proposed by Verizon New York, which will eliminate
regulation of earnings and provide other deregulatory benefits.
Verizon North Inc.
Illinois
Verizon North's telephone operations in Illinois are subject to rate of return
regulation. Optional toll plans, Integrated Services Digital Network (ISDN),
frame relay, payphones, CentraNet(R), and other data services are considered
deregulated and have total pricing flexibility.
Indiana
Verizon North's telephone operations in Indiana are subject to rate of return
regulation.
Michigan
Since the Michigan Telecommunications Act was passed in 1991, a form of
regulation that focuses on services, prices and costs has replaced rate of
return regulation. Earnings are not regulated. All rates for regulated services
must meet a cost floor. Verizon North may increase local rates annually up to 1%
less than the Consumer Price Index. Any rate increases above that amount must be
approved by the Michigan Public Service Commission (MPSC) as "just and
reasonable." The MPSC may only approve rate increases based upon one or more of
the following 5 factors: total service long-run incremental cost (LRIC);
comparison to other provider rates; whether a new function, feature or
capability is offered; increase in costs to provide local service; and whether
further
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investment is economically justified. The MPSC has no jurisdiction over numerous
unregulated services. Other services have substantial pricing flexibility.
On July 17, 2000, several amendments to the Michigan Telecommunications Act,
among other things, reduced Verizon North's local rates by approximately $26
million and prohibited any rate increases for three years. On September 4, 2000,
the U.S. District Court for the Eastern District of Michigan issued an order
that temporarily stopped the rate freeze from going into effect pending further
proceedings, but refused to issue an order to stop the rate reduction from going
into effect. On September 28, 2000, the U.S. Court of Appeals for the Sixth
Circuit issued an order to temporarily stop the rate reduction from going into
effect, pending further proceedings. The matter is pending.
Ohio
Verizon North's telephone operations in Ohio are subject to rate of return
regulation.
Pennsylvania
On October 31, 2000, Verizon North filed a proposed price cap plan with the
Pennsylvania Public Utility Commission (PPUC). The plan, as proposed, would
deregulate pricing of competitive services. It would provide for improvement of
Verizon North's network infrastructure, as required under the applicable
Pennsylvania law. Other key provisions of the plan, as proposed, include
elimination of earnings sharing; adoption of a productivity factor based on
inflation; a provision to adjust rates for exogenous events; and a price cap on
rates of protected services through December 31, 2003. We anticipate that the
PPUC will conclude this case by the end of 2001.
Wisconsin
Verizon North entered a price cap plan in 1995. The plan does not regulate
earnings and price cap index increases can be accumulated and deferred up to
three years. The maximum increase for any non-basic rate element is 10% or the
increase in the GDP-PI, whichever is greater. Basic local service is limited to
GDP-PI less 2%. Intrastate access service mirrors interstate rates. There are no
restrictions on other services as long as they cover LRICs. Rate changes are
effective on one day notice after customer notice and new services take effect
after ten days. The statute requires that no earlier than six years, and no more
frequently than every three years thereafter, the Public Service Commission of
Wisconsin may by rule increase or decrease the GDP-PI productivity factor in any
twelve month period to reflect any statewide changes in the productivity
experience of the telecommunications industry. The productivity factor is under
review.
Verizon Northwest Inc.
Idaho
Verizon Northwest's Idaho operations are subject to rate of return regulation.
Oregon
Verizon Northwest's Oregon operations are subject to rate of return regulation.
Pricing flexibility is permitted in competitive zones and Verizon Northwest
currently has Digital Channel Service, ISDN, PBX trunks (telephone switching
equipment on customer premises), DID trunks (trunks from the customer premises
switches to the central office) and single line business service offerings in
these zones. Billing and collection and CentraNet(R) are in a competitive class
and are flexibly priced.
Washington
Verizon Northwest's Washington operations are subject to rate of return
regulation. IntraLATA toll and billing and collection are flexibly priced.
Verizon Pennsylvania Inc.
The PPUC regulates Verizon Pennsylvania under an Alternative Regulation Plan
approved in 1994. The plan provides for a pure price cap plan with no sharing of
earnings with customers and replaces rate base, rate of return regulation.
Competitive services, including directory advertising, billing services, Centrex
service, paging, speed calling, repeat calling, and HiCap (high capacity private
line) and business services provided to larger customers are price deregulated.
All noncompetitive services are price regulated.
The plan:
. permits annual price increases up to, but not exceeding, the GDP-PI minus
2.93%;
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. requires annual price decreases when the GDP-PI falls below 2.93%;
. caps prices for protected services, including residential and business
basic exchange services, special access and switched access, through 1999;
and
. permits revenue-neutral rate restructuring for noncompetitive services.
The PPUC's order approving the Bell Atlantic-GTE merger extended the cap on
residential and business basic exchange services through 2003.
The plan requires Verizon Pennsylvania to provide a Lifeline Service for
residential customers. The plan also requires deployment of a universal
broadband network, which must be completed in phases: 20% by 1998; 50% by 2004;
and 100% by 2015. Deployment must be reasonably balanced among urban, suburban
and rural areas.
In September 1999, the PPUC issued a decision in which it proposed to require
Verizon Pennsylvania to split into separate retail and wholesale corporations.
The matter was subsequently assigned to an administrative law judge of the PPUC
for further proceedings to determine the form and nature of the structural
separation. In January 2001, the Administrative Law Judge released a decision
which recommends that the PPUC order Verizon Pennsylvania to establish a
separate retail affiliate within one year of a final order by the PPUC. On March
22, 2001, the full PPUC rejected the recommended decision and proposed that
Verizon Pennsylvania adopt functional separation between its retail and
wholesale businesses, and abide by a code of conduct in its operations between
the retail and wholesale businesses. The PPUC also proposed that Verizon
Pennsylvania maintain the separate data affiliate it established when the FCC
approved the merger of Bell Atlantic and GTE. Verizon has the option of
rejecting the functional separation proposal and it is weighing its options at
this time.
Verizon South Inc.
Alabama
Verizon South's price cap plan started in January 1996. The plan does not have
an expiration date but is reviewed every five years. There are three service
categories: basic, non-basic and interconnection. Basic services are capped for
five years from the September 1995 order date. At the end of the cap, prices can
be increased by GDP-PI less a 1% productivity factor less any service penalties
(up to .75% maximum penalty). Non-basic services can be increased beginning
January 1997 and prices can be increased a maximum of 10% in the aggregate for a
given year. Individual prices can be changed more than 10% as long as the
aggregate change is 10% or less. Verizon South's intrastate access charges are
capped at a composite rate of $0.064 per minute. Tariff filings for incumbent
local exchange carriers are presumptively valid. Earnings are not regulated.
Kentucky
Verizon South's operations in Kentucky are currently under rate of return
regulation.
North Carolina
Verizon South's operations in North Carolina have been under a price cap plan
since 1996 that is subject to review in 2001. Earnings are not regulated and
local rates can be increased by GDP-PI less 2%. Rate increases are effective on
fourteen days notice. Verizon South has complete flexibility to increase rates
for billing and collection, Centrex, and enhanced digital switch service.
South Carolina
Verizon South's South Carolina price cap plan started during 2000. Under the
statute, existing rates are deemed just and reasonable on the date of
notification. Residential and single-line business local service rates are
capped for two years from the date of election. After two years, these rates may
be adjusted annually pursuant to an inflation-based index. Rates for other
services are flexibly priced. Price decreases are effective in seven days. Price
increases and new services prices are effective in fourteen days.
Virginia
On October 2, 2000, Verizon South filed an application with the Virginia State
Corporation Commission (VSCC), seeking approval of a new price cap plan. Verizon
South proposed a plan that is substantially similar to Verizon Virginia's plan
described below. On December 21, 2000, the VSCC approved the plan as submitted.
The new plan is effective January 1, 2001 and has no expiration date. In
addition, the VSCC approved a settlement for the years 1995 to 2000, approving
reductions in access charges, reductions in other rates and infrastructure
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investment goals. This settlement also provided for a $200 million refund to
current and former customers. The settlement successfully terminated all pending
and future financial obligations arising out of the prior plan under which
Verizon South operated.
Verizon Southwest
The Texas Public Utilities Commission regulates Verizon Southwest under a price
cap plan with no cap on earnings pursuant to the Public Utility Regulatory Act
(PURA). The plan places services into four categories:
. Basic services - These include basic local residential charges such as
service connection, mandatory expanded calling plans and residential call
waiting. Price increases prior to September 1, 2005 are only allowed to
adjust for changes in FCC separations that affect net income by at least
10% and for rate group reclassifications due to access line growth. After
September 1, 2005, price increases require approval. Full packaging (an
integrated offering of some or all of our products and services) is
allowed.
. Non-basic services - This category only includes switched access, which is
price-capped until September 1, 2005. Decreases can be made to the LRIC.
The statute contains no expiration provision.
. Price-capped non-basic services - These services include basic local
business charges such as service connection and BRI-ISDN (Basic Rate
Interface - Integrated Services Digital Network). These services are
price-capped until September 1, 2005. Decreases can be made to the LRIC.
Full packaging is allowed.
. Non-basic services without caps - This category represents all other
regulated services, including intraLATA toll, custom calling features
(except residential call waiting), special access, operator services, PBX
and ISDN services. These services have unlimited upward pricing
flexibility. Decreases can be made to the LRIC (with imputation) or the
prices in effect on September 1, 1999, whichever is less. Full packaging is
allowed.
Verizon Virginia Inc.
Effective in 1995, the VSCC approved an alternative regulatory plan that
regulates Verizon Virginia's noncompetitive services on a price cap basis and
does not regulate Verizon Virginia's competitive services. The plan includes a
moratorium on rate increases for basic local telephone service until 2001 and
eliminates regulation of profits. In its November 1999 order approving the Bell
Atlantic-GTE merger, the VSCC conditioned its approval by extending the
moratorium on rate increases for basic local services to 2004.
Verizon Washington, DC Inc.
In 1996, the District of Columbia Public Service Commission (DCPSC) approved a
price cap plan for intra-Washington, D.C. services provided by Verizon
Washington, DC. In 1999, the DCPSC modified the plan and extended it through the
end of 2001. Key provisions of the plan, as extended, include:
. a term of two additional years, through December 31, 2001;
. retention of three service categories: basic, discretionary and
competitive;
. caps on some basic residential rates for the extended term of the plan and
elimination of the prior rate adjustment formula (GDP-PI minus 3%);
. discretionary service rate increases of up to 15% annually;
. elimination of price limits on competitive service rates;
. elimination of the regulation of profits;
. guaranteed $4.3 million reduction in basic rates during the next two years;
and
. contribution of $1.5 million to the Infrastructure Trust Fund.
Verizon West Virginia Inc.
In February 1998, the West Virginia Public Service Commission (WVPSC) issued an
order extending the Incentive Regulation Plan until December 31, 2000. The
Incentive Regulation Plan includes pricing flexibility for competitive
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services and required Verizon West Virginia to invest a minimum of $225 million
in its network over the three-year period from 1998 through 2000. Proceedings to
adopt a successor plan were concluded in fourth quarter 2000, however, the WVPSC
has not yet issued a decision.
Other Telephone Operations
Our Missouri statutory price cap plan started in February 1999. Under the plan,
we can rebalance rates in the first four years of the plan by increasing local
rates by $1.50 and reducing switched access by an equivalent amount. Toll rates
must be reduced by 10% in the first year. Non-basic service rates may increase
by 8% annually. Earnings are not regulated.
COMPETITION
Legislative changes, including provisions of the 1996 Act discussed under the
section "Telecommunications Act of 1996," regulatory changes and new technology
are continuing to expand the types of available communications services and
equipment and the number of competitors offering such services. We anticipate
that these industry changes, together with the rapid growth, enormous size and
global scope of these markets, will attract new entrants and encourage existing
competitors to broaden their offerings. Current and potential competitors in
telecommunication services include long distance companies, other local
telephone companies, cable companies, wireless service providers, foreign
telecommunications providers, electric utilities, Internet service providers and
other companies that offer network services. Many of these companies have a
strong market presence, brand recognition and existing customer relationships,
all of which contribute to intensifying competition and may affect our future
revenue growth. In addition, a number of major industry participants have
announced mergers, acquisitions and joint ventures which could substantially
affect the development and nature of some or all of our markets.
Local Exchange Services
The ability to offer local exchange services has historically been subject to
regulation by state regulatory commissions. Applications from competitors to
provide and resell local exchange services have been approved in every
jurisdiction in our service territory. The 1996 Act has significantly increased
the level of competition in our local exchange markets.
One of the purposes of the 1996 Act was to ensure, and accelerate, the emergence
of competition in local exchange markets. Toward this end, the 1996 Act requires
most existing local exchange carriers (incumbent local exchange carriers, or
ILECs), including our telephone operations, to permit potential competitors
(competitive local exchange carriers, or CLECs) to:
. purchase service from the ILEC for resale to CLEC customers
. purchase unbundled network elements from the ILEC, and/or
. interconnect the CLEC's network with the ILEC's network.
The 1996 Act provides for arbitration by the state public utility commission if
an ILEC and a CLEC are unable to reach agreement on the terms of the arrangement
sought by the CLEC.
Negotiations between our telephone subsidiaries and various CLECs, and
arbitrations before state public utility commissions, have continued. As of
January 31, 2001, our telephone operations had entered into approximately 3,276
agreements with CLECs covering all of our territory, of which 2,730 have been
approved by state regulators.
We expect that these agreements, and the 1996 Act, will continue to lead to
substantially increased competition in our local exchange markets in 2001 and
subsequent years. We believe that this competition will be both on a facilities
basis and in the form of resale by CLECs of our telephone operations' service.
Under the various agreements and arbitrations discussed above, our telephone
operations are generally required to sell their services to CLECs at discounts
of up to 29% from the prices our telephone operations charge their retail
customers.
IntraLATA Toll Services
IntraLATA toll calls originate and terminate within the same LATA, but generally
cover a greater distance than a local call. State regulatory commissions rather
than federal authorities generally regulate these services. All of our
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state regulatory commissions (except in the District of Columbia, where
intraLATA toll service is not provided) permit other carriers to offer intraLATA
toll services within the state.
Until the implementation of "presubscription," intraLATA toll calls were
completed by our telephone operations unless the customer dialed a code to
access a competing carrier. Presubscription changed this dialing method and
enabled customers to make these toll calls using another carrier without having
to dial an access code. All of our telephone operations have implemented
presubscription.
Implementation of presubscription for intraLATA toll services has had a material
negative effect on intraLATA toll service revenues. However, the negative effect
has been partially mitigated by an increase in intraLATA network access
revenues.
Alternative Access
A substantial portion of our telephone operations' revenues from business and
government customers is derived from a relatively small number of large,
multiple-line subscribers.
We face competition from alternative communications systems, constructed by
large end-users, interexchange carriers and alternative access vendors, which
are capable of originating and/or terminating calls without the use of our
plant. The FCC's orders requiring us to offer collocated interconnection for
special and switched access services have enhanced the ability of such
alternative access providers to compete with us.
Other potential sources of competition include cable television systems, shared
tenant services and other noncarrier systems which are capable of bypassing our
telephone operations' local plant, either partially or completely, through
substitution of special access for switched access or through concentration of
telecommunications traffic on fewer of our telephone operations' lines.
Wireless Services
Wireless services also constitute potential sources of competition to our
wireline telecommunications services, especially as wireless carriers continue
to lower their prices to end-users. Wireless telephone services employ analog
and digital technology that allows customers to make and receive telephone calls
from any location using small handsets, and can also be used for data
transmission. Our investment in wireless services is described under the section
"Domestic Wireless."
Public Telephone Services
We face increasing competition in the provision of pay telephone services from
other providers. In addition, the growth of wireless communications decreases
usage of public telephones.
Operator Services
Alternative operator services providers have entered into competition with our
operator services product line.
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Domestic Wireless
- --------------------------------------------------------------------------------
We provide wireless communications services in the United States principally
through Verizon Wireless.
Verizon Wireless is the leading wireless communications provider in the United
States in terms of the number of subscribers, network coverage, revenues and
operating cash flow. Verizon Wireless has the largest customer base of any U.S.
wireless provider, with 27.5 million wireless subscribers as of December 31,
2000 and offers wireless voice and data services across the United States.
Approximately 240 million people reside in areas of the United States in which
we have FCC licenses to offer our services and 203 million people reside in
areas covered by our service. We provide digital coverage in almost every major
U.S. city.
Cellular and PCS licenses are granted for an initial 10-year term and are
renewable for successive 10-year terms. To date, all Verizon Wireless and
predecessor company (see following formation discussion) wireless licenses have
been successfully renewed.
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Verizon Wireless has five to seven competitors in its major markets and at least
one other competitor in all of its markets. Competition occurs principally on
the basis of service quality, product offerings, price and coverage area. As new
entrants invest in the expansion of their networks, they will be able to provide
increasingly competitive service offerings. Verizon Wireless has introduced new
pricing plans designed to meet this competition, and is expanding its digital
service as well as enhanced calling features in its markets.
In September 1999, Bell Atlantic Corporation and Vodafone Group plc agreed to
combine their U.S. mobile wireless telecommunications businesses and form
Verizon Wireless. In April 2000, Vodafone contributed U.S. mobile wireless
assets and its interest in PrimeCo to Verizon Wireless in exchange for a 65.1%
economic interest in Verizon Wireless. Bell Atlantic contributed its U.S.
wireless assets and its interest in PrimeCo to Verizon Wireless. In July 2000,
after the merger of Bell Atlantic and GTE, Verizon Communications contributed
GTE's U.S. wireless assets to Verizon Wireless, increasing Verizon
Communications' economic interest in Verizon Wireless from 34.9% to 55%.
Verizon Wireless brings together operations of four well-recognized U.S.
wireless carriers: Bell Atlantic Mobile, GTE Wireless, AirTouch and PrimeCo,
resulting in the formation of the most extensive wireless network in the United
States.
Bell Atlantic Mobile
Bell Atlantic Mobile, based in Bedminster, New Jersey, had 8.0 million customers
as of March 31, 2000. It operated in 18 states and the District of Columbia and
12 of the top 50 U.S. markets, including Baltimore, Boston, New York City,
Philadelphia and Washington, D.C.
GTE Wireless
GTE Wireless had more than 7.0 million U.S. wireless customers in June 2000. It
operated in 19 states and 18 of the top 50 United States markets, including
Chicago, Cleveland, Houston, San Francisco and St. Louis. GTE Wireless acquired
approximately one-half of Ameritech Corporation's wireless assets in the Midwest
United States in October 1999. GTE Wireless was based in Atlanta, as a
subsidiary of GTE Corporation.
AirTouch
AirTouch, which was owned by Vodafone, served nearly 10 million wireless
customers and 3.5 million paging customers in the United States as of March 31,
2000. Based in San Francisco, AirTouch operated broadband wireless networks in
22 states and 18 of the top 50 U.S. markets, including Atlanta, Detroit, Los
Angeles, Phoenix, San Diego and Seattle.
PrimeCo
PrimeCo was formed in October 1994 as a limited partnership to provide advanced
wireless digital communications services over an all-digital PCS network. As of
March 31, 2000, PrimeCo had more than 1.5 million subscribers. Immediately prior
to its contribution to the partnership, PrimeCo was a partnership between Bell
Atlantic and Vodafone. Based in Westlake, Texas, PrimeCo operated in nine states
and 13 of the top 50 United States markets, including Dallas, Miami, San Antonio
and Tampa.
The preceding includes overlap subscriber information.
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International
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Our International segment includes international wireline and wireless
communications operations, investments and management contracts in the Americas,
Europe, Asia and the Pacific, extending to over 40 countries. Our global
presence also includes an investment in Fiberoptic Link Around the Globe Ltd.
(FLAG), the world's longest undersea fiber optic cable. Our consolidated
international investments include Grupo Iusacell (Mexico), CODETEL (Dominican
Republic), CTI Holdings, S.A. (Argentina) and Micronesian Telecommunications
Corporation (Northern Mariana Islands). As of December 31, 2000, our
International segment managed approximately 13 million access lines and provided
wireless services to approximately 36 million customers.
AMERICAS
Argentina
We own a 59.5% interest in CTI Holdings, S.A., which wholly owns CTI - Interior,
a wireless company serving the northern and southern interior regions of
Argentina, and CTI PCS Holdings, S.A., a PCS provider serving the
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Buenos Aires greater Metropolitan area. Together, CTI-Interior and CTI PCS
Holdings, S.A. offers the first nationwide wireless service in Argentina.
The National Telecommunications Commission of Argentina awarded cellular
licenses to CTI-Interior in 1994. The Buenos Aires PCS licenses were awarded to
CTI PCS Holdings, S.A. in 1999.
Canada
We own a 22% interest in TELUS Corporation, a full-service telecommunications
provider headquartered in British Columbia, Canada. TELUS is the primary service
provider to Western Canada and has begun to expand its services to Central and
Eastern Canada. The consolidated TELUS Group served approximately 4.8 million
access lines and provided wireless services to approximately 2.1 million
subscribers as of December 31, 2000.
On October 20, 2000, TELUS acquired 98.5% of Clearnet Communications, a leading
Canadian wireless company, creating Canada's largest wireless company in terms
of annual revenue.
Dominican Republic
We own Compania Dominicana de Telefonos, C. por A. (CODETEL), a company which
provides Internet access, local, wireless and national and international long
distance telephone services in the Dominican Republic. At December 31, 2000,
CODETEL served approximately 735,000 access lines and approximately 393,000
wireless customers.
Mexico
We own a 37.2% interest in, and control, Grupo Iusacell, S.A. de C.V.
(Iusacell), a telecommunications company which provides cellular, paging,
wireless local access, long distance, wireless Internet and data services to the
central southern regions of Mexico. At December 31, 2000, Iusacell served
approximately 1.7 million wireless customers.
Puerto Rico
We own a 40% interest in Telecomunicaciones de Puerto Rico, Inc., which owns
Puerto Rico's wireline company, Puerto Rico Telephone Company, Inc. (PRTC) and
its wireless company, Celulares Telefonica, Inc. (CT). As of December 31, 2000,
PRTC served 1.3 million access lines and CT provided wireless services to
approximately 335,000 customers.
Prior to our investment in March 1999, PRTC's rates were regulated on a
rate-of-return basis, which entitled PRTC to financial support from subsidy
pools and permission to charge prices sufficient to cover costs up to an annual
rate of return of 11.5%. As a result of our acquisition of a controlling
interest in PRTC, it was scheduled to convert to a price cap plan effective in
June 2000; the FCC, however, has granted PRTC approval to remain regulated until
at least July 2001.
Venezuela
We own a 28.5% interest in Compania Anonima Nacional Telefonos de Venezuela
(CANTV), Venezuela's full-service telecommunications company. CANTV offers local
telephone service and national and international long distance service in
Venezuela. CANTV also provides wireless services, public telephones, private
networks, data transmission, directory services and other value-added services
in Venezuela. At December 31, 2000, CANTV managed approximately 2.6 million
access lines and 1.7 million wireless customers. Verizon's ownership consists of
both directly held shares and shares indirectly held through VenWorld, a
multinational consortium controlled by us.
Effective November 27, 2000, CANTV's exclusive concession to operate as a
full-service telecommunications provider offering local and domestic and
international long-distance service throughout Venezuela expired. CANTV is now
subject to direct competition for these services.
EUROPE AND ASIA
Czech Republic and Slovakia
We own a 24.5% interest in EuroTel Praha s r.o. and a 24.5% interest in EuroTel
Bratislava a.s. EuroTel Praha provides voice, data and wireless Internet access
over analog and digital Global Satellite Mobile (GSM) networks to the Czech
Republic and EuroTel Bratislava provides voice and data over analog and digital
GSM networks to Slovakia.
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Gibraltar
Gibraltar NYNEX is the sole provider of wireline services to the country of
Gibraltar. We currently own a 50% interest in the company. Our sole partner in
the company is the Government of Gibraltar.
Italy
We own a 23.1% interest in Omnitel Pronto Italia, S.p.A. (Omnitel), an Italian
digital cellular telecommunications company. Omnitel served approximately 15
million subscribers at December 31, 2000.
Indonesia
P.T. Excelcomindo Pratama (Excelcomindo) is a nationwide provider of GSM
services in which we own a 23.1% interest. We also own a 36.7% interest of Citra
Sari Makmur, a provider of data, voice and video communications.
Northern Mariana Islands
We are the sole shareholder of Micronesian Telecommunications Corporation (MTC),
a provider of local services. At December 31, 2000, MTC served approximately
25,000 access lines and 3,000 wireless customers on the islands of Saipan,
Tinian and Rota.
New Zealand
Telecom Corporation of New Zealand Limited (TCNZ) is the principal provider of
telecommunications services in New Zealand, offering local, national and
international long distance, Internet access and wireless services. Our current
ownership level is 24.9%.
OTHER
Our International segment also includes several properties in which our
investment is 20% or less. These include: Japan - Tu-Ka companies, 2.7% - 5%;
Philippines - BayanTel, 19.4%; Taiwan - Taiwan Cellular Corporation, 13.5%;
Thailand - TelecomAsia, 13.8%; and Greece - STET Hellas Telecommunications,
20.0%; United Kingdom - Cable & Wireless plc, 4.6%, and NTL Incorporated, 9.1%.
All of these investments provide a variety of telecommunication services to the
country or a specific region within the country in which they reside.
Global Solutions
FLAG owns and operates an undersea fiber optic cable system, providing digital
communications links between Europe and Asia. At December 31, 1999, we had an
approximately 34% interest in FLAG and an approximately 5% interest in the
parent company of FLAG, FLAG Telecom Holding Limited (FLAG Telecom). In January
2000, we exchanged our shares in FLAG for an interest in FLAG Telecom resulting
in an aggregate interest in FLAG Telecom of approximately 38%.
In February 2000, FLAG Telecom conducted an initial public offering. The primary
offering consisted of approximately 28 million of newly issued common shares.
Some existing shareowners also participated in a secondary offering in which
approximately 8 million of their common shares were sold. We did not acquire any
new shares in the primary offering, nor did we participate in the secondary
offering. As a result, our ownership interest at December 31, 2000 has been
reduced to 29.8%.
INTERNATIONAL REGULATORY AND COMPETITIVE TRENDS
For several years, the telecommunications industry has been experiencing dynamic
changes as national and international regulatory reforms embrace competition. We
have enjoyed the opportunity provided by this global market liberalization to
expand our international operations across the Americas, Europe, Asia and the
Pacific.
In the Americas, the degree of liberalization varies widely among countries. In
Argentina, the government issued a decree which introduced new
telecommunications licensing, interconnection, universal service and wireless
spectrum regulations. The weak economy, however, has depressed both local and
long distance calling in spite of significant decreases in price. At the same
time, increases in costs have resulted from the need to introduce new handsets
and improved network technology. Our affiliate, CTI, continues to take advantage
of the new competitive landscape.
In Venezuela, where our affiliate CANTV operates, the government further opened
the basic telephony market for local, national and international long distance
on November 27, 2000 and issued new guidelines governing basic telephony
competition, interconnection and the use of the wireless spectrum.
16
<PAGE>
In the Dominican Republic, CODETEL is facing greater competition under new
market regulations issued by its regulatory agency, Indotel. CODETEL continues
to retain its majority share of the market in local, national and international
long distance, wireless and Internet services despite increased competition.
The Mexican market continues to undergo change primarily due to the World Trade
Organization Agreement. The U.S. government raised several competitive concerns
with the WTO regarding unfair market practices by Telmex, Mexico's largest
national carrier. In its appeal, it denounced prohibitive interconnection
charges.
PRTC continues to be the largest provider of telecommunications service in
Puerto Rico to both business and consumer segments, including local, long
distance, wireless, Internet and data. An important milestone was reached by
PRTC this year by retaining its FCC status as a rate of return carrier through
July 2001. In addition, PRTC signed a five-year agreement with Societe
Internationale de Telecomunicaciones Aeronautiques for data and voice services.
In Canada, regulators instituted a telecommunication company funded system of
local phone subsidies. This system is designed to offset the cost of providing
affordable residential phone services in costly, hard-to-reach areas.
In Asia, our affiliate, Taiwan Cellular Corporation, continues to expand its
wireless network system. Taiwan Cellular currently has the highest number of
subscribers of any wireless operator in the country at over 5 million.
In Greece, the government approved a bill deregulating the country's
telecommunications market as of January 1, 2001, ending Hellenic
Telecommunication Organization SA's fixed line monopoly. In further opening of
the Greek telecom market, the government will be issuing new fixed wireless
licenses. Our affiliate, Stet Hellas, continues to be one of the three leading
wireless operators in the country.
In Italy, our affiliate, Omnitel, was awarded a license for the third-generation
mobile spectrum with a winning bid of $2.03 billion.
- --------------------------------------------------------------------------------
Information Services
- --------------------------------------------------------------------------------
Through our Information Services segment, we are a world leader in print and
online directory publishing and a content provider for communications products
and services. A leader in linking buyers and sellers, we produce the Internet's
preeminent online directory and shopping resource, SuperPages.com(R). We
aggressively pursue national and global growth by offering customers
comprehensive communications solutions that include bundled print and electronic
commerce offerings.
With approximately 20% of the worldwide market for directory advertising, our
Information Services segment provides sales, publishing and other related
services for nearly 2,300 directory titles in 48 states and 17 countries. This
includes over 1,600 Verizon directory titles with a total circulation of
approximately 110 million copies in the U.S. and 37 million internationally.
We have more than 40 years of international experience in information services
and currently publish directories, sell Yellow Pages advertising, and/or provide
consulting services for directories in 17 countries. These countries include
Austria, Belize, Brunei, Canada, Costa Rica, the Czech Republic, the Dominican
Republic, Gibraltar, Greece, Hungary, Malaysia, the Philippines, Poland, Puerto
Rico (U.S. territory), Shanghai, Slovakia and Sri Lanka. In January 2000, we
began publishing the official directory for Puerto Rico as a result of a joint
venture with VNU World Directories, Inc.
Our directory publishing business competes within the Yellow Pages industry with
five major U.S.-based directory publishers, and encounters significant
competition in nearly all our domestic print markets. We also compete against
alternative advertising media, including radio, network and cable television,
newspapers, magazines, Internet, direct mail and others for a share of the total
U.S. advertising media market.
17
<PAGE>
- --------------------------------------------------------------------------------
Employees
- --------------------------------------------------------------------------------
As of December 31, 2000, Verizon and its subsidiaries had approximately 260,000
employees. Unions represent approximately 53% of our employees.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
In this Annual Report on Form 10-K we have made forward-looking statements.
These statements are based on our estimates and assumptions and are subject to
risks and uncertainties. Forward-looking statements include the information
concerning our possible or assumed future results of operations. Forward-looking
statements also include those preceded or followed by the words "anticipates,"
"believes," "estimates," "hopes" or similar expressions. For those statements,
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
The following important factors, along with those discussed elsewhere in this
Annual Report, could affect future results and could cause those results to
differ materially from those expressed in the forward-looking statements:
. materially adverse changes in economic conditions in the markets served by
us or by companies in which we have substantial investments;
. material changes in available technology;
. the final outcome of federal, state and local regulatory initiatives and
proceedings, including arbitration proceedings, and judicial review of
those initiatives and proceedings, pertaining to, among other matters, the
terms of interconnection, access charges, universal service, and unbundled
network elements and resale rates;
. the extent, timing, success and overall effects of competition from others
in the local telephone and intraLATA toll service markets;
. the timing and profitability of our entry into the in-region long distance
market;
. our ability to combine former Bell Atlantic and GTE operations, satisfy
regulatory conditions and obtain revenue enhancements and cost savings;
. the profitability of our entry into the broadband access market;
. the ability of Verizon Wireless to combine operations and obtain revenue
enhancements and cost savings;
. our ability to convert our ownership interest in Genuity Inc. into a
controlling interest consistent with regulatory conditions, and Genuity's
ensuing profitability; and
. changes in our accounting assumptions by regulatory agencies, including the
SEC, or that result from changes in the accounting rules or their
application, which could result in an impact on earnings.
18
<PAGE>
Item 2. Properties
GENERAL
Our principal properties do not lend themselves to simple description by
character and location. Our total investment in plant, property and equipment
was approximately $159 billion at December 31, 2000 and $143 billion at December
31, 1999, including the effect of retirements, but before deducting accumulated
depreciation. Our gross investment in plant, property and equipment consisted of
the following at December 31:
2000 1999
- --------------------------------------------------------------------------------
Network equipment 78.5% 79.3%
Land, buildings and building equipment 8.2 8.5
Furniture and other equipment 8.0 6.5
Other 5.3 5.7
----------------------------
100.0% 100.0%
============================
Our properties are divided among our operating segments as follows:
2000 1999
- --------------------------------------------------------------------------------
Domestic Telecom 83.0% 86.7%
Domestic Wireless 13.4 8.4
International 2.4 2.7
Information Services 0.4 0.4
Corporate and Other 0.8 1.8
----------------------------
100.0% 100.0%
============================
"Network equipment" consists primarily of aerial cable, underground cable,
conduit and wiring, cellular plant, telephone poles, switching equipment,
transmission equipment and related facilities. "Land, buildings and building
equipment" consists of land and land improvements and central office buildings.
"Furniture and other equipment" consists of public telephone instruments and
telephone equipment (including PBXs), furniture, office equipment, motor
vehicles and other work equipment. "Other" property consists primarily of plant
under construction, capital leases, capitalized computer software costs and
leasehold improvements. Substantially all of the properties are subject to the
liens of their respective mortgages securing funded debt.
The customers of our telephone operations are served by electronic switching
systems that provide a wide variety of services. At December 31, 2000,
substantially all of the access lines were served by digital capability.
CAPITAL EXPENDITURES
We continue to make significant capital expenditures to meet the demand for
communications services and to further improve such services. Capital
expenditures for our Domestic Telecom business were approximately $12.1 billion
in 2000, $10.1 billion in 1999 and $10.0 billion in 1998. Capital expenditures
for our Domestic Wireless, International, Information Services and Corporate and
Other business were approximately $5.5 billion in 2000, $2.9 billion in 1999 and
$2.8 billion in 1998. Capital expenditures exclude additions under capital
leases. We expect capital expenditures in 2001 to be in the range of $18.0
billion to $18.5 billion.
19
<PAGE>
Item 3. Legal Proceedings
The New York State Attorney General's Office has conducted an investigation of
possible environmental violations and false document charges relating to the
former Orangeburg, New York, Material Reclamation Center, which was operated by
NYNEX Material Enterprises Company from 1988 to 1990, by Telesector Resources
Group, Inc. (TRG) from 1990 to May 1997, and under contract with TRG by an
unrelated third party from May 1997 to October 1998, when the facility was
closed. TRG has reached an agreement with the Attorney General's Office to
resolve the investigation on a civil basis. The agreement has not been finalized
in writing.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information with respect to our executive officers.
<TABLE>
<CAPTION>
Held
Name Age Office Since
- ---------------------------- --- ------------------------------------------------------------- -----
<S> <C> <C> <C>
Charles R. Lee 61 Chairman and Co-Chief Executive Officer 2000
Ivan G. Seidenberg 54 President and Co-Chief Executive Officer 2000
Lawrence T. Babbio, Jr. 56 Vice Chairman and President 2000
Mary Beth Bardin 46 Executive Vice President - Public Affairs and Communications 2000
William P. Barr 50 Executive Vice President and General Counsel 2000
David H. Benson 51 Executive Vice President - Strategy, Development and Planning 2000
William F. Heitmann 51 Senior Vice President and Treasurer 2000
Michael T. Masin 56 Vice Chairman and President 2000
Frederic V. Salerno 57 Vice Chairman and Chief Financial Officer 2000
Ezra D. Singer 46 Executive Vice President - Human Resources 2000
Dennis F. Strigl 54 Executive Vice President and President - Domestic Wireless 2000
Lawrence R. Whitman 49 Senior Vice President and Controller 2000
</TABLE>
Prior to serving as an executive officer, each of the above officers have held
high level managerial positions with the company or one of its subsidiaries for
at least five years.
Officers are not elected for a fixed term of office but are removable at the
discretion of the Board of Directors.
20
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The principal market for trading in the common stock of Verizon Communications
is the New York Stock Exchange. The common stock is also listed in the United
States on the Boston, Chicago, Pacific and Philadelphia stock exchanges. As of
December 31, 2000, there were 1,335,000 shareowners of record.
High and low stock prices, as reported on the New York Stock Exchange composite
tape of transactions, and dividend data are as follows:
<TABLE>
<CAPTION>
Market Price
-------------------------- Cash Dividend
High Low Declared
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000: First Quarter $63 3/16 $47 3/8 $.385
Second Quarter 66 49 1/2 .385 *
Third Quarter 56 7/8 39 1/16 .385
Fourth Quarter 59 3/8 45 3/16 .385
1999: First Quarter $60 7/16 $50 5/8 $.385
Second Quarter 65 3/8 50 15/16 .385
Third Quarter 68 3/16 60 1/4 .385
Fourth Quarter 69 1/2 59 3/16 .385
</TABLE>
* Includes two pro-rata dividends. The first pro-rata dividend of $.338462
per share is for the period from April 11, 2000 through the day before the
date of the merger between Bell Atlantic and GTE (June 30, 2000). The
second pro-rata dividend of $.046538 is for the period from the date of the
merger through July 10, 2000.
Item 6. Selected Financial Data
The information required by this item is included on page F-2 of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is included on pages F-2 through F-21 of
this report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included on pages F-16 through F-18 of
this report.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included on pages F-22 through F-56 of
this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required by this item regarding a change in accountants is
included in a Current Report on Form 8-K dated September 7, 2000.
21
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to our executive officers, see "Executive Officers
of the Registrant" at the end of Part I of this Report. For information with
respect to the Directors and compliance with Section 16(a) of the Securities
Exchange Act of 1934, see the Proxy Statement for our 2001 Annual Meeting of
Shareholders filed pursuant to Regulation 14A, which is incorporated herein by
reference.
Item 11. Executive Compensation
For information with respect to executive compensation, see the Proxy Statement
for our 2001 Annual Meeting of Shareholders filed pursuant to Regulation 14A,
which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
For information with respect to the security ownership of the Directors and
Executive Officers, see the Proxy Statement for our 2001 Annual Meeting of
Shareholders filed pursuant to Regulation 14A, which is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
For information with respect to certain relationships and related transactions,
see the Proxy Statement for our 2001 Annual Meeting of Shareholders filed
pursuant to Regulation 14A, which is incorporated herein by reference.
22
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Index to Financial Information appearing on Page F-1.
(2) Financial Statement Schedule
See Index to Financial Information appearing on Page F-1.
(3) Exhibits
Exhibit
Number
- -------
3a Restated Certificate of Incorporation of Verizon Communications Inc.
(Verizon) filed herewith.
3b Bylaws of Verizon, as amended and restated, filed herewith.
4 No instrument which defines the rights of holders of long-term debt of
Verizon and its consolidated subsidiaries is filed herewith pursuant to
Regulation S-K, Item 601 (b) (4) (iii) (A). Pursuant to this regulation,
Verizon hereby agrees to furnish a copy of any such instrument to the SEC
upon request.
10a Description of Verizon Deferred Compensation Plan for Non-Employee
Directors filed herewith.*
10b Bell Atlantic Deferred Compensation Plan for Outside Directors, as amended
and restated (Exhibit 10a to Form 10-K for the year ended December 31,
1998).*
10c Deferred Compensation Plan for Non-Employee Members of the Board of
Directors of GTE, as amended (Exhibit 10-1 to GTE's Form 10-K for the year
ended December 31, 1997 and Exhibit 10.1 to GTE's Form 10-K for the year
ended December 31, 1998, File No. 1-2755).*
10d GTE's Directors' Deferred Stock Unit Plan (Exhibit 10-8 to GTE's Form 10-K
for the year ended December 31, 1997, File No. 1-2755).*
10e Bell Atlantic Stock Compensation Plan for Outside Directors, as amended
and restated (Exhibit 10e to Form 10-K for the year ended December 31,
1998); Description of Amendments filed herewith.*
10f Description of Plan for Non-Employee Directors' Travel Accident Insurance
(Exhibit 10c to Form 10-K for the year ended December 31, 1999).*
10g Bell Atlantic Directors' Charitable Giving Program, as amended (Exhibit
10p to Form SE dated March 29, 1990 and Exhibit 10p to Form SE dated March
29, 1993).*
10h GTE's Charitable Awards Program (Exhibit 10-10 to GTE's Form 10-K for the
year ended December 31, 1992, File No. 1-2755).*
10i NYNEX Directors' Charitable Award Program filed herewith.*
10j Verizon Communications 2000 Broad-Based Incentive Plan (Exhibit 10h to
Form 10-Q for the period ended September 30, 2000).*
23
<PAGE>
10k Bell Atlantic 1985 Incentive Stock Option Plan (Exhibit 10 to the Form
10-Q for the period ended March 30, 2000); Description of Amendments filed
herewith.*
10l GTE's Long-Term Incentive Plan, as amended (Exhibit B to GTE's 1997 Proxy
Statement and Exhibit 10.5 to GTE's 1998 Form 10-K for the year ended
December 31, 1998, File No. 1-2755); Description of Amendments filed
herewith.*
10m NYNEX 1990 Stock Option Plan, as amended (Exhibit No. 2 to NYNEX's Proxy
Statement dated March 20, 1995, File No. 1-8608); Description of
Amendments filed herewith.*
10n NYNEX 1995 Stock Option Plan, as amended (Exhibit No. 1 to NYNEX's Proxy
Statement dated March 20, 1995, File No. 1-8608); Description of
Amendments filed herewith.*
10o Bell Atlantic Senior Management Short Term Incentive Plan, as amended and
restated (Exhibit 10a to Form 10-K for the year ended December 31, 1996
and Exhibit 10a(i) to Form 10-Q for the period ended September 30, 1997).*
10p GTE's Executive Incentive Plan, as amended (Exhibit A to GTE's 1997 Proxy
Statement and Exhibit 10.6 to GTE's Form 10-K for the year ended December
31, 1998, File No. 1-2755).*
10q Bell Atlantic Senior Management Income Deferral Plan (Exhibit 10i to Form
10-K for the year ended December 31, 1999).*
10r GTE's Supplemental Executive Retirement Plan, as amended (Exhibits 10-3,
10-3, 10-3 and 10-3 to GTE's Form 10-K for the years ended December 31,
1991, 1992, 1993 and 1994, respectively, File No. 1-2755).*
10s GTE's Executive Salary Deferral Plan, as amended (Exhibit 10.10 to GTE's
Form 10-K for the year ended December 31, 1998, File No. 1-2755).*
10t Bell Atlantic Senior Management Long-Term Disability and Survivor
Protection Plan, as amended (Exhibit 10h to Form SE filed on March 27,
1986 and Exhibit 10b(ii) to Form 10-K for the year ended December 31,
1997).*
10u Description of Bell Atlantic Senior Management Estate Management Plan
(Exhibit 10rr to Form 10-K for year ended December 31, 1997).*
10v GTE's Executive Retired Life Insurance Plan, as amended (Exhibits 10-6,
10-6 and 10-6 to GTE's Form 10-K for the years ended December 31, 1991,
1992 and 1993, respectively, File No. 1-2755).*
10w NYNEX Supplemental Life Insurance Plan (Exhibit No. 10 iii 21 to NYNEX's
Form 10-Q for the period ended June 30, 1996, File No. 1-8608).*
10x Employment Agreement between Verizon and Charles R. Lee filed herewith.*
10y Amended and Restated Employment Agreement between Verizon and Ivan G.
Seidenberg. (Exhibit 10 to Form 10-Q for the period ended June 30, 2000).*
10z Employment Agreement and stock option arrangements with respect to the
stock of Grupo Iusacell, S.A. de C.V., between Verizon and Lawrence T.
Babbio (Exhibit 10a to Form 10-Q for the period ended September 30, 2000,
Exhibit 10s to Form 10-K for the year ended December 31, 1993 and Exhibit
10q to Form 10-K for the year ended December 31, 1996).*
10aa Employment Agreement between Verizon and Mary Beth Bardin (Exhibit 10b to
Form 10-Q for the period ended September 30, 2000).*
10bb Employment Agreement between Verizon and William P. Barr (Exhibit 10c to
Form 10-Q for the period ended September 30, 2000).*
24
<PAGE>
10cc Employment Agreement between Verizon and David H. Benson filed herewith.*
10dd Agreements with William F. Heitmann (Exhibits 10ll and 10nn to Form 10-K
for the year ended December 31, 1998).*
10ee Employment Agreement between Verizon and Michael T. Masin (Exhibit 10d to
Form 10-Q for the period ended September 30, 2000).*
10ff Employment Agreement between Verizon and Frederic V. Salerno (Exhibit 10e
to Form 10-Q for the period ended September 30, 2000).*
10gg Employment Agreement between Verizon and Ezra D. Singer filed herewith.*
10hh Employment Agreement between Verizon Wireless and Dennis F. Strigl
(Exhibit 10f to Form 10-Q for the period ended September 30, 2000).*
10ii Employment Agreement between Verizon and Lawrence R. Whitman (Exhibit 10g
to Form 10-Q for the period ended September 30, 2000).*
10jj U.S. Wireless Agreement, dated September 21, 1999, among Bell Atlantic and
Vodafone Airtouch plc, including the forms of Amended and Restated
Partnership Agreement and the Investment Agreement (Exhibit 10 to Form
10-Q for the period ended September 30, 1999).
12 Computation of Ratio of Earnings to Fixed Charges filed herewith.
21 List of principal subsidiaries of Verizon filed herewith.
23a Consent of Independent Accountants filed herewith.
23b Consent of Independent Accountants filed herewith.
23c Consent of Independent Accountants filed herewith.
- --------------------------------------------------------------------------------
* Indicates management contract or compensatory plan or arrangement.
(b) Current Reports on Form 8-K filed during the quarter ended December
31, 2000:
A Current Report on Form 8-K was filed on November 30, 2000,
containing a press release issued by Verizon Communications announcing
revised earnings targets to reflect the impact of the termination of
its merger agreement with NorthPoint Communications and steps Verizon
is taking to compete outside its current wireline footprint.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 Communications Inc.
Date March 23, 2001 By /s/ Lawrence R. Whitman
--------------- ----------------------------
Lawrence R. Whitman
Senior Vice President and
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Principal Executive Officers:
/s/ Charles R. Lee Chairman and March 23, 2001
- ------------------------------ Co-Chief Executive Officer
Charles R. Lee
/s/ Ivan G. Seidenberg President and March 23, 2001
- ------------------------------ Co-Chief Executive Officer
Ivan G. Seidenberg
Principal Financial Officer:
/s/ Frederic V. Salerno Vice Chairman and March 23, 2001
- ------------------------------ Chief Financial Officer
Frederic V. Salerno
Principal Accounting Officer:
/s/ Lawrence R. Whitman Senior Vice President and March 23, 2001
- ------------------------------ Controller
Lawrence R. Whitman
26
<PAGE>
SIGNATURES - Continued
----------------------
/s/ James R. Barker Director March 23, 2001
- ----------------------------
James R. Barker
/s/ Edward H. Budd Director March 23, 2001
- ----------------------------
Edward H. Budd
/s/ Richard L. Carrion Director March 23, 2001
- ----------------------------
Richard L. Carrion
/s/ Robert F. Daniell Director March 23, 2001
- ----------------------------
Robert F. Daniell
/s/ Helene L. Kaplan Director March 23, 2001
- ----------------------------
Helene L. Kaplan
/s/ Charles R. Lee Director March 23, 2001
- ----------------------------
Charles R. Lee
/s/ Sandra O. Moose Director March 23, 2001
- ----------------------------
Sandra O. Moose
/s/ Joseph Neubauer Director March 23, 2001
- ----------------------------
Joseph Neubauer
/s/ Thomas H. O'Brien Director March 23, 2001
- ----------------------------
Thomas H. O'Brien
/s/ Russell E. Palmer Director March 23, 2001
- ----------------------------
Russell E. Palmer
/s/ Hugh B. Price Director March 23, 2001
- ----------------------------
Hugh B. Price
/s/ Ivan G. Seidenberg Director March 23, 2001
- ----------------------------
Ivan G. Seidenberg
/s/ Walter V. Shipley Director March 23, 2001
- ----------------------------
Walter V. Shipley
/s/ John W. Snow Director March 23, 2001
- ----------------------------
John W. Snow
/s/ John R. Stafford Director March 23, 2001
- ----------------------------
John R. Stafford
/s/ Robert D. Storey Director March 23, 2001
- ----------------------------
Robert D. Storey
27
<PAGE>
Index to Financial Information
Page Number
-----------
Selected Financial Data............................................ F-2
Management's Discussion and Analysis of Results of Operations
and Financial Condition......................................... F-2
Report of Management............................................... F-22
Reports of Independent Accountants................................. F-22
Consolidated Statements of Income
For the years ended December 31, 2000, 1999 and 1998............ F-24
Consolidated Balance Sheets
December 31, 2000 and 1999...................................... F-25
Consolidated Statements of Cash Flows
For the years ended December 31, 2000, 1999 and 1998............ F-26
Consolidated Statements of Changes in Shareowners' Investment
For the years ended December 31, 2000, 1999 and 1998............ F-27
Notes to Consolidated Financial Statements......................... F-28
Schedule II--Valuation and Qualifying Accounts
For the years ended December 31, 2000, 1999 and 1998............ F-57
Financial statement schedules other than that listed above have been omitted
because such schedules are not required or applicable.
F-1
<PAGE>
SELECTED FINANCIAL DATA Verizon Communications Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions, except per share amounts)
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Operating revenues $ 64,707 $ 58,194 $ 57,075 $ 53,575 $ 50,411
Operating income 16,758 15,953 11,756 10,881 11,392
Income before extraordinary items and
cumulative effect of changes in accounting principles 10,810 8,296 5,326 5,181 5,818
Per common share-basic 3.98 3.03 1.94 1.90 2.13
Per common share-diluted 3.95 2.98 1.92 1.89 2.12
Net income 11,797 8,260 4,980 5,181 6,091
Net income available to common shareowners 11,787 8,260 4,948 5,181 6,091
Per common share-basic 4.34 3.02 1.81 1.90 2.23
Per common share-diluted 4.31 2.97 1.79 1.89 2.22
Cash dividends declared per common share 1.54 1.54 1.54 1.51 1.44
FINANCIAL POSITION
Total assets $ 164,735 $ 112,830 $ 98,164 $ 95,742 $ 91,538
Long-term debt 42,491 32,419 33,064 27,759 28,496
Employee benefit obligations 12,543 13,744 14,788 14,760 14,276
Minority interest, including a portion
subject to redemption requirements 21,830 1,900 2,490 3,338 4,456
Shareowners' investment 34,578 26,376 21,435 20,632 20,184
</TABLE>
Note: All amounts have been restated to reflect financial information of Bell
Atlantic and GTE as if they had been combined as of the beginning of the
earliest period presented.
. Significant events affecting our historical earnings trends in 1998 through
2000 are described in Management's Discussion and Analysis of Results of
Operations and Financial Condition.
. 1997 data includes retirement incentive costs, merger-related costs and other
special items.
. 1996 data includes retirement incentive costs, other special items and the
effect of the adoption of a change in accounting for directory publishing.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
Verizon Communications Inc., formed in 2000 by the merger of Bell Atlantic
Corporation and GTE Corporation, is one of the world's leading providers of
communications services. Verizon companies are the largest providers of wireline
and wireless communications in the United States, with nearly 109 million access
line equivalents and more than 27.5 million wireless customers, as well as the
world's largest provider of print and online directory information. With
approximately 260,000 employees and nearly $65 billion in reported revenues,
Verizon's global presence extends to over 40 countries in the Americas, Europe,
Asia and the Pacific.
The merger of Bell Atlantic and GTE qualified as a tax-free reorganization and
has been accounted for as a pooling-of-interests business combination. Under
this method of accounting, Bell Atlantic and GTE are treated as if they had
always been combined for accounting and financial reporting purposes. As a
result, we have restated our consolidated financial statements for all dates and
periods presented in this report prior to the merger to reflect the combined
results of Bell Atlantic and GTE as of the beginning of the earliest period
presented.
Also in 2000, Verizon and Vodafone Group plc consummated the previously
announced agreement to combine U.S. wireless assets, including cellular,
Personal Communications Services (PCS) and paging operations. Vodafone
contributed its U.S. wireless operations to a Verizon partnership in exchange
for a 45% economic interest in the partnership. We accounted for this
transaction as a purchase business combination.
We operate and manage around four segments: Domestic Telecom, Domestic Wireless,
International and Information Services. Domestic Telecom provides local
telephone services, including voice and data transport, enhanced and custom
calling features, network access, long distance, directory assistance, private
lines and public telephones. This segment also provides customer premises
equipment distribution, data solutions and systems integration, billing and
collections, Internet access services, research and development and inventory
management services. Domestic Wireless products and services include cellular,
PCS and paging services and equipment sales. International operations include
wireline and wireless communications operations, investments and management
contracts in the Americas, Europe, Asia and the Pacific. Information Services
includes domestic and international publishing businesses including print and
electronic directories and Internet-based shopping guides, as well as website
creation and other electronic commerce services.
F-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
In this section, we discuss our overall reported results and highlight special
and nonrecurring items. In the following section, we review the performance of
our segments on what we call an adjusted basis. This means we adjust the
segments' reported results for the effects of these items, which management does
not consider in assessing segment performance due primarily to their
nonrecurring and/or non-operational nature. We believe that this presentation
will assist readers in better understanding trends from period to period.
We reported net income available to common shareowners of $11,787 million, or
$4.31 diluted earnings per share for the year ended December 31, 2000, compared
to net income available to common shareowners of $8,260 million, or $2.97
diluted earnings per share for the year ended December 31, 1999. In 1998, we
reported net income available to common shareowners of $4,948 million, or $1.79
diluted earnings per share.
Our reported results for all three years were affected by special items. After
adjusting for such items, net income would have been $7,962 million, or $2.91
diluted earnings per share in 2000, $7,895 million, or $2.84 diluted earnings
per share in 1999, and $7,358 million, or $2.67 diluted earnings per share in
1998.
The table below summarizes reported and adjusted results of operations for each
period.
(dollars in millions, except per share amounts)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Reported operating revenues $ 64,707 $ 58,194 $ 57,075
Reported operating expenses 47,949 42,241 45,319
--------------------------------------
Reported operating income 16,758 15,953 11,756
REPORTED NET INCOME AVAILABLE TO
COMMON SHAREOWNERS 11,787 8,260 4,948
--------------------------------------
Bell Atlantic-GTE merger-related
costs 749 - -
Merger transition and integration costs 316 126 121
Gains on sales of assets, net (1,987) (819) 222
Gain on CWC stock (1,941) - -
Settlement gains and enhancement costs (564) (410) 645
Mark-to-market adjustment for C&W/NTL
exchangeable notes (431) 432 -
Genuity loss 281 325 258
Wireless joint venture - (173) -
NorthPoint investment write-off 153 - -
International restructuring 50 - -
Other charges and special items 526 126 786
Extraordinary items (1,027) 36 346
Impact of accounting change
(SAB No. 101) 40 (8) -
Redemption of minority interest and
investee/subsidiary preferred stock 10 - 32
--------------------------------------
ADJUSTED NET INCOME $ 7,962 $ 7,895 $ 7,358
======================================
DILUTED EARNINGS PER SHARE-REPORTED $ 4.31 $ 2.97 $ 1.79
DILUTED EARNINGS PER SHARE-ADJUSTED $ 2.91 $ 2.84 $ 2.67
The following is further explanation of the nature and timing of these special
items.
- --------------------------------------------------------------------------------
Completion of Mergers
- --------------------------------------------------------------------------------
On June 30, 2000, Bell Atlantic and GTE completed a merger under a definitive
merger agreement dated as of July 27, 1998 and began doing business as Verizon
Communications. The merger qualified as a tax-free reorganization and has been
accounted for as a pooling-of-interests business combination. Under this method
of accounting, Bell Atlantic and GTE are treated as if they had always been
combined for accounting and financial reporting purposes. As a result, we have
restated our consolidated financial statements for all dates and periods prior
to the merger to reflect the combined results of Bell Atlantic and GTE as of the
beginning of the earliest period presented.
In August 1997, Bell Atlantic and NYNEX completed a merger of equals under a
definitive merger agreement entered into on April 21, 1996 and amended on July
2, 1996. The merger qualified as a tax-free reorganization and has been
accounted for as a pooling-of-interests.
The following table summarizes the one-time charges incurred for each merger.
Amounts for 2000 pertain to the Bell Atlantic-GTE merger. Transition and
integration costs for 1999 and 1998 pertain to the Bell Atlantic-NYNEX merger.
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
DIRECT INCREMENTAL COSTS
Compensation arrangements $ 210 $ - $ -
Professional services 161 - -
Shareowner-related 35 - -
Registration, regulatory and other 66 - -
-------------------------------------
TOTAL DIRECT INCREMENTAL COSTS 472 - -
-------------------------------------
EMPLOYEE SEVERANCE COSTS 584 - -
-------------------------------------
TRANSITION AND INTEGRATION COSTS
Systems modifications 99 186 149
Branding 240 1 31
Relocation, training and other 355 18 16
-------------------------------------
TOTAL TRANSITION AND INTEGRATION COSTS 694 205 196
-------------------------------------
TOTAL MERGER-RELATED COSTS $ 1,750 $ 205 $ 196
=====================================
MERGER-RELATED COSTS
Direct Incremental Costs
Direct incremental costs related to the Bell Atlantic-GTE merger of $472 million
($378 million after-tax, or $.14 per diluted share) include compensation,
professional services and other costs. Compensation includes retention payments
to employees that were contingent on the close of the merger and payments to
employees to satisfy contractual obligations triggered by the changes in
control. Professional services include investment banking, legal, accounting,
consulting and other advisory fees incurred to obtain federal and state
regulatory approvals and take other actions necessary to complete the merger.
Other includes costs incurred to obtain shareholder approval of the merger,
register securities and communicate with shareholders, employees and regulatory
authorities regarding merger issues.
F-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
Employee Severance Costs
Employee severance costs related to the Bell Atlantic-GTE merger of $584 million
($371 million after-tax, or $.14 per diluted share), as recorded under Statement
of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for
Postemployment Benefits," represent the benefit costs for the separation of
approximately 5,500 management employees who are entitled to benefits under
pre-existing separation plans, as well as an accrual for ongoing SFAS No. 112
obligations for GTE employees. Of these employees, approximately 5,200 were
located in the United States and approximately 300 were located at various
international locations. The separations either have or are expected to occur as
a result of consolidations and process enhancements within our operating
segments.
Transition and Integration Costs
In addition to the direct incremental merger-related and severance costs
discussed above, from the date of the Bell Atlantic-GTE merger, we expect to
incur a total of approximately $2.0 billion of transition costs related to the
Bell Atlantic-GTE merger and the formation of the wireless joint venture. These
costs will be incurred to integrate systems, consolidate real estate, and
relocate employees. They also include approximately $500 million for advertising
and other costs to establish the Verizon brand. Transition costs related to the
Bell Atlantic-GTE merger were $694 million ($316 million after taxes and
minority interests, or $.12 per diluted share) in 2000.
In connection with the Bell Atlantic-NYNEX merger, we recorded transition costs
similar in nature to the Bell Atlantic-GTE merger transition costs of $205
million ($126 million after-tax, or $.05 per diluted share) in 1999 and $196
million ($121 million after-tax, or $.04 per diluted share) in 1998.
- --------------------------------------------------------------------------------
Gains on Sales of Assets, Net
- --------------------------------------------------------------------------------
During 2000 and 1999, we recognized net gains related to sales of assets and
impairments of assets held for sale. During 1998, we recognized net losses
related to impairments of assets held for sale. Impairments were based on
expected future cash flows. These net gains and losses are summarized as
follows:
<TABLE>
<CAPTION>
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Pretax After-tax Pretax After-tax Pretax After-tax
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wireline property
sales $ 3,051 $ 1,856 $ - $ - $ - $ -
Wireless overlap sales 1,922 1,156 - - - -
Other, net (1,180) (1,025) 1,379 819 (361) (222)
-----------------------------------------------------------------------------
$ 3,793 $ 1,987 $ 1,379 $ 819 $ (361) $ (222)
=============================================================================
</TABLE>
As required, gains on sales of wireless overlap properties that occurred prior
to the closing of the Bell Atlantic-GTE merger are included in operating income
and in the table above. Gains on sales of wireless overlap properties that
occurred after the Bell Atlantic-GTE merger are classified as extraordinary
items. See "Extraordinary Items" below for gains on sales of wireless overlap
properties subsequent to the Bell Atlantic-GTE merger.
Wireline Property Sales
During 1998, GTE committed to sell approximately 1.6 million non-strategic
domestic access lines located in Alaska, Arizona, Arkansas, California,
Illinois, Iowa, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Texas and
Wisconsin. During 1999, definitive sales agreements were reached for the sale of
all 1.6 million lines.
During 2000, we sold non-strategic access lines of former GTE properties listed
above, except for those located in Arizona and California, for combined cash
proceeds of approximately $4,903 million and $125 million in convertible
preferred stock. The pretax gain on the sales was $3,051 million ($1,856 million
after-tax, or $.68 per diluted share). The remaining sales are expected to close
in 2001.
Wireless Overlap Sales
A U.S. Department of Justice consent decree issued on December 6, 1999 required
GTE Wireless, Bell Atlantic Mobile, Vodafone Group plc and PrimeCo Personal
Communications, L.P. to resolve a number of wireless market overlaps in order to
complete the wireless joint venture and the Bell Atlantic-GTE merger. As a
result, during April 2000 we completed a transaction with ALLTEL Corporation
that provided for the exchange of a former Bell Atlantic Mobile market cluster
in the Southwestern U.S. for several of ALLTEL's wireless markets in Nevada and
Iowa and cash. In a separate transaction entered into by GTE, in June 2000, we
exchanged several former GTE markets in Florida, Alabama and Ohio, as well as an
equity interest in South Carolina, for several ALLTEL interests in Pennsylvania,
New York, Indiana and Illinois. These exchanges were accounted for as purchase
business combinations and resulted in combined pretax gains of $1,922 million
($1,156 million after-tax, or $.42 per diluted share). For a description of the
resolution of the remaining service area conflicts, see "Extraordinary Items"
below.
Other Transactions
During 2000, we recorded charges related to the write-down of certain impaired
assets, determined based on expected future cash flows, and other charges of
$1,180 million pretax ($1,025 million after-tax, or $.37 per diluted share), as
follows:
(dollars in millions, except per share amounts)
Per diluted
Year Ended December 31, 2000 Pretax After-tax share
- --------------------------------------------------------------------------------
GTE Airfone and Video impairment $ 566 $ 362 $ .13
CLEC impairment 334 218 .08
Real estate consolidation and other
merger-related charges 220 142 .05
Deferred taxes on contribution to
the wireless joint venture - 249 .09
Other, net 60 54 .02
--------------------------------------
$ 1,180 $ 1,025 $ .37
======================================
In connection with our decisions to exit the video business and GTE Airfone (a
company involved in air-to-ground communications), in the second quarter of 2000
we recorded an impairment charge to reduce the carrying value of these
investments to their estimated net realizable value.
F-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
The competitive local exchange carrier (CLEC) impairment primarily relates to
the revaluation of assets and the accrual of costs pertaining to certain
long-term contracts due to strategic changes in our approach to offering bundled
services both in and out of its franchise areas. The revised approach to
providing such services resulted, in part, from post-merger integration
activities and acquisitions.
The real estate consolidation and other merger-related charges include the
revaluation of assets and the accrual of costs to exit leased facilities that
are in excess of our needs as the result of post-merger integration activities.
The deferred tax charge is non-cash and was recorded as the result of the
contribution in July 2000 of the GTE Wireless assets to Verizon Wireless based
on the differences between the book and tax bases of assets contributed.
During 1999, we sold substantially all of GTE Government Systems to General
Dynamics Corporation for $1.0 billion in cash. The pretax gain on the sale was
$754 million ($445 million after-tax, or $.16 per diluted share). In addition,
during 1999, we recorded a net pretax gain of $112 million ($66 million
after-tax, or $.02 per diluted share), primarily associated with the sale of the
remaining major division of GTE Government Systems to DynCorp. The 1999
year-to-date net gains for asset sales also include a pretax gain of $513
million ($308 million after-tax, or $.11 per diluted share) associated with the
merger of BC TELECOM Inc. and TELUS Communications Inc. during the first quarter
of 1999.
During the first quarter of 1998, we committed to a plan to sell or exit various
business activities and reduce costs through employee reductions and related
actions. Based on the decision to sell, we recorded a pretax charge of $200
million ($117 million after-tax, or $.04 per diluted share) to reduce the
carrying value of the assets to estimated net sales proceeds.
Also in 1998, after completing a review of our operations, we decided to scale
back the deployment of the hybrid fiber coax (HFC) video networks that we built
in certain test markets. Due to the significant change in the scale of the HFC
networks and the effect on future revenues and expenses, we recorded a pretax
charge for impairment of approximately $161 million ($105 million after-tax, or
$.04 per diluted share).
- --------------------------------------------------------------------------------
Gain on CWC Stock
- --------------------------------------------------------------------------------
In May 2000, Cable & Wireless plc (C&W), NTL Incorporated (NTL) and Cable &
Wireless Communications plc (CWC) completed a restructuring of CWC. Under the
terms of the restructuring, CWC's consumer cable telephone, television and
Internet operations were separated from its corporate, business, Internet
protocol and wholesale operations. Once separated, the consumer operations were
acquired by NTL and the other operations were acquired by C&W. In connection
with the restructuring, we, as a shareholder in CWC, received shares in the two
acquiring companies, representing approximately 9.1% of the NTL shares
outstanding at the time and approximately 4.6% of the C&W shares outstanding at
the time.
Our exchange of CWC shares for C&W and NTL shares resulted in the recognition of
a non-cash pretax gain of $3,088 million ($1,941 million after-tax, or $.71 per
diluted share) in Equity in Income (Loss) From Unconsolidated Businesses in the
consolidated statements of income and a corresponding increase in the cost basis
of the shares received.
- --------------------------------------------------------------------------------
Settlement Gains and Enhancement Costs
- --------------------------------------------------------------------------------
In 2000 and 1999, we recorded pension settlement gains of $911 million and $663
million pretax ($564 million and $410 million after-tax, or $.21 and $.15 per
diluted share), respectively, in accordance with SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits." They relate to certain settlements of pension
obligations for former GTE employees through direct payment, the purchase of
annuities or otherwise.
In 1993, we announced a restructuring plan which included a pretax accrual of
approximately $1.1 billion for severance and postretirement medical benefits
under an involuntary force reduction plan. Since the inception of the retirement
incentive program, we recorded additional pretax costs totaling approximately
$3.0 billion through December 31, 1998, including $1,021 million ($651 million
after-tax, or $.24 per diluted share) in 1998. The enhancement costs were
comprised of special termination pension and postretirement benefit amounts, as
well as employee costs for other items and have been presented net of 1998
settlement gains of $9 million ($6 million after-tax, or less than $.01 per
diluted share).
- --------------------------------------------------------------------------------
Mark-to-Market Adjustment for
C&W/NTL Exchangeable Notes
- --------------------------------------------------------------------------------
In 2000, we recorded a gain on a mark-to-market adjustment of $664 million ($431
million after-tax, or $.16 per diluted share) related to our $3,180 million of
notes which are now exchangeable into shares of C&W and NTL. Prior to the
reorganization of CWC in May 2000, these notes were exchangeable into shares of
CWC. In 1999, we recorded a loss on a mark-to-market adjustment of $664 million
($432 million after-tax, or $.16 per diluted share) related to these notes.
The mark-to-market adjustments are non-cash, non-operational transactions that
result in either an increase or decrease in the carrying value of the debt
obligation and a charge or credit to income. The mark-to-market adjustments are
required because the carrying value of the notes is indexed to the fair market
value of C&W's and NTL's common stock. If the combined fair value of the C&W and
NTL common stocks declines, our debt obligation is reduced (but not to less than
its amortized carrying value) and income is increased. If the combined fair
value of the C&W and NTL common stock increases, our debt obligation increases
and income is decreased. The CWC exchangeable notes may be exchanged beginning
in July 2002.
F-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Genuity Loss
- --------------------------------------------------------------------------------
In accordance with the provisions of a Federal Communications Commission (FCC)
order in June 2000, Genuity Inc., formerly a wholly owned subsidiary of GTE,
sold in a public offering 174 million of its Class A common shares, representing
100% of the issued and outstanding Class A common stock and 90.5% of the overall
voting equity in Genuity. GTE retained 100% of Genuity's Class B common stock,
which represents 9.5% of the voting equity in Genuity and contains a contingent
conversion feature. A complete description of the circumstances in which the
conversion feature can be exercised is included in "Other Factors That May
Affect Future Results."
In accordance with provisions of the FCC order, the sale transferred ownership
and control of Genuity to the Class A common stockholders and, accordingly, we
deconsolidated our investment in Genuity on June 30, 2000 and are accounting for
our investment in Genuity using the cost method. The impact of this change is
that Genuity's revenues and expenses, as well as changes in balance sheet
accounts and cash flows subsequent to June 30, 2000 are no longer included in
our consolidated financial results. As a result, for comparability, we have
adjusted the reported results for all periods prior to June 30, 2000 to exclude
the results of Genuity. The after-tax losses were $281 million (or $.10 per
diluted share) in 2000, $325 million (or $.12 per diluted share) in 1999 and
$258 million (or $.09 per diluted share) in 1998.
- --------------------------------------------------------------------------------
Wireless Joint Venture
- --------------------------------------------------------------------------------
On April 3, 2000, Verizon and Vodafone consummated the previously announced
agreement to combine U.S. wireless assets, including cellular, PCS and paging
operations. In July 2000, following the closing of the Bell Atlantic-GTE merger,
interests in GTE's U.S. wireless assets were contributed to Verizon Wireless. As
a result, Verizon owns an economic interest of 55% and Vodafone owns an economic
interest of 45% in the wireless joint venture. Adjusted results of operations
for 1999 reflect the impact of the wireless joint venture for the comparable
period in 1999 so that the 2000 and 1999 financial information is presented on a
comparable basis.
- --------------------------------------------------------------------------------
Other Charges and Special Items
- --------------------------------------------------------------------------------
Other charges and special items recorded during 2000 include the write-off of
our investment in NorthPoint Communications Corp. of $155 million ($153 million
after-tax, or $.06 per diluted share) as a result of the deterioration in
NorthPoint's business, operations and financial condition. We also recorded a
pretax charge of $50 million ($50 million after-tax, or $.02 per diluted share)
associated with our share of costs incurred at two of our international equity
investees to complete employee separation programs.
Other charges and special items in 2000 include the cost of disposing or
abandoning redundant assets and discontinued system development projects in
connection with the Bell Atlantic-GTE merger of $287 million ($175 million
after-tax, or $.06 per diluted share), regulatory settlements of $98 million
($61 million after-tax, or $.02 per diluted share) and other asset write-downs
of $416 million ($290 million after-tax, or $.11 per diluted share).
During the first quarter of 1999, we recorded a special charge of $192 million
($119 million after-tax, or $.04 per diluted share) associated with employee
separation programs. The charge included separation and related benefits such as
outplacement and benefit continuation costs for approximately 3,000 employees.
The programs were completed in early April 1999, as planned, consistent with the
original cost estimates.
In 1998, we recorded total pretax charges of $918 million ($786 million
after-tax, or $.28 per diluted share) related to the write-down of assets, exit
of business activities, consolidation of facilities, the elimination of employee
functions and other actions as discussed below.
In 1998, we recorded pretax charges of $485 million to adjust the carrying
values of two Asian investments, TelecomAsia, a wireline investment in Thailand,
and Excelcomindo, a wireless investment in Indonesia. We account for these
investments under the cost method. We continue to monitor the political,
economic, and financial aspects of our remaining investments in Thailand and
Indonesia, as well as other investments. The book value of our remaining Asian
investments was approximately $179 million at December 31, 2000. Should we
determine that any further decline in the fair values of these investments is
other than temporary, the impact would be recorded in our results of operations.
During the first quarter of 1998, we also committed to a plan to exit a number
of other non-strategic domestic business activities. As a result, we recorded a
pretax charge of $156 million to reduce the carrying value of affected assets to
expected net salvage value and to recognize costs resulting from the exit plan.
The major components of the charge included the write-off of network equipment
and supplies for discontinued wireless products and services ($81 million); the
shutdown of business units developing interactive video products and services
and excess printing facilities ($42 million); and the write-off of impaired
assets in Latin America ($33 million).
During the first quarter of 1998, we consolidated facilities and centralized or
eliminated a variety of employee functions and, as a result, recorded a $107
million pretax charge. During the second half of 1998, we closed several
administrative facilities, including the former GTE corporate headquarters in
Connecticut and approximately 140 domestic retail stores and other locations.
The cost of these actions is composed primarily of employee severance,
outplacement and benefit continuation costs for approximately 1,700 employees
and other costs to exit locations we no longer use.
We also recorded a pretax charge of approximately $131 million in 1998 related
to nonrecurring federal and state regulatory rulings affecting our Domestic
Telecom segment. Approximately two thirds of this charge relates to nonrecurring
access rate refunds applied by the FCC retroactively in 1997. In addition, the
charge included the write-off of mandated costs, including generic software, and
other costs we incurred for which revenue recovery was not allowable under the
regulatory process.
Other items arising in 1998 included pretax charges totaling $39 million
principally associated with the settlement of labor contracts in August 1998.
F-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Extraordinary Items
- --------------------------------------------------------------------------------
In June 2000, we entered into a series of definitive sale agreements to resolve
service area conflicts prohibited by FCC regulations as a result of the Bell
Atlantic-GTE merger (see "Gains on Sales of Assets, Net - Wireless Overlap
Sales"). These agreements, which were pursuant to the consent decree issued for
the merger, enabled both the formation of Verizon Wireless and the closing of
the merger. Since the sales were required pursuant to the consent decree and
several occurred after the merger, the gains on sales were recorded net of taxes
as Extraordinary Items in the consolidated statements of income.
During the second half of 2000, we completed the sale of the Richmond (former
PrimeCo) wireless market to CFW Communications Company in exchange for two
wireless rural service areas in Virginia and cash. The sale resulted in a pretax
gain of $184 million ($112 million after-tax, or $.04 per diluted share). In
addition, we completed the sales of the consolidated markets in Washington and
Texas and unconsolidated interests in Texas (former GTE) to SBC Communications.
The sales resulted in a pretax gain of $886 million ($532 million after-tax, or
$.19 per diluted share). Also, we completed the sale of the San Diego (former
GTE) market to AT&T Wireless. The sale resulted in a pretax gain of $304 million
($182 million after-tax, or $.07 per diluted share). In 2000, we also completed
the sale of the Houston PCS (former PrimeCo) wireless overlap market to AT&T
Wireless, resulting in a pretax gain of $350 million ($213 million after-tax, or
$.08 per diluted share).
During the first quarter of 2000, we retired $128 million of debt prior to the
stated maturity date, resulting in a one-time, pretax extraordinary charge of
$15 million ($9 million after-tax, or less than $.01 per diluted share). During
the fourth quarter of 2000, we retired $61.6 million of debt prior to the stated
maturity date, resulting in a one-time, pretax extraordinary charge of $4
million ($3 million after-tax, or less than $.01 per diluted share).
During the first quarter of 1999, we repurchased $338 million of high-coupon
debt through a public tender offer prior to stated maturity, resulting in a
one-time, pretax extraordinary charge of $46 million ($30 million after-tax, or
$.01 per diluted share). During the second quarter of 1999, we recorded a
one-time, pretax extraordinary charge of $10 million ($6 million after-tax, or
less than $.01 per diluted share) associated with the early extinguishment of
debentures of our telephone subsidiaries.
During 1998, we recorded pretax extraordinary charges of $616 million ($346
million after-tax, or $.13 per diluted share). Approximately $300 million of the
after-tax charge related to the discontinuation of SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation," by our Canadian operations. The
decision by our Canadian subsidiaries to discontinue using regulatory accounting
practices was in response to rulings by the Canadian regulatory commission in
March 1998 that opened the Canadian telecommunications market to full
competition. Under SFAS No. 71, certain assets were depreciated and certain
expenses were recognized over a longer period of time than would have been the
case in a competitive environment. This charge includes a reduction in the net
carrying value of property, plant and equipment of $270 million to reflect
impairment based on the estimated cash flows that the assets are expected to
generate in a competitive environment and a reduction in costs that had been
capitalized based on the expectation of future recovery of approximately $30
million. In addition, during the first quarter of 1998, we called $800 million
of high-coupon debt and preferred stock prior to their stated maturity date,
resulting in a pretax extraordinary charge of $31 million ($20 million
after-tax, or less than $.01 per diluted share). Also, in 1998, we recorded
pretax extraordinary charges of $40 million ($26 million after-tax, or $.01 per
diluted share) associated with the early extinguishment of debentures and
refunding mortgage bonds of the operating telephone subsidiaries and debt issued
by Fiberoptic Link Around the Globe Ltd. (FLAG), an investment accounted for
under the equity method.
- --------------------------------------------------------------------------------
SAB No. 101 Impact
- --------------------------------------------------------------------------------
We adopted the provisions of the Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements"
in the fourth quarter of 2000, retroactive to January 1, 2000, as required by
the SEC. The impact to Verizon pertains to the deferral of certain non-recurring
fees, such as service activation and installation fees, and associated
incremental direct costs, and the recognition of those revenues and costs over
the expected term of the customer relationship. Our 1999 adjusted results
reflect the impact of newly effective accounting rules on revenue recognition,
had the rules been effective January 1, 1999.
F-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
Special items are reflected in our consolidated statements of income for each
period as follows:
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
OPERATING REVENUES
Operations sold $ (874) $ (1,390) $ (1,346)
Deconsolidation of Genuity (529) (807) (468)
Wireless joint venture - 4,282 -
Deconsolidation of BC TELECOM - - (2,153)
Impact of accounting change
(SAB No. 101) - (117) -
Other special Items 119 (981) (934)
-----------------------------------
(1,284) 987 (4,901)
-----------------------------------
OPERATIONS AND SUPPORT EXPENSE
Operations sold 325 522 496
Bell Atlantic-GTE merger-related costs 1,056 - -
Merger transition costs 694 205 196
Settlement gains (911) (663) (9)
Deconsolidation of Genuity 829 1,123 761
Wireless joint venture - (2,695) -
Deconsolidation of BC TELECOM - - 1,252
Retirement incentive costs - - 1,021
Impact of accounting change
(SAB No. 101) - 114 -
Other special items 639 1,164 1,352
DEPRECIATION AND AMORTIZATION
Operations sold 19 46 243
Deconsolidation of Genuity 112 168 99
Wireless joint venture - (1,548) -
Deconsolidation of BC TELECOM - - 312
Other special items 3 - (19)
GAINS ON SALES OF ASSETS, NET (3,793) (1,379) 361
-----------------------------------
(2,311) (1,956) 1,164
-----------------------------------
OPERATING INCOME IMPACT OF OPERATIONS SOLD 530 822 607
EQUITY IN (INCOME) LOSS FROM
UNCONSOLIDATED BUSINESSES
Gain on CWC stock (3,088) - -
International restructuring 50 - -
Wireless joint venture - 108 -
Deconsolidation of BC TELECOM - - 135
Impact of accounting change
(SAB No. 101) - (5) -
Other special items 155 1 511
OTHER (INCOME) AND EXPENSE, NET
Total special items 18 (7) (8)
INTEREST EXPENSE
Wireless joint venture - (100) -
Deconsolidation of BC TELECOM - - 89
Other special items 35 2 11
MINORITY INTEREST
Merger transition costs (204) - -
Wireless joint venture - (379) -
Deconsolidation of BC TELECOM - - 133
Other special items - - (13)
MARK-TO-MARKET ADJUSTMENT FOR
C&W/NTL EXCHANGEABLE NOTES (664) 664 -
-----------------------------------
TOTAL SPECIAL ITEMS-PRETAX (5,479) (850) 2,629
Tax effect of special items and
other tax-related items 2,631 449 (597)
-----------------------------------
TOTAL SPECIAL ITEMS-AFTER-TAX (2,848) (401) 2,032
Extraordinary Items, Net of Tax (1,027) 36 346
Cumulative Effect of Change in
Accounting Principle, Net of Tax 40 - -
Redemption of Minority Interest and
Investee/Subsidiary Preferred Stock 10 - 32
-----------------------------------
TOTAL SPECIAL ITEMS $ (3,825) $ (365) $ 2,410
===================================
- --------------------------------------------------------------------------------
Deconsolidation of BC TELECOM
- --------------------------------------------------------------------------------
On December 31, 1998, we had a 50.8% ownership interest in BC TELECOM, a
full-service telecommunications provider in the province of British Columbia,
Canada. In January 1999, BC TELECOM and TELUS Corporation merged to form a new
public company. Our ownership interest in the merged company, TELUS, was
approximately 26.7% and, as such, we changed the accounting for our investment
from consolidation to the equity method. Accordingly, BC TELECOM's results of
operations for 1998 are reflected in reported revenues and expenses, while for
2000 and 1999 TELUS net results are reported as a component of Equity in Income
(Loss) from Unconsolidated Businesses in the consolidated statements of income.
In the preceding table, 1998 results of BC TELECOM are deconsolidated to be
comparable with 2000 and 1999. Consolidated net income and earnings per share
for 1998 are not affected by this change in accounting method.
- --------------------------------------------------------------------------------
SEGMENT RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
We have four reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments are Domestic
Telecom, Domestic Wireless, International and Information Services. You can find
additional information about our segments in Note 19 to the consolidated
financial statements.
We measure and evaluate our reportable segments based on adjusted net income,
which excludes unallocated corporate expenses and other adjustments arising
during each period. The other adjustments include transactions that management
excludes in assessing business unit performance due primarily to their
nonrecurring and/or non-operational nature. Although such transactions are
excluded from business segment results, they are included in reported
consolidated earnings. We previously described the more significant of these
transactions in the "Consolidated Results of Operations" section.
Special items affected our segments as follows:
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
DOMESTIC TELECOM
Reported net income $ 6,057 $ 5,664 $ 4,072
Special items (922) (644) 678
-----------------------------------------
Adjusted net income $ 5,135 $ 5,020 $ 4,750
=========================================
DOMESTIC WIRELESS
Reported net income $ 854 $ 614 $ 906
Special items (410) 14 56
-----------------------------------------
Adjusted net income $ 444 $ 628 $ 962
=========================================
INTERNATIONAL
Reported net income (loss) $ 2,547 $ 608 $ (381)
Special items (1,814) 10 891
-----------------------------------------
Adjusted net income $ 733 $ 618 $ 510
=========================================
INFORMATION SERVICES
Reported net income $ 1,098 $ 1,197 $ 1,113
Special items 140 14 32
-----------------------------------------
Adjusted net income $ 1,238 $ 1,211 $ 1,145
=========================================
CORPORATE AND OTHER
Reported net income (loss) $ 1,241 $ 177 $ (730)
Special items (829) 241 721
-----------------------------------------
Adjusted net income (loss) $ 412 $ 418 $ (9)
=========================================
Corporate and Other includes intersegment eliminations.
F-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Domestic Telecom
- --------------------------------------------------------------------------------
Our Domestic Telecom segment consists primarily of our 16 operating telephone
subsidiaries that provide local telephone services in over 30 states. These
services include voice and data transport, enhanced and custom calling features,
network access, directory assistance, private lines and public telephones. This
segment also provides customer premises equipment distribution, data solutions
and systems integration, billing and collections, Internet access services,
research and development and inventory management services. In addition, this
segment includes our long distance service.
HIGHLIGHTS
Healthy demand for core communications services and robust demand for new data
services enabled the Domestic Telecom group to increase total operating revenues
3.9% in 2000 and 3.3% in 1999 over the respective prior year. Much of this
growth was generated by increased sales of core and advanced communications
services, primarily our data services that grew 30% in 2000 and 32% in 1999.
These revenues include our high-bandwidth, packet-switched and special access
services, as well as our network integration business. We ended the year 2000
with 108.8 million access line equivalents in service, an increase of 20.0% from
December 31, 1999. These include data circuits equivalent to 45.9 million
voice-grade lines, 60% more than 1999, as more customers chose high-capacity,
high-speed transport services, and 62.9 million access lines, a 1.4% increase.
In 1999, access line equivalents in service were 90.7 million, an increase of
12.2% over 1998 and included data circuits equivalent to 28.7 million access
lines, a 37.0% increase over 1998. Access minutes of use increased 4.2% in 2000
and 6.3% in 1999. Our interLATA long distance business showed strong growth in
2000, fueled by the introduction of interLATA long distance service in the State
of New York at the beginning of the year. We ended the year 2000 with almost 1.4
million long distance subscribers in New York, representing approximately 20% of
the consumer market, and nearly 4.9 million customers nationwide, an increase of
more than 44% from the prior year. In 1999, long distance customers totaled 3.4
million, an increase of nearly 25% over 1998. Operating revenue growth in both
years was negatively affected by federal and state regulatory rate reductions
totaling approximately $860 million in 2000, $660 million in 1999 and $725
million in 1998, primarily affecting our network access revenues.
Higher costs associated with entering new businesses such as long distance and
data services were the principal driver of increases in operating expenses of
4.4% in 2000 and 2.3% in 1999. These entry costs include customer acquisition
expenses associated with the launch of long distance in New York in 2000 and
costs related to marketing, distribution and service installation of our Digital
Subscriber Line (DSL) service. The effect of cost containment measures partially
offset expense increases in both years.
Wireline Property Sales
As discussed earlier under "Consolidated Results of Operations," we have either
recently sold or committed to sell wireline properties representing
approximately 1.7% of the total Domestic Telecom access lines. The effect of
these dispositions largely depends on the timing of the sales and the
reinvestment of the proceeds. As of December 31, 2000, we have sold all but
approximately 65,000 access lines. Those remaining access lines are under
definitive sale agreements. For comparability purposes, the adjusted results of
operations shown in the table below exclude the operating revenues and expenses
contributed by the properties that have been sold or will be sold in early 2001.
These operating revenues were approximately $766 million, $1,151 million and
$1,124 million for the years 2000, 1999 and 1998, respectively. Operating
expenses contributed by the sold properties were approximately $253 million,
$378 million and $566 million for the years 2000, 1999 and 1998, respectively.
Net income contributed by the sold properties was approximately $314 million,
$475 million and $345 million for the years 2000, 1999 and 1998, respectively.
For additional information on wireline property sales, see Note 3 to the
consolidated financial statements.
Additional financial information about Domestic Telecom's results of operations
for 2000, 1999, and 1998 follows:
Years Ended December 31, (dollars in millions)
Results of Operations-Adjusted Basis 2000 1999 1998
- --------------------------------------------------------------------------------
OPERATING REVENUES
Local services $ 21,368 $ 20,600 $ 19,960
Network access services 13,142 12,827 12,434
Long distance services 3,153 3,183 3,288
Other services 5,680 5,113 4,713
----------------------------------------
43,343 41,723 40,395
----------------------------------------
OPERATING EXPENSES
Operations and support 24,537 23,691 23,449
Depreciation and amortization 8,752 8,200 7,711
----------------------------------------
33,289 31,891 31,160
----------------------------------------
OPERATING INCOME $ 10,054 $ 9,832 $ 9,235
========================================
ADJUSTED NET INCOME $ 5,135 $ 5,020 $ 4,750
OPERATING REVENUES
Local Services
Local service revenues are earned by our operating telephone subsidiaries 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 include wholesale
revenues from unbundled network element (UNE) platforms, certain data transport
revenues, and wireless interconnection revenues.
Growth in local service revenues of $768 million, or 3.7% in 2000 and $640
million, or 3.2% in 1999 was driven by higher usage of our network facilities.
This growth, generated in part by an increase in access lines in service in each
year, reflects strong customer demand and usage of our data transport and
digital services. Both years also reflect solid demand for our value-added
services as a result of new packaging of services, as well as growth in wireless
interconnection, inside wire maintenance, and national directory assistance
services. In 2000, revenue growth was partially attributable to the favorable
resolution of certain regulatory matters and the impact of implementing SAB No.
101. Revenue growth associated with SAB No. 101 was entirely offset by
corresponding increases in operating expenses.
F-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
Local service revenue growth was partially offset in both years by the effect of
resold and UNE platforms, as well as the effect of net regulatory price
reductions and customer rebates.
See "Other Factors That May Affect Future Results" for additional information on
the Telecommunications Act of 1996 (1996 Act) and its impact on the local
exchange market.
Network Access Services
Network access services revenues are earned from end-user subscribers and 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.
Our network access revenues grew $315 million, or 2.5%, in 2000 and $393
million, or 3.2%, in 1999. This growth was mainly attributable to higher
customer demand, primarily for special access services that grew approximately
36% in both 2000 and 1999. This volume growth reflects a continuing expansion of
the business market, particularly for high-capacity, high-speed digital
services. Growth in access minutes of use and higher revenues received from
customers for the recovery of local number portability also contributed to
network access revenue growth in both years.
Volume-related growth was substantially offset by price reductions associated
with federal and state price cap filings and other regulatory decisions. State
public utility commissions regulate our operating telephone subsidiaries with
respect to certain intrastate rates and services and certain other matters.
State rate reductions on access services were approximately $285 million in
2000, $220 million in 1999 and $180 million in 1998.
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 2000, we implemented the Coalition for
Affordable Local and Long Distance Service (CALLS) plan. Rates included in the
July 2000 CALLS plan will be in effect through June 2001. Interstate price
reductions on access services were approximately $520 million in 2000, $380
million in 1999 and $360 million in 1998. Beginning in January 1998, the rates
include amounts necessary to recover our operating telephone subsidiaries'
contribution to the FCC's universal service fund and are subject to change every
quarter due to potential increases or decreases in our contribution to the
universal service fund. The subsidiaries' contributions to the universal service
fund are included in Operations and Support Expense.
See "Other Factors That May Affect Future Results" for additional information on
FCC rulemakings concerning federal access rates, universal service and
unbundling of network elements.
Long Distance Services
Long distance service revenues include both intraLATA toll services and
interLATA long distance voice and data services.
Long distance service revenues declined $30 million, or .9%, in 2000 and $105
million, or 3.2%, in 1999. Revenues in both periods reflect higher demand for
interLATA long distance services throughout the region, including the
introduction of our interLATA long distance service in the State of New York in
the first quarter of 2000.
These revenue increases were offset 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 was partially mitigated by increased network access services
revenues for usage of our network by alternative providers. In response to
presubscription, we have implemented customer win-back and retention initiatives
that include toll calling discount packages and product bundling offers.
See also "Other Factors That May Affect Future Results" for a discussion of our
plans to enter the interLATA long distance market in other states in our region.
Other Services
Our other services include such services as billing and collections for long
distance carriers, collocation for competitive local exchange carriers, public
(coin) telephone and customer premises equipment services. Other services
revenues also include services provided by our non-regulated subsidiaries such
as inventory management and purchasing, Internet access, and data solutions and
systems integration businesses.
Revenues from other services grew $567 million, or 11.1%, in 2000 and $400
million, or 8.5%, in 1999. Revenue growth in both years was attributable to
higher payments received from competitive local exchange carriers for
interconnection of their networks with our network. Revenue growth was also
boosted by higher demand for such services as systems integration and data
solutions and inventory management and purchasing services, primarily due to new
contracts with business customers. These factors were partially offset in both
years by lower demand for our billing and collection, public telephone and
directory services.
OPERATING EXPENSES
Operations and Support
Operations and support, which consists of employee costs and other operating
expenses, increased by $846 million, or 3.6%, in 2000 and by $242 million, or
1.0%, in 1999. These expense increases were principally due to higher costs
associated with entering new businesses such as long distance and data services
and higher interconnection payments to competitive local exchange and other
carriers to terminate calls on their networks (reciprocal compensation). Higher
costs at our operating telephone subsidiaries, including salary and wage
increases for management and non-management employees and the effect of higher
work force levels also contributed to cost increases in both years. In 2000,
expense increases reflect the implementation of SAB No. 101. Expense increases
associated with SAB No. 101 were entirely offset by corresponding increases in
operating revenues, as described earlier. Higher costs associated with Year 2000
readiness also contributed to expense increases in 1999.
Cost increases in both years were partially offset by a decline in pension and
benefit costs. The decline in pension and benefit costs was chiefly due to
favorable pension plan investment returns and changes in actuarial assumptions.
These factors were offset, in part, by changes in certain plan provisions,
increased health care costs caused by inflation, savings plan benefit
improvements for
F-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
certain management employees, as well as benefit improvements provided for under
new contracts with other employees. In 2000, we executed new contracts with
unions representing our employees. The new contracts provide for wage and
pension increases and other benefit improvements, including annual wage
increases of 4%, 3% and 5%, beginning in August 2000. Customer service
representatives received an additional 4% wage increase. Pension benefits for
active employees will increase by 5% on July 1, 2001, 5% on July 1, 2002 and 4%
on July 1, 2003. The contracts also include team-based incentive awards for
meeting higher service performance and other standards, increased funding for
work and family programs, improvements to health and other benefits and certain
provisions relating to overtime, access to work and employment security. In
addition, all union-represented employees were granted options to purchase 100
shares of our common stock.
In 1999, the effect of a new accounting standard, Statement of Position (SOP)
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," further reduced operations and support expenses. Under SOP
No. 98-1, we capitalize the cost of internal use software which has a useful
life in excess of one year. Previously, we expensed most of these software
purchases in the period in which they were incurred. For additional information
on SOP No. 98-1, see Note 1 to the consolidated financial statements.
For additional information on reciprocal compensation refer to "Other Factors
That May Affect Future Results - Compensation for Internet Traffic."
Depreciation and Amortization
Depreciation and amortization expense increased by $552 million, or 6.7%, in
2000 and by $489 million, or 6.3%, in 1999. These expense increases were
principally due to growth in depreciable telephone plant as a result of
increased capital expenditures for higher growth services and the adoption of
SOP No. 98-1. These factors were partially offset in both years by the effect of
lower rates of depreciation.
- --------------------------------------------------------------------------------
Domestic Wireless
- --------------------------------------------------------------------------------
Our Domestic Wireless segment provides cellular, PCS and paging services and
equipment sales. This segment primarily represents the operations of Verizon
Wireless, a joint venture combining our merged wireless properties with the U.S.
properties and paging assets of Vodafone, including the consolidation of
PrimeCo. The formation of Verizon Wireless occurred in April 2000. Effective
with the contribution of the GTE Wireless assets in July 2000, Verizon owns a
55% interest in the joint venture and Vodafone owns the remaining 45%.
Accordingly, the information presented below reflects the combined results of
Verizon Wireless. All periods prior to the formation of Verizon Wireless are
reported on a historical basis and, therefore, do not reflect the contribution
of the Vodafone properties and the consolidation of PrimeCo.
HIGHLIGHTS
Our Domestic Wireless segment ended the year 2000 with more than 27.5 million
customers, an increase of 88.4% over year-end 1999. At year-end 1999, customers
totaled approximately 14.6 million, an increase of 32.7% over year-end 1998. The
2000 growth in customers is primarily attributable to the formation of Verizon
Wireless in 2000. In addition, more than half of Verizon Wireless customers now
subscribe to CDMA (Code Division Multiple Access) digital services, and generate
more than 80% of the company's busy-hour usage, compared to 65% at mid-year.
More than 750,000 customers subscribe to the company's wireless data services,
including Mobile Web Internet access.
During the fourth quarter of 2000, Verizon Wireless agreed to acquire Price
Communications Wireless, a wholly owned subsidiary of Price Communications, for
$1.5 billion in Verizon Wireless stock and the assumption of $550 million in net
debt. The transaction is conditioned upon completion of the Verizon Wireless
initial public offering. The deal will significantly expand the company's
footprint in the Southeastern U.S. and add approximately 500,000 customers. See
"Other Factors that May Affect Future Results - Recent Developments."
Verizon Wireless was the winning bidder for 113 licenses in the FCC's recently
concluded auction of 1.9 GHz spectrum. The company added capacity for growth and
advanced services in markets including New York, Boston, Los Angeles, Chicago,
Philadelphia, Washington, D.C., Seattle and San Francisco, for a total price of
approximately $8.8 billion. Verizon Wireless now has spectrum in all 50 of the
top 50 Metropolitan Statistical Areas in the United States.
As discussed earlier under "Consolidated Results of Operations," we either have
recently disposed of, or are committed to dispose of, certain wireless
properties in order to resolve overlaps created by the Bell Atlantic-GTE merger
and prohibited by the FCC. The effect of these dispositions will largely depend
on the timing of the sales and the reinvestment of the proceeds. In some cases,
these dispositions involve the exchanges of wireless properties that will be
accounted for as purchase business combinations with a step-up in the carrying
value of the assets received in the exchanges. For additional information on
wireless property sales, see Note 3 and Note 5 to the consolidated financial
statements.
Additional financial information about Domestic Wireless results of operations
for 2000, 1999, and 1998 follows:
Years Ended December 31, (dollars in millions)
Results of Operations-Adjusted Basis 2000 1999 1998
- --------------------------------------------------------------------------------
OPERATING REVENUES
Wireless services $ 14,236 $ 7,653 $ 6,652
-------------------------------------
OPERATING EXPENSES
Operations and support 9,563 5,166 4,174
Depreciation and amortization 2,894 1,100 959
-------------------------------------
12,457 6,266 5,133
-------------------------------------
OPERATING INCOME $ 1,779 $ 1,387 $ 1,519
=====================================
EQUITY IN INCOME (LOSS) FROM
UNCONSOLIDATED BUSINESSES $ 55 $ 1 $ (89)
MINORITY INTEREST $ (504) $ (76) $ (93)
ADJUSTED NET INCOME $ 444 $ 628 $ 962
F-11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
OPERATING REVENUES
Revenues earned from our consolidated wireless businesses grew by $6,583
million, or 86.0%, in 2000 and $1,001 million, or 15.0%, in 1999. By including
the revenues of the properties of the wireless joint venture on a basis
comparable with 2000, revenues were $2,300 million, or 19.3%, higher than 1999.
On this comparable basis, revenue growth was largely attributable to customer
additions and stable revenue per customer per month. Our domestic wireless
customer base grew to 27.5 million customers in 2000, compared to 23.8 million
customers in 1999, an increase of nearly 16%. During the year, 1.1 million
customers selected one of Verizon Wireless's new national SingleRate plans. Over
70% of national SingleRate subscribers are taking plans at $55 a month or
higher.
Revenues for 1999 were $7,653 million, an increase of $1,001 million, or 15.0%,
compared to 1998. The increase was primarily the result of an increase in the
number of subscribers. Excluding acquisitions, revenues were $7,462 million, or
12.2% higher than 1998. The revenue growth was due to the growth in the customer
base as well as the migration of analog subscribers to digital service.
OPERATING EXPENSES
Operations and Support
Operations and support expenses, which represent employee costs and other
operating expenses, increased by $4,397 million, or 85.1%, in 2000 and $992
million, or 23.8%, in 1999. The increase in 2000 over the prior year is
principally the result of the formation of the wireless joint venture in the
second quarter of 2000. By including the expenses of the properties of the
wireless joint venture on a basis comparable with 2000, operations and support
expenses were $1,693 million, or 21.5%, higher than 1999. Higher costs were
attributable to the significant growth in the subscriber base described above,
as well as the continuing migration of analog customers to digital.
The increased costs in 1999 were primarily attributable to increased service
costs due to the growth in our subscriber base, including additional costs of
equipment, higher roaming payments to wireless carriers, and higher sales
commissions.
Depreciation and Amortization
Depreciation and amortization expense increased by $1,794 million, or 163.1%, in
2000 and by $141 million, or 14.7%, in 1999. The increase in 2000 over the prior
year was mainly attributable to the formation of the wireless joint venture in
the second quarter of 2000. Adjusting for the joint venture in a manner similar
to operations and support expenses above, depreciation and amortization was $246
million, or 9.3%, higher than 1999. Capital expenditures for our cellular
network have increased in 2000 and 1999 to support increased demand in all
markets.
The 1999 increase was mainly attributable to growth in depreciable cellular
plant at Bell Atlantic Mobile and GTE Wireless. These increases were primarily
due to increased capital expenditures to support the increasing demand for
wireless services.
EQUITY IN INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES
The variances in the 2000 and 1999 results from unconsolidated operations were
principally due to the consolidation of PrimeCo in connection with the formation
of the wireless joint venture.
The changes in equity in income (loss) from unconsolidated businesses in 1999
and 1998 were principally due to improved operating results from our wireless
investments in PrimeCo, driven primarily by strong subscriber growth.
MINORITY INTEREST
The significant increase in minority interest in 2000 was principally due to the
formation of the wireless joint venture and the significant minority interest
attributable to Vodafone.
- --------------------------------------------------------------------------------
International
- --------------------------------------------------------------------------------
Our International segment includes international wireline and wireless
telecommunication operations, investments and management contracts in the
Americas, Europe, Asia and the Pacific. Our consolidated international
investments include Grupo Iusacell (Iusacell) (Mexico), CODETEL (Dominican
Republic), CTI Holdings, S.A. (CTI) (Argentina) and Micronesian
Telecommunications Corporation (Northern Mariana Islands). Our international
investments in which we have less than a controlling interest are accounted for
on either the cost or equity method.
HIGHLIGHTS
International adjusted net income grew $115 million, or 18.6%, in 2000 and $108
million, or 21.2%, in 1999. This growth was aided by the continued worldwide
demand for wireless services. The number of proportionate international wireless
customers served by Verizon investments increased 2.6 million in 2000 to more
than 8.1 million.
In May 2000, Verizon affiliate, CTI commenced PCS operations in the Buenos Aires
greater metropolitan area. CTI now provides wireless service throughout
Argentina.
On January 31, 1999, BC TELECOM and TELUS Corporation, merged to form TELUS.
TELUS is the premier telecommunications provider in British Columbia and Alberta
and has begun to expand its services into Central and Eastern Canada. As a part
of this expansion, TELUS acquired approximately 70% of the QuebecTel Group Inc.,
another Verizon investee, in May 2000 and 98.5% of Clearnet Communications Inc.,
a national digital wireless company in Canada, in October 2000. The combination
of TELUS's and Clearnet's wireless operations created Canada's largest wireless
company in terms of annual revenues.
Effective May 31, 1999, we took steps to disaffiliate from Telecom Corporation
of New Zealand Limited (TCNZ). As a result, we no longer have significant
influence over TCNZ's operating and financial policies and, therefore, have
changed the accounting for our investment in TCNZ from the equity method to the
cost method. The change in the method of accounting for this investment did not
have a material effect on results of operations in 1999. We currently hold a
24.94% interest in TCNZ.
F-12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
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Years Ended December 31, (dollars in millions)
Results of Operations-Adjusted Basis 2000 1999 1998
- --------------------------------------------------------------------------------
OPERATING REVENUES
Wireline services $ 758 $ 740 $ 617
Wireless services 1,218 974 851
-----------------------------------------
1,976 1,714 1,468
-----------------------------------------
OPERATING EXPENSES
Operations and support 1,359 1,195 1,131
Depreciation and amortization 355 264 233
-----------------------------------------
1,714 1,459 1,364
-----------------------------------------
OPERATING INCOME $ 262 $ 255 $ 104
=========================================
EQUITY IN INCOME FROM
UNCONSOLIDATED BUSINESSES $ 672 $ 547 $ 462
ADJUSTED NET INCOME $ 733 $ 618 $ 510
The revenues and operating expenses for the International segment exclude
QuebecTel, which was deconsolidated in the second quarter of 2000. QuebecTel's
net results for all periods are included in Equity in Income From Unconsolidated
Businesses.
OPERATING REVENUES
Revenues earned from our international businesses grew by $262 million, or
15.3%, in 2000 and by $246 million, or 16.8%, in 1999. The increase in revenues
was primarily due to an increase in wireless subscribers of the consolidated
subsidiaries and the start-up of CTI's Buenos Aires PCS operations in the second
quarter of 2000, partially offset by lower revenue per customer per month of
CTI.
OPERATING EXPENSES
Operations and Support
Operations and support expenses, which represent employee costs and other
operating expenses, increased by $164 million, or 13.7%, in 2000 and by $64
million, or 5.7%, in 1999. The higher costs were driven primarily by customer
acquisition costs associated with wireless customer growth and the start-up of
CTI's Buenos Aires PCS operations.
Depreciation and Amortization
Depreciation and amortization expense increased by $91 million, or 34.5%, in
2000 and by $31 million, or 13.3%, in 1999. This increase reflects the
continuing build-out of the Mexican and Argentine wireless networks necessary to
meet customer demand.
EQUITY IN INCOME FROM UNCONSOLIDATED BUSINESSES
Equity in income from unconsolidated businesses increased by $125 million, or
22.9%, in 2000 and by $85 million, or 18.4%, in 1999 due to strong subscriber
growth at Taiwan Cellular Corporation and Omnitel Pronto Italia S.p.A. and a
full twelve months of operations at Telecomunicaciones de Puerto Rico (TELPRI)
in 2000. In addition, we no longer record equity losses from our investment in
BayanTel, a Philippines-based telecommunications company, since our investment
in BayanTel has been written-down to zero and we have no further obligations.
These increases were partially offset by lower results at Compania Anonima
Nacional Telefonos de Venezuela (CANTV) driven by the weakened Venezuelan
economy and delayed tariff increases, as well as lower income from our TCNZ
investment driven by the above-mentioned change from the equity to cost method
of accounting and a reduction in the TCNZ dividend payout ratio.
- --------------------------------------------------------------------------------
Information Services
- --------------------------------------------------------------------------------
Our Information Services segment consists of our domestic and international
publishing businesses, including print and electronic directories and
Internet-based shopping guides, as well as website creation and other electronic
commerce services. This segment has operations principally in North America,
Europe, Asia and Latin America.
Years Ended December 31, (dollars in millions)
Results of Operations-Adjusted Basis 2000 1999 1998
- --------------------------------------------------------------------------------
OPERATING REVENUES
Information services $4,144 $4,086 $3,818
--------------------------------------
OPERATING EXPENSES
Operations and support 2,026 2,007 1,878
Depreciation and amortization 74 76 77
--------------------------------------
2,100 2,083 1,955
--------------------------------------
OPERATING INCOME $2,044 $2,003 $1,863
======================================
ADJUSTED NET INCOME $1,238 $1,211 $1,145
OPERATING REVENUES
Operating revenues from our Information Services segment improved by $58
million, or 1.4%, in 2000. The 2000 revenue increases were primarily generated
by growth in print directory advertising revenue and expansion of our Internet
directory service, SuperPages.com(R), offset by reductions in certain affiliated
transactions.
In 1999, operating revenue increased by $268 million, or 7.0%, principally as a
result of increased pricing for certain directory services and higher business
volumes, including revenue from a new Internet-based shopping directory and
electronic commerce services. Due to the deconsolidation of BC TELECOM in 1999,
Verizon International Directories discontinued netting publication-right fees
paid to TELUS against its Yellow Pages advertising revenues. This classification
change in reporting increased both 1999 revenues and operating expenses by
approximately $82 million, see "Operating Expenses" below. In addition, 1999
results include the activities of Axesa Informacion, Inc., a directory
publication business in Puerto Rico in which we acquired a controlling interest
in April 1999, as well as revenues from annual technology right-to-use fees paid
to us.
OPERATING EXPENSES
In 2000, total operating expenses increased $17 million, or 0.8%, from the
corresponding period in 1999. Cost control programs related to directory
publishing limited expense increases in 2000.
In 1999, total operating expenses increased $128 million, or 6.5%, largely due
to the classification change related to publication-right fees mentioned above
and higher costs associated with directory publishing expense.
F-13
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
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- --------------------------------------------------------------------------------
NONOPERATING ITEMS
- --------------------------------------------------------------------------------
The following discussion of nonoperating items is based on the amounts reported
in our consolidated financial statements.
Years Ended December 31, (dollars in millions)
Other Income and (Expense), Net 2000 1999 1998
- --------------------------------------------------------------------------------
Interest income $ 281 $ 101 $ 192
Foreign exchange gains (losses), net (11) 11 47
Other, net 41 31 42
-------------------------------
Total $ 311 $ 143 $ 281
===============================
The change in other income and expense was the result of higher interest income
in 2000 due to higher levels of short-term investments, income from our
investment in Metromedia Fiber Network, Inc.'s (MFN's) subordinated debt
securities and the favorable settlement of a tax-related matter. In 1998, we
also recorded interest income in connection with the favorable settlement of
tax-related matters.
Foreign exchange gains were affected in 2000 and 1999 primarily by Iusacell,
which uses the Mexican peso as its functional currency. Effective January 1,
1999, highly inflationary accounting was discontinued by Iusacell. We expect
that our earnings will continue to be affected by any foreign exchange gains or
losses associated with the U.S. dollar denominated debt issued by Iusacell. In
1998 we recognized higher foreign exchange gains associated with other
international investments.
Years Ended December 31, (dollars in millions)
Interest Expense 2000 1999 1998
- --------------------------------------------------------------------------------
Total interest expense - reported $ 3,490 $ 2,616 $ 2,705
Write-down of assets - - (47)
Other items (42) - (46)
--------------------------------------
Subtotal 3,448 2,616 2,612
Capitalized interest costs 230 146 117
--------------------------------------
Total interest costs on debt balances $ 3,678 $ 2,762 $ 2,729
======================================
Average debt outstanding $ 51,987 $ 40,821 $ 38,626
Effective interest rate 7.1% 6.8% 7.1%
The rise in interest costs on debt balances in both 2000 and 1999 was
principally due to higher average debt levels. The increase in debt levels in
2000 was mainly the result of the debt assumed by Verizon Wireless in connection
with the formation of Verizon Wireless and higher capital expenditures in our
Domestic Telecom and Domestic Wireless segments. The increase in 1999 was
partially offset by the effect of lower interest rates.
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Minority interest $ (216) $ (159) $ (315)
The increase in minority interest in 2000 was primarily due to the impact of the
wireless joint venture with Vodafone. This increase was partially offset by the
redemption in October 1999 and March 2000 of preferred securities issued by our
subsidiary GTE Delaware, L.P. and higher operating losses at Iusacell and our
operations in Argentina. The decrease in minority interest in 1999 was largely
due to operating losses at Iusacell and the fact that we no longer record a
minority interest expense related to an outside party's share of one of our
subsidiary's earnings in connection with the sale of our investment in Viacom
Inc.
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Effective income tax rates 39.3% 37.0% 39.5%
The effective income tax rate is the provision for income taxes as a percentage
of income before the provision for income taxes.
Our reported effective tax rate for 2000 was higher than 1999 primarily due to
certain merger-related costs for which no tax benefits were recorded, the
write-down of certain investments for which no tax benefits were recorded,
deferred taxes recorded in connection with the contribution of GTE Wireless
assets to Verizon Wireless and higher state income taxes.
The lower reported effective income tax rate in 1999 as compared to 1998 was
principally as a result of the write-down of certain foreign investments in 1998
for which no tax benefits were recorded.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is included in Note 18 to the consolidated
financial statements.
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL CONDITION
- --------------------------------------------------------------------------------
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN)
Operating activities $ 15,827 $ 17,017 $ 15,724
Investing activities (16,055) (17,420) (12,956)
Financing activities (1,048) 1,732 (2,938)
--------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (1,276) $ 1,329 $ (170)
======================================
We use the net cash generated from our operations and from external financing to
fund capital expenditures for network expansion and modernization, pay
dividends, and invest in new businesses. While current liabilities exceeded
current assets at December 31, 2000 and 1999, our sources of funds, primarily
from operations and, to the extent necessary, from readily available external
financing arrangements, are sufficient to meet ongoing operating and investing
requirements. We expect that capital spending requirements will continue to be
financed primarily through internally generated funds. Additional debt or equity
financing will be needed to fund additional development activities (including
the purchase of wireless licenses obtained in the recent FCC auction, see "Other
Factors That May Affect Future Results") or to maintain our capital structure to
ensure our financial flexibility.
- --------------------------------------------------------------------------------
Cash Flows Provided By Operating Activities
- --------------------------------------------------------------------------------
Our primary source of funds continued to be cash generated from operations.
Decreased cash flow from operations during 2000 resulted primarily from the
payment of income taxes on the disposition of businesses and assets. See "Cash
Flows Used In Investing Activities" below for additional information on sales of
businesses and assets. Improved cash flows from operations during 1999 and 1998
resulted from growth in operating income, partially offset by changes in certain
assets and liabilities.
F-14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
In 1999, the change in certain assets and liabilities largely reflects growth in
customer accounts receivable and a reduction in employee benefit obligations
primarily due to favorable investment returns and changes in plan provisions and
actuarial assumptions. The change in certain assets and liabilities in 1998
reflects the effect of our retirement incentive program that increased employee
benefit obligations as a result of special charges recorded through the
completion of the program in 1998. An increase in accounts receivable due to
subscriber growth and greater usage of our networks, as well as timing
differences in the payment of accounts payable and accrued liabilities also
contributed to the change.
- --------------------------------------------------------------------------------
Cash Flows Used In Investing Activities
- --------------------------------------------------------------------------------
Capital expenditures continued to be our primary use of capital resources. We
invested approximately $12,119 million in our Domestic Telecom business in 2000,
compared to $10,087 million and $10,000 million in 1999 and 1998, respectively,
to facilitate the introduction of new products and services, enhance
responsiveness to competitive challenges and increase the operating efficiency
and productivity of the network. We also invested approximately $4,322 million
in our Domestic Wireless business in 2000, compared to $1,497 million and $1,160
million, respectively, in 1999 and 1998. The increase in 2000 is primarily due
to the inclusion of both Vodafone and PrimeCo properties in Verizon Wireless in
April 2000, as well as increased capital spending in existing Bell Atlantic and
GTE wireless properties.
Capital spending is expected to be approximately $18.0 billion to $18.5 billion
in 2001, excluding the cost of wireless licenses obtained in the recent FCC
auction (see "Other Factors That May Affect Future Results"), which is slightly
higher than capital spending during 2000.
We invested $2,247 million in acquisitions and investments in businesses during
2000, including approximately $715 million in the equity of MFN and $1,028
million in wireless properties. In 1999, we invested $5,219 million in
acquisitions and investments including $3,250 million to acquire approximately
half of the wireless properties of Ameritech Corporation, $635 million to
increase our ownership percentage in Omnitel from 19.7% to 23.1%, $374 million
to fully acquire the cellular properties of Frontier Cellular, $200 million in
PrimeCo, $366 million for a 40% interest in TELPRI, a full-service
telecommunications provider serving the commonwealth of Puerto Rico, and $120
million for the purchase of the PCS license in Buenos Aires, Argentina. In 1998,
we invested $784 million, which included an additional investment of $162
million in Omnitel to increase our ownership interest from 17.45% to 19.7%, $301
million in PrimeCo, and $140 million in our lease financing businesses.
In 2000, we also received cash proceeds on sales of businesses and assets of
$6,794 million, including gross cash proceeds of $4,903 million from the sale of
non-strategic access lines and $1,464 million from overlap wireless properties,
as well as $144 million from the sale of CyberTrust. In 1999, we received cash
proceeds on sales of businesses and assets of $1,813 million, including $1,196
million from the sale of a substantial portion of GTE Government Systems and
$612 million from the disposition of our remaining investment in Viacom. In
1998, we received cash proceeds of $846 million in connection with the
disposition of investments, including $564 million associated with Viacom's
repurchase of one-half of our investment in Viacom and $73 million from the
sales of our paging and other non-strategic businesses.
During 2000, we invested $975 million in subordinated convertible notes of MFN,
in connection with our overall investment in MFN described above, as well as $45
million in OnePoint notes. The MFN notes are convertible at our option, upon
receipt of necessary government approvals, into common stock at a conversion
price of $17 per share (after two-for-one stock split) or an additional 9.6% of
the equity of MFN. This investment completed a portion of our previously
announced agreement, as amended, with MFN, which included the acquisition of
approximately $350 million of long-term capacity in MFN's fiber optic networks,
beginning in 1999 through 2002. Of the $350 million, 10% was paid in November
1999, 30% was paid in October 2000, and an additional 30% will be paid in both
October 2001 and October 2002. These payments are included in cash provided by
operating activities.
Our short-term investments include principally cash equivalents held in trust
accounts for payment of certain employee benefits. In 2000 and 1999, we invested
$1,204 million and $1,051 million, respectively, in short-term investments,
primarily to pre-fund health and welfare benefits. Cash payments for short-term
investments totaled $1,028 million in 1998, principally to pre-fund vacation pay
and health and welfare benefit trusts. Beginning in 1999, we no longer fund the
vacation pay trust for all employees. Proceeds from the sales of all short-term
investments, principally for the payment of these benefits were $983 million,
$954 million and $968 million in the years 2000, 1999 and 1998, respectively.
Other, net investing activities include capitalized non-network software of
$1,044 million and $923 million in 2000 and 1999, respectively. In 1998,
non-network software was expensed as incurred (see Note 1 to consolidated
financial statements for additional information concerning the capitalization of
software).
- --------------------------------------------------------------------------------
Cash Flows Provided By (Used In) Financing Activities
- --------------------------------------------------------------------------------
The net cash proceeds from increases in our total debt during 2000 of $5,058
million was primarily due to the issuance of $5,500 million of long-term notes
issued by Verizon Global Funding Corp. The increase in total debt was also
attributable to the issuance of $893 million of medium-term notes, $657 million
of financing transactions of cellular assets, $398 million of long-term bank
debt at Verizon Wireless and an increase in other short-term borrowings,
partially offset by repayments of long-term debt. In 1999 we increased our total
debt (including capital lease obligations) by approximately $6,592 million,
primarily due to the issuance of $4,375 million of long-term debt issued by GTE.
Our debt balance at December 31, 1999 also included $456 million of additional
debt issued by Iusacell in 1999. These factors were partially offset by the use
of cash proceeds received from the disposition of our remaining investment in
Viacom. During 1998, our debt level increased by $2,607 million, principally to
fund the capital program and for continued investments in PrimeCo and Omnitel.
The pre-funding of employee benefit trusts and purchases of shares to fund
employee stock option exercises also contributed to the increase in debt levels
in 2000, 1999 and 1998.
In February 1998, Verizon Global Funding issued $2,455 million in 5.75%
exchangeable notes due on April 1, 2003 that are exchangeable into ordinary
shares of TCNZ stock (TCNZ exchangeable notes).
F-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
In August 1998, Verizon Global Funding also issued $3,180 million of 4.25%
senior exchangeable notes due on September 15, 2005 which are now exchangeable
into shares of C&W and NTL. Prior to the reorganization of CWC in May 2000,
these notes were exchangeable into shares of CWC. Proceeds of both offerings
were used for the repayment of a portion of our short-term debt and other
general corporate purposes.
Our operating telephone subsidiaries refinanced debentures totaling $275
million, $482 million and $2,490 million in the years 2000, 1999 and 1998,
respectively.
As of December 31, 2000, we had in excess of $10.4 billion of unused bank lines
of credit and $4.4 billion in bank borrowings outstanding. As of December 31,
2000, our operating telephone subsidiaries and financing subsidiaries had shelf
registrations for the issuance of up to $3.5 billion of unsecured debt
securities. The debt securities of our telephone and financing subsidiaries
continue to be accorded high ratings by primary rating agencies.
We also have a $2.0 billion Euro Medium Term Note Program, under which we may
issue notes that are not registered with the SEC. The notes may be issued from
time to time by Verizon Global Funding and will have the benefit of a support
agreement between Verizon Global Funding and us. There have been no notes issued
under this program.
In 1999, we received cash proceeds totaling $119 million from the public
offerings of Iusacell shares. See Note 9 to the consolidated financial
statements for additional information on Iusacell and the share offerings.
In December 1998, we accepted an offer from Viacom to repurchase one-half of our
investment in Viacom, or 12 million shares of their preferred stock (with a book
value of approximately $600 million), for approximately $564 million in cash.
The cash proceeds, together with additional cash, were used to purchase an
outside party's interest in one of our fully consolidated subsidiaries. This
transaction reduced Minority Interest by $600 million and included certain stock
appreciation rights and costs totaling $32 million.
As in prior years, dividend payments were a significant use of capital
resources. We determine the appropriateness of the level of our dividend
payments on a periodic basis by considering such factors as long-term growth
opportunities, internal cash requirements, and the expectations of our
shareowners. In the first, third and fourth quarters of 2000, we announced a
quarterly cash dividend of $.385 per share. In the second quarter of 2000, we
announced two separate pro rata dividends to ensure that the respective
shareowners of Bell Atlantic and GTE received dividends at an appropriate rate.
In 1999 and 1998, we declared quarterly cash dividends of $.385 per share or
$1.54 per share in each year.
In 2000, common stock repurchases were primarily the result of the two-year
share buyback program approved by the Board of Directors in March 2000 and
repurchase of GTE common stock. In 2000, 35.1 million Verizon common shares were
repurchased. In August 1999, GTE announced the initiation of a share repurchase
program to offset shares issued under its employee-benefit and
dividend-reinvestment programs. Under the program, we repurchased approximately
17.7 million shares of GTE common stock in 1999, and completed the program with
the purchase of an additional 8.4 million shares valued at approximately $600
million through February 2000.
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
- --------------------------------------------------------------------------------
Our cash and cash equivalents at December 31, 2000 totaled $757 million, a
decrease of $1,276 million over 1999. This change is primarily attributable to
the increase in cash at December 31, 1999 for the anticipated funding
requirements in early 2000 for our investment in MFN, which occurred in March
2000.
- --------------------------------------------------------------------------------
MARKET RISK
- --------------------------------------------------------------------------------
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes, foreign currency
exchange rate fluctuations, changes in equity investment prices and changes in
corporate tax rates. We employ risk management strategies using a variety of
derivatives including interest rate swap agreements, interest rate caps and
floors, foreign currency forwards and options, equity options and basis swap
agreements. We do not hold derivatives for trading purposes.
It is our policy to enter into interest rate, foreign currency and other
derivative transactions only to the extent necessary to achieve our desired
objectives in limiting our exposures to the various market risks. Our objectives
include maintaining a mix of fixed and variable rate debt to lower borrowing
costs within reasonable risk parameters and protecting against earnings and cash
flow volatility resulting from changes in market conditions. We do not hedge our
market risk exposure in a manner that would completely eliminate the effect of
changes in interest rates, equity prices and foreign exchange rates on our
earnings. While we do not expect that our liquidity and cash flows will be
materially affected by these risk management strategies, our net income may be
materially affected by certain market risks associated with the exchangeable
notes discussed below.
- --------------------------------------------------------------------------------
Exchangeable Notes
- --------------------------------------------------------------------------------
In 1998, we issued exchangeable notes as described in Note 8 to the consolidated
financial statements and discussed earlier under "Mark-to-Market Adjustment for
C&W/NTL Exchangeable Notes." These financial instruments expose us to market
risk, including:
. Equity price risk, because the notes are exchangeable into shares that are
traded on the open market and routinely fluctuate in value.
. Interest rate risk, because the notes carry fixed interest rates.
. Foreign exchange rate risk, because the notes are exchangeable into shares
that are denominated in a foreign currency.
Periodically, equity price or foreign exchange rate movements may require us to
mark-to-market the exchangeable note liability to reflect the increase or
decrease in the current share price compared to the established exchange price,
resulting in a charge or credit to income. The following sensitivity analysis
measures the effect on earnings and financial condition due to changes in the
underlying share prices of the TCNZ, C&W and NTL stock.
. At December 31, 2000, the exchange price for the TCNZ shares (expressed as
American Depositary Receipts) was $44.93. In May 2000, the underlying
exchange property for the
F-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
$3,180 million exchangeable notes we issued in August 1998 changed from
shares of CWC stock to shares of C&W and NTL stock. Therefore, the value of
the stocks taken together determines the impact on our earnings in any
given period. The notes are exchangeable into 128.4 million shares of C&W
stock and 24.5 million shares of NTL stock.
. For each $1 increase in the value of the TCNZ shares above the exchange
price, our pretax earnings would be reduced by approximately $55 million.
Assuming the aggregate value of the C&W and NTL stocks exceeds the value of
the debt liability, each $1 increase in the value of the C&W shares
(expressed as American Depositary Receipts) or NTL shares would reduce our
pretax earnings by approximately $43 million or $24 million, respectively.
A subsequent decrease in the value of these shares would correspondingly
increase earnings, but not to exceed the amount of any previous reduction
in earnings.
. Our cash flows would not be affected by mark-to-market activity relating to
the exchangeable notes.
. If we decide to deliver shares in exchange for the notes, the exchangeable
note liability (including any mark-to-market adjustments) will be
eliminated and the investment will be reduced by the fair market value of
the related number of shares delivered. Upon settlement, the excess of the
liability over the book value of the related shares delivered will be
recorded as a gain. We also have the option to settle these liabilities
with cash upon exchange.
- --------------------------------------------------------------------------------
Interest Rate Risk
- --------------------------------------------------------------------------------
The table that follows summarizes the fair values of our long-term debt,
interest rate derivatives and exchangeable notes as of December 31, 2000 and
1999. The table also provides a sensitivity analysis of the estimated fair
values of these financial instruments assuming 100-basis-point upward and
downward parallel shifts in the yield curve. Our sensitivity analysis did not
include the fair values of our commercial paper and bank loans because they are
not significantly affected by changes in market interest rates.
(dollars in millions)
Fair Value Fair Value
assuming assuming
+100 basis -100 basis
At December 31, 2000 Fair Value point shift point shift
- --------------------------------------------------------------------------------
Long-term debt and
interest rate derivatives $38,117 $36,309 $39,990
Exchangeable notes 5,694 5,558 5,830
--------------------------------------------
Total $43,811 $41,867 $45,820
============================================
At December 31, 1999
- --------------------------------------------------------------------------------
Long-term debt and
interest rate derivatives $31,051 $29,514 $32,611
Exchangeable notes 6,417 6,335 6,498
--------------------------------------------
Total $37,468 $35,849 $39,109
============================================
- --------------------------------------------------------------------------------
Equity Price Risk
- --------------------------------------------------------------------------------
The fair values of certain of our investments, primarily in common stock, expose
us to equity price risk. These investments are subject to changes in the market
prices of the securities. As noted earlier, the fair values of our exchangeable
notes are also affected by changes in equity price movements. The table that
follows summarizes the fair values of our investments and exchangeable notes and
provides a sensitivity analysis of the estimated fair values of these financial
instruments assuming a 10% increase or decrease in equity prices.
(dollars in millions)
Fair Value Fair Value
assuming 10% assuming 10%
decrease in increase in
At December 31, 2000 Fair Value equity price equity price
- --------------------------------------------------------------------------------
Equity price sensitive cost
investments, at fair value and
derivatives $ 4,715 $ 4,239 $ 5,191
Exchangeable notes (5,694) (5,604) (5,799)
-------------------------------------------
Total $ (979) $(1,365) $ (608)
===========================================
At December 31, 1999
- --------------------------------------------------------------------------------
Equity price sensitive cost
investments, at fair value and
derivatives $ 2,751 $ 2,469 $ 3,033
Exchangeable notes (6,417) (6,050) (6,822)
-------------------------------------------
Total $ (3,666) $(3,581) $(3,789)
===========================================
- --------------------------------------------------------------------------------
Foreign Currency Translation
- --------------------------------------------------------------------------------
The functional currency for nearly all of our foreign operations is the local
currency. The translation of income statement and balance sheet amounts of these
entities into U.S. dollars are recorded as cumulative translation adjustments,
which are included in Accumulated Other Comprehensive Income (Loss) in our
consolidated balance sheets. At December 31, 2000, our primary translation
exposure was to the Venezuelan bolivar, Italian lira and Canadian dollar. We
have not hedged our accounting translation exposure to foreign currency
fluctuations relative to these investments.
Equity income from our international investments is affected by exchange rate
fluctuations when an equity investee has assets and liabilities denominated in a
currency other than the investee's functional currency. Several of our equity
investees have assets and liabilities denominated in a currency other than the
investee's functional currency, such as our investments in Canada, the
Philippines and Slovakia.
For the period October 1, 1996 through December 31, 1998, we considered Iusacell
to operate in a highly inflationary economy and utilized the U.S. dollar as its
functional currency. Beginning January 1, 1999, we discontinued highly
inflationary accounting for our Iusacell subsidiary and resumed using the
Mexican peso as its functional currency. As a result, in 2000 and 1999 our
earnings were affected by any foreign currency gains or losses associated with
the U.S dollar denominated debt issued by Iusacell and our equity was affected
by the translation from the Mexican peso.
F-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Foreign Exchange Risk
- --------------------------------------------------------------------------------
The fair values of our foreign currency derivatives and investments accounted
for under the cost method are subject to fluctuations in foreign exchange rates.
Also, we used forward foreign currency exchange contracts to offset foreign
exchange gains and losses on British pound and Japanese yen denominated debt
obligations.
The table that follows summarizes the fair values of our foreign currency
derivatives, cost investments, and the exchangeable notes as of December 31,
2000 and 1999. The table also provides a sensitivity analysis of the estimated
fair values of these financial instruments assuming a 10% decrease and increase
in the value of the U.S. dollar against the various currencies to which we are
exposed. Our sensitivity analysis does not include potential changes in the
value of our international investments accounted for under the equity method. As
of December 31, 2000, the carrying value of our equity method international
investments totaled approximately $5.4 billion.
(dollars in millions)
Fair Value Fair Value
assuming 10% assuming 10%
decrease increase
At December 31, 2000 Fair Value in US$ in US$
- --------------------------------------------------------------------------------
Foreign exchange sensitive cost
investments and foreign
currency derivatives $ 4,159 $ 4,585 $ 3,818
Exchangeable notes (5,694) (5,799) (5,604)
--------------------------------------------
Total $(1,535) $(1,214) $(1,786)
============================================
At December 31, 1999
- --------------------------------------------------------------------------------
Foreign exchange sensitive cost
investments and foreign
currency derivatives $ 2,270 $ 2,464 $ 2,126
Exchangeable notes (6,417) (6,822) (6,050)
--------------------------------------------
Total $(4,147) $(4,358) $(3,924)
============================================
- --------------------------------------------------------------------------------
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------------------------------------------------
Bell Atlantic - GTE Merger
- --------------------------------------------------------------------------------
Genuity Inc., formerly a wholly owned subsidiary of GTE, operates a tier-one
interLATA Internet backbone and related data businesses. The transition of
Genuity to a public company was part of a comprehensive proposal filed with the
FCC on January 27, 2000, to address regulatory restrictions associated with
Verizon's ability to provide long-distance and Internet-related data service
offerings that GTE had previously provided to consumers and businesses.
In accordance with the provisions of a FCC order in June 2000, Genuity sold 174
million of its Class A common shares, representing 100% of the issued and
outstanding Class A common stock and 90.5% of the overall voting equity in
Genuity, in an initial public offering. GTE retained 100% of Genuity's Class B
common stock, which represents 9.5% of the voting equity in Genuity, as
permitted by the 1996 Act. Our investment also includes a contingent conversion
right.
Our contingent conversion right permits us to increase our ownership interest to
as much as 82% of the total equity of Genuity, representing approximately 96% of
Genuity's total voting rights (before giving effect to outstanding options
granted to Genuity employees and additional shares of common stock that Genuity
may issue in the future), if we eliminate the applicable restrictions of Section
271 of the 1996 Act as to 100% of the total telephone access lines owned by Bell
Atlantic in 1999 in its region. This option expires if we do not eliminate these
restrictions within five years of the merger, subject to extension under certain
circumstances. In addition, if we eliminate Section 271 restrictions as to 95%
of the former Bell Atlantic in-region lines, we may require Genuity to
reconfigure its operations in one or more former Bell Atlantic in-region states
where we have not eliminated those restrictions in order to bring those
operations into compliance with Section 271 under certain circumstances.
The IPO transferred current ownership and control of Genuity to the public
shareholders and, accordingly, we deconsolidated our investment in Genuity on
June 30, 2000 and are accounting for our investment in Genuity using the cost
method.
Federal and state regulatory conditions to the merger also included certain
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. The pretax cost to begin compliance with these conditions was
approximately $200 million in 2000. We expect a similar impact in 2001 and 2002.
- --------------------------------------------------------------------------------
Recent Developments
- --------------------------------------------------------------------------------
VERIZON WIRELESS
FCC Auctions
Verizon Wireless was the winning bidder for 113 licenses in the FCC's recently
concluded auction of 1.9 GHz spectrum. Verizon Wireless added capacity for
growth and advanced services in markets including New York, Boston, Los Angeles,
Chicago, Philadelphia, Washington, D.C., Seattle and San Francisco, for a total
price of approximately $8.8 billion, $1.6 billion of which was paid in February
2001 and the remainder will be paid when the FCC requires payment, which is
expected to occur in 2001, and may be as early as March 2001. Verizon Wireless
now has spectrum in all 50 of the top 50 Metropolitan Statistical Areas in the
United States.
Timing of Initial Public Offering
On October 16, 2000, we announced that Verizon Wireless would defer its planned
IPO of common stock. Verizon and Vodafone agreed that, despite Verizon
Wireless's strong third quarter subscriber growth, the recent volatility of
capital markets has created an environment in which it is prudent to defer the
offering. We announced in February 2001 that we expect the IPO to occur during
2001.
Price Communications Wireless
During the fourth quarter of 2000, Verizon Wireless agreed to acquire Price
Communications Wireless, a wholly owned subsidiary of Price Communications, for
$1.5 billion in Verizon Wireless stock and the assumption of $550 million in net
debt. The transaction is conditioned upon completion of a Verizon Wireless IPO.
The deal will significantly expand the company's footprint in the Southeastern
U.S. and add approximately 500,000 customers.
F-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Regulatory and Competitive Trends
- --------------------------------------------------------------------------------
THE TELECOMMUNICATIONS ACT OF 1996 AND COMPETITION
The telecommunications industry is undergoing substantial changes as a result of
the 1996 Act, other public policy changes and technological advances. These
changes are bringing increased competitive pressures in our current business,
but will also open new markets to us.
The 1996 Act became effective on February 8, 1996, and, with respect to the
former Bell Atlantic operating telephone subsidiaries, replaced the Modification
of Final Judgment, a consent decree that arose out of an antitrust action
brought by the United States Department of Justice against AT&T. In general, the
1996 Act includes provisions that open local exchange markets to competition and
permit Bell Operating Companies or their affiliates, including our former Bell
Atlantic operating telephone subsidiaries, to engage in manufacturing and to
provide long distance service under certain conditions.
Under the 1996 Act, our ability to offer in-region long distance services (that
is, services originating in the states where the former Bell Atlantic operating
telephone subsidiaries operate as local exchange carriers) is largely dependent
on satisfying certain requirements. The requirements include a 14-point
"competitive checklist" of steps which we must take to help competitors offer
local services through resale, through purchase of unbundled network elements,
or through their own networks. We must also demonstrate to the FCC that our
entry into the in-region long distance market would be in the public interest.
We are unable to predict definitively the impact that the 1996 Act will
ultimately have on our business, results of operations, or financial condition.
The financial impact will depend on several factors, including the timing,
extent and success of competition in our markets, the timing and outcome of
various regulatory proceedings and any appeals, and the timing, extent and
success of our pursuit of new opportunities resulting from the 1996 Act.
We anticipate that these industry changes, together with the rapid growth,
enormous size and global scope of these markets, will attract new entrants and
encourage existing competitors to broaden their offerings. Current and potential
competitors in telecommunication services include long distance companies, other
local telephone companies, cable companies, wireless service providers, foreign
telecommunications providers, electric utilities, Internet service providers and
other companies that offer network services. Many of these companies have a
strong market presence, brand recognition and existing customer relationships,
all of which contribute to intensifying competition and may affect our future
revenue growth. In addition, a number of major industry participants have
announced or recently consummated mergers, acquisitions and joint ventures which
could substantially affect the development and nature of some or all of our
markets.
In-Region Long Distance
On December 22, 1999, the FCC released an order approving our application for
permission to enter the in-region long distance market in New York. The FCC
concluded that Verizon New York (formerly New York Telephone Company) has
satisfied the 14-point "competitive checklist" required under the 1996 Act for
entry into the in-region long distance market, and that our entry into the long
distance business in New York would benefit the public interest.
Following the FCC's decision, AT&T and Covad appealed the FCC's order and sought
a stay. The appeal and stay request were both denied by the U.S. Court of
Appeals.
After an intensive review of our compliance with the long distance provisions of
the 1996 Act by the Massachusetts Department of Telecommunications and Energy,
on September 22, 2000, Verizon Massachusetts filed an application for long
distance authority with the FCC. On December 18, 2000, we withdrew our
application in order to address issues relating to the provision of DSL capable
loops to other carriers in Massachusetts. We refiled our application on January
16, 2001, with additional data concerning our DSL capable loop performance for
other carriers. Under the 1996 Act, the FCC's decision is due on or before April
16, 2001.
On January 8, 2001, Verizon Pennsylvania filed with the Pennsylvania Public
Utility Commission (PPUC) a notice requesting state review of our compliance
with the long distance provisions of the 1996 Act in preparation for a filing
with the FCC. The PPUC has set a schedule that may allow completion of the state
review, and filing of an application at the FCC, during the second quarter of
2001.
Like the New York, Massachusetts and Pennsylvania commissions before them, the
New Jersey Board of Public Utilities is conducting a test of the Verizon New
Jersey operations support systems (OSS). This test builds on the recently
concluded third party testing of similar systems by the accounting and
consulting firm KPMG in Pennsylvania. The Virginia State Corporation Commission
has also retained KPMG for the same purpose. In connection with the KPMG testing
in Virginia, KPMG is conducting a comparability assessment to advise the
District of Columbia, Maryland and West Virginia commissions on the extent to
which the systems in Virginia and their jurisdictions are the same.
FCC REGULATION AND INTERSTATE RATES
The operating telephone subsidiaries are subject to the jurisdiction of the FCC
with respect to interstate services and certain related matters. In 2000, the
FCC continued to implement reforms to the interstate access charge system and to
implement the "universal service" and other requirements of the 1996 Act.
Access Charges
Interstate access charges are the rates long distance carriers pay for use and
availability of our operating telephone subsidiaries' facilities for the
origination and termination of interstate service. The FCC required a phased
restructuring of access charges, from January 1998 until January 2000, pursuant
to which the operating telephone subsidiaries recover non-usage-sensitive costs
from long distance carriers and end-users through flat rate charges, and
usage-sensitive costs from long distance carriers through usage-based rates.
On May 31, 2000, the FCC adopted a plan advanced by members of the industry (The
Coalition for Affordable Local and Long Distance Service, or "CALLS") as a
comprehensive five year plan for regulation of interstate access charges. The
CALLS plan has three main components. First, it establishes a portable
interstate access universal service support of $650 million for the industry. Of
that amount, we expect approximately $340 million to be used to support
interstate access services in our service territory. This explicit support
replaces implicit support embedded in interstate access charges. Second, the
F-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
plan simplifies the patchwork of common line charges into one subscriber line
charge (SLC) and provides for de-averaging of the SLC by zones and class of
customers in a manner that will not undermine comparable and affordable
universal service. Third, the plan sets into place a mechanism to transition to
a set target of $.0055 per minute for switched access services. Once that target
rate is reached, local exchange carriers are no longer required to make further
annual price cap reductions to their switched access prices.
As of September 14, 2000, we formally elected to participate in the full
five-year term of the CALLS plan. As a result of this decision, price caps on
our interstate access charges will be set according to the conditions of the FCC
order on the CALLS plan. Under 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 service
prices reach $0.0055 per-minute. As a result of tariff adjustments which became
effective in August 2000, our operating telephone subsidiaries in ten states in
the former GTE territory and seven states in the former Bell Atlantic territory
reached the $0.0055 benchmark.
The FCC has adopted rules for special access services that provide for pricing
flexibility and ultimately the removal of services from price regulation when
certain competitive thresholds are met. In order to use these rules, carriers
must forego the ability to take advantage of provisions in the current rules
that provide relief in the event earnings fall below certain thresholds. In
November and December 2000, we made filings to obtain this added pricing
flexibility. This flexibility includes the ability to remove from price cap
regulation those interstate special access services in Metropolitan Statistical
Areas (MSAs) that meet the competitive thresholds. Of the 57 MSAs in the former
Bell Atlantic area, 35 are included in the petition to remove price cap
regulation for special access and dedicated transport. In addition, the petition
identifies 10 MSAs where the stricter standards for special access connections
to end-user customers are also met. The later petition, addressing the former
GTE areas, seeks removal from price cap regulation for three additional MSAs.
The FCC is expected to act on these filings in March 2001 for the filing for the
former Bell Atlantic areas, and in April 2001 for the former GTE areas.
Universal Service
As a result of a July 1999 decision of the U.S. Court of Appeals, our
contributions to the universal service fund were reduced by approximately $107
million annually beginning on November 1, 1999, and our interstate access rates
were reduced accordingly because we will no longer have to recover these
contributions in our rates. Last year, the petitions asking the U.S. Supreme
Court to review the court of appeals decision were either withdrawn or rejected.
In November 1999, the FCC adopted a new mechanism for providing universal
service support to high cost areas served by large local telephone companies.
This funding mechanism provides additional support for local telephone services
in several states served by Verizon. This system has been supplemented by the
new FCC access charge plan described above.
On October 18, 2000, we asked the U.S. Supreme Court to dismiss its pending
review of the FCC's use of a theoretical model as one factor to determine the
appropriate size of federal support for a fund for intrastate high cost areas.
The review was no longer necessary because, subsequent to our petition to the
U.S. Supreme Court, the FCC expressly disclaimed supervisory authority over the
states' universal service activities.
The FCC is currently considering two modifications to its universal service
programs, both relating to support for rural carriers. The first, a proposal by
an appointed policy task force, would provide additional support for intrastate
services provided by rural carriers. The second, a proposal by a coalition of
rural carriers, would make explicit support for interstate access services
provided by rural carriers. The FCC is likely to address both these proposals in
2001.
Unbundling of Network Elements
In November 1999, the FCC announced its decision setting forth new unbundling
requirements, eliminating elements that it had previously required to be
unbundled, limiting the obligation to provide others and adding new elements.
Appeals from this decision are pending.
In addition to the unbundling requirements released in November 1999, the FCC
released an order in a separate proceeding in December 1999, requiring incumbent
local exchange companies also to unbundle and provide to competitors the higher
frequency portion of their local loop. This provides competitors with the
ability to provision data services on top of incumbent carriers' voice services.
Appeals from this order are also pending.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit found that
certain aspects of the FCC's requirements for pricing UNEs were inconsistent
with the 1996 Act. In particular, it found that the FCC was wrong to require
incumbent carriers to base these prices not on their real costs but on the
imaginary costs of the most efficient equipment and the most efficient network
configuration. The court upheld the FCC's decision that UNEs be priced based on
a forward-looking cost model that ignores actual historical costs. The U.S.
Supreme Court has accepted this decision for review in a case to be heard in the
fall term of 2001. That portion of the court of appeals' decision has been
stayed pending that review.
Compensation for Internet Traffic
In March 2000, the Washington, D.C. Circuit Court of Appeals reversed and
remanded the FCC's February 1999 order that concluded that calls to the Internet
through Internet service providers (ISP) do not terminate at the ISP but are
single interstate calls. The court found that the FCC had inadequately explained
why these Internet calls were not two calls. Under the FCC's decision, it was
left to carrier agreements and state regulators to determine which traffic is
subject to reciprocal compensation. The FCC is currently considering a new order
to address the issue in light of the court remand.
STATE REGULATION
Verizon Pennsylvania
In September 1999, the PPUC issued a decision in which it proposed to require
Verizon Pennsylvania to split into separate retail and wholesale corporations.
The matter was subsequently assigned to an administrative law judge of the PPUC
for further proceedings to determine the form and nature of the structural
separation. In January 2001, the Administrative Law Judge released a decision
which recommends that the PPUC order Verizon Pennsylvania to establish a
separate retail affiliate within one year of a final order by
F-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION continued
- --------------------------------------------------------------------------------
the PPUC. On March 22, 2001, the full PPUC rejected the recommended decision and
proposed that Verizon Pennsylvania adopt functional separation between its
retail and wholesale businesses, and abide by a code of conduct in its
operations between the retail and wholesale businesses. The PPUC also proposed
that Verizon Pennsylvania maintain the separate data affiliate it established
when the FCC approved the merger of Bell Atlantic and GTE. Verizon has the
option of rejecting the functional separation proposal and it is weighing its
options at this time.
- --------------------------------------------------------------------------------
OTHER MATTERS
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued 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 in our balance sheet. Changes in the fair values
of derivative instruments not used as hedges will be recognized in earnings
immediately. Changes in the fair values of derivative instruments used
effectively as hedges will be recognized either in earnings for hedges of
changes in fair value or in Other Comprehensive Income (Loss) for hedges of
changes in cash flows. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
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.
Effective January 1, 2001, we will adopt SFAS No. 133 and SFAS No. 138. The
initial impact of adoption on our financial statements will be recorded as a
cumulative effect of an accounting change in our first quarter 2001 SEC Form
10-Q. An after-tax charge of approximately $180 million will be recorded to
earnings in our consolidated statements of income. The recognition of assets and
liabilities in the consolidated balance sheets will be immaterial. The ongoing
effect of adoption on our consolidated financial statements will be determined
each quarter by several factors, including the specific hedging instruments in
place and their relationships to hedged items, as well as market conditions at
the end of each period.
- --------------------------------------------------------------------------------
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS
- --------------------------------------------------------------------------------
In this Management's Discussion and Analysis, and elsewhere in this Annual
Report, we have made forward-looking statements. These statements are based on
our estimates and assumptions and are subject to risks and uncertainties.
Forward-looking statements include the information concerning our possible or
assumed future results of operations. Forward-looking statements also include
those preceded or followed by the words "anticipates," "believes," "estimates,"
"hopes" or similar expressions. For those statements, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
The following important factors, along with those discussed elsewhere in this
Annual Report, could affect future results and could cause those results to
differ materially from those expressed in the forward-looking statements:
. materially adverse changes in economic conditions in the markets served by
us or by companies in which we have substantial investments;
. material changes in available technology;
. the final outcome of federal, state, and local regulatory initiatives and
proceedings, including arbitration proceedings, and judicial review of
those initiatives and proceedings, pertaining to, among other matters, the
terms of interconnection, access charges, universal service, and unbundled
network element and resale rates;
. the extent, timing, success, and overall effects of competition from others
in the local telephone and intraLATA toll service markets;
. the timing and profitability of our entry into the in-region long-distance
market;
. our ability to combine former Bell Atlantic and GTE operations, satisfy
regulatory conditions and obtain revenue enhancements and cost savings;
. the profitability of our entry into the broadband access market;
. the ability of Verizon Wireless to combine operations and obtain revenue
enhancements and cost savings;
. our ability to convert our ownership interest in Genuity into a controlling
interest consistent with regulatory conditions, and Genuity's ensuing
profitability; and
. changes in our accounting assumptions by regulatory agencies, including the
SEC, or that result from changes in the accounting rules or their
application, which could result in an impact on earnings.
F-21
<PAGE>
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
We, the management of Verizon Communications Inc., are responsible for the
consolidated financial statements and the information and representations
contained in this report. The financial statements have been prepared in
conformity with generally accepted accounting principles and include amounts
based on management's best estimates and judgments. Financial information
elsewhere in this report is consistent with that in the financial statements.
Management has established and maintained a system of internal control which is
designed to provide reasonable assurance that errors or irregularities that
could be material to the financial statements are prevented or would be
detected within a timely period. The system of internal control includes widely
communicated statements of policies and business practices, which are designed
to require all employees to maintain high ethical standards in the conduct of
our business. The internal controls are augmented by organizational arrangements
that provide for appropriate delegation of authority and division of
responsibility and by a program of internal audits.
The 2000 financial statements have been audited by Ernst & Young LLP,
independent accountants, and the 1999 and 1998 financial statements have been
audited by PricewaterhouseCoopers LLP, independent accountants (based on
reliance upon Arthur Andersen LLP, independent accountants, for work related to
the financial statements of GTE Corporation). Their audits were conducted in
accordance with generally accepted auditing standards and included an evaluation
of our internal control structure and selective tests of transactions. The
Reports of Independent Accountants follow this report.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, meets periodically with the independent accountants,
management and internal auditors to review accounting, auditing, internal
controls, litigation and financial reporting matters. Both the internal auditors
and the independent accountants have free access to the Audit Committee without
management present.
/s/ Charles R. Lee
Charles R. Lee
Chairman of the Board and Co-Chief Executive Officer
/s/ Ivan G. Seidenberg
Ivan G. Seidenberg
President and Co-Chief Executive Officer
/s/ Frederic V. Salerno
Frederic V. Salerno
Vice Chairman and Chief Financial Officer
/s/ Lawrence R. Whitman
Lawrence R. Whitman
Senior Vice President and Controller
REPORTS OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareowners of
Verizon Communications Inc.:
We have audited the accompanying consolidated balance sheet of Verizon
Communications Inc. and subsidiaries (Verizon) as of December 31, 2000, and the
related consolidated statements of income, cash flows and changes in
shareowners' investment for the year then ended. Our audit also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and the financial statement schedule are the responsibility of
Verizon's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Verizon at
December 31, 2000, and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
New York, New York
February 1, 2001
F-22
<PAGE>
REPORTS OF INDEPENDENT ACCOUNTANTS continued
- --------------------------------------------------------------------------------
To the Board of Directors and Shareowners of
Verizon Communications Inc.:
In our opinion, the 1999 and 1998 consolidated financial statements listed in
the accompanying index present fairly, in all material respects, the financial
position of Verizon Communications Inc. and its subsidiaries at December 31,
1999, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the 1999 and 1998 financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We did not audit the financial statements of GTE
Corporation, a wholly owned subsidiary of Verizon Communications Inc., which
statements reflect total assets of $50,288 million as of December 31, 1999 and
total revenues of $25,242 million and $25,672 million for each of the two years
in the period ended December 31, 1999. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for GTE
Corporation, is based solely on the report of the other auditors. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for computer software costs in accordance with
AICPA Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" effective January 1, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 14, 2000, except as to the
pooling-of-interests with GTE Corporation,
which is as of June 30, 2000.
To the Board of Directors and Shareowners of
Verizon Communications Inc.:
We have audited the consolidated balance sheet of GTE Corporation (a New York
corporation and wholly owned subsidiary of Verizon Communications Inc.) and
subsidiaries as of December 31, 1999, and the related consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the two
years in the period then ended, not separately presented herein. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Corporation and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the two years in the period then ended, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for computer software costs in accordance with
AICPA Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" effective January 1, 1999.
Our audits were made for the purpose of forming an opinion on the basic
financial statements referred to above taken as a whole. The supporting schedule
listed under Item 14 is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements referred to above. The supporting schedule information pertaining to
GTE Corporation for the two years in the period ended December 31, 1999, not
separately presented herein, has been subjected to the auditing procedures
applied in the audits of the basic financial statements referred to above and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
referred to above taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Dallas, Texas
June 30, 2000
F-23
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME Verizon Communications Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions,
except per share amounts)
Years Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues $ 64,707 $ 58,194 $ 57,075
Operations and support expense 39,481 33,730 35,313
Depreciation and amortization 12,261 9,890 9,645
Gains on sales of assets, net (3,793) (1,379) 361
---------------------------------------------------------------
Operating Income 16,758 15,953 11,756
Equity in income (loss) from unconsolidated businesses 3,792 511 (216)
Other income and (expense), net 311 143 281
Interest expense (3,490) (2,616) (2,705)
Minority interest (216) (159) (315)
Mark-to-market adjustment for C&W/NTL exchangeable notes 664 (664) -
---------------------------------------------------------------
Income before provision for income taxes, extraordinary items
and cumulative effect of change in accounting principle 17,819 13,168 8,801
Provision for income taxes 7,009 4,872 3,475
---------------------------------------------------------------
Income Before Extraordinary Items and Cumulative
Effect of Change in Accounting Principle 10,810 8,296 5,326
Extraordinary items, net of tax 1,027 (36) (346)
Cumulative effect of change in accounting principle, net of tax (40) - -
---------------------------------------------------------------
Net Income 11,797 8,260 4,980
Redemption of minority interest - - (30)
Redemption of investee/subsidiary preferred stock (10) - (2)
---------------------------------------------------------------
Net Income Available to Common Shareowners $ 11,787 $ 8,260 $ 4,948
===============================================================
Basic Earnings (Loss) Per Common Share:
Income before extraordinary items and cumulative
effect of change in accounting principle $ 3.98 $ 3.03 $ 1.94
Extraordinary items, net of tax .37 (.01) (.13)
Cumulative effect of change in accounting principle, net of tax (.01) - -
---------------------------------------------------------------
Net Income $ 4.34 $ 3.02 $ 1.81
===============================================================
Weighted-average shares outstanding (in millions) 2,713 2,739 2,728
---------------------------------------------------------------
Diluted Earnings (Loss) Per Common Share:
Income before extraordinary items and cumulative
effect of change in accounting principle $ 3.95 $ 2.98 $ 1.92
Extraordinary items, net of tax .37 (.01) (.13)
Cumulative effect of change in accounting principle, net of tax (.01) - -
---------------------------------------------------------------
Net Income $ 4.31 $ 2.97 $ 1.79
===============================================================
Weighted-average shares outstanding (in millions) 2,737 2,777 2,759
---------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-24
<PAGE>
CONSOLIDATED BALANCE SHEETS Verizon Communications Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions, except per share amounts)
At December 31, 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 757 $ 2,033
Short-term investments 1,613 1,035
Accounts receivable, net of allowances of $1,562 and $1,170 14,010 11,998
Inventories 1,910 1,366
Net assets held for sale 518 1,802
Prepaid expenses and other 3,313 1,761
--------------------------------------
Total current assets 22,121 19,995
Plant, property and equipment 158,957 142,989
Less accumulated depreciation 89,453 80,816
--------------------------------------
69,504 62,173
--------------------------------------
Investments in unconsolidated businesses 13,115 10,177
Intangible assets 41,990 8,645
Other assets 18,005 11,840
--------------------------------------
Total assets $ 164,735 $ 112,830
======================================
Liabilities and Shareowners' Investment
Current liabilities
Debt maturing within one year $ 14,838 $ 15,063
Accounts payable and accrued liabilities 13,965 10,878
Other 5,433 3,809
--------------------------------------
Total current liabilities 34,236 29,750
Long-term debt 42,491 32,419
Employee benefit obligations 12,543 13,744
Deferred income taxes 15,260 7,288
Other liabilities 3,797 1,353
Minority interest, including a portion subject to redemption requirements 21,830 1,900
Shareowners' investment
Series preferred stock ($.10 par value; none issued) - -
Common stock ($.10 par value; 2,751,650,484 shares and 2,756,484,606 shares issued) 275 276
Contributed capital 24,555 20,134
Reinvested earnings 14,667 7,428
Accumulated other comprehensive income (loss) (2,176) 75
--------------------------------------
37,321 27,913
Less common stock in treasury, at cost 1,861 640
Less deferred compensation-employee stock ownership plans and other 882 897
--------------------------------------
Total shareowners' investment 34,578 26,376
--------------------------------------
Total liabilities and shareowners' investment $ 164,735 $ 112,830
======================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS Verizon Communications Inc. and
Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Income before extraordinary items and cumulative effect of
change in accounting principle $ 10,810 $ 8,296 $ 5,326
Adjustments to reconcile income before extraordinary
items and cumulative effect of change in accounting principle to
net cash provided by operating activities:
Depreciation and amortization 12,261 9,890 9,645
Gains on sales of assets, net (3,793) (1,379) 361
Mark-to-market adjustment for C&W/NTL exchangeable notes (664) 664 -
Employee retirement benefits (3,340) (1,707) 167
Deferred income taxes 3,434 2,148 639
Provision for uncollectible accounts 1,409 1,133 929
Equity in (income) loss from unconsolidated businesses (3,792) (511) 216
Changes in current assets and liabilities, net of effects from
acquisition/disposition of businesses:
Accounts receivable (2,440) (1,865) (1,446)
Inventories (530) (146) (111)
Other assets (264) (334) 17
Accounts payable and accrued liabilities 1,973 780 90
Other, net 763 48 (109)
-------------------------------------------------------------
Net cash provided by operating activities 15,827 17,017 15,724
-------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures (17,633) (13,013) (12,820)
Acquisitions, net of cash acquired, and investments (2,247) (5,219) (784)
Proceeds from disposition of businesses and assets 6,794 1,813 846
Investments in notes receivable (1,024) (1) -
Purchases of short-term investments (1,204) (1,051) (1,028)
Proceeds from sale of short-term investments 983 954 968
Other, net (1,724) (903) (138)
-------------------------------------------------------------
Net cash used in investing activities (16,055) (17,420) (12,956)
-------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from long-term borrowings 8,781 5,299 10,262
Repayments of long-term borrowings and capital lease obligations (7,238) (2,873) (2,639)
Increase (decrease) in short-term obligations, excluding current
maturities 3,515 4,166 (5,016)
Dividends paid (4,421) (4,227) (4,186)
Proceeds from sale of common stock 576 1,166 1,006
Purchase of common stock for treasury (2,294) (2,037) (1,002)
Minority interest 3 122 (628)
Other, net 30 116 (735)
-------------------------------------------------------------
Net cash provided by (used in) financing activities (1,048) 1,732 (2,938)
-------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,276) 1,329 (170)
Cash and cash equivalents, beginning of year 2,033 704 874
-------------------------------------------------------------
Cash and cash equivalents, end of year $ 757 $ 2,033 $ 704
=============================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-26
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' INVESTMENT Verizon
Communications Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions, except per share amounts, and shares in thousands)
YEARS ENDED DECEMBER 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of year 2,756,485 $ 276 2,757,203 $ 276 2,560,306 $ 206
Pooling-of-interests with GTE Corporation - - - - 184,506 68
-------------------------------------------------------------------------------------
Balance at beginning of year, restated 2,756,485 276 2,757,203 276 2,744,812 274
Shares issued-employee plans 5,533 - 20,918 2 12,391 2
Shares retired (10,368) (1) (21,636) (2) - -
-------------------------------------------------------------------------------------
Balance at end of year 2,751,650 275 2,756,485 276 2,757,203 276
-------------------------------------------------------------------------------------
CONTRIBUTED CAPITAL
Balance at beginning of year 20,134 20,160 20,737
Pooling-of-interests with GTE Corporation - - (1,218)
-------------------------------------------------------------------------------------
Balance at beginning of year, restated 20,134 20,160 19,519
Shares issued-employee plans 473 989 624
Shares retired (577) (1,314) -
Issuance of stock by subsidiaries 171 44 13
Tax benefit from exercise of stock options 66 256 -
Gain on formation of wireless joint venture 4,271 - -
Other 17 (1) 4
-------------------------------------------------------------------------------------
Balance at end of year 24,555 20,134 20,160
-------------------------------------------------------------------------------------
REINVESTED EARNINGS
Balance at beginning of year 7,428 3,754 3,634
Pooling-of-interests with GTE Corporation - - (195)
-------------------------------------------------------------------------------------
Balance at beginning of year, restated 7,428 3,754 3,439
Net income 11,797 8,260 4,980
Dividends declared ($1.54, $1.54, and $1.54 (4,416) (4,219) (4,203)
per share)
Shares issued-employee plans (160) (359) (443)
Other 18 (8) (19)
-------------------------------------------------------------------------------------
Balance at end of year 14,667 7,428 3,754
-------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year 75 (1,088) (796)
Pooling-of-interests with GTE Corporation - - 1
-------------------------------------------------------------------------------------
Balance at beginning of year, restated 75 (1,088) (795)
-------------------------------------------------------------------------------------
Foreign currency translation adjustment (262) (41) (290)
Unrealized gains (losses) on marketable (1,965) 1,197 14
securities
Minimum pension liability adjustment (24) 7 (17)
-------------------------------------------------------------------------------------
Other comprehensive income (loss) (2,251) 1,163 (293)
-------------------------------------------------------------------------------------
Balance at end of year (2,176) 75 (1,088)
-------------------------------------------------------------------------------------
TREASURY STOCK
Balance at beginning of year 23,569 640 22,887 593 49,205 1,741
Pooling-of-interests with GTE Corporation - - - - (26,253) (1,150)
-------------------------------------------------------------------------------------
Balance at beginning of year, restated 23,569 640 22,887 593 22,952 591
Shares purchased 35,110 1,717 12,142 723 20,743 1,002
Shares distributed
Employee plans (9,444) (495) (11,446) (675) (20,779) (999)
Shareowner plans (20) (1) (14) (1) (26) (1)
Acquisition agreements - - - - (3) -
-------------------------------------------------------------------------------------
Balance at end of year 49,215 1,861 23,569 640 22,887 593
-------------------------------------------------------------------------------------
DEFERRED COMPENSATION-ESOPS AND OTHER
Balance at beginning of year 897 1,074 1,213
Amortization (155) (177) (139)
Other 140 - -
-------------------------------------------------------------------------------------
Balance at end of year 882 897 1,074
-------------------------------------------------------------------------------------
TOTAL SHAREOWNERS' INVESTMENT $ 34,578 $ 26,376 $ 21,435
=====================================================================================
COMPREHENSIVE INCOME
Net income $ 11,797 $ 8,260 $ 4,980
Other comprehensive income (loss) per above (2,251) 1,163 (293)
-------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 9,546 $ 9,423 $ 4,687
=====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Verizon Communications Inc. and
Subsidiaries
- --------------------------------------------------------------------------------
Note 1
Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
DESCRIPTION OF BUSINESS
Verizon Communications Inc. (Verizon), formed by the merger of Bell Atlantic
Corporation (Bell Atlantic) and GTE Corporation (GTE), is one of the world's
leading providers of communications services. Our company is the largest
provider of wireline and wireless communications in the United States. Our
global presence extends to over 40 countries in the Americas, Europe, Asia and
the Pacific. We operate and are managed around four segments: Domestic Telecom,
Domestic Wireless, International and Information Services. For further
information concerning our business segments, see Note 19.
CONSOLIDATION
The consolidated financial statements include our controlled subsidiaries.
Investments in businesses which we do not control, but have the ability to
exercise significant influence over operating and financial policies, are
accounted for using the equity method. Investments in which we do not have the
ability to exercise significant influence over operating and financial policies
are accounted for under the cost method. Certain of our cost method investments
are classified as available-for-sale securities and adjusted to fair value
pursuant to Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
We prepare our financial statements using generally accepted accounting
principles which require management to make estimates and assumptions that
affect reported amounts and disclosures. Actual results could differ from those
estimates.
REVENUE RECOGNITION
We recognize wireline and wireless service revenues based upon usage of our
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.
We adopted the provisions of the Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements"
in the fourth quarter of 2000, retroactive to January 1, 2000, as required by
the SEC. The impact to Verizon pertains to the deferral of certain non-recur-
ring fees, such as service activation and installation fees, and associated
incremental direct costs, and the recognition of those revenues and costs over
the expected term of the customer relationship. As of January 1, 2000, the
total cumulative effect of the non-cash, after-tax charge was a decrease in net
income of $40 million. The retroactive adoption of SAB No. 101 decreases
revenues reported in our SEC Form 10-Q through September 30, 2000 by $59 million
and reduces expenses by $52 million.
MAINTENANCE AND REPAIRS
We charge the cost of maintenance and repairs, including the cost of replacing
minor items not constituting substantial betterments, to Operations and Support
Expense.
EARNINGS PER COMMON SHARE
Basic earnings per common share are based on the weighted-average number of
shares outstanding during the year. Diluted earnings per common share include
the dilutive effect of shares issuable under our stock-based compensation plans,
which represent the only potentially dilutive common shares.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with a maturity of 90 days or less
when purchased to be cash equivalents, except cash equivalents held as
short-term investments. Cash equivalents are stated at cost, which approximates
market value.
SHORT-TERM INVESTMENTS
Our short-term investments consist primarily of cash equivalents held in trust
to pay for certain employee benefits. Short-term investments are stated at
cost, which approximates market value.
INVENTORIES
We include in inventory new and reusable materials of the operating telephone
subsidiaries which are stated principally at average original cost, except
that specific costs are used in the case of large individual items. Inventories
of our other subsidiaries are stated at the lower of cost (determined
principally on either an average cost or first-in, first-out basis) or market.
PLANT AND DEPRECIATION
We record plant, property and equipment at cost. Our operating telephone
subsidiaries' 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.
The asset lives used by our operating telephone subsidiaries are presented in
the following table:
Average Lives (in years)
- --------------------------------------------------------------------------------
Buildings 20-60
Central office equipment 5-12
Outside communications plant 8-65
Furniture, vehicles and other equipment 3-15
When we replace or retire depreciable telephone plant, we deduct the carrying
amount of such plant from the respective accounts and charge accumulated
depreciation.
Plant, property and equipment of our other subsidiaries is depreciated on a
straight-line basis over the following estimated useful lives: buildings, 20 to
40 years and other equipment, 1 to 20 years.
When the depreciable assets of our other subsidiaries are retired or otherwise
disposed of, the related cost and accumulated depreciation are deducted from
the plant accounts, and any gains or losses on disposition are recognized in
income.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
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 cost.
COMPUTER SOFTWARE COSTS
We capitalize the cost of internal-use software which has a useful life in
excess of one year in accordance with Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Also, we capi-
talize interest associated with the development of internal-use software.
Capitalized computer software costs are amortized using the straight-line method
over a period of 3 to 5 years. The effect of adopting SOP No. 98-1 was an
increase in net income of approximately $560 million in 1999.
Prior to adopting SOP No. 98-1, our operating telephone subsidiaries capitalized
initial right-to-use fees for central office switching equipment, including
initial operating system and initial application software costs. For non-central
office equipment, only the initial operating system software was capitalized.
Subsequent additions, modifications, or upgrades of initial software programs,
whether operating or application packages, were expensed as incurred.
GOODWILL AND OTHER INTANGIBLES
Goodwill is the excess of the acquisition cost of businesses over the fair value
of the identifiable net assets acquired. We generally amortize goodwill,
wireless licenses and other identifiable intangibles on a straight-line basis
over their estimated useful life, not exceeding 40 years. Certain acquired
customer bases are amortized in a manner consistent with historical attrition
patterns. We assess the impairment of other identifiable intangibles and
goodwill related to our consolidated subsidiaries under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. A determination of impairment (if any) is
made based on estimates of future cash flows. In instances where goodwill has
been recorded for assets that are subject to an impairment loss, the carrying
amount of the goodwill is eliminated before any reduction is made to the
carrying amounts of impaired long-lived assets and identifiable intangibles. On
a quarterly basis, we assess the impairment of enterprise level goodwill under
Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets." A
determination of impairment (if any) is made based primarily on estimates of
market value.
SALE OF STOCK BY SUBSIDIARY
We recognize in consolidation changes in our ownership percentage in a
subsidiary caused by issuances of the subsidiary's stock as adjustments to
Contributed Capital.
INCOME TAXES
Verizon and its domestic subsidiaries file a consolidated federal income tax
return. For periods prior to the Bell Atlantic-GTE merger (see Note 2), GTE
filed a separate consolidated federal income tax return.
Our operating telephone subsidiaries use the deferral method of accounting for
investment tax credits earned prior to the repeal of investment tax credits by
the Tax Reform Act of 1986. We also defer certain transitional credits earned
after the repeal. We amortize these credits over the estimated service lives
of the related assets as a reduction to the Provision for Income Taxes.
STOCK-BASED COMPENSATION
We account for stock-based employee compensation plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, and
follow the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
FOREIGN CURRENCY TRANSLATION
The functional currency for nearly all of our foreign operations is the local
currency. For these foreign entities, we translate income statement amounts at
average exchange rates for the period, and we translate assets and liabilities
at end-of-period exchange rates. We record these translation adjustments in
Accumulated Other Comprehensive Income (Loss), a separate component of
Shareowners' Investment, in our consolidated balance sheets. We report exchange
gains and losses on intercompany foreign currency transactions of a long-term
nature in Accumulated Other Comprehensive Income (Loss). Other exchange gains
and losses are reported in income.
When a foreign entity operates in a highly inflationary economy, we use the U.S.
dollar as the functional currency rather than the local currency. We translate
nonmonetary assets and liabilities and related expenses into U.S. dollars at
historical exchange rates. We translate all other income statement amounts using
average exchange rates for the period. Monetary assets and liabilities are
translated at end-of-period exchange rates, and any gains or losses are
reported in income. For the period October 1, 1996, through December 31, 1998,
we considered Grupo Iusacell S.A. de C.V. (Iusacell) to operate in a highly
inflationary economy. Beginning January 1, 1999, we discontinued highly
inflationary accounting for this entity and resumed using the Mexican peso as
its functional currency.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned during
the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits.
DERIVATIVE INSTRUMENTS
We have entered into derivative transactions to manage our exposure to
fluctuations in foreign currency exchange rates, interest rates, equity prices
and corporate tax rates. We employ risk management strategies using a variety of
derivatives including foreign currency forwards and options, equity options,
interest rate swap agreements, interest rate caps and floors, and basis swap
agreements. We do not hold derivatives for trading purposes.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Fair Value Method
We use the fair value method of accounting for our foreign currency derivatives,
which requires us to record these derivatives at fair value in our consolidated
balance sheets, and changes in value are recorded in income or Shareowners'
Investment. Depending upon the nature of the derivative instruments, the fair
value of these instruments may be recorded in Current Assets, Other Assets,
Current Liabilities and Other Liabilities in our consolidated balance sheets.
Gains and losses and related discounts or premiums arising from foreign currency
derivatives (which hedge our net investments in consolidated foreign
subsidiaries and investments in foreign entities accounted for under the equity
method) are included in Accumulated Other Comprehensive Income (Loss) and
reflected in income upon sale or substantial liquidation of the investment.
Certain of these derivatives also include an interest element, which is recorded
in Interest Expense over the lives of the contracts. Gains and losses from
derivatives which hedge our short-term transactions and cost investments are
included in Other Income and (Expense), Net, and discounts or premiums on these
contracts are included in income over the lives of the contracts. Gains and
losses from derivatives hedging identifiable foreign currency commitments are
deferred and reflected as adjustments to the related transactions. If the
foreign currency commitment is no longer likely to occur, the gain or loss is
recognized immediately in income.
Earnings generated from our leveraged lease portfolio may be affected by changes
in corporate tax rates. In order to hedge a portion of this risk, we use basis
swap agreements, which we account for using the fair value method of accounting.
Under this method, these agreements are carried at fair value and included in
Other Assets or Other Liabilities in our consolidated balance sheets. Changes in
the unrealized gain or loss are included in Other Income and (Expense), Net.
Accrual Method
Interest rate swap agreements and interest rate caps and floors that qualify as
hedges are accounted for under the accrual method. An instrument qualifies as a
hedge if it effectively modifies and/or hedges the interest rate characteristics
of the underlying fixed or variable interest rate debt. Under the accrual
method, no amounts are recognized in our consolidated balance sheets related to
the principal balances. The interest differential to be paid or received,
which is accrued as interest rates change, and premiums related to caps and
floors, is recognized as adjustments to Interest Expense over the lives of the
agreements. These interest accruals are recorded in Current Assets and Current
Liabilities in our consolidated balance sheets. If we terminate an agreement,
the gain or loss is recorded as an adjustment to the basis of the underlying
liability and amortized over the remaining original life of the agreement. If
the underlying liability matures, or is extinguished and the related derivative
is not terminated, that derivative would no longer qualify for accrual
accounting. In this situation, the derivative is accounted for at fair value,
and changes in the value are recorded in income.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued 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 in our balance sheet. Changes in the fair values
of derivative instruments not used as hedges will be recognized in earnings
immediately. Changes in the fair values of derivative instruments used
effectively as hedges will be recognized either in earnings for hedges of
changes in fair value or in Other Comprehensive Income (Loss) for hedges of
changes in cash flows. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
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.
Effective January 1, 2001, we will adopt SFAS No. 133 and SFAS No. 138. The
initial impact of adoption on our financial statements will be recorded as a
cumulative effect of an accounting change in our first quarter 2001 SEC Form
10-Q. An after-tax charge of approximately $180 million will be recorded to
earnings in our consolidated statements of income. The recognition of assets
and liabilities in the consolidated balance sheets will be immaterial. The
ongoing effect of adoption on our consolidated financial statements will be
determined each quarter by several factors, including the specific hedging
instruments in place and their relationships to hedged items, as well as market
conditions at the end of each period.
- --------------------------------------------------------------------------------
Note 2
Completion of Mergers
- --------------------------------------------------------------------------------
On June 30, 2000, Bell Atlantic and GTE completed a merger under a definitive
merger agreement dated as of July 27, 1998. With the closing of the merger, the
combined company began doing business as Verizon. GTE shareowners received 1.22
shares of Bell Atlantic common stock for each share of GTE common stock that
they owned. The merger qualified as a tax-free reorganization and has been
accounted for as a pooling-of-interests business combination. Under this method
of accounting, Bell Atlantic and GTE are treated as if they had always been
combined for accounting and financial reporting purposes. As a result, we have
restated our consolidated financial statements for all dates and periods prior
to the merger to reflect the combined results of Bell Atlantic and GTE as of the
beginning of the earliest period presented.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
In addition to combining the separate historical results of Bell Atlantic and
GTE, the restated combined financial statements include the adjustments
necessary to conform accounting methods and presentation, to the extent that
they were different, and to eliminate significant intercompany transactions. The
separate Bell Atlantic and GTE results of operations for periods prior to the
merger were as follows:
(dollars in millions)
Three Months Ended Years Ended
March 31, December 31,
2000 1999 1998
- --------------------------------------------------------------------------------
Operating Revenues (Unaudited)
Bell Atlantic $ 8,534 $ 33,174 $ 31,566
GTE 6,100 25,336 25,473
Conforming adjustments,
reclassifications and eliminations (85) (316) 36
-----------------------------------
Combined $ 14,549 $ 58,194 $ 57,075
===================================
Net Income
Bell Atlantic $ 731 $ 4,202 $ 2,965
GTE 807 4,033 2,172
Conforming adjustments,
reclassifications and eliminations 19 25 (157)
-----------------------------------
Combined $ 1,557 $ 8,260 $ 4,980
===================================
In August 1997, Bell Atlantic and NYNEX Corporation (NYNEX) completed a merger
of equals under a definitive merger agreement entered into on April 21, 1996 and
amended on July 2, 1996. The merger qualified as a tax-free reorganization and
has been accounted for as a pooling-of-interests.
The following table summarizes the one-time charges incurred for each merger.
Amounts for 2000 pertain to the Bell Atlantic-GTE merger. Transition and
integration costs for 1999 and 1998 pertain to the Bell Atlantic-NYNEX merger.
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Direct Incremental Costs
Compensation arrangements $ 210 $ - $ -
Professional services 161 - -
Shareowner-related 35 - -
Registration, regulatory and other 66 - -
-------------------------------
Total Direct Incremental Costs 472 - -
-------------------------------
Employee Severance Costs 584 - -
-------------------------------
Transition and Integration Costs
Systems modifications 99 186 149
Branding 240 1 31
Relocation, training and other 355 18 16
-------------------------------
Total Transition and Integration Costs 694 205 196
-------------------------------
Total Merger-Related Costs $ 1,750 $ 205 $ 196
===============================
The following table provides a reconciliation of the liabilities associated with
Bell Atlantic-GTE merger-related costs, Bell Atlantic-NYNEX merger-related costs
and other charges and special items described below:
<TABLE>
<CAPTION>
(dollars in millions)
1998 1999 2000
----------------------------------------------------------------------------------------------------------
Asset Asset Asset
Beginning Write-offs End of Write-offs End of Charged to Write-offs End of
of Year Payments and Other Year Payments and Other Year Expense Payments and Other Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Merger-Related
Direct incremental costs $ 35 $ (5) $ (26) $ 4 $ (1) $ (3) $ - $ 472 $ (469) $ - $ 3
Employee severance costs 330 (61) 47 316 (35) (15) 266 584 (120) (68) 662
Other Initiatives
Video-related costs 21 (3) (12) 6 (2) (4) - - - - -
Write-down of fixed assets
and real estate
consolidation 43 - (20) 23 (3) (18) 2 - - (2) -
Regulatory, tax and legal
contingencies, and
other special items 382 (108) (25) 249 (4) (40) 205 - (14) (73) 118
------------------------------------------------------------------------------------------------------
$ 811 $ (177) $ (36) $ 598 $ (45) $ (80) $ 473 $ 1,056 $ (603) $ (143) $ 783
======================================================================================================
</TABLE>
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
MERGER-RELATED COSTS
Direct Incremental Costs
Direct incremental costs related to the Bell Atlantic-GTE merger of $472 million
($378 million after-tax, or $.14 per diluted share) include compensation,
professional services and other costs. Compensation includes retention payments
to employees that were contingent on the close of the merger and payments to
employees to satisfy contractual obligations triggered by the change in control.
Professional services include investment banking, legal, accounting, consulting
and other advisory fees incurred to obtain federal and state regulatory
approvals and take other actions necessary to complete the merger. Other
includes costs incurred to obtain shareholder approval of the merger, register
securities and communicate with shareholders, employees and regulatory
authorities regarding merger issues. Substantially all of the Bell Atlantic-GTE
merger direct incremental costs had been paid as of December 31, 2000.
Employee Severance Costs
Employee severance costs related to the Bell Atlantic-GTE merger of $584 million
($371 million after-tax, or $.14 per diluted share), as recorded under SFAS No.
112, "Employers' Accounting for Postemployment Benefits," represent the benefit
costs for the separation of approximately 5,500 management employees who are
entitled to benefits under pre-existing separation plans, as well as an accrual
for ongoing SFAS No. 112 obligations for GTE employees. Of these employees,
approximately 5,200 were located in the United States and approximately 300 were
located at various international locations. The separations either have or are
expected to occur as a result of consolidations and process enhancements within
our operating segments. Accrued postemployment benefit liabilities for those
employees are included in our consolidated balance sheets as components of
Other Current Liabilities and Employee Benefit Obligations.
Employee severance costs related to the Bell Atlantic-NYNEX merger represent the
benefit costs for the separation of approximately 3,100 management employees who
are entitled to benefits under pre-existing separation pay plans. During 1999,
1998, and 1997, 231, 856, and 245 management employees, respectively, were
separated with severance benefits. There were no Bell Atlantic-NYNEX merger
- -related separations in 2000. Accrued postemployment benefit liabilities were
included in our consolidated balance sheets as a component of Employee Benefit
Obligations at December 31, 1999. There is no remaining severance liability as
of December 31, 2000.
Transition and Integration Costs
In addition to the direct incremental merger-related and severance costs
discussed above, from the date of the Bell Atlantic-GTE merger, we expect to
incur a total of approximately $2.0 billion of transition costs related to the
Bell Atlantic-GTE merger and the formation of the wireless joint venture. These
costs will be incurred to integrate systems, consolidate real estate, and
relocate employees. They also include approximately $500 million for
advertising and other costs to establish the Verizon brand. Transition costs
related to the Bell Atlantic-GTE merger were $694 million ($316 million after
taxes and minority interests, or $.12 per diluted share) in 2000.
In connection with the Bell Atlantic-NYNEX merger, we recorded transition costs
similar in nature to the Bell Atlantic-GTE merger transition costs of $205
million ($126 million after-tax, or $.05 per diluted share) in 1999 and $196
million ($121 million after-tax, or $.04 per diluted share) in 1998.
GENUITY
In accordance with the provisions of a Federal Communications Commission (FCC)
order approving the merger of Bell Atlantic and GTE in June 2000, Genuity Inc.
(Genuity), formerly a wholly owned subsidiary of GTE, sold in a public offering
174 million of its Class A common shares, representing 100% of Genuity's issued
and outstanding Class A common stock and 90.5% of its overall voting equity. The
issuance resulted in cash proceeds to Genuity of $1.9 billion. GTE retained 100%
of Genuity's Class B common stock, which represents 9.5% of the voting equity in
Genuity and contains a contingent conversion feature.
In accordance with provisions of the FCC order, the sale transferred ownership
and control of Genuity to the Class A common stockholders and, accordingly, we
have deconsolidated our investment in Genuity and are accounting for it using
the cost method.
The Class B common stock's conversion rights are dependent on the percentage of
certain of Verizon's access lines that are compliant with Section 271 of the
Telecommunications Act of 1996 (Section 271). Under the FCC order, if we
eliminate the applicable Section 271 restrictions as to at least 50% of the
former Bell Atlantic in-region access lines, we can transfer our Class B common
stock to a disposition trustee for sale to one or more third parties. If we
eliminate the applicable Section 271 restrictions as to 100% of the former
Bell Atlantic in-region access lines, we can convert our Class B common stock
into 800 million shares of Genuity's Class A common stock or Class C common
stock, subject to the terms of the FCC order. This conversion feature expires if
we do not eliminate the applicable Section 271 restrictions as to 100% of the
former Bell Atlantic in-region access lines by the fifth anniversary of the Bell
Atlantic-GTE merger, subject to extension under certain circumstances. In
addition, if we eliminate Section 271 restrictions as to 95% of the former Bell
Atlantic in-region lines, we may require Genuity to reconfigure its operations
in one or more former Bell Atlantic in-region states where we have not
eliminated those restrictions in order to bring those operations into
compliance with Section 271 under certain circumstances.
Genuity's revenues for the first six months of 2000 were $529 million and its
net loss was $281 million. As previously discussed, beginning in the third
quarter of 2000 our investment in Genuity is being accounted for under the cost
method. Genuity's revenues and net loss for the period from July 1, 2000 to
December 31, 2000 are $621 million and $513 million, respectively.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 3
Gains on Sales of Assets, Net
- --------------------------------------------------------------------------------
During 2000 and 1999, we recognized net gains related to sales of assets and
impairments of assets held for sale. During 1998, we recognized net losses
related to impairments of assets held for sale. Impairments were based on
expected future cash flows. These net gains and losses are summarized as
follows:
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Pretax After-tax Pretax After-tax Pretax After-tax
------------------------------------------------------------
Wireline property
sales $ 3,051 $ 1,856 $ - $ - $ - $ -
Wireless overlap
sales 1,922 1,156 - - - -
Other, net (1,180) (1,025) 1,379 819 (361) (222)
------------------------------------------------------------
$ 3,793 $ 1,987 $1,379 $ 819 $ (361) $ (222)
============================================================
As required, gains on sales of wireless overlap properties that occurred prior
to the closing of the Bell Atlantic-GTE merger are included in operating income
and in the table above. Gains on sales of wireless overlap properties that
occurred after the Bell Atlantic-GTE merger are classified as extraordinary
items. See Note 5 for gains on sales of wireless overlap properties subsequent
to the Bell Atlantic-GTE merger, reported as Extraordinary Items, Net of Tax.
Wireline Property Sales
During 1998, GTE committed to sell approximately 1.6 million non-strategic
domestic access lines located in Alaska, Arizona, Arkansas, California,
Illinois, Iowa, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Texas and
Wisconsin. During 1999, definitive sales agreements were reached for the sale
of all 1.6 million access lines. The net plant, property and equipment of
approximately $1.7 billion related to these access lines is classified as Net
Assets Held for Sale in the consolidated balance sheets as of December 31, 1999.
These access lines comprise approximately 1.7% of the total Domestic Telecom
access lines. Operating revenues of the properties sold were approximately $766
million, $1,151 million and $1,124 million for the years 2000, 1999 and 1998,
respectively. Net income contributed by the sold properties was approximately
$314 million, $475 million and $345 million for the years 2000, 1999 and 1998,
respectively.
During 2000, we sold non-strategic access lines of former GTE properties listed
above, except for those located in Arizona and California, for combined cash
proceeds of approximately $4,903 million and $125 million in convertible
preferred stock. The pretax gain on the sales was $3,051 million ($1,856 million
after-tax, or $.68 per diluted share). The remaining sales are expected to close
in 2001.
Wireless Overlap Sales
A U.S. Department of Justice consent decree issued on December 6, 1999 approving
the merger of Bell Atlantic and GTE required GTE Wireless, Bell Atlantic Mobile,
Vodafone Group plc (Vodafone) and PrimeCo Personal Communications, L.P.
(PrimeCo) to resolve a number of wireless market overlaps in order to complete
the wireless joint venture and the Bell Atlantic-GTE merger. As a result, during
April 2000 we completed a transaction with ALLTEL Corporation (ALLTEL) that
provided for the exchange of a former Bell Atlantic Mobile market cluster in the
Southwestern U.S. for several of ALLTEL's wireless markets in Nevada and Iowa
and cash. In a separate transaction entered into by GTE, in June 2000, we
exchanged several former GTE markets in Florida, Alabama and Ohio, as well as an
equity interest in South Carolina, for several ALLTEL interests in Pennsylvania,
New York, Indiana and Illinois. These exchanges were accounted for as purchase
business combinations and resulted in combined pretax gains of $1,922 million
($1,156 million after-tax, or $.42 per diluted share).
Other Transactions
During 2000, we recorded charges related to the write-down of certain impaired
assets, determined based on expected future cash flows, and other charges of
$1,180 million pretax ($1,025 million after-tax, or $.37 per diluted share), as
follows:
(dollars in millions, except per share amounts)
Per diluted
Year Ended December 31, 2000 Pretax After-tax share
- --------------------------------------------------------------------------------
GTE Airfone and Video impairment $ 566 $ 362 $ .13
CLEC impairment 334 218 .08
Real estate consolidation and
other merger-related charges 220 142 .05
Deferred taxes on contribution to
the wireless joint venture - 249 .09
Other, net 60 54 .02
-----------------------------------------
$ 1,180 $ 1,025 $ .37
=========================================
In connection with our decisions to exit the video business and GTE Airfone (a
company involved in air-to-ground communications), in the second quarter of 2000
we recorded an impairment charge to reduce the carrying value of these
investments to their estimated net realizable value.
The competitive local exchange carrier (CLEC) impairment primarily relates to
the revaluation of assets and the accrual of costs pertaining to certain
long-term contracts due to strategic changes in Verizon's approach to offering
bundled services both in and out of its franchise areas. The revised approach to
providing such services resulted, in part, from post-merger integration
activities and acquisitions.
The real estate consolidation and other merger-related charges include the
revaluation of assets and the accrual of costs to exit leased facilities that
are in excess of Verizon's needs as the result of post-merger integration
activities.
The deferred tax charge is non-cash and was recorded as the result of the
contribution in July 2000 of the GTE Wireless assets to Verizon Wireless based
on the differences between the book and tax bases of assets contributed.
During 1999, we sold substantially all of GTE Government Systems to General
Dynamics Corporation for $1.0 billion in cash. The pretax gain on the sale was
$754 million ($445 million after-tax, or $.16 per diluted share). In addition,
during 1999, we recorded a net pretax gain of $112 million ($66 million
after-tax, or $.02 per diluted share), primarily associated with the sale of the
remaining major division of GTE Government Systems to DynCorp. The 1999
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
year-to-date net gains for asset sales also include a pretax gain of $513
million ($308 million after-tax, or $.11 per diluted share) associated with the
merger of BC TELECOM Inc. (BC TELECOM) and TELUS Communications, Inc. (TELUS)
during the first quarter of 1999.
During the first quarter of 1998, we committed to a plan to sell or exit various
business activities and reduce costs through employee reductions and related
actions. Based on the decision to sell, we recorded a pretax charge of $200
million ($117 million after-tax, or $.04 per diluted share) to reduce the
carrying value of the assets to estimated net sales proceeds.
Also in 1998, after completing a review of our operations, we decided to scale
back the deployment of the hybrid fiber coax (HFC) video networks that we built
in certain test markets. Due to the significant change in the scale of the HFC
networks and the effect on future revenues and expenses, we recorded a pretax
charge for impairment of approximately $161 million ($105 million after-tax, or
$.04 per diluted share).
- --------------------------------------------------------------------------------
Note 4
Other Strategic Actions
- --------------------------------------------------------------------------------
Other charges and special items recorded during 2000 include the write-off of
our investment in NorthPoint Communications Corp. (NorthPoint) of $155 million
($153 million after-tax, or $.06 per diluted share) as a result of the
deterioration in NorthPoint's business, operations and financial condition. We
also recorded a pretax charge of $50 million ($50 million after-tax, or $.02 per
diluted share) associated with our share of costs incurred at two of our
international equity investees to complete employee separation programs.
Other charges and special items in 2000 include the cost of disposing or
abandoning redundant assets and discontinued system development projects in
connection with the Bell Atlantic-GTE merger of $287 million ($175 million
after-tax, or $.06 per diluted share), regulatory settlements of $98 million
($61 million after-tax, or $.02 per diluted share) and other asset write-downs
of $416 million ($290 million after-tax, or $.11 per diluted share).
During the first quarter of 1999, we recorded a special charge of $192 million
($119 million after-tax, or $.04 per diluted share) associated with employee
separation programs. The charge included separation and related benefits such as
outplacement and benefit continuation costs for approximately 3,000 employees.
The programs were completed in early April 1999, as planned, consistent with
the original cost estimates.
In 1998, we recorded total pretax charges of $918 million ($786 million
after-tax, or $.28 per diluted share) related to the write-down of assets, exit
of business activities, consolidation of facilities, the elimination of employee
functions and other actions as discussed below.
In 1998, we recorded pretax charges of $485 million to adjust the carrying
values of two Asian investments, TelecomAsia, a wireline investment in Thailand,
and Excelcomindo, a wireless investment in Indonesia. We account for these
investments under the cost method. We continue to monitor the political,
economic, and financial aspects of our remaining investments in Thailand and
Indonesia, as well as other investments. The book value of our remaining Asian
investments was approximately $179 million at December 31, 2000. Should we
determine that any further decline in the fair values of these investments is
other than temporary, the impact would be recorded in our results of operations.
During the first quarter of 1998, we also committed to a plan to exit a number
of other non-strategic domestic business activities. As a result, we recorded a
pretax charge of $156 million to reduce the carrying value of affected assets to
expected net salvage value and to recognize costs resulting from the exit plan.
The major components of the charge included the write-off of network equipment
and supplies for discontinued wireless products and services ($81 million); the
shutdown of business units developing interactive video products and services
and excess printing facilities ($42 million); and the write-off of impaired
assets in Latin America ($33 million).
During the first quarter of 1998, we consolidated facilities and centralized or
eliminated a variety of employee functions and, as a result, recorded a $107
million pretax charge. During the second half of 1998, we closed several
administrative facilities, including the former GTE corporate headquarters in
Connecticut and approximately 140 domestic retail stores and other locations.
The cost of these actions is composed primarily of employee severance,
outplacement and benefit continuation costs for approximately 1,700 employees
and other costs to exit locations we no longer use.
We also recorded a pretax charge of approximately $131 million in 1998 related
to nonrecurring federal and state regulatory rulings affecting our Domestic
Telecom segment. Approximately two thirds of this charge relates to nonrecurring
access rate refunds applied by the FCC retroactively in 1997. In addition, the
charge included the write-off of mandated costs, including generic software, and
other costs we incurred for which revenue recovery was not allowable under the
regulatory process.
Other items arising in 1998 included pretax charges totaling $39 million
principally associated with the settlement of labor contracts in August 1998.
F-34
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 5
Extraordinary Items
- --------------------------------------------------------------------------------
In June 2000, we entered into a series of definitive sale agreements to resolve
service area conflicts prohibited by FCC regulations as a result of the Bell
Atlantic-GTE merger (see Note 3). These agreements, which were pursuant to the
consent decree issued for the merger, enabled both the formation of Verizon
Wireless (see Note 6) and the closing of the merger. Since the sales were
required pursuant to the consent decree and several occurred after the merger,
the gains on sales were recorded net of taxes as Extraordinary Items in the
consolidated statements of income.
During the second half of 2000, we completed the sale of the Richmond (former
PrimeCo) wireless market to CFW Communications Company in exchange for two
wireless rural service areas in Virginia and cash. The sale resulted in a pretax
gain of $184 million ($112 million after-tax, or $.04 per diluted share). In
addition, we completed the sales of the consolidated markets in Washington and
Texas and unconsolidated interests in Texas (former GTE) to SBC Communications.
The sales resulted in a pretax gain of $886 million ($532 million after-tax, or
$.19 per diluted share). Also, we completed the sale of the San Diego (former
GTE) market to AT&T Wireless. The sale resulted in a pretax gain of $304 million
($182 million after-tax, or $.07 per diluted share). In 2000, we also completed
the sale of the Houston PCS (former PrimeCo) wireless overlap market to AT&T
Wireless, resulting in a pretax gain of $350 million ($213 million after-tax, or
$.08 per diluted share).
During the first quarter of 2000, we retired $128 million of debt prior to the
stated maturity date, resulting in a one-time, pretax extraordinary charge of
$15 million ($9 million after-tax, or less than $.01 per diluted share). During
the fourth quarter of 2000, we retired $61.6 million of debt prior to the stated
maturity date, resulting in a one-time, pretax extraordinary charge of $4
million ($3 million after-tax, or less than $.01 per diluted share).
During the first quarter of 1999, we repurchased $338 million of high-coupon
debt through a public tender offer prior to stated maturity, resulting in a
one-time, pretax extraordinary charge of $46 million ($30 million after-tax, or
$.01 per diluted share). During the second quarter of 1999, we recorded a
one-time, pretax extraordinary charge of $10 million ($6 million after-tax, or
less than $.01 per diluted share) associated with the early extinguishment of
debentures of our telephone subsidiaries.
During 1998, we recorded pretax extraordinary charges of $616 million ($346
million after-tax, or $.13 per diluted share). Approximately $300 million of the
after-tax charge related to the discontinuation of SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation," by our Canadian operations. The
decision by our Canadian subsidiaries to discontinue using regulatory
accounting practices was in response to rulings by the Canadian regulatory
commission in March 1998 that opened the Canadian telecommunications market to
full competition. Under SFAS No. 71, certain assets were depreciated and certain
expenses were recognized over a longer period of time than would have been the
case in a competitive environment. This charge includes a reduction in the net
carrying value of property, plant and equipment of $270 million to reflect
impairment based on the estimated cash flows that the assets are expected to
generate in a competitive environment and a reduction in costs that had been
capitalized based on the expectation of future recovery of approximately $30
million. In addition, during the first quarter of 1998, we called $800 million
of high-coupon debt and preferred stock prior to their stated maturity date,
resulting in a pretax extraordinary charge of $31 million ($20 million after-
tax, or less than $.01 per diluted share). Also, in 1998, we recorded pretax
extraordinary charges of $40 million ($26 million after-tax, or $.01 per diluted
share) associated with the early extinguishment of debentures and refunding
mortgage bonds of the operating telephone subsidiaries and debt issued by
Fiberoptic Link Around the Globe Ltd. (FLAG), an investment accounted for under
the equity method.
- --------------------------------------------------------------------------------
Note 6
Wireless Joint Venture
- --------------------------------------------------------------------------------
On April 3, 2000, Verizon and Vodafone consummated the previously announced
agreement to combine U.S. wireless assets, including cellular, Personal
Communications Services (PCS) and paging operations. Vodafone contributed its
U.S. wireless operations, including its interest in PrimeCo, to an existing
Bell Atlantic partnership in exchange for a 65.1% economic interest in the part-
nership. Bell Atlantic retained a 34.9% economic interest and control pursuant
to the terms of the partnership agreement. We accounted for this transaction as
a purchase business combination. The total consideration for the U.S. wireless
operations of Vodafone was approximately $34 billion, resulting in increases in
intangible assets of approximately $31 billion, minority interest of approxi-
mately $21 billion and debt of approximately $4 billion included in the
consolidated balance sheets. Since the acquisition was effected through the
issuance of partnership interests, the $4,271 million after-tax gain on the
transaction was reported as an adjustment to contributed capital in accordance
with our accounting policy for recording gains on the issuance of subsidiary
stock. The appraisal and the allocation of the purchase price to the tangible
and identifiable intangible assets were completed in the fourth quarter of
2000. A substantial portion of the excess purchase price over the tangible
assets acquired was identified with wireless licenses, which will be amortized
over a period up to 40 years since they are renewable on an indefinite basis,
and therefore, have an indefinite life. In connection with the recent initial
public offering filing by Verizon Wireless, the Division of Corporation Finance
of the SEC has requested additional support for our use of a 40-year life for
our wireless licenses. The SEC has questioned the use of a 40-year amortization
period by other communications companies for purchased intangible assets similar
to ours. In some cases, companies have shortened their amortization periods in
response to these questions. In other cases, companies are continuing to use a
40-year life. We continue to believe licenses have an indefinite life, and
therefore, continue to amortize the cost of licenses over 40 years.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
In July 2000, following the closing of the Bell Atlantic-GTE merger, interests
in GTE's U.S. wireless assets were contributed to Verizon Wireless in exchange
for an increase in our economic ownership interest to 55%. This transaction was
accounted for as a transfer of assets between entities under common control and,
accordingly, was recorded at the net book value of the assets contributed.
The following represents Verizon's historical results for 1999 adjusted to
include the wireless joint venture on a pro forma basis comparable with 2000
results. No other pro forma adjustments were made to the historical results.
(dollars in millions, except per share amount)
Revenues $ 62,504
Net income $ 8,101
Diluted earnings per common share $ 2.92
Under the terms of the venture formation agreement, Vodafone has the right to
require us or Verizon Wireless to purchase up to $20 billion worth of its
interest in Verizon Wireless between 2003 and 2007 at its then fair market
value.
- --------------------------------------------------------------------------------
Note 7
Marketable Securities
- --------------------------------------------------------------------------------
We have investments in marketable securities, primarily common stocks, which are
considered "available-for-sale" under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." These investments have been included
in our consolidated balance sheets in Investments in Unconsolidated Businesses
and Other Assets.
Under SFAS No. 115, available-for-sale securities are required to be carried at
their fair value, with unrealized gains and losses (net of income taxes)
recorded in Accumulated Other Comprehensive Income (Loss). The fair values of
our investments in marketable securities are determined based on market
quotations.
The following table shows certain summarized information related to our
investments in marketable securities:
(dollars in millions)
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------
At December 31, 2000
Investments in unconsolidated
businesses $ 4,529 $ 559 $(1,542) $ 3,546
Other assets 1,326 29 (241) 1,114
---------------------------------------------
$ 5,855 $ 588 $(1,783) $ 4,660
=============================================
At December 31, 1999
Investments in unconsolidated
businesses $ 367 $ 1,892 $ - $ 2,259
Other assets 401 8 (3) 406
---------------------------------------------
$ 768 $ 1,900 $ (3) $ 2,665
=============================================
Our investments in marketable securities increased from December 31, 1999 as a
result of our Metromedia Fiber Network, Inc. (MFN) investment and our exchange
of Cable & Wireless Communications plc (CWC) shares for Cable & Wireless plc
(C&W) and NTL Incorporated (NTL) shares (see Note 8).
One half of our total MFN shares are deemed to be "available for sale"
securities. Accordingly, this portion of our investment in MFN shares has been
adjusted from a carrying value of $357 million to its fair value of $258 million
at December 31, 2000. This decrease in the value of our investment has been
recorded in Investments in Unconsolidated Businesses. The unrealized holding
loss of $64 million (net of income tax benefit of $35 million) has been
recognized in Accumulated Other Comprehensive Income (Loss). The remaining half
of our investment in MFN shares is restricted, and being carried at cost.
Our investment in MFN's subordinated debt securities also qualifies as
"available for sale" securities and, accordingly, this investment has been
adjusted from a carrying value of $975 million to its fair value of $734 million
at December 31, 2000. This decrease in the value of our investment has been
recorded in Other Assets. The unrealized holding loss of $157 million (net of
income tax benefit of $84 million) has also been recognized in Accumulated Other
Comprehensive Income (Loss).
Certain other investments in marketable securities that we hold are not carried
at their fair values because those values are not readily determinable. We have,
however, adjusted the carrying values of these securities in situations where we
believe declines in value below cost were other than temporary. The carrying
values for these investments were $3,071 million at December 31, 2000 and $188
million at December 31, 1999. The increase from December 31, 1999 was
principally due to our deconsolidation of Genuity effective June 30, 2000 (see
Note 2) and the MFN shares not deemed to be "available for sale."
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 8
Investments in Unconsolidated Businesses
- --------------------------------------------------------------------------------
Our investments in unconsolidated businesses are comprised of the following:
(dollars in millions)
2000 1999
At December 31, Ownership Investment Ownership Investment
- --------------------------------------------------------------------------------
Equity Investees
CANTV 28.50% $ 1,901 26.40% $ 1,873
Omnitel Pronto Italia S.p.A. 23.14 1,300 23.14 1,262
TELUS 22.00 1,258 26.70 1,175
Puerto Rico Telephone Company 40.00 427 40.00 380
FLAG 29.80 297 37.67 161
PrimeCo - - 50.00 1,078
CWC - - 18.59 643
Other Various 1,325 Various 1,178
------- -------
Total equity investees 6,508 7,750
------- -------
Cost Investees
Genuity 9.50 2,515 - -
C&W 4.60 1,706 - -
Telecom Corporation of
New Zealand Limited 24.94 912 24.94 2,103
MFN 9.90 622 - -
NTL 9.10 586 - -
Other Various 266 Various 324
------- -------
Total cost investees 6,607 2,427
------- -------
Total $13,115 $10,177
======= =======
Dividends received from investees amounted to $215 million in 2000, $336 million
in 1999, and $353 million in 1998.
Equity Investees
CANTV
Compania Anonima Nacional Telefonos de Venezuela (CANTV) is the primary provider
of local telephone service and national and international long-distance service
in Venezuela. CANTV also provides wireless, Internet-access and directory
advertising services. At December 31, 2000 and 1999, our investment in CANTV
included unamortized goodwill, which is being amortized on a straight-line basis
over a period of 40 years, of $715 million and $740 million, respectively.
Omnitel Pronto Italia S.p.A.
Omnitel Pronto Italia S.p.A. (Omnitel) operates a cellular mobile telephone
network in Italy. Goodwill related to this investment totals approximately $995
million which is being amortized on a straight-line basis over a period of 25
years. At December 31, 2000 and 1999, remaining goodwill was approximately $779
million and $900 million, respectively.
TELUS
Prior to 1999, we had a 50.8% ownership interest in BC TELECOM, a full-service
telecommunications provider in the province of British Columbia, Canada. On
January 31, 1999, BC TELECOM and TELUS Corporation merged to form a public
company now called TELUS. Our ownership interest in TELUS at the time of the
merger was approximately 26.7%. Accordingly, we changed the accounting for our
investment from consolidation to the equity method effective January 1, 1999. In
1998, our consolidated results include revenues of $2.2 billion, operating
income of $589 million, total assets of $2.6 billion, including $1.7 billion of
net property, plant and equipment, and long-term debt of $686 million related
to BC TELECOM.
On October 20, 2000, TELUS acquired 98.5% of Clearnet Communications Inc., a
leading Canadian wireless company through the issuance of non-voting TELUS
shares, creating Canada's largest wireless company in terms of annual revenue.
The issuance of additional TELUS shares diluted Verizon's interest in TELUS from
26.7% to approximately 22.0%.
At December 31, 2000 and 1999, our investment in TELUS included unamortized
goodwill of $345 million and $432 million, respectively, which we are amortizing
on a straight-line basis over a period of 40 years.
Puerto Rico Telephone Company
In March 1999, we completed our 40% investment in Telecomunicaciones de Puerto
Rico, Inc. (TELPRI), which provides local, wireless, long-distance, paging, and
Internet-access services in Puerto Rico. At December 31, 2000 and 1999, our
investment in TELPRI included unamortized goodwill, which is being amortized on
a straight-line basis over a period of 25 years, of $211 million and $222
million, respectively.
FLAG
FLAG is an undersea fiber optic cable system, providing digital communications
links between Europe and Asia. At December 31, 1999, our ownership interest was
comprised of our interest in FLAG Ltd. and our interest in its parent company,
FLAG Telecom Holdings Limited (FLAG Telecom). In January 2000, we exchanged our
shares in FLAG for an interest in FLAG Telecom resulting in an aggregate
interest in FLAG Telecom of approximately 38%. There was no impact to our
financial statements or our effective ownership interest as a result of this
transaction.
In February 2000, FLAG Telecom conducted an initial public offering. The primary
offering consisted of 28 million newly issued common shares. Certain existing
shareowners also participated in a secondary offering in which approximately 8
million of their common stock holdings were sold. We did not acquire any new
shares in the primary offering, nor did we participate in the secondary
offering. As a result, our current ownership interest has been reduced to
approximately 30%.
PrimeCo Personal Communications, L.P.
PrimeCo was a partnership between Bell Atlantic and Vodafone, which provided PCS
in major cities across the United States. In connection with the formation of
the wireless joint venture (see Note 6), overlapping wireless properties were
transferred out of PrimeCo and PrimeCo was contributed into the wireless joint
venture. The overlapping wireless properties are being sold (see Note 5).
Cable & Wireless Communications
In the second quarter of 1997, we transferred our interests in cable television
and telecommunications operations in the United Kingdom to CWC in exchange for
an 18.5% ownership interest in CWC. This transaction was accounted for as a
nonmonetary
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
exchange of similar productive assets and, as a result, no gain or loss was
recorded. We accounted for our investment in CWC under the equity method because
we had significant influence over CWC's operating and financial policies. Prior
to the transfer, we consolidated the results of these operations.
In May 2000, C&W, NTL and CWC completed a restructuring of CWC. Under the terms
of the restructuring, CWC's consumer cable telephone, television and Internet
operations were separated from its corporate, business, Internet protocol and
wholesale operations. Once separated, the consumer operations were acquired by
NTL and the other operations were acquired by C&W. In connection with the
restructuring, we, as a shareholder in CWC, received shares in the two acquiring
companies, representing approximately 9.1% of the NTL shares outstanding at the
time and approximately 4.6% of the C&W shares outstanding at the time. Based on
this level of ownership, our investments in NTL and C&W are accounted for under
the cost method.
Our exchange of CWC shares for C&W and NTL shares resulted in the recognition of
a non-cash pretax gain of $3,088 million ($1,941 million after-tax, or $.71 per
diluted share) in Equity in Income (Loss) From Unconsolidated Businesses in the
consolidated statements of income, and a corresponding increase in the cost
basis of the shares received. Since the shares, which are reported as
Investments in Unconsolidated Businesses, are being accounted for as cost
investments, changes in their value since the date of the exchange have been
recognized in Accumulated Other Comprehensive Income (Loss). At December 31,
2000, the cumulative decrease in the value of the shares since the date of the
exchange of $1,407 million ($871 million after-tax, or $.32 per diluted share)
has been recognized in Accumulated Other Comprehensive Income (Loss).
Other Equity Investees
We also have international wireless investments in the Czech Republic, Slovakia,
Greece, and Indonesia. These investments are in joint ventures to build and
operate cellular networks in these countries. We also have an investment in a
company in the Philippines which provides telecommunications services in certain
regions of that country. The remaining investments include wireless partner-
ships in the U.S., real estate partnerships, publishing joint ventures, and
several other domestic and international joint ventures.
Cost Investees
Certain of our cost investments are carried at their fair value, principally
our investment in Telecom Corporation of New Zealand Limited (TCNZ), as
described below. Other cost investments are carried at their original cost,
except in cases where we have determined that a decline in the estimated fair
value of an investment is other than temporary as described below under the
section "Other Cost Investees."
Genuity
In June 2000, we issued common stock of our wholly owned Internet infrastructure
subsidiary, Genuity, through an initial public offering, effectively reducing
our common stock voting interest to 9.5%. As we no longer have the ability to
exercise significant influence over operating and financial policies of
Genuity, we changed the accounting for our investment from full consolidation of
its financial results to the cost method. This transaction was a condition of
the Bell Atlantic-GTE merger (see Note 2).
Telecom Corporation of New Zealand Limited
TCNZ is the principal provider of telecommunications services in New Zealand.
Effective May 31, 1999, we took steps to disaffiliate from TCNZ. We no longer
have significant influence over TCNZ's operating and financial policies. As a
result, in 1999, we changed the accounting for our investment from the equity
method to the cost method.
In February 1998, we issued $2,455 million of 5.75% senior exchangeable notes
due on April 1, 2003. The notes were exchangeable into 437.1 million ordinary
shares of TCNZ stock at the option of the holder, beginning September 1, 1999.
As of December 31, 2000, no notes have been delivered for exchange. See Note 12
for additional information on the TCNZ exchangeable notes.
Agreement with Metromedia Fiber Network
On March 6, 2000, we invested approximately $1.7 billion in MFN, a domestic and
international provider of dedicated fiber optic networks in major metropolitan
markets. This investment included $715 million to acquire approximately 9.5% of
the equity of MFN through the purchase of newly issued shares at $14 per share
(after two-for-one stock split). We also purchased approximately $975 million in
subordinated debt securities convertible at our option, upon receipt of
necessary government approvals, into common stock at a conversion price of $17
per share (after two-for-one stock split) or an additional 9.6% of the equity
of MFN. This investment completed a portion of our previously announced agree-
ment, as amended, with MFN, which included the acquisition of approximately $350
million of long-term capacity on MFN's fiber optic networks, beginning in 1999
through 2002. Of the $350 million, 10% was paid in November 1999, 30% was paid
in October 2000 and an additional 30% will be paid in both October 2001 and
October 2002.
Viacom Inc.
Prior to 1998, we held an investment in Viacom Inc. (Viacom), an entertainment
and publishing company. In December 1998, we accepted an offer from Viacom to
repurchase one-half of our Viacom investment, or 12 million shares of the
preferred stock (with a book value of approximately $600 million) for
approximately $564 million in cash. This preferred stock had been held by a
fully consolidated subsidiary, which had been created as part of a transaction
to monetize a portion of our Viacom investment during 1995 and 1996. This
monetization transaction involved entering into nonrecourse contracts whereby
we raised $600 million based, among other things, on the value of our investment
in Viacom. To accomplish the monetization, two fully consolidated subsidiaries
were created to manage and protect certain assets for distribution at a later
date. In addition, an outside party contributed $600 million in cash in exchange
for an interest in one of these subsidiaries, and we contributed a $600 million
note that was collateralized by certain financial assets, including the 12
million shares of Viacom preferred stock and 22.4 million shares of our common
stock. The outside party's contribution was reflected in Minority Interest, and
the issuance of common stock was reflected as Treasury Stock.
The cash proceeds from the repurchase of the 12 million shares of Viacom
preferred stock, together with additional cash, was used to repay the note that
had been contributed to one of the subsidiaries.
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
The total amount of cash was distributed to the outside party, under a
pre-existing agreement, to redeem most of that party's interest in the
subsidiary. We then purchased the remaining portion of the outside party's
interest. The transaction was accounted for as a charge to Reinvested Earnings
and a reduction from Net Income in calculating Net Income Available to Common
Shareowners in the amount of $30 million.
The remaining 12 million shares of preferred stock were repurchased by Viacom in
a second transaction in January 1999 for approximately $612 million in cash.
This transaction did not have a material effect on our consolidated results of
operations.
Other Cost Investees
Other cost investments include our Asian investments - TelecomAsia, a wireline
investment in Thailand, and Excelcomindo, a wireless investment in Indonesia. In
the third quarter of 1998, we recorded pretax charges of $485 million to Equity
in Income (Loss) from Unconsolidated Businesses to adjust our carrying values of
TelecomAsia and Excelcomindo. The charges were necessary because we determined
that the decline in the estimated fair values of these investments were other
than temporary. We determined the fair values of these investments by
discounting estimated future cash flows.
In the case of TelecomAsia, we recorded a charge of $348 million to adjust the
carrying value of the investment to its estimated fair value. We considered the
following factors in determining the charge:
. The continued weakness of the Thai currency as compared to historical
exchange rates had placed additional financial burdens on the company in
servicing U.S. dollar-denominated debt.
. The economic instability and prospects for an extended recovery period had
resulted in weaker than expected growth in TelecomAsia's business. This was
indicated by slower than expected growth in total subscribers and usage.
These factors resulted in reduced expectations of future cash flows and,
accordingly, a reduction in the value of our investment.
. The business plan for TelecomAsia contemplated cash flows from several
lines of business. Given TelecomAsia's inclination to focus on its core
wireline business, these other lines of business would not contribute
future cash flows at previously expected levels.
In the case of Excelcomindo, we recorded a charge of $137 million to adjust the
carrying value of the investment to its estimated fair value. We considered the
following factors in determining this charge:
. The continued weakness of the Indonesian currency as compared to historical
exchange rates had placed additional financial burdens on the company in
servicing U.S. dollar-denominated debt. The political unrest in Indonesia
contributed to the currency's instability.
. The economic instability and prospects for an extended recovery period had
resulted in weaker than expected growth in Excelcomindo's business. One
significant factor was the inflexible tariff regulation despite rising
costs due to inflation. This and other factors resulted in reduced
expectations of future cash flows and, accordingly, a reduction in the
value of our investment.
. Issues with cash flow required Excelcomindo's shareholders to evaluate the
future funding of the business.
- --------------------------------------------------------------------------------
Note 9
Minority Interest
- --------------------------------------------------------------------------------
Minority interests in equity of subsidiaries were as follows:
(dollars in millions)
At December 31, 2000 1999
- --------------------------------------------------------------------------------
Minority interests in consolidated subsidiaries:
Wireless joint venture (see Note 6) $ 20,894 $ -
Cellular partnerships and other 489 820
Iusacell (37.2% and 40.2%)
Subject to redemption 102 102
Nonredeemable 30 50
CTI Holdings, S.A. (59.5% and 58.0%) 103 93
Preferred securities issued by subsidiaries 212 835
-------------------------
$ 21,830 $ 1,900
=========================
Cellular Partnerships and Other
Cellular partnerships for 1999 include $286 million related to the October 1999
acquisition of several wireless properties from Ameritech Corporation, of which
a 7% interest is owned by a minority shareholder. These properties, which were
purchased for approximately $3.25 billion, are located in St. Louis, Chicago and
Central Illinois and include approximately 1.7 million subscribers. As a result
of this acquisition, we recorded goodwill and customer base of approximately
$2.85 billion. Minority interest declined in 2000 as a result of organization
structure changes initiated in connection with the formation of the wireless
joint venture.
Iusacell
Since 1993, we have invested $1.2 billion in Iusacell, a wireless
telecommunications company in Mexico. Since we control its board of directors,
we consolidate Iusacell. Goodwill related to this investment totaled
approximately $810 million and is being amortized on a straight-line basis over
a period of 25 years. At December 31, 2000 and 1999, remaining goodwill, net of
amortization and cumulative translation adjustments, was approximately $247
million and $260 million, respectively.
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Iusacell and its principal shareholders entered into an agreement (the 1998
Restructuring Agreement) to reorganize ownership of the company. This
reorganization provided for the formation of a new holding company, Nuevo Grupo
Iusacell, S.A. de C.V. (New Iusacell), with two classes of shares, one of which
is traded publicly. As contemplated in the reorganization plan, during 1999 and
1998, Iusacell borrowed $133 million from us, as a bridge loan, under a $150
million subordinated convertible debt facility that expired in June 1999 (the
Facility). In accordance with the Facility and the 1998 Restructuring Agreement,
we converted the debt into additional Series A shares at a price of $.70 per
share. We also sold a portion of those shares to the Peralta Group, the other
principal shareholder of Iusacell, for $.70 per share and received proceeds of
approximately $15 million in 1999 and $15 million in 1998. As a result of these
interim steps of the reorganization plan, our ownership of Iusacell temporarily
increased to 47.2%.
On August 4, 1999, the reorganization plan was finalized when New Iusacell
concluded an exchange and rights offering to existing Iusacell shareholders. In
addition, New Iusacell launched primary and secondary share offerings. We and
the Peralta Group participated in the secondary share offering. We received
approximately $73 million of proceeds from the secondary share offering and New
Iusacell received approximately $31 million of proceeds from the primary share
and rights offerings. As a result of the reorganization, we recorded an
adjustment to increase our contributed capital by $43 million which recognizes
the ultimate change in our ownership percentage resulting from these
transactions.
Under an agreement dated February 22, 1999, the Peralta Group can require us to
purchase from it approximately 517 million Iusacell shares for $.75 per share,
or approximately $388 million in the aggregate, by giving notice of exercise
between November 15 and December 15, 2001.
CTI Holdings, S.A.
CTI Holdings, S.A. (CTI) provides wireless services in Argentina. During 1998,
we increased our ownership interest in CTI and assumed management control
through the conversion of debt to equity, and through the purchase of additional
shares. As a result, in the fourth quarter of 1998, we changed the accounting
for our investment in CTI from the equity method to consolidation. The
consolidation of CTI increased our revenues and operating income by $126 million
and $17 million, respectively, during 1998.
Preferred Securities Issued by Subsidiaries
At December 31, 1999, preferred securities of subsidiaries included $511 million
of Series B, 8.75% Monthly Income Preferred Securities maturing in 2025. These
securities, issued by GTE Delaware, a limited partnership holding solely GTE
junior subordinated debentures, were redeemed in March 2000 at a price of $25
per share.
- --------------------------------------------------------------------------------
Note 10
Plant, Property and Equipment
- --------------------------------------------------------------------------------
The following table displays the details of plant, property and equipment, which
is stated at cost:
(dollars in millions)
At December 31, 2000 1999
- --------------------------------------------------------------------------------
Land $ 805 $ 796
Buildings and equipment 12,258 11,373
Network equipment 124,779 113,338
Furniture, office and data processing equipment 12,720 9,313
Work in progress 2,480 3,219
Leasehold improvements 1,563 1,389
Other 4,352 3,561
-------------------------
158,957 142,989
Accumulated depreciation (89,453) (80,816)
-------------------------
Total $ 69,504 $ 62,173
=========================
- --------------------------------------------------------------------------------
Note 11
Leasing Arrangements
- --------------------------------------------------------------------------------
As Lessor
We are the lessor in leveraged and direct financing lease agreements under which
commercial aircraft, rail equipment, industrial equipment, power generating
facilities, real estate property, and telecommunications and other equipment are
leased for remaining terms of 1 to 47 years as of December 31, 2000. Minimum
lease payments receivable represent unpaid rentals, less principal and interest
on third-party nonrecourse debt relating to leveraged lease transactions. Since
we have no general liability for this debt, the related principal and interest
have been offset against the minimum lease payments receivable. Minimum lease
payments receivable are subordinate to the debt and the holders of the debt have
a security interest in the leased equipment.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Finance lease receivables, which are included in Prepaid Expenses and Other and
Other Assets in our consolidated balance sheets are comprised of the following:
<TABLE>
<CAPTION>
(dollars in millions)
At December 31, 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Direct Direct
Leveraged Finance Leveraged Finance
Leases Leases Total Leases Leases Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Minimum lease payments receivable $ 3,625 $ 437 $ 4,062 $ 3,185 $ 359 $ 3,544
Estimated residual value 2,459 53 2,512 2,264 58 2,322
Unearned income (2,374) (66) (2,440) (2,151) (82) (2,233)
----------------------------------------------------------------------------
$ 3,710 $ 424 4,134 $ 3,298 $ 335 3,633
============================================================
Allowance for doubtful accounts (46) (53)
---------- ----------
Finance lease receivables, net $ 4,088 $ 3,580
---------- ----------
Current $ 126 $ 32
---------- ----------
Noncurrent $ 3,962 $ 3,548
========== ==========
</TABLE>
Accumulated deferred taxes arising from leveraged leases, which are included in
Deferred Income Taxes, amounted to $2,942 million at December 31, 2000 and
$2,538 million at December 31, 1999.
As Lessor
The following table is a summary of the components of income from leveraged
leases:
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Pretax lease income $ 135 $ 138 $ 99
Income tax expense 46 49 47
Investment tax credits 3 2 5
The future minimum lease payments to be received from noncancelable leases, net
of nonrecourse loan payments related to leveraged and direct financing leases in
excess of debt service requirements, for the periods shown at December 31, 2000,
are as follows:
(dollars in millions)
Years Capital Leases Operating Leases
- --------------------------------------------------------------------------------
2001 $ 213 $ 45
2002 192 31
2003 147 17
2004 115 13
2005 142 8
Thereafter 3,253 49
------------------------------------
Total $ 4,062 $ 163
====================================
As Lessee
We lease certain facilities and equipment for use in our operations under both
capital and operating leases. Total rent expense under operating leases amounted
to $1,052 million in 2000, $1,008 million in 1999 and $1,020 million in 1998.
Capital lease amounts included in plant, property and equipment are as follows:
(dollars in millions)
At December 31, 2000 1999
- --------------------------------------------------------------------------------
Capital leases $ 283 $ 257
Accumulated amortization (165) (155)
---------------------------------
Total $ 118 $ 102
=================================
The aggregate minimum rental commitments under noncancelable leases for the
periods shown at December 31, 2000, are as follows:
(dollars in millions)
Years Capital Leases Operating Leases
- --------------------------------------------------------------------------------
2001 $ 38 $ 571
2002 31 500
2003 24 416
2004 15 335
2005 15 254
Thereafter 76 1,224
------------------------------------
Total minimum rental commitments 199 $ 3,300
=============
Less interest and executory costs (55)
-------------
Present value of minimum lease payments 144
Less current installments (32)
-------------
Long-term obligation at December 31, 2000 $ 112
=============
As of December 31, 2000, the total minimum sublease rentals to be received in
the future under noncancelable operating subleases was $229 million.
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 12
Debt
- --------------------------------------------------------------------------------
Debt Maturing Within One Year
Debt maturing within one year is as follows:
(dollars in millions)
At December 31, 2000 1999
- --------------------------------------------------------------------------------
Notes payable
Commercial paper $ 12,659 $ 8,725
Bank loans 151 143
Short-term notes 209 228
Long-term debt maturing within one year 1,819 5,967
-------------------------------------
Total debt maturing within one year $ 14,838 $ 15,063
=====================================
Weighted-average interest rates for
notes payable outstanding at
year-end 6.5% 6.1%
Capital expenditures (primarily construction of telephone plant) are partially
financed, pending long-term financing, through bank loans and the issuance of
commercial paper payable within 12 months.
At December 31, 2000, we had in excess of $10.4 billion of unused bank lines of
credit. Certain of these lines of credit contain requirements for the payment of
commitment fees.
Substantially all of the assets of Iusacell, totaling approximately $1,201
million at December 31, 2000, are subject to lien under credit facilities with
certain bank lenders.
Long-Term Debt
Outstanding long-term debt obligations are as follows:
<TABLE>
<CAPTION>
(dollars in millions)
At December 31, Interest Rates % Maturities 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes payable 5.00 - 14.98 2001 - 2030 $ 10,667 $ 3,082
Telephone subsidiaries - debentures and first/refunding mortgage
bonds 2.00 - 7.00 2001 - 2033 9,574 12,031
7.125 - 7.75 2002 - 2033 3,990 2,465
7.85 - 10.54 2008 - 2031 2,817 2,044
Other subsidiaries - debentures and other 6.36 - 14.00 2001 - 2028 5,558 10,454
Employee stock ownership plan loans:
GTE guaranteed obligations 9.73 2005 388 453
NYNEX debentures 9.55 2010 256 281
Bell Atlantic senior notes 8.17 2000 - 70
Capital lease obligations (average rate 9.4% and 10.2%)
and other (average rate 4.8% and 6.7%) 1,337 1,275
Exchangeable notes, net of unamortized discount of $180 and $212 4.25 - 5.75 2003 - 2005 5,710 6,341
Revolving loans expected to be refinanced on a long-term basis 6.86 4,120 -
Property sale holdbacks held in escrow 6.00 13 -
Unamortized discount, net of premium (120) (110)
--------------------------
Total long-term debt, including current maturities 44,310 38,386
Less maturing within one year (1,819) (5,967)
--------------------------
Total long-term debt $ 42,491 $ 32,419
==========================
</TABLE>
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Telephone Subsidiaries' Debt
The telephone subsidiaries' debentures outstanding at December 31, 2000 include
$1,567 million that are callable. The call prices range from 100.0% to 101.51%
of face value, depending upon the remaining term to maturity of the issue. All
of our refunding mortgage bonds are also callable as of December 31, 2000. Our
first mortgage bonds also include $14 million that are callable as of December
31, 2000. In addition, our long-term debt includes $350 million that will become
redeemable in 2002 at the option of the holders. The redemption prices will be
100.0% of face value plus accrued interest.
Exchangeable Notes
In February 1998, our wholly owned subsidiary Verizon Global Funding Corp.
(formerly Bell Atlantic Financial Services, Inc.) (Verizon Global Funding)
issued $2,455 million of 5.75% senior exchangeable notes due on April 1, 2003
(TCNZ exchangeable notes). The TCNZ exchangeable notes are exchangeable into
437.1 million ordinary shares of TCNZ stock at the option of the holder,
beginning on September 1, 1999. The exchange price was established at a 20%
premium to the TCNZ share price at the pricing date of the offering. Upon
exchange by investors, we retain the option to settle in cash or by delivery of
TCNZ shares. During the period from April 1, 2001 to March 31, 2002, the TCNZ
exchangeable notes are callable at our option at 102.3% of the principal amount
and, thereafter and prior to maturity at 101.15%. As of December 31, 2000, no
notes have been delivered for exchange.
In August 1998, Verizon Global Funding issued $3,180 million of 4.25% senior
exchangeable notes due on September 15, 2005 (CWC exchangeable notes). When
issued, the CWC exchangeable notes were exchangeable into 277.6 million ordinary
shares of CWC stock at the option of the holder beginning on July 1, 2002. The
exchange price was established at a 28% premium to the CWC share price at the
pricing date of the offering. The CWC exchangeable notes were issued at a
discount, and as of December 31, 2000 and December 31, 1999, the notes had a
carrying value of $3,255 million and $3,222 million, respectively.
In connection with a restructuring of CWC described in Note 8, the CWC
exchangeable notes are now exchangeable into 128.4 million shares of C&W and
24.5 million shares of NTL. The CWC exchangeable notes are redeemable at our
option, beginning September 15, 2002, at escalating prices from 104.2% to 108.0%
of the principal amount. If the CWC exchangeable notes are not called or
exchanged prior to maturity, they will be redeemable at 108.0% of the principal
amount at that time.
The TCNZ exchangeable notes are indexed to the fair market value of the TCNZ
common stock and the CWC exchangeable notes are indexed to the fair market value
of the C&W and NTL common stock. If the price of the shares exceeds the exchange
price established at the offering date, a mark-to-market adjustment is recorded,
recognizing an increase in the carrying value of the debt obligation and a
charge to income. If the price of the shares subsequently declines, the debt
obligation is reduced (but not to less than the amortized carrying value of the
notes).
At December 31, 2000, the exchange price exceeded the combined value of the C&W
and NTL share prices, resulting in the notes recorded at their amortized
carrying value with no mark-to-market adjustments. The decrease in the debt
obligation since December 31, 1999 of $664 million was recorded as an increase
to income in 2000 ($431 million after-tax, or $.16 per diluted share). For 1999,
the CWC share price exceeded the exchange price and we recorded an increase in
the carrying value of the CWC exchangeable notes of $664 million and a
corresponding charge to income ($432 million after-tax, or $.16 per diluted
share). During 1998, no mark-to-market adjustments were recorded on the CWC
exchangeable notes. As of December 31, 2000, we have recorded no mark-to-market
adjustments for the TCNZ exchangeable notes.
Support Agreements
All of Verizon Global Funding's debt has the benefit of Support Agreements
between us and Verizon Global Funding, which guarantee payment of interest,
premium (if any) and principal outstanding should Verizon Global Funding fail to
pay. The holders of Verizon Global Funding debt do not have recourse to the
stock or assets of our operating telephone subsidiaries or TCNZ; however, they
do have recourse to dividends paid to us by any of our consolidated subsidiaries
as well as assets not covered by the exclusion. Verizon Global Funding's long-
term debt, including current portion, aggregated $12,505 million at December 31,
2000. The carrying value of the available assets reflected in our consolidated
financial statements was approximately $64.8 billion at December 31, 2000.
In 1998, we established a $2.0 billion Euro Medium Term Note Program under which
we may issue notes that are not registered with the SEC. The notes will be
issued from time to time from Verizon Global Funding, and will have the benefit
of a support agreement between Verizon Global Funding and us. There have been no
notes issued under this program.
Refinancing of Short-Term Debt
Verizon has the ability and intent to extend $4,120 million of short-term
revolving loans beyond one year. Consequently, this debt has been reclassified
to Long-Term Debt as of December 31, 2000 in the consolidated balance sheets.
Maturities of Long-Term Debt
Maturities of long-term debt outstanding at December 31, 2000 are $1.8 billion
in 2001, $6.9 billion in 2002, $4.5 billion in 2003, $2.2 billion in 2004, $5.6
billion in 2005 and $23.3 billion thereafter. These amounts include the
redeemable debt at the earliest redemption dates.
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 13
Financial Instruments
- --------------------------------------------------------------------------------
Derivatives
We limit our use of derivatives to managing risk that could negatively impact
our financing and operating flexibility, making cash flows more stable over the
long run and achieving savings over other means of financing. Our risk
management strategy is designed to protect against adverse changes in interest
rates, foreign currency exchange rates, equity prices and corporate tax rates,
as well as facilitate our financing strategies. We use several types of deriva-
tives in managing these risks, including interest rate swap agreements, interest
rate caps and floors, foreign currency forwards and options, equity options and
basis swap agreements. Derivative agreements are linked to specific liabilities
or assets and hedge the related economic exposures. We do not hold derivatives
for trading purposes.
The table that follows provides additional information about our risk
management. The notional amounts shown are used to calculate interest payments,
foreign currencies and stock to be exchanged. These amounts are not actually
paid or received, nor are they a measure of our potential gains or losses from
market risks. They do not represent our exposure in the event of nonperformance
by a counterparty or our future cash requirements. Our financial instruments
are grouped based on the nature of the hedging activity.
(dollars in millions)
Weighted-Average Rate
Notional ----------------------
At December 31, Amount Maturities Receive Pay
- --------------------------------------------------------------------------------
Interest Rate Swap Agreements
Foreign Currency Forwards/Interest Rate Swaps
1999 $ 232 2000 - 2002 5.8% 6.6%
Other Interest Rate Swaps
Pay fixed
2000 $ 270 2001 - 2005 Various 6.3%
1999 $ 636 2000 - 2005 Various 6.2%
Pay variable
2000 $ 901 2001 - 2007 7.0% Various
1999 $ 753 2000 - 2006 6.2% Various
Foreign Currency Contracts
2000 $ 613 2001 - 2005
1999 $ 517 2000 - 2004
Interest Rate Cap/Floor Agreements
2000 $ 147 2001 - 2002
1999 $ 147 2001 - 2002
Basis Swap Agreements
2000 $ 1,001 2003 - 2004
1999 $ 1,001 2003 - 2004
Call Options on Common Stock
2000 $ 80 2001 - 2006
1999 $ 99 2000 - 2006
Interest Rate Risk Management
In 1999, we used foreign currency forwards/interest rate swap agreements to
hedge the value of certain international investments. The agreements generally
required us to receive payments based on fixed interest rates and make payments
based on variable interest rates.
Other interest rate swap agreements, which sometimes incorporate options and
interest rate caps and floors are all used to adjust the interest rate profile
of our debt portfolio and allow us to achieve a targeted mix of fixed and
variable rate debt. We have entered into domestic interest rate swaps, where we
principally pay floating rates and receive fixed rates, as indicated in the
previous table, primarily based on six-month LIBOR. At December 31, 2000 and
1999, the six-month LIBOR was 6.2% and 6.1%, respectively.
Earnings generated from our leveraged lease portfolio may be affected by changes
in corporate tax rates. In order to hedge a portion of this risk, we entered
into several basis swap agreements which require us to receive payments based on
a variable interest rate (LIBOR-based) and make payments based on a tax-exempt
market index (J.J. Kenney). We account for these basis swap agreements at fair
value and recognized income (expense) of $(5) million in 2000, $12 million in
1999, and $(4) million in 1998 related to mark-to-market adjustments.
Foreign Exchange Risk Management
Our foreign exchange risk management includes the use of foreign currency
forward contracts, options and foreign currency swaps. Forward contracts and
options call for the sale or purchase, or the option to sell or purchase,
certain foreign currencies on a specified future date. These contracts are
typically used to hedge short-term foreign currency transactions and
commitments, or to offset foreign exchange gains or losses on the foreign
currency obligations. The total notional amounts of our foreign currency
derivative contracts were $613 million at December 31, 2000 and $517 million at
December 31, 1999. The contracts outstanding at December 31, 2000 have
maturities ranging from approximately one month to four years. The contracts
outstanding at December 31, 1999 had maturities ranging from three months to
four years.
In 1999, certain of the interest rate swap agreements shown in the table
contained both a foreign currency forward and a U.S. dollar interest rate swap
component. These agreements required the exchange of payments in U.S. dollars
based on specified interest rates in addition to the exchange of currencies at
the maturity of the contract. The required payments for both components were
based on the notional amounts of the contracts.
Our net equity position in unconsolidated foreign businesses as reported in our
consolidated balance sheets totaled $5,386 million at December 31, 2000 and
$5,778 million at December 31, 1999. Our most significant investments at
December 31, 2000 had operations in Italy, Venezuela and Canada. As of December
31, 1999, we also had a significant operation in the United Kingdom (CWC) which
was accounted for under the equity method. As of December 31, 2000, in
connection with a restructuring of CWC described in Note 8, our post-
restructuring investments in NTL and
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
C&W are accounted for under the cost method. We have not hedged our accounting
translation exposure to foreign currency fluctuations relative to these
investments.
Our equity income is subject to exchange rate fluctuations when our equity
investees have balances denominated in currencies other than the investees'
functional currency. We recognized $(2) million in 2000, $(9) million in 1999
and $7 million in 1998 related to such fluctuations in Equity in Income (Loss)
from Unconsolidated Businesses. In 2000, our consolidated subsidiaries
recognized a net loss of $23 million related to balances denominated in
currencies other than their functional currencies. Our consolidated subsidiaries
recognized a net gain of $14 million in 1999, primarily due to a $15 million
gain recognized by Iusacell related to balances denominated in a currency other
than its functional currency, the Mexican peso. In 1998, our consolidated
subsidiaries in Canada and the Dominican Republic recognized losses totaling $11
million. Gains and losses from consolidated subsidiaries are recorded in Other
Income and (Expense), Net.
We continually monitor the relationship between gains and losses recognized on
all of our foreign currency contracts and on the underlying transactions being
hedged to mitigate market risk.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist
primarily of temporary cash investments, short-term and long-term investments,
trade receivables, certain notes receivable, preferred stock, and derivative
contracts. Our policy is to place our temporary cash investments with major
financial institutions. Counterparties to our derivative contracts are also
major financial institutions and organized exchanges. The financial institutions
have all been accorded high ratings by primary rating agencies. We limit the
dollar amount of contracts entered into with any one financial institution and
monitor our counterparties' credit ratings. We generally do not give or receive
collateral on swap agreements due to our credit rating and those of our
counterparties. While we may be exposed to credit losses due to the
nonperformance of our counterparties, we consider the risk remote and do not
expect the settlement of these transactions to have a material effect on our
results of operations or financial condition.
Fair Values of Financial Instruments
The tables that follow provide additional information about our material
financial instruments:
Financial Instrument Valuation Method
- --------------------------------------------------------------------------------
Cash and cash equivalents and short- Carrying amounts
term investments
Short- and long-term debt (excluding Market quotes for similar terms and
capital leases and maturities or future cash flows
exchangeable notes) discounted at current rates
Exchangeable notes Market quotes
Cost investments in unconsolidated Future cash flows discounted at current
businesses and notes receivable rates, market quotes for similar
instruments or other valuation models
(dollars in millions)
2000 1999
---------------------------------------------
Carrying Carrying
At December 31, Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
Short- and long-term debt $ 51,475 $ 51,180 $ 41,008 $ 40,172
Exchangeable notes 5,710 5,694 6,341 6,417
Cost investments in
unconsolidated businesses 6,607 6,607 2,427 2,450
Notes receivable, net 1,395 1,393 13 13
The increase in our cost investments in unconsolidated businesses resulted
primarily from our investment in Genuity and our post-restructuring investments
in C&W and NTL, which are now accounted for under the cost method.
- --------------------------------------------------------------------------------
Note 14
Shareowners' Investment
- --------------------------------------------------------------------------------
Our certificate of incorporation provides authority for the issuance of up to
250 million shares of Series Preferred Stock, $.10 par value, in one or more
series, with such designations, preferences, rights, qualifications, limitations
and restrictions as the Board of Directors may determine.
We are authorized to issue up to 4.25 billion shares of common stock.
Common Stock Buyback Program
On March 1, 2000, our Board of Directors authorized a new two-year share buyback
program through which we may repurchase up to 80 million shares of common stock
in the open market. As of December 31, 2000, we had repurchased 35.1 million
shares principally under this program. The Board of Directors also rescinded a
previous authorization to repurchase up to $1.4 billion in Verizon shares.
Common Stock Split
On May 1, 1998, the Board of Directors declared a two-for-one split of Bell
Atlantic common stock, effected in the form of a 100% stock dividend to
shareholders of record on June 1, 1998 and payable on June 29, 1998.
Shareholders of record received an additional share of common stock for each
share of common stock held at the record date. We retained the par value of $.10
per share for all shares of common stock. The prior period financial information
(including share and per share data) contained in this report has been adjusted
to give retroactive recognition to this common stock split.
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 15
Earnings Per Share
- --------------------------------------------------------------------------------
The following table is a reconciliation of the numerators and denominators used
in computing earnings per share:
(dollars and shares in millions, except per share amounts)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Net Income Available To Common Shareowners
Income before extraordinary items
and cumulative effect of change in
accounting principle $ 10,810 $ 8,296 $ 5,326
Redemption of minority interest - - (30)
Redemption of investee/subsidiary
preferred stock (10) - (2)
-----------------------------------
Income available to common shareowners* 10,800 8,296 5,294
Extraordinary items, net 1,027 (36) (346)
Cumulative effect of change in
accounting principle, net (40) - -
-----------------------------------
Net income available to
common shareowners* $ 11,787 $ 8,260 $ 4,948
===================================
Basic Earnings (Loss) Per Common Share
Weighted-average shares outstanding 2,713 2,739 2,728
-----------------------------------
Income before extraordinary items and
cumulative effect of change in
accounting principle $ 3.98 $ 3.03 $ 1.94
Extraordinary items, net .37 (.01) (.13)
Cumulative effect of change in
accounting principle, net (.01) - -
-----------------------------------
Net income $ 4.34 $ 3.02 $ 1.81
===================================
Diluted Earnings (Loss) Per Common Share
Weighted-average shares outstanding 2,713 2,739 2,728
Effect of dilutive securities 24 38 31
-----------------------------------
Weighted-average shares - diluted 2,737 2,777 2,759
===================================
Income before extraordinary items and
cumulative effect of change in
accounting principle $ 3.95 $ 2.98 $ 1.92
Extraordinary items, net .37 (.01) (.13)
Cumulative effect of change in
accounting principle, net (.01) - -
-----------------------------------
Net income $ 4.31 $ 2.97 $ 1.79
===================================
* Income and Net income available to common shareowners is the same for
purposes of calculating basic and diluted earnings per share.
Certain outstanding options to purchase shares were not included in the
computation of diluted earnings per common share because to do so would have
been anti-dilutive for the period, including approximately 85.3 million shares
during 2000, .3 million shares during 1999 and 1.5 million shares during 1998.
- --------------------------------------------------------------------------------
Note 16
Stock Incentive Plans
- --------------------------------------------------------------------------------
We have stock-based compensation plans consisting of fixed stock options and
performance-based shares which include restricted stock and phantom shares. We
recognize no compensation expense for our fixed stock option plans. Compensation
expense charged to income for our performance-based share plans was $101 million
in 2000, $61 million in 1999, and $35 million in 1998. If we had elected to
recognize compensation expense based on the fair value at the date of grant for
the fixed and performance-based plan awards consistent with the provisions of
SFAS No. 123, net income and earnings per share would have been changed to the
pro forma amounts below:
(dollars in millions, except per share amounts)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Net income available to
common shareowners As reported $ 11,787 $ 8,260 $ 4,948
Pro forma 11,445 8,075 4,842
Diluted earnings per share As reported $ 4.31 $ 2.97 $ 1.79
Pro forma 4.19 2.91 1.76
We determined the pro forma amounts using the Black-Scholes option-pricing model
based on the following weighted-average assumptions:
2000 1999 1998
- --------------------------------------------------------------------------------
Dividend yield 3.3% 3.4% 3.9%
Expected volatility 27.5% 20.0% 18.4%
Risk-free interest rate 6.2% 5.3% 5.6%
Expected lives (in years) 6 6 6
The weighted-average value of options granted during 2000, 1999 and 1998 was
$13.09, $11.58 and $7.36, respectively.
The GTE stock options outstanding and exercisable at the date of the Bell
Atlantic-GTE merger were converted to Verizon stock options. The GTE option
activity and share prices have been restated, for all years presented, to
Verizon shares using the exchange ratio of 1.22 per share of Verizon common
stock to one share of GTE common stock.
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Our stock incentive plans are described below:
Fixed Stock Option Plans
We have fixed stock option plans for substantially all employees. Options to
purchase common stock were granted at a price equal to the market price of the
stock at the date of grant. The options generally vest over three years and have
a maximum term of ten years.
We have several plans for employees not otherwise covered under the plans above,
including the 1985 Incentive Stock Option Plan, the 1994 Option Plus Plan, the
1990 and 1995 Stock Option Plans and the Long-Term Incentive Plan.
We have established several broad-based stock option plans covering
substantially all employees, other than key employees. These include the 1992,
1994 and 1996 NYNEX plans, the 1996 GTE Partnership Shares Plan and the 2000
Verizon Founders' Grant.
This table summarizes our fixed stock option plans:
Stock Options Weighted-Average
(in thousands) Exercise Price
- --------------------------------------------------------------------------------
Outstanding, December 31, 1997 131,753 $ 31.24
Granted 41,999 45.48
Exercised (33,953) 30.02
Canceled/forfeited (4,746) 36.77
-------------
Outstanding, December 31, 1998 135,053 36.01
Granted 55,423 55.21
Exercised (30,189) 34.05
Canceled/forfeited (4,123) 43.19
-------------
Outstanding, December 31, 1999 156,164 42.76
Granted 98,022 48.93
Exercised (14,663) 35.57
Canceled/forfeited (6,955) 51.39
-------------
Outstanding, December 31, 2000 232,568 45.58
=============
Options exercisable, December 31,
1998 76,819 31.53
1999 94,719 35.79
2000 111,021 40.97
The following table summarizes information about fixed stock options outstanding
as of December 31, 2000:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
--------------------------------------------------------------------------------------------------------------
Range of Shares Weighted-Average Weighted-Average Shares Weighted-Average
Exercise Prices (in thousands) Remaining Life Exercise Price (in thousands) Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 20.00 - 29.99 18,702 2.9 years $ 25.40 18,702 $ 25.40
30.00 - 39.99 38,805 5.7 34.77 38,805 34.77
40.00 - 49.99 87,847 8.8 44.10 24,970 45.44
50.00 - 59.99 85,107 8.6 56.05 27,267 55.35
60.00 - 69.99 2,107 8.8 62.42 1,277 63.05
----------- -----------
Total 232,568 7.7 45.58 111,021 40.97
=========== ===========
</TABLE>
Performance-Based Share Plans
Performance-based share plans provided for the granting of awards to certain key
employees of the former Bell Atlantic, which are now fully vested. Certain key
employees of the former GTE participated in the Equity Participation Program
(EPP). Under EPP, a portion of their cash bonuses were deferred and held in
restricted stock units for a minimum of three years. In 2000, certain key
Verizon employees were granted restricted stock units which vest over a three to
five year period.
The number of shares outstanding in the performance-based share plans were
4,387,000, 2,133,000 and 1,985,000 at December 31, 2000, 1999 and 1998,
respectively.
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 17
Employee Benefits
- --------------------------------------------------------------------------------
We maintain noncontributory defined benefit pension plans for substantially all
employees. The postretirement healthcare and life insurance plans for our
retirees and their dependents are both contributory and noncontributory and
include a limit on the company's share of cost for certain recent and future
retirees. We also sponsor defined contribution savings plans to provide
opportunities for eligible employees to save for retirement on a tax-deferred
basis and to encourage employees to acquire and maintain an equity interest in
our company.
Pension and Other Postretirement Benefits
Pension and other postretirement benefits for the majority of our employees are
subject to collective bargaining agreements. Modifications in benefits have been
bargained from time to time, and we may also periodically amend the benefits in
the management plans. At December 31, 2000, shares of our common stock accounted
for less than 1% of the plan assets.
The following tables summarize benefit costs, as well as the benefit
obligations, plan assets, funded status and rate assumptions associated with
pension and postretirement healthcare and life insurance benefit plans.
Benefit Cost
<TABLE>
<CAPTION>
(dollars in millions)
Pension Healthcare and Life
---------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 612 $ 675 $ 682 $ 121 $ 149 $ 145
Interest cost 2,562 2,485 2,506 909 822 827
Expected return on plan assets (4,686) (4,089) (3,852) (441) (373) (326)
Amortization of transition asset (127) (150) (158) - - -
Amortization of prior service cost (66) (94) (107) (28) (22) (26)
Actuarial (gain), net (623) (241) (171) (124) (83) (111)
---------------------------------------------------------------------------
Net periodic benefit (income) cost (2,328) (1,414) (1,100) 437 493 509
---------------------------------------------------------------------------
Termination benefits, curtailments and other, net (250) 152 849 - - 3
Settlement gains (911) (663) (9) (43) (8) 148
---------------------------------------------------------------------------
Subtotal (1,161) (511) 840 (43) (8) 151
---------------------------------------------------------------------------
Total (income) cost $ (3,489) $ (1,925) $ (260) $ 394 $ 485 $ 660
===========================================================================
</TABLE>
Assumptions
The actuarial assumptions used are based on market interest rates, past
experience, and management's best estimate of future economic conditions.
Changes in these assumptions may impact future benefit costs and obligations.
The weighted-average assumptions used in determining expense and benefit
obligations are as follows:
<TABLE>
<CAPTION>
Pension Healthcare and Life
--------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate at end of year 7.75% 8.00% 7.00% 7.75% 8.00% 7.00%
Long-term rate of return on plan assets for the year 9.25 9.00 8.95 9.10 8.90 8.80
Rate of future increases in compensation at end of year 5.00 4.80 4.45 4.00 4.20 4.00
Medical cost trend rate at end of year 5.00 5.75 6.20
Ultimate (year 2001) 5.00 5.15 5.15
Dental cost trend rate at end of year 3.50 3.50 3.50
Ultimate (year 2002) 3.00 3.00 3.00
</TABLE>
The medical cost trend rate significantly affects the reported postretirement
benefit costs and obligations. A one-percentage-point change in the assumed
healthcare cost trend rate would have the following effects:
<TABLE>
<CAPTION>
(dollars in millions)
One-Percentage-Point Increase Decrease
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on 2000 total service and interest cost $ 87 $ (71)
Effect on postretirement benefit obligation as of December 31, 2000 904 (745)
</TABLE>
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions)
Pension Healthcare and Life
-------------------------------------------------------------
At December 31, 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit Obligation
Beginning of year $ 32,996 $ 36,869 $ 11,168 $ 12,764
Service cost 612 675 121 149
Interest cost 2,562 2,485 909 822
Plan amendments 564 433 33 (1)
Actuarial (gain) loss, net 1,275 (3,208) 1,067 (1,741)
Benefits paid (3,371) (3,023) (828) (851)
Termination benefits - 148 - -
Divestitures (215) (538) (43) (2)
Settlements and curtailments (1,407) (922) (30) 25
Other 120 77 - 3
-------------------------------------------------------------
End of year 33,136 32,996 12,397 11,168
-------------------------------------------------------------
Fair Value of Plan Assets
Beginning of year 59,141 54,915 5,580 5,019
Actual return on plan assets 1,294 9,129 (128) 692
Company contribution 138 115 243 386
Benefits paid (3,371) (3,023) (457) (518)
Settlements (1,764) (1,359) (2) -
Divestitures (216) (683) - -
Other 3 47 - 1
-------------------------------------------------------------
End of year 55,225 59,141 5,236 5,580
-------------------------------------------------------------
Funded Status
End of year 22,089 26,145 (7,161) (5,588)
Unrecognized
Actuarial (gain), net (15,153) (21,973) (2,019) (3,748)
Prior service (benefit) cost 54 (560) (407) (452)
Transition asset (272) (427) - -
-------------------------------------------------------------
Net amount recognized $ 6,718 $ 3,185 $ (9,587) $ (9,788)
=============================================================
Amounts recognized on the balance sheet
Prepaid pension cost $ 8,626 $ 6,218 $ - $ -
Employee benefit obligation (1,981) (3,072) (9,587) (9,788)
Other assets 21 24 - -
Accumulated other comprehensive loss 52 15 - -
-------------------------------------------------------------
Net amount recognized $ 6,718 $ 3,185 $ (9,587) $ (9,788)
=============================================================
</TABLE>
Changes in benefit obligations were caused by factors including changes in
actuarial assumptions (see "Assumptions"), plan amendments and special
termination benefits. In 2000 and 1999, the former GTE's lump-sum pension
distributions surpassed the settlement threshold equal to the sum of service
cost and interest cost requiring settlement gain or loss recognition for all
cash settlements for each year.
Retirement Incentives
In 1993, the former Bell Atlantic announced a restructuring plan which included
an accrual of approximately $1.1 billion (pretax) for severance and
postretirement medical benefits under an involuntary force reduction plan.
Since the inception of the retirement incentive program, Bell Atlantic had
recorded additional costs totaling approximately $3.0 billion (pretax) through
December 31, 1998. The retirement incentive costs are included in Operations and
Support Expense in our consolidated statements of income and the accrued
liability is a component of Employee Benefit Obligations reported in our
consolidated balance sheets. The additional costs were comprised of special
termination pension and postretirement benefit amounts, as well as employee
costs for other items. In 1998, we recorded $1,021 million for costs associated
with 7,299 employees accepting the retirement incentive offer.
The retirement incentive program covering management employees ended on March
31, 1997 and the program covering other employees was completed in September
1998.
Savings Plan and Employee Stock Ownership Plans
We maintain four leveraged employee stock ownership plans (ESOPs). Under these
plans, we match a certain percentage of eligible employee contributions with
shares of our common stock. In 1989, two leveraged ESOPs were established by
Bell Atlantic and one leveraged ESOP was established by GTE to purchase Bell
Atlantic and GTE common stock to fund matching contributions. In 1990, NYNEX
established a leveraged ESOP to fund matching contributions to management
employees and purchased shares of NYNEX common stock. At the date of the
respective mergers, NYNEX and GTE common stock outstanding was converted to Bell
Atlantic shares using an exchange ratio of 0.768 and 1.22 per share of Bell
Atlantic common stock to one share of NYNEX and GTE common stock, respectively.
F-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Common stock is allocated from all leveraged ESOP trusts based on the proportion
of principal and interest paid on ESOP debt in a year to the remaining principal
and interest due over the term of the debt. At December 31, 2000, the number of
unallocated and allocated shares of common stock was 25 million and 56 million,
respectively. All leveraged ESOP shares are included in earnings per share
computations.
We recognize leveraged ESOP cost based on the modified shares allocated method
for the Bell Atlantic and GTE leveraged ESOP trusts which held securities before
December 15, 1989 and the shares allocated method for the NYNEX leveraged ESOP
trust which held securities after December 15, 1989.
ESOP cost and trust activity consist of the following:
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Compensation $ 161 $ 176 $ 145
Interest incurred 69 86 102
Dividends (43) (50) (61)
-------------------------------------
Net leveraged ESOP cost 187 212 186
Reduced ESOP cost (19) (74) (13)
-------------------------------------
Total ESOP cost $ 168 $ 138 $ 173
=====================================
Dividends received for debt service $ 87 $ 134 $ 113
Total company contributions to
leveraged ESOP trusts $ 151 $ 265 $ 197
In addition to the ESOPs described above, we maintain savings plans for
non-management employees and employees of certain subsidiaries. Compensation
expense associated with these savings plans was $219 million in 2000, $161
million in 1999, and $107 million in 1998.
- --------------------------------------------------------------------------------
Note 18
Income Taxes
- --------------------------------------------------------------------------------
The components of income tax expense from continuing operations are as follows:
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Current
Federal $ 3,165 $ 2,612 $ 2,237
Foreign 105 83 325
State and local 657 379 513
-------------------------------------
3,927 3,074 3,075
-------------------------------------
Deferred
Federal 2,969 1,708 562
Foreign (60) 148 (14)
State and local 553 338 142
-------------------------------------
3,462 2,194 690
-------------------------------------
Investment tax credits (28) (46) (51)
Other credits (352) (350) (239)
-------------------------------------
Total income tax expense $ 7,009 $ 4,872 $ 3,475
=====================================
The following table shows the principal reasons for the difference between the
effective income tax rate and the statutory federal income tax rate:
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income tax,
net of federal tax benefits 4.3 3.5 4.8
Write-down of foreign investments - - 2.2
Other, net - (1.5) (2.5)
--------------------------------
Effective income tax rate 39.3% 37.0% 39.5%
================================
Deferred taxes arise because of differences in the book and tax bases of certain
assets and liabilities. Significant components of deferred tax liabilities
(assets) are shown in the following table:
(dollars in millions)
At December 31, 2000 1999
- --------------------------------------------------------------------------------
Depreciation $ 5,360 $ 6,128
Employee benefits (1,623) (3,378)
Leasing activity 2,953 2,776
Net unrealized gains (losses) on
marketable securities (515) 664
Partnership investments 5,925 593
Exchange of CWC stock 1,147 -
Other-net 589 (425)
-----------------------
13,836 6,358
Valuation allowance 441 326
-----------------------
Net deferred tax liability $ 14,277 $ 6,684
=======================
At December 31, 2000, undistributed earnings of our foreign subsidiaries
amounted to approximately $3.6 billion. Deferred income taxes are not provided
on these earnings as it is intended that the earnings are indefinitely invested
in these entities. It is not practical to estimate the amount of taxes that
might be payable upon the remittance of the undistributed earnings.
The valuation allowance primarily represents the tax benefits of certain state
net operating loss carryforwards and other deferred tax assets which may expire
without being utilized. During 2000, the valuation allowance increased $115
million. This increase primarily relates to state net operating loss
carryforwards and the write-down of investments for which tax benefits may never
be realized.
F-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 19
Segment Information
- --------------------------------------------------------------------------------
We have four reportable segments, which we operate and manage as strategic
business units and organize by products and services. We measure and evaluate
our reportable segments based on adjusted net income, which excludes unallocated
corporate expenses and other adjustments arising during each period. The other
adjustments include transactions that management excludes in assessing
business unit performance due primarily to their nonrecurring and/or
non-operational nature. Although such transactions are excluded from the
business segment results, they are included in reported consolidated earnings.
Our segments and their principal activities consist of the following:
Segment Description
- --------------------------------------------------------------------------------
Domestic Telecom Domestic wireline communications services, principally
representing our 16 operating telephone subsidiaries that
provide local telephone services in over 30 states. These
services include voice and data transport, enhanced and custom
calling features, network access, directory assistance,
private lines and public telephones. This segment also provides
customer premises equipment distribution, data solutions and
systems integration, billing and collections, Internet access
services, research and development and inventory management
services. In addition, this segment includes our long distance
services.
Domestic Domestic wireless products and services including
Wireless cellular, PCS and paging services and equipment sales.
International International wireline and wireless communications opera-
tions, investments and management contracts in the Americas,
Europe, Asia and the Pacific.
Information Domestic and international publishing businesses including
Services print and electronic directories and Internet-based shopping
guides, as well as website creation and other electronic
commerce services. This segment has operations principally in
North America, Europe, Asia and Latin America.
Geographic Areas
Our foreign investments are located principally in Europe, the Americas, and
Asia. Domestic and foreign operating revenues are based on the location of
customers. Long-lived assets consist of plant, property and equipment (net of
accumulated depreciation) and investments in unconsolidated businesses. The
table below presents financial information by major geographic area:
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Domestic
Operating revenues $ 62,066 $ 55,802 $ 53,343
Long-lived assets 71,180 61,944 60,049
Foreign
Operating revenues 2,641 2,392 3,732
Long-lived assets 11,439 10,406 7,672
Consolidated
Operating revenues 64,707 58,194 57,075
Long-lived assets 82,619 72,350 67,721
F-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Reportable Segments
The following table provides adjusted operating financial information for our
four reportable segments:
<TABLE>
<CAPTION>
(dollars in millions)
Domestic Domestic Information Total Segments
2000 Telecom Wireless International Services Adjusted
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
External revenues $ 42,597 $ 14,194 $ 1,976 $ 4,031 $ 62,798
Intersegment revenues 746 42 - 113 901
-------------------------------------------------------------------
Total operating revenues 43,343 14,236 1,976 4,144 63,699
Depreciation & amortization 8,752 2,894 355 74 12,075
Equity in income from unconsolidated businesses 35 55 672 5 767
Interest income 116 66 28 13 223
Interest expense (1,767) (617) (398) (25) (2,807)
Income tax expense (benefit) 3,311 345 (53) 788 4,391
Net income 5,135 444 733 1,238 7,550
Assets 78,112 56,029 14,466 3,148 151,755
Investments in unconsolidated businesses 24 133 8,919 28 9,104
Capital expenditures 12,119 4,322 586 48 17,075
1999
- ------------------------------------------------------------------------------------------------------------------------------------
External revenues $ 41,075 $ 7,632 $ 1,714 $ 3,971 $ 54,392
Intersegment revenues 648 21 - 115 784
-------------------------------------------------------------------
Total operating revenues 41,723 7,653 1,714 4,086 55,176
Depreciation & amortization 8,200 1,100 264 76 9,640
Equity in income (loss) from unconsolidated businesses 10 1 547 (1) 557
Interest income 54 5 17 15 91
Interest expense (1,623) (247) (268) (20) (2,158)
Income tax expense (benefit) 3,249 443 (9) 780 4,463
Net income 5,020 628 618 1,211 7,477
Assets 69,997 16,590 12,543 2,829 101,959
Investments in unconsolidated businesses 23 1,464 7,936 35 9,458
Capital expenditures 10,087 1,497 521 50 12,155
1998
- ------------------------------------------------------------------------------------------------------------------------------------
External revenues $ 39,924 $ 6,634 $ 1,468 $ 3,692 $ 51,718
Intersegment revenues 471 18 - 126 615
-------------------------------------------------------------------
Total operating revenues 40,395 6,652 1,468 3,818 52,333
Depreciation & amortization 7,711 959 233 77 8,980
Equity in income (loss) from unconsolidated businesses 16 (89) 462 22 411
Interest income 106 - 33 8 147
Interest expense (1,665) (203) (223) (22) (2,113)
Income tax expense (benefit) 2,938 174 (35) 724 3,801
Net income 4,750 962 510 1,145 7,367
Assets 66,008 11,447 10,210 2,738 90,403
Investments in unconsolidated businesses 17 1,413 3,864 34 5,328
Capital expenditures 10,000 1,160 930 62 12,152
</TABLE>
F-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
Reconciliation To Consolidated Financial Information
A reconciliation of the adjusted results for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
(dollars in millions)
2000 1999 1998
- --------------------------------------------------------------------------------
Operating Revenues
Total reportable segments $ 63,699 $ 55,176 $ 52,333
Genuity and GTE Government Systems 529 1,789 1,773
Domestic Telecom operations sold
(see Note 3) 766 1,151 1,124
Deconsolidation of BC TELECOM - - 2,153
Merger-related regulatory settlements (69) - -
Impact of accounting change
(SAB No. 101) - 117 -
Corporate, eliminations and other (218) (39) (308)
------------------------------------
Consolidated operating revenues -
reported $ 64,707 $ 58,194 $ 57,075
====================================
Net Income
Total reportable segments $ 7,550 $ 7,477 $ 7,367
Corporate and other 98 116 (354)
Domestic Telecom operations sold 314 475 345
Bell Atlantic-GTE merger-related costs (749) - -
Merger transition and integration costs (316) (126) (121)
Gains on sales of assets, net 1,987 819 (222)
Gain on CWC stock 1,941 - -
Settlement gains and enhancement costs 564 410 (645)
Mark-to-market adjustment for C&W/NTL
exchangeable notes 431 (432) -
Genuity loss (281) (325) (258)
NorthPoint investment write-off (153) - -
International restructuring (50) - -
Other charges and special items (526) (126) (786)
Extraordinary items 1,027 (36) (346)
Impact of accounting change
(SAB No. 101) (40) 8 -
------------------------------------
Consolidated net income - reported $ 11,797 $ 8,260 $ 4,980
====================================
Assets
Total reportable segments $151,755 $101,959 $ 90,403
Reconciling items 12,980 10,871 7,761
------------------------------------
Consolidated assets $164,735 $112,830 $ 98,164
====================================
Pension settlement gains before tax of $911 million, $663 million and $9 million
($564 million, $410 million and $6 million after-tax) were recognized for the
twelve month periods ended December 31, 2000, 1999 and 1998, respectively. These
gains were recorded in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." They relate to the settlement of pension obligations for
former GTE employees through the purchase of annuities or otherwise.
Prior to 1998, we announced a restructuring plan which included an accrual of
approximately $1.1 billion (pretax) for severance and postretirement medical
benefits under an involuntary force reduction plan. Since the inception of the
retirement incentive program, we recorded additional costs totaling
approximately $3.0 billion (pretax) through December 31, 1998. In 1998, we
recorded a pretax charge of $1,021 million ($651 million after-tax). The
additional costs were comprised of special termination pension and postretire-
ment benefit amounts, as well as employee costs for other items.
As described in Note 1, Verizon adopted the provisions of SAB No. 101 effective
January 1, 2000. The revenue reclassification in 1999 that would have been
recorded had SAB No. 101 been effective January 1, 1999 would have been a
reduction of revenues of $117 million and a reduction of operating costs and
expenses of $109 million.
Corporate, eliminations and other includes unallocated corporate expenses,
intersegment eliminations recorded in consolidation, the results of other
businesses such as lease financing, and asset impairments and expenses that are
not allocated in assessing segment performance due to their nonrecurring nature.
We generally account for intersegment sales of products and services and asset
transfers at current market prices. We are not dependent on any single customer.
F-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 20
Comprehensive Income
- --------------------------------------------------------------------------------
Comprehensive income consists of net income and other gains and losses affecting
shareowners' investment that, under generally accepted accounting principles,
are excluded from net income.
Changes in the components of other comprehensive income (loss), net of income
tax expense (benefit), are as follows:
<TABLE>
<CAPTION>
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign Currency Translation Adjustments, net of taxes of $1, $1 and $2 $ (262) $ (41) $ (290)
--------------------------------------------------
Unrealized Gains (Losses) on Marketable Securities
Unrealized gains (losses), net of taxes of $(1,077), $648 and $22 (1,877) 1,198 24
Less: reclassification adjustments for gains realized in net
income, net of taxes of $51, $ - and $13 88 1 10
--------------------------------------------------
Net unrealized gains (losses) on marketable securities (1,965) 1,197 14
--------------------------------------------------
Minimum Pension Liability Adjustment, net of taxes of $(13), $5 and $(10) (24) 7 (17)
--------------------------------------------------
Other Comprehensive Income (Loss) $ (2,251) $ 1,163 $ (293)
==================================================
</TABLE>
The net unrealized losses on marketable securities in 2000 primarily relate to
our investments in MFN, C&W and NTL (see Note 7). The increase in unrealized
gains on marketable securities for 1999 is principally due to the change in
accounting for our investment in TCNZ from the equity method to the cost method
(see Note 8).
The components of accumulated other comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
(dollars in millions)
At December 31, 2000 1999
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation adjustments $ (1,408) $ (1,146)
Unrealized gains (losses) on marketable securities (734) 1,231
Minimum pension liability adjustment (34) (10)
----------------------------------
Accumulated other comprehensive income (loss) $ (2,176) $ 75
==================================
</TABLE>
F-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 21
Additional Financial Information
- --------------------------------------------------------------------------------
The tables that follow provide additional financial information related to our
consolidated financial statements:
Income Statement Information
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Depreciation expense $ 10,276 $ 9,550 $ 9,402
Taxes other than income 2,210 2,218 2,018
Interest expense incurred 3,720 2,762 2,822
Capitalized interest (230) (146) (117)
Advertising expense 1,399 796 853
Balance Sheet Information
(dollars in millions)
At December 31, 2000 1999
- --------------------------------------------------------------------------------
Accounts Payable and Accrued
Liabilities
Accounts payable $ 6,247 $ 5,165
Accrued expenses 3,063 1,466
Accrued vacation pay 1,043 945
Accrued salaries and wages 1,346 943
Interest payable 574 556
Accrued taxes 1,692 1,803
--------------------------------
$ 13,965 $ 10,878
================================
Other Current Liabilities
Advance billings and customer deposits $ 1,162 $ 1,123
Dividends payable 1,053 1,061
Other 3,218 1,625
--------------------------------
$ 5,433 $ 3,809
================================
Cash Flow Information
(dollars in millions)
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Cash Paid
Income taxes, net of amounts refunded $ 3,201 $ 1,997 $ 2,223
Interest, net of amounts capitalized 2,065 2,628 2,522
Supplemental investing and financing transactions:
Assets acquired in
business combinations 6,944 3,960 -
Liabilities assumed in
business combinations 3,667 259 -
Debt assumed in
business combinations 4,387 490 -
- --------------------------------------------------------------------------------
Note 22
Commitments and Contingencies
- --------------------------------------------------------------------------------
In connection with certain state regulatory incentive plan commitments, we
have deferred revenues, which will be recognized as the commitments are met or
obligations are satisfied under the plans. In addition, several state and
federal regulatory proceedings may require our telephone subsidiaries to refund
a portion of the revenues collected in the current and prior periods. There are
also various legal actions 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.
Verizon Wireless was the winning bidder for 113 licenses in the FCC's recently
concluded auction of 1.9 GHz spectrum. Verizon Wireless added capacity for
growth and advanced services in markets including New York, Boston, Los Angeles,
Chicago, Philadelphia, Washington, D.C., Seattle and San Francisco, for a total
price of approximately $8.8 billion, $1.6 billion of which was paid in February
2001 and the remainder will be paid when the FCC requires payment, which is
expected to occur in 2001, and may be as early as March 2001.
During the fourth quarter of 2000, Verizon Wireless agreed to acquire Price
Communications Wireless, a wholly owned subsidiary of Price Communications, for
$1.5 billion in Verizon Wireless stock and the assumption of $550 million in net
debt. The transaction is conditioned upon completion of a Verizon Wireless IPO.
The deal will significantly expand the company's footprint in the Southeastern
U.S. and add approximately 500,000 customers.
F-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 23
Quarterly Financial Information (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in millions, except per share amounts)
Income before Extraordinary Items and
Cumulative Effect of Change in Accounting Principle
---------------------------------------------------
Operating Operating Per Share- Per Share-
Quarter Ended Revenues* Income Amount Basic Diluted Net Income
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000
March 31 (a) $ 14,532 $ 3,828 $ 1,564 $ .57 $ .56 $ 1,515
June 30 (b) 16,769 4,609 4,904 1.80 1.79 4,904
September 30 (c) 16,533 4,943 2,640 .97 .97 3,466
December 31 16,873 3,378 1,702 .63 .62 1,912
1999
March 31 (d) $ 13,761 $ 3,787 $ 2,072 $ .76 $ .75 $ 2,042
June 30 14,513 3,624 1,948 .71 .70 1,942
September 30 (e) 14,655 4,548 2,538 .92 .91 2,538
December 31 (f) 15,265 3,994 1,738 .64 .63 1,738
</TABLE>
* The impact of adopting SAB No. 101 on previously reported revenues in 2000 is
as follows:
Quarters Ended March 31 June 30 September 30
- ------------------------------------------------------------------------------
Previously reported $ 14,549 $16,787 $ 16,557
Impact of SAB No. 101 (17) (18) (24)
-----------------------------------------
Currently reported $ 14,532 $16,769 $ 16,533
=========================================
(a) Results of operations for the first quarter of 2000 include a $536 million
(after-tax) loss on mark-to-market adjustment for CWC exchangeable notes.
(b) Results of operations for the second quarter of 2000 include a $722 million
(after-tax) gain on mark-to-market adjustment for CWC exchangeable notes, a
$1,941 million (after-tax) gain on exchange of CWC stock, and a $1,811
million (after-tax) gain related to the sale of overlapping wireless
properties and non-strategic domestic access lines, partially offset by a
$1,032 million (after-tax) charge for direct merger, severance and
transition costs related to the Bell Atlantic-GTE merger.
(c) Results of operations for the third quarter of 2000 include a $245 million
(after-tax) gain on mark-to-market adjustment for CWC exchangeable notes, a
$1,085 million (after-tax) gain on the sale of non-strategic domestic
access lines and an extraordinary gain of $826 million (after-tax) as a
result of the wireless properties sold.
(d) Results of operations for the first quarter of 1999 include a $308 million
(after-tax) gain on the merger of BC TELECOM and TELUS in January 1999.
(e) Results of operations for the third quarter of 1999 include a $445 million
(after-tax) gain associated with the sale of substantially all of the GTE
Government Systems business to General Dynamics.
(f) Results of operations for the fourth quarter of 1999 include a $432 million
(after-tax) loss on mark-to-market adjustment for CWC exchangeable notes.
Income before extraordinary items and cumulative effect of change in accounting
principle per common share is computed independently for each quarter and the
sum of the quarters may not equal the annual amount.
F-56
<PAGE>
VERIZON COMMUNICATIONS INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2000, 1999 and 1998
(Dollars in Millions)
<TABLE>
<CAPTION>
Additions
--------------------------------
Charged to
Balance at Other Balance at
Beginning Charged To Accounts-- Deductions-- End of
Description of Period Expenses Note (a) Note (b) Period
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible
Accounts Receivable:
Year 2000 $1,170 $1,409 $974 $1,991 $1,562
Year 1999 988 1,133 597 1,548 1,170
Year 1998 945 929 660 1,546 988
Valuation Allowance for
Deferred Tax Assets:
Year 2000 $ 326 $ 115 $ - $ - $ 441
Year 1999 317 9 - - 326
Year 1998 79 276 - 38 317
Discontinued Businesses:
Year 2000 $ 353 $ (52) $ - $ 15 $ 286
Year 1999 223 184 - 54 353
Year 1998 239 17 17 50 223
Merger-Related Costs:
Year 2000 $ 473 $1,056 $ - $ 746 $ 783
Year 1999 598 - - 125 473
Year 1998 811 - - 213 598
</TABLE>
- ------------
(a) Allowance for Uncollectible Accounts Receivable includes (1) amounts
previously written off which were credited directly to this account when
recovered, and (2) accruals charged to accounts payable for anticipated
uncollectible charges on purchases of accounts receivable from others which
were billed by us.
(b) Amounts written off as uncollectible or transferred to other accounts or
utilized (except for the valuation allowance for deferred tax assets).
F-57
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.A
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>RESTATED CERTIFICATE OF INCORPORATION
<TEXT>
<PAGE>
Exhibit 3a
- --------------------------------------------------------------------------------
VERIZON COMMUNICATIONS INC.
RESTATED CERTIFICATE
OF
INCORPORATION
- --------------------------------------------------------------------------------
October 11, 2000
- --------------------------------------------------------------------------------
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
VERIZON COMMUNICATIONS INC.
Verizon Communications Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Verizon Communications Inc., and the
name under which the corporation was originally incorporated is Bell Atlantic
Corporation. The date of filing of its original Certificate of Incorporation
with the Secretary of State was October 7, 1983.
2. This Restated Certificate of Incorporation only restates and
integrates and does not further amend the provisions of the Certificate of
Incorporation of the corporation as heretofore amended or supplemented and there
is no discrepancy between those provisions and the provisions of this Restated
Certificate of Incorporation.
3. The text of the Certificate of Incorporation as amended or
supplemented heretofore is hereby restated without further amendments or changes
to read as herein set forth in full in Exhibit A attached hereto.
4. This Restated Certificate of Incorporation was duly adopted by the
Board of Directors in accordance with Section 245 of the General Corporation Law
of the State of Delaware.
5. This Restated Certificate of Incorporation shall be effective upon
filing with the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, said Verizon Communications Inc. has caused this
Certificate to be signed by Marianne Drost, its Senior Vice President, Deputy
General Counsel and Corporate Secretary this ____________ day of October, 2000.
VERIZON COMMUNICATIONS INC.
By _____________________________
Marianne Drost
Senior Vice President, Deputy
General Counsel and Corporate
Secretary
<PAGE>
EXHIBIT A
RESTATED CERTIFICATE
OF INCORPORATION
OF
VERIZON COMMUNICATIONS INC.
1. Corporate Name. The name of the corporation is Verizon
--------------
Communications Inc. (the "Corporation").
2. Registered Office. The address of the registered office of the
-----------------
Corporation is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of the registered agent of the Corporation at such address is
The Corporation Trust Company.
3. Corporate Purpose. The nature of the business of the Corporation or
-----------------
the purposes of the Corporation to be conducted or promoted is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware, as amended from time to time (the
"GCL").
4. Capital Stock.
-------------
A. Authorized Shares. The total number of shares of all classes of
-----------------
stock which the Corporation shall have the authority to issue is 4,500,000,000
shares, of which 4,250,000,000 shares are Common Stock, $.10 par value per
share, and 250,000,000 shares Series Preferred Stock, $.10 par value.
B. Authority of Board to Fix Terms of Series Preferred Stock. The
---------------------------------------------------------
Board of Directors of the Corporation is hereby expressly authorized at any time
and from time to time to provide for the issuance of all or any shares of the
Series Preferred Stock in one or more classes or series, and to fix for each
such class or series such voting powers, full or limited, or no voting powers,
and such distinctive designations, preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions adopted by the Board of Directors providing for the issuance of such
class or series and to the fullest extent as may now or hereafter be permitted
by the GCL, including, without limiting the generality of the foregoing, the
authority to provide that any such class or series may be (i) subject to
redemption at such time or times and at such price or prices; (ii) entitled to
receive dividends (which may be cumulative or non-cumulative) at such rates, on
such conditions, and at such times, and payable in preference to, or in such
relation to, the dividends payable on any other class or classes or any other
series; (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same
1
<PAGE>
or any other class or classes of stock, or other securities or property, of the
Corporation at such price or prices or at such rates of exchange and with such
adjustments; all as may be stated in such resolution or resolutions. Unless
otherwise provided in such resolution or resolutions, shares of Series Preferred
Stock of such class or series which shall be issued and thereafter acquired by
the Corporation through purchase, redemption, exchange, conversion or otherwise
shall return to the status of authorized but unissued Series Preferred Stock.
5. Board of Directors of the Corporation.
-------------------------------------
A. Responsibilities. The business and affairs of the Corporation
----------------
shall be managed under the direction of the Board of Directors.
B. Number. Subject to the right of the Board of Directors to
------
increase or decrease the number of directors pursuant to this Article 5.B., the
Board of Directors shall consist of 22 directors. The Board of Directors may
increase or decrease the number of directors by the affirmative vote of (a)
three-quarters of the entire Board of Directors if the effective date of such
increase or decrease is prior to the date on which Raymond W. Smith ceases to be
Chairman of the Corporation (hereinafter referred to as the "Retirement Date"),
and (b) a majority of the entire Board of Directors if the effective date of the
increase or decrease is on or after the Retirement Date.
C. Elections of Directors. Elections of directors need not be by
----------------------
written ballot unless the Bylaws of the Corporation shall so provide.
D. Nominations for Directors. Except as otherwise permitted in
-------------------------
Article 5.E., only persons who are nominated in accordance with the procedures
established in the Bylaws shall be eligible for election as directors.
E. Vacancies. Vacancies and newly created directorships may be
---------
filled by the Board of Directors, provided that on or prior to the Retirement
Date, such action shall be in accordance with the method for the selection of
directors set forth in Section 4.16 of the Bylaws.
6. Bylaws. The Board of Directors is expressly authorized from time to
------
time to make, alter or repeal the Bylaws of the Corporation in the manner set
forth in the Bylaws from time to time.
2
<PAGE>
7. Indemnification.
---------------
A. Indemnification of Authorized Representatives in Third Party
------------------------------------------------------------
Proceedings.--The Corporation shall indemnify any person who was or is an
- -----------
authorized representative of the Corporation, and who was or is a party, or is
threatened to be made a party to any third party proceeding, by reason of the
fact that such person was or is an authorized representative of the Corporation,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such third party
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Corporation and, with respect to any criminal third party proceeding, had no
reasonable cause to believe such conduct was unlawful. The termination of any
third party proceeding by judgment, order, settlement, conviction or upon a plea
of nolo contendere or its equivalent, shall not of itself create a presumption
that the authorized representative did not act in good faith and in a manner
which such person reasonably believed to be in or not opposed to, the best
interests of the Corporation, or, with respect to any criminal third party
proceeding, had reasonable cause to believe that such conduct was unlawful.
B. Indemnification of Authorized Representatives in Corporate
----------------------------------------------------------
Proceedings.--The Corporation shall indemnify any person who was or is an
- -----------
authorized representative of the Corporation and who was or is a party or is
threatened to be made a party to any corporate proceeding, by reason of the fact
that such person was or is an authorized representative of the Corporation,
against expenses actually and reasonably incurred by such person in connection
with the defense or settlement of such corporate proceeding if such person acted
in good faith and in a manner reasonably believed to be in, or not opposed to,
the best interests of the Corporation; provided, however, that, except as
-------- -------
provided in this Article 7 with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such person in connection
with an action, suit or proceeding (or part thereof) initiated by such person
only if the initiation of such action, suit or proceeding (or part thereof) was
authorized by the Board of Directors; provided further, however, that no
-------- ------- -------
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in which
such corporate proceeding was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such authorized representative is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
C. Mandatory Indemnification of Authorized Representatives.--To the
-------------------------------------------------------
extent that an authorized representative or other employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
third party or corporate proceeding or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses actually and
reasonably incurred by such person in connection therewith.
3
<PAGE>
D. Determination of Entitlement to Indemnification.--Any
-----------------------------------------------
indemnification under section 7(A), (B) or (C) of this Article (unless ordered
by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the authorized representative
or other employee or agent is proper in the circumstances because such person
has either met the applicable standard of conduct set forth in section 7(A) or
(B) of this Article or has been successful on the merits or otherwise as set
forth in section 7(C) of this Article and that the amount requested has been
actually and reasonably incurred. Such determination shall be made:
(1) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such third party or
corporate proceeding; or
(2) if such a quorum is not obtainable, or even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel
in a written opinion; or
(3) by the stockholders.
E. Advancing Expenses.--Expenses actually and reasonably
------------------
incurred in defending a third party or corporate proceeding shall be paid on
behalf of an authorized representative by the Corporation in advance of the
final disposition of such third party or corporate proceeding and within 30 days
of receipt by the secretary of the Corporation of (i) an application from such
authorized representative setting forth the basis for such indemnification, and
(ii) if required by law at the time such application is made, an undertaking by
or on behalf of the authorized representative to repay such amount if it shall
ultimately be determined that the authorized representative is not entitled to
be indemnified by the Corporation as authorized in this Article. The financial
ability of any authorized representative to make a repayment contemplated by
this section shall not be a prerequisite to the making of an advance. Expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
F. Definitions.--For purposes of this Article:
-----------
(1) "authorized representative" shall mean any and all directors
and officers of the Corporation and any person designated as an authorized
representative by the Board of Directors of the Corporation or any officer
of the Corporation to whom the Board has delegated the authority to make
such designations (which "authorized representative" may, but need not,
include any person serving at the request of the Corporation as a
director, officer, employee, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise);
4
<PAGE>
(2) "Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify
its directors, officers, employees or agents, so that any person who is or
was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this Article with
respect to the resulting or surviving corporation as such person would
have with respect to such constituent corporation if its separate
existence had continued;
(3) "corporate proceeding" shall mean any threatened, pending or
completed action or suit by or in the right of the Corporation to procure
a judgment in its favor and any investigative proceeding by the
Corporation;
(4) "criminal third party proceeding" shall include any action or
investigation which could or does lead to a criminal third party
proceeding;
(5) "expenses" shall include attorneys' fees and disbursements;
(6) "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan;
(7) actions "not opposed to the best interests of the Corporation"
shall include without limitation actions taken in good faith and in a
manner the authorized representative reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit
plan;
(8) "other enterprises" shall include employee benefit plans;
(9) "party" shall include the giving of testimony or similar
involvement;
(10) "serving at the request of the Corporation" shall include
without limitation any service as a director, officer or employee of the
Corporation which imposes duties on, or involves services by, such
director, officer or employee with respect to an employee benefit plan,
its participants, or beneficiaries; and
(11) "third party proceeding" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right
of the Corporation.
5
<PAGE>
G. Insurance.--The Corporation may purchase and maintain insurance
---------
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against the
person and incurred by the person in any such capacity, or arising out of his or
her status as such, whether or not the Corporation would have the power or the
obligation to indemnify such person against such liability under the provisions
of this Article.
H. Scope of Article.--The indemnification of authorized
----------------
representatives and advancement of expenses, as authorized by the preceding
provisions of this Article, shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office. The indemnification and advancement of
expenses provided by or granted pursuant to this Article shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be an authorized representative and shall inure to the benefit of the heirs,
executors and administrators of such a person.
I. Reliance on Provisions.--Each person who shall act as an
----------------------
authorized representative of the Corporation shall be deemed to be doing so in
reliance upon rights of indemnification provided by this Article. Any repeal or
modification of the provisions of this Article 7 by the stockholders of the
Corporation shall not adversely affect any right or benefit of a director
existing at the time of such repeal or modification.
J. Severability.--If this Article 7 or any portion thereof shall be
------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each authorized representative of the
Corporation as to expenses, judgments, fines and amounts paid in settlement with
respect to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, including, without limitation, a grand jury
proceeding and an action, suit or proceeding by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article 7 that shall not have been invalidated, by the GCL or by any other
applicable law.
8. Duty of Care. A director of the Corporation shall not be liable to
------------
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) under Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
GCL is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the GCL, as so amended. Any repeal or modification of the provisions of this
Article 8 by the stockholders of the Corporation shall not adversely affect any
right or benefit of a director of the Corporation existing at the time of such
repeal or modification.
6
<PAGE>
9. Board Consideration of All Relevant Factors. The Board of Directors
-------------------------------------------
of the Corporation, when evaluating any offer of another party to (a) make a
tender or exchange offer for any equity security of the Corporation, (b) merge
or consolidate the Corporation with another corporation, or (c) purchase or
otherwise acquire all or substantially all of the properties and assets of the
Corporation, may, in connection with the exercise of its judgment in determining
what is in the best interests of the Corporation and its stockholders, give due
consideration to (i) all relevant factors, including without limitation the
social, legal, environmental and economic effects on employees, customers,
suppliers and other affected persons, firms and corporations and on the
communities and geographical areas in which the Corporation and its subsidiaries
operate or are located and on any of the businesses and properties of the
Corporation or any of its subsidiaries, as well as such other factors as the
directors deem relevant, and (ii) the consideration being offered, not only in
relation to the then current market price for the Corporation's outstanding
shares of capital stock, but also in relation to the then current value of the
Corporation in a freely negotiated transaction and in relation to the Board of
Directors' estimate of the future value of the Corporation (including the
unrealized value of its properties and assets) as an independent going concern.
10. Unanimous Consent of Stockholders in Lieu of Meeting. Any action
----------------------------------------------------
required to be taken at any annual or special meeting of stockholders of the
Corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of all of the outstanding stock entitled
to vote to take such action at any annual or special meeting of stockholders of
the Corporation and shall be delivered to the Corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the Corporation having custody of the books in which proceedings or
meetings of stockholders are recorded. Every written consent shall bear the date
of signature of each stockholder who signs the consent and no written consent
shall be effective to take the corporate action referred to unless, within 60
days of the earliest dated consent delivered in the manner required in this
section to the Corporation, written consents signed by the holders of all of the
outstanding stock entitled to vote to take such action are delivered to the
Corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the Corporation having custody of
the books in which proceedings of meetings of stockholders are recorded.
Delivery made to a Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested.
11. Amendments. The Corporation reserves the right to amend, alter,
----------
change or repeal any provision contained in this certificate of incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.B
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>BYLAWS OF VERIZON COMMUNICATIONS INC.
<TEXT>
<PAGE>
Exhibit 3b
- --------------------------------------------------------------------------------
VERIZON COMMUNICATIONS INC.
BYLAWS
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As Amended, effective as of June 30, 2000
(Restated to reflect the legal name change on September 22, 2000)
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BYLAWS
OF
VERIZON COMMUNICATIONS INC.
(a Delaware corporation)
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BYLAWS
OF
VERIZON COMMUNICATIONS INC.
Table of Contents
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ARTICLE I
Offices and Fiscal Year 1
SECTION 1.01. Registered Office 1
SECTION 1.02. Fiscal Year 1
ARTICLE II
Notice - Waivers - Meetings 1
SECTION 2.01. Notice, What Constitutes 1
SECTION 2.02. Notice of Meetings of Board of Directors 1
SECTION 2.03. Notice of Meetings of Stockholders 2
SECTION 2.04. Waivers of Notice 2
SECTION 2.05. Exception to Requirements of Notice 2
SECTION 2.06. Conference Telephone Meetings 3
ARTICLE III
Meetings of Stockholders 3
SECTION 3.01. Place of Meeting 3
SECTION 3.02. Annual Meeting 3
SECTION 3.03. Special Meetings 3
SECTION 3.04. Quorum, Manner of Acting and Adjournment 3
SECTION 3.05. Organization 4
SECTION 3.06. Voting 5
SECTION 3.07. Voting Lists 5
SECTION 3.08. Inspectors of Election 6
ARTICLE IV
Board of Directors 7
SECTION 4.01. Powers 7
SECTION 4.02. Number 7
SECTION 4.03. Term of Office 7
SECTION 4.04. Vacancies 7
SECTION 4.05. Resignations 7
SECTION 4.06. Organization 8
SECTION 4.07. Place of Meeting 8
SECTION 4.08. Regular Meetings 8
SECTION 4.09. Special Meetings 8
SECTION 4.10. Quorum, Manner of Acting and Adjournment 8
SECTION 4.11. Committees of the Board 9
SECTION 4.12. Compensation of Directors 9
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SECTION 4.13. Qualifications and Election of Directors 10
SECTION 4.14. Voting of Stock 11
SECTION 4.15. Endorsement of Securities for Transfer 11
SECTION 4.16 Representation on Board of Directors 11
ARTICLE V
Officers 12
SECTION 5.01. Number, Qualifications and Designation 12
SECTION 5.02. Election and Term of Office 12
SECTION 5.03. Subordinate Officers, Committees and Agents 12
SECTION 5.04. Officers' Bonds 12
SECTION 5.05. Salaries 12
SECTION 5.06 Succession Arrangements 12
ARTICLE VI
Certificates of Stock, Transfer, Etc. 13
SECTION 6.01. Form and Issuance 13
SECTION 6.02. Transfer 13
SECTION 6.03. Lost, Stolen, Destroyed or Mutilated Certificates 14
SECTION 6.04. Record Holder of Shares 14
SECTION 6.05. Determination of Stockholders of Record 14
ARTICLE VII
General Provisions 15
SECTION 7.01. Dividends 15
SECTION 7.02. Contracts 15
SECTION 7.03. Corporate Seal 15
SECTION 7.04. Checks, Notes, Etc. 15
SECTION 7.05. Corporate Records 16
SECTION 7.06. Amendment of Bylaws 16
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BYLAWS
OF
VERIZON COMMUNICATIONS INC.
(a Delaware corporation)
ARTICLE I
Offices and Fiscal Year
SECTION 1.01. Registered Office. --The registered office of the corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware
until a different office is established by resolution of the board of directors
and a certificate certifying the change is filed in the manner provided by
statute.
SECTION 1.02. Fiscal Year. --The fiscal year of the corporation shall end
on the 31st day of December in each year.
ARTICLE II
Notice - Waivers - Meetings
SECTION 2.01. Notice, What Constitutes. --Whenever, under the provisions of
the Delaware General Corporation Law ("GCL") or the certificate of incorporation
or these Bylaws, notice is required to be given to any director or stockholder,
it shall not be construed to require personal notice, but such notice may be
given in writing, by mail or by telegram (with messenger service specified),
telex or TWX (with answerback received) or courier service, charges prepaid, or
by telephone or facsimile transmission to the address (or to the telex, TWX,
facsimile or telephone number) of the person appearing on the books of the
corporation, or in the case of directors, supplied to the corporation for the
purpose of notice. If the notice is sent by mail, telegram or courier service,
it shall be deemed to be given when deposited in the United States mail or with
a telegraph office or courier service for delivery to that person or, in the
case of telex or TWX, when dispatched, or in the case of facsimile transmission,
when received.
SECTION 2.02. Notice of Meetings of Board of Directors. --Notice of a
regular meeting of the board of directors need not be given. Notice of every
special meeting of the board of directors shall be given to each director in
person or by telephone or in writing at least 24 hours (in the case of notice in
person or by telephone, telex, TWX or facsimile transmission) or 48 hours (in
the case of notice by telegram, courier service or express mail) or five days
(in the case of notice by first class mail) before the time at which the meeting
is to be held. Every such notice shall state the time and place of the meeting.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the board need be specified in a notice of the meeting.
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SECTION 2.03. Notice of Meetings of Stockholders. --Written notice of the
place, date and hour of every meeting of the stockholders, whether annual or
special, shall be given to each stockholder of record entitled to vote at the
meeting not less than ten nor more than 60 days before the date of the meeting.
Every notice of a special meeting shall state the purpose or purposes thereof.
If the notice is sent by mail, it shall be deemed to have been given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at the address of the stockholder as it appears on the records of
the corporation.
SECTION 2.04. Waivers of Notice.
(a) Written Waiver. --Whenever notice is required to be given under any
provisions of the GCL or the certificate of incorporation or these Bylaws, a
written waiver, signed by the person or persons entitled to the notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the stockholders, directors, or members of a committee of
directors need be specified in any written waiver of notice of such meeting.
(b) Waiver by Attendance. --Attendance of a person at a meeting, either in
person or by proxy, shall constitute a waiver of notice of such meeting, except
where a person attends a meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened.
SECTION 2.05. Exception to Requirements of Notice.
(a) General Rule. --Whenever notice is required to be given, under any
provision of the GCL or the certificate of incorporation or these Bylaws, to any
person with whom communication is unlawful, the giving of such notice to such
person shall not be required and there shall be no duty to apply to any
governmental authority or agency for a license or permit to give such notice to
such person. Any action or meeting which shall be taken or held without notice
to any such person with whom communication is unlawful shall have the same force
and effect as if such notice had been duly given.
(b) Stockholders Without Forwarding Addresses. --Whenever notice is
required to be given, under any provision of the GCL or the certificate of
incorporation or these Bylaws, to any stockholder to whom (i) notice of two
consecutive annual meetings, and all notices of meetings or of the taking of
action by written consent without a meeting to such person during the period
between such two consecutive annual meetings, or (ii) all, and at least two,
payments (if sent by first class mail) of dividends or interest on securities
during a 12 month period, have been mailed addressed to such person at his
address as shown on the records of the corporation and have been returned
undeliverable, the giving of such notice to such person shall not be required.
Any action or meeting which shall be taken or held without notice to such person
shall have the same force and effect as if such notice had been duly given. If
any such person shall deliver to the corporation a written notice setting forth
the person's then current address, the requirement that notice be given to such
person shall be reinstated.
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SECTION 2.06. Conference Telephone Meetings. --One or more directors may
participate in a meeting of the board, or of a committee of the board, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Participation in a
meeting pursuant to this section shall constitute presence in person at such
meeting.
ARTICLE III
Meetings of Stockholders
SECTION 3.01. Place of Meeting. --All meetings of the stockholders of the
corporation shall be held at such place within or without the State of Delaware
as shall be designated by the board of directors in the notice of such meeting
(or by the Chairman calling a meeting pursuant to Section 3.03).
SECTION 3.02. Annual Meeting. --The board of directors may fix and
designate the date and time of the annual meeting of the stockholders. At said
meeting the stockholders then entitled to vote shall elect directors and shall
transact such other business as may properly be brought before the meeting.
SECTION 3.03. Special Meetings. --Special meetings of the stockholders of
the corporation may be called at any time by the chairman of the board or a
majority of the board of directors. At any time, upon the written request of any
person or persons who have duly called a special meeting, which written request
shall state the purpose or purposes of the meeting, it shall be the duty of the
secretary to fix the date of the meeting which shall be held at such date and
time as the secretary may fix, not less than ten nor more than 60 days after the
receipt of the request, and to give due notice thereof. If the secretary shall
neglect or refuse to fix the time and date of such meeting and give notice
thereof, the person or persons calling the meeting may do so.
SECTION 3.04. Quorum, Manner of Acting and Adjournment.
(a) Quorum. --The holders of a majority of the shares entitled to vote,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders except as otherwise provided by the GCL, by the
certificate of incorporation or by these Bylaws. If a quorum is not present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented. At any such adjourned
meeting at which a quorum is present or represented, the corporation may
transact any business which might have been transacted at the original meeting.
If the adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
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(b) Manner of Acting. --Directors shall be elected by a plurality of the
votes of the shares present in person or represented by proxy and entitled to
vote at the meeting on the election of directors. In all matters other than the
election of directors, the affirmative vote of the majority of shares present in
person or represented by proxy at the meeting and entitled to vote and voting
thereon shall be the act of the stockholders, unless the question is one upon
which, by express provision of the applicable statute, the certificate of
incorporation or these Bylaws, a different vote is required in which case such
express provision shall govern and control the decision of the question. The
stockholders present in person or by proxy at a duly organized meeting can
continue to do business until adjournment, notwithstanding withdrawal of enough
stockholders to leave less than a quorum.
(c) Stockholder Proposals. --Nominations by stockholders of persons for
election to the board of directors of the corporation may be made at an annual
meeting in compliance with Section 4.13 hereof. The proposal of other business
to be considered by the stockholders at an annual meeting of stockholders may be
made (i) pursuant to the corporation's notice of meeting, (ii) by or at the
direction of the board of directors, or (iii) by any stockholder of the
corporation pursuant to timely notice in writing to the secretary of the
corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the corporation not
less than 90 days prior to the anniversary date of the prior year's annual
meeting. Such stockholder's notice to the secretary shall set forth (a) as to
the stockholder giving notice and the beneficial owner, if any on whose behalf
the proposal is made, (i) their name and record address, and (ii) the class and
number of shares of capital stock of the corporation which are beneficially
owned by each of them, and (b) a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder giving
notice and the beneficial owner, if any, on whose behalf the proposal is made.
Only such business shall be conducted at a special meeting of stockholders as
shall have been brought before the meeting pursuant to the corporation's notice
of meeting. Only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this section.
(d) The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that any proposal made at the meeting was not made in
accordance with the foregoing procedures and, in such event, the proposal shall
be disregarded. Any decision by the chairman of the meeting shall be conclusive
and binding upon all stockholders of the corporation for any purpose.
SECTION 3.05. Organization. --At every meeting of the stockholders, the
chairman of the board, if there be one, or in the case of a vacancy in the
office or absence of the chairman of the board, one of the following persons
present in the order stated: the president, the vice chairman, if one has been
appointed, a chairman designated by the board of directors or a chairman chosen
by