-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bj+9gxikeeRtjE39uywYFljOpoNaXWNTQeiWOwTvYhFz9KVSq3hlmEM5hKYNQffH IyrBE5uu2dyrNDHVHYPQcg== /in/edgar/work/20000814/0000950134-00-007067/0000950134-00-007067.txt : 20000921 0000950134-00-007067.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950134-00-007067 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELL ATLANTIC CORP CENTRAL INDEX KEY: 0000732712 STANDARD INDUSTRIAL CLASSIFICATION: [4813 ] IRS NUMBER: 232259884 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08606 FILM NUMBER: 700533 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 STREET 2: 1717 ARCH ST 47TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19103 10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 1-8606 BELL ATLANTIC CORPORATION (d/b/a VERIZON COMMUNICATIONS) (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 10036 NEW YORK, NEW YORK (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER (212) 395-2121 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 --- --- At June 30, 2000, 2,717,995,916 shares of the registrant's Common Stock were outstanding, after deducting 33,820,400 shares held in treasury. ================================================================================ 2 TABLE OF CONTENTS ITEM NO.
PART I. FINANCIAL INFORMATION PAGE ---- 1. FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three and six months ended June 30, 2000 and 1999 1-2 CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2000 and December 31, 1999 3 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2000 and 1999 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35 PART II. OTHER INFORMATION 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36 6. EXHIBITS AND REPORTS ON FORM 8-K 37
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENTS OF INCOME Bell Atlantic Corporation and Subsidiaries (d/b/a Verizon Communications)
(Dollars in Millions, Except Per Share Amounts) (Unaudited) THREE MONTHS ENDED JUNE 30, --------------------------- 2000 1999 ----------- ------------- OPERATING REVENUES $ 16,787 $ 14,513 OPERATING EXPENSES Operations and support 11,411 8,464 Depreciation and amortization 3,220 2,425 GAINS ON SALES OF ASSETS, NET 2,456 -- -------- -------- OPERATING INCOME 4,612 3,624 Income from unconsolidated businesses 3,283 115 Other income and (expense), net 4 (17) Interest expense 916 637 Mark-to-market adjustment for exchangeable notes 1,112 -- -------- -------- Income before provision for income taxes and extraordinary items 8,095 3,085 Provision for income taxes 3,188 1,137 -------- -------- INCOME BEFORE EXTRAORDINARY ITEMS 4,907 1,948 Extraordinary items -- (6) -------- -------- NET INCOME $ 4,907 $ 1,942 ======== ======== BASIC EARNINGS PER COMMON SHARE: Income before extraordinary items $ 1.81 $ .71 Extraordinary items -- -- -------- -------- NET INCOME $ 1.81 $ .71 ======== ======== Weighted-average shares outstanding (in millions) 2,718 2,739 ======== ======== DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary items $ 1.79 $ .70 Extraordinary items -- -- -------- -------- NET INCOME $ 1.79 $ .70 ======== ======== Weighted-average shares outstanding - diluted (in millions) 2,747 2,775 ======== ======== Dividends declared per common share $ .385 $ .385 ======== ========
See Notes to Condensed Consolidated Financial Statements. 1 4 CONDENSED CONSOLIDATED STATEMENTS OF INCOME Bell Atlantic Corporation and Subsidiaries (d/b/a Verizon Communications)
(Dollars in Millions, Except Per Share Amounts) (Unaudited) SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 --------- ------------ OPERATING REVENUES $ 31,336 $ 28,274 OPERATING EXPENSES Operations and support 19,637 16,548 Depreciation and amortization 5,811 4,828 GAINS ON SALES OF ASSETS, NET 2,553 513 -------- -------- OPERATING INCOME 8,441 7,411 Income from unconsolidated businesses 3,514 248 Other income and (expense), net 56 (13) Interest expense 1,690 1,276 Mark-to-market adjustment for exchangeable notes 287 -- -------- -------- Income before provision for income taxes and extraordinary items 10,608 6,370 Provision for income taxes 4,135 2,350 -------- -------- INCOME BEFORE EXTRAORDINARY ITEMS 6,473 4,020 Extraordinary items (9) (36) -------- -------- NET INCOME 6,464 3,984 Redemption of subsidiary preferred stock (8) -- -------- -------- NET INCOME AVAILABLE TO COMMON SHAREOWNERS $ 6,456 $ 3,984 ======== ======== BASIC EARNINGS PER COMMON SHARE: Income before extraordinary items $ 2.37 $ 1.47 Extraordinary items -- (.01) -------- -------- NET INCOME $ 2.37 $ 1.46 ======== ======== Weighted-average shares outstanding (in millions) 2,722 2,738 ======== ======== DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary items $ 2.35 $ 1.45 Extraordinary items -- (.01) -------- -------- NET INCOME $ 2.35 $ 1.44 ======== ======== Weighted-average shares outstanding - diluted (in millions) 2,752 2,774 ======== ======== Dividends declared per common share $ .77 $ .77 ======== ========
See Notes to Condensed Consolidated Financial Statements. 2 5 CONDENSED CONSOLIDATED BALANCE SHEETS Bell Atlantic Corporation and Subsidiaries (d/b/a Verizon Communications)
(Dollars in Millions, Except Per Share Amounts) (Unaudited) JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,346 $ 2,033 Short-term investments 355 1,035 Accounts receivable, net of allowances of $1,279 and $1,170 12,360 11,998 Inventories 1,385 1,366 Prepaid expenses and other current assets 2,388 1,761 Net assets held for sale 2,302 1,802 -------- -------- 20,136 19,995 -------- -------- PLANT, PROPERTY AND EQUIPMENT 150,896 142,989 Less accumulated depreciation 86,122 80,816 -------- -------- 64,774 62,173 -------- -------- INVESTMENTS IN UNCONSOLIDATED BUSINESSES 15,905 10,177 INTANGIBLE ASSETS 40,954 8,645 OTHER ASSETS 15,244 11,840 -------- -------- TOTAL ASSETS $157,013 $112,830 ======== ======== LIABILITIES AND SHAREOWNERS' INVESTMENT CURRENT LIABILITIES Debt maturing within one year $ 20,060 $ 15,063 Accounts payable and accrued liabilities 13,275 10,878 Other current liabilities 4,782 3,809 -------- -------- 38,117 29,750 -------- -------- LONG-TERM DEBT 33,286 32,419 EMPLOYEE BENEFIT OBLIGATIONS 13,246 13,744 DEFERRED INCOME TAXES 14,572 7,288 OTHER LIABILITIES 1,577 1,353 MINORITY INTEREST, INCLUDING A PORTION SUBJECT TO REDEMPTION REQUIREMENTS 22,039 1,900 SHAREOWNERS' INVESTMENT Series preferred stock ($.10 par value; none issued) -- -- Common stock ($.10 par value; 2,751,816,316 shares and 2,756,484,606 shares issued) 275 276 Contributed capital 24,324 20,134 Reinvested earnings 11,512 7,428 Accumulated other comprehensive income 92 75 -------- -------- 36,203 27,913 Less common stock in treasury, at cost 1,200 640 Less deferred compensation - employee stock ownership plans 827 897 -------- -------- 34,176 26,376 -------- -------- TOTAL LIABILITIES AND SHAREOWNERS' INVESTMENT $157,013 $112,830 ======== ========
See Notes to Condensed Consolidated Financial Statements. 3 6 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Bell Atlantic Corporation and Subsidiaries (d/b/a Verizon Communications)
(Dollars in Millions) (Unaudited) SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Income before extraordinary items $ 6,473 $ 4,020 Adjustments to reconcile income before extraordinary items to net cash provided by operating activities: Depreciation and amortization 5,811 4,828 Gains on sales of assets, net (2,553) (513) Gain on exchange of CWC stock (3,088) -- Mark-to-market adjustment for exchangeable notes (287) -- Employee retirement benefits (1,760) (817) Deferred income taxes, net 2,084 983 Provision for uncollectible accounts 510 482 Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses 1,750 (1,057) Other, net (611) (360) ------- ------- Net cash provided by operating activities 8,329 7,566 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (7,632) (5,772) Acquisitions, net of cash acquired, and investments (1,132) (1,410) Proceeds from disposition of businesses 1,899 612 Investments in notes receivable (979) -- Other, net 249 411 ------- ------- Net cash used in investing activities (7,595) (6,159) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 2,822 3,420 Repayments of long-term borrowings and capital lease obligations (4,651) (1,060) Increase (decrease) in short-term obligations, excluding current maturities 3,518 (1,879) Net dividends paid (2,099) (2,112) Proceeds from sale of common stock 380 585 Purchase of common stock for treasury (1,382) (398) Other, net (9) 14 ------- ------- Net cash used in financing activities (1,421) (1,430) ------- ------- Decrease in cash and cash equivalents (687) (23) Cash and cash equivalents, beginning of period 2,033 704 ------- ------- Cash and cash equivalents, end of period $ 1,346 $ 681 ======= =======
See Notes to Condensed Consolidated Financial Statements. 4 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Bell Atlantic Corporation and Subsidiaries (d/b/a Verizon Communications) (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. These financial statements give retroactive effect to the merger of Bell Atlantic Corporation (Bell Atlantic) and GTE Corporation (GTE) as required for business combinations using pooling-of-interests accounting (see Note 2). These condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. To assist you in understanding the historical financial information of the merged entity, now referred to as Verizon Communications (Verizon), you should refer to the financial statements filed with the 1999 SEC Form 10-Ks and the first quarter 2000 SEC Form 10-Qs of both Bell Atlantic and GTE and Note 3 below. In this report, Bell Atlantic, as the SEC registrant, and Verizon are referred to as "we" or "us." 2. BELL ATLANTIC - GTE MERGER On June 30, 2000, Bell Atlantic and GTE completed a merger under a definitive merger agreement dated as of July 27, 1998 (the Merger). Under the terms of the agreement, GTE became a wholly-owned subsidiary of Bell Atlantic. GTE shareholders received 1.22 shares of Bell Atlantic common stock for each share of GTE common stock that they owned. This resulted in the issuance of 1,176 million shares of Bell Atlantic common stock. With the closing of the Merger, the combined company began doing business as Verizon. The Merger qualified as a tax-free reorganization and has been accounted for as a pooling-of-interests. 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. 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 interim periods prior to the Merger were as follows: (Dollars in Millions)
THREE MONTHS ENDED MARCH 31, SIX MONTHS ------------------- ENDED JUNE 30, 2000 1999 1999 ---- ---- -------------- OPERATING REVENUES Bell Atlantic $ 8,534 $ 7,967 $ 16,262 GTE 6,100 5,879 12,167 Conforming adjustments, reclassifications and eliminations (85) (85) (155) -------- -------- -------- Combined $ 14,549 $ 13,761 $ 28,274 ======== ======== ======== NET INCOME Bell Atlantic $ 731 $ 1,142 $ 2,309 GTE 807 882 1,658 Conforming adjustments, reclassifications and eliminations 19 18 17 -------- -------- -------- Combined $ 1,557 $ 2,042 $ 3,984 ======== ======== ========
5 8 Verizon is managed around four operating segments: Domestic Telecom, Domestic Wireless, International and Information Services. For further information concerning these operating segments, see Note 13. In addition to the Merger, there were a number of transactions during the quarter that had a significant effect on our company, including the formation of a nationwide wireless venture with Vodafone AirTouch plc (Vodafone AirTouch) (see Note 6) and the divestiture of a controlling interest in Genuity through an initial public offering of its stock. Genuity In accordance with the provisions of a Federal Communications Commission (FCC) order in June 2000, Genuity, 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. The shares were priced at $11 resulting 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 Merger, subject to extension under certain circumstances. Genuity's revenues for the second quarter and first half of 2000 were $275 million and $529 million, respectively, and its net losses were $153 million and $281 million, respectively. Merger-Related and Severance Costs During the second quarter, we recorded a pretax charge of $472 million ($378 million after-tax, or $.14 per diluted share) for direct, incremental merger-related costs that we incurred in the current quarter or had previously deferred, and $584 million ($371 million after-tax, or $.14 per diluted share) for employee severance. The direct incremental merger costs include the following:
(Dollars in Millions) Compensation $ 210 Professional services 161 Other 101 ----- $ 472 =====
Compensation includes retention payments to employees that were contingent on the Merger close and payments to employees to satisfy contractual obligations triggered by the change in control. Professional services includes 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. Employee severance costs, 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 of ongoing SFAS No. 112 obligations for GTE employees. Of these employees, approximately 5,200 are located in the United States and approximately 300 are located at various international locations. The separations 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 condensed consolidated balance sheets as a component of Other current liabilities or Employee Benefit Obligations. Transition Costs In addition to the direct merger-related and severance costs discussed above, over the next several years, we expect to incur substantial transition costs related to the Merger and the recently formed wireless joint venture, Verizon Wireless (see Note 6). These costs will be incurred to integrate systems, consolidate real estate, and relocate employees. They also include advertising and other costs to establish the Verizon brand. During the second quarter, we incurred approximately $172 million ($47 million after taxes and minority interests, or $.02 per diluted share) of transition costs primarily related to the wireless joint venture. The results for the second quarter and first six months of 1999 included pretax transition costs of $35 million and $52 million, respectively, related to the Bell Atlantic-NYNEX merger. 6 9 Other related actions During the second quarter of 2000, we also recorded $385 million ($236 million after-tax, or $.09 per diluted share) for other actions in relation to the Merger or other strategic decisions. These actions included the following:
(Dollars in Millions) Write-off of duplicate assets $ 167 Regulatory settlements 69 Contract termination fees 86 Other 63 ----- $ 385 =====
The direct merger, severance, transition or other costs discussed above are not included in the operating segment financial results in Note 13 since they are not considered in assessing segment performance due primarily to their nonrecurring nature. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Verizon's significant accounting policies are consistent with those described in Bell Atlantic's 1999 Form 10-K. Where there were differences between Bell Atlantic and GTE, the accounting policies of the businesses that were formerly part of GTE have been conformed to those of Bell Atlantic. All significant intercompany accounts and transactions have been eliminated. We prepare our financial statements under generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts or certain disclosures. Actual results could differ from those estimates. 4. RECENT ACCOUNTING PRONOUNCEMENTS Derivatives and Hedging Activities 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 on our balance sheet. Changes in the fair values of derivative instruments will be recognized in either earnings or comprehensive income, depending on the designated use and effectiveness of the instruments. We must adopt SFAS No. 133 no later than January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which amended SFAS No. 133. The amendments in SFAS No. 138 address certain implementation issues and relate to such matters as the normal purchases and normal sales exception, the definition of interest rate risk, hedging recognized foreign-currency-denominated assets and liabilities, and intercompany derivatives. We are currently evaluating the provisions of SFAS No. 133 and SFAS No. 138. The impact of adoption will be determined by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions at the date of adoption. Stock Compensation In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." Interpretation No. 44 was issued in order to clarify certain issues arising from Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Interpretation No. 44 is effective July 1, 2000, but certain conclusions cover specific events that occur either after December 15, 1998 or January 12, 2000. The main issues addressed by Interpretation No. 44 are: (a) the definition of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. Interpretation No. 44 will not have a material impact on our results of operations or financial position. 7 10 Revenue Recognition In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which provides additional guidance on revenue recognition and, in certain circumstances, requires the deferral of incremental costs. We must adopt SAB No. 101 no later than the fourth quarter of 2000. The Company is currently assessing the impact of SAB No. 101. 5. GAINS ON SALES OF ASSETS, NET During the second quarter of 2000, we recognized net gains related to sales of assets and impairments of assets held for sale, as follows:
(Dollars in Millions) Pretax After-tax ------- --------- Wireline properties $ 1,078 $ 655 Wireless properties 1,922 1,156 Other, net (544) (356) ------- --------- $ 2,456 $ 1,455 ======= =========
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 June 2000, we sold approximately 471,000 access lines located in Iowa, Nebraska and Oklahoma for combined cash proceeds of $1.4 billion and $125 million in convertible preferred stock. The $655 million after-tax gain on the sale represents $.24 per diluted share. As of June 30, 2000, the remaining 1.1 million access lines continue to be reported in our condensed consolidated balance sheets as Net assets held for sale. Although all of the remaining access lines are subject to definitive sales agreements, their sale is contingent upon final agreements and regulatory approvals. We expect these sales to close in 2000 and will continue to operate all of the properties until sold. The 1.1 million access lines held for sale at June 30, 2000 represented approximately 1.7% of the domestic access lines that our Domestic Telecom business had in service at the time. Given the decision to sell, no depreciation was recorded for these properties during 1999 or 2000 in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Wireless Overlap A U.S. Department of Justice consent decree issued on December 6, 1999 required GTE Wireless, Bell Atlantic Mobile, Vodafone AirTouch and PrimeCo Communications (PrimeCo) to resolve a number of wireless market overlaps in order to complete the wireless joint venture and the Merger. As a result, during April 2000 we completed a transaction with ALLTEL Corporation (ALLTEL) that provided for the exchange of several former Bell Atlantic Mobile markets in Texas, New Mexico and Arizona 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). 8 11 In June 2000, we entered into a series of definitive sale agreements to resolve the remaining service area conflicts prohibited by FCC regulations. These agreements, which were pursuant to the consent decree, enabled both the formation of Verizon Wireless and the closing of the Merger. These definitive sales agreements included: o An agreement with AT&T Wireless related to the San Diego (former GTE) and Houston (former PrimeCo) markets. o An agreement with SBC Communications related to the Austin, Seattle and Spokane (former GTE) markets. o Agreements with BGV PCS Acquisition Co. LLC related to the Chicago (former PrimeCo) and Cincinnati (former GTE) markets. o An agreement with an affiliate of CFW Communications Company related to the Richmond (former PrimeCo) market. As of June 30, 2000 the wireless properties discussed above are reported in our condensed consolidated balance sheets as Net assets held for sale. We expect these sales to occur in 2000. Based on the decision to sell, depreciation and amortization has been discontinued for these properties in accordance with SFAS No. 121. Other Transactions In connection with our decisions to exit the video business and GTE Airfone, a company involved in air-to-ground communications, we have recorded an impairment charge of $566 million ($362 million after-tax, or $.13 per diluted share) to reduce the carrying value of these investments to their estimated net realizable value. In addition, there were other sales resulting in a net pretax gain of approximately $22 million ($6 million after-tax). 6. WIRELESS JOINT VENTURE On April 3, 2000, we and Vodafone AirTouch consummated the previously announced agreement to combine U.S. wireless assets, including cellular, PCS and paging operations. Vodafone AirTouch contributed its U.S. wireless operations to an existing Bell Atlantic partnership in exchange for a 65.1% economic interest in the partnership. 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 with a total purchase price for the equity of the U.S. operations of Vodafone AirTouch of approximately $30 billion resulting in increases in intangible assets of approximately $31 billion, minority interest of approximately $21 billion and debt of approximately $4 billion included in the condensed consolidated balance sheets. Since the acquisition was effected through the issuance of partnership interests, the $4,281 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 is in the process of being completed. It is our initial expectation that a substantial portion of the excess purchase price over the tangible assets acquired will be identified with wireless licenses, which we will amortize over a period up to 40 years since they are renewable on an indefinite basis. The following represents Verizon's historical results for the second quarter of 1999 adjusted to include the wireless joint venture on a pro forma basis. No other pro forma adjustments were made to the historical results.
(Dollars in Millions, Except Per Share Amount) Revenues $ 16,006 Net Income 1,884 Diluted earnings per common share $ 0.68
Under the terms of the venture formation agreement, Vodafone AirTouch 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. In July 2000, following the closing of the 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. 9 12 7. MARKETABLE SECURITIES We have investments in marketable securities, primarily common stocks and convertible debt securities, 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 condensed 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. The fair values of our investments in marketable securities are determined based on market quotations. The table below shows certain summarized information related to our investments in marketable securities.
GROSS GROSS UNREALIZED UNREALIZED (Dollars in Millions) COST GAINS LOSSES FAIR VALUE ------- ---------- ---------- ---------- AT JUNE 30, 2000 Investments in unconsolidated businesses $4,513 $1,883 $(102) $6,294 Other assets 1,344 426 (6) 1,764 ------ ------ ----- ------ $5,857 $2,309 $(108) $8,058 ====== ====== ====== ====== 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 $1,014 million at June 30, 2000. This increase in the value of our investment has been recorded in Investments in Unconsolidated Businesses. The unrealized holding gain of $427 million (net of income taxes of $230 million) has been recognized in Accumulated other comprehensive income. The remaining half of our investment in MFN shares is 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 $1,387 million at June 30, 2000. This increase in the value of our investment has been recorded in Other Assets. The unrealized holding gain of $268 million (net of income taxes of $144 million) has also been recognized in Accumulated other comprehensive income. 10 13 8. CABLE & WIRELESS COMMUNICATIONS PLC (CWC) RESTRUCTURING 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 will be accounted for under the cost method. Our previous interest in CWC was accounted for using the equity 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) and a corresponding increase in the cost basis of the shares received. Since the shares are being accounted for as cost investments, changes in their value since the date of the exchange, which totaled $63 million (net of income taxes of $39 million), have been recognized during the second quarter of 2000 in Accumulated other comprehensive income. 9. DEBT Exchangeable Notes In February 1998, our wholly owned subsidiary Verizon Global Funding Corp. (formerly Bell Atlantic Financial Services, Inc.) (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 (Telecom Corporation of New Zealand Limited) 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 June 30, 2000, no notes have been delivered for exchange. In August 1998, 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 at June 30, 2000 the notes had a carrying value of $3,615 million, including a cumulative loss on a mark-to-market adjustment of $378 million. 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 its amortized carrying value of the notes). At June 30, 2000, the combined value of the C&W and NTL share prices exceeded the exchange price, resulting in a cumulative mark-to-market adjustment of $378 million. The decrease in the debt obligation since December 31, 1999 of $287 million was recorded as an increase to income in the first six months of 2000 ($186 million after-tax, or $.07 per diluted share) and an increase to income of $1,112 million ($722 million after-tax, or $.26 per diluted share) in the second quarter of 2000. As of June 30, 2000, we have recorded no mark-to-market adjustments for the TCNZ exchangeable notes. 11 14 Support Agreements The TCNZ exchangeable notes have the benefit of a Support Agreement dated February 1, 1998, and the CWC exchangeable notes have the benefit of a Support Agreement dated August 26, 1998, both of which are between us and Global Funding. In each of the Support Agreements, we guarantee the payment of interest, premium (if any), principal and the cash value of exchange property related to the notes should Global Funding fail to pay. Another Support Agreement between us and Global Funding dated October 1, 1992, guarantees payment of interest, premium (if any) and principal on Global Funding's medium term notes (aggregating $1,326 million at June 30, 2000) should Global Funding fail to pay. The holders of 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. The carrying value of the available assets reflected in our condensed consolidated financial statements was approximately $63 billion at June 30, 2000. 10. 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 June 30, 2000, we had repurchased 11,633,800 shares under this program. The Board of Directors also rescinded a previous authorization to repurchase up to $1.4 billion in company shares. 11. 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. For our company, such items consist primarily of foreign currency translation gains and losses and unrealized gains and losses on marketable equity investments. The components of total comprehensive income for interim periods are presented in the following table:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------ 2000 1999 2000 1999 -------- ------- ------- ------- NET INCOME $ 4,907 $ 1,942 $ 6,464 $ 3,984 ------- ------- ------- ------- OTHER COMPREHENSIVE INCOME (LOSS), net of tax Foreign currency translation adjustments (99) (87) (163) (114) Unrealized gains (losses) on securities (761) 1,016 202 1,007 Minimum pension liability adjustment -- -- (22) -- ------- ------- ------- ------- (860) 929 17 893 ------- ------- ------- ------- TOTAL COMPREHENSIVE INCOME $ 4,047 $ 2,871 $ 6,481 $ 4,877 ======= ======= ======= =======
12 15 12. 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) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- NET INCOME AVAILABLE TO COMMON SHAREOWNERS Income before extraordinary items $ 4,907 $ 1,948 $ 6,473 $ 4,020 Redemption of subsidiary preferred stock -- -- (8) -- ------- ------- ------- ------- Income available to common shareowners before extraordinary items* 4,907 1,948 6,465 4,020 Extraordinary items -- (6) (9) (36) ------- ------- ------- ------- Net income available to common shareowners* $ 4,907 $ 1,942 $ 6,456 $ 3,984 ======= ======= ======= ======= BASIC EARNINGS PER COMMON SHARE Weighted-average shares outstanding 2,718 2,739 2,722 2,738 Income available to common shareowners before extraordinary items $ 1.81 $ .71 $ 2.37 $ 1.47 Extraordinary items -- -- -- (.01) ------- ------- ------- ------- Net income available to common shareowners $ 1.81 $ .71 $ 2.37 $ 1.46 ======= ======= ======= ======= DILUTED EARNINGS PER COMMON SHARE Weighted-average shares outstanding 2,718 2,739 2,722 2,738 Effect of dilutive securities 29 36 30 36 ------- ------- ------- ------- Weighted-average shares - diluted 2,747 2,775 2,752 2,774 ======= ======= ======= ======= Income available to common shareowners before extraordinary items $ 1.79 $ .70 $ 2.35 $ 1.45 Extraordinary items -- -- -- (.01) ------- ------- ------- ------- Net income available to common shareowners $ 1.79 $ .70 $ 2.35 $ 1.44 ======= ======= ======= =======
*Income and Net income available to common shareowners is the same for purposes of calculating basic and diluted earnings per share. Stock options for 53 million shares of common stock were outstanding at June 30, 2000 which were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common stock. 13. SEGMENT INFORMATION We have four reportable segments, which we operate and manage as strategic business units and organize by products and services. Our segments include a Domestic Telecom group which provides domestic wireline communications services; a Domestic Wireless group which provides domestic wireless communications services; an International group which includes our foreign wireline and wireless communications investments; and an Information Services group which is responsible for our domestic and international publishing businesses and electronic commerce services. We measure and evaluate our reportable segments based on adjusted net income, which excludes undistributed 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 nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. 13 16 REPORTABLE SEGMENTS The following table provides adjusted operating financial information for our four reportable segments and a reconciliation of adjusted segment results to consolidated results:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- EXTERNAL OPERATING REVENUES Domestic Telecom $ 11,011 $ 10,557 $ 21,723 $ 20,867 Domestic Wireless 3,958 1,837 6,128 3,505 International 518 470 1,040 921 Information Services 1,031 1,032 1,781 1,771 -------- -------- -------- -------- Total segments - adjusted 16,518 13,896 30,672 27,064 Reconciling items 269 617 664 1,210 -------- -------- -------- -------- Total consolidated - reported $ 16,787 $ 14,513 $ 31,336 $ 28,274 ======== ======== ======== ======== INTERSEGMENT REVENUES Domestic Telecom $ 210 $ 155 $ 410 $ 291 Domestic Wireless 9 5 18 9 International -- -- -- -- Information Services 25 23 54 43 -------- -------- -------- -------- Total segments - reported 244 183 482 343 Reconciling items (244) (183) (482) (343) -------- -------- -------- -------- Total consolidated - reported $ -- $ -- $ -- $ -- ======== ======== ======== ======== TOTAL OPERATING REVENUES Domestic Telecom $ 11,221 $ 10,712 $ 22,133 $ 21,158 Domestic Wireless 3,967 1,842 6,146 3,514 International 518 470 1,040 921 Information Services 1,056 1,055 1,835 1,814 -------- -------- -------- -------- Total segments - adjusted 16,762 14,079 31,154 27,407 Reconciling items 25 434 182 867 -------- -------- -------- -------- Total consolidated - reported $ 16,787 $ 14,513 $ 31,336 $ 28,274 ======== ======== ======== ======== NET INCOME Domestic Telecom $ 1,503 $ 1,339 $ 2,887 $ 2,785 Domestic Wireless 91 138 220 341 International 175 147 348 317 Information Services 329 311 527 503 -------- -------- -------- -------- Total segments - adjusted 2,098 1,935 3,982 3,946 Reconciling items 2,809 7 2,482 38 -------- -------- -------- -------- Total consolidated - reported $ 4,907 $ 1,942 $ 6,464 $ 3,984 ======== ======== ======== ========
(Dollars in Millions) JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- ASSETS Domestic Telecom $ 71,203 $ 69,997 Domestic Wireless 52,567 16,590 International 15,622 12,543 Information Services 2,876 2,829 --------- --------- Total segments 142,268 101,959 Reconciling items 14,745 10,871 --------- --------- Total consolidated $ 157,013 $ 112,830 ========= =========
14 17 Major reconciling items between the segments and the consolidated results are as follows:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- TOTAL REVENUES Genuity and Government Systems $ 275 $ 515 $ 529 $1,005 Regulatory settlements (see Note 2) (69) -- (69) -- Eliminations and other (181) (81) (278) (138) ----- ----- ----- ------ $ 25 $ 434 $ 182 $ 867 ===== ===== ===== ====== NET INCOME Genuity and Government Systems $ (153) $ (63) $ (281) $ (119) Direct merger, severance, transition costs and other related actions (see Note 2) (1,032) (22) (1,032) (32) Gains on sales of assets, net (see Note 5) 1,455 -- 1,510 308 CWC restructuring (see Notes 8 and 9) 2,663 -- 2,128 -- Pension settlements 260 102 564 102 Corporate, eliminations and other (384) (10) (407) (221) ------- ----- ------- ------ $ 2,809 $ 7 $ 2,482 $ 38 ======= ===== ======= ======
Pension settlement gains before tax of $425 million ($260 million after-tax) and $911 million ($564 million after-tax) were recognized for the three and six month periods ended June 30, 2000, respectively. This compares to pretax pension settlement gains of $165 million ($102 million after-tax) for the comparable three and six month periods of the prior year. 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. Additionally, in 2000 our lump-sum pension distributions surpassed the settlement threshold equal to the sum of the service cost and interest cost components of net periodic pension cost requiring settlement gain or loss recognition for all cash settlements for the year. 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 at current market prices. 14. 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 operating 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. Federal and state regulatory conditions to the Merger include certain commitments to, among other things, promote competition and the widespread deployment of advanced services, while helping 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. Over the remainder of 2000, based on preliminary estimates, the cost of satisfying these commitments is likely to impact net income by approximately $275-$325 million. 15. SUBSEQUENT EVENTS During August 2000, we announced a merger with NorthPoint Communications. Completion of the merger is subject to regulatory approvals and the approval of the NorthPoint shareholders. We expect the merger to close in 2001. We will account for the transaction as a purchase business combination. Upon completion of the merger, we will own 55% of NorthPoint and will consolidate its results. In accordance with the merger agreement, NorthPoint's shareholders will receive $2.50 per share or approximately $350 million in cash. The exact amount will be based on the number of shares outstanding at the time of closing. In addition, we have agreed to make a cash investment in NorthPoint of $450 million. Up to $350 million of this investment will be in the form of financing prior to the closing, subject to certain circumstances. During August 2000, we announced the purchase of OnePoint Communications. The transaction is subject to certain conditions and regulatory approvals. We expect the transaction to close in 2000. During July 2000, we completed the sales of the Arkansas and Missouri wireline properties for proceeds of approximately $1.1 billion and the sale of the Richmond wireless market in exchange for two wireless rural service areas in Virginia and cash of approximately $400 million. 15 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - ------------------------------------------------------------------------------- OVERVIEW - ------------------------------------------------------------------------------- The second quarter of 2000 marked a period of significant change for our company. We completed the merger with GTE Corporation on June 30, 2000, creating one of the world's leading providers of communications services. The merger has been accounted for as a pooling-of-interests. Under this method of accounting, the companies are treated as if they had always been combined for accounting and financial reporting purposes and, therefore, we have restated our financial information for all dates and periods prior to the merger on this basis. The financial statements presented reflect the new presentation used by our company. You should read Note 2 to our condensed consolidated financial statements for additional information on the merger transaction. - ------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- In this section of the Management's Discussion and Analysis (MD&A) we discuss our overall reported results and highlight special and nonrecurring items. In the following section of the MD&A, we review the performance of our segments on what we call an adjusted basis. This means we take our reported results and adjust them for the effects of these items, which management does not consider in assessing segment performance due primarily to their nonrecurring nature. We believe that this presentation will assist readers in better understanding trends from period to period. Our results for the first half of 2000 reflect solid operating performance marked by strong data, long distance, wireless and DSL growth. Revenues were $16.8 billion and $31.3 billion for the three and six months ended June 30, 2000, respectively. This represented increases of 15.7% and 10.8% over the comparable periods of the prior year. These increases were driven by the formation of Verizon Wireless during the second quarter of 2000, including the addition of Vodafone AirTouch properties and the consolidation of PrimeCo properties that were previously accounted for as equity investments. The revenue growth was also attributable to strong growth in data-related and international revenues. Operating income was $4.6 billion and $8.4 billion during the three months and six months ended June 30, 2000. These amounts include $2.5 billion and $2.6 billion, respectively, of net gains on sales of assets as described later in the MD&A. They also include merger-related and other charges of $1.6 billion for the three and six month periods ended June 30, 2000 as compared to $35 million and $52 million, respectively, during the comparable periods of the prior year. Pension settlement gains of $425 million and $911 million were recognized for the three and six months ended June 30, 2000, respectively. This compares to pension settlement gains of $165 million during the comparable three and six month periods of the prior year. Substantially all of the settlement gains recorded during the second quarter of 2000 relate to Domestic Telecom employees. For the six months ended June 30, 2000, approximately $689 million of the pension settlement gains relates to Domestic Telecom employees. The remainder relates primarily to employees of corporate units or employees of discontinued businesses whose pensions were settled during the period through annuities or otherwise. Net income was $4,907 million, or $1.79 diluted earnings per share, for the three month period ended June 30, 2000, compared to $1,942 million, or $.70 diluted earnings per share, for the three month period ended June 30, 1999. Net income for the first six months of 2000 was $6,464 million, or $2.35 diluted earnings per share, compared to $3,984 million, or $1.44 diluted earnings per share, for the same period in 1999. In addition to the after-tax effect of the items impacting operating income, net income during the three month and six month periods ended June 30, 2000 also benefited from a $3,088 million pretax gain related to the restructuring of Cable and Wireless Communications, in which we held an investment, and pretax mark-to-market adjustments related to our exchangeable notes payable of $1,112 million and $287 million for the three month and six month periods ended June 30, 2000, respectively. The special and nonrecurring items impacting our reported results for the three and six month periods are discussed in detail below. 16 19 - -------------------------------------------------------------------------------- MERGER-RELATED AND OTHER COSTS - -------------------------------------------------------------------------------- During the second quarter of 2000, in connection with the Bell Atlantic-GTE merger, we recorded a pretax charge of $472 million ($378 million after-tax, or $.14 per diluted share) for direct, incremental merger-related costs as follows:
(Dollars in Millions) ================================================================================================================= Compensation $ 210 Professional services 161 Other 101 ----- $ 472 =====
Compensation includes retention payments to employees that were contingent on the merger close and payments to employees to satisfy contractual obligations triggered by the change in control. Professional services includes 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. Since these costs were directly related to closing the merger, we have not identified them with any specific segment. Charges associated with employee severance of $584 million ($371 million after-tax, or $.14 per diluted share) were also recorded during the second quarter of 2000. Since these are merger-related costs, they are not included in the segment results discussed below. Had these costs been included, they would have been allocated as follows: Domestic Telecom $438 million, Domestic Wireless $38 million, International $8 million, Information Services $57 million. The balance would have been allocated to corporate. Employee severance costs, as recorded under Statement of Financial Accounting Standards 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 of ongoing SFAS No. 112 obligations for GTE employees. Of these employees, approximately 5,200 are located in the United States and approximately 300 are located at various international locations. The separations 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 condensed consolidated balance sheets as a component of Other current liabilities or Employee Benefit Obligations. In addition to the costs discussed above, during the quarter, we incurred $172 million ($47 million after taxes and minority interests, or $.02 per diluted share) of transition costs. Approximately $25 million of these charges ($15 million after-tax) relate to transition activities at Domestic Telecom and $147 million ($32 million after taxes and minority interests) relate to transition activities at Domestic Wireless. These costs, which are not included in the segment results, were incurred for the integration of systems, real estate consolidation and employee relocation. Based on preliminary estimates, we expect to incur approximately $2.0 billion of transition costs, including approximately $500 million for advertising and other costs to establish the Verizon brand over the next several years. During the second quarter, we also recorded charges of $385 million ($236 million after-tax, or $.09 per diluted share) for other actions in relation to the merger or other strategic decisions. These actions included the following:
(Dollars in Millions) ================================================================================================================= Write-off of duplicate assets $ 167 Regulatory settlements 69 Contract termination fees 86 Other 63 ----- $ 385 =====
These other merger-related costs were also excluded from the segment results primarily due to their nonrecurring nature. Had these costs been included, they would have been allocated as follows: Domestic Telecom $170 million, Domestic Wireless $75 million, International $19 million, Information Services $111 million. The balance would have been allocated to corporate. In connection with the Bell Atlantic-NYNEX merger, which was completed in August 1997, we recorded pretax transition and integration costs of $35 million in the second quarter of 1999 and $52 million in the first six months of 1999. These costs are not included in the segment results discussed below. 17 20 - ------------------------------------------------------------------------------- MARK-TO-MARKET ADJUSTMENT FOR EXCHANGEABLE NOTES - ------------------------------------------------------------------------------- In the three and six months ended June 30, 2000, we recorded a gain on a mark-to-market adjustment of $1,112 million ($722 million after-tax, or $.26 per diluted share) and $287 million ($186 million after-tax, or $.07 per diluted share) related to our $3.2 billion of notes which are now exchangeable into shares of Cable & Wireless plc (C&W) and NTL Incorporated (NTL). Prior to the reorganization of Cable & Wireless Communications plc (CWC) in May 2000, these notes were exchangeable into shares of CWC. The mark-to-market adjustments are non-cash, nonoperational 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. For additional information about these exchangeable notes, see Note 9 to the condensed consolidated financial statements. - ------------------------------------------------------------------------------- GAINS ON SALES OF ASSETS, NET - ------------------------------------------------------------------------------- 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 June 2000, we sold the approximately 471,000 access lines located in Iowa, Nebraska and Oklahoma for combined cash proceeds of $1.4 billion and $125 million in convertible preferred stock. The pretax gain on sale was $1,078 million ($655 million after-tax gain, or $.24 per diluted share). As of June 30, 2000, the remaining 1.1 million access lines continue to be reported in our condensed consolidated balance sheets as Net assets held for sale. Although all of the remaining access lines are subject to definitive sales agreements, their sale is contingent upon final agreements and regulatory approvals. We expect these sales to close in 2000 and will continue to operate all of the properties until sold. The 1.1 million access lines held for sale at June 30, 2000 represented approximately 1.7% of the domestic access lines that our Domestic Telecom business had in service at the time. Given the decision to sell, no depreciation was recorded for these properties during 1999 or 2000. Wireless Overlap A U.S. Department of Justice consent decree issued on December 6, 1999 required GTE Wireless, Bell Atlantic Mobile, Vodafone AirTouch and PrimeCo to resolve a number of wireless market overlaps in order to complete the wireless joint venture and the merger. As a result, during April 2000 we completed a transaction with ALLTEL that provided for the exchange of several former Bell Atlantic Mobile markets in Texas, New Mexico and Arizona 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). In June 2000, we entered into a series of definitive sale agreements to resolve the remaining service area conflicts prohibited by Federal Communications Commission (FCC) regulations. These agreements, which were entered into pursuant to the consent decree, enabled both the formation of Verizon Wireless and the closing of the merger. These definitive sales agreements included: o An agreement with AT&T Wireless related to the San Diego (former GTE) and Houston (former PrimeCo) markets. o An agreement with SBC Communications related to the Austin, Seattle and Spokane (former GTE) markets. o Agreements with BGV PCS Acquisition Co. LLC related to the Chicago (former PrimeCo) and Cincinnati (former GTE) markets. o An agreement with an affiliate of CFW Communications Company related to the Richmond (former PrimeCo) market. 18 21 As of June 30, 2000, the wireless properties discussed above are reported in our condensed consolidated balance sheets as Net assets held for sale. We expect these sales to occur in 2000. Based on the decision to sell, depreciation and amortization has been discontinued for these properties in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Other Transactions In connection with our decisions to exit the video business and GTE Airfone, a company involved in air-to-ground communications, we have recorded an impairment charge of $566 million ($362 million after-tax, or $.13 per diluted share) to reduce the carrying value of these investments to their estimated net realizable value. In addition, there were other sales resulting in a net pretax gain of approximately $22 million ($6 million after-tax). - ------------------------------------------------------------------------------- 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 13 to the condensed consolidated financial statements. We measure and evaluate our reportable segments based on adjusted net income, which excludes undistributed 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 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. 19 22 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 competitive local exchange carrier, which provides nationwide long distance service and bundled telecommunications services through its national sales and marketing organization. The Domestic Telecom segment is organized into 5 business units (enterprise, retail, wholesale, national operations and advanced services) in order to focus on specific markets and better meet customer requirements.
THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in Millions) JUNE 30, JUNE 30, ------------------ ---------------- 2000 1999 % CHANGE 2000 1999 % CHANGE RESULTS OF OPERATIONS - ADJUSTED BASIS -------- -------- -------- ------ ------ --------- OPERATING REVENUES Local services $ 5,493 $ 5,285 3.9% $10,981 $10,437 5.2% Network access services 3,421 3,380 1.2 6,774 6,645 1.9 Long distance services 793 781 1.5 1,615 1,614 .1 Other services 1,514 1,266 19.6 2,763 2,462 12.2 ------- ------- ------- ------- 11,221 10,712 4.8 22,133 21,158 4.6 ------- ------- ------- ------- OPERATING EXPENSES Operations and support 6,220 6,107 1.9 12,333 11,784 4.7 Depreciation and amortization 2,153 2,025 6.3 4,250 4,036 5.3 ------- ------- ------- ------- 8,373 8,132 3.0 16,583 15,820 4.8 ------- ------- ------- ------- OPERATING INCOME $ 2,848 $ 2,580 10.4 $ 5,550 $ 5,338 4.0 ======= ======= ======= ======= ADJUSTED NET INCOME $ 1,503 $ 1,339 12.2 $ 2,887 $ 2,785 3.7 ======= ======= ======= =======
As discussed earlier under "Consolidated Results of Operations," we either have sold recently or committed to sell wireline properties representing approximately 1.7% of the total Domestic Telecom access lines. The effect of these dispositions will largely depend on the timing of the sales and the reinvestment of the proceeds. OPERATING REVENUES Local Services Revenues Local services 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 includes wholesale revenues from unbundled network element (UNE) platforms, certain data transport revenues, and wireless interconnection revenues. Growth in local service revenues of $208 million, or 3.9%, and $544 million, or 5.2%, in the second quarter and first six months of 2000, respectively, was spurred by higher usage of our network facilities. This growth was generated, in part, by an increase in access lines in service of 2.6% from June 30, 1999. We had 64,469,000 access lines in service at June 30, 2000, compared to 62,810,000 access lines in service at June 30, 1999. Strong customer demand and usage of our data transport and digital services and the effect of price increases for certain local services, also contributed to revenue growth in the second quarter and first six months of 2000. Local service revenues were boosted in both periods by higher demand for our value-added, wireless interconnection and national directory assistance services. In the second quarter and first six months of 2000, local service revenue growth was partially offset by the effect of resold and UNE platform access lines. 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 20 23 DOMESTIC TELECOM - CONTINUED private networks. End-user access revenues are earned from our customers and from resellers who purchase dial-tone services. Our network access services revenues grew $41 million, or 1.2%, and $129 million, or 1.9%, in the second quarter and first six months of 2000, respectively, as compared to the same periods in 1999. This growth was mainly attributable to higher customer demand, as reflected by growth in access minutes of use of 2.5% and 4.3%, respectively, from the second quarter and first half of 1999. Volume growth also reflects a continuing expansion of the business market, particularly for high-capacity services. Demand for special access services grew 36.5% in the second quarter of 2000 and 34.4% in the first six months of 2000, reflecting a greater utilization of the network. Higher network usage by alternative providers of intraLATA toll services and higher end-user revenues attributable to an increase in access lines in service also contributed to revenue growth in both periods. Volume-related growth was largely offset by price reductions associated with federal and state price cap filings and other regulatory decisions. For more information on federal access rates, see "Other Factors That May Affect Future Results - Recent Developments - FCC Regulation and Interstate Rates." Long Distance Services Long distance service revenues include both intraLATA toll services and interLATA long-distance voice and data services. Long distance service revenues grew $12 million, or 1.5%, in the second quarter of 2000 and $1 million, or 0.1%, for the six month period ended June 30, 2000, as compared to the corresponding periods in 1999. Revenues in both periods reflect higher demand for interLATA long distance services throughout the region, including the January 2000 introduction of our interLATA long distance service in the State of New York. 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. 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 service 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. In the second quarter and the six month period ended June 30, 2000, we recognized higher other service revenues of $248 million, or 19.6%, and $301 million, or 12.2%, as compared to the corresponding periods last year. These revenue increases were largely attributable to new contracts with business customers for inventory management and purchasing services and data solutions and systems integration services. Revenue growth in both periods was partially offset by lower demand for our billing and collection, public telephone and customer premises equipment services. OPERATING EXPENSES Operations and Support Operations and support, which consists of employee costs and other operating expenses, increased by $113 million or 1.9% in the second quarter of 2000 and by $549 million or 4.7% in the first six months of 2000, as compared to the same periods in 1999. These expense increases were principally due to higher costs associated with entering new businesses such as long distance and data services, higher interconnection payments to competitive local exchange and other carriers to terminate calls on their networks (reciprocal compensation) and higher costs associated with growth in our non-regulated businesses. Higher costs at our operating telephone subsidiaries, including higher salary and wage increases for management and associate employees, higher overtime pay and the effect of higher work force levels, also contributed to the cost increases. 21 24 DOMESTIC TELECOM - CONTINUED A decline in pension and benefit costs and lower costs associated with Year 2000 readiness partially offset expense increases in both periods. The decline in pension and benefit costs in 2000 was chiefly due to favorable pension plan investment returns and changes in actuarial assumptions. These factors were partially offset by changes in certain plan provisions, including a previously reported amendment to our management cash balance plan and a special lump sum pension payment to management and associate retirees. Associate employee wages and pension and other benefits are determined under contracts with unions representing associate employees of the network subsidiaries. For more information on recent contract settlements/negotiations, see "Other Factors That May Affect Future Results - Recent Developments - Labor Agreements." Depreciation and Amortization Depreciation and amortization expense increased $128 million or 6.3% in the second quarter of 2000 and $214 million or 5.3% in the first six months of 2000 principally due to growth in depreciable telephone plant and changes in the mix of plant assets. The growth in telephone plant was largely attributable to increased capital expenditures for software and hardware to support the expansion of our network. These expense increases were partially offset in both periods by the effect of lower rates of depreciation. 22 25 DOMESTIC WIRELESS Domestic Wireless products and services includes 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 AirTouch, including the consolidation of PrimeCo Communications. The formation of Verizon Wireless occurred in April 2000. Effective with the contribution of the GTE Wireless assets in July 2000, Verizon Communications owns a 55% economic interest in the joint venture and Vodafone AirTouch owns the remaining 45%. The second quarter 2000 information in the table 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 AirTouch properties and the consolidation of PrimeCo.
THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in Millions) JUNE 30, JUNE 30, ------------------- ----------------- 2000 1999 % CHANGE 2000 1999 % CHANGE ---- ---- -------- ---- ---- -------- RESULTS OF OPERATIONS ADJUSTED BASIS OPERATING REVENUES Wireless services $ 3,967 $ 1,842 115.4% $ 6,146 $ 3,514 74.9% ======= ======= ======= ======= OPERATING EXPENSES Operations and support 2,648 1,204 119.9 4,147 2,299 80.4 Depreciation and amortization 877 258 239.9 1,199 512 134.2 ------- ------- ------- ------- 3,525 1,462 141.1 5,346 2,811 90.2 ------- ------- ------- ------- OPERATING INCOME $ 442 $ 380 16.3 $ 800 $ 703 13.8 ======= ======= ======= ======= INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES $ 23 $ (47) -- $ 24 $ 2 -- ------- ------- ------- ------- MINORITY INTEREST $ (120) $ (19) -- $ (151) $ (33) -- ------- ------- ------- ------- ADJUSTED NET INCOME $ 91 $ 138 (34.1) $ 220 $ 341 (35.5) ------- ------- ------- -------
As discussed earlier under "Consolidated Results of Operations," we either have disposed of recently or committed to dispose of certain wireless properties in order to resolve overlap situations 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 a purchase business combination with a step-up in the carrying value of the assets received in the exchange. OPERATING REVENUES Revenues earned from our consolidated wireless businesses grew by $2.1 billion or 115.4%, in the second quarter of 2000 and $2.6 billion or 74.9% in the first six months of 2000 as compared to the same periods in 1999. By including the revenues of the properties of the wireless joint venture on a basis comparable with the second quarter and first six months of 2000, revenues were $632 million (or 19%) and $1.1 billion (or 22.7%) higher than the similar periods of 1999. On this comparable basis, revenue growth was largely attributable to customer additions. Our domestic wireless customer base grew to 25.6 million customers in the second quarter of 2000, compared to 22.3 million customers in the second quarter of 1999, a 14.8% increase. During the quarter, approximately 300,000 customers selected one of Verizon Wireless's new national SingleRate plans since their introduction on April 4. Approximately 70 percent of national SingleRate subscribers are taking plans at $50 a month or higher. OPERATING EXPENSES Operations and Support Operations and support expenses, which represent employee costs and other operating expenses, increased by $1.4 billion or 119.9% in the second quarter of 2000 and $1.8 billion or 80.4% in the first six months of 2000 principally as a 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 the second quarter and first six months of 2000, operations and support expenses were $503 million (or 23.4%) and $907 million (or 28.0%) higher than the similar periods of 1999. Higher costs were attributable to the significant growth in the subscriber base described above. Depreciation and Amortization Depreciation and amortization expense increased by $619 million or 239.9% in the second quarter of 2000 and $687 million or 134.2% in the first six months of 2000. This increase 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 $50 million (or 6.0%) and $118 million (or 10.9%) higher than the comparable periods of 1999. Capital expenditures for our cellular network have increased in 2000 to support increased demand in all markets. 23 26 DOMESTIC WIRELESS - CONTINUED INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES The variances in the second quarter and year-to-date results from unconsolidated operations were principally due to the consolidation of PrimeCo in connection with the formation of the wireless joint venture. On a comparable basis, income from unconsolidated businesses in the second quarter 2000 was $4 million higher than the prior year. MINORITY INTEREST The significant increases in minority interest in the second quarter of 2000 and the first half of 2000 were principally due to the formation of the wireless joint venture and the significant minority interest attributable to Vodafone AirTouch. INTERNATIONAL Our International segment includes international wireline and wireless telecommunication operations, investments and management contracts in the Americas, Europe, Asia and Africa.
THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in Millions) JUNE 30, JUNE 30, ------------------- ----------------- 2000 1999 % CHANGE 2000 1999 % CHANGE ---- ---- -------- ---- ---- -------- RESULTS OF OPERATIONS - ADJUSTED BASIS OPERATING REVENUES Wireline services $ 218 $ 228 (4.4)% $ 458 $ 437 4.8% Wireless services 300 242 24.0 582 484 20.2 ----- ----- ------ ----- 518 470 10.2 1,040 921 12.9 ----- ----- ------ ----- OPERATING EXPENSES Operations and support 318 320 (.6) 688 633 8.7 Depreciation and amortization 91 74 23.0 183 150 22.0 ----- ----- ------ ----- 409 394 3.8 871 783 11.2 ----- ----- ------ ----- OPERATING INCOME $ 109 $ 76 43.4 $ 169 $ 138 22.5 ===== ===== ====== ===== INCOME FROM UNCONSOLIDATED BUSINESSES $ 127 $ 125 1.6 $ 296 $ 265 11.7 ADJUSTED NET INCOME $ 175 $ 147 19.0 $ 348 $ 317 9.8
OPERATING REVENUES Revenues earned from our international businesses grew by $48 million or 10.2%, in the second quarter of 2000 and $119 million or 12.9% in the first six months of 2000 as compared to the same periods in 1999. The increase in revenues is primarily due to an increase in cellular subscribers at the consolidated subsidiaries partially offset by lower revenue per subscriber. The second quarter drop in wireline revenues is attributable to the deconsolidation of QuebecTel in June 2000, as the result of the change in our ownership percentage to meet regulatory requirements. June year to date wireline revenues reflect increased local service revenues driven by an increase in access lines. OPERATING EXPENSES Operations and Support Operations and support expenses, which represent employee costs and other operating expenses, decreased by $2 million, or .6%, in the second quarter of 2000 and increased by $55 million, or 8.7%, in the first six months of 2000. The changes were impacted by increased service costs in Iusacell and Codetel, partially offset by the reduction in reported expenses resulting from the deconsolidation of QuebecTel. Depreciation and Amortization Depreciation and amortization expense increased by $17 million, or 23%, for the second quarter of 2000 and $33 million, or 22%, for the first six months of 2000. This increase reflects the continuing build-out of the Mexican and Argentine wireless networks necessary to meet customer demand. 24 27 INTERNATIONAL - CONTINUED INCOME FROM UNCONSOLIDATED BUSINESSES Income from unconsolidated businesses increased by $2 million in the second quarter of 2000 and $31 million in the first six months of 2000 over the same periods in 1999 due to strong subscriber growth at Taiwan Cellular Corporation, a full six months of operations at the Puerto Rico Telephone Company and from our investment in BayanTel, a Philippines-based telecommunications company. These increases were partially offset by lower results at CANTV driven by the weakened Venezuelan economy and delayed tariff increases as well as equity losses from our investment in Cable & Wireless Communications plc(CWC), an international cable television and telecommunications operation in the United Kingdom. Due to the restructuring that occurred during May 2000, we no longer record equity losses for CWC. 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.
THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in Millions) JUNE 30, JUNE 30, ------------------- ------------------ 2000 1999 % CHANGE 2000 1999 % CHANGE ------ ----- -------- ------ ---- -------- RESULTS OF OPERATIONS - ADJUSTED BASIS OPERATING REVENUES Information services $ 1,056 $ 1,055 .1% $ 1,835 $ 1,814 1.2% ------- ------- ------- ------- OPERATING EXPENSES Operations and support 475 506 (6.1) 909 928 (2.0) Depreciation and amortization 20 20 -- 39 38 2.6 ------- ------- ------- ------- 495 526 (5.9) 948 966 (1.9) ------- ------- ------- ------- OPERATING INCOME $ 561 $ 529 6.0 $ 887 $ 848 4.6 ======= ======= ======= ======= ADJUSTED NET INCOME $ 329 $ 311 5.8 $ 527 $ 503 4.8
OPERATING REVENUES Operating revenues from our Information Services segment improved by $1 million or .1% in the second quarter of 2000 and $21 million or 1.2% in the first six months of 2000 as compared to the same periods in 1999. These revenue increases were generated by growth in domestic and international directory advertising revenue and SuperPages.com(R), the Company's Internet directory service, offset by changes in the timing of revenue recognition due to changes in directory publication dates in various markets. OPERATING EXPENSES Second quarter 2000 total operating expenses declined $31 million or 5.9% and $18 million or 1.9% in the first six months of 2000 from the corresponding periods in 1999. These decreases were largely attributable to the in-year shifts of directory publication dates mentioned above, reduced uncollectible expenses and the Company's ongoing effort to reduce directory publishing expenses. 25 28 NONOPERATING ITEMS
THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in Millions) JUNE 30, JUNE 30, ------------------ ----------------- 2000 1999 % CHANGE 2000 1999 % CHANGE ----- ----- -------- ------ ---- -------- INTEREST EXPENSE Interest expense from continuing operations $916 $637 43.8% $1,690 $1,276 32.4% Capitalized interest costs 53 23 130.4 97 48 102.1 ---- ---- ------ ------ Total interest costs on debt balances $969 $660 46.8 $1,787 $1,324 35.0 ==== ==== ====== ======
The increase in interest costs for the three and six months ended June 30, 2000 was principally attributable to higher average short-term debt levels and interest rates. The increase in debt levels was mainly the result of the debt contributed by Vodafone AirTouch as part of the formation of Verizon Wireless.
THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in Millions) JUNE 30, JUNE 30, ------------------- ------------------- 2000 1999 % CHANGE 2000 1999 % CHANGE ----- ------- -------- ------ ------ -------- OTHER INCOME AND (EXPENSE), NET Foreign currency gains (losses), net $ (32) $ 5 -- $ (21) $ 19 -- Interest income 58 24 141.7% 126 50 152.0% Minority interest (9) (53) 83.0 (35) (101) 65.3 Other, net (13) 7 -- (14) 19 -- ----- ----- ------ ----- Total $ 4 $ (17) -- $ 56 $ (13) -- ===== ===== ====== =====
The changes in other income and expense in the three and six months ended June 30, 2000, as compared to the same periods in 1999, were due to changes in several components as shown in the table above. Foreign exchange gains were affected primarily by our Iusacell subsidiary that uses the Mexican peso as its functional currency. We expect that our earnings will continue to be affected by foreign currency gains or losses associated with the U.S. dollar denominated debt issued by Iusacell. We recorded additional interest income in the second quarter and first six months of 2000 in connection with the settlement of a tax-related matter and higher levels of short-term investments. The change in minority interest was partly due to the redemption in October 1999 and March 2000 of a total of $1.0 billion of preferred securities issued by GTE Delaware, L.P., a subsidiary of GTE, and higher operating losses at Grupo Iusacell, partially offset by the impact of the wireless joint venture with Vodafone AirTouch.
THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in Millions) JUNE 30, JUNE 30, ------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- EFFECTIVE INCOME TAX RATES 39.4% 36.9% 39.0% 36.9%
The effective income tax rate is the provision for income taxes as a percentage of income before the provision for income taxes. Our effective income tax rates for the three and six month periods ended June 30, 2000 were higher than the corresponding periods in 1999 principally as a result of certain merger related costs and special charges for which there were no corresponding tax benefits recorded. 26 29 - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL CONDITION - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- SIX MONTHS ENDED (Dollars in Millions) JUNE 30, -------------------- 2000 1999 $ CHANGE ------- ------- -------- CASH FLOWS FROM (USED IN) Operating activities $ 8,329 $ 7,566 $ 763 Investing activities (7,595) (6,159) (1,436) Financing activities (1,421) (1,430) 9 ------- ------- ------- DECREASE IN CASH AND CASH EQUIVALENTS $ (687) $ (23) $ (664) ======= ======= =======
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 June 30, 2000 and 1999 and December 31, 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 presently foreseeable capital requirements will continue to be financed primarily through internally generated funds. Additional debt or equity financing may be needed to fund additional development activities or to maintain our capital structure to ensure our financial flexibility. - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES - -------------------------------------------------------------------------------- Our primary source of funds continued to be cash generated from operations. The increase in cash from operations primarily reflects improved operating income before depreciation and amortization. Favorable changes in working capital also contributed to the increase in cash flows from operating activities. - -------------------------------------------------------------------------------- CASH FLOWS USED IN INVESTING ACTIVITIES - -------------------------------------------------------------------------------- Capital expenditures continued to be our primary use of capital resources. We invested approximately $5.6 billion in our Domestic Telecom business in the first half of 2000, compared to $4.5 billion in the first half of 1999 to facilitate the introduction of new products and services, enhance responsiveness to competitive challenges and increase the operating efficiency and productivity of the network. Capital spending is expected to total approximately $18 billion in 2000, an increase of approximately $4.5 billion. Approximately $2.0 billion of the increase is due to the inclusion of both Vodafone AirTouch and PrimeCo properties in Verizon Wireless as well as increases in existing Bell Atlantic and GTE wireless properties' capital spending in 2000. Domestic Telecom network expenditures on data, DSL and strong demand growth account for the remainder of the increase. We invested $1,132 million in acquisitions and investments in businesses during the first six months of 2000, including approximately $715 million in the equity of Metromedia Fiber Network, Inc. (MFN) and $205 million in wireless properties. In the first six months of 1999, we invested $1,410 million in acquisitions and investments including $635 million in Omnitel to increase our ownership percentage from 19.7% to 23.1%, $177 million in PrimeCo and $366 million for a 40% interest in Telecommunicaciones de Puerto Rico (TELPRI), a full-service telecommunications provider serving the commonwealth of Puerto Rico. During the first half of 2000, we also invested $975 million in subordinated convertible notes of MFN. In the first half of 2000, we received cash proceeds of $1,899 million, including $1,433 million from the sale of non-strategic access lines and $144 million from the sale of CyberTrust. In the first half of 1999, we received cash proceeds of $612 million in connection with the disposition of our remaining investment in Viacom. 27 30 - -------------------------------------------------------------------------------- CASH FLOWS USED IN FINANCING ACTIVITIES - -------------------------------------------------------------------------------- The net cash proceeds from increases in our total debt from December 31, 1999 of $1,689 million was primarily due to the issuance of $893 million of medium term notes, $757 million of financing transactions of cellular assets and $386 million of new wireless long-term bank debt, partially offset by repayments of short term debt. Our debt ratio was 61.0% as of June 30, 2000, compared to 61.8% as of June 30, 1999 and 64.3% as of December 31, 1999. We expect the year-end total debt to be slightly below current levels, subject to any modification of our investment strategy. As in prior quarters, 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 and second quarters of 1999 and in the first quarter of 2000, we announced a quarterly cash dividend of $.385 per share. In the second quarter of 2000 we announced two separate prorata dividends to ensure that the respective shareowners of Bell Atlantic and GTE received dividends at an appropriate rate. As of June 30, 2000, we had in excess of $10.3 billion of unused bank lines of credit and $4.4 billion in bank borrowings outstanding. As of June 30, 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 Securities and Exchange Commission. The notes may be issued from time to time by our subsidiary, Verizon Global Funding Corp. and will have the benefit of a support agreement between Verizon Global Funding Corp. and us. There have been no notes issued under this program. - -------------------------------------------------------------------------------- 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 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, hedging the value of certain international investments, and protecting against earnings and cash flow volatility resulting from changes in foreign exchange rates. 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. 28 31 - -------------------------------------------------------------------------------- EXCHANGEABLE NOTES - -------------------------------------------------------------------------------- In 1998, we issued exchangeable notes as described in Note 9 to the condensed consolidated financial statements and discussed earlier under "Mark-to-Market Adjustment for Exchangeable Notes." These financial instruments expose us to market risk, including: o Equity price risk, because the notes are exchangeable into shares that are traded on the open market and routinely fluctuate in value. o Interest rate risk, because the notes carry fixed interest rates. o 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 in the current share price over 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. o At June 30, 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 $3.2 billion 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 will determine 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. o For each $1 increase in the value of the TCNZ shares above the exchange price, our 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 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. o Our cash flows would not be affected by mark-to-market activity relating to the exchangeable notes. o 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. - -------------------------------------------------------------------------------- EQUITY RISK - -------------------------------------------------------------------------------- We also have equity price risk associated with our investments, primarily in common stocks and convertible debt securities that are carried at fair value. The value of these investments is subject to changes in the market prices of the securities. Investments recorded at fair value totaled $8,058 million at June 30, 2000 and $2,665 million at December 31, 1999. The increase from December 31, 1999 was primarily due to our purchase of common stock and subordinated debt securities of MFN and our exchange of CWC shares for shares of C&W and NTL. We accounted for our investment in CWC using the equity method, while we are accounting for our investments in C&W and NTL on the cost method and carrying them at their fair value as required by SFAS No. 115. A sensitivity analysis of our investments recorded at fair value indicated that a 10% increase or decrease in the fair value of these securities would result in a $806 million increase or decrease in the fair value of the investments. A change in fair value, net of income taxes, would be recognized in Accumulated other comprehensive income in our statement of changes in shareowners' investment. 29 32 - -------------------------------------------------------------------------------- OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS - -------------------------------------------------------------------------------- On August 8, 2000, we filed a Current Report on Form 8-K announcing our revised financial outlook in light of the impact of the Bell Atlantic-GTE merger including the impact of conditions for merger approval imposed by state and FCC regulators, the deconsolidation of Genuity, the formation of Verizon Wireless, including the impact of goodwill resulting from its formation, and the newly announced combinations with NorthPoint Communications Group, Inc and OnePoint Communications. - -------------------------------------------------------------------------------- BELL ATLANTIC - GTE MERGER - -------------------------------------------------------------------------------- On June 30, 2000, Bell Atlantic and GTE completed a merger under a definitive merger agreement dated as of July 27, 1998. Under the terms of the agreement, GTE became a wholly-owned subsidiary of Bell Atlantic. GTE shareholders received 1.22 shares of Bell Atlantic common stock for each share of GTE common stock that they owned. This resulted in the issuance of 1,176 million shares of Bell Atlantic common stock. The merger qualified as a tax-free reorganization and has been accounted for as a pooling of interests. Under this method of accounting, the companies are treated as if they had always been combined for accounting and financial reporting purposes and, therefore, we have restated our financial information for all dates and periods prior to the merger. On June 27, 2000, Genuity Inc., formerly GTE Internetworking, sold 90.5% of its equity to the public through an initial public offering (IPO). We retained a 9.5% equity interest in Genuity, as permitted by the Telecommunications Act of 1996. Genuity 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. We have an option to increase our ownership interest to as much as 82 percent 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 Telecommunications Act of 1996 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. The IPO transferred ownership and control of Genuity to the public shareholders and, accordingly, we deconsolidated our investment in Genuity and, effective as of the IPO, we account for our investment in Genuity using the cost method of accounting. 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. Over the remainder of 2000, based on preliminary estimates, the cost of satisfying these commitments is likely to impact net income by approximately $275-$325 million. 30 33 - -------------------------------------------------------------------------------- RECENT DEVELOPMENTS - -------------------------------------------------------------------------------- NorthPoint Communications Group On August 8, 2000, we and NorthPoint Communications Group, Inc. (NorthPoint) announced that we will merge our digital subscriber line (DSL) businesses to form a premier broadband communications company dedicated to accelerating the delivery of high-speed data services nationwide. The merger will combine the companies' DSL networks, products, technology, strategic partnerships and management. The merger agreement has been approved by the boards of directors of both companies and is subject to regulatory approvals and the approval of NorthPoint shareholders. Shareholders representing approximately 48 percent of the currently outstanding shares of NorthPoint have agreed to vote their shares in support of the merger. The companies anticipate completing the transaction by mid-2001. Upon completion of the transaction, we will own 55% of NorthPoint and NorthPoint's existing shareholders will own 45%. As a result, we will account for the transaction as a purchase business combination and consolidate NorthPoint's financial results from the date of the merger close. Based on preliminary estimates, completion of the NorthPoint transaction during mid-2001 could have the effect of lowering our year-over-year earnings per share growth in 2001 by approximately 4 - 5 %. In accordance with the merger agreement, NorthPoint shareholders will receive $350 million in cash or approximately $2.50 per share. The actual per share amount will be based on the number of outstanding NorthPoint shares and warrants as of the closing date of the transaction. NorthPoint shareholders also will receive one share in the new NorthPoint for each share held as of the closing date. In addition, we have agreed to make a cash investment in NorthPoint of $450 million. Up to $350 million will be provided in the form of financing prior to closing, subject to certain conditions. Upon completion of the merger, such financing would be converted into common stock in NorthPoint. OnePoint Communications Corp. On August 7, 2000, we announced that we will purchase OnePoint Communications Corp., an acquisition that will accelerate delivery of voice, video and high-speed Internet services to apartment buildings, condominiums, business offices and other multi-unit structures. The transaction, which we plan to complete by year-end 2000, is subject to certain conditions and regulatory approvals. Based on preliminary estimates, completion of the OnePoint transaction by the end of 2000 could have the effect of lowering our earnings per share growth in 2001 by approximately 1%. Wireline Property Sales During July 2000, we completed the sales of the Arkansas and Missouri wireline properties for proceeds of approximately $1.1 billion. Wireless Overlap During July 2000, we completed the sale of the Richmond (former PrimeCo) wireless market in exchange for two wireless rural service areas in Virginia and approximately $400 million in cash. LABOR AGREEMENTS On August 6, 2000, collective bargaining agreements with unions representing approximately 85,000 of our employees in the former Bell Atlantic region expired, and the unions initiated a work stoppage. As of 8:00 a.m. on August 14, 2000 we continued to negotiate new agreements with the unions. 31 34 FCC REGULATION AND INTERSTATE RATES On May 31, 2000, the FCC approved the industry proposal to restructure access charges (known as the "CALLS plan"). Both Bell Atlantic and GTE had been part of the industry group that had originally made the proposal for this five year plan to the FCC. Under the terms of the plan, direct end-user access charges are increased while access charges to long distance carriers are reduced. While the plan continues the 6.5% (less inflation) annual reductions for most interstate access charges, it provides for a price freeze when switched access transport prices reach $0.0055 per-minute. In addition, in conjunction with provisions that will allow carriers to deaverage their subscriber line charges by geographic zones, the plan establishes a new $650 million universal service fund to support interstate access rates. Of that amount, we expect approximately $320 million to be used to support interstate access services in our service territory. The price restructuring portions of the plan are mandatory for all large local exchange carriers, including our telephone operating companies. The price level portions of the plan are mandatory only in the initial year of the plan. Carriers have until September 14, 2000 to decide whether to participate in the remaining four years of the plan, or whether to submit cost studies as the basis of future price caps. Consistent with the new access plan, we filed tariff adjustments to take effect on July 1, 2000 (with modifications effective August 11, 2000). As a result of these tariff adjustments, former GTE carriers in ten states, and former Bell Atlantic carriers in seven states reached the $0.0055 benchmark and, should we opt into the full five year CALLS plan, they will not be subject to further annual interstate switched access price reductions for the remaining life of the plan. Universal Service The Supreme Court has agreed to review one aspect of the FCC's universal service funding plan. The FCC had relied on a theoretical cost model to determine the appropriate size of federal support for a fund for intrastate high cost areas. GTE had challenged use of such a model for such purposes. The Supreme Court will likely decide this issue in the first half of 2001. The Court rejected all other challenges to the U.S. Court of Appeals review of FCC universal service practices, including that of AT&T and MCI WorldCom, Inc., which had sought Supreme Court review of the Court of Appeal's decision that the FCC may not include intrastate revenues as part of the basis for assessing contributions to an FCC administered universal service fund. Unbundling of Network Elements On July 18, 2000, the U.S. Court of Appeals invalidated many of the FCC's pricing guidelines for unbundled network elements. In particular, the Court ruled that while the FCC may rely on forward looking costs as a benchmark, the FCC's cost rules were invalid because they were based on a hypothetical efficient carrier's network rather than the actual network of the incumbent local exchange carriers. The Court also reaffirmed that incumbent local exchange carriers are not required to combine unbundled network elements that are not already combined. The FCC has not yet announced whether it will seek Supreme Court review of this order, or whether it will begin a new rulemaking to determine pricing guidelines to replace those rejected by the Court. On June 2, 2000, the FCC clarified what services are required to be unbundled. In particular, the FCC clarified and extended a temporary constraint on the obligation to provide unbundled network elements for existing loop-transport combinations. The FCC order requires unbundled network elements for such combinations only where the requesting carrier has "a significant amount of local exchange service" as specifically defined by the FCC. The FCC has announced its intention to open a rulemaking in early 2001 to gather evidence to determine whether competitors for special access services (users of these loop-transport combinations) are "impaired" in their ability to provide competing services without unbundled network elements. This "impairment" test will provide the factual basis for a decision as to under what circumstances, if any, unbundled elements for loop-transport combinations will be required on a going-forward basis. Reciprocal Compensation The FCC has opened a proceeding to determine whether calls to internet service providers are under federal jurisdiction and whether such calls should be subject to intercarrier compensation requirements. A March 24, 2000 U.S. Court of Appeals order had rejected the justification of an earlier FCC decision that had found that these calls are interstate (and therefore subject to federal authority), but that the FCC would continue to defer to the states in determining whether local intercarrier compensation agreements would apply to this traffic. The FCC has indicated that it expects to issue a new order in the second half of 2000 on this issue. 32 35 TELECOMMUNICATIONS ACT OF 1996 In-Region Long Distance On August 1, 2000, the U.S. Court of Appeals rejected an appeal of AT&T and Covad seeking a reversal of the FCC's order that gave Verizon permission to enter the in-region long distance market in New York. The FCC approval order was upheld by the Court with respect to every challenge raised. STATE REGULATION Pennsylvania On September 30, 1999, the Pennsylvania Public Utility Commission (PUC) issued a final decision in its "Global" proceeding on telecommunications competition matters. The decision proposes to require our operating telephone subsidiary in Pennsylvania, Verizon Pennsylvania, to split into separate retail and wholesale corporations. It proposes reductions in access charges applicable to services provided to interexchange carriers and in both unbundled network element rates and wholesale rates applicable to services and facilities provided to competitive local exchange carriers. It requires Verizon Pennsylvania to provide combinations of unbundled network elements beyond those required by the FCC. It reclassifies certain business services as "competitive," but restricts the pricing freedom that that classification is supposed to give Verizon Pennsylvania. It sets a schedule of prerequisites for state endorsement of a Verizon Pennsylvania application to the FCC for permission to offer in-region long distance service under Section 271 of the 1996 Act that are likely to delay that endorsement. Verizon Pennsylvania has challenged the lawfulness of this order in the Commonwealth Court of Pennsylvania and the Federal District Court. On January 18, 2000, Verizon Pennsylvania and fourteen other parties submitted to the PUC a Joint Petition for Settlement to resolve the appeals from the "Global" Order. If approved by the PUC, the settlement will eliminate the wholesale/retail separate subsidiary requirement and replace it with a requirement to establish an advanced services affiliate. The settlement would also expedite the process to obtain state endorsement of any Verizon Pennsylvania application to the FCC for permission to offer long distance service. On February 2, 2000, the Commonwealth Court denied the PUC's request to consider the settlement and set an expedited briefing schedule for the appeals. On February 22, 2000, Verizon Pennsylvania appealed this determination, along with the PUC, to the Pennsylvania Supreme Court, and on April 27, 2000, the Pennsylvania Supreme Court denied this appeal. On May 16, 2000, the Commonwealth Court heard oral argument on the Global Order appeal. The Commonwealth Court's decision is pending. On April 26, 2000, the Commission reinitiated its proceeding to determine the nature and form of the separate subsidiary ordered in its "Global" proceeding. The Commission ordered Verizon Pennsylvania to file an updated structural separation plan and mitigation plan. In addition, in recognition of the passage of time and the potential for changed circumstances, the Commission invited Verizon Pennsylvania to submit alternative proposals to structurally separate its retail and wholesale operations. On June 26, 2000, Verizon Pennsylvania submitted a structural separation plan, estimating that the implementation costs for full structural separation would be over $800 million and that the ongoing annual costs of operation would be over $300 million. Verizon Pennsylvania also submitted an alternative proposal for structural separation that involved the establishment of a separate data affiliate. A final ruling in this docket is not expected until early next year. 33 36 OTHER MATTERS RECENT ACCOUNTING PRONOUNCEMENTS Derivatives and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivatives be measured at fair value and recognized as either assets or liabilities on our balance sheet. Changes in the fair values of derivative instruments will be recognized in either earnings or comprehensive income, depending on the designated use and effectiveness of the instruments. We must adopt SFAS No. 133 no later than January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which amended SFAS No. 133. The amendments in SFAS No. 138 address certain implementation issues and relate to such matters as the normal purchases and normal sales exception, the definition of interest rate risk, hedging recognized foreign-currency-denominated assets and liabilities, and intercompany derivatives. We are currently evaluating the provisions of SFAS No. 133 and No. 138. The impact of adoption will be determined by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions at the date of adoption. Stock Compensation In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." Interpretation No. 44 was issued in order to clarify certain issues arising from Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Interpretation No. 44 is effective July 1, 2000, but certain conclusions cover specific events that occur either after December 15, 1998 or January 12, 2000. The main issues addressed by Interpretation No. 44 are: (a) the definition of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. Interpretation No. 44 will not have a material impact on our results of operations or financial position. Revenue Recognition In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which provides additional guidance on revenue recognition and, in certain circumstances, requires the deferral of incremental costs. We must adopt SAB No. 101 no later than the fourth quarter of 2000. The Company is currently assessing the impact of SAB No. 101. 34 37 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS In this Management's Discussion and Analysis, and elsewhere in this Quarterly 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 Quarterly Report, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: o materially adverse changes in economic conditions in the markets served by us or by companies in which we have substantial investments; o material changes in available technology; o 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; o the extent, timing, success, and overall effects of competition from others in the local telephone and toll service markets; o the outcome of collective bargaining with the unions; o the timing and profitability of our entry into the in-region long distance market; o our ability to combine former Bell Atlantic and GTE operations, satisfy regulatory conditions and obtain revenue enhancements and cost savings following the merger; o the profitability of our entry into the nationwide broadband access market, including the impact of our transaction with NorthPoint Communications; o the ability of Verizon Wireless to combine operations and obtain revenue enhancements and cost savings; and o our ability to convert our ownership interest in Genuity Inc. into a controlling interest consistent with regulatory conditions, and Genuity's ensuing profitability. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information relating to market risk is included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Financial Condition section under the caption "Market Risk." 35 38 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our 2000 Annual Meeting of Shareholders was held on May 24, 2000. At the meeting, the following items were submitted to a vote of shareholders. (a) The following nominees were elected to serve on the Board of Directors:
Name of Nominee Votes Cast For Votes Withheld ------------------ -------------- -------------- Richard L. Carrion 1,216,089,162 35,379,920 Helene L. Kaplan 1,214,370,456 37,098,626 Joseph Neubauer 1,213,155,963 38,313,119 Thomas H. O'Brien 1,216,075,704 35,393,378 Hugh B. Price 1,215,379,979 36,089,103 Ivan G. Seidenberg 1,214,616,346 36,852,736 Walter V. Shipley 1,215,480,182 35,988,900 John R. Stafford 1,215,999,298 35,469,784
(b) The appointment of PricewaterhouseCoopers LLP as independent accountants for 2000 was ratified with 1,230,666,277 votes for, 12,298,720 votes against, and 8,504,085 abstentions. (c) A shareholder proposal regarding additional disclosure of executive compensation was defeated with 142,243,426 votes for, 916,548,725 votes against, 26,087,290 abstentions, and 166,589,641 broker non-votes. (d) A shareholder proposal regarding executive severance agreements was defeated with 320,200,312 votes for, 726,571,938 votes against, 38,107,190 abstentions, and 166,589,642 broker non-votes. (e) A shareholder proposal regarding composition of the Board of Directors was defeated with 288,249,897 votes for, 754,378,251 votes against, 42,251,295 abstentions, and 166,589,639 broker non-votes. (f) A shareholder proposal regarding a stockholder matching gift program was defeated with 63,808,302 votes for, 967,865,618 votes against, 53,205,525 abstentions, and 166,589,637 broker non-votes. 36 39 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number 10 Amended and Restated Employment Agreement of Ivan G. Seidenberg, dated as of June 30, 2000. 27 Financial Data Schedule. (b) Reports on Form 8-K filed during the quarter ended June 30, 2000: A Current Report on Form 8-K, dated April 3, 2000, was filed on April 5, 2000, regarding the selection of Verizon as the new name of the combined companies of Bell Atlantic and GTE after their merger, and the launch of Verizon Wireless. A Current Report on Form 8-K, dated April 3, 2000, was filed on April 17, 2000, and amended by a Form 8-K/A filed on May 11, 2000, reporting unaudited pro forma financial information relating to the Bell Atlantic and Vodafone AirTouch plc combination of U.S. wireless assets for the period ended December 31, 1999. A Current Report on Form 8-K, dated April 25, 2000, was filed on April 26, 2000, regarding Bell Atlantic's first quarter 2000 financial results as a stand-alone company before the Bell Atlantic and GTE merger. A Current Report on Form 8-K, dated June 30, 2000, was filed regarding the completion of the Bell Atlantic and GTE merger. 37 40 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BELL ATLANTIC CORPORATION Date: August 14, 2000 By /s/ Lawrence R. Whitman ---------------------------- Lawrence R. Whitman Vice President - Controller (Principal Accounting Officer) UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 10, 2000. 38 41 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10 Amended and Restated Employment Agreement of Ivan G. Seidenberg, dated as of June 30, 2000 27 Financial Data Schedule
EX-10 2 ex10.txt AGREEMENT 1 EXHIBIT 10 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the 1st day of January, 1999, and amended and restated as of the 30th day of June, 2000, is made by and between Bell Atlantic Corporation, its successors and assigns ("Bell Atlantic"), and Ivan G. Seidenberg, Chief Executive Officer of Bell Atlantic (the "Key Executive"). In this Agreement, "Bell Atlantic Companies" means all of, and "Bell Atlantic Company" means any one of, Bell Atlantic, all corporate subsidiaries or other companies affiliated with Bell Atlantic, all companies in which Bell Atlantic directly or indirectly owns a substantial equity interest, and their successors and assigns. WHEREAS, Bell Atlantic and the Key Executive previously entered into an Executive Retention Agreement, last amended March 14, 1997 (the "Retention Agreement") and an Employment Agreement, dated as of August 14, 1997 (the "Prior Employment Agreement"); and WHEREAS, Bell Atlantic and the Key Executive subsequently entered into an Employment Agreement, dated as of January 1, 1999 (the "Employment Agreement"), which superseded the Retention Agreement and Prior Employment Agreement; and WHEREAS, Bell Atlantic and GTE Corporation ("GTE") have agreed to merge their businesses (the "Merger") pursuant to the terms of an Agreement and Plan of Merger dated as of July 27, 1998, among Bell Atlantic, GTE, and Beta Gamma Corporation (the "Definitive Agreement"); and WHEREAS, in contemplation of the closing of the Merger, Bell Atlantic and the Key Executive now wish to amend the Employment Agreement to describe the Key Executive's position and duties in the post-Merger period and to implement the terms of succession provided for in Section 7.10 of the Definitive Agreement; NOW, THEREFORE, for good and valuable consideration, the Key Executive and Bell Atlantic hereby agree as follows: 1. TERM OF EMPLOYMENT. The term of employment under this Agreement (the "Term of Employment") shall commence on January 1, 1999 and end on June 30, 2004. The Term of Employment shall consist of a "Pre-Merger Period", an "Initial Post-Merger Period", and a "Secondary Post-Merger Period". The Pre-Merger Period shall begin on January 1, 1999 and shall end on the closing date of the Merger. The Initial Post-Merger period shall begin on the closing date of the Merger and shall end on the earlier of (i) June 30, 2002, or (ii) the date that Charles R. Lee ceases to be Co-Chief Executive Officer of the Company for any reason. The Secondary Post-Merger Period shall begin at the end of the Initial Post-Merger period and shall end on June 30, 2004. - -------------------------------------------------------------------------------- Employment Agreement Page 1 Ivan G. Seidenberg 2 2. OBLIGATIONS OF THE BELL ATLANTIC COMPANIES. During the Term of Employment, the Bell Atlantic Companies shall have the following obligations and duties and shall provide the following compensation to the Key Executive. (a) SALARY. Bell Atlantic shall compensate the Key Executive at a base salary of not less than $1,200,000 per year, subject to annual review by the Board of Directors of Bell Atlantic (the "Board") in January, 2000 and each January thereafter during the Term of Employment. (b) STIP. The Key Executive shall participate in the Bell Atlantic Senior Management Short Term Incentive Plan or any successor to that plan ("STIP") and shall be eligible for a potential maximum award which, for each performance year during the Term of Employment, shall be equal to or greater than 2.25 multiplied by the Key Executive's base salary in effect on January 1 of each such year. (c) STOCK OPTIONS. The Key Executive shall participate in the Bell Atlantic 1985 Incentive Stock Option Plan or any successor to that plan (the "Stock Option Plan") and shall receive an annual grant of options thereunder with a value equal to or greater than 2.5 multiplied by the Key Executive's base salary in effect on the date of grant. (d) VACATION. The Key Executive shall have the same holidays per calendar year recognized by Bell Atlantic for its management employees and shall have an aggregate of 4 management personal days and 5 weeks vacation per calendar year, provided that such management personal days and vacation days shall be scheduled with due regard to the needs of the business. (e) CORPORATE AIRCRAFT. The Key Executive and his immediate family shall use Bell Atlantic corporate aircraft for all business and personal travel, except that the Key Executive may use commercial aircraft where use of corporate aircraft is not practical. The Key Executive shall be responsible for the payment of taxes on imputed income attributable to personal use of corporate aircraft, except that, whenever the Key Executive uses corporate aircraft for business purposes and is accompanied by an immediate family member whose use of corporate aircraft results in the imputation of income to the Key Executive, the Company shall pay the Key Executive additional cash compensation in an amount sufficient to allow the Key Executive to pay taxes on (i) such additional compensation, plus (ii) the income imputed to the Key Executive because of such family member's use of corporate aircraft. (f) OTHER BENEFIT PLANS. To the extent not otherwise modified by the terms of this Agreement, the Key Executive shall be eligible to participate in all of the benefit and compensation plans, and the programs or perquisites, applicable to senior managers of Bell Atlantic, as those plans and programs may be amended, supplemented, replaced or terminated from time to time. (g) CORPORATE HEADQUARTERS. Bell Atlantic's headquarters shall be located in New York City, and the Key Executive's services shall be rendered primarily at that location. - -------------------------------------------------------------------------------- Employment Agreement Page 2 Ivan G. Seidenberg 3 3. POSITIONS, DUTIES AND OBLIGATIONS OF THE KEY EXECUTIVE. During the Term of Employment, the Key Executive shall have the following positions, duties, and obligations. (a) POSITION AND DUTIES AS OFFICER. During the Pre-Merger Period, the Key Executive shall serve as sole Chief Executive Officer of the Company. During the Initial Post-Merger Period, the Key Executive shall serve as President of the Company and, together with Charles R. Lee, as one of two-Co-Chief Executive Officers of the Company. During the Secondary Post-Merger Period, the Key Executive shall serve as sole Chief Executive Officer of the Company. During each such period, the Key Executive shall report solely to the Board, with such duties and responsibilities as are customarily assigned to his position, and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the Board. During the Initial Post-Merger Period, the principal executive officers of Bell Atlantic shall report jointly to the Key Executive and Mr. Lee, in their capacity as Co-Chief Executive Officers, and during the Secondary Post-Merger Period, such executive officers shall report solely to the Key Executive, in his capacity as sole Chief Executive Officer. (b) BOARD OF DIRECTORS. The Key Executive shall be nominated for election to the Board at each annual meeting of shareowners which occurs prior to the end of the Term of Employment. The Key Executive shall serve as Chairman of the Board during the Pre-Merger Period, and shall resign from such position on the closing date of the Merger so that Charles R. Lee may become Chairman of the Board (as provided in Section 7.10 of the Definitive Agreement). The Key Executive shall again become Chairman of the Board on the earlier of (i) June 30, 2004, or (ii) the date Mr. Lee ceases to be Chairman of the Board for any reason, and thereafter the Key Executive shall serve as Chairman of the Board throughout the remaining Term of Employment. (c) ENTIRE BUSINESS EFFORTS. The Key Executive shall fully and faithfully perform the duties and responsibilities described in Sections (a) and (b) of this Agreement, shall diligently devote his entire business skill, time and effort to the affairs of the Bell Atlantic Companies in accordance with the duties assigned to him, and shall perform all such duties, and otherwise conduct himself, in a manner reasonably calculated in good faith by him to promote the best interests of the Bell Atlantic Companies. Prior to the Key Executive's termination of employment, except to the extent specifically permitted by the Board, and except for memberships on boards of directors which the Key Executive held on January 1, 1999, the Key Executive shall not, directly or indirectly, render any services of a business, commercial or professional nature to any other person or organization other than a Bell Atlantic Company or a venture in which a Bell Atlantic Company has a financial interest, whether or not the services are rendered for compensation. 4. POTENTIAL INTERIM AMOUNT. Effective January 1, 1999, Bell Atlantic shall credit $3,224,483 to the Company Contribution sub-account contained within the Key Executive's account under the Bell Atlantic Income Deferral Plan ("IDP"). This credit shall be allocated in full to the Bell Atlantic Shares Fund maintained under the IDP. The Key Executive shall have the right to change this allocation from the Bell Atlantic Shares Fund to any other permitted investment option in accordance with the terms of the IDP. The parties acknowledge that such credit is in complete satisfaction of and will fully discharge any right or entitlement that the Key Executive may have, now or in the future, to a Potential Interim Amount ("PIA") under the IDP or under any other benefit plan maintained by any Bell Atlantic Company. - -------------------------------------------------------------------------------- Employment Agreement Page 3 Ivan G. Seidenberg 4 5. RETENTION AGREEMENT PAYMENTS. (a) RETENTION AWARD. Effective January 1, 1999, the Key Executive will forfeit any right or entitlement that he may have, now or in the future, to the Retention Award provided for in Section 3(e) of the Retention Agreement. In lieu thereof, Bell Atlantic shall credit the Key Executive's account under the IDP with the number of Bell Atlantic shares comprising, as of January 1, 1999, the Retention Award. This credit valued as $1,016,636 shall be allocated in full to the Bell Atlantic Shares Fund maintained under the IDP, provided that the Key Executive shall have the right to change this allocation from the Bell Atlantic Shares Fund to any other permitted investment option in accordance with the terms of the IDP. (b) SEVERANCE. Effective January 1, 1999, Bell Atlantic shall credit the Key Executive's account under the IDP with the value of the Severance Payment, including the Global Balanced Fund Account, provided for in Section 3(h) of the Retention Agreement. Such value shall be determined in accordance with the provisions of the Retention Agreement, except that the value shall be determined as of December 31, 1998. This credit shall be allocated to the following investment funds maintained under the IDP: a) $136,146 of the Severance Payment shall be credited to the Bell Atlantic Shares Fund; and b) the balance of the Severance Payment in the amount of $4,377,290 shall be credited to the Government Money Market Fund. The Key Executive shall have the right to change these allocations to any other permitted investment option in accordance with the terms of the IDP. The parties acknowledge that these credits to the IDP shall be in complete satisfaction of, and will fully discharge, any right or entitlement that the Key Executive may have, now or in the future, to the Severance Payment. 6. SPECIAL INCENTIVE. (a) INCENTIVE ACCOUNTS. Bell Atlantic shall establish three sub-accounts within the Key Executive's account under the IDP. These sub-accounts shall consist of the 2001 Account, the 2002 Account and the 2003 Account (together, the "Incentive Accounts"). (b) CREDIT. Effective January 1, 1999, Bell Atlantic shall credit $6,000,000 to the 2001 Account, $2,000,000 to the 2002 Account, and $2,000,000 to the 2003 Account. These credits shall be allocated to the Global Balanced Fund maintained under the IDP, and shall continue to be allocated to such Fund until the credits vest as provided in Section 6(c) of this Agreement. The credits, plus any earnings or losses, shall constitute the "Incentive Awards". The Key Executive shall have no right or entitlement to these Awards unless, and only to the extent that, rights to these Awards vest under Section 6(c) of this Agreement. (c) VESTING. Provided the Key Executive is an "employee in good standing" (as hereinafter defined) on the respective vesting dates described in clauses (i) through (iii), the Key Executive's rights under the IDP to the Incentive Awards shall vest as follows: - -------------------------------------------------------------------------------- Employment Agreement Page 4 Ivan G. Seidenberg 5 (i) 2001 Account: if "adjusted earnings per share" (or "AEPS"), as hereinafter defined, for Bell Atlantic for the fiscal year ending December 31, 2001 are less than 121.0% of the AEPS for the fiscal year ending December 31, 1998 (the "1998 Base Year"), the Key Executive shall forfeit any right or entitlement to the Incentive Award in the 2001 Account; if such earnings are equal to 121.0% of the 1998 Base Year AEPS, the Key Executive's rights to 70% of such Incentive Award shall vest as of December 31, 2001; if such earnings are equal to or greater than 136.0% of the 1998 Base Year AEPS, the Key Executive's rights to 130% of such Incentive Award shall vest as of December 31, 2001; and, if such earnings are between 121.0% and 136.0% of the 1998 Base Year AEPS, the Key Executive's rights to a pro rated amount of between 70% to 130% of such Incentive Award shall vest as of December 31, 2001; (ii) 2002 Account: if AEPS for Bell Atlantic for the fiscal year ending December 31, 2002 are less than 107.0% of the AEPS for the fiscal year ending December 31,2001 (the "2001 Base Year"), the Key Executive shall forfeit any right or entitlement to the Incentive Award in the 2002 Account; if such earnings are equal to 107.0% of the 2001 Base Year AEPS, the Key Executive's rights to 70% of such Incentive Award shall vest as of December 31, 2002; if such earnings are equal to or greater than 112.0% of the 2001 Base Year AEPS, the Key Executive's rights to 130% of such Retention Award shall vest as of December 31, 2002; and, if such earnings are between 107.0% and 112.0% of the 2001 Base Year AEPS, the Key Executive's rights to a pro rated amount of between 70% and 130% of such Incentive Award shall vest as of December 31, 2002; and (iii) 2003 Account: if AEPS for Bell Atlantic for the fiscal year ending December 31, 2003 are less than 107.0% of the AEPS for the fiscal year ending December 31, 2002 (the "2002 Base Year"), the Key Executive shall forfeit any right or entitlement to the Incentive Award in the 2003 Account; if such earnings are equal to 107.0% of the 2002 Base Year AEPS, the Key Executive's rights to 70% of such Incentive Award shall vest as of December 31, 2003; if such earnings are equal to or greater than 112.0% of the 2002 Base Year AEPS, the Key Executive's rights to 130% of such Incentive Award shall vest as of December 31, 2003; and, if such earnings are between 107.0% and 112.0% of the 2002 Base Year AEPS, the Key Executive's rights to a pro rated amount of between 70% and 130% of such Incentive Award shall vest as of December 31, 2003. (d) ADJUSTED EARNINGS PER SHARE AND EARNINGS TARGETS. "Adjusted earnings per share" for any year shall be the earnings per share of Bell Atlantic adjusted, in the discretion of the Board, to eliminate or modify any extraordinary, non-reoccurring, one-time or other such items necessary to more appropriately reflect the ongoing results of the Bell Atlantic businesses. In addition, the Board, in its discretion, may modify or change the earnings targets set forth in Section 6(c) of this Agreement to take into account acquisitions, mergers, dispositions, reorganizations, changes in capital structure, or other such events. (e) DEFINITION OF EMPLOYEE IN GOOD STANDING. For purposes of this Agreement, the Key Executive will be considered to be an "employee in good standing" - -------------------------------------------------------------------------------- Employment Agreement Page 5 Ivan G. Seidenberg 6 on a given date if, on or before that date, the Key Executive has not terminated employment for any reason (other than "constructive discharge" as defined in Section 8(d) of this Agreement), has not tendered oral or written notice of intent to resign or retire effective as of a date on or before the given date (other than pursuant to a "constructive discharge"), and has not behaved in a manner that would be grounds for discharge with "cause" as defined in Section 8(b) of this Agreement. 7. STAY BONUS. (a) CLOSING OF MERGER. If the Merger occurs pursuant to the terms of the Definitive Agreement, and if the Key Executive has remained an Employee in Good Standing of a Bell Atlantic Company from January 1, 1999 to the closing date of the Merger (the "Closing Date"), then, not later than 30 calendar days following the Closing Date, Bell Atlantic shall pay the Key Executive a special bonus (a "Stay Bonus") consisting of a single cash payment in an amount equal (before withholding of taxes) to 1.5 multiplied by the sum, as of the Closing Date, of (i) the Key Executive's annual rate of base salary, and (ii) 50% of the Key Executive's maximum short-term incentive under the STIP. (b) BUSINESS DISCRETION OF BELL ATLANTIC/TERMINATION OF MERGER PLAN. Nothing in this Agreement is intended to limit the discretion of any Bell Atlantic Company to take any action with regard to the Merger which Bell Atlantic may consider appropriate, including, without limitation, postponing the Closing Date or terminating the Definitive Agreement. If the Definitive Agreement is terminated without the Merger occurring, the Key Executive shall have no right to receive the Stay Bonus or any portion of such bonus. 8. TERMINATIONS OF EMPLOYMENT. (a) VOLUNTARY RESIGNATION, RETIREMENT, OR DISCHARGE FOR CAUSE. In the event that, prior to the end of the Term of Employment, the Key Executive voluntarily resigns or retires for any reason (except a "constructive discharge"), or is discharged by Bell Atlantic for "cause", the Key Executive shall forfeit any and all rights to receive the compensation and benefits set forth in Sections 2, 6 and 7 of this Agreement which as of the relevant date have not yet been earned under this Agreement, but shall otherwise be eligible to receive any and all compensation and benefits for which a senior manager would be eligible under the applicable provisions of the compensation and benefit plans in which he is then eligible to participate, as those plans may be amended from time to time. (b) CAUSE. For purposes of this Agreement, the term "cause" shall mean (i) grossly incompetent performance or substantial or continuing inattention to or neglect of the duties and responsibilities assigned to the Key Executive; fraud, misappropriation or embezzlement involving any Bell Atlantic Company; or a material breach of the Employee Code of Business Conduct or Paragraphs 10 (Non-Compete/No Solicitation), 11 (Return of Property; Intellectual Property Rights) or 12 (Proprietary and Confidential Information) of this Agreement; each of the foregoing as determined in the reasonable discretion and judgment of the Board, or (ii) commission of any felony of which the Key Executive is finally adjudged guilty in a court of competent jurisdiction. In the event that Bell Atlantic terminates the employment of the Key Executive for Cause, it will state in - -------------------------------------------------------------------------------- Employment Agreement Page 6 Ivan G. Seidenberg 7 writing the grounds for such termination and provide this statement to the Key Executive within 10 business days after the date of termination. (c) INVOLUNTARY TERMINATIONS. Except in the case of a discharge for cause, in the event that Bell Atlantic discharges the Key Executive, or the Key Executive is "constructively discharged", prior to the end of the Term of Employment, then the Key Executive shall be entitled to receive, as liquidated damages, subject to signing and delivering the Release (attached as Exhibit A), the following payments, credits and benefits in lieu of any payment, credit or benefit otherwise provided in Sections 2, 6 and 7 of this Agreement, provided that each payment, credit and benefit shall be contingent upon the absence, at the time such payment, credit or benefit is due, of any act that would constitute a material breach of this Agreement: (i) Salary: through the Term of Employment, on a monthly basis, an amount equal to the monthly salary which would have been paid to the Key Executive under Section 2 of this Agreement, assuming that his annual rate of salary would have been increased each January 1 by the greater of (A) 5%, or (B) the general percentage increase, if any, approved by the Human Resources Committee ("HRC") of the Board for comparable positions in the senior management group based on the HRC's review of market-median values for such comparable positions; (ii) Short-Term Incentives: through the Term of Employment, on an annual basis, not later than 30 days after the date on which incentives are awarded by Bell Atlantic under the STIP for the prior year's performance, an amount equal to the value of the potential maximum award which the Key Executive would have been entitled to receive under the STIP based on the maximum STIP award for comparable positions in the senior management group, without adjustment for individual performance; (iii) Special Incentive: if the separation from service occurs prior to December 31, 2001, vested rights under the IDP to 100% of the Incentive Awards in each of the Incentive Accounts; if the separation from service occurs after December 31, 2001 but before December 31, 2002, vested rights under the IDP to 100% of the Retention Awards in the 2002 and 2003 Incentive Accounts; and, if the separation from service occurs after December 31, 2002, vested rights under the IDP to 100% of the Incentive Award in the 2003 Incentive Account; (iv) Stock Options: through the Term of Employment, on an annual basis, within 30 days of the granting of stock options for the year to senior managers, an amount equal to 2.5 multiplied by the annual salary amount determined in accordance with clause (i) above; provided further, with respect to any and all Bell Atlantic stock options which are outstanding on the date of the Key Executive's separation from service, the Key Executive shall be deemed, for purposes of determining the duration of the Key Executive's right to exercise any and all such stock options, to have remained in active service with Bell Atlantic continuously through the Term of Employment, and then to have separated from service with whatever rights would then be applicable to a holder of such options under the Stock Option Plan; - -------------------------------------------------------------------------------- Employment Agreement Page 7 Ivan G. Seidenberg 8 (v) IDP Benefits: through the Term of Employment, company credits to the Company Contribution sub-account contained within the Key Executive's account under the IDP to the fullest extent provided, and at the same time such amounts would have been credited, as if the Key Executive had remained actively employed until the end of the Term of Employment and received the salary and maximum STIP awards determined in accordance with clauses (i) and (ii) above; provided further, that Bell Atlantic shall also credit to such IDP sub-account an amount each year equal to the sum of (A) the amount which the Key Executive would otherwise have been eligible to receive as company matching contributions under the Bell Atlantic Savings Plan or any successor to that plan (if he had fully participated in contributions to that plan) and (B) the pay credits which the Key Executive would otherwise have been eligible to receive under the Bell Atlantic Cash Balance Plan or any successor to that plan; (vi) Split- Dollar Benefits: regardless of whether the Key Executive is retirement eligible at the time of his separation from service, split-dollar life insurance benefits applicable to a retiring participating senior manager, under the terms of the Bell Atlantic Senior Management Estate Management Program; (vii) Flexible Perquisites: through the Term of Employment, on a monthly basis, $3,000 in lieu of the Flexible Perquisites Account allowance that the Key Executive would have been entitled to receive; (viii) Stay Bonus: if the Merger subsequently occurs pursuant to the Definitive Agreement, a single cash payment, not later than 30 days after the Closing Date of the Merger, which shall be equal (before withholding of taxes) to the Stay Bonus which would otherwise have become payable under Section 7(a) of this Agreement, provided that the date of separation from service shall be substituted for the Closing Date for purposes of calculating the dollar amount of such payment; and (ix) Other: accommodations for travel, office support and facilities, executive assistance and other perquisites as provided previous retiring Chairmen; provided, however, that if Bell Atlantic should discharge the Key Executive without cause after June 30, 2001, or the Key Executive should be constructively discharged after such date, the Term of Employment, for purposes of calculating liquidated damages under this Section 8(c), shall end on the third-year anniversary of the date of the Key Executive's discharge or constructive discharge; and, provided further, that if the Key Executive should be discharged without cause or constructively discharged at any time, the liquidated damages provided for in clauses (i) through (ix) above shall be supplemented by an amount equal to the excess, if any, of (i) the remuneration earned by the Chairman and Chief Executive Officer of the Company from the date of the Key Executive's discharge through the remaining Term of Employment, over (ii) the liquidated damages provided for in clauses (i) through (ix) above. (d) CONSTRUCTIVE DISCHARGE. The Key Executive shall be deemed to have been "constructively discharged" for purposes of this Agreement if the Key Executive is - -------------------------------------------------------------------------------- Employment Agreement Page 8 Ivan G. Seidenberg 9 an Employee in Good Standing and he terminates his employment for any of the following reasons: Bell Atlantic (or the Key Executive's employing company) has materially breached this Agreement; the Key Executive's responsibilities, as described in Section 3(a) hereof, have been significantly reduced in type or scope; there has been a significant adverse change in the Key Executive's reporting relationship, as described in Section 3(a) hereof; there has been a significant adverse change in the Key Executive's relative compensation (including a negative individual performance adjustment which causes the Key Executive's STIP award for a particular year to be reduced by 10% or more); the Company requires that the Key Executive's services be rendered primarily at a location or locations other than that provided in Section 2(g) of this Agreement; during the Pre-Merger Period, the Key Executive is removed from the position of Chairman of the Board of the Company (provided that the Key Executive's resignation from that position upon the closing of the Merger, as provided in Section 3(b) hereof, shall not constitute grounds for constructive discharge); at the end of the Initial Post-Merger Period, the Key Executive is not appointed sole Chief-Executive Officer of the Company; on the date provided in Section 3(b) of this Agreement, the Key Executive does not succeed Charles R. Lee as Chairman of the Board; following his appointment as Chairman of the Board, the Key Executive is removed from such position; or there has been a "change of control" of Bell Atlantic. For purposes of this Agreement, a "change of control" of Bell Atlantic shall mean that any of the following events or circumstances has occurred: (i) any "Person" (as such term is used in sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes a beneficial owner, directly or indirectly, of shares of one or more classes of stock of Bell Atlantic representing 20% or more of the total voting power of Bell Atlantic's then outstanding voting stock, provided, however, that if such beneficial ownership is acquired in a transaction that has been negotiated and approved by the Board, such acquisition of beneficial ownership shall not be treated as a change of control of Bell Atlantic for purpose of this Agreement; (ii) a tender offer (for which a filing has been or is required to be made with the Securities and Exchange Commission under section 14(d) of the Securities Exchange Act of 1934) is made for the stock of Bell Atlantic, and the Person making the offer owns or has accepted for payment shares of one or more classes of Bell Atlantic stock which represent, when combined with any shares otherwise acquired and owned by such Person, 20% or more of the total voting power of Bell Atlantic's then outstanding stock, provided, however, that if such tender offer has been negotiated and approved by the Board, such tender offer and stock acquisition shall not be treated as a change of control of Bell Atlantic for purposes of this Agreement; or (iii) there ceases to be a majority of the Board comprised of individuals who either (A) have been members of the Board continuously for a period of not less than two years, or (B) are new directors whose election by the Board or nomination for election by shareowners of Bell Atlantic was approved by a vote of at least two-thirds of the directors then in office who either were directors described in clause (A) hereof or whose election or nomination for election was previously so approved. - -------------------------------------------------------------------------------- Employment Agreement Page 9 Ivan G. Seidenberg 10 (e) DISABILITY OR DEATH. If, during the Term of Employment at a time when the Key Executive is an Employee in Good Standing, the Key Executive terminates employment on account of disability (within the meaning of the applicable disability benefit plans in which the Key Executive participates from time to time) or dies, and provided Bell Atlantic receives a Release in the form of Exhibit A from the Key Executive (in the case of disability) or from his estate (in the case of death), then Bell Atlantic shall pay to the Key Executive (in the case of disability) or pay to the Key Executive's estate (in the case of death) the amounts determined as if, at the date of termination of employment on account of disability or death, the Key Executive had been terminated without cause under Section 8(c) of this Agreement; provided, however, that, regardless of the date of death or disability, the Term of Employment shall end on June 30, 2004 for purposes of calculating the amount due the Key Executive or his estate pursuant to this Section 8(e); provided further, that in lieu of the amount described in Section 8(c)(viii) of this Agreement (the "Stay Bonus Amount"), the Key Executive (or his estate) shall receive the Stay Bonus Amount multiplied by the following fraction: the numerator shall be the number of days that have elapsed between the date of this Agreement and the date of the Key Executive's death or disability, and the denominator shall be the number of days that have elapsed between the date of this Agreement and the Closing Date of the Merger; and, provided finally, that in the case of a termination of employment on account of disability, the amounts paid pursuant to Sections 8(c)(i) and (ii) of this Agreement shall reduce dollar for dollar the disability benefits which would otherwise be payable to the Key Executive during the remainder of the Term of Employment under the various disability benefit plans in which he participates. (f) BOARD APPROVAL OF CERTAIN ACTIONS. Notwithstanding any other provision of this Agreement, prior to July 1, 2002, the Key Executive's employment as Co-Chief Executive Officer or sole Chief Executive Officer, as the case may be, may not be terminated by Bell Atlantic, either for cause or without cause, unless such action is approved by affirmative vote of at least three-quarters of the entire membership of the Board. In addition, if the Key Executive has been appointed Chairman of the Board prior to July 1, 2002, he may not be removed from such position prior to that date unless such action is approved by affirmative vote of at least three-quarters of the entire membership of the Board. 9. PAYMENTS SUBJECT TO EXCISE TAX. In the event that it shall be determined, in the manner described in Exhibit B, that any payment or distribution by any Bell Atlantic Company to or for the benefit of the Key Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, Bell Atlantic shall pay the Key Executive an additional amount, determined in accordance with and subject to the provisions of Exhibit B, to compensate the Key Executive for his excise tax cost. 10. PROHIBITION AGAINST COMPETITIVE ACTIVITIES. (a) PROHIBITED CONDUCT BY THE KEY EXECUTIVE. During the period of the Key Executive's employment with any Bell Atlantic Company, and for a period of 24 months following the Key Executive's termination of employment for any reason from all Bell Atlantic Companies, the Key Executive, without the prior written consent of the Board, shall not: - -------------------------------------------------------------------------------- Employment Agreement Page 10 Ivan G. Seidenberg 11 (i) personally engage in "Competitive Activities" (as defined in Section 9(b) of this Agreement); or (ii) work for, own, manage, operate, control or participate in the ownership, management, operation or control of, or provide consulting or advisory services to, any individual, partnership, firm, corporation or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities; provided, however, that the Key Executive's purchase or holding, for investment purposes, of securities of a publicly-traded company shall not constitute "ownership" or "participation in ownership" for purposes of this paragraph so long as the Key Executive's equity interest in any such company is less than a controlling interest. (b) COMPETITIVE ACTIVITIES. For purposes of this Agreement, "Competitive Activities" means business activities relating to products or services of the same or similar type as the products or services which (i) are sold (or, pursuant to an existing business plan, will be sold) to paying customers of one or more Bell Atlantic Companies, and (ii) for which the Key Executive then has responsibility to plan, develop, manage, market or oversee, or had any such responsibility within the prior 24 months. Notwithstanding the previous sentence, a business activity will not be treated as a Competitive Activity if the geographic marketing area of the relevant products or services sold by the Key Executive or a third party does not overlap with the geographic marketing area for the applicable products and services of the Bell Atlantic Companies. (c) NO SOLICITATION OF BELL ATLANTIC EMPLOYEES. During the period of the Key Executive's employment with any Bell Atlantic Company, and for a period of 24 months following the Key Executive's termination of employment for any reason from all Bell Atlantic Companies, the Key Executive shall not, without the consent of the Board: (i) recruit or solicit any active employee of any Bell Atlantic Company for employment or for retention as a consultant or service provider; (ii) hire or participate (with another company or third party) in the process of hiring (other than for a Bell Atlantic Company) any person who is then an active employee of any Bell Atlantic Company, or provide names or other information about Bell Atlantic employees to any person or business (other than a Bell Atlantic Company) under circumstances which could lead to the use of that information for purposes of recruiting or hiring; or (iii) interfere with the relationship of any Bell Atlantic Company with any of its employees, agents, or representatives. (d) WAIVER. Nothing in this Agreement shall bar the Key Executive from requesting, at the time of the Key Executive's termination of employment or at any time thereafter, that the Board waive, in its sole discretion, Bell Atlantic's rights to enforce some or all of this Section. 11. RETURN OF PROPERTY; INTELLECTUAL PROPERTY RIGHTS. The Key Executive agrees that on or before the Key Executive's termination of employment for any reason with all Bell Atlantic Companies, the Key Executive shall return to the appropriate Bell Atlantic Company all - -------------------------------------------------------------------------------- Employment Agreement Page 11 Ivan G. Seidenberg 12 property owned by each such company or in which any such company has an interest. The Key Executive acknowledges that Bell Atlantic or an applicable Bell Atlantic Company is the rightful owner of any programs, ideas, inventions, discoveries, copyright material or trademarks which the Key Executive may have originated or developed, or assisted in originating or developing, during the Key Executive's period of employment with any Bell Atlantic Company, where any such origination or development involved the use of company time or resources, or the exercise of the Key Executive's responsibilities for or on behalf of any such company. The Key Executive shall at all times, both before and after termination of employment, cooperate with Bell Atlantic in executing and delivering documents requested by any Bell Atlantic Company, and taking any other actions, that are necessary or requested by Bell Atlantic to assist any Bell Atlantic Company in patenting, copyrighting or registering any programs, ideas, inventions, discoveries, copyright material or trademarks, and to vest title thereto in the applicable company. 12. PROPRIETARY AND CONFIDENTIAL INFORMATION. The Key Executive shall at all times preserve the confidentiality of all proprietary information and trade secrets of any and all Bell Atlantic Companies, except to the extent that disclosure of such information is legally required. "Proprietary information" means information that has not been disclosed to the public, and which is treated as confidential within the business of any Bell Atlantic Company. 13. NONDISCLOSURE. Unless and until the precise terms of this Agreement, and the precise amount of any payment eligible to be paid or actually paid under this Agreement, are disclosed in writing to the public by any Bell Atlantic Company, the Key Executive shall hold the terms of this Agreement and the amount of any payment, benefit, credit, or right hereunder in strict confidence, except that the Key Executive may disclose such details (i) on a confidential basis to his spouse (if any), and to any financial counselor, tax adviser or legal counsel retained by the Key Executive, or (ii) to the extent such disclosure is legally required. 14. ASSIGNMENT BY BELL ATLANTIC. The obligations of Bell Atlantic hereunder shall be the obligations of any and all successors and assigns of Bell Atlantic. Bell Atlantic may assign this Agreement without the Key Executive's consent to any company that acquires all or substantially all of the stock or assets of Bell Atlantic, or into which or with which Bell Atlantic is merged or consolidated. This Agreement may not be assigned by the Key Executive, and no person other than the Key Executive (or the Key Executive's estate) may assert the rights of the Key Executive under this Agreement. 15. NON-BENEFIT BEARING PAYMENTS. The amounts to be paid, provided or credited under Sections 4, 5, 6, 7, 8, and 9 of this Agreement shall not be treated as compensation for purposes of computing or determining any additional benefit payable under any savings plan, insurance plan, pension plan, or other employee benefit plan maintained by any Bell Atlantic Company. 16. DEFERRALS UNDER IDP. Amounts otherwise payable to the Key Executive under Sections 7 or 8 of this Agreement may be deferred under the IDP or any successor plan, but only if and to the extent that a valid deferral election is in place and deferral of such amounts is permitted under the terms of the IDP or successor plan. 17. FORFEITURE OF IDP AMOUNTS. The Key Executive acknowledges that if he breaches Section 10 (Non-Compete/No Solicitation) of this Agreement or engages in serious misconduct that is contrary to written policies of Bell Atlantic and is harmful to any Bell Atlantic - -------------------------------------------------------------------------------- Employment Agreement Page 12 Ivan G. Seidenberg 13 Company or its reputation, he may forfeit any balance remaining in any Company Contribution sub-account contained within his account under the IDP. 18. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions of this Agreement shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 19. ADDITIONAL REMEDIES. In addition to any other rights or remedies, whether legal, equitable or otherwise, which each of the parties may have, the Key Executive acknowledges that Sections 10 (Non-Compete/No Solicitation), 11 (Return of Property), 12 Proprietary and Confidential Information), and 13 (Nondisclosure) of this Agreement are essential to the continued good will and profitability of Bell Atlantic and further acknowledges that the application and operation thereof shall not involve a substantial hardship upon the Key Executive's future livelihood. The parties hereto further recognize that irreparable damage to Bell Atlantic will result in the event that these sections of the Agreement are not specifically enforced and that monetary damages will not adequately protect Bell Atlantic from a breach of these sections of the Agreement. If any dispute arises concerning the violation by the Key Executive of these sections of the Agreement, the parties hereto agree that an injunction may be issued restraining such violation pending the determination of such controversy, and no bond or other security may be required in connection therewith. 20. REFORMATION AND SEVERABILITY. The Key Executive and Bell Atlantic agree that the agreements contained herein and within the Release shall each constitute a separate agreement independently supported by good and adequate consideration, and shall each be severable from the other provisions of the Agreement and the Release. If an arbitrator or court of competent jurisdiction determines that any term, provision or portion of this Agreement or the Release is void, illegal or unenforceable, the other terms, provisions and portions of this Agreement or the Release shall remain in full force and effect and the terms, provisions and portions that are determined to be void, illegal or unenforceable shall either be limited so that they shall remain in effect to the extent permissible by law, or such arbitrator or court shall substitute, to the extent enforceable, provisions similar thereto or other provisions, so as to provide to Bell Atlantic, to the fullest extent permitted by applicable law, the benefits intended by this Agreement and the Release. 21. GTE MERGER. If the Merger occurs pursuant to the Definitive Agreement, any action taken to implement succession as contemplated under Section 7.10 of the Definitive Agreement shall not result in a breach of this Agreement or constitute grounds for constructive discharge under Section 8(d) of this Agreement, and this Agreement shall be amended to the extent necessary to permit such succession. - -------------------------------------------------------------------------------- Employment Agreement Page 13 Ivan G. Seidenberg 14 22. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or messenger, transmitted by telex or telegram or mailed by registered or certified mail, return receipt requested and postage prepaid, as follows: (a) If to Bell Atlantic, to: Bell Atlantic Corporation 1095 Avenue of the Americas New York, New York 10036 Attention: Executive Vice President and General Counsel (b) If to the Key Executive, to: [Address] [Address] or to such other person or address as either of the parties shall hereafter designate to the other from time to time by similar notice. 23. ARBITRATION. Any dispute arising out of or relating to this Agreement, except any dispute arising out of or relating to Sections 10 through 13 of this Agreement, shall be settled by final and binding arbitration, which shall be the exclusive means of resolving any such dispute, and the parties specifically waive all rights to pursue any other remedy, recourse or relief. With respect to disputes by Bell Atlantic arising out of or relating to Sections 10 through 13 of this Agreement, Bell Atlantic has retained all its rights to legal and equitable recourse and relief, including but not limited to injunctive relief. Notice of the existence of a dispute which a party wishes to have resolved by arbitration shall be provided pursuant to Section 22 of this Agreement. The arbitration shall be expedited and conducted in New York, New York pursuant to the Center for Public Resources ("CPR") Rules for Non-Administered Arbitration of Employment Disputes in effect at the time of notice of the dispute before one neutral arbitrator appointed by CPR from the CPR Panel of Neutrals unless the parties mutually agree to the appointment of a different neutral arbitrator. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award rendered by the arbitration may be entered by any court having jurisdiction. The finding of the arbitrator may not change the express terms of this Agreement and shall be consistent with the arbitrator's understanding of the findings a court of proper jurisdiction would make in applying the applicable law to the facts underlying the dispute. In no event whatsoever shall such an arbitration award include any award of damages other than the amounts in controversy under this Agreement. The parties waive the right to recover, in such arbitration, punitive damages. 24. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of New York. 25. ENTIRE AGREEMENT. Except for the terms of other compensation and benefit plans in which the Key Executive participates, this Agreement shall set forth the entire understanding of Bell Atlantic and the Key Executive and shall supersede all prior agreements and communications, whether oral or written, between Bell Atlantic and the - -------------------------------------------------------------------------------- Employment Agreement Page 14 Ivan G. Seidenberg 15 Key Executive including, without limitation, the Retention Agreement and the Prior Employment Agreement. This Agreement shall not be modified except by written agreement of the Key Executive and Bell Atlantic; provided, further, that if the Merger occurs pursuant to the Definitive Agreement, Bell Atlantic shall cause to be maintained, through June 30, 2002, Section 5.11 of its Bylaws which requires (among other things) a three-quarters vote of the entire Board in order to amend or modify the terms of this Agreement. 26. TAX WITHHOLDING. Any payment made pursuant to this Agreement will be subject to applicable withholding taxes under federal, state and local law. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of January 1, 1999, and have amended and restated this Agreement as of June 30, 2000. BELL ATLANTIC CORPORATION By: -------------------------- THE KEY EXECUTIVE ----------------------------- Ivan G. Seidenberg - -------------------------------------------------------------------------------- Employment Agreement Page 15 Ivan G. Seidenberg 16 EXHIBIT A THIS RELEASE (the "Release") is entered into by _____________________ (the "Key Executive"), for the benefit of BELL ATLANTIC CORPORATION (the "Company"), and all companies, and their officers, directors and employees, which are affiliated with the Company or in which the Company owns a substantial economic interest, and any benefit plan maintained by any Bell Atlantic Company (or any plan administrator of any such plan). Capitalized terms in this document which are not otherwise defined herein shall have the respective meanings assigned to them in the Employment Agreement between the Company and the Key Executive, dated ____________, _____ (the "Agreement"). WHEREAS, the Key Executive has separated from service with the Key Executive's employing company (the "Employer") on __________ , _____ (the "Separation Date") pursuant to the terms of the Agreement, and the Key Executive wishes to execute this Release as contemplated under the terms of the Agreement. NOW, THEREFORE, the Key Executive affirms as follows: 1. The Key Executive hereby waives any and all claims which the Key Executive might have against any Bell Atlantic Company, and any benefit plan maintained by any Bell Atlantic Company (or any plan administrator of any such plan), for salary payments, vacation pay, incentives, bonuses, or other remuneration or employee benefits of any kind, with the exception of any obligations of the Company or Employer arising after the Separation Date under Sections 8 and 9 of the Agreement. 2. Except as provided in Section 1 hereof, the Key Executive hereby voluntarily releases and discharges each and every Bell Atlantic Company and their successors and assigns, and the directors, officers, employees, and agents of each of them, and any benefit plan maintained by any Bell Atlantic Company (or any plan administrator of any such plan), of and from any and all debts, obligations, claims, demands, judgments or causes of action of any kind whatsoever, known or unknown, in tort, contract, by statute or on any other basis, for equitable relief, compensatory, punitive or other damages, expenses (including attorneys' fees), reimbursements or costs of any kind which the Key Executive might have or assert against any of said entities or persons as of the Separation Date by reason of the Key Executive's employment by any Bell Atlantic Company or the termination of said employment, and all circumstances related thereto, including but not limited to, any and all claims, demands, rights and causes of action, including those which might arise out of allegations relating to a claimed breach of an alleged oral or written employment contract, or relating to purported employment discrimination or civil rights violations, such as, but not limited to, those arising under Title VII of the Civil Rights Act of 1964 (42 U.S.C. Section 2000e et seq.), the Civil Rights Acts of 1866 and 1871 (42 U.S.C. Sections 1981 and 1983), Executive Order 11246, as amended, the Age Discrimination in Employment Act of 1967, as amended (29 U.S.C. Section 621 et seq.), the Equal Pay Act of 1963 (29 U.S.C. Section 206(d)(1)), the Rehabilitation Act of 1973 (29 U.S.C. Sections 701-794), the Civil Rights Act of 1991, the Americans with Disabilities Act, the Employee Retirement Income Security Act ("ERISA") or any other applicable federal, state or local employment discrimination statute or ordinance. 17 3. The Key Executive hereby reaffirms all covenants and promises given by the Key Executive under the Agreement, and all other terms and conditions of the Agreement, in all respects. 4. Should any provision of this Release be declared or be determined by any court to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby, and said illegal or invalid part, term or provision shall be deemed not to be a part of this Release. STATEMENT BY THE KEY EXECUTIVE WHO IS SIGNING BELOW: THE COMPANY HAS ADVISED ME IN WRITING TO CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING THIS RELEASE. THE COMPANY HAS FULFILLED ITS DUTIES TO ME UNDER THE OLDER WORKERS BENEFITS PROTECTION ACT, AND I ACKNOWLEDGE THAT THIS RELEASE IS LEGALLY ENFORCEABLE BY THE COMPANY. I HAVE CAREFULLY READ AND FULLY UNDERSTAND THE PROVISIONS OF THIS RELEASE AND HAVE HAD SUFFICIENT TIME AND OPPORTUNITY (OVER A PERIOD OF SUBSTANTIALLY MORE THAN 21 DAYS) TO CONSULT WITH MY PERSONAL TAX, FINANCIAL AND LEGAL ADVISORS PRIOR TO EXECUTING THIS DOCUMENT, AND I INTEND TO BE LEGALLY BOUND BY ITS TERMS. I UNDERSTAND THAT I MAY REVOKE THIS RELEASE WITHIN SEVEN (7) DAYS FOLLOWING MY SIGNING, AND THIS RELEASE WILL NOT BECOME ENFORCEABLE OR EFFECTIVE UNTIL THAT SEVEN-DAY PERIOD HAS EXPIRED. THE UNDERSIGNED, intending to be legally bound, has executed this Release as of the ___ day of _________, _____, that being the Key Executive's Separation Date. THE KEY EXECUTIVE Signed: -------------------------------- THIS IS A RELEASE READ CAREFULLY BEFORE SIGNING - -------------------------------------------------------------------------------- Exhibits to Employment Agreement Page 17 Ivan G. Seidenberg 18 EXHIBIT B DETERMINATION OF GROSS-UP PAYMENT. In the event that any payment or benefit received or to be received by the Key Executive pursuant to the terms of the Agreement (the "Contract Payments") or of any other plan, arrangement or agreement of any Bell Atlantic Company ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code (the "Code") as determined in accordance with this paragraph, Bell Atlantic shall pay to the Key Executive, at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount retained by the Key Executive, after deduction of the Excise Tax on Payments and any federal, state and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by the Key Executive with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in Section 1274(d) of the Code) in such calculation) of the Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the written opinion of independent counsel selected by Bell Atlantic and reasonably acceptable to the Key Executive ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax; (ii) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(1) of the Code (after applying clause (i) hereof); and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Key Executive shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of the Key Executive's residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. TIMING OF GROSS-UP PAYMENT. The Gross-Up Payments provided for in this Exhibit B shall be made upon the earlier of (i) the payment to the Key Executive of any Payment or (ii) the imposition upon the Key Executive or payment by the Key Executive of any Excise Tax. ADJUSTMENTS TO GROSS-UP PAYMENT. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax is less than the amount previously taken into account hereunder, the Key Executive shall repay to Bell Atlantic within thirty (30) days of the Key Executive's receipt of notice of such final determination or opinion the portion of - -------------------------------------------------------------------------------- Exhibits to Employment Agreement Page 18 Ivan G. Seidenberg 19 the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Key Executive if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by the Key Executive on the amount of such repayment, provided, however, that if any such amount has been paid by the Key Executive as an Excise Tax or other tax, the Key Executive shall cooperate with Bell Atlantic in seeking a refund of any tax overpayments, and shall not be required to make repayments to Bell Atlantic until the overpaid taxes and interest thereon are refunded to the Key Executive. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Bell Atlantic shall make an additional Gross-Up Payment in respect of such excess within thirty (30) days of Bell Atlantic's receipt of notice of such final determination or opinion. CHANGE IN LAW OR INTERPRETATION. In the event of any change in, or further interpretation of, sections 280G or 4999 of the Code and the regulations promulgated thereunder, the Key Executive shall be entitled, by written notice to Bell Atlantic, to request a written opinion of Independent Counsel regarding the application of such change to any of the foregoing, and Bell Atlantic shall use its best efforts to cause such opinion to be rendered as promptly as practicable. All fees and expenses of Independent Counsel incurred in connection with this Exhibit B shall be borne by Bell Atlantic. - -------------------------------------------------------------------------------- Exhibits to Employment Agreement Page 19 Ivan G. Seidenberg EX-27 3 ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1,346 0 13,639 1,279 1,385 20,136 150,896 86,122 157,013 38,117 33,286 0 0 275 33,901 157,013 0 31,336 0 25,448 0 0 1,690 10,608 4,135 6,473 0 9 0 6,464 2.37 2.35
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