10-Q 1 d89821e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8606 VERIZON COMMUNICATIONS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 23-2259884 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1095 AVENUE OF THE AMERICAS 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, 2001, 2,709,370,282 shares of the registrant's Common Stock were outstanding, after deducting 42,280,202 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, 2001 and 2000 1 CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2001 and December 31, 2000 2 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2001 and 2000 3 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34 PART II. OTHER INFORMATION -------------------------- 1. LEGAL PROCEEDINGS 35 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 35 6. EXHIBITS AND REPORTS ON FORM 8-K 36 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENTS OF INCOME Verizon Communications Inc. and Subsidiaries
(Dollars in Millions, Except Per Share THREE MONTHS ENDED SIX MONTHS ENDED Amounts) (Unaudited) JUNE 30, JUNE 30, --------------------- -------------------- 2001 2000 2001 2000 ------- -------- --------- -------- OPERATING REVENUES $ 16,909 $ 16,769 $ 33,175 $ 31,301 Operations and support expense 9,713 11,392 19,012 19,600 Depreciation and amortization 3,400 3,224 6,760 5,817 Gains on sales of assets, net (5) (2,456) (5) (2,553) -------- -------- -------- -------- OPERATING INCOME 3,801 4,609 7,408 8,437 Equity in income (loss) from unconsolidated businesses (3,664) 3,283 (3,448) 3,513 Other income and (expense), net 114 12 184 90 Interest expense (909) (915) (1,830) (1,689) Minority interest (209) (9) (307) (35) Mark-to-market adjustment - financial instruments (37) 1,112 (153) 287 -------- -------- -------- -------- Income (loss) before provision for income taxes, extraordinary item and cumulative effect of change in accounting principle (904) 8,092 1,854 10,603 Provision for income taxes 117 3,188 1,121 4,135 -------- -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,021) 4,904 733 6,468 Extraordinary item, net of tax -- -- -- (9) Cumulative effect of change in accounting principle, net of tax -- -- (182) (40) -------- -------- -------- -------- NET INCOME (LOSS) (1,021) 4,904 551 6,419 Redemption of subsidiary preferred stock -- -- -- (8) -------- -------- -------- -------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREOWNERS $ (1,021) $ 4,904 $ 551 $ 6,411 ======== ======== ======== ======== BASIC EARNINGS (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item and cumulative effect of change in accounting principle $ (.38) $ 1.80 $ .27 $ 2.37 Extraordinary item, net of tax -- -- -- -- Cumulative effect of change in accounting principle, net of tax -- -- (.07) (.01) -------- -------- -------- -------- NET INCOME (LOSS) $ (.38) $ 1.80 $ .20 $ 2.36 ======== ======== ======== ======== Weighted-average shares outstanding (in millions) 2,707 2,718 2,706 2,722 ======== ======== ======== ======== DILUTED EARNINGS (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item and cumulative effect of change in accounting principle $ (.38) $ 1.79 $ .27 $ 2.34 Extraordinary item, net of tax -- -- -- -- Cumulative effect of change in accounting principle, net of tax -- -- (.07) (.01) -------- -------- -------- -------- NET INCOME (LOSS) $ (.38) $ 1.79 $ .20 $ 2.33 ======== ======== ======== ======== Weighted-average shares outstanding - diluted (in millions) 2,707 2,747 2,728 2,752 ======== ======== ======== ======== Dividends declared per common share $ .385 $ .385 $ .77 $ .77 ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements 1 4 CONDENSED CONSOLIDATED BALANCE SHEETS Verizon Communications Inc. and Subsidiaries
(Dollars in Millions, Except Per Share Amounts) (Unaudited) JUNE 30, DECEMBER 31, 2001 2000 --------- ------------ ASSETS Current assets Cash and cash equivalents $ 2,616 $ 757 Short-term investments 797 1,613 Accounts receivable, net of allowances of $1,717 and $1,562 13,777 14,010 Inventories 2,047 1,910 Net assets held for sale 279 518 Prepaid expenses and other 3,744 3,313 -------- -------- Total current assets 23,260 22,121 -------- -------- Plant, property and equipment 167,219 158,957 Less accumulated depreciation 93,677 89,453 -------- -------- 73,542 69,504 -------- -------- Investments in unconsolidated businesses 11,850 13,115 Intangible assets 43,627 41,990 Other assets 17,894 18,005 -------- -------- Total assets $170,173 $164,735 ======== ======== LIABILITIES AND SHAREOWNERS' INVESTMENT Current liabilities Debt maturing within one year $ 20,591 $ 14,838 Accounts payable and accrued liabilities 11,740 13,965 Other 5,433 5,433 -------- -------- Total current liabilities 37,764 34,236 -------- -------- Long-term debt 44,280 42,491 Employee benefit obligations 12,115 12,543 Deferred income taxes 15,689 15,260 Other liabilities 3,677 3,797 Minority interest 21,739 21,830 Shareowners' investment Series preferred stock ($.10 par value; none issued) -- -- Common stock ($.10 par value; 2,751,650,484 shares issued in both periods) 275 275 Contributed capital 24,498 24,555 Reinvested earnings 13,137 14,667 Accumulated other comprehensive loss (692) (2,176) -------- -------- 37,218 37,321 Less common stock in treasury, at cost 1,525 1,861 Less deferred compensation - employee stock ownership plans and other 784 882 -------- -------- Total shareowners' investment 34,909 34,578 -------- -------- Total liabilities and shareowners' investment $170,173 $164,735 ======== ========
See Notes to Condensed Consolidated Financial Statements 2 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Verizon Communications Inc. and Subsidiaries
(Dollars in Millions) (Unaudited) SIX MONTHS ENDED JUNE 30, 2001 2000 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Income before extraordinary item and cumulative effect of change in accounting principle $ 733 $ 6,468 Adjustments to reconcile income before extraordinary item and cumulative effect of change in accounting principle to net cash provided by operating activities: Depreciation and amortization 6,760 5,817 Gains on sales of assets, net (5) (2,553) Mark-to-market adjustment - financial instruments 153 (287) Employee retirement benefits (1,118) (1,760) Deferred income taxes (349) 2,085 Provision for uncollectible accounts 782 539 Equity in income (loss) from unconsolidated businesses 3,448 (3,513) Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses (2,961) 1,750 Other, net 215 (217) -------- -------- Net cash provided by operating activities 7,658 8,329 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (9,163) (7,632) Acquisitions, net of cash acquired, and investments (2,212) (1,132) Proceeds from disposition of businesses and assets -- 1,899 Investments in notes receivable -- (979) Net change in short-term investments 1,010 483 Other, net (510) (234) -------- -------- Net cash used in investing activities (10,875) (7,595) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 8,253 2,822 Repayments of long-term borrowings and capital lease obligations (1,604) (4,651) Increase in short-term obligations, excluding current maturities 620 3,518 Dividends paid (2,079) (2,099) Proceeds from sale of common stock 242 380 Purchase of common stock for treasury (8) (1,382) Other, net (348) (9) -------- -------- Net cash provided by (used in) financing activities 5,076 (1,421) -------- -------- Increase (decrease) in cash and cash equivalents 1,859 (687) Cash and cash equivalents, beginning of period 757 2,033 -------- -------- Cash and cash equivalents, end of period $ 2,616 $ 1,346 ======== ========
See Notes to Condensed Consolidated Financial Statements 3 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Verizon Communications Inc. and Subsidiaries (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. The condensed consolidated financial statements for the six months ended June 30, 2000 give retroactive effect to the merger of Bell Atlantic Corporation (Bell Atlantic) and GTE Corporation (GTE) on June 30, 2000, as required for business combinations using pooling-of-interests accounting. These 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. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2000. We have reclassified certain amounts from prior year's data to conform to the 2001 presentation. 2. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The amortization of goodwill included in our investments in equity investees will also no longer be recorded upon adoption of the new rules. Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121. We are required to adopt SFAS No. 142 effective January 1, 2002. We are currently evaluating our intangible assets in relation to the provisions of SFAS No. 142 to determine the impact, if any, the adoption of SFAS No. 142 will have on our results of operations or financial position. 3. MERGER CHARGES In connection with the merger of Bell Atlantic and GTE on June 30, 2000, we incurred charges associated with employee severance of $584 million ($371 million after-tax, or $.14 per diluted share). Employee severance costs, as recorded under SFAS No. 112, "Employers' Accounting for Postemployment Benefits," represent the benefit costs for the separation of approximately 5,500 management employees who are entitled to benefits under pre-existing separation plans, as well as an accrual of ongoing SFAS No. 112 obligations for GTE employees. The remaining severance liability as of June 30, 2001 is $354 million. During the second quarter of 2000, in connection with the merger, we also recorded a pretax charge of $472 million ($378 million after-tax, or $.14 per diluted share) for direct, incremental merger-related costs, including compensation, professional services and other direct costs. In addition, we recorded $385 million ($236 million after-tax, or $.09 per diluted share) for other actions in relation to the merger or other strategic decisions, in the second quarter of 2000. 4 7 From the date of the merger, we expect to incur a total of approximately $2 billion of transition costs related to the merger and the formation of the wireless joint venture. These costs will be incurred to integrate systems, consolidate real estate and relocate employees. They also include approximately $500 million for advertising and other costs to establish the Verizon brand. Transition costs related to the merger have totaled $1,136 million since the date of the merger. During the second quarter and for the first six months of 2001, we incurred transition costs of $279 million and $442 million ($162 million and $250 million after taxes and minority interests, or $.06 and $.09 per diluted share), respectively. During the second quarter of 2000, we incurred $172 million ($47 million after taxes and minority interests, or $.02 per diluted share) of transition costs. 4. GAINS ON SALES OF ASSETS, NET During 2001 and 2000, we recognized net gains in operations related to sales of assets and impairments of assets held for sale, as follows:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2001 2000 2001 2000 ------------------- -------------------- ------------------ ------------------ PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX ------ --------- ------ --------- ------ --------- ------ --------- Wireline properties $ -- $ -- $ 1,078 $ 655 $ -- $ -- $ 1,078 $ 655 Wireless properties 5 3 1,922 1,156 5 3 1,922 1,156 Other, net -- -- (544) (356) -- -- (447) (301) ------ ------ ------- ------- ----- ------ -------- ------- $ 5 $ 3 $ 2,456 $ 1,455 $ 5 $ 3 $ 2,553 $ 1,510 ====== ====== ======= ======= ===== ====== ======== =======
Wireline Property Sales During June 2000, we sold approximately 471,000 access lines located in Iowa, Nebraska and Oklahoma for combined cash proceeds of $1,433 million and $125 million in convertible preferred stock. The pretax gain on the sales was $1,078 million ($655 million after-tax or $.24 per diluted share). Wireless Overlap A U.S. Department of Justice consent decree issued on December 6, 1999 required GTE Wireless, Bell Atlantic Mobile, Vodafone AirTouch Group plc and PrimeCo Personal Communications L.P. (PrimeCo) to resolve a number of wireless market overlaps in order to complete the wireless joint venture and the Bell Atlantic-GTE merger. As a result, during April 2000 we completed a transaction with ALLTEL Corporation (ALLTEL) that provided for the exchange of 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). As of June 30, 2001, we completed the sales of all overlap properties with the exception of the Chicago market. The sale of the Cincinnati market was completed during the second quarter of 2001. The pretax gain was $80 million ($48 million after-tax, or $.02 per diluted share). In addition, during the quarter an agreement to sell the Chicago market at a price lower than the net book value of the Chicago assets was executed. Consequently, we recorded an impairment charge of $75 million ($45 million after-tax, or $.02 per diluted share) related to the expected sale. The sale of the Chicago market is expected to close in the second half of 2001. Other Transactions In connection with our decisions to exit the video business and GTE Airfone, we recorded an impairment charge during the second quarter of 2000 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, other sales during the quarter resulted in a net pretax gain of approximately $22 million ($6 million after-tax, or less than $.01 per diluted share). During the first quarter of 2000, we recorded a pretax gain of $97 million ($55 million after-tax, or $.02 per diluted share), primarily comprised of the gain on the sale of our CyberTrust line of business. 5 8 5. EXTRAORDINARY ITEM Results for the six months ended June 30, 2000 include the retirement in the first quarter of 2000 of $128 million of debt prior to the stated maturity date, resulting in a one-time, pretax extraordinary charge of $15 million ($9 million after-tax, or less than $.01 per diluted share). 6. WIRELESS JOINT VENTURE On April 3, 2000, Verizon and Vodafone Group plc consummated the previously announced agreement to combine U.S. wireless assets, including cellular, Personal Communications Services (PCS) and paging operations. We accounted for this transaction as a purchase business combination, and accordingly, began reporting the combined wireless operations prospectively in the second quarter of 2000. 7. INVESTMENTS Marketable Securities We have investments in marketable securities, primarily common stocks, which are considered "available-for-sale" under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These investments have been included in our 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) that are considered temporary in nature recorded in Accumulated Other Comprehensive Loss. The fair values of our investments in marketable securities are determined based on market quotations. The following table shows certain summarized information related to our investments in marketable securities:
GROSS GROSS UNREALIZED UNREALIZED (Dollars in Millions) COST GAINS LOSSES FAIR VALUE ------ ---------- ---------- ---------- AT JUNE 30, 2001 Investments in unconsolidated businesses $1,935 $620 $ (4) $2,551 Other assets 342 23 -- 365 ------ ------ ------- ------- $2,277 $643 $ (4) $2,916 ====== ====== ======= ======= AT DECEMBER 31, 2000 Investments in unconsolidated businesses $4,529 $559 $(1,542) $3,546 Other assets 1,326 29 (241) 1,114 ------ ------ ------- ------- $5,855 $588 $(1,783) $4,660 ====== ====== ======= =======
We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other than temporary, a charge to earnings is recorded for all or a portion of the unrealized loss, and a new cost basis in the investment is established. Prior to the second quarter of 2001, we considered the declines in the market values of our marketable securities investments to be temporary, due principally to the overall weakness in the securities markets as well as telecommunications sector share prices. However, in June 2001, we recognized a pretax loss of $3,913 million ($2,926 million after-tax, or $1.07 diluted loss per share) primarily relating to our investments in Cable & Wireless plc (C&W), NTL Incorporated (NTL) and Metromedia Fiber Network, Inc. (MFN). We determined, through the evaluations described above, that market value declines in these investments were considered other than temporary. 6 9 During the second quarter of 2000, we recognized a pretax gain of $3,088 million ($1,941 million after-tax, or $.71 per diluted share) related to the restructuring of our equity investment in Cable & Wireless Communications plc (CWC). In exchange for our equity investment in CWC, we received shares of C&W and NTL. At June 30, 2001, the unrealized gains on marketable securities relate primarily to our investment in Telecom Corporation of New Zealand Limited (TCNZ). Other Securities Prior to the merger of Bell Atlantic and GTE, we owned and consolidated Genuity Inc. (Genuity). In June 2000, as a condition of the merger, 90.5% of the voting equity of Genuity was issued in an initial public offering (IPO). We currently own 9.5% of the voting equity of Genuity, which contains a contingent conversion feature. The 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. Verizon cannot currently exercise this conversion feature. Genuity's revenues for the second quarter and first half of 2000 were $275 million and $529 million, respectively, its net losses were $153 million and $281 million, respectively. These periods preceded the IPO when Genuity was wholly owned by Verizon. Consequently, these revenues and losses were included in Verizon's consolidated results. Although no longer included in Verizon's consolidated results of operations as a result of the IPO, Genuity's revenues for the second quarter and first half of 2001 were $303 million and $602 million, respectively, its net losses were $354 million and $646 million, respectively. 8. ACCOUNTING CHANGE - DERIVATIVE FINANCIAL INSTRUMENTS Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133 requires that all derivatives, including derivatives embedded in other financial instruments, be measured at fair value and recognized as either assets or liabilities on our balance sheet. Changes in the fair values of derivative instruments not qualifying as hedges under SFAS No. 133 or any ineffective portion of hedges are recognized in earnings in the current period. Changes in the fair values of derivative instruments used effectively as fair value hedges are recognized in earnings, along with changes in the fair value of the hedged item. Changes in the fair value of the effective portions of cash flow hedges are reported in other comprehensive income (loss), and recognized in earnings when the hedged item is recognized in earnings. The initial impact of adoption on our consolidated financial statements was recorded as a cumulative effect of an accounting change resulting in a charge of $182 million to current earnings and income of $110 million to other comprehensive income (loss). The recognition of assets and liabilities was immaterial to our financial position. The ongoing effect of SFAS No. 133 on our consolidated financial statements will be determined each quarter by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions at the end of each period. For the three months ended June 30, 2001, we recorded a charge to current earnings of $37 million and a loss of $2 million to other comprehensive income (loss). For the six months ended June 30, 2001, we recorded a charge to current earnings of $153 million (before minority interest of $2 million) and a loss of $14 million to other comprehensive income (loss). The charges to current earnings are primarily due to changes in the fair value of the conversion option on our investment in MFN debt securities which allows us to convert our debt securities into MFN common stock. The conversion option has, as its underlying risk, changes in the MFN stock price. This risk is not clearly and closely related to the change in interest rate risk underlying the debt securities and therefore the conversion option does not qualify as a hedge under SFAS No. 133. The fair value of the conversion option is recognized as an asset in our balance sheet and we record the mark-to-market adjustment in current earnings. A net charge of $186 million related to the MFN conversion option was included as part of the cumulative effect of the accounting change recorded on January 1, 2001. A net charge of $41 million was recorded to mark-to-market adjustment for the three months ended June 30, 2001. A net charge of $149 million was recorded to mark-to-market adjustment for the six months ended June 30, 2001. 7 10 9. DEBT Exchangeable Notes Previously, Verizon Global Funding issued two series of notes that are exchangeable for shares of TCNZ and for C&W and NTL shares. The exchangeable notes are indexed to the fair market value of the common stock into which they are exchangeable. If the price of the shares exceeds the exchange price established at the offering date, a mark-to-market adjustment is recorded, recognizing an increase in the carrying value of the debt obligation and a charge to income. If the price of the shares subsequently declines, the debt obligation is reduced (but not to less than the amortized carrying value of the notes). At June 30, 2001, the exchange price of the notes exchangeable into C&W and NTL shares exceeded the combined value of the share prices. Consequently, the notes were recorded at their amortized carrying value with no mark-to-market adjustments recorded in the second quarter or in the first six months of 2001. At June 30, 2000, the decrease in the debt obligation since December 31, 1999 of $287 million ($186 million after-tax, or $.07 per diluted share) was recorded as an increase to income in the first six months of 2000 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, 2001, we have recorded no mark-to-market adjustments for the TCNZ exchangeable notes. Support Agreements All of Verizon Global Funding's debt (including the TCNZ and the C&W and NTL exchangeable notes) have the benefit of Support Agreements between us and Verizon Global Funding, which guarantee payment of interest, premium (if any) and principal outstanding should Verizon Global Funding fail to pay. The holders of Verizon Global Funding debt do not have recourse to the stock or assets of most of our telephone operations or TCNZ; however, they do have recourse to dividends paid to us by any of our consolidated subsidiaries as well as assets not covered by the exclusion. Verizon Global Funding's long-term debt, including current portion, aggregated $19,697 million at June 30, 2001. The carrying value of the available assets reflected in our condensed consolidated financial statements was approximately $68.4 billion at June 30, 2001. Debt Issuances In April 2001, Verizon South Inc., an indirect wholly owned subsidiary of Verizon Communications, issued $300 million of 7% Series F debentures due 2041 at a discount, resulting in gross proceeds of approximately $291 million. In May 2001, Verizon Global Funding issued $2 billion of floating rate notes due 2002. Interest on the notes is reset quarterly at three-month LIBOR plus .05%. In May 2001, Verizon Global Funding issued approximately $5.4 billion in principal amount at maturity of zero-coupon convertible notes due 2021, resulting in gross proceeds of approximately $3 billion. The notes are convertible into shares of our common stock at an initial price of $69.50 per share if the closing price of Verizon common stock on the New York Stock Exchange exceeds specified levels or in other specified circumstances. The conversion price increases by at least 3% a year. The initial conversion price represents a 25% premium over the May 8, 2001 closing price of $55.60 per share. There are no scheduled cash interest payments associated with the notes. Reclassification of Long-Term Debt During the second quarter of 2001, approximately $5.1 billion of revolving loans was reclassified to short-term debt in connection with the expiration of the current credit facility agreement in the second quarter of 2002. 8 11 10. COMPREHENSIVE INCOME Comprehensive income consists of net income and other gains and losses affecting shareowners' investment that, under generally accepted accounting principles, are excluded from net income. Changes in the components of other comprehensive income (loss) are as follows:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2001 2000 2001 2000 -------- ------- --------- -------- NET INCOME (LOSS) $(1,021) $ 4,904 $ 551 $ 6,419 -------- ------- --------- -------- OTHER COMPREHENSIVE INCOME (LOSS), net of taxes Foreign currency translation adjustments 100 (99) 348 (163) Unrealized gains (losses) on marketable securities 1,947 (761) 1,152 202 Unrealized derivative losses on cash flow hedges (2) -- (16) -- Minimum pension liability adjustment -- -- -- (22) -------- ------- --------- -------- 2,045 (860) 1,484 17 -------- ------- --------- -------- TOTAL COMPREHENSIVE INCOME $ 1,024 $ 4,044 $ 2,035 $ 6,436 ======== ======= ========= ========
The change in unrealized gains (losses) on marketable securities in 2001 primarily relates to the reclassification of after-tax realized losses of $2,926 million recorded due to the other than temporary decline in market value of certain of our marketable securities (see Note 7). The net unrealized gains (losses) on marketable securities in 2000 primarily related to our investments in MFN and TCNZ. The components of accumulated other comprehensive loss are as follows:
(Dollars in Millions) AT JUNE 30, 2001 AT DECEMBER 31, 2000 ---------------- -------------------- Foreign currency translation adjustments $(1,060) $(1,408) Unrealized gains (losses) on marketable securities 418 (734) Unrealized derivative losses on cash flow hedges (16) -- Minimum pension liability adjustment (34) (34) -------- ------- Accumulated other comprehensive loss $ (692) $(2,176) ======== =======
9 12 11. EARNINGS PER SHARE The following table is a reconciliation of the share amounts used in computing earnings per share.
(Dollars and Shares in Millions, Except Per THREE MONTHS ENDED SIX MONTHS ENDED Share Amounts) JUNE 30, JUNE 30, 2001 2000 2001 2000 ------- -------- ------- -------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREOWNERS Income (loss) before extraordinary item and cumulative effect of change in accounting principle $(1,021) $ 4,904 $733 $ 6,468 Redemption of subsidiary preferred stock -- -- -- (8) ------- -------- ------- -------- Income (loss) available to common shareowners* (1,021) 4,904 733 6,460 Extraordinary item, net of tax -- -- -- (9) Cumulative effect of change in accounting principle, net of tax -- -- (182) (40) ------- -------- ------- -------- Net income (loss) available to common shareowners* $(1,021) $ 4,904 $551 $ 6,411 ======= ======== ======= ======== BASIC EARNINGS (LOSS) PER COMMON SHARE Weighted-average shares outstanding 2,707 2,718 2,706 2,722 ------- -------- ------- -------- Income (loss) available to common shareowners before extraordinary item and cumulative effect of change in accounting principle $ (.38) $ 1.80 $ .27 $ 2.37 Extraordinary item, net of tax -- -- -- -- Cumulative effect of change in accounting principle, net of tax -- -- (.07) (.01) ------- -------- ------- -------- Net income (loss) available to common shareowners $ (.38) $ 1.80 $ .20 $ 2.36 ======= ======== ======= ======== DILUTED EARNINGS (LOSS) PER COMMON SHARE Weighted-average shares outstanding 2,707 2,718 2,706 2,722 Effect of dilutive securities -- 29 22 30 ------- -------- ------- -------- Weighted-average shares outstanding - diluted 2,707 2,747 2,728 2,752 ------- -------- ------- -------- Income (loss) available to common shareowners before extraordinary item and cumulative effect of change in accounting principle $ (.38) $ 1.79 $ .27 $ 2.34 Extraordinary item, net of tax -- -- -- -- Cumulative effect of change in accounting principle, net of tax -- -- (.07) (.01) ------- -------- ------- -------- Net income (loss) available to common shareowners $ (.38) $ 1.79 $ .20 $ 2.33 ======= ======== ======= ========
*Income (loss) and Net income (loss) available to common shareowners are the same for purposes of calculating basic and diluted earnings per share. Stock options for 116 million shares for the three months ended June 30, 2001 and 117 million shares for the six months ended June 30, 2001 were not included in the computation of diluted earnings per share because the exercise price of stock options was greater than the average market price of the common stock. For the three and six months ended June 30, 2000, the number of shares not included in the computation of diluted earnings per share was 53 million for both periods. No other contingently issuable shares were included in the diluted earnings per share calculation since conversion conditions were not met. 12. 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 unallocated corporate expenses and other adjustments arising during each period. The other adjustments include transactions that management excludes in assessing business unit performance due primarily to their nonrecurring and/or non-operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. 10 13 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 SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------- ------- ------- ------- EXTERNAL OPERATING REVENUES Domestic Telecom $10,817 $10,706 $21,601 $21,122 Domestic Wireless 4,373 3,943 8,411 6,098 International 586 471 1,111 928 Information Services 970 1,031 1,754 1,781 ------- ------- ------- ------- Total segments - adjusted 16,746 16,151 32,877 29,929 Reconciling items 163 618 298 1,372 ------- ------- ------- ------- Total consolidated - reported $16,909 $16,769 $33,175 $31,301 ======= ======= ======= ======= INTERSEGMENT REVENUES Domestic Telecom $ 136 $ 210 $ 272 $ 410 Domestic Wireless 10 9 18 18 International 12 -- 14 -- Information Services 14 25 19 54 ------- ------- ------- ------- Total segments - reported 172 244 323 482 Reconciling items (172) (244) (323) (482) ------- ------- ------- ------- Total consolidated - reported $ -- $ -- $ -- $ -- ======= ======= ======= ======= TOTAL OPERATING REVENUES Domestic Telecom $10,953 $10,916 $21,873 $21,532 Domestic Wireless 4,383 3,952 8,429 6,116 International 598 471 1,125 928 Information Services 984 1,056 1,773 1,835 ------- ------- ------- ------- Total segments - adjusted 16,918 16,395 33,200 30,411 Reconciling items (9) 374 (25) 890 ------- ------- ------- ------- Total consolidated - reported $16,909 $16,769 $33,175 $31,301 ======= ======= ======= ======= NET INCOME Domestic Telecom $ 1,361 $ 1,378 $ 2,711 $ 2,640 Domestic Wireless 151 91 249 220 International 243 155 453 326 Information Services 298 329 510 527 ------- ------- ------- ------- Total segments - adjusted 2,053 1,953 3,923 3,713 Reconciling items (3,074) 2,951 (3,372) 2,706 ------- ------- ------- ------- Total consolidated - reported $(1,021) $ 4,904 $ 551 $ 6,419 ======= ======= ======= =======
(Dollars in Millions) JUNE 30, 2001 DECEMBER 31,2000 ASSETS ------------- ---------------- Domestic Telecom $ 80,025 $ 78,112 Domestic Wireless 59,047 56,029 International 14,853 14,466 Information Services 3,555 3,148 --------- ---------- Total segments 157,480 151,755 Reconciling items 12,693 12,980 --------- ---------- Total consolidated $ 170,173 $ 164,735 ========= ==========
11 14 Major reconciling items between the segments and the consolidated results are as follows:
(Dollars in Millions) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------- ------- ------ ------ TOTAL REVENUES Genuity (see Note 7) $ -- $ 275 $ -- $ 529 Significant operations sold in 2000 -- 349 -- 709 Regulatory settlements -- (69) -- (69) Corporate, eliminations and other (9) (181) (25) (279) ------- ------ ------- ------ $ (9) $ 374 $ (25) $ 890 ======= ====== ======= ====== NET INCOME Genuity (see Note 7) $ -- $ (153) $ -- $ (281) (Loss)/gain on marketable securities (see Note 7) (2,926) 1,941 (2,926) 1,941 Mark-to-market adjustment - exchangeable notes (see Note 9) -- 722 -- 186 Mark-to-market adjustment - other financial instruments (see Note 8) (37) -- (151) -- Other charges and special items (see Note 3) -- (491) -- (526) Merger related costs (see Note 3) -- (749) -- (749) Transition costs (see Note 3) (162) (47) (250) (47) Gains on sales of assets, net (see Note 4) 3 1,455 3 1,510 Cumulative effect of accounting change (see Note 8) -- -- (182) (40) Pension settlements -- 260 -- 564 Extraordinary item (see Note 5) -- -- -- (9) Corporate, eliminations and other 48 13 134 157 ------- ------ ------- ------ $(3,074) $2,951 $(3,372) $2,706 ======= ====== ======= ======
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. 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 certain settlements of pension obligations for former GTE employees through direct payment, the purchase of annuities or otherwise. There were no similar pension settlement gains recorded during 2001. Corporate, eliminations and other includes unallocated corporate expenses, intersegment eliminations recorded in consolidation, the results of other businesses such as lease financing, and asset impairments and expenses that are not allocated in assessing segment performance due to their nonrecurring nature. We generally account for intersegment sales of products and services and asset transfers at current market prices. We are not dependent on any single customer. 13. COMMITMENTS AND CONTINGENCIES Several state and federal regulatory proceedings may require our telephone operations to refund a portion of the revenues collected in the current and prior periods. There are also various legal actions pending to which we are a party and claims which, if asserted, may lead to other legal actions. We have established reserves for specific liabilities in connection with regulatory and legal matters that we currently deem to be probable and estimable. We do not expect that the ultimate resolution of pending regulatory and legal matters in future periods will have a material effect on our financial condition, but it could have a material effect on our results of operations. Verizon Wireless was the winning bidder for 113 licenses in the Federal Communications Commission's (FCC) auction of 1.9 GHz spectrum, which concluded in January 2001. These licenses would add capacity for growth and advanced services in markets including New York, Boston, Los Angeles, Chicago, Philadelphia, Washington, D.C., Seattle and San Francisco. The total price of these licenses was approximately $8.8 billion, $1.8 billion of which has already been paid and the balance of which will be paid when the FCC requires payment. 12 15 There were no legal challenges to Verizon Wireless's qualifications to acquire these licenses. However, most of the licenses that were auctioned are the subject of pending litigation by the original licensees, NextWave Personal Communications Inc. and NextWave Power Partners Inc., which have appealed to the federal courts the FCC's action canceling NextWave's licenses and reclaiming the spectrum. In a decision on June 22, 2001, the U.S. appeals court ruled that the FCC was not allowed to repossess the NextWave licenses. The FCC has announced that it intends to appeal the U.S. appeals court decision to the U.S. Supreme Court. If the licenses must be returned, the FCC has stated that it will refund to winning bidders any amounts that they may have paid, without interest. Nearly all of Verizon Wireless's $8.8 billion license cost relates to licenses subject to NextWave's appeal. During the fourth quarter of 2000, Verizon Wireless agreed to acquire the wireless business of Price Communications for $1.5 billion in Verizon Wireless stock and the repayment by Verizon Wireless of $550 million in net debt. The transaction was conditioned upon completion of a Verizon Wireless initial public offering by September 30, 2001. Since we have disclosed that the initial public offering cannot be completed by September 30, 2001, we have begun discussions with Price Communications to explore alternative forms of consideration and other terms for an acquisition of the wireless business of Price Communications. In the first quarter of 2001, we agreed to provide up to $500 million in interim financing to Genuity. We subsequently increased the amount to $1,150 million. As of June 30, 2001, $750 million of that commitment had been loaned to Genuity. 13 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Verizon Communications Inc. was formed in June 2000 by the merger of Bell Atlantic Corporation and GTE Corporation. Financial information for the three and six months ended June 30, 2000 gives retroactive effect to the merger, as required for business combinations using pooling-of-interests accounting. The formation of the wireless joint venture occurred in April 2000. Financial information for the six months ended June 30, 2000 does not give retroactive effect to the formation of the wireless joint venture, as required for purchase business combinations. CONSOLIDATED RESULTS OF OPERATIONS In this section, we discuss our overall reported results and highlight special and nonrecurring items. In the following section, we review the performance of our segments on an adjusted basis. We adjust the segments' reported results for the effects of these items, which management does not consider in assessing segment performance due primarily to their nonrecurring and/or non-operational nature. We believe that this presentation will assist readers in better understanding trends from period to period. Reported consolidated revenues were $16,909 million for the quarter ended June 30, 2001, compared to $16,769 million for the similar period of the prior year. Consolidated revenues reported during the first six months of 2001 were $33,175 million, compared to $31,301 million for the first six months of 2000. Reported revenues were not adjusted for prior year sales of wireline operations and the deconsolidation of Genuity Inc. (Genuity). In addition, prior year revenues include the formation of the Verizon Wireless joint venture beginning in April 2000 and include overlapping wireless properties through June 30, 2000. Consolidated second quarter 2001 revenues, adjusted for the items in the preceding paragraph, increased 5.0% to $16,909 million from $16,104 million in second quarter of 2000. Six-month 2001 consolidated adjusted revenues were $33,175 million, or 6.0% higher than the first six months of 2000 adjusted revenues of $31,308 million. We reported a net loss of $1,021 million, or $.38 diluted loss per share for the quarter ended June 30, 2001, compared to net income available to common shareowners of $4,904 million, or $1.79 diluted earnings per share for the quarter ended June 30, 2000. Reported net income available to common shareowners for the first six months of 2001 was $551 million, or $.20 diluted earnings per share, compared to $6,411 million, or $2.33 diluted earnings per share, for the same period in 2000. Our reported results were affected by special items. After adjusting for such items, net income would have been $2,101 million, or $.77 diluted earnings per share in the second quarter of 2001 and $1,966 million, or $.72 diluted earnings per share in the second quarter of 2000. For the first half of 2001, net income would have been $4,057 million, or $1.49 diluted earnings per share compared to $3,870 million, or $1.41 diluted earnings per share for the first half of 2000. 14 17 The table below summarizes reported and adjusted results of operations for each period.
(Dollars in Millions, Except Per Share Amounts) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------------------- --------------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Reported operating revenues $ 16,909 $ 16,769 $ 33,175 $ 31,301 Reported operating expenses 13,108 12,160 25,767 22,864 -------- -------- -------- -------- Reported operating income 3,801 4,609 7,408 8,437 REPORTED NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS (1,021) 4,904 551 6,411 -------- -------- -------- -------- Merger-related costs -- 749 -- 749 Transition costs 162 47 250 47 Gains on sales of assets, net (3) (1,455) (3) (1,510) Pension settlements -- (260) -- (564) Loss/(gain) on marketable securities 2,926 (1,941) 2,926 (1,941) Mark-to-market adjustment - financial instruments 37 (722) 151 (186) Genuity loss -- 153 -- 281 Other charges and special items -- 491 -- 526 Extraordinary item -- -- -- 9 Cumulative effect of accounting change -- -- 182 40 Redemption of subsidiary preferred stock -- -- -- 8 -------- -------- -------- -------- ADJUSTED NET INCOME $ 2,101 $ 1,966 $ 4,057 $ 3,870 ======== ======== ======== ======== DILUTED EARNINGS (LOSS) PER SHARE - REPORTED $ (.38) $ 1.79 $ .20 $ 2.33 DILUTED EARNINGS PER SHARE - ADJUSTED $ .77 $ .72 $ 1.49 $ 1.41
MERGER-RELATED COSTS Charges associated with employee severance of $584 million ($371 million after-tax, or $.14 per diluted share) were recorded during the second quarter of 2000. 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. The remaining severance liability as of June 30, 2001 is $354 million. In addition, during the second quarter of 2000, in connection with the merger, we recorded a pretax charge of $472 million ($378 million after-tax, or $.14 per diluted share) for direct, incremental merger-related costs, including compensation, professional services and other direct costs. TRANSITION COSTS From the date of the merger, we expect to incur a total of approximately $2.0 billion of transition costs related to the merger and the formation of the wireless joint venture. These costs will be incurred to integrate systems, consolidate real estate and relocate employees. They also include approximately $500 million for advertising and other costs to establish the Verizon brand. Transition costs related to the merger have totaled $1,136 million since the date of the merger. During the second quarter and for the first six months of 2001, we incurred transition costs of $279 million and $442 million ($162 million and $250 million after taxes and minority interests, or $.06 and $.09 per diluted share), respectively. During the second quarter of 2000, we incurred $172 million ($47 million after taxes and minority interests, or $.02 per diluted share) of transition costs. 15 18 GAINS ON SALES OF ASSETS, NET As of June 30, 2001, we completed the sales of all overlap wireless properties with the exception of the Chicago market. The sale of the Cincinnati market was completed during the second quarter of 2001. The pretax gain was $80 million ($48 million after-tax, or $.02 per diluted share). In addition, during the quarter an agreement to sell the Chicago market at a price lower than the net book value of the Chicago assets was executed. Consequently, we recorded an impairment charge of $75 million ($45 million after-tax, or $.02 per diluted share) related to the expected sale. The sale of the Chicago market is expected to close in the second half of 2001. During the second quarter of 2000, we recognized net gains of $2,456 million ($1,455 million after-tax, or $.53 per diluted share) related to sales of assets and impairments of assets held for sale. These net gains resulted primarily from a pretax gain on the sale of access lines of $1,078 million ($655 million after-tax, or $.24 per diluted share); pretax gains on exchanges of wireless overlap properties of $1,922 million ($1,156 million after-tax, or $.42 per diluted share); and an impairment charge in connection with our exit from the video business and GTE Airfone of $566 million ($362 million after-tax, or $.13 per diluted share). Results for the six months ended June 30, 2000 also include a pretax gain recorded in the first quarter of 2000 of $97 million ($55 million after-tax, or $.02 per diluted share), primarily comprised of the gain on the sale of our CyberTrust line of business. PENSION SETTLEMENTS Pension settlement gains of $425 million ($260 million after-tax, or $.09 per diluted share) and $911 million ($564 million after-tax, or $.20 per diluted share) were recognized for the three- and six-month periods ended June 30, 2000, respectively. These gains were recorded in accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." They relate to certain settlements of pension obligations for former GTE employees through direct payment, the purchase of annuities or otherwise. There were no similar pension settlement gains recorded during 2001. LOSS/(GAIN) ON MARKETABLE SECURITIES We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other than temporary, a charge to earnings is recorded for all or a portion of the unrealized loss, and a new cost basis in the investment is established. Prior to the second quarter of 2001, we considered the declines in the market values of our marketable securities investments to be temporary, due principally to the overall weakness in the securities markets as well as telecommunications sector share prices. However, in June 2001, we recognized a pretax loss of $3,913 million ($2,926 million after-tax, or $1.07 diluted loss per share) primarily relating to our investments in Cable & Wireless plc (C&W), NTL Incorporated (NTL) and Metromedia Fiber Network, Inc. (MFN). We determined, through the evaluations described above, that market value declines in these investments were considered other than temporary. In May 2000, C&W, NTL and Cable & Wireless Communications plc (CWC) completed a restructuring of CWC. In connection with the restructuring, we, as a shareholder in CWC, received shares in the two acquiring companies, representing approximately 9.1% of the NTL shares outstanding at the time and approximately 4.6% of the C&W shares outstanding at the time. Based on this level of ownership, our investments in NTL and C&W are accounted for under the cost method. Our 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. 16 19 MARK-TO-MARKET ADJUSTMENT - FINANCIAL INSTRUMENTS During 2001, we began recording mark-to-market adjustments in earnings relating to some of our financial instruments in accordance with newly effective accounting rules on derivative financial instruments. Mark-to-market losses of $37 million ($37 million after taxes and minority interest, or $.01 per diluted share) and $153 million ($151 million after taxes and minority interest, or $.06 per diluted share) were recorded during the three- and six-month periods ended June 30, 2001, respectively, due primarily to the change in the fair value of the MFN debt conversion option. In addition, during the three- and six-month periods ended June 30, 2000, we recorded mark-to-market gains 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), respectively, related to our $3,180 million notes which are exchangeable into shares of C&W and NTL. These mark-to-market adjustments were required because the carrying value of the exchangeable notes is indexed to the fair market value of the underlying common stock. As the combined fair value of the C&W and NTL common stock declines, our debt obligation is reduced (but not to less than its amortized carrying value) and income is increased. If the combined fair value of the C&W and NTL common stock increases, our debt obligation increases and income is decreased. GENUITY LOSS 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. 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. The sale transferred ownership and control of Genuity to the Class A common stockholders and, accordingly, we deconsolidated our investment in Genuity on June 30, 2000 and are accounting for our investment in Genuity using the cost method. The impact of this change is that Genuity's revenues and expenses, as well as changes in balance sheet accounts and cash flows subsequent to June 30, 2000 are no longer included in our consolidated financial results. As a result, for comparability, we have adjusted the reported results for the first and second quarters of 2000 to exclude the results of Genuity. Genuity's after-tax losses for the second quarter and the first half of 2000 were $153 million (or $.06 per diluted share) and $281 million (or $.10 per diluted share), respectively. OTHER CHARGES AND SPECIAL ITEMS During the three and six months ended June 30, 2000, we recognized other charges and special items of $744 million ($491 million after-tax, or $.18 per diluted share) and $801 million ($526 million after-tax or $.19 per diluted share), respectively. Other charges and special items for the three and six months ended June 30, 2000 include the cost of disposing or abandoning redundant assets, discontinued system development projects in connection with the merger, regulatory settlements and other asset write-downs. EXTRAORDINARY ITEM Results for the six months ended June 30, 2000 include the retirement in the first quarter of 2000 of $128 million of debt prior to the stated maturity date, resulting in a one-time, pretax extraordinary charge of $15 million ($9 million after-tax, or less than $.01 per diluted share). 17 20 CUMULATIVE EFFECT OF ACCOUNTING CHANGE Impact of SAB No. 101 We adopted the provisions of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" in the fourth quarter of 2000, retroactive to January 1, 2000, as required by the SEC. The impact to Verizon pertains to the deferral of certain non-recurring fees, such as service activation and installation fees, and associated incremental direct costs, and the recognition of those revenues and costs over the expected term of the customer relationship. Results for the six months ended June 30, 2000 include the initial impact of adoption recorded as a cumulative effect of an accounting change of $40 million after-tax (or $.01 per diluted share) in the first quarter of 2000. Impact of SFAS No. 133 We adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and the related SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" on January 1, 2001. The impact to Verizon pertains to the recognition of changes in the fair value of derivative instruments. Results for the six months ended June 30, 2001 include the initial impact of adoption recorded as a cumulative effect of an accounting change of $182 million (or $.07 per diluted share) in the first quarter of 2001. This cumulative effect charge primarily relates to the change in the fair value of the MFN debt conversion option prior to January 1, 2001. 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 12 to the condensed consolidated financial statements. We measure and evaluate our reportable segments based on adjusted net income, which excludes unallocated corporate expenses and other adjustments arising during each period. Other adjustments include transactions that management has excluded in assessing business unit performance, due primarily to their nonrecurring and/or non-operational nature, but has included in reported consolidated earnings. We previously described these items in the "Consolidated Results of Operations" section. 18 21 Special items affected our segments as follows:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------- --------------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- DOMESTIC TELECOM Reported net income $ 1,204 $ 1,290 $ 2,485 $ 2,839 Special items 157 88 226 (199) ------- ------- ------- ------- Adjusted net income $ 1,361 $ 1,378 $ 2,711 $ 2,640 ======= ======= ======= ======= DOMESTIC WIRELESS Reported net income $ 137 $ 548 $ 216 $ 678 Special items 14 (457) 33 (458) ------- ------- ------- ------- Adjusted net income $ 151 $ 91 $ 249 $ 220 ======= ======= ======= ======= INTERNATIONAL Reported net income $(1,506) $ 2,064 $(1,296) $ 2,195 Special items 1,749 (1,909) 1,749 (1,869) ------- ------- ------- ------- Adjusted net income $ 243 $ 155 $ 453 $ 326 ======= ======= ======= ======= INFORMATION SERVICES Reported net income $ 293 $ 219 $ 502 $ 419 Special items 5 110 8 108 ------- ------- ------- ------- Adjusted net income $ 298 $ 329 $ 510 $ 527 ======= ======= ======= ======= CORPORATE AND OTHER Reported net income $(1,149) $ 783 $(1,356) $ 288 Special items 1,197 (770) 1,490 (131) ------- ------- ------- ------- Adjusted net income $ 48 $ 13 $ 134 $ 157 ======= ======= ======= =======
Corporate and Other includes intersegment eliminations. DOMESTIC TELECOM Our Domestic Telecom segment consists primarily of our telephone operations that provide local telephone services in over 30 states. These services include voice and data transport, enhanced and custom calling features, network access, directory assistance, private lines and public telephones. This segment also provides customer premises equipment distribution, data solutions and systems integration, billing and collections, Internet access services, research and development and inventory management services. In addition, this segment includes our long distance service.
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------- --------------------------- ------------------------- 2001 2000 % CHANGE 2001 2000 % CHANGE ---- ---- -------- ---- ---- -------- RESULTS OF OPERATIONS - ADJUSTED BASIS OPERATING REVENUES Local services $ 5,545 $ 5,537 0.1% $11,165 $10,967 1.8% Network access services 3,399 3,297 3.1 6,691 6,527 2.5 Long distance services 758 779 (2.7) 1,520 1,583 (4.0) Other services 1,251 1,303 (4.0) 2,497 2,455 1.7 ------- -------- ------- ------- 10,953 10,916 0.3 21,873 21,532 1.6 ------- -------- ------- ------- OPERATING EXPENSES Operations and support 5,904 6,118 (3.5) 11,861 12,129 (2.2) Depreciation and amortization 2,344 2,155 8.8 4,627 4,256 8.7 ------- -------- ------- ------- 8,248 8,273 (0.3) 16,488 16,385 0.6 ------- -------- ------- ------- OPERATING INCOME $ 2,705 $ 2,643 2.3 $ 5,385 $ 5,147 4.6 ======= ======== ======= ======= ADJUSTED NET INCOME $ 1,361 $ 1,378 (1.2) $ 2,711 $ 2,640 2.7
19 22 DOMESTIC TELECOM - CONTINUED HIGHLIGHTS Domestic Telecom's adjusted operating income grew 2.3% for the second quarter of 2001 and 4.6% for the first half of 2001. Adjusted results for the second quarter of 2001 reflect revenue growth of 0.3% and a reduction in operating costs of 0.3%, while year-to-date results include revenue growth of 1.6% and a slight increase in operating costs of 0.6%. The modest revenue growth in the first half of 2001 reflects the impact of a slowing U.S. economy and weakening demand for basic wireline services and we expect these factors to impact the revenue growth of our Domestic Telecom business in 2001. Our revenue growth was sustained by strong demand for our data transport and long distance services. Data transport revenues, which include our high-bandwidth, packet-switched and special access services, as well as Digital Subscriber Line (DSL) services, grew nearly 25% over the second quarter of 2000 and more than 27% year-to-date. We ended the second quarter of 2001 with data circuits in service equivalent to 63 million voice-grade access lines, up 53.0% from the same period in 2000. Our interLATA long distance business also showed strong growth in the first half of 2001, fueled by the introduction of interLATA long distance service in the state of Massachusetts in late April 2001. We ended the second quarter of 2001 with 6.0 million long distance customers nationwide, an increase of 1.9 million new customers, or 47.2%, over the second quarter of 2000. Our revenues were negatively affected by federal and state regulatory price reductions of approximately $230 million in the second quarter of 2001 and approximately $480 million in the first six months of 2001, primarily affecting our network access revenues. Lower employee costs, effective cost-control management and merger-related expense savings and other cost reductions, partially offset by increased costs associated with our growth businesses such as long distance and data services, contributed to lower operations and support expenses of 3.5% and 2.2% in the second quarter and first half of 2001, respectively. These and other items affecting Domestic Telecom's adjusted results of operations for the three and six months ended June 30, 2001 and 2000 are discussed in the following section. OPERATING REVENUES Local Services Local service revenues are earned by our telephone operations from the provision of local exchange, local private line, wire maintenance, voice messaging and value-added services. Value-added services are a family of services that expand the utilization of the network, including products such as Caller ID, Call Waiting and Return Call. The provision of local exchange services not only includes retail revenue but also includes local wholesale revenues from unbundled network elements (UNEs), interconnection revenues from competitive local exchange carriers, certain data transport revenues, and wireless interconnection revenues. Growth in local service revenues of $8 million, or 0.1%, and $198 million, or 1.8%, in the second quarter and first six months of 2001, respectively, reflect higher payments received from competitive local exchange carriers for interconnection of their networks with our network and solid demand for our value-added services as a result of new packaging of services. These factors were substantially offset by the effects of lower demand and usage of our basic local wireline services and mandated intrastate price reductions. Our switched access lines in service declined 0.4% from June 30, 2000, primarily reflecting the impact of an economic slowdown. In addition, technology substitution is increasing, as more customers are choosing wireless and Internet services over certain basic wireline services. 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 20 23 DOMESTIC TELECOM - CONTINUED are derived from fixed and usage-based charges paid by carriers for access to our local network. Special access revenues originate from carriers and end-users that buy dedicated local exchange capacity to support their private networks. End-user access revenues are earned from our customers and from resellers who purchase dial-tone services. Our network access revenues grew $102 million, or 3.1%, and $164 million, or 2.5%, in the second quarter and first six months of 2001, respectively, compared to the same periods in 2000. This growth was mainly attributable to higher customer demand, primarily for special access services (including DSL) that grew approximately 28% over the second quarter of 2000 and 30% year-to-date. Special access revenue growth reflects a continuing expansion of the business market, particularly for high-capacity, high-speed digital services. Volume-related growth was largely offset by price reductions of approximately $173 million and $359 million for the three and six months ended June 30, 2001, respectively. These price reductions are associated with federal and state price cap filings and other regulatory decisions. State public utility commissions regulate our telephone operations with respect to certain intrastate rates and services and certain other matters. The FCC regulates the rates that we charge long distance carriers and end-user subscribers for interstate access services. We are required to file new access rates with the FCC each year. In July 2000, we implemented the Coalition for Affordable Local and Long Distance Service (CALLS) plan. Under the plan, direct end-user access charges are increased while access charges to long distance carriers are reduced. While the plan continues the 6.5% (less inflation) annual reductions for most interstate access charges, it provides for a price freeze when switched access service prices reach $0.0055 per-minute. As a result of tariff adjustments, which became effective in August 2000, our telephone operations in 19 states and the District of Columbia reached the $0.0055 benchmark. Rates included in the July 2000 CALLS plan were in effect through June 2001. Effective July 3, 2001, we implemented further rate reductions in accordance with the plan. The impact of the slowing economy also affected network access revenues in the first half of 2001, as reflected by a decline in minutes of use and a reduction in switched access lines in service. Long Distance Services Long distance service revenues include both intraLATA toll services and interLATA long distance voice and data services. Long distance service revenues declined $21 million, or 2.7%, in the second quarter of 2001 and $63 million, or 4.0%, in the first half of 2001 primarily due to competition and the effects of toll calling discount packages and product bundling offers of our intraLATA toll services. These reductions were partially offset by revenue growth from our interLATA long distance services offered throughout the region, including substantial customer win-backs resulting from the introduction of interLATA long distance services in New York in January 2000 and in Massachusetts in late April 2001. Other Services Our other services include such services as billing and collections for long distance carriers, public (pay) telephone and customer premises equipment services. Other services revenues also include services provided by most of our non-regulated subsidiaries such as inventory management and purchasing, Internet access, and data solutions and systems integration businesses. Revenues from other services declined $52 million, or 4.0%, in the second quarter of 2001 and increased $42 million, or 1.7%, in the first six months of 2001, compared to the same periods last year. Both periods reflect a decline in public telephone revenues, as more customers substituted wireless communications for pay phone services. The second quarter of 2001 also included lower billing and collection revenues, reflecting the take-back of these services by interexchange carriers and lower data solutions and systems integration revenues due to slower demand resulting from the downturn of the economy. These revenue reductions were partially offset in the second quarter of 2001 and more than offset in the first half of 2001 by higher revenues from other non-regulated services. 21 24 DOMESTIC TELECOM - CONTINUED OPERATING EXPENSES Operations and Support Operations and support, which consists of employee costs and other operating expenses, decreased by $214 million, or 3.5%, in the second quarter of 2001 and by $268 million, or 2.2%, year-to-date principally due to lower costs at our telephone operations. These reductions were largely attributable to lower employee costs, primarily due to reduced employee overtime for repair and maintenance activity as a result of improved productivity and reduced volumes at our dispatch and call centers. Operating costs have also decreased due to business integration activities and achievement of merger synergies. Other effective cost containment measures, including lower spending by non-strategic businesses and declining workforce levels and associated employee costs, also contributed to cost reductions in both periods. These cost reductions were partially offset by higher costs associated with our growth businesses such as long distance and data services. Depreciation and Amortization Depreciation and amortization expense increased by $189 million, or 8.8%, in the second quarter of 2001 and $371 million, or 8.7%, in the first six months of 2001, compared to the same periods in 2000. These expense increases were principally due to growth in depreciable telephone plant as a result of increased capital expenditures for higher growth services and increased software amortization costs. These factors were partially offset by the effect of lower rates of depreciation. 22 25 DOMESTIC WIRELESS Our Domestic Wireless segment provides cellular, personal communications services (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 Group plc (Vodafone), including the consolidation of PrimeCo Communications (PrimeCo). The formation of Verizon Wireless occurred in April 2000. Verizon owns a 55% interest in the joint venture and Vodafone owns the remaining 45%. The 2001 financial results included in the table below reflect the combined results of Verizon Wireless. The period prior to the formation of Verizon Wireless is reported on a historical basis, and therefore, does not reflect the contribution of the Vodafone properties and the consolidation of PrimeCo. In addition, the financial results of several overlap properties were included in Domestic Wireless's results through June 30, 2000.
THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in Millions) JUNE 30, JUNE 30, --------------------- ----------------------- ----------------------- 2001 2000 % CHANGE 2001 2000 % CHANGE ---- ---- -------- ---- ---- -------- RESULTS OF OPERATIONS - ADJUSTED BASIS OPERATING REVENUES Wireless services $ 4,383 $ 3,952 10.9% $ 8,429 $ 6,116 37.8% ------- ------- ------- ------- OPERATING EXPENSES Operations and support 2,817 2,633 7.0 5,454 4,117 32.5 Depreciation and amortization 887 877 1.1 1,806 1,199 50.6 ------- ------- ------- ------- 3,704 3,510 5.5 7,260 5,316 36.6 ------- ------- ------- ------- OPERATING INCOME $ 679 $ 442 53.6 $ 1,169 $ 800 46.1 ======= ======= ======= ======= MINORITY INTEREST $ (232) $ (120) 93.3 $ (387) $ (151) 156.3 ADJUSTED NET INCOME $ 151 $ 91 65.9 $ 249 $ 220 13.2
OPERATING REVENUES Revenues earned from our consolidated wireless businesses grew by $431 million, or 10.9%, in the second quarter of 2001 and $2.3 billion, or 37.8% in the first six months of 2001 compared to the similar periods in 2000. By including the revenues of the properties of the wireless joint venture and excluding the impact of wireless overlap properties on a basis comparable with the second quarter and first six months of 2001, revenues were $590 million, or 15.6%, and $1.2 billion, or 16.4%, higher than the similar periods of 2000. On this comparable basis, revenue growth was largely attributable to customer additions and higher revenue per customer per month. Our domestic wireless customer base grew to 27.9 million customers in the second quarter of 2001, compared to 24.8 million customers in the second quarter of 2000, an increase of 12.7%. In the first quarter of 2001, we removed approximately 900,000 non-revenue producing customers as a result of a customer base assessment performed as part of the merger integration process. Prior period subscribers reflect the impact from the subscriber base adjustment allocable to the prior period. The company's strong subscriber growth and financial performance resulted from a number of initiatives during the quarter, including the company's launch of its store-within-a-store at 4,400 RadioShack locations, the introduction of its Worry Free Guarantee for customers, nationwide promotions and its new digital prepay product. In addition, on June 30, 2001, approximately 18 million customers were using digital service, representing 64% of total subscribers. OPERATING EXPENSES Operations and Support Operations and support expenses, which represent employee costs and other operating expenses, increased by $184 million, or 7.0%, in the second quarter of 2001 and $1.3 billion, or 32.5%, in the first six months of 2001. By including the expenses of the properties of the wireless joint venture and excluding the impact of wireless overlap properties on a basis comparable with the second quarter and first six months of 2001, operations and support expenses were $349 million, or 14.1%, and $707 million, or 14.9% higher than the similar periods of 2000. On this comparable basis, higher costs were also attributable to the significant growth in the subscriber base described above, as well as the continuing migration of analog customers to digital. 23 26 DOMESTIC WIRELESS - CONTINUED Depreciation and Amortization Depreciation and amortization expense increased by $10 million, or 1.1%, in the second quarter of 2001 and $607 million or 50.6% in the first six months of 2001 as compared to the same periods in 2000. The year to date increase was mainly attributable to the formation of the wireless joint venture in the second quarter of 2000. Adjusting for the wireless joint venture in a manner similar to operations and support expenses above, depreciation and amortization increased $31 million, or 3.6%, in the second quarter of 2001 and $128 million, or 7.6%, in the first six months of 2001 compared to the similar periods of 2000. On this comparable basis, capital expenditures for our cellular network have increased in 2001 to support increased demand in all markets, partially offset by lower amortization expense in the second quarter of 2001. MINORITY INTEREST The increase in minority interest in the second quarter of 2001 is primarily driven by higher earnings. The significant increases in minority interest for the first half of 2001 were principally due to the formation of the wireless joint venture at the beginning of the second quarter of 2000 and the significant minority interest attributable to Vodafone. INTERNATIONAL Our International segment includes international wireline and wireless telecommunication operations, investments and management contracts in the Americas, Europe, Asia and the Pacific. Our consolidated international investments include Grupo Iusacell (Iusacell) (Mexico), CODETEL (Dominican Republic), CTI Holdings, S.A. (CTI) (Argentina) and Micronesian Telecommunications Corporation (Northern Mariana Islands). Our international investments in which we have a less than controlling interest are accounted for on either the cost or equity method.
THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in Millions) JUNE 30, JUNE 30, --------------------- --------------------- --------------------- 2001 2000 % CHANGE 2001 2000 % CHANGE ---- ---- -------- ---- ---- -------- RESULTS OF OPERATIONS - ADJUSTED BASIS OPERATING REVENUES Wireline and other $ 243 $ 175 38.9% $ 452 $ 355 27.3% Wireless 355 296 19.9 673 573 17.5 ------ ------ ------ ------ 598 471 27.0 1,125 928 21.2 ------ ------ ------ ------ OPERATING EXPENSES Operations and support 432 288 50.0 816 616 32.5 Depreciation and amortization 114 83 37.3 219 164 33.5 ------ ------ ------ ------ 546 371 47.2 1,035 780 32.7 ------ ------ ------ ------ OPERATING INCOME $ 52 $ 100 (48.0) $ 90 $ 148 (39.2) ====== ====== ====== ====== EQUITY IN INCOME FROM UNCONSOLIDATED BUSINESSES $ 266 $ 128 107.8 $ 483 $ 300 61.0 ADJUSTED NET INCOME $ 243 $ 155 56.8 $ 453 $ 326 39.0
The revenues and operating expenses for the International segment exclude QuebecTel, which was deconsolidated in the second quarter of 2000. QuebecTel's net results for all periods are included in Equity in Income from Unconsolidated Businesses. 24 27 INTERNATIONAL - CONTINUED OPERATING REVENUES Revenues earned from our international businesses grew by $127 million, or 27.0%, in the second quarter of 2001 and $197 million, or 21.2% in the first six months of 2001 as compared to the same periods in 2000. The increase in revenues is primarily due to an increase in wireless subscribers and wireline access lines of the consolidated subsidiaries and the results of CTI's Buenos Aires PCS operations, which commenced commercial operations in the second quarter of 2000. In addition, revenues for the three and six months ended June 30, 2001 were generated by the Verizon Global Solutions Inc. (GSI) network which began its switching operations in the first quarter of 2001 and continued its expansion into the second quarter of 2001. OPERATING EXPENSES Operations and Support Operations and support expenses, which represent employee costs and other operating expenses, increased $144 million, or 50.0%, in the second quarter of 2001 and increased $200 million, or 32.5%, in the first six months of 2001 as compared to the same periods in 2000. The increase was driven primarily by variable costs associated with the increased revenues and the start-up of CTI's Buenos Aires PCS operations and GSI's operations. Depreciation and Amortization Depreciation and amortization expense increased $31 million, or 37.3%, for the second quarter of 2001 and $55 million, or 33.5%, for the first six months of 2001 as compared to the same periods in 2000. This increase is attributable to the ongoing network capital expenditures necessary to support the increased subscriber base. EQUITY IN INCOME FROM UNCONSOLIDATED BUSINESSES Equity in income from unconsolidated businesses increased $138 million, or 107.8%, in the second quarter of 2001 and $183 million, or 61.0%, in the first six months of 2001 compared to the similar periods in 2000. The increase is primarily due to improved operational growth at Omnitel Pronto Italia S.p.A and dividends received in the current year from C&W, compared to equity losses in the prior year periods relating to CWC. These increases were partially offset by lower income from our Canadian investments due primarily to TELUS's investment in Clearnet Communications Inc. in the third quarter of 2000 and a reduction in dividends received from Telecom Corporation of New Zealand Limited. 25 28 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, 2001 2000 % CHANGE 2001 2000 % CHANGE ---- ---- -------- ---- ---- -------- RESULTS OF OPERATIONS - ADJUSTED BASIS OPERATING REVENUES Information services $ 984 $ 1,056 (6.8)% $ 1,773 $ 1,835 (3.4)% --------- --------- --------- --------- OPERATING EXPENSES Operations and support 453 475 (4.6) 869 909 (4.4) Depreciation and amortization 20 20 -- 41 39 5.1 --------- --------- --------- --------- 473 495 (4.4) 910 948 (4.0) --------- --------- --------- --------- OPERATING INCOME $ 511 $ 561 (8.9) $ 863 $ 887 (2.7) ========= ========= ========= ========= ADJUSTED NET INCOME $ 298 $ 329 (9.4) $ 510 $ 527 (3.2)
OPERATING REVENUES Operating revenues from our Information Services segment declined by $72 million, or 6.8%, in the second quarter of 2001 and $62 million, or 3.4%, in the first six months of 2001 compared to the same periods in 2000. The decrease was primarily generated by the delayed publication of several large directories and lower affiliate transactions. OPERATING EXPENSES Total operating expenses for the second quarter of 2001 decreased $22 million, or 4.4%, and $38 million, or 4.0%, in the first six months of 2001 from the corresponding periods in 2000. These decreases were primarily attributable to a reduction in operations and support expenses from our ongoing cost containment efforts to reduce directory publishing expenses and lower costs associated with the delayed publication of several large directories mentioned above. NONOPERATING ITEMS
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2001 2000 % CHANGE 2001 2000 % CHANGE ---- ---- -------- ---- ---- -------- OTHER INCOME AND (EXPENSE), NET Interest Income $ 62 $ 58 6.9% $ 115 $ 126 (8.7)% Foreign exchange gains (losses), net 41 (32) (228.1) 40 (21) (290.5) Other, net 11 (14) (178.6) 29 (15) (293.3) ------- -------- ------- -------- Total $ 114 $ 12 -- $ 184 $ 90 104.4 ======= ======== ======= ========
The changes in other income and expense in the three and six months ended June 30, 2001, compared to the same periods in 2000, were primarily due to changes in interest income and foreign exchange gains and losses. We recorded additional interest income in the first six months of 2000 in connection with the settlement of a tax-related matter. Foreign exchange gains were affected primarily by our Iusacell subsidiary, which 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. 26 29
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2001 2000 % CHANGE 2001 2000 % CHANGE ---- ---- -------- ---- ---- -------- INTEREST EXPENSE Interest expense $ 909 $ 915 (0.7)% $ 1,830 $ 1,689 8.3% Capitalized interest costs 93 52 78.8 177 97 82.5 ------- ------- ------- ------- Total interest costs on debt balances $ 1,002 $ 967 3.6 $ 2,007 $ 1,786 12.4 ======= ======= ======= ======= Average debt outstanding $63,879 $52,999 20.5 $61,622 $51,029 20.8 Effective interest rate 6.3% 7.3% 6.5% 7.0%
The increase in interest costs for the three and six months ended June 30, 2001, compared to the same periods in 2000, were principally attributable to higher average debt levels partially offset by lower interest rates. The increase in debt levels was mainly the result of the debt assumed by Verizon Wireless in connection with the formation of Verizon Wireless, anticipated payments for FCC licenses (see "Other Factors That May Affect Future Results") and higher capital expenditures primarily in our Domestic Telecom and Domestic Wireless segments.
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2001 2000 % CHANGE 2001 2000 % CHANGE ---- ---- -------- ---- ---- -------- MINORITY INTEREST $209 $9 -- $307 $35 --
The increase in minority interest during the second quarter of 2001 compared to the prior year period is due to higher earnings at Verizon Wireless. The year-to-date variance is primarily driven by the formation of Verizon Wireless at the beginning of the second quarter of 2000.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2001 2000 2001 2000 ---- ---- ---- ---- EFFECTIVE INCOME TAX RATES (12.9)% 39.4% 60.5% 39.0%
The effective income tax rate is the provision for income taxes as a percentage of income (loss) before the provision for income taxes. Our effective income tax rate for the three- and six-month periods ended June 30, 2001 are not consistent with the same periods last year primarily because tax benefits were not available on some of the losses resulting from the other than temporary decline in market value of several of our marketable securities. CONSOLIDATED FINANCIAL CONDITION
(Dollars in Millions) SIX MONTHS ENDED JUNE 30, 2001 2000 $ CHANGE ---- ---- -------- CASH FLOWS PROVIDED BY (USED IN) Operating activities $ 7,658 $ 8,329 $ (671) Investing activities (10,875) (7,595) (3,280) Financing activities 5,076 (1,421) 6,497 -------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 1,859 $ (687) $ 2,546 ======== ======= =======
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, 2001, our sources of funds, primarily from operations and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that capital spending requirements will continue to be financed primarily through internally generated funds. Additional debt or equity financing may be needed to fund additional development activities (including the purchase of wireless licenses obtained in the recent FCC auction, see "Other Factors That May Affect Future Results") or to maintain our capital structure to ensure our financial flexibility. 27 30 CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Cash generated from operations continued to be one of our primary sources of funds. The decrease in cash from operations compared to the first half of 2000 primarily reflects an increase in working capital requirements, partially offset by improved results of operations. CASH FLOWS USED IN INVESTING ACTIVITIES Capital expenditures continued to be our primary use of capital resources. We invested $6,406 million in our Domestic Telecom business in the first half of 2001, compared to $5,594 million in the first half of 2000 to facilitate the introduction of new products and services, enhance responsiveness to competitive challenges and increase the operating efficiency and productivity of the network. We also invested approximately $2,372 million in our Domestic Wireless businesses in the first half of 2001, compared to $1,386 million during the same period last year. The increase in 2001 is primarily due to the inclusion of both Vodafone and PrimeCo properties in Verizon Wireless in April 2000, as well as increased capital spending in existing Bell Atlantic and GTE wireless properties. We expect total capital expenditures in 2001 to be approximately $17.5 billion. We invested $2,212 million in acquisitions and investments in businesses during the first six months of 2001, including $1,625 million for wireless licenses obtained in the recent FCC auction and $410 million for additional wireless spectrum purchased from another telecommunications carrier. In the first six months of 2000, we invested $1,132 million in acquisitions and investments in businesses, including approximately $715 million in the equity of MFN and $205 million in wireless properties. 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. The net change in short-term investments in 2001 includes the maturity of a $375 million short-term investment and other, net investing activities include loans to Genuity of $750 million. CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES The net cash proceeds from increases in our total debt from December 31, 2000 of $7,269 million was primarily due to the issuance of $7.0 billion of long-term debt by Verizon Global Funding, partially offset by net repayments of $589 million of commercial paper and other short-term borrowings by Verizon Global Funding and by $617 million of maturities of other corporate long-term debt. In addition, Verizon Wireless issued $580 million of long-term debt and Domestic Telecom incurred $298 million of long-term debt, issued $1.2 billion of net short-term debt and retired $570 million of long-term debt. The $1,689 million increase in our total debt during the first half of 2000 was primarily due to the issuances 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 65.0% as of June 30, 2001, compared to 61.0% as of June 30, 2000. As of June 30, 2001, we had in excess of $7.9 billion of unused bank lines of credit and $5.1 billion in bank borrowings outstanding. As of June 30, 2001, our telephone and financing subsidiaries had shelf registrations for the issuance of up to $7.5 billion of unsecured debt securities. The debt securities of our telephone and financing subsidiaries continue to be accorded high ratings by primary rating agencies. However, in April 2001, Moody's Investors Service (Moody's) revised our credit rating outlook from stable to negative. Moody's cited concern about our ability to complete an initial public offering (IPO) of Verizon Wireless in a timely fashion in order to pay for the anticipated FCC spectrum auction purchases of $8.8 billion. A delay in the IPO would require us to issue debt to cover these purchases. See "Other Factors That May Affect Future Results." A change in an outlook does not necessarily signal a rating downgrade but rather highlights an issue whose final resolution may result in placing a company on review for possible downgrade. 28 31 We also have a $2.0 billion Euro Medium Term Note Program, under which we may issue notes that are not registered with the SEC. The notes may be issued from time to time by Verizon Global Funding, and will have the benefit of a support agreement between Verizon Global Funding and us. There have been no notes issued under this program. 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 2001, we announced a quarterly cash dividend of $.385 per share. In the first quarter of 2000, we announced a quarterly cash dividend of $.385 per share; and 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. INCREASE IN CASH AND CASH EQUIVALENTS Our cash and cash equivalents at June 30, 2001 totaled $2,616 million, an increase of $1,859 million compared to December 31, 2000. This increase in cash is primarily related to the anticipated payments for FCC licenses (see "Other Factors That May Affect Future Results"). MARKET RISK We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in equity investment prices and changes in corporate tax rates. We employ risk management strategies using a variety of derivatives, including interest rate swap agreements, interest rate caps and floors, foreign currency forwards and options, equity options and basis swap agreements. We do not hold derivatives for trading purposes. It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in limiting our exposures to the various market risks. Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and protecting against earnings and cash flow volatility resulting from changes in market conditions. We do not hedge our market risk exposure in a manner that would completely eliminate the effect of changes in interest rates, equity prices and foreign exchange rates on our earnings. While we do not expect that our liquidity and cash flows will be materially affected by these risk management strategies, our net income may be materially affected by certain market risks associated with the exchangeable notes discussed below. EXCHANGEABLE NOTES In 1998, we issued exchangeable notes as described in Note 9 to the condensed consolidated financial statements and discussed earlier under "Mark-to-Market Adjustment - Financial Instruments." These financial instruments expose us to market risk, including: - Equity price risk, because the notes are exchangeable into shares that are traded on the open market and routinely fluctuate in value. - Foreign exchange rate risk, because the notes are exchangeable into shares that are denominated in a foreign currency. - Interest rate risk, because the notes carry fixed interest rates. Periodically, equity price or foreign exchange rate movements may require us to mark-to-market the exchangeable note liability to reflect the increase or decrease in the current share price compared to the established exchange price, resulting in a charge or credit to income. The following sensitivity analysis measures the effect on earnings and 29 32 financial condition due to changes in the underlying share prices of the Telecom Corporation of New Zealand Limited (TCNZ), C&W and NTL stock. - At June 30, 2001, the exchange price for the TCNZ shares (expressed as American Depositary Receipts) was $44.93. The C&W and NTL notes of $3,180 million are exchangeable into 128.4 million shares of C&W stock and 24.5 million shares of NTL stock. - For each $1 increase in the value of the TCNZ shares above the exchange price, our pretax earnings would be reduced by approximately $55 million. Assuming the aggregate value of the C&W and NTL stocks exceeds the value of the debt liability, each $1 increase in the value of the C&W shares (expressed as American Depositary Receipts) or NTL shares would reduce our pretax earnings by approximately $43 million or $24 million, respectively. A subsequent decrease in the value of these shares would correspondingly increase earnings, but not to exceed the amount of any previous reduction in earnings. - Our cash flows would not be affected by mark-to-market activity relating to the exchangeable notes. - If we decide to deliver shares in exchange for the notes, the exchangeable note liability (including any mark-to-market adjustments) will be eliminated and the investment will be reduced by the fair market value of the related number of shares delivered. Upon settlement, the excess of the liability over the book value of the related shares delivered will be recorded as a gain. We also have the option to settle these liabilities with cash upon exchange. EQUITY RISK We also have equity price risk associated with our cost investments, primarily in common stocks, and equity price sensitive derivatives and derivatives embedded in other financial instruments that are carried at fair value. The value of these cost investments and derivatives is subject to changes in the market prices of the underlying securities. Our cost investments and equity price sensitive derivatives recorded at fair value totaled $2,983 million at June 30, 2001. A sensitivity analysis of our cost investments and equity price sensitive derivatives recorded at fair value indicated that a 10% increase or decrease in the fair value of the underlying common stock equity prices would result in a $255 million increase or decrease in the fair value of our cost investments and equity price sensitive derivatives. Of this amount, a change in the fair value of our cost investments of $242 million would be recognized in Accumulated Other Comprehensive Loss in our condensed consolidated statement of changes in shareowners' investment under SFAS No. 115. Our equity price sensitive derivatives and embedded derivatives (primarily a MFN conversion option and several long-term call options on our common stock) (see Note 8 - Accounting Change - Derivative Financial Instruments) do not qualify for hedge accounting under SFAS No. 133. As such, a change of approximately $13 million in the fair value of our equity price sensitive derivatives and embedded derivatives would be recognized in our condensed consolidated balance sheets and in current earnings in mark-to-market adjustment. We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other than temporary, a charge to earnings is recorded for all or a portion of the unrealized loss, and a new cost basis in the investment is established. Prior to the second quarter of 2001, we considered the declines in the market values of our marketable securities investments to be temporary, due principally to the overall weakness in the securities markets as well as telecommunications sector share prices. However, in June 2001, we recognized a pretax loss of $3,913 million ($2,926 million after-tax, or $1.07 diluted loss per share) primarily relating to our investments in C&W, NTL and MFN. We determined, through the evaluations described above, that market value declines in these investments were considered other than temporary. 30 33 OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS On July 31, 2001 and August 2, 2001, we filed Current Reports on Form 8-K announcing our second quarter financial results and supplemental information about our revised 2001 earnings guidance. BELL ATLANTIC-GTE MERGER Federal and state regulatory conditions to the merger included certain commitments to, among other things, promote competition and the widespread deployment of advanced services while helping to ensure that consumers continue to receive high-quality, low-cost telephone services. In some cases there are significant penalties associated with not meeting these commitments. The cost of satisfying these commitments could have a significant impact on net income in future periods. The pretax cost to begin compliance with these conditions was approximately $200 million in 2000. We expect a similar impact in 2001 and 2002. RECENT DEVELOPMENTS VERIZON WIRELESS FCC Auctions Verizon Wireless was the winning bidder for 113 licenses in the FCC's auction of 1.9 GHz spectrum, which concluded in January 2001. These licenses would add capacity for growth and advanced services in markets including New York, Boston, Los Angeles, Chicago, Philadelphia, Washington, D.C., Seattle and San Francisco. The total price of these licenses was approximately $8.8 billion, $1.8 billion of which has already been paid and the balance of which will be paid when the FCC requires payment. There were no legal challenges to Verizon Wireless's qualifications to acquire these licenses. However, most of the licenses that were auctioned are the subject of pending litigation by the original licensees, NextWave Personal Communications Inc. and NextWave Power Partners Inc., which have appealed to the federal courts the FCC's action canceling NextWave's licenses and reclaiming the spectrum. In a decision on June 22, 2001, the U.S. court of appeals ruled that the FCC was not allowed to repossess the NextWave licenses. The FCC has announced that it intends to appeal the U.S. appeals court decision to the U.S. Supreme Court. If the licenses must be returned, the FCC has stated that it will refund to winning bidders any amounts that they may have paid, without interest. Nearly all of Verizon Wireless's $8.8 billion license cost relates to licenses subject to NextWave's appeal. Timing of Initial Public Offering In late 2000, we announced that Verizon Wireless would defer its planned IPO of common stock. We have periodically reiterated that the IPO will occur when market conditions are favorable. Price Communications Wireless During the fourth quarter of 2000, Verizon Wireless agreed to acquire the wireless business of Price Communications for $1.5 billion in Verizon Wireless stock and the repayment by Verizon Wireless of $550 million in net debt. The transaction was conditioned upon completion of a Verizon Wireless IPO by September 30, 2001. Since we have disclosed that the IPO cannot be completed by September 30, 2001, we have begun discussions with Price Communications to explore alternative forms of consideration and other terms for an acquisition of the wireless business of Price Communications. POTENTIAL SALE OF ACCESS LINES We are currently exploring the sale of 1.2 million access lines in Alabama, Kentucky and Missouri. 31 34 TELECOMMUNICATIONS ACT OF 1996 In-Region Long Distance We now have authority to offer in-region long distance service in three states in the former Bell Atlantic territory. In addition to the New York order released in December 1999, on April 16, 2001 and July 23, 2001, the FCC released orders approving our applications for permission to enter the in-region long distance market in Massachusetts and Connecticut, respectively. Several parties have appealed the Massachusetts order to the U.S. Court of Appeals. On July 25, 2001, the court denied their request for a stay of the FCC's Massachusetts order pending the appeal. On June 21, 2001, we filed an application with the FCC for approval to offer in-region long distance in Pennsylvania. Under the terms of the Telecommunications Act of 1996 (the Telecommunications Act), the FCC is required to act on our application no later than September 19, 2001. In addition, on July 25, 2001 and July 31, 2001, we filed state applications for support of our anticipated applications with the FCC for permission to enter the in-region long distance market in Rhode Island and New Hampshire. In support of these applications, the accounting and consulting firm KPMG conducted a review comparing operations support systems (OSS) in Rhode Island to those in Massachusetts and PricewaterhouseCoopers LLP is doing the same for the remaining New England states of Vermont, New Hampshire and Maine. KPMG is also nearing completion of a comprehensive assessment of our OSS in New Jersey. Once that assessment is complete we expect to file for state support of our anticipated application with the FCC for permission to enter the in-region long distance market in New Jersey. FCC REGULATION AND INTERSTATE RATES Universal Service In November 1999, the FCC adopted a new mechanism for providing universal service support to high cost areas served by large local telephone companies. This funding mechanism provides additional support for local telephone services in several states served by our telephone operations. On July 31, 2001, the U. S. Court of Appeals for the Tenth Circuit reversed and remanded to the FCC for further proceedings. The court concluded that the FCC had failed to adequately explain some aspects of its decision and had failed to address any need for state universal service mechanisms. Compensation for Internet Traffic In March 2000, the U. S. Court of Appeals for the District of Columbia Circuit reversed and remanded the FCC's February 1999 order that concluded that calls to the Internet through Internet service providers (ISP) do not terminate at the ISP but are single interstate calls. The FCC had concluded that calls to the Internet are not therefore subject to reciprocal compensation under section 251(b)(5) of the Telecommunications Act, but left it to state regulatory commissions to determine whether local interconnection agreements entered into with competing carriers required the payment of compensation on such calls. On April 27, 2001, the FCC released an order responding to the court's remand. The FCC found that Internet-bound traffic is interstate and subject to the FCC's jurisdiction. Moreover, the FCC again found that Internet-bound traffic is not subject to reciprocal compensation under section 251(b)(5) of the Telecommunications Act. Instead, the FCC established federal rates that decline from $0.0015 to $0.0007 over a three year period. The FCC order also sets caps on the total minutes that may be subject to any intercarrier compensation and requires that incumbent local exchange carriers must offer to pay reciprocal compensation for local traffic at the same rate as they are required to pay on Internet-bound traffic. STATE REGULATION Verizon Virginia On June 26, 2001, the Virginia State Corporation Commission rejected a petition by competing carriers to order a retail/wholesale structural separation of Verizon Virginia. 32 35 OTHER MATTERS RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The amortization of goodwill included in our investments in equity investees will also no longer be recorded upon adoption of the new rules. Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121. We are required to adopt SFAS No. 142 effective January 1, 2002. We are currently evaluating our intangible assets in relation to the provisions of SFAS No. 142 to determine the impact, if any, the adoption of SFAS No. 142 will have on our results of operations or financial position. 33 36 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: - materially adverse changes in economic conditions in the markets served by us or by companies in which we have substantial investments; - material changes in available technology; - an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations; - the final outcome of federal, state and local regulatory initiatives and proceedings, including arbitration proceedings, and judicial review of those initiatives and proceedings, pertaining to, among other matters, the terms of interconnection, access charges, universal service, and unbundled network elements and resale rates; - the extent, timing, success and overall effects of competition from others in the local telephone and toll service markets; - the timing and profitability of our entry into the in-region long distance market; - our ability to combine former Bell Atlantic and GTE operations, satisfy regulatory conditions and obtain revenue enhancements and cost savings; - the profitability of our entry into the broadband access market; - the ability of Verizon Wireless to combine operations, achieve revenue enhancements and cost savings, and obtain sufficient spectrum resources; - our ability to convert our ownership interest in Genuity into a controlling interest consistent with regulatory conditions, and Genuity's ensuing profitability; and - changes in our accounting assumptions that may be required by regulatory agencies, including the SEC, or that result from changes in the accounting rules or their application, which could result in an impact on earnings. 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 Consolidated Financial Condition section under the caption "Market Risk." 34 37 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 10, 2001, Telesector Resources Group, Inc. (TRG), a wholly owned indirect subsidiary of Verizon, entered into an agreement with the New York State Attorney General's Office to resolve on a civil basis, without a finding of liability on the part of TRG, the Attorney General's investigation of possible environmental violations and false document charges relating to the former Orangeburg, New York, Material Reclamation Center. Pursuant to the agreement TRG has paid a $100,000 civil penalty and $2.65 million in support of certain environmental projects. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our 2001 Annual Meeting of Shareholders was held on April 25, 2001. 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 ------------------- -------------- -------------- James R. Barker 2,108,794,467 53,380,914 Edward H. Budd 2,107,519,900 54,655,481 Richard L. Carrion 2,110,133,231 52,042,150 Robert F. Daniell 2,107,520,191 54,655,190 Helene L. Kaplan 2,073,494,907 88,680,474 Charles R. Lee 2,104,429,700 57,745,681 Sandra O. Moose 2,081,382,018 80,793,363 Joseph Neubauer 2,083,011,508 79,163,873 Thomas H. O'Brien 2,109,170,210 53,005,171 Russell E. Palmer 2,108,553,598 53,621,783 Hugh B. Price 2,083,513,192 78,662,189 Ivan G. Seidenberg 2,105,869,919 56,305,462 Walter V. Shipley 2,108,284,553 53,890,828 John W. Snow 2,082,717,438 79,457,943 John R. Stafford 2,108,077,647 54,097,734 Robert D. Storey 2,077,788,901 84,386,480
(b) The appointment of Ernst and Young LLP as independent accountants for 2001 was ratified with 2,113,861,117 votes for, 30,499,820 votes against, and 17,814,444 abstentions. (c) A management proposal regarding approval of Verizon Communications Inc. Long-Term Incentive Plan was ratified with 1,418,698,501 votes for, 300,250,940 votes against, 35,586,315 abstentions and 407,639,625 broker non-votes. (d) A management proposal regarding approval of Verizon Communications Inc. Short-Term Incentive Plan was ratified with 1,872,479,151 votes for, 251,204,706 against and 38,491,524 abstentions. (e) A shareholder proposal regarding additional Director Nominees was defeated with 172,650,379 votes for, 1,529,318,945 votes against, 52,577,937 abstentions and 407,628,120 broker non-votes. (f) A shareholder proposal regarding Executive Severance Agreements was defeated with 533,918,976 votes for, 1,155,560,575 votes against, 65,067,704 abstentions and 407,628,126 broker non-votes. (g) A shareholder proposal regarding composition of the Board of Directors was defeated with 504,751,053 votes for, 1,178,661,058 votes against, 71,135,151 abstentions and 407,628,119 broker non-votes. (h) A shareholder proposal regarding Calculation of Incentive Compensation was defeated with 318,957,589 votes for, 1,384,639,453 votes against, 50,943,214 abstentions and 407,635,125 broker non-votes. 35 38 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K filed during the quarter ended June 30, 2001: A Current Report on Form 8-K, dated April 24, 2001, was filed regarding our first quarter 2001 financial results. A Current Report on Form 8-K, dated May 9, 2001, was filed regarding our sale of zero-coupon convertible notes due 2021. It also included a current ratio of earnings to fixed charges. A Current Report on Form 8-K, dated June 5, 2001, was filed summarizing forward-looking information presented in an analyst meeting. 36 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VERIZON COMMUNICATIONS INC. Date: August 14, 2001 By /s/ Lawrence R. Whitman -------------------------------------- Lawrence R. Whitman Senior Vice President and Controller (Principal Accounting Officer) UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 8, 2001. 37