-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lw98tOcTCrSWF7kD8zxA0y425ECAmlheZvxfFqtdozz11r9/ZY3tTKLTbT4CA84s WQ+92md4ZE1jAGhh/BcPEA== 0000950109-00-001253.txt : 20000331 0000950109-00-001253.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950109-00-001253 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELL ATLANTIC CORP CENTRAL INDEX KEY: 0000732712 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 232259884 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08606 FILM NUMBER: 586742 BUSINESS ADDRESS: STREET 1: 1095 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2123952121 MAIL ADDRESS: STREET 1: 1717 ARCH ST 47TH FL STREET 2: 1717 ARCH ST 47TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19103 10-K405 1 BELL ATLANTIC CORPORATION FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8606 BELL ATLANTIC CORPORATION (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, INCLUDING AREA CODE: (212) 395-2121 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- Common Stock, $.10 par value......... New York, Philadelphia, Boston, Chicago and Pacific Stock Exchanges SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At February 29, 2000, the aggregate market value of the registrant's voting stock held by nonaffiliates was approximately $75,843,000,000. At February 29, 2000, 1,550,659,354 shares of the registrant's Common Stock were outstanding, after deducting 25,586,971 shares held in treasury. Documents incorporated by reference: Portions of the registrant's Proxy Statement prepared in connection with the 2000 Annual Meeting of Shareholders (Part III). ================================================================================ TABLE OF CONTENTS ITEM NO. PAGE - -------- ---- PART I 1. Business........................................................... 1 2. Properties......................................................... 15 3. Legal Proceedings.................................................. 16 4. Submission of Matters to a Vote of Security Holders................ 16 Executive Officers of the Registrant...................................... 16 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................................ 17 6. Selected Financial Data............................................ 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 17 7A. Quantitative and Qualitative Disclosures About Market Risk......... 17 8. Financial Statements and Supplementary Data........................ 17 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 17 PART III 10. Directors and Executive Officers of the Registrant................. 18 11. Executive Compensation............................................. 18 12. Security Ownership of Certain Beneficial Owners and Management..... 18 13. Certain Relationships and Related Transactions..................... 18 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 19 UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 28, 2000 PART I Item 1. Business GENERAL Bell Atlantic Corporation was incorporated in 1983 under the laws of the State of Delaware and completed a merger with NYNEX Corporation on August 14, 1997. Our principal executive offices are located at 1095 Avenue of the Americas, New York, New York 10036 (telephone number 212-395-2121). Bell Atlantic is a telecommunications company that operates in a region stretching from Maine to Virginia. Our principal operating subsidiaries are: New York Telephone Company, Bell Atlantic - New Jersey, Inc., Bell Atlantic - Pennsylvania, Inc., New England Telephone and Telegraph Company, Bell Atlantic - Maryland, Inc., Bell Atlantic - Virginia, Inc., Bell Atlantic - West Virginia, Inc., Bell Atlantic - Delaware, Inc., Bell Atlantic - Washington, D.C., Inc. and Bell Atlantic Mobile. We have four reportable segments, which we operate and manage as strategic business units and organize by products and services. Our segments and their principal activities consist of the following: Domestic Telecom Domestic wireline telecommunications services - primarily our nine operating telephone subsidiaries that provide local telephone services from Maine to Virginia, including 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, and Internet access services. Global Wireless Wireless telecommunications services to customers in 24 states in the United States and foreign wireless investments servicing customers in Latin America, Europe and the Pacific Rim. Directory Domestic and international publishing businesses, including print directories and Internet-based shopping guides, as well as website creation and other electronic commerce services. This segment has operations principally in the United States and Central Europe. Other Businesses International wireline telecommunications investments primarily in Europe and the Pacific Rim and lease financing and other businesses. - -------------------------------------------------------------------------------- You can find financial information with respect to our segments in Note 18 to the consolidated financial statements. PROPOSED BELL ATLANTIC-GTE MERGER Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of equals under a definitive merger agreement dated as of July 27, 1998. Under the terms of the agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common stock for each share of GTE common stock that they own. Bell Atlantic shareholders will continue to own their existing shares after the merger. We expect the merger to qualify as a pooling of interests, which means that for accounting and financial purposes, the companies will be treated as if they had always been combined. At annual meetings held in May of 1999 the shareholders of each company approved the merger. The completion of the merger is subject to a number of conditions, including certain regulatory approvals (all of which have been obtained except that of the Federal Communications Commission (FCC)) and receipt of opinions that the merger will be tax-free. We are targeting completion of the merger in the second quarter of 2000. 1 DOMESTIC TELECOM OPERATIONS Our Domestic Telecom segment, primarily comprised of our nine operating telephone subsidiaries, provided approximately 79% of 1999 operating revenues. The operating telephone subsidiaries presently serve a territory consisting of 31 LATAs, or local access and transport areas, and provide mainly two types of telecommunications services: . Exchange telecommunications service is the transmission of ----------------------------------- telecommunications among customers located within a local calling area within a LATA. Examples of exchange telecommunications services include switched local residential and business services, local private line voice and data services, and Centrex services. We also provide toll services within a LATA, including Wide Area Telecommunications Service and intraLATA toll (long distance) service. In New York State, we also provide interLATA toll (long distance) services. . Exchange access service links a customer's premises and the transmission ----------------------- facilities of other telecommunications carriers, generally interLATA (long distance) carriers. Examples of exchange access services include switched access and special access services. We have organized our Domestic Telecom segment into business units operating across our telephone subsidiaries. The business units focus on specific market segments. We are not dependent on any single customer. The telephone subsidiaries remain responsible within their respective service areas for the provision of telephone services, financial performance, and regulatory matters. The Consumer unit markets communications services to residential customers, as -------- well as operator services, within our territory (22 million households and 63 million people). 1999 revenues were approximately $10 billion, representing approximately 39% of Domestic Telecom's aggregate revenues. These revenues were derived primarily from the provision of telephone services to residential users. The General Business unit markets communications and information services to ---------------- small and medium-sized businesses, as well as pay telephone services, within our territory. The General Business unit has approximately 2.1 million customers in our territory and generated approximately $5 billion in revenues in 1999, representing approximately 19% of Domestic Telecom's aggregate revenues. The Enterprise Business unit markets communications and information technology ------------------- and services to large businesses and to departments, agencies and offices of the executive, judicial and legislative branches of the federal and state government. These services include voice switching/processing services (e.g., dedicated private lines, custom Centrex, call management, and voice messaging), end-user networking (e.g., credit and debit card transactions and personal computer-based conferencing, including data and video), internetworking (establishing links between the geographically disparate networks of two or more companies or within the same company), network optimization (disaster avoidance, 911 service, and intelligent vehicle highway systems), video services (distance learning, telemedicine, and videoconferencing) and interactive multimedia applications services. The Enterprises Business unit also includes the Data Solutions Group which provides data transmission and network integration services (integrating multiple geographically disparate networks into one system), as well as IP-based solutions (communications using internet protocol and internet services, including high-speed internet access). Global Networks, a unit of the Data Solutions Group, is building a next generation long distance network using ATM (asynchronous transfer mode) technology. 1999 revenues were approximately $5 billion, representing approximately 19% of Domestic Telecom's aggregate revenues. The Network Services unit markets (i) switched and special access to the ---------------- telephone subsidiaries' local exchange networks, and (ii) billing and collection services, including recording, rating, bill processing and bill rendering. 1999 revenues were approximately $6 billion, representing approximately 23% of Domestic Telecom's aggregate revenues. Approximately 75% of total Network Services revenues were derived from interexchange carriers. Most of the remaining revenues came from business customers and government agencies with their own special access network connections, wireless companies, and other local exchange carriers which resell network connections to their own customers. 2 TELECOMMUNICATIONS ACT OF 1996 The Telecommunications Act of 1996 (1996 Act) became effective on February 8, 1996, and replaced the Modification of Final Judgment (MFJ), a consent decree that arose out of an antitrust action brought by the United States Department of Justice against AT&T. In general, the 1996 Act includes provisions that open local exchange markets to competition and permit Bell Operating Companies (BOC), including ours, to engage in manufacturing and to provide long distance service under certain conditions. First, the 1996 Act permitted us to apply immediately for state approval to offer long distance services originating outside of the states where our operating telephone subsidiaries operate as local exchange carriers. Our wireless businesses also were permitted immediately to offer long distance services without having to comply with the conditions imposed in waivers granted under the MFJ. Second, the 1996 Act permits us to offer in-region long distance services (that is, services originating in the states where our telephone subsidiaries operate as local exchange carriers), once we have demonstrated to the FCC that we have satisfied certain requirements. The requirements include a 14-point "competitive checklist" of steps which we must take to help competitors offer local services through resale, through purchase of unbundled network elements, or through their own networks. We must also demonstrate to the FCC that our entry into the in-region long distance market would be in the public interest. In-Region Long Distance On December 22, 1999, the FCC released an order approving our application for permission to enter the in-region long distance market in New York. The FCC concluded that we have satisfied the 14-point "competitive checklist" required under the 1996 Act for entry into the in-region long distance market, and that our entry into the long distance business in New York would benefit the public interest. Following the FCC's decision, AT&T and Covad sought a stay of the Commission's order. The stay request was denied, first by the FCC and later by the U.S. Court of Appeals. AT&T's and Covad's appeal of the order remains pending and is proceeding on an accelerated schedule, with argument scheduled for April 2000. KPMG LLP (KPMG), which conducted an extensive third-party test of our operations support systems (OSS) in New York under the supervision of the New York Public Service Commission, has been retained by the Massachusetts Department of Telecommunications and Energy to conduct a third-party test of our OSS in Massachusetts. The Massachusetts test is designed to build on the KPMG test of the similar systems in New York. KPMG has also been retained by the Pennsylvania Public Utility Commission to conduct a third-party test of our OSS in Pennsylvania and by the New Jersey Board of Public Utilities to conduct a test of the New Jersey OSS that builds on the concurrent testing of the similar systems in Pennsylvania. The Virginia State Corporation Commission has also retained KPMG for the same purpose. The timing of our long distance entry in each of our remaining 13 jurisdictions depends on the receipt of FCC approval. We are unable to predict definitively the impact that the 1996 Act will ultimately have on our business, results of operations, or financial condition. The financial impact will depend on several factors, including the timing, extent and success of competition in our markets, the timing and outcome of various regulatory proceedings and any appeals, and the timing, extent and success of our pursuit of new opportunities resulting from the 1996 Act. FCC REGULATION AND INTERSTATE RATES The operating telephone subsidiaries are subject to the jurisdiction of the FCC with respect to interstate services and certain related matters. In 1999, the FCC continued to implement reforms to the interstate access charge system and to implement the "universal service" and other requirements of the 1996 Act. 3 Access Charges Interstate access charges are the rates long distance carriers pay for use and availability of our operating telephone companies' facilities for the origination and termination of interstate service. The FCC required a phased restructuring of access charges, which began in January 1998, so that the telephone companies' non-usage-sensitive costs will be recovered from long distance carriers and end-users through flat rate charges, and usage-sensitive costs will be recovered from long distance carriers through usage-based rates. In addition, the FCC has required that different levels of usage-based charges for originating and for terminating interstate traffic be established. The final phase of this restructuring was completed on January 1, 2000. Price Caps Under the FCC price cap rules that apply to interstate access rates, each year our price cap index is adjusted downward by a fixed percentage intended to reflect increases in productivity (productivity factor) and adjusted upward by an allowance for inflation (GDP-PI). Our annual price cap filing, effective July 1, 1999, reflects the effects of the current productivity factor of 6.5%. In May 1999, the U. S. Court of Appeals reversed the FCC's order that adopted the 6.5 % productivity factor. The Court concluded that the FCC had not justified its choice of a productivity factor and directed the FCC to reconsider and explain the methods used in selecting the productivity factor. The Court granted the FCC a stay of its order, however, until April 1, 2000. As a result, the FCC is now conducting a proceeding to determine an appropriate productivity factor in response to the Court's order. At the same time, the FCC is considering a proposal to further restructure access rates by an industry coalition that includes both local exchange carriers (including Bell Atlantic) and long distance carriers. Among other things, that proposal would set into place a mechanism to transition to a set target of $.0055 per minute for switched access services. Once that target rate is reached, local exchange carriers would no longer be required to make further annual price cap reductions to their switched access prices. To allow time to consider this industry proposal, parties have requested that the Court further extend the stay of its price cap decision order until June 30, 2000. The FCC has adopted rules for special access services that provide for added pricing flexibility and ultimately the removal of services from price regulation when certain competitive thresholds are met. In order to take advantage of this relief, however, carriers must forego the ability to take advantage of provisions in the current rules that provide relief in the event earnings fall below certain thresholds, and we have not filed for this relief. The order also allows certain services, including those included in the interexchange basket of services, to be removed from price regulation immediately. In response, effective in October 1999, we removed approximately $90 million in annual revenues of our services in the interexchange basket from price regulation and from the operation of the productivity offset which otherwise would require annual price reductions. Universal Service In July 1999, the U.S. Court of Appeals reversed certain aspects of the FCC's order implementing the "universal service" provision of the 1996 Act. The universal service fund includes a multi-billion dollar interstate fund to link schools and libraries to the Internet and to subsidize high cost areas, low income consumers and rural healthcare providers. Previously, under the FCC's rules, all providers of interstate telecommunications services had to contribute to the schools and libraries fund based on their total interstate and intrastate retail revenues. The Court reversed the decision to include intrastate revenues as part of the basis for assessing contributions to that fund. As a result of this decision, our contributions to the universal service fund were reduced by approximately $107 million annually beginning on November 1, 1999, and our interstate access rates will be reduced accordingly because we will no longer have to recover these contributions in our rates. AT&T and MCI WorldCom, Inc. have since asked the U.S. Supreme Court to review this latter portion of the appeals court decision. Other parties have asked the U.S. Supreme Court to review additional aspects of the court of appeals decision. 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 will provide additional support for local telephone services in several states served by Bell Atlantic. State regulatory commissions must take these funds into account in the ratemaking process. 4 Unbundling of Network Elements In November 1999, the FCC announced its decision setting forth new unbundling requirements. The FCC had previously identified seven elements that had to be provided to competitors on an unbundled basis. With respect to those seven elements, the FCC concluded that incumbent local exchange carriers, such as our operating telephone subsidiaries, do not have to provide unbundled switching (or combinations of elements that include switching, such as the so-called unbundled element "platform") under certain circumstances to business customers with four or more lines in certain offices in the top 50 Metropolitan Statistical Areas (MSAs). It also held that incumbents do not have to provide unbundled access to their directory assistance or operator services. The remaining elements on the FCC's original list still must be provided. With respect to new elements, the FCC concluded that new equipment to provide advanced services such as Asymmetric Digital Subscriber Line (ADSL) does not have to be unbundled as a general matter. On the other hand, the FCC concluded that incumbents must provide dark fiber as an unbundled element, and that sub-loop unbundling should be provided. Finally, the FCC ruled that combinations of loops and transport must be made available under certain circumstances, but left to a further rulemaking that it initiated certain issues relating to the use of these combinations to substitute for special access services. While this rulemaking proceeds, the FCC adopted interim rules limiting the instances in which such combinations of elements must be made available. The FCC set a target date of June 30, 2000 to decide the further rulemaking. In addition to the unbundling requirements released in November 1999, the FCC released an order on December 9, 1999 in a separate proceeding requiring incumbent local exchange companies also to unbundle and provide to competitors the higher frequency portion of their local loop. This provides competitors with the ability to provision data services on top of incumbent carriers' voice services. STATE REGULATION OF RATES AND SERVICES State public utility commissions regulate our operating telephone subsidiaries with respect to certain intrastate rates and services and certain other matters. In most jurisdictions the telephone subsidiaries have been able to replace rate of return regulation with price regulation plans. New York Telephone New York The New York State Public Service Commission has regulated New York Telephone under the Performance Incentive Plan since 1995. The plan is performance-based, replacing rate of return regulation with a form of price regulation and incentives to improve service, and does not restrict New York Telephone's earnings. The plan: . caps prices at current rates for "basic" services such as residence and business exchange access, residence and business local calling, and LifeLine Service; . establishes price reduction commitments for a number of services, including toll and intraLATA carrier access services; . adjusts prices annually based on certain costs associated with state commission mandates and other defined "exogenous" events; and . establishes service quality targets with stringent rebate provisions if New York Telephone is unable to meet some or all of the targets. Connecticut New York Telephone's operations are subject to rate of return regulation, but an incentive regulation plan which would eliminate regulation of earnings has been filed with the Connecticut Department of Public Utility Control. Bell Atlantic - New Jersey The 1992 New Jersey Telecommunications Act classifies telecommunications services as "Competitive" or "Protected." "Protected telephone services" include basic residence and business local service, touch tone, access services and the ordering, installation and restoration of these services. Bell Atlantic - New Jersey provides "Protected telephone services" and other services, including vertical services (Rate-Regulated Services), under a Plan for Alternative Form of Regulation, which is scheduled to expire on December 31, 2000. 5 There is no cap on earnings for Rate-Regulated Services. Under the terms of the Plan, Bell Atlantic - New Jersey shares equally with ratepayers earnings above a 13.7% return on equity for Rate-Regulated Services. Bell Atlantic - New Jersey may petition the New Jersey Board of Public Utilities to reclassify services from "Protected" to "Competitive" and may change prices for any Competitive service without prior regulatory review or approval. Bell Atlantic - Pennsylvania The Pennsylvania Public Utility Commission (PUC) regulates Bell Atlantic - Pennsylvania under an Alternative Regulation Plan approved in 1994. The plan provides for a pure price cap plan with no sharing of earnings with customers and replaces rate base, rate of return regulation. . Competitive Services, including directory advertising, billing services, Centrex service, paging, speed calling, repeat calling, and HiCap and business services provided to larger customers are price deregulated. . All Noncompetitive Services are price regulated. The plan: . permits annual price increases up to, but not exceeding, the GDP-PI minus 2.93%; . requires annual price decreases when the GDP-PI falls below 2.93%; . caps prices for protected services, including residential and business basic exchange services, special access and switched access, through 1999; and . permits revenue-neutral rate restructuring for noncompetitive services. The PUC's order approving the Bell Atlantic-GTE merger extended the cap on residential and business basic exchange services through 2003. The plan requires Bell Atlantic - Pennsylvania to provide a Lifeline Service for residential customers. The plan also requires deployment of a universal broadband network, which must be completed in phases: 20% by 1998; 50% by 2004; and 100% by 2015. Deployment must be reasonably balanced among urban, suburban and rural areas. From September 1998 through February 1999, the PUC sponsored a multi-party global telecommunications settlement proceeding aimed at resolving issues in a number of contentious telecommunications regulatory dockets at the PUC. On September 30, 1999, the PUC issued a final decision in its Global proceeding on telecommunications competition matters. The decision proposes to require Bell Atlantic - Pennsylvania, to split into separate retail and wholesale corporations. It proposes reductions in access charges applicable to services provided to interexchange carriers and in both unbundled network element rates and wholesale rates applicable to services and facilities provided to competitive local exchange carriers. It requires Bell Atlantic - Pennsylvania to provide combinations of unbundled network elements beyond those required by the FCC. It reclassifies certain business services as "competitive," but restricts the pricing freedom that that classification is supposed to give Bell Atlantic - Pennsylvania. It sets a schedule of prerequisites for state endorsement of a Bell Atlantic - Pennsylvania application to the FCC for permission to offer in-region long distance service under Section 271 of the 1996 Act that are likely to delay that endorsement. Bell Atlantic - Pennsylvania has challenged the lawfulness of this order in the Pennsylvania Supreme Court, the Commonwealth Court of Pennsylvania, and the Federal District Court. On January 18, 2000, Bell Atlantic - Pennsylvania and fourteen other parties submitted to the PUC a Joint Petition for Settlement to resolve the appeals from the Global Order. If approved by the PUC, the settlement will eliminate the wholesale/retail separate subsidiary requirement and replace it with a requirement to establish an advanced services affiliate. The settlement would also expedite the process to obtain state endorsement of any Bell Atlantic - Pennsylvania application to the FCC for permission to offer long distance service. On February 2, 2000, the Commonwealth Court denied the PUC's request to consider the settlement and set an expedited briefing schedule for the appeals. On February 22, 2000, the PUC and Bell Atlantic - Pennsylvania appealed this determination to the Pennsylvania Supreme Court, and the matter is pending. New England Telephone Maine In 1995, the Maine Public Utilities Commission adopted a five year price cap plan for New England Telephone, with the provision for a five year extension after review by the state commission. Overall average prices and specific rate 6 elements for most services are limited by a price cap formula of inflation minus a productivity factor plus or minus certain exogenous cost changes. There is no restriction on New England Telephone's earnings. The Commission also established a service quality index with penalties in the form of customer rebates to apply if service quality categories are missed. Massachusetts In 1995, the Massachusetts Department of Telecommunications and Energy approved a price regulation plan for New England Telephone through August 2001, with no restriction on earnings. Certain residence exchange rates are capped. Pricing rules limit New England Telephone's ability to increase prices for most services, including a ceiling on the weighted average price of all tariffed services based on a formula of inflation minus a productivity factor plus or minus certain exogenous changes. In addition, New England Telephone's service quality performance levels in any given month could result in an increase in the productivity offset by one-twelfth of one percent for purposes of the annual price cap filing. New Hampshire New England Telephone's operations in New Hampshire are subject to rate of return regulation. Rhode Island In 1996, the Rhode Island Public Utilities Commission approved an incentive regulation plan for New England Telephone. The plan has no set term or expiration, although there are opportunities for annual review by the state commission, and there is no earnings cap or sharing mechanism. Other features of the plan include: more stringent service quality requirements, including a financial penalty, and no increase in residence or business basic exchange rates through 1999. On April 28, 1999, the Commission opened dockets to review New England Telephone's earnings and its form of regulation. To date, those dockets remain open, but no substantive action has been taken. Vermont New England Telephone traditionally has been subject to rate of return regulation. The Vermont Public Service Board, however, has approved a five year incentive regulation plan that will provide New England Telephone increased flexibility to introduce and price new products and services. The plan also removes most restrictions on New England Telephone's earnings from Vermont operations during the life of the plan and contains no productivity adjustment. The plan will limit New England Telephone's ability to raise prices on existing products and services, and will require revenue reductions of $16.5 million at the outset of the plan; $6.5 million during the first year of the plan; and approximately $6.0 million over the subsequent years of the plan. The plan also will require certain service quality improvements subject to financial penalty. Bell Atlantic - Maryland In 1996, the Public Service Commission of Maryland approved a price cap plan for regulating the intrastate services provided by Bell Atlantic - Maryland. Under the plan, services are divided into six categories: Access; Basic-Residential; Basic-Business; Discretionary; Competitive; and Miscellaneous. Rates for Access, Basic-Residential, Basic-Business and Discretionary Services can be increased or decreased annually under a formula that is based upon changes in the GDP-PI minus a productivity offset based upon changes in the rate of inflation (CPI). Rates for Competitive Services may be increased without regulatory limits. Regulation of profits is eliminated. Bell Atlantic - Virginia Effective in 1995, the Virginia State Corporation Commission approved an alternative regulatory plan that regulates Bell Atlantic - Virginia's Noncompetitive Services on a price cap basis and does not regulate Bell Atlantic - - Virginia's Competitive Services. The plan includes a moratorium on rate increases for basic local telephone service until 2001 and eliminates regulation of profits. In its November 1999 Order approving the Bell Atlantic - GTE merger, the Commission conditioned its approval by extending the moratorium on rate increases for basic local services to 2004. Bell Atlantic - West Virginia In February 1998, the West Virginia Public Service Commission issued an order extending the Incentive Regulation Plan until December 31, 2000. The Incentive Regulation Plan includes pricing flexibility for competitive services. Bell Atlantic - West Virginia is committed to invest at least $225 million in its network over the three-year period from 1998 through 2000. 7 Bell Atlantic - Delaware In 1994, Bell Atlantic - Delaware elected to be regulated under the alternative regulation provisions of the Delaware Telecommunications Technology Investment Act of 1993 (Delaware Telecommunications Act). The Delaware Telecommunications Act provides that: . the prices of "Basic Telephone Services" (e.g., dial-tone and local usage) will remain regulated and cannot change in any one year by more than the GDP- PI less 3%; . the prices of "Discretionary Services" (e.g., Identa Ring(SM) and Call Waiting) cannot increase more than 15% per year per service; . the prices of "Competitive Services" (e.g., voice messaging and message toll service) are not subject to tariff or regulation; and . Bell Atlantic - Delaware will develop a technology deployment plan with a commitment to invest a minimum of $250 million in Delaware's telecommunications network during the first five years of the plan. The Delaware Telecommunications Act also provides protections to ensure that competitors will not be unfairly disadvantaged, including a prohibition on cross-subsidization, imputation rules, service unbundling and resale service availability requirements, and a review by the Delaware Public Service Commission during the fifth year of the plan. In March 1998, the Commission approved Bell Atlantic - Delaware's request to continue under the Delaware Telecommunications Act until March 2002. Bell Atlantic - Washington, D.C. In 1996, the District of Columbia Public Service Commission approved a price cap plan for intra-Washington, D.C. services provided by Bell Atlantic - Washington, D.C. In 1999, the Commission modified the plan and extended it through the end of 2001. Key provisions of the plan, as extended, include: . a term of two additional years, through December 31, 2001; . retention of three service categories: basic, discretionary, and competitive; . caps on certain basic residential rates for the extended term of the plan and elimination of the prior rate adjustment formula (GDP-PI minus 3%); . discretionary service rate increases of up to 15% annually; . elimination of price limits on competitive service rates; . elimination of the regulation of profits; . guaranteed $4.3 million reduction in basic rates during the next two years; and . contribution of $1.5 million to the Infrastructure Trust Fund. RECIPROCAL COMPENSATION State regulatory decisions have required us to pay "reciprocal compensation" under the 1996 Act for the increasing volume of one-way traffic from our customers to customers of other carriers, primarily calls to Internet service providers. In February 1999, the FCC confirmed that such traffic is largely interstate but concluded that it would not interfere with state regulatory decisions requiring payment of reciprocal compensation for such traffic and that carriers are bound by their existing interconnection agreements. The U.S. Court of Appeals has vacated and remanded the FCC's decision for a better explanation of why this traffic is interstate. Based upon the FCC's February 1999 decision, the Massachusetts Department of Telecommunications and Energy modified its earlier decision, resulting in a reduction of our reciprocal compensation obligation. Both the New Jersey Board of Public Utilities and the West Virginia Public Service Commission also have issued favorable decisions on reciprocal compensation for Internet-bound traffic. The New York PSC issued a decision that high volume, convergent traffic (which includes Internet-bound traffic) has different cost characteristics and should be compensated at the lower end-office rate. The New York PSC determined that traffic in excess of a 3:1 ratio is presumed to be high volume, convergent traffic, although this presumption may be rebutted. The Virginia State Corporation Commission has denied jurisdiction over compensation for Internet access and has referred us and other parties to the FCC. Commissions in Delaware, Maryland, Pennsylvania and Rhode Island have issued decisions requiring us to continue to pay reciprocal 8 compensation on Internet-bound traffic. We currently estimate that our reciprocal compensation payment obligations will be approximately $500 million to $550 million in 2000. COMPETITION Legislative changes, including provisions of the 1996 Act discussed above under the section "Telecommunications Act of 1996," regulatory changes and new technology are continuing to expand the types of available communications services and equipment and the number of competitors offering such services. We anticipate that these industry changes, together with the rapid growth, enormous size and global scope of these markets, will attract new entrants and encourage existing competitors to broaden their offerings. Current and potential competitors in telecommunication services include long distance companies, other local telephone companies, cable companies, wireless service providers, foreign telecommunications providers, electric utilities, Internet service providers and other companies that offer network services. Many of these companies have a strong market presence, brand recognition and existing customer relationships, all of which contribute to intensifying competition and may affect our future revenue growth. In addition, a number of major industry participants have announced mergers, acquisitions and joint ventures which could substantially affect the development and nature of some or all of our markets. Local Exchange Services The ability to offer local exchange services has historically been subject to regulation by state regulatory commissions. Applications from competitors to provide and resell local exchange services have been approved in every jurisdiction in our territory. The 1996 Act has significantly increased the level of competition in our local exchange markets. One of the purposes of the 1996 Act was to ensure, and accelerate, the emergence of competition in local exchange markets. Toward this end, the 1996 Act requires most existing local exchange carriers (incumbent local exchange carriers, or ILECs), including our operating telephone subsidiaries, to permit potential competitors (competitive local exchange carriers, or CLEC) to: . purchase service from the ILEC for resale to CLEC customers . purchase unbundled network elements from the ILEC, and/or . interconnect the CLEC network with the ILEC's network. The 1996 Act provides for arbitration by the state public utility commission if an ILEC and a CLEC are unable to reach agreement on the terms of the arrangement sought by the CLEC. Negotiations between the operating telephone subsidiaries and various CLECs, and arbitrations before state public utility commissions, have continued. As of January 31, 2000, the operating telephone subsidiaries had entered into approximately 1,316 agreements with CLECs covering all of our territory, of which 1,045 have been approved by state regulators. We expect that these agreements, and the 1996 Act, will continue to lead to substantially increased competition in our local exchange markets in 2000 and subsequent years. We believe that this competition will be both on a facilities basis and in the form of resale by CLECs of our operating telephone subsidiaries' service. Under the various agreements and arbitrations discussed above, our operating telephone subsidiaries are generally required to sell their services to CLECs at discounts ranging from approximately 14% to 29% from the prices our operating telephone subsidiaries charge their retail customers. IntraLATA Toll Services IntraLATA toll calls originate and terminate within the same LATA, but generally cover a greater distance than a local call. State regulatory commissions rather than federal authorities generally regulate these services. All of our state regulatory commissions (except in the District of Columbia, where intraLATA toll service is not provided) permit other carriers to offer intraLATA toll services within the state. Until the implementation of "presubscription," intraLATA toll calls were completed by our operating telephone subsidiaries unless the customer dialed a code to access a competing carrier. Presubscription changed this dialing 9 method and enabled customers to make these toll calls using another carrier without having to dial an access code. All of our operating telephone subsidiaries have implemented presubscription. Implementation of presubscription for intraLATA toll services has had a material negative effect on intraLATA toll service revenues. However, the negative effect has been partially mitigated by an increase in intraLATA network access revenues. Alternative Access A substantial portion of our operating telephone subsidiaries' revenues from business and government customers is derived from a relatively small number of large, multiple-line subscribers. We face competition from alternative communications systems, constructed by large end-users, interexchange carriers and alternative access vendors, which are capable of originating and/or terminating calls without the use of our plant. The FCC's orders requiring us to offer collocated interconnection for special and switched access services have enhanced the ability of such alternative access providers to compete with us. Other potential sources of competition include cable television systems, shared tenant services and other noncarrier systems which are capable of bypassing our operating telephone subsidiaries' local plant, either partially or completely, through substitution of special access for switched access or through concentration of telecommunications traffic on fewer of our operating telephone subsidiaries' lines. Wireless Services Wireless services also constitute potential sources of competition to our wireline telecommunications services, especially as wireless carriers continue to lower their prices to end users. Wireless portable telephone services employ analog and digital technology that allows customers to make and receive telephone calls from any location using small handsets, and can also be used for data transmission. Our investment in wireless services is described below under the section "Global Wireless." Public Telephone Services We face increasing competition in the provision of pay telephone services from other providers. In addition, the growth of wireless communications decreases usage of public telephones. Operator Services Alternative operator services providers have entered into competition with our operator services product line. AGREEMENT WITH METROMEDIA FIBER NETWORK, INC. On October 7, 1999, we announced a strategic agreement with Metromedia Fiber Network, Inc. (MFN), a domestic and international provider of fiber optic networks in major metropolitan markets, pursuant to which we agreed to acquire approximately $550 million of long-term capacity on MFN's fiber optic networks and to make an investment of approximately $1.7 billion. DIRECTORY Through Bell Atlantic Yellow Pages Company, Bell Atlantic Electronic Commerce Services, Inc. and other subsidiaries, we publish printed and electronic directories and provide Internet-based electronic shopping guides, as well as website creation and other electronic commerce services. Our directory publishing business produces over 600 domestic and international Yellow Page directories with over 900,000 advertisers and distributes approximately 80 million copies annually in its regional markets, as well as in Poland, the Czech Republic, Slovakia, Greece, Gibraltar and China. We provide on-line shopping services with more than 10,000 advertisers and nearly 23 million visits per month. 1999 revenues from the Directory segment were approximately $2.3 billion. 10 GLOBAL WIRELESS 1999 revenues from our Global Wireless segment were approximately $4.5 billion. United States We provide wireless communications services in the United States principally through our subsidiary, Bell Atlantic Mobile (BAM), and PrimeCo Personal Communications, L.P. (PrimeCo), a joint venture. BAM provides wireless services to approximately 7.7 million customers in the Northeast, mid-Atlantic, Southeast and Southwest portions of the United States. BAM competes with other cellular carriers and personal communications service (PCS) providers licensed by the FCC. Competing providers offer competitive pricing plans, digital technology, and enhanced calling features. BAM has introduced new pricing plans designed to meet this new competition, and offers digital service as well as enhanced calling features in its markets. PrimeCo is a partnership between Bell Atlantic and AirTouch Communications which provides PCS services in over 30 major cities across the United States. At year-end PrimeCo had approximately 1.4 million customers. Since 1994 we have invested approximately $2 billion in PrimeCo to fund its operations and the build-out of its PCS network. Proposed Domestic Wireless Transactions On September 21, 1999, we signed a definitive agreement with Vodafone AirTouch plc (Vodafone AirTouch) to create a national wireless business (Wireless Co.) composed of both companies' U.S. wireless assets. The completion of this transaction is subject to a number of conditions, including certain regulatory approvals. In February 2000, we signed an agreement with ALLTEL Corporation to exchange certain wireless interests. This agreement eliminates all of the overlapping cellular operations that would be created by the combination of Bell Atlantic and Vodafone AirTouch properties. We expect to complete the Vodafone AirTouch transaction in April 2000. On August 3, 1999, Bell Atlantic and Vodafone AirTouch announced an agreement to restructure our ownership interests in PrimeCo. Under the terms of that agreement, we would assume full ownership of PrimeCo operations in five "major trading areas" (MTAs) - Richmond, VA, New Orleans, LA and the Florida MTAs of Jacksonville, Tampa and Miami. Vodafone AirTouch would assume full ownership of the remaining five PrimeCo MTAs - Chicago, IL, Milwaukee, WI and the Texas MTAs of Dallas, San Antonio and Houston. Under the terms of the Wireless Co. agreement described earlier, Bell Atlantic and Vodafone AirTouch agreed to suspend the August 3, 1999 agreement to restructure PrimeCo ownership interests, with certain limited exceptions. As a result, no action will be taken to allocate most PrimeCo markets unless either we or Vodafone AirTouch give notice to initiate such an allocation. Neither party has given such notice. In January 2000, we and Vodafone AirTouch purchased the remaining 20% partnership interest in the Texas MTAs of Dallas, San Antonio and Houston held by TXU Communications Holding Company (TXU). We invested $196 million to acquire 55% of the TXU partnership interest. Vodafone AirTouch will own the remaining 45% of the TXU partnership interest. Mexico We have a 40.2% economic interest in Nuevo Grupo Iusacell, S.A. de C.V. (Iusacell), a telecommunications company in Mexico whose primary business is the provision of wireless telephone service. The Peralta Group, the other principal shareholder of Iusacell, holds approximately 40.2%, and the remaining 19.6% is held by public shareholders. Since 1993, we have invested approximately $1.2 billion in Iusacell. In the first quarter of 1997, we consummated a restructuring of our investment in Iusacell to permit us to assume control of its board of directors and management. At year end, Iusacell had approximately 1.3 million subscribers. 11 Italy We have an economic interest of approximately 23% in Omnitel Pronto Italia, S.p.A. (Omnitel), an Italian digital cellular telecommunications company. Since 1994 we have invested approximately $1.2 billion in Omnitel. At year-end, Omnitel had approximately 10.4 million subscribers. Greece We have a 20% economic interest in STET Hellas Telecommunications S.A. (STET Hellas), which holds one of three nationwide licenses for cellular services in Greece. At year-end, STET Hellas had approximately 1.2 million subscribers. Czech Republic and Slovakia We have an economic interest of approximately 25% in EuroTel Praha s r.o. and EuroTel Bratislava a.s., which have been operating cellular systems in the Czech Republic and Slovakia, respectively, since 1991. At year-end EuroTel Praha had approximately 1.1 million subscribers and Eurotel Bratislava had approximately 267,000 subscribers. Indonesia We have an economic interest of approximately 23% in P.T. Excelcomindo Pratama (Excelcomindo), which holds a nationwide license to provide cellular service in Indonesia. OTHER BUSINESSES 1999 revenues from our Other Businesses were approximately $151 million. New Zealand We have a 24.94% economic interest in Telecom Corporation of New Zealand Limited (TCNZ). TCNZ is the principal provider of telecommunications services in New Zealand, offering local service, national and international long distance service, cellular service and Internet access. TCNZ faces increasing competition in most of its markets. The New Zealand government retains a single share in TCNZ, which gives the government the right to limit residential local service price increases to no more than the rate of inflation and requires a flat-rate local calling option for residential customers. In February 1998, we monetized our investment in TCNZ and issued approximately $2.5 billion in five year notes, which are exchangeable into shares of TCNZ at the option of the holder after September 1, 1999. Upon exchange by the holders, we retain the option to settle in cash or by delivery of shares. None of the notes have been exchanged. Great Britain We have an 18.6% economic interest in Cable & Wireless Communications, plc (CWC), which was created in April 1997 through the merger of Mercury Communications, NYNEX CableComms, and Bell Cablemedia, following the acquisition of Videotron Holdings by Bell Cablemedia. CWC provides telecommunications and CATV services. On July 27, 1999, we announced our agreement to a proposal by Cable & Wireless plc (Cable & Wireless), NTL Incorporated (NTL) and CWC for the proposed restructuring of CWC. Under the terms of the agreement, CWC's consumer cable telephone, television and Internet operations would be separated from its corporate, business, Internet protocol and wholesale operations. The consumer operations would be acquired by NTL and the other operations would be acquired by Cable & Wireless. In exchange for our interest in CWC, we would receive shares in the two acquiring companies, representing approximately 9.1% of the NTL shares currently outstanding and approximately 4.6% of the Cable & Wireless shares currently outstanding. The completion of the restructuring is subject to a number of conditions and, assuming satisfaction of those conditions, is expected to close in the first half of 2000. 12 In August 1998 we monetized our investment in CWC and issued approximately $3,180 million in notes which are exchangeable into shares of CWC at the option of the holder after July 1, 2002. Upon completion of the restructuring, our previously issued $3,180 million in CWC exchangeable notes would be exchangeable on and after July 1, 2002 for shares in NTL and Cable & Wireless in proportion to the shares received in the restructuring. Upon exchange by the holders, we retain the option to settle in cash or by delivery of shares. Thailand We have an economic interest of 18.2% in TelecomAsia Corporation Public Company Limited (TelecomAsia), which operates a telecommunications network and CATV system in metropolitan Bangkok. At year-end, TelecomAsia had approximately 1.4 million telephony lines billed. It is anticipated that, on or about March 31, 2000, our economic interest in Telecom Asia will drop to approximately 13.8% in connection with an increase in capital of the company and the issuance of preference shares to a major creditor of the company as part of the company's debt restructuring. Under the terms of the issuance, we would have the right, commencing March 31, 2002 and continuing for six years thereafter, to purchase our pro rata portion of common shares from the creditor at a formula price, and thereby restore our 18.2% interest in TelecomAsia. Philippines We have a 19.36% economic interest in Bayan Telecommunications Holdings Corporation (BayanTel), a local exchange provider. At December 31, 1999, BayanTel had approximately 252,000 access lines. FLAG FLAG Limited (FLAG) owns and operates an undersea fiberoptic cable system, providing digital communications links between Europe and Asia. FLAG launched commercial service in the fourth quarter of 1997. We have invested approximately $227 million in the venture since 1994. At December 31, 1999, we had an approximately 34% interest in FLAG and an approximately 5% interest in the parent company of FLAG, FLAG Telecom Holding Limited (FLAG Telecom). In January 2000, we exchanged our shares in FLAG for an interest in FLAG Telecom resulting in an aggregate interest in FLAG Telecom of approximately 38%. There was no impact to our financial statements or our effective ownership interest as a result of this transaction. In February 2000, FLAG Telecom conducted an initial public offering. The primary offering consisted of approximately 28 million of newly issued common shares. Certain existing shareowners also participated in a secondary offering in which approximately 8 million of their common shares were sold. We did not acquire any new shares in the primary offering, nor did we participate in the secondary offering. As a result, our current ownership interest has been reduced to approximately 30%. EMPLOYEES As of December 31, 1999, Bell Atlantic and its subsidiaries had approximately 145,000 employees. Unions represent approximately 69% of our employees. Collective bargaining agreements with the unions expire in August 2000. 13 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS In this Annual Report on Form 10-K we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "hopes" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The following important factors, along with those discussed elsewhere in this Annual Report, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: . materially adverse changes in economic conditions in the markets served by us or by companies in which we have substantial investments; . material changes in available technology; . the final outcome of federal, state and local regulatory initiatives and proceedings, including arbitration proceedings, and judicial review of those initiatives and proceedings, pertaining to, among other matters, the terms of interconnection, access charges, universal service, and unbundled network elements and resale rates; . the extent, timing, success and overall effects of competition from others in the local telephone and toll service markets; . the timing and profitability of our entry into the in-region long distance market; . the timing of, and regulatory or other conditions associated with, the completion of the merger with GTE and our ability to combine operations and obtain revenue enhancement and cost savings following the merger; and . the timing of, and regulatory or other conditions associated with, the completion of the wireless transaction with Vodafone AirTouch, and the ability of the new wireless enterprise to combine operations and obtain revenue enhancements and cost savings. 14 Item 2. Properties GENERAL Our principal properties do not lend themselves to simple description by character and location. Our total investment in plant, property and equipment was approximately $89.2 billion at December 31, 1999 and $83.1 billion at December 31, 1998, including the effect of retirements, but before deducting accumulated depreciation. Our gross investment in plant, property and equipment consisted of the following at December 31: 1999 1998 ---------------------------- Outside communications plant 40.7% 40.5% Central office equipment 37.9 37.9 Land and buildings 8.3 8.5 Furniture, vehicles and other work equipment 8.9 9.5 Other 4.2 3.6 ---------------------------- 100.0% 100.0% ============================ Our properties are divided among our operating segments as follows: 1999 1998 --------------------------- Domestic Telecom 87.4% 92.3% Global Wireless 12.0 7.2 Directory .3 .4 Other Businesses .3 .1 --------------------------- 100.0% 100.0% =========================== "Outside communications plant" consists primarily of aerial cable, underground cable, conduit and wiring, cellular plant, and telephone poles. "Central office equipment" consists of switching equipment, transmission equipment and related facilities. "Land and buildings" consists of land and land improvements, and principally central office buildings. "Furniture, vehicles and other work equipment" consists of public telephone instruments and telephone equipment (including PBXs), furniture, office equipment, motor vehicles and other work equipment. "Other" property consists primarily of plant under construction, capital leases, capitalized computer software costs and leasehold improvements. The customers of our operating telephone subsidiaries are served by electronic switching systems that provide a wide variety of services. The operating telephone subsidiaries' network is in a transition from an analog to a digital network, which provides the capabilities to furnish advanced data transmission and information management services. At December 31, 1999, approximately 99% of the access lines were served by digital capability. Substantially all of the assets of New York Telephone Company, totaling approximately $14.1 billion at December 31, 1999, are subject to the lien of New York Telephone Company's refunding mortgage bond indenture. CAPITAL EXPENDITURES We continue to make significant capital expenditures to meet the demand for communications services and to further improve such services. Capital expenditures for our Domestic Telecom business were approximately $7.5 billion in 1999, $6.4 billion in 1998 and $5.5 billion in 1997. Capital expenditures for our Global Wireless, Directory and Other Businesses were approximately $1.2 billion in 1999, $1.0 billion in 1998 and $1.1 billion in 1997. Capital expenditures exclude additions under capital leases. We expect capital expenditures in 2000 to be in the range of $8.9 billion to $9.2 billion. 15 Item 3. Legal Proceedings The New York State Attorney General's Office is conducting a grand jury investigation of possible environmental violations and false document charges relating to the former Orangeburg, New York Material Reclamation Center, which was operated by NYNEX Material Enterprises Company from 1988 to 1990; by Telesector Resources Group, Inc. from 1990 to May 1997; and under contract with Telesector Resources Group, Inc. by an unrelated company from May 1997 to October 1998, when the facility was closed. The Attorney General's Office has indicated that its investigation includes Telesector Resources Group, Inc., NYNEX Corporation and Bell Atlantic Corporation, but no charges have been filed against any of the foregoing companies, which are cooperating with the investigation. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information with respect to our executive officers.
Held Name Age Office Since - ------------------------- --- -------------------------------------------------------------- ----- Ivan G. Seidenberg 53 Chairman and Chief Executive Officer 1998 Lawrence T. Babbio, Jr. 55 President and Chief Operating Officer 1998 James G. Cullen 57 President and Chief Operating Officer 1998 Jacquelyn B. Gates 48 Vice President - Ethics and Corporate Compliance 1998 William F. Heitmann 51 Vice President - Treasurer (Acting) 1999 John F. Killian 45 Vice President - Investor Relations 1999 Mark J. Mathis 52 Executive Vice President and General Counsel (Acting) 2000 Donald J. Sacco 58 Executive Vice President - Human Resources 1997 Frederic V. Salerno 56 Senior Executive Vice President and Chief Financial 1997 Officer/Strategy and Business Development Dennis F. Strigl 53 President and Chief Executive Officer - Global Wireless Group 1995 Thomas J. Tauke 49 Executive Vice President - External Affairs and Corporate 1999 Communications (Acting) Doreen A. Toben 50 Vice President - Controller 1998
Prior to serving as an executive officer, each of the above officers have held high level managerial positions with the company or one of its subsidiaries for at least five years. Officers are not elected for a fixed term of office but are removable at the discretion of the Board of Directors. 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The principal market for trading in the common stock of Bell Atlantic is the New York Stock Exchange. The common stock is also listed in the United States on the Boston, Chicago, Pacific, and Philadelphia stock exchanges. As of December 31, 1999, there were 1,028,500 shareowners of record. High and low stock prices, as reported on the New York Stock Exchange composite tape of transactions, and dividend data are as follows:
Market Price -------------------------------- Cash Dividend High Low Declared - -------------------------------------------------------------------------------------- 1999: First Quarter $60 7/16 $50 5/8 $.385 Second Quarter 65 3/8 50 15/16 .385 Third Quarter 68 3/16 60 1/4 .385 Fourth Quarter 69 1/2 59 3/16 .385 1998: First Quarter $53 $42 3/8 $.385 Second Quarter 51 5/8 44 11/16 .385 Third Quarter 50 7/16 40 7/16 .385 Fourth Quarter 61 3/16 47 3/4 .385
Reflects 2-for-1 stock split declared and paid in second quarter of 1998. Item 6. Selected Financial Data The information required by this item is included on page F-23 of this report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is included on pages F-2 through F-21 of this report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is included on pages F-15 through F-17 of this report. Item 8. Financial Statements and Supplementary Data The information required by this item is included on pages F-22 through F-55 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. 17 PART III Item 10. Directors and Executive Officers of the Registrant For information with respect to our executive officers, see "Executive Officers of the Registrant" at the end of Part I of this Report. For information with respect to the Directors and compliance with Section 16(a) of the Securities Exchange Act of 1934, see the Proxy Statement for our 2000 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A, which is incorporated herein by reference. Item 11. Executive Compensation For information with respect to executive compensation, see the Proxy Statement for our 2000 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A, which is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management For information with respect to the security ownership of the Directors and Executive Officers, see the Proxy Statement for our 2000 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A, which is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions For information with respect to certain relationships and related transactions, see the Proxy Statement for our 2000 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A, which is incorporated herein by reference. 18 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report: (1) Financial Statements See Index to Financial Information appearing on Page F-1. (2) Financial Statement Schedule See Index to Financial Information appearing on Page F-1. (3) Exhibits Exhibits identified in parentheses below, on file with the Securities and Exchange Commission (SEC) in File No. 1-8606 except as otherwise noted, are incorporated herein by reference as exhibits hereto. Exhibit Number - ------ 2 Agreement and Plan of Merger by and among Bell Atlantic Corporation, Beta Gamma Corporation and GTE Corporation, dated as of July 27, 1998. (Exhibit 2.01 to Form 8-K, date of report July 30, 1998.) 3a Restated Certificate of Incorporation of Bell Atlantic Corporation ("Bell Atlantic"). (Exhibit 3(i) to Form 8-K, date of report August 14, 1997.) 3b By-Laws of Bell Atlantic, as amended and restated as of January 1, 1999. (Exhibit 3b to Form 10-K for the year ended December 31, 1998.) 4 No instrument which defines the rights of holders of long-term debt of Bell Atlantic and its consolidated subsidiaries is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, Bell Atlantic hereby agrees to furnish a copy of any such instrument to the SEC upon request. 10a Bell Atlantic Deferred Compensation Plan for Outside Directors, as amended and restated as of January 1, 1998. (Exhibit 10a to Form 10-K for the year ended December 31, 1998.)* 10b Description of Bell Atlantic Insurance Plan for Directors.* 10c Description of Bell Atlantic Plan for Non-Employee Directors' Travel Accident Insurance.* 10d Bell Atlantic Retirement Plan for Outside Directors, as amended and restated as of January 1, 1996. (Exhibit 10k to Form 10-K for the year ended December 31, 1995.)* 10e Bell Atlantic Stock Compensation Plan for Outside Directors, as amended and restated as of January 1, 1998. (Exhibit 10e to Form 10-K for the year ended December 31, 1998.)* 10f Bell Atlantic Corporation Directors' Charitable Giving Program. (Exhibit 10p to Form SE dated March 29, 1990.)* 10f(i) Resolutions amending and partially terminating the Program. (Exhibit 10p to Form SE dated March 29, 1993.)* 10g Description of Changes in Compensation for Outside Directors of Bell Atlantic, effective August 14, 1997 (Exhibit 10y to Form 10-Q for the quarter ended September 30, 1997.)* 19 10h Bell Atlantic Senior Management Short Term Incentive Plan, as amended and restated effective as of January 22 1996. (Exhibit 10a to Form 10-K for the year ended December 31, 1996.)* 10h(i) Description of Amendment, effective August 14, 1997. (Exhibit 10a(i) to Form 10-Q for the quarter ended September 30, 1997.)* 10i Bell Atlantic Senior Management Income Deferral Plan, effective as of January 1, 1998. * 10j Bell Atlantic 1985 Incentive Stock Option Plan, restated as of June 1, 1999 to incorporate amendments adopted through May 31, 1999.* 10k Section 6 from Bell Atlantic Cash Balance Plan regarding limitations on payment of pension amounts which exceed the limitations contained in the Employee Retirement Income Security Act of 1974. * 10l Bell Atlantic Senior Management Long-Term Disability and Survivor Protection Plan, as amended. (Exhibit 10h to Form SE filed on March 27, 1986.)* 10l(i) Description of Amendments, effective January 1, 1998, to Bell Atlantic Senior Management Long Term Disability Plan (formerly known, as the Bell Atlantic Senior Management Long-Term Disability and Survivor Protection Plan). (Exhibit 10b(ii) to Form 10-K for the year ended December 31, 1997.)* 10m Bell Atlantic Salary Program for Senior Managers, effective August 14, 1997. (Exhibit 10x to Form 10-Q for the quarter ended September 30, 1997.)* 10n (reserved) 10o Description of Bell Atlantic Senior Management Estate Management Plan, effective April 1, 1998. (Exhibit 10rr to Form 10-K for year ended December 31, 1997.)* 10p Description of Bell Atlantic Senior Management Flexible Spending Perquisite Account, effective January 1, 1998. (Exhibit 10ss to Form 10-K for year ended December 31, 1997.)* 10q (reserved) 10r NYNEX 1987 Restricted Stock Award Plan (Exhibit No. (28) (i) 1 to NYNEX's filing on Form SE dated March 23, 1988, File No. 1-8608.)* 10s NYNEX 1990 Stock Option Plan as amended. (Exhibit No. 2 to NYNEX's Proxy Statement dated March 20, 1995, File No. 1-8608.)* 10t NYNEX 1995 Stock Option Plan as amended. (Exhibit No. 1 to NYNEX's Proxy Statement dated March 20, 1995, File No. 1-8608.)* 10u (reserved) 10v NYNEX Supplemental Life Insurance Plan. (Exhibit No. 10 iii 21 to NYNEX's Quarterly Report on Form 10-Q for the period ended June 30, 1996, File No. 1-8608.)* 10w Form of NYNEX Executive Retention Agreement with John Killian and Thomas J. Tauke. (Exhibit No. 10 iii 35 to NYNEX's Quarterly Report on Form 10-Q, for the period ended June 30, 1996, File No. 1-8608.)* 10x Employment Agreement, dated June 30, 1995, between Cellco Partnership and Dennis Strigl, as amended.* 10y Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and Lawrence T. Babbio, Jr.. (Exhibit 10a to Form 10-Q for the quarter ended June 30, 1998.)* 10z Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and James G. Cullen. (Exhibit 10b to Form 10-Q for the quarter ended June 30, 1998.)* 20 10z(i) Letter, dated November 4, 1999, to James G. Cullen concerning employment-related issues.* 10aa Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and Frederic V. Salerno. (Exhibit 10c to Form 10-Q for the quarter ended June 30, 1998.)* 10bb Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and Donald J. Sacco. (Exhibit 10d to Form 10-Q for the quarter ended June 30, 1998.)* 10cc Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and Morrison DeS. Webb. (Exhibit 10e to Form 10-Q for the quarter ended June 30, 1998.)* 10dd Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and James R. Young. (Exhibit 10f to Form 10-Q for the quarter ended June 30, 1998.)* 10ee Form of Amendment, dated as of October 27, 1998, to Employment Agreements with Lawrence T. Babbio, Jr., James G. Cullen, Frederic V. Salerno, Donald J. Sacco, Morrison DeS. Webb and James R. Young. (Exhibit 10ee to Form 10-K for the year ended December 31, 1998.)* 10ff Employment Agreement, dated as of January 1, 1999, by and between Bell Atlantic Corporation and Ivan G. Seidenberg. (Exhibit 10ff to Form 10-K for the year ended December 31, 1998.)* 10gg (reserved) 10hh Resolution, dated January 24, 1994, granting Lawrence T. Babbio, Jr. certain nonqualified stock options to purchase American Depository Receipts representing Series L shares of the capital stock of Grupo Iusacell, S.A. de C.V. (Exhibit 10s to Form 10-K for the year ended December 31, 1993.)* 10ii Form of stock option grant to Lawrence T. Babbio, Jr., dated February 18, 1997, containing terms and conditions of certain nonqualified stock options to purchase American Depository Receipts representing Series L shares of the capital stock of Grupo Iusacell, S.A. de C.V. (Exhibit 10q to Form 10-K for the year ended December 31, 1996.)* 10jj Form of Stay Incentive Agreement and Separation and Non-Compete Agreement with Doreen A. Toben with respect to the Bell Atlantic-NYNEX merger. (Exhibit 10(f) to Registration Statement on Form S-4 No. 333-11573.)* 10kk Form of Stay Incentive Agreement, dated as of November 23, 1998, with Doreen A. Toben and Dennis Strigl with respect to the Bell Atlantic - GTE Merger. (Exhibit 10kk to Form 10-K for the year ended December 31, 1998.)* 10ll Form of Stay Incentive Agreement, dated as of November 23, 1998, with Thomas J. Tauke, William F. Heitmann, Mark J. Mathis, and John Killian. (Exhibit 10ll to Form 10-K for the year ended December 31, 1998.)* 10mm Form of Stay Incentive Agreement, dated as of November 23, 1998, with Jacquelyn B. Gates and Chester N. Watson. (Exhibit 10mm to Form 10-K for the year ended December 31, 1998.)* 10nn Form of Merger Agreement, dated as of January 29, 1999, with Doreen A. Toben, William F. Heitmann, and Mark J. Mathis. (Exhibit 10nn to Form 10-K for the year ended December 31, 1998.)* 10oo U.S. Wireless Agreement, dated September 21, 1999, among Bell Atlantic Corporation and Vodafone AirTouch plc, including the forms of Amended and Restated Partnership Agreement and the Investment Agreement. (Exhibit 10 to Form 10-Q for the quarter ended September 30, 1999.) 10pp Form of Merger Agreement, dated as of January 29, 1999, with Jacquelyn B. Gates and Chester N. Watson. (Exhibit 10pp to Form 10-K for the year ended December 31, 1998.)* 21 10qq Stock Option Agreement, dated as of July 27, 1998, between Bell Atlantic Corporation and GTE Corporation. (Exhibit 10.01 to Form 8-K, date of report July 30, 1998.)* 10rr Stock Option Agreement, dated as of July 27, 1998, between GTE Corporation and Bell Atlantic Corporation. (Exhibit 10.02 to Form 8-K, date of report July 30, 1998.)* 12 Computation of Ratio of Earnings to Fixed Charges. 21 List of subsidiaries of Bell Atlantic. 23 Consent of Independent Accountants. 24 Powers of Attorney. 27 Financial Data Schedule. - ----------- *Indicates management contract or compensatory plan or arrangement. 22 (b) Current Reports on Form 8-K filed during the quarter ended December 31, 1999: A Current Report on Form 8-K, dated October 7, 1999, was filed regarding a strategic agreement with Metromedia Fiber Network, Inc. A Current Report on Form 8-K, dated October 20, 1999, was filed regarding Bell Atlantic's third quarter 1999 financial results. A Current Report on Form 8-K, dated November 16, 1999, was filed regarding a statement made on November 16, 1999 following an investment conference. A Current Report on From 8-K, dated November 19, 1999, was filed regarding the termination of discussions concerning a potential combination of the wireless properties of Nuevo Grupo Iusacell, S.A. de C.V. and cellular properties in Northern Mexico. A Current Report on Form 8-K, dated December 22, 1999, was filed regarding the approval by the Federal Communications Commission of our application to offer long distance service in New York. A Current Report on Form 8-K, dated December 27, 1999, was filed containing audited financial statements of Cellco Partnership and Subsidiaries at and for the years ended December 31, 1996, 1997 and 1998, together with a report of PricewaterhouseCoopers LLP, and unaudited financial statements at and for the nine months ended September 30, 1999 and for the nine months ended September 30, 1998. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BELL ATLANTIC CORPORATION By /s/ Doreen A. Toben ----------------------------- Doreen A. Toben Vice President - Controller March 28, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officer: Chairman of the * * * Ivan G. Seidenberg Board and Chief * Executive Officer * * Principal Financial Officer: Senior Executive Vice * Frederic V. Salerno President and Chief * Financial Officer/Strategy and * Business Development * * Principal Accounting Officer: Vice President - Controller * Doreen A. Toben * * Directors: * * Lawrence T. Babbio, Jr. * * * By /s/ Doreen A. Toben Richard L. Carrion * -------------------------- James G. Cullen * Doreen A. Toben Lodewijk J.R. de Vink * (individually and as James H. Gilliam, Jr. * attorney-in-fact) Stanley P. Goldstein * March 28, 2000 Helene L. Kaplan * Thomas H. Kean * Elizabeth T. Kennan * John F. Maypole * Joseph Neubauer * Thomas H. O'Brien * Eckhard Pfeiffer * Hugh B. Price * Rozanne L. Ridgway * Frederic V. Salerno * Ivan G. Seidenberg * Walter V. Shipley * John R. Stafford * Shirley Young * * * *
24 INDEX TO FINANCIAL INFORMATION Page Number ----------- Management's Discussion and Analysis of Results of Operations and Financial Condition ........................................ F-2 Report of Management .............................................. F-22 Report of Independent Accountants ................................. F-22 Selected Financial Data ........................................... F-23 Consolidated Statements of Income For the years ended December 31, 1999, 1998, and 1997 .......... F-24 Consolidated Balance Sheets December 31, 1999 and 1998 ..................................... F-25 Consolidated Statements of Changes in Shareowners' Investment For the years ended December 31, 1999, 1998, and 1997 .......... F-26 Consolidated Statements of Cash Flows For the years ended December 31, 1999, 1998, and 1997 .......... F-27 Notes to Consolidated Financial Statements ........................ F-28 Schedule II--Valuation and Qualifying Accounts For the years ended December 31, 1999, 1998, and 1997 .......... F-56 Financial statement schedules other than that listed above have been omitted because such schedules are not required or applicable. F-1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OVERVIEW - -------------------------------------------------------------------------------- We are in the midst of an extraordinarily eventful period in our history as we continue to transform our business, assembling the assets and capabilities to compete in a telecommunications industry that is rapidly consolidating and becoming global in scope. In 1999, we continued to deliver on our financial targets and made dramatic progress on the strategic front, as well. Financially, we achieved our fifth consecutive year of double-digit earnings growth, accelerated our revenue growth to more than 5%, and did an excellent job of controlling costs and capturing synergy savings from the Bell Atlantic-NYNEX merger. In addition, we continued to aggressively invest in areas of new growth, namely data, wireless, and long distance. On the strategic front, we became the first of our peers to enter the long distance market, gaining approval to offer long distance service in the State of New York in late December 1999. We believe that competition expands markets, and the opening of our network to other providers has created significant opportunities for us, not just in long distance, but as a wholesale provider, as well. During the year, we expanded our data capabilities for the large business customer with some targeted acquisitions and alliances. And we reached a strategic agreement with Metromedia Fiber Network, Inc. that gives us access to fiber-optic capacity in 50 cities across the country and several international locations. On the residential side, we accelerated the roll-out of our high-speed Internet access service, Digital Subscriber Line, aiming to be able to serve ten million households in early 2000. In the wireless business, we announced that we will join the U.S. wireless assets of Bell Atlantic and Vodafone AirTouch plc which, with the addition of GTE Corporation's (GTE) U.S. wireless assets, will create a new nationwide wireless company serving 49 of the top 50 markets in the nation. In addition, we continued to fill out our regional footprint with a number of small acquisitions and fully acquired the cellular properties of Frontier Corporation. We extended digital coverage to 95% of our market and entered the fast-growing wireless data market with several commercial products in the fall of 1999. Internationally, we increased our equity stake in Omnitel Pronto Italia S.p.A. (Omnitel), the fastest growing wireless company in Europe, to 23.14% in 1999. And we continued to make progress on our most important strategic initiative of all, the merger with GTE. The state approval process is complete, our discussions with the Federal Communications Commission (FCC) continue, and we aim for Bell Atlantic and GTE to be one company in the second quarter of 2000. - -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- In reviewing our operating performance, we discuss our results of operations on what we call an adjusted basis. This means we take our as-reported results and adjust for the effects of special items, which are of a nonoperational nature. We believe that this will assist readers in better understanding Bell Atlantic in terms of trends from period to period. A discussion of these special items, including tables which illustrate their effects on our consolidated statements of income, follows. We reported net income of $4,202 million or $2.65 diluted earnings per share for the year ended December 31, 1999, compared to net income of $2,965 million or $1.86 diluted earnings per share for the year ended December 31, 1998. In 1997, we reported net income of $2,455 million or $1.56 diluted earnings per share. Our reported results for all three years were affected by special items. After adjusting for such items, net income would have been $4,760 million or $3.01 diluted earnings per share in 1999, $4,323 million or $2.72 diluted earnings per share in 1998, and $3,847 million or $2.45 diluted earnings per share in 1997. The table below summarizes reported and adjusted results of operations for each period.
(dollars in millions) Years Ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------------------- Operating revenues $ 33,174 $ 31,566 $ 30,194 Operating expenses 24,679 24,939 24,853 ------------------------------------------- Operating income 8,495 6,627 5,341 REPORTED NET INCOME 4,202 2,965 2,455 ------------------------------------------- Special items--pre-tax Mark-to-market adjustment for exchangeable notes 664 - - Merger-related costs 205 196 519 Retirement incentive costs - 1,021 513 Other charges and special items - 589 1,041 ------------------------------------------- Total special items--pre-tax 869 1,806 2,073 Tax effect and other tax-related items (311) (448) (681) ------------------------------------------- Total special items--after-tax 558 1,358 1,392 ------------------------------------------- ADJUSTED NET INCOME $ 4,760 $ 4,323 $ 3,847 =========================================== DILUTED EARNINGS PER SHARE--REPORTED $ 2.65 $ 1.86 $ 1.56 DILUTED EARNINGS PER SHARE--ADJUSTED $ 3.01 $ 2.72 $ 2.45
F-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- The following table shows how special items are reflected in our consolidated statements of income for each period. (dollars in millions) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- OPERATING REVENUES Regulatory contingencies $ - $ - $ 179 -------------------------------------- EMPLOYEE COSTS Retirement incentive costs - 1,021 513 Merger direct incremental costs - - 53 Merger severance costs - - 223 Merger transition costs 58 15 4 Video-related charges - - 12 Other special items - 30 - DEPRECIATION AND AMORTIZATION Write-down of assets - 40 300 OTHER OPERATING EXPENSES Merger direct incremental costs - - 147 Merger transition costs 147 181 92 Video-related charges - 15 69 Real estate consolidation - - 55 Regulatory, tax and legal contingencies and other special items - 9 347 -------------------------------------- 205 1,311 1,815 -------------------------------------- INCOME/LOSS FROM UNCONSOLIDATED BUSINESSES Write-down of Asian investments - 485 - Write-down of video investments - 8 162 Equity share of CWC formation costs - - 59 Gains on sales of investments - - (142) OTHER INCOME AND EXPENSE, NET Write-down of assets - (45) - INTEREST EXPENSE Write-down of assets - 47 - MARK-TO-MARKET ADJUSTMENT FOR EXCHANGEABLE NOTES 664 - - -------------------------------------- TOTAL SPECIAL ITEMS--PRE-TAX 869 1,806 2,073 PROVISION FOR INCOME TAXES Tax effect of special items and other tax-related items (311) (448) (681) -------------------------------------- TOTAL SPECIAL ITEMS--AFTER-TAX $ 558 $ 1,358 $ 1,392 ====================================== What follows is a further explanation of the nature and timing of these special items. - -------------------------------------------------------------------------------- Mark-to-Market Adjustment for Exchangeable Notes - -------------------------------------------------------------------------------- YEAR 1999 In the fourth quarter of 1999, we recorded a loss on a mark-to-market adjustment of $664 million ($432 million after-tax) related to our $3.2 billion notes exchangeable into shares of Cable & Wireless Communications plc (CWC). This noncash, nonoperational adjustment resulted in an increase in the carrying value of the debt obligation and a charge to income. This mark-to-market adjustment was required because the CWC exchangeable notes are indexed to the fair market value of CWC's common stock. At December 31, 1999, the price of CWC shares exceeded the exchange price established at the offering date. If the share price of CWC subsequently declines, our debt obligation is reduced (but not to less than its amortized carrying value) and income is increased. A mark-to-market adjustment may be recorded monthly, recognizing either a gain or a loss, to reflect the difference between the CWC market price and the exchange price (no adjustment is required if the market price is below the exchange price). The CWC exchangeable notes may be exchanged beginning in July 2002. For additional information about the CWC exchangeable notes, see Note 10 to the consolidated financial statements. - -------------------------------------------------------------------------------- Merger-related Costs - -------------------------------------------------------------------------------- YEARS 1999, 1998 AND 1997 In connection with the Bell Atlantic-NYNEX merger, which was completed in August 1997, we recorded pre-tax merger-related costs totaling $205 million in 1999, $196 million in 1998, and $519 million in 1997. In 1999 and 1998, all merger-related costs were transition and integration costs. Transition and integration costs represent costs associated with integrating the operations of Bell Atlantic and NYNEX, such as systems modifications costs, advertising and branding costs, and costs associated with the elimination and consolidation of duplicate facilities, relocation and retraining. Transition and integration costs are expensed as incurred. In 1997, direct incremental costs consisted of expenses associated with completing the merger transaction, such as professional and regulatory fees, compensation arrangements, and shareowner-related costs. Employee severance costs, as recorded under SFAS No. 112, "Employers' Accounting for Postemployment Benefits," represent the anticipated benefit costs for the separation by the end of 1999 of approximately 3,100 management employees who are entitled to benefits under pre-existing separation pay plans. During 1997, 1998, and 1999, 245, 856, and 231 management employees were separated with severance benefits. At December 31, 1999, the merger-related separations were completed and the remaining liability balance represents our obligation for ongoing separations under the pre-existing separation plan pays in accordance with SFAS No. 112. Merger-related costs were comprised of the following amounts in each year: (dollars in millions) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- TRANSITION AND INTEGRATION COSTS Systems modifications $ 186 $ 149 $ 36 Advertising - 20 - Branding 1 11 48 Relocation, training and other 18 16 12 ----------------------------------- TOTAL TRANSITION AND INTEGRATION COSTS 205 196 96 =================================== DIRECT INCREMENTAL COSTS Professional services 80 Compensation arrangements 54 Shareowner-related 16 Registration and other regulatory 18 Taxes and other 32 ----------- TOTAL DIRECT INCREMENTAL COSTS 200 =========== EMPLOYEE SEVERANCE COSTS 223 ----------------------------------- TOTAL MERGER-RELATED COSTS $ 205 $ 196 $ 519 =================================== F-3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Retirement Incentives - -------------------------------------------------------------------------------- YEARS 1998 AND 1997 In 1993, we announced a restructuring plan which included an accrual of approximately $1.1 billion (pre-tax) for severance and postretirement medical benefits under an involuntary force reduction plan. Beginning in 1994, retirement incentives were offered under a voluntary program as a means of implementing substantially all of the work force reductions announced in 1993. Since the inception of the retirement incentive program, we have recorded additional costs totaling approximately $3.0 billion (pre-tax) through December 31, 1998. These additional costs and the corresponding number of employees accepting the retirement incentive offer for each year ended December 31 are as follows: (dollars in millions) Years Amount Employees - -------------------------------------------------------------------------------- 1994 $ 694 7,209 1995 515 4,759 1996 236 2,996 1997 513 4,311 1998 1,021 7,299 ----------------------------- $ 2,979 26,574 ============================= The additional costs were comprised of special termination pension and postretirement benefit amounts, as well as employee costs for other items. These costs were reduced by severance and postretirement medical benefit reserves established in 1993 and transferred to offset the pension and postretirement benefit liabilities as employees accepted the retirement incentive offer. The voluntary retirement program covering associate employees was completed in September 1998. The severance and postretirement medical reserves balances were fully utilized at December 31, 1998. You can find additional information on retirement incentive costs in Note 16 to the consolidated financial statements. - -------------------------------------------------------------------------------- Other Charges and Special Items - -------------------------------------------------------------------------------- YEAR 1998 During 1998, we recorded other charges and special items totaling $589 million (pre-tax) in connection with the write-down of Asian investments and obsolete or impaired assets and for other special items arising during the period. The remaining liability associated with these charges was $2 million at December 31, 1999 and $8 million at December 31, 1998. These charges are comprised of the following significant items. Asian Investments In the third quarter of 1998, we recorded pre-tax charges of $485 million to adjust the carrying values of two Asian investments--TelecomAsia, a wireline investment in Thailand, and Excelcomindo, a wireless investment in Indonesia. We account for these investments under the cost method. The charges were necessary because we determined that the decline in the estimated fair values of each of these investments was other than temporary. We determined the fair values of these investments by discounting estimated future cash flows. In the case of TelecomAsia, we recorded a charge of $348 million to adjust the carrying value of the investment to its estimated fair value. We considered the following factors in determining this charge: . The continued weakness of the Thai currency as compared to historical exchange rates had placed additional financial burdens on the company in servicing U.S. dollar-denominated debt. . The economic instability and prospects for an extended recovery period had resulted in weaker than expected growth in TelecomAsia's business. This was indicated by slower than expected growth in total subscribers and usage. These factors resulted in reduced expectations of future cash flows and, accordingly, a reduction in the value of our investment. . The business plan for TelecomAsia contemplated cash flows from several lines of business. Given TelecomAsia's inclination to focus on its core wireline business, these other lines of business would not contribute future cash flows at previously expected levels. In the case of Excelcomindo, we recorded a charge of $137 million to adjust the carrying value of the investment to its estimated fair value. We considered the following factors in determining this charge: . The continued weakness of the Indonesian currency as compared to historical exchange rates had placed additional financial burdens on the company in servicing U.S. dollar-denominated debt. The political unrest in Indonesia contributed to the currency's instability. . The economic instability and prospects for an extended recovery period had resulted in weaker than expected growth in Excelcomindo's business. One significant factor was the inflexible tariff regulation despite rising costs due to inflation. This and other factors resulted in reduced expectations of future cash flows and, accordingly, a reduction in the value of our investment. . Issues with cash flow required Excelcomindo's shareholders to evaluate the future funding of the business. We continue to monitor the political, economic, and financial aspects of our remaining investments in Thailand and Indonesia, as well as other investments. The book value of our remaining Asian investments was approximately $179 million at December 31, 1999. Should we determine that any further decline in the fair values of these investments is other than temporary, the impact could be material to our results of operations. Video-related Charges During 1998, we recorded pre-tax charges of $23 million related primarily to wireline and other nonsatellite video initiatives. We made a strategic decision in 1998 to focus our video efforts on satellite service offered in conjunction with DirecTV and USSB. We communicated the decision to stop providing wireline video services F-4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- to subscribers and offered them the opportunity to subscribe to the satellite-based video service that we introduced in 1998. In the third quarter of 1998, we decided to dispose of these wireline video assets by sale or abandonment, and we conducted an impairment review under the requirements of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." We based our estimate on an estimate of cash flows expected to result from the use of the assets prior to their disposal and the net proceeds (if any) expected to result from the disposal. Write-down of Other Assets and Other Items Results for 1998 also included a pre-tax charge, net of minority interest, of $42 million for the write-down of fixed assets (primarily buildings and wireless communications equipment) and capitalized interest associated with our Mexican wireless investment, Grupo Iusacell, S.A. de C.V. (Iusacell), which we account for as a consolidated subsidiary. These assets relate to Iusacell's trial of fixed wireless service provided over the 450 MHz frequency. While continuing this trial, Iusacell has been considering whether or not to pursue its rights to acquire 450 MHz licenses for certain areas or to offer new services. Iusacell concluded that, in view of the capability of CDMA technology and the success it had with its deployment, an impairment existed with respect to assets related to the 450 MHz technology since the carrying value of these assets exceeded the sum of the estimated future cash flows associated with the assets. Iusacell is waiting for a definitive proposal from the Mexican Federal Telecommunications Commissions (COFETEL) as to the terms under which it could acquire certain 450 MHz licenses in 2000. At that time, we should have available the full facts to decide Iusacell's overall strategy concerning the 450 MHz licenses. Other items arising in 1998 included charges totaling $39 million principally associated with the settlement of labor contracts in August 1998. YEAR 1997 During 1997, we recorded other charges and special items totaling $1,041 million (pre-tax) in connection with consolidating operations and combining organizations, and for other special items arising during the year. You can find additional detail about these accrued liabilities in Note 2 to the consolidated financial statements. Video-related Charges In 1997, we recognized total pre-tax charges of $243 million related to certain video investments and operations. We determined that we would no longer pursue a multichannel, multipoint, distribution system (MMDS) as part of our video strategy. As a result, we recognized liabilities for purchase commitments associated with the MMDS technology and costs associated with closing the operations of our Tele-TV partnership because this operation no longer supports our video strategy. We also wrote-down our remaining investment in CAI Wireless Systems, Inc. Write-down of Assets and Real Estate Consolidation In the third quarter of 1997, we recorded pre-tax charges of $355 million for the write-down of obsolete or impaired fixed assets and for the cost of consolidating redundant real estate properties. As part of our merger integration planning, we reviewed the carrying values of long-lived assets. This review included estimating remaining useful lives and cash flows and identifying assets to be abandoned. In the case of impaired assets, we analyzed cash flows related to those assets to determine the amount of the impairment. As a result of these reviews, we recorded charges of $275 million for the write-off of some assets and $25 million for the impairment of other assets. These assets primarily included computers and other equipment used to transport data for internal purposes, copper wire used to provide telecommunications service in New York, and duplicate voice mail platforms. None of these assets is held for disposal. At December 31, 1998 and 1999, the impaired assets had no remaining carrying value. In connection with our merger integration efforts, we consolidated real estate to achieve a reduction in the total square footage of building space that we utilize. We sold properties, subleased some of our leased facilities, and terminated other leases, for which we recorded a charge of $55 million in the third quarter of 1997. Most of the charge related to properties in Pennsylvania and New York, where corporate support functions were consolidated into fewer work locations. Regulatory, Tax and Legal Contingencies and Other Special Items In 1997, we also recorded reductions to operating revenues and charges to operating expenses totaling $526 million (pre-tax), which consisted of the following: . Revenue reductions consisted of $179 million for federal regulatory matters. These matters relate to specific issues that are currently under investigation by federal regulatory commissions. We believe that it is probable that the ultimate resolution of these pending matters will result in refunds to our customers. . Charges to operating expenses totaled $347 million and consisted of $75 million for interest on federal and other tax contingencies; $55 million for other tax matters; and $52 million for legal contingencies and a state regulatory audit issue. These contingencies were accounted for under the rules of SFAS No. 5, "Accounting for Contingencies." These charges also included $95 million related to costs incurred in standardizing and consolidating our directory businesses and $70 million for other post-merger initiatives. Other charges arising in 1997 included $59 million for our equity share of formation costs previously announced by Cable & Wireless Communications plc (CWC). We own an 18.6% interest in CWC and account for our investment under the equity method. In 1997, we recognized pre-tax gains of $142 million on the sales of our ownership interests of several nonstrategic businesses. These gains included $42 million on the sale of our interest in Sky Network Television Limited of New Zealand (SkyTV); $54 million on the sale of our 33% stake in an Italian wireline venture, Infostrada; and $46 million on the sale of our two-sevenths interest in Bell Communications Research, Inc. (Bellcore). F-5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SEGMENTAL 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, Global Wireless, Directory and Other Businesses. You can find additional information about our segments in Note 18 to the consolidated financial statements. We measure and evaluate our reportable segments based on adjusted net income, which excludes undistributed corporate expenses and special items arising during each period. Special items are transactions that management has excluded from the business units' results, but are included in reported consolidated earnings. We previously described these special items in the Consolidated Results of Operations section. Special items affected our segments as follows: (dollars in millions) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- DOMESTIC TELECOM Reported net income $ 3,332 $ 2,383 $ 2,016 Special items 112 790 977 -------------------------------------------- Adjusted net income $ 3,444 $ 3,173 $ 2,993 ============================================ GLOBAL WIRELESS Reported net income $ 388 $ 50 $ 113 Special items - 178 (18) -------------------------------------------- Adjusted net income $ 388 $ 228 $ 95 ============================================ DIRECTORY Reported net income $ 712 $ 662 $ 564 Special items 14 22 93 -------------------------------------------- Adjusted net income $ 726 $ 684 $ 657 ============================================ OTHER BUSINESSES Reported net income (loss) $ 67 $ (231) $ 28 Special items - 366 20 -------------------------------------------- Adjusted net income $ 67 $ 135 $ 48 ============================================ RECONCILING ITEMS Reported net income (loss) $ (297) $ 101 $ (266) Special items 432 2 320 -------------------------------------------- Adjusted net income $ 135 $ 103 $ 54 ============================================ Reconciling items consist of corporate operations and intersegment eliminations. [PIE CHART APPEARS HERE] - -------------------------------------------------------------------------------- 1999 Revenues by Segment - -------------------------------------------------------------------------------- Directory 7% Global Wireless 14% Domestic Telecom 79% ------------------------ - -------------------------------------------------------------------------------- [LOGO APPEARS HERE] Domestic Telecom - -------------------------------------------------------------------------------- Our Domestic Telecom segment consists primarily of our nine operating telephone subsidiaries that provide local telephone services from Maine to Virginia, including 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, and Internet access services. Domestic Telecom represents the aggregation of our domestic wireline business units (consumer, enterprise, general business, and network services) that focus on specific markets to meet customer requirements. [PIE CHART APPEARS HERE] - -------------------------------------------------------------------------------- 1999 Domestic Telecom Revenues Components - -------------------------------------------------------------------------------- Local 55% Long Distance 7% Ancillary 8% Network Access 30% ----------------------------------------- HIGHLIGHTS Healthy demand for core communications services and robust demand for new data services enabled the Domestic Telecom group to increase total operating revenues 3.0% in each of 1999 and 1998 over the respective prior year. Access lines grew 3.1% in 1999 and 4.1% in 1998. Basic access line growth has declined because customers are now choosing high capacity/high speed services for their transport. The number of voice-grade equivalents (access lines plus data circuits) in service grew 13.2% in 1999 and 11.6% in 1998. The number of DSO circuits in service (digital, high-bandwidth and packet-switched services as measured in 64-kilobit voice-grade equivalents) increased 39.6% over 1998 and 38.3% over 1997. Growth in access minutes of use was 5.0% in 1999, compared to 7.8% in 1998, reflecting a decline in customer demand due to win-back programs for long distance services and a shift to wireless calling. Data revenues (including those from high-bandwidth, packet-switched, and special access services and network integration businesses) reached over $2.9 billion for the year 1999, nearly 26% over 1998 levels. Data revenues in 1998 totaled $2.3 billion, an increase of 33% over 1997. Adjusted operating expenses totaled $19.8 billion in 1999, 1.2% above 1998 levels and $19.5 billion in 1998, an increase of 2.2% over 1997. Results in all three years included costs for long distance entry, construction of a regional long distance network, Year 2000 compliance costs, and interconnection payments to competitive local exchange carriers. F-6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- Additional financial information about Domestic Telecom's results of operations for 1999, 1998, and 1997 follows. Years Ended December 31, (dollars in millions) Results of Operations-Adjusted Basis 1999 1998 1997 - -------------------------------------------------------------------------------- OPERATING REVENUES Local services $ 14,346 $ 13,882 $ 13,256 Network access services 7,924 7,656 7,340 Long distance services 1,816 1,929 2,190 Ancillary services 2,236 2,090 2,023 ------------------------------------------- 26,322 25,557 24,809 ------------------------------------------- OPERATING EXPENSES Employee costs 7,275 7,298 7,436 Depreciation and amortization 5,505 5,195 4,990 Other operating expenses 6,994 7,047 6,696 ------------------------------------------- 19,774 19,540 19,122 ------------------------------------------- OPERATING INCOME $ 6,548 $ 6,017 $ 5,687 =========================================== INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES $ 14 $ 27 $ (14) ADJUSTED NET INCOME $ 3,444 $ 3,173 $ 2,993 OPERATING REVENUES Local Services Local service revenues are earned by our operating telephone subsidiaries from the provision of local exchange, local private line, public telephone (pay phone) and value-added services. Value-added services are a family of services that expand the utilization of the network. These services include products such as Caller ID, Call Waiting and Return Call. Growth in local service revenues of $464 million or 3.3% in 1999 and $626 million or 4.7% in 1998 was spurred by higher usage of our network facilities. This growth, generated in part by an increase in access lines in service in each year, reflects strong customer demand and usage of our data transport and digital services, such as Frame Relay, Integrated Services Digital Network (ISDN) and Switched Multi-megabit Data Service (SMDS). Revenues from our value-added services were boosted in both years by marketing and promotional campaigns offering new service packages. In 1999, local service revenue growth was partially offset by the effect of resold access lines and the provision of unbundled network elements to competitive local exchange carriers. Lower revenues from our pay phone services due to the increasing popularity of wireless communications and a rebate to customers in Massachusetts further reduced revenues in 1999. In 1998, revenue growth was partially offset by price reductions on certain local services and the elimination of Touch-Tone service charges by several of our operating telephone subsidiaries. You can find additional information on the Telecommunications Act of 1996 (1996 Act) and its impact on the local exchange market under "Other Factors That May Affect Future Results." [PIE CHART APPEARS HERE] - -------------------------------------------------------------------------------- Access Lines by Category - -------------------------------------------------------------------------------- Residence 63% Public 1% Business 36% 43 million - -------------------------------------------------------------------------------- Network Access Services Network access revenues are earned from end-user subscribers and long distance and other competing carriers who use our local exchange facilities to provide services to their customers. Switched access revenues are derived from fixed and usage-based charges paid by carriers for access to our local network. Special access revenues originate from carriers and end-users that buy dedicated local exchange capacity to support their private networks. End-user access revenues are earned from our customers and from resellers who purchase dial-tone services. Our network access revenues grew $268 million or 3.5% in 1999 and $316 million or 4.3% in 1998. This growth was mainly attributable to customer demand, as reflected by growth in access minutes of use. Volume growth also reflects a continuing expansion of the business market, particularly for high capacity data services. In 1999 and 1998, demand for special access services increased, reflecting a greater utilization of the network. Higher network usage by alternative providers of intraLATA toll services and higher end-user revenues attributable to an increase in access lines in service further contributed to revenue growth in both years. [BAR CHART APPEARS HERE] - -------------------------------------------------------------------------------- Access Minutes of Use - -------------------------------------------------------------------------------- 1997 160.5 B 1998 173.0 B 1999 181.6 B 1997-1998 7.8% growth 1998-1999 5.0% growth - -------------------------------------------------------------------------------- In 1999, network access revenues included approximately $90 million received from customers for the recovery of local number portability (LNP) costs. LNP allows customers to change local exchange carriers while maintaining their existing telephone numbers. In December 1998, the FCC issued an order permitting us to recover costs incurred for LNP in the form of monthly end-user charges for a five-year period beginning in March 1999. Volume-related growth was partially offset by price reductions associated with federal and state price cap filings and other regulatory decisions. State public utility commissions regulate our operating telephone subsidiaries with respect to certain intrastate rates and services and certain other matters. State rate reductions on access services were approximately $104 million in 1999, $79 million in 1998, and $97 million in 1997. F-7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- The FCC regulates the rates that we charge long distance carriers and end-user subscribers for interstate access services. We are required to file new access rates with the FCC each year. In July 1999, we implemented interstate price decreases of approximately $235 million on an annual basis in connection with the FCC's Price Cap Plan. The rates included in our July 1999 filing will be in effect through June 2000. Interstate price decreases were $175 million on an annual basis for the period July 1998 through June 1999 and $430 million on an annual basis for the period July 1997 through June 1998. Beginning in January 1998, the rates include amounts necessary to recover our operating telephone subsidiaries' contribution to the FCC's universal service fund and are subject to change every quarter due to potential increases or decreases in our contribution to the universal service fund. The subsidiaries' contributions to the universal service fund are included in Other Operating Expenses. You can find additional information on FCC rulemakings concerning access charges, price caps, and universal service under "Other Factors That May Affect Future Results." Long Distance Services Long distance revenues are earned primarily from calls made to points outside a customer's local calling area, but within the service area of an operating telephone subsidiary (intraLATA toll). Other long distance services that we provide include 800 services, Wide Area Telephone Service (WATS), corridor services and long distance services originating outside of our region. IntraLATA toll calls originate and terminate within the same LATA, but generally cover a greater distance than a local call. These services are regulated by state regulatory commissions, except where they cross state lines. All of our state regulatory commissions permit other carriers to offer intraLATA toll services. Until the implementation of presubscription, intraLATA toll calls were completed by our operating telephone subsidiaries unless the customer dialed a code to access a competing carrier. Presubscription changed this dialing method and enabled customers to make these toll calls using another carrier without having to dial an access code. All of our operating telephone companies have implemented presubscription. The competitive effects of presubscription for intraLATA toll services principally caused declines in long distance revenues of $113 million or 5.9% in 1999 and $261 million or 11.9% in 1998. The negative effect of presubscription on long distance revenues was partially mitigated by increased network access services for usage of our network by these alternative providers. In response to presubscription, we have implemented customer win-back and retention initiatives that include toll calling discount packages and product bundling offers. These revenue reductions were partially offset by higher calling volumes in both years. In December 1999, we won approval to offer in-region long distance service in the State of New York, which we launched in January 2000. You can find additional information on our entry into the in-region long distance market under "Other Factors That May Affect Future Results." Ancillary Services Our ancillary services include billing and collections for long distance carriers, collocation for competitive local exchange carriers, data solutions and systems integration, voice messaging, Internet access, customer premises equipment and wiring and maintenance services. Revenues from ancillary services grew $146 million or 7.0% in 1999 and $67 million or 3.3% in 1998. Revenue growth in both years was attributable to higher demand for such services as data solutions and systems integration, voice messaging, and billing and collections. Revenue growth in 1999 was also boosted by higher payments received from competitive local exchange carriers for interconnection of their networks with our network. Revenues earned from our customer premises services increased in 1999, while in 1998 revenues from these services declined over the prior year. These factors were partially offset in both years by accruals primarily for regulatory matters. OPERATING EXPENSES [BAR CHART APPEARS HERE] - -------------------------------------------------------------------------------- Domestic Telecom Operating Expenses - -------------------------------------------------------------------------------- 1997 $19.1 B 1998 $19.5 B 1999 $19.8 B 1997-1998 2.2% growth 1998-1999 1.2% growth - -------------------------------------------------------------------------------- Employee Costs Employee costs, which consist of salaries, wages and other employee compensation, employee benefits and payroll taxes, declined by $23 million or 0.3% in 1999 and by $138 million or 1.9% in 1998. These cost reductions were largely attributable to lower pension and benefit costs of $158 million in 1999 and $286 million in 1998. Our pension and benefit costs have declined in each year chiefly due to favorable pension plan investment returns and changes in plan provisions and actuarial assumptions. These factors were partially offset in 1999 by increased health care costs caused by inflation, savings plan benefit improvements for certain management employees, as well as benefit improvements provided for under new contracts with associate employees. In 1999, the effect of capitalizing employee-related expenses associated with developing internal use software under the new accounting standard, Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," also contributed approximately $100 million to the reduction in employee costs. For additional information on SOP No. 98-1, see Note 1 to the consolidated financial statements. Cost reductions in both years were partially offset by annual salary and wage increases for management and associate employees and higher payroll taxes. In 1998, we executed new contracts with unions representing associate employees. The new contracts provide for wage and pension increases and other benefit improvements as follows: F-8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- . The wages, pension and other benefits for our associate employees are negotiated with unions. During 1998, we entered into two-year contracts with the Communications Workers of America (CWA), representing more than 73,000 associate workers and with the International Brotherhood of Electrical Workers (IBEW), representing approximately 13,000 associate workers in New York and the New England states. These contracts, which expire in August 2000, provide for wage increases of up to 3.8% effective August 1998, and up to 4% effective August 1999. Over the course of this two-year contract period, pension increases range from 11% to 20%. The contracts also include cash payments, working condition improvements, and continuation of certain employment security provisions. . We also entered into a two-year extension of contracts with the IBEW, representing approximately 9,000 associate members in New Jersey and Pennsylvania. These contracts, which expire in August 2002, provide for wage increases of 4.8% in April 1999, 3% in May 2000, and 3% in May 2001. Pensions will increase by a total of 11% for the years 1999-2001, and there will be improvements in a variety of other benefits and working conditions. Other items affecting the change in employee costs in 1999, but to a lesser extent, were higher overtime payments due to severe rainstorms experienced throughout the region and higher work force levels attributable to our recent entry into the in-region long distance market in New York and service quality improvement initiatives. A reduction of work force in 1998 contributed to the decline in employee costs in that year. You should also read "Other Factors That May Affect Future Results-Pension Plan Amendments" for additional information on employee benefit costs. Depreciation and Amortization Depreciation and amortization expense increased by $310 million or 6.0% in 1999 and by $205 million or 4.1% in 1998, principally due to growth in depreciable telephone plant and changes in the mix of plant assets. The adoption of SOP No. 98-1 contributed approximately $100 million to the increase in depreciation expense in 1999. Under this new accounting standard, computer software developed or obtained for internal use is now capitalized and amortized. Previously, we expensed most of these software purchases in the period in which they were incurred. These factors were partially offset in both years by the effect of lower rates of depreciation. Other Operating Expenses Other operating expenses declined by $53 million or 0.8% in 1999, compared to an increase of $351 million or 5.2% in 1998. The major components that caused the change in other operating expenses in both years included higher costs associated with entering new businesses such as long distance and data services, and higher interconnection payments to competitive local exchange and other carriers to terminate calls on their networks (reciprocal compensation). Payments for reciprocal compensation increased over the prior year by approximately $175 million in each of 1999 and 1998. In 1999, these factors were largely offset by the effect of SOP No. 98-1, which reduced other operating expenses by approximately $370 million as a result of capitalizing expenditures for internal use software previously expensed in 1998 and prior years. Lower costs associated with opening our network to competitors, including local number portability, and lower spending by our operating telephone subsidiaries for such expenditures as rent, marketing and advertising further offset expense increases in 1999. Other operating expenses in 1998 also included additional Year 2000 readiness costs, higher material purchases, and additional costs associated with our contribution to the federal universal service fund which was created by the FCC in 1998. The cost increases in 1998 were partially offset by lower taxes other than income due to the effect of a change in New Jersey state tax law. This state tax law change, which became effective January 1, 1998, repealed the gross receipts tax for our operating telephone subsidiary in New Jersey and replaced it with a net income-based tax. For additional information on reciprocal compensation refer to "Other Factors That May Affect Future Results." INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES The change in income (loss) from unconsolidated businesses in 1999 and 1998 was primarily due to the effect of the disposition of our video operations. F-9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- [LOGO APPEARS HERE] Global Wireless - -------------------------------------------------------------------------------- Our Global Wireless segment provides wireless telecommunications services to customers in 24 states in the United States and includes foreign wireless investments servicing customers in Latin America, Europe and the Pacific Rim. HIGHLIGHTS The Global Wireless group's adjusted net income grew $160 million or 70.2% in 1999 and $133 million or 140% in 1998. This growth was fueled by strong subscriber growth at our domestic wireless subsidiary, Bell Atlantic Mobile (BAM), and record growth in new customers in the group's international wireless portfolio. Our international portfolio includes our investments in Omnitel in Italy, STET Hellas in Greece, EuroTel Praha in the Czech Republic, and our fully-consolidated Iusacell investment in Mexico. In December 1999, BAM completed the acquisition of Frontier Corporation's (Frontier) interests in wireless properties doing business under the Frontier Cellular name. This acquisition increased BAM's ownership in Frontier from 50% to 100%. As a result, we changed the accounting for our Frontier Cellular investment from the equity method to full consolidation. The Global Wireless group ended the year 1999 with approximately 12.0 million global proportionate wireless subscribers, up 39.1% over year-end 1998. The 1999 subscriber amount includes 452,000 added through BAM's acquisition of Frontier Cellular properties. At year-end 1998, our global proportionate wireless subscribers totaled approximately 8.6 million, an increase of 35.4% over year-end 1997. BAM ended 1999 with approximately 7.7 million customers (including Frontier Cellular subscribers), an increase of 24.0% over year-end 1998. At year-end 1998, BAM customers totaled approximately 6.2 million, an increase of 15.8% over year-end 1997. Total revenue per subscriber for BAM operations was $51.71 in 1999, $50.84 in 1998, and $53.15 in 1997. PrimeCo Personal Communications, L.P. (PrimeCo), a personal communications services (PCS) joint venture in the United States which we account for under the equity method, reported proportionate subscriber growth of 52.8% in 1999 and 133.1% in 1998. [BAR CHART APPEARS HERE] - -------------------------------------------------------------------------------- Global Wireless Proportional Subscribers - -------------------------------------------------------------------------------- 1997 6.3 M 1998 8.6 M 1999 12.0 M 1997-1998 35.4% growth 1998-1999 39.1% growth - -------------------------------------------------------------------------------- Additional financial information about Global Wireless results of operations for 1999, 1998, and 1997 follows. Years Ended December 31, (dollars in millions) Results of Operations--Adjusted Basis 1999 1998 1997 - -------------------------------------------------------------------------------- OPERATING REVENUES Wireless services revenues $ 4,564 $ 3,798 $ 3,347 ------------------------------------------- OPERATING EXPENSES Employee costs 604 548 490 Depreciation and amortization 673 592 481 Other operating expenses 2,459 1,942 1,742 ------------------------------------------- 3,736 3,082 2,713 ------------------------------------------- OPERATING INCOME $ 828 $ 716 $ 634 =========================================== INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES $ 80 $ (96) $ (196) ADJUSTED NET INCOME $ 388 $ 228 $ 95 OPERATING REVENUES [PIE CHART APPEARS HERE] - -------------------------------------------------------------------------------- Sources of Subscriber Growth - -------------------------------------------------------------------------------- International 52% Bell Atlantic Mobile 39% PrimeCo 9% 2.7 million net adds - -------------------------------------------------------------------------------- Revenues earned from our consolidated wireless businesses grew by $766 million or 20.2% in 1999 and $451 million or 13.5% in 1998. This revenue growth was largely attributable to BAM, which contributed $658 million to revenue growth in 1999 and $383 million to revenue growth in 1998. Customer additions and increased usage of our domestic wireless services drove this growth. New pricing plans for BAM's digital wireless services fueled subscriber growth in 1999. Revenues from Iusacell grew $130 million in 1999 and $63 million in 1998, principally as a result of subscriber growth and higher rates charged for services. Revenue growth in 1999 from our consolidated wireless businesses was slightly offset by the effect of the December 1998 sale of our paging business. F-10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- OPERATING EXPENSES Employee Costs Employee costs increased by $56 million or 10.2% in 1999 and $58 million or 11.8% in 1998, principally as a result of higher work force levels at BAM. Employee costs at Iusacell were lower in 1999 as a result of work force reductions and higher in 1998 as a result of increased employee levels and related benefits. Depreciation and Amortization Depreciation and amortization expense increased by $81 million or 13.7% in 1999 and by $111 million or 23.1% in 1998. This increase was mainly attributable to growth in depreciable cellular plant at BAM, contributing $69 million in 1999 and $110 million in 1998 to higher depreciation costs. Higher depreciation costs at Iusacell also contributed to expense growth in 1999, but to a lesser extent. These increases were chiefly due to increased capital expenditures to support the increasing demand for wireless services in both the domestic and international markets. Other Operating Expenses In 1999, other operating expenses increased by $517 million or 26.6%, compared to $200 million or 11.5% in 1998. These increases were primarily attributable to our BAM operations as a result of increased service costs due to the growth in their subscriber base, including additional costs of equipment, higher roaming payments to wireless carriers, and higher sales commissions. BAM's other operating expenses, including taxes other than income, increased $459 million in 1999 and $149 million in 1998. Higher service costs at Iusacell also contributed to expense growth in both years, but to a lesser extent. In 1999, these factors were slightly offset by the effect of the December 1998 sale of our paging business. INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES The changes in income (loss) from unconsolidated businesses in 1999 and 1998 were principally due to improved operating results from our wireless investments in PrimeCo and Omnitel, fueled primarily by strong subscriber growth. Equity income from Omnitel included the effect of increased goodwill amortization as a result of increases in our economic ownership in Omnitel in 1999 and 1998. PrimeCo's results in 1999 included a gain on the sale of operations in Hawaii. Other international wireless investments such as STET Hellas and EuroTel Praha also reported improved operating results in 1999. - -------------------------------------------------------------------------------- [LOGO APPEARS HERE] Directory - -------------------------------------------------------------------------------- Our Directory segment consists of our domestic and international publishing businesses, including print directories and Internet-based shopping guides, as well as website creation and other electronic commerce services. This segment has operations principally in the United States and Central Europe. Years Ended December 31, (dollars in millions) Results of Operations-Adjusted Basis 1999 1998 1997 - -------------------------------------------------------------------------------- OPERATING REVENUES Directory services revenues $ 2,338 $ 2,264 $ 2,215 -------------------------------------------- OPERATING EXPENSES Employee costs 314 326 215 Depreciation and amortization 36 37 39 Other operating expenses 757 777 886 -------------------------------------------- 1,107 1,140 1,140 -------------------------------------------- OPERATING INCOME $ 1,231 $ 1,124 $ 1,075 ============================================ INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES $ (1) $ 29 $ 23 ADJUSTED NET INCOME $ 726 $ 684 $ 657 OPERATING REVENUES Operating revenues from our Directory segment improved by $74 million or 3.3% in 1999 and $49 million or 2.2% in 1998, principally as a result of increased pricing for certain directory services. Higher business volumes, including revenue from new Internet-based shopping directory and electronic commerce services, also contributed to revenue growth in both years, but to a lesser extent. OPERATING EXPENSES In 1999, total operating expenses declined $33 million or 2.9% largely due to lower work force levels. Lower spending for maintenance, repair and other costs of services also contributed to the decline in operating costs in 1999. In 1998, total operating expenses were unchanged from 1997. The changes in the major components of operating expenses include a reclassification of certain costs from other operating expenses to employee costs, beginning in 1998. For comparability purposes, had similar costs of approximately $95 million been reclassified in 1997, employee costs would have increased by approximately $16 million or 5.2% in 1998 and other operating expenses would have declined by approximately $14 million or 1.8% in 1998. The increase in employee costs was largely due to salary and wage increases. The reduction in other operating expenses was principally due to lower general and administrative costs of service. INCOME (LOSS) FROM UNCONSOLIDATED BUSINESSES In 1998 and 1997, income from unconsolidated businesses included gains on the sale of portions of our ownership interests in certain global directory businesses. The loss from unconsolidated businesses in 1999 was due to lower operating results from our international directory businesses. F-11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO APPEARS HERE] Other Businesses - -------------------------------------------------------------------------------- Our Other Businesses segment includes international wireline telecommunications investments in Europe and the Pacific Rim, lease financing and all other businesses. HIGHLIGHTS Effective May 31, 1999, our representatives resigned from the Board of Directors of Telecom Corporation of New Zealand Limited (TCNZ) and we agreed to vote our shares neutrally. As a result, we no longer have significant influence over TCNZ's operating and financial policies and, therefore, have changed the accounting for our investment in TCNZ from the equity method to the cost method. The change in the method of accounting for this investment did not have a material effect on results of operations in 1999. We currently hold a 24.94% interest in TCNZ. Coincident with our change to the cost method of accounting, our investment in TCNZ is now subject to the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under these provisions, our TCNZ shares are classified as "available-for-sale" securities and, accordingly, our TCNZ investment has been adjusted from a carrying value of $363 million to its fair value of $2,103 million at December 31, 1999. The increased value of our investment is recorded in Investments in Unconsolidated Businesses in our consolidated balance sheet. The unrealized gain of $1,131 million (net of income taxes of $609 million) has been recognized in Accumulated Other Comprehensive Income (Loss). In the second quarter of 1997, we transferred our interests in cable television and telecommunications operations in the United Kingdom to CWC in exchange for an 18.5% ownership interest in CWC. This transaction was accounted for as a nonmonetary exchange of similar productive assets and as a result no gain or loss was recorded. We now account for our investment in CWC under the equity method. Prior to this transfer, we included the accounts of these operations in our consolidated financial statements. You can find more information about CWC in Note 3 to the consolidated financial statements. Years Ended December 31, (dollars in millions) Results of Operations--Adjusted Basis 1999 1998 1997 - -------------------------------------------------------------------------------- OPERATING REVENUES Other services revenues $ 151 $ 124 $ 278 ------------------------------------ OPERATING EXPENSES Employee costs 7 14 58 Depreciation and amortization 2 3 48 Other operating expenses 97 105 210 ------------------------------------ 106 122 316 ------------------------------------ OPERATING INCOME (LOSS) $ 45 $ 2 $ (38) ==================================== INCOME FROM UNCONSOLIDATED BUSINESSES $ 37 $ 86 $ 78 ADJUSTED NET INCOME $ 67 $ 135 $ 48 OPERATING RESULTS The improvement in operating income between 1999 and 1998 was largely attributable to improved operating results by our lease financing businesses. Income from unconsolidated businesses declined in 1999 primarily as a result of higher equity losses from our investment in CWC and from our investment in BayanTel, a Philippines-based telecommunications company. BayanTel's 1999 results also included a charge for the write-down of their interest in a joint venture. These losses were partially offset by improved equity results from our investment in Fiberoptic Link Around the Globe (FLAG), which owns an undersea fiberoptic cable system, providing digital communications links between Europe and Asia. FLAG's 1999 results also reflect the effect of one-time charges recorded in 1998. In 1998, the changes in operating revenues, operating expenses, and income from unconsolidated businesses principally reflect the effect of the change in the accounting for our CWC investment under the equity method, beginning in the second quarter of 1997. - -------------------------------------------------------------------------------- NONOPERATING ITEMS - -------------------------------------------------------------------------------- The following discussion of nonoperating items is based on the amounts reported in our consolidated financial statements. Years Ended December 31, (dollars in millions) Interest Expense 1999 1998 1997 - -------------------------------------------------------------------------------- Total interest expense--reported $ 1,263 $ 1,335 $ 1,230 Special items--write-down of assets - (47) - Settlement of tax-related matters - (46) - ------------------------------------- Interest expense--excluding special items and tax settlement 1,263 1,242 1,230 Capitalized interest costs 98 90 81 ------------------------------------- Total interest cost on debt balances $ 1,361 $ 1,332 $ 1,311 ===================================== Average debt outstanding $ 20,777 $ 19,963 $ 18,897 Effective interest rate 6.6% 6.7% 6.9% Our interest cost on debt balances was higher in 1999 and 1998 principally due to higher average debt levels. These increases were partially offset by the effect of lower interest rates. Years Ended December 31, (dollars in millions) Other Income and (Expense), Net 1999 1998 1997 - -------------------------------------------------------------------------------- Minority interest $ (81) $ (75) $ (95) Foreign currency gains, net 15 40 28 Interest income 32 81 27 Gains on disposition of assets/businesses, net 53 44 17 Other, net 35 32 20 ---------------------------------- Total $ 54 $ 122 $ (3) ================================== F-12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- The changes in other income and expense were due to changes in several components, as shown in the table. The change in minority interest was largely due to the recognition of minority interest expense in 1999 related to our investment in Iusacell. In 1998, we recorded minority interest income for Iusacell, principally resulting from the write-down of fixed assets as described earlier. Further contributing to the change in minority interest, in 1999, we no longer record a minority interest expense related to the outside party's share of the subsidiary's earnings in connection with the sale of our investment in Viacom Inc. (Viacom). Foreign exchange gains were affected in 1999 as a result of the discontinuation of highly inflationary accounting for our Iusacell subsidiary, effective January 1, 1999. As a result of this change, Iusacell now uses the Mexican peso as its functional currency and we expect that our earnings will continue to be affected by any foreign currency gains or losses associated with the U.S. dollar denominated debt issued by Iusacell. Also, in 1998 we recognized higher foreign exchange gains associated with other international investments. Finally, we recorded gains on the disposition of assets in 1999, primarily related to the sale of real estate in New York and gains on the sale of land and our paging business in 1998. In 1998, we recorded additional interest income in connection with the settlement of tax-related matters. Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Effective Income Tax Rates 37.8% 40.2% 38.4% The effective income tax rate is the provision for income taxes as a percentage of income before the provision for income taxes. Our reported effective income tax rate for 1999 was lower than 1998, primarily due to the write-down of certain international investments in 1998 for which no tax benefit was provided. This factor was partially offset by lower tax credits in 1999, as well as adjustments to deferred income taxes at certain subsidiaries in 1998. The higher reported effective income tax rate in 1998 resulted from higher state and local income taxes caused by the change in the New Jersey state tax law described earlier under "Domestic Telecom--Other Operating Expenses," and from the write-down of certain international investments for which no tax benefits were provided. These rate increases were partially offset by adjustments to deferred tax balances at certain subsidiaries and higher tax credits related to our foreign operations. You can find a reconciliation of the statutory federal income tax rate to the effective income tax rate for each period in Note 17 to the consolidated financial statements. EXTRAORDINARY ITEM In 1998, we recorded extraordinary charges associated with the early extinguishment of debentures and refunding mortgage bonds of our operating telephone subsidiaries and debt issued by FLAG. These charges reduced net income by $26 million (net of an income tax benefit of $14 million). - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL CONDITION - -------------------------------------------------------------------------------- (dollars in millions) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- CASH FLOWS FROM (USED IN) Operating activities $ 10,656 $ 10,071 $ 8,859 Investing activities (9,629) (7,685) (7,339) Financing activities (167) (2,472) (1,447) ------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 860 $ (86) $ 73 =========================================== We use the net cash generated from our operations and from external financing to fund capital expenditures for network expansion and modernization, pay dividends, and invest in new businesses. While current liabilities exceeded current assets at December 31, 1999 and 1998, our sources of funds, primarily from operations and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that presently foreseeable capital requirements will continue to be financed primarily through internally generated funds. Additional debt or equity financing may be needed to fund additional development activities or to maintain our capital structure to ensure our financial flexibility. - -------------------------------------------------------------------------------- Cash Flows From Operating Activities - -------------------------------------------------------------------------------- Our primary source of funds continued to be cash generated from operations. Improved cash flows from operations during 1999, 1998, and 1997 resulted from growth in operating income, partially offset by changes in certain assets and liabilities. In 1999, the change in certain assets and liabilities largely reflects growth in customer accounts receivable and a reduction in employee benefit obligations chiefly due to favorable investment returns and changes in plan provisions and actuarial assumptions. The change in certain assets and liabilities in 1998 and 1997 reflects the effect of our retirement incentive program that increased employee benefit obligations as a result of special charges recorded through the completion of the program in 1998. An increase in accounts receivable due to subscriber growth and greater usage of our networks, as well as timing differences in the payment of accounts payable and accrued liabilities also contributed to the change in both years. - -------------------------------------------------------------------------------- Cash Flows Used In Investing Activities - -------------------------------------------------------------------------------- Capital expenditures continued to be our primary use of capital resources. We invested approximately $7.5 billion in 1999, $6.4 billion in 1998 and $5.5 billion in 1997 in our Domestic Telecom business 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 $1.2 billion in 1999, $1.0 billion in 1998 and $1.1 billion in 1997 in our Wireless, Directory and Other Businesses. We expect capital expenditures in 2000 to be in the range of $8.9 billion to $9.2 billion. F-13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- We continue to make substantial investments in our unconsolidated businesses. During 1999, we invested $901 million, which included a cash payment of approximately $630 million to increase our ownership interest in Omnitel from 19.71% to 23.14%. In 1999, we also invested $202 million in PrimeCo to fund the build-out and operations of its PCS network and $69 million principally in our lease financing businesses. In 1998, we invested $603 million, which included an additional investment of $162 million in Omnitel to increase our ownership interest from 17.45% to 19.71%, $301 million in PrimeCo, and $140 million in our lease financing businesses. In 1997, cash investing activities in unconsolidated businesses totaled $833 million and included $426 million in PrimeCo, $138 million in FLAG, and $269 million in leasing and other partnerships. In 1999, we invested $505 million to acquire new businesses, including $374 million to fully acquire the cellular properties of Frontier Cellular and $81 million for other wireless properties. We also invested $50 million in data service businesses in 1999. We invested cash for new businesses of $62 million in each of 1998 and 1997 in connection with our domestic wireless subsidiaries. Our short-term investments include principally cash equivalents held in trust accounts for payment of certain employee benefits. We invested $855 million in short-term investments in 1999, including $785 million to pre-fund associate health and welfare benefits. Cash payments for short-term investments totaled $1,028 million in 1998 and $844 million in 1997, principally to pre-fund vacation pay and associate health and welfare benefit trusts. Beginning in 1999, we no longer fund the vacation pay trust for all employees. Proceeds from the sales of all short-term investments were $795 million in 1999, $968 million in 1998, and $427 million in 1997. In 1999, we received cash proceeds of $612 million in connection with the disposition of our remaining investment in Viacom, representing 12 million shares of their preferred stock (with a book value of approximately $600 million). In 1998, we received cash proceeds of $637 million in connection with the disposition of investments. These proceeds included $564 million associated with Viacom's repurchase of one-half of our investment in Viacom and $73 million from the sales of our paging and other nonstrategic businesses. In 1997, we disposed of our real estate properties and our interests in Bellcore, Infostrada, SkyTV and other joint ventures and received cash proceeds totaling $547 million. During 1997, we received cash proceeds of $153 million from the TCNZ share repurchase plan, which was completed in December 1997. [BAR CHART APPEARS HERE] - -------------------------------------------------------------------------------- Debt Ratio - -------------------------------------------------------------------------------- 1997 60.5% 1998 61.2% 1999 60.1% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Cash Flows Used In Financing Activities - -------------------------------------------------------------------------------- As in prior years, dividend payments were a significant use of capital resources. We determine the appropriateness of the level of our dividend payments on a periodic basis by considering such factors as long-term growth opportunities, internal cash requirements, and the expectations of our shareowners. In 1999 and 1998, we declared quarterly cash dividends of $.385 per share or $1.54 per share in each year. We declared cash dividends of $.37 per share in the first and second quarters of 1997 and $.385 per share in the second half of 1997, or $1.51 per share for the year. [BAR CHART APPEARS HERE] - -------------------------------------------------------------------------------- Dividends - -------------------------------------------------------------------------------- 1997 $2.3 B 1998 $2.4 B 1999 $2.4 B - -------------------------------------------------------------------------------- We increased our total debt (including capital lease obligations) by approximately $3.3 billion from December 31, 1998, primarily to fund our investments in Omnitel, PrimeCo, and Frontier Cellular. Our debt balance at December 31, 1999 also included $664 million for the mark-to-market adjustment for the CWC exchangeable notes, $456 million of additional debt issued by Iusacell in 1999, and approximately $105 million of debt assumed from the acquisition of Frontier Cellular. These factors were partially offset by the use of cash proceeds received from the disposition of our remaining investment in Viacom. Our debt level increased by $1,026 million from 1997 to 1998, principally to fund the capital program and for continued investments in PrimeCo and Omnitel. The pre-funding of employee benefit trusts and purchases of shares to fund employee stock option exercises also contributed to the increase in debt levels in both 1999 and 1998. In February 1998, our wholly owned subsidiary, Bell Atlantic Financial Services, Inc. (FSI), issued $2,455 million in 5.75% exchangeable notes due on April 1, 2003 that are exchangeable into ordinary shares of TCNZ stock (TCNZ exchangeable notes). In August 1998, FSI also issued $3,180 million of 4.25% senior exchangeable notes due on September 15, 2005 that are exchangeable into ordinary shares of CWC stock (CWC exchangeable notes). Proceeds of both offerings were used for the repayment of a portion of our short-term debt and other general corporate purposes. Our operating telephone subsidiaries refinanced debentures totaling $257 million in 1999 and $790 million in 1998. As of December 31, 1999, we had in excess of $4.0 billion of unused bank lines of credit and $143 million in bank borrowings outstanding. As of December 31, 1999, our operating telephone subsidiaries and financing subsidiaries had shelf registrations for the issuance of up to $2.9 billion of unsecured debt securities. In March 2000, FSI issued approximately $893 million of medium-term notes, the proceeds of which were used to reduce short-term debt levels and for other general corporate purposes. The debt securities of those F-14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- subsidiaries continue to be accorded high ratings by primary rating agencies. After the announcement of the Bell Atlantic-GTE merger, the rating agencies placed the ratings of certain of our subsidiaries under review for potential downgrade. In January 2000, Standard & Poor's revised its regulatory separation policy as it applies to U.S. telephone companies. Under the revised policy, Standard & Poor's will no longer assign higher corporate credit ratings to telephone operating subsidiaries. Rating actions by Standard & Poor's on Bell Atlantic and its operating telephone subsidiaries reflect both the new policy and their continued CreditWatch listings, which resulted from the pending Bell Atlantic-GTE merger. We also have a $2.0 billion Euro Medium Term Note Program, under which we may issue notes that are not registered with the Securities and Exchange Commission. The notes may be issued from time to time by our subsidiary, Bell Atlantic Global Funding, Inc. (BAGF), and will have the benefit of a support agreement between BAGF and Bell Atlantic. There have been no notes issued under this program. In March 1999, we received cash proceeds of $380 million from a financing transaction involving cellular assets between BAM and Crown Castle International Corporation. A joint venture was formed for the primary purpose of financing BAM's investment in cellular towers. BAM, together with certain partnerships in which it is the managing partner (the managed entities), contributed to the joint venture approximately 1,460 cellular towers in exchange for approximately $380 million in cash and an equity interest of approximately 37.7% in the joint venture. BAM and the managed entities have leased back a portion of the towers, and the joint venture will lease the remaining space to third parties. The joint venture also plans to build new towers. In 1999, we received cash proceeds totaling $119 million from the public offerings of Iusacell shares. See Note 4 to the consolidated financial statements for additional information on Iusacell and the share offerings. In December 1998, we accepted an offer from Viacom to repurchase one-half of our investment in Viacom, or 12 million shares of their preferred stock (with a book value of approximately $600 million), for approximately $564 million in cash. The cash proceeds, together with additional cash, were used to purchase an outside party's interest in one of our fully consolidated subsidiaries. This transaction reduced Minority Interest by $600 million and included certain stock appreciation rights and costs totaling $32 million. - -------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents - -------------------------------------------------------------------------------- Our cash and cash equivalents at December 31, 1999 totaled $1,097 million, an increase of $860 million over 1998. This increase was primarily attributable to anticipated funding requirements in early 2000 in connection with an agreement with Metromedia Fiber Network, Inc. (MFN), a domestic and international provider of dedicated fiber optic networks in major metropolitan markets. On March 6, 2000, we invested approximately $1.7 billion in MFN. This investment included $715 million to acquire approximately 9.5% of the equity of MFN through the purchase of newly issued shares at $28 per share. We also purchased approximately $975 million in subordinated debt securities convertible at our option, upon receipt of necessary government approvals, into common stock at a conversion price of $34 per share or an additional 9.6% of the equity of MFN. This investment completed a portion of our previously announced agreement with MFN, which included the acquisition of approximately $550 million of long-term capacity in MFN's fiber optic networks, beginning in 1999 through 2002. Of the $550 million, 10% was paid in November 1999 and 30% will be paid each October from 2000 through 2002. - -------------------------------------------------------------------------------- MARKET RISK - -------------------------------------------------------------------------------- We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in equity investment prices and changes in corporate tax rates. We employ risk management strategies using a variety of derivatives including interest rate swap agreements, interest rate caps and floors, foreign currency forwards and options and basis swap agreements. We do not hold derivatives for trading purposes. It is our policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in limiting our exposures to the various market risks. Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters, hedging the value of certain international investments, and protecting against earnings and cash flow volatility resulting from changes in foreign exchange rates. We do not hedge our market risk exposure in a manner that would completely eliminate the effect of changes in interest rates, equity prices and foreign exchange rates on our earnings. While we do not expect that our liquidity and cash flows will be materially affected by these risk management strategies, our net income may be materially affected by certain market risk associated with the TCNZ and CWC exchangeable notes as discussed below. - -------------------------------------------------------------------------------- Exchangeable Notes - -------------------------------------------------------------------------------- In 1998, we issued exchangeable notes as described in Note 10 to the consolidated financial statements and discussed earlier under "Mark-to-Market Adjustment for Exchangeable Notes." These financial instruments expose us to market risk, including: . Equity price risk, because the notes are exchangeable into shares that are traded on the open market and routinely fluctuate in value. . Interest rate risk, because the notes carry fixed interest rates. . Foreign exchange rate risk, because the notes are exchangeable into shares that are denominated in a foreign currency. Periodically, equity price and/or foreign exchange rate movements may require us to mark to market the exchangeable note liability to reflect the increase in the current share price over the established exchange price, resulting in a charge to income. F-15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- The following sensitivity analysis measures the effect on earnings and financial condition due to changes in the underlying share prices of the TCNZ and CWC stock. . At December 31, 1999, the exchange price for the TCNZ shares (expressed as American Depositary Receipts) was $44.93 and the exchange price for the CWC shares (expressed as American Depositary Shares) was $58.03. . For each $1.00 increase in value of the TCNZ shares or the CWC shares above the exchange price, our earnings would be reduced by approximately $55 million or $56 million, respectively. A subsequent decrease in value of the TCNZ shares or the CWC shares would correspondingly increase earnings, but not to exceed the amount of any previous reduction in earnings. Our earnings are not affected so long as the TCNZ and CWC share prices are at or below their exchange prices. . Our cash flows would not be affected by mark-to-market transactions related 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 book 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. A proposed restructuring of our investment in CWC, as discussed in Note 3 to the consolidated financial statements, would change the securities to be delivered upon exchange for the CWC exchangeable notes. Under this restructuring, we would receive shares in the two acquiring companies in exchange for our CWC shares. - -------------------------------------------------------------------------------- Interest Rate Risk - -------------------------------------------------------------------------------- The table that follows summarizes the fair values of our long-term debt, interest rate derivatives and exchangeable notes as of December 31, 1999 and 1998. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming 100-basis-point upward and downward parallel shifts in the yield curve. Our sensitivity analysis did not include the fair values of our commercial paper and bank loans because they are not significantly affected by changes in market interest rates. (dollars in millions) Fair Value Fair Value assuming assuming +100 basis -100 basis At December 31, 1999 Fair Value point shift point shift - -------------------------------------------------------------------------------- Long-term debt and interest rate derivatives $12,625 $11,923 $13,385 Exchangeable notes 6,417 6,335 6,498 ----------------------------------------------- Total $19,042 $18,258 $19,883 =============================================== At December 31, 1998 - -------------------------------------------------------------------------------- Long-term debt and interest rate derivatives $14,243 $13,414 $15,098 Exchangeable notes 5,818 5,618 6,018 ----------------------------------------------- Total $20,061 $19,032 $21,116 =============================================== - -------------------------------------------------------------------------------- Equity Price Risk - -------------------------------------------------------------------------------- The fair values of certain of our investments, primarily in common stock, expose us to equity price risk. These investments are subject to changes in the market prices of the securities. As noted earlier, the fair values of our exchangeable notes are also affected by changes in equity price movements. The table that follows summarizes the fair values of our investments and exchangeable notes and provides a sensitivity analysis of the estimated fair values of these financial instruments assuming a 10% increase or decrease in equity prices. (dollars in millions) Fair Value Fair Value assuming 10% assuming 10% decrease in increase in At December 31, 1999 Fair Value equity price equity price - -------------------------------------------------------------------------------- Cost investments, at fair value $ 2,296 $ 2,066 $ 2,526 Exchangeable notes (6,417) (6,050) (6,822) -------------------------------------------- Total $(4,121) $(3,984) $(4,296) ============================================ At December 31, 1998 - -------------------------------------------------------------------------------- Cost investments, at fair value $ 29 $ 26 $ 32 Exchangeable notes (5,818) (5,643) (6,023) -------------------------------------------- Total $(5,789) $(5,617) $(5,991) ============================================ - -------------------------------------------------------------------------------- Foreign Currency Translation - -------------------------------------------------------------------------------- The functional currency for nearly all of our foreign operations is the local currency. The translation of income statement and balance sheet amounts of these entities into U.S. dollars are recorded as cumulative translation adjustments, which are included in Accumulated Other Comprehensive Income (Loss) in our consolidated balance sheets. At December 31, 1999, our primary translation exposure was to the British pound and Italian lira. We have not hedged our accounting translation exposure to foreign currency fluctuations relative to these investments, except for our United Kingdom investment which is partially hedged. Equity income from our international investments is affected by exchange rate fluctuations when an equity investee has assets and liabilities denominated in a currency other than the investee's functional currency. Our investment in the Philippines is exposed to fluctuations in the U.S. dollar/Filipino peso exchange rate. Iusacell, our consolidated investment in Mexico, also issues U.S. dollar denominated debt. For the period October 1, 1996 through December 31, 1998, we considered Iusacell to operate in a highly inflationary economy and utilized the U.S. dollar as its functional currency. Beginning January 1, 1999, we discontinued highly inflationary accounting for our Iusacell subsidiary and resumed using the Mexican peso as its functional currency. As a result, in 1999 our earnings were affected by any foreign currency gains or losses associated with the U.S dollar denominated debt issued by Iusacell and our equity was affected by the translation from the Mexican peso. F-16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Foreign Exchange Risk - -------------------------------------------------------------------------------- The fair values of our foreign currency derivatives and investments accounted for under the cost method are subject to fluctuations in foreign exchange rates. Our most significant foreign currency derivatives contain both a foreign currency forward and a U.S. dollar interest rate component. These agreements require an exchange of British pounds and U.S. dollars at the maturity of the contract. The table that follows summarizes the fair values of our foreign currency derivatives, cost investments, and the exchangeable notes as of December 31, 1999 and 1998. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming a 10% decrease and increase in the value of the U.S. dollar against the various currencies to which we are exposed. Our sensitivity analysis does not include potential changes in the value of our international investments accounted for under the equity method. As of December 31, 1999, the carrying value of our equity method international investments totaled approximately $2.2 billion. (dollars in millions) Fair Value Fair Value assuming assuming 10% decrease 10% increase At December 31, 1999 Fair Value in US$ in US$ - -------------------------------------------------------------------------------- Cost investments and foreign currency derivatives $ 2,273 $ 2,502 $ 2,091 Exchangeable notes (6,417) (6,822) (6,050) --------------------------------------------- Total $(4,144) $(4,320) $(3,959) ============================================= At December 31, 1998 - -------------------------------------------------------------------------------- Cost investments and foreign currency derivatives $ 154 $ 140 $ 172 Exchangeable notes (5,818) (6,023) (5,643) --------------------------------------------- Total $(5,664) $(5,883) $(5,471) ============================================= - -------------------------------------------------------------------------------- OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS - -------------------------------------------------------------------------------- Proposed Bell Atlantic-GTE Merger - -------------------------------------------------------------------------------- Bell Atlantic and GTE have announced a proposed merger of equals under a definitive merger agreement dated as of July 27, 1998. Under the terms of the agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common stock for each share of GTE common stock that they own. Bell Atlantic shareholders will continue to own their existing shares after the merger. We expect the merger to qualify as a pooling of interests, which means that for accounting and financial reporting purposes the companies will be treated as if they had always been combined. At annual meetings held in May 1999, the shareholders of each company approved the merger. The completion of the merger is subject to a number of conditions, including certain regulatory approvals (all of which have been obtained except that of the FCC) and receipt of opinions that the merger will be tax-free. We are targeting completion of the merger in the second quarter of 2000. Future operating revenues, expenses and net income of the combined company may not follow the same historical trends, or reflect the same dependence on economic and competitive factors, as presented in our discussion of our own historical results of operations and financial condition. You should refer to Note 22 to the consolidated financial statements for pro forma income statements for the years ended December 31, 1999, 1998 and 1997 and a pro forma balance sheet for the year ended December 31, 1999. - -------------------------------------------------------------------------------- Recent Developments - -------------------------------------------------------------------------------- PROPOSED DOMESTIC WIRELESS TRANSACTIONS Vodafone AirTouch On September 21, 1999, we signed a definitive agreement with Vodafone AirTouch plc (Vodafone AirTouch) to create a national wireless business (Wireless Co.) composed of both companies' U.S. wireless assets. The completion of this transaction is subject to a number of conditions, including certain regulatory approvals. In February 2000, we signed an agreement with ALLTEL Corporation to exchange certain wireless interests. This agreement eliminates all of the overlapping cellular operations that would be created by the combination of Bell Atlantic and Vodafone AirTouch wireless properties. We expect to complete the transaction in April 2000. You should also read Note 21 to the consolidated financial statements for additional information about this proposed domestic wireless business. PrimeCo Personal Communications, L.P. On August 3, 1999, Bell Atlantic and Vodafone AirTouch announced an agreement to restructure our ownership interests in PrimeCo, a partnership that was formed by us and Vodafone AirTouch in 1994 and provides personal communications services in major cities across the United States. Under the terms of that agreement, we would assume full ownership of PrimeCo operations in five "major trading areas" (MTAs)-Richmond, VA, New Orleans, LA and the Florida MTAs of Jacksonville, Tampa and Miami. Vodafone AirTouch would assume full ownership of the remaining five PrimeCo MTAs-Chicago, IL, Milwaukee, WI and the Texas MTAs of Dallas, San Antonio and Houston. Under the terms of the Wireless Co. agreement described earlier, Bell Atlantic and Vodafone AirTouch agreed to suspend the August 3, 1999 agreement to restructure PrimeCo ownership interests, with certain limited exceptions. As a result, no action will be taken to allocate most PrimeCo markets unless either we or Vodafone AirTouch give notice to initiate such an allocation. Neither party has given such notice. In January 2000, we and Vodafone AirTouch purchased the remaining 20% partnership interest in the Texas MTAs of Dallas, San Antonio and Houston held by TXU Communications Holding Company (TXU). We invested $196 million to acquire 55% of the TXU partnership interest. Vodafone AirTouch will own the remaining 45% of the TXU partnership interest. F-17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- PROPOSED RESTRUCTURE OF CABLE & WIRELESS COMMUNICATIONS PLC On July 27, 1999, we announced our agreement to a proposal by Cable & Wireless plc (Cable & Wireless), NTL Incorporated (NTL) and CWC for the proposed restructuring of CWC. We currently have an 18.6% ownership interest in CWC. Under the terms of the agreement, CWC's consumer cable telephone, television and Internet operations would be separated from its corporate, business, Internet protocol and wholesale operations. The consumer operations would be acquired by NTL and the other operations would be acquired by Cable & Wireless. In exchange for our interest in CWC, we would receive shares in the two acquiring companies, representing approximately 9.1% of the NTL shares currently outstanding and approximately 4.6% of the Cable & Wireless shares currently outstanding. Upon completion of the restructuring, our previously issued $3,180 million in CWC exchangeable notes would be exchangeable on and after July 1, 2002 for shares in NTL and Cable & Wireless in proportion to the shares received in the restructuring. Upon exchange by investors, we retain the option to settle in cash or by delivery of the Cable & Wireless and NTL shares. We expect the restructuring to result in a material non-cash gain. The completion of the restructuring is subject to a number of conditions and, assuming satisfaction of those conditions, is expected to close in the first half of 2000. PENSION PLAN AMENDMENTS Effective January 19, 2000, we amended our management cash balance plan to provide employees having at least 15 years of service as of September 1, 1999 with a pension benefit that is the "greater of" their cash balance account or a benefit based on our former management pension plan. Employees will be given the greater of the two benefits when they retire or terminate from the company. In February 2000, we announced a special lump sum pension payment to management and associate employees who retired before January 1, 1995 and who are receiving pension annuities. The payments range from $2,500 to $20,000 depending on years in retirement and current pension amount. Retirees will have the option of electing the payment as a lump sum or an annuity. Together these two plan amendments will increase annual pension costs by approximately $65 million. We expect that favorable investment returns and changes in actuarial assumptions will compensate for these cost increases. For additional information about our employee benefits, see Note 16 to the consolidated financial statements. THE TELECOMMUNICATIONS ACT OF 1996 AND COMPETITION The telecommunications industry is undergoing substantial changes as a result of the 1996 Act, other public policy changes and technological advances. These changes are bringing increased competitive pressures in our current businesses, but will also open new markets to us. The 1996 Act became law on February 8, 1996 and replaced the Modification of Final Judgment (MFJ). In general, the 1996 Act includes provisions that open local exchange markets to competition and permit Bell Operating Companies or their affiliates, including Bell Atlantic, to provide interLATA (long distance) services and to engage in manufacturing previously prohibited by the MFJ. Under the 1996 Act, our ability to provide in-region long distance service is largely dependent on satisfying certain conditions. The requirements include a 14-point "competitive checklist" of steps we must take which will help competitors offer local services through resale, through the purchase of unbundled network elements or through their own networks. We must also demonstrate to the FCC that our entry into the in-region long distance market would be in the public interest. We are unable to predict definitively the impact that the 1996 Act will ultimately have on our business, results of operations or financial condition. The financial impact will depend on several factors, including the timing, extent and success of competition in our markets, the timing and outcome of various regulatory proceedings and any appeals, and the timing, extent and success of our pursuit of new opportunities resulting from the 1996 Act. We anticipate that these industry changes, together with the rapid growth, enormous size and global scope of these markets, will attract new entrants and encourage existing competitors to broaden their offerings. Current and potential competitors in telecommunication services include long distance companies, other local telephone companies, cable companies, wireless service providers, foreign telecommunications providers, electric utilities, Internet service providers and other companies that offer network services. Many of these companies have a strong market presence, brand recognition and existing customer relationships, all of which contribute to intensifying competition and may affect our future revenue growth. In addition, a number of major industry participants have announced mergers, acquisitions and joint ventures which could substantially affect the development and nature of some or all of our markets. In-Region Long Distance On December 22, 1999, the FCC released an order approving our application for permission to enter the in-region long distance market in New York. The FCC concluded that we have satisfied the 14-point "competitive checklist" required under the 1996 Act for entry into the in-region long distance market, and that our entry into the long distance business in New York would benefit the public interest. Following the FCC's decision, AT&T and Covad sought a stay of the Commission's order. The stay request was denied, first by the FCC and later by the U.S. Court of Appeals. AT&T's and Covad's appeal of the order remains pending and is proceeding on an accelerated schedule, with argument scheduled for April 2000. KPMG LLP (KPMG), which conducted an extensive third-party test of our operations support systems (OSS) in New York under the supervision of the New York Public Service Commission (PSC), has been retained by the Massachusetts Department of Telecommunications and Energy to conduct a third-party test of our OSS in Massachusetts. The Massachusetts test is designed to build on the KPMG test of the similar systems in New York. F-18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- KPMG has also been retained by the Pennsylvania Public Utility Commission to conduct a third-party test of our OSS in Pennsylvania and by the New Jersey Board of Public Utilities to conduct a test of the New Jersey OSS that builds on the concurrent testing of the similar systems in Pennsylvania. The Virginia State Corporation Commission has also retained KPMG for the same purpose. The timing of our long distance entry in each of our remaining 13 jurisdictions depends on the receipt of FCC approval. FCC REGULATION AND INTERSTATE RATES In 1999, the FCC continued to implement reforms to the interstate access charge system and to implement "universal service" and other requirements of the 1996 Act. Access Charges Interstate access charges are the rates long distance carriers pay for use and availability of our operating telephone companies' facilities for the origination and termination of interstate service. The FCC required a phased restructuring of access charges, which began in January 1998, so that the telephone companies' non-usage-sensitive costs will be recovered from long distance carriers and end-users through flat rate charges, and usage-sensitive costs will be recovered from long distance carriers through usage-based rates. In addition, the FCC has required that different levels of usage-based charges for originating and for terminating interstate traffic be established. The final phase of this restructuring was completed on January 1, 2000. Price Caps Under the FCC price cap rules that apply to interstate access rates, each year our price cap index is adjusted downward by a fixed percentage intended to reflect increases in productivity (productivity factor) and adjusted upward by an allowance for inflation (GDP-PI). Our annual price cap filing effective July 1, 1999 reflects the effects of the current productivity factor of 6.5%. In May 1999, the U.S. Court of Appeals reversed the FCC order that adopted the 6.5% productivity factor. The Court concluded that the FCC had not justified its choice of a productivity factor and directed the FCC to reconsider and explain the methods used in selecting the productivity factor. The Court granted the FCC a stay of its order, however, until April 1, 2000. As a result, the FCC is now conducting a proceeding to determine an appropriate productivity factor in response to the court's order. At the same time, the FCC is considering a proposal to further restructure access rates by an industry coalition that includes both local exchange carriers (including Bell Atlantic) and long distance carriers. Among other things, that proposal would set into place a mechanism to transition to a set target of $.0055 per minute for switched access services. Once that target rate is reached, local exchange carriers would no longer be required to make further annual price cap reductions to their switched access prices. To allow time to consider this industry proposal, parties have requested that the Court further extend the stay of its price cap decision order until June 30, 2000. The FCC has adopted rules for special access services that provide for added pricing flexibility and ultimately the removal of services from price regulation when certain competitive thresholds are met. In order to take advantage of this relief, however, carriers must forego the ability to take advantage of provisions in the current rules that provide relief in the event earnings fall below certain thresholds, and we have not filed for this relief. The order also allows certain services, including those included in the interexchange basket of services, to be removed from price regulation immediately. In response, effective October 1999, we removed approximately $90 million in annual revenues of our services in the interexchange basket from price regulation and from the operation of the productivity offset which otherwise would require annual price reductions. Universal Service In July 1999, the U.S. Court of Appeals reversed certain aspects of the FCC's order implementing the "universal service" provision of the 1996 Act. The universal service fund includes a multi-billion dollar interstate fund to link schools and libraries to the Internet and to subsidize high cost areas, low income consumers and rural healthcare providers. Previously, under the FCC's rules, all providers of interstate telecommunications services had to contribute to the schools and libraries fund based on their total interstate and intrastate retail revenues. The Court reversed the decision to include intrastate revenues as part of the basis for assessing contributions to that fund. As a result of this decision, our contributions to the universal service fund were reduced by approximately $107 million annually beginning on November 1, 1999, and our interstate access rates will be reduced accordingly because we will no longer have to recover these contributions in our rates. AT&T and MCI WorldCom, Inc. have since asked the U.S. Supreme Court to review this latter portion of the appeals court decision. Other parties have asked the U.S. Supreme Court to review additional aspects of the court of appeals decision. 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 will provide additional support for local telephone services in several states served by Bell Atlantic. State regulatory commissions must take these funds into account in the rate-making process. Unbundling of Network Elements In November 1999, the FCC announced its decision setting forth new unbundling requirements. The FCC had previously identified seven elements that had to be provided to competitors on an unbundled basis. With respect to those seven elements, the FCC concluded that incumbent local exchange carriers, such as our operating telephone subsidiaries, do not have to provide unbundled switching (or combinations of elements that include switching, such as the so-called unbundled element "platform") under certain circumstances to business customers with four or more lines in certain offices in the top 50 Metropolitan Statistical Areas (MSAs). It also held that incumbents do not have to provide unbundled access to their directory assistance or operator services. The remaining elements on the FCC's original list still must be provided. F-19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- With respect to new elements, the FCC concluded that new equipment to provide advanced services such as Asymmetric Digital Subscriber Line (ADSL) does not have to be unbundled as a general matter. On the other hand, the FCC concluded that incumbents must provide dark fiber as an unbundled element, and that sub-loop unbundling should be provided. Finally, the FCC ruled that combinations of loops and transport must be made available under certain circumstances, but left to a further rulemaking that it initiated certain issues relating to the use of these combinations to substitute for special access services. While this rulemaking proceeds, the FCC adopted interim rules limiting the instances in which such combinations of elements must be made available. The FCC set a target date of June 30, 2000 to decide the further rulemaking. In addition to the unbundling requirements released in November 1999, the FCC released an order on December 9, 1999 in a separate proceeding requiring incumbent local exchange companies also to unbundle and provide to competitors the higher frequency portion of their local loop. This provides competitors with the ability to provision data services on top of incumbent carriers' voice service. STATE REGULATION Pennsylvania On September 30, 1999, the Pennsylvania Public Utility Commission (PUC) issued a final decision in its "Global" proceeding on telecommunications competition matters. The decision proposes to require our operating telephone subsidiary in Pennsylvania, Bell Atlantic-Pennsylvania, to split into separate retail and wholesale corporations. It proposes reductions in access charges applicable to services provided to interexchange carriers and in both unbundled network element rates and wholesale rates applicable to services and facilities provided to competitive local exchange carriers. It requires Bell Atlantic-Pennsylvania to provide combinations of unbundled network elements beyond those required by the FCC. It reclassifies certain business services as "competitive," but restricts the pricing freedom that that classification is supposed to give Bell Atlantic-Pennsylvania. It sets a schedule of prerequisites for state endorsement of a Bell Atlantic-Pennsylvania application to the FCC for permission to offer in-region long distance service under Section 271 of the 1996 Act that are likely to delay that endorsement. Bell Atlantic-Pennsylvania has challenged the lawfulness of this order in the Pennsylvania Supreme Court, the Commonwealth Court of Pennsylvania and the Federal District Court. On January 18, 2000, Bell Atlantic-Pennsylvania and fourteen other parties submitted to the PUC a Joint Petition for Settlement to resolve the appeals from the "Global" Order. If approved by the PUC, the settlement will eliminate the wholesale/retail separate subsidiary requirement and replace it with a requirement to establish an advanced services affiliate. The settlement would also expedite the process to obtain state endorsement of any Bell Atlantic- Pennsylvania application to the FCC for permission to offer long distance service. On February 2, 2000, the Commonwealth Court denied the PUC's request to consider the settlement and set an expedited briefing schedule for the appeals. On February 22, 2000, the PUC and Bell Atlantic-Pennsylvania appealed this determination to the Pennsylvania Supreme Court, and the matter is pending. RECIPROCAL COMPENSATION State regulatory decisions have required us to pay "reciprocal compensation" under the 1996 Act for the increasing volume of one-way traffic from our customers to customers of other carriers, primarily calls to Internet service providers. In February 1999, the FCC confirmed that such traffic is largely interstate but concluded that it would not interfere with state regulatory decisions requiring payment of reciprocal compensation for such traffic and that carriers are bound by their existing interconnection agreements. The U.S. Court of Appeals has remanded the FCC's decision for a better explanation of why this traffic is interstate. Based upon the FCC's February 1999 decision, the Massachusetts Department of Telecommunications and Energy modified its earlier decision, resulting in a reduction of our reciprocal compensation obligation. Both the New Jersey Board of Public Utilities and the West Virginia Public Service Commission also have issued favorable decisions on reciprocal compensation for Internet-bound traffic. The New York PSC issued a decision that high volume, convergent traffic (which includes Internet-bound traffic) has different cost characteristics and should be compensated at the lower end-office rate. The New York PSC determined that traffic in excess of a 3:1 ratio is presumed to be high volume, convergent traffic, although this presumption may be rebutted. The Virginia State Corporation Commission has denied jurisdiction over compensation for Internet access and has referred us and other parties to the FCC. Commissions in Delaware, Maryland, Pennsylvania, and Rhode Island have issued decisions requiring us to continue to pay reciprocal compensation on Internet-bound traffic. We currently estimate that our reciprocal compensation payment obligations will be approximately $500 million to $550 million in 2000. F-20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OTHER MATTERS - -------------------------------------------------------------------------------- New Accounting Standard-Derivatives and Hedging Activities - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivatives be measured at fair value and recognized as either assets or liabilities on our balance sheet. Changes in the fair values of derivative instruments will be recognized in either earnings or comprehensive income, depending on the designated use and effectiveness of the instruments. The FASB amended this pronouncement in June 1999 to defer the effective date of SFAS No. 133 for one year. We must adopt SFAS No. 133 no later than January 1, 2001. On March 3, 2000, the FASB issued a Proposed SFAS, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which would amend SFAS No. 133. The proposed amendments address certain implementation issues and relate to such matters as the normal purchases and normal sales exception, the definition of interest rate risk, hedging recognized foreign-currency- denominated debt instruments, and intercompany derivatives. We are currently evaluating the provisions of SFAS No. 133 and the proposed amendments. The impact of adoption will be determined by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions at the date of adoption. - -------------------------------------------------------------------------------- New Staff Accounting Bulletin-Revenue Recognition - -------------------------------------------------------------------------------- In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which currently must be adopted by June 30, 2000. SAB No. 101 provides additional guidance on revenue recognition, as well as criteria for when revenue is generally realized and earned, and also requires the deferral of incremental direct selling costs. We are currently assessing the impact of SAB No. 101 on our results of operations and financial position. - -------------------------------------------------------------------------------- Year "2000" Update - -------------------------------------------------------------------------------- We implemented a comprehensive program to evaluate and address the impact of the Year 2000 date transition on our operations. We did not experience any material interruption or failure of our normal business functions or operations as a result of an actual or perceived Year 2000 problem. From the inception of our Year 2000 project through December 31, 1999, and based on the cost tracking methods we have historically applied to this project, we incurred total pre-tax expenses of approximately $230 million, and we have made capital expenditures of approximately $181 million. For 1999, total pre-tax expenses for our Year 2000 project were approximately $108 million and total capital expenditures were approximately $101 million. - -------------------------------------------------------------------------------- CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS - -------------------------------------------------------------------------------- In this Management's Discussion and Analysis, and elsewhere in this Annual Report, we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "hopes" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The following important factors, along with those discussed elsewhere in this Annual Report, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: . materially adverse changes in economic conditions in the markets served by us or by companies in which we have substantial investments; . material changes in available technology; . the final outcome of federal, state, and local regulatory initiatives and proceedings, including arbitration proceedings, and judicial review of those initiatives and proceedings, pertaining to, among other matters, the terms of interconnection, access charges, universal service, and unbundled network element and resale rates; . the extent, timing, success, and overall effects of competition from others in the local telephone and toll service markets; . the timing and profitability of our entry into the in-region long distance market; . the timing of, and regulatory or other conditions associated with, the completion of the merger with GTE and our ability to combine operations and obtain revenue enhancements and cost savings following the merger; and . the timing of, and regulatory or other conditions associated with, the completion of the wireless transaction with Vodafone AirTouch, and the ability of the new wireless enterprise to combine operations and obtain revenue enhancements and cost savings. F-21 REPORT OF MANAGEMENT - -------------------------------------------------------------------------------- We, the management of Bell Atlantic Corporation, are responsible for the consolidated financial statements and the information and representations contained in this report. The financial statements have been prepared in conformity with generally accepted accounting principles and include amounts based on management's best estimates and judgments. Financial information elsewhere in this report is consistent with that in the financial statements. Management has established and maintained a system of internal control which is designed to provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period. The system of internal control includes widely communicated statements of policies and business practices, which are designed to require all employees to maintain high ethical standards in the conduct of our business. The internal controls are augmented by organizational arrangements that provide for appropriate delegation of authority and division of responsibility and by a program of internal audits. The financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants. Their audit was conducted in accordance with generally accepted auditing standards and included an evaluation of our internal control structure and selective tests of transactions. The Report of Independent Accountants appears on this page. The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets periodically with the independent accountants, management and internal auditors to review accounting, auditing, internal controls, litigation and financial reporting matters. Both the internal auditors and the independent accountants have free access to the Audit Committee without management present. /s/ Ivan G. Seidenberg Ivan G. Seidenberg Chairman of the Board and Chief Executive Officer /s/ Frederic V. Salerno Frederic V. Salerno Senior Executive Vice President and Chief Financial Officer/ Strategy and Business Development /s/ Doreen A. Toben Doreen A. Toben Vice President - Controller REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Board of Directors and Shareowners of Bell Atlantic Corporation: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Bell Atlantic Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for computer software costs in accordance with AICPA Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," effective January 1, 1999. /s/ PricewaterhouseCoopers LLP New York, New York February 14, 2000, except for Note 24, as to which the date is March 22, 2000. F-22 SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
(dollars in millions, except per share amounts) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ RESULTS OF OPERATIONS Operating revenues $ 33,174 $ 31,566 $ 30,194 $ 29,155 $ 27,927 Operating income 8,495 6,627 5,341 6,079 5,418 Income before extraordinary items and cumulative effect of change in accounting principle 4,208 2,991 2,455 3,129 2,826 Per common share-basic 2.72 1.90 1.58 2.02 1.85 Per common share-diluted 2.66 1.87 1.56 2.00 1.84 Net income (loss) 4,202 2,965 2,455 3,402 (97) Per common share-basic 2.71 1.89 1.58 2.20 (.06) Per common share-diluted 2.65 1.86 1.56 2.18 (.06) Cash dividends declared per common share 1.54 1.54 1.51 1.44 1.40 FINANCIAL POSITION Total assets $ 62,614 $ 55,144 $ 53,964 $ 53,361 $ 50,623 Long-term debt 18,463 17,646 13,265 15,286 15,744 Employee benefit obligations 9,326 10,384 10,004 9,588 9,388 Minority interest, including a portion subject to redemption requirements 458 330 911 2,014 1,221 Preferred stock of subsidiary 201 201 201 145 145 Shareowners' investment 15,880 13,025 12,789 12,976 11,214
Significant events affecting our historical earnings trends include the following: . 1999 data include a loss on mark-to-market adjustment for exchangeable notes (see Note 10) and merger-related costs. . 1998 and 1997 data include retirement incentive costs (see Note 16), merger-related costs and other special items (see Note 2). . 1996 data include retirement incentive costs (see Note 16), other special items, and the adoption of a change in accounting for directory publishing. . 1995 data include retirement incentive costs (see Note 16), and an extraordinary charge for the discontinuation of regulatory accounting principles. Per share amounts have been adjusted to reflect a two-for-one stock split on June 1, 1998. F-23 CONSOLIDATED STATEMENTS OF INCOME Bell Atlantic Corporation and Subsidiaries - --------------------------------------------------------------------------------
(dollars in millions, except per share amounts) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES $ 33,174 $ 31,566 $ 30,194 OPERATING EXPENSES Employee costs, including benefits and taxes 8,241 9,266 9,047 Depreciation and amortization 6,221 5,870 5,865 Other operating expenses 10,217 9,803 9,941 ------------------------------------------------- 24,679 24,939 24,853 ------------------------------------------------- OPERATING INCOME 8,495 6,627 5,341 Income (loss) from unconsolidated businesses 143 (415) (124) Other income and (expense), net 54 122 (3) Interest expense 1,263 1,335 1,230 Mark-to-market adjustment for exchangeable notes (664) - - ------------------------------------------------- Income before provision for income taxes and extraordinary item 6,765 4,999 3,984 Provision for income taxes 2,557 2,008 1,529 ------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 4,208 2,991 2,455 Extraordinary item Early extinguishment of debt, net of tax (6) (26) - ------------------------------------------------- NET INCOME 4,202 2,965 2,455 Redemption of minority interest - (30) - Redemption of investee preferred stock - (2) - ------------------------------------------------- NET INCOME AVAILABLE TO COMMON SHAREOWNERS $ 4,202 $ 2,933 $ 2,455 ================================================= BASIC EARNINGS PER COMMON SHARE: INCOME BEFORE EXTRAORDINARY ITEM $ 2.72 $ 1.90 $ 1.58 Extraordinary item (.01) (.01) - ------------------------------------------------- NET INCOME $ 2.71 $ 1.89 $ 1.58 ================================================= Weighted-average shares outstanding (in millions) 1,553 1,553 1,552 ================================================= DILUTED EARNINGS PER COMMON SHARE: INCOME BEFORE EXTRAORDINARY ITEM $ 2.66 $ 1.87 $ 1.56 Extraordinary item (.01) (.01) - ------------------------------------------------- NET INCOME $ 2.65 $ 1.86 $ 1.56 ================================================= Weighted-average shares-diluted (in millions) 1,583 1,578 1,571 =================================================
See Notes to Consolidated Financial Statements F-24 CONSOLIDATED BALANCE SHEETS Bell Atlantic Corporation and Subsidiaries
(dollars in millions, except per share amounts) At December 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 1,097 $ 237 Short-term investments 839 786 Accounts receivable, net of allowances of $619 and $593 7,025 6,560 Inventories 664 566 Prepaid expenses 673 522 Other 298 411 -------------------------------------------- 10,596 9,082 -------------------------------------------- Plant, property and equipment 89,238 83,064 Less accumulated depreciation 49,939 46,248 -------------------------------------------- 39,299 36,816 -------------------------------------------- Investments in unconsolidated businesses 6,275 4,276 Other assets 6,444 4,970 -------------------------------------------- Total assets $ 62,614 $ 55,144 ============================================ LIABILITIES AND SHAREOWNERS' INVESTMENT Current liabilities Debt maturing within one year $ 5,455 $ 2,988 Accounts payable and accrued liabilities 6,465 6,105 Other 1,547 1,438 -------------------------------------------- 13,467 10,531 -------------------------------------------- Long-term debt 18,463 17,646 -------------------------------------------- Employee benefit obligations 9,326 10,384 -------------------------------------------- Deferred credits and other liabilities Deferred income taxes 3,892 2,254 Unamortized investment tax credits 197 222 Other 730 551 -------------------------------------------- 4,819 3,027 -------------------------------------------- Minority interest, including a portion subject to redemption requirements 458 330 -------------------------------------------- Preferred stock of subsidiary 201 201 -------------------------------------------- Commitments and contingencies (Notes 2, 3, 8, and 9) Shareowners' investment Series preferred stock ($.10 par value; none issued) - - Common stock ($.10 par value; 1,576,246,325 shares and 1,576,246,325 shares issued) 158 158 Contributed capital 13,550 13,368 Reinvested earnings 2,806 1,371 Accumulated other comprehensive income (loss) 450 (714) -------------------------------------------- 16,964 14,183 Less common stock in treasury, at cost 640 593 Less deferred compensation-employee stock ownership plans 444 565 -------------------------------------------- 15,880 13,025 -------------------------------------------- Total liabilities and shareowners' investment $ 62,614 $ 55,144 ============================================
See Notes to Consolidated Financial Statements F-25 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' INVESTMENT Bell Atlantic Corporation and Subsidiaries - --------------------------------------------------------------------------------
(dollars in millions, except per share amounts, and shares in thousands) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount ------------------------------------------------------------------ COMMON STOCK Balance at beginning of year 1,576,246 $ 158 1,576,053 $ 157 1,574,001 $ 157 Shares issued Employee plans - - 193 1 2,044 - Shareowner plans - - - - 8 - ------------------------------------------------------------------ Balance at end of year 1,576,246 158 1,576,246 158 1,576,053 157 ------------------------------------------------------------------ CONTRIBUTED CAPITAL Balance at beginning of year 13,368 13,177 13,216 Shares issued Employee plans 138 178 (22) Issuance of stock by subsidiaries 44 13 - Other - - (17) ------------------------------------------------------------------ Balance at end of year 13,550 13,368 13,177 ------------------------------------------------------------------ REINVESTED EARNINGS Balance at beginning of year 1,371 1,262 1,282 Net income 4,202 2,965 2,455 Dividends declared ($1.54, $1.54, and $1.51 per share) (2,391) (2,392) (2,363) Shares issued Employee plans (359) (443) (121) Tax benefit of dividends paid to ESOPs 9 11 13 Redemption of minority interest - (30) - Redemption of investee preferred stock - (2) - Other (26) - (4) ------------------------------------------------------------------ Balance at end of year 2,806 1,371 1,262 ------------------------------------------------------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance at beginning of year (714) (553) (321) ------------------------------------------------------------------ Foreign currency translation adjustment (68) (146) (234) Unrealized gains on marketable securities 1,225 2 2 Minimum pension liability adjustment 7 (17) - ------------------------------------------------------------------ Other comprehensive income (loss) 1,164 (161) (232) ------------------------------------------------------------------ Balance at end of year 450 (714) (553) ------------------------------------------------------------------ TREASURY STOCK Balance at beginning of year 22,887 593 22,952 591 22,540 589 Shares purchased 12,142 723 20,743 1,002 24,148 920 Shares distributed Employee plans (11,446) (675) (20,779) (999) (23,260) (899) Shareowner plans (14) (1) (26) (1) (52) (2) Acquisition agreements - - (3) - (424) (17) ------------------------------------------------------------------ Balance at end of year 23,569 640 22,887 593 22,952 591 ------------------------------------------------------------------ DEFERRED COMPENSATION-ESOPS Balance at beginning of year 565 663 769 Amortization (121) (98) (106) ------------------------------------------------------------------ Balance at end of year 444 565 663 ------------------------------------------------------------------ Total Shareowners' Investment $15,880 $13,025 $12,789 ================================================================== COMPREHENSIVE INCOME Net income $ 4,202 $ 2,965 $ 2,455 Other comprehensive income (loss) per above 1,164 (161) (232) ------------------------------------------------------------------ TOTAL COMPREHENSIVE INCOME $ 5,366 $ 2,804 $ 2,223 ==================================================================
See Notes to Consolidated Financial Statements F-26 CONSOLIDATED STATEMENTS OF CASH FLOWS Bell Atlantic Corporation and Subsidiaries
(dollars in millions) Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,202 $ 2,965 $ 2,455 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 6,221 5,870 5,865 Deferred income taxes, net 928 264 237 Mark-to-market adjustment for exchangeable notes 664 - - Loss (income) from unconsolidated businesses (143) 415 124 Dividends received from unconsolidated businesses 116 170 192 Amortization of unearned lease income (151) (120) (110) Investment tax credits (25) (29) (38) Extraordinary item, net of tax 6 26 - Other items, net 169 227 88 Changes in certain assets and liabilities, net of effects from acquisition/disposition of businesses Accounts receivable (423) (220) (140) Inventories (92) (111) (74) Other assets (379) (108) 65 Employee benefit obligations (1,046) 354 416 Accounts payable and accrued liabilities 345 376 (93) Other liabilities 264 (8) (128) --------------------------------------- Net cash provided by operating activities 10,656 10,071 8,859 --------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (8,675) (7,446) (6,638) Proceeds from sale of plant, property and equipment 211 12 6 Purchases of short-term investments (855) (1,028) (844) Proceeds from sale of short-term investments 795 968 427 Investments in unconsolidated businesses, net (901) (603) (833) Acquisition of businesses, less cash acquired (505) (62) (62) Proceeds from disposition of businesses 612 637 547 Investment in leased assets (170) (269) (162) Proceeds from leasing activities 110 155 83 Proceeds from Telecom Corporation of New Zealand Limited share repurchase plan - - 153 Other, net (251) (49) (16) --------------------------------------- Net cash used in investing activities (9,629) (7,685) (7,339) --------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (2,399) (2,379) (2,340) Net change in short-term borrowings with original maturities of three months or less 2,645 (4,038) 1,580 Proceeds from borrowings 662 6,328 633 Principal repayments of borrowings and capital lease obligations (942) (651) (902) Early extinguishment of debt (257) (790) - Proceeds from financing of cellular assets 380 - - Proceeds from sale of common stock 314 559 711 Purchase of common stock for treasury (723) (1,002) (920) Minority interest - (632) - Reduction in preferred stock of subsidiary - - (10) Proceeds from sale of stock of subsidiary 119 - - Proceeds from sale of preferred stock by subsidiary - - 66 Net change in outstanding checks drawn on controlled disbursement accounts 34 133 (265) --------------------------------------- Net cash used in financing activities (167) (2,472) (1,447) --------------------------------------- Increase (decrease) in cash and cash equivalents 860 (86) 73 Cash and cash equivalents, beginning of year 237 323 250 --------------------------------------- Cash and cash equivalents, end of year $ 1,097 $ 237 $ 323 =======================================
See Notes to Consolidated Financial Statements F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Bell Atlantic Corporation and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 1 Description of Business and Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- DESCRIPTION OF BUSINESS Bell Atlantic is an international telecommunications company that operates in four segments: Domestic Telecom, Global Wireless, Directory and Other Businesses. For further information concerning our business, see Note 18. The telecommunications industry is undergoing substantial changes as a result of new legislation, public policy changes, technological advances, and various mergers and alliances. We are participating in this transformation in several ways, including: . The provision of in-region long distance service in New York beginning in January 2000. . Our forthcoming merger of equals with GTE Corporation (see Note 22). . The combination of the U.S. wireless assets of both our company and Vodafone AirTouch plc (see Note 21). CONSOLIDATION The consolidated financial statements include our controlled or majority-owned subsidiaries. Investments in businesses which we do not control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. Investments in which we do not have the ability to exercise significant influence over operating and financial policies are accounted for under the cost method. Certain of our cost method investments are classified as available-for-sale securities and adjusted to fair value under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All significant intercompany accounts and transactions have been eliminated. Telecom Corporation of New Zealand Limited Effective May 31, 1999, our representatives resigned from the Board of Directors of Telecom Corporation of New Zealand Limited (TCNZ), an unconsolidated business in which we hold a 24.94% ownership interest, and we agreed to vote our shares neutrally. As a result, we no longer have significant influence over TCNZ's operating and financial policies and, therefore, have changed the accounting for our investment from the equity method to the cost method. You can find additional information about our TCNZ investment in Notes 3 and 10. COMMON STOCK SPLIT On May 1, 1998, the Board of Directors declared a two-for-one split of Bell Atlantic common stock, effected in the form of a 100% stock dividend to shareholders of record on June 1, 1998 and payable on June 29, 1998. Shareholders of record received an additional share of common stock for each share of common stock held at the record date. We retained the par value of $.10 per share for all shares of common stock. The prior period financial information (including share and per share data) contained in this report has been adjusted to give retroactive recognition to this common stock split. USE OF ESTIMATES We prepare our financial statements under generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts or certain disclosures. Actual results could differ from those estimates. REVENUE RECOGNITION We recognize wireline and wireless services revenues based upon usage of our network and facilities and contract fees. We recognize products and other services revenues when the products are delivered and accepted by the customers and when services are provided in accordance with contract terms. MAINTENANCE AND REPAIRS We charge the cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, to Operating Expenses. EARNINGS PER COMMON SHARE Basic earnings per common share are based on the weighted-average number of shares outstanding during the year. Diluted earnings per common share include the dilutive effect of shares issuable under our stock-based compensation plans, which represent the only potential dilutive common shares. CASH AND CASH EQUIVALENTS We consider all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents, except cash equivalents held as short-term investments. Cash equivalents are stated at cost, which approximates market value. SHORT-TERM INVESTMENTS Our short-term investments consist primarily of cash equivalents held in trust to pay for certain employee benefits. Short-term investments are stated at cost, which approximates market value. INVENTORIES We include in inventory new and reusable materials of the operating telephone subsidiaries which are stated principally at average original cost, except that specific costs are used in the case of large individual items. Inventories of our other subsidiaries are stated at the lower of cost (determined principally on either an average or first-in, first-out basis) or market. PLANT AND DEPRECIATION We state plant, property and equipment at cost. Our operating telephone subsidiaries' depreciation expense is principally based on the composite group remaining life method and straight-line composite rates. This method provides for the recognition of the cost of the remaining net investment in telephone plant, less anticipated net salvage value, over the remaining asset lives. This method requires the periodic revision of depreciation rates. The asset lives used by our operating telephone subsidiaries are presented in the following table: Average Lives (in years) - -------------------------------------------------------------------------------- Buildings 20-60 Central office equipment 5-12 Outside communications plant 8-65 Furniture, vehicles and other 3-15 F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 1 continued When we replace or retire depreciable telephone plant, we deduct the carrying amount of such plant from the respective accounts and charge accumulated depreciation. Gains or losses on disposition are amortized with the remaining net investment in telephone plant. Plant, property and equipment of our other subsidiaries is depreciated on a straight-line basis over the following estimated useful lives: buildings, 20 to 40 years, and other equipment, 1 to 20 years. When the depreciable assets of our other subsidiaries are retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the plant accounts, and any gains or losses on disposition are recognized in income. We capitalize interest associated with the acquisition or construction of plant assets. Capitalized interest is reported as a cost of plant and a reduction in interest cost. COMPUTER SOFTWARE COSTS Effective January 1, 1999, we adopted Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Under SOP No. 98-1, we capitalize the cost of internal-use software which has a useful life in excess of one year. Subsequent additions, modifications or upgrades to internal use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period in which they are incurred. Also, we capitalize interest associated with the development of internal-use software. Capitalized computer software costs are amortized using the straight-line method over a period of 3 to 5 years. The effect of adopting SOP No. 98-1 was an increase in net income of approximately $230 million in 1999. We also capitalized approximately $600 million as an intangible asset in 1999. Prior to 1999, our operating telephone subsidiaries capitalized initial right-to-use fees for central office switching equipment, including initial operating system and initial application software costs. For noncentral office equipment, only the initial operating system software was capitalized. Subsequent additions, modifications, or upgrades of initial software programs, whether operating or application packages, were expensed as incurred. COSTS OF START-UP ACTIVITIES Effective January 1, 1999, we adopted SOP No. 98-5, "Reporting on the Costs of Start-Up Activities." Under this accounting standard, we expense costs of start-up activities as incurred, including pre-operating, pre-opening and other organizational costs. The adoption of SOP No. 98-5 did not have a material effect on our results of operations or financial condition because our policy has been generally to expense all start-up activities. GOODWILL AND OTHER INTANGIBLES Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. We amortize goodwill and other identifiable intangibles on a straight-line basis over their estimated useful life, not exceeding 40 years. We assess the impairment of other identifiable intangibles and goodwill related to our consolidated subsidiaries under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. A determination of impairment (if any) is made based on estimates of future cash flows. In instances where goodwill has been recorded for assets that are subject to an impairment loss, the carrying amount of the goodwill is eliminated before any reduction is made to the carrying amounts of impaired long-lived assets and identifiable intangibles. On a quarterly basis, we assess the impairment of enterprise level goodwill under Accounting Principles Board (APB) Opinion No. 17 "Intangible Assets." A determination of impairment (if any) is made based primarily on estimates of market value. SALE OF STOCK BY SUBSIDIARY We recognize in consolidation changes in our ownership percentage in a subsidiary caused by issuances of the subsidiary's stock as adjustments to Contributed Capital. INCOME TAXES Bell Atlantic and its domestic subsidiaries file a consolidated federal income tax return. For periods prior to the Bell Atlantic - NYNEX merger, NYNEX filed its own consolidated federal income tax return. Our operating telephone subsidiaries use the deferral method of accounting for investment tax credits earned prior to the repeal of investment tax credits by the Tax Reform Act of 1986. We also defer certain transitional credits earned after the repeal. We amortize these credits over the estimated service lives of the related assets as a reduction to the Provision for Income Taxes. ADVERTISING COSTS We expense advertising costs as they are incurred. STOCK-BASED COMPENSATION We account for stock-based employee compensation plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and follow the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." FOREIGN CURRENCY TRANSLATION The functional currency for nearly all of our foreign operations is the local currency. For these foreign entities, we translate income statement amounts at average exchange rates for the period, and we translate assets and liabilities at end-of-period exchange rates. We record these translation adjustments in Accumulated Other Comprehensive Income (Loss) in our consolidated balance sheets. We report exchange gains and losses on intercompany foreign currency transactions of a long-term nature in Accumulated Other Comprehensive Income (Loss). Other exchange gains and losses are reported in income. When a foreign entity operates in a highly inflationary economy, we use the U.S. dollar as the functional currency rather than the local currency. We translate nonmonetary assets and liabilities and related expenses into U.S. dollars at historical exchange rates. We translate all other income statement amounts using average exchange rates for the period. Monetary assets and liabilities are translated at end-of-period exchange rates, and any gains or losses are reported in income. For the period October 1, 1996, through December 31, 1998, we considered Grupo Iusacell S.A. de C.V., a fully consolidated subsidiary in Mexico, to operate in a highly inflationary economy and utilized the U.S. dollar as its functional F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 1 continued currency. Beginning January 1, 1999, we discontinued highly inflationary accounting for this entity and resumed using the Mexican peso as its functional currency. DERIVATIVE INSTRUMENTS We have entered into derivative transactions to manage our exposure to fluctuations in foreign currency exchange rates, interest rates, and corporate tax rates. We employ risk management strategies using a variety of derivatives including foreign currency forwards and options, interest rate swap agreements, interest rate caps and floors, and basis swap agreements. We do not hold derivatives for trading purposes. Fair Value Method We use the fair value method of accounting for our foreign currency derivatives, which requires us to record these derivatives at fair value in our consolidated balance sheets, and changes in value are recorded in income or Shareowners' Investment. Depending upon the nature of the derivative instruments, the fair value of these instruments may be recorded in Current Assets, Other Assets, Current Liabilities, and Deferred Credits and Other Liabilities in our consolidated balance sheets. Gains and losses and related discounts or premiums arising from foreign currency derivatives (which hedge our net investments in consolidated foreign subsidiaries and investments in foreign entities accounted for under the equity method) are included in Accumulated Other Comprehensive Income (Loss) and reflected in income upon sale or substantial liquidation of the investment. Certain of these derivatives also include an interest element, which is recorded in Interest Expense over the lives of the contracts. Gains and losses from derivatives which hedge our short-term transactions and cost investments are included in Other Income and Expense, Net, and discounts or premiums on these contracts are included in income over the lives of the contracts. Gains and losses from derivatives hedging identifiable foreign currency commitments are deferred and reflected as adjustments to the related transactions. If the foreign currency commitment is no longer likely to occur, the gain or loss is recognized immediately in income. Earnings generated from our leveraged lease portfolio may be affected by changes in corporate tax rates. In order to hedge a portion of this risk, we use basis swap agreements, which we account for using the fair value method of accounting. Under this method, these agreements are carried at fair value and included in Other Assets or Deferred Credits and Other Liabilities in our consolidated balance sheet. Changes in the unrealized gain or loss are included in Other Income and Expense, Net. Accrual Method Interest rate swap agreements and interest rate caps and floors that qualify as hedges are accounted for under the accrual method. An instrument qualifies as a hedge if it effectively modifies and/or hedges the interest rate characteristics of the underlying fixed or variable interest rate debt. Under the accrual method, no amounts are recognized in our consolidated balance sheets related to the principal balances. The interest differential to be paid or received, which is accrued as interest rates change, and premiums related to caps and floors, are recognized as adjustments to Interest Expense over the lives of the agreements. These interest accruals are recorded in Current Assets and Current Liabilities in our consolidated balance sheets. If we terminate an agreement, the gain or loss is recorded as an adjustment to the basis of the underlying liability and amortized over the remaining original life of the agreement. If the underlying liability matures, or is extinguished and the related derivative is not terminated, that derivative would no longer qualify for accrual accounting. In this situation, the derivative is accounted for at fair value, and changes in the value are recorded in income. NEW ACCOUNTING STANDARD-DERIVATIVES AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivatives be measured at fair value and recognized as either assets or liabilities on our balance sheet. Changes in the fair values of derivative instruments will be recognized in either earnings or comprehensive income, depending on the designated use and effectiveness of the instruments. The FASB amended this pronouncement in June 1999 to defer the effective date of SFAS No. 133 for one year. We must adopt SFAS No. 133 no later than January 1, 2001. On March 3, 2000, the FASB issued a Proposed SFAS, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which would amend SFAS No. 133. The proposed amendments address certain implementation issues and relate to such matters as the normal purchases and normal sales exception, the definition of interest rate risk, hedging recognized foreign-currency-denominated debt instruments, and intercompany derivatives. We are currently evaluating the provisions of SFAS No. 133 and the proposed amendments. The impact of adoption will be determined by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions at the date of adoption. NEW STAFF ACCOUNTING BULLETIN-REVENUE RECOGNITION In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which currently must be adopted by June 30, 2000. SAB No. 101 provides additional guidance on revenue recognition, as well as criteria for when revenue is generally realized and earned, and also requires the deferral of incremental direct selling costs. We are currently assessing the impact of SAB No. 101 on our results of operations and financial position. F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 2 Bell Atlantic - NYNEX Merger - -------------------------------------------------------------------------------- On August 14, 1997, Bell Atlantic Corporation and NYNEX Corporation completed a merger of equals under a definitive merger agreement entered into on April 21, 1996 and amended on July 2, 1996. Under the terms of the amended agreement, NYNEX became a wholly owned subsidiary of Bell Atlantic. NYNEX stockholders received 0.768 of a share of Bell Atlantic common stock for each share of NYNEX common stock that they owned. This resulted in the issuance of 700.4 million shares of Bell Atlantic common stock. The merger qualified as a tax-free reorganization and has been accounted for as a pooling of interests. Under this method of accounting, the companies are treated as if they had always been combined for accounting and financial reporting purposes and, therefore, we restated our financial information for all dates and periods prior to the merger. BELL ATLANTIC-NYNEX MERGER-RELATED COSTS In the third quarter of 1997, we recorded merger-related pre-tax costs of $200 million for direct incremental costs, and $223 million for employee severance costs. Direct incremental costs consist of expenses associated with completing the merger transaction, such as professional and regulatory fees, compensation arrangements, and shareowner-related costs. Employee severance costs, as recorded under SFAS No. 112, "Employers' Accounting for Postemployment Benefits," represent the anticipated benefit costs for the separation by the end of 1999 of approximately 3,100 management employees who are entitled to benefits under pre-existing separation pay plans. During 1997, 1998, and 1999, 245, 856, and 231 management employees were separated with severance benefits. Accrued postemployment benefit liabilities are included in our consolidated balance sheets as a component of Employee Benefit Obligations. OTHER INITIATIVES During 1997, we recorded other charges and special items totaling $1,041 million (pre-tax) in connection with consolidating operations and combining organizations, and for other special items arising during the year. Video-Related Charges In 1997, we recognized total pre-tax charges of $243 million related to certain video investments and operations. We determined that we would no longer pursue a multichannel, multipoint, distribution system (MMDS) as part of our video strategy. As a result, we recognized liabilities for purchase commitments associated with the MMDS technology and costs associated with closing the operations of our Tele-TV partnership because this operation no longer supports our video strategy. We also wrote-down our remaining investment in CAI Wireless Systems, Inc. Write-Down of Assets and Real Estate Consolidation In the third quarter of 1997, we recorded pre-tax charges of $355 million for the write-down of obsolete or impaired fixed assets and for the cost of consolidating redundant real estate properties. As part of our merger integration planning, we reviewed the carrying values of long-lived assets. This review included estimating remaining useful lives and cash flows and identifying assets to be abandoned. In the case of impaired assets, we analyzed cash flows related to those assets to determine the amount of the impairment. As a result of these reviews, we recorded charges of $275 million for the write-off of some assets and $25 million for the impairment of other assets. These assets primarily included computers and other equipment used to transport data for internal purposes, copper wire used to provide telecommunications service in New York, and duplicate voice mail platforms. None of these assets is held for disposal. At December 31, 1999 and 1998, the impaired assets had no remaining carrying value. In connection with our merger integration efforts, we consolidated real estate to achieve a reduction in the total square footage of building space that we utilize. We sold properties, subleased some of our leased facilities, and terminated other leases, for which we recorded a charge of $55 million in the third quarter of 1997. Most of the charge related to properties in Pennsylvania and New York, where corporate support functions were consolidated into fewer work locations. Regulatory, Tax and Legal Contingencies and Other Special Items In 1997, we also recorded reductions to operating revenues and charges to operating expenses totaling $526 million (pre-tax), which consisted of the following: . Revenue reductions consisted of $179 million for federal regulatory matters. These matters relate to specific issues that are currently under investigation by federal regulatory commissions. We believe that it is probable that the ultimate resolution of these pending matters will result in refunds to our customers. . Charges to operating expenses totaled $347 million and consisted of $75 million for interest on federal and other tax contingencies; $55 million for other tax matters; and $52 million for legal contingencies and a state regulatory audit issue. These contingencies were accounted for under the rules of SFAS No. 5, "Accounting for Contingencies." These charges also included $95 million related to costs incurred in standardizing and consolidating our directory businesses and $70 million for other post-merger initiatives. Other charges arising in 1997 included $59 million for our equity share of formation costs previously announced by Cable & Wireless Communications plc (CWC). We own an 18.6% interest in CWC and account for our investment under the equity method of accounting. In 1997, we recognized pre-tax gains of $142 million on the sales of our ownership interests of several nonstrategic businesses. These gains included $42 million on the sale of our interest in Sky Network Television Limited of New Zealand; $54 million on the sale of our 33% stake in an Italian wireline venture, Infostrada; and $46 million on the sale of our two-sevenths interest in Bell Communications Research, Inc. F-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 2 continued The following table provides a reconciliation of the liabilities associated with Bell Atlantic-NYNEX merger-related costs and other charges and special items described above:
(dollars in millions) 1997 1998 -------------------------------------------------------------------------------------------------------- Charged to Beginning Expense or of Year Revenue Deductions Adjustments End of Year Deductions Adjustments End of Year - ----------------------------------------------------------------------------------------------------------------------------------- MERGER-RELATED Direct incremental costs $ - $ 200 $ (165)a $ - $ 35 $ (5)a $ (26) $ 4 Severance obligation 111 223 (24)a 20 330 (61)a 47 316 OTHER INITIATIVES Video-related costs - 243 (227)b 5 21 (3)a (12) 6 Write-down of fixed assets and real estate consolidation - 355 (312)b - 43 (18)b (2) 23 Regulatory, tax and legal contingencies, and other special items - 526 (144)b - 382 (118)c (15) 249 ------------------------------------------------------------------------------------------------------- $ 111 $1,547 $ (872) $ 25 $ 811 $ (205) $ (8) $ 598 ======================================================================================================= (dollars in millions) 1999 ------------------------------------------ Deductions Adjustments End of Year ------------------------------------------ MERGER-RELATED Direct incremental costs $ (1)a $ (3) $ - Severance obligation (35)a (15) 266 OTHER INITIATIVES Video-related costs (2)a (4) - Write-down of fixed assets and real estate consolidation (8)d (13) 2 Regulatory, tax and legal contingencies, and other special items (7)e (37) 205 --------------------------------------- $ (53) $ (72) $ 473 =======================================
. Adjustments refer to deductions to the liability that reduced expense, or additions to the liability that increased expense resulting from changes in circumstances or experience in implementing the planned activities. In 1999, adjustments include the favorable settlement of tax matters. . Deductions refer to the utilization of the liability through payments, asset write-offs, or refunds to customers. a-primarily comprised of cash payments b-primarily comprised of asset write-offs c-comprised of cash payments of $66 million, refunds to customers of $42 million, and asset write-offs of $10 million d-comprised of cash payments of $3 million and asset write-offs of $5 million e-comprised of cash payments of $4 million and asset write-offs of $3 million At December 31, 1999, direct incremental and video-related liabilities were fully utilized through either payments or adjustments. We expect that the remaining real estate liabilities will extend through 2003. Liabilities for regulatory, tax and legal contingencies, and other special items will be utilized as the respective matter is settled. The obligation for severance benefits, which has been determined under SFAS No. 112, represents expected payments to employees who leave the company with benefits provided under pre-existing separation pay plans. The severance obligation is adjusted through annual costs, which are actuarially determined based upon financial market interest rates, experience, and management's best estimate of future benefit payments. In 1997, the merger-related severance costs increased our existing severance obligation. At December 31, 1999, the merger-related separations were completed and the remaining liability balance represents our obligation for ongoing separations under the pre-existing separation pay plans, in accordance with SFAS No. 112. F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 3 Investments in Unconsolidated Businesses - -------------------------------------------------------------------------------- Our investments in unconsolidated businesses comprise the following:
(dollars in millions) 1999 1998 At December 31, Ownership Investment Ownership Investment - ---------------------------------------------------------------------------------------- EQUITY INVESTEES Omnitel Pronto Italia S.p.A 23.14% $ 1,262 19.71% $ 521 PrimeCo Personal Communications, L.P. 50.00 1,078 50.00 1,012 Cable & Wireless Communications plc 18.59 643 18.50 675 FLAG 37.67 161 37.67 178 Telecom Corporation of New Zealand Limited - - 24.95 373 Other Various 723 Various 739 ---------- ---------- Total equity investees 3,867 3,498 ---------- ---------- COST INVESTEES Telecom Corporation of New Zealand Limited 24.94 2,103 - - Viacom Inc. - - - 603 Other Various 305 Various 175 ---------- ---------- Total cost investees 2,408 778 ---------- ---------- Total $ 6,275 $ 4,276 ========== ==========
Dividends received from investees amounted to $116 million in 1999, $170 million in 1998, and $192 million in 1997. OMNITEL PRONTO ITALIA S.p.A. Omnitel Pronto Italia S.p.A. (Omnitel) operates a wireless mobile telephone network in Italy. We account for this investment under the equity method because we have significant influence over Omnitel's operating and financial policies. Since 1994, we have invested approximately $1.2 billion in Omnitel. Approximately $630 million of this amount was invested in June 1999, which increased our ownership interest from 19.71% to 23.14%. Goodwill related to this investment totals approximately $995 million which is being amortized on a straight-line basis over a period of 25 years. At December 31, 1999, remaining goodwill was approximately $900 million. PRIMECO PERSONAL COMMUNICATIONS, L.P. PrimeCo Personal Communications, L.P. (PrimeCo) is a partnership established in 1994 between Bell Atlantic and Vodafone AirTouch plc (Vodafone AirTouch), which provides personal communications services (PCS) in major cities across the United States. Since 1994, we have invested approximately $2 billion in PrimeCo to fund its operations and the build-out of its PCS network. Under the terms of the partnership agreement, PrimeCo entered into a leveraged lease financing arrangement for certain equipment which has been guaranteed by the partners in the joint venture. Our share of this guarantee is approximately $126 million. On August 3, 1999, Bell Atlantic and Vodafone AirTouch announced an agreement to restructure our ownership interests in PrimeCo. Under the terms of that agreement, we would assume full ownership of PrimeCo operations in five "major trading areas" (MTAs) - Richmond, VA, New Orleans, LA and the Florida MTAs of Jacksonville, Tampa and Miami. Vodafone AirTouch would assume full ownership of the remaining five PrimeCo MTAs - Chicago, IL, Milwaukee, WI and the Texas MTAs of Dallas, San Antonio and Houston. Under the terms of the Wireless Co. agreement (see Note 21), Bell Atlantic and Vodafone AirTouch agreed to suspend the August 3, 1999 agreement to restructure PrimeCo ownership interests, with certain limited exceptions. As a result, no action will be taken to allocate most PrimeCo markets unless either we or Vodafone AirTouch give notice to initiate such an allocation. Neither party has given such notice. In January 2000, we and Vodafone AirTouch purchased the remaining 20% partnership interest in the Texas MTAs of Dallas, San Antonio and Houston held by TXU Communications Holding Company (TXU). We invested $196 million to acquire 55% of the TXU partnership interest. Vodafone AirTouch will own the remaining 45% of the TXU partnership interest. CABLE & WIRELESS COMMUNICATIONS plc In the second quarter of 1997, we transferred our interests in cable television and telecommunications operations in the United Kingdom to Cable & Wireless Communications plc (CWC) in exchange for an 18.5% ownership interest in CWC. This transaction was accounted for as a nonmonetary exchange of similar productive assets and, as a result, no gain or loss was recorded. We account for our investment in CWC under the equity method because we have significant influence over CWC's operating and financial policies. Prior to the transfer, we included the accounts of these operations in our consolidated financial statements. On July 27, 1999, we announced our agreement to a proposal by Cable & Wireless plc (Cable & Wireless), NTL Incorporated (NTL) and CWC for the proposed restructuring of CWC. Under the terms of the agreement, CWC's consumer cable telephone, television and Internet operations would be separated from its corporate, business, Internet protocol and wholesale operations. The consumer operations would be acquired by NTL and the other operations would be acquired by Cable & Wireless. In exchange for our interest in CWC, we would receive shares in the two acquiring companies, representing approximately 9.1% of the NTL shares currently outstanding and approximately 4.6% of the Cable & Wireless shares currently outstanding. Our investments in NTL and Cable & Wireless will be accounted for under the cost method. We expect the restructuring to result in a material non-cash gain. The completion of the restructuring is subject to a number of conditions and, assuming satisfaction of those conditions, is expected to close in the first half of 2000. In August 1998 we issued $3,180 million of 4.25% senior exchangeable notes due on September 15, 2005. Prior to the proposed restructuring described above, the notes are exchangeable into 277.6 million ordinary shares of CWC stock at the option of the holder, beginning on July 1, 2002. However, upon completion of the proposed restructuring, the CWC exchangeable notes would be exchangeable on and after July 1, 2002 for shares in NTL and Cable F-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- NOTE 3 continued & Wireless in proportion to the shares received in the restructuring. Upon exchange by investors, we retain the option to settle in cash or by delivery of the Cable & Wireless and NTL shares. You can find additional information on the CWC exchangeable notes in Note 10. FLAG Fiberoptic Link Around the Globe (FLAG) is an undersea fiberoptic cable system, providing digital communications links between Europe and Asia. FLAG launched commercial service in the fourth quarter of 1997. We have invested approximately $227 million in FLAG since 1994. At December 31, 1999, our ownership interest was comprised of our interest in FLAG Ltd. and our interest in its parent company, FLAG Telecom Holdings Limited (FLAG Telecom). In January 2000, we exchanged our shares in FLAG Ltd. for an interest in FLAG Telecom resulting in an aggregate interest in FLAG Telecom of approximately 38%. There was no impact to our financial statements or our effective ownership interest as a result of this transaction. In February 2000, Flag Telecom conducted an initial public offering. The primary offering consisted of approximately 28 million newly issued common shares. Certain existing shareowners also participated in a secondary offering in which approximately 8 million of their common shares were sold. We did not acquire any new shares in the primary offering, nor did we participate in the secondary offering. As a result, our current ownership interest has been reduced to approximately 30%. FLAG had outstanding borrowings of $615 million as of December 31, 1997 under a limited recourse debt facility, which it refinanced in the first quarter of 1998 through a new $800 million credit facility. This refinancing resulted in an after-tax extraordinary charge of $15 million. The refinancing also released us from certain obligations under a contingent sponsor support agreement signed in connection with the debt facility outstanding in 1997. OTHER EQUITY INVESTMENTS We also have global wireless investments in the Czech Republic, Slovakia, Greece, and Indonesia. These investments are in joint ventures to build and operate wireless networks in these countries. We also have an investment in a company in the Philippines which provides telecommunications services in certain regions of that country. The remaining investments include real estate partnerships, publishing joint ventures, and several other domestic and international joint ventures. In 1998, other equity investees also included Bell Atlantic Mobile's (BAM) investment in domestic wireless properties doing business under the Frontier Cellular name. Frontier Cellular was a joint venture between BAM and Frontier Corporation (Frontier). In December 1999, BAM completed its purchase of Frontier's interests for $374 million and assumed approximately $105 million in debt, resulting in purchased goodwill of approximately $265 million. As a result of this transaction, we increased our ownership interest from 50% to 100% and, therefore, have changed the accounting for our investment in Frontier Cellular from the equity method to full consolidation. The change in accounting methodology resulted in a reduction to Investments in Unconsolidated Businesses of $87 million in 1999. SUMMARIZED FINANCIAL INFORMATION The following tables display the summarized audited financial information for our equity investees. These amounts are shown on a 100 percent basis. (dollars in millions) Years Ended December 31, 1999 1998 - ---------------------------------------------------------------------------- Results of operations Operating revenues $10,584 $ 8,832 Operating income 2,124 1,474 Income before extraordinary item 698 577 Net income 698 520 Bell Atlantic's equity share of income $ 72 $ 25 At December 31, 1999 1998 - ---------------------------------------------------------------------------- Financial position Current assets $ 3,736 $ 4,680 Noncurrent assets 18,613 18,986 Current liabilities 4,484 4,830 Noncurrent liabilities 8,877 10,027 Minority interest 169 155 Stockholders' equity 8,819 8,654 Bell Atlantic's equity share of investees $ 3,867 $ 3,498 COST INVESTEES Certain of our cost investments are carried at their fair value, principally our investment in Telecom Corporation of New Zealand Limited (TCNZ), as described below. Other cost investments are carried at their original cost, except in cases where we have determined that a decline in the estimated fair value of an investment is other than temporary as described below under the section "Other Cost Investments." Telecom Corporation of New Zealand Limited TCNZ is that country's principal provider of telecommunications services. We account for our investment in TCNZ under the cost method because we do not have significant influence over TCNZ's operating and financial policies (see Note 1). In February 1998, we issued $2,455 million of 5.75% senior exchangeable notes due on April 1, 2003. The notes were exchangeable into 437.1 million ordinary shares of TCNZ stock at the option of the holder, beginning September 1, 1999. As of December 31, 1999, no notes have been delivered for exchange. You can find additional information on the TCNZ exchangeable notes in Note 10. Viacom Inc. Since 1993, we have held an investment in Viacom Inc. (Viacom), an entertainment and publishing company. This investment consisted of 24 million shares of Viacom Series B Cumulative Preferred Stock that we purchased for $1.2 billion. The preferred stock, which carried an annual dividend of 5%, was convertible into shares of Viacom Class B nonvoting common stock at a price of $70 per share. In December 1998, we accepted an offer from Viacom to repurchase one-half of our Viacom investment, or 12 million shares of the preferred stock (with a book value of approximately $600 million) for approximately $564 million in cash. This transaction resulted in a small loss, which was recorded in Income (Loss) from Unconsolidated Businesses in 1998. This preferred stock had been held by a fully F-34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 3 continued consolidated subsidiary, which had been created as part of a transaction to monetize a portion of our Viacom investment during 1995 and 1996. This monetization transaction involved entering into nonrecourse contracts whereby we raised $600 million based, among other things, on the value of our investment in Viacom. To accomplish the monetization, two fully consolidated subsidiaries were created to manage and protect certain assets for distribution at a later date. In addition, an outside party contributed $600 million in cash in exchange for an interest in one of these subsidiaries, and we contributed a $600 million note that was collateralized by certain financial assets, including the 12 million shares of Viacom preferred stock and 22.4 million shares of our common stock. The outside party's contribution was reflected in Minority Interest, and the issuance of common stock was reflected as Treasury Stock. The cash proceeds from the repurchase of the 12 million shares of Viacom preferred stock, together with additional cash, was used to repay the note that had been contributed to one of the subsidiaries. The total amount of cash was distributed to the outside party, under a pre-existing agreement, to redeem most of that party's interest in the subsidiary. We then purchased the remaining portion of the outside party's interest. The transaction was accounted for as a charge to Reinvested Earnings and a reduction from Net Income in calculating Net Income Available to Common Shareowners in the amount of $30 million. As a result of our purchase of the outside party's interest, we reduced Minority Interest by $600 million in 1998. However, the subsidiaries continue to hold shares of our common stock, which have been reported as Treasury Stock at December 31, 1999. The remaining 12 million shares of preferred stock were repurchased by Viacom in a second transaction in January 1999 for approximately $612 million in cash. This transaction did not have a material effect on our consolidated results of operations. Other Cost Investments Other cost investments include our Asian investments - TelecomAsia, a wireline investment in Thailand, and Excelcomindo, a wireless investment in Indonesia. In the third quarter of 1998, we recorded pre-tax charges of $485 million to Income (Loss) From Unconsolidated Businesses to adjust our carrying values of TelecomAsia and Excelcomindo. The charges were necessary because we determined that the decline in the estimated fair values of each of these investments were other than temporary. We determined the fair values of these investments by discounting estimated future cash flows. In the case of TelecomAsia, we recorded a charge of $348 million to adjust the carrying value of the investment to its estimated fair value. We considered the following factors in determining the charge: . The continued weakness of the Thai currency as compared to historical exchange rates had placed additional financial burdens on the company in servicing U.S. dollar-denominated debt. . The economic instability and prospects for an extended recovery period had resulted in weaker than expected growth in TelecomAsia's business. This was indicated by slower than expected growth in total subscribers and usage. These factors resulted in reduced expectations of future cash flows and, accordingly, a reduction in the value of our investment. . The business plan for TelecomAsia contemplated cash flows from several lines of business. Given TelecomAsia's inclination to focus on its core wireline business, these other lines of business would not contribute future cash flows at previously expected levels. In the case of Excelcomindo, we recorded a charge of $137 million to adjust the carrying value of the investment to its estimated fair value. We considered the following factors in determining this charge: . The continued weakness of the Indonesian currency as compared to historical exchange rates had placed additional financial burdens on the company in servicing U.S. dollar-denominated debt. The political unrest in Indonesia contributed to the currency's instability. . The economic instability and prospects for an extended recovery period had resulted in weaker than expected growth in Excelcomindo's business. One significant factor was the inflexible tariff regulation despite rising costs due to inflation. This and other factors resulted in reduced expectations of future cash flows and, accordingly, a reduction in the value of our investment. . Issues with cash flow required Excelcomindo's shareholders to evaluate the future funding of the business. F-35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 4 Grupo Iusacell, S.A. de C.V. - -------------------------------------------------------------------------------- Since 1993, we have invested $1.2 billion in Iusacell, a wireless telecommunications company in Mexico. Goodwill related to this investment totaled approximately $810 million and is being amortized on a straight-line basis over a period of 25 years. At December 31, 1999, remaining goodwill, net of amortization and cumulative translation adjustments, was approximately $260 million. In the first quarter of 1997, we consummated a restructuring of our investment in Iusacell to permit us to assume control of the Board of Directors and management of Iusacell. As a result of the restructuring, we changed the accounting for our Iusacell investment from the equity method to full consolidation. Iusacell and its principal shareholders entered into an agreement (the 1998 Restructuring Agreement) to reorganize ownership of the company. This reorganization provided for the formation of a new holding company, Nuevo Grupo Iusacell, S.A. de C.V. (New Iusacell), with two classes of shares, one of which is traded publicly. The intention of the reorganization was to raise capital, increase the availability of debt financing, and increase the liquidity of its publicly traded shares. As contemplated in the reorganization plan, during 1998 and 1999, Iusacell borrowed $133 million from us, as a bridge loan, under a $150 million subordinated convertible debt facility that expired in June 1999 (the Facility). In accordance with the Facility and the 1998 Restructuring Agreement, we converted the debt into additional Series A shares at a price of $.70 per share. We also sold a portion of those shares to the Peralta Group, the other principal shareholder of Iusacell, for $.70 per share and received proceeds of approximately $15 million in 1999 and $15 million in 1998. As a result of these interim steps of the reorganization plan, our ownership of Iusacell temporarily increased to 47.2%. On August 4, 1999, the reorganization plan was finalized when New Iusacell concluded an exchange and rights offering to existing Iusacell shareholders. These offerings permitted shareholders to exchange their shares in Iusacell for shares in New Iusacell and to subscribe to additional shares of New Iusacell based on their current ownership. In addition, New Iusacell launched primary and secondary share offerings. We and the Peralta Group participated in the secondary share offering. We received approximately $73 million of proceeds from the secondary share offering and New Iusacell received approximately $31 million of proceeds from the primary share and rights offerings. As a result of the reorganization, we have recorded an adjustment to increase our contributed capital by $43 million, which recognizes the ultimate change in our ownership percentage resulting from these transactions. As of December 31, 1999, we own 40.2% of New Iusacell, which we continue to control and consolidate. - -------------------------------------------------------------------------------- Note 5 Minority Interest - -------------------------------------------------------------------------------- (dollars in millions) At December 31, 1999 1998 - ------------------------------------------------------------------------- Portion subject to redemption requirements $ 121 $ 41 Portion nonredeemable 337 289 ------------------------------------- $ 458 $ 330 ===================================== Minority interest primarily consists of certain partnerships consolidated by our domestic wireless subsidiary, Bell Atlantic Mobile, and the other shareowners' interest in Iusacell. A portion of our minority interest is subject to redemption requirements, primarily the ownership interest held by the Peralta Group. Under an agreement dated February 22, 1999, the Peralta Group can require us to purchase from it approximately 517 million Iusacell shares for $.75 per share, or approximately $388 million in the aggregate, by giving notice of exercise between November 15, 2001, and December 15, 2001. You can find additional information about our Iusacell investment in Note 4. F-36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 6 Marketable Securities - -------------------------------------------------------------------------------- We have investments in marketable securities, primarily common stocks, which are considered "available-for-sale" under SFAS No. 115. These investments have been included in our balance sheet in Investments in Unconsolidated Businesses and Short-term Investments. Under SFAS No. 115, available-for-sale securities are required to be carried at their fair value, with unrealized gains and losses (net of income taxes) recorded in Accumulated Other Comprehensive Income (Loss). The fair values of our investments in marketable securities are determined based on market quotations. The following table shows certain summarized information related to our investments in marketable securities: (dollars in millions) Gross Gross Unrealized Unrealized Cost Gains Losses Fair Value - -------------------------------------------------------------------------------- AT DECEMBER 31, 1999 Investments in unconsolidated businesses $ 367 $1,892 $ -- $2,259 Short-term investments 38 1 (2) 37 ---------------------------------------------------- $ 405 $1,893 $ (2) $2,296 ==================================================== AT DECEMBER 31, 1998 Investments in unconsolidated businesses $ 1 $ 6 $ -- $ 7 Short-term investments 23 -- (1) 22 ---------------------------------------------------- $ 24 $ 6 $ (1) $ 29 ==================================================== Our investments in unconsolidated businesses increased from December 31, 1998 as a result of a change in accounting for our investment in TCNZ from the equity method to the cost method. Certain other investments in marketable securities that we hold are not carried at their fair values because those values are not readily determinable. We have, however, adjusted the carrying values of these securities in situations where we believe declines in value below cost were other than temporary. The carrying values for these investments were $169 million at December 31, 1999 and $771 million at December 31, 1998. The decrease from December 31, 1998 was principally due to the disposition of our remaining investment in Viacom in January 1999 (see Note 3). - -------------------------------------------------------------------------------- Note 7 Plant, Property and Equipment - -------------------------------------------------------------------------------- The following table displays the details of plant, property and equipment, which is stated at cost: (dollars in millions) AT DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- Land $ 447 $ 412 Buildings 6,954 6,667 Central office equipment 33,822 31,441 Outside communications plant 36,252 33,605 Furniture, vehicles, and other work equipment 7,972 7,870 Other 1,646 1,356 Construction-in-progress 2,145 1,713 -------------------------------- 89,238 83,064 Accumulated depreciation (49,939) (46,248) -------------------------------- Total $ 39,299 $ 36,816 ================================ Plant, property and equipment at December 31, 1999 and 1998 includes real estate property and equipment under operating leases (or held for lease) of $76 million and $97 million, and accumulated depreciation of $38 million and $22 million. - -------------------------------------------------------------------------------- Note 8 Leasing Arrangements - -------------------------------------------------------------------------------- AS LESSOR We are the lessor in leveraged and direct financing lease agreements under which commercial aircraft, rail equipment, industrial equipment, power generating facilities, real estate property, and telecommunications and other equipment are leased for remaining terms of 1 to 47 years. Minimum lease payments receivable represent unpaid rentals, less principal and interest on third-party nonrecourse debt relating to leveraged lease transactions. Since we have no general liability for this debt, the related principal and interest have been offset against the minimum lease payments receivable. Minimum lease payments receivable are subordinate to the debt and the holders of the debt have a security interest in the leased equipment. F-37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 8 continued Finance lease receivables, which are included in Current Assets-Other and Noncurrent Assets-Other Assets in our consolidated balance sheets comprise the following:
(dollars in millions) At December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Direct Direct Leveraged Finance Leveraged Finance Leases Leases Total Leases Leases Total - ------------------------------------------------------------------------------------------------------------------------------------ Minimum lease payments receivable $ 3,178 $ 138 $ 3,316 $ 2,986 $ 190 $ 3,176 Estimated residual value 2,262 29 2,291 2,187 36 2,223 Unearned income (2,151) (44) (2,195) (2,132) (58) (2,190) --------------------------------------------------------------------------------------------- $ 3,289 $ 123 3,412 $ 3,041 $ 168 3,209 ============================ ============================ Allowance for doubtful accounts (37) (37) ------------ ------------- Finance lease receivables, net $ 3,375 $ 3,172 ------------ ------------- Current $ 32 $ 37 ------------ ------------- Noncurrent $ 3,343 $ 3,135 ============ =============
Accumulated deferred taxes arising from leveraged leases, which are included in Deferred Income Taxes, amounted to $2,531 million at December 31, 1999 and $2,445 million at December 31, 1998. AS LESSOR The following table is a summary of the components of income from leveraged leases: (dollars in millions) Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------ Pre-tax lease income $ 138 $ 99 $ 97 Income tax expense 49 47 31 Investment tax credits 2 5 3 This table displays the future minimum lease payments to be received from noncancelable leases, net of nonrecourse loan payments related to leveraged and direct financing leases in excess of debt service requirements, for the periods shown at December 31, 1999: (dollars in millions) Capital Operating Years Leases Leases - -------------------------------------------------------------------------------- 2000 $ 68 $ 20 2001 72 1 2002 86 1 2003 79 1 2004 83 - Thereafter 2,928 - ---------------------------------- Total $3,316 $ 23 ================================== AS LESSEE We lease certain facilities and equipment for use in our operations under both capital and operating leases. Total rent expense under operating leases amounted to $572 million in 1999, $556 million in 1998, and $573 million in 1997. We incurred initial capital lease obligations of $1 million in 1999, $3 million in 1998, and $11 million in 1997. Capital lease amounts included in Plant, Property and Equipment are as follows: (dollars in millions) At December 31, 1999 1998 - -------------------------------------------------------------------------------- Capital leases $ 222 $ 296 Accumulated amortization (151) (169) ---------------------------------- Total $ 71 $ 127 ================================== This table displays the aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 1999: (dollars in millions) Capital Operating Years Leases Leases - -------------------------------------------------------------------------------- 2000 $ 35 $ 234 2001 26 217 2002 20 186 2003 11 159 2004 9 131 Thereafter 56 648 ---------------------------------- Total minimum rental commitments 157 $1,575 =========== Less interest and executory costs 60 ----------- Present value of minimum lease payments 97 Less current installments 22 ----------- Long-term obligation at December 31, 1999 $ 75 =========== As of December 31, 1999, the total minimum sublease rentals to be received in the future under noncancelable operating subleases was $236 million. F-38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 9 Commitments and Contingencies - -------------------------------------------------------------------------------- In connection with certain state regulatory incentive plan commitments, we have deferred revenues which will be recognized as the commitments are met or obligations are satisfied under the plans. In addition, several state and federal regulatory proceedings may require our operating telephone subsidiaries to refund a portion of the revenues collected in the current and prior periods. There are also various legal actions pending to which we are a party and claims which, if asserted, may lead to other legal actions. We have established reserves for specific liabilities in connection with regulatory and legal matters, which we currently deem to be probable and estimable. We do not expect that the ultimate resolution of pending regulatory and legal matters in future periods will have a material effect on our financial condition, but it could have a material effect on our results of operations. - -------------------------------------------------------------------------------- Note 10 Debt - -------------------------------------------------------------------------------- DEBT MATURING WITHIN ONE YEAR The following table displays the details of debt maturing within one year: (dollars in millions) At December 31, 1999 1998 - -------------------------------------------------------------------------------- Notes payable Commercial paper $4,310 $1,384 Bank loans 143 300 Short-term note 22 - Long-term debt maturing within one year 980 1,304 ------------------------------- Total debt maturing within one year $5,455 $2,988 =============================== Weighted-average interest rates for notes payable outstanding at year-end 6.0% 5.6% Capital expenditures (primarily construction of telephone plant) are partially financed, pending long-term financing, through bank loans and the issuance of commercial paper payable within 12 months. At December 31, 1999, we had in excess of $4.0 billion of unused bank lines of credit. The availability of these lines, for which there are no formal compensating balances, is at the discretion of each bank. Certain of these lines of credit contain requirements for the payment of commitment fees. Substantially all of the assets of Iusacell, totaling approximately $1,252 million at December 31, 1999, are subject to lien under credit facilities with certain bank lenders. LONG-TERM DEBT This table shows our outstanding long-term debt obligations:
(dollars in millions) At December 31, Interest Rates % Maturities 1999 1998 - -------------------------------------------------------------------------------------------------------------------- -------------- Telephone subsidiaries' debentures 4.375 - 7.00 2000-2033 $ 4,427 $ 4,572 7.125 - 7.75 2002-2033 2,265 2,465 7.85 - 9.375 2010-2031 1,922 1,979 Unamortized discount, net of premium (51) (56) ------------- -------------- 8,563 8,960 Exchangeable notes, net of unamortized discount of $212 and $244 4.25 - 5.75 2003-2005 6,341 5,645 Notes payable 5.30 - 12.00 2000-2012 3,082 3,036 Refunding mortgage bonds 4.25 - 7.375 2000-2011 635 635 Employee stock ownership plan loans (Note 16) NYNEX debentures 9.55 2010 281 305 Bell Atlantic senior notes 8.17 2000 70 200 Capital lease obligations (average rate 10.2% and 11.0%) and other (average rate 6.2%) 471 152 Mortgage and installment notes 10.50 - 11.00 - 17 ------------- -------------- Total long-term debt, including current maturities 19,443 18,950 Less maturing within one year 980 1,304 ------------- -------------- Total long-term debt $ 18,463 $ 17,646 ============= ==============
F-39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 10 continued Telephone Subsidiaries' Debt The telephone subsidiaries' debentures outstanding at December 31, 1999 include $2,247 million that are callable. The call prices range from 101.72% to 100.00% of face value, depending upon the remaining term to maturity of the issue. All of our refunding mortgage bonds are also callable as of December 31, 1999. In addition, our long-term debt includes $350 million that will become redeemable for limited periods at the option of the holders. Of this amount, $175 million becomes redeemable in 2002. One debenture totaling $175 million becomes redeemable in 2000 and again in 2002. The redemption prices will be 100.0% of face value plus accrued interest. Substantially all of the assets of New York Telephone Company, totaling approximately $14.1 billion at December 31, 1999, are subject to lien under New York Telephone Company's refunding mortgage bond indenture. Exchangeable Notes In February 1998, our wholly owned subsidiary Bell Atlantic Financial Services, Inc. (FSI) issued $2,455 million of 5.75% senior exchangeable notes due on April 1, 2003 (TCNZ exchangeable notes). The TCNZ exchangeable notes are exchangeable into 437.1 million ordinary shares of TCNZ stock at the option of the holder, beginning on September 1, 1999. The exchange price was established at a 20% premium to the TCNZ share price at the pricing date of the offering. Upon exchange by investors, we retain the option to settle in cash or by delivery of TCNZ shares. During the period from April 1, 2001 to March 31, 2002, the TCNZ exchangeable notes are callable at our option at 102.3% of the principal amount and, thereafter and prior to maturity at 101.15%. The proceeds of the TCNZ exchangeable notes offering were used for the repayment of a portion of our short-term debt. As of December 31, 1999, no notes have been delivered for exchange. In August 1998, FSI issued $3,180 million of 4.25% senior exchangeable notes due on September 15, 2005 (CWC exchangeable notes). The CWC exchangeable notes were issued at a discount and at December 31, 1999 the notes had a carrying value of $3,886 million, including a loss on a mark-to-market adjustment of $664 million. The CWC exchangeable notes are exchangeable into 277.6 million ordinary shares of CWC stock at the option of the holder beginning on July 1, 2002. The exchange price was established at a 28% premium to the CWC share price at the pricing date of the offering. Upon exchange by investors, we retain the option to settle in cash or by delivery of CWC shares. The CWC exchangeable notes are redeemable at our option, beginning September 15, 2002, at escalating prices from 104.2% to 108.0% of the principal amount. If the CWC exchangeable notes are not called or exchanged prior to maturity, they will be redeemable at 108.0% of the principal amount at that time. The proceeds of the CWC exchangeable notes offering were used for the repayment of a portion of our short-term debt and other general corporate purposes. The CWC and TCNZ exchangeable notes are indexed to the fair market value of each company's common stock. If the price of the shares exceeds the exchange price established at the offering date, a mark-to-market adjustment is recorded, recognizing an increase in the carrying value of the debt obligation and a charge to income. If the price of the shares subsequently declines the debt obligation is reduced (not to less than its amortized carrying value). At December 31, 1999, the CWC share price exceeded the exchange price and we recorded an increase in the carrying value of the CWC exchangeable notes of $664 million and a corresponding charge to income ($432 million after-tax). We recorded no mark-to-market adjustment for the TCNZ exchangeable notes at December 31, 1999. During 1998, no mark-to-market adjustments were recorded. A proposed restructuring of our investment in CWC, as discussed in Note 3, would change the securities to be delivered upon exchange for the CWC exchangeable notes. Under this restructuring, we would receive shares of two companies acquiring the businesses of CWC in exchange for our CWC shares. After the restructuring, we would account for these investments under the cost method. Support Agreements The TCNZ exchangeable notes have the benefit of a Support Agreement dated February 1, 1998, and the CWC exchangeable notes have the benefit of a Support Agreement dated August 26, 1998, both of which are between Bell Atlantic and FSI. In each of the Support Agreements, Bell Atlantic guarantees the payment of interest, premium (if any), principal, and cash value of exchange property related to the notes should FSI fail to pay. Another Support Agreement between Bell Atlantic and FSI dated October 1, 1992, guarantees payment of interest, premium (if any), and principal on FSI's medium-term notes (aggregating $184 million at December 31, 1999 and $245 million at December 31, 1998) should FSI fail to pay. The holders of FSI debt do not have recourse to the stock or assets of our operating telephone subsidiaries or TCNZ; however, they do have recourse to dividends paid to Bell Atlantic by any of our consolidated subsidiaries as well as assets not covered by the exclusion. The carrying value of the available assets reflected in our consolidated financial statements was approximately $17 billion at December 31, 1999. In 1998, we established a $2.0 billion Euro Medium Term Note Program under which we may issue notes that are not registered with the Securities and Exchange Commission. The notes will be issued from time to time from our subsidiary, Bell Atlantic Global Funding, Inc. (BAGF), and will have the benefit of a support agreement between BAGF and Bell Atlantic. There have been no notes issued under this program. Maturities of Long-Term Debt Maturities of long-term debt outstanding at December 31, 1999, excluding capital lease obligations and unamortized discount and premium, are $958 million in 2000, $536 million in 2001, $882 million in 2002, $3,581 million in 2003, $1,030 million in 2004 and $12,632 million thereafter. These amounts include the redeemable debt at the earliest possible redemption dates. F-40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 10 continued Early Extinguishment of Debt In 1999, we recorded charges associated with the early extinguishment of debentures of the telephone subsidiaries. These charges reduced net income by $6 million (net of an income tax benefit of $4 million). In 1998, we recorded extraordinary charges associated with the early extinguishment of debentures and refunding mortgage bonds of the operating telephone subsidiaries and debt issued by FLAG, an investment accounted for under the equity method. These charges reduced net income by $26 million (net of an income tax benefit of $14 million) in 1998. - -------------------------------------------------------------------------------- Note 11 Financial Instruments - -------------------------------------------------------------------------------- DERIVATIVES We limit our use of derivatives to managing risk that could negatively impact our financing and operating flexibility, making cash flows more stable over the long run and achieving savings over other means of financing. Our risk management strategy is designed to protect against adverse changes in interest rates, foreign currency exchange rates, and corporate tax rates, as well as facilitate our financing strategies. We use several types of derivatives in managing these risks, including interest rate swap agreements, interest rate caps and floors, foreign currency forwards and options, and basis swap agreements. Derivative agreements are linked to specific liabilities or assets and hedge the related economic exposures. We do not hold derivatives for trading purposes. We recognized pre-tax income (expense) of $13 million in 1999, $(4) million in 1998, and $17 million in 1997 in our statements of income related to our risk management activities involving derivatives. INTEREST RATE RISK MANAGEMENT The table that follows provides additional information about our interest rate risk management. The notional amounts shown are used to calculate interest payments to be exchanged. These amounts are not actually paid or received, nor are they a measure of our potential gains or losses from market risks. They do not represent our exposure in the event of nonperformance by a counterparty or our future cash requirements. Our financial instruments are grouped based on the nature of the hedging activity. (dollars in millions) Weighted-Average Rate --------------------------------- Notional At December 31, Amount Maturities Receive Pay - -------------------------------------------------------------------------------- INTEREST RATE SWAP AGREEMENTS Foreign Currency Forwards/Interest Rate Swaps 1999 $ 232 2000 - 2002 5.8% 6.6% 1998 $ 303 1999 - 2002 5.3% 6.0% Other Interest Rate Swaps Pay fixed 1999 $ 285 2000 - 2005 6.1% 5.9% 1998 $ 260 1999 - 2005 5.0% 5.9% Pay variable 1999 $ 553 2000 - 2006 6.4% 6.1% 1998 $ 784 1999 - 2006 6.6% 5.3% STRUCTURED NOTE SWAP AGREEMENTS 1999 $ - - 1998 $ 60 1999 INTEREST RATE CAP/FLOOR AGREEMENTS 1999 $ 147 2001 - 2002 1998 $ 297 1999 - 2002 BASIS SWAP AGREEMENTS 1999 $ 1,001 2003 - 2004 1998 $ 1,001 2003 - 2004 We use foreign currency forwards/interest rate swap agreements to hedge the value of certain international investments. The agreements generally require us to receive payments based on fixed interest rates and make payments based on variable interest rates. The structured note swap agreements converted structured medium-term notes to conventional fixed rate liabilities while reducing financing costs. The effective fixed interest rate on these notes averaged 6.1% at December 31, 1998. These contracts expired in 1999. Other interest rate swap agreements, which sometimes incorporate options, and interest rate caps and floors are all used to adjust the interest rate profile of our debt portfolio and allow us to achieve a targeted mix of fixed and variable rate debt. Earnings generated from our leveraged lease portfolio may be affected by changes in corporate tax rates. In order to hedge a portion of this risk, we entered into several basis swap agreements which require us to receive payments based on a variable interest rate (LIBOR-based) and make payments based on a tax-exempt market index (J.J. Kenney). We account for these basis swap agreements at fair value and recognized income (expense) of $12 million in 1999, $(4) million in 1998, and $4 million in 1997 related to mark-to-market adjustments. FOREIGN EXCHANGE RISK MANAGEMENT Our foreign exchange risk management includes the use of foreign currency forward contracts, options and foreign currency swaps. Forward contracts and options call for the sale or purchase, or the option to sell or purchase, certain foreign currencies on a specified future date. These contracts are typically used to hedge short-term foreign currency transactions and commitments. The total notional amounts of our foreign currency forward contracts and option F-41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 11 continued contracts were $77 million at December 31, 1999, $2 million at December 31, 1998, and $15 million at December 31, 1997. The contracts outstanding at December 31, 1999 have maturities ranging from four to sixteen months. Contracts outstanding in 1998 and 1997 had maturities of six months or less. Certain of the interest rate swap agreements shown in the table contain both a foreign currency forward and a U.S. dollar interest rate swap component. These agreements require the exchange of payments in U.S. dollars based on specified interest rates in addition to the exchange of currencies at the maturity of the contract. The required payments for both components are based on the notional amounts of the contracts. Our net equity position in unconsolidated foreign businesses as reported in our consolidated balance sheets totaled $2,218 million at December 31, 1999 and $1,917 million at December 31, 1998. Our most significant investments at December 31, 1999 and 1998 had operations in Italy and the United Kingdom. We have not hedged our accounting translation exposure to foreign currency fluctuations relative to these investments, except for our United Kingdom investment which is partially hedged. Our equity income is subject to exchange rate fluctuations when our equity investee has balances denominated in a currency other than the investees' functional currency. We recognized $(8) million in 1999, $11 million in 1998, and $(30) million in 1997, related to such fluctuations in Income (Loss) From Unconsolidated Businesses. Our consolidated subsidiary, Iusacell, recognized a gain of $15 million in 1999 related to balances denominated in a currency other than its functional currency, the Mexican peso. Amounts recognized in 1998 and 1997 were immaterial. We continually monitor the relationship between gains and losses recognized on all of our foreign currency contracts and on the underlying transactions being hedged to mitigate market risk. CONCENTRATIONS OF CREDIT RISK Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term investments, trade receivables, certain notes receivable, preferred stock, and derivative contracts. Our policy is to place our temporary cash investments with major financial institutions. Counterparties to our derivative contracts are also major financial institutions and organized exchanges. The financial institutions have all been accorded high ratings by primary rating agencies. We limit the dollar amount of contracts entered into with any one financial institution and monitor our counterparties' credit ratings. We generally do not give or receive collateral on swap agreements due to our credit rating and those of our counterparties. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote and do not expect the settlement of these transactions to have a material effect on our results of operations or financial condition. FAIR VALUES OF FINANCIAL INSTRUMENTS The tables that follow provide additional information about our material financial instruments: Financial Instrument Valuation Method - -------------------------------------------------------------------------------- Cash and cash equivalents Carrying amounts and short-term investments Short-and long-term debt Market quotes for similar terms (excluding capital leases and and maturities or future cash exchangeable notes) flows discounted at current rates Exchangeable notes Market quotes Cost investments in Future cash flows discounted unconsolidated businesses at current rates, market and notes receivable quotes for similar instruments or other valuation models Interest rate swap and other Future cash flows discounted agreements; foreign currency at current rates forwards and option contracts (dollars in millions) 1999 1998 ------------------------------------------------------ Carrying Fair Carrying Fair At December 31, Amount* Value Amount* Value - -------------------------------------------------------------------------------- Short-and long-term debt $17,480 $17,088 $14,837 $15,928 Exchangeable notes 6,341 6,417 5,645 5,818 Cost investments in unconsolidated businesses 2,406 2,430 777 797 Notes receivable, net 13 13 18 18 Interest rate swap and other agreements Assets 8 8 6 27 Liabilities 14 20 26 40 Foreign currency forward and option contracts Assets - - - - Liabilities - 1 - - * The carrying amounts shown for derivatives include deferred gains and losses. The increase in our cost investments in unconsolidated businesses resulted from a change in the method of accounting for our TCNZ investment, as described in Note 3. In January 1999, we accepted an offer from Viacom to repurchase their preferred stock from us. Our investment in Viacom is included in the table under "Cost investments in unconsolidated businesses." We used the sale price as the fair value of our Viacom investment at December 31, 1998. We were unable to determine the fair value of other investments, with carrying values of $2 million and $1 million at December 31, 1999 and 1998, without incurring excessive costs. F-42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 12 Preferred Stock of Subsidiary - -------------------------------------------------------------------------------- Our subsidiary Bell Atlantic New Zealand Holdings, Inc. (BANZHI) has the authority to issue 5,000,000 shares of Serial Preferred Stock. BANZHI has issued three series of preferred stock. BANZHI owns a portion of our investment in Iusacell and, with another subsidiary, indirectly owns our investment in TCNZ and a portion of our investment in CWC. In 1994, BANZHI issued 850,000 shares of Series A Preferred Stock at $100 per share with an annual dividend rate of $7.08 per share. In 1995, 600,000 shares of Series B Preferred Stock were issued at $100 per share with an annual dividend rate of $5.80 per share. At December 31, 1999 and 1998, 95,000 shares ($9 million) of Series B Preferred Stock were held by a wholly owned subsidiary. Both series are subject to mandatory redemption on May 1, 2004 at a redemption price per share of $100, together with any accrued and unpaid dividends. In 1997, 650,000 shares of Series C Variable Term Preferred Stock were issued at $100 per share. At December 31, 1999, these shares had an annual dividend rate of 4.80%. - -------------------------------------------------------------------------------- Note 13 Shareowners' Investment - -------------------------------------------------------------------------------- Our certificate of incorporation provides authority for the issuance of up to 250 million shares of Series Preferred Stock, $.10 par value, in one or more series, with such designations, preferences, rights, qualifications, limitations and restrictions as the Board of Directors may determine. We are authorized to issue up to 2.25 billion shares of common stock. - -------------------------------------------------------------------------------- Note 14 Earnings Per Share - -------------------------------------------------------------------------------- The following table is a reconciliation of the numerators and denominators used in computing earnings per share:
(dollars and shares in millions, except per share amounts) Years Ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON SHAREOWNERS Income before extraordinary item $ 4,208 $ 2,991 $ 2,455 Redemption of minority interest - (30) - Redemption of investee preferred stock - (2) - ------------------------------------------------------- Income available to common shareowners* 4,208 2,959 2,455 Extraordinary item (6) (26) - ------------------------------------------------------- Net income available to common shareowners* $ 4,202 $ 2,933 $ 2,455 ======================================================= BASIC EARNINGS PER COMMON SHARE Weighted-average shares outstanding 1,553 1,553 1,552 ------------------------------------------------------- Income before extraordinary item $ 2.72 $ 1.90 $ 1.58 Extraordinary item (.01) (.01) - ------------------------------------------------------- Net income $ 2.71 $ 1.89 $ 1.58 ======================================================= DILUTED EARNINGS PER COMMON SHARE Weighted-average shares outstanding 1,553 1,553 1,552 Effect of dilutive securities 30 25 19 ------------------------------------------------------- Weighted-average shares - diluted 1,583 1,578 1,571 ------------------------------------------------------- Income before extraordinary item $ 2.66 $ 1.87 $ 1.56 Extraordinary item (.01) (.01) - ------------------------------------------------------- Net income $ 2.65 $ 1.86 $ 1.56 =======================================================
* Income and Net income available to common shareowners is the same for purposes of calculating basic and diluted earnings per share. For the years ended December 31, 1999, 1998 and 1997, the number of stock options excluded from the calculation of diluted earnings per share because they were antidilutive was not material. F-43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 15 Stock Incentive Plans - -------------------------------------------------------------------------------- We have stock-based compensation plans that include fixed stock option, performance-based, and phantom share plans. We recognize no compensation expense for our fixed stock option plans. Compensation expense charged to income for our performance-based and phantom share plans was $57 million in 1999, $29 million in 1998, and $27 million in 1997. If we had elected to recognize compensation expense based on the fair value at the grant dates for 1997 and subsequent fixed plan awards consistent with the provisions of SFAS No. 123, net income and earnings per share would have been changed to the pro forma amounts indicated below: (dollars in millions, except per share amounts) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Net income As reported $4,202 $2,965 $2,455 Pro forma 4,129 2,918 2,394 Basic earnings per As reported $ 2.71 $ 1.89 $ 1.58 share Pro forma 2.66 1.86 1.54 Diluted earnings per As reported $ 2.65 $ 1.86 $ 1.56 share Pro forma 2.61 1.83 1.52 These results may not be representative of the effects on pro forma net income for future years. We determined the pro forma amounts using the Black-Scholes option-pricing model based on the following weighted-average assumptions: 1999 1998 1997 - -------------------------------------------------------------------------------- Dividend yield 3.98% 4.59% 4.86% Expected volatility 21.51% 18.63% 14.87% Risk-free interest rate 4.82% 5.55% 6.35% Expected lives (in years) 5 5 5 The weighted-average value of options granted was $9.60 per option during 1999, $6.47 per option during 1998 and $4.30 per option during 1997. The NYNEX stock options outstanding and exercisable at the date of the merger were converted to Bell Atlantic stock options. The NYNEX option activity and share prices have been restated, for all years presented, to Bell Atlantic shares using the exchange ratio of 0.768 per share of Bell Atlantic common stock to one share of NYNEX common stock. Our stock incentive plans are described below: FIXED STOCK OPTION PLANS We have fixed stock option plans for key management employees under which options to purchase Bell Atlantic common stock are granted at a price equal to the market price of the stock at the date of grant. Under the 1985 Incentive Stock Option Plan (ISO Plan), key employees (including employees of the former NYNEX companies, after the merger) may be granted incentive and/or nonqualified stock options to purchase shares of common stock and certain key employees may receive reload options upon tendering shares of common stock to exercise options. In 1994, we adopted the Options Plus Plan. Under this plan, we granted nonqualified stock options to approximately 800 managers below the officer level in place of a portion of each manager's annual cash bonus in 1994 and 1995. The Options Plus Plan was discontinued after the January 1995 grant. The Stock Compensation Plan for Outside Directors entitles each outside director to receive up to 5,000 stock options per year. Options are exercisable after three years or less and the maximum term is ten years. Fixed stock option plans covering key management employees of the former NYNEX companies include the 1990 and the 1995 Stock Option Plans. The 1990 Stock Option Plan, which expired on December 31, 1994, permitted the grant of options through December 1994 to purchase shares of common stock. In January 1995, NYNEX established the 1995 Stock Option Plan. Options under the 1995 Stock Option Plan are exercisable after three years or less and the maximum term is ten years. Since the merger with NYNEX, the new options granted under this plan are reload options. Both the 1990 and 1995 plans will continue to exist until the last outstanding option has been exercised or has expired. In 1992, 1994 and 1996, NYNEX established stock option plans for associates and management employees other than those eligible to participate in the other stock option plans. These employees were granted options (with the number of options granted varying according to employee level) to purchase a fixed number of shares of common stock at the market price of the stock on the grant date. Options granted under these plans are exercisable after two years or less and the maximum term is ten years. This table is a summary of the status of the fixed stock option plans: Weighted-Average Stock Options Exercise Price - -------------------------------------------------------------------------------- Outstanding, December 31, 1996 90,593 $ 27.93 Granted 15,670 33.10 Exercised (26,238) 26.40 Canceled/forfeited (885) 29.39 ------------- Outstanding, December 31, 1997 79,140 29.28 Granted 24,061 46.40 Exercised (23,373) 29.01 Canceled/forfeited (1,744) 36.88 ------------- Outstanding, December 31, 1998 78,084 34.87 Granted 22,021 56.23 Exercised (13,430) 30.94 Canceled/forfeited (2,037) 38.21 ------------- Outstanding, December 31, 1999 84,638 40.55 ============= Options exercisable, December 31, 1997 63,651 28.27 1998 55,396 30.17 1999 53,683 33.62 F-44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 15 continued The following table summarizes information about fixed stock options outstanding as of December 31, 1999:
Stock Options Outstanding Stock Options Exercisable ------------------------------------------------------------------------------------------------------------ Weighted-Average Range of Shares Remaining Weighted-Average Shares Weighted-Average Exercise Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ $ 20.00 - 24.99 5,991 2.5 years $ 23.05 5,991 $ 23.05 25.00 - 29.99 12,238 4.6 25.74 12,238 25.74 30.00 - 34.99 22,687 6.4 33.02 22,687 33.02 35.00 - 39.99 1,190 7.6 37.78 946 37.78 40.00 - 44.99 237 8.0 43.24 237 43.24 45.00 - 49.99 19,895 8.1 46.11 9,121 46.17 50.00 - 54.99 1,356 8.8 52.15 930 52.19 55.00 - 59.99 19,434 9.1 55.86 1,478 56.70 60.00 - 64.99 1,432 9.7 62.51 55 61.44 65.00 - 69.99 178 9.6 65.99 - - --------------- --------------- Total 84,638 7.0 40.55 53,683 33.62 =============== ===============
PERFORMANCE-BASED SHARE PLANS Our performance-based share plans provided for the granting of awards to certain key employees, including employees of the former NYNEX companies in the form of Bell Atlantic common stock. Authority to make new grants expired in December 1994. Final awards were credited to pre-merger employees of Bell Atlantic in January 1996 and to employees of the former NYNEX companies in March 1994. Effective January 1, 1998, the Income Deferral Plan replaced the deferred compensation plans, including deferred performance shares, and expands the award distribution options for those employees. Employees who were active as of January 1, 1998 had their performance share balances transferred to the Income Deferral Plan. Those employees who were inactive as of that date continue to hold deferred share balances. We also have deferred compensation plans that allow members of the Board of Directors to defer all or a portion of their compensation. Some of these plans provide for returns based on the performance of, and eventual settlement in, Bell Atlantic common stock. Compensation expense for all of these plans is recorded based on the fair market value of the shares as they are credited to participants' accounts. The Income Deferral Plan is accounted for with our pension plans. The number of shares outstanding in the performance share plans were 387,000 at December 31, 1999, 393,000 at December 31, 1998, and 1,100,000 at December 31, 1997. A total of 230,560,000 shares may be distributed under the fixed stock option plans and the performance-based share plans. As of December 31, 1999 and 1998, a total of 94,666,000 and 56,579,000 shares of common stock were available for the granting of stock options under the fixed stock option plans and for distributions of shares under the performance-based share plans. In addition to plans described above, Iusacell maintains a separate stock option plan for its key employees in which it awards options to acquire Iusacell common stock. The effect of this plan on our consolidated results of operations was not significant. - -------------------------------------------------------------------------------- Note 16 Employee Benefits - -------------------------------------------------------------------------------- We maintain noncontributory defined benefit pension plans for substantially all management and associate employees, as well as postretirement healthcare and life insurance plans for our retirees and their dependents. We also sponsor defined contribution savings plans to provide opportunities for eligible employees to save for retirement on a tax-deferred basis and to encourage employees to acquire and maintain an equity interest in our company. In 1998, following the completion of the merger with NYNEX, the assets of the Bell Atlantic and NYNEX pension and savings plans were commingled in a master trust, and effective January 1, 1998 we established common pension and savings plan benefit provisions for all management employees. The disclosures provided for 1997 were determined using weighted-average assumptions for the combined Bell Atlantic and NYNEX benefit plans. PENSION AND OTHER POSTRETIREMENT BENEFITS At December 31, 1999, shares of our common stock accounted for less than 1% of the plan assets. Substantive commitments for future amendments are reflected in the pension costs and benefit obligations. Pension and other postretirement benefits for our associate employees (approximately 68% of our work force) are subject to collective bargaining agreements. Modifications in associate benefits have been bargained from time to time, and we may also periodically amend the benefits in the management plans. The following tables summarize benefit costs, as well as the benefit obligations, plan assets, funded status and rate assumptions associated with pension and postretirement healthcare and life insurance benefit plans. F-45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 16 continued BENEFIT COST
(dollars in millions) Pension Healthcare and Life ------------------------------------------------------------------------------ Years Ended December 31, 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Service cost $ 394 $ 389 $ 356 $ 111 $ 101 $ 98 Interest cost 1,899 1,855 1,877 613 593 626 Expected return on plan assets (2,763) (2,545) (2,347) (331) (287) (249) Amortization of transition asset (82) (82) (82) - - - Amortization of prior service cost (118) (133) (136) 52 53 50 Actuarial (gain), net (176) (111) (62) (66) (102) (40) ------------------------------------------------------------------------------ Net periodic (income) benefit cost (846) (627) (394) 379 358 485 ------------------------------------------------------------------------------ Special termination benefits - 1,029 688 - 58 60 Curtailment (gain) loss (including recognition of prior service cost) - (134) (222) - 150 118 Release of severance and postretirement medical reserves - (39) (69) - (55) (88) ------------------------------------------------------------------------------ Retirement incentive cost, net* - 856 397 - 153 90 ------------------------------------------------------------------------------ Total (income) cost $ (846) $ 229 $ 3 $ 379 $ 511 $ 575 ==============================================================================
* See "Retirement Incentives" section for additional information ASSUMPTIONS The actuarial assumptions used are based on financial market interest rates, past experience, and management's best estimate of future benefit changes and economic conditions. Changes in these assumptions may impact future benefit costs and obligations. The weighted-average assumptions used in determining expense and benefit obligations are as follows:
Pension Healthcare and Life ------------------------------------------------------------------------------ 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Discount rate at end of year 8.00% 7.00% 7.25% 8.00% 7.00% 7.25% Long-term rate of return on plan assets for the year 9.00 8.90 8.90 9.00 8.90 8.70 Rate of future increases in compensation at end of year 4.00 4.00 4.00 4.20 4.00 4.00 Medical cost trend rate at end of year 5.50 6.00 6.50 Ultimate (year 2001) 5.00 5.00 5.00 Dental cost trend rate at end of year 3.50 3.50 3.50 Ultimate (year 2002) 3.00 3.00 3.00
The medical cost trend rate significantly affects the reported postretirement benefit costs and benefit obligations. A one-percentage-point change in the assumed healthcare cost trend rate would have the following effects:
(dollars in millions) One-Percentage-Point Increase One-Percentage-Point Decrease - -------------------------------------------------------------------------------------------------------------------------- Effect on total service and interest cost $ 63 $ (50) Effect on postretirement benefit obligation 609 (495)
F-46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 16 continued
(dollars in millions) Pension Healthcare and Life ------------------------------------------------------------------------ At December 31, 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- BENEFIT OBLIGATION Beginning of year $ 28,080 $ 26,732 $ 9,063 $ 8,852 Service cost 394 389 111 101 Interest cost 1,899 1,855 613 593 Plan amendments 272 38 (1) 11 Actuarial (gain) loss, net (2,534) 350 (881) (91) Benefits paid (2,713) (2,371) (635) (550) Curtailments - (96) - 89 Special termination benefits - 1,029 - 58 Transfers 40 154 - - ------------------------------------------------------------------------ End of year 25,438 28,080 8,270 9,063 ------------------------------------------------------------------------ FAIR VALUE OF PLAN ASSETS Beginning of year 36,966 35,253 4,463 3,825 Actual return on plan assets 6,214 4,019 652 722 Company contribution 33 61 187 173 Benefits paid (2,713) (2,371) (301) (257) Transfers 2 4 - - ------------------------------------------------------------------------ End of year 40,502 36,966 5,001 4,463 ------------------------------------------------------------------------ FUNDED STATUS End of year 15,064 8,886 (3,269) (4,600) Unrecognized Actuarial (gain), net (16,343) (10,534) (3,093) (1,952) Prior service cost (928) (1,317) 91 143 Transition asset (275) (357) - - ------------------------------------------------------------------------ Net amount recognized $ (2,482) $ (3,322) $ (6,271) $ (6,409) ======================================================================== Amounts recognized on the balance sheet Employee benefit obligations $ (2,521) $ (3,373) $ (6,271) $ (6,409) Other assets 24 24 - - Accumulated other comprehensive loss 15 27 - - ------------------------------------------------------------------------ Net amount recognized $ (2,482) $ (3,322) $ (6,271) $ (6,409) ========================================================================
The changes in benefit obligations from year to year were caused by a number of factors, including changes in actuarial assumptions (see Assumptions), plan amendments and special termination benefits. Effective January 19, 2000, we amended our management cash balance plan to provide employees having at least 15 years of service as of September 1, 1999 with a pension benefit that is the "greater of" their cash balance account or a benefit based on our former management pension plan. Employees will be given the greater of the two benefits when they retire or terminate from the company. In February 2000, we announced a special lump sum pension payment to management and associate employees who retired before January 1, 1995 and who are receiving pension annuities. The payments range from $2,500 to $20,000 depending on years in retirement and current pension amount. Retirees will have the option of electing the payment as a lump sum or an annuity. RETIREMENT INCENTIVES In 1993, we announced a restructuring plan which included an accrual of approximately $1.1 billion (pre-tax) for severance and postretirement medical benefits under an involuntary force reduction plan. Beginning in 1994, retirement incentives have been offered under a voluntary program as a means of implementing substantially all of the work force reductions announced in 1993. Since the inception of the retirement incentive program, we have recorded additional costs totaling approximately $3.0 billion (pre-tax) through December 31, 1998. These additional costs and the corresponding number of employees accepting the retirement incentive offer for each year ended December 31 are as follows: F-47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 16 continued (dollars in millions) Years Amount Employees - -------------------------------------------------------------------------------- 1994 $ 694 7,209 1995 515 4,759 1996 236 2,996 1997 513 4,311 1998 1,021 7,299 ---------------------------------- $ 2,979 26,574 ================================== The retirement incentive costs are included in Employee Costs in our statements of income and the accrued liability is a component of Employee Benefit Obligations reported in our consolidated balance sheets. The additional costs are comprised of special termination pension and postretirement benefit amounts, as well as employee costs for other items. These costs have been reduced by severance and postretirement medical benefit reserves established in 1993 and transferred to offset the pension and postretirement benefit liabilities as employees accepted the retirement incentive offer. The voluntary program covering associate employees was completed in September 1998. The following table provides the amounts transferred from the 1993 reserve balance to pension and postretirement benefits (OPEB) liabilities: (dollars in millions) Years Pension OPEB Total - -------------------------------------------------------------------------------- 1994 $ 293 $ 179 $ 472 1995 82 72 154 1996 91 126 217 1997 82 88 170 1998 38 55 93 --------------------------------------------------------- $ 586 $ 520 $ 1,106 ========================================================= The remaining severance and postretirement medical reserves balances associated with the 1993 restructuring plan were as follows at December 31, 1997 and 1998: (dollars in millions) 1997 1998 - -------------------------------------------------------------------------------- Beginning of year $ 263 $ 93 Utilization (170) (93) ---------------------------------- End of year $ 93 $ - ================================== SAVINGS PLANS AND EMPLOYEE STOCK OWNERSHIP PLANS We maintain three leveraged employee stock ownership plans (ESOPs). Under these plans, we match a certain percentage of eligible employee contributions with shares of our common stock. In 1989, two leveraged ESOPs were established by Bell Atlantic to purchase Bell Atlantic common stock and fund matching contributions. In 1990, NYNEX established a leveraged ESOP to fund matching contributions to management employees and purchased shares of NYNEX common stock. At the date of the merger, NYNEX common stock outstanding was converted to Bell Atlantic shares using an exchange ratio of 0.768 per share of Bell Atlantic common stock to one share of NYNEX common stock. The Bell Atlantic leveraged ESOP trusts were funded by the issuance of $790 million in senior notes. The annual interest rate on the senior notes is 8.17%. The senior notes are payable in semiannual installments, which began on January 1, 1990 and end in the year 2000. The company funded $64 million for the January 2000 debt service payment in December 1999. The NYNEX leveraged ESOP trust was established through a company loan of $450 million, the proceeds of which were used to purchase common shares of NYNEX stock held in treasury. NYNEX issued and guaranteed $450 million of 9.55% debentures, the proceeds of which were principally used to repurchase common shares in the open market. The debentures require annual payments of principal and are due on May 1, 2010. Interest payments are due semiannually. All of the leveraged ESOP trusts repay the debt, including interest, with funds from our contributions to the ESOP trusts, as well as dividends received on unallocated and allocated shares of common stock. The obligations of the leveraged ESOP trusts, which we guarantee, are recorded as Long-Term Debt and the offsetting deferred compensation is classified as a reduction of Shareowners' Investment. As the ESOP trusts make principal payments, we reduce the long-term debt balance. The deferred compensation balance is reduced by the amount of employee compensation recognized as the ESOP shares are allocated to participants. Common stock is allocated from all leveraged ESOP trusts based on the proportion of principal and interest paid on ESOP debt in a year to the remaining principal and interest due over the term of the debt. At December 31, 1999, the number of unallocated and allocated shares of common stock was 15 million and 36 million. All leveraged ESOP shares are included in earnings per share computations. We recognize leveraged ESOP cost based on the modified shares allocated method for the Bell Atlantic leveraged ESOP trusts which held securities before December 15, 1989 and the shares allocated method for the NYNEX leveraged ESOP trust which held securities after December 15, 1989. ESOP cost and trust activity consist of the following: (dollars in millions) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Compensation $ 121 $ 98 $ 105 Interest incurred 36 49 57 Dividends (26) (34) (37) -------------------------------------- Net leveraged ESOP cost 131 113 125 Reduced ESOP cost (43) (9) (2) -------------------------------------- Total ESOP cost $ 88 $ 104 $ 123 ====================================== Dividends received for debt service $ 84 $ 66 $ 67 Total company contributions to leveraged ESOP trusts $ 210 $ 144 $ 137 In addition to the ESOPs described above, we maintain savings plans for associate employees of the former NYNEX companies, and employees of certain other subsidiaries. Compensation expense associated with these savings plans was $134 million in 1999, $81 million in 1998, and $71 million in 1997. F-48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 17 Income Taxes - -------------------------------------------------------------------------------- The components of income tax expense from continuing operations are presented in the following table: (dollars in millions) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Current Federal $ 1,454 $ 1,514 $ 1,208 State and local 315 368 222 --------------------------------------------- 1,769 1,882 1,430 --------------------------------------------- Deferred Federal 733 178 279 State and local 195 86 (42) --------------------------------------------- 928 264 237 --------------------------------------------- Investment tax credits (25) (29) (38) Other credits (115) (109) (100) --------------------------------------------- Total income tax expense $ 2,557 $ 2,008 $ 1,529 ============================================= During 1997, two states in our operating region enacted significant changes in their tax laws. In New Jersey, a law was enacted that repealed the gross receipts tax applicable to telephone companies and extended the net-income-based corporate business tax to include telephone companies. This resulted in a decrease in deferred state income tax expense of $75 million. In Maryland, a law was enacted that changed the determination of taxable income. This resulted in an increase in deferred state income tax expense of $8 million. The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal income tax rate: Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 4.6 5.5 2.6 Write-down of foreign investments - 3.8 - Other, net (1.8) (4.1) .8 ------------------------------------- Effective income tax rate 37.8% 40.2% 38.4% ===================================== Deferred taxes arise because of differences in the book and tax bases of certain assets and liabilities. Significant components of deferred tax liabilities (assets) are shown in the following table: (dollars in millions) At December 31, 1999 1998 - -------------------------------------------------------------------------------- Deferred tax liabilities Depreciation $ 3,886 $ 3,634 Leveraged leases 2,732 2,437 Net unrealized gains on marketable securities 664 3 Partnership investments 528 471 Other 539 628 -------------------------- 8,349 7,173 -------------------------- Deferred tax assets Employee benefits (3,818) (4,123) Investment tax credits (78) (84) Allowance for uncollectible accounts receivable (129) (94) Other (865) (985) -------------------------- (4,890) (5,286) Valuation allowance 326 317 -------------------------- Net deferred tax liability $ 3,785 $ 2,204 ========================== Deferred tax assets include approximately $2,632 million at December 31, 1999 and $2,609 million at December 31, 1998 related to postretirement benefit costs recognized under SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." This deferred tax asset will gradually be realized over the estimated lives of current retirees and employees. At December 31, 1999, undistributed earnings of our foreign subsidiaries amounted to approximately $285 million. Deferred income taxes are not provided on these earnings as it is intended that the earnings are indefinitely invested in these entities. It is not practical to estimate the amount of taxes that might be payable upon the remittance of the undistributed earnings. The valuation allowance primarily represents the tax benefits of certain state net operating loss carryforwards and other deferred tax assets which may expire without being utilized. During 1999, the valuation allowance increased $9 million. This increase primarily relates to state net operating loss carryforwards and a federal net operating loss carryforward for which we do not anticipate receiving a benefit in future periods. F-49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 18 Segment Information - -------------------------------------------------------------------------------- We have four reportable segments, which we operate and manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on adjusted net income, which excludes undistributed corporate expenses and special items arising during each period. Special items are transactions that management has excluded from the business units' results, but are included in reported consolidated earnings. 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. Our segments and their principal activities consist of the following: - -------------------------------------------------------------------------------- Segment Description - -------------------------------------------------------------------------------- DOMESTIC TELECOM Domestic wireline telecommunications services-primarily our nine operating telephone subsidiaries that provide local telephone services from Maine to Virginia including 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, and Internet access services. Domestic Telecom represents the aggregation of our domestic wireline business units (consumer, enterprise, general, and network services), which focus on specific markets to meet customer requirements. - -------------------------------------------------------------------------------- GLOBAL WIRELESS Wireless telecommunications services to customers in 24 states in the United States and foreign wireless investments servicing customers in Latin America, Europe and the Pacific Rim. - -------------------------------------------------------------------------------- DIRECTORY Domestic and international publishing businesses including print directories and Internet-based shopping guides, as well as website creation and other electronic commerce services. This segment has operations principally in the United States and Central Europe. - -------------------------------------------------------------------------------- OTHER BUSINESSES International wireline telecommunications investments in Europe and the Pacific Rim and lease financing and other businesses. - -------------------------------------------------------------------------------- GEOGRAPHIC AREAS Our foreign investments are located principally in Europe, Latin America and the Pacific Rim. Domestic and foreign operating revenues are based on the location of customers. Long-lived assets consist of property, plant and equipment (net of accumulated depreciation) and investments in unconsolidated businesses. The table below presents financial information by major geographic area: (dollars in millions) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- DOMESTIC Operating revenues $ 32,636 $ 31,168 $ 29,760 Long-lived assets 40,444 38,528 37,432 FOREIGN Operating revenues 538 398 434 Long-lived assets 5,130 2,564 2,752 CONSOLIDATED Operating revenues 33,174 31,566 30,194 Long-lived assets 45,574 41,092 40,184 F-50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 18 continued REPORTABLE SEGMENTS
(dollars in millions) Domestic Global Other Total Segments 1999 Telecom Wireless Directory Businesses Adjusted - ------------------------------------------------------------------------------------------------------------------------------------ External revenues $ 26,168 $ 4,543 $ 2,331 $ 136 $ 33,178 Intersegment revenues 154 21 7 15 197 -------------------------------------------------------------------------- Total operating revenues 26,322 4,564 2,338 151 33,375 Depreciation and amortization 5,505 673 36 2 6,216 Income (loss) from unconsolidated businesses 14 80 (1) 37 130 Interest income 20 5 1 2 28 Interest expense 951 340 18 57 1,366 Income tax expense 2,224 151 474 (35) 2,814 Extraordinary items (6) - - - (6) Net income 3,444 388 726 67 4,625 Assets 43,080 10,468 1,730 7,420 62,698 Investments in unconsolidated businesses 2 2,515 15 3,591 6,123 Capital expenditures 7,498 1,100 31 22 8,651 (dollars in millions) Domestic Global Other Total Segments 1998 Telecom Wireless Directory Businesses Adjusted - ------------------------------------------------------------------------------------------------------------------------------------ External revenues $ 25,435 $ 3,780 $ 2,258 $ 104 $ 31,577 Intersegment revenues 122 18 6 20 166 -------------------------------------------------------------------------- Total operating revenues 25,557 3,798 2,264 124 31,743 Depreciation and amortization 5,195 592 37 3 5,827 Income (loss) from unconsolidated businesses 27 (96) 29 86 46 Interest income 45 11 1 24 81 Interest expense 972 276 20 38 1,306 Income tax expense 1,959 115 437 (35) 2,476 Extraordinary items (10) - - (16) (26) Net income 3,173 228 684 135 4,220 Assets 41,217 7,739 1,741 5,353 56,050 Investments in unconsolidated businesses - 1,768 15 1,868 3,651 Capital expenditures 6,409 996 35 3 7,443 (dollars in millions) Domestic Global Other Total Segments 1997 Telecom Wireless Directory Businesses Adjusted - ------------------------------------------------------------------------------------------------------------------------------------ External revenues $ 24,669 $ 3,328 $ 2,210 $ 255 $ 30,462 Intersegment revenues 140 19 5 23 187 -------------------------------------------------------------------------- Total operating revenues 24,809 3,347 2,215 278 30,649 Depreciation and amortization 4,990 481 39 48 5,558 Income (loss) from unconsolidated businesses (14) (196) 23 78 (109) Interest income 15 9 1 13 38 Interest expense 906 268 17 33 1,224 Income tax expense 1,792 65 410 (40) 2,227 Net income 2,993 95 657 48 3,793 Assets 39,429 7,090 1,474 5,583 53,576 Investments in unconsolidated businesses 4 1,571 22 2,080 3,677 Capital expenditures 5,486 988 34 134 6,642 Noncash financing and investing activities: Contributions of net assets to unconsolidated businesses - - - 682 682 Contributions to partnerships - - - 73 73
F-51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Note 18 continued RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION The following is a reconciliation of the adjusted results for the operating segments to the applicable line items in the consolidated financial statements. (dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- OPERATING REVENUES Total reportable segments - adjusted $ 33,375 $ 31,743 $ 30,649 Reconciling items (201) (177) (192) Special items -- -- (263) ------------------------------------------- Consolidated operating revenues $ 33,174 $ 31,566 $ 30,194 =========================================== NET INCOME Total reportable segments - adjusted $ 4,625 $ 4,220 $ 3,793 Reconciling items 135 103 54 Special items (558) (1,358) (1,392) ------------------------------------------- Consolidated net income $ 4,202 $ 2,965 $ 2,455 =========================================== ASSETS Total reportable segments $ 62,698 $ 56,050 $ 53,576 Reconciling items (84) (906) 388 ------------------------------------------- Consolidated assets $ 62,614 $ 55,144 $ 53,964 =========================================== Reconciling items include undistributed corporate expenses, corporate assets and intersegment eliminations. Special items in 1999 included costs associated with our 1997 merger with NYNEX Corporation and a loss on a mark-to-market adjustment for exchangeable notes. Special items in 1998 and 1997 included merger-related costs, retirement incentives, and other charges. - -------------------------------------------------------------------------------- Note 19 Additional Financial Information - -------------------------------------------------------------------------------- The tables that follow provide additional financial information related to our consolidated financial statements: INCOME STATEMENT INFORMATION (dollars in millions) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Taxes other than income $ 1,484 $ 1,466 $ 1,607 Interest expense incurred, net of amounts capitalized 1,285 1,376 1,275 Capitalized interest 98 90 81 Advertising expense 379 394 397 Interest expense incurred includes $22 million in 1999, $41 million in 1998, and $45 million in 1997 related to our lease financing business. Such interest expense is classified as Other Operating Expenses. BALANCE SHEET INFORMATION (dollars in millions) At December 31, 1999 1998 - -------------------------------------------------------------------------------- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable $ 3,753 $ 3,401 Accrued expenses 1,148 1,272 Accrued vacation pay 641 634 Accrued salaries and wages 282 232 Interest payable 292 329 Accrued taxes 349 237 ---------------------------- $ 6,465 $ 6,105 ============================ OTHER CURRENT LIABILITIES Advance billings and customer deposits $ 635 $ 696 Dividends payable 602 610 Other 310 132 ---------------------------- $ 1,547 $ 1,438 ============================ CASH FLOW INFORMATION (dollars in millions) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- CASH PAID Income taxes, net of amounts refunded $ 1,352 $ 1,369 $ 1,403 Interest, net of amounts capitalized 1,247 1,201 1,215 F-52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 20 Comprehensive Income - -------------------------------------------------------------------------------- Comprehensive income consists of net income and other gains and losses affecting shareowners' equity that, under generally accepted accounting principles, are excluded from net income. Changes in the components of other comprehensive income (loss), net of income tax expense (benefit), are as follows:
(dollars in millions) Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN CURRENCY TRANSLATION ADJUSTMENTS, net of taxes of $1, $2 and $(2) $ (68) $ (146) $ (234) -------------------------------------------- UNREALIZED GAINS ON MARKETABLE SECURITIES Unrealized gains, net of taxes of $661, $16 and $0 1,226 12 3 Less: reclassification adjustments for gains realized in net income, net of taxes of $0, $13 and $1 1 10 1 -------------------------------------------- Net unrealized gains on marketable securities 1,225 2 2 -------------------------------------------- MINIMUM PENSION LIABILITY ADJUSTMENT, net of taxes of $5 and $(10) 7 (17) -- -------------------------------------------- OTHER COMPREHENSIVE INCOME (LOSS) $ 1,164 $ (161) $ (232) ============================================
The components of accumulated other comprehensive income (loss) are as follows: (dollars in millions) At December 31, 1999 1998 - -------------------------------------------------------------------------------- Foreign currency translation adjustments $ (767) $ (699) Unrealized gains on marketable securities 1,227 2 Minimum pension liability adjustment (10) (17) ---------------------------- Accumulated other comprehensive income (loss) $ 450 $ (714) ============================ In 1999, unrealized gains included $1,131 million (net incomes taxes of $609 million) related to our investment in TCNZ, for which we changed our accounting from the equity method to the cost method (see Note 1). - -------------------------------------------------------------------------------- Note 21 Proposed Domestic Wireless Transaction - -------------------------------------------------------------------------------- On September 21, 1999, we signed a definitive agreement with Vodafone AirTouch plc (Vodafone AirTouch) to create a national wireless business (Wireless Co.) composed of both companies' U.S. wireless assets. Assuming that all of the assets are contributed as provided for in the agreement, Wireless Co. will be 55% owned by Bell Atlantic and 45% owned by Vodafone AirTouch. We will control the venture and, accordingly, consolidate the results of Wireless Co. into our financial results. The transaction will be accounted for as a purchase method business combination. The completion of this transaction is subject to a number of conditions, including certain regulatory approvals. In January 2000, the transaction was approved by shareholders of Vodafone AirTouch. In February 2000, we signed an agreement with ALLTEL Corporation to exchange certain wireless interests. This agreement eliminates all of the overlapping cellular operations that would be created by the combination of Bell Atlantic and Vodafone AirTouch wireless properties. Wireless Co. will initially assume or incur up to $10 billion in existing and new debt. Vodafone AirTouch has the right to require that up to $20 billion worth of its interest in Wireless Co. be purchased by Bell Atlantic and/or Wireless Co. between the third and seventh years following the closing of the transaction. We expect to complete the transaction in April 2000. F-53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 22 Proposed Bell Atlantic - GTE Merger - -------------------------------------------------------------------------------- Bell Atlantic and GTE Corporation (GTE) have announced a proposed merger of equals under a definitive merger agreement dated as of July 27, 1998. Under the terms of the agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common stock for each share of GTE common stock that they own. Bell Atlantic shareholders will continue to own their existing shares after the merger. We expect the merger to qualify as a pooling of interests, which means that for accounting and financial reporting purposes the companies will be treated as if they had always been combined. At annual meetings held in May 1999, the shareholders of each company approved the merger. The completion of the merger is subject to a number of conditions, including certain regulatory approvals (all of which have been obtained except that of the Federal Communications Commission) and receipt of opinions that the merger will be tax-free. We are targeting completion of the merger in the second quarter of 2000. We have provided the following unaudited pro forma combined condensed financial statements. These financial statements are presented assuming that the merger will be accounted for as a pooling of interests, and include certain reclassifications to conform to the presentation that will be used by the combined company and certain pro forma adjustments that conform the companies' methods of accounting. This information is presented for illustration purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the merger had been completed at the period indicated. This information does not give pro forma effect to the proposed domestic wireless transaction described in Note 21. The information does not necessarily indicate the future operating results or financial position of the combined company. PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (dollars in millions, except per share amounts)(unaudited) Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Operating revenues $ 58,510 $ 57,039 $ 53,454 Operating expenses 42,643 45,284 42,613 ----------------------------------------- Operating income 15,867 11,755 10,841 Income (loss) from unconsolidated businesses 575 (175) 93 Other income and (expense), net (7) (39) (178) Interest expense 2,616 2,705 2,465 Mark-to-market adjustment for exchangeable notes (664) - - Provision for income taxes 4,862 3,482 3,111 ----------------------------------------- Income from continuing operations $ 8,293 $ 5,354 $ 5,180 ========================================= BASIC EARNINGS PER COMMON SHARE Income from continuing operations $ 3.03 $ 1.95 $ 1.90 Weighted-average shares outstanding (in millions) 2,739 2,728 2,720 ----------------------------------------- DILUTED EARNINGS PER COMMON SHARE Income from continuing operations $ 2.99 $ 1.93 $ 1.89 Weighted-average shares - diluted (in millions) 2,777 2,759 2,745 ----------------------------------------- PRO FORMA COMBINED CONDENSED BALANCE SHEET At December 31, 1999 (dollars in millions)(unaudited) - -------------------------------------------------------------------------------- ASSETS Current assets Cash and temporary cash investments $ 3,068 Receivables, net 12,083 Net assets available for sale 1,802 Other current assets 2,919 ------------- 19,872 Plant, property and equipment, net 62,366 Investments in unconsolidated businesses 10,207 Other assets 20,668 ------------- Total assets $113,113 ============= LIABILITIES AND SHAREOWNERS' INVESTMENT Current liabilities Debt maturing within one year $ 15,063 Accounts payable and accrued liabilities 12,247 Other current liabilities 2,635 ------------- 29,945 ------------- Long-term debt 32,420 ------------- Employee benefit obligations 13,744 ------------- Deferred credits and other liabilities 10,710 ------------- Shareowners' investment Common stock (2,756,484,606 shares) 276 Contributed capital 20,135 Reinvested earnings 7,346 Accumulated other comprehensive income 74 ------------- 27,831 Less common stock in treasury, at cost 640 Less deferred compensation - employee stock ownership plans 897 ------------- 26,294 ------------- Total liabilities and shareowners' investment $113,113 ============= We anticipate that the combined company will record a pre-tax charge of approximately $375 million for direct incremental merger-related costs in the quarter in which the merger is completed. Merger-related costs anticipated to be incurred have been reflected as an increase to Other Current Liabilities and amounts already incurred by GTE and Bell Atlantic have been shown as a reduction to Other Current Assets. The after-tax cost of this anticipated charge (approximately $310 million) has been reflected as a reduction in Reinvested Earnings in the unaudited pro forma combined condensed balance sheet as of December 31, 1999. F-54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 23 Quarterly Financial Information (Unaudited) - --------------------------------------------------------------------------------
(dollars in millions, except per share amounts) Income (Loss)Before Extraordinary Item ------------------------------------------------- Operating Operating Per Share - Per Share - Net Income Quarter Ended Revenues Income Amount Basic Diluted (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ 1999 March 31 $ 7,967 $ 2,078 $ 1,142 $ .74 $ .72 $ 1,142 June 30 8,295 2,147 1,173 .76 .75 1,167 September 30 8,304 2,118 1,174 .76 .74 1,174 December 31* 8,608 2,152 719 .46 .45 719 1998 March 31 $ 7,651 $ 1,712 $ 910 $ .58 $ .57 $ 893 June 30 7,928 1,953 1,027 .66 .65 1,021 September 30** 7,910 1,130 (7) (.01) (.01) (8) December 31 8,077 1,832 1,061 .66 .65 1,059
* Results of operations for the fourth quarter of 1999 include a $432 million (after-tax) loss on mark-to-market adjustment for exchangeable notes and a credit of $19 million (after-tax) for the favorable settlement of a litigation matter. ** Results of operations for the third quarter of 1998 include approximately $1,100 million (after-tax) of costs associated with the completion of our retirement incentive program, as well as charges to adjust the carrying values of two Asian investments and to write-down assets. Income (loss) before extraordinary item per common share is computed independently for each quarter and the sum of the quarters may not equal the annual amount. - -------------------------------------------------------------------------------- Note 24 Subsequent Events - -------------------------------------------------------------------------------- COMMON STOCK BUYBACK PROGRAM On March 1, 2000, our Board of Directors authorized a new share buyback program through which we may repurchase up to 80 million shares of our common stock over time in the open market. The Board of Directors also rescinded a previous authorization to repurchase up to $1.4 billion in company shares. AGREEMENT WITH METROMEDIA FIBER NETWORK, INC. On March 6, 2000, we invested approximately $1.7 billion in Metromedia Fiber Network, Inc. (MFN), a domestic and international provider of dedicated fiber optic networks in major metropolitan markets. This investment included $715 million to acquire approximately 9.5% of the equity of MFN through the purchase of newly issued shares at $28 per share. We also purchased approximately $975 million in subordinated debt securities convertible at our option, upon receipt of necessary government approvals, into common stock at a conversion price of $34 per share or an additional 9.6% of the equity of MFN. This investment completed a portion of our previously announced agreement with MFN, which included the acquisition of approximately $550 million of long-term capacity on MFN's fiber optic networks, beginning in 1999 through 2002. Of the $550 million, 10% was paid in November 1999 and 30% will be paid each October from 2000 through 2002. F-55 BELL ATLANTIC CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1999, 1998 and 1997 (Dollars in Millions)
Additions --------------------------- Charged to Balance at Other Balance at Beginning Charged To Accounts-- Deductions-- End of Description of Period Expenses Note (a) Note (b) Period - ------------------------------------------------------------------------------------------------- Allowance for Uncollectible Accounts Receivable: Year 1999 $593 $536 $571 $1,081 $619 Year 1998 612 460 578 1,057 593 Year 1997 567 531 557 1,043 612 Valuation Allowance for Deferred Tax Assets: Year 1999 $317 $ 9 $ -- $ -- $326 Year 1998 79 276 -- 38 317 Year 1997 45 65 -- 31 79 Restructuring Reserves: Year 1999 $ 55 $ -- $ -- $ 55 $ -- Year 1998 150 -- -- 95 55 Year 1997 330 -- -- 180 150 Allowance for Uncollectible Finance Lease Receivables: Year 1999 $ 37 $ 6 $ -- $ 6 $ 37 Year 1998 25 5 7 -- 37 Year 1997 24 13 -- 12 25
- ------------ (a) Allowance for Uncollectible Accounts Receivable includes (1) amounts previously written off which were credited directly to this account when recovered, and (2) accruals charged to accounts payable for anticipated uncollectible charges on purchases of accounts receivable from others which were billed by us. Allowance for Uncollectible Finance Lease Receivables includes amounts transferred from other accounts. (b) Amounts written off as uncollectible or transferred to other accounts or utilized (except for the valuation allowance for deferred tax assets). F-56 INDEX TO EXHIBITS Exhibits identified in parentheses below, on file with the Securities and Exchange Commission (SEC) in File No. 1-8606 except as otherwise noted, are incorporated herein by reference as exhibits hereto. Exhibit Number - ------ 2 Agreement and Plan of Merger by and among Bell Atlantic Corporation, Beta Gamma Corporation and GTE Corporation, dated as of July 27, 1998. (Exhibit 2.01 to Form 8-K, date of report July 30, 1998.) 3a Restated Certificate of Incorporation of Bell Atlantic Corporation ("Bell Atlantic"). (Exhibit 3(i) to Form 8-K, date of report August 14, 1997.) 3b By-Laws of Bell Atlantic, as amended and restated as of January 1, 1999. (Exhibit 3b to Form 10-K for the year ended December 31, 1998.) 4 No instrument which defines the rights of holders of long-term debt of Bell Atlantic and its consolidated subsidiaries is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, Bell Atlantic hereby agrees to furnish a copy of any such instrument to the SEC upon request. 10a Bell Atlantic Deferred Compensation Plan for Outside Directors, as amended and restated as of January 1, 1998. (Exhibit 10a to Form 10-K for the year ended December 31, 1998.)* 10b Description of Bell Atlantic Insurance Plan for Directors.* 10c Description of Bell Atlantic Plan for Non-Employee Directors' Travel Accident Insurance.* 10d Bell Atlantic Retirement Plan for Outside Directors, as amended and restated as of January 1, 1996. (Exhibit 10k to Form 10-K for the year ended December 31, 1995.)* 10e Bell Atlantic Stock Compensation Plan for Outside Directors, as amended and restated as of January 1, 1998. (Exhibit 10e to Form 10-K for the year ended December 31, 1998.)* 10f Bell Atlantic Corporation Directors' Charitable Giving Program. (Exhibit 10p to Form SE dated March 29, 1990.)* 10f(i) Resolutions amending and partially terminating the Program. (Exhibit 10p to Form SE dated March 29, 1993.)* 10g Description of Changes in Compensation for Outside Directors of Bell Atlantic, effective August 14, 1997 (Exhibit 10y to Form 10-Q for the quarter ended September 30, 1997.)* 10h Bell Atlantic Senior Management Short Term Incentive Plan, as amended and restated effective as of January 22, 1996. (Exhibit 10a to Form 10-K for the year ended December 31, 1996.)* 10h(i) Description of Amendment, effective August 14, 1997. (Exhibit 10a(i) to Form 10-Q for the quarter ended September 30, 1997.)* 10i Bell Atlantic Senior Management Income Deferral Plan, effective as of January 1, 1998.* 10j Bell Atlantic 1985 Incentive Stock Option Plan, restated as of June 1, 1999 to incorporate amendments adopted through May 31, 1999.* 10k Section 6 from Bell Atlantic Cash Balance Plan regarding limitations on payment of pension amounts which exceed the limitations contained in the Employee Retirement Income Security Act of 1974.* 10l Bell Atlantic Senior Management Long-Term Disability and Survivor Protection Plan, as amended. (Exhibit 10h to Form SE filed on March 27, 1986.)* 10l(i) Description of Amendments, effective January 1, 1998, to Bell Atlantic Senior Management Long Term Disability Plan (formerly known, as the Bell Atlantic Senior Management Long-Term Disability and Survivor Protection Plan). (Exhibit 10b(ii) to Form 10-K for the year ended December 31, 1997.)* 10m Bell Atlantic Salary Program for Senior Managers, effective August 14, 1997. (Exhibit 10x to Form 10-Q for the quarter ended September 30, 1997.)* 10n (reserved) 10o Description of Bell Atlantic Senior Management Estate Management Plan, effective April 1, 1998. (Exhibit 10rr to Form 10-K for year ended December 31, 1997.)* 10p Description of Bell Atlantic Senior Management Flexible Spending Perquisite Account, effective January 1, 1998. (Exhibit 10ss to Form 10-K for year ended December 31, 1997.)* 10q (reserved) 10r NYNEX 1987 Restricted Stock Award Plan (Exhibit No. (28) (i) 1 to NYNEX's filing on Form SE dated March 23, 1988, File No. 1-8608.)* 10s NYNEX 1990 Stock Option Plan as amended. (Exhibit No. 2 to NYNEX's Proxy Statement dated March 20, 1995, File No. 1-8608.)* 10t NYNEX 1995 Stock Option Plan as amended. (Exhibit No. 1 to NYNEX's Proxy Statement dated March 20, 1995, File No. 1-8608.)* 10u (reserved) 10v NYNEX Supplemental Life Insurance Plan. (Exhibit No. 10 iii 21 to NYNEX's Quarterly Report on Form 10-Q for the period ended June 30, 1996, File No. 1-8608.)* 10w Form of NYNEX Executive Retention Agreement with John Killian and Thomas J. Tauke. (Exhibit No. 10 iii 35 to NYNEX's Quarterly Report on Form 10-Q, for the period ended June 30, 1996, File No. 1-8608.)* 10x Employment Agreement, dated June 30, 1995, between Cellco Partnership and Dennis Strigl, as amended.* 10y Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and Lawrence T. Babbio, Jr. (Exhibit 10a to Form 10-Q for the quarter ended June 30, 1998.)* 10z Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and James G. Cullen. (Exhibit 10b to Form 10-Q for the quarter ended June 30, 1998.)* 10z(i) Letter, dated November 4, 1999, to James G. Cullen concerning employment-related issues.* 10aa Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and Frederic V. Salerno. (Exhibit 10c to Form 10-Q for the quarter ended June 30, 1998.)* 10bb Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and Donald J. Sacco. (Exhibit 10d to Form 10-Q for the quarter ended June 30, 1998.)* 10cc Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and Morrison DeS. Webb. (Exhibit 10e to Form 10-Q for the quarter ended June 30, 1998.)* 10dd Employment Agreement, dated as of June 1, 1998, by and between Bell Atlantic Corporation and James R. Young. (Exhibit 10f to Form 10-Q for the quarter ended June 30, 1998.)* 10ee Form of Amendment, dated as of October 27, 1998, to Employment Agreements with Lawrence T. Babbio, Jr., James G. Cullen, Frederic V. Salerno, Donald J. Sacco, Morrison DeS. Webb and James R. Young. (Exhibit 10ee to Form 10-K for the year ended December 31, 1998.)* 10ff Employment Agreement, dated as of January 1, 1999, by and between Bell Atlantic Corporation and Ivan G. Seidenberg. (Exhibit 10ff to Form 10-K for the year ended December 31, 1998.)* 10gg (reserved) 10hh Resolution, dated January 24, 1994, granting Lawrence T. Babbio, Jr. certain nonqualified stock options to purchase American Depository Receipts representing Series L shares of the capital stock of Grupo Iusacell, S.A. de C.V. (Exhibit 10s to Form 10-K for the year ended December 31, 1993.)* 10ii Form of stock option grant to Lawrence T. Babbio, Jr., dated February 18, 1997, containing terms and conditions of certain nonqualified stock options to purchase American Depository Receipts representing Series L shares of the capital stock of Grupo Iusacell, S.A. de C.V. (Exhibit 10q to Form 10-K for the year ended December 31, 1996.)* 10jj Form of Stay Incentive Agreement and Separation and Non-Compete Agreement with Doreen A. Toben with respect to the Bell Atlantic-NYNEX merger. (Exhibit 10(f) to Registration Statement on Form S-4 No. 333-11573.)* 10kk Form of Stay Incentive Agreement, dated as of November 23, 1998, with Doreen A. Toben and Dennis Strigl with respect to the Bell Atlantic - GTE Merger. (Exhibit 10kk to Form 10-K for the year ended December 31, 1998.)* 10ll Form of Stay Incentive Agreement, dated as of November 23, 1998, with Thomas J. Tauke, William F. Heitmann, Mark J. Mathis, and John Killian. (Exhibit 10ll to Form 10-K for the year ended December 31, 1998.)* 10mm Form of Stay Incentive Agreement, dated as of November 23, 1998, with Jacquelyn B. Gates and Chester N. Watson. (Exhibit 10mm to Form 10-K for the year ended December 31, 1998.)* 10nn Form of Merger Agreement, dated as of January 29, 1999, with Doreen A. Toben, William F. Heitmann, and Mark J. Mathis. (Exhibit 10nn to Form 10-K for the year ended December 31, 1998.)* 10oo U.S. Wireless Agreement, dated September 21, 1999, among Bell Atlantic Corporation and Vodafone AirTouch plc, including the forms of Amended and Restated Partnership Agreement and the Investment Agreement. (Exhibit 10 to Form 10-Q for the quarter ended September 30, 1999.) 10pp Form of Merger Agreement, dated as of January 29, 1999, with Jacquelyn B. Gates and Chester N. Watson. (Exhibit 10pp to Form 10-K for the year ended December 31, 1998.)* 10qq Stock Option Agreement, dated as of July 27, 1998, between Bell Atlantic Corporation and GTE Corporation. (Exhibit 10.01 to Form 8-K, date of report July 30, 1998.)* 10rr Stock Option Agreement, dated as of July 27, 1998, between GTE Corporation and Bell Atlantic Corporation. (Exhibit 10.02 to Form 8-K, date of report July 30, 1998.)* 12 Computation of Ratio of Earnings to Fixed Charges. 21 List of subsidiaries of Bell Atlantic. 23 Consent of Independent Accountants. 25 Powers of Attorney. 27 Financial Data Schedule. - ----------- *Indicates management contract or compensatory plan or arrangement. EX-10.B 2 BELL ATLANTIC INSURANCE PLAN FOR DIRECTORS EXHIBIT 10b [BELL ATLANTIC LOGO] ================================================================================ DIRECTORS' GROUP LIFE INSURANCE (OPTIONAL) SUMMARY Non-employee Directors are covered through a rider on Bell Atlantic Network Services, Inc.'s Group Life policy. $100,000 coverage. Term insurance, convertible at retirement, with no residuals. The carrier is Metropolitan Life. Director can accept coverage, elect to make an irrevocable assignment, or decline coverage entirely. TAX IMPLICATIONS OF LIFE INSURANCE OPTIONS While the following is the Company's view of the tax implications of your options under this life insurance program, a tax or financial advisor should be consulted when considering an irrevocable assignment of your insurance coverage, since an assignment would be an integral part of your estate and financial planning.* LIFE INSURANCE COVERAGE FOR OUTSIDE DIRECTORS The Board of Directors has authorized $100,000 of life insurance coverage for each outside director. However, the resolution also allows each outside director to decline the life insurance coverage, which he might do for income tax reasons. The actual premium cost of providing an outside director with $100,000 of life insurance coverage will have to be included in the outside director's income, even though he receives no cash. Since an outside director is not an employee of Bell Atlantic Corporation, the special income tax rules for group- term life insurance coverage would not apply, even though the actual coverage for outside directors may be provided through a Bell Atlantic group-term life insurance policy. As a consequence, the actual premium cost to Bell Atlantic is taxable as income. For example, if it costs Bell Atlantic Corporation $.75 per month to provide a 58-year old director $1,000 of coverage, then the director would have to report as income $900 for each year of coverage ($.75/$1,000 x $100,000 coverage x 12 months/year). Similarly, if it cost $1.17 per month to provide a 63-year old director $1,000 of coverage, the director would have to report $1404 as income for each year of coverage. *See Commentary for the Benefit of the Director and His Attorney On Some Aspects of Absolute Assignments of Group Term Insurance", following in this section. [BELL ATLANTIC LOGO] ================================================================================ COMMENTARY FOR THE BENEFIT OF THE DIRECTOR AND HIS* ATTORNEY ON SOME ASPECTS OF ABSOLUTE ASSIGNMENTS OF GROUP TERM LIFE INSURANCE. A. INTRODUCTION The assignment of the ownership of life insurance, especially group term life insurance such as that provided by Bell Atlantic to its Directors, is a popular and effective estate planning tool. However, because the tax and state law rules in this area are quite complicated, it is essential that the Director secure advice from his own attorney before executing any assignment. Such advice cannot be given to the Director by the Insurance Company or by representatives of Bell Atlantic Corporation. Neither Bell Atlantic Corporation nor the Insurance Company assumes any responsibility for the adequacy or effect of an assignment for any purpose. These comments are for the purpose of informing the Director of some of the considerations and problems involved in determining whether to make an assignment. B. RIGHTS IRREVOCABLY TRANSFERRED UNDER AN ASSIGNMENT The Director who makes an assignment of Group Life Insurance irrevocably transfers to the assignee and loses all control over all rights, title, interest and incidents of ownership, both present and future, relating to the assigned Group Life Insurance. The assigned rights over which the assignor loses all control include but are not limited to the following: 1. The right to designate and change beneficiaries and contingent beneficiaries. 2. The right to elect or revise any Optional Mode of Settlement. 3. The right to make any application or election when and if the Director would otherwise be eligible to make such application or election. 4. The right to elect any optional increases in the amounts of insurance. 5. All other rights or incidents of ownership of any nature relating to the assigned insurance. All the above rights, which would otherwise be exercisable by the Director would, following an assignment, be exercisable by the assignee. C. FEDERAL ESTATE TAX CONSEQUENCES The Internal Revenue Service has ruled that an absolute assignment by an insured party of all of his incidents of ownership in a Group Term Life Insurance policy wholly paid for by the Company is effective to prevent the insurance death proceeds from being included in his gross estate for Federal Estate Tax purposes under Internal Revenue Code Section 2042, provided that both the applicable state law and the policy itself permit the insured party to make such assignment, and that the assignment was made at least three years prior to the death of the insured party, as required by Section 2035 of the Code. D. ASSIGNABILITY UNDER STATE LAW The laws of almost all states permit the assignment of Group Term Life Insurance. Nonetheless, a Director contemplating an assignment should consult an attorney to determine any particular requirements of applicable state law. E. ASSIGNMENTS CANNOT BE REVOKED Once done, an assignment cannot be undone without the cooperation of the assignee. Therefore, a Director should reflect on the undesirable complications and loss of control which might result-if an assignment is followed by changes in family circumstances such as death of the assignee, divorce, remarriage, incompetency, etc. Also, there could possibly be changes in the Federal tax law that could *For the sake of grammatical convenience, the masculine pronoun is used throughout the commentary. [BELL ATLANTIC LOGO] ================================================================================ change some of the tax aspects involved. F. DISPOSITION OF ASSIGNEE'S INTEREST BY WILL OR INTESTACY If the assignee is an individual, when he dies the value of the assigned policy will be included in his estate for death tax purposes. However, should the assignee die before the insured Director--so that at the assignee's death the insurance will not yet have been converted to cash proceeds-- the policy will have only minimal value. A problem might arise in such a case, however, if the assignee's Will, or in the absence of a Will the applicable state intestacy laws, caused the policy to revert to the insured Director. In such a case, the Director would again be the owner of the policy and on the Director's death the full value of the proceeds of the policy would be included in his estate for death tax purposes. Further problems along these lines might arise if the assignee should by Will or under the intestate laws leave all or a portion of the policy to a minor or an incompetent who would be unable without the appointment of a guardian to exercise his ownership rights. G. ADDITIONAL TAX CONSIDERATIONS--GIFT, ESTATE AND INCOME The following very general Gift, Estate and Income Tax consequences should be considered: 1. A gratuitous assignment of a policy constitutes a gift for Federal gift tax purposes. However, as noted in F above, the value of the assigned policy is likely to be minimal. In addition, each premium payment with respect to the assigned policy made by the Company on behalf of the Director will also constitute a gift by the Director to the assignee. Whether the policy assignment or subsequent premium payments made on behalf of the Director will qualify for the annual gift tax exclusion (currently $10,000 per donee), depends on whether the assignment and subsequent premium payments are gifts of a "present interest" as defined in the Internal Code. An assignment to a trust (see 3 below), may not be a gift of a present interest, unless the trust is carefully drafted to comply with the Code's requirements. 2. If the Director should die within three years of making an assignment, the proceeds of the assigned policy will be included in his estate for Federal estate tax purposes. 3. An irrevocable trust can be the assignee of a Director's Group Term Life Insurance Policy. As noted above, if the Director lives for three years after making the assignment to such a trust the proceeds of the policy will not be included in his estate for Federal estate tax purposes. If the Director is married, even though the trust is designed so that after his death the policy proceeds are held in trust for his spouse and then for his children, the proceeds will not be included in his spouse's estate on her death, provided, of course, that the trust complies with the Internal Revenue Code's rules in this area. 4. The Director's or his assignee's group life insurance proceeds payable at his death are free from Federal income tax. If the policy beneficiary elects payment of the proceeds in installments or in an annuity, the interest element of the installment will constitute taxable income. H. COMMUNITY PROPERTY LAW CONSIDERATIONS In community property states, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington, generally when any part of a life insurance premium is paid from community funds during marriage, all or a part of the insurance proceeds may be considered community property. *For the sake of grammatical convenience, the masculine pronoun is used throughout the commentary. [BELL ATLANTIC LOGO] ================================================================================ Where an assignment is made to an assignee other than the spouse, consideration should be given to the rights of the Director's spouse under such laws in that the insured Director may not make a gift of his spouse's interest without her consent. These considerations apply to assignments made in states which have community property laws. They may also apply to an assignment previously made in a non-community property State if the Director subsequently becomes domiciled in a community property State and premium contributions are paid from community funds. Since under community property laws a Director's spouse is considered a part owner of the policy, the Federal tax consequences of an assignment governed by community property law may be different from the consequences of an assignment made in a common law jurisdiction. *For the sake of grammatical convenience, the masculine pronoun is used throughout the commentary. EX-10.C 3 NON-EMPLOYEE DIRECTORS' TRAVEL ACCIDENT INSURANCE EXHIBIT 10c [LOGO OF BELL ATLANTIC] ================================================================================ INDEMNIFICATION AND TRAVEL ACCIDENT INSURANCE INDEMNIFICATION The Company indemnifies directors to the full extent permitted under applicable law. Liability insurance policies cover the Company for many losses arising from a claim made against directors for a "wrongful act" or certain matters claimed solely by reason of being in a position of a Director of the Company. The policies also directly cover the directors for certain losses for which the Company cannot legally provide indemnification. TRAVEL ACCIDENT INSURANCE This insurance provides financial compensation to beneficiaries of non- employee directors in the case of death, disability, or dismemberment from an accident while the non-employee director is away from home or permanent employment and on company business. Beneficiary cards are available from the Corporate Secretary's organization. ================================================================================ ABSOLUTE ASSIGNMENT OF TRAVEL ACCIDENT INSURANCE A Director may choose to make an irrevocable assignment of his Travel Accident Insurance. Since the same conditions which apply to the assignment of Group Life Insurance also apply to the life insurance portion (but not the dismemberment or disability portion) of the Travel Accident Insurance, a Director considering an assignment of Travel Accident Insurance should first review "Commentary for the Benefit of the Director and His Attorney on Some Aspects of Absolute Assignments of Group Term Life Insurance", in Part B, Section 5 of this Handbook. As always, a tax advisor should be consulted when considering an irrevocable assignment of insurance. Assignment forms are available from the Corporate Secretary's organization. EX-10.I 4 SENIOR MANAGEMENT INCOME DEFERRAL PLAN EXHIBIT 10i BELL ATLANTIC SENIOR MANAGEMENT INCOME DEFERRAL PLAN Effective January 1, 1998 Table of Contents -----------------
Section Page ------- ---- 1. Purpose 1 2. Definitions 1 3. Participation 4 4. Deferral Elections 4 5. Ongoing Company Credits 6 6. Conversion and Other Transitional Credits 7 7. Section 415 Credits 8 8. Account Investments 9 9. Distribution Rules 11 10. Vesting, Forfeiture and Non-Compete 15 11. Unfunded Plan 17 12. Administration, Amendment and Termination 17
BELL ATLANTIC SENIOR MANAGEMENT INCOME DEFERRAL PLAN 1. PURPOSE. ------- The Bell Atlantic Senior Management Income Deferral Plan (the "Plan") is a nonqualified deferred compensation and supplemental retirement plan. Its purpose is to enable Participants to defer voluntarily the receipt of certain compensation, and to provide retirement and other benefits to Participants through a defined contribution, individual account program. 2. DEFINITIONS. ----------- (a) Base Salary and Eligible Base Salary. "Base Salary" is the gross ------------------------------------ amount (before reduction for tax withholding, pre-tax or after-tax contributions to any employee benefit plans, or other special payroll reductions) of total annual base recurring salary. "Eligible Base Salary" is the portion of Base Salary for a Plan Year in excess of the Qualified Plan Compensation Limit for that Plan Year, provided, however, that (i) the Plan Administrator shall have the discretion to calculate Eligible Base Salary without regard to any merit increases in Base Salary which occur during a Plan Year, (ii) in the case of a newly hired, newly promoted, or newly demoted Senior Manager, Eligible Base Salary for the year of hiring, promotion, or demotion shall be prorated and calculated in a reasonable manner as determined by the Plan Administrator, and (iii) Eligible Base Salary shall also include any pre-tax contribution to the Bell Atlantic Savings Plan for Salaried Employees which exceeds the limitations set forth in Sections 401, 402, or 415 of the Internal Revenue Code (plus the earnings on any such excess contribution). (b) Bell Atlantic, Bell Atlantic Company and Company. "Bell Atlantic" ------------------------------------------------ means Bell Atlantic Corporation or any successor. "Bell Atlantic Company" or "Company" means (i) Bell Atlantic, (ii) each corporation and partnership in which Bell Atlantic has a direct or indirect ownership interest of at least 50%, and (iii) any other corporation, partnership or other entity which the Plan Administrator determines shall be treated as a Bell Atlantic Company for purposes of this Plan. (c) Bonus Compensation and Eligible Bonus Compensation. -------------------------------------------------- "Bonus Compensation" is the gross amount (before reduction for tax withholding, pre-tax or after-tax contributions to any employee benefit plans, or other special payroll reductions) of (i) a short-term incentive award under the Bell Atlantic Senior Management Short Term Incentive Plan, (ii) a short-term incentive award under the Bell Atlantic Attorney Incentive Plan, and (iii) any other incentive award paid by a Participating Company which is designated by the Plan Administrator as Bonus Compensation for purposes of this Plan. All Bonus Compensation shall be "Eligible Bonus Compensation" provided, however, that in the case of a newly promoted or newly demoted Senior Manager, Eligible Bonus Compensation for the year of promotion or demotion shall be determined and calculated in a reasonable manner as determined by the Plan Administrator. (d) Company Balance. The term "Company Balance" is defined in section --------------- 9(a) of this Plan. (e) Change in Control. The term "Change in Control" shall be an event ----------------- which results in funding of the Bell Atlantic Rabbi Trust or any successor trust or other financial arrangement which is designed to provide Participants in this Plan with additional assurance that the obligation to pay benefits under this Plan will be honored. (f) Employee Balance. The term "Employee Balance" is defined in Section ---------------- 9(a) of this Plan. (g) HRC. "HRC" means the Human Resources Committee of the Board of --- Directors of Bell Atlantic. (h) Investment Funds. The term "Investment Funds" is defined in Section ---------------- 8(a) of this Plan. (i) Internal Revenue Code. "Internal Revenue Code" means the Internal --------------------- Revenue Code of 1986, as amended. (j) Other Eligible Compensation. "Other Eligible Compensation" shall mean --------------------------- any form of compensation, other than Eligible Base Salary and Eligible Bonus Compensation, which the Plan Administrator determines is eligible to be deferred or credited to a Participant's Account under the terms of this Plan. (k) Participant. The term "Participant" includes an "Active Participant" ----------- and an "Inactive Participant" as those terms are defined in Section 3 of this Plan. (l) Participant's Account. The term "Participant's Account" shall refer, --------------------- collectively, to the unfunded book-entry sub-accounts which represent a Participant's deferred compensation, retirement benefits, and other benefits under this Plan, as adjusted from time to time to reflect credits to such sub- accounts, withdrawals from such sub-accounts, and earnings and losses derived from the performance of the Investment Funds to which sub-account balances have been allocated. Each Participant's Account, and the credits reflected in such account, shall consist of the aggregate of the following sub-accounts and credits. 2 (1) Personal Deferral Sub-Account and Personal Deferral Credits. The ----------------------------------------------------------- "Personal Deferral Sub-Account" shall consist of (i) certain conversion credits as provided for in Section 6 of the Plan, (ii) credits pursuant to a Participant's voluntary election to defer the receipt of Eligible Base Salary, Eligible Bonus Compensation, or Other Eligible Compensation as provided for in Section 4 of the Plan, and (iii) credits pursuant to any employment, retention, stay incentive, or other agreement between a Participant and any Bell Atlantic Company which provides for a credit of Other Eligible Compensation to this sub- account in accordance with Section 5(c) of the Plan. All credits described in this sub-paragraph (1), and all earnings and losses with respect to such credits, are collectively referred to in this Plan as "Personal Deferral Credits". (2) Matching Contribution Sub-Account and Matching Contribution ----------------------------------------------------------- Credits. The "Matching Contribution Sub-Account" shall consist of (i) certain - ------- conversion credits as provided for in Section 6 of the Plan, and (ii) matching credits provided by the Company in accordance with Section 5(a) of the Plan. All credits described in this sub-paragraph (2), and all earnings and losses with respect to such credits, are collectively referred to in this Plan as "Matching Contribution Credits". (3) Retirement Contribution Sub-Account and Retirement Contribution --------------------------------------------------------------- Credits. The "Retirement Contribution Sub-Account" shall consist of (i) certain - ------- conversion and other credits as provided for in Section 6 of the Plan, (ii) retirement credits provided by the Company in accordance with Section 5(b) of the Plan, (iii) certain other retirement credits provided by the Company in accordance with Section 7 of the Plan, and (iv) credits pursuant to any employment, retention, stay incentive or other agreement between a Participant and any Bell Atlantic Company which provides for a credit of Other Eligible Compensation to this sub-account in accordance with Section 5(c) of the Plan. All credits described in this sub-paragraph (3), and all earnings and losses with respect to such credits, are collectively referred to in this Plan as "Retirement Contribution Credits". (m) Participating Company. Each Bell Atlantic Company which employs one --------------------- or more Senior Managers at any time during a Plan Year, or which was the last employing company of one or more Inactive Participants in this Plan, shall be a "Participating Company" in this Plan. (n) Plan Year The "Plan Year" shall be the calendar year. --------- (o) Qualified Plan Compensation Limit. The "Qualified Plan Compensation --------------------------------- Limit" is the limit under Section 401(a)(17) of the Internal Revenue Code. (p) Senior Manager. A "Senior Manager" is any active employee of a Bell -------------- Atlantic Company who (i) is designated, or has previously been designated, as a "Senior Manager" in accordance with procedures approved by the HRC (or is an attorney with a 3 compensation grade comparable to Senior Manager), and (ii) has not subsequently been demoted below the rank of Senior Manager. 3. PARTICIPATION. ------------- (a) Active Participation. Each actively employed Senior Manager on January -------------------- 1, 1998 shall be an "Active Participant" in the Plan effective January 1, 1998 and shall continue to be an Active Participant for so long as he or she remains a Senior Manager. Each Senior Manager hired or promoted into Senior Manager status after January 1, 1998 shall be an Active Participant in the Plan effective on the date on which the Senior Manager was hired or promoted into that status and shall continue to be an Active Participant for so long as he or she remains a Senior Manager. (b) Promotion to Senior Management. Each employee who is promoted to a ------------------------------ Senior Manager position will forfeit any future right to benefits, after the date of promotion and while remaining an Active Participant, under the Bell Atlantic Supplemental Retirement Plan for non-Senior Managers ("SRP") and any other plan of any Bell Atlantic Company in which the Plan Administrator determines that Senior Managers shall not participate. Upon any such promotion, the account balance (or accrued benefit) of the Participant under any such plan referred to in this paragraph shall be transferred to this Plan in accordance with Section 6(b) of the Plan. (c) Consequences of Demotion. If an Active Participant is demoted so that ------------------------ he or she ceases to be a Senior Manager, such individual shall cease to be a Participant as of the effective date of the demotion. The Participant's Account of any such individual shall be transferred and credited to the SRP, and shall become subject to the terms and conditions of that plan. (d) Other Participation. Any employee who has separated from service on or ------------------- after January 1, 1998 and who, at the time of such separation, was an Active Participant with an account balance under the Plan, shall be an "Inactive Participant" in the Plan as of the date of such separation. Any employee who separated from service on or before December 31, 1997 with an account balance governed by the provisions of the Bell Atlantic Deferred Compensation Plan (the predecessor to this Plan) or the Bell Atlantic Incentive Award Deferral Plan (the predecessor to the Bell Atlantic Deferred Compensation Plan) shall continue to have his or her account balance governed by the Plan provisions that were in effect on the date he or she separated from service. 4. DEFERRAL ELECTIONS. ------------------ (a) Voluntary Deferrals. Each Participant may elect to defer the receipt ------------------- of Eligible Base Salary, Eligible Bonus Compensation, and Other Eligible Compensation in accordance with this Section 4. 4 (b) Timing of Elections to Defer Eligible Base Salary and Eligible Bonus -------------------------------------------------------------------- Compensation. An election by a Participant to defer the receipt of Eligible - ------------ Base Salary or Eligible Bonus Compensation shall be delivered to the Plan Administrator as follows. (1) General Rule. Except as provided in sub-paragraph (2) below, ------------ for each Plan Year, an election by a Participant to defer Eligible Base Salary or Eligible Bonus Compensation shall be delivered to the Plan Administrator not later than the date specified by the Plan Administrator, which date shall be on or before the last business day of December prior to the Plan Year in which the compensation to be deferred would have been paid. Any such election may be changed or revoked by the Participant on or before, but not after, such last day of December. During the Plan Year, a Participant shall not have the right to modify the rate or amount of deferral of Eligible Base Salary or Eligible Bonus Compensation. (2) Newly Hired and Newly Promoted Participants. Newly hired and ------------------------------------------- newly promoted Participants shall have a 30-day period, following the effective date of such hiring or promotion, in which to deliver an election to defer Eligible Base Salary or Eligible Bonus Compensation. Any such deferral election shall become irrevocable seven calendar days after the Participant delivers such election to the Plan Administrator. Deferral elections for subsequent years shall be governed by the general rule set forth in sub-paragraph (1) above. (c) Timing of Elections to Defer Other Eligible Compensation. An election -------------------------------------------------------- by a Participant to defer the receipt of Other Eligible Compensation shall be delivered to the Plan Administrator not later than the date determined by the Plan Administrator. (d) Election Forms. The deferral election, and any permitted change to or -------------- revocation of such election, shall be completed and signed by the Participant on a form provided by the Plan Administrator (an "Election Form") or shall be made by the Participant, in writing, in such other manner as the Plan Administrator may approve. An Election Form shall permit the Participant to make separate deferral elections for Eligible Base Salary, Eligible Bonus Compensation and Other Eligible Compensation, subject to the following rules. (1) Eligible Base Salary. In accordance with the terms of the -------------------- Election Form, the Participant may elect to defer a whole percentage or a stated amount of Eligible Base Salary, provided that the amount deferred equals or exceeds 6 percent of Eligible Base Salary. (2) Eligible Bonus Compensation. In accordance with the terms of --------------------------- the Election Form, the Participant may elect to defer a whole percentage or a stated amount of Eligible Bonus Compensation, provided that the amount deferred equals or exceeds 6 percent of Eligible Bonus Compensation. 5 (3) Other Eligible Compensation. The Participant may elect to defer --------------------------- any whole percentage or stated amount of Other Eligible Compensation that is permitted by the terms of the Election Form. (e) Credits to Personal Deferral Sub-Account. If a Participant makes a ---------------------------------------- deferral election pursuant to this Section 4, Personal Deferral Credits for the amounts deferred shall be calculated and made to the Participant's Personal Deferral Sub-Account in accordance with procedures established by the Plan Administrator. 5. ONGOING COMPANY CREDITS. ----------------------- (a) Matching Contribution Credits. Each Active Participant shall be ----------------------------- entitled to have Matching Contribution Credits made to his or her Matching Contribution Sub-Account on the following basis. (1) Matching Base Salary Credits. If the Participant elects to defer ---------------------------- 6 percent or more of his or her Eligible Base Salary for the Plan Year, the Matching Contribution Credits shall be equal to 83 1/3 percent of the first 6 percent of Eligible Base Salary. Throughout the Plan Year, such Matching Contribution Credits shall be calculated by the Plan Administrator and made to the Participant's Matching Contribution Sub-Account as of the same date as the associated Personal Deferral Credits provided for in Section 4(e) of the Plan. (2) Matching Bonus Credits. Subject to paragraph (d) below, if the ---------------------- Participant elects to defer 6 percent or more of his or her Eligible Bonus Compensation for the Plan Year, the Matching Contribution Credits shall be equal to 83 1/3 percent of the first 6 percent of Eligible Bonus Compensation. Such Matching Contribution Credits shall be calculated by the Plan Administrator and made to the Participant's Matching Contribution Sub-Account as of the same date as the associated Personal Deferral Credits provided for in Section 4(e) of the Plan. (b) Retirement Contribution Credits. Each Active Participant shall be ------------------------------- entitled to have Retirement Contribution Credits made to his or her Retirement Contribution Sub-Account on the following basis. (1) Retirement Base Salary Credits. Annual Retirement Contribution ------------------------------ Credits equal to 32 percent of a Participant's Eligible Base Salary for the Plan Year shall be made to the Participant's Retirement Contribution Sub-Account for the first 240 months following commencement of participation in the Plan, provided that such 240 month period shall be reduced by the number of months (if any) during which the Participant previously participated in the NYNEX Senior Management Nonqualified Defined Contribution Pension Plan (the "NYNEX Defined Contribution Plan"). After such 240 month period, annual Retirement Contribution Credits equal to 7 percent of the Participant's Eligible Base Salary for the Plan Year shall be made to the Participant's Retirement Contribution Sub-Account. The Retirement Contribution Credits provided 6 for in this paragraph shall be calculated in accordance with guidelines established by the Plan Administrator and made to the Participant's Retirement Contribution Sub-Account as of the last day of each month of the Plan Year. (2) Retirement Bonus Credits. Subject to Paragraph (d) below, annual ------------------------ Retirement Contribution Credits equal to 32 percent of a Participant's Eligible Bonus Compensation for the Plan Year shall be made to the Participant's Retirement Contribution Sub-Account for the first 240 months following commencement of participation in the Plan, provided that such 240 month period shall be reduced by the number of months (if any) during which the Participant previously participated in the NYNEX Defined Contribution Plan. After such 240 month period, annual Retirement Contribution Credits equal to 7 percent of the Participant's Eligible Bonus Compensation for the Plan Year shall be made to the Participant's Retirement Contribution Sub-Account. The Retirement Contribution Credits provided for in this paragraph shall be made to the Participant's Retirement Contribution Sub-Account as of the date that the associated Eligible Bonus Compensation is paid (or would have been paid in the absence of a deferral election under this Plan.) (c) Credits of Other Eligible Compensation. If a Participant has entered -------------------------------------- into an agreement or arrangement with any Bell Atlantic Company that provides for Other Eligible Compensation to be credited to the Participant's Account, such credits shall be made in accordance with the terms of such agreement or arrangement, and in a manner approved by the Plan Administrator. (d) Special Rule for Inactive Participants. If a Participant is an -------------------------------------- Inactive Participant at the time Eligible Bonus Compensation becomes payable (or would otherwise become payable in the absence of a deferral election under this Plan), the Plan Administrator shall determine, in his or her sole discretion, whether the Participant shall receive the Matching Contribution Credits and Retirement Contribution Credits provided for in paragraphs (a)(2) and (b)(2) with respect to such Eligible Bonus Compensation. 6. CONVERSION AND OTHER TRANSITIONAL CREDITS. ----------------------------------------- (a) Conversion Credits as of January 1, 1998. Active Participants on ---------------------------------------- January 1, 1998 shall receive opening conversion credits under the Plan equal to the amount of any account balance and any accrued benefits they may have under (i) the Bell Atlantic Deferred Compensation Plan; (ii) the Bell Atlantic Senior Management Retirement Income Plan; (iii) the Bell Atlantic Executive Management Retirement Income Plan; (iv) the NYNEX Supplemental Savings Plan; (v) the NYNEX Defined Contribution Plan; (vi) the NYNEX Incentive Award Deferral Program; (vii) the NYNEX Supplemental Pension Plan; or (viii) the NYNEX Mid Career Pension Plan. The Plan Administrator shall determine the amount of any accrued benefits under any such plan, and shall further determine, based on the character of the account balance or accrued benefits under the applicable plan, whether conversion credits under this Plan shall be made as Personal Deferral Credits, Matching Contribution Credits, or Retirement Contribution Credits. 7 (b) Conversion Credits after January 1, 1998. Employees who are promoted to ---------------------------------------- a Senior Manager position after January 1, 1998 shall receive opening conversion credits under the Plan equal to the amount of any account balance and any accrued benefits they may have under (i) the Supplemental Savings Part of the SRP; (ii) the Supplemental Cash Balance Part of the SRP; or (iii) any other nonqualified deferred compensation plan or arrangement of a Bell Atlantic Company if the Plan Administrator determines that the employee shall no longer participate in such plan or arrangement. Such conversion credits shall be made by the Plan Administrator as soon as practicable following the date of promotion. The Plan Administrator shall determine the amount of any accrued benefits under any such plan, and shall further determine, based on the character of the account balance or accrued benefits under the applicable plan or arrangement, whether such conversion credits shall be made as Personal Deferral Credits, Company Matching Credits, or Retirement Contribution Credits. (c) Annual Transition Credits. If a Participant is entitled to an annual ------------------------- transition credit for a Plan Year, such transition credit shall be made to the Participant's Retirement Contribution Sub-Account as of December 31 of such year, unless the Participant is separating from service during such year, in which case the transition credit shall be made as soon as practicable following the Participant's separation from service. (d) Potential Interim Amount. If a Participant is entitled to a potential ------------------------ interim amount ("PIA") credit for the year in which the Participant separates from service, the amount of such PIA shall be credited to the Participant's Retirement Contribution Sub-Account as soon as practicable following the Participant's separation from service. 7. SECTION 415 CREDITS. ------------------- (a) General. Subject to paragraph (b) below, if a Participant's accrued ------- benefit under the Bell Atlantic Cash Balance Plan, upon commencement of benefits thereunder, exceeds the benefit permitted by Section 415 of the Internal Revenue Code ("Section 415"), the excess amount shall be credited to the Participant's Retirement Contribution Sub-Account as of the Participant's benefit commencement date. Any such credit pursuant to this paragraph or paragraph (b) below shall be in full satisfaction of any right to similar credits or benefits which the Participant may have under any NYNEX benefit plan. (b) Participants Who Previously Received Section 415 Credits. For those -------------------------------------------------------- Participants who previously received a Section 415 credit to their account balance under the NYNEX Defined Contribution Plan, the calculation described in paragraph (a) above shall be made upon the Participant's commencement of benefits under the Bell Atlantic Cash Balance Plan. If the amount calculated under paragraph (a) exceeds the Section 415 credit that was previously made to the Participant's account under such NYNEX plan, as determined by the Plan Administrator, the excess amount shall be credited to the 8 Participant's Retirement Contribution Sub-Account as of the Participant's benefit commencement date. 8. ACCOUNT INVESTMENTS. -------------------- (a) General. The balance in a Participant's Account shall be allocated by ------- the Participant to the Investment Funds under the Plan in accordance with this Section 8. The Investment Funds shall consist of a set of unfunded book-entry investment accounts. Except as provided below, (i) each Investment Fund shall correspond to, and shall mirror the earnings and valuation performance of, an investment fund under the Bell Atlantic Savings Plan for Salaried Employees ("BASP"); (ii) each Investment Fund shall be available as an investment choice for the balance in a Participant's Account; and (iii) in the event that there is a change in, addition to, or deletion of any of the investment funds in the BASP, a corresponding change, addition, or deletion shall be made in the Investment Funds offered under this Plan. (1) Telecommunications Fund. The Plan shall continue to maintain an ----------------------- Investment Fund known as the "Telecommunications Fund" for any Participant who, as of December 31, 1997, had an account balance invested in the telecommunications fund under any prior nonqualified deferred compensation plan maintained by NYNEX Corporation and who elected to transfer all or any portion of such balance into the "Telecommunications Fund" in this Plan as of January 1, 1998. Amounts allocated to such fund shall be limited to account balances described in the preceding sentence, and no new credits may be allocated or transferred to the Telecommunications Fund. Any or all of the balance of a Participant's Account allocated to the Telecommunications Fund may be transferred to any other Investment Fund in accordance with paragraph (b)(2) below, provided that balances transferred out of the Telecommunications Fund may not be transferred back into such fund. Any balance remaining in the Telecommunications Fund at the time a Participant separates from service must be transferred to another Investment Fund no later than December 31 of the year such separation occurs. (2) Tandem Investment Fund. The Plan shall continue to maintain an ---------------------- Investment Fund known as the "Tandem Investment Fund" for any Participant who, as of December 31, 1997, had an account balance invested in the tandem account under any prior nonqualified deferred compensation plan maintained by Bell Atlantic Corporation and who elected to transfer all or any portion of such balance into the "Tandem Investment Fund" in this Plan as of January 1, 1998. This fund shall track the earnings and valuation performance, as determined by the Plan Administrator over the life of the Participant's selection of this fund, of the greater of (i) Bell Atlantic common stock, and (ii) the investment performance of ten year U.S. Treasury notes. Amounts allocated to this fund shall be limited to account balances described in the first sentence of this sub-paragraph, and no new credits may be allocated or transferred to the Tandem Investment Fund. Any or all of the balance of a Participant's Account allocated to the Tandem Investment Fund may be transferred to any other Investment Fund, provided that such a transfer shall be permitted on only one occasion per year (unless the Plan Administrator 9 decides to permit more frequent transfers), and provided further, that balances transferred out of the Tandem Investment Fund may not be transferred back into such fund. Any balance remaining in the Tandem Investment Fund at the time a Participant separates from service must be transferred to another Investment Fund no later than December 31 of the year such separation occurs. (3) Bell Atlantic Shares Fund. The Plan shall maintain an Investment ------------------------- Fund known as the "Bell Atlantic Shares Fund" which shall mirror the earnings and valuation performance of Bell Atlantic common stock. The entire balance in a Participant's Matching Contribution Sub-Account shall initially be allocated to the Bell Atlantic Shares Fund, provided, however, that a Participant may thereafter transfer all or any portion of such balance out of the Bell Atlantic Shares Fund and into any other available Investment Fund in accordance with paragraph (b)(2) below. (4) Additional Investment Funds. In addition to the Investment Funds --------------------------- described above, the HRC may from time to time provide for alternative investment funds or choices under the Plan, subject to such restrictions on eligibility to select an alternative investment fund or choice and such other terms and conditions as the HRC may establish. (5) Discontinuation of BASP. Notwithstanding any other provision of ----------------------- this paragraph (a), in the event that the BASP is discontinued, (i) a single Investment Fund shall be established under this Plan which shall track the earnings and valuation performance of ten year U.S. Treasury notes, and (ii) the entire balance in each Participant's Account shall be transferred to such Investment Fund as of the date the BASP is discontinued. (b) Investment Elections. Elections to allocate balances in a -------------------- Participant's Account to the available Investment Funds shall be made by Participants in whole percentage units, subject to the following rules. (1) Initial Elections. Senior Managers who will be Active ----------------- Participants on January 1, 1998 shall submit their initial investment elections, on a form provided by the Plan Administrator, no later than December 31, 1997. Newly hired or promoted Participants shall submit their initial investment elections, on a form provided by the Plan Administrator, within 30 days of the effective date of being hired or promoted. Investment elections may allocate balances in a Participant's Account to any Investment Fund, and elections shall be applied uniformly to the balance in each of the Participant's sub-accounts, except that (i) allocations to the Telecommunications Fund and the Tandem Investment Fund shall be subject to the limitations described in paragraphs (a)(1) and (2) above, and (ii) balances in the Matching Contribution Sub-Account shall initially be allocated to the Bell Atlantic Shares Fund as provided in paragraph (a)(3) above. (2) Changes in Investment Elections. Except as provided in paragraph ------------------------------- (a)(2) above with respect to the Tandem Investment Fund, Participants shall be permitted 10 to change their investment elections at least once per month, and may be permitted to change their elections more frequently if the Plan Administrator so determines. Changes in investment elections and the consequent transfers to different Investment Funds shall be applied uniformly to balances in a Participant's Account that are eligible to be transferred. From the period January 1, 1998 until March 31, 1999, any change in investment elections will be effective on the first day of the calendar month succeeding such change. Beginning April 1, 1999, any change in investment elections will be effective on the first day following such change. 9. DISTRIBUTION RULES. ------------------ (a) General Rules for Distribution Elections. Each Participant shall be ---------------------------------------- permitted to make a separate distribution election with respect to (i) vested balances in the Participant's Personal Deferral Sub-Account (an "Employee Balance") and (ii) vested balances in the Participant's Matching Contribution Sub-Account and Retirement Contribution Sub-Account (a "Company Balance"). Each such election must be submitted on a form provided by the Plan Administrator and shall be subject to the following rules. (1) Commencement of Distributions. Subject to sub-paragraphs (2) and ----------------------------- (5) below, the Participant may elect to begin receiving distributions of the Employee Balance during active service or upon or after separation from service. Subject to sub-paragraphs (2) and (5) below, and also subject to Section 10(e) of the Plan, the Participant may elect to begin receiving distributions of the Company Balance upon or after separation from service; provided further, that following a Change in Control of Bell Atlantic, distributions of the Company Balance shall also be permitted (subject to sub-paragraphs (2) and (5) below) during active service. (2) Twelve Months Between Election and Commencement Date. The date ---------------------------------------------------- elected by the Participant for distributions to commence must be at least twelve months from the date the election form is submitted. If the Participant elects to commence distributions at separation from service, and separation occurs within twelve months of such election, distributions will begin twelve months after the election is submitted, provided the election is not invalidated by sub-paragraph (5) below. Notwithstanding this requirement, (i) if a Participant makes an election, prior to January 1, 1998, to receive a distribution upon separation from service and such separation occurs within twelve months of the election, such election shall be honored, and (ii), if a newly hired or newly promoted Participant makes an election, within 30 days of being hired or promoted, to receive a distribution upon separation from service and such separation occurs within twelve months of the election, such election shall also be honored. (3) Bifurcation of Employee Balance and Company Balance. The --------------------------------------------------- Participant shall be allowed to divide his or her Employee Balance into two portions (with each portion consisting of a whole percentage of the total balance) and make a separate distribution election for each portion of the balance so divided. Subject to 11 Section 10(e) of the Plan, the Participant shall also be allowed to divide his or her Company Balance into two portions (with each portion consisting of a whole percentage of the total balance) and make a separate distribution election for each portion of the balance so divided. If the Participant elects to have distributions of the Employee Balance commence prior to separation from service, any additional deferrals after the earliest elected commencement date and before the later elected commencement date will be subject to the form and timing of the later elected commencement date; any additional deferrals after the later elected commencement date will be subject to the default rules under paragraph (c) below for form and timing of distributions. (4) Five Day Waiting Period for Irrevocability. An election shall ------------------------------------------ become irrevocable at the close of the fifth business day following delivery to the Plan Administrator of a signed election form. (5) Invalid Elections. Any election will be invalid if it is ----------------- delivered to the Plan Administrator less than twelve months prior to the date on which, in the absence of such election, the Participant would begin to receive a distribution of the Employee Balance or Company Balance covered by such election. (6) Death of Participant. If the Participant dies, his or her -------------------- distribution election shall be canceled and any ongoing distribution arrangement shall cease. The death benefit distribution rules under paragraph (d) below shall then apply. (7) One-Time Modification. A Participant shall be allowed one --------------------- opportunity to modify a previously delivered distribution election with respect to the Participant's Employee Balance and one opportunity to modify a previously delivered distribution election with respect to the Participant's Company Balance. Such modifying elections may be made on separate occasions, on a form provided by the Plan Administrator, provided that each such election shall be subject to the rules set forth in sub-paragraphs (1) through (6) above. (8) Non-Compete Requirements. A distribution election with respect ------------------------ to a Participant's Company Balance is subject to the non-compete requirements of Section 10 of this Plan. (b) Form of Distributions. The Participant may elect to receive --------------------- distributions of his or her vested Employee Balance or vested Company Balance (or portions of such balances) as follows. (1) Single Sum. The Participant may elect to receive a single sum ---------- distribution of the Participant's Employee Balance or Company Balance covered by the election. At the time such distribution is due, the amount of the distribution shall be calculated by the Plan Administrator and shall be paid as soon as administratively practicable following such calculation. 12 (2) Annual Installments from Two to Thirty Years. Alternatively, the -------------------------------------------- Participant may elect to receive installment distributions which shall be paid annually, over a period of two to thirty years as elected by the Participant. Each installment shall be equal to (i) the undistributed portion of the Employee Balance or Company Balance covered by the election, multiplied by (ii) a fraction, the numerator of which shall be one, and the denominator of which shall be the number of remaining annual installments. At the time each installment is due, the amount of the installment shall be calculated by the Plan Administrator and shall be paid as soon as administratively practicable following such calculation. (3) Appreciation Only. Alternatively, the Participant may elect to ----------------- receive distributions of appreciation with respect to the Employee Balance or Company Balance covered by an election. Under this option, distributions shall be paid to the Participant each month, up to and including the month of the Participant's death, at which time the balance covered by this election (adjusted to reflect such monthly distributions) shall be paid in accordance with paragraph (d). Each monthly distribution during the Participant's lifetime shall be equal to the greater of (i) a fixed amount equal to two-thirds of one percent of the balance covered by the election immediately prior to the first distribution, and (ii) the amount by which the current balance covered by the election exceeds such balance immediately after the first distribution. At the time each monthly distribution is due, the amount of the distribution shall be calculated by the Plan Administrator and shall be paid as soon as administratively practicable following such calculation. (c) Default for Form and Timing of Distributions. If, with respect to all -------------------------------------------- or a portion of a Participant's Employee Balance or Company Balance, a Participant does not make a distribution election, or if his or her distribution election is determined to be invalid and is not subject to a prior valid election, the entire vested portion of such Employee Balance and/or Company Balance shall be distributed in a single sum on the later of (i) the end of the month in which the Participant's 60th birthday occurs, or (ii) the Participant's separation from service from all Bell Atlantic Companies; provided, further, that any distribution of the balance in the Participant's Retirement Contribution Sub-Account shall be subject to Section 10(e) of the Plan. (d) Death of Participant. If a Participant dies with a vested balance in -------------------- his or her Participant's Account, any distribution elections pursuant to paragraphs (a) and (b) above shall be cancelled and the following rules shall apply. (1) Election of Form of Distribution in the Event of Death. Each ------------------------------------------------------ Participant shall be entitled to make or change a distribution election, which shall become effective upon his or her death, that provides for annual installments to be paid to the Participant's beneficiary or beneficiaries over a period of two to ten years. Any such election must be submitted on a form provided by the Plan Administrator, and shall include a designation of beneficiaries. Each installment paid to a particular beneficiary shall be equal to (i) the undistributed portion of the Participant's Account to which the 13 beneficiary is entitled, multiplied by (ii) a fraction, the numerator of which shall be one, and the denominator of which shall be the number of remaining annual installments. The first installment shall be calculated by the Plan Administrator and paid as soon as administratively practicable following the date of the Participant's death, and each subsequent installment shall be paid on or about the anniversary of the first installment. (2) Default Distribution. If a Participant dies without having made -------------------- the death-benefit election described in sub-paragraph (1), the entire vested balance of his or her Participant's Account shall be paid in a single sum to the Participant's beneficiaries or estate as soon as administratively practicable following the date of death. (e) Early Withdrawals Subject to Penalty. Except as provided in this ------------------------------------ paragraph, neither the Participant, a beneficiary, nor the estate of a Participant shall have any right to receive a distribution or make any withdrawal from the Plan, other than in accordance with the terms of the Plan which apply to elective distributions, default distributions or distributions in the event of death. Prior to the commencement date or dates of any elective or mandatory distributions under paragraphs (a) through (c) above, a Participant may withdraw all or any portion of the vested balance of the Participant's Account (an "Early Withdrawal"), subject to the following rules. (1) Early Withdrawal from Personal Deferral Sub-Account. A --------------------------------------------------- Participant may at any time submit a written notice directing the Plan Administrator to distribute, as soon as practicable, all or any portion of any vested balance in the Participant's Personal Deferral Sub-Account; provided, however, that in each such instance of an Early Withdrawal, the Participant's Personal Deferral Sub-Account shall be reduced by six percent of the amount of the Early Withdrawal. In the event that the Early Withdrawal would not leave a balance in the Personal Deferral Sub-Account equal to at least six percent of the Early Withdrawal amount (prior to giving effect to the six percent penalty), the Early Withdrawal amount shall be reduced by the Plan Administrator to the extent necessary to give full effect to such penalty. (2) Early Withdrawal from Matching Contribution Sub-Account or ---------------------------------------------------------- Retirement Contribution Sub-Account. Subject to Section 10(e) of the Plan, at - ----------------------------------- any time following a Participant's separation from service, the Participant may submit a written notice directing the Plan Administrator to distribute, as soon as practicable, all or any portion of any vested balance in the Participant's Retirement Contribution Sub-Account or Matching Contribution Sub-Account; provided, however, that in each such instance of an Early Withdrawal, the Participant's applicable sub-account shall be reduced by six percent of the amount of the Early Withdrawal. In the event that the Early Withdrawal would not leave a balance in such sub-account equal to at least six percent of the Early Withdrawal amount (prior to giving effect to the six percent penalty), the Early Withdrawal amount shall be reduced by the Plan Administrator to the extent necessary to give full effect to such penalty. 14 (f) Prior Plan Distribution Rules. The distribution rules of this ----------------------------- Section 9 and any distribution elections made hereunder shall supercede the distribution rules and any elections made under the prior plans described in Section 6 of this Plan, except as follows. Notwithstanding any other provision of this Section 9, in the event that any Participant made an election under a prior plan, before the fourth quarter of 1997, to receive an in-service distribution from such plan in 1998 with respect to an account balance or accrued benefit that was transferred to this Plan pursuant to Section 6, such distribution election for 1998 (but not for subsequent years) shall be honored. 10. VESTING, FORFEITURE AND NON-COMPETE. ----------------------------------- (a) Personal Deferral Sub-Account. Except as otherwise provided in ----------------------------- an agreement between the Participant and a Bell Atlantic Company regarding the crediting of Other Eligible Compensation to the Participant's Personal Deferral Sub-Account, each Participant shall at all times be fully vested in the balance in his or her Personal Deferral Sub-Account, and such balance shall under no circumstances be subject to forfeiture. The rights of the Participant to such sub-account balance shall not be assignable or subject to alienation. (b) Matching Contribution and Retirement Contribution Sub-Account. ------------------------------------------------------------- Each Participant shall be fully vested in the balance in his or her Matching Contribution Sub-Account after attaining three years of service with any Bell Atlantic Company. Except as otherwise provided in an agreement between the Participant and a Bell Atlantic Company regarding the crediting of Other Eligible Compensation to the Participant's Retirement Contribution Sub-Account, and subject to paragraph (c) below, each Participant shall be fully vested in the balance in his or her Retirement Contribution Sub-Account. The rights of the Participant to each such sub-account balance shall not be assignable or subject to alienation. (c) Potential Forfeiture and Other Remedies. Bell Atlantic shall have the --------------------------------------- discretion to cause a forfeiture of all or part of the balance in a Participant's Retirement Contribution Sub-Account if Bell Atlantic determines that (i) the Participant has engaged in "Competitive Activities" as described in paragraph (d) below, or (ii) while an active employee, the Participant has engaged in serious misconduct contrary to written policies and harmful to Bell Atlantic or its affiliated companies or their reputation; provided, however, that under no circumstances shall the Plan Administrator, the HRC, or any other officer or director of any Bell Atlantic Company, take any action on or after the occurrence of a Change in Control of Bell Atlantic to cause forfeiture of any such sub-account balance. In addition, the Chairman of Bell Atlantic shall have the discretion to cause a forfeiture of any PIA credit made to a Participant's Retirement Contribution Sub-Account if the Chairman determines that the Participant's separation from service is seriously detrimental to the interests of any Bell Atlantic Company; provided, however, that the Chairman may not cause such a forfeiture on or after the occurrence of a Change in Control of Bell Atlantic. 15 (d) Competitive Activities. A Participant will be considered to have ---------------------- engaged in "Competitive Activities" if, during the period of the Participant's employment with any Bell Atlantic Company, through the second anniversary of the Participant's separation from service for any reason from all Bell Atlantic Companies, the Participant, without the prior written consent of the Plan Administrator, (i) personally engages in "Competitive Activities" (as hereinafter defined); or (ii) works for, owns, manages, operates, controls or participates in the ownership, management, operation or control of, or provides consulting or advisory services to, any individual, partnership, firm, corporation or institution engaged in Competitive Activities; provided, however, that the Participant's purchase or holding, for investment purposes, of securities of a publicly-traded company shall not constitute "ownership" or "participation in ownership" for purposes of this paragraph so long as the Participant's equity interest in any such company is less than a controlling interest. "Competitive Activities" means business activities relating to products or services of the same or similar type as the products or services which (i) are sold (or, pursuant to an existing business plan, will be sold) to paying customers of one or more Bell Atlantic Companies, and (ii) for which the Participant had responsibility to plan, develop, manage, market or oversee within the prior 24 months, or, in the case of an Inactive Participant, within the 24 months preceding his or her separation from service. Notwithstanding the previous sentence, a business activity will not be treated as a Competitive Activity if the geographic marketing area of the relevant products or services does not overlap with the Bell Atlantic territory (in the case of an Inactive Participant, as such territory existed when he or she separated from service). The Plan Administrator shall have the authority to determine whether a Participant has engaged in Competitive Activities and, if so, what remedies to invoke. (e) Non-Compete Agreement Upon or After Separation from Service. If (i) a ----------------------------------------------------------- Participant has elected to receive distributions from his or her Retirement Contribution Sub-Account to commence upon separation from service or within two years of such separation, or (ii) distributions from such Retirement Contribution Sub-Account would otherwise commence upon separation from service under the default distribution rule of Section 9(c) of the Plan, or (iii) the Participant has directed the Plan Administrator to make distributions from such Retirement Contribution Sub-Account under the Early Withdrawal rule of Section 9(e) of the Plan, any such distributions will be made only if the Participant executes an agreement provided by Bell Atlantic that (x) prohibits the Participant from engaging in Competitive Activities within two years following separation from service, (y) gives Bell Atlantic the right to obtain injunctive relief if the Participant violates such agreement, and (z) includes such other terms and conditions as may be determined by the Plan Administrator; provided, further, that following a Change in Control of Bell Atlantic, no such non- compete agreement shall be required as a condition to making a distribution to a Participant, and any such non-compete agreement that has been executed by a Participant shall become null and void as of the effective date of the Change in Control. If the Participant does not execute a non-compete agreement required by this paragraph (e), (i) no distributions may be made from the Participant's Retirement Contribution Sub-Account for two years following the Participant's separation from service, and (ii) at the conclusion of such two-year period, the balance in the Participant's Retirement Contribution Sub- 16 Account shall be distributed in accordance with the Participant's distribution election or, if applicable, the default distribution rule of Section 9(c) of the Plan. 11. UNFUNDED PLAN. ------------- Except as required by the Bell Atlantic Rabbi Trust, no Participating Company shall be required to fund any obligations under this Plan to the Participants or their beneficiaries. Any assets which may be accumulated by a Participating Company to meet its obligations under this Plan shall for all purposes be part of the general assets of such Participating Company. To the extent that any Participant or beneficiary acquires a right to receive distributions under this Plan for which any Participating Company is liable, such rights shall be no greater than the rights of any unsecured general creditor of the applicable Participating Company. 12. ADMINISTRATION, AMENDMENT AND TERMINATION. ----------------------------------------- (a) Plan Administrator. The Executive Vice President - Human Resources of ------------------ Bell Atlantic (or, if that position is vacant, the most senior officer in the Human Resources organization of Bell Atlantic) shall have the authority and responsibility to act as "Plan Administrator", as that term is used in this Plan, including, without limitation, the authority and responsibility to develop administrative guidelines, distribute summary descriptions of the Plan, notify Participants of their rights and obligations under the Plan, and calculate balances of Participant's Accounts and the amount of distributions from the Plan. The Plan Administrator, with the advice of counsel, shall have the right to delegate to one or more persons the authority to decide any dispute raised in any written claim by any Participant or beneficiary. Any appeal from such a claim shall be decided by the Plan Administrator, in his or her sole discretion, and the decision of the Plan Administrator shall be final and binding for the Plan and the Participant or beneficiary. (b) Allocation of Administrative and Other Expenses. Participants shall ----------------------------------------------- not be charged for their participation in the Plan or their withdrawals from the Plan, except that (i) Participants who make an Early Withdrawal shall be subject to the six percent penalty provided for in Section 9(e) of the Plan, and (ii) the reasonable expenses of administering the Plan may be offset against the earnings of the Investment Funds under the Plan. The Plan Administrator, with the advice of the officers of Bell Atlantic who have responsibility for legal, treasury and accounting matters, shall have authority to establish and maintain cost allocation guidelines which shall govern the allocation of accrued expenses under the Plan for financial accounting purposes, and the determination of any amounts by which Participating Companies are obligated to reimburse each other for disbursements and other expenditures under the Plan. Any such guidelines shall allocate to each Participating Company its reasonable and appropriate share of the direct benefit cost of the Plan, plus any associated administrative cost to the extent such cost is not offset against Investment Fund earnings. 17 (c) Amendment and Termination of Plan by HRC. The HRC may at any time amend ---------------------------------------- or terminate the Plan, and a Plan amendment or termination under this paragraph (c), or an administrative amendment under paragraph (d) below, may affect Participants at the time of the amendment or termination as well as future Participants, provided, however, that no amendment or termination of the Plan may adversely affect the rights of any Participant (or beneficiary or estate, in the case of a deceased Participant), without his or her consent, to any benefit under the Plan to which such Participant (or beneficiary or estate) may have previously become entitled prior to the effective date of such amendment or termination. In addition to this general rule protecting the prior rights of Participants, the following specific rules shall apply in the case of certain Plan amendments or termination of the Plan. (1) Certain Plan Amendments. If Section 8 of the Plan is amended in a ----------------------- manner that allows Investments Funds to differ from the investment funds under the BASP, the Investments Funds under the Plan immediately prior to the effective date of such amendment shall continue to be made available with respect to the entire amount of each then existing balance in a Participant's Account until such time as such existing balance (plus future earnings thereon) has been distributed to the Participant and/or the Participant's estate or beneficiaries in accordance with Section 9 of the Plan. If Section 9 of the Plan is amended to change or eliminate a distribution option, such distribution option, as it existed immediately prior to the effective date of the amendment, shall continue to be made available with respect to the entire amount of each then existing balance in a Participant's Account (plus future earnings thereon). (2) Plan Termination. If the Plan is terminated, (i) any existing ---------------- deferral elections under Section 4 of the Plan shall be disregarded with respect to compensation earned by Participants after the termination date, and (ii) Participants shall no longer be entitled to the credits provided for in Sections 5 and 7 of the Plan with respect to compensation earned after the termination date. However, the remaining provisions of the Plan shall remain in effect until such time as the entire balance in each Participant's Account has been distributed to the Participant and/or the Participant's estate or beneficiaries in accordance with Section 9 of the Plan. (d) Administrative Amendments; Authority to Deny Reinvestment Requests ------------------------------------------------------------------ Which Would Result in Short-Swing Profits. The Plan Administrator, with advice - ----------------------------------------- of counsel, may develop additional terms and conditions for the administration of the Plan, and may modify the administrative terms and conditions of the Plan from time to time; provided, however, that the Plan Administrator shall not have the authority to amend the Plan in any manner which alters the amount of compensation or benefits provided by the Plan. Notwithstanding any other provision of this Plan, the Plan Administrator shall have the authority (i) to adopt amendments to the Plan which the Plan Administrator determines, with the advice of counsel, are necessary or appropriate to ensure that transactions under the Plan are exempt, to the maximum extent practicable, from the short- swing trading provisions of Section 16(b) of the Securities Exchange Act of 1934, and (ii) to refuse any investment redirection request by a Participant who is subject to the 18 reporting obligations of Section 16 of the Securities Exchange Act of 1934 if the Plan Administrator determines, with the advice of counsel, that fulfilling such investment redirection request would cause the Participant to have engaged in matching purchase and sale transactions which give rise to a short-swing profit which the Participant would have a legal obligation to disgorge to Bell Atlantic. (e) Determination and Withholding of Taxes. The Plan Administrator shall -------------------------------------- have full authority, with or without the consent of a Participant, to withhold from any compensation being deferred under this Plan, and to withhold from a Participant's other compensation from any and all sources, any taxes applicable to deferred amounts including, without limitation, any FICA taxes and any income taxes occasioned by the withholding of FICA taxes. The Plan Administrator shall also have full authority to determine whether any FICA taxes apply with respect to credits made to a Participant's Matching Contribution Sub-Account or Retirement Contribution Sub-Account and, in the event that any such taxes apply, to withhold such taxes from the Participant's other compensation from any and all sources. The Plan Administrator shall furthermore have full authority to satisfy the responsibility of any Bell Atlantic Company to withhold taxes with respect to a Participant, including FICA taxes, by withholding such taxes from any elective distributions under the Plan to the Participant or his beneficiaries or estate or, if necessary, by directing a distribution from the Plan to satisfy such withholding responsibility. 19 EX-10.J 5 1985 INCENTIVE STOCK PLAN RESTATED 06/01/99 EXHIBIT 10j BELL ATLANTIC 1985 INCENTIVE STOCK OPTION PLAN Re-adopted by the Committee on January 24, 1994 and March 23, 1999 Re-approved by Shareholders of the Company on April 29, 1994 and May 19, 1999 Restated as of June 1, 1999, to incorporate amendments adopted through May 31,1999 Section 1. Purpose. The Bell Atlantic 1985 Incentive Stock Option Plan (the "Plan") is intended to provide key employees of Bell Atlantic Corporation (the "Company") and its subsidiaries an opportunity to acquire common stock of the Company. The Plan is expected to help the Company and its subsidiaries attract, retain, and motivate key employees to work for the success of the Company and its subsidiaries. With the exception of options granted under section 6 of the Plan, options granted under the Plan are intended to be incentive stock options as defined in section 422(b) of the Internal Revenue of 1986 (the "Code"). Options granted under section 6 of the Plan are intended to be nonqualified stock options. Section 2. Administration. (a) In General. The Plan shall be administered by the Human Resources Committee of the Company's Board of Directors (the "Committee") and the Plan Administrator (as hereafter defined). The Committee may delegate some or all of its administrative responsibility under the Plan to one or more persons. (b) Plan Administrator. The Executive Vice President - Human Resources of the Company shall have the authority and responsibility to act as "Plan Administrator" (as that term is used in this Plan), including, without limitation, the authority and responsibility, with the advice of counsel, to do the following: to distribute summary descriptions of the Plan; to enter into stock option Agreements (as hereafter defined) on behalf of the Company; to establish, modify and revoke, from time to time, terms, conditions and administrative rules applicable to options which are consistent with the terms and conditions established by the Committee pursuant to paragraph 2(c); to maintain records of options granted and outstanding; and to administer transactions in connection with the exercise of options by Optionees (as hereafter defined). The Plan Administrator, with the advice of counsel, shall have the authority to cause any outstanding incentive stock options to be recharacterized as nonqualified stock options if and when so required in order to comply with the requirements of applicable law. Moreover, the Plan Administrator, with the advice of counsel, shall have the right to respond to and decide any claims or appeals under the Plan and to interpret the Plan. In the event of any such appeal, the action of the Plan Administrator shall be final and binding. (c) Committee. The Committee shall determine the key employees of the Company and its subsidiaries to whom options may be granted under this Plan. The Committee shall also establish the time at which options shall be granted under the Plan, the number of shares for which these options shall be granted, the time at which these options may be exercised, the conditions under which these options may be exercised, and other terms and conditions it considers appropriate for these options. - -------------------------------------------------------------------------------- Bell Atlantic 1985 Incentive Stock Option Plan (5/31/99) Page 1 (d) Agreements. Each stock option granted under the Plan will be evidenced by a stock option agreement between the Company and the individual to whom the option is granted ("Optionee") or by such other written documentation reciting the date and number of options granted and their respective terms and conditions as the Plan Administrator may distribute from time to time. Any such agreement or other documentation, as it may be amended by the Plan Administrator from time to time, is collectively referred to herein as an "Agreement". (e) Liability. No member of the Committee may be held accountable for any action taken under this Plan in good faith. Section 3. Eligibility. (a) In General. Options may be granted to key employees of either the Company, any affiliate in which the Company holds a direct or indirect ownership interest of 50 percent of more, or any company in which the Company holds an ownership interest of less than 50 percent but which, in the discretion of the Committee, is treated as a participating company in this Plan (collectively, such companies shall be referred to as "Subsidiaries"); provided, however, that only those employees who are employed by a Subsidiary which meets the definition of a "Subsidiary Corporation" (as defined in section 424(f) of the Code) shall be potentially eligible to receive a grant of "incentive stock options" (within the meaning of Section 422 of the Code) under this Plan. (b) Directors. Options may not be granted to any member of the board of directors of the Company or its Subsidiaries unless any such director is also a key employee of the Company or any of its Subsidiaries. (c) Ten-Percent Shareholders. Incentive stock options may not be granted under this Plan to shareholders of the Company or any of its Subsidiaries who own more than ten percent of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, unless the special requirements of paragraphs 5(a) and 5(c) relating to ten-percent shareholders are met. (d) No Options for Committee. Options may not be granted under this Plan to members of the Committee. Section 4. Stock. (a) Common Stock. Options may be granted under this Plan for shares of the $0.10 par value common stock of the Company (the "Stock"). In the discretion of the Treasurer of the Company, Stock distributed under this Plan may be authorized but unissued shares or treasury shares; it may also be outstanding shares acquired by the Company in the open market or elsewhere. (b) Aggregate Share Limitation. The aggregate number of shares of Stock (restated to take into account the stock splits of record on March 31, 1986, April 10, 1990 and June 29, 1998) which may be distributed upon the exercise of options under this Plan may not exceed 100 million shares, less the number of shares (restated to take account of such splits) distributed under the Bell Atlantic 1985 Performance Share Plan. The expiration or termination of an option will not reduce the number of shares which may be distributed under this Plan; but the exercise of a stock - -------------------------------------------------------------------------------- Bell Atlantic 1985 Incentive Stock Option Plan (5/31/99) Page 2 appreciation right and the cancellation of the related option shall reduce the number of shares which may be distributed under this Plan by the number of shares for which the canceled option was granted. For purposes of determining whether the aggregate share limitation of this paragraph has been exceeded, the total number of shares distributed under this Plan shall be reduced by the number of shares tendered by key employees in Stock-for-Stock Exercises (as defined in paragraph 5(d)) which occur after January 1, 1991. (c) Individual Option Grant Limitation. In the absence of a Plan amendment approved by the shareowners of the Company, the aggregate number of options to purchase a class of stock of the Company which may be granted under this Plan to any individual in any single calendar year shall be a number not greater than one-half of one percent of the number of shares of that class of stock which are issued and outstanding as of the first day of that calendar year. (d) Reorganization of the Company. The limitation on the aggregate number of shares that may be distributed or granted under this Plan may be adjusted in accordance with section 8 of the Plan (relating to recapitalizations, etc., of the Company). Section 5. Terms and Conditions of Incentive Stock Options. Each incentive stock option granted under the Plan will comply with the following conditions: (a) Option Price. The option price of an incentive stock option will not be less than the fair market value of the Stock at the time an option is granted. However, in the case of an Optionee who owns more than ten percent of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, the option price will not be less than one-hundred-ten percent of the fair market value of the Stock at the time the option is granted. The fair market value of the Stock shall be the mean between the highest and lowest selling prices of the Stock on the day an option is granted, as reported by the New York Stock Exchange. However, if there are no sales on the day an option is granted, the fair market value of the Stock shall be a weighted average of the means between the highest and lowest selling prices of the Stock on the nearest day before and the nearest day after the day the option is granted, as reported by the New York Stock Exchange. (b) Dollar Limitation. The aggregate fair market value (determined at the time the option is granted) of the Stock with respect to which any such incentive stock options are exercisable for the first time by the Optionee during any calendar year shall not exceed $100,000. For purposes of the dollar limitation under this paragraph 5(b), all incentive stock options which are granted on or after January 1, 1987 by the Company or any of its Subsidiaries, and which first become exercisable in the applicable year, shall be treated as granted under this Plan and shall be subject to the aggregate fair market value limit under this paragraph 5(b) for such year. (c) Ten-Year Limitation. No incentive stock option may be exercised more than ten years after it is granted. However, in the case of an Optionee who owns more than ten percent of the combined voting power of all classes of stock of the Company or any of its Subsidiaries, no incentive stock option may be exercised more than five years after it is granted. Each Agreement must contain this ten-year (or five-year) limitation. However, the Committee may grant options which may only be exercised during a period of less than ten (or five) years. In the case of any options which may only be exercised during a period of less than ten (or five) years, each Agreement must contain this shorter limitation. - -------------------------------------------------------------------------------- Bell Atlantic 1985 Incentive Stock Option Plan (5/31/99) Page 3 (d) Exercise of Options. The Committee will determine the time at which incentive stock options may be exercised and the conditions under which incentive stock options may be exercised. Any restrictions upon exercise of an option will be contained in the Agreement. Subject to these limitations, if any, options may be exercised in whole or in part. They may be exercised on any New York Stock Exchange trading day until they expire. However, no option may be exercised for fewer than 100 shares (or such other minimum number as may be established by the Plan Administrator) unless fewer than 100 shares (or such other number established by the Plan Administrator) are outstanding, and the option is exhausted upon its exercise. When an option is exercised, and before shares are transferred to an Optionee upon his or her exercise of the option, the option price must be paid in full. In the discretion of the Committee, the option price may be paid in cash, with Stock, or in any combination of cash and Stock. If the option price may be paid other than in cash, then the Agreement or other administrative guidelines will specify the acceptable methods of payment. If the option price may be paid in Stock (a "Stock-for-Stock Exercise"), the Optionee may tender Stock in accordance with rules established by the Plan Administrator. An Optionee will not have any of the rights of a shareholder by reason of an option until it is exercised. The Committee in its sole discretion may accelerate the time at which options may be exercised when it is in the best interests of the Company and its Subsidiaries to do so. (e) Seriatim Exercise. [No longer applicable; rescinded.] (f) Termination of Employment. (i) In the case of any stock options which are not yet exercisable, the remaining waiting period shall be waived, and a 90-day exercise period shall commence, on the day following the effective date of either (1) an Optionee's termination of employment under a company-initiated, voluntary or involuntary, force management or force reduction program or initiative, or (2) an Optionee's cessation of employment by Bell Atlantic or any Subsidiary as a direct consequence of the sale of the business unit or Subsidiary which then employs the Optionee; provided, however, that this paragraph will not apply to an Optionee whose employment is terminated for unsatisfactory performance, misconduct, or refusal to accept a reassignment that involves no relocation or downgrade. In case of a termination or cessation of employment as described in clause "(1)" or "(2)" of the prior sentence, any outstanding stock options which are exercisable on the date of such termination or cessation of employment shall remain exercisable until the earlier of (a) the 90th day following the date of such termination or cessation of employment, or (b) the tenth anniversary of the date of grant. For a separation from service occurring between August 15, 1997 and December 31, 1999, and which is of a type described in clause "(1)" or "(2)" of the first sentence of this paragraph, the period of five years shall be substituted for the 90-day period referred to in the prior two sentences, provided the Optionee executes and complies with a legal release provided by the Plan Administrator. Nothing in this paragraph is intended to cause the post-employment exercise period to be shorter than may be provided for under any other applicable sections of this Plan, such as those relating either to retirement, death or termination of employment due to disability. For an Optionee who retires (within the meaning of paragraph 5(g)), dies (as described in paragraph 5(h)), or separates from service on account of disability (within the meaning of paragraph 5(i)), the provisions of those respective paragraphs shall apply in lieu of the provisions of this paragraph. - -------------------------------------------------------------------------------- Bell Atlantic 1985 Incentive Stock Option Plan (5/31/99) Page 4 (ii) Except as provided in paragraphs 5(j), 5(f)(i), 5(g) (relating to retirement of an Optionee), 5(h) (relating to death of an Optionee), and 5(i) (relating to disability of an Optionee), no incentive stock option may be exercised by an Optionee after termination of the employment relationship between the Optionee and the Company, or between the Optionee and a Subsidiary, as the case may be. In the case of an Optionee who is transferred to the Company or to a Subsidiary, the termination of the employment relationship shall not be deemed to occur until the first date on which the Optionee is employed neither by the Company or a Subsidiary. (g) Retirement. Except as provided in paragraph 5(j) or this paragraph 5(g), in the case of an Optionee who either: (i) separates from service with a combination of age and years of service (as calculated for retirement-eligibility purposes) that equals or exceeds any of the following combinations: Age equal to or greater than: Service equal to or greater than: ----------------------------- --------------------------------- Any age 30 years 50 25 years 55 20 years 60 15 years 65 10 years, or (ii) at the time of termination of employment satisfies such age and service criteria for retirement as the Committee may have established, in its discretion, on a case-by-case basis at the time of granting options to said Optionee, incentive stock options which are exercisable on the day of retirement may be exercised during the remaining option term, but not more than five years after the day of retirement. The Committee may, in its discretion, at the time of granting options to some or all key employees, establish a permissible exercise period following retirement which is shorter than the five-year period stated in the previous sentence. (h) Death. Except as provided in paragraph 5(j) or this paragraph 5(h), in the case of the death of an Optionee while employed by the Company or a Subsidiary, an incentive stock option may be exercised during the remaining option term, but not more than one year after the day of death, by the person entitled to exercise the option under the Optionee's will or under the laws of descent and distribution. The Committee may, in its discretion, at the time of granting options to some or all key employees, establish a permissible exercise period following death which is shorter than the one-year period stated in the previous sentence. (i) Disability. Except as provided in paragraph 5(j) or this paragraph 5(i), in the case of an Optionee who separates from service due to disability, upon expiration of short term disability benefits (as disability is defined under the terms of the short term disability plan in which the Optionee participates), incentive stock options which are exercisable on the date of such separation for disability may be exercised during the remaining option term, but not more than five years after the date of such separation for disability, and options which are not exercisable on the date of such separation for disability may never be exercised. The Committee may, in its discretion, at the time of granting options to some or all key employees, establish a permissible - -------------------------------------------------------------------------------- Bell Atlantic 1985 Incentive Stock Option Plan (5/31/99) Page 5 exercise period following termination for disability which is shorter than the five-year period stated in the previous sentence. (j) Waiver of Limitations; Acceleration of Options. Upon an Optionee's termination of employment, retirement, death, or disability, the Committee in its sole discretion may waive the limitations on exercise of an incentive stock option contained in paragraphs 5(f) through 5(i) when it is in the best interests of the Company and its Subsidiaries to do so. Upon an Optionee's termination of employment, retirement, death, or disability, the Committee may also waive any requirements of paragraphs 5(d) and 5(l) that an incentive stock option may not be exercised within a certain time of its grant when it is in the best interests of the Company and its Subsidiaries to do so. However, the Committee may not extend the period during which an incentive stock option could otherwise be exercised. (k) Transferability of Option. Except as provided in this paragraph 5(k), no incentive stock option will be transferable. Upon the death of an Optionee, an incentive stock option may be transferred as provided in paragraph 5(h) (relating to death of an Optionee). Moreover, an Optionee may designate the person or persons who may exercise and benefit from the option after the Optionee's death. During an Optionee's lifetime, an incentive stock option may only be exercised by the Optionee. Each Agreement will contain these restrictions on transferability. (l) No Exercise within One Year of Grant. Except as provided in this paragraph 5(l) or in paragraph 5(f)(i), 8(b) or 6(b) of this Plan, no option granted under the Plan may be exercised within one year of its grant. The Committee may, in its discretion, waive this limitation in the case of any or all options granted to any or all Optionees when it is in the best interests of the Company and its Subsidiaries to do so. The Committee may grant options with a period of more than one year from the date of grant to the date of exercise. Section 6. Terms and Conditions of Nonqualified Options. (a) General Provisions. Each nonqualified option granted under this Plan shall be subject to all the terms and conditions of this Plan with the exception of paragraph 5(b) (relating to the dollar limitation) and paragraph 5(c) (relating to the ten-year limitation); provided, further, that paragraphs 5(d) (relating to exercise of options) and 5(k) (relating to transferability) shall apply to nonqualified options except as modified by paragraph 6(d) below. No nonqualified stock option may be exercised more than ten years after it is granted, except in the case of an Optionee who separates from service due to disability as described in paragraph 5(i), in which case the nonqualified option shall remain exercisable for (i) five years after the date of separation from service for disability (without regard to the ten-year limitation), or (ii) such shorter time limit as the Committee may, in its discretion, prescribe at the time the option is granted. Each Agreement must contain these limitations on exercise. (b) Reload Options. Except as provided in paragraph 6(d)(ii), the Committee may provide for the automatic granting of nonqualified stock options ("reload options") to all or one or more classifications of key employees, as designated by the Committee, upon the exercise by any such designated key employees of options in transactions in which Stock is tendered to pay the option price. In such a case, the number of reload options which shall automatically be granted by the Company to a designated key employee shall be equal to the number of shares of Stock tendered by the designated key employee. The option price of each such reload option shall be equal to the fair market value of the Stock on the date on which the reload option is automatically - -------------------------------------------------------------------------------- Bell Atlantic 1985 Incentive Stock Option Plan (5/31/99) Page 6 granted, and such reload options shall expire on the same date as the options then being exercised would have expired in the absence of being exercised. Reload options shall be exercisable by the Optionee after the date on which they are granted, subsequent to any waiting period that the Plan Administrator with the advice of counsel determines is necessary or appropriate to conform with legal or accounting requirements. Except as provided in this paragraph 6(b) to the contrary, the terms and conditions applicable to reload options shall be the same as those that apply to other nonqualified options as described in paragraph 6(a). (c) Deferral Feature. The Committee may provide a deferral feature (as hereafter described) with respect to any nonqualified option granted to an Optionee who is a Senior Manager (as hereafter defined). If a nonqualified option has a deferral feature, the Optionee may elect, pursuant to procedures adopted by the Plan Administrator, to defer the delivery of the additional shares of Stock that otherwise would be issued to the Optionee upon a Stock for Stock Exercise of such option. Such deferral election must (i) be effected while the Optionee is a Senior Manager, (ii) be delivered to the Plan Administrator not later than six months before the expiration date of the option, (iii) state the date of grant and number of options subject to the deferral election, (iv) acknowledge that the deferral election is not revocable by the Optionee, (v) acknowledge that options subject to the election may thereafter be exercised solely through a Stock-for-Stock Exercise, (vi) designate whether dividends on the deferred shares will be deferred or distributed in cash, and (vii) otherwise comply with the applicable election procedures adopted by the Plan Administrator. A "Senior Manager" is any active employee of the Company or any of its Subsidiaries who is designated, or has previously been designated, as a Senior Manager (or an attorney with a compensation grade comparable to a Senior Management compensation band) according to the governance procedures approved by the Committee, and whose position has not subsequently been downgraded below the rank of Senior Manager. (d) Transfers to Immediate Family Members. The Committee shall have discretion to modify outstanding grants of nonqualified options, and to grant nonqualified options in the future, to permit any one or more categories of Optionees ("Eligible Optionees"), as may be specified by the Committee from time to time, to transfer outstanding nonqualified options by way of gift to one or more "Immediate Family Members." "Immediate Family Members" shall consist of the lawful civil law or common law spouse of the Eligible Optionee; the natural, adopted, or step children or grandchildren of the Eligible Optionee; a trust or trusts for the exclusive benefit of one or more of the foregoing; and any other person which the Plan Administrator determines should be treated as an Immediate Family Member. The transfer of nonqualified options to Immediate Family Members shall be subject to administrative guidelines adopted by the Plan Administrator, as well as the following specific terms and conditions. (i) No consideration may be paid for any transfer of a nonqualified option, the transferree may not exercise such an option by means of a Stock-for-Stock Exercise, and no reload options shall be granted as a result of the exercise of a transferred option. (ii) The transferee may not make a deferral election with respect to a transferred option, and an Eligible Optionee may not transfer an option which is, at the time of a proposed transfer, then subject to a deferral election. (iii) It shall not be permissible for an Eligible Optionee to designate joint transferrees for a nonqualified option, and it shall not be permissible for a transferee to further transfer any nonqualified option to any person except upon death of the transferee, - -------------------------------------------------------------------------------- Bell Atlantic 1985 Incentive Stock Option Plan (5/31/99) Page 7 in which case the option may be transferred pursuant to a beneficiary designation under the Plan or by will or by the laws of descent and distribution. (iv) The Eligible Optionee shall remain liable for any applicable payroll taxes due upon the exercise of a transferred option. Section 7. Stock Appreciation Rights. Incentive stock options and nonqualified stock options granted under the Plan may, in the discretion of the Committee, be coupled with stock appreciation rights in the same number of shares of Stock for which the options are granted. Stock appreciation rights may be exercised at the same time, and under the same conditions, as the incentive stock options or nonqualified stock options to which they relate. Upon an Optionee's exercise of a stock appreciation right, the Optionee shall be entitled to a cash payment from the Company in an amount equal to the difference between the fair market value of one share of Stock on the day the stock appreciation right is exercised, as determined under section 5(a), and the option price of the related incentive stock option or nonqualified stock option, and the related incentive stock option or nonqualified stock option shall be canceled. Section 8. Recapitalization of Company. (a) Adjustments in Stock. In a transaction to which section 424(a) of the Code applies, the share and option limitations of sections 4(b) and 4(c) may be adjusted and the Stock subject to option under section 4(a) may be changed. The Committee will determine the adjustments to be made in the case of reorganization, recapitalization, stock split, stock dividend, combination of shares, or any other change affecting the Stock. Adjustments in the shares subject to option under the Plan may be in the aggregate number of shares subject to option under the Plan; the number of shares for which any Optionee has options; the option price of any options; and the type of stock subject to option under the Plan. (b) Acceleration of Options. In connection with a transaction to which section 424(a) of the Code applies, the Committee may waive any requirements of sections 5(d) and 5(l) that an incentive stock option may not be exercised within a certain time of its grant. The Committee may waive these requirements in the case of any or all Optionees. It may waive these requirements with respect to any or all options granted to an Optionee. The Committee may take this action either before or after the transaction to which section 424(a) of the Code applies. If this action is taken by the Committee before the transaction occurs, the action must be contingent upon the transaction occurring. - -------------------------------------------------------------------------------- Bell Atlantic 1985 Incentive Stock Option Plan (5/31/99) Page 8 Section 9. Amendment and Termination. To the extent permitted by law, the Committee or the Company's Board of Directors ("Board") may amend or suspend, and the Board may terminate, this Plan. The Plan Administrator may make administrative modifications to the Plan to comply with changes in applicable law or to ensure effective and consistent administration of the Plan; provided, however, that the Plan Administrator shall not amend the Plan in any manner which alters the amount of the benefit provided under the Plan. Unless an Optionee consents to an amendment, suspension, or termination of the Plan which is adopted by the Board, the Committee or the Plan Administrator, no amendment, suspension, or termination of the Plan will adversely affect the rights of an Optionee with respect to any option granted to the Optionee. Moreover, without approval of the owners of a majority of the shares of the Stock voting either in person or by proxy at a duly convened meeting of the Company's shareowners, no amendment to the Plan may (i) except as provided in section 8(a), increase the aggregate number of shares subject to option under section 4(b) of the Plan or the number of options which may be granted to an individual in a single calendar year under section 4(c) of the Plan; (ii) except as provided in section 8(a), decrease the option price at which options may be granted under section 5(a) of the Plan; (iii) extend the period during which any option may be exercised beyond the limits stated in Section 5(c); or (iv) extend the period during which options may be granted under section 10 of the Plan. The Executive Vice President - Human Resources of the Company, with the advice of counsel, has the authority to amend the Plan or modify the administration of the Plan to the extent required to ensure that transactions under the Plan are exempt to the maximum extent possible from the short-swing profit provisions of Section 16(b) of the Securities Exchange Act of 1934. Section 10. Effective Date. Pursuant to the re-adoption of this Plan by the Committee on March 23, 1999 and the re-approval of this Plan by the shareholders of the Company on May 19, 1999, the effective date of this Plan is March 23, 1999. No options may be granted under the Plan following the tenth anniversary of the effective date. Section 11. Miscellaneous Provisions. (a) No Right to Employment. No grant of an incentive stock option, nonqualified stock option, or stock appreciation right under this plan shall give an Optionee a right to continued employment by the Company or any Subsidiary or otherwise interfere with the Company's or any Subsidiary's right to discharge an Optionee, whether or not for cause. (b) Tax Withholding. When the Company has an obligation to withhold any federal, state, or local tax upon the exercise of an incentive stock option or a nonqualified stock option under the Plan, the Optionee may pay the Company the amount of the required withholding, in cash, at the time of exercising the option, in lieu of the Company withholding the amount through the sale of shares. (c) Governing Law. This Plan shall be construed and enforced in accordance with the laws of the State of Delaware (without regard to the legislative or judicial conflict of laws rules of any state), except to the extent superseded by federal law. - -------------------------------------------------------------------------------- Bell Atlantic 1985 Incentive Stock Option Plan (5/31/99) Page 9 EX-10.K 6 BELL ATLANTIC CASH BALANCE PLAN EXHIBIT 10k Bell Atlantic Cash Balance Plan - Effective January 1, 1999 (12/01/99 edition) Section 6 6. LIMITATIONS ON CONTRIBUTIONS AND BENEFITS 6.1 Conditional Contributions. In no event, shall Plan assets be diverted for any purpose other than for the exclusive benefit of Plan Participants and beneficiaries; provided, however, that to the extent permitted under ERISA and the Code, all contributions to the Plan are subject to the following conditions: 6.1.1 Contributions Conditioned on Deductibility. All contributions made to the Plan by each Participating Employer shall be conditioned upon the deductibility of such contributions under the Code. To the extent that any such deduction is disallowed by the Internal Revenue Service, or such contribution is otherwise nondeductible and recovery thereof is permitted, each Participating Employer, upon the approval of the Treasurer of Bell Atlantic, shall have the right to demand and receive from the Trustee the related contribution to the extent disallowed within one year after the disallowance of said deduction or as otherwise permitted by applicable administrative rules. 6.1.2 Mistaken Contributions. If a Participating Employer makes a contribution, or any part thereof, by mistake of fact, such contribution or part thereof shall be returned to the Participating Employer within one year after such contribution is made. 6.2 Special Limitation on Benefits for Higher-Paid Employees. 6.2.1 Nondiscrimination upon Plan Termination. In the event of Plan termination, the benefit payable to any highly compensated employee or any highly compensated former employee (as defined in Section 414(q) of the Code and regulations thereunder) shall be limited to a benefit that is nondiscriminatory under Section 401(a)(4) of the Code. If payment of benefits is restricted in accordance with this paragraph, assets in excess of the amount required to provide such restricted benefits shall become a part of the assets available under Section 10.4 for allocation among Participants and their beneficiaries whose benefits are not restricted under this paragraph. 6.2.2 Restrictions on Highly Compensated Participants. The restrictions of this paragraph shall apply prior to termination of the Plan to any Participant who is a highly compensated employee or a highly compensated former employee and who is one of the 25 highest paid employees or former employees of all Participating Employers and all Bell Atlantic Affiliates for any Plan Year. The annual payments to or on behalf of any such Participant shall be limited to an amount equal to the sum of: (1) the payment that would have been made to the Participant under a single life annuity that is the Actuarial Equivalent of the sum of the Participant's Accrued Benefit and any other benefits under the Plan (other than a social security supplement), plus (2) the payment that the Participant is entitled to receive under any applicable social security supplement. 6.2.3 Exception to Restrictions on Highly Compensated Participants. The restrictions in Section 6.2.2 shall not apply: (a) if, after the payment of benefits to or on behalf of such Participant, the value of the Plan assets equals or exceeds 110% of the value of the current liabilities (within the meaning of Section 412(l)(7) of the Code); (b) if the value of the benefits payable to or on behalf of the Participant is less than 1% of the value of current liabilities before distribution; (c) if the value of the benefits payable to or on behalf of the Participant does not exceed $5,000; or (d) such Participant has entered into an agreement with the Plan Administrator as described in Section 6.2.4. 6.2.4 Further Exception from Restrictions on a Highly Compensated Participant. Notwithstanding Section 6.2.2, a Participant described in that Section (a "restricted Participant") may receive one or more distributions without regard to the restrictions described in that Section, provided that the following requirements are met: (a) The "restricted amount" (which may be required to be repaid to the Plan) is the excess of the accumulated amount of distributions made to the restricted Participant over the accumulated amount of the Participant's nonrestricted limit. The Participant's "nonrestricted limit" is equal to the payments that could have been distributed to the Participant pursuant to subsection (b). An "accumulated amount" is the amount of a payment increased by a reasonable amount of interest from the date the payment was made (or would have been made) until the date for the determination of the restricted amount. (b) Prior to receipt of a distribution from the Plan, the restricted Participant shall deposit in escrow with a depository acceptable to the Plan Administrator property having a fair market value equal to at least 125% of the restricted amount. Alternatively, the Participant may either: (i) post a bond from an insurance company, bonding company or other surety approved by the U.S. Treasury Department as an acceptable surety for federal bonds, or (ii) obtain a bank letter of credit in an amount equal to at least 100% of the restricted amount. (c) Amounts in the escrow account in excess of 125% of the restricted amount may be withdrawn on behalf of the Participant. If the market value of the property in the escrow account falls below 110% of the restricted amount, the Participant shall deposit additional property to bring the value of the property up to 125% of the restricted amount. The Participant may receive any income from the property placed in escrow, provided that the 125% minimum is maintained. Similar rules shall apply to the release of any liability in excess of 100% of the restricted amount where the repayment obligation has been secured by a bond or a letter of credit. (d) A depository may not redeliver to a Participant any property held under the agreement, other than amounts in excess of 125% of the restricted amount and a surety or bank may not release any liability on a bond or letter of credit unless the Plan Administrator certifies that the restricted Participant (or the Participant's estate) is no longer obligated to repay any amount under the agreement. The Plan Administrator shall make such certification at any time after the distribution commences if either: (i) the conditions of paragraphs "(a)" to "(c)" above are met; or (ii) the Plan is terminated and the requirement of subsection "(a)" is met; or (iii) the Participant is no longer a restricted Participant. Such certification shall terminate the agreement between the Participant and the Plan Administrator. 6.3 Code Section 415 Limits on Benefits. 6.3.1 Code Section 415 Single Plan Limits. A Participant's benefit under this Plan shall not be payable to the extent it exceeds the amount set forth in Section 415 of the Code, the limitations of which are hereby incorporated by reference into the Plan. For purposes of applying these limitations, changes to Section 415(b)(2)(E) of the Code made by the Retirement Protection Act of 1994 as amended by the Small Business Job Protection Act of 1996 were implemented effective January 1, 1995. 6.3.2 Section 415 Combined Plan Limits. If a Participant is a participant in one or more defined contribution plans sponsored by a Participating Employer or a Bell Atlantic Affiliate, the annual benefit under this Plan shall be reduced to the extent necessary to meet the combined plan limits of Section 415(e) of the Code. Except as otherwise provided in Section 6.3.5, this limit does not apply to payments from the Plan for months after December, 1999. 6.3.3 Application of Section 415 to Surviving Spouses. Unless this adjustment is not applicable to a Surviving Spouse described in Section 5.2.2(b) pursuant to Section 6.3.5, if a Participant's benefit is limited by the limitations set forth in Code Section 415, the benefit payable to the Participant's Surviving Spouse under Section 5.2.2(b) or 5.5 shall be determined on the basis of the Participant's benefit calculated under Section 4 without regard to the Section 415 limitations, and such limitations shall be applied instead to the resulting benefit payable to the Surviving Spouse. If this adjustment is not applicable, the benefit payable to the Surviving Spouse will be determined based on the Participant's benefit calculated taking the Code Section 415 limits into account. 6.3.4 Annual Adjustments. Except as otherwise provided in Section 6.3.5: (a) the limitation of Section 415(b)(1)(A) of the Code will be automatically adjusted for each Terminated Vested Participant by multiplying such limit by the cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code in such manner as the Secretary shall prescribe; and (b) the limitation of Section 415(b)(1)(B) of the Code shall be automatically adjusted for Terminated Vested Participants to reflect the cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code in such manner as the Secretary shall prescribe. The new limitation will apply to Limitation Years ending within the calendar year of the date of the adjustment. The pension paid to any Terminated Vested Participant (or his or her Surviving Spouse or other beneficiary) shall be automatically adjusted to reflect the maximum amount allowable under Section 415 of the Code for such Limitation Year. 6.3.5 Benefits Not Eligible for Adjustments. Notwithstanding anything in the Plan or any predecessor plan to the contrary, the adjustments described in Sections 6.3.3 and 6.3.4 shall not be applied to a benefit paid to a Terminated Vested Participant or his Surviving Spouse or other beneficiary that has previously started on a Benefit Commencement Date under the Plan, the North Plan, BAMPP or the NYNEX Plan if: (a) as of such Benefit Commencement Date, the Participant or beneficiary had a Code Section 415 excess benefit under the Bell Atlantic Senior Management Income Deferral Plan; or (b) as of such Benefit Commencement Date, the Participant or beneficiary had a benefit under the Code Section 415 excess benefit provisions of the Bell Atlantic Supplemental Retirement Plan; or (c) as of such Benefit Commencement Date, the Participant or beneficiary had a benefit under the NYNEX Corporation Executive Retirement Account; or (d) the benefit was paid from the Plan, the North Plan, BAMPP or the NYNEX Plan in a lump-sum cashout; or (e) as of such Benefit Commencement Date the Participant or beneficiary had a Code Section 415 excess benefit provided through a non-qualified plan maintained by his or her Participating Employer, and the Participant or beneficiary received payment of such excess benefit in a form other than a life annuity (based on the Participant's, the beneficiary's or the Participant's and beneficiary's life). In the event a Terminated Vested Participant originally took payment of his benefit partly in the form of a lump-sum cashout and partly in the form of an annuity, the annuity (but not the lump-sum cashout) shall be eligible for adjustment under Sections 6.3.3 and 6.34 if it is not part of a benefit described in Section 6.3.5(a), (b), (c) or (e); provided, however, that the adjustment shall be prorated to exclude that portion of the adjustment allocable to the benefit paid in a lump-sum. In addition, the limit described in Section 6.3.2 of the Plan shall continue to apply to payments of benefits for months after December, 1999 if, as of December 31, 1999, the benefits were ineligible for adjustment under Sections 6.3.3 and 6.3.4 under the provisions of this Section 6.3.5. EX-10.X 7 EMPLOYMENT AGREEMENT DATED 06/30/95 EXHIBIT 10x CONFIDENTIAL ------------ EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT between CELLCO PARTNERSHIP ("Cellco"), and DENNIS STRIGL (the "Executive"), is made this 30th day of June, 1995. WHEREAS, Cellco contemplates a closing (referred to herein as the "Closing") of certain transactions involving contributions to Cellco of assets and liabilities of the NYNEX Mobile and Bell Atlantic Mobile businesses; and WHEREAS, the Executive is currently serving as President and Chief Executive Officer of Bell Atlantic Mobile Systems, Inc. ("BAM") under the terms of an Employment Agreement, dated September 30, 1994, between BAM and the Executive (the "BAM Employment Agreement"); and the BAM Employment Agreement contemplates the Closing and imposes no impediment to the Executive ceasing employment with BAM and commencing employment with Cellco; and WHEREAS, subject to the occurrence of the Closing, Cellco wishes to employ the Executive as its Chief Executive Officer; and Cellco and the Executive wish to state the terms and conditions of employment which shall apply during the term of this Agreement; NOW, THEREFORE, the parties hereto, acknowledging the mutual consideration embodied in the terms and conditions of this Agreement and intending to be legally bound, hereby agree as follows: 1. Employment: Term of Agreement. Subject to the terms of this Agreement, ----------------------------- and subject to the occurrence of the Closing on June 30, 1995 or any date in the third or fourth quarter of 1995, the Executive agrees to commence employment with Cellco effective as of the Closing Date. Moreover, the Executive agrees to serve as Chief Executive Officer of Cellco, and Cellco agrees to employ the Executive as its Chief Executive Officer, for the period from the date of Closing to the second anniversary of that date (said two-year period is referred to herein as the "Term" of this Agreement). 2. Compensation. During the Term of this Agreement, the compensation ------------ program for the Executive shall consist of the following components: a) Salary: The Executive's base salary which shall initially be ------ at an annual rate of $265,400, and such salary shall be subject to review and adjustment from time to time, as determined by the Managing General Partner of Cellco (the "General Partner"), and shall not be reduced below that rate during the Term of the Agreement; and b) Short Term Incentive: -------------------- I) The Executive shall participate in a short term incentive plan for Cellco executives, in accordance with a plan to be adopted by the Managing Partner on or about the date of Closing, and which may be amended from time to time. The Managing Partner shall set a target incentive at the beginning of each year (or, in 1995, as of the Closing), and shall determine the award, subject to company and individual performance results, after the end of each year. - -------------------------------------------------------------------------------- Private and Confidential Page 1 ii) On an annualized basis for 1995, the target incentive shall be $149,300, subject to proration by twelfths for the number of months from the Closing through the end of 1995. iii) In January 1996, Cellco shall also pay the Executive a short term incentive for 1995 service at BAM prior to the Closing, based on an annualized target incentive of $98,200, subject to proration by twelfths for the number of months from the beginning of 1995 to the Closing. c) Long Term Incentive: ------------------- i) The Executive shall participate in a long term incentive plan for Cellco executives, in accordance with a plan to be adopted by the Managing Partner within 90 days after the Closing and which may be amended from time to time. The Managing Partner shall grant a long term incentive at the beginning of each year (or, in 1995, as of the Closing). ii) For 1995, the value on an annualized basis (before any applicable proration) of the Cellco long term incentive shall be $273,000, less the value of any 1995 long-term incentive granted by Bell Atlantic which remains outstanding. iii) With respect to the treatment of stock options granted by Bell Atlantic for 1995, vis a vis the Cellco long term incentive grant for 1995, the Executive shall have the same rights and elections as other former BAM executives who received such Bell Atlantic stock options and are eligible for a Cellco 1995 long term incentive. d) Benefits: The Executive shall be eligible to participate in -------- all employee benefit plans which are offered to similarly situated employees of Cellco, in accordance with the terms of the plans adopted by the Managing Partner, as those plans may be amended from time to time. 3. Non-Compete and Proprietary Information Agreement: As consideration for ------------------------------------------------- the offer of employment by Cellco as its Chief Executive Officer and the promotional increase in compensation associated with that appointment, the Executive agrees that, on the date he commences employment with Cellco, he will execute and deliver to Cellco the Non-Compete and Proprietary Information Agreement (the "Non-Compete Agreement") attached to this Agreement. 4. Employment Duties. The Executive will, during the Term of this ----------------- Agreement: a) faithfully and diligently perform all acts and duties required of a Chief Executive Officer, and furnish such services as the Managing Partner of Cellco shall direct, and shall perform all acts in the ordinary course of Cellco's business necessary and conducive to Cellco's best interest; and b) devote his full time, energy, and skill to the business of Cellco and to the promotion of Cellco's best interests, except for vacations and absences allowed under company policies; and c) abide by high standards of business ethics and fair competition, comply with federal, state, and local laws and any applicable foreign laws known to the Executive in consultation with Cellco legal counsel, and abide by the policies of Cellco which are applicable to its employees and officers, when carrying out his obligations under this Agreement and conducting Cellco's business. - -------------------------------------------------------------------------------- Private and Confidential Page 2 5. Obligations of Cellco: Subject to Section 6 of this Agreement, for the --------------------- Term of the Executive's employment with Cellco: a) Cellco shall retain the Executive in the position of Chief Executive Officer, with authority and responsibilities commensurate with that position; b) Cellco shall not reduce the base salary of the Executive below $265,400 per annum; and c) except for short-term travel obligations in the ordinary course of business, Cellco shall not assign the Executive to a principal place of work outside the United States. 6. Termination. ----------- a) The Executive's employment with Cellco may be terminated by Cellco, without any obligation to pay liquidated damages (including, without limitation, "Liquidated Damages" as defined in Section 7(a)) or other severance benefits, either by reason of his death, by reason of his continuing disability on the date on which his short-term disability benefits expire, or for Cause. b) For purposes of this Agreement, "Cause" means any of the following: a breach by the Executive of any of his covenants or obligations under this Agreement or under the Non-Compete Agreement; insubordination or failure to perform job responsibilities with full-time and good-faith efforts; violation of law (other than a traffic citation or minor misdemeanor); material violation of any policy or code of conduct adopted by Cellco, including, by way of example, a knowing violation of the employer's voucher or expense reimbursement rules; or engaging in some form of misconduct which, if it were known by the public, could harm the reputation of Cellco. c) If there is "Good Reason" (as defined in paragraph (d) below), and if the Executive gives Cellco 90 days notice of his intent to resign for Good Reason, the Executive shall be eligible, subject to the terms and conditions of this Agreement, to receive Liquidated Damages (as defined in Section 7(a) of the Agreement) upon such a resignation. d) A termination for "Good Reason" means a resignation by the Executive under circumstances in which the Executive is not in breach of this Agreement or the Non-Compete Agreement, no event has occurred which would permit Cellco to terminate his employment pursuant to paragraph (a) of this Section, and in which Cellco has breached any of its obligations under Section 1, 2 or 5 of this Agreement. e) Cellco may terminate the Executive's employment at any time for any reason other than as stated in paragraph (a) of this Section, providing, that, in such a case the Executive shall be eligible to receive Liquidated Damages, as defined in, and subject to the terms of, Section 7 of this Agreement. 7. Liquidated Damages. ------------------ a) Subject to paragraphs (b) through (d) of this Section, in the event that, during the Term of this Agreement, Cellco terminates the Executive's employment other than pursuant to Section 6(a), or in the event that the Executive resigns for Good Reason, Cellco shall pay "Liquidated Damages" to the Executive in the nature of severance benefits as follows, and such amounts shall be the sole and exclusive severance benefits or damages that Cellco shall be required to - -------------------------------------------------------------------------------- Private and Confidential Page 3 pay to the Executive in the event of any such termination (other than any savings, retirement, deferred compensation, disability or death benefits which may be applicable under any benefit plans in which the Executive participates): i) One Year's Salary: Cellco shall pay the Executive 12 ----------------- monthly installments of cash at a rate equal to the Executive's base salary at the time of termination of employment, less applicable withholding taxes. ii) Most Recent Short Term Award: Cellco shall pay the ---------------------------- Executive, within 30 days of the termination of employment, an amount equal to the gross amount of the annual short term award which was most recently paid to the Executive, less applicable withholding taxes. iii) Pay in Lieu of Vacation: Cellco shall pay the ----------------------- Executive cash in lieu of any accrued but unused vacation days, at a daily rate equal to 1/260th of his base salary rate, less applicable withholding taxes. b) No Liquidated Damages shall be payable under this Agreement if the Executive is in breach of this Agreement at the time of his termination of employment. The Executive shall forfeit any right to receive any further payments of Liquidated Damages if and when he breaches any of his covenants or continuing obligations under the Non-Compete Agreement. c) A condition to the Executive's right to receive any Liquidated Damages hereunder shall be his signing, on or about the date of his termination of employment, a release in the form shown at Exhibit A of this Agreement (the "Release"). d) In the event that the Executive's employment terminates under circumstances which make him eligible (subject to the signing of a Release) to receive Liquidated Damages, the Executive hereby acknowledges that any such Damages are in lieu of any right he may otherwise have had to receive benefits under any severance or separation pay plan, program or practice which may otherwise have been applicable to him, and, under such circumstances, the Executive hereby waives any right to receive any such severance benefit under any such plan, program or practice. e) If and when the Executive resigns or retires, or his employment terminates for any reason, he shall, prior to the last day of active employment and without charge, return to Cellco all company property, including, without limitation, credit cards; building passes and identification cards; computer hardware and software; communications and office equipment; and records, files and documents (whether in paper or machine-readable form). 8. Intellectual Property. The Executive shall disclose promptly to Cellco ---------------------- or its nominee(s) any and all inventions, discoveries, improvements, works of authorship, and computer or other apparatus programs (collectively "Innovations") whether or not patentable or susceptible to copyright or other forms of protection, conceived of or made by him in the course of his employment. The Executive assigns and agrees to assign all interest in any such Innovations to Cellco or its nominee(s). An Innovation will be deemed to have been made in the course of employment unless the Innovation (1) was developed on the Executive's own time, (2) was developed outside the Executive's regular or assigned duties for Cellco, and (3) no Employer equipment, facility, or proprietary information was used. The Executive further agrees, without charge to Cellco, to execute as and when determined appropriate by Cellco, a specific assignment to Cellco or its nominee(s) of all rights, title, and interest to any such Innovations, and the - -------------------------------------------------------------------------------- Private and Confidential Page 4 Executive agrees to execute all applications or other forms of protection for such Innovations in the United States and in other countries. 9. Confidentiality. The Executive agrees not to disclose or discuss, other --------------- than with his legal counsel, personal tax or financial advisors, or spouse, either the existence of or any details of this Agreement. The Executive will use his best efforts to ensure that any such legal counsel, personal tax or financial advisor, or spouse will not disclose or discuss the existence or any details of this Agreement with any other person. 10. Duty to Disclose Acceptance of Offers of Employment by a Competitor. -------------------------------------------------------------------- The Executive acknowledges that Cellco has an ongoing interest in being in a position to determine whether any of its employees or former employees who have, or had, access to proprietary information intend to provide services as an employee, consultant or in any other capacity to a company which Cellco considers to be a competitor or potential competitor. Accordingly, during the period of the Executive's employment by Cellco, the Executive shall give written notice to Cellco not later than the earliest date on which he gives his preliminary or final written or oral acceptance of an offer of employment, or offer of compensation in exchange for advice, information or consulting services. Said notice shall state the name of the offering company, the role or position accepted, and a brief summary of the responsibilities and the geographic location or scope of that role or position. 11. Miscellaneous Provisions. ------------------------ a) Assignment by Cellco. Cellco may assign this Agreement to any company that acquires all or substantially all of the assets of Cellco, or into which or with which Cellco is merged or consolidated. If and when the Executive transfers from Cellco to any affiliate of Cellco, this Agreement shall be deemed to be assigned to the transferee company. This Agreement may not be assigned by the Executive. b) Waiver. The waiver by Cellco of a breach by the Executive of ------ any provision of this Agreement shall not be construed as a waiver of any prior or subsequent breach. c) Severability. If any clause, phrase or provision of this ------------ Agreement or the Non-Compete Agreement or Release, or the application thereof to any person or circumstance, shall be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of this Agreement, Non-Compete Agreement or Release. d) Governing Law. This Agreement shall be construed and enforced ------------- in accordance with the laws of the State of New Jersey. e) Notices. Whenever this Agreement requires or permits notice to ------- be given to Cellco, the notice should be given in writing to the Chairman of the Board of the Managing Partner. f) Entire Agreement: Supersedes Employment Agreement. Except -------------------------------------------------- for the terms and conditions of the Non-Compete Agreement and the compensation and benefit plans applicable to the Executive (as such plans may be amended by Cellco from time to time), this Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, pertaining to the subject matter hereof, including without limitation the BAM Employment Agreement; provided, - -------------------------------------------------------------------------------- Private and Confidential Page 5 however, that the BAM Employment Agreement shall remain in effect unless and until the date of Closing, at which time the parties contemplate that the Signing Bonus shall be payable to the Executive by BAM under the terms of the BAM Employment Agreement, and the BAM Employment Agreement shall thereupon be rescinded and superseded by this Agreement and the Non-Compete Agreement. This Agreement shall not be modified or amended except by written agreement of Cellco and the Executive. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, hereby execute this Agreement. CELLCO PARTNERSHIP Date: 6/16 /95 By: /s/ Frederic V. Salerno ------------------------------ -------------------------- Frederic V. Salerno Chairman of the Board, Cellco Management Corporation, as Managing General Partner of Cellco Partnership THE EXECUTIVE Date: 6/30/95 By: /s/ Dennis Strigl ------------------------------ -------------------------- Dennis Strigl - -------------------------------------------------------------------------------- Private and Confidential Page 6 AMENDMENT AND EXTENSION OF TERM OF EMPLOYMENT AGREEMENT This AMENDMENT AND EXTENSION OF TERM OF EMPLOYMENT AGREEMENT is made between CELLCO PARTNERSHIP ("Cellco") and DENNIS F. STRIGL (the "Executive") is made this 10th of June, 1996. WHEREAS, Cellco and the Executive are parties to that certain EMPLOYMENT AGREEMENT made the 30th day of June, 1995, including the Exhibits and attachments thereto including that certain NON-COMPETE AND PROPRIETARY INFORMATION AGREEMENT attached thereto and executed by the parties in connection therewith (collectively, the "Employment Agreement"); and WHEREAS, Cellco and the Executive wish to extend the term of the Employment Agreement, subject to certain changes set forth in this AMENDMENT AND EXTENSION OF TERM OF EMPLOYMENT AGREEMENT ("Amendment to Employment Agreement"); and WHEREAS, the Closing of the Cellco Partnership contemplated by the Employment Agreement has occurred; and WHEREAS, Bell Atlantic Corporation and NYNEX Corporation contemplate a merger of the two companies during the extended term of the Employment Agreement (the "Merger"), and Cellco and the Executive wish to address the Merger in connection with the Employment Agreement; WHEREAS, Cellco and the Executive wish to make other changes in the terms and conditions of the Employment Agreement as set forth herein and to extend and reaffirm all other terms and conditions of the Employment Agreement (including without limitation the terms and conditions of the NON-COMPETE AND PROPRIETARY INFORMATION AGREEMENT), except as specifically changed in this Amendment to Employment Agreement; NOW THEREFORE, the parties hereto, acknowledging the mutual consideration embodied in the terms and conditions of this Amendment to Employment Agreement and intending to be legally bound, hereby agree as follows: 1. The Employment Agreement is incorporated herein by reference, and all of the terms and conditions of the Employment Agreement, except to the extent amended by this Amendment to Employment Agreement, remain in full force and effect according to their terms. The defined terms of the Employment Agreement shall have the same meaning in this Amendment to Employment Agreement as in the Employment Agreement, unless otherwise defined herein. Any provisions of this Amendment to Employment Agreement which are inconsistent with or conflict with the Employment Agreement shall control. (The Employment Agreement and the Amendment to Employment Agreement may be collectively referred to as the "Amended Employment Agreement.") -2- 2. The "Term" of the Employment Agreement is hereby extended to the fourth anniversary of the signing of this Amendment to Employment Agreement. 3. The Executive's annual base salary beginning with execution of this Amendment to Employment Agreement is hereby increased to be $400,000. The base salary increase shall be retroactive to January 1, 1996, and Cellco shall promptly pay Executive the retroactive amount of increase. 4. The Executive's base salary shall be increased by a minimum of $50,000 annually, effective January 1 of each year of the Term of the Amended Employment Agreement. 5. The Executive's short term incentive target described in Section 2 (b)(i) of the Employment Agreement is hereby set as follows: for 1996, $250,000; for 1997, $285,000; for 1998, $320,000; for 1999, $350,000. 6. In view of the Merger, and in addition to other compensation provided for in the Employment Agreement and this Amendment to Employment Agreement, Executive shall receive and Cellco shall pay to Executive a "Merger Stay Bonus" as follows: (a) If the Merger closes during the Term of the Amended Employment Agreement, the Merger Stay Bonus shall be one times the Executive's then current base salary plus the Executive's then applicable short term incentive target, payable at the date of the closing of the Merger. (Example: If the Merger closes on December 31, 1996, Executive's base salary is $400,000, Executive's 1996 target bonus is $250,000, hence the Merger Stay Bonus is $650,000.) (b) If Merger fails to close during the Term of the Amended Employment Agreement, or is canceled by Bell Atlantic Corporation and/or NYNEX Corporation, the Merger Stay Bonus shall be 25% of the Executive's then current base salary plus 25% of the Executive's then applicable short term incentive target, payable at the earlier of the date upon which the Merger is canceled, or at the end of the Term. (Example: If the Merger is canceled on December 31, 1996, Executive's base salary is $400,000, Executive's 1996 target bonus is $250,000, hence the Merger Stay Bonus is 25% of $650,000, namely $162,500.) 7. Executive shall be eligible to participate in the current executive retirement, savings, and life insurance plans during the Term of the Amended Employment Agreement, in accordance with the terms of the plans adopted by the Managing Partner, as those plans may be amended from time to time. 8. At the expiration of the Term, Cellco shall pay the Executive (in addition to other compensation then due to Executive) an "Expiration Bonus" in an amount equal to Private and Confidential -3- Executive's then current base salary and short term incentive target, but only if the following conditions are then true: (i) the Amended Employment Agreement has not been terminated, (ii) the Executive remains employed as President and Chief Executive Officer and has not resigned or been terminated for any reason, including for Cause or Good Reason, and (iii) Executive has not received Liquidated Damages. (Example: The Term expires at the fourth anniversary of the signing of this Amendment to Employment Agreement; Executive then remains employed as President and Chief Executive Officer of Cellco at a base salary of $550,000 and a short term incentive target of $350,000; the Expiration Bonus is payable at the amount of $900,000.) 9. Notwithstanding Section 6(a) of the Employment Agreement, Cellco shall be obligated to pay Liquidated Damages if Executive's employment with Cellco is terminated by Cellco by reason of Executive's death or by reason of his continuing disability (to be established by reference to the provisions of Cellco's long term disability plan) after the date on which his short-term disability benefits expire. In the event of such death or continuing disability, the entire applicable amount of the Liquidated Damages shall be payable by Cellco in a lump sum within six months of such death or the establishment of such continuing disability, notwithstanding any other provisions of the Amended Employment Agreement. 10. Section 6(d) of the Employment Agreement is amended as follows (new material underlined): "d) A termination for "Good Reason" means a resignation by the Executive under circumstances in which the Executive is not in breach of this Agreement or the Non-Compete Agreement, no event has occurred which would permit Cellco to terminate his employment pursuant to paragraph (a) of this Section, and in which Cellco has either (i) breached any of its obligations under Section 1, 2, or S ---------- of this Agreement, or (ii) approved a voluntary termination by -- ----------------------------------- action of the Board of its Managing Partner." ------------------------------------------- 11. Section 7 of the Employment Agreement ("Liquidated Damages") is amended by striking paragraphs 7(a)(i) ("One Year's Salary") and ----------------- 7(a)(ii) ("Most Recent Short Term Award") and replacing them with the following: ---------------------------- "i) Two Years' Salary: Cellco shall pay the Executive ----------------- 24 monthly installments of cash at a rate equal to the Executive's base salary at the time of termination of employment, less applicable withholding taxes. ii) Two Times Most Recent Short Term Award: Cellco -------------------------------------- shall pay the Executive, within 30 days of the termination of employment, an amount equal to the gross amount of the annual short term award which was most recently paid to the Executive, less applicable withholding taxes. Twelve months thereafter, Cellco shall pay Executive a further amount equal to the amount payable under the preceding sentence, less applicable withholding taxes." Private and Confidential -4- IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, hereby execute this Amendment to Employment Agreement. CELLCO PARTNERSHIP Date: 6-10-96 By: ------------------- ------------------------------- Bell Atlantic NYNEX Mobile, Inc., as Managing General Partner of Cellco Partnership Date: 6-10-96 By: /s/ Dennis F. Strigl ------------------- ------------------------------- Dennis F. Strigl Private and Confidential Dennis F. Strigl Amendment of Employment Agreement effective 8th of September, 1998. . Terms and conditions of page 2, section 5. -- The Executive's short term incentive target described in Section 2 (b)(i) of the Employment Agreement is hereby set as follows: for the 1996 performance year with payout in 1997, S250,000; for the 1997 performance year with payout in 1998, $285,000; for the 1998 performance year with payout in 1999, $320,000; for the 1999 performance year with payout in 2000, $350,000; for the 2000 performance year with payout in 2001, $400,000. . Terms and conditions of pages 2 and 3, section 8. -- At the expiration of the Term, Cellco shall pay the Executive (in addition to other compensation then due to the Executive) an "Expiration Bonus" in an amount equal to Executive's then current base salary and short term incentive target, but only if the following conditions are then true: (i) the Amended Employment Agreement has not been terminated, (ii) the Executive remains employed as President and Chief Executive Officer of Bell Atlantic Global Wireless and has not resigned or been terminated for any reason, including for Cause or Good Reason, and (iii) Executive has not received Liquidated Damages. (Example: The Term expires at the fourth anniversary of the signing of this Amendment to Employment Agreement; Executive then remains employed as President and Chief Executive Officer of Bell Atlantic Global Wireless at a base salary of $600,000 and a short term incentive target of $400,000, the Expiration Bonus is payable at the amount of $1,000,000). All other terms and conditions remain intact as agreed to on June 10, 1996. Cellco Partnership Date: 9-15-98 By: [ILLEGIBLE SIGNATURE] -------------- ----------------------------- Bell Atlantic Mobile Inc., as Managing General Partner of Cellco Partnership Date: Sept 8, 1998 By: /s/ Dennis F. Strigl -------------- ----------------------------- Dennis F. Strigl Private and Confidential EX-10.Z(I) 8 LETTER TO JAMES G. CULLEN DATED 11/04/99 EXHIBIT 10z(i) [LOGO OF BELL ATLANTIC] November 4, 1999 Mr. James G. Cullen 1310 North Court House Road 11th Floor Arlington, Virginia 22201 Dear Jim, The purpose of this letter is to confirm that Bell Atlantic Corporation (the "Company") has offered you an additional stay bonus in the amount of $1.7 million (the "Additional Bonus") on the same terms and conditions as the stay bonus provided for in your Amendment to Employment Agreement, dated as of October 27, 1998 (the "Amendment"), except as follows: (i) for purposes of the Additional Bonus, you will not be considered to be an "Employee in Good Standing" (as that term is used in the Amendment and defined in Section 5(d) of your Employment Agreement with the Company dated as of June 1, 1998), and you will therefore not be entitled to receive the Additional Bonus if, prior to completion of the Company's merger with GTE, you terminate your employment with the Company on grounds of "Constructive Discharge" (as that term is defined in Section 7(d) of your Employment Agreement with the Company, dated as of June 1, 1998); and (ii) if you become entitled to the Additional Bonus, it will be credited to your Personal Deferral sub-account under the Bell Atlantic Senior Management Income Deferral Plan ("IDP") as of the date you separate from service from the Company. In addition, the Company agrees that, upon your separation from service following completion of the GTE merger, the Company will enter into a letter agreement with you substantially in the form of Attachment 1. (For purposes of illustration, Attachment 1 assumes your separation date will be June 1, 2000; your actual separation date will be used in the final letter agreement.) Finally, this letter confirms that you have elected to defer, into your Personal Deferral sub-account under the IDP, the full amount of any stay bonus you become entitled to pursuant to the Amendment. Please indicate your acceptance of the terms of this letter by signing and dating it in the spaces provided below. Sincerely yours, Donald J. Sacco ______________________ James G. Cullen ______________________ Dated 2 [LOGO OF BELL ATLANTIC] Attachment 1 Form of Letter Agreement June 1, 2000 Mr. James G. Cullen 1310 North Court House Road 11th Floor Arlington, Virginia 22201 Dear Jim, The purpose of this letter is to confirm our mutual understanding regarding the terms of your separation from service from Bell Atlantic Corporation (the "Company"). Your separation will be considered to be an involuntary termination of employment, without cause, effective as of the close of business on June 1, 2000 (the "Separation Date"). Accordingly, subject to your signing and not revoking the Release attached as Exhibit A, and your fulfillment of the non-compete and other terms of your Employment Agreement with the Company, dated as of June 1, 1998 (the "Employment Agreement"), you will be entitled to receive, as liquidated damages, the payments, credits, and benefits provided for in Section 7(c) of your Employment Agreement. In addition, because you have fulfilled your obligations to the Company under your Amendment to Employment Agreement, dated October 27, 1998 (the "Amendment") and your letter agreement with the Company dated as of November 4, 1999 (the "Letter Agreement"), you will be entitled to receive the stay bonuses provided for in the Amendment and the Letter Agreement. More specifically, you will be entitled to receive: (1) payments in lieu of salary, as provided in Section 7(c)(i) of your Employment Agreement; (2) payments in lieu of short-term incentives, as provided in Section 7(c)(ii) of your Employment Agreement, which payments, upon your submission to the Company of a timely deferral election, may be deferred into the Bell Atlantic Income Deferral Plan ("IDP"; (3) a payment equal to the value of your Phantom Shares as of the Separation Date, as provided in Section 7(c)(iii) of your Employment Agreement; (4) a payment in lieu of a stock option grant, as provided in Section 7(c)(iv) of your Employment Agreement; provided further, with respect to your outstanding stock options, that (i) any options that are unexerciseable on the Separation Date shall become exerciseable on June 2, 2000; (ii) each outstanding option shall remain exercisable until June 1, 2006, (or, if earlier, the first anniversary of your death or the tenth anniversary of the date of grant); and (iii) for the period through June 1, 2001, each outstanding option shall be exercisable on the same terms and conditions as if you were still an active employee of the Company (for example, if you undertake a stock-for-stock exercise, you will be entitled to receive reload options and to elect to defer your receipt of gain shares, subject to the terms of the Bell Atlantic 1985 Incentive Stock Option Plan and the applicable administrative guidelines thereunder); (5) credits to your IDP account, as provided in Section 7(c)(v) of your Employment Agreement, which credits shall be calculated by the Company and allocated to your IDP account (i) as of the Separation Date, for credits due this year, and (ii) as of February 1, for each subsequent year in which such credits are due; (6) split-dollar life insurance benefits, as provided in Section 7(c)(vi) of your Employment Agreement. (7) payments in lieu of flexible perquisites, as provided in Section 7(c)(vii) of your Employment Agreement; (8) a payment in lieu of up to five weeks of unused vacation, provided that all management personal days and floating holidays must be used by the Separation Date; (9) in accordance with the Letter Agreement and Section 2(a) of the Amendment, credits to your Personal Deferral sub-account under the IDP in the amounts of $1.7 million (which shall be made as of the Separation Date) and $1.969 million (which shall be made as of [insert closing date for BA/GTE merger]); (10) retiree medical and dental benefits; and (11) outplacement services for a period of up to one year from the date you begin to use such services. Except for the points of clarification outlined above, this letter does not amend or supersede your Employment Agreement, the Amendment, or the Letter Agreement, each of which shall remain in full force and effect. To confirm that this letter accurately describes the terms of your separation from service, please sign and date the letter in the space provided below, and return the letter to me. Also, please return to me an executed original of the attached Release. Sincerely yours, Donald J. Sacco ___________________________ James G. Cullen _________________ Dated 2 EXHIBIT A --------- THIS RELEASE (the "Release") is entered into by James G. Cullen (the "Key Executive"), for the benefit of BELL ATLANTIC CORPORATION (the "Company"), and all companies, and their officers, directors and employees, which are affiliated with the Company or in which the Company owns a substantial economic interest, and any benefit plan maintained by any Bell Atlantic Company (or any plan administrator of any such plan). Capitalized terms in this document which are not otherwise defined herein shall have the respective meanings assigned to them in the Employment Agreement between the Company and the Key Executive, dated as of June 1, 1998 (the "Agreement"), and the Amendment to Employment Agreement dated October 27, 1998 (the "Amendment"). WHEREAS, the Key Executive has separated from service with the Company on June 1, 2000 (the "Separation Date") pursuant to the terms of (i) the Agreement, (ii) the Amendment, (iii) the letter agreement between the Company and the Key Executive dated as of November 4, 1999 (the "First Letter Agreement"), and (iv) the letter agreement between the Key Executive and the Company, dated June 1, 2000 (the "Second Letter Agreement"); and WHEREAS, the Key Executive wishes to execute this Release as contemplated under the terms of the Agreement. NOW, THEREFORE, the Key Executive affirms as follows: 1. The Key Executive hereby waives any and all claims which the Key Executive might have against any Bell Atlantic Company, and any benefit plan maintained by any Bell Atlantic Company (or any plan administrator of any such plan), for salary payments, vacation pay, incentives, bonuses, or other remuneration or employee benefits of any kind, with the exception of any obligations of the Company arising after the Separation Date under Sections 7 and 8 of the Agreement, Section 2 of the Amendment, or any provisions of the First Letter Agreement or the Second Letter Agreement. 2. Except as provided in Section 1 hereof, the Key Executive hereby voluntarily releases and discharges each and every Bell Atlantic Company and their successors and assigns, and the directors, officers, employees, and agents of each of them, and any benefit plan maintained by any Bell Atlantic Company (or any plan administrator of any such plan), of and from any and all debts, obligations, claims, demands, judgments or causes of action of any kind whatsoever, known or unknown, in tort, contract, by statute or on any other basis, for equitable relief, compensatory, punitive or other damages, expenses (including attorneys' fees), reimbursements or costs of any kind which the Key Executive might have or assert against any of said entities or persons as of the Separation Date by reason of the Key Executive's employment by any Bell Atlantic Company or the termination of said employment, and all circumstances related thereto, including but not limited to, any and all claims, demands, rights and causes of action, including those which might arise out of allegations relating to a claimed breach of an alleged oral or written employment contract, or relating to purported employment discrimination or civil rights violations, such as, but not limited to, those arising under Title VII of the Civil Rights Act of 1964 (42 U.S.C. Section 2000e et seq.), the Civil Rights Acts of 1866 and 1871 -- --- (42 U.S.C. Sections 1981 and 1983), Executive Order 11246, as amended, the Age Discrimination in Employment Act of 1967, as amended (29 U.S.C. Section 621 et -- seq.), the Equal Pay Act of 1963 (29 U.S.C. Section 206(d)(1)), the - --- Rehabilitation Act of 1973 (29 U.S.C. Sections 701-794), the Civil Rights Act of 1991, the Americans with Disabilities Act, the Employee Retirement Income Security Act ("ERISA") or any other applicable federal, state or local employment discrimination statute or ordinance. 3 3. The Key Executive hereby reaffirms all covenants and promises given by the Key Executive under the Agreement, and all other terms and conditions of the Agreement, in all respects. 4. Should any provision of this Release be declared or be determined by any court to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby, and said illegal or invalid part, term or provision shall be deemed not to be a part of this Release. STATEMENT BY THE KEY EXECUTIVE WHO IS SIGNING BELOW: THE COMPANY HAS --------------------------------------------------- ADVISED ME IN WRITING TO CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING THIS RELEASE. THE COMPANY HAS FULFILLED ITS DUTIES TO ME UNDER THE OLDER WORKERS BENEFITS PROTECTION ACT, AND I ACKNOWLEDGE THAT THIS RELEASE IS LEGALLY ENFORCEABLE BY THE COMPANY. I HAVE CAREFULLY READ AND FULLY UNDERSTAND THE PROVISIONS OF THIS RELEASE AND HAVE HAD SUFFICIENT TIME AND OPPORTUNITY (OVER A PERIOD OF SUBSTANTIALLY MORE THAN 21 DAYS) TO CONSULT WITH MY PERSONAL TAX, FINANCIAL AND LEGAL ADVISORS PRIOR TO EXECUTING THIS DOCUMENT, AND I INTEND TO BE LEGALLY BOUND BY ITS TERMS. I UNDERSTAND THAT I MAY REVOKE THIS RELEASE WITHIN SEVEN (7) DAYS FOLLOWING MY SIGNING, AND THIS RELEASE WILL NOT BECOME ENFORCEABLE OR EFFECTIVE UNTIL THAT SEVEN-DAY PERIOD HAS EXPIRED. THE UNDERSIGNED, intending to be legally bound, has executed this Release as of the lst day of June, 2000, that being the Key Executive's Separation Date. THE KEY EXECUTIVE Signed:___________________________ James G. Cullen THIS IS A RELEASE READ CAREFULLY BEFORE SIGNING 4 EX-12 9 COMPENSATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 BELL ATLANTIC CORPORATION AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions)
Years Ended December 31 ------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------ Income before provision for income taxes, extraordinary items, and cumulative effect of change in accounting principle $6,765 $4,999 $3,984 $4,911 $4,536 Minority interest 82 32 46 131 130 Loss (income) from unconsolidated businesses (143) 415 124 (14) 22 Dividends from unconsolidated businesses 116 170 192 195 179 Interest expense, including interest related to lease financing activities 1,285 1,376 1,275 1,124 1,305 Portion of rent expense representing interest 191 185 191 177 177 Amortization of capitalized interest 28 21 16 10 5 ------------------------------------------ Income, as adjusted $8,324 $7,198 $5,828 $6,534 $6,354 ========================================== Fixed charges: Interest expense, including interest related to lease financing activities $1,285 $1,376 $1,275 $1,124 $1,305 Portion of rent expense representing interest 191 185 191 177 177 Capitalized interest 98 90 81 129 73 Priority distributions -- -- 19 58 47 Preferred stock dividend requirement 20 21 15 15 10 ------------------------------------------ Fixed Charges $1,594 $1,672 $1,581 $1,503 $1,612 ========================================== Ratio of Earnings to Fixed Charges 5.22 4.31 3.69 4.35 3.94 ==========================================
EX-21 10 SUBSIDIARIES OF BELL ATLANTIC EXHIBIT 21 Principal Subsidiaries of Bell Atlantic Corporation ---------------------------------------------------- Name Jurisdiction of Organization - ---- ---------------------------- Bell Atlantic - Delaware, Inc. Delaware Bell Atlantic - Maryland, Inc. Maryland Bell Atlantic - New Jersey, Inc. New Jersey Bell Atlantic - Pennsylvania, Inc. Pennsylvania Bell Atlantic - Virginia, Inc. Virginia Bell Atlantic - Washington, D.C., Inc. New York Bell Atlantic - West Virginia, Inc. West Virginia New England Telephone and Telegraph Company New York (d/b/a Bell Atlantic - New England) New York Telephone Company New York (d/b/a Bell Atlantic - New York) Cellco Partnership Delaware (d/b/a Bell Atlantic Mobile) Grupo Iusacell, S.A. de C.V. Mexico Bell Atlantic Credit Corporation Delaware Bell Atlantic International, Inc. Delaware Bell Atlantic Holdings Limited Bermuda EX-23 11 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements of Bell Atlantic Corporation on Form S-8 (File No. 333-66785), Form S-8 (File No. 333-66459), Form S-8 (File No. 333-66349), Form S-3 (File No. 33- 49085), Form S-3 (File No. 333-48083), Form S-3 (File No. 33-30642), Form S-3 (File No. 33-8451), Form S-8 (File No. 33-10377), Form S-8 (File No. 33-10378), Form S-8 (File No. 33-58681), Form S-8 (File No. 33-58683), Form S-8 (File No. 333-00409), Form S-8 (File No. 33-36551), Form S-3 (File No. 33-62393), Form S-4 (File No. 333-11573), Form S-8 (File No. 333-33747), Form S-8 (File No. 333- 41593), Form S-3 (File No. 333-42801), Form S-8 (File No. 333-45985), Form S-8 (File No. 333-75553), Form S-8 (File No. 333-81619), and Form S-3 (File No. 333- 78121-01) of our report dated February 14, 2000, except for Note 24, as to which the date is March 22, 2000, on our audits of the consolidated financial statements and financial statement schedule of the Company and its subsidiaries as of December 31, 1999 and December 31, 1998, and for each of the three years in the period ended December 31, 1999, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP New York, New York March 28, 2000 EX-24 12 POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Lawrence T. Babbio, Jr. --------------------------- Lawrence T. Babbio, Jr. POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Richard L. Carrion ---------------------- Richard L. Carrion POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ James G. Cullen ------------------- James G. Cullen POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Lodewijk J.R. de Vink ------------------------- Lodewijk J.R. de Vink POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ James H. Gilliam, Jr. ------------------------- James H. Gilliam, Jr. POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Stanley P. Goldstein ------------------------ Stanley P. Goldstein POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Helene L. Kaplan -------------------- Helene L. Kaplan POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Thomas H. Kean ------------------ Thomas H. Kean POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Elizabeth T. Kennan ----------------------- Elizabeth T. Kennan POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ John F. Maypole ------------------- John F. Maypole POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Joseph Neubauer ------------------- Joseph Neubauer POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Eckhard Pfeiffer -------------------- Eckhard Pfeiffer POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Hugh B. Price ----------------- Hugh B. Price POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Rozanne L. Ridgway ---------------------- Rozanne L. Ridgway POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Frederic V. Salerno ----------------------- Frederic V. Salerno POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben and Frederic V. Salerno as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Ivan G. Seidenberg ---------------------- Ivan G. Seidenberg POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Walter V. Shipley --------------------- Walter V. Shipley POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Thomas H. O'Brien --------------------- Thomas H. O'Brien POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ John R. Stafford -------------------- John R. Stafford POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Doreen A. Toben, Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Shirley Young ----------------- Shirley Young POWER OF ATTORNEY WHEREAS, BELL ATLANTIC CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOW, THEREFORE, the undersigned hereby appoints each of Frederic V. Salerno and Ivan G. Seidenberg as attorney for the undersigned for the purpose of executing and filing such Annual Report and any amendment or amendments or other necessary documents, hereby giving to each said attorney full authority to perform all acts necessary thereto as fully as the undersigned could do if personally present, and hereby ratifying all that said attorney may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of March, 2000. /s/ Doreen A. Toben ------------------- Doreen A. Toben EX-27 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,899 37 7,644 619 664 10,596 89,238 49,939 62,614 13,467 18,463 0 0 158 15,722 62,614 0 33,174 0 24,679 0 0 1,263 6,765 2,557 4,208 0 (6) 0 4,202 2.71 2.65
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