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, 2003 | ||
| OR
| ||
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) | |
| OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from to | ||
Commission file number 1-8606
Verizon Communications Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 23-2259884 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
| 1095 Avenue of the Americas | ||
| New York, New York | 10036 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 395-2121
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on 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 þ 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. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No ¨
At June 30, 2003, the aggregate market value of the registrant’s voting stock held by nonaffiliates was approximately $109,150,468,000.
At January 31, 2004, 2,769,412,414 shares of the registrant’s Common Stock were outstanding, after deducting 4,553,774 shares held in treasury.
Documents incorporated by reference:
Portions of the registrant’s Annual Report to Shareowners for the year ended December 31, 2003 (Parts I and II).
Portions of the registrant’s Proxy Statement prepared in connection with the 2004 Annual Meeting of Shareowners (Part III).
Certifications
Unless otherwise indicated, all information is as of March 8, 2004
General
Verizon Communications Inc. is one of the world’s leading providers of communications services. Verizon companies are the largest providers of wireline and wireless communications in the United States, with 140.3 million access line equivalents and 37.5 million wireless customers. Verizon is the third largest long distance carrier for U.S. consumers, with 16.6 million long distance lines, and the company is also the largest directory publisher in the world, as measured by directory titles and circulation. Verizon’s international presence extends primarily to the Americas, as well as investments in Europe. Stressing diversity and commitment to the communities in which we operate, Verizon has a highly diverse workforce of over 200,000 employees.
Verizon was formerly known as Bell Atlantic Corporation, which was incorporated in 1983 under the laws of the State of Delaware. We began doing business as Verizon Communications on June 30, 2000, when Bell Atlantic Corporation merged with GTE Corporation.
Our principal executive offices are located at 1095 Avenue of the Americas, New York, New York 10036 (telephone number 212-395-2121).
We have four reportable segments, which we operate and manage as strategic business units and organize by products and services. Our segments and their principal activities consist of the following:
| Domestic Telecom |
Domestic wireline communications services, principally representing our telephone operations that provide local telephone services in 29 states and the District of Columbia. These services include voice and data transport, enhanced and custom calling features, network access, directory assistance, private lines and public telephones. This segment also provides long distance services, customer premises equipment distribution, data solutions and systems integration, billing and collections, Internet access services and inventory management services. |
| Domestic Wireless |
Domestic wireless products and services include wireless voice and data services and equipment sales across the United States. |
| Information Services |
Domestic and international publishing businesses, including print SuperPages® and electronic SuperPages.com™ directories, as well as website creation and other electronic commerce services. This segment has operations principally in North America and Latin America. |
| International |
International wireline and wireless communications operations and investments primarily in the Americas, as well as investments in Europe. |
You can find segment financial information under the heading “Segment Results of Operations” on pages 19 through 25 and in Note 17 on pages 62 through 64 of the 2003 Verizon Annual Report to Shareowners, which is incorporated herein by reference.
Domestic Telecom
Operations
Our Domestic Telecom segment, principally representing our wireline telephone operations, provided approximately 60% of 2003 total operating revenues. Our telephone operations presently serve a territory consisting of 140.3 million access line equivalents in 29 states and the District of Columbia. This segment also provides long distance and other telecommunication services. Domestic Telecom provides mainly two types of telecommunications services:
| • | Exchange telecommunications service is the transmission of telecommunications among customers located within a local calling area within a local access and transport area (LATA). Examples of exchange telecommunications services include switched local residential and business services, local private line voice and data services and Centrex services. We also provide toll services within a LATA (intraLATA long distance) and toll services outside a LATA (interLATA long distance). |
| • | Exchange access service links a customer’s premises and the transmission facilities of other telecommunications carriers, generally interLATA carriers. Examples of exchange access services include switched access and special access services. |
We have organized our Domestic Telecom segment into four marketing units operating across our telephone subsidiaries. The units focus on specific markets. We are not dependent on any single customer. Our telephone operations remain responsible within their respective service areas for the provision of telephone services, financial performance and regulatory matters.
The Enterprise unit markets communications and information technology and services to large businesses and to departments, agencies and offices of the executive, judicial and legislative branches of the federal, state and local governments. These services include voice switching/processing services (e.g., dedicated private lines, custom Centrex, call management and voice messaging), end-user networking (e.g., credit and debit card transactions and personal computer-based conferencing, including data and video), internetworking (establishing links between the geographically disparate networks of two or more companies or within the same company), network optimization (disaster avoidance and 911 service) and other communications services. The Enterprise unit also provides data transmission, Internet and network integration services, interLATA long distance services, network monitoring services and telecommunications equipment sales to medium and
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large businesses. Revenues in 2003 were approximately $6.6 billion, representing approximately 17% of Domestic Telecom’s aggregate revenues.
The Retail unit markets communications and information services to residential customers and to small and medium-sized businesses within our territory, including our long distance services and Internet access services. Our long distance subsidiary provides national and international long distance services in all 50 states to residential and business customers, including calling cards, 800/888 services and operator services. This unit also provides operator and pay telephone services and sells customer premises equipment. Revenues in 2003 were approximately $23.0 billion, representing approximately 58% of Domestic Telecom’s aggregate revenues. These revenues were derived primarily from the provision of telephone services to residential users.
The Wholesale unit markets our network operations, which principally includes our carrier access and telecom industry services. Revenues in 2003 were approximately $8.6 billion, representing approximately 22% of Domestic Telecom’s aggregate revenues. Approximately 68% of total wholesale revenues were derived from interexchange carriers (switched and special access). The remaining revenues come from our telecom industry services, principally from other local exchange carriers which resell network connections to their own customers.
The Network unit is principally responsible for the construction and maintenance of our telephone operations’ networks. This unit is also responsible for the procurement and management of inventory and supplies for our subsidiaries and sells materials and logistic services to third-party carriers. Revenues in 2003 (after eliminations and combined with all other Domestic Telecom revenues) were approximately $1.4 billion, representing approximately 3% of Domestic Telecom’s aggregate revenues.
Telecommunications Act of 1996
We face increasing competition in all areas of our business. The Telecommunications Act of 1996 (the 1996 Act), regulatory and judicial actions and the development of new technologies, products and services have created opportunities for alternative telecommunication service providers, many of which are subject to fewer regulatory constraints. We are unable to predict definitively the impact that the ongoing changes in the telecommunications industry 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 and technological advances.
In-Region Long Distance
Under the 1996 Act, our ability to offer in-region long distance services in the regions where the former Bell Atlantic telephone subsidiaries operate as local exchange carriers was largely dependent on satisfying specified requirements. These requirements included a 14-point “competitive checklist” of steps which we must take to help competitors offer local services through resale, through purchase of unbundled network elements (UNEs), or by interconnecting their own networks to ours. We were required to demonstrate to the Federal Communications Commission (FCC) that our entry into the in-region long distance market would be in the public interest.
We now have authority from the FCC to offer in-region long distance service in all 14 of the former Bell Atlantic jurisdictions. The United States Court of Appeals for the District of Columbia remanded the Massachusetts order to the FCC for further explanation on one issue, but left our long distance authority in effect. The FCC’s orders for the remaining jurisdictions were upheld on appeal or no appeal was filed.
FCC Regulation and Interstate Rates
Our telephone operations are subject to the jurisdiction of the FCC with respect to interstate services and related matters.
Access Charges and Universal Service
On May 31, 2000, the FCC adopted the Coalition for Affordable Local and Long Distance Services (CALLS) plan as a comprehensive five-year plan for regulation of interstate access charges. The CALLS plan has three main components. First, it establishes a portable interstate access universal service support of $650 million for the industry. This explicit support replaces implicit support embedded in interstate access charges. Second, the plan simplifies the patchwork of common line charges into one subscriber line charge (SLC) and provides for de-averaging of the SLC by zones and class of customers in a manner that will not undermine comparable and affordable universal service. Third, the plan sets into place a mechanism to transition to a set target of $.0055 per minute for switched access services. Once that target rate is reached, local exchange carriers are no longer required to make further annual price cap reductions to their switched access prices. The annual reductions leading to the target rate, as well as annual reductions for the subset of special access services that remain subject to price cap regulation was set at 6.5% per year.
As a result of tariff adjustments which became effective in July 2003, virtually all of our switched access lines reached the $.0055 benchmark.
The FCC has adopted rules for special access services that provide for pricing flexibility and ultimately the removal of services from price regulation when prescribed competitive thresholds are met. Approximately 55% of special access revenues are now removed from price regulation.
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In November 1999, the FCC adopted a new mechanism for providing universal service support to high-cost areas served by large local telephone companies. This funding mechanism provides additional support for local telephone services in several states served by our telephone operations. This system has been supplemented by the new FCC access charge plan described above. On October 16, 2003, in response to a previous court decision, the FCC announced a decision providing additional justification for its non-rural high-cost universal support mechanism and modifying it in part. The FCC also has proceedings underway to evaluate possible changes to its current rules for assessing contributions to the universal service fund. Any change in the current assessment mechanism could result in a change in the contribution that local telephone companies must make and that would have to be collected from customers.
Unbundling of Network Elements
On February 20, 2003, the FCC announced a decision adopting new rules defining the obligations of incumbent local exchange carriers to provide competing carriers with access to UNEs. The decision was the culmination of an FCC rulemaking referred to as its triennial review of its UNE rules, and also was in response to a decision by the U.S. Court of Appeals for the D.C. Circuit. The U.S. Court of Appeals for the D.C. Circuit had overturned the FCC’s previous unbundling rules on the grounds that the FCC did not adequately consider the limitations of the “necessary and impair” standards of the 1996 Act when it chose national rules for unbundling and that it failed to consider the relevance of competition from other types of service providers, including cable and satellite.
The text of the order and accompanying rules was released on August 21, 2003. With respect to broadband facilities, such as mass market fiber to the premises loops and packet switching, that order generally removed unbundling obligations under Section 251 of the 1996 Act. With respect to narrowband services, the order generally left unbundling obligations in place, with certain limited exceptions, and delegated to state regulatory proceedings a further review. The order also provided a new set of criteria relating to when carriers may purchase a combination of unbundled loops and transport elements known as enhanced extended loops (EELs).
The FCC’s order significantly increases arbitrage opportunities by making it easier for carriers to use EELs for non-local service at regulated prices set using the pricing formula that applies to UNEs rather than competitive special access prices. In addition, the FCC’s order eliminates important safeguards that protected against this kind of arbitrage, including the FCC’s previous rule against co-mingling unbundled elements and other services. As a result, we estimate the impact on earnings related to this portion of the FCC’s order to be potentially 4 cents to 6 cents per diluted share in 2004.
Multiple parties, including Verizon, appealed various aspects of the decision. Multiple parties also have asked the FCC to clarify or reconsider various aspects of its order, and Verizon has petitioned the FCC to make clear that any broadband facilities that do not have to be unbundled under Section 251 of the 1996 Act also do not have to be unbundled under another provision of the 1996 Act. On March 2, 2004, the U.S. Court of Appeals for the D.C. Circuit issued an order upholding the FCC in part, and overturning its order in part. The court upheld the FCC with respect to broadband facilities. On the narrowband unbundling requirements and on the EELs rules, the court reversed key aspects of the FCC decision. The court’s reversal of the FCC will not go into effect for 60 days following the ruling or until a petition for rehearing is denied or granted.
Intercarrier Compensation
On April 27, 2001, the FCC released an order addressing intercarrier compensation for dial-up connections for Internet-bound traffic. The FCC found that Internet-bound traffic is interstate and subject to the FCC’s jurisdiction. Moreover, the FCC again found that Internet-bound traffic is not subject to reciprocal compensation under Section 251(b)(5) of the 1996 Act. Instead, the FCC established federal rates per minute for this traffic that decline from $.0015 to $.0007 over a three-year period. The FCC order also sets caps on the total minutes of this traffic that may be subject to any intercarrier compensation and requires that incumbent local exchange carriers must offer to both bill and pay reciprocal compensation for local traffic at the same rate as they are required to pay on Internet-bound traffic. On May 3, 2002, the U.S. Court of Appeals for the D.C. Circuit rejected part of the FCC’s rationale for its April 27, 2001 order, but declined to vacate the order while it is on remand. As a result, pending further action by the FCC, the FCC’s underlying order remains in effect.
More generally, the FCC has an ongoing rulemaking that could fundamentally restructure the regulatory regime for intercarrier compensation, including, but not limited to, access charges, compensation for Internet traffic, and reciprocal compensation for local traffic. The FCC also is considering multiple petitions asking it to declare whether, and under what circumstances, services that employ Internet protocol are subject to access charges under current law, or asking it to forbear from any requirement to pay access charges on some such services. The FCC also has announced that it intends to initiate a rulemaking proceeding to address the regulation of voice over Internet protocol services generally.
Broadband Services
The FCC has several ongoing rulemakings considering the regulatory treatment of broadband services. Among the questions at issue are whether to require local telephone companies like Verizon to offer such services as a common carrier or whether such services may be offered under a potentially less regulated private carriage arrangement, and whether to declare broadband services offered by local telephone companies as non-dominant and what the effect should be of any such classification.
State Regulation of Rates and Services
State public utility commissions regulate our telephone operations with respect to intrastate rates and services and other matters. In many jurisdictions the telephone operations have been able to replace rate of return regulation with price regulation plans.
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Verizon California Inc.
Arizona
Verizon California’s operations in Arizona are subject to rate of return regulation.
California
Verizon California’s operations in California have operated under the New Regulatory Framework (NRF) since 1990. The NRF allows for a gradual transition to less regulation on a service-by-service basis. The NRF is reviewed every three years and currently has the following features:
| • | Earnings Ceiling: The ceiling is suspended. |
| • | Price Cap Index: By setting inflation equal to productivity, the California Public Utilities Commission (CPUC) has suspended the price cap index. Limited exogenous changes are allowed. Generally, exogenous changes are changes unique to or specifically targeted to a company that are beyond its control (in this case, changes are permitted only for matters mandated by the CPUC or changes in total intrastate cost recovery resulting from changes between federal and state jurisdictions). |
| • | Price Flexibility: Services fall into three categories. |
| • | Category I services cannot be changed without CPUC approval. |
| • | Category II services are partially competitive and can be adjusted within a ceiling/floor range. The current price (effectively the ceiling) cannot be increased without a formal application. |
| • | Category III services are considered competitive and can be increased or decreased on short notice. |
| • | New Services: New services can be classified as Category II or III. If introduced as Category III, Verizon California must demonstrate insignificant market power. |
The CPUC will review NRF features during 2003 – 2004.
Nevada
Verizon California’s operations in Nevada are subject to rate of return regulation.
Verizon Delaware Inc.
Since 1994, Verizon Delaware has been regulated under the alternative regulation provisions of the Delaware Telecommunications Technology Investment Act of 1993 (Delaware Telecommunications Act). On September 9, 2003, the Delaware Public Service Commission approved a stipulation permitting Verizon Delaware to continue to be regulated under the Delaware Telecommunications Act through September 2006. The Delaware Telecommunications Act provides the following:
| • | The prices of “Basic Telephone Services” (e.g., dial-tone and local usage) will remain regulated and cannot change in any one year by more than the Gross Domestic Product – Price Index (GDP-PI) less 3%. |
| • | The prices of “Discretionary Services” (e.g., Identa Ring(SM) and Call Waiting) cannot increase more than 15% per year per service. |
| • | The prices of “Competitive Services” (e.g., voice messaging and message toll service) are not subject to tariff or regulation. |
| • | Verizon Delaware will develop a technology deployment plan with a commitment to invest a minimum of $250 million in Delaware’s telecommunications network during the first five years of the plan. |
Verizon Florida Inc.
Florida statutes govern the price cap plan. Beginning January 1, 2001, Verizon Florida was able to raise basic local rates on 30 days notice once in any 12-month period not to exceed the GDP-PI less 1%. Verizon Florida may increase rates for non-basic services but increases for any category cannot exceed 6% in any 12-month period unless another company is providing service in a given exchange, at which time Verizon Florida can increase its price up to 20% in a 12-month period. Earnings are not regulated. Legislation was passed in 2003 that allows Verizon Florida to offset a reduction in intrastate access rates with an increase in basic local exchange revenues upon Florida Public Service Commission (FPSC) approval. The offset must be revenue neutral and take place over two to four years. In evaluating the petition, the FPSC is to consider whether granting the petition will remove current support for basic local telecommunications services preventing the creation of a more attractive competitive local exchange market for the benefit of residential consumers and enhanced market entry. When Verizon Florida’s rates
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are reduced to parity as defined by the statute, Verizon Florida’s basic services become subject to the same regulatory treatment as its non-basic services.
Verizon Hawaii Inc.
Verizon Hawaii’s telephone operations are subject to rate of return regulation.
Verizon Maryland Inc.
In 1996, the Public Service Commission of Maryland approved a price cap plan for regulating the intrastate services provided by Verizon Maryland. Under the plan, services are divided into six categories: Access; Basic-Residential; Basic-Business; Discretionary; Competitive; and Miscellaneous. Rates for Access, Basic-Residential, Basic-Business and Discretionary Services can be increased or decreased annually under a formula that is based upon changes in the GDP-PI minus a productivity offset based upon changes in the rate of inflation as reflected in the Consumer Price Index (CPI). Rates for Competitive Services may be increased without regulatory limits. Regulation of profits is eliminated. The Public Service Commission of Maryland is currently reviewing the incentive regulation plan. Verizon Maryland has sought to eliminate the price cap formula and to move all business services into the competitive category.
Verizon New England Inc.
Maine
In June 2001, the Maine Public Utilities Commission (MPUC) ordered the continuation of an Alternative Form of Regulation (AFOR) for Verizon Maine for a second five-year term. Key aspects of the plan:
| • | Eliminates annual filings to adjust rates of core services; |
| • | Eliminates the 4.5% productivity factor applied in the initial AFOR term; |
| • | Provides total pricing flexibility for all services except local service, operator services and directory assistance; |
| • | Allows an increase in local service rates that offsets (in whole or in part) a legislatively required access charge reduction; |
| • | Rejects proposals to institute over 9,000 retail service quality measures and instead continues the current service quality plan with some modifications; and |
| • | Requires monitoring of Verizon Maine’s toll rate/revenue reductions to insure that toll users benefit from the access reductions, either in reduced toll rates from Verizon Maine, or in toll savings from alternative carriers. At the end of a two-year monitoring period that began December 31, 2000, Verizon Maine’s toll rates/revenues must be $19.8 million lower, or additional cuts in toll rates will be required. Thereafter, toll rates are unrestricted. On February 6, 2003, Verizon Maine filed with the MPUC proof that the required reduction in toll revenues had occurred and that no further regulation of toll prices is required. MPUC consideration of Verizon Maine’s filing is pending. |
The Maine Public Advocate appealed the MPUC’s 2001 AFOR decision to the Maine Supreme Judicial Court, claiming that any extension to the AFOR must be preceded by an investigation of Verizon Maine’s costs and earnings utilizing traditional rate of return principles. On February 28, 2003, the court ruled that while state law requires that telephone rates under an AFOR are no higher than under rate of return regulation, the MPUC has broad discretion in making such a determination that would not necessarily require a full rate of return inquiry. However, the court vacated and remanded the decision to the MPUC for its failure to expressly make such a determination, or in the alternative that if such a showing cannot be made, that it nonetheless remains in the best interest of ratepayers to proceed with an AFOR. No change in any of Verizon Maine’s rates was required by the court’s decision while the remand proceeding was pending.
In March 2003, the MPUC opened a proceeding to address the Maine Supreme Judicial Court’s remand of the 2001 AFOR decision. In an order issued on July 11, 2003, the MPUC ruled that it would keep in place the $1.78 increase in Verizon New England’s monthly basic exchange rates pending completion of the remand and maintain certain elements (pricing flexibility, Service Quality Index) of the proposed AFOR on an interim basis until a final decision on the remand. On September 25, 2003, the PUC issued an order reinstating the AFOR. Certain parties have appealed that decision to the Maine Supreme Judicial Court and the appeal is pending.
Massachusetts
In April 2001, Verizon New England filed with the Massachusetts Department of Telecommunications and Energy (DTE) a proposed alternative regulatory plan to replace the price regulation plan that was to expire in August 2001. On May 8, 2002, the DTE issued its decision in Phase I of the case in which it found that Verizon New England had demonstrated the existence of sufficient competition for most of its retail business services and granted Verizon New England pricing flexibility on the services. Price increases are not constrained. Price decreases are subject to price floor requirements. In addition, the DTE ruled that Verizon New England should reduce state switched access prices to interstate levels on a revenue neutral basis by increases in residence dial-tone rates. With respect to residence services, the DTE tentatively concluded that Verizon
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New England should have pricing flexibility for non-basic services but that increases in basic services should be limited. The DTE directed Verizon New England to file proposals consistent with its findings.
In May 2003, the DTE issued a final ruling approving with minor modifications Verizon New England’s compliance filing implementing the DTE’s alternative regulatory plan. The plan gives Verizon New England pricing flexibility for most retail business services and residence non-basic services, including second dial-tone lines. The DTE also approved rate reductions for state switched access prices to interstate levels with offsetting revenue-neutral increases in residence dial-tone rates. Those rate changes became effective on June 1, 2003.
New Hampshire
Verizon New England’s operations in New Hampshire are currently subject to rate of return regulation. On January 16, 2004, the New Hampshire Public Utilities Commission (NHPUC) concluded a comprehensive proceeding examining the appropriate cost of capital for Verizon. In its order, the NHPUC set the average weighted cost of capital for Verizon at 8.2%. At present, the newly determined cost of capital has no effect on Verizon’s retail rates, however, the NHPUC directed Verizon to file revised UNE rates reflecting this new cost of determination by March 16, 2004. Verizon’s current UNE rates were approved in 2001 relying upon an average weighted cost of capital of 10.46%. Verizon will file an appeal of the NHPUC decision in federal district court in New Hampshire.
Rhode Island
Pursuant to a directive of the Rhode Island Public Utilities Commission (RIPUC), Verizon Rhode Island filed in July 2002 a proposal for a new alternative regulation plan to replace the existing price cap plan that was to expire in December 2002. Following the close of evidentiary hearings in the case, Verizon Rhode Island and the Rhode Island Division of Public Utilities and Carriers (Division) filed a stipulation on December 6, 2002 resolving all issues in the case. The principal components of the stipulated plan are:
| • | No index or price cap formula; |
| • | Pricing flexibility for all business services, subject to a long-run incremental cost (LRIC)-based price floor; |
| • | The company may increase residential basic exchange rates by $1 per year in years one and two. An additional $1 increase in year three will be subject to RIPUC and Division review; |
| • | The company may pass through exogenous changes, subject to a $2.5 million annual cap, but must absorb the first $1 million in exogenous changes in the year in which approval is sought; |
| • | The company will continue its voluntary funding of a discount program for Internet access for schools and libraries at up to $2 million per year until the earlier of December 31, 2004, or the implementation of an alternative funding mechanism (e.g., legislation); |
| • | The current retail service quality plan is maintained with certain modifications; and |
| • | The term of the plan is three years. |
After further hearing and briefing, the RIPUC approved the stipulation at an open meeting on January 10, 2003, with two modifications. First, the RIPUC imposed limits on price increases for all other non-basic residential services as follows:
For services priced at $5 or less, rates may increase 15% per year
For services priced at $5.01 to $10, rates may increase 10% per year
For services priced over $10, rates may increase 5% per year
Second, the company is required to file quarterly reports showing for each wire center in the state the number of access lines served by the company and the number and type of access lines served by competitors. On March 31, 2003, the Rhode Island Public Utilities Commission issued an order adopting the modified stipulation approved on January 10, 2003.
Vermont
In 2000, the Vermont Public Service Board approved a five-year incentive regulation plan that will provide Verizon New England with increased flexibility to introduce and price new products and services. The plan also removes most restrictions on Verizon New England’s earnings from Vermont operations during the life of the plan and contains no productivity adjustment. The plan limits Verizon New England’s ability to raise prices on existing products and services, and requires revenue reductions of $16.5 million at the outset of the plan, $6.5 million during the first year of the plan and approximately $6.0 million over the subsequent years of the plan. The plan also requires some service quality improvements subject to financial penalty.
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Verizon New Jersey Inc.
The 1992 New Jersey Telecommunications Act classifies telecommunications services as “competitive” or “protected.” “Protected telephone services” include basic residence, touch-tone, access services other than those otherwise deemed competitive by the New Jersey Board of Public Utilities (NJBPU), business local service for customers with four lines or less, and the ordering, installation and restoration of these services. Verizon New Jersey provides “protected telephone services” and other services, including vertical services (Rate-Regulated Services), under a Plan for Alternative Form of Regulation, which became effective on July 1, 2002, pursuant to a decision announced by the NJBPU on June 19, 2002 and issued August 19, 2003. The new plan eliminates earnings regulation, eliminates earnings sharing provisions, streamlines the process to introduce new services and strengthens commitments to service quality, lifeline service and schools and public libraries. A petition for reconsideration of the Plan was filed by an opposing party and is pending.
Verizon New York Inc.
New York
The New York State Public Service Commission (NYSPSC) has adopted an incentive plan to regulate the services of Verizon New York, effective March 1, 2002. The plan provides pricing flexibility, adopts new service quality standards and does not restrict Verizon New York’s earnings. The plan will expire in 2004, except that the service quality provisions of the plan will expire in 2005.
The new plan:
| • | Permits Verizon New York to increase its retail rates by 3% of its intrastate revenues per year in each of the two years of the plan, but limits any increase on residence service first lines to $1.85 in 2002 and $.65 in 2003, and freezes rates and lowers service connection charges for low income consumers; |
| • | Establishes state-wide service quality standards, with the potential for customer credits and restrictions on Verizon New York’s pricing flexibility if it fails to meet those standards; |
| • | Establishes that the rates provided in the NYSPSC’s January 2002 order on pricing of UNEs will remain in effect for the duration of the plan; and |
| • | Requires Verizon New York to transition to generally accepted accounting principles accounting for preparing financial statements for regulatory purposes, over a three-year period. |
On January 22, 2003, the NYSPSC, noting that current FCC and NYSPSC cost allocation and accounting safeguards imposed on Verizon New York offer strong protection against abusive affiliate transactions, granted our request to terminate an 11-year old set of structural safeguards that restricted transactions between Verizon New York and its affiliates.
As of May 31, 2003, the NYSPSC suspended Verizon New York’s pricing flexibility under the incentive plan for failure to meet the requisite service quality standards as discussed above. The NYSPSC also ordered a service quality audit by an outside auditor to evaluate Verizon New York’s service quality and adherence to NYSPSC service quality standards. That audit is in progress.
Connecticut
In February 2001, the Connecticut Department of Public Utility Control adopted an incentive regulation plan proposed by Verizon New York, which eliminates regulation of earnings and provides other deregulatory benefits for Verizon New York’s operations in Connecticut. A petition to extend the effective date of that plan is currently pending.
Verizon North Inc.
Illinois
Verizon North’s telephone operations in Illinois are subject to rate of return regulation. Optional toll plans, Integrated Services Digital Network (ISDN), frame relay, payphones, CentraNet®, and other data services are considered deregulated and have total pricing flexibility.
Indiana
Verizon North’s telephone operations in Indiana are subject to rate of return regulation.
Michigan
Since the Michigan Telecommunications Act was passed in 1991, a form of regulation that focuses on services, prices and costs has replaced rate of return regulation. Earnings are not regulated. All rates for regulated services must meet a cost floor. Verizon North may increase local
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rates annually up to 1% less than the Consumer Price Index. Any rate increases above that amount must be approved by the Michigan Public Service Commission (MPSC) as “just and reasonable.” The MPSC may only approve rate increases based upon one or more of the following 5 factors: total service LRIC; comparison to other provider rates; whether a new function, feature or capability is offered; increase in costs to provide local service; and whether further investment is economically justified. The MPSC has no jurisdiction over numerous unregulated services. Other services have substantial pricing flexibility.
Ohio
Verizon North’s telephone operations in Ohio are subject to rate of return regulation.
Pennsylvania
On July 26, 2001, the Pennsylvania Public Utility Commission (PPUC) rejected, in part, and accepted, in part, a proposed price cap plan filed by Verizon North. The PPUC accepted, with some modification, that part of the plan that provided for the deregulation of the pricing of competitive services; elimination of earnings sharing; adoption of a productivity factor based on inflation; a provision to adjust rates for exogenous events; and a price cap of rates of protected services. The PPUC rejected that part of Verizon North’s plan that provided for improvement of Verizon North’s network infrastructure. The PPUC subsequently approved a revised infrastructure plan for Verizon North that requires, inter alia, universal broadband deployment by 2015.
Wisconsin
Verizon North entered a price cap plan in 1995. The plan does not regulate earnings and price cap index increases can be accumulated and deferred up to three years. The maximum increase for any non-basic rate element is 10% or the increase in the GDP-PI, whichever is greater. Basic local service is limited to GDP-PI less 2%. Intrastate access service mirrors interstate rates. There are no restrictions on other services as long as they cover LRICs. Rate changes are effective on one day’s notice after customer notice and new services take effect after ten days. The statute requires that no earlier than six years, and no more frequently than every three years thereafter, the Public Service Commission of Wisconsin may by rule increase or decrease the GDP-PI productivity factor in any twelve-month period to reflect any statewide changes in the productivity experience of the telecommunications industry. The productivity factor review is complete and the factor was not changed.
Verizon Northwest Inc.
California
Verizon Northwest’s California operations are subject to rate of return regulation.
Idaho
Verizon Northwest’s Idaho operations are subject to rate of return regulation.
Oregon
Verizon Northwest’s Oregon operations are subject to rate of return regulation. Pricing flexibility is permitted in competitive zones and Verizon Northwest currently has Digital Channel Service, ISDN, PBX trunks (telephone switching equipment on customer premises), DID trunks (trunks from the customer premises switches to the central office) and single line business service offerings in these zones. Billing and collection and CentraNet® are in a competitive class and are flexibly priced.
Washington
Verizon Northwest’s Washington operations are subject to rate of return regulation. IntraLATA toll and billing and collection are flexibly priced.
Verizon Pennsylvania Inc.
The PPUC regulates Verizon Pennsylvania under an Alternative Regulation Plan approved in 1994. The plan provides for a pure price cap plan with no sharing of earnings with customers and replaces rate base, rate of return regulation. Competitive services, including toll, directory advertising, billing services, Centrex service, paging, speed calling, repeat calling, and HiCap (high capacity private line) and business services provided to larger customers are price deregulated. All non-competitive 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%; |
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| • | Caps prices for protected services, including residential and business basic exchange services, special access and switched access, through 1999; and |
| • | Permits revenue-neutral rate restructuring for noncompetitive services. |
The PPUC’s order approving the Bell Atlantic–GTE merger extended the cap on residential and business basic exchange services through 2003.
The plan requires Verizon Pennsylvania to provide a Lifeline Service for residential customers. The plan also requires deployment of a universal broadband network. On September 17, 2003, the Commission approved a revised plan that requires Verizon Pennsylvania to deploy a universal broadband network, defined at 1.544 megabits per second, in the following phases: 50% by 2004; 60% by 2006; 70% by 2008; 80% by 2010, 90% by 2012 and 100% by 2015. Verizon Pennsylvania is also required to make broadband services at 45 mbps available on a commercially reasonable time frame to 50% of exchanges by 2004 and 100% by 2015.
In 2002, Verizon Pennsylvania proposed that all business services be reclassified as competitive. In August 2003, the PPUC denied that petition. Verizon Pennsylvania has filed for reconsideration by the PPUC and that petition is currently pending.
In December 2003, the statute authorizing alternative regulation in Pennsylvania expired. A proposed new bill was passed by the Pennsylvania House of Delegates and is pending in the Pennsylvania Senate. In January 2004, the PPUC issued a policy statement that the expiration of the statute had no effect upon current incentive regulation plans.
Verizon South Inc.
North Carolina
Verizon South’s operations in North Carolina have been under a price cap plan since 1996 that was subject to review in 2002 – 2003. Earnings are not regulated and local rates can be increased by GDP-PI less 2%. Rate increases are effective on fourteen days notice. Verizon South has complete flexibility to increase rates for billing and collection, Centrex, and enhanced digital switch service. The price cap plan was terminated. It is anticipated that the review will be reinstated during late 2004.
South Carolina
Verizon South’s South Carolina price cap plan started during 2000. Under the statute, existing rates are deemed just and reasonable on the date of notification. Residential and single-line business local service rates are capped for two years from the date of election. After two years, these rates may be adjusted annually pursuant to an inflation-based index. Rates for other services are flexibly priced. Price decreases are effective in seven days. Price increases and new services prices are effective in fourteen days.
Virginia
On December 21, 2000, the Virginia State Corporation Commission (VSCC) approved a price cap plan for Verizon South that is substantially similar to Verizon Virginia’s plan described below.
The plan was effective January 1, 2001 and has no expiration date.
Verizon Southwest
The Texas Public Utilities Commission regulates Verizon Southwest under a price cap plan with no cap on earnings pursuant to the Public Utility Regulatory Act (PURA). The plan places services into four categories:
| • | Basic services – These include basic local residential charges such as service connection, mandatory expanded calling plans and residential call waiting. Price increases prior to September 1, 2005 are only allowed to adjust for changes in FCC separations that affect net income by at least 10% and for rate group reclassifications due to access line growth. After September 1, 2005, price increases require approval. Full packaging (an integrated offering of some or all of our products and services) is allowed. |
| • | Non-basic services – This category only includes switched access, which is price-capped until September 1, 2005. Decreases can be made to the LRIC. The statute contains no expiration provision. |
| • | Price-capped non-basic services – These services include basic local business charges such as service connection and BRI-ISDN (Basic Rate Interface – Integrated Services Digital Network). These services are price-capped until September 1, 2005. Decreases can be made to the LRIC. Full packaging is allowed. |
| • | Non-basic services without caps – This category represents all other regulated services, including intraLATA toll, custom calling features (except residential call waiting), special access, operator services, PBX and ISDN services. These services have unlimited upward pricing flexibility. Decreases can be made to the LRIC (with imputation) or the prices in effect on September 1, 1999, whichever is less. Full packaging is allowed. |
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Verizon Virginia Inc.
Effective in 1995, the VSCC approved an alternative regulatory plan that regulates Verizon Virginia’s noncompetitive services on a price cap basis and does not regulate Verizon Virginia’s competitive services. The plan does not regulate profits. In June 2001, the VSCC modified the plan and extended the moratorium on rate increases for basic local telephone service until 2004. The plan has no expiration date.
Verizon Washington, DC Inc.
On February 28, 2002, the District of Columbia Public Service Commission (DCPSC) approved a new price cap plan for local retail services provided by Verizon Washington, DC. Key provisions of the 2002 plan include:
| • | A two-year term; |
| • | No earnings restrictions, service penalties or revenue sharing; |
| • | Four service categories: basic residential, basic business, discretionary and competitive; |
| • | A cap on residential dial-tone line rates for the term of the plan and a reduction in residential service connection charges; |
| • | Annual pricing flexibility for all other basic residential services, with the increase in total revenues from these services limited to the annual inflation rate (as measured by the change in GDP-PI) and increases for any individual service in the category limited to 10%; |
| • | Classification of all business services as competitive with complete pricing flexibility except for basic business dial-tone lines, PBX trunks, local directory service and message units, which are subject to a 10% annual limit on any rate increase; |
| • | Pricing flexibility on discretionary services, with a 15% annual limit on any rate increase; |
| • | Flexibility to bundle or package existing services; and |
| • | Assistance by Verizon Washington, DC to the District of Columbia government to set up “211” dialing for District of Columbia social services agencies, as well as additional social services infrastructure investments and one-time customer discounts. |
In November 2003, Verizon Washington, DC filed a motion to extend the current incentive regulation plan indefinitely. In February 2004, Verizon Washington, DC reached a settlement with the Office of the People’s Counsel of the District of Columbia to extend the current plan for a three-year period with minor modifications. A petition to accept that settlement is currently pending with the DCPSC.
Verizon West Virginia Inc.
On October 3, 2001, the West Virginia Public Service Commission (WVPSC) approved Verizon West Virginia’s new Incentive Regulation Plan (IRP). The IRP continues, until December 31, 2005, the flexible price regulation of competitive services, caps on basic rates, infrastructure commitments and unlimited earnings freedom that have been in place since 1988. In addition, long distance, wide area telephone service and national directory assistance will be rate-deregulated, and Verizon West Virginia may petition for the rate deregulation of any other service, except basic residential service, as early as January 1, 2002.
In addition, Verizon West Virginia will phase-in an annual rate decrease of $19.2 million by July 2004. Cumulative rate reductions will be $91.7 million over the five-year life of the IRP, and total annual reductions by the end of the IRP will be $26 million.
Competition
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.
Local Exchange Services
The ability to offer local exchange services historically has been subject to regulation by state regulatory commissions. Applications from competitors to provide and resell local exchange services have been approved in every jurisdiction in our service territory. The 1996 Act has significantly increased the level of competition in our local exchange markets.
One of the purposes of the 1996 Act was to ensure, and accelerate, the emergence of competition in local exchange markets. Toward this end, the 1996 Act requires most existing local exchange carriers (incumbent local exchange carriers, or ILECs), including our telephone operations, to permit potential competitors (CLECs) to:
| • | Purchase service from the ILEC for resale to CLEC customers; |
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| • | Purchase UNEs from the ILEC; and/or |
| • | Interconnect the CLEC’s network with the ILEC’s network. |
As a result, competition in our local exchange markets continues to increase. Our telephone operations are generally required to sell their services to CLECs at discounts of approximately 56% from the prices our telephone operations charge their retail customers. The rates we charge local exchange competitors for access to UNEs remain under near-continual review and revision by state regulators and often result in reductions in those rates. See “State Regulation of Rates and Services.”
Long Distance Services
We offer intraLATA and interLATA long distance 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. Federal regulators have jurisdiction over interstate toll 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. InterLATA toll calls terminate outside the LATA of origination. We now offer long distance services throughout the United States, capping a seven-year effort. Our authority in Alaska is limited to interstate and international services. A number of our major competitors in the long distance business have strong brand recognition and existing customer relationships.
Alternative Access Services
A substantial portion of our telephone operations’ revenues from business and government customers is derived from a relatively small number of large, multiple-line subscribers.
We face competition from alternative communications systems, constructed by large end-users, interexchange carriers and alternative access vendors, which are capable of originating and/or terminating calls without the use of our plant. The FCC’s orders requiring us to offer collocated interconnection for special and switched access services have enhanced the ability of such alternative access providers to compete with us.
Other potential sources of competition include cable television systems, shared tenant services and other noncarrier systems which are capable of bypassing our telephone operations’ local plant, either partially or completely, through substitution of special access for switched access or through concentration of telecommunications traffic on fewer of our telephone operations’ lines.
Wireless Services
Wireless services also constitute a significant source of competition to our wireline telecommunications services, especially as wireless carriers (including Verizon Wireless) expand and improve their network coverage and continue to lower their prices to end-users. As a result, more end-users are substituting wireless services for basic wireline service. Wireless telephone services can also be used for data transmission.
Public Telephone Services
The growth of wireless communications has significantly decreased usage of public telephones, as more customers are substituting wireless services for public telephone services. In addition, we face competition from other providers of public telephone services.
Operator Services
Our operator services product line faces competition from alternative operator services providers and Internet service providers.
Domestic Wireless
Operations
Our Domestic Wireless segment provides wireless voice and data services and equipment sales in the United States, principally through Verizon Wireless.
Verizon Wireless is the leading wireless communications provider in the United States in terms of the number of subscribers, revenues and operating income. Verizon Wireless has the largest customer base of any U.S. wireless provider, with 37.5 million wireless subscribers as of December 31, 2003, and provides wireless voice and data services across the United States. Approximately 262 million people reside in areas of the U.S. in which we have FCC licenses to offer our services and approximately 236 million people reside in areas covered by our service. This coverage includes approximately 90% of the population in our licensed areas and 49 of the 50 and 97 of the 100 most populated U.S. metropolitan areas.
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Wireless licenses are granted by the FCC for an initial 10-year term and are renewable for successive 10-year terms. To date, all Verizon Wireless and predecessor company wireless licenses have been successfully renewed.
Background
The wireless joint venture was formed in April 2000 in connection with the combination of the U.S. wireless operations and interests of Verizon and Vodafone Group Plc (Vodafone). The wireless joint venture operates as Verizon Wireless. Verizon owns a controlling 55% interest in Verizon Wireless and Vodafone owns the remaining 45%.
Recent Acquisitions
Spectrum Acquisition
In May 2003, we acquired 50 wireless licenses and related network assets from Northcoast Communications LLC for $762 million in cash. The licenses provide Verizon Wireless with additional growth capacity over large portions of the East Coast and Midwest. Total population served by the licenses is approximately 47 million.
Price Communications
In August 2002, Verizon Wireless and Price Communications Corp. (Price) combined Price’s wireless business with a portion of Verizon Wireless in a transaction valued at approximately $1.7 billion, including $550 million of net debt. The resulting limited partnership is controlled and managed by Verizon Wireless. In exchange for its contributed assets, Price received a limited partnership interest in the new partnership which is exchangeable into common stock of Verizon Wireless if an initial public offering of that stock occurs, or into the common stock of Verizon on the fourth anniversary of the asset contribution date if the initial public offering of Verizon Wireless common stock does not occur prior to then. The price of the Verizon common stock used in determining the number of Verizon common shares received in an exchange is also subject to a maximum and minimum amount.
Competition
There is substantial competition in the wireless telecommunications industry. We expect competition to intensify as a result of the higher penetration levels that currently exist in the industry, the introduction of wireless Local Number Portability (LNP), the development and deployment of new technologies, the introduction of new products and services, the availability of additional spectrum, both licensed and unlicensed, and regulatory changes. Other wireless providers, including operators and resellers, serve each of the markets in which we compete. We currently provide service to 49 of the top 50 markets in the U.S., and each of these 49 markets has an average of five other competing wireless providers. Competition also may increase to the extent that smaller, stand-alone wireless providers transfer licenses to larger, better capitalized and more experienced wireless providers. In addition, resellers and Mobile Virtual Network Operators, who buy bulk wholesale service from carriers for resale, provide another set of differentiated competitors in the marketplace.
We compete primarily against five other major wireless service providers: AT&T Wireless, Cingular Wireless, Nextel Communications, Sprint PCS and T-Mobile USA. In addition, in many markets we also compete with regional carriers, such as ALLTEL and US Cellular. The wireless communications industry has experienced consolidation over the past several years, including the recently announced acquisition of AT&T Wireless by Cingular Wireless, and this trend may continue. This consolidation trend could enhance the ability of wireless service providers with substantial financial, technical, marketing and other resources to compete with our offerings.
We believe that the following are the most important competitive factors in our industry:
Network technology, quality and coverage: In recent years, competition in our industry has led to lower prices and to the popularity of pricing plans that do not charge for roaming. As a result, the ability to offer high quality national coverage through one’s own network is important. We have a more extensive network than any of our competitors, and we continue to look for expansion opportunities either through the build-out of existing licenses, acquisitions, roaming agreements, and/or spectrum leasing.
Customer service: Quality customer service is essential to ensure that existing subscribers do not terminate service and to obtain new subscribers. With LNP, customers may find it easier to switch their service to an alternate carrier, since they can take their telephone number with them to that carrier. We believe that our quality customer service will be a key to retaining our customers and to attracting customers who want to switch from other carriers.
Pricing: Service pricing is an important element on which wireless carries compete. We offer our customers services that we believe represent the best available value for their money.
Distribution: Key to achieving our sales success is the reach and quality of our sales channels and distribution points. We believe that the correct mix of direct, indirect and resale distribution channels is a necessary ingredient in achieving industry-leading sales. A goal of our distribution strategy is to increase sales through our company-owned stores and our outside sales team, as well as through telemarketing and web-based sales and fulfillment capabilities.
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Capital resources: In order to expand capacity and build out networks and introduce new products and services, wireless providers require significant capital resources.
As a result of competition, we may encounter further market pressures to:
| • | respond to particular short-term, market-specific situations, for example, promotional service pricing or equipment discounts; |
| • | introduce new service offerings at lower prices or restructure our service packages to offer more value; |
| • | increase advertising spending; or |
| • | increase our capital investment to ensure we retain our market leadership in service quality. |
These market pressures could cause us to experience lower revenues, margins and average revenue per user, as well as increased capital spending to ensure proper capacity levels.
Our success will depend on our ability to anticipate and respond to various factors affecting the industry, including the factors described above, as well as new services and technologies, changes in consumer preferences, regulatory changes, demographic trends, economic conditions, and pricing strategies by competitors.
Information Services
Information Services is a world leader in print and online directory publishing and a content provider for electronic communications products and services. A leader in linking buyers and sellers, we produce Verizon SuperPages® print yellow and white pages directories, as well as the Internet’s preeminent online directory, SuperPages.com™. We pursue national and international growth by offering customers comprehensive advertising solutions that include bundled print and electronic commerce offerings.
Information Services provides sales, publishing and other related services for approximately 1,870 directory titles in 48 states, the District of Columbia, 6 countries and a Commonwealth outside the United States. Total circulation is approximately 112 million copies in the U.S. and 25 million copies internationally.
In 2003, we completed the sale of our directory businesses in Europe, which consisted of publishing operations in Austria, the Czech Republic, Gibraltar, Hungary, Poland and Slovakia.
In 2001, we acquired the advertising services business of TELUS Corporation (TELUS) in Canada. This acquisition advances our growth strategy by expanding our existing Canadian footprint with the creation of a new company, Dominion Information Services, Inc.
Our directory publishing business competes within the yellow pages industry with six major U.S.-based directory publishers (SBC Communications Inc., BellSouth Corporation, R.H. Donnelley, Yellow Book USA, Dex Media, Inc. and Trans Western Publishing) and encounters competition in nearly all our domestic print markets. We also compete against alternative advertising media, including radio, network and cable television, newspapers, magazines, Internet, direct mail and others for a share of the total U.S. advertising media market. Our SuperPages.com™ competitors include national directory and local Internet search engines including Yahoo and Google.
International
Our International segment includes international wireline and wireless communications operations and investments primarily in the Americas and Europe. Our consolidated international investments as of December 31, 2003 included Verizon in the Dominican Republic, Telecomunicaciones de Puerto Rico, Inc. (TELPRI) in Puerto Rico and Micronesian Telecommunications Corporation in the Northern Mariana Islands. As of December 31, 2003, our International segment managed approximately 9 million access lines and provided wireless services to approximately 30 million customers.
Americas
Canada
TELUS is the largest telecommunications company in Western Canada and the second largest in Canada. The company is a full-service telecommunications provider and provides subscribers with a full range of telecommunications products and services including data, voice and wireless services across Canada. As of December 31, 2003, we held a 20.9% interest in TELUS. TELUS served approximately 4.6 million access lines and provided wireless services to approximately 3.3 million subscribers as of December 31, 2003.
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Dominican Republic
We own 100% of Verizon in the Dominican Republic, the principal telecommunications provider in the Dominican Republic. Verizon provides local, wireless, national and international long distance and Internet access services throughout the Dominican Republic. At December 31, 2003, Verizon in the Dominican Republic served approximately 774,000 access lines and approximately 927,000 wireless customers.
Puerto Rico
As of December 31, 2003, we owned a 52% interest in TELPRI, which owns Puerto Rico Telephone Company (PRTC), Puerto Rico’s principal wireline company. Verizon Wireless Puerto Rico (VWPR), a division of PRTC, is one of the island’s largest wireless companies. At December 31, 2003, PRTC served 1.2 million access lines and VWPR provided wireless services to approximately 353,000 customers.
Venezuela
We own a 28.5% interest in Compañia Anónima Nacional Teléfonos de Venezuela (CANTV), Venezuela’s largest full-service telecommunications provider. CANTV offers local services, national and international long distance, Internet access and wireless services in Venezuela as well as public telephone, private network, data transmission, directory and other value-added services. At December 31, 2003, CANTV served approximately 2.7 million access lines and 2.7 million wireless customers.
Argentina
During 2003, we sold our entire interest in CTI Holdings, S.A. (CTI). CTI offers wireless services throughout Argentina.
Mexico
In 2003 we sold our 39.4% interest in Grupo Iusacell, S.A. de C.V. (Iusacell). Iusacell is a telecommunications company that provides wireless, long distance, and data services primarily in the central and southern regions of Mexico.
Europe and Asia
Italy
We own a 23.1% interest in Vodafone Omnitel N.V. (Vodafone Omnitel), an Italian digital cellular telecommunications company. It is the second largest wireless provider in Italy. Vodafone Omnitel served 20.6 million subscribers at December 31, 2003 through its GSM network.
Gibraltar
Gibraltar NYNEX Communications Limited, operating as Gibtelecom, is a full-service provider of wireline, wireless, and Internet access services to the country of Gibraltar. We currently own a 50% interest in the company. Our sole partner in the company is the Government of Gibraltar.
Slovakia
We own a 24.5% interest in EuroTel Bratislava, a.s., a leading provider of mobile telecommunication services and managed data network services in the Slovakia. The company’s digital and analog networks served over 1.6 million subscribers at December 31, 2003.
Czech Republic
In 2003, we sold our 24.5% interest in Eurotel Praha, spol. s r.o. (Eurotel Praha). Eurotel Praha is the largest provider of wireless voice and data services in the Czech Republic.
Indonesia
P.T. Excelcomindo Pratama (Excelcomindo) is a nationwide provider of GSM services in which we own a 23.1% interest. We also own a 36.7% interest of P.T. Citra Sari Makmur, a provider of data, voice and video communications.
Northern Mariana Islands
We are the sole shareholder of The Micronesian Telecommunications Corporation (MTC), a provider of local services. At December 31, 2003, MTC served approximately 30,000 access lines and 19,000 wireless customers on the islands of Saipan, Tinian and Rota. In November 2001 an agreement was signed to sell MTC, which is pending due to regulatory approvals.
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Other
Our International segment also includes several properties in which our investment is 20% or less. These include: Japan – Tu-Ka companies, 2.7% – 5% and Taiwan – Taiwan Cellular Corporation, 0.9%. These investments provide wireless telecommunication services to the country or a specific region within the country in which they reside.
International Regulatory and Competitive Trends
For several years, the telecommunications industry has been experiencing dynamic changes as national and international regulatory reforms embrace competition.
In Canada, the wireless services market has long been highly competitive and its local switched services voice market was effectively opened to full competition in 1997. While TELUS currently experiences and expects continued strong competition within its wireline voice, data and Internet, and wireless businesses, it continues to be the dominant telecommunications provider in Western Canada. The Canadian Radio-television and Telecommunications Commission (CRTC) may not regulate services or classes of services if it finds that those services are subject to an adequate degree of competition. Generally, wireless services are not regulated. Additionally, selected wireline services such as long distance and data are lightly regulated. Wireline services, however, generally continue to be subject to a higher degree of regulation. The CRTC instituted a price cap regulatory regime for a number of local services in 2002 for a four-year period.
In the Dominican Republic, Verizon faces both wireline and wireless competitors, although it remains the principal service provider in all telecommunication segments. The Dominican Republic’s regulatory environment is generally favorable and pricing is set at market rates.
In Puerto Rico, five other facilities-based providers operate in the wireless market. All wireline services, including local, long distance, Internet access and data, face competition from a facilities-based local carrier, interexchange carriers, resellers, cable providers, and Internet service providers. PRTC is the leading wireline service provider in Puerto Rico and second in wireless market share operating under the Verizon Wireless brand. With respect to regulatory matters, PRTC operates in a very challenging environment. The Puerto Rico Telecommunications Regulatory Board (TRB) issued orders in October 2001 and February 2002, which called for cash refunds and substantial reductions in access rates for intra-island long distance service. PRTC appealed the order with the Puerto Rico Circuit Court of Appeals which stayed the orders and heard the appeal. The court rejected the claims of PRTC in August 2003 and denied PRTC’s reconsideration request in October 2003. The company filed in October 2003 a writ of certiorari before the Puerto Rico Supreme Court challenging the order and particularly the cash refund aspect of the order. In November 2003, PRTC agreed with the TRB to implement the reduction in access rates and replace the cash refund portion of the order with an expansion of local exchange areas, rate adjustments to reflect these changes, certain local rate credits, and the elimination of touchtone charges. While the TRB has accepted and approved these commitments, it has not issued a final resolution and order to terminate the refund provisions in the order. In addition, some of the interexchange carriers have challenged the expansion of the local exchange areas portion of this commitment which is pending with the TRB.
In Venezuela, CANTV’s wireless operations have faced competition since inception. In late 2000, the government opened the basic telephone market for local, national and international long distance service to competition and issued new guidelines governing interconnection and the use of wireless spectrum. CANTV remains Venezuela’s leading provider of switched, fixed local and domestic and international long distance services and is one of the country’s top providers of wireless services. CANTV is subject to comprehensive rate regulation, especially with respect to residential services, that limits the company’s ability to raise prices to keep pace with changes in foreign exchange rates and inflation.
In Italy, Vodafone Omnitel was awarded a license for third-generation mobile spectrum in 2000, which was extended from a 15-year life to a 20-year life in November 2001. It is expected that Vodafone Omnitel will launch commercial operations of third-generation network services during 2004.
In Slovakia, EuroTel Bratislava was awarded a license for the third-generation mobile spectrum in July 2002.
Recent Developments
Telephone Access Lines
As we have stated in the past, Verizon continually evaluates its assets and properties for strategic fit and financial performance. In connection with this analysis, discussions have taken place regarding the possible sale of telephone access lines in Hawaii and upstate New York. However, no sale is pending at this time.
Environmental Matters
During 2003, under a government-approved plan, remediation of the site of a former facility in Hicksville, New York that processed nuclear fuel rods in the 1950s and 1960s commenced. Remediation beyond original expectations proved to be necessary and a reassessment of the anticipated remediation costs was conducted. In addition, a reassessment of costs related to remediation efforts at several other former facilities was undertaken. As a result, an additional environmental remediation expense of $240 million was recorded in Selling, General and Administrative Expense in the consolidated statements of income in the fourth quarter of 2003.
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New York Recovery Funding
In August 2002, President Bush signed the Supplemental Appropriations bill which included $5.5 billion in New York recovery funding. Of that amount, approximately $750 million has been allocated to cover the uninsured losses of businesses (including the restoration of utility infrastructure) as a result of the September 11th terrorist attacks. These funds will be distributed through the Lower Manhattan Development Corporation following an application process.
On October 31, 2003, Verizon applied for reimbursement of $33 million. We received $11 million in December 2003. We are awaiting an audit for the remaining funds. Once the audit is complete, we will apply for additional funds.
Employees
As of December 31, 2003, Verizon and its subsidiaries had approximately 203,100 employees. Unions represent approximately 51% of our employees.
Information on Our Internet Website
We make available, free of charge on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website address is www.verizon.com. This information is included in “Investor Information” on our website.
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:
| • | the duration and extent of the current economic downturn; |
| • | materially adverse changes in economic and industry conditions and labor matters, including workforce levels and labor negotiations, and any resulting financial and/or operational impact, in the markets served by us or by companies in which we have substantial investments; |
| • | material changes in available technology; |
| • | technology substitution; |
| • | an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations; |
| • | the final results of federal and state regulatory proceedings concerning our provision of retail and wholesale services and judicial review of those results; |
| • | the effects of competition in our markets; |
| • | our ability to satisfy regulatory merger conditions; |
| • | the ability of Verizon Wireless to continue to obtain sufficient spectrum resources; and |
| • | changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings. |
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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 $181 billion at December 31, 2003 and $177 billion at December 31, 2002, 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:
| 2003 | 2002 | |||||||||||
| Network equipment |
78.6 | % | 77.7 | % | ||||||||
| Land, buildings and building equipment |
9.1 | 8.8 | ||||||||||
| Furniture and other equipment |
9.1 | 9.8 | ||||||||||
| Other |
3.2 | 3.7 | ||||||||||
| 100.0 | % | 100.0 | % | |||||||||
Our properties are divided among our operating segments at December 31, as follows:
| 2003 | 2002 | |||||||||||
| Domestic Telecom |
70.9 | % | 71.3 | % | ||||||||
| Domestic Wireless |
25.2 | 24.0 | ||||||||||
| Information Services |
0.2 | 0.3 | ||||||||||
| International |
2.9 | 3.3 | ||||||||||
| Corporate and Other |
0.8 | 1.1 | ||||||||||
| 100.0 | % | 100.0 | % | |||||||||
Network equipment consists primarily of aerial cable, underground cable, conduit and wiring, wireless plant, telephone poles, switching equipment, transmission equipment and related facilities. Land, buildings and building equipment consists of land and land improvements and central office buildings. Furniture and other equipment consists of public telephone instruments and telephone equipment (including PBXs), furniture, office equipment, motor vehicles and other work equipment. Other property consists primarily of plant under construction, capital leases, capitalized computer software costs and leasehold improvements. A portion of our property is subject to the liens of their respective mortgages securing funded debt.
The customers of our telephone operations are served by electronic switching systems that provide a wide variety of services. At December 31, 2003, substantially all of the access lines were served by digital capability.
Capital Expenditures
We continue to make significant capital expenditures to meet the demand for communications services and to further improve such services. Capital spending for Domestic Telecom was approximately $6.8 billion in 2003, $8.0 billion in 2002 and $12.7 billion in 2001. Capital spending for Domestic Wireless was $4.6 billion in 2003, $4.4 billion in 2002 and $5.1 billion in 2001. Capital spending for Information Services, International and Corporate and Other businesses was approximately $.5 billion in 2003, $.7 billion in 2002 and $.6 billion in 2001. Capital spending for those years includes capitalized software and excludes additions under capital leases. Capital spending, including capitalized software, is expected to be in the range of $12 billion to $13 billion in 2004. This range includes $6.5 billion to $7.0 billion for Domestic Telecom, $5.0 billion to $5.5 billion for Domestic Wireless and a total of $.5 billion for Information Services, International and Corporate and Other businesses.
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None.
Not Applicable.
Set forth below is information with respect to our executive officers.
| Name | Age | Office | Held Since | |||
| Ivan G. Seidenberg |
57 | Chairman and Chief Executive Officer | 2000 | |||
| Lawrence T. Babbio, Jr. |
59 | Vice Chairman and President | 2000 | |||
| Mary Beth Bardin |
49 | Executive Vice President – Public Affairs and Communications | 2000 | |||
| William P. Barr |
53 | Executive Vice President and General Counsel | 2000 | |||
| David H. Benson |
54 | Senior Vice President and Controller | 2003 | |||
| John W. Diercksen |
54 | Executive Vice President – Strategy, Development and Planning | 2003 | |||
| William F. Heitmann |
54 | Senior Vice President and Treasurer | 2000 | |||
| Marc C. Reed |
45 | Executive Vice President – Human Resources | 2004 | |||
| Dennis F. Strigl |
57 | Executive Vice President and President and CEO – Domestic Wireless | 2000 | |||
| Doreen A. Toben |
54 | Executive Vice President and Chief Financial Officer | 2002 | |||
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.
| Item 5. Market for Registrant's Common Equity and Related Stockholder Matters |
The principal market for trading in the common stock of Verizon 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, 2003, there were 1,064,000 shareowners of record.
High and low stock prices, as reported on the New York Stock Exchange composite tape of transactions, and dividend data are as follows:
| Market Price | Cash Dividend Declared | ||||||||||||||||
| High | Low | ||||||||||||||||
| 2003 |
First Quarter | $ | 44.31 | $ | 32.06 | $ | .385 | ||||||||||
| Second Quarter | 41.35 | 32.80 | .385 | ||||||||||||||
| Third Quarter | 40.25 | 32.05 | .385 | ||||||||||||||
| Fourth Quarter | 35.25 | 31.10 | .385 | ||||||||||||||
| 2002 |
First Quarter | $ | 51.09 | $ | 43.02 | $ | .385 | ||||||||||
| Second Quarter | 46.01 | 36.50 | .385 | ||||||||||||||
| Third Quarter | 40.20 | 26.01 | .385 | ||||||||||||||
| Fourth Quarter | 43.20 | 27.50 | .385 | ||||||||||||||
Information required by this item is included in the 2003 Verizon Annual Report to Shareowners under the heading “Selected Financial Data” on page 13, which is incorporated herein by reference.
| Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Information required by this item is included in the 2003 Verizon Annual Report to Shareowners under the heading “Management’s Discussion and Analysis of Results of Operations and Financial Condition” on pages 14 through 34, which is incorporated herein by reference.
18
| Item 7A. Quantitative and Qualitative Disclosures About Market Risk |
Information required by this item is included in the 2003 Verizon Annual Report to Shareowners under the heading “Market Risk” on page 31, which is incorporated herein by reference.
Information required by this item is included in the 2003 Verizon Annual Report to Shareowners on pages 35 through 71, which is incorporated herein by reference.
| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Our chief executive officer and chief financial officer have evaluated the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this annual report, that ensure that information relating to the registrant which is required to be disclosed in this report is recorded, processed, summarized and reported, within required time periods. Based on this evaluation, which disclosed no significant deficiencies or material weaknesses, they have concluded that the registrant’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the registrant and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this annual report was being prepared. There were no significant changes in the registrant’s internal control over financial reporting during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
For information with respect to our executive officers, see “Executive Officers of the Registrant” at the end of Part I of this Report. For other information required by this item see the Proxy Statement for our 2004 Annual Meeting of Shareholders filed pursuant to Regulation 14A, which is incorporated herein by reference.
For information with respect to executive compensation, see the Proxy Statement for our 2004 Annual Meeting of Shareholders filed pursuant to Regulation 14A, which is incorporated herein by reference.
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| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
For information with respect to the security ownership of the Directors and Executive Officers and related stockholder matters, see the Proxy Statement for our 2004 Annual Meeting of Shareholders filed pursuant to Regulation 14A, which is incorporated herein by reference. In addition, see the following table for other equity compensation plan information (numbers of securities in thousands):
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance | |||
| (a) | (b) | (c) | ||||
| Equity compensation plans approved by security holders |
218,561 | $ 49.39 | 120,487 | |||
| Equity compensation plans not approved by security holders |
59,239 | 41.10 | 4,654* | |||
| Total |
277,800 | 47.62 | 125,141 | |||
| * | Indicates the number of shares available for issuance under the Verizon Communications 2000 Broad-Based Incentive Plan, which provides for awards of nonqualified stock options, restricted stock, restricted stock units and other equity-based hypothetical stock units to employees of Verizon and its subsidiaries. |
For information with respect to certain relationships and related transactions, see the Proxy Statement for our 2004 Annual Meeting of Shareholders filed pursuant to Regulation 14A, which is incorporated herein by reference.
For information with respect to principal accounting fees and services, see the Proxy Statement for our 2004 Annual Meeting of Shareholders filed pursuant to Regulation 14A, which is incorporated herein by reference.
20
| Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K |
| (a) | Documents filed as part of this report: |
| Page | ||||
| (1) | Report of Independent Auditors | * | ||
| Financial Statements covered by Report of Independent Auditors: | ||||
| Consolidated Statements of Income | * | |||
| Consolidated Balance Sheets | * | |||
| Consolidated Statements of Cash Flows | * | |||
| Consolidated Statements of Changes in Shareowners’ Investment | * | |||
| Notes to Consolidated Financial Statements | * | |||
| * Incorporated herein by reference to the appropriate portions of the registrant’s annual report to shareowners for the fiscal year ended December 31, 2003. (See Part II.) |
||||
| (2) | Financial Statement Schedule | |||
| II – Valuation and Qualifying Accounts | 24 | |||
| (3) | Exhibits | |||
| Exhibit Number | ||||
| 3a | Restated Certificate of Incorporation of Verizon Communications Inc. (Verizon) (Exhibit 3a to Form 10-K for the year ended December 31, 2000). | |||
| 3b | Bylaws of Verizon, as amended and restated filed herewith. | |||
| 4 | No instrument which defines the rights of holders of long-term debt of Verizon and its consolidated subsidiaries is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, Verizon hereby agrees to furnish a copy of any such instrument to the SEC upon request. | |||
| 10a | Description of Verizon Deferred Compensation Plan for Non-Employee Directors (Exhibit 10a to Form 10-K for the year ended December 31, 2000).* | |||
| 10b | Bell Atlantic Deferred Compensation Plan for Outside Directors, as amended and restated (Exhibit 10a to Form 10-K for the year ended December 31, 1998).* | |||
| 10c | Deferred Compensation Plan for Non-Employee Members of the Board of Directors of GTE, as amended (Exhibit 10-1 to GTE’s Form 10-K for the year ended December 31, 1997 and Exhibit 10.1 to GTE’s Form 10-K for the year ended December 31, 1998, File No. 1-2755).* | |||
| 10d | GTE’s Directors’ Deferred Stock Unit Plan (Exhibit 10-8 to GTE’s Form 10-K for the year ended December 31, 1997, File No. 1-2755).* | |||
| 10e | Description of Plan for Non-Employee Directors’ Travel Accident Insurance (Exhibit 10c to Form 10-K for the year ended December 31, 1999).* | |||
| 10f | Bell Atlantic Directors’ Charitable Giving Program, as amended (Exhibit 10p to Form SE dated March 29, 1990 and Exhibit 10p to Form SE dated March 29, 1993).* | |||
| 10g | GTE’s Charitable Awards Program (Exhibit 10-10 to GTE’s Form 10-K for the year ended December 31, 1992, File No. 1- 2755).* | |||
| 10h | NYNEX Directors’ Charitable Award Program (Exhibit 10i to Form 10-K for the year ended December 31, 2000).* | |||
| 10i | Verizon Communications 2000 Broad-Based Incentive Plan (Exhibit 10h to Form 10-Q for the period ended September 30, 2000).* | |||
| 10j | Verizon Communications Inc. Long-Term Incentive Plan (Appendix B to Verizon’s 2001 Proxy Statement filed March 12, 2001).* | |||
| 10k | GTE’s Long-Term Incentive Plan, as amended (Exhibit B to GTE’s 1997 Proxy Statement and Exhibit 10.5 to GTE’s 1998 Form 10-K for the year ended December 31, 1998, File No. 1-2755); Description of Amendments (Exhibit 10l to Form 10-K for the year ended December 31, 2000).* | |||
21
| 10l | NYNEX 1990 Stock Option Plan, as amended (Exhibit No. 2 to NYNEX’s Proxy Statement dated March 20, 1995, File No. 1-8608); Description of Amendments (Exhibit 10m to Form 10-K for the year ended December 31, 2000).* | |
| 10m | NYNEX 1995 Stock Option Plan, as amended (Exhibit No. 1 to NYNEX’s Proxy Statement dated March 20, 1995, File No. 1-8608); Description of Amendments (Exhibit 10n to Form 10-K for the year ended December 31, 2000).* | |
| 10n | Verizon Communications Inc. Short-Term Incentive Plan (Appendix C to Verizon’s 2001 Proxy Statement filed March 12, 2001).* | |
| 10o | Verizon Communications Inc. Income Deferral Plan (Exhibit 10f to Form 10-Q for the period ended June 30, 2002).* | |
| 10p | GTE’s Supplemental Executive Retirement Plan, as amended (Exhibits 10-3, 10-3, 10-3 and 10-3 to GTE’s Form 10-K for the years ended December 31, 1991, 1992, 1993 and 1994, respectively, File No. 1-2755).* | |
| 10q | GTE’s Executive Salary Deferral Plan, as amended (Exhibit 10.10 to GTE’s Form 10-K for the year ended December 31, 1998, File No. 1-2755).* | |
| 10r | Bell Atlantic Senior Management Long-Term Disability and Survivor Protection Plan, as amended (Exhibit 10h to Form SE filed on March 27, 1986 and Exhibit 10b(ii) to Form 10-K for the year ended December 31, 1997).* | |
| 10s | Description of Bell Atlantic Senior Management Estate Management Plan (Exhibit 10rr to Form 10-K for year ended December 31, 1997).* | |
| 10t | GTE’s Executive Retired Life Insurance Plan, as amended (Exhibits 10-6, 10-6 and 10-6 to GTE’s Form 10-K for the years ended December 31, 1991, 1992 and 1993, respectively, File No. 1-2755).* | |
| 10u | NYNEX Supplemental Life Insurance Plan (Exhibit No. 10 iii 21 to NYNEX’s Form 10-Q for the period ended June 30, 1996, File No. 1-8608).* | |
| 10v | Employment Agreement between Verizon and Charles R. Lee, as amended and supplemented (Exhibit 10x to Form 10-K for the year ended December 31, 2000, Exhibit 10e to Form 10-Q for the period ended June 30, 2002 and Exhibit 10 to the Form 10-Q for the period ended September 30, 2002 and by the exhibit filed herewith).* | |
| 10w | Amended and Restated Employment Agreement between Verizon and Ivan G. Seidenberg (Exhibit 10 to Form 10-Q for the period ended June 30, 2000).* | |
| 10x | Employment Agreement and stock option arrangements with respect to the stock of Grupo Iusacell, S.A. de C.V., between Verizon and Lawrence T. Babbio (Exhibit 10a to Form 10-Q for the period ended September 30, 2000, Exhibit 10s to Form 10-K for the year ended December 31, 1993 and Exhibit 10q to Form 10-K for the year ended December 31, 1996).* | |
| 10y | Employment Agreement between Verizon and Mary Beth Bardin (Exhibit 10a to Form 10-Q for the period ended June 30, 2002).* | |
| 10z | Employment Agreement between Verizon and William P. Barr (Exhibit 10z to Form 10-Q for the period ended March 31, 2003).* | |
| 10aa | Employment Agreement between Verizon and David H. Benson (Exhibit 10b to Form 10-Q for the period ended June 30, 2002).* | |
| 10cc | Employment Agreement between Verizon and Doreen A. Toben (Exhibit 10d to Form 10-Q for the period ended June 30, 2002).* | |
| 10dd | Description of the Split-Dollar Insurance Arrangements for Lawrence T. Babbio and William P. Barr (Exhibit 10g to Form 10-Q for the period ended June 30, 2002).* | |
| 10ee | Employment Agreement between Verizon Wireless and Dennis F. Strigl (Exhibit 10f to Form 10-Q for the period ended September 30, 2000).* | |
22
| 10ff | NYNEX Deferred Compensation Plan for Non-Employee Directors (Exhibit 10gg to NYNEX’s Registration Statement No. 2-87850, File No. 1-8608).* | |
| 10ff(i) Amendment to NYNEX Corporation Deferred Compensation Plan for Non-Employee Directors (Exhibit 10iii 5a to NYNEX’s Quarterly Report on Form 10-Q for the period ended June 30, 1996, File No. 1-8608).* | ||
| 10gg | U.S. Wireless Agreement, dated September 21, 1999, among Bell Atlantic and Vodafone Airtouch plc, including the forms of Amended and Restated Partnership Agreement and the Investment Agreement (Exhibit 10 to Form 10-Q for the period ended September 30, 1999). | |
| 12 | Computation of Ratio of Earnings to Fixed Charges filed herewith. | |
| 13 | Portions of Verizon’s Annual Report to Shareowners for the fiscal year ended December 31, 2003. Only the information incorporated by reference into this Form 10-K is included in the exhibit. | |
| 21 | List of principal subsidiaries of Verizon filed herewith. | |
| 23 | Consent of Ernst & Young LLP filed herewith. | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| * | Indicates management contract or compensatory plan or arrangement. |
| (b) | Current Reports on Form 8-K filed during the quarter ended December 31, 2003: |
A Current Report on Form 8-K, furnished on October 28, 2003, containing a press release announcing earnings for the third quarter ended September 30, 2003.
A Current Report on Form 8-K, furnished on November 17, 2003, containing a press release in connection with a presentation by Vice Chairman and President Lawrence T. Babbio Jr. on November 17, 2003 at the UBS Eighth Annual Global Communications Conference.
A Current Report on Form 8-K, furnished on December 9, 2003, containing a press release announcing an estimation of expected charges and ongoing saving associated with a voluntary separation plan.
23
Schedule II – Valuation and Qualifying Accounts
Verizon Communications Inc. and Subsidiaries
For the Years Ended December 31, 2003, 2002 and 2001
| Additions |
(dollars in millions) | ||||||||||||||
| Description | Balance at Beginning of Period |
Charged To Expenses |
Charged to Other Accounts Note (a) |
Deductions Note (b) |
Balance at End of Period | ||||||||||
| Allowance for Uncollectible |
|||||||||||||||
| Accounts Receivable: |
|||||||||||||||
| Year 2003 |
$ | 2,771 | $ | 1,803 | $ 937 | $ | 3,124 | $ | 2,387 | ||||||
| Year 2002 |
2,127 | 2,899 | 972 | 3,227 | 2,771 | ||||||||||
| Year 2001 |
1,535 | 1,940 | 822 | 2,170 | 2,127 | ||||||||||
| Valuation Allowance for Deferred Tax Assets: |
|||||||||||||||
| Year 2003 |
$ | 661 | $ | 844 | $ – | $ | 42 | $ | 1,463 | ||||||
| Year 2002 |
1,574 | 103 | – | 1,016 | 661 | ||||||||||
| Year 2001 |
441 | 1,133 | – | – | 1,574 | ||||||||||
| Discontinued Businesses: |
|||||||||||||||
| Year 2003 |
$ | 151 | $ | 240 | $ 60 | $ | 120 | $ | 331 | ||||||
| Year 2002 |
219 | (49 | ) | – | 19 | 151 | |||||||||
| Year 2001 |
286 | (60 | ) | – | 7 | 219 | |||||||||
| Merger-Related Costs: |
|||||||||||||||
| Year 2003 |
$ | – | $ | – | $ – | $ | – | $ | – | ||||||
| Year 2002 |
531 | – | – | 531 | – | ||||||||||
| Year 2001 |
783 | – | – | 252 | 531 | ||||||||||
| (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. Also includes amounts transferred from other accounts. |
| (b) | Amounts written off as uncollectible or transferred to other accounts or utilized. |
24
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Verizon Communications Inc.
| Date: March 12, 2004 |
By: |
/s/ David H. Benson | ||||||
| David H. Benson Senior Vice President and Controller | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Principal Executive Officer: | ||||
| /s/ Ivan G. Seidenberg |
Chairman and Chief Executive Officer |
March 12, 2004 | ||
| Ivan G. Seidenberg |
||||
| Principal Financial Officer: |
||||
| /s/ Doreen A. Toben |
Executive Vice President and Chief Financial Officer |
March 12, 2004 | ||
| Doreen A. Toben |
||||
| Principal Accounting Officer: |
||||
| /s/ David H. Benson |
Senior Vice President and Controller |
March 12, 2004 | ||
| David H. Benson |
||||
25
Signatures – Continued
| /s/ Ivan G. Seidenberg |
Director | March 12, 2004 | ||
| Ivan G. Seidenberg |
||||
| /s/ James R. Barker |
Director | March 12, 2004 | ||
| James R. Barker |
||||
| /s/ Richard L. Carrión |
Director | March 12, 2004 | ||
| Richard L. Carrión |
||||
| /s/ Robert W. Lane |
Director | March 12, 2004 | ||
| Robert W. Lane |
||||
| /s/ Sandra O. Moose |
Director | March 12, 2004 | ||
| Sandra O. Moose |
||||
| /s/ Joseph Neubauer |
Director | March 12, 2004 | ||
| Joseph Neubauer |
||||
| /s/ Thomas H. O’Brien |
Director | March 12, 2004 | ||
| Thomas H. O’Brien |
||||
| /s/ Russell E. Palmer |
Director | March 12, 2004 | ||
| Russell E. Palmer |
||||
| /s/ Hugh B. Price |
Director | March 12, 2004 | ||
| Hugh B. Price |
||||
| /s/ Walter V. Shipley |
Director | March 12, 2004 | ||
| Walter V. Shipley |
||||
| /s/ John R. Stafford |
Director | March 12, 2004 | ||
| John R. Stafford |
||||
| /s/ Robert D. Storey |
Director | March 12, 2004 | ||
| Robert D. Storey |
||||
26