VZ

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2001 for Verizon Communications Inc., formed by the merger of Bell Atlantic and GTE in June 2000. The company operates four reportable segments: Domestic Telecom, Domestic Wireless, International, and Information Services. The filing reflects the adoption of new accounting standards (SFAS No. 133) effective January 1, 2001, and includes the results of the Verizon Wireless joint venture with Vodafone.

Key Financial Metrics

Note: Adjusted Net Income excludes nonrecurring items such as merger costs, accounting changes, and mark-to-market adjustments.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 12% year-over-year, driven primarily by the Domestic Wireless segment (87% increase due to the inclusion of the Vodafone joint venture) and growth in Domestic Telecom data services.
• Accounting Changes: The adoption of SFAS No. 133 resulted in a cumulative effect charge of $182 million and a quarterly mark-to-market charge of $116 million, significantly impacting reported net income compared to the prior year.
• Wireless Segment: The Domestic Wireless segment now includes the full results of the Verizon Wireless joint venture, leading to a substantial increase in both revenues and expenses compared to Q1 2000.
• Debt Levels: Total debt increased due to the formation of the wireless joint venture and higher capital expenditures. The debt ratio was 64.1% as of March 31, 2001.
• Investment Losses: Significant unrealized losses were recorded in Accumulated Other Comprehensive Loss related to investments in NTL, Cable & Wireless, and Metromedia Fiber Network (MFN).

Guidance, Outlook, and Risks

• Capital Spending: Management expects 2001 capital expenditures to be approximately $17.5 billion, excluding the cost of recent wireless license purchases.
• FCC Spectrum Auction: Verizon Wireless won 113 licenses for approximately $8.8 billion. $1.8 billion has been paid; the remainder is due in 2001. This creates a significant liquidity requirement.
• Verizon Wireless IPO: The planned Initial Public Offering (IPO) of Verizon Wireless has been deferred due to market volatility. Management's bias is to complete the IPO in 2001 to fund the spectrum purchases.
• Credit Rating: In April 2001, Moody's revised the company's credit rating outlook from stable to negative, citing concerns over the timing of the Verizon Wireless IPO and the ability to fund the spectrum auction.
• Regulatory Risks: Pending litigation regarding the FCC spectrum auction (NextWave appeal) could require the return of licenses. Additionally, regulatory proceedings regarding in-region long distance and unbundling of network elements remain active.
• Market Risk: The company faces equity price risk on exchangeable notes and investments. A 10% decline in underlying equity prices could result in a $306 million decrease in fair value.

Investor Verification Checklist

• Wireless IPO Timing: Verify the status of the Verizon Wireless IPO, as its delay necessitates debt financing for the $8.8 billion spectrum auction.
• Spectrum Litigation: Monitor the outcome of the NextWave appeal, which could jeopardize the validity of the recently acquired licenses.
• Investment Impairment: Review the status of unrealized losses on investments in NTL, Cable & Wireless, and MFN to assess the risk of future charges to earnings if declines are deemed "other than temporary."
• Regulatory Compliance: Track progress on meeting Bell Atlantic-GTE merger conditions and FCC requirements for in-region long distance entry.
• Cash Flow Sufficiency: Assess whether operating cash flows and existing credit lines ($9.8 billion unused) are sufficient to cover the remaining spectrum payments and capital expenditures without diluting shareholders or downgrading credit ratings.