UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8606
VERIZON COMMUNICATIONS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2259884
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1095 AVENUE OF THE AMERICAS 10036
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER (212) 395-2121
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
At June 30, 2002, 2,728,421,871 shares of the registrant's Common Stock were outstanding, after deducting 23,228,613 shares held in treasury.
TABLE OF CONTENTS
ITEM NO.
PART I. FINANCIAL INFORMATION PAGE
----
1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and six months ended June 30, 2002 and 2001 1
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 and 2001 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 16
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36
PART II. OTHER INFORMATION
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 37
6. EXHIBITS AND REPORTS ON FORM 8-K 38
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Verizon Communications Inc. and Subsidiaries
(Dollars in Millions, Except Per Share Amounts)
(Unaudited) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
OPERATING REVENUES $ 16,835 $ 16,909 $ 33,210 $ 33,175
Operations and support expense (exclusive of items
shown below) 10,796 9,713 20,560 19,012
Depreciation and amortization 3,356 3,400 6,676 6,760
Sales of assets, net -- (5) (220) (5)
----------- ----------- ----------- -----------
OPERATING INCOME 2,683 3,801 6,194 7,408
Loss from unconsolidated businesses (3,361) (3,664) (4,904) (3,448)
Other income and (expense), net 4 114 69 184
Interest expense (798) (909) (1,612) (1,830)
Minority interest (313) (209) (556) (307)
Mark-to-market adjustment - financial instruments (8) (37) (11) (153)
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes,
extraordinary item and cumulative effect of
accounting change (1,793) (904) (820) 1,854
Provision for income taxes 325 117 1,294 1,121
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (2,118) (1,021) (2,114) 733
Extraordinary item, net of tax 3 -- (6) --
Cumulative effect of accounting change, net of tax -- -- (496) (182)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (2,115) $ (1,021) $ (2,616) $ 551
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (.78) $ (.38) $ (.78) $ .27
Extraordinary item, net of tax -- -- -- --
Cumulative effect of accounting change, net of tax -- -- (.18) (.07)
----------- ----------- ----------- -----------
Net Income (Loss) $ (.78) $ (.38) $ (.96) $ .20
=========== =========== =========== ===========
Weighted-average shares outstanding (in millions) 2,726 2,707 2,723 2,706
----------- ----------- ----------- -----------
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (.78) $ (.38) $ (.78) $ .27
Extraordinary item, net of tax -- -- -- --
Cumulative effect of accounting change, net of tax -- -- (.18) (.07)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (.78) $ (.38) $ (.96) $ .20
=========== =========== =========== ===========
Weighted-average shares outstanding - diluted
(in millions) 2,726 2,707 2,723 2,728
----------- ----------- ----------- -----------
Dividends declared per common share $ .385 $ .385 $ .77 $ .77
=========== =========== =========== ===========
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See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
Verizon Communications Inc. and Subsidiaries
(Dollars in Millions, Except Per Share Amounts) (Unaudited) JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 2,962 $ 979
Short-term investments 769 1,991
Accounts receivable, net of allowances of $2,449 and $2,153 13,068 14,254
Inventories 1,843 1,968
Net assets held for sale 1,323 1,199
Prepaid expenses and other 3,176 2,796
----------- -----------
Total current assets 23,141 23,187
----------- -----------
Plant, property and equipment 175,802 169,586
Less accumulated depreciation 101,418 95,167
----------- -----------
74,384 74,419
----------- -----------
Investments in unconsolidated businesses 5,881 10,202
Intangible assets, net 45,231 44,262
Other assets 19,656 18,725
----------- -----------
Total assets $ 168,293 $ 170,795
=========== ===========
LIABILITIES AND SHAREOWNERS' INVESTMENT
Current liabilities
Debt maturing within one year $ 16,969 $ 18,669
Accounts payable and accrued liabilities 13,130 13,947
Other 5,581 5,404
----------- -----------
Total current liabilities 35,680 38,020
----------- -----------
Long-term debt 44,639 45,657
Employee benefit obligations 13,628 11,898
Deferred income taxes 18,824 16,543
Other liabilities 4,056 3,989
Minority interest 22,824 22,149
Shareowners' investment
Series preferred stock ($.10 par value; none issued) -- --
Common stock ($.10 par value; 2,751,650,484 shares issued in both periods) 275 275
Contributed capital 24,713 24,676
Reinvested earnings 5,842 10,704
Accumulated other comprehensive loss (924) (1,187)
----------- -----------
29,906 34,468
Less common stock in treasury, at cost 606 1,182
Less deferred compensation - employee stock ownership plans and other 658 747
----------- -----------
Total shareowners' investment 28,642 32,539
----------- -----------
Total liabilities and shareowners' investment $ 168,293 $ 170,795
=========== ===========
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See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Verizon Communications Inc. and Subsidiaries
(Dollars in Millions) (Unaudited) SIX MONTHS ENDED JUNE 30,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before extraordinary item and cumulative effect of accounting change $ (2,114) $ 733
Adjustments to reconcile income (loss) before extraordinary item and cumulative effect
of accounting change to net cash provided by operating activities:
Depreciation and amortization 6,676 6,760
Sales of assets, net (220) (5)
Mark-to-market adjustment - financial instruments 11 153
Employee retirement benefits (726) (1,118)
Deferred income taxes 784 (349)
Provision for uncollectible accounts 1,465 782
Loss from unconsolidated businesses 4,904 3,448
Changes in current assets and liabilities, net of effects from
acquisition/disposition of businesses (927) (2,961)
Other, net 189 215
------------- -------------
Net cash provided by operating activities 10,042 7,658
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (5,510) (9,163)
Acquisitions, net of cash acquired, and investments (998) (2,212)
Proceeds from disposition of businesses 770 --
Proceeds from spectrum payment refund 1,479 --
Net change in short-term investments 1,126 1,010
Other, net (380) (510)
------------- -------------
Net cash used in investing activities (3,513) (10,875)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 5,583 8,253
Repayments of long-term borrowings and capital lease obligations (3,938) (1,604)
Increase (decrease) in short-term obligations, excluding current maturities (4,623) 620
Dividends paid (2,096) (2,079)
Proceeds from sale of common stock 424 242
Other, net 104 (356)
------------- -------------
Net cash provided by (used in) financing activities (4,546) 5,076
------------- -------------
Increase in cash and cash equivalents 1,983 1,859
Cash and cash equivalents, beginning of period 979 757
------------- -------------
Cash and cash equivalents, end of period $ 2,962 $ 2,616
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See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Verizon Communications Inc. and Subsidiaries
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in the Verizon Communications Inc. (Verizon) Annual Report on Form 10-K for the year ended December 31, 2001, as amended by the Annual Report on Form 10-K/A for the year ended December 31, 2001.
We have reclassified certain amounts from prior year's data to conform to the 2002 presentation.
2. MERGER CHARGES AND OTHER STRATEGIC ACTIONS
In connection with the Bell Atlantic Corporation-GTE Corporation merger on June 30, 2000, we incurred charges associated with employee severance of $584 million ($371 million after-tax) for the separation of approximately 5,500 management employees who were entitled to benefits under pre-existing separation plans, as well as an accrual of ongoing Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits," obligations for GTE employees. As of June 30, 2002, the severances in connection with the Bell Atlantic-GTE merger are complete.
During the fourth quarter of 2001, we recorded a special charge of $765 million ($477 million after-tax) for the voluntary and involuntary separation of approximately 10,000 employees. Also, during the second quarter of 2002, we recorded a special charge of $734 million ($475 million after-taxes and minority interest) primarily associated with employee severance costs and severance-related activities in connection with the voluntary and involuntary separation of approximately 8,000 employees. As of June 30, 2002, a total of approximately 8,900 employees have been separated under the 2001 and 2002 severance programs, excluding a significant number of voluntary separations that were not processed by June 30, 2002. The remaining severance liability relating to these programs is $1,085 million, which includes future payments to employees separated as of June 30, 2002. We expect to complete the severance programs within a year of when the charge was recorded.
Also, during the second quarter of 2002, we recorded pretax charges of $394 million ($254 million after-tax) primarily resulting from a pretax impairment charge in connection with our financial statement exposure to WorldCom Inc. of $300 million ($183 million after-tax) and other pretax charges of $94 million ($71 million after-tax). In addition, during the second quarter of 2002, we recorded a pretax charge of $175 million ($114 million after-tax) related to a proposed settlement of a litigation matter that arose from our decision to terminate an agreement with NorthPoint Communications Group, Inc. (NorthPoint) to combine the two companies' digital subscriber line (DSL) businesses (see Note 14).
We expect to incur a total of approximately $2 billion of transition costs through the end of 2002 related to the merger and the formation of the wireless joint venture. These costs are incurred to integrate systems, consolidate real estate and relocate employees. They also include approximately $500 million for advertising and other costs to establish the Verizon brand. Transition costs incurred through the second quarter of 2002 total $1,931 million. Transition costs for the three and six months ended June 30, 2002 were $102 million and $198 million ($57 million and $109 million after taxes and minority interest), respectively. Transition costs for the three and six months ended June 30, 2001 were $279 million and $442 million ($162 million and $250 million after taxes and minority interest), respectively.
3. SALES OF ASSETS, NET
During the first quarter of 2002, we recorded a net pretax gain of $220 million ($116 million after-tax), primarily resulting from a pretax gain on the sale of TSI Telecommunication Services Inc. (TSI) of $466 million ($275 million
after-tax), partially offset by an impairment charge in connection with our exit from the video business and other charges of $246 million ($159 million after-tax).
During the second quarter of 2001, we completed the sale of the overlapping Cincinnati wireless market. The pretax gain was $80 million ($48 million after-tax). In addition, during the second quarter of 2001, an agreement to sell the overlapping Chicago wireless market at a price lower than the net book value of the Chicago assets was executed. Consequently, we recorded an impairment charge of $75 million ($45 million after-tax) related to the expected sale. The sale of the Chicago market closed in the second half of 2001.
4. EXTRAORDINARY ITEM
During the second quarter of 2002, we recognized a pretax extraordinary gain of $4 million ($3 million after-tax) related to the extinguishment of $243 million of debt prior to the stated maturity date. Results for the six months ended June 30, 2002 include the retirement in the first quarter of 2002 of $1,536 million of debt prior to the stated maturity date, resulting in a pretax extraordinary charge of $15 million ($9 million after-tax).
5. NET ASSETS HELD FOR SALE
In October 2001, we agreed to sell all 675,000 of our switched access lines in Alabama and Missouri to CenturyTel Inc. (CenturyTel) for $2.2 billion. In early July 2002, we completed the sale of approximately 300,000 switched access lines and related local exchange operations in Alabama to CenturyTel for approximately $1.0 billion in cash. The Missouri sale has been approved by the Missouri Public Service Commission and the Federal Communications Commission (FCC). We expect to close the Missouri transaction in the third quarter of 2002.
Also in October 2001, we agreed to sell approximately 600,000 switched access lines in Kentucky to ALLTEL Corporation for $1.9 billion. This sale was completed on July 31, 2002.
In December 2001, we agreed to sell TSI, for approximately $800 million. The transaction closed on February 14, 2002 (see Note 3).
6. INVESTMENTS
Marketable Securities
We have investments in marketable securities, primarily common stocks, which are considered "available-for-sale" under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These investments have been included in our condensed consolidated balance sheets in Investments in Unconsolidated Businesses and Other Assets.
Under SFAS No. 115, available-for-sale securities are required to be carried at their fair value, with unrealized gains and losses (net of income taxes) that are considered temporary in nature recorded in Accumulated Other Comprehensive Loss. The fair values of our investments in marketable securities are determined based on market quotations.
The following table shows certain summarized information related to our investments in marketable securities:
(Dollars in Millions) GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ----------- ------------
AT JUNE 30, 2002
Investments in unconsolidated businesses $ 765 $ 625 $ (15) $ 1,375
Other assets 206 26 -- 232
------------- ------------ ----------- ------------
$ 971 $ 651 $ (15) $ 1,607
============= ============ =========== ============
AT DECEMBER 31, 2001
Investments in unconsolidated businesses $ 1,337 $ 578 $ (80) $ 1,835
Other assets 243 26 -- 269
------------- ------------ ----------- ------------
$ 1,580 $ 604 $ (80) $ 2,104
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We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices,
general economic and company-specific evaluations. In the event of a determination that a decline in market value is other than temporary, a charge to earnings is recorded for all or a portion of the unrealized loss, and a new cost basis in the investment is established.
At June 30, 2002 and December 31, 2001, the unrealized gains on marketable securities related primarily to our investment in Telecom Corporation of New Zealand Limited (TCNZ).
Investment Ownership Changes
On January 25, 2002, Verizon exercised its option to purchase an additional 12% of Telecomunicaciones de Puerto Rico, Inc. (TELPRI) common stock, from the government of Puerto Rico. We now hold 52% of TELPRI stock, up from 40% held at December 31, 2001. As a result of gaining control of TELPRI, Verizon changed the accounting for its investment in TELPRI from the equity method to full consolidation, effective January 1, 2002.
On March 28, 2002, Verizon transferred 5.5 million of its shares in CTI Holdings, S.A. (CTI), our wireless investment in Argentina, to an indirectly wholly-owned subsidiary of Verizon and subsequently transferred ownership of that subsidiary to a newly created trust for CTI employees. This decreased our ownership percentage in CTI from 65% to 48%. We also reduced our representation on CTI's Board of Directors from five of nine members to four of nine (subsequently reduced to two of five members). As a result of these actions that surrender control of CTI, we changed the method of accounting for our investment in CTI from consolidation to the equity method.
Investment-Related Charges
During the second quarter of 2002, we recorded pretax losses of $3,558 million ($3,305 million after-tax), including a loss of $2,443 million ($2,443 million after-tax) related to our interest in Genuity Inc. (Genuity) (see "Other Securities" below for additional information); a loss of $580 million ($430 million after-tax) to the market value of our investment in TELUS Corporation (TELUS); a loss of $303 million ($201 million after-tax) to the market value of our investment in Cable & Wireless plc (C&W) and a loss of $232 million ($231 million after-tax) relating to several other investments. We determined that market value declines in these investments were considered other than temporary.
During the first quarter of 2002, we recorded a pretax loss of $1,400 million ($1,400 million after-tax) due to the other than temporary decline in the market value of our investment in Compania Anonima Nacional Telefonos de Venezuela (CANTV). As a result of the political and economic instability in Venezuela, including the devaluation of the Venezuelan bolivar, and the related impact on CANTV's future economic prospects, we no longer expected that the future undiscounted cash flows applicable to CANTV were sufficient to recover our investment. Accordingly, we wrote our investment down to market value as of March 31, 2002.
During the first quarter of 2002, we recorded a pretax loss of $516 million ($436 million after-tax) to market value due primarily to the other than temporary decline in the market value of our investment in Metromedia Fiber Network, Inc. (MFN). We wrote off our remaining investment and other financial statement exposure related to MFN in the first quarter of 2002 primarily as a result of its deteriorating financial condition and related defaults. In addition, we delivered to MFN a notice of termination of our fiber optic capacity purchase agreement.
During the first quarter of 2002, we recorded a pretax loss of $230 million ($190 million after-tax) to fair value due to the other than temporary decline in the fair value of our remaining investment in CTI as a result of the impact of the deterioration of the Argentinean economy and the devaluation of the Argentinean peso on CTI's financial position. As a result of the first quarter 2002 charge, and a charge recorded in 2001, our financial exposure related to our equity investment in CTI has been eliminated.
During the second quarter of 2001, we recognized a pretax loss of $3,913 million ($2,926 million after-tax) primarily relating to our investments in C&W, NTL Incorporated (NTL) and MFN. We determined, based on the evaluations described above, that the market value declines in these investments were considered other than temporary.
Other Securities
Prior to the merger of Bell Atlantic and GTE, we owned and consolidated Genuity (a tier-one interLATA Internet backbone and related data business). In June 2000, as a condition of the merger, 90.5% of the voting equity of
Genuity was issued in an initial public offering. As a result of the initial public offering and our loss of control, we deconsolidated Genuity. Our remaining ownership interest in Genuity contained a contingent conversion feature that gave us the option (if prescribed conditions were met), among other things, to regain control of Genuity. Our ability to legally exercise this conversion feature was dependent on obtaining approvals to provide long distance service in the former Bell Atlantic states and satisfaction of other regulatory and legal requirements.
On July 24, 2002, we converted all but one of our shares of Class B common stock of Genuity into shares of Class A common stock of Genuity. We now own just under a 10% voting and economic interest in Genuity. As a result, we have relinquished the right to convert our current ownership into a controlling interest as described above. See Note 14 for additional information on our ongoing business relationship and future commitments to Genuity.
As a result of Genuity's continuing operating losses and a significant decrease in the market price of the Class A common stock of Genuity during the second quarter, we have determined that recoverability of our investment in Genuity is not reasonably assured. As a result, we have recorded a pretax charge of $2,443 million to reduce the carrying value of our interest in Genuity to its estimated fair value.
7. ACCOUNTING CHANGE - GOODWILL AND OTHER INTANGIBLE ASSETS
Accounting Change
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under various conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach. The goodwill impairment test under SFAS No. 142 requires a two-step approach, which is performed at the reporting unit level, as defined in SFAS No. 142. Step one identifies potential impairments by comparing the fair value of the reporting unit to its carrying amount. Step two, which is only performed if there is a potential impairment, compares the carrying amount of the reporting unit's goodwill to its implied value, as defined in SFAS No. 142. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for an amount equal to that excess. The amortization of goodwill included in our investments in equity investees is no longer recorded in accordance with the new rules. Intangible assets that do not have indefinite lives are amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The initial impact of adoption on our consolidated financial statements was recorded as a cumulative effect of an accounting change resulting in a charge of $496 million, net of tax. This charge is comprised of $204 million ($203 million after-tax) for goodwill, $294 million ($293 million after-tax) for wireless licenses and goodwill of equity method investments and for other intangible assets. In accordance with SFAS No. 142, we ceased amortizing existing goodwill (including goodwill recorded on our equity investments), acquired workforce intangible assets and wireless licenses which we determined have an indefinite life (see discussion below).
Wireless Licenses
In conjunction with the adoption of SFAS No. 142, we have reassessed the useful lives of previously recognized intangible assets. A significant portion of our intangible assets are licenses, including licenses associated with equity method investments, that provide our wireless operations with the exclusive right to utilize certain radio frequency spectrum to provide cellular communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the FCC. Renewals of licenses have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of our wireless licenses. As a result, the wireless licenses will be treated as an indefinite-lived intangible asset under the provisions of SFAS No. 142 and will not be amortized but rather will be tested for impairment. We will reevaluate the useful life determination for wireless licenses each reporting period to determine whether events and circumstances continue to support an indefinite useful life.
Previous wireless business combinations have been for the purpose of acquiring existing licenses and related infrastructure to enable us to build out our existing nationwide wireless network. The primary asset acquired in such combinations has been wireless licenses. In the allocation of the purchase price of these previous acquisitions, amounts classified as goodwill have related predominately to the expected synergies of placing the acquired licenses in our national footprint. Further, in purchase accounting, the values assigned to both wireless licenses and goodwill
were principally determined based on an allocation of the excess of the purchase price over the other acquired net assets. We believe that the nature of our wireless licenses and related goodwill are fundamentally indistinguishable.
In light of these considerations, on January 1, 2002, amounts previously classified as goodwill, approximately $7.9 billion for the year ended December 31, 2001, were reclassified into wireless licenses. Also, assembled workforce, previously included in other intangible assets, will no longer be recognized separately from wireless licenses. Amounts for 2001 have been reclassified to conform to the presentation adopted on January 1, 2002. In conjunction with this reclassification, and in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes," we have recognized a deferred tax liability of approximately $1.6 billion related to the difference in the tax basis versus book basis of the wireless licenses. This reclassification, including the related impact on deferred taxes, had no impact on our results of operations. This reclassification and the methodology to be subsequently used to test wireless licenses for impairment under SFAS No. 142 as described in the next paragraph have been reviewed with the staff of the SEC.
When testing the carrying value of the wireless licenses for impairment, we will determine the fair value of the aggregated wireless licenses by subtracting from wireless operations' discounted cash flows the fair value of all of the other net tangible and intangible assets of our wireless operations. If the fair value of the aggregated wireless licenses as determined above is less than the aggregated carrying amount of the licenses, an impairment will be recognized. Upon adoption of SFAS No. 142, a test for impairment of wireless licenses was performed with no impairment recognized. Future tests for impairment will be performed at least annually and more often if events or circumstances warrant.
Impact of SFAS No. 142
The following tables present the impact of SFAS No. 142 on reported income
(loss) before extraordinary item and cumulative effect of accounting change,
reported net income (loss) and earnings (loss) per share had the standard been
in effect for the three and six months ended June 30, 2001:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------ ------------- ------------
REPORTED INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ (2,118) $ (1,021) $ (2,114) $ 733
Goodwill amortization -- 14 -- 23
Wireless licenses amortization -- 83 -- 168
------------- ------------ ------------- ------------
ADJUSTED INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ (2,118) $ (924) $ (2,114) $ 924
============= ============ ============= ============
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------ ------------- ------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (.78) $ (.38) $ (.78) $ .27
Goodwill amortization -- .01 -- .01
Wireless licenses amortization -- .03 -- .06
------------- ------------ ------------- ------------
ADJUSTED EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ (.78) $ (.34) $ (.78) $ .34
============= ============ ============= ============
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(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------ ------------- ------------
REPORTED NET INCOME (LOSS) $ (2,115) $ (1,021) $ (2,616) $ 551
Goodwill amortization -- 14 -- 23
Wireless licenses amortization -- 83 -- 168
------------- ------------ ------------- ------------
ADJUSTED NET INCOME (LOSS) $ (2,115) $ (924) $ (2,616) $ 742
============= ============ ============= ============
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------ ------------- ------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (.78) $ (.38) $ (.96) $ .20
Goodwill amortization -- .01 -- .01
Wireless licenses amortization -- .03 -- .06
------------- ------------ ------------- ------------
ADJUSTED EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ (.78) $ (.34) $ (.96) $ .27
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The preceding tables exclude $27 million and $45 million, or $.01 per share and $.02 per share, in the second quarter and the first six months of 2001, respectively, related to amortization of goodwill and other intangible assets with indefinite lives of equity method investments.
Goodwill
Changes in the carrying amount of goodwill for the six months ended June 30, 2002 are as follows:
DOMESTIC DOMESTIC INFORMATION CORPORATE &
(Dollars in Millions) TELECOM WIRELESS INTERNATIONAL SERVICES OTHER TOTAL
--------- -------- ------------- ----------- ----------- --------
BALANCE AS OF DECEMBER 31, 2001 $ 401 $ -- $ 627 $ 558 $ 112 $ 1,698
Goodwill reclassifications -- -- 416 29 -- 445
Goodwill acquired during the period -- -- 51 -- -- 51
CTI Goodwill in impairment charge -- -- (220) -- -- (220)
Goodwill impairment losses under SFAS
No. 142 (90) -- -- (2) (112) (204)
--------- -------- -------- -------- -------- --------
BALANCE AS OF JUNE 30, 2002 $ 311 $ -- $ 874 $ 585 $ -- $ 1,770
========= ======== ======== ======== ======== ========
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Other Intangible Assets
The major components and average useful lives of our other acquired intangible assets follows:
(Dollars in Millions) AS OF JUNE 30, 2002 AS OF DECEMBER 31, 2001
------------------------------ -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- -------------
Amortized intangible assets:
Customer lists (4 to 6 years) $ 3,372 $ 1,563 $ 3,349 $ 1,279
Non-network software (3 to 7 years) 4,009 1,096 3,187 793
Other (2 to 30 years) 50 24 74 29
------------ ------------ ----------- -------------
Total $ 7,431 $ 2,683 $ 6,610 $ 2,101
============ ============ =========== =============
Unamortized intangible assets:
Wireless licenses $ 38,713 $ 38,055
============ ===========
|
Intangible assets amortization expense was $285 million and $570 million for the three and six months ended June 30, 2002, respectively. It is estimated to be $926 million for the remainder of 2002, $1,251 million in 2003, $1,130 million in 2004, $921 million in 2005 and $478 million in 2006, primarily related to customer lists and non-network software.
8. FINANCIAL INSTRUMENTS
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." The initial impact of adoption on our consolidated financial statements was recorded as a cumulative effect of an accounting change resulting in a charge of $182 million to current earnings and income of $110 million to other comprehensive income (loss). The recognition of assets and liabilities was immaterial to our financial position.
The ongoing effect of SFAS No. 133 on our consolidated financial statements is determined each quarter by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions at the end of each period. For the three and six months ended June 30, 2002, we recorded charges to current earnings of $8 million and $11 million, respectively, and income of $20 million and $17 million to other comprehensive income (loss), respectively. The charges to current earnings relate primarily to the mark-to-market adjustments on our long-term call options and the income in other comprehensive income (loss) relates to our cash flow hedges on foreign exchange risk. For the three and six months ended June 30, 2001, we recorded charges to current earnings of $37 million and $153 million, respectively, and losses of $2 million and $14 million to other comprehensive income (loss), respectively. The charges to current earnings in 2001 related primarily to the mark-to-market adjustment on the conversion option on our MFN debt securities and the loss in other comprehensive income (loss) related to our cash flow hedges on foreign exchange risk.
9. DEBT
Exchangeable Notes
Previously, Verizon Global Funding issued two series of notes that are exchangeable into shares of TCNZ and into C&W and NTL shares.
The exchangeable notes are indexed to the fair market value of the common stock into which they are exchangeable. If the price of the shares exceeds the exchange price established at the offering date, a mark-to-market adjustment is recorded, recognizing an increase in the carrying value of the debt obligation and a charge to income. If the price of the shares subsequently declines, the debt obligation is reduced (but not to less than the amortized carrying value of the notes).
At June 30, 2002 and 2001, the exchange prices of the notes exchangeable into TCNZ and into C&W and NTL shares exceeded the fair market value of the common stocks into which they are exchangeable. Consequently, the notes were recorded at their amortized carrying value with no mark-to-market adjustments recorded in the second quarter or in the first six months of 2002 and 2001. In the second quarter of 2002, we recorded the extinguishment of $243 million of the notes exchangeable into C&W and NTL shares. As of June 30, 2002, $8,000 in principal amount of TCNZ notes has been delivered for exchange.
Support Agreements
All of Verizon Global Funding's debt has the benefit of Support Agreements between us and Verizon Global Funding, which guarantee payment of interest, premium (if any) and principal outstanding should Verizon Global Funding fail to pay. The holders of Verizon Global Funding debt do not have recourse to the stock or assets of most of our telephone operations or TCNZ; however, they do have recourse to dividends paid to us by any of our consolidated subsidiaries as well as assets not covered by the exclusion. Verizon Global Funding's long-term debt, including current portion, aggregated $19,796 million at June 30, 2002. The carrying value of the available assets reflected in our condensed consolidated financial statements was approximately $61.1 billion at June 30, 2002.
Debt Issuances
In June 2002, Verizon Global Funding issued $1 billion of 6.125% notes due 2007, $600 million of 6.875% notes due 2012 and $400 million of 7.750% notes due 2032 at discounts, resulting in total gross proceeds of approximately $1,978 million.
In May 2002, Verizon New England Inc., a wholly owned subsidiary of Verizon, issued $480 million of 7% quarterly interest Series B debentures due 2042 at par, resulting in gross proceeds of approximately $465 million.
In March 2002, Verizon New York Inc., a wholly owned subsidiary of Verizon, issued $1 billion of 6.875% Series A debentures due 2012 and $500 million of 7.375% Series B debentures due 2032 at discounts, resulting in gross proceeds of approximately $990 million and $489 million, respectively.
In February 2002, Verizon Maryland Inc., a wholly owned subsidiary of Verizon, issued $500 million of 6.125% Series A debentures due 2012 at a discount, resulting in gross proceeds of approximately $497 million.
In January 2002, Verizon New Jersey Inc., a wholly owned subsidiary of Verizon, issued $1 billion of 5.875% Series A debentures due 2012 at a discount, resulting in gross proceeds of approximately $987 million.
10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income and other gains and losses affecting shareowners' investment that, under generally accepted accounting principles, are excluded from net income.
Changes in the components of other comprehensive income (loss) are as follows:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
============ ============ ============ ============
NET INCOME (LOSS) $ (2,115) $ (1,021) $ (2,616) $ 551
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Foreign currency translation adjustments 227 100 187 348
Unrealized gains on marketable securities 284 1,947 99 1,152
Unrealized derivative gains (losses) on cash flow
hedges 20 (2) 17 (16)
Minimum pension liability adjustment -- -- (40) --
------------ ------------ ------------ ------------
531 2,045 263 1,484
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (1,584) $ 1,024 $ (2,353) $ 2,035
============ ============ ============ ============
|
The increase in the net unrealized gains on marketable securities in 2002 primarily relate to reclassification of after-tax realized losses of $246 million recorded due to the other than temporary decline in market value of certain of our marketable securities in the second quarter of 2002 and our investment in TCNZ (see Note 6). The minimum pension liability was increased in 2002 to include the minimum pension liability of TELPRI (see Note 6). The change in unrealized gains on marketable securities in 2001 primarily relates to the reclassification of after-tax realized losses of $2,926 million recorded primarily due to the other than temporary decline in market value of investments in C&W, NTL and MFN (see Note 6).
The components of accumulated other comprehensive loss are as follows:
(Dollars in Millions) AT JUNE 30, 2002 AT DECEMBER 31, 2001
-------------------- --------------------
Foreign currency translation adjustments $ (1,261) $ (1,448)
Unrealized gains on marketable securities 426 327
Unrealized derivative losses on cash flow hedges (28) (45)
Minimum pension liability adjustment (61) (21)
-------------------- -------------------
Accumulated other comprehensive loss $ (924) $ (1,187)
==================== ===================
|
11. EARNINGS (LOSS) PER SHARE
The following table is a reconciliation of the share amounts used in computing earnings per share.
(Dollars and Shares in Millions, Except
Per Share Amounts) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET INCOME (LOSS)
Income (loss) before extraordinary item and cumulative
effect of accounting change $ (2,118) $ (1,021) $ (2,114) $ 733
Extraordinary item, net of tax 3 -- (6) --
Cumulative effect of accounting change, net of tax -- -- (496) (182)
------------ ------------ ------------ ------------
Net income (loss) $ (2,115) $ (1,021) $ (2,616) $ 551
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE
Weighted-average shares outstanding 2,726 2,707 2,723 2,706
------------ ------------ ------------ ------------
Income (loss) before extraordinary item and cumulative
effect of accounting change $ (.78) $ (.38) $ (.78) $ .27
Extraordinary item, net of tax -- -- -- --
Cumulative effect of accounting change, net of tax -- -- (.18) (.07)
------------ ------------ ------------ ------------
Net income (loss) $ (.78) $ (.38) $ (.96) $ .20
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Weighted-average shares outstanding 2,726 2,707 2,723 2,706
Effect of dilutive securities -- -- -- 22
------------ ------------ ------------ ------------
Weighted-average shares outstanding - diluted 2,726 2,707 2,723 2,728
============ ============ ============ ============
Income (loss) before extraordinary item and cumulative
effect of accounting change $ (.78) $ (.38) $ (.78) $ .27
Extraordinary item, net of tax -- -- -- --
Cumulative effect of accounting change, net of tax -- -- (.18) (.07)
------------ ------------ ------------ ------------
Net income (loss) $ (.78) $ (.38) $ (.96) $ .20
============ ============ ============ ============
|
Stock options for 226 million shares for the three months ended June 30, 2002 and 171 million shares for the six months ended June 30, 2002 were not included in the computation of diluted earnings per share because the exercise price of stock options was greater than the average market price of the common stock. For the three and six months ended June 30, 2001, the number of shares not included in the computation of diluted earnings per share was 116 million and 117 million, respectively.
12. SEGMENT INFORMATION
We have four reportable segments, which we operate and manage as strategic business units and organize by products and services. Our segments include a Domestic Telecom group which provides domestic wireline communications services; a Domestic Wireless group which provides domestic wireless communications services; an International group which includes our foreign wireline and wireless communications investments; and an Information Services group which is responsible for our domestic and international publishing businesses and electronic commerce services.
We measure and evaluate our reportable segments based on segment income. This segment income excludes unallocated corporate expenses and other adjustments arising during each period. The other adjustments include transactions that the chief operating decision makers exclude in assessing business unit performance due primarily to their nonrecurring and/or non-operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results, since these items are included in the chief operating decision makers' assessment of unit performance. These are mostly contained in International and Information Services since they actively manage investment portfolios.
REPORTABLE SEGMENTS
The following table provides operating financial information for our four reportable segments and a reconciliation of segment results to consolidated results:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
--------------- ------------- ------------- -------------
EXTERNAL OPERATING REVENUES
Domestic Telecom $ 10,306 $ 10,817 $ 20,631 $ 21,601
Domestic Wireless 4,726 4,373 9,090 8,411
International 728 586 1,452 1,111
Information Services 936 970 1,739 1,754
--------------- ------------- ------------- -------------
Total segments 16,696 16,746 32,912 32,877
Reconciling items 139 163 298 298
--------------- ------------- ------------- -------------
Total consolidated - reported $ 16,835 $ 16,909 $ 33,210 $ 33,175
=============== ============= ============= =============
INTERSEGMENT REVENUES
Domestic Telecom $ 162 $ 136 $ 311 $ 272
Domestic Wireless 12 10 22 18
International 26 12 53 14
Information Services -- 14 -- 19
--------------- ------------- ------------- -------------
Total segments 200 172 386 323
Reconciling items (200) (172) (386) (323)
--------------- ------------- ------------- -------------
Total consolidated - reported $ -- $ -- $ -- $ --
=============== ============= ============= =============
TOTAL OPERATING REVENUES
Domestic Telecom $ 10,468 $ 10,953 $ 20,942 $ 21,873
Domestic Wireless 4,738 4,383 9,112 8,429
International 754 598 1,505 1,125
Information Services 936 984 1,739 1,773
--------------- ------------- ------------- -------------
Total segments 16,896 16,918 33,298 33,200
Reconciling items (61) (9) (88) (25)
--------------- ------------- ------------- -------------
Total consolidated - reported $ 16,835 $ 16,909 $ 33,210 $ 33,175
=============== ============= ============= =============
SEGMENT INCOME (LOSS)
Domestic Telecom $ 1,232 $ 1,361 $ 2,498 $ 2,711
Domestic Wireless 240 151 437 249
International 256 243 467 453
Information Services 260 298 473 510
--------------- ------------- ------------- -------------
Total segment income 1,988 2,053 3,875 3,923
Reconciling items (4,103) (3,074) (6,491) (3,372)
--------------- ------------- ------------- -------------
Total consolidated net income (loss) - reported $ (2,115) $ (1,021) $ (2,616) $ 551
=============== ============= ============= =============
|
(Dollars in Millions) JUNE 30, 2002 DECEMBER 31, 2001
---------------- -----------------
ASSETS
Domestic Telecom $ 81,581 $ 82,635
Domestic Wireless 61,440 60,262
International 12,455 14,324
Information Services 4,209 4,160
---------------- ----------------
Total segments 159,685 161,381
Reconciling items 8,608 9,414
---------------- ----------------
Total consolidated $ 168,293 $ 170,795
================ ================
|
Major reconciling items between the segments and the consolidated results are as follows:
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
------------- ------------ ------------- -------------
TOTAL REVENUES
Corporate, eliminations and other $ (61) $ (9) $ (88) $ (25)
------------- ------------ ------------- -------------
NET INCOME (LOSS)
Mark-to-market adjustment - financial
instruments (see Note 8) $ (8) $ (37) $ (11) $ (151)
Sales of assets, net (see Note 3) -- 3 116 3
Transition costs (see Note 2) (57) (162) (109) (250)
Severance (see Note 2) (475) -- (475) --
Cumulative effect of accounting change (see Note
7 and Note 8) -- -- (496) (182)
Investment-related charges (see Note 6) (3,305) (2,926) (5,331) (2,926)
NorthPoint settlement (see Note 2) (114) -- (114) --
WorldCom exposure and other special items (see
Note 2 and Note 4) (251) -- (260) --
Corporate, eliminations and other 107 48 189 134
------------- ------------ ------------- -------------
$ (4,103) $ (3,074) $ (6,491) $ (3,372)
============= ============ ============= =============
|
Corporate, eliminations and other includes unallocated corporate expenses, intersegment eliminations recorded in consolidation and the results of other businesses such as lease financing. We generally account for intersegment sales of products and services and asset transfers at current market prices. We are not dependent on any single customer.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)." EITF Issue No. 94-3 required accrual of liabilities related to exit and disposal activities at a plan (commitment) date. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are currently evaluating the impact this new standard will have on our future results of operations or financial position.
14. COMMITMENTS AND CONTINGENCIES
Several state and federal regulatory proceedings may require our telephone operations to refund to customers a portion of the revenues collected in the current and prior periods. There are also various legal actions pending to which we are a party and claims which, if asserted, may lead to other legal actions. We have established reserves for specific liabilities in connection with regulatory and legal actions, including environmental matters, that we currently deem to be probable and estimable. We do not expect that the ultimate resolution of pending regulatory and legal matters in future periods will have a material effect on our financial condition, but it could have a material effect on our results of operations.
On January 29, 2001, the bidding phase of the FCC reauction of 1.9 GHz C and F block broadband Personal Communications Services spectrum licenses, which began December 12, 2000, officially ended. Verizon Wireless was the winning bidder for 113 licenses. The total price of these licenses was $8,781 million, $1,822 million of which had been paid. Most of the licenses that were reauctioned relate to spectrum that was previously licensed to
NextWave Personal Communications Inc. and NextWave Power Partners Inc. (collectively NextWave), which have appealed to the federal courts the FCC's action canceling NextWave's licenses and reclaiming the spectrum.
In a decision on June 22, 2001, the U.S. Court of Appeals for the D.C. Circuit ruled that the FCC's cancellation and repossession of NextWave's licenses was unlawful. The FCC sought a stay of the court's decision which was denied. The FCC subsequently reinstated NextWave's licenses but it did not return Verizon Wireless's payment on the NextWave licenses nor did it acknowledge that the court's decision extinguished Verizon Wireless's obligation to purchase the licenses. On October 19, 2001, the FCC filed a petition asking the U.S. Supreme Court to consider reversing the U.S. Court of Appeals for the D.C. Circuit's decision. On March 4, 2002, the U.S. Supreme Court granted the FCC's petition and agreed to hear the appeal. Oral argument on the appeal has been scheduled for October 8, 2002, with a decision by the U.S. Supreme Court expected in early 2003.
In April 2002, the FCC returned $1,479 million of Verizon Wireless's $1,822 million license payment and stated its view that Verizon Wireless remains obligated to purchase the licenses if and when the FCC succeeds in regaining them from NextWave. On April 4, 2002, Verizon Wireless filed a complaint in the U.S. Court of Federal Claims against the United States government seeking both a declaration that Verizon Wireless has no further performance obligations with respect to the reauction, and money damages. On April 8, 2002, Verizon Wireless filed a petition with the U.S. Court of Appeals for the District of Columbia seeking a declaration that the auction obligation is voidable and a return of its remaining down payment of $261 million. Both of these matters are pending.
In December 2001, Verizon Wireless and Price Communications Corp. (Price) announced that an agreement had been reached combining 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 will be controlled and managed by Verizon Wireless. Price's partnership interest will be exchangeable into Verizon Wireless or Verizon stock, subject to several conditions including an exchange price minimum and maximum. Price's shareholders approved the transaction on July 23, 2002, and the transaction is now expected to close in the third quarter of 2002.
In 2001, we agreed to provide up to $2.0 billion in financing to Genuity with maturity in 2005 and have loaned $1,150 million of that commitment to date, which was included in our analysis of financial statement exposure to Genuity (see Note 6). As a result of our recent decision to convert all but one of our shares of Class B common stock of Genuity into shares of Class A common stock of Genuity and relinquish our right to convert to a controlling interest in Genuity, we are no longer committed to fund the additional $850 million under the $2.0 billion agreement. Our commercial relationship with Genuity will continue, which includes a five-year purchase commitment for Genuity services such as dedicated Internet access, managed web hosting and Internet security. Under this purchase commitment, which terminates in 2005, Verizon has agreed to pay Genuity a minimum of $500 million over five years for its services, of which we have satisfied $230 million as of June 30, 2002.
In addition, under the terms of an investment agreement relating to our wireless joint venture, Vodafone Group plc (Vodafone) may require us or Verizon Wireless to purchase up to an aggregate of $20 billion worth of its interest in Verizon Wireless between 2003 and 2007 at its then fair market value. The purchase of up to $10 billion, in cash or stock at our option, may be required in the summer of 2003 or 2004, and the remainder, which may not exceed $10 billion at any one time, in the summers of 2005 through 2007. Vodafone has the option to require us or Verizon Wireless to satisfy up to $7.5 billion of the remainder with cash or contributed debt.
As previously discussed in Note 2, during the second quarter of 2002, we recorded a pretax charge of $175 million ($114 million after-tax) for a proposed settlement of the NorthPoint litigation. The lawsuit arose from Verizon's decision to terminate an agreement with NorthPoint to combine the two companies' DSL businesses. Verizon terminated the merger agreement due to the deterioration in NorthPoint's business, operations and financial condition. The proposed settlement is subject to approval by the bankruptcy court, expected in the third quarter of 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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 135.1 million access line equivalents and 30.3 million wireless customers. Verizon is also the largest directory publisher in the world. With more than $67 billion in annual revenues and approximately 241,000 employees, Verizon's global presence extends to more than 40 countries in the Americas, Europe, Asia and the Pacific.
We have four reportable segments, which we operate and manage as strategic business units: Domestic Telecom, Domestic Wireless, International and Information Services. Domestic Telecom includes local, long distance and other telecommunication services. Domestic Wireless products and services include wireless voice and data services, paging services and equipment sales. International operations include wireline and wireless communications operations and investments in the Americas, Europe, Asia and the Pacific. Information Services consists of our domestic and international publishing businesses, including print and electronic directories and Internet-based shopping guides, as well as includes website creation and other electronic commerce services.
CONSOLIDATED RESULTS OF OPERATIONS
In this section, we discuss our overall reported results and highlight special and nonrecurring items. In the following section, we review the performance of our segments. We exclude from the segments' reported results the effects of these items, which management does not consider in assessing segment performance due primarily to their nonrecurring and/or non-operational nature. We believe that this presentation will assist readers in better understanding operating results and trends from period to period.
Reported consolidated revenues were $16,835 million and $33,210 million for the quarter and the six months ended June 30, 2002, respectively, compared to $16,909 million and $33,175 million for the quarter and six months ended June 30, 2001, respectively. Reported consolidated expenses were $14,152 million and $27,016 million for the second quarter and the first six months of 2002, respectively, compared to $13,108 million and $25,767 million, respectively, for the same periods of 2001. Prior year reported consolidated revenues and operating expenses were not adjusted to reflect the deconsolidation of CTI Holdings, S.A. (CTI) to the equity method and the consolidation of Telecomunicaciones de Puerto Rico, Inc. (TELPRI). See "Segment Results of Operations - International" for additional discussion of the CTI and TELPRI transactions. We reported net losses of $2,115 million ($.78 per diluted share) and $2,616 million ($.96 per diluted share) for the quarter and six months ended June 30, 2002, respectively, compared to a net loss of $1,021 million ($.38 per diluted share) and net income of $551 million ($.20 per diluted share) for the quarter and six months ended June 30, 2001, respectively.
Reported consolidated revenues decreased by $74 million, or 0.4% in the second quarter of 2002 and grew by $35 million, or 0.1% in the first six months of 2002, compared to the similar periods of the prior year. For the second quarter and the first half of 2002, reported consolidated operating expenses increased $1,044 million, or 8.0% and increased $1,249 million, or 4.8% compared to the similar periods of 2001, respectively. In the second quarter and six months ended June 30, 2002, higher Domestic Wireless and International revenues and expenses were offset by lower Domestic Telecom revenues and expenses compared to the similar periods of 2001 (see summary below and "Segment Results of Operations"). In addition, operating expenses in the current quarter are impacted by severance costs and other special charges primarily related to our financial statement exposure to WorldCom Inc. and a proposed settlement of a litigation matter involving NorthPoint Communications Group, Inc. (NorthPoint), partially offset by lower transition costs, compared to the second quarter of 2001. Operating expenses in the first six months of 2002 also include a portion of our investment-related charges, partially offset by a net gain on asset sales compared to the similar period of 2001 (see summary below and "Special Items"). The significant items impacting net income also include higher investment-related charges in the current quarter, partially offset by lower unfavorable mark-to-market adjustments related to financial instruments compared to the second quarter of 2001, and a higher cumulative effect of accounting change, partially offset by lower unfavorable mark-to-market adjustments related to financial instruments, in the first six months of 2002 compared to the similar period of 2001. These items are described in the "Special Items" section.
CONSOLIDATED REVENUES
Domestic Wireless revenues grew by $355 million, or 8.1%, in the second quarter of 2002 and $683 million, or 8.1%, for the six months ended 2002 compared to the similar periods in 2001. This increase was primarily due to an 8.5% increase in subscribers, partially offset by a slight decline in average service revenue per subscriber. Average service revenue per subscriber decreased 1.4% to slightly under $49 for the quarter and by 1.1% to $47 for the six months ended 2002 compared to the similar periods in 2001.
Revenues earned by our International segment grew by $156 million, or 26.1%, in the second quarter of 2002 and $380 million, or 33.8% in the first six months of 2002 as compared to the similar periods in 2001. This growth is primarily due to the consolidation of TELPRI partially offset by the deconsolidation of CTI in 2002. Adjusting the quarter and first six months of 2001 to be comparable with 2002, revenues earned from our international businesses declined by $74 million, or 8.9%, in the second quarter of 2002 and $50 million, or 3.2%, in the first six months of 2002 as compared to the similar periods in 2001 primarily due to weak economies and increased competition in Latin America.
The decline in Domestic Telecom's revenues in the current quarter and six months ended June 30, 2002 was driven by lower local and other services, partially offset by higher network access services for the six months ended June 30, 2002. The decline in local service revenues of $315 million, or 5.7% in the second quarter of 2002 and $700 million, or 6.3% in the first half of 2002 was largely due to lower demand and usage of our basic local wireline services and mandated intrastate price reductions. Revenues from other services declined $208 million, or 16.6% in the second quarter of 2002 and $451 million, or 18.1% in the first half of 2002. This decline was substantially due to lower sales of customer premises equipment to some major customers and a decline in public telephone revenues as more customers substituted wireless communications for pay telephone services. Our network access revenues grew $184 million, or 2.7% in the first half of 2002. This growth was mainly attributable to higher customer demand for data transport services (primarily special access services and digital subscriber line, or DSL).
CONSOLIDATED OPERATING EXPENSES
Domestic Wireless's operations and support expenses increased by $229 million, or 8.1%, in the second quarter 2002 and $411 million, or 7.5%, for the six months ended June 30, 2002 compared to the similar periods in 2001. This increase was primarily due to increased salary and wage expense, advertising and billing and data processing charges and selling expenses related to an increase in gross customer additions in the second quarter 2002 compared to the second quarter 2001, partially offset by cost savings resulting from headcount reductions. Partially offsetting this increase, Domestic Wireless's depreciation and amortization decreased by $102 million, or 11.5%, for the quarter ended June 30, 2002 and by $240 million, or 13.3%, in the six months ended June 30, 2002 compared to the similar periods in 2001. The decrease was primarily attributable to a reduction of amortization expense from the adoption of Statement of Financial Accounting Standards (SFAS) No.142, "Goodwill and Other Intangible Assets," effective January 1, 2002, which requires that goodwill and indefinite-lived intangible assets no longer be amortized. This decrease was partially offset by increased depreciation expense related to the increase in depreciable assets related to an increased asset base.
International's operations and support expenses increased by $42 million, or 9.7%, in the second quarter of 2002 and $156 million, or 19.1%, in the first six months of 2002 as compared to the similar periods in 2001. This growth is primarily due to the consolidation of TELPRI partially offset by the deconsolidation of CTI in 2002. Adjusting the quarter and first six months of 2001 to be comparable with 2002, operations and support expenses decreased $51 million, or 9.7%, in the second quarter of 2002 and $8 million, or 0.8%, in the first six months of 2002 as compared to the similar periods in 2001 reflecting lower variable costs associated with reduced sales volumes in Latin America offset in part by higher variable start-up costs. Adjusting the quarter and first six months of 2001 to be comparable with 2002, depreciation and amortization expense decreased $7 million, or 4.9%, in the second quarter of 2002 and $10 million, or 3.5%, in the first six months of 2002 as compared to the similar periods in 2001.
Domestic Telecom's operations and support expenses decreased by $312 million, or 5.3% in the second quarter of 2002 and $691 million, or 5.8% in the first half of 2002 principally due to lower costs at our domestic telephone operations. These reductions were attributable to reduced spending for materials and contracted services, lower overtime for repair and maintenance activity principally as a result of reduced volumes at our dispatch and call centers and lower employee costs associated with declining workforce levels. Operating costs have also decreased due to business integration activities, achievement of merger synergies and other effective cost containment measures, including lower spending by non-strategic businesses, and favorable adjustments to ongoing expense
estimates as a result of specific regulatory decisions in New York and other states. These cost reductions were partially offset by higher costs associated with our growth businesses such as data and long distance services. Increased costs associated with higher uncollectible accounts receivable and salary and wage increases for employees further offset cost reductions in both periods of 2002. Pension income, net of postretirement benefit costs, was $335 million and $657 million for the second quarter and year-to-date 2002, respectively, compared to $420 million and $762 million for the second quarter and year-to-date 2001, respectively. Partially offsetting this decrease, Domestic Telecom's depreciation and amortization expense increased by $49 million, or 2.1% in the second quarter of 2002 and $131 million, or 2.8% in the first half of 2002. This expense increase was principally due to growth and a change in the mix of depreciable telephone plant and increased software amortization costs partially offset by the effect of lower rates of depreciation.
Consolidated operating expenses in the second quarter of 2002 include $692 million of severance charges, $394 million of special charges primarily related to our financial statement exposure to WorldCom Inc. and a charge of $175 million related to the NorthPoint litigation matter, partially offset by lower transition costs of $102 million compared to $279 million in the second quarter of 2001. For the six months ended June 30, 2002, consolidated operating expenses also include $227 million of investment-related charges, partially offset by lower transition costs of $198 million compared to $442 million in the first six months of 2001 and a net pretax gain of $220 million primarily resulting from the sale of a business and exit activities.
CONSOLIDATED NET INCOME (LOSS)
Total segment income was driven by the after-tax impact of operating revenues and operating expenses, after minority interests. Our reported results for all periods were primarily affected by special items. These special items, described in detail on pages 25 to 27, impacted net income (loss) by $4,210 million ($1.55 per diluted share) and $6,680 million ($2.45 per diluted share) in the current quarter and the first six months of 2002, respectively, and by $3,122 million ($1.15 per diluted share) and $3,506 million ($1.29 per diluted share) in the comparable periods of 2001, respectively. In addition, for the three and six months ended June 30, 2002, our net losses were impacted by lower interest expense and by higher minority interest and income taxes, compared to the similar periods of the prior year. See "Other Consolidated Results" for additional discussion of these items.
SEGMENT RESULTS OF OPERATIONS
We have four reportable segments, which we operate and manage as strategic business units and organize by products and services. Our segments are Domestic Telecom, Domestic Wireless, International and Information Services. You can find additional information about our segments in Note 12 to the condensed consolidated financial statements.
We measure and evaluate our reportable segments based on segment income. This segment income excludes unallocated corporate expenses and other adjustments arising during each period. The other adjustments include transactions that the chief operating decision makers exclude in assessing business unit performance due primarily to their nonrecurring and/or non-operational nature. Although such transactions are excluded from business segment results, they are included in reported consolidated earnings. We previously highlighted the more significant of these transactions in the "Consolidated Results of Operations" section. Gains and losses that are not individually significant are included in all segment results, since these items are included in the chief operating decision makers' assessment of unit performance. These are mostly contained in International and Information Services since they actively manage investment portfolios.
DOMESTIC TELECOM
Domestic Telecom provides local telephone services, including voice and data transport, enhanced and custom calling features, network access, directory assistance, private lines and public telephones in 30 states and the District of Columbia. 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.
OPERATING REVENUES
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
----------- ----------- --------- ----------- ------------- ----------
Local services $ 5,230 $ 5,545 (5.7)% $ 10,465 $ 11,165 (6.3)%
Network access services 3,418 3,399 .6 6,875 6,691 2.7
Long distance services 777 758 2.5 1,556 1,520 2.4
Other services 1,043 1,251 (16.6) 2,046 2,497 (18.1)
----------- ----------- ----------- -------------
$ 10,468 $ 10,953 (4.4) $ 20,942 $ 21,873 (4.3)
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Local Services
Local service revenues are earned by our telephone operations from the provision of local exchange, local private line, wire maintenance, voice messaging and value-added services. Value-added services are a family of services that expand the utilization of the network, including products such as Caller ID, Call Waiting and Return Call. The provision of local exchange services not only includes retail revenue but also includes local wholesale revenues from unbundled network elements (UNEs), interconnection revenues from competitive local exchange carriers (CLECs), wireless interconnection revenues and some data transport revenues.
The decline in local service revenues of $315 million, or 5.7% in the second quarter of 2002 and $700 million, or 6.3% in the first half of 2002 was largely due to lower demand and usage of our basic local wireline services and mandated intrastate price reductions. Our switched access lines in service declined 3.3% from June 30, 2001, primarily reflecting the impact of the economic slowdown and competition for some local services. Technology substitution has also affected local service revenue growth, as indicated by lower demand for residential access lines of 2.1% from a year ago. The primary contributor to the decline in residential access lines is negative growth in additional lines, with second line penetration at 19% at June 30, 2002, compared to 20% at the similar period last year. At the same time, business access lines have declined 5.3% from a year ago, primarily reflecting the continued weakness in the economy. Local service revenues were also negatively impacted in both periods of 2002 by one-time billing increases recorded in the prior year.
These factors were partially offset by higher payments received from CLECs for interconnection of their networks with our network and by increased sales of packaged wireline services. Sales of packages of wireline services increased by 27% year-over-year, with over half of our new lines installed with packages. Furthermore, we have expanded our new ONE-BILL service, which bundles Verizon wireline and wireless charges on a single monthly bill. This service was expanded in the second quarter of 2002 to Vermont, Maine and New Hampshire, after successful launches in New York, Massachusetts, New Jersey and Connecticut.
Network Access Services
Network access services revenues are earned from end-user subscribers and long distance and other competing carriers who use our local exchange facilities to provide usage services to their customers. Switched access revenues are derived from fixed and usage-based charges paid by carriers for access to our local network. Special access revenues originate from carriers and end-users that buy dedicated local exchange capacity to support their private networks. End-user access revenues are earned from our customers and from resellers who purchase dial-tone services.
Our network access revenues grew $19 million, or 0.6%, in the second quarter of 2002 and $184 million, or 2.7% in the first half of 2002. This growth was mainly attributable to higher customer demand for data transport services (primarily special access services and DSL) that grew 7.5% and 8.9% in the second quarter and first six months of 2002, respectively. Special access revenue growth reflects strong demand in the business market for high-capacity, high-speed digital services. Voice-grade equivalents (switched access lines and data circuits) grew 7.9% from June 30, 2001 as more customers chose digital services. We added 150,000 new DSL lines in the second quarter of 2002 and 300,000 lines year-to-date, for a total of 1.5 million lines in service at June 30, 2002, a nearly 80% year-over-year increase. Currently, 55% of our total access lines qualify for DSL service. At the same time, customer service levels continue to show improvement through a reduction in the DSL order provisioning interval from more than fifteen days a year ago to five days by the second quarter 2002, and we have nearly reached a 100% self installation rate by our customers.
Volume-related growth was partially offset by price reductions of approximately $40 million in the second quarter of 2002 and $90 million year-to-date associated with federal and state price cap filings and other regulatory decisions. Revenue growth in both periods of 2002 was also affected by the slowing economy, as reflected by declines in minutes of use from carriers and CLECs of 7.4% in the second quarter 2002 and 7.5% year-to-date from the similar periods last year.
WorldCom Inc. currently has several long-term contracts with us for the provision of various network access products and services. If WorldCom Inc. terminated those contracts, our network access revenues would be lower in future periods. Lower revenues as a result of cancelling these contracts could be partially offset with termination liabilities and/or migration of customers to other interexchange carriers that interconnect with us.
Long Distance Services
Long distance service revenues include both intraLATA toll services and interLATA long distance voice and data services.
Long distance service revenues increased $19 million, or 2.5% in the second quarter of 2002 and $36 million, or 2.4% in the first half of 2002, primarily as a result of revenue growth from our interLATA long distance services offered throughout the region. We now offer long distance service in 44 states and to more than 80% of our local telephone customers across the country. More than 45% of our long distance customers come from states where service was most recently introduced - New York, Massachusetts, Pennsylvania, Connecticut, Rhode Island and Vermont. In June 2002, we received Federal Communications Commission (FCC) approval to sell long distance in Maine and New Jersey and began offering service in those states in July 2002. We added 800,000 new long distance customers in the second quarter of 2002 and 1.6 million new customers in the first half of 2002. At June 30, 2002, we had a total of 9.0 million long distance customers nationwide, representing an increase of 3.0 million long distance customers year-over-year or nearly 51% customer growth and 26% revenue growth from the similar period last year. We currently have applications at the FCC for New Hampshire, Delaware and Virginia. The FCC must decide on the New Hampshire and Delaware applications by September 25, 2002 and decide on the Virginia application by October 30, 2002. We are targeting completion of the FCC filing process in all former Bell Atlantic jurisdictions by year-end.
This growth was partially offset by the effects of competition and toll calling discount packages and product bundling offers of our intraLATA toll services. However, in the second quarter of 2002, we saw a net win-back in customers for intraLATA toll services in the states where interLATA long distance service has been introduced. Technology substitution and lower access line growth due to the slowing economy also affected long distance services revenue growth.
Other Services
Our other services include such services as billing and collections for long distance carriers, public (coin) telephone and customer premises equipment services. Other services revenues also include services provided by our non-regulated subsidiaries such as inventory management and purchasing, and data solutions and systems integration businesses.
Revenues from other services declined $208 million, or 16.6% in the second quarter of 2002 and $451 million, or 18.1% in the first half of 2002. This decline was substantially due to lower sales of customer premises equipment to some major customers and a decline in public telephone revenues as more customers substituted wireless communications for pay telephone services.
OPERATING EXPENSES
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------ ----------- -------- ----------- ----------- --------
Operations and support $ 5,592 $ 5,904 (5.3)% $ 11,170 $ 11,861 (5.8)%
Depreciation and amortization 2,393 2,344 2.1 4,758 4,627 2.8
------------ ----------- ----------- -----------
$ 7,985 $ 8,248 (3.2) $ 15,928 $ 16,488 (3.4)
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Operations and Support
Operations and support expenses, which consist of employee costs and other operating expenses, decreased by $312 million, or 5.3% in the second quarter of 2002 and $691 million, or 5.8% in the first half of 2002 principally due to lower costs at our domestic telephone operations. These reductions were attributable to reduced spending for materials and contracted services, lower overtime for repair and maintenance activity principally as a result of reduced volumes at our dispatch and call centers and lower employee costs associated with declining workforce levels. We have reduced our full-time headcount by 21,000 employees, or 10.8% from a year ago and 6,400 employees, or 3.6% since year-end 2001. We have reduced overtime hours per employee, per week, by 38.4% from a year ago. Operating costs have also decreased due to business integration activities and achievement of merger synergies. Other effective cost containment measures, including lower spending by non-strategic businesses, and favorable adjustments to ongoing expense estimates as a result of specific regulatory decisions in New York and other states also contributed to cost reductions in both periods of 2002. These cost reductions are reflected in improved productivity levels of 9.1% for installation and 6.4% for repair services, as compared to the second quarter of 2001. Furthermore, we have reduced rework service levels from a year ago by 11.7% for installation and 20.9% for repair, and repair dispatches have declined by more than 11.5% since the second quarter of 2001.
These cost reductions were partially offset by higher costs associated with our growth businesses such as data and long distance services. Increased costs associated with higher uncollectible accounts receivable and salary and wage increases for employees further offset cost reductions in both periods of 2002. Pension income, net of postretirement benefit costs, was $335 million and $657 million for the second quarter and year-to-date 2002, respectively, compared to $420 million and $762 million for the second quarter and year-to-date 2001, respectively.
Depreciation and Amortization
Depreciation and amortization expense increased by $49 million, or 2.1% in the second quarter of 2002 and $131 million, or 2.8% in the first half of 2002. This expense increase was principally due to growth and a change in the mix of depreciable telephone plant and increased software amortization costs. These factors were partially offset by the effect of lower rates of depreciation.
SEGMENT INCOME
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------ ----------- ---------- ----------- ---------- ---------
Segment Income $ 1,232 $ 1,361 (9.5)% $ 2,498 $ 2,711 (7.9)%
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Segment income decreased by $129 million, or 9.5% in the second quarter of 2002 and $213 million, or 7.9% on year-to-date, compared to the similar periods last year, primarily as a result of the after-tax impact of operating revenues and operating expenses described above.
DOMESTIC WIRELESS
Our Domestic Wireless segment provides wireless voice and data services, paging services and equipment sales. This segment primarily represents the operations of the Verizon Wireless joint venture.
OPERATING REVENUES
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
-------------- ---------- ---------- ------------ ----------- ---------
Wireless services $ 4,738 $ 4,383 8.1% $ 9,112 $ 8,429 8.1%
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Revenues earned from our consolidated wireless segment grew by $355 million, or 8.1%, in the second quarter of 2002 and $683 million, or 8.1%, for the six months ended June 30, 2002 compared to the similar periods in 2001. This increase was primarily due to an 8.5% increase in subscribers, partially offset by a slight decline in average service revenue per subscriber.
Our Domestic Wireless segment ended the second quarter 2002 with 30.3 million subscribers, compared to 27.9 million subscribers at the end of the second quarter 2001, an increase of 8.5%. Approximately 25 million, or 83%, of these customers subscribe to digital service, compared to 64% in the second quarter 2001. Approximately 1.1 million net retail customers were added during the second quarter of 2002, partially offset by a net reduction of
wholesale customers of 378,000 driven primarily by subscribers related to WorldCom Inc. Overall, total customers including wholesale increased by 723,000. Total churn, including retail and wholesale, remained constant at 2.3% in the second quarter of 2002 and decreased to 2.4% for the six months ended June 30, 2002, compared to 2.6% for the similar period in 2001.
Average service revenue per subscriber decreased 1.4% to slightly under $49 for the second quarter of 2002 and by 1.1% to $47 for the six months ended June 30, 2002 compared to the similar periods in 2001. This decrease is mainly attributable to decreased roaming and long distance revenues for the second quarter of 2002 compared to the second quarter of 2001. Offsetting these decreases was the launch of America's Choice in February 2002. Since then, approximately 61% of new contract customers chose the America's Choice plans. Nearly 21% of America's Choice subscribers are on price plans with monthly access of $55 and above. In addition, retail customers, who generally have higher service revenue, now comprise approximately 95% of the subscriber base, compared to 92% in the second quarter of 2001. The overall composition of the customer base is 90% contract retail customers, 5% retail prepaid and 5% resellers.
The Express Network, which was launched in the first quarter of 2002 and is based on third generation 1XRTT technology, now covers a population of 145 million or approximately 65% of Verizon Wireless' network in second quarter of 2002 compared to a population of 74 million, or approximately one-third of the Domestic Wireless network in first quarter 2002.
OPERATING EXPENSES
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
----------- ----------- ---------- ----------- ----------- ----------
Operations and support $ 3,046 $ 2,817 8.1% $ 5,865 $ 5,454 7.5%
Depreciation and amortization 785 887 (11.5) 1,566 1,806 (13.3)
----------- ----------- ----------- -----------
$ 3,831 $ 3,704 3.4 $ 7,431 $ 7,260 2.4
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Operations and Support
Operations and support expenses, which represent employee costs and other operating expenses, increased by $229 million, or 8.1%, in the second quarter 2002 and $411 million, or 7.5%, for the six months ended June 30, 2002 compared to the similar periods in 2001. This increase was primarily due to increased salary and wage expense, advertising, billing and data processing charges and selling expenses related to an increase in gross customer additions in the second quarter 2002 compared to the second quarter 2001, partially offset by cost savings resulting from headcount reductions occurring earlier this year.
Depreciation and Amortization
Depreciation and amortization decreased by $102 million, or 11.5%, in the second quarter 2002 and by $240 million, or 13.3%, for the six months ended June 30, 2002 compared to the similar periods in 2001. The decrease was primarily attributable to a reduction of amortization expense from the adoption of SFAS No. 142, effective January 1, 2002, which requires that goodwill and indefinite-lived intangible assets no longer be amortized. This decrease was partially offset by increased depreciation expense related to the increase in depreciable assets related to an increased asset base.
SEGMENT INCOME
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------- ---------- --------- ------------ ----------- ---------
Segment Income $ 240 $ 151 58.9% $ 437 $ 249 75.5%
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Segment income increased by $89 million, or 58.9% in the second quarter of 2002 and by $188 million, or 75.5%, for the six months ended June 30, 2002 when compared to the similar period in 2001. The increase is primarily due to the result of the after-tax impact of operating revenues and operating expenses described above, partially offset by an increase in minority interest.
The significant increase in minority interest of $102 million, or 44.0% to $334 million in second quarter 2002 and $219 million, or 56.6% to $606 million for the six months ended June 30, 2002 was principally due to the increase in the earnings of the Domestic Wireless segment, which has a significant minority interest attributable to Vodafone Group plc (Vodafone).
INTERNATIONAL
Our International segment includes international wireline and wireless telecommunication operations and investments in the Americas, Europe, Asia and the Pacific. Our consolidated international investments as of June 30, 2002 included Grupo Iusacell, S.A. de C.V. (Iusacell) (Mexico), CODETEL, C. por A. (Codetel) (Dominican Republic), TELPRI (Puerto Rico), Micronesian Telecommunications Corporation (Northern Mariana Islands) and Global Solutions Inc. (GSI). Those investments in which we have less than a controlling interest are accounted for by either the cost or equity method.
On January 25, 2002, we exercised our option to purchase an additional 12% of TELPRI common stock, from the government of Puerto Rico. We now hold 52% of TELPRI stock, up from 40% held at December 31, 2001. As a result of gaining control over TELPRI, we changed the accounting for this investment from the equity method to full consolidation, effective January 1, 2002. Accordingly, TELPRI's net results are reported as a component of Income from Unconsolidated Businesses for the three and six month periods ended June 30, 2001, while 2002 results of operations are included in consolidated revenues and expenses in the tables below.
On March 28, 2002, we transferred 5.5 million of our shares in CTI to an indirectly wholly-owned subsidiary of Verizon and subsequently transferred ownership of that subsidiary to a newly created trust for CTI employees. This decreased our ownership percentage in CTI from 65% to 48%. We also reduced our representation on CTI's Board of Directors from five of nine members to four of nine (subsequently reduced to two of five members). As a result of these actions that surrender control of CTI, we changed our method of accounting for this investment from consolidation to the equity method. On June 3, 2002, as a result of an option exercised by Telfone (BVI) Limited (Telfone), a CTI shareholder, Verizon acquired approximately 5.3 million additional CTI shares. Also on June 3, 2002, we transferred ownership of a wholly owned subsidiary of Verizon that held 5.4 million CTI shares to a second independent trust leaving us with an approximately 48% non-controlling interest in CTI. In addition, during the first quarter of 2002, we wrote our remaining investment in CTI, including those shares we were contractually committed to purchase under the Telfone option, down to zero (see "Special Items"). Since we have no other future commitments or plans to fund CTI's operations and we have written our investment down to zero, in accordance with the accounting rules for equity method investments, we are no longer recording operating income or losses related to CTI's operations. CTI's results of operations are reported in revenues and expenses for the three and six month periods ended June 30, 2001, while 2002 revenues and expenses are not included in the tables below.
OPERATING REVENUES
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------- ---------- -------- ------------ ----------- --------
Operating revenues $ 754 $ 598 26.1% $ 1,505 $ 1,125 33.8%
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Revenues earned from our international businesses grew by $156 million, or 26.1%, in the second quarter of 2002 and $380 million, or 33.8% in the first six months of 2002 as compared to the similar periods in 2001. This growth is primarily due to the consolidation of TELPRI partially offset by the deconsolidation of CTI in 2002. Adjusting the quarter and first six months of 2001 to be comparable with 2002, revenues earned from our international businesses declined by $74 million, or 8.9%, in the second quarter of 2002 and $50 million, or 3.2%, in the first six months of 2002 as compared to the similar periods in 2001. These decreases in revenues are primarily due to the weak economies and increased competition in Latin America. These decreases were offset in part by higher revenues generated by the GSI network, which began its commercial operations in the first quarter of 2001.
OPERATING EXPENSES
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------- ---------- -------- ------------ ----------- --------
Operations and support $ 474 $ 432 9.7% $ 972 $ 816 19.1%
Depreciation and amortization 137 114 20.2 273 219 24.7
----------- ---------- ------------ -----------
$ 611 $ 546 11.9 $ 1,245 $ 1,035 20.3
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Operations and Support
Operations and support expenses, which include employee costs and other operating expenses, increased by $42 million, or 9.7%, in the second quarter of 2002 and $156 million, or 19.1%, in the first six months of 2002 as compared to the similar periods in 2001. This growth is primarily due to the consolidation of TELPRI partially
offset by the deconsolidation of CTI in 2002. Adjusting the quarter and first six months of 2001 to be comparable with 2002, operations and support expenses decreased $51 million, or 9.7%, in the second quarter of 2002 and $8 million, or 0.8%, in the first six months of 2002 as compared to the similar periods in 2001. These decreases reflect lower variable costs associated with reduced sales volumes in Latin America offset in part by higher variable costs associated with the increased revenues and start-up of GSI's operations.
Depreciation and Amortization
Depreciation and amortization expense increased by $23 million, or 20.2%, in the second quarter of 2002 and $54 million, or 24.7%, in the first six months of 2002 as compared to the similar periods in 2001. This growth is primarily due to the consolidation of TELPRI partially offset by the deconsolidation of CTI in 2002. Adjusting the quarter and first six months of 2001 to be comparable with 2002, depreciation and amortization expense decreased $7 million, or 4.9%, for the second quarter of 2002 and $10 million, or 3.5%, for the first six months of 2002 as compared to the similar periods in 2001. These decreases were attributable to the January 1, 2002 cessation of the amortization of goodwill and intangible assets with indefinite lives as required by SFAS No.142, offset in part by increased depreciation due to ongoing network capital expenditures necessary to meet the increase in subscriber base.
SEGMENT INCOME
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------- ---------- --------- ----------- ---------- ---------
Segment Income $ 256 $ 243 5.3% $ 467 $ 453 3.1%
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Segment income increased by $13 million, or 5.3%, for the second quarter of 2002 as compared to the similar period in 2001. The increase is primarily the result of the after-tax impact of operating revenues and operating expenses described above, as well as an increase in income from unconsolidated businesses partially offset by the impact on Iusacell of fluctuations of the Mexican peso of $104 million, before minority interest benefit of $64 million. An after-tax gain on the sale of a portion of our interest in Taiwan Cellular Corporation of $31.5 million was recorded in the second quarter of 2002, compared to an after-tax gain on the sale of our interest in QuebecTel in the second quarter of 2001 of $63.7 million. Proportionate wireless subscribers grew 9.8% over the second quarter 2001 to 8.7 million. Segment income increased by $14 million, or 3.1%, for the first six months of 2002 as compared to the similar period in 2001. The increase is primarily the result of the after-tax impact of operating revenues and operating expenses described above, partially offset by a decrease in income from unconsolidated businesses and the impact on Iusacell of fluctuations of the Mexican peso of $108 million, before minority interest benefit of $67 million. The favorable impact on minority interest expense of losses at Iusacell was offset by the consolidation of TELPRI and the deconsolidation of CTI for the second quarter and six months ended June 30, 2002 as compared to the similar periods in 2001.
Income from unconsolidated businesses increased by $9 million, or 3.4%, for the second quarter of 2002 and decreased by $32 million, or 6.6%, for the first six months of 2002 as compared to the similar periods in 2001. Adjusting the quarter and first six months of 2001 for the consolidation of TELPRI and the deconsolidation of CTI in 2002, income from unconsolidated businesses increased by $58 million, or 26.7%, for the second quarter of 2002 and $66 million, or 17.1%, for the first six months of 2002 as compared to the similar periods in 2001. The increases reflect the 2002 cessation of recording CTI's operating losses and the discontinuation of amortization of goodwill and intangible assets with indefinite lives of our equity investments, as required by SFAS 142. Partially offsetting these increases was the impact of fluctuations of the Venezuelan bolivar on the results of Compania Anonima Nacional Telefonos de Venezuela (CANTV) in 2002.
INFORMATION SERVICES
Our Information Services segment consists of our domestic and international publishing businesses, including print and electronic directories and Internet-based shopping guides, as well as includes website creation and other electronic commerce services. This segment has operations principally in North America, Europe and Latin America.
OPERATING REVENUES
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------ ---------- -------- ----------- ----------- --------
Information services $ 936 $ 984 (4.9)% $ 1,739 $ 1,773 (1.9)%
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Operating revenues from our Information Services segment decreased by $48 million, or 4.9%, in the second quarter of 2002 and $34 million, or 1.9%, in the first six months of 2002 compared to the similar periods in 2001. The decreases were primarily due to the negative impact of shifts in the timing of directory publications and reduced affiliate revenues partially offset by domestic operational multi-product revenue growth and increased revenue from the 2001 acquisition of TELUS Corporation's (TELUS) advertising services business in Canada. Revenues from SuperPages.com, Verizon's Internet directory service, grew 81.6% over second quarter 2001 as Information Services continues to strengthen its leadership position in online directory services.
OPERATING EXPENSES
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
----------- ----------- -------- ---------- ----------- --------
Operations and support $ 477 $ 453 5.3% $ 911 $ 869 4.8%
Depreciation and amortization 16 20 (20.0) 31 41 (24.4)
----------- ----------- ---------- -----------
$ 493 $ 473 4.2 $ 942 $ 910 3.5
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Total operating expenses for the second quarter of 2002 increased $20 million, or 4.2%, and $32 million, or 3.5%, in the first six months of 2002 compared to similar periods in 2001. The increases were primarily due to a small asset sale gain in 2001 partially offset by the lower costs associated with changes in publication dates mentioned above.
SEGMENT INCOME
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
----------- ----------- -------- ---------- ----------- --------
Segment Income $ 260 $ 298 (12.8)% $ 473 $ 510 (7.3)%
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Segment income decreased by $38 million, or 12.8% in the second quarter of 2002 and $37 million, or 7.3% in the first six months of 2002 compared to the similar periods in 2001 primarily as a result of the after-tax impact of operating revenue and expense issues described above.
SPECIAL ITEMS
Special items generally represent revenues and gains as well as expenses and losses that are nonrecurring and/or non-operational in nature. Several of these special items include impairment losses. These impairment losses were determined in accordance with our policy of comparing the fair value of the asset with its carrying value. The fair value is determined by quoted market prices, if available, or by estimates of future cash flows.
These special items are not considered in assessing operational performance, either at the segment level, or for the consolidated company. However, they are included in our reported results. This section provides a detailed description of these special items.
TRANSITION COSTS
In connection with the Bell Atlantic Corporation-GTE Corporation merger and the formation of the wireless joint venture, we expect to incur a total of approximately $2 billion of transition costs through the end of 2002. These costs are incurred to integrate systems, consolidate real estate and relocate employees. They also include approximately $500 million for advertising and other costs to establish the Verizon brand. Transition costs incurred through the second quarter of 2002 total $1,931 million. Transition costs in the second quarter and for the first six months of 2002 were $102 million and $198 million ($57 million and $109 million after taxes and minority interest, or $.02 and $.04 per diluted share), respectively. During the second quarter and for the first six months of 2001, we incurred transition costs of $279 million and $442 million ($162 million and $250 million after taxes and minority interest, or $.06 and $.09 per diluted share), respectively.
SALES OF ASSETS, NET
During the first quarter of 2002, we recorded a net pretax gain of $220 million ($116 million after-tax, or $.04 per diluted share), primarily resulting from a pretax gain on the sale of TSI Telecommunication Services Inc. (TSI) of $466 million ($275 million after-tax, or $.10 per diluted share), partially offset by an impairment charge in connection with our exit from the video business and other charges of $246 million ($159 million after-tax, or $.06 per diluted share).
During the second quarter 2001, we completed the sale of the overlapping Cincinnati wireless market. The pretax gain was $80 million ($48 million after-tax, or $.02 per diluted share). In addition, during the second quarter of 2001, an agreement to sell the overlapping Chicago wireless market at a price lower than the net book value of the Chicago assets was executed. Consequently, we recorded an impairment charge of $75 million ($45 million after-tax, or $.02 per diluted share) related to the expected sale. The sale of the Chicago market closed in the second half of 2001.
SEVERANCE/RETIREMENT ENHANCEMENT COSTS AND SETTLEMENT GAINS
During the second quarter of 2002, we recorded a special charge of $734 million
($475 million after taxes and minority interest, or $.17 per diluted share)
primarily associated with employee severance costs and severance-related
activities in connection with the voluntary and involuntary separation of
approximately 8,000 employees.
MARK-TO-MARKET ADJUSTMENT - FINANCIAL INSTRUMENTS
During 2001, we began recording mark-to-market adjustments in earnings relating to some of our financial instruments in accordance with newly effective accounting rules on derivative financial instruments. In the second quarter and the first six months of 2002, we recorded losses on mark-to-market adjustments of $8 million ($8 million after-tax, or less than $.01 per diluted share) and $11 million ($11 million after-tax, or less than $.01 per diluted share), respectively. In the second quarter and the first six months of 2001, we recorded losses on mark-to-market adjustments of $37 million ($37 million after taxes and minority interest, or $.01 per diluted share) and $153 million ($151 million after taxes and minority interest, or $.06 per diluted share), respectively. The losses on mark-to-market adjustments in 2001 were primarily due to the change in the fair value of the Metromedia Fiber Network, Inc. (MFN) debt conversion option.
INVESTMENT-RELATED CHARGES
During the second quarter of 2002, we recorded pretax losses of $3,558 million ($3,305 million after-tax, or $1.20 per diluted share), including a loss of $2,443 million ($2,443 million after-tax, or $.89 per diluted share) related to our interest in Genuity Inc. (Genuity) (see "Other Factors That May Affect Future Results - Genuity and Bell Atlantic-GTE Merger" for additional information); a loss of $580 million ($430 million after-tax, or $.16 per diluted share) to the market value of our investment in TELUS; a loss of $303 million ($201 million after-tax, or $.07 per diluted share) to the market value of our investment in Cable & Wireless plc (C&W) and a loss of $232 million ($231 million after-tax, or $.08 per diluted share) relating to several other investments. We determined that market value declines in these investments were considered other than temporary.
Results for the six months ended June 30, 2002 also include the recognition of pretax losses totaling $2,146 million ($2,026 million after-tax, or $.74 per diluted share) recorded in the first quarter of 2002 relating to our investments in CANTV, MFN and CTI which are described below.
We recorded a pretax loss of $1,400 million ($1,400 million after-tax, or $.51 per diluted share) due to the other than temporary decline in the market value of our investment in CANTV. As a result of the political and economic instability in Venezuela, including the devaluation of the Venezuelan bolivar, and the related impact on CANTV's future economic prospects, we no longer expected that the future undiscounted cash flows applicable to CANTV were sufficient to recover our investment. Accordingly, we wrote our investment down to market value as of March 31, 2002.
We recorded a pretax loss of $516 million ($436 million after-tax, or $.16 per diluted share) to market value primarily due to the other than temporary decline in the market value of our investment in MFN. During 2001, we
wrote down our investment in MFN due to the declining market value of its stock. We wrote off our remaining investment and other financial statement exposure related to MFN in the first quarter of 2002 primarily as a result of its deteriorating financial condition and related defaults. In addition, we delivered to MFN a notice of termination of our fiber optic capacity purchase agreement.
We recorded a pretax loss of $230 million ($190 million after-tax, or $.07 per diluted share) to fair value due to the other than temporary decline in the fair value of our remaining investment in CTI. In 2001, we recorded an estimated loss of $637 million ($637 million after-tax, or $.23 per diluted share) to reflect the impact of the deteriorating Argentinean economy and devaluation of the Argentinean peso on CTI's financial position. As a result of the first quarter 2002 and 2001 charges, our financial exposure related to our equity investment in CTI has been eliminated.
During the second quarter of 2001, we recognized a pretax loss of $3,913 million ($2,926 million after-tax, or $1.07 diluted loss per share) primarily relating to our investments in C&W, NTL Incorporated (NTL) and MFN. We determined that market value declines in these investments were considered other than temporary.
OTHER CHARGES AND SPECIAL ITEMS
During the second quarter of 2002, we recorded pretax charges of $394 million ($254 million after-tax, or $.09 per diluted share) primarily resulting from a pretax impairment charge in connection with our financial statement exposure to WorldCom Inc. of $300 million ($183 million after-tax, or $.07 per diluted share) and other pretax charges of $94 million ($71 million after-tax, or $.02 per diluted share). In addition, during the second quarter of 2002, we recorded a pretax charge of $175 million ($114 million after-tax, or $.04 per diluted share) related to a proposed settlement of a litigation matter that arose from our decision to terminate an agreement with NorthPoint to combine the two companies' DSL businesses.
EXTRAORDINARY ITEM
During the second quarter of 2002, we recognized a pretax extraordinary gain of $4 million ($3 million after-tax, or less than $.01 per diluted share) related to the extinguishment of $243 million of debt prior to the stated maturity date. Results for the six months ended June 30, 2002 include the retirement in the first quarter of 2002 of $1,536 million of debt prior to the stated maturity date, resulting in a pretax extraordinary charge of $15 million ($9 million after-tax, or less than $.01 per diluted share).
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Impact of SFAS No. 142
We adopted the provisions of SFAS No. 142 on January 1, 2002. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under various conditions) for impairment in accordance with this statement. Our results for the six months ended June 30, 2002 include the initial impact of adoption recorded as a cumulative effect of an accounting change of $496 million after-tax (or $.18 per diluted share). In accordance with the new rules, starting January 1, 2002, we are no longer amortizing goodwill, acquired workforce intangible assets and wireless licenses which we determined have an indefinite life. On a comparable basis, had we not amortized these intangible assets in the quarter and six months ended June 30, 2001, net income (loss) before extraordinary item and cumulative effect of accounting change would have been $(924) million, or $(.34) per diluted share, and $924 million, or $.34 per diluted share, respectively.
Impact of SFAS No. 133
We adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and the related SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" on January 1, 2001. The impact to Verizon pertains to the recognition of changes in the fair value of derivative instruments. The initial impact of adoption was recorded as a cumulative effect of an accounting change of $182 million after-tax (or $.07 per diluted share) and is included in our results for the six months ended June 30, 2001. This cumulative effect charge primarily relates to the change in the fair value of the MFN debt conversion option prior to January 1, 2001.
OTHER CONSOLIDATED RESULTS
The following discussion of several nonoperating items is based on the amounts reported in our condensed consolidated financial statements.
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------ ----------- -------- ----------- ----------- ----------
OTHER INCOME AND (EXPENSE), NET
Interest Income $ 53 $ 62 (14.5)% $ 107 $ 115 (7.0)%
Foreign exchange gains (losses),
net (63) 41 (253.7) (61) 40 (252.5)
Other, net 14 11 27.3 23 29 (20.7)
------------ ----------- ----------- -----------
Total $ 4 $ 114 (96.5) $ 69 $ 184 (62.5)
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The changes in other income and expense in the three and six months ended June 30, 2002, compared to the similar periods in 2001, were primarily due to the changes in foreign exchange gains and losses. Foreign exchange gains and losses were driven primarily by fluctuations in the Mexican peso, which is used by Iusacell as its functional currency. We expect that our earnings will continue to be affected by foreign currency gains or losses associated with the U.S. dollar denominated debt issued by Iusacell.
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------- ----------- -------- ----------- ---------- ---------
INTEREST EXPENSE
Interest expense $ 798 $ 909 (12.2)% $ 1,612 $ 1,830 (11.9)%
Capitalized interest costs 64 93 (31.2) 101 177 (42.9)
------------- ----------- ----------- ----------
Total interest costs on debt
balances $ 862 $ 1,002 (14.0) $ 1,713 $ 2,007 (14.6)
============= =========== =========== ==========
Average debt outstanding $ 61,626 $ 63,879 (3.5) $ 63,184 $ 61,622 2.5
Effective interest rate 5.6% 6.3% 5.4% 6.5%
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The decrease in interest costs for the three and six months ended June 30, 2002, as compared to the similar periods in 2001, was principally attributable to lower average interest rates and was partially offset in the six months ended June 30, 2002 by the higher average debt level. The increase in the average debt level for the six months ended June 30, 2002 was mainly the result of funding for capital expenditures and acquisitions at our Domestic Telecom and Domestic Wireless segments. The reduction in the average debt level for the second quarter of 2002 is primarily due to lower commercial paper borrowings.
(Dollars in Millions) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------------- ----------- -------- ----------- ---------- ---------
MINORITY INTEREST $ 313 $ 209 49.8% $ 556 $ 307 81.1%
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The increase in minority interest expense for the three and six months ended June 30, 2002, compared to the similar periods in 2001, was primarily due to higher earnings at Domestic Wireless, which has a significant minority interest attributable to Vodafone (see "Segment Results of Operations-Domestic Wireless"). The favorable impact on minority interest expense of losses at Iusacell was offset by the consolidation of TELPRI and the deconsolidation of CTI for the second quarter and six months ended June 30, 2002 as compared to the similar periods in 2001 (see "Segment Results of Operations-International").
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
------- ------- ---------- ---------
EFFECTIVE INCOME TAX RATES (18.1)% (12.9)% (157.8)% 60.5%
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The effective income tax rate is the provision for income taxes as a percentage of income before the provision for income taxes. Our effective income tax rates for the three and six months ended June 30, 2002 and 2001 were impacted by the other than temporary decline in fair value of several of our investments during 2002 and 2001 because tax benefits were not available on some of the losses (see "Special Items"). The effective rate for the quarter and six months ended June 30, 2002 was favorably impacted by a tax law change relating to ESOP dividend deductions, increased state tax benefits and capital loss utilization.
CONSOLIDATED FINANCIAL CONDITION
(Dollars in Millions) SIX MONTHS ENDED JUNE 30,
-----------------------------------
2002 2001 $ CHANGE
-------------- --------------- --------------
CASH FLOWS PROVIDED BY (USED IN)
Operating activities $ 10,042 $ 7,658 $ 2,384
Investing activities (3,513) (10,875) 7,362
Financing activities (4,546) 5,076 (9,622)
-------------- --------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS $ 1,983 $ 1,859 $ 124
============== =============== ==============
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We use the net cash generated from our operations to fund capital expenditures for network expansion and modernization, repay external financing, pay dividends and invest in new businesses. Additional external financing is utilized when necessary. While our current liabilities typically exceeded our current assets, our sources of funds, primarily from operations and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that capital spending requirements will continue to be financed primarily through internally generated funds. Additional debt or equity financing will be needed to fund additional development activities or to maintain our capital structure to ensure our financial flexibility.
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Our primary source of funds continues to be cash generated from operations. The increase in cash from operations in the first half of 2002 compared to the similar period of 2001 primarily reflects a decrease in working capital requirements and deferred tax favorability.
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures continue to be our primary use of capital resources. We invested $3,175 million in our Domestic Telecom business in the first half of 2002, compared to $6,406 million in the first half of 2001 to facilitate the introduction of new products and services, enhance responsiveness to competitive challenges and increase the operating efficiency and productivity of the network. We also invested $2,060 million in our Domestic Wireless business in the first half of 2002, compared to $2,372 million in the first half of 2001. The decrease in 2002 is primarily due to the effective management of our capital expenditure budget to current network demand. We expect total capital expenditures in 2002 to be approximately $13 billion to $13.5 billion.
We invested $998 million in acquisitions and investments in businesses during the first six months of 2002, including $556 million to acquire some of the cellular properties of Dobson Communications Corporation and $218 million for other wireless properties. We also received a $1,479 million refund from the FCC in connection with our wireless auction deposit (see "Other Factors That May Affect Future Results - Recent Developments - FCC Auction" for additional information). In the first six months of 2001, we invested $2,212 million in acquisitions and investments in businesses, including $1,625 million related to an FCC auction of wireless licenses (see "Other Factors That May Affect Future Results - Recent Developments - FCC Auction" for additional information) and $410 million for additional wireless spectrum purchased from another telecommunications carrier.
In the first half of 2002, we received cash proceeds of $770 million in connection with the sale of TSI.
Other, net investing activities include capitalized non-network software of $513 million in the first half of 2002 compared with $473 million in the similar period of 2001. The first half of 2001 also includes $750 million of loans to Genuity (see "Other Factors That May Affect Future Results - Genuity and Bell Atlantic-GTE Merger"), largely offset by proceeds of $515 million related to wireless asset sales.
In addition, under the terms of an investment agreement relating to our wireless joint venture, Vodafone may require us or Verizon Wireless to purchase up to an aggregate of $20 billion worth of its interest in Verizon Wireless between 2003 and 2007 at its then fair market value. The purchase of up to $10 billion, in cash or stock at our option, may be required in the summer of 2003 or 2004 and the remainder, which may not exceed $10 billion at any one time, in the summers of 2005 through 2007. Vodafone has the option to require us or Verizon Wireless to satisfy up to $7.5 billion of the remainder with cash or contributed debt.
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Cash of $2,978 million was used to reduce our total debt during the first half of 2002. We repaid $1,659 million of Verizon Global Funding Corp. and $1,796 million of Domestic Telecom long-term debt and reduced our short-term borrowings by $4,623 million primarily with cash and the issuance of Domestic Telecom and Verizon Global Funding long-term debt. Domestic Telecom and Verizon Global Funding issued $3,429 million and $1,978 million of long-term debt, respectively.
The net cash proceeds from increases in our total debt during the first six months of 2001 was primarily due to the issuance of $7,006 million of long-term debt by Verizon Global Funding, partially offset by net repayments of $589 million of commercial paper and other short-term borrowings by Verizon Global Funding and by $617 million of maturities of other corporate long-term debt. In addition, Verizon Wireless issued $580 million of long-term debt and Domestic Telecom incurred $298 million of long-term debt, issued $1,225 million of net short-term debt and retired $570 million of long-term debt.
Our debt to equity ratio was 68.3% at June 30, 2002, compared to 65.0% at June 30, 2001.
As of June 30, 2002, we had approximately $8.0 billion of unused bank lines of credit and $560 million in bank borrowings outstanding. As of June 30, 2002, our telephone and financing subsidiaries had shelf registrations for the issuance of up to $6.4 billion of unsecured debt securities. The debt securities of our telephone and financing subsidiaries continue to be accorded high ratings by primary rating agencies. However, in March 2002, Standard & Poor's (S&P) revised our credit rating outlook from stable to negative, and Moody's Investors Service (Moody's) reaffirmed our credit rating outlook as negative. S&P and Moody's cited concern about the overall debt level of Verizon. We have adopted a debt portfolio strategy that includes a reduction in total debt as well as a reduction in the short-term debt component. A change in an outlook does not necessarily signal a rating downgrade but rather highlights an issue whose final resolution may result in placing a company on review for possible downgrade. In May 2002, Moody's placed our debt under review for possible downgrade.
As in prior quarters, dividend payments were a significant use of capital resources. We determine the appropriateness of the level of our dividend payments on a periodic basis by considering such factors as long-term growth opportunities, internal cash requirements, and the expectations of our shareowners. In the first and second quarters of 2002 and 2001, we announced quarterly cash dividends of $.385 per share.
INCREASE IN CASH AND CASH EQUIVALENTS
Our cash and cash equivalents at June 30, 2002 totaled $2,962 million, a $1,983 million increase over cash and cash equivalents at December 31, 2001 of $979 million. This increase in cash and cash equivalents was primarily driven by a debt issuance at the end of the current quarter, which will be used to reduce outstanding borrowings after quarter-end.
MARKET RISK
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in equity investment prices and changes in corporate tax rates. We employ risk management strategies using a variety of derivatives, including interest rate swap agreements, interest rate caps and floors, foreign currency forwards and options, equity options and basis swap agreements. We do not hold derivatives for trading purposes.
It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in limiting our exposures to the various market risks. Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. We do not hedge our market risk exposure in a manner that would completely eliminate the effect of changes in interest rates, equity prices and foreign exchange rates on our earnings. While we do not expect that our liquidity and cash flows will be materially affected by these risk management strategies, our net income may be materially affected by certain market risks associated with the exchangeable notes discussed below.
EXCHANGEABLE NOTES
In 1998, we issued exchangeable notes as described in Note 9 to the condensed consolidated financial statements. These financial instruments expose us to market risk, including:
o Equity price risk, because the notes are exchangeable into shares that are traded on the open market and routinely fluctuate in value.
o Foreign exchange rate risk, because the notes are exchangeable into shares that are denominated in a foreign currency.
o Interest rate risk, because the notes carry fixed interest rates.
Periodically, equity price or foreign exchange rate movements may require us to mark-to-market the exchangeable note liability to reflect the increase or decrease in the current share price compared to the established exchange price, resulting in a charge or credit to income. The following sensitivity analysis measures the effect on earnings and financial condition due to changes in the underlying share prices of the Telecom Corporation of New Zealand Limited (TCNZ), C&W and NTL stock.
o At June 30, 2002, the exchange price for the TCNZ shares (expressed as American Depositary Receipts) was $44.93. The C&W and NTL notes in the amount of $2,946 million are exchangeable into 118.9 million shares of C&W stock and 22.7 million shares of NTL stock.
o For each $1 increase in the value of the TCNZ shares above the exchange price, our pretax earnings would be reduced by approximately $55 million. Assuming the aggregate value of the C&W and NTL stocks exceeds the value of the debt liability, each $1 increase in the value of the C&W shares (expressed as American Depositary Receipts) or NTL shares would reduce our pretax earnings by approximately $40 million or $23 million, respectively. A subsequent decrease in the value of these shares would correspondingly increase earnings, but not to exceed the amount of any previous reduction in earnings.
o Our cash flows would not be affected by mark-to-market activity relating to the exchangeable notes.
If we decide to deliver shares in exchange for the notes, the exchangeable note liability (including any mark-to-market adjustments) will be eliminated and the investment will be reduced by the fair market value of the related number of shares delivered. Upon settlement, the excess of the liability over the book value of the related shares delivered will be recorded as a gain. We also have the option to settle these liabilities with cash upon exchange.
EQUITY RISK
We also have equity price risk associated with our cost investments, primarily in common stocks and equity price sensitive derivatives that are carried at fair value. The value of these cost investments and derivatives is subject to changes in the market prices of the underlying securities. Our cost investments and equity price sensitive derivatives recorded at fair value totaled $1,634 million at June 30, 2002.
A sensitivity analysis of our cost investments and equity price sensitive
derivatives recorded at fair value indicated that a 10% increase or decrease in
the fair value of the underlying common stock equity prices would result in a
$140 million increase or decrease in the fair value of our cost investments and
equity price sensitive derivatives. Of this amount, a change in the fair value
of our cost investments of $133 million would be recognized in Accumulated Other
Comprehensive Loss in our condensed consolidated balance sheets under SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities." Our
equity price sensitive derivatives (primarily several long-term call options on
our common stock) (see Note 8 - Financial Instruments) do not qualify for hedge
accounting under SFAS No. 133. As such, a change of approximately $7 million in
the fair value of our equity price sensitive derivatives would be recognized in
our condensed consolidated balance sheets and in current earnings in
mark-to-market adjustment.
We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other than temporary, a charge to earnings is recorded for all or a portion of the unrealized loss, and a new cost basis in the investment is established.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
GENUITY AND BELL ATLANTIC - GTE MERGER
Prior to the merger of Bell Atlantic and GTE, we owned and consolidated Genuity (a tier-one interLATA Internet backbone and related data business). In June 2000, as a condition of the merger, 90.5% of the voting equity of Genuity was issued in an initial public offering. As a result of the initial public offering and our loss of control, we deconsolidated Genuity. Our remaining ownership interest in Genuity contained a contingent conversion feature that gave us the option (if prescribed conditions were met), among other things, to regain control of Genuity. Our ability to legally exercise this conversion feature was dependent on obtaining approvals to provide long distance service in the former Bell Atlantic states and satisfaction of other regulatory and legal requirements.
On July 24, 2002, we converted all but one of our shares of Class B common stock of Genuity into shares of Class A common stock of Genuity. We now own just under a 10% voting and economic interest in Genuity. As a result, we have relinquished the right to convert our current ownership into a controlling interest as described above. Our commercial relationship with Genuity will continue, which includes a five-year purchase commitment for Genuity services such as dedicated Internet access, managed web hosting and Internet security. Under this purchase commitment, which terminates in 2005, Verizon has agreed to pay Genuity a minimum of $500 million over five years for its services, of which we have satisfied $230 million as of June 30, 2002.
As a result of Genuity's continuing operating losses and a significant decrease in the market price of the Class A common stock of Genuity during the second quarter, we have determined that recoverability of our investment in Genuity is not reasonably assured. As a result, we have recorded a pretax charge of $2,443 million to reduce the carrying value of our interest in Genuity to its estimated fair value.
Federal and state regulatory conditions to the merger also included commitments to, among other things, promote competition and the widespread deployment of advanced services while helping to ensure that consumers continue to receive high-quality, low-cost telephone services. In some cases, there are significant penalties associated with not meeting these commitments. The cost of satisfying these commitments could have a significant impact on net income in future periods. The pretax cost to begin compliance with these conditions was approximately $200 million in 2000 and approximately $300 million in 2001. We expect an impact of $200 million to $300 million in 2002.
RECENT DEVELOPMENTS
VERIZON WIRELESS
FCC Auction
On January 29, 2001, the bidding phase of the FCC reauction of 1.9 GHz C and F block broadband Personal Communications Services spectrum licenses, which began December 12, 2000, officially ended. Verizon Wireless was the winning bidder for 113 licenses. The total price of these licenses was $8,781 million, $1,822 million of which had been paid. Most of the licenses that were reauctioned relate to spectrum that was previously licensed to NextWave Personal Communications Inc. and NextWave Power Partners Inc. (collectively NextWave), which have appealed to the federal courts the FCC's action canceling NextWave's licenses and reclaiming the spectrum.
In a decision on June 22, 2001, the U.S. Court of Appeals for the D.C. Circuit ruled that the FCC's cancellation and repossession of NextWave's licenses was unlawful. The FCC sought a stay of the court's decision which was denied. The FCC subsequently reinstated NextWave's licenses, but it did not return Verizon Wireless's payment on the NextWave licenses nor did it acknowledge that the court's decision extinguished Verizon Wireless's obligation to purchase the licenses. On October 19, 2001, the FCC filed a petition asking the U.S. Supreme Court to consider reversing the U.S. Court of Appeals for the D.C. Circuit's decision. On March 4, 2002, the U.S Supreme Court granted the FCC's petition and agreed to hear the appeal. Oral argument on the appeal has been scheduled for October 8, 2002, with a decision by the U.S. Supreme Court expected in early 2003.
In April 2002, the FCC returned $1,479 million of Verizon Wireless's $1,822 million license payment and stated its view that Verizon Wireless remains obligated to purchase the licenses if and when the FCC succeeds in regaining them from NextWave. On April 4, 2002, Verizon Wireless filed a complaint in the U.S. Court of Federal Claims against the United States government seeking both a declaration that Verizon Wireless has no further performance
obligations with respect to the reauction, and money damages. On April 8, 2002, Verizon Wireless filed a petition with the U.S. Court of Appeals for the District of Columbia seeking a declaration that the auction obligation is voidable and a return of its remaining down payment of $261 million. Both of these matters are pending.
Price Communications Transaction
In December 2001, Verizon Wireless and Price Communications Corp. (Price) announced that an agreement had been reached combining 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 will be controlled and managed by Verizon Wireless. Price's partnership interest will be exchangeable into Verizon Wireless or Verizon stock, subject to several conditions including an exchange price minimum and maximum. Price's shareholders approved the transaction on July 23, 2002, and the transaction is now expected to close in the third quarter of 2002.
SALE OF ACCESS LINES
In October 2001, we agreed to sell all 675,000 of our switched access lines in Alabama and Missouri to CenturyTel Inc. (CenturyTel) for $2.2 billion. In early July 2002, we completed the sale of approximately 300,000 switched access lines and related local exchange operations in Alabama to CenturyTel for approximately $1.0 billion in cash. The Missouri sale has been approved by the Missouri Public Service Commission and the FCC. We expect to close the Missouri transaction in the third quarter of 2002.
Also in October 2001, we agreed to sell approximately 600,000 switched access lines in Kentucky to ALLTEL Corporation for $1.9 billion. This sale was completed on July 31, 2002.
NEW YORK RECOVERY FUNDING
In August 2002, President Bush signed the Supplemental Appropriations bill passed earlier this year by the U.S. House of Representatives and the U.S. Senate. The Supplemental Appropriations bill includes $5.5 billion in New York recovery funding. Of that amount, $750 million has been allocated to cover the uninsured losses of two major utilities, which includes Verizon, incurred in connection with the September 11th terrorist attacks. These funds will be distributed as federal grants through the Lower Manhattan Development Corporation following a thorough application process.
TELECOMMUNICATIONS ACT OF 1996
In-Region Long Distance
We offer long distance service throughout most of the country, except in those regions served by the former Bell Atlantic telephone operations where we have not yet received authority to offer long distance service under the Telecommunications Act of 1996 (1996 Act). We now have authority to offer in-region long distance service in eight states in the former Bell Atlantic territory, accounting for three-quarters of the lines served by the former Bell Atlantic. In addition to its New York order released in December 1999, the FCC released orders on April 16, 2001, July 23, 2001, September 19, 2001, February 22, 2002, April 17, 2002, June 19, 2002 and June 24, 2002, approving our applications for permission to enter the in-region long distance market in Massachusetts, Connecticut, Pennsylvania, Rhode Island, Vermont, Maine and New Jersey, respectively. The Massachusetts, Pennsylvania, Vermont and New Jersey orders are currently on appeal to the U.S. Court of Appeals. Manhattan Telecommunications Corporation (doing business as Metropolitan Telecommunications) has filed a motion for a stay of the New Jersey order or, in the alternative, for expedited briefing. We and the FCC filed oppositions to the motion. WorldCom Inc. filed a complaint with the FCC seeking to have our long distance authority in Massachusetts revoked or suspended. On July 23, 2002, the FCC denied the complaint.
We have filed a joint application with the FCC to offer long distance service in New Hampshire and Delaware. The FCC must rule on this application by September 25, 2002. We have also filed an application to offer long distance service in Virginia. The FCC must rule on this application by October 30, 2002. We have also filed state applications for support of anticipated applications with the FCC for permission to enter the in-region long distance market in Maryland, West Virginia and the District of Columbia.
FCC REGULATION AND INTERSTATE RATES
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.
On September 10, 2001, the U.S. Court of Appeals for the Fifth Circuit ruled on an appeal of the FCC order adopting the plan. The court upheld the FCC on several challenges to the order, but remanded two aspects of the decision back to the FCC on the grounds that they lacked sufficient justification. The court remanded back to the FCC for further consideration its decision setting the annual reduction factor at 6.5% minus an inflation factor and the size of the new universal service fund at $650 million. The entire plan (including these elements) will continue in effect pending the FCC's further consideration of its justification of these components.
As a result of tariff adjustments which became effective in July 2002, approximately 98% of our access lines reached the $0.0055 benchmark.
Unbundling of Network Elements
In July 2000, the U.S. Court of Appeals for the Eighth Circuit found that some aspects of the FCC's requirements for pricing UNEs were inconsistent with the 1996 Act. In particular, it found that the FCC was wrong to require incumbent carriers to base these prices not on their real costs but on the imaginary costs of the most efficient equipment and the most efficient network configuration. This portion of the court's decision was stayed pending review by the U.S. Supreme Court. On May 13, 2002, the U.S. Supreme Court reversed that decision and upheld the FCC's pricing rules.
On May 24, 2002, the U.S. Court of Appeals for the District of Columbia Circuit released an order that overturned the most recent FCC decision establishing which network elements were required to be unbundled. In particular, the court found 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 court also vacated a separate order that had authorized an unbundling requirement for "line sharing" where a competing carrier purchases only a portion of the copper connection to the end-user in order to provide high-speed broadband services using DSL technology. Several parties, including the FCC, have petitioned the court for rehearing of the court order.
Prior to the issuance of this order, the FCC had already begun a review of the scope of its unbundling requirement through a rulemaking, the triennial review of UNEs. This rulemaking reopens the question of what network elements must be made available on an unbundled basis under the 1996 Act and will revisit the unbundling decisions made in the order overturned by the U.S. Court of Appeals for the District of Columbia Circuit. In this rulemaking, the FCC also will address other pending issues relating to unbundled elements, including the question of whether competing carriers may substitute combinations of unbundled loops and transport for already competitive special access services.
Compensation for Internet Traffic
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 $0.0015 to $0.0007 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 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 District of Columbia Circuit rejected the justification relied upon by the FCC in its April 27, 2001 order, and remanded the order for further proceedings. It did not vacate the interim pricing rules established in that order.
Several parties, including Pac-West Telecomm and Focal Communications Corp. have requested rehearing, asking the court to vacate the underlying order. A decision on the rehearing petitions remains pending, and the FCC's underlying order remains in effect.
OTHER MATTERS
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)." EITF Issue No. 94-3 required accrual of liabilities related to exit and disposal activities at a plan (commitment) date. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are currently evaluating the impact this new standard will have on our future results of operations or financial position.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
In this Management's Discussion and Analysis, and elsewhere in this Quarterly Report, we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "hopes" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
The following important factors, along with those discussed elsewhere in this Quarterly Report, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements:
o the duration and extent of the current economic downturn;
o materially adverse changes in economic conditions in the markets served by us or by companies in which we have substantial investments;
o material changes in available technology;
o technology substitution;
o an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations;
o the final results of federal and state regulatory proceedings concerning our provision of retail and wholesale services and judicial review of those results;
o the effects of competition in our markets;
o our ability to satisfy regulatory merger conditions and obtain combined company revenue enhancements and cost savings;
o the ability of Verizon Wireless to achieve revenue enhancements and cost savings, and obtain sufficient spectrum resources;
o the outcome of litigation concerning the FCC NextWave spectrum auction;
o our ability to recover insurance proceeds relating to equipment losses and other adverse financial impacts resulting from the terrorist attacks on Sept. 11, 2001; and
o 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to market risk is included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Consolidated Financial Condition section under the caption "Market Risk."
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2002 Annual Meeting of Shareholders was held on April 24, 2002. At the meeting, the following items were submitted to a vote of shareholders.
The number of common shares present at the Annual Meeting of Shareholders of Verizon Communications Inc. voting and withholding authority to vote in the election of Directors (the "Total Vote") was 2,224,172,047 or 81.79% of the common shares outstanding on February 25, 2002, the record date for said meeting.
(a) The following nominees were elected to serve on the Board of Directors:
Name of Nominee Votes Cast For Votes Withheld -------------------------------- --------------------------------- ---------------------------------- James R. Barker 2,137,316,961 86,855,086 -------------------------------- --------------------------------- ---------------------------------- Edward H. Budd 2,136,102,788 88,069,259 -------------------------------- --------------------------------- ---------------------------------- Richard L. Carrion 2,151,928,142 72,243,905 -------------------------------- --------------------------------- ---------------------------------- Robert F. Daniell 2,150,220,961 73,951,086 -------------------------------- --------------------------------- ---------------------------------- Helene L. Kaplan 2,111,827,168 112,344,879 -------------------------------- --------------------------------- ---------------------------------- Charles R. Lee 2,133,025,481 91,146,566 -------------------------------- --------------------------------- ---------------------------------- Sandra O. Moose 2,128,789,099 95,382,948 -------------------------------- --------------------------------- ---------------------------------- Joseph Neubauer 2,130,306,330 93,865,717 -------------------------------- --------------------------------- ---------------------------------- Thomas H. O'Brien 2,138,105,611 86,066,436 -------------------------------- --------------------------------- ---------------------------------- Russell E. Palmer 2,150,153,750 74,018,297 -------------------------------- --------------------------------- ---------------------------------- Hugh B. Price 2,037,624,844 186,547,203 -------------------------------- --------------------------------- ---------------------------------- Ivan G. Seidenberg 2,138,489,471 85,682,576 -------------------------------- --------------------------------- ---------------------------------- Walter V. Shipley 2,150,343,201 73,828,846 -------------------------------- --------------------------------- ---------------------------------- John W. Snow 2,114,587,602 109,584,445 -------------------------------- --------------------------------- ---------------------------------- John R. Stafford 2,131,839,846 92,332,201 -------------------------------- --------------------------------- ---------------------------------- Robert D. Storey 2,111,636,002 112,536,045 -------------------------------- --------------------------------- ---------------------------------- |
(b) The appointment of Ernst and Young LLP as independent accountants for 2002 was ratified with 2,114,750,670 votes for, 85,619,046 votes against, and 23,802,331 abstentions.
(c) A shareholder proposal regarding Cumulative Voting was defeated with 519,554,375 votes for, 1,181,461,380 votes against, 119,681,624 abstentions and 403,474,668 broker non-votes.
(d) A shareholder proposal regarding Executive Severance Agreements was defeated with 544,830,236 votes for, 1,211,469,524 votes against, 64,397,335 abstentions and 403,474,952 broker non-votes.
(e) A shareholder proposal regarding composition of the Board of Directors was defeated with 483,719,748 votes for, 1,288,847,110 votes against, 48,129,941 abstentions and 403,475,248 broker non-votes.
(f) A shareholder proposal regarding Calculation of Incentive Compensation was defeated with 728,056,432 votes for, 972,294,070 votes against, 120,346,593 abstentions and 403,474,952 broker non-votes.
(g) A shareholder proposal regarding Additional Director Nominees was defeated with 194,627,486 votes for, 1,570,731,791 votes against, 55,337,816 abstentions and 403,474,954 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number
10a Employment Agreement between Verizon and Mary Beth Bardin.
10b Employment Agreement between Verizon and David H. Benson.
10c Employment Agreement between Verizon and Ezra D. Singer.
10d Employment Agreement between Verizon and Doreen A. Toben.
10e Supplemental Letter to Employment Agreement between Verizon and Charles R. Lee.
10f Verizon Communications Inc. Income Deferral Plan, as amended and restated.
10g Description of the Split-Dollar Insurance Arrangements for Lawrence T. Babbio and William P. Barr.
(b) Reports on Form 8-K filed or furnished during the quarter ended June 30, 2002:
A Current Report on Form 8-K, filed April 9, 2002, containing a press release providing an estimate of adjusted diluted earnings per share, and estimating charges for goodwill and other investments, for the first quarter of 2002.
A Current Report on Form 8-K, filed April 10, 2002, containing a legal opinion issued in connection with the Verizon Communications Direct Invest direct stock purchase and share ownership plan.
A Current Report on Form 8-K, filed April 23, 2002, containing a press release announcing earnings for the first quarter of 2002 and selected slides containing supplemental information about our financial and other projections.
A Current Report on Form 8-K, filed April 29, 2002, containing a press release announcing the retirement of Vice Chairman and Chief Financial Officer Frederic V. Salerno before year-end 2002.
A Current Report on Form 8-K, filed April 30, 2002, containing a press release announcing the appointment of Doreen A. Toben as Executive Vice President and Chief Financial Officer, effective immediately.
A Current Report on Form 8-K, furnished on May 22, 2002, containing the consolidated financial statements of Cellco Partnership, doing business as Verizon Wireless, as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999.
A Current Report on Form 8-K, filed June 19, 2002, containing a Form of Purchase Agreement to be used in connection with the offering of debt securities.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VERIZON COMMUNICATIONS INC.
Date: August 12, 2002 By /s/ John F. Killian
------------------------------------
John F. Killian
Senior Vice President and Controller
(Principal Accounting Officer)
|
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 7, 2002.
EXHIBIT INDEX
Exhibit
Number
-------
10a Employment Agreement between Verizon and Mary Beth Bardin.
10b Employment Agreement between Verizon and David H. Benson.
10c Employment Agreement between Verizon and Ezra D. Singer.
10d Employment Agreement between Verizon and Doreen A. Toben.
10e Supplemental Letter to Employment Agreement between Verizon
and Charles R. Lee.
10f Verizon Communications Inc. Income Deferral Plan, as amended
and restated.
10g Description of the Split-Dollar Insurance Arrangements for
Lawrence T. Babbio and William P. Barr.
|
EXHIBIT 10a
[VERIZON LOGO]
1095 Avenue of the Americas
New York, NY 10036
July 1, 2002
Ms. Mary Beth Bardin
[Address]
[Address]
Dear Mary Beth:
I am pleased to offer you this new employment agreement (the "Agreement") with Verizon Communications Inc. ("Verizon"), and, as an indication of my confidence in your abilities, I have added an automatic renewal provision. For purposes of this Agreement, the term "Company" means Verizon, all corporate subsidiaries and other companies affiliated with Verizon, all companies in which Verizon has an ownership or other proprietary interest of more than 10 percent, and their successors and assigns.
The many opportunities and challenges facing the Company are enormous and exciting. As a leader in our industry, we will be constantly challenged with sustaining our market growth and presence. We will meet these challenges by leveraging the strength of our talented and committed leaders. This Agreement demonstrates my continued confidence in you.
I value you and the leadership, vision, and commitment you bring to the Company. I am excited by the prospect of you continuing as a key member of the Company's leadership team.
The terms and conditions of this Agreement are set forth below.
1. PURPOSE - Verizon enters into this Agreement with you because the rapidly-changing and increasingly global telecommunications market requires the Company to make critical strategic, marketing, and technical decisions. These decisions by the Company will be based, in whole or in part, on confidential analyses of the evolving telecommunications market, confidential assessments of the technical capabilities and strategic plans of the Company and competing businesses, and confidential or proprietary information regarding the Company's technology, resources, and business opportunities or other confidential or proprietary information relating to the Company's business. Verizon seeks by this
Ms. Mary Beth Bardin
July 1, 2002
Agreement to ensure that you remain a part of the executive management team that plays a central role in this decision-making process.
In consideration for your entering into this Agreement, including the restrictions on the disclosure and use of confidential or proprietary information and the limitations on your engaging in competitive activities, the Company is providing you with the security of a written two-year agreement, short- and long-term award opportunities, and other benefits.
2. GENERAL - Under this Agreement, you shall continue as a senior executive of the Company. As a senior executive, you shall report to the Chief Executive Officer of Verizon (the "CEO").
3. TERM - The term of employment under this Agreement ("Term of Employment") shall commence on July 1, 2002, and end on June 30, 2004; provided that, on the last day of the Term of Employment, the Term of Employment shall automatically be extended for an additional two years unless, on or before that date, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended. For example, on June 30, 2004, the Term of Employment shall be extended until June 30, 2006, unless, on or before June 30, 2004, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended, and, if the Term of Employment is extended until June 30, 2006, the Term of Employment shall be extended on that date until June 30, 2008, unless, on or before June 30, 2006, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended. Notwithstanding the preceding provisions of this paragraph 3, the Company reserves the right to terminate your employment and the Term of Employment at any time. Your employment and the Term of Employment also may terminate for other reasons (such as your resignation, retirement, death, or disability). The consequences of the termination of your employment are specified in paragraph 11 ("Termination Of Employment").
4. DUTIES AND RESPONSIBILITIES - You shall continue to serve as a senior executive of the Company in such capacities, with such titles and authorities, as the CEO or his successor may from time to time prescribe, and you shall perform all duties incidental to such positions, shall cooperate fully with the CEO or his successor, and shall work cooperatively with the other officers of the Company. You shall continue to devote your entire business skill, time, and effort diligently to the affairs of the Company in accordance with the duties assigned to you, and you shall perform all such duties, and otherwise conduct yourself, in a manner reasonably calculated in good faith by you to promote the best interests of the
Ms. Mary Beth Bardin
July 1, 2002
Company. During the Term of Employment, except to the extent specifically permitted in writing by the CEO or his successor, and except for memberships on boards of directors that you held on October 3, 2000, (the date of your previous employment agreement with Verizon), you shall not, directly or indirectly, render any services of a business, commercial, or professional nature to any other person or organization other than the Company or a person or organization in which the Company has a financial interest, whether or not the services are rendered for compensation.
5. LOCATION - During the Term of Employment, you shall perform services for the Company at its New York City headquarters, or at any other location designated by the Company as necessary or appropriate for the discharge of your responsibilities under this Agreement. In the event of any change in your principal work location, you shall be eligible for relocation assistance under the terms of any Company relocation policy applicable to other senior executives of the Company in your salary band at the time of such relocation.
6. BASE SALARY - During the Term of Employment, your annual base salary shall not be less than your annual base salary on the date of this Agreement; provided that if you are granted a merit increase in your base salary, your base salary shall not thereafter be reduced below that increased level during the Term of Employment. The Human Resources Committee of Verizon's Board of Directors or its designee shall review your base salary at least annually.
7. SHORT-TERM AND LONG-TERM BONUS OPPORTUNITIES - During the Term of Employment, the Company shall provide you with annual short-term and long-term bonus opportunities equivalent to those available to other senior executives of the Company in your salary band. While you are not guaranteed an annual short-term or long-term bonus award in any amount, (a) the value of your annual short-term bonus opportunity shall be not less than 75 percent of your then-current base salary, and (b) the value of your annual long-term bonus opportunity shall not be less than 425 percent of your then-current base salary.
8. BENEFITS AND PERQUISITES - (a) IN GENERAL - For the immediate future, you shall-
(1) participate in the tax-qualified and nonqualified retirement plans and in the other employee benefit plans (such as the medical and dental plans), programs, and policies in which you currently participate;
and
Ms. Mary Beth Bardin
July 1, 2002
(2) be eligible for the perquisites available to senior executives in your salary band;
provided that the Company retains the right to amend or terminate any benefit plan, policy, program, or perquisite at any time.
(b) ANNUAL PHYSICAL - You are encouraged to take an annual physical examination from a physician at the Company's expense and to certify in writing to the Company's designee each year (1) that you have had the examination and (2) the nature and extent of any medical impairments that prevent you from currently performing the essential functions of your position.
9. SPECIAL RETENTION ACCOUNT PROGRAM - Pursuant to your October 3, 2000, employment agreement with Verizon (the "Prior Agreement"), the Company established a Special Retention Account on your behalf under the GTE Executive Salary Deferral Plan, which was subsequently transferred to the Verizon Income Deferral Plan. You shall also be eligible for such other benefits as are provided under the Verizon Income Deferral Plan to employees with Special Retention Accounts. A copy of the applicable provisions of the Verizon Income Deferral Plan relating to the Special Retention Account is attached hereto as Exhibit A, which is incorporated herein by reference. Your rights to the balance in your Special Retention Account following the termination of your employment shall be governed by the applicable provisions of the Verizon Income Deferral Plan, rather than by the terms of paragraphs 11 ("Termination of Employment") and 12 ("Release").
10. EXCISE TAX GROSS-UP - Under certain circumstances you may become entitled to a gross-up payment with respect to the excise tax imposed by section 4999 of the Internal Revenue Code (the "Code"). The terms governing the gross-up payment are set forth in Exhibit B, which is incorporated herein by reference.
11. TERMINATION OF EMPLOYMENT - (a) VOLUNTARY TERMINATION BY YOU - You may terminate your employment under this Agreement for a reason other than Retirement (as defined in subparagraph (c), below) or Good Reason (as defined in subparagraph (d), below) by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination, written notice of your intent to so terminate. The termination shall automatically become effective upon the expiration of such notice period. Upon the effective date of such termination, your base salary and any other Company benefits and perquisites shall cease to accrue, you shall forfeit all then-outstanding stock options, and you shall forfeit all rights under this Agreement which as of the relevant date have not yet been earned. A termination
Ms. Mary Beth Bardin
July 1, 2002
of employment in accordance with this subparagraph (a) shall be deemed a "Voluntary Termination."
(b) TERMINATION DUE TO DEATH OR DISABILITY - If, during the
Term of Employment, you terminate employment because of death or disability (as
defined under the Company-sponsored long-term disability plan that applies to
you at the time your employment is so terminated), the Company shall make a
lump-sum cash payment to you equal to the excess of (1) one times the sum of
your base salary and short-term bonus (at 50% of maximum), over (2) any amounts
payable to you under Company-sponsored disability plans. You shall also be
entitled to accelerated vesting of all outstanding stock options, and you shall
be entitled to exercise all then-outstanding stock options until the earlier of
(1) the fifth anniversary of the date your employment terminates (or any later
date prescribed by the terms of the option relating to termination of
employment) or (2) the expiration of the option; provided that if you terminate
employment because of death, your rights under this subparagraph (b) shall pass
to your estate. For this purpose, your base salary shall be based on your base
salary rate in effect immediately before your employment terminated.
(c) RETIREMENT - You may terminate your employment under this Agreement by reason of Retirement (as defined below) by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination, written notice of your intent to so terminate. The termination shall automatically become effective upon the expiration of such notice period. Upon the effective date of such termination, you shall be entitled to a pro-rated portion of any short-term and long-term bonuses (when and to the extent that they are earned) and accelerated vesting of all outstanding stock options (other than the Founders' Grant), and you shall be entitled to exercise all then-outstanding stock options (excluding nonvested Founders' Grant options) until the earlier of (1) the fifth anniversary of the date your employment terminates (or any later date prescribed by the terms of the option relating to termination of employment) or (2) the expiration of the option. For purposes of this Agreement, "Retirement" means attaining normal retirement age under the terms of the Verizon Management Pension Plan (the "Pension Plan") or satisfying the Rule of 75 under the Pension Plan (or being deemed retirement eligible pursuant to any other plan or agreement of Verizon). Except as provided by the preceding provisions of this subparagraph (c), upon the effective date of your Retirement, your base salary and any other Company benefits and perquisites shall cease to accrue; provided that you shall otherwise be eligible to receive any and all compensation and benefits for which a similarly situated senior executive would be eligible under the applicable provisions of the
Ms. Mary Beth Bardin
July 1, 2002
compensation and benefit plans in which he is then eligible to participate, as those plans may be amended from time to time.
(d) TERMINATION FOR GOOD REASON - (1) You may terminate your employment under this Agreement for Good Reason by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination (the "Notice Period"), written notice of your intent to so terminate, setting forth in reasonable detail the facts and circumstances deemed to provide a basis for such termination. For purposes of this Agreement, "Good Reason" means a material breach by the Company of the terms and conditions of this Agreement, a material reduction in your overall compensation opportunities, or your assignment to a new principal work location that is more than 50 miles from your previous principal work location. A "Good Reason" shall not occur merely because of a change in the individual (or position) to whom (or to which) you report. In addition, a "Good Reason" shall not occur merely because the Company notifies you, in accordance with paragraph 3 ("Term"), that the Term of Employment shall not be extended for an additional two-year period.
(2) Notwithstanding the foregoing, the Company shall have 15 calendar days from its receipt of such notice to cure the action specified in the notice. In the event of a cure by the Company within the 15-day period, the action in question shall not constitute Good Reason.
(3) Except as provided in subparagraph (d)(2), above, at the end of the Notice Period, the Good Reason termination shall take effect, and your obligation to serve the Company, and the Company's obligation to employ you, under the terms of this Agreement shall terminate simultaneously, and you shall be deemed to have incurred an Involuntary Termination Without Cause, with the consequences described in subparagraph (e), below; provided that your rights under this subparagraph (d) are contingent on your execution of a release in accordance with paragraph 12 ("Release").
(4) If you do not fulfill the notice and explanation requirements imposed by this subparagraph (d), the resulting termination of employment shall be deemed a Voluntary Termination.
(e) INVOLUNTARY TERMINATION WITHOUT CAUSE - The Company may terminate your employment under this Agreement at any time and for any reason. However, if the Company terminates your employment during the Term of Employment for any reason other than death, disability, or Cause (as defined in subparagraph (f), below), such termination shall be deemed an Involuntary Termination by the Company, and you shall be entitled to receive the following
Ms. Mary Beth Bardin
July 1, 2002
payments and benefits in lieu of any payment or benefit otherwise provided pursuant to paragraphs 6 ("Base Salary") through 8 ("Benefits And Perquisites"):
(1) The Company shall make a lump-sum cash severance payment to you equal to the excess of (i) two times the sum of your base salary and short-term bonus (at 50% of maximum), over (ii) the sum of your then-current balance in your Special Retention Account, as determined under the Verizon Income Deferral Plan, and any amounts paid or payable to you under any Company-sponsored severance plan, program, policy, contract, account, or arrangement;
(2) Your unvested stock options shall immediately vest, and you may exercise all of your then-outstanding stock options at any time up to the earlier of (i) the fifth anniversary of the date your employment terminates (or any later date prescribed by the terms of the option relating to termination of employment) or (ii) the expiration of the option; and
(3) You shall be eligible for outplacement services to the extent that such services are then available to senior executives in your salary band;
provided that your rights under this subparagraph (e) are contingent on your execution of a release in accordance with paragraph 12 ("Release"). For purposes of this paragraph 11(e), the Company shall not be deemed to have terminated your employment during the Term of Employment if the Company notifies you, in accordance with paragraph 3 ("Term"), that the Term of Employment shall not be extended for an additional two-year period.
(f) INVOLUNTARY TERMINATION FOR CAUSE - (1) Nothing in this Agreement prevents the Company from terminating your employment under this Agreement for Cause. In the event of your termination for Cause, the Company shall pay you your full accrued base salary and accrued vacation time through the date of your termination, you shall forfeit all then-outstanding stock options if you are not eligible for Retirement at the time of your termination, and the Company shall have no further obligations under this Agreement; provided that you shall otherwise be eligible to receive any and all compensation and benefits for which a similarly situated senior executive would be eligible under the applicable provisions
Ms. Mary Beth Bardin
July 1, 2002
of the compensation and benefit plans in which he is then eligible to participate, as those plans may be amended from time to time.
(2) For purposes of this Agreement, "Cause" is defined as (i) grossly incompetent performance or substantial or continuing inattention to or neglect of the duties and responsibilities assigned to you; fraud, misappropriation or embezzlement involving the Company or a material breach of any provision incorporated in paragraph 13 ("Covenants"), as determined by the CEO in his discretion, or (ii) commission of any felony of which you are finally adjudged guilty by a court of competent jurisdiction.
(3) If the Company terminates your employment for Cause, the Company shall provide you with a written statement of the grounds for such termination within 10 business days after the date of termination.
12. RELEASE - You shall not be entitled to any benefits under paragraphs 10 ("Excise Tax Gross-Up"), 11(d) ("Termination For Good Reason"), and 11(e) ("Involuntary Termination Without Cause") following the termination of your employment unless, at the time your employment terminates, you execute a release satisfactory to the Company releasing the Company, its affiliates, shareholders, directors, officers, employees, representatives, and agents and their successors and assigns from any and all employment-related claims you or your successors and beneficiaries might then have against them (excluding any claims you might then have under this Agreement, or any employee benefit plan that is subject to the vesting standards imposed by the Employee Retirement Income Security Act of 1974, as amended).
13. COVENANTS - In consideration for the benefits and agreements described above, you agree to comply with the covenants set forth in Exhibit C hereto, which is incorporated herein by reference.
14. REQUEST FOR WAIVER - Nothing in this Agreement bars you from requesting, at the time of your termination of employment or at any time thereafter, that the CEO, in his sole discretion, waive in writing the Company's rights to enforce some or all of the provisions incorporated in paragraph 13 ("Covenants").
15. OTHER AGREEMENTS AND POLICIES - The obligations imposed on you by paragraph 13 ("Covenants") are in addition to, and not in lieu of, any and all other policies and agreements of the Company regarding the subject matter of the foregoing obligations.
Ms. Mary Beth Bardin
July 1, 2002
16. NONDUPLICATION OF BENEFITS - No provision of this Agreement shall require the Company to provide you with any payment, benefit, or grant that duplicates any payment, benefit, or grant that you are entitled to receive under any Company compensation or benefit plan, award agreement, or other arrangement.
17. OTHER COMPANY PLANS - Except to the extent otherwise explicitly provided by this Agreement, any awards made to you under any Company compensation or benefit plan or program shall be governed by the terms of that plan or program and any applicable award agreement thereunder as in effect from time to time. Notwithstanding the foregoing, you shall not be entitled to participate in any Company compensation or benefit plan that is established after your employment with the Company terminates, and except as specifically provided in this Agreement, you shall not be entitled to any additional grants or awards under any Company compensation or benefit plan after your employment with the Company terminates. The amounts paid, provided, or credited under this Agreement shall not be treated as compensation for purposes of determining any benefits payable under any Company-sponsored pension, savings, life insurance, or other employee benefit plan except to the extent provided by the terms of such plan.
18. FORFEITURE - (a) If you breach any of the obligations incorporated in paragraph 13 ("Covenants"), or engage in serious misconduct that is contrary to written policies of the Company and is harmful to the Company or its reputation, you shall forfeit:
(1) all credits that are added to your Retirement Contribution Sub-Account in the Verizon Income Deferral Plan (or to any successor account in that plan or a successor plan) ("Retirement Contribution Sub-Account"), on or after January 1, 2002, other than the GTE Supplemental Executive Retirement Plan conversion credit (the "Conversion Credit");
(2) any interest or other earnings or gains on or after January 1, 2002, with respect to any credits in your Retirement Contribution Sub-Account (including any interest, or other earnings or gains attributable to the Conversion Credit or any interest or other earnings or gains attributable to any other credit regardless of when the credit was added to your Retirement Contribution Sub-Account); and
(3) any unpaid incentive compensation (such as performance bonus awards or other awards under the Verizon Communications Inc.
Ms. Mary Beth Bardin
July 1, 2002
Long-Term Incentive Plan) that you are
otherwise entitled to receive.
(b) The remedies available under this paragraph are in addition to, and not in lieu of, the remedies available under paragraph 25 ("Additional Remedies").
19. NO DEEMED WAIVER - Failure to insist upon strict compliance with any of the terms, covenants, or conditions of this Agreement shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times.
20. TAXES - The Company may withhold from any benefits payable under this Agreement all taxes that the Company reasonably determines to be required pursuant to any law, regulation, or ruling. However, it is your obligation to pay all required taxes on any amounts and benefits provided under this Agreement, including the benefits and perquisites provided to you pursuant to paragraph 8 ("Benefits and Perquisites"), regardless of whether withholding is required.
21. CONFIDENTIALITY - Except to the extent otherwise required by law, you shall not disclose, in whole or in part, any of the terms of this Agreement. This paragraph 21 does not prevent you from disclosing the terms of this Agreement to your spouse or to your legal, tax, or financial adviser, provided that you take all reasonable measures to assure that he or she does not disclose the terms of this Agreement to a third party except as otherwise required by law.
22. GOVERNING LAW - To the extent not preempted by federal law, the provisions of this Agreement shall be construed and enforced in accordance with the laws of the State of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this provision to the substantive law of another jurisdiction.
23. ASSIGNMENT - Verizon may, without your consent, assign its rights and obligations under this Agreement to any entity that is a part of the Company, and if Verizon makes such an assignment, all references in this Agreement to Verizon (except for references to Verizon common stock) shall be deemed to refer to the assignee. However, you may not assign your rights and obligations under this Agreement.
Ms. Mary Beth Bardin
July 1, 2002
24. SEVERABILITY - The agreements contained herein and within the release prescribed by paragraph 12 ("Release") shall each constitute a separate agreement independently supported by good and adequate consideration, and shall each be severable from the other provisions of the Agreement and such release. If an arbitrator or court of competent jurisdiction determines that any term, provision, or portion of this Agreement or such release is void, illegal, or unenforceable, the other terms, provisions, and portions of this Agreement or such release shall remain in full force and effect, and the terms, provisions, and portions that are determined to be void, illegal, or unenforceable shall either be limited so that they shall remain in effect to the extent permissible by law, or such arbitrator or court shall substitute, to the extent enforceable, provisions similar thereto or other provisions, so as to provide to the Company, to the fullest extent permitted by applicable law, the benefits intended by this Agreement and such release.
25. ADDITIONAL REMEDIES - In addition to any other rights or remedies, whether legal, equitable, or otherwise, that each of the parties to this Agreement may have, you acknowledge that
(a) The covenants incorporated in paragraph 13 ("Covenants") are essential to the continued good will and profitability of the Company;
(b) You have broad-based skills that will serve as the
basis for employment opportunities that are not
prohibited by the covenants incorporated in paragraph
13 ("Covenants");
(c) When your employment with the Company terminates, you shall be able to earn a livelihood without violating any of the terms of this Agreement;
(d) Irreparable damage to the Company shall result in the event that the covenants incorporated in paragraph 13 ("Covenants") are not specifically enforced and that monetary damages will not adequately protect the Company from a breach of such covenants;
(e) If any dispute arises concerning the violation by you of the covenants incorporated in paragraph 13 ("Covenants"), an injunction may be issued restraining such violation pending the determination of such controversy, and no bond or other security shall be required in connection therewith;
Ms. Mary Beth Bardin
July 1, 2002
(f) Such covenants shall continue to apply after any expiration, termination, or cancellation of this Agreement; and
(g) Your breach of any of such covenants shall result in your immediate forfeiture of all rights under this Agreement.
26. SURVIVAL - The provisions of paragraphs 13 ("Covenants") through 28 ("Entire Agreement") shall survive the Term of Employment. In addition, if the Term of Employment is not extended in accordance with paragraph 3 ("Term") but your employment continues after the end of the Term of Employment, you shall be subject to the obligations imposed by each of such paragraphs with respect to such employment. Any obligations that the Company has incurred under this Agreement to provide benefits that have vested under the terms of this Agreement (including the Company's obligations under paragraph 11(c) ("Retirement")) shall likewise survive the Term of Employment. Except as provided by the preceding provisions of this paragraph 26, if the Term of Employment is not extended in accordance with paragraph 3 ("Term") but your employment continues after the end of the Term of Employment, the terms of such employment shall not be governed by this Agreement.
27. ARBITRATION - Any dispute arising out of or relating to this Agreement (except any dispute arising out of or relating to paragraph 13 ("Covenants")), and any dispute arising out of or relating to your employment, shall be settled by final and binding arbitration, which shall be the exclusive means of resolving any such dispute, and the parties specifically waive all rights to pursue any other remedy, recourse, or relief. With respect to disputes by the Company arising out of or relating to paragraph 13 ("Covenants"), the Company has retained all its rights to legal and equitable recourse and relief, including but not limited to injunctive relief, as referred to in paragraph 25 ("Additional Remedies"). The arbitration shall be expedited and conducted in the State of New York pursuant to the Center for Public Resources ("CPR") Rules for Non-Administered Arbitration in effect at the time of notice of the dispute before one neutral arbitrator appointed by CPR from the CPR Panel of neutrals unless the parties mutually agree to the appointment of a different neutral arbitrator. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. sections 1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction. The finding of the arbitrator may not change the express terms of this Agreement and shall be consistent with the arbitrator's understanding of the findings a court of proper jurisdiction would make in applying the applicable law to the facts underlying the dispute. In no event whatsoever shall such an arbitration award include any award of damages other than the amounts in controversy under this Agreement. The parties waive the right
Ms. Mary Beth Bardin
July 1, 2002
to recover, in such arbitration, punitive damages. Each party hereby agrees that New York City is the proper venue for any litigation seeking to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27, and each party hereby waives any right it otherwise might have to defend, oppose, or object to, on the basis of jurisdiction, venue, or forum nonconveniens, a suit filed by the other party in any federal or state court in New York City to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27. Each party also waives any right it might otherwise have to seek to transfer from a federal or state court in New York City a suit filed by the other party to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27.
28. ENTIRE AGREEMENT - Except for the terms of the compensation and benefit plans in which you participate (including any award agreements issued thereunder), this Agreement, including the Exhibits hereto, sets forth the entire understanding of you and the Company, and supersedes all prior agreements and communications, whether oral or written, between the Company (or GTE or Bell Atlantic or any of their respective subsidiaries) and you regarding the subject matter of this Agreement, including the Prior Agreement. This Agreement shall not be modified except by written agreement of you and Verizon.
Mary Beth, I believe that this Agreement continues to provide you and your family with a firm foundation of financial security as our Company faces many new challenges and opportunities. I recognize that the Company and the telecommunications industry operate in a rapidly changing and demanding environment. It is my hope that this Agreement demonstrates to you the level of confidence that I have in your abilities to meet the commitments that I expect from you. Please indicate your acceptance by signing below and returning the signed Agreement to me or Ezra Singer within ten business days after your receipt of this Agreement.
Sincerely yours,
/s/ Ivan Seidenberg ----------------------------- Ivan Seidenberg Chief Executive Officer |
cc: E. Singer
Ms. Mary Beth Bardin
July 1, 2002
I agree to the terms described above.
/s/ Mary Beth Bardin ----------------------------- Mary Beth Bardin |
Attachments: Exhibit A - Special Retention Account Program
Exhibit B - Excise Tax Gross-Up
Exhibit C - Covenants
|
EXHIBIT A
SPECIAL RETENTION ACCOUNT
AND OTHER BENEFITS PROGRAM
PART OF THE
VERIZON INCOME DEFERRAL PLAN
Amended and Restated Effective January 1, 2002
SPECIAL RETENTION ACCOUNT
AND OTHER BENEFITS PROGRAM
TABLE OF CONTENTS
Article 1. Introduction...........................................................................................1
1.01. Nature of Program...............................................................................1
1.02. Effective Date..................................................................................1
Article 2. Definitions and Construction...........................................................................2
2.01. Definitions.....................................................................................2
2.02. Part of the Plan................................................................................3
2.03. Gender and Number...............................................................................3
Article 3. Eligibility and Account Balance........................................................................4
3.01. Eligibility.....................................................................................4
Article 4. Accounts...............................................................................................5
4.01. Accounts........................................................................................5
Article 5. Payments...............................................................................................6
5.01. Exclusive Entitlement to Payment................................................................6
5.02. Amount and Sources of Payment...................................................................6
5.03. Limitations on Rights to Payment................................................................7
Article 6. Other Benefits.........................................................................................8
6.01. Other Benefits..................................................................................8
6.02. Certain Additional Payments by the Company......................................................9
6.03. Nonduplication..................................................................................9
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ARTICLE 1. INTRODUCTION
1.01. NATURE OF PROGRAM.
This Program was established effective July 1, 2000, as part of the GTE Executive Salary Deferral Plan (and any successors to that plan). Effective January 1, 2002, it became part of the Verizon Income Deferral Plan, which is a successor to the GTE Executive Salary Deferral Plan. This Program shall apply only to those participants in the Verizon Income Deferral Plan who have Special Retention Accounts by virtue of having waived any entitlement they might otherwise have had to certain payments and/or other benefits as a result of the merger involving GTE Corporation and Bell Atlantic Corporation.
1.02. EFFECTIVE DATE.
The Program was originally effective as of July 1, 2000. This amendment and restatement of the Program is effective January 1, 2002, except to the extent specifically provided herein.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
2.01. DEFINITIONS.
Unless the context clearly indicates otherwise, the following terms, when used in capitalized form in this Program, shall have the meanings set forth below.
COMMITTEE. "Committee" shall mean the Human Resources Committee of the Board of Directors of the Company.
COMPANY. "Company" shall mean Verizon Communications Inc. and its affiliates.
COVERED EMPLOYEE. "Covered Employee" shall mean an employee of the Company who is designated as a Covered Employee by the Plan Administrator.
MERGER. "Merger" shall mean the merger of the businesses of GTE Corporation and Bell Atlantic Corporation pursuant to the terms of an Agreement and Plan of Merger dated as of July 27, 1998, among Bell Atlantic, GTE, and Beta Gamma Corporation.
OTHER BENEFITS. "Other Benefits" shall mean the benefits described in Article 6 of this Program.
OTHER PLANS. "Other Plans" shall mean all employee benefit plans, programs, awards, arrangements, policies, and practices of the Company, whether or not qualified under the Code or subject to the Employee Retirement Income Security Act of 1974, as amended, including any employment agreement the Participant may have with the Company or its predecessors.
PARTICIPANT. "Participant" shall mean each Covered Employee whose Special Retention Account has a positive balance.
PLAN. "Plan" shall mean the Verizon Income Deferral Plan, as effective January 1, 2002, and as it may be amended from time to time, and any successor thereto.
PLAN ADMINISTRATOR. "Plan Administrator" shall mean the chief human resources officer of the Company or any other Person designated by the Committee to serve as Plan Administrator of the Plan.
PROGRAM. "Program" shall mean this Special Retention Account and Other Benefits program.
SPECIAL RETENTION ACCOUNT. "Special Retention Account" shall mean the subaccount established under the Plan pursuant to the terms of this Program.
2.02. PART OF THE PLAN.
The provisions of this Program are a part of the Plan. The terms of the Plan shall apply to the benefits provided by this Program to Participants, except to the extent a provision of this Program is contrary to a provision of the Plan, in which case the provisions of this Program shall control.
2.03. GENDER AND NUMBER.
Masculine pronouns shall refer to both males and females. The singular form shall include the plural, where appropriate.
ARTICLE 3. ELIGIBILITY AND ACCOUNT BALANCE
3.01. ELIGIBILITY.
Individuals who were Participants on January 1, 2002, shall remain Participants after that date for as long as they have a positive balance in their Special Retention Account. No individual shall first become a Participant after December 31, 2001.
ARTICLE 4. ACCOUNTS
4.01. ACCOUNTS.
(a) The Special Retention Account shall be maintained as a separate subaccount in each Participant's Account in the Plan.
(b) The Special Retention Account shall be invested in the Moody's Investment Fund in accordance with Section 6.03 of the Plan ("Moody's Investment Fund"), unless the Plan Administrator determines in its discretion that a different hypothetical investment vehicle is appropriate for the Special Retention Account.
ARTICLE 5. PAYMENTS
5.01. EXCLUSIVE ENTITLEMENT TO PAYMENT.
A Participant in the Program has waived his right to receive change in control benefits under one or more prior agreements with the Company or its predecessors (including his executive severance agreement) as a result of the Merger and has agreed to receive in lieu thereof the amount payable to him at the times and in the amounts specified in this Article 5 and in Article 7 of the Plan ("Payments From The Plan"), as well as the Other Benefits set forth in Article 6, below. No other amounts shall be due under the Plan or otherwise as a result of the Participant's deferral election pursuant to Section 3.03 of the Program as it existed before the January 1, 2002, amendment and restatement.
5.02. AMOUNT AND SOURCES OF PAYMENT.
(a) Upon termination of employment, a Participant shall be entitled to receive the greater of (1) the balance in his Special Retention Account at termination of employment or (2) the cash component of any severance benefits that the Participant receives or is entitled to receive in the aggregate under all Other Plans. For purposes of this Section 5.02(a)--
(1) the "cash component" of any severance benefits shall include monetary benefits payable in all forms, whether payable in a lump sum or otherwise; and
(2) a Participant shall be treated as "entitled to receive" any benefits under a Company-sponsored employee benefit plan to which the Participant would be entitled based on compensation and service, even if the Participant does not receive the benefit for any other reason.
(b) The amount payable under the Program after application of Section 5.02(a) shall be payable to the Participant from the following sources in the following order until the entire amount is paid, if available--
(1) any of the Other Plans that is qualified (or intended to be qualified) under Section 401(a) of the Code;
(2) the Special Retention Account;
(3) any of the Other Plans that is not qualified (or intended to be qualified) under Section 401(a) of the Code; and
(4) the general assets of the Company.
(c) Any amount not paid from the Special Retention Account as a result of application of this Section 5.02 shall be forfeited.
5.03. LIMITATIONS ON RIGHTS TO PAYMENT.
(a) Period of Service, Notice. A Participant shall not be entitled to receive any amount from his Special Retention Account if he (1) voluntarily terminates from the Company (including a retirement) without providing 30 days' written notice of his intent to terminate or (2) is terminated for Cause (as defined in Section 5.03(b), below). Nothing in this Section 5.03(a) shall affect the right of a Participant to receive any amount from his Special Retention Account if he is involuntarily terminated without Cause or terminates employment due to his death or disability (as defined in the applicable long-term disability plan).
(b) Cause. For purposes of this Program, "Cause" shall mean (i) grossly incompetent performance or substantial or continuing inattention to or neglect of the duties and responsibilities assigned to the Participant; fraud, misappropriation or embezzlement involving the Company or a material breach of any provision incorporated in paragraph 13 ("Covenants") of the employment agreement to which this Program is an exhibit, as determined by the CEO in his discretion or (ii) commission of any felony of which the participant is finally adjudged guilty by a court of competent jurisdiction.
(c) Other Benefits. The Other Benefits provided in Article 6, below, shall not be subject to the requirements of Section 5.03(a), above, except to the extent specifically provided in Article 6, below.
(d) Other Limitations on Rights to Payment. The provisions of Sections 8.04 and 8.06 of the Plan ("Forfeiture" and "Non-Competition/Non-Solicitation Agreement Upon or After Termination of Employment," respectively) shall not apply to the Special Retention Account or the Other Benefits provided in Article 6, below.
(e) In-Service Withdrawals. The provisions of Section 7.06 of the Plan ("Early Payments") shall not apply to the Special Retention Account to the extent they permit withdrawals or distributions before a Participant terminates employment with the Company, except that a Participant may apply to the Committee for such a withdrawal or distribution, which the Committee may grant in its discretion.
ARTICLE 6. OTHER BENEFITS
6.01. OTHER BENEFITS.
In addition to the benefits provided in the Plan or otherwise in this
Program, Participants shall be entitled to the benefits set forth in paragraphs
(a) and (b) of this Section 6.01.
(a) Insurance. The Company shall provide each Participant, at the Company's expense, for a period beginning on the date of the Participant's termination of employment with the Company, the same medical, dental, and life insurance coverage as was in effect on June 30, 2000, or, if greater, coverage under any other Company-sponsored medical, dental, or life insurance coverage available on the date of the Participant's termination of employment. Such coverage shall end upon the expiration of 24 months after the Participant's termination of employment. For purposes of this paragraph (a), "at the Company's expense" means that the Company shall make all contributions or premium payments required to obtain coverage, and that the Participant shall not make any such contributions or premium payments, but that the Participant shall be subject to any deductibles and co-payment provisions in effect on June 30, 2000 (or, if applicable, immediately before the termination of employment). Except to the extent otherwise required by law, the period of coverage for any health care continuation coverage required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, shall begin on the date of the Participant's termination of employment.
(b) Benefit Credit.
(1) Each Participant shall receive service credit, for the purpose of receiving benefits and for vesting, retirement eligibility, benefit accrual, and all other purposes, under all employee benefit plans sponsored by the Company (including, but not limited to, health, life insurance, pension, savings, stock, and stock ownership plans, but excluding the Company's short-term and long-term disability plans) in which he participated on June 30, 2000, for 24 months.
(2) Other than the benefit credit set forth in Section 6.01(b)(1), above, a Participant shall not receive any additional benefit credit under the Program. The benefit credit provided in accordance with Section 6.01(b) of the Program as in effect before January 1, 2002 (other than to the extent such provisions are preserved in Section 6.01(b)(1), above) was converted to a dollar amount that was reflected in each Participant's Account as of January 1, 2002, or has otherwise been provided to the Participant through another plan or program of the Company. Therefore, that benefit credit has already been provided and will not be credited again.
6.02. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
Participants shall be entitled to a tax gross-up payment in accordance with Addendum A to the Program.
6.03. NONDUPLICATION.
No provision of this Program shall require the Company to provide the Participant with any payment, benefit, or grant that duplicates any payment, benefit, or grant that the Participant is entitled to receive under any Company compensation or benefit plan, award agreement, or other arrangement or a payment, benefit, or grant that was included in the Participant's Account in the Verizon Income Deferral Plan as of January 1, 2002.
SPECIAL RETENTION ACCOUNT AND OTHER BENEFITS PROGRAM
ADDENDUM A
ADDITIONAL PAYMENTS BY THE COMPANY
A Participant in the Program shall be entitled to a tax gross-up payment in accordance with the following provisions:
(a) Gross-Up Payment. If any payment or benefit received or to be received by the Participant from the Company pursuant to the Plan (the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Code as determined in accordance with this Addendum A, the Company shall pay the Participant, at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount that the Participant retains, after deduction of the Excise Tax on the Payments and any federal, state, and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties, or additions to tax payable by the Participant with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in section 1274(d) of the Code) in such calculation) of the Payments at the time such Payments are to be made.
(b) Calculations. For purposes of determining whether any of the Payments shall be subject to the Excise Tax and the amount of such excise tax,
(1) The total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the excise tax, except to the extent that, in the written opinion of independent counsel selected by the Company and reasonably acceptable to the Participant ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax;
(2) The amount of the Payments that shall be subject to the Excise Tax
shall be equal to the lesser of (i) the total amount of the Payments or
(ii) the amount of "excess parachute payments " within the meaning of
section 280G(b)(1) of the Code (after applying clause (1), above); and
(3) The value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of section 280G(d)(3) and (4) of the Code.
(c) Tax Rates. For purposes of determining the amount of the Gross-Up Payment, the Participant shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of the Participant's residence in the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates.
(d) Time of Gross-Up Payments. The Gross-Up Payments provided for in this paragraph 12 shall be made upon the earlier of (i) the payment to the Participant of any Payment or (ii) the imposition upon the Participant, or any payment by the Participant, of any Excise Tax.
(e) Adjustments to Gross-Up Payments. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax is less than the amount previously taken into account hereunder, the Participant shall repay the Company, within 30 days of the Participant's receipt of notice of such final determination or opinion, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state, and local income tax imposed on the Gross-Up Payment being repaid by the Participant if such repayment results in a reduction in Excise Tax or a federal, state, and local income tax deduction) plus any interest received by the Participant on the amount of such repayment, provided that if any such amount has been paid by the Participant as an Excise Tax or other tax, the Participant shall cooperate with the Company in seeking a refund of any tax overpayments, and the Participant shall not be required to make repayments to the Company until the overpaid taxes and interest thereon are refunded to the Participant.
(f) Additional Gross-Up Payment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within 30 days of the Company's receipt of notice of such final determination or opinion.
(g) Change In Law Or Interpretation. In the event of any change in, or further interpretation of section 280G or 4999 of the Code and the regulations promulgated thereunder, the Participant shall be entitled, by written notice to the Company, to request a written opinion of Independent Counsel regarding the application of such change to any of the foregoing, and the Company shall use its best efforts to cause such opinion to be rendered as promptly as practicable.
(h) Fees And Expenses. All fees and expenses of Independent Counsel incurred in connection with this Addendum A shall be borne by the Company.
(i) Survival. The Company's obligation to make a Gross-Up Payment with respect to Payments made or accrued before the Participant's termination of employment with the Company shall survive the termination of the Participant's with the Company unless (1) the Participant's employment is terminated for Cause, or (2) the
Participant fails to execute a release, in which event the Company's obligation under this Addendum A shall terminate immediately.
EXHIBIT B
EXCISE TAX GROSS-UP
1. GROSS-UP PAYMENT - If any payment or benefit received or to be received by you from the Company pursuant to the terms of the Agreement to which this Exhibit B is attached or otherwise (the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code (the "Code") as determined in accordance with this Exhibit B, the Company shall pay you, at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount that you retain, after deduction of the Excise Tax on the Payments and any federal, state, and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties, or additions to tax payable by you with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in section 1274(d) of the Code) in such calculation) of the Payments at the time such Payments are to be made.
2. CALCULATIONS - For purposes of determining whether any of the Payments shall be subject to the Excise Tax and the amount of such excise tax,
(a) The total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the excise tax, except to the extent that, in the written opinion of independent counsel selected by Verizon and reasonably acceptable to you ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax;
(b) The amount of the Payments that shall be subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Payments or (ii) the amount of "excess parachute payments " within the meaning of section 280G(b)(1) of the Code (after applying clause (a), above); and
(c) The value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of section 280G(d)(3) and (4) of the Code.
3. TAX RATES - For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates.
4. TIME OF GROSS-UP PAYMENTS - The Gross-Up Payments provided for in this Exhibit B shall be made upon the earlier of (a) the payment to you of any Payment or (b) the imposition upon you, or any payment by you, of any Excise Tax.
5. ADJUSTMENTS TO GROSS-UP PAYMENTS - If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax is less than the amount previously taken into account hereunder, you shall repay the Company, within 30 days of your receipt of notice of such final determination or opinion, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state, and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax or a federal, state, and local income tax deduction) plus any interest received by you on the amount of such repayment, provided that if any such amount has been paid by you as an Excise Tax or other tax, you shall cooperate with the Company in seeking a refund of any tax overpayments, and you shall not be required to make repayments to the Company until the overpaid taxes and interest thereon are refunded to you.
6. ADDITIONAL GROSS-UP PAYMENT - If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within 30 days of the Company's receipt of notice of such final determination or opinion.
7. CHANGE IN LAW OR INTERPRETATION - In the event of any change in or further interpretation of section 280G or 4999 of the Code and the regulations promulgated thereunder, you shall be entitled, by written notice to Verizon, to request a written opinion of Independent Counsel regarding the application of such change or further interpretation to any of the foregoing, and Verizon shall use its best efforts to cause such opinion to be rendered as promptly as practicable.
8. FEES AND EXPENSES - All fees and expenses of Independent Counsel incurred in connection with this Exhibit B shall be borne by Verizon.
9. SURVIVAL - The Company's obligation to make a Gross-Up Payment with respect to Payments made or accrued before the end of the Term of Employment
shall survive the Term of Employment unless (a) your employment is terminated for Cause pursuant to paragraph 11(f) of the Agreement to which this Exhibit B is attached ("Involuntary Termination For Cause"), (b) you fail to execute a release in accordance with paragraph 12 of such Agreement ("Release"), or (c) you fail to comply with the covenants incorporated in paragraph 13 of such Agreement ("Covenants"), in which event the Company's obligation under this Exhibit B shall terminate immediately.
10. DEFINED TERMS - Except where clearly provided to the contrary, all capitalized terms used in this Exhibit B shall have the definitions given to those terms in the Agreement to which this Exhibit B is attached.
EXHIBIT C
COVENANTS
1. NONCOMPETITION - In consideration for the benefits and agreements described in the Agreement to which this Exhibit C is attached, you agree that:
(a) PROHIBITED CONDUCT - During the period of your employment with the Company, and for the period ending six months after your termination of employment for any reason from the Company, you shall not, without the prior written consent of the CEO(s):
(1) personally engage in Competitive Activities (as defined below); or
(2) work for, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or provide consulting or advisory services to, any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities; provided that your purchase or holding, for investment purposes, of securities of a publicly-traded company shall not constitute "ownership" or "participation in ownership" for purposes of this paragraph so long as your equity interest in any such company is less than a controlling interest;
provided that this paragraph (a) shall not prohibit you from (i) being employed by, or providing services to, a consulting firm, provided that you do not personally engage in Competitive Activities or provide consulting or advisory services to any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities, or (ii) engaging in the private practice of law as a sole practitioner or as a partner in (or as an employee of or counsel to) a law firm in accordance with applicable legal and professional standards.
(b) COMPETITIVE ACTIVITIES - For purposes of the Agreement to which this Exhibit C is attached, "Competitive Activities" means business activities relating to products or services of the same or similar type as the products or services (1) which are sold (or, pursuant to an existing business plan, will be sold) to paying customers of the Company, and (2) for which you then have responsibility to plan, develop, manage, market, or oversee, or had any such responsibility within your most recent 24 months of employment with the Company. Notwithstanding the previous sentence, a business activity shall not be treated as a Competitive Activity if the geographic marketing area of the relevant products or services sold by you or
a third party does not overlap with the geographic marketing area for the applicable products and services of the Company.
2. INTERFERENCE WITH BUSINESS RELATIONS - During the period of your employment with the Company, and for a period ending with the expiration of 12 months following your termination of employment for any reason from the Company, you shall not, without the written consent of the CEO(s):
(a) recruit or solicit any employee of the Company for employment or for retention as a consultant or service provider;
(b) hire or participate (with another company or third party) in the process of hiring (other than for the Company) any person who is then an employee of the Company, or provide names or other information about Company employees to any person or business (other than the Company) under circumstances that could lead to the use of that information for purposes of recruiting or hiring;
(c) interfere with the relationship of the Company with any of its employees, agents, or representatives;
(d) solicit or induce, or in any manner attempt to solicit or induce, any client, customer, or prospect of the Company (1) to cease being, or not to become, a customer of the Company or (2) to divert any business of such customer or prospect from the Company; or
(e) otherwise interfere with, disrupt, or attempt to interfere with or disrupt, the relationship, contractual or otherwise, between the Company and any of its customers, clients, prospects, suppliers, consultants, or employees.
3. RETURN OF PROPERTY; INTELLECTUAL PROPERTY RIGHTS - You agree that on or before your termination of employment for any reason with the Company, you shall return to the Company all property owned by the Company or in which the Company has an interest, including files, documents, data and records (whether on paper or in tapes, disks, or other machine-readable form), office equipment, credit cards, and employee identification cards. You acknowledge that the Company is the rightful owner of any programs, ideas, inventions, discoveries, patented or copyrighted material, or trademarks that you may have originated or developed, or assisted in originating or developing, during your period of employment with the Company, where any such origination or development involved the use of Company
time or resources, or the exercise of your responsibilities for or on behalf of the Company. You shall at all times, both before and after termination of employment, cooperate with the Company in executing and delivering documents requested by the Company, and taking any other actions, that are necessary or requested by the Company to assist the Company in patenting, copyrighting, or registering any programs, ideas, inventions, discoveries, patented or copyrighted material, or trademarks, and to vest title thereto in the Company.
4. PROPRIETARY AND CONFIDENTIAL INFORMATION - You shall at all times preserve the confidentiality of all proprietary information and trade secrets of the Company, except to the extent that disclosure of such information is legally required. "Proprietary information" means information that has not been disclosed to the public and that is treated as confidential within the business of the Company, such as strategic or tactical business plans; undisclosed financial data; ideas, processes, methods, techniques, systems, patented or copyrighted information, models, devices, programs, computer software, or related information; documents relating to regulatory matters and correspondence with governmental entities; undisclosed information concerning any past, pending, or threatened legal dispute; pricing and cost data; reports and analyses of business prospects; business transactions that are contemplated or planned; research data; personnel information and data; identities of users and purchasers of the Company's products or services; and other confidential matters pertaining to or known by the Company, including confidential information of a third party that you know or should know the Company is bound to protect.
5. DEFINITIONS - Except where clearly provided to the contrary, all capitalized terms used in this Exhibit C shall have the definitions given to those terms in the Agreement to which this Exhibit C is attached.
EXHIBIT 10b
[Verizon Logo]
1095 Avenue of the Americas
New York, NY 10036
July 1, 2002
Mr. David Benson
[Address]
[Address]
Dear Dave:
I am pleased to offer you this new employment agreement (the "Agreement") with Verizon Communications Inc. ("Verizon"), and, as an indication of my confidence in your abilities, I have added an automatic renewal provision. For purposes of this Agreement, the term "Company" means Verizon, all corporate subsidiaries and other companies affiliated with Verizon, all companies in which Verizon has an ownership or other proprietary interest of more than 10 percent, and their successors and assigns.
The many opportunities and challenges facing the Company are enormous and exciting. As a leader in our industry, we will be constantly challenged with sustaining our market growth and presence. We will meet these challenges by leveraging the strength of our talented and committed leaders. This Agreement demonstrates my continued confidence in you.
I value you and the leadership, vision, and commitment you bring to the Company. I am excited by the prospect of you continuing as a key member of the Company's leadership team.
The terms and conditions of this Agreement are set forth below.
1. PURPOSE - Verizon enters into this Agreement with you because the rapidly-changing and increasingly global telecommunications market requires the Company to make critical strategic, marketing, and technical decisions. These decisions by the Company will be based, in whole or in part, on confidential analyses of the evolving telecommunications market, confidential assessments of the technical capabilities and strategic plans of the Company and competing businesses, and confidential or proprietary information regarding the Company's technology, resources, and business opportunities or other confidential or proprietary information relating to the Company's business. Verizon seeks by this
Mr. David Benson
July 1, 2002
Agreement to ensure that you remain a part of the executive management team that plays a central role in this decision-making process.
In consideration for your entering into this Agreement, including the restrictions on the disclosure and use of confidential or proprietary information and the limitations on your engaging in competitive activities, the Company is providing you with the security of a written two-year agreement, short- and long-term award opportunities, and other benefits.
2. GENERAL - Under this Agreement, you shall continue as a senior executive of the Company. As a senior executive, you shall report to the Chief Executive Officer of Verizon (the "CEO").
3. TERM - The term of employment under this Agreement ("Term of Employment") shall commence on July 1, 2002, and end on June 30, 2004; provided that, on the last day of the Term of Employment, the Term of Employment shall automatically be extended for an additional two years unless, on or before that date, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended. For example, on June 30, 2004, the Term of Employment shall be extended until June 30, 2006, unless, on or before June 30, 2004, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended, and, if the Term of Employment is extended until June 30, 2006, the Term of Employment shall be extended on that date until June 30, 2008, unless, on or before June 30, 2006, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended. Notwithstanding the preceding provisions of this paragraph 3, the Company reserves the right to terminate your employment and the Term of Employment at any time. Your employment and the Term of Employment also may terminate for other reasons (such as your resignation, retirement, death, or disability). The consequences of the termination of your employment are specified in paragraph 11 ("Termination Of Employment").
4. DUTIES AND RESPONSIBILITIES - You shall continue to serve as a senior executive of the Company in such capacities, with such titles and authorities, as the CEO or his successor may from time to time prescribe, and you shall perform all duties incidental to such positions, shall cooperate fully with the CEO or his successor, and shall work cooperatively with the other officers of the Company. You shall continue to devote your entire business skill, time, and effort diligently to the affairs of the Company in accordance with the duties assigned to you, and you shall perform all such duties, and otherwise conduct yourself, in a manner reasonably calculated in good faith by you to promote the best interests of the
Mr. David Benson
July 1, 2002
Company. During the Term of Employment, except to the extent specifically permitted in writing by the CEO or his successor, and except for memberships on boards of directors that you held on February 23, 2001 (the date of your previous employment agreement with Verizon), you shall not, directly or indirectly, render any services of a business, commercial, or professional nature to any other person or organization other than the Company or a person or organization in which the Company has a financial interest, whether or not the services are rendered for compensation.
5. LOCATION - During the Term of Employment, you shall perform services for the Company at its New York City headquarters, or at any other location designated by the Company as necessary or appropriate for the discharge of your responsibilities under this Agreement. In the event of any change in your principal work location, you shall be eligible for relocation assistance under the terms of any Company relocation policy applicable to other senior executives of the Company in your salary band at the time of such relocation.
6. BASE SALARY - During the Term of Employment, your annual base salary shall not be less than your annual base salary on the date of this Agreement; provided that if you are granted a merit increase in your base salary, your base salary shall not thereafter be reduced below that increased level during the Term of Employment. The Human Resources Committee of Verizon's Board of Directors or its designee shall review your base salary at least annually.
7. SHORT-TERM AND LONG-TERM BONUS OPPORTUNITIES - During the Term of Employment, the Company shall provide you with annual short-term and long-term bonus opportunities equivalent to those available to other senior executives of the Company in your salary band. While you are not guaranteed an annual short-term or long-term bonus award in any amount, (a) the value of your annual short-term bonus opportunity shall be not less than 75 percent of your then-current base salary, and (b) the value of your annual long-term bonus opportunity shall not be less than 425 percent of your then-current base salary.
8. BENEFITS AND PERQUISITES - For the immediate future, you shall-
(1) participate in the tax-qualified and nonqualified retirement plans and in the other employee benefit plans (such as the medical and dental plans), programs, and policies in which you currently participate; and
Mr. David Benson
July 1, 2002
(2) be eligible for the perquisites available to senior executives in your salary band;
provided that the Company retains the right to amend or terminate any benefit plan, policy, program, or perquisite at any time.
9. ANNUAL PHYSICAL - You are encouraged to take an annual physical
examination from a physician at the Company's expense and to certify in writing
to the Company's designee each year (1) that you have had the examination and
(2) the nature and extent of any medical impairments that prevent you from
currently performing the essential functions of your position.
10. EXCISE TAX GROSS-UP - Under certain circumstances you may become entitled to a gross-up payment with respect to the excise tax imposed by section 4999 of the Internal Revenue Code (the "Code"). The terms governing the gross-up payment are set forth in Exhibit A, which is incorporated herein by reference.
11. TERMINATION OF EMPLOYMENT - (a) VOLUNTARY TERMINATION BY YOU - You may terminate your employment under this Agreement for a reason other than Retirement (as defined in subparagraph (c), below) or Good Reason (as defined in subparagraph (d), below) by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination, written notice of your intent to so terminate. The termination shall automatically become effective upon the expiration of such notice period. Upon the effective date of such termination, your base salary and any other Company benefits and perquisites shall cease to accrue, you shall forfeit all then-outstanding stock options, and you shall forfeit all rights under this Agreement which as of the relevant date have not yet been earned. A termination of employment in accordance with this subparagraph (a) shall be deemed a "Voluntary Termination."
(b) TERMINATION DUE TO DEATH OR DISABILITY - If, during the Term of
Employment, you terminate employment because of death or disability (as defined
under the Company-sponsored long-term disability plan that applies to you at the
time your employment is so terminated), the Company shall make a lump-sum cash
payment to you equal to the excess of (1) one times the sum of your base salary
and short-term bonus (at 50% of maximum), over (2) any amounts payable to you
under Company-sponsored disability plans. You shall also be entitled to
accelerated vesting of all outstanding stock options, and you shall be entitled
to exercise all then-outstanding stock options until the earlier of (1) the
fifth anniversary of the date your employment terminates (or any later date
prescribed by the terms of the option relating to termination of employment) or
(2) the expiration of
Mr. David Benson
July 1, 2002
the option; provided that if you terminate employment because of death, your rights under this subparagraph (b) shall pass to your estate. For this purpose, your base salary shall be based on your base salary rate in effect immediately before your employment terminated.
(c) RETIREMENT - You may terminate your employment under this Agreement by reason of Retirement (as defined below) by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination, written notice of your intent to so terminate. The termination shall automatically become effective upon the expiration of such notice period. Upon the effective date of such termination, you shall be entitled to a pro-rated portion of any short-term and long-term bonuses (when and to the extent that they are earned) and accelerated vesting of all outstanding stock options (other than the Founders' Grant), and you shall be entitled to exercise all then-outstanding stock options (excluding nonvested Founders' Grant options) until the earlier of (1) the fifth anniversary of the date your employment terminates (or any later date prescribed by the terms of the option relating to termination of employment) or (2) the expiration of the option. For purposes of this Agreement, "Retirement" means attaining normal retirement age under the terms of the Verizon Management Pension Plan (the "Pension Plan") or satisfying the Rule of 75 under the Pension Plan. Except as provided by the preceding provisions of this subparagraph (c), upon the effective date of your Retirement, your base salary and any other Company benefits and perquisites shall cease to accrue; provided that you shall otherwise be eligible to receive any and all compensation and benefits for which a similarly situated senior executive would be eligible under the applicable provisions of the compensation and benefit plans in which he is then eligible to participate, as those plans may be amended from time to time.
(d) TERMINATION FOR GOOD REASON - (1) You may terminate your employment under this Agreement for Good Reason by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination (the "Notice Period"), written notice of your intent to so terminate, setting forth in reasonable detail the facts and circumstances deemed to provide a basis for such termination. For purposes of this Agreement, "Good Reason" means a material breach by the Company of the terms and conditions of this Agreement, a material reduction in your overall compensation opportunities, or your assignment to a new principal work location that is more than 50 miles from your previous principal work location. A "Good Reason" shall not occur merely because of a change in the individual (or position) to whom (or to which) you report. In addition, a "Good Reason" shall not occur merely because the Company notifies you, in accordance
Mr. David Benson
July 1, 2002
with paragraph 3 ("Term"), that the Term of Employment shall not be extended for an additional two-year period.
(2) Notwithstanding the foregoing, the Company shall have 15 calendar days from its receipt of such notice to cure the action specified in the notice. In the event of a cure by the Company within the 15-day period, the action in question shall not constitute Good Reason.
(3) Except as provided in subparagraph (d)(2), above, at the end of the Notice Period, the Good Reason termination shall take effect, and your obligation to serve the Company, and the Company's obligation to employ you, under the terms of this Agreement shall terminate simultaneously, and you shall be deemed to have incurred an Involuntary Termination Without Cause, with the consequences described in subparagraph (e), below; provided that your rights under this subparagraph (d) are contingent on your execution of a release in accordance with paragraph 12 ("Release").
(4) If you do not fulfill the notice and explanation requirements imposed by this subparagraph (d), the resulting termination of employment shall be deemed a Voluntary Termination.
(e) INVOLUNTARY TERMINATION WITHOUT CAUSE - The Company may terminate your employment under this Agreement at any time and for any reason. However, if the Company terminates your employment during the Term of Employment for any reason other than death, disability, or Cause (as defined in subparagraph (f), below), such termination shall be deemed an Involuntary Termination by the Company, and you shall be entitled to receive the following payments and benefits in lieu of any payment or benefit otherwise provided pursuant to paragraphs 6 ("Base Salary") through 8 ("Benefits And Perquisites"):
(1) The Company shall make a lump-sum cash severance payment to
you equal to the excess of (i) two times the sum of your
base salary and short-term bonus (at 50% of maximum), over
(ii) the sum of any amounts paid or payable to you under any
Company-sponsored severance plan, program, policy, contract,
account, or arrangement;
(2) Your unvested stock options shall immediately vest, and you may exercise all of your then-outstanding stock options at any time up to the earlier of (i) the fifth anniversary of the date your employment terminates (or
Mr. David Benson
July 1, 2002
any later date prescribed by the terms of the option relating to termination of employment) or (ii) the expiration of the option; and
(3) You shall be eligible for outplacement services to the extent that such services are then available to senior executives in your salary band;
provided that your rights under this subparagraph (e) are contingent on your execution of a release in accordance with paragraph 12 ("Release"). For purposes of this paragraph 11(e), the Company shall not be deemed to have terminated your employment during the Term of Employment if the Company notifies you, in accordance with paragraph 3 ("Term"), that the Term of Employment shall not be extended for an additional two-year period.
(f) INVOLUNTARY TERMINATION FOR CAUSE - (1) Nothing in this Agreement prevents the Company from terminating your employment under this Agreement for Cause. In the event of your termination for Cause, the Company shall pay you your full accrued base salary and accrued vacation time through the date of your termination, you shall forfeit all then-outstanding stock options if you are not eligible for Retirement at the time of your termination, and the Company shall have no further obligations under this Agreement; provided that you shall otherwise be eligible to receive any and all compensation and benefits for which a similarly situated senior executive would be eligible under the applicable provisions of the compensation and benefit plans in which he is then eligible to participate, as those plans may be amended from time to time.
(2) For purposes of this Agreement, "Cause" is defined as (i) grossly incompetent performance or substantial or continuing inattention to or neglect of the duties and responsibilities assigned to you; fraud, misappropriation or embezzlement involving the Company or a material breach of any provision incorporated in paragraph 13 ("Covenants"), as determined by the CEO in his discretion, or (ii) commission of any felony of which you are finally adjudged guilty by a court of competent jurisdiction.
(3) If the Company terminates your employment for Cause, the Company shall provide you with a written statement of the grounds for such termination within 10 business days after the date of termination.
12. RELEASE - You shall not be entitled to any benefits under paragraphs 10
("Excise Tax Gross-Up"), 11(d) ("Termination For Good Reason"), and 11(e)
("Involuntary Termination Without Cause") following the termination of your
Mr. David Benson
July 1, 2002
employment unless, at the time your employment terminates, you execute a release satisfactory to the Company releasing the Company, its affiliates, shareholders, directors, officers, employees, representatives, and agents and their successors and assigns from any and all employment-related claims you or your successors and beneficiaries might then have against them (excluding any claims you might then have under this Agreement, or any employee benefit plan that is subject to the vesting standards imposed by the Employee Retirement Income Security Act of 1974, as amended).
13. COVENANTS - In consideration for the benefits and agreements described above, you agree to comply with the covenants set forth in Exhibit B hereto, which is incorporated herein by reference.
14. REQUEST FOR WAIVER - Nothing in this Agreement bars you from requesting, at the time of your termination of employment or at any time thereafter, that the CEO, in his sole discretion, waive in writing the Company's rights to enforce some or all of the provisions incorporated in paragraph 13 ("Covenants").
15. OTHER AGREEMENTS AND POLICIES - The obligations imposed on you by paragraph 13 ("Covenants") are in addition to, and not in lieu of, any and all other policies and agreements of the Company regarding the subject matter of the foregoing obligations.
16. NONDUPLICATION OF BENEFITS - No provision of this Agreement shall require the Company to provide you with any payment, benefit, or grant that duplicates any payment, benefit, or grant that you are entitled to receive under any Company compensation or benefit plan, award agreement, or other arrangement.
17. OTHER COMPANY PLANS - Except to the extent otherwise explicitly provided by this Agreement, any awards made to you under any Company compensation or benefit plan or program shall be governed by the terms of that plan or program and any applicable award agreement thereunder as in effect from time to time. Notwithstanding the foregoing, you shall not be entitled to participate in any Company compensation or benefit plan that is established after your employment with the Company terminates, and except as specifically provided in this Agreement, you shall not be entitled to any additional grants or awards under any Company compensation or benefit plan after your employment with the Company terminates. The amounts paid, provided, or credited under this Agreement shall not be treated as compensation for purposes of determining any benefits payable under any Company-sponsored pension, savings, life insurance, or other employee benefit plan except to the extent provided by the terms of such plan.
Mr. David Benson
July 1, 2002
18. FORFEITURE - (a) If you breach any of the obligations incorporated in paragraph 13 ("Covenants"), or engage in serious misconduct that is contrary to written policies of the Company and is harmful to the Company or its reputation, you shall forfeit:
(1) all credits that are added to your Retirement Contribution Sub-Account in the Verizon Income Deferral Plan (or to any successor account in that plan or a successor plan) ("Retirement Contribution Sub-Account"), on or after January 1, 2002;
(2) any interest or other earnings or gains on or after January 1, 2002, with respect to any credits in your Retirement Contribution Sub-Account (including any interest, or other earnings or gains attributable to any credit regardless of when the credit was added to your Retirement Contribution Sub-Account); and
(3) any unpaid incentive compensation (such as performance bonus awards or other awards under the Verizon Communications Inc. Long-Term Incentive Plan) that you are otherwise entitled to receive.
(b) The remedies available under this paragraph are in addition to, and not in lieu of, the remedies available under paragraph 25 ("Additional Remedies").
19. NO DEEMED WAIVER - Failure to insist upon strict compliance with any of the terms, covenants, or conditions of this Agreement shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times.
20. TAXES - The Company may withhold from any benefits payable under this Agreement all taxes that the Company reasonably determines to be required pursuant to any law, regulation, or ruling. However, it is your obligation to pay all required taxes on any amounts and benefits provided under this Agreement, including the benefits and perquisites provided to you pursuant to paragraph 8 ("Benefits and Perquisites"), regardless of whether withholding is required.
Mr. David Benson
July 1, 2002
21. CONFIDENTIALITY - Except to the extent otherwise required by law, you shall not disclose, in whole or in part, any of the terms of this Agreement. This paragraph 21 does not prevent you from disclosing the terms of this Agreement to your spouse or to your legal, tax, or financial adviser, provided that you take all reasonable measures to assure that he or she does not disclose the terms of this Agreement to a third party except as otherwise required by law.
22. GOVERNING LAW - To the extent not preempted by federal law, the provisions of this Agreement shall be construed and enforced in accordance with the laws of the State of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this provision to the substantive law of another jurisdiction.
23. ASSIGNMENT - Verizon may, without your consent, assign its rights and obligations under this Agreement to any entity that is a part of the Company, and if Verizon makes such an assignment, all references in this Agreement to Verizon (except for references to Verizon common stock) shall be deemed to refer to the assignee. However, you may not assign your rights and obligations under this Agreement.
24. SEVERABILITY - The agreements contained herein and within the release prescribed by paragraph 12 ("Release") shall each constitute a separate agreement independently supported by good and adequate consideration, and shall each be severable from the other provisions of the Agreement and such release. If an arbitrator or court of competent jurisdiction determines that any term, provision, or portion of this Agreement or such release is void, illegal, or unenforceable, the other terms, provisions, and portions of this Agreement or such release shall remain in full force and effect, and the terms, provisions, and portions that are determined to be void, illegal, or unenforceable shall either be limited so that they shall remain in effect to the extent permissible by law, or such arbitrator or court shall substitute, to the extent enforceable, provisions similar thereto or other provisions, so as to provide to the Company, to the fullest extent permitted by applicable law, the benefits intended by this Agreement and such release.
25. ADDITIONAL REMEDIES - In addition to any other rights or remedies, whether legal, equitable, or otherwise, that each of the parties to this Agreement may have, you acknowledge that
(a) The covenants incorporated in paragraph 13 ("Covenants") are essential to the continued good will and profitability of the Company;
Mr. David Benson
July 1, 2002
(b) You have broad-based skills that will serve as the basis for employment opportunities that are not prohibited by the covenants incorporated in paragraph 13 ("Covenants");
(c) When your employment with the Company terminates, you shall be able to earn a livelihood without violating any of the terms of this Agreement;
(d) Irreparable damage to the Company shall result in the event that the covenants incorporated in paragraph 13 ("Covenants") are not specifically enforced and that monetary damages will not adequately protect the Company from a breach of such covenants;
(e) If any dispute arises concerning the violation by you of the covenants incorporated in paragraph 13 ("Covenants"), an injunction may be issued restraining such violation pending the determination of such controversy, and no bond or other security shall be required in connection therewith;
(f) Such covenants shall continue to apply after any expiration, termination, or cancellation of this Agreement; and
(g) Your breach of any of such covenants shall result in your immediate forfeiture of all rights under this Agreement.
26. SURVIVAL - The provisions of paragraphs 13 ("Covenants") through 28 ("Entire Agreement") shall survive the Term of Employment. In addition, if the Term of Employment is not extended in accordance with paragraph 3 ("Term") but your employment continues after the end of the Term of Employment, you shall be subject to the obligations imposed by each of such paragraphs with respect to such employment. Any obligations that the Company has incurred under this Agreement to provide benefits that have vested under the terms of this Agreement (including the Company's obligations under paragraph 11(c) ("Retirement")) shall likewise survive the Term of Employment. Except as provided by the preceding provisions of this paragraph 26, if the Term of Employment is not extended in accordance with paragraph 3 ("Term") but your employment continues after the end of the Term of Employment, the terms of such employment shall not be governed by this Agreement.
27. ARBITRATION - Any dispute arising out of or relating to this Agreement (except any dispute arising out of or relating to paragraph 13 ("Covenants")), and any dispute arising out of or relating to your employment, shall be settled by final
Mr. David Benson
July 1, 2002
and binding arbitration, which shall be the exclusive means of resolving any such dispute, and the parties specifically waive all rights to pursue any other remedy, recourse, or relief. With respect to disputes by the Company arising out of or relating to paragraph 13 ("Covenants"), the Company has retained all its rights to legal and equitable recourse and relief, including but not limited to injunctive relief, as referred to in paragraph 25 ("Additional Remedies"). The arbitration shall be expedited and conducted in the State of New York pursuant to the Center for Public Resources ("CPR") Rules for Non-Administered Arbitration in effect at the time of notice of the dispute before one neutral arbitrator appointed by CPR from the CPR Panel of neutrals unless the parties mutually agree to the appointment of a different neutral arbitrator. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. sections 1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction. The finding of the arbitrator may not change the express terms of this Agreement and shall be consistent with the arbitrator's understanding of the findings a court of proper jurisdiction would make in applying the applicable law to the facts underlying the dispute. In no event whatsoever shall such an arbitration award include any award of damages other than the amounts in controversy under this Agreement. The parties waive the right to recover, in such arbitration, punitive damages. Each party hereby agrees that New York City is the proper venue for any litigation seeking to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27, and each party hereby waives any right it otherwise might have to defend, oppose, or object to, on the basis of jurisdiction, venue, or forum nonconveniens, a suit filed by the other party in any federal or state court in New York City to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27. Each party also waives any right it might otherwise have to seek to transfer from a federal or state court in New York City a suit filed by the other party to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27.
28. ENTIRE AGREEMENT - Except for the terms of the compensation and benefit plans in which you participate (including any award agreements issued thereunder), this Agreement, including the Exhibits hereto, sets forth the entire understanding of you and the Company, and supersedes all prior agreements and communications, whether oral or written, between the Company (or Bell Atlantic or GTE or any of their respective subsidiaries) and you regarding the subject matter of this Agreement, including your February 23, 2001, employment agreement with Verizon. This Agreement shall not be modified except by written agreement of you and Verizon.
Mr. David Benson
July 1, 2002
Dave, I believe that this Agreement continues to provide you and your family with a firm foundation of financial security as our Company faces many new challenges and opportunities. I recognize that the Company and the telecommunications industry operate in a rapidly changing and demanding environment. It is my hope that this Agreement demonstrates to you the level of confidence that I have in your abilities to meet the commitments that I expect from you. Please indicate your acceptance by signing below and returning the signed Agreement to me or Ezra Singer within ten business days after your receipt of this Agreement.
Sincerely yours,
/s/ Ivan Seidenberg ------------------------------------- Ivan Seidenberg Chief Executive Officer |
cc: E. Singer
I agree to the terms described above.
/s/ David Benson ------------------------------------- David Benson |
Attachments: Exhibit A - Excise Tax Gross-Up Exhibit B - Covenants
EXHIBIT A
EXCISE TAX GROSS-UP
1. GROSS-UP PAYMENT - If any payment or benefit received or to be received by you from the Company pursuant to the terms of the Agreement to which this Exhibit A is attached or otherwise (the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code (the "Code") as determined in accordance with this Exhibit A, the Company shall pay you, at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount that you retain, after deduction of the Excise Tax on the Payments and any federal, state, and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties, or additions to tax payable by you with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in section 1274(d) of the Code) in such calculation) of the Payments at the time such Payments are to be made.
2. CALCULATIONS - For purposes of determining whether any of the Payments shall be subject to the Excise Tax and the amount of such excise tax,
(a) The total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the excise tax, except to the extent that, in the written opinion of independent counsel selected by Verizon and reasonably acceptable to you ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax;
(b) The amount of the Payments that shall be subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Payments or (ii) the amount of "excess parachute payments " within the meaning of section 280G(b)(1) of the Code (after applying clause (a), above); and
(c) The value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of section 280G(d)(3) and (4) of the Code.
3. TAX RATES - For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates.
4. TIME OF GROSS-UP PAYMENTS - The Gross-Up Payments provided for in this Exhibit A shall be made upon the earlier of (a) the payment to you of any Payment or (b) the imposition upon you, or any payment by you, of any Excise Tax.
5. ADJUSTMENTS TO GROSS-UP PAYMENTS - If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax is less than the amount previously taken into account hereunder, you shall repay the Company, within 30 days of your receipt of notice of such final determination or opinion, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state, and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax or a federal, state, and local income tax deduction) plus any interest received by you on the amount of such repayment, provided that if any such amount has been paid by you as an Excise Tax or other tax, you shall cooperate with the Company in seeking a refund of any tax overpayments, and you shall not be required to make repayments to the Company until the overpaid taxes and interest thereon are refunded to you.
6. ADDITIONAL GROSS-UP PAYMENT - If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within 30 days of the Company's receipt of notice of such final determination or opinion.
7. CHANGE IN LAW OR INTERPRETATION - In the event of any change in or further interpretation of section 280G or 4999 of the Code and the regulations promulgated thereunder, you shall be entitled, by written notice to Verizon, to request a written opinion of Independent Counsel regarding the application of such change or further interpretation to any of the foregoing, and Verizon shall use its best efforts to cause such opinion to be rendered as promptly as practicable.
8. FEES AND EXPENSES - All fees and expenses of Independent Counsel incurred in connection with this Exhibit A shall be borne by Verizon.
9. SURVIVAL - The Company's obligation to make a Gross-Up Payment with respect to Payments made or accrued before the end of the Term of Employment shall survive the Term of Employment
unless (a) your employment is terminated for Cause pursuant to paragraph 11(f) of the Agreement to which this Exhibit A is attached ("Involuntary Termination For Cause"), (b) you fail to execute a release in accordance with paragraph 12 of such Agreement ("Release"), or (c) you fail to comply with the covenants incorporated in paragraph 13 of such Agreement ("Covenants"), in which event the Company's obligation under this Exhibit A shall terminate immediately.
10. DEFINED TERMS - Except where clearly provided to the contrary, all capitalized terms used in this Exhibit A shall have the definitions given to those terms in the Agreement to which this Exhibit A is attached.
EXHIBIT B
COVENANTS
1. NONCOMPETITION - In consideration for the benefits and agreements described in the Agreement to which this Exhibit B is attached, you agree that:
(a) PROHIBITED CONDUCT - During the period of your employment with the Company, and for the period ending six months after your termination of employment for any reason from the Company, you shall not, without the prior written consent of the CEO(s):
(1) personally engage in Competitive Activities (as defined below); or
(2) work for, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or provide consulting or advisory services to, any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities; provided that your purchase or holding, for investment purposes, of securities of a publicly-traded company shall not constitute "ownership" or "participation in ownership" for purposes of this paragraph so long as your equity interest in any such company is less than a controlling interest;
provided that this paragraph (a) shall not prohibit you from (i) being employed by, or providing services to, a consulting firm, provided that you do not personally engage in Competitive Activities or provide consulting or advisory services to any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities, or (ii) engaging in the private practice of law as a sole practitioner or as a partner in (or as an employee of or counsel to) a law firm in accordance with applicable legal and professional standards.
(b) COMPETITIVE ACTIVITIES - For purposes of the Agreement to which this Exhibit B is attached, "Competitive Activities" means business activities relating to products or services of the same or similar type as the products or services (1) which are sold (or, pursuant to an existing business plan, will be sold) to paying customers of the Company, and (2) for which you then have responsibility to plan, develop, manage, market, or oversee, or had any such responsibility within your most recent 24 months of employment with the Company. Notwithstanding the previous sentence, a business activity shall not be treated as a Competitive Activity if the geographic marketing area of the relevant products or services sold by you or
a third party does not overlap with the geographic marketing area for the applicable products and services of the Company.
2. INTERFERENCE WITH BUSINESS RELATIONS - During the period of your employment with the Company, and for a period ending with the expiration of 12 months following your termination of employment for any reason from the Company, you shall not, without the written consent of the CEO(s):
(a) recruit or solicit any employee of the Company for employment or for retention as a consultant or service provider;
(b) hire or participate (with another company or third party) in the process of hiring (other than for the Company) any person who is then an employee of the Company, or provide names or other information about Company employees to any person or business (other than the Company) under circumstances that could lead to the use of that information for purposes of recruiting or hiring;
(c) interfere with the relationship of the Company with any of its employees, agents, or representatives;
(d) solicit or induce, or in any manner attempt to solicit or induce, any client, customer, or prospect of the Company (1) to cease being, or not to become, a customer of the Company or (2) to divert any business of such customer or prospect from the Company; or
(e) otherwise interfere with, disrupt, or attempt to interfere with or disrupt, the relationship, contractual or otherwise, between the Company and any of its customers, clients, prospects, suppliers, consultants, or employees.
3. RETURN OF PROPERTY; INTELLECTUAL PROPERTY RIGHTS - You agree that on or before your termination of employment for any reason with the Company, you shall return to the Company all property owned by the Company or in which the Company has an interest, including files, documents, data and records (whether on paper or in tapes, disks, or other machine-readable form), office equipment, credit cards, and employee identification cards. You acknowledge that the Company is the rightful owner of any programs, ideas, inventions, discoveries, patented or copyrighted material, or trademarks that you may have originated or developed, or assisted in originating or developing, during your period of employment with the Company, where any such origination or development involved the use of Company
time or resources, or the exercise of your responsibilities for or on behalf of the Company. You shall at all times, both before and after termination of employment, cooperate with the Company in executing and delivering documents requested by the Company, and taking any other actions, that are necessary or requested by the Company to assist the Company in patenting, copyrighting, or registering any programs, ideas, inventions, discoveries, patented or copyrighted material, or trademarks, and to vest title thereto in the Company.
4. PROPRIETARY AND CONFIDENTIAL INFORMATION - You shall at all times preserve the confidentiality of all proprietary information and trade secrets of the Company, except to the extent that disclosure of such information is legally required. "Proprietary information" means information that has not been disclosed to the public and that is treated as confidential within the business of the Company, such as strategic or tactical business plans; undisclosed financial data; ideas, processes, methods, techniques, systems, patented or copyrighted information, models, devices, programs, computer software, or related information; documents relating to regulatory matters and correspondence with governmental entities; undisclosed information concerning any past, pending, or threatened legal dispute; pricing and cost data; reports and analyses of business prospects; business transactions that are contemplated or planned; research data; personnel information and data; identities of users and purchasers of the Company's products or services; and other confidential matters pertaining to or known by the Company, including confidential information of a third party that you know or should know the Company is bound to protect.
5. DEFINITIONS - Except where clearly provided to the contrary, all capitalized terms used in this Exhibit B shall have the definitions given to those terms in the Agreement to which this Exhibit B is attached.
EXHIBIT 10c
[Verizon Logo]
1095 Avenue of the Americas
New York, NY 10036
July 1, 2002
Mr. Ezra D. Singer
[Address]
[Address]
Dear Ezra:
I am pleased to offer you this new employment agreement (the "Agreement") with Verizon Communications Inc. ("Verizon"), and, as an indication of my confidence in your abilities, I have added an automatic renewal provision. For purposes of this Agreement, the term "Company" means Verizon, all corporate subsidiaries and other companies affiliated with Verizon, all companies in which Verizon has an ownership or other proprietary interest of more than 10 percent, and their successors and assigns.
The many opportunities and challenges facing the Company are enormous and exciting. As a leader in our industry, we will be constantly challenged with sustaining our market growth and presence. We will meet these challenges by leveraging the strength of our talented and committed leaders. This Agreement demonstrates my continued confidence in you.
I value you and the leadership, vision, and commitment you bring to the Company. I am excited by the prospect of you continuing as a key member of the Company's leadership team.
The terms and conditions of this Agreement are set forth below.
1. PURPOSE - Verizon enters into this Agreement with you because the rapidly-changing and increasingly global telecommunications market requires the Company to make critical strategic, marketing, and technical decisions. These decisions by the Company will be based, in whole or in part, on confidential
Mr. Ezra D. Singer
July 1, 2002
analyses of the evolving telecommunications market, confidential assessments of the technical capabilities and strategic plans of the Company and competing businesses, and confidential or proprietary information regarding the Company's technology, resources, and business opportunities or other confidential or proprietary information relating to the Company's business. Verizon seeks by this Agreement to ensure that you remain a part of the executive management team that plays a central role in this decision-making process.
In consideration for your entering into this Agreement, including the restrictions on the disclosure and use of confidential or proprietary information and the limitations on your engaging in competitive activities, the Company is providing you with the security of a written two-year agreement, short- and long-term award opportunities, and other benefits.
2. GENERAL - Under this Agreement, you shall continue as a senior executive of the Company. As a senior executive, you shall report to the Chief Executive Officer of Verizon (the "CEO").
3. TERM - The term of employment under this Agreement ("Term of Employment") shall commence on July 1, 2002, and end on June 30, 2004; provided that, on the last day of the Term of Employment, the Term of Employment shall automatically be extended for an additional two years unless, on or before that date, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended. For example, on June 30, 2004, the Term of Employment shall be extended until June 30, 2006, unless, on or before June 30, 2004, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended, and, if the Term of Employment is extended until June 30, 2006, the Term of Employment shall be extended on that date until June 30, 2008, unless, on or before June 30, 2006, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended. Notwithstanding the preceding provisions of this paragraph 3, the Company reserves the right to terminate your employment and the Term of Employment at any time. Your employment and the Term of Employment also may terminate for other reasons (such as your resignation, retirement, death, or disability). The consequences of the termination of your employment are specified in paragraph 11 ("Termination Of Employment").
4. DUTIES AND RESPONSIBILITIES - You shall continue to serve as a senior executive of the Company in such capacities, with such titles and authorities, as the CEO or his successor may from time to time prescribe, and you shall perform all duties incidental to such positions, shall cooperate fully with the CEO or his
Mr. Ezra D. Singer
July 1, 2002
successor, and shall work cooperatively with the other officers of the Company. You shall continue to devote your entire business skill, time, and effort diligently to the affairs of the Company in accordance with the duties assigned to you, and you shall perform all such duties, and otherwise conduct yourself, in a manner reasonably calculated in good faith by you to promote the best interests of the Company. During the Term of Employment, except to the extent specifically permitted in writing by the CEO or his successor, and except for memberships on boards of directors that you held on January 26, 2001 (the date of your previous employment agreement with Verizon), you shall not, directly or indirectly, render any services of a business, commercial, or professional nature to any other person or organization other than the Company or a person or organization in which the Company has a financial interest, whether or not the services are rendered for compensation.
5. LOCATION - During the Term of Employment, you shall perform services for the Company at its New York City headquarters, or at any other location designated by the Company as necessary or appropriate for the discharge of your responsibilities under this Agreement. In the event of any change in your principal work location, you shall be eligible for relocation assistance under the terms of any Company relocation policy applicable to other senior executives of the Company in your salary band at the time of such relocation.
6. BASE SALARY - During the Term of Employment, your annual base salary shall not be less than your annual base salary on the date of this Agreement; provided that if you are granted a merit increase in your base salary, your base salary shall not thereafter be reduced below that increased level during the Term of Employment. The Human Resources Committee of Verizon's Board of Directors or its designee shall review your base salary at least annually.
7. SHORT-TERM AND LONG-TERM BONUS OPPORTUNITIES - During the Term of Employment, the Company shall provide you with annual short-term and long-term bonus opportunities equivalent to those available to other senior executives of the Company in your salary band. While you are not guaranteed an annual short-term or long-term bonus award in any amount, (a) the value of your annual short-term bonus opportunity shall be not less than 75 percent of your then-current base salary, and (b) the value of your annual long-term bonus opportunity shall not be less than 425 percent of your then-current base salary.
8. BENEFITS AND PERQUISITES - (a) IN GENERAL - For the immediate future, you shall-
Mr. Ezra D. Singer
July 1, 2002
(1) participate in the tax-qualified and nonqualified retirement plans and in the other employee benefit plans (such as the medical and dental plans), programs, and policies in which you currently participate; and
(2) be eligible for the perquisites available to senior executives in your salary band;
provided that the Company retains the right to amend or terminate any benefit plan, policy, program, or perquisite at any time.
(b) ANNUAL PHYSICAL - You are encouraged to take an annual physical
examination from a physician at the Company's expense and to certify in writing
to the Company's designee each year (1) that you have had the examination and
(2) the nature and extent of any medical impairments that prevent you from
currently performing the essential functions of your position.
9. SPECIAL RETENTION ACCOUNT PROGRAM - Pursuant to your January 26, 2001, employment agreement with Verizon (the "Prior Agreement"), the Company established a Special Retention Account on your behalf under the GTE Executive Salary Deferral Plan, which was subsequently transferred to the Verizon Income Deferral Plan. You shall also be eligible for such other benefits as are provided under the Verizon Income Deferral Plan to employees with Special Retention Accounts. A copy of the applicable provisions of the Verizon Income Deferral Plan relating to the Special Retention Account is attached hereto as Exhibit A, which is incorporated herein by reference. Your rights to the balance in your Special Retention Account following the termination of your employment shall be governed by the applicable provisions of the Verizon Income Deferral Plan, rather than by the terms of paragraphs 11 ("Termination of Employment") and 12 ("Release").
10. EXCISE TAX GROSS-UP - Under certain circumstances you may become entitled to a gross-up payment with respect to the excise tax imposed by section 4999 of the Internal Revenue Code (the "Code"). The terms governing the gross-up payment are set forth in Exhibit B, which is incorporated herein by reference.
11. TERMINATION OF EMPLOYMENT - (a) VOLUNTARY TERMINATION BY YOU - You may terminate your employment under this Agreement for a reason other than Retirement (as defined in subparagraph (c), below) or Good Reason (as defined in subparagraph (d), below) by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination, written notice of your intent to so terminate. The termination shall automatically become effective upon the expiration
Mr. Ezra D. Singer
July 1, 2002
of such notice period. Upon the effective date of such termination, your base salary and any other Company benefits and perquisites shall cease to accrue, you shall forfeit all then-outstanding stock options, and you shall forfeit all rights under this Agreement which as of the relevant date have not yet been earned. A termination of employment in accordance with this subparagraph (a) shall be deemed a "Voluntary Termination."
(b) TERMINATION DUE TO DEATH OR DISABILITY - If, during the Term of
Employment, you terminate employment because of death or disability (as defined
under the Company-sponsored long-term disability plan that applies to you at the
time your employment is so terminated), the Company shall make a lump-sum cash
payment to you equal to the excess of (1) one times the sum of your base salary
and short-term bonus (at 50% of maximum), over (2) any amounts payable to you
under Company-sponsored disability plans. You shall also be entitled to
accelerated vesting of all outstanding stock options, and you shall be entitled
to exercise all then-outstanding stock options until the earlier of (1) the
fifth anniversary of the date your employment terminates (or any later date
prescribed by the terms of the option relating to termination of employment) or
(2) the expiration of the option; provided that if you terminate employment
because of death, your rights under this subparagraph (b) shall pass to your
estate. For this purpose, your base salary shall be based on your base salary
rate in effect immediately before your employment terminated.
(c) RETIREMENT - You may terminate your employment under this Agreement by reason of Retirement (as defined below) by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination, written notice of your intent to so terminate. The termination shall automatically become effective upon the expiration of such notice period. Upon the effective date of such termination, you shall be entitled to a pro-rated portion of any short-term and long-term bonuses (when and to the extent that they are earned) and accelerated vesting of all outstanding stock options (other than the Founders' Grant), and you shall be entitled to exercise all then-outstanding stock options (excluding nonvested Founders' Grant options) until the earlier of (1) the fifth anniversary of the date your employment terminates (or any later date prescribed by the terms of the option relating to termination of employment) or (2) the expiration of the option. For purposes of this Agreement, "Retirement" means attaining normal retirement age under the terms of the Verizon Management Pension Plan (the "Pension Plan") or satisfying the Rule of 75 under the Pension Plan (or being deemed retirement eligible pursuant to any other plan or agreement of Verizon). Except as provided by the preceding provisions of this subparagraph (c), upon the effective date of your Retirement, your base salary and any other Company benefits
Mr. Ezra D. Singer
July 1, 2002
and perquisites shall cease to accrue; provided that you shall otherwise be eligible to receive any and all compensation and benefits for which a similarly situated senior executive would be eligible under the applicable provisions of the compensation and benefit plans in which he is then eligible to participate, as those plans may be amended from time to time.
(d) TERMINATION FOR GOOD REASON - (1) You may terminate your employment under this Agreement for Good Reason by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination (the "Notice Period"), written notice of your intent to so terminate, setting forth in reasonable detail the facts and circumstances deemed to provide a basis for such termination. For purposes of this Agreement, "Good Reason" means a material breach by the Company of the terms and conditions of this Agreement, a material reduction in your overall compensation opportunities, or your assignment to a new principal work location that is more than 50 miles from your previous principal work location. A "Good Reason" shall not occur merely because of a change in the individual (or position) to whom (or to which) you report. In addition, a "Good Reason" shall not occur merely because the Company notifies you, in accordance with paragraph 3 ("Term"), that the Term of Employment shall not be extended for an additional two-year period.
(2) Notwithstanding the foregoing, the Company shall have 15 calendar days from its receipt of such notice to cure the action specified in the notice. In the event of a cure by the Company within the 15-day period, the action in question shall not constitute Good Reason.
(3) Except as provided in subparagraph (d)(2), above, at the end of the Notice Period, the Good Reason termination shall take effect, and your obligation to serve the Company, and the Company's obligation to employ you, under the terms of this Agreement shall terminate simultaneously, and you shall be deemed to have incurred an Involuntary Termination Without Cause, with the consequences described in subparagraph (e), below; provided that your rights under this subparagraph (d) are contingent on your execution of a release in accordance with paragraph 12 ("Release").
(4) If you do not fulfill the notice and explanation requirements imposed by this subparagraph (d), the resulting termination of employment shall be deemed a Voluntary Termination.
(e) INVOLUNTARY TERMINATION WITHOUT CAUSE - The Company may terminate your employment under this Agreement at any time and for any reason. However, if the Company terminates your employment during the Term of
Mr. Ezra D. Singer
July 1, 2002
Employment for any reason other than death, disability, or Cause (as defined in subparagraph (f), below), such termination shall be deemed an Involuntary Termination by the Company, and you shall be entitled to receive the following payments and benefits in lieu of any payment or benefit otherwise provided pursuant to paragraphs 6 ("Base Salary") through 8 ("Benefits And Perquisites"):
(1) The Company shall make a lump-sum cash severance payment to
you equal to the excess of (i) two times the sum of your
base salary and short-term bonus (at 50% of maximum), over
(ii) the sum of your then-current balance in your Special
Retention Account, as determined under the Verizon Income
Deferral Plan, and any amounts paid or payable to you under
any Company-sponsored severance plan, program, policy,
contract, account, or arrangement;
(2) Your unvested stock options shall immediately vest, and you may exercise all of your then-outstanding stock options at any time up to the earlier of (i) the fifth anniversary of the date your employment terminates (or any later date prescribed by the terms of the option relating to termination of employment) or (ii) the expiration of the option; and
(3) You shall be eligible for outplacement services to the extent that such services are then available to senior executives in your salary band;
provided that your rights under this subparagraph (e) are contingent on your execution of a release in accordance with paragraph 12 ("Release"). For purposes of this paragraph 11(e), the Company shall not be deemed to have terminated your employment during the Term of Employment if the Company notifies you, in accordance with paragraph 3 ("Term"), that the Term of Employment shall not be extended for an additional two-year period.
(f) INVOLUNTARY TERMINATION FOR CAUSE - (1) Nothing in this Agreement prevents the Company from terminating your employment under this Agreement for Cause. In the event of your termination for Cause, the Company shall pay you your full accrued base salary and accrued vacation time through the date of your termination, you shall forfeit all then-outstanding stock options if you are not eligible for Retirement at the time of your termination, and the Company shall have no further obligations under this Agreement; provided that you shall
Mr. Ezra D. Singer
July 1, 2002
otherwise be eligible to receive any and all compensation and benefits for which a similarly situated senior executive would be eligible under the applicable provisions of the compensation and benefit plans in which he is then eligible to participate, as those plans may be amended from time to time.
(2) For purposes of this Agreement, "Cause" is defined as (i) grossly incompetent performance or substantial or continuing inattention to or neglect of the duties and responsibilities assigned to you; fraud, misappropriation or embezzlement involving the Company or a material breach of any provision incorporated in paragraph 13 ("Covenants"), as determined by the CEO in his discretion, or (ii) commission of any felony of which you are finally adjudged guilty by a court of competent jurisdiction.
(3) If the Company terminates your employment for Cause, the Company shall provide you with a written statement of the grounds for such termination within 10 business days after the date of termination.
12. RELEASE - You shall not be entitled to any benefits under paragraphs 10
("Excise Tax Gross-Up"), 11(d) ("Termination For Good Reason"), and 11(e)
("Involuntary Termination Without Cause") following the termination of your
employment unless, at the time your employment terminates, you execute a release
satisfactory to the Company releasing the Company, its affiliates, shareholders,
directors, officers, employees, representatives, and agents and their successors
and assigns from any and all employment-related claims you or your successors
and beneficiaries might then have against them (excluding any claims you might
then have under this Agreement, or any employee benefit plan that is subject to
the vesting standards imposed by the Employee Retirement Income Security Act of
1974, as amended).
13. COVENANTS - In consideration for the benefits and agreements described above, you agree to comply with the covenants set forth in Exhibit C hereto, which is incorporated herein by reference.
14. REQUEST FOR WAIVER - Nothing in this Agreement bars you from requesting, at the time of your termination of employment or at any time thereafter, that the CEO, in his sole discretion, waive in writing the Company's rights to enforce some or all of the provisions incorporated in paragraph 13 ("Covenants").
15. OTHER AGREEMENTS AND POLICIES - The obligations imposed on you by paragraph 13 ("Covenants") are in addition to, and not in lieu of, any and all other
Mr. Ezra D. Singer
July 1, 2002
policies and agreements of the Company regarding the subject matter of the foregoing obligations.
16. NONDUPLICATION OF BENEFITS - No provision of this Agreement shall require the Company to provide you with any payment, benefit, or grant that duplicates any payment, benefit, or grant that you are entitled to receive under any Company compensation or benefit plan, award agreement, or other arrangement.
17. OTHER COMPANY PLANS - Except to the extent otherwise explicitly provided by this Agreement, any awards made to you under any Company compensation or benefit plan or program shall be governed by the terms of that plan or program and any applicable award agreement thereunder as in effect from time to time. Notwithstanding the foregoing, you shall not be entitled to participate in any Company compensation or benefit plan that is established after your employment with the Company terminates, and except as specifically provided in this Agreement, you shall not be entitled to any additional grants or awards under any Company compensation or benefit plan after your employment with the Company terminates. The amounts paid, provided, or credited under this Agreement shall not be treated as compensation for purposes of determining any benefits payable under any Company-sponsored pension, savings, life insurance, or other employee benefit plan except to the extent provided by the terms of such plan.
18. FORFEITURE - (a) If you breach any of the obligations incorporated in paragraph 13 ("Covenants"), or engage in serious misconduct that is contrary to written policies of the Company and is harmful to the Company or its reputation, you shall forfeit:
(1) all credits that are added to your Retirement Contribution Sub-Account in the Verizon Income Deferral Plan (or to any successor account in that plan or a successor plan) ("Retirement Contribution Sub-Account"), on or after January 1, 2002, other than the GTE Supplemental Executive Retirement Plan conversion credit (the "Conversion Credit");
(2) any interest or other earnings or gains on or after January 1, 2002, with respect to any credits in your Retirement Contribution Sub-Account (including any interest, or other earnings or gains attributable to the Conversion Credit or any interest or other earnings or gains attributable to any other credit regardless of when the credit was added to your Retirement Contribution Sub-Account); and
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July 1, 2002
(3) any unpaid incentive compensation (such as performance bonus awards or other awards under the Verizon Communications Inc. Long-Term Incentive Plan) that you are otherwise entitled to receive.
(b) The remedies available under this paragraph are in addition to, and not in lieu of, the remedies available under paragraph 25 ("Additional Remedies").
19. NO DEEMED WAIVER - Failure to insist upon strict compliance with any of the terms, covenants, or conditions of this Agreement shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times.
20. TAXES - The Company may withhold from any benefits payable under this Agreement all taxes that the Company reasonably determines to be required pursuant to any law, regulation, or ruling. However, it is your obligation to pay all required taxes on any amounts and benefits provided under this Agreement, including the benefits and perquisites provided to you pursuant to paragraph 8 ("Benefits and Perquisites"), regardless of whether withholding is required.
21. CONFIDENTIALITY - Except to the extent otherwise required by law, you shall not disclose, in whole or in part, any of the terms of this Agreement. This paragraph 21 does not prevent you from disclosing the terms of this Agreement to your spouse or to your legal, tax, or financial adviser, provided that you take all reasonable measures to assure that he or she does not disclose the terms of this Agreement to a third party except as otherwise required by law.
22. GOVERNING LAW - To the extent not preempted by federal law, the provisions of this Agreement shall be construed and enforced in accordance with the laws of the State of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this provision to the substantive law of another jurisdiction.
23. ASSIGNMENT - Verizon may, without your consent, assign its rights and obligations under this Agreement to any entity that is a part of the Company, and if Verizon makes such an assignment, all references in this Agreement to Verizon (except for references to Verizon common stock) shall be deemed to refer to the assignee. However, you may not assign your rights and obligations under this Agreement.
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July 1, 2002
24. SEVERABILITY - The agreements contained herein and within the release prescribed by paragraph 12 ("Release") shall each constitute a separate agreement independently supported by good and adequate consideration, and shall each be severable from the other provisions of the Agreement and such release. If an arbitrator or court of competent jurisdiction determines that any term, provision, or portion of this Agreement or such release is void, illegal, or unenforceable, the other terms, provisions, and portions of this Agreement or such release shall remain in full force and effect, and the terms, provisions, and portions that are determined to be void, illegal, or unenforceable shall either be limited so that they shall remain in effect to the extent permissible by law, or such arbitrator or court shall substitute, to the extent enforceable, provisions similar thereto or other provisions, so as to provide to the Company, to the fullest extent permitted by applicable law, the benefits intended by this Agreement and such release.
25. ADDITIONAL REMEDIES - In addition to any other rights or remedies, whether legal, equitable, or otherwise, that each of the parties to this Agreement may have, you acknowledge that
(a) The covenants incorporated in paragraph 13 ("Covenants") are essential to the continued good will and profitability of the Company;
(b) You have broad-based skills that will serve as the basis for employment opportunities that are not prohibited by the covenants incorporated in paragraph 13 ("Covenants");
(c) When your employment with the Company terminates, you shall be able to earn a livelihood without violating any of the terms of this Agreement;
(d) Irreparable damage to the Company shall result in the event that the covenants incorporated in paragraph 13 ("Covenants") are not specifically enforced and that monetary damages will not adequately protect the Company from a breach of such covenants;
(e) If any dispute arises concerning the violation by you of the covenants incorporated in paragraph 13 ("Covenants"), an injunction may be issued restraining such violation pending the determination of such controversy, and no bond or other security shall be required in connection therewith;
Mr. Ezra D. Singer
July 1, 2002
(f) Such covenants shall continue to apply after any expiration, termination, or cancellation of this Agreement; and
(g) Your breach of any of such covenants shall result in your immediate forfeiture of all rights under this Agreement.
26. SURVIVAL - The provisions of paragraphs 13 ("Covenants") through 28 ("Entire Agreement") shall survive the Term of Employment. In addition, if the Term of Employment is not extended in accordance with paragraph 3 ("Term") but your employment continues after the end of the Term of Employment, you shall be subject to the obligations imposed by each of such paragraphs with respect to such employment. Any obligations that the Company has incurred under this Agreement to provide benefits that have vested under the terms of this Agreement (including the Company's obligations under paragraph 11(c) ("Retirement")) shall likewise survive the Term of Employment. Except as provided by the preceding provisions of this paragraph 26, if the Term of Employment is not extended in accordance with paragraph 3 ("Term") but your employment continues after the end of the Term of Employment, the terms of such employment shall not be governed by this Agreement.
27. ARBITRATION - Any dispute arising out of or relating to this Agreement (except any dispute arising out of or relating to paragraph 13 ("Covenants")), and any dispute arising out of or relating to your employment, shall be settled by final and binding arbitration, which shall be the exclusive means of resolving any such dispute, and the parties specifically waive all rights to pursue any other remedy, recourse, or relief. With respect to disputes by the Company arising out of or relating to paragraph 13 ("Covenants"), the Company has retained all its rights to legal and equitable recourse and relief, including but not limited to injunctive relief, as referred to in paragraph 25 ("Additional Remedies"). The arbitration shall be expedited and conducted in the State of New York pursuant to the Center for Public Resources ("CPR") Rules for Non-Administered Arbitration in effect at the time of notice of the dispute before one neutral arbitrator appointed by CPR from the CPR Panel of neutrals unless the parties mutually agree to the appointment of a different neutral arbitrator. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. sections 1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction. The finding of the arbitrator may not change the express terms of this Agreement and shall be consistent with the arbitrator's understanding of the findings a court of proper jurisdiction would make in applying the applicable law to the facts underlying the dispute. In no event whatsoever shall such an arbitration award include any award of damages other than the amounts in controversy under this Agreement. The parties waive the right
Mr. Ezra D. Singer
July 1, 2002
to recover, in such arbitration, punitive damages. Each party hereby agrees that New York City is the proper venue for any litigation seeking to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27, and each party hereby waives any right it otherwise might have to defend, oppose, or object to, on the basis of jurisdiction, venue, or forum nonconveniens, a suit filed by the other party in any federal or state court in New York City to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27. Each party also waives any right it might otherwise have to seek to transfer from a federal or state court in New York City a suit filed by the other party to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27.
28. ENTIRE AGREEMENT - Except for the terms of the compensation and benefit plans in which you participate (including any award agreements issued thereunder), this Agreement, including the Exhibits hereto, sets forth the entire understanding of you and the Company, and supersedes all prior agreements and communications, whether oral or written, between the Company (or GTE or Bell Atlantic or any of their respective subsidiaries) and you regarding the subject matter of this Agreement, including the Prior Agreement. This Agreement shall not be modified except by written agreement of you and Verizon.
Ezra, I believe that this Agreement continues to provide you and your family with a firm foundation of financial security as our Company faces many new challenges and opportunities. I recognize that the Company and the telecommunications industry operate in a rapidly changing and demanding environment. It is my hope that this Agreement demonstrates to you the level of confidence that I have in your abilities to meet the commitments that I expect from you. Please indicate your acceptance by signing below and returning the signed Agreement to me within ten business days after your receipt of this Agreement.
Sincerely yours,
/s/ Ivan Seidenberg ------------------------------------- Ivan Seidenberg Chief Executive Officer |
Mr. Ezra D. Singer
July 1, 2002
I agree to the terms described above.
/s/ Ezra D. Singer ------------------------------------- Ezra D. Singer |
Attachments: Exhibit A - Special Retention Account Program Exhibit B - Excise Tax Gross-Up Exhibit C - Covenants
EXHIBIT A
SPECIAL RETENTION ACCOUNT
AND OTHER BENEFITS PROGRAM
PART OF THE
VERIZON INCOME DEFERRAL PLAN
Amended and Restated Effective January 1, 2002
SPECIAL RETENTION ACCOUNT
AND OTHER BENEFITS PROGRAM
TABLE OF CONTENTS
Article 1. Introduction...........................................................................................1
1.01. Nature of Program...............................................................................1
1.02. Effective Date..................................................................................1
Article 2. Definitions and Construction...........................................................................2
2.01. Definitions.....................................................................................2
2.02. Part of the Plan................................................................................3
2.03. Gender and Number...............................................................................3
Article 3. Eligibility and Account Balance........................................................................4
3.01. Eligibility.....................................................................................4
Article 4. Accounts...............................................................................................5
4.01. Accounts........................................................................................5
Article 5. Payments...............................................................................................6
5.01. Exclusive Entitlement to Payment................................................................6
5.02. Amount and Sources of Payment...................................................................6
5.03. Limitations on Rights to Payment................................................................7
Article 6. Other Benefits.........................................................................................8
6.01. Other Benefits..................................................................................8
6.02. Certain Additional Payments by the Company......................................................9
6.03. Nonduplication..................................................................................9
|
ARTICLE 1. INTRODUCTION
1.01. NATURE OF PROGRAM.
This Program was established effective July 1, 2000, as part of the GTE Executive Salary Deferral Plan (and any successors to that plan). Effective January 1, 2002, it became part of the Verizon Income Deferral Plan, which is a successor to the GTE Executive Salary Deferral Plan. This Program shall apply only to those participants in the Verizon Income Deferral Plan who have Special Retention Accounts by virtue of having waived any entitlement they might otherwise have had to certain payments and/or other benefits as a result of the merger involving GTE Corporation and Bell Atlantic Corporation.
1.02. EFFECTIVE DATE.
The Program was originally effective as of July 1, 2000. This amendment and restatement of the Program is effective January 1, 2002, except to the extent specifically provided herein.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
2.01. DEFINITIONS.
Unless the context clearly indicates otherwise, the following terms, when used in capitalized form in this Program, shall have the meanings set forth below.
COMMITTEE. "Committee" shall mean the Human Resources Committee of the Board of Directors of the Company.
COMPANY. "Company" shall mean Verizon Communications Inc. and its affiliates.
COVERED EMPLOYEE. "Covered Employee" shall mean an employee of the Company who is designated as a Covered Employee by the Plan Administrator.
MERGER. "Merger" shall mean the merger of the businesses of GTE Corporation and Bell Atlantic Corporation pursuant to the terms of an Agreement and Plan of Merger dated as of July 27, 1998, among Bell Atlantic, GTE, and Beta Gamma Corporation.
OTHER BENEFITS. "Other Benefits" shall mean the benefits described in Article 6 of this Program.
OTHER PLANS. "Other Plans" shall mean all employee benefit plans, programs, awards, arrangements, policies, and practices of the Company, whether or not qualified under the Code or subject to the Employee Retirement Income Security Act of 1974, as amended, including any employment agreement the Participant may have with the Company or its predecessors.
PARTICIPANT. "Participant" shall mean each Covered Employee whose Special Retention Account has a positive balance.
PLAN. "Plan" shall mean the Verizon Income Deferral Plan, as effective January 1, 2002, and as it may be amended from time to time, and any successor thereto.
PLAN ADMINISTRATOR. "Plan Administrator" shall mean the chief human resources officer of the Company or any other Person designated by the Committee to serve as Plan Administrator of the Plan.
PROGRAM. "Program" shall mean this Special Retention Account and Other Benefits program.
SPECIAL RETENTION ACCOUNT. "Special Retention Account" shall mean the subaccount established under the Plan pursuant to the terms of this Program.
2.02. PART OF THE PLAN.
The provisions of this Program are a part of the Plan. The terms of the Plan shall apply to the benefits provided by this Program to Participants, except to the extent a provision of this Program is contrary to a provision of the Plan, in which case the provisions of this Program shall control.
2.03. GENDER AND NUMBER.
Masculine pronouns shall refer to both males and females. The singular form shall include the plural, where appropriate.
ARTICLE 3. ELIGIBILITY AND ACCOUNT BALANCE
3.01. ELIGIBILITY.
Individuals who were Participants on January 1, 2002, shall remain Participants after that date for as long as they have a positive balance in their Special Retention Account. No individual shall first become a Participant after December 31, 2001.
ARTICLE 4. ACCOUNTS
4.01. ACCOUNTS.
(a) The Special Retention Account shall be maintained as a separate subaccount in each Participant's Account in the Plan.
(b) The Special Retention Account shall be invested in the Moody's Investment Fund in accordance with Section 6.03 of the Plan ("Moody's Investment Fund"), unless the Plan Administrator determines in its discretion that a different hypothetical investment vehicle is appropriate for the Special Retention Account.
ARTICLE 5. PAYMENTS
5.01. EXCLUSIVE ENTITLEMENT TO PAYMENT.
A Participant in the Program has waived his right to receive change in control benefits under one or more prior agreements with the Company or its predecessors (including his executive severance agreement) as a result of the Merger and has agreed to receive in lieu thereof the amount payable to him at the times and in the amounts specified in this Article 5 and in Article 7 of the Plan ("Payments From The Plan"), as well as the Other Benefits set forth in Article 6, below. No other amounts shall be due under the Plan or otherwise as a result of the Participant's deferral election pursuant to Section 3.03 of the Program as it existed before the January 1, 2002, amendment and restatement.
5.02. AMOUNT AND SOURCES OF PAYMENT.
(a) Upon termination of employment, a Participant shall be entitled to receive the greater of (1) the balance in his Special Retention Account at termination of employment or (2) the cash component of any severance benefits that the Participant receives or is entitled to receive in the aggregate under all Other Plans. For purposes of this Section 5.02(a)--
(1) the "cash component" of any severance benefits shall include monetary benefits payable in all forms, whether payable in a lump sum or otherwise; and
(2) a Participant shall be treated as "entitled to receive" any benefits under a Company-sponsored employee benefit plan to which the Participant would be entitled based on compensation and service, even if the Participant does not receive the benefit for any other reason.
(b) The amount payable under the Program after application of Section 5.02(a) shall be payable to the Participant from the following sources in the following order until the entire amount is paid, if available--
(1) any of the Other Plans that is qualified (or intended to be qualified) under Section 401(a) of the Code;
(2) the Special Retention Account;
(3) any of the Other Plans that is not qualified (or intended to be qualified) under Section 401(a) of the Code; and
(4) the general assets of the Company.
(c) Any amount not paid from the Special Retention Account as a result of application of this Section 5.02 shall be forfeited.
5.03. LIMITATIONS ON RIGHTS TO PAYMENT.
(a) Period of Service, Notice. A Participant shall not be entitled to receive any amount from his Special Retention Account if he (1) voluntarily terminates from the Company (including a retirement) without providing 30 days' written notice of his intent to terminate or (2) is terminated for Cause (as defined in Section 5.03(b), below). Nothing in this Section 5.03(a) shall affect the right of a Participant to receive any amount from his Special Retention Account if he is involuntarily terminated without Cause or terminates employment due to his death or disability (as defined in the applicable long-term disability plan).
(b) Cause. For purposes of this Program, "Cause" shall mean (i) grossly incompetent performance or substantial or continuing inattention to or neglect of the duties and responsibilities assigned to the Participant; fraud, misappropriation or embezzlement involving the Company or a material breach of any provision incorporated in paragraph 13 ("Covenants") of the employment agreement to which this Program is an exhibit, as determined by the CEO in his discretion or (ii) commission of any felony of which the participant is finally adjudged guilty by a court of competent jurisdiction.
(c) Other Benefits. The Other Benefits provided in Article 6, below, shall not be subject to the requirements of Section 5.03(a), above, except to the extent specifically provided in Article 6, below.
(d) Other Limitations on Rights to Payment. The provisions of Sections 8.04 and 8.06 of the Plan ("Forfeiture" and "Non-Competition/Non-Solicitation Agreement Upon or After Termination of Employment," respectively) shall not apply to the Special Retention Account or the Other Benefits provided in Article 6, below.
(e) In-Service Withdrawals. The provisions of Section 7.06 of the Plan ("Early Payments") shall not apply to the Special Retention Account to the extent they permit withdrawals or distributions before a Participant terminates employment with the Company, except that a Participant may apply to the Committee for such a withdrawal or distribution, which the Committee may grant in its discretion.
ARTICLE 6. OTHER BENEFITS
6.01. OTHER BENEFITS.
In addition to the benefits provided in the Plan or otherwise in this
Program, Participants shall be entitled to the benefits set forth in paragraphs
(a) and (b) of this Section 6.01.
(a) Insurance. The Company shall provide each Participant, at the Company's expense, for a period beginning on the date of the Participant's termination of employment with the Company, the same medical, dental, and life insurance coverage as was in effect on June 30, 2000, or, if greater, coverage under any other Company-sponsored medical, dental, or life insurance coverage available on the date of the Participant's termination of employment. Such coverage shall end upon the expiration of 24 months after the Participant's termination of employment. For purposes of this paragraph (a), "at the Company's expense" means that the Company shall make all contributions or premium payments required to obtain coverage, and that the Participant shall not make any such contributions or premium payments, but that the Participant shall be subject to any deductibles and co-payment provisions in effect on June 30, 2000 (or, if applicable, immediately before the termination of employment). Except to the extent otherwise required by law, the period of coverage for any health care continuation coverage required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, shall begin on the date of the Participant's termination of employment.
(b) Benefit Credit.
(1) Each Participant shall receive service credit, for the purpose of receiving benefits and for vesting, retirement eligibility, benefit accrual, and all other purposes, under all employee benefit plans sponsored by the Company (including, but not limited to, health, life insurance, pension, savings, stock, and stock ownership plans, but excluding the Company's short-term and long-term disability plans) in which he participated on June 30, 2000, for 24 months.
(2) Other than the benefit credit set forth in Section 6.01(b)(1), above, a Participant shall not receive any additional benefit credit under the Program. The benefit credit provided in accordance with Section 6.01(b) of the Program as in effect before January 1, 2002 (other than to the extent such provisions are preserved in Section 6.01(b)(1), above) was converted to a dollar amount that was reflected in each Participant's Account as of January 1, 2002, or has otherwise been provided to the Participant through another plan or program of the Company. Therefore, that benefit credit has already been provided and will not be credited again.
6.02. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
Participants shall be entitled to a tax gross-up payment in accordance with Addendum A to the Program.
6.03. NONDUPLICATION.
No provision of this Program shall require the Company to provide the Participant with any payment, benefit, or grant that duplicates any payment, benefit, or grant that the Participant is entitled to receive under any Company compensation or benefit plan, award agreement, or other arrangement or a payment, benefit, or grant that was included in the Participant's Account in the Verizon Income Deferral Plan as of January 1, 2002.
SPECIAL RETENTION ACCOUNT AND OTHER BENEFITS PROGRAM
ADDENDUM A
ADDITIONAL PAYMENTS BY THE COMPANY
A Participant in the Program shall be entitled to a tax gross-up payment in accordance with the following provisions:
(a) Gross-Up Payment. If any payment or benefit received or to be received by the Participant from the Company pursuant to the Plan (the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Code as determined in accordance with this Addendum A, the Company shall pay the Participant, at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount that the Participant retains, after deduction of the Excise Tax on the Payments and any federal, state, and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties, or additions to tax payable by the Participant with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in section 1274(d) of the Code) in such calculation) of the Payments at the time such Payments are to be made.
(b) Calculations. For purposes of determining whether any of the Payments shall be subject to the Excise Tax and the amount of such excise tax,
(1) The total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the excise tax, except to the extent that, in the written opinion of independent counsel selected by the Company and reasonably acceptable to the Participant ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax;
(2) The amount of the Payments that shall be subject to the Excise Tax
shall be equal to the lesser of (i) the total amount of the Payments or
(ii) the amount of "excess parachute payments " within the meaning of
section 280G(b)(1) of the Code (after applying clause (1), above); and
(3) The value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of section 280G(d)(3) and (4) of the Code.
(c) Tax Rates. For purposes of determining the amount of the Gross-Up Payment, the Participant shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of the Participant's residence in the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates.
(d) Time of Gross-Up Payments. The Gross-Up Payments provided for in this paragraph 12 shall be made upon the earlier of (i) the payment to the Participant of any Payment or (ii) the imposition upon the Participant, or any payment by the Participant, of any Excise Tax.
(e) Adjustments to Gross-Up Payments. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax is less than the amount previously taken into account hereunder, the Participant shall repay the Company, within 30 days of the Participant's receipt of notice of such final determination or opinion, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state, and local income tax imposed on the Gross-Up Payment being repaid by the Participant if such repayment results in a reduction in Excise Tax or a federal, state, and local income tax deduction) plus any interest received by the Participant on the amount of such repayment, provided that if any such amount has been paid by the Participant as an Excise Tax or other tax, the Participant shall cooperate with the Company in seeking a refund of any tax overpayments, and the Participant shall not be required to make repayments to the Company until the overpaid taxes and interest thereon are refunded to the Participant.
(f) Additional Gross-Up Payment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within 30 days of the Company's receipt of notice of such final determination or opinion.
(g) Change In Law Or Interpretation. In the event of any change in, or further interpretation of section 280G or 4999 of the Code and the regulations promulgated thereunder, the Participant shall be entitled, by written notice to the Company, to request a written opinion of Independent Counsel regarding the application of such change to any of the foregoing, and the Company shall use its best efforts to cause such opinion to be rendered as promptly as practicable.
(h) Fees And Expenses. All fees and expenses of Independent Counsel incurred in connection with this Addendum A shall be borne by the Company.
(i) Survival. The Company's obligation to make a Gross-Up Payment with respect to Payments made or accrued before the Participant's termination of employment with the Company shall survive the termination of the Participant's with the Company unless (1) the Participant's employment is terminated for Cause, or (2) the
Participant fails to execute a release, in which event the Company's obligation under this Addendum A shall terminate immediately.
EXHIBIT B
EXCISE TAX GROSS-UP
1. GROSS-UP PAYMENT - If any payment or benefit received or to be received by you from the Company pursuant to the terms of the Agreement to which this Exhibit B is attached or otherwise (the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code (the "Code") as determined in accordance with this Exhibit B, the Company shall pay you, at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount that you retain, after deduction of the Excise Tax on the Payments and any federal, state, and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties, or additions to tax payable by you with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in section 1274(d) of the Code) in such calculation) of the Payments at the time such Payments are to be made.
2. CALCULATIONS - For purposes of determining whether any of the Payments shall be subject to the Excise Tax and the amount of such excise tax,
(a) The total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the excise tax, except to the extent that, in the written opinion of independent counsel selected by Verizon and reasonably acceptable to you ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax;
(b) The amount of the Payments that shall be subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Payments or (ii) the amount of "excess parachute payments " within the meaning of section 280G(b)(1) of the Code (after applying clause (a), above); and
(c) The value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of section 280G(d)(3) and (4) of the Code.
3. TAX RATES - For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates.
4. TIME OF GROSS-UP PAYMENTS - The Gross-Up Payments provided for in this Exhibit B shall be made upon the earlier of (a) the payment to you of any Payment or (b) the imposition upon you, or any payment by you, of any Excise Tax.
5. ADJUSTMENTS TO GROSS-UP PAYMENTS - If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax is less than the amount previously taken into account hereunder, you shall repay the Company, within 30 days of your receipt of notice of such final determination or opinion, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state, and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax or a federal, state, and local income tax deduction) plus any interest received by you on the amount of such repayment, provided that if any such amount has been paid by you as an Excise Tax or other tax, you shall cooperate with the Company in seeking a refund of any tax overpayments, and you shall not be required to make repayments to the Company until the overpaid taxes and interest thereon are refunded to you.
6. ADDITIONAL GROSS-UP PAYMENT - If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within 30 days of the Company's receipt of notice of such final determination or opinion.
7. CHANGE IN LAW OR INTERPRETATION - In the event of any change in or further interpretation of section 280G or 4999 of the Code and the regulations promulgated thereunder, you shall be entitled, by written notice to Verizon, to request a written opinion of Independent Counsel regarding the application of such change or further interpretation to any of the foregoing, and Verizon shall use its best efforts to cause such opinion to be rendered as promptly as practicable.
8. FEES AND EXPENSES - All fees and expenses of Independent Counsel incurred in connection with this Exhibit B shall be borne by Verizon.
9. SURVIVAL - The Company's obligation to make a Gross-Up Payment with respect to Payments made or accrued before the end of the Term of Employment
shall survive the Term of Employment unless (a) your employment is terminated for Cause pursuant to paragraph 11(f) of the Agreement to which this Exhibit B is attached ("Involuntary Termination For Cause"), (b) you fail to execute a release in accordance with paragraph 12 of such Agreement ("Release"), or (c) you fail to comply with the covenants incorporated in paragraph 13 of such Agreement ("Covenants"), in which event the Company's obligation under this Exhibit B shall terminate immediately.
10. DEFINED TERMS - Except where clearly provided to the contrary, all capitalized terms used in this Exhibit B shall have the definitions given to those terms in the Agreement to which this Exhibit B is attached.
EXHIBIT C
COVENANTS
1. NONCOMPETITION - In consideration for the benefits and agreements described in the Agreement to which this Exhibit C is attached, you agree that:
(a) PROHIBITED CONDUCT - During the period of your employment with the Company, and for the period ending six months after your termination of employment for any reason from the Company, you shall not, without the prior written consent of the CEO(s):
(1) personally engage in Competitive Activities (as defined below); or
(2) work for, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or provide consulting or advisory services to, any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities; provided that your purchase or holding, for investment purposes, of securities of a publicly-traded company shall not constitute "ownership" or "participation in ownership" for purposes of this paragraph so long as your equity interest in any such company is less than a controlling interest;
provided that this paragraph (a) shall not prohibit you from (i) being employed by, or providing services to, a consulting firm, provided that you do not personally engage in Competitive Activities or provide consulting or advisory services to any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities, or (ii) engaging in the private practice of law as a sole practitioner or as a partner in (or as an employee of or counsel to) a law firm in accordance with applicable legal and professional standards.
(b) COMPETITIVE ACTIVITIES - For purposes of the Agreement to which this Exhibit C is attached, "Competitive Activities" means business activities relating to products or services of the same or similar type as the products or services (1) which are sold (or, pursuant to an existing business plan, will be sold) to paying customers of the Company, and (2) for which you then have responsibility to plan, develop, manage, market, or oversee, or had any such responsibility within your most recent 24 months of employment with the Company. Notwithstanding the previous sentence, a business activity shall not be treated as a Competitive Activity if the geographic marketing area of the relevant products or services sold by you or
a third party does not overlap with the geographic marketing area for the applicable products and services of the Company.
2. INTERFERENCE WITH BUSINESS RELATIONS - During the period of your employment with the Company, and for a period ending with the expiration of 12 months following your termination of employment for any reason from the Company, you shall not, without the written consent of the CEO(s):
(a) recruit or solicit any employee of the Company for employment or for retention as a consultant or service provider;
(b) hire or participate (with another company or third party) in the process of hiring (other than for the Company) any person who is then an employee of the Company, or provide names or other information about Company employees to any person or business (other than the Company) under circumstances that could lead to the use of that information for purposes of recruiting or hiring;
(c) interfere with the relationship of the Company with any of its employees, agents, or representatives;
(d) solicit or induce, or in any manner attempt to solicit or induce, any client, customer, or prospect of the Company (1) to cease being, or not to become, a customer of the Company or (2) to divert any business of such customer or prospect from the Company; or
(e) otherwise interfere with, disrupt, or attempt to interfere with or disrupt, the relationship, contractual or otherwise, between the Company and any of its customers, clients, prospects, suppliers, consultants, or employees.
3. RETURN OF PROPERTY; INTELLECTUAL PROPERTY RIGHTS - You agree that on or before your termination of employment for any reason with the Company, you shall return to the Company all property owned by the Company or in which the Company has an interest, including files, documents, data and records (whether on paper or in tapes, disks, or other machine-readable form), office equipment, credit cards, and employee identification cards. You acknowledge that the Company is the rightful owner of any programs, ideas, inventions, discoveries, patented or copyrighted material, or trademarks that you may have originated or developed, or assisted in originating or developing, during your period of employment with the Company, where any such origination or development involved the use of Company
time or resources, or the exercise of your responsibilities for or on behalf of the Company. You shall at all times, both before and after termination of employment, cooperate with the Company in executing and delivering documents requested by the Company, and taking any other actions, that are necessary or requested by the Company to assist the Company in patenting, copyrighting, or registering any programs, ideas, inventions, discoveries, patented or copyrighted material, or trademarks, and to vest title thereto in the Company.
4. PROPRIETARY AND CONFIDENTIAL INFORMATION - You shall at all times preserve the confidentiality of all proprietary information and trade secrets of the Company, except to the extent that disclosure of such information is legally required. "Proprietary information" means information that has not been disclosed to the public and that is treated as confidential within the business of the Company, such as strategic or tactical business plans; undisclosed financial data; ideas, processes, methods, techniques, systems, patented or copyrighted information, models, devices, programs, computer software, or related information; documents relating to regulatory matters and correspondence with governmental entities; undisclosed information concerning any past, pending, or threatened legal dispute; pricing and cost data; reports and analyses of business prospects; business transactions that are contemplated or planned; research data; personnel information and data; identities of users and purchasers of the Company's products or services; and other confidential matters pertaining to or known by the Company, including confidential information of a third party that you know or should know the Company is bound to protect.
5. DEFINITIONS - Except where clearly provided to the contrary, all capitalized terms used in this Exhibit C shall have the definitions given to those terms in the Agreement to which this Exhibit C is attached.
EXHIBIT 10d
[Verizon Logo]
1095 Avenue of the Americas
New York, NY 10036
July 1, 2002
Ms. Doreen A. Toben
[Address]
[Address]
Dear Doreen:
I am pleased to offer you this new employment agreement (the "Agreement") with Verizon Communications Inc. ("Verizon"), and, as an indication of my confidence in your abilities, I have added an automatic renewal provision. For purposes of this Agreement, the term "Company" means Verizon, all corporate subsidiaries and other companies affiliated with Verizon, all companies in which Verizon has an ownership or other proprietary interest of more than 10 percent, and their successors and assigns.
The many opportunities and challenges facing the Company are enormous and exciting. As a leader in our industry, we will be constantly challenged with sustaining our market growth and presence. We will meet these challenges by leveraging the strength of our talented and committed leaders. This Agreement demonstrates my continued confidence in you.
I value you and the leadership, vision, and commitment you bring to the Company. I am excited by the prospect of you continuing as a key member of the Company's leadership team.
The terms and conditions of this Agreement are set forth below.
1. PURPOSE - Verizon enters into this Agreement with you because the rapidly-changing and increasingly global telecommunications market requires the Company to make critical strategic, marketing, and technical decisions. These decisions by the Company will be based, in whole or in part, on confidential analyses of the evolving telecommunications market, confidential assessments of the technical capabilities and strategic plans of the Company and competing businesses, and confidential or proprietary information regarding the Company's technology, resources, and business opportunities or other confidential or
Ms. Doreen A. Toben
July 1, 2002
proprietary information relating to the Company's business. Verizon seeks by this Agreement to ensure that you remain a part of the executive management team that plays a central role in this decision-making process.
In consideration for your entering into this Agreement, including the restrictions on the disclosure and use of confidential or proprietary information and the limitations on your engaging in competitive activities, the Company is providing you with the security of a written two-year agreement, short- and long-term award opportunities, and other benefits.
2. GENERAL - Under this Agreement, you shall continue as a senior executive of the Company. As a senior executive, you shall report to the Chief Executive Officer of Verizon (the "CEO").
3. TERM - The term of employment under this Agreement ("Term of Employment") shall commence on July 1, 2002, and end on June 30, 2004; provided that, on the last day of the Term of Employment, the Term of Employment shall automatically be extended for an additional two years unless, on or before that date, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended. For example, on June 30, 2004, the Term of Employment shall be extended until June 30, 2006, unless, on or before June 30, 2004, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended, and, if the Term of Employment is extended until June 30, 2006, the Term of Employment shall be extended on that date until June 30, 2008, unless, on or before June 30, 2006, the Term of Employment terminates or the Company notifies you in writing that the Term of Employment shall not be extended. Notwithstanding the preceding provisions of this paragraph 3, the Company reserves the right to terminate your employment and the Term of Employment at any time. Your employment and the Term of Employment also may terminate for other reasons (such as your resignation, retirement, death, or disability). The consequences of the termination of your employment are specified in paragraph 11 ("Termination Of Employment").
4. DUTIES AND RESPONSIBILITIES - You shall continue to serve as a senior executive of the Company in such capacities, with such titles and authorities, as the CEO or his successor may from time to time prescribe, and you shall perform all duties incidental to such positions, shall cooperate fully with the CEO or his successor, and shall work cooperatively with the other officers of the Company. You shall continue to devote your entire business skill, time, and effort diligently to the affairs of the Company in accordance with the duties assigned to you, and you shall perform all such duties, and otherwise conduct yourself, in a manner
Ms. Doreen A. Toben
July 1, 2002
reasonably calculated in good faith by you to promote the best interests of the Company. During the Term of Employment, except to the extent specifically permitted in writing by the CEO or his successor, and except for memberships on boards of directors that you held on October 3, 2000 (the date of your previous employment agreement with Verizon), you shall not, directly or indirectly, render any services of a business, commercial, or professional nature to any other person or organization other than the Company or a person or organization in which the Company has a financial interest, whether or not the services are rendered for compensation.
5. LOCATION - During the Term of Employment, you shall perform services for the Company at its New York City headquarters, or at any other location designated by the Company as necessary or appropriate for the discharge of your responsibilities under this Agreement. In the event of any change in your principal work location, you shall be eligible for relocation assistance under the terms of any Company relocation policy applicable to other senior executives of the Company in your salary band at the time of such relocation.
6. BASE SALARY - During the Term of Employment, your annual base salary shall not be less than your annual base salary on the date of this Agreement; provided that if you are granted a merit increase in your base salary, your base salary shall not thereafter be reduced below that increased level during the Term of Employment. The Human Resources Committee of Verizon's Board of Directors or its designee shall review your base salary at least annually.
7. SHORT-TERM AND LONG-TERM BONUS OPPORTUNITIES - During the Term of Employment, the Company shall provide you with annual short-term and long-term bonus opportunities equivalent to those available to other senior executives of the Company in your salary band. While you are not guaranteed an annual short-term or long-term bonus award in any amount, (a) the value of your annual short-term bonus opportunity shall be not less than 75 percent of your then-current base salary, and (b) the value of your annual long-term bonus opportunity shall not be less than 425 percent of your then-current base salary.
8. BENEFITS AND PERQUISITES - For the immediate future, you shall-
(1) participate in the tax-qualified and nonqualified retirement plans and in the other employee benefit plans (such as the medical and dental plans), programs, and policies in which you currently participate; and
Ms. Doreen A. Toben
July 1, 2002
(2) be eligible for the perquisites available to senior executives in your salary band;
provided that the Company retains the right to amend or terminate any benefit plan, policy, program, or perquisite at any time.
9. ANNUAL PHYSICAL - You are encouraged to take an annual physical
examination from a physician at the Company's expense and to certify in writing
to the Company's designee each year (1) that you have had the examination and
(2) the nature and extent of any medical impairments that prevent you from
currently performing the essential functions of your position.
10. EXCISE TAX GROSS-UP - Under certain circumstances you may become entitled to a gross-up payment with respect to the excise tax imposed by section 4999 of the Internal Revenue Code (the "Code"). The terms governing the gross-up payment are set forth in Exhibit A, which is incorporated herein by reference.
11. TERMINATION OF EMPLOYMENT - (a) VOLUNTARY TERMINATION BY YOU - You may terminate your employment under this Agreement for a reason other than Retirement (as defined in subparagraph (c), below) or Good Reason (as defined in subparagraph (d), below) by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination, written notice of your intent to so terminate. The termination shall automatically become effective upon the expiration of such notice period. Upon the effective date of such termination, your base salary and any other Company benefits and perquisites shall cease to accrue, you shall forfeit all then-outstanding stock options, and you shall forfeit all rights under this Agreement which as of the relevant date have not yet been earned. A termination of employment in accordance with this subparagraph (a) shall be deemed a "Voluntary Termination."
(b) TERMINATION DUE TO DEATH OR DISABILITY - If, during the Term of
Employment, you terminate employment because of death or disability (as defined
under the Company-sponsored long-term disability plan that applies to you at the
time your employment is so terminated), the Company shall make a lump-sum cash
payment to you equal to the excess of (1) one times the sum of your base salary
and short-term bonus (at 50% of maximum), over (2) any amounts payable to you
under Company-sponsored disability plans. You shall also be entitled to
accelerated vesting of all outstanding stock options, and you shall be entitled
to exercise all then-outstanding stock options until the earlier of (1) the
fifth anniversary of the date your employment terminates (or any later date
prescribed by the terms of the option relating to termination of employment) or
(2) the expiration of
Ms. Doreen A. Toben
July 1, 2002
the option; provided that if you terminate employment because of death, your rights under this subparagraph (b) shall pass to your estate. For this purpose, your base salary shall be based on your base salary rate in effect immediately before your employment terminated.
(c) RETIREMENT - You may terminate your employment under this Agreement by reason of Retirement (as defined below) by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination, written notice of your intent to so terminate. The termination shall automatically become effective upon the expiration of such notice period. Upon the effective date of such termination, you shall be entitled to a pro-rated portion of any short-term and long-term bonuses (when and to the extent that they are earned) and accelerated vesting of all outstanding stock options (other than the Founders' Grant), and you shall be entitled to exercise all then-outstanding stock options (excluding nonvested Founders' Grant options) until the earlier of (1) the fifth anniversary of the date your employment terminates (or any later date prescribed by the terms of the option relating to termination of employment) or (2) the expiration of the option. For purposes of this Agreement, "Retirement" means attaining normal retirement age under the terms of the Verizon Management Pension Plan (the "Pension Plan") or satisfying the Rule of 75 under the Pension Plan. Except as provided by the preceding provisions of this subparagraph (c), upon the effective date of your Retirement, your base salary and any other Company benefits and perquisites shall cease to accrue; provided that you shall otherwise be eligible to receive any and all compensation and benefits for which a similarly situated senior executive would be eligible under the applicable provisions of the compensation and benefit plans in which he is then eligible to participate, as those plans may be amended from time to time.
(d) TERMINATION FOR GOOD REASON - (1) You may terminate your employment under this Agreement for Good Reason by giving the CEO, at least 30 calendar days' (exclusive of vacation days) in advance of such termination (the "Notice Period"), written notice of your intent to so terminate, setting forth in reasonable detail the facts and circumstances deemed to provide a basis for such termination. For purposes of this Agreement, "Good Reason" means a material breach by the Company of the terms and conditions of this Agreement, a material reduction in your overall compensation opportunities, or your assignment to a new principal work location that is more than 50 miles from your previous principal work location. A "Good Reason" shall not occur merely because of a change in the individual (or position) to whom (or to which) you report. In addition, a "Good Reason" shall not occur merely because the Company notifies you, in accordance
Ms. Doreen A. Toben
July 1, 2002
with paragraph 3 ("Term"), that the Term of Employment shall not be extended for an additional two-year period.
(2) Notwithstanding the foregoing, the Company shall have 15 calendar days from its receipt of such notice to cure the action specified in the notice. In the event of a cure by the Company within the 15-day period, the action in question shall not constitute Good Reason.
(3) Except as provided in subparagraph (d)(2), above, at the end of the Notice Period, the Good Reason termination shall take effect, and your obligation to serve the Company, and the Company's obligation to employ you, under the terms of this Agreement shall terminate simultaneously, and you shall be deemed to have incurred an Involuntary Termination Without Cause, with the consequences described in subparagraph (e), below; provided that your rights under this subparagraph (d) are contingent on your execution of a release in accordance with paragraph 12 ("Release").
(4) If you do not fulfill the notice and explanation requirements imposed by this subparagraph (d), the resulting termination of employment shall be deemed a Voluntary Termination.
(e) INVOLUNTARY TERMINATION WITHOUT CAUSE - The Company may terminate your employment under this Agreement at any time and for any reason. However, if the Company terminates your employment during the Term of Employment for any reason other than death, disability, or Cause (as defined in subparagraph (f), below), such termination shall be deemed an Involuntary Termination by the Company, and you shall be entitled to receive the following payments and benefits in lieu of any payment or benefit otherwise provided pursuant to paragraphs 6 ("Base Salary") through 8 ("Benefits And Perquisites"):
(1) The Company shall make a lump-sum cash severance payment to
you equal to the excess of (i) two times the sum of your
base salary and short-term bonus (at 50% of maximum), over
(ii) the sum of any amounts paid or payable to you under any
Company-sponsored severance plan, program, policy, contract,
account, or arrangement;
(2) Your unvested stock options shall immediately vest, and you may exercise all of your then-outstanding stock options at any time up to the earlier of (i) the fifth anniversary of the date your employment terminates (or
Ms. Doreen A. Toben
July 1, 2002
any later date prescribed by the terms of the option relating to termination of employment) or (ii) the expiration of the option; and
(3) You shall be eligible for outplacement services to the extent that such services are then available to senior executives in your salary band;
provided that your rights under this subparagraph (e) are contingent on your execution of a release in accordance with paragraph 12 ("Release"). For purposes of this paragraph 11(e), the Company shall not be deemed to have terminated your employment during the Term of Employment if the Company notifies you, in accordance with paragraph 3 ("Term"), that the Term of Employment shall not be extended for an additional two-year period.
(f) INVOLUNTARY TERMINATION FOR CAUSE - (1) Nothing in this Agreement prevents the Company from terminating your employment under this Agreement for Cause. In the event of your termination for Cause, the Company shall pay you your full accrued base salary and accrued vacation time through the date of your termination, you shall forfeit all then-outstanding stock options if you are not eligible for Retirement at the time of your termination, and the Company shall have no further obligations under this Agreement; provided that you shall otherwise be eligible to receive any and all compensation and benefits for which a similarly situated senior executive would be eligible under the applicable provisions of the compensation and benefit plans in which he is then eligible to participate, as those plans may be amended from time to time.
(2) For purposes of this Agreement, "Cause" is defined as (i) grossly incompetent performance or substantial or continuing inattention to or neglect of the duties and responsibilities assigned to you; fraud, misappropriation or embezzlement involving the Company or a material breach of any provision incorporated in paragraph 13 ("Covenants"), as determined by the CEO in his discretion, or (ii) commission of any felony of which you are finally adjudged guilty by a court of competent jurisdiction.
(3) If the Company terminates your employment for Cause, the Company shall provide you with a written statement of the grounds for such termination within 10 business days after the date of termination.
12. RELEASE - You shall not be entitled to any benefits under paragraphs 10
("Excise Tax Gross-Up"), 11(d) ("Termination For Good Reason"), and 11(e)
("Involuntary Termination Without Cause") following the termination of your
Ms. Doreen A. Toben
July 1, 2002
employment unless, at the time your employment terminates, you execute a release satisfactory to the Company releasing the Company, its affiliates, shareholders, directors, officers, employees, representatives, and agents and their successors and assigns from any and all employment-related claims you or your successors and beneficiaries might then have against them (excluding any claims you might then have under this Agreement, or any employee benefit plan that is subject to the vesting standards imposed by the Employee Retirement Income Security Act of 1974, as amended).
13. COVENANTS - In consideration for the benefits and agreements described above, you agree to comply with the covenants set forth in Exhibit B hereto, which is incorporated herein by reference.
14. REQUEST FOR WAIVER - Nothing in this Agreement bars you from requesting, at the time of your termination of employment or at any time thereafter, that the CEO, in his sole discretion, waive in writing the Company's rights to enforce some or all of the provisions incorporated in paragraph 13 ("Covenants").
15. OTHER AGREEMENTS AND POLICIES - The obligations imposed on you by paragraph 13 ("Covenants") are in addition to, and not in lieu of, any and all other policies and agreements of the Company regarding the subject matter of the foregoing obligations.
16. NONDUPLICATION OF BENEFITS - No provision of this Agreement shall require the Company to provide you with any payment, benefit, or grant that duplicates any payment, benefit, or grant that you are entitled to receive under any Company compensation or benefit plan, award agreement, or other arrangement.
17. OTHER COMPANY PLANS - Except to the extent otherwise explicitly provided by this Agreement, any awards made to you under any Company compensation or benefit plan or program shall be governed by the terms of that plan or program and any applicable award agreement thereunder as in effect from time to time. Notwithstanding the foregoing, you shall not be entitled to participate in any Company compensation or benefit plan that is established after your employment with the Company terminates, and except as specifically provided in this Agreement, you shall not be entitled to any additional grants or awards under any Company compensation or benefit plan after your employment with the Company terminates. The amounts paid, provided, or credited under this Agreement shall not be treated as compensation for purposes of determining any benefits payable under any Company-sponsored pension, savings, life insurance, or other employee benefit plan except to the extent provided by the terms of such plan.
Ms. Doreen A. Toben
July 1, 2002
18. FORFEITURE - (a) If you breach any of the obligations incorporated in paragraph 13 ("Covenants"), or engage in serious misconduct that is contrary to written policies of the Company and is harmful to the Company or its reputation, you shall forfeit:
(1) all credits that are added to your Retirement Contribution Sub-Account in the Verizon Income Deferral Plan (or to any successor account in that plan or a successor plan) ("Retirement Contribution Sub-Account"), on or after January 1, 2002;
(2) any interest or other earnings or gains on or after January 1, 2002, with respect to any credits in your Retirement Contribution Sub-Account (including any interest, or other earnings or gains attributable to any credit regardless of when the credit was added to your Retirement Contribution Sub-Account); and
(3) any unpaid incentive compensation (such as performance bonus awards or other awards under the Verizon Communications Inc. Long-Term Incentive Plan) that you are otherwise entitled to receive.
(b) The remedies available under this paragraph are in addition to, and not in lieu of, the remedies available under paragraph 25 ("Additional Remedies").
19. NO DEEMED WAIVER - Failure to insist upon strict compliance with any of the terms, covenants, or conditions of this Agreement shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times.
20. TAXES - The Company may withhold from any benefits payable under this Agreement all taxes that the Company reasonably determines to be required pursuant to any law, regulation, or ruling. However, it is your obligation to pay all required taxes on any amounts and benefits provided under this Agreement, including the benefits and perquisites provided to you pursuant to paragraph 8 ("Benefits and Perquisites"), regardless of whether withholding is required.
21. CONFIDENTIALITY - Except to the extent otherwise required by law, you shall not disclose, in whole or in part, any of the terms of this Agreement. This
Ms. Doreen A. Toben
July 1, 2002
paragraph 21 does not prevent you from disclosing the terms of this Agreement to your spouse or to your legal, tax, or financial adviser, provided that you take all reasonable measures to assure that he or she does not disclose the terms of this Agreement to a third party except as otherwise required by law.
22. GOVERNING LAW - To the extent not preempted by federal law, the provisions of this Agreement shall be construed and enforced in accordance with the laws of the State of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this provision to the substantive law of another jurisdiction.
23. ASSIGNMENT - Verizon may, without your consent, assign its rights and obligations under this Agreement to any entity that is a part of the Company, and if Verizon makes such an assignment, all references in this Agreement to Verizon (except for references to Verizon common stock) shall be deemed to refer to the assignee. However, you may not assign your rights and obligations under this Agreement.
24. SEVERABILITY - The agreements contained herein and within the release prescribed by paragraph 12 ("Release") shall each constitute a separate agreement independently supported by good and adequate consideration, and shall each be severable from the other provisions of the Agreement and such release. If an arbitrator or court of competent jurisdiction determines that any term, provision, or portion of this Agreement or such release is void, illegal, or unenforceable, the other terms, provisions, and portions of this Agreement or such release shall remain in full force and effect, and the terms, provisions, and portions that are determined to be void, illegal, or unenforceable shall either be limited so that they shall remain in effect to the extent permissible by law, or such arbitrator or court shall substitute, to the extent enforceable, provisions similar thereto or other provisions, so as to provide to the Company, to the fullest extent permitted by applicable law, the benefits intended by this Agreement and such release.
25. ADDITIONAL REMEDIES - In addition to any other rights or remedies, whether legal, equitable, or otherwise, that each of the parties to this Agreement may have, you acknowledge that
(a) The covenants incorporated in paragraph 13 ("Covenants") are essential to the continued good will and profitability of the Company;
Ms. Doreen A. Toben
July 1, 2002
(b) You have broad-based skills that will serve as the basis for employment opportunities that are not prohibited by the covenants incorporated in paragraph 13 ("Covenants");
(c) When your employment with the Company terminates, you shall be able to earn a livelihood without violating any of the terms of this Agreement;
(d) Irreparable damage to the Company shall result in the event that the covenants incorporated in paragraph 13 ("Covenants") are not specifically enforced and that monetary damages will not adequately protect the Company from a breach of such covenants;
(e) If any dispute arises concerning the violation by you of the covenants incorporated in paragraph 13 ("Covenants"), an injunction may be issued restraining such violation pending the determination of such controversy, and no bond or other security shall be required in connection therewith;
(f) Such covenants shall continue to apply after any expiration, termination, or cancellation of this Agreement; and
(g) Your breach of any of such covenants shall result in your immediate forfeiture of all rights under this Agreement.
26. SURVIVAL - The provisions of paragraphs 13 ("Covenants") through 28 ("Entire Agreement") shall survive the Term of Employment. In addition, if the Term of Employment is not extended in accordance with paragraph 3 ("Term") but your employment continues after the end of the Term of Employment, you shall be subject to the obligations imposed by each of such paragraphs with respect to such employment. Any obligations that the Company has incurred under this Agreement to provide benefits that have vested under the terms of this Agreement (including the Company's obligations under paragraph 11(c) ("Retirement")) shall likewise survive the Term of Employment. Except as provided by the preceding provisions of this paragraph 26, if the Term of Employment is not extended in accordance with paragraph 3 ("Term") but your employment continues after the end of the Term of Employment, the terms of such employment shall not be governed by this Agreement.
27. ARBITRATION - Any dispute arising out of or relating to this Agreement (except any dispute arising out of or relating to paragraph 13 ("Covenants")), and any dispute arising out of or relating to your employment, shall be settled by final
Ms. Doreen A. Toben
July 1, 2002
and binding arbitration, which shall be the exclusive means of resolving any such dispute, and the parties specifically waive all rights to pursue any other remedy, recourse, or relief. With respect to disputes by the Company arising out of or relating to paragraph 13 ("Covenants"), the Company has retained all its rights to legal and equitable recourse and relief, including but not limited to injunctive relief, as referred to in paragraph 25 ("Additional Remedies"). The arbitration shall be expedited and conducted in the State of New York pursuant to the Center for Public Resources ("CPR") Rules for Non-Administered Arbitration in effect at the time of notice of the dispute before one neutral arbitrator appointed by CPR from the CPR Panel of neutrals unless the parties mutually agree to the appointment of a different neutral arbitrator. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. sections 1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction. The finding of the arbitrator may not change the express terms of this Agreement and shall be consistent with the arbitrator's understanding of the findings a court of proper jurisdiction would make in applying the applicable law to the facts underlying the dispute. In no event whatsoever shall such an arbitration award include any award of damages other than the amounts in controversy under this Agreement. The parties waive the right to recover, in such arbitration, punitive damages. Each party hereby agrees that New York City is the proper venue for any litigation seeking to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27, and each party hereby waives any right it otherwise might have to defend, oppose, or object to, on the basis of jurisdiction, venue, or forum nonconveniens, a suit filed by the other party in any federal or state court in New York City to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27. Each party also waives any right it might otherwise have to seek to transfer from a federal or state court in New York City a suit filed by the other party to enforce any provision of this Agreement or to enforce any arbitration award under this paragraph 27.
28. ENTIRE AGREEMENT - Except for the terms of the compensation and benefit plans in which you participate (including any award agreements issued thereunder), this Agreement, including the Exhibits hereto, sets forth the entire understanding of you and the Company, and supersedes all prior agreements and communications, whether oral or written, between the Company (or Bell Atlantic or GTE or any of their respective subsidiaries) and you regarding the subject matter of this Agreement, including your October 3, 2000, employment agreement with Verizon. This Agreement shall not be modified except by written agreement of you and Verizon.
Ms. Doreen A. Toben
July 1, 2002
Doreen, I believe that this Agreement continues to provide you and your family with a firm foundation of financial security as our Company faces many new challenges and opportunities. I recognize that the Company and the telecommunications industry operate in a rapidly changing and demanding environment. It is my hope that this Agreement demonstrates to you the level of confidence that I have in your abilities to meet the commitments that I expect from you. Please indicate your acceptance by signing below and returning the signed Agreement to me or Ezra Singer within ten business days after your receipt of this Agreement.
Sincerely yours,
/s/ Ivan Seidenberg ------------------------------------- Ivan Seidenberg Chief Executive Officer |
cc: E. Singer
I agree to the terms described above.
/s/ Doreen Toben ------------------------------------- Doreen Toben |
Attachments: Exhibit A - Excise Tax Gross-Up Exhibit B - Covenants
EXHIBIT A
EXCISE TAX GROSS-UP
1. GROSS-UP PAYMENT - If any payment or benefit received or to be received by you from the Company pursuant to the terms of the Agreement to which this Exhibit A is attached or otherwise (the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code (the "Code") as determined in accordance with this Exhibit A, the Company shall pay you, at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount that you retain, after deduction of the Excise Tax on the Payments and any federal, state, and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties, or additions to tax payable by you with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in section 1274(d) of the Code) in such calculation) of the Payments at the time such Payments are to be made.
2. CALCULATIONS - For purposes of determining whether any of the Payments shall be subject to the Excise Tax and the amount of such excise tax,
(a) The total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the excise tax, except to the extent that, in the written opinion of independent counsel selected by Verizon and reasonably acceptable to you ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax;
(b) The amount of the Payments that shall be subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Payments or (ii) the amount of "excess parachute payments " within the meaning of section 280G(b)(1) of the Code (after applying clause (a), above); and
(c) The value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of section 280G(d)(3) and (4) of the Code.
3. TAX RATES - For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates.
4. TIME OF GROSS-UP PAYMENTS - The Gross-Up Payments provided for in this Exhibit A shall be made upon the earlier of (a) the payment to you of any Payment or (b) the imposition upon you, or any payment by you, of any Excise Tax.
5. ADJUSTMENTS TO GROSS-UP PAYMENTS - If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax is less than the amount previously taken into account hereunder, you shall repay the Company, within 30 days of your receipt of notice of such final determination or opinion, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state, and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax or a federal, state, and local income tax deduction) plus any interest received by you on the amount of such repayment, provided that if any such amount has been paid by you as an Excise Tax or other tax, you shall cooperate with the Company in seeking a refund of any tax overpayments, and you shall not be required to make repayments to the Company until the overpaid taxes and interest thereon are refunded to you.
6. ADDITIONAL GROSS-UP PAYMENT - If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the written opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within 30 days of the Company's receipt of notice of such final determination or opinion.
7. CHANGE IN LAW OR INTERPRETATION - In the event of any change in or further interpretation of section 280G or 4999 of the Code and the regulations promulgated thereunder, you shall be entitled, by written notice to Verizon, to request a written opinion of Independent Counsel regarding the application of such change or further interpretation to any of the foregoing, and Verizon shall use its best efforts to cause such opinion to be rendered as promptly as practicable.
8. FEES AND EXPENSES - All fees and expenses of Independent Counsel incurred in connection with this Exhibit A shall be borne by Verizon.
9. SURVIVAL - The Company's obligation to make a Gross-Up Payment with respect to Payments made or accrued before the end of the Term of Employment
shall survive the Term of Employment unless (a) your employment is terminated for Cause pursuant to paragraph 11(f) of the Agreement to which this Exhibit A is attached ("Involuntary Termination For Cause"), (b) you fail to execute a release in accordance with paragraph 12 of such Agreement ("Release"), or (c) you fail to comply with the covenants incorporated in paragraph 13 of such Agreement ("Covenants"), in which event the Company's obligation under this Exhibit A shall terminate immediately.
10. DEFINED TERMS - Except where clearly provided to the contrary, all capitalized terms used in this Exhibit A shall have the definitions given to those terms in the Agreement to which this Exhibit A is attached.
EXHIBIT B
COVENANTS
1. NONCOMPETITION - In consideration for the benefits and agreements described in the Agreement to which this Exhibit B is attached, you agree that:
(a) PROHIBITED CONDUCT - During the period of your employment with the Company, and for the period ending six months after your termination of employment for any reason from the Company, you shall not, without the prior written consent of the CEO(s):
(1) personally engage in Competitive Activities (as defined below); or
(2) work for, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or provide consulting or advisory services to, any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities; provided that your purchase or holding, for investment purposes, of securities of a publicly-traded company shall not constitute "ownership" or "participation in ownership" for purposes of this paragraph so long as your equity interest in any such company is less than a controlling interest;
provided that this paragraph (a) shall not prohibit you from (i) being employed by, or providing services to, a consulting firm, provided that you do not personally engage in Competitive Activities or provide consulting or advisory services to any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities, or (ii) engaging in the private practice of law as a sole practitioner or as a partner in (or as an employee of or counsel to) a law firm in accordance with applicable legal and professional standards.
(b) COMPETITIVE ACTIVITIES - For purposes of the Agreement to which this Exhibit B is attached, "Competitive Activities" means business activities relating to products or services of the same or similar type as the products or services (1) which are sold (or, pursuant to an existing business plan, will be sold) to paying customers of the Company, and (2) for which you then have responsibility to plan, develop, manage, market, or oversee, or had any such responsibility within your most recent 24 months of employment with the Company. Notwithstanding the previous sentence, a business activity shall not be treated as a Competitive Activity if the geographic marketing area of the relevant products or services sold by you or
a third party does not overlap with the geographic marketing area for the applicable products and services of the Company.
2. INTERFERENCE WITH BUSINESS RELATIONS - During the period of your employment with the Company, and for a period ending with the expiration of 12 months following your termination of employment for any reason from the Company, you shall not, without the written consent of the CEO(s):
(a) recruit or solicit any employee of the Company for employment or for retention as a consultant or service provider;
(b) hire or participate (with another company or third party) in the process of hiring (other than for the Company) any person who is then an employee of the Company, or provide names or other information about Company employees to any person or business (other than the Company) under circumstances that could lead to the use of that information for purposes of recruiting or hiring;
(c) interfere with the relationship of the Company with any of its employees, agents, or representatives;
(d) solicit or induce, or in any manner attempt to solicit or induce, any client, customer, or prospect of the Company (1) to cease being, or not to become, a customer of the Company or (2) to divert any business of such customer or prospect from the Company; or
(e) otherwise interfere with, disrupt, or attempt to interfere with or disrupt, the relationship, contractual or otherwise, between the Company and any of its customers, clients, prospects, suppliers, consultants, or employees.
3. RETURN OF PROPERTY; INTELLECTUAL PROPERTY RIGHTS - You agree that on or before your termination of employment for any reason with the Company, you shall return to the Company all property owned by the Company or in which the Company has an interest, including files, documents, data and records (whether on paper or in tapes, disks, or other machine-readable form), office equipment, credit cards, and employee identification cards. You acknowledge that the Company is the rightful owner of any programs, ideas, inventions, discoveries, patented or copyrighted material, or trademarks that you may have originated or developed, or assisted in originating or developing, during your period of employment with the Company, where any such origination or development involved the use of Company
time or resources, or the exercise of your responsibilities for or on behalf of the Company. You shall at all times, both before and after termination of employment, cooperate with the Company in executing and delivering documents requested by the Company, and taking any other actions, that are necessary or requested by the Company to assist the Company in patenting, copyrighting, or registering any programs, ideas, inventions, discoveries, patented or copyrighted material, or trademarks, and to vest title thereto in the Company.
4. PROPRIETARY AND CONFIDENTIAL INFORMATION - You shall at all times preserve the confidentiality of all proprietary information and trade secrets of the Company, except to the extent that disclosure of such information is legally required. "Proprietary information" means information that has not been disclosed to the public and that is treated as confidential within the business of the Company, such as strategic or tactical business plans; undisclosed financial data; ideas, processes, methods, techniques, systems, patented or copyrighted information, models, devices, programs, computer software, or related information; documents relating to regulatory matters and correspondence with governmental entities; undisclosed information concerning any past, pending, or threatened legal dispute; pricing and cost data; reports and analyses of business prospects; business transactions that are contemplated or planned; research data; personnel information and data; identities of users and purchasers of the Company's products or services; and other confidential matters pertaining to or known by the Company, including confidential information of a third party that you know or should know the Company is bound to protect.
5. DEFINITIONS - Except where clearly provided to the contrary, all capitalized terms used in this Exhibit B shall have the definitions given to those terms in the Agreement to which this Exhibit B is attached.
EXHIBIT 10e
[Verizon Logo]
EZRA D. SINGER 1095 Avenue of the Americas Executive Vice President Room 3909 Human Resources New York, NY 10036
Tel: 212.395.1041 Fax: 212.597.2979 Ezra.Singer@verizon.com
Charles R. Lee
1095 Avenue of the Americas
Room 3919
New York, NY 10036
Dear Chuck:
On behalf of the Board of Directors, I am writing to express our gratitude for the leadership, vision, and commitment you have provided to Verizon. Consistent with your past actions, your decision to relinquish your title and duties as Co-Chief Executive Officer at this time was based on your view of what was in Verizon's interest, and Verizon will always be indebted to you for the example you have set by acting on that basis. We look forward to your continued leadership as Chairman of Verizon's Board of Directors.
This letter will confirm that you are voluntarily stepping down as Co-Chief Executive Officer of Verizon effective as of the close of business on March 31, 2002. As a result, your December 5, 2000 Employment Agreement now provides that you will continue to be an employee of Verizon until June 30, 2002 and then, after your retirement, you will continue to serve as the non-employee Chairman of the Board of Directors of Verizon until June 30, 2004. Except as amended by this letter, the terms and conditions of your employment agreement remain in effect and are unchanged.
Please indicate your agreement by signing and returning one copy of this letter.
Sincerely yours,
/s/ Ezra Singer ------------------------------------------ Ezra Singer Executive Vice President - Human Resources Verizon Communications Inc. |
I agree to the terms set forth above.
/s/ Charles R. Lee ------------------------------------------ Charles R. Lee |
cc: Ivan Seidenberg
EXHIBIT 10f
VERIZON COMMUNICATIONS INC.
VERIZON INCOME DEFERRAL PLAN
Effective January 1, 2002
TABLE OF CONTENTS
ARTICLE 1. INTRODUCTION.........................................................................................1
1.01 Name of Plan....................................................................................1
1.02 Purpose of Plan.................................................................................1
1.03 Effective Date..................................................................................1
1.04 Employees Who Terminated Employment Before Effective Date.......................................1
ARTICLE 2. DEFINITIONS..........................................................................................2
2.01 Definitions.....................................................................................2
2.02 Gender and Number...............................................................................7
ARTICLE 3. PARTICIPATION........................................................................................8
3.01 Active Participation............................................................................8
3.02 Inactive Participation..........................................................................9
ARTICLE 4. PARTICIPANT DEFERRALS...............................................................................10
4.01 Nature of Deferrals............................................................................10
4.02 Exclusive Entitlement to Payment...............................................................10
4.03 Time and Manner of Deferral Elections..........................................................10
4.04 Timing of Elections............................................................................10
4.05 Amount of Deferrals............................................................................12
ARTICLE 5. COMPANY CONTRIBUTION CREDITS........................................................................13
5.01 Matching Contribution Credits..................................................................13
5.02 Section 415 Credits............................................................................14
5.03 Retirement Contribution Credits................................................................14
5.04 Other Credits..................................................................................15
ARTICLE 6. ACCOUNT INVESTMENTS.................................................................................16
6.01 General........................................................................................16
6.02 Verizon Shares Fund............................................................................16
6.03 Moody's Investment Fund........................................................................17
6.04 Investment Elections...........................................................................18
ARTICLE 7. PAYMENTS FROM THE PLAN..............................................................................20
7.01 Participant Elections..........................................................................20
7.02 Method of Payment..............................................................................22
7.03 Payment Commencement...........................................................................23
7.04 Special Rules in the Event of Disability.......................................................25
7.05 Death Benefits.................................................................................26
7.06 Early Payments.................................................................................27
7.07 Default for Form and Timing of Payments........................................................29
7.08 Payment of Small Benefits......................................................................29
7.09 Prior Plan Payment Rules.......................................................................29
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Verizon Income Deferral Plan Page i
ARTICLE 8. VESTING, FORFEITURE, NON-COMPETITION, AND NON-SOLICITATION..........................................30
8.01 Personal Deferral Sub-Account..................................................................30
8.02 Matching Contribution Sub-Account..............................................................30
8.03 Retirement Contribution Sub-Account............................................................30
8.04 Forfeiture.....................................................................................31
8.05 Competitive Activities.........................................................................33
8.06 Non-Competition/Non-Solicitation Agreement Upon or After Termination of Employment.............34
8.07 Change in Control..............................................................................35
ARTICLE 9. NATURE OF PLAN AND ACCOUNTS.........................................................................37
9.01 Unfunded Plan..................................................................................37
9.02 Hypothetical Accounts..........................................................................37
ARTICLE 10. MISCELLANEOUS......................................................................................38
10.01 Plan Administrator.............................................................................38
10.02 Allocation of Administrative and Other Expenses................................................38
10.03 Amendment and Termination of Plan..............................................................38
10.04 Determination and Withholding of Taxes.........................................................40
10.05 No Assignment or Alienation....................................................................40
10.06 Severability...................................................................................40
10.07 Certain Rights Reserved........................................................................40
10.08 Titles and Headings Not to Control.............................................................41
10.09 Governing Law..................................................................................41
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ARTICLE 1. INTRODUCTION
1.01 NAME OF PLAN
The name of the Plan is the Verizon Income Deferral Plan.
1.02 PURPOSE OF PLAN
The Verizon Income Deferral Plan is a nonqualified deferred compensation and supplemental retirement plan. The purpose of the Plan is to enable Participants to defer voluntarily the receipt of certain compensation not otherwise eligible for deferral under any other deferred compensation arrangement maintained by any Verizon Company, to receive matching credits on certain deferrals that are comparable to the matching contributions under the Savings Plan, and to provide retirement and other benefits to Participants through an individual account program.
1.03 EFFECTIVE DATE
The Plan is an amendment and restatement of the plan formerly known as the Bell Atlantic Senior Management Income Deferral Plan, which was effective January 1, 1998. The effective date of this amendment and restatement of the Plan is January 1, 2002.
1.04 EMPLOYEES WHO TERMINATED EMPLOYMENT BEFORE EFFECTIVE DATE
The terms of the Plan, as amended and restated herein, apply only to individuals who are actively employed as a Senior Manager by a Verizon Company on or after January 1, 2002. If an employee terminated employment on or before December 31, 2001, with an account balance governed by the provisions of the Plan in effect before January 1, 2002, or with an account balance or accrued benefit governed by the provisions of any other deferred compensation or supplemental retirement plan of any Verizon Company, his account balance or accrued benefit shall be governed by the plan provisions that were in effect on the date he terminated employment (as those plan provisions may be amended from time to time).
ARTICLE 2. DEFINITIONS
2.01 DEFINITIONS
Unless the context clearly indicates otherwise, the following terms, when used in capitalized form in the Plan, shall have the meanings set forth below.
(a) "ARTICLE" means an Article of the Plan.
(b) "BASE SALARY" means the gross amount of annual base salary, before such annual base salary is reduced for tax withholding and pre-tax or after-contributions to any employee benefit plan, and before any other special payroll deductions.
(c) "BENEFICIARY" or "BENEFICIARIES" means a Participant's beneficiary or beneficiaries designated in accordance with procedures established by the Plan Administrator, or, if no beneficiary is so designated, the Participant's estate. A Beneficiary shall not be permitted to name a beneficiary of his right to all or a portion of a Participant's Account in the Plan; the beneficiary of a Beneficiary shall be the Beneficiary's estate.
(d) "BOARD" means the Board of Directors of Verizon.
(e) "CAUSE" means (1) grossly incompetent performance or substantial or continuing inattention to or neglect of the duties and responsibilities assigned to an employee; fraud, misappropriation or embezzlement involving the Company; or a material breach of the Participant's Non-Compete Agreement, as determined by the Plan Administrator or (2) commission of any felony of which the employee is finally adjudged guilty by a court of competent jurisdiction. A Participant who voluntarily terminates employment with a Verizon Company to avoid being terminated for Cause shall, for purposes of the Plan, be deemed to have been terminated for Cause. Notwithstanding the preceding two sentences of this Section 2.01(e), for purposes of the Plan, a Participant shall not be treated as having been terminated for Cause if the Participant is eligible to Retire.
(f) "CHANGE IN CONTROL" has the meaning provided in Section 8.07.
(g) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable Treasury regulations and rulings issued thereunder.
(h) "COMPANY BALANCE" means the vested balances in a Participant's Matching Contribution Sub-Account, Retirement Contribution Sub-Account and any other sub-account so designated by the Plan Administrator.
(i) "COMMITTEE" means the Human Resources Committee of the Board or any successor to that committee.
(j) "DIRECTOR" means any active employee of a Verizon Company who is designated as a "Director" in accordance with procedures that the Committee approves or is in a position comparable to that of a Director as determined by the Plan Administrator. The term Director shall not include an individual temporarily assigned the status of Director or promoted to or designated as a Director on an acting basis.
(k) "DISABILITY" means "Disability" as that term is defined in the Pension Plan.
(l) "ELIGIBLE BASE SALARY" means the amount of Base Salary for a Plan Year in excess of the limit for that Plan Year under section 401(a)(17) of the Code; provided that, in determining Eligible Base Salary for a Plan Year, the Plan Administrator may disregard all or part of any Base Salary earned before an Eligible Employee becomes an Active Participant.
(m) "ELIGIBLE COMPENSATION" means the sum of Eligible Base Salary and Eligible Short-Term Incentive.
(n) "ELIGIBLE SHORT-TERM INCENTIVE" means all of an Active Participant's Short-Term Incentive for a Plan Year; provided that, in determining the amount of an Eligible Short-Term Incentive for a Plan Year, the Plan Administrator may disregard all or part of any Short-Term Incentive earned before an Eligible Employee becomes an Active Participant.
(o) "ELIGIBLE EMPLOYEE" means an employee of a Participating Company who has the status of Senior Manager and has been designated by the Plan Administrator as being eligible to participate in the Plan.
(p) "EMPLOYEE BALANCE" means the vested balance in a Participant's Personal Deferral Sub-Account.
(q) "EXECUTIVE DIRECTOR" means any active employee of a Verizon Company who is designated as an "Executive Director" in accordance with procedures that the Committee approves or is in a position comparable to that of an Executive Director as determined by the Plan Administrator. The term Executive Director shall not include an individual temporarily assigned the status of Executive Director or promoted to or designated as a Executive Director on an acting basis.
(r) "INCUMBENT BOARD" means those persons who either (1) have been members of the Board of Directors of the Company since June 30, 2000, or (2) are new directors whose election by the Board of Directors or nomination for election by the shareowners of the Company was approved by a vote of at least three-fourths of the members of the Incumbent Board then in office who either were directors described in Section 2.01(r)(1) or whose election or nomination for election was previously so approved, but shall not include any director elected as a result of an actual or threatened solicitation of proxies by any Person.
(s) "INVESTMENT FUNDS" means the unfunded bookkeeping accounts identified in Article 6.
(t) "MOODY'S RATE" means the "Corporate Average" yield of long-term, high-grade corporate bonds as reported by Moody's Investors Service, or such other substantially similar yield that the Plan Administrator designates as the applicable interest rate.
(u) "NON-COMPETE AGREEMENT" means the non-competition/non-solicitation agreement described in Section 8.06(a).
(v) "OTHER ELIGIBLE COMPENSATION" means any compensation that (1) is not Eligible Base Salary or an Eligible Short-Term Incentive and (2) the Plan Administrator determines is eligible to be deferred under the Plan or otherwise used as the basis for credits to a Participant's Account. The Plan Administrator may determine the sub-account to which Other Eligible Compensation shall be credited.
(w) "PARTICIPANT" means an individual who is either an "Active Participant" or an "Inactive Participant" as those terms are defined in Article 3.
(x) "PARTICIPANT'S ACCOUNT" means, collectively, the unfunded book-entry sub-accounts that represent a Participant's deferred compensation, retirement benefits, and other benefits under the Plan, as adjusted from time to time to reflect credits to and withdrawals from such sub-accounts as well as earnings and losses derived from the performance of the Investment Funds to which sub-account balances have been allocated. Each Participant's Account, and the credits reflected in such Participant's Account, shall consist of the aggregate of the amounts, if any, in the following sub-accounts and of the following credits:
(1) PERSONAL DEFERRAL SUB-ACCOUNT AND PERSONAL DEFERRAL CREDITS
The "Personal Deferral Sub-Account" shall consist of (A) certain conversion and other credits provided for in Appendix A or
Appendix B, (B) credits pursuant to a Participant's voluntary election to defer the receipt of Eligible Base Salary, Eligible Short-Term Incentive, or Other Eligible Compensation as provided for in Article 4, and (C) certain credits pursuant to any employment, retention, stay incentive, or other agreement between a Participant and any Verizon Company that provides for a credit of Other Eligible Compensation to this sub-account. All credits described in this Section 2.01(x)(1), as adjusted to reflect all earnings and losses with respect to such credits, are referred to collectively as "Personal Deferral Credits."
(2) MATCHING CONTRIBUTION SUB-ACCOUNT AND MATCHING CONTRIBUTION CREDITS
The "Matching Contribution Sub-Account" shall consist of (A) certain conversion and other credits provided for in Appendix A and (B) matching credits provided by the Company in accordance with Section 5.01. All credits described in this Section 2.01(x)(2), as adjusted to reflect all earnings and losses with respect to such credits, are referred to collectively as "Matching Contribution Credits."
(3) RETIREMENT CONTRIBUTION SUB-ACCOUNT AND RETIREMENT CONTRIBUTION CREDITS
The "Retirement Contribution Sub-Account" shall consist of (A)
certain conversion and other credits provided for in Appendix A
or Appendix B, (B) retirement credits provided by the Company in
accordance with Section 5.02, (C) certain other retirement
credits provided by the Company in accordance with Section 5.03,
and (D) credits pursuant to any employment, retention, stay
incentive or other agreement between a Participant and any
Verizon Company that provides for a credit of Other Eligible
Compensation to this sub-account. All credits described in this
Section 2.01(x)(3), as adjusted to reflect all earnings and
losses with respect to such credits, are referred to collectively
as "Retirement Contribution Credits."
(y) "PARTICIPATING COMPANY" means each Verizon Company that the Plan Administrator designates as a "Participating Company."
(z) "PENSION PLAN" means the Verizon Management Pension Plan, as it may be amended from time to time, or any successor thereto.
(aa) "PERSON" means any individual, firm, corporation, partnership, joint venture, association, trust, or other entity.
(bb) "PLAN" means this Verizon Income Deferral Plan, as it may be amended from time to time, or any successor thereto.
(cc) "PLAN ADMINISTRATOR" means "Plan Administrator" as that term is defined in Section 10.01, except that, with respect to a Section 16 Person, the "Plan Administrator" means the Committee.
(dd) "PLAN YEAR" means the calendar year.
(ee) "RETIRE" or "RETIREMENT" means attaining normal retirement age under the Pension Plan or satisfying either the Rule of 75 in section 6A.2(b)(i) (or any successor provision) of the Pension Plan or the Rule of 73 in section 6A.2(b)(ii) (or any successor provision) of the Pension Plan.
(ff) "SAVINGS PLAN" means the Verizon Savings Plan for Management Employees, as it may be amended from time to time, or any successor thereto.
(gg) "SECTION" means a section of the Plan, unless the context clearly indicates another meaning (for example, "Section 16" shall have the meaning prescribed by Section 2.01(hh)).
(hh) "SECTION 16" means Section 16 of the Securities Exchange Act of 1934, as amended from time to time, and "SECTION 16 PERSON" means a Participant who is an "officer" or "director" of the Company within the meaning of Section 16.
(ii) "SENIOR MANAGER" means any active employee of a Verizon Company who is designated as a "Senior Manager" in accordance with procedures approved by the Committee or is in a position comparable to that of a Senior Manager as determined by the Plan Administrator. The term "Senior Manager" shall not include an individual temporarily assigned the status of Senior Manager or promoted to or designated as a Senior Manager on an acting basis.
(jj) "SHORT-TERM INCENTIVE" means the amount of (1) any short-term incentive award paid or payable under the Verizon Short-Term Incentive Plan and (2) any other incentive award that the Plan Administrator designates as Short-Term Incentive for purposes of the Plan. The term Short-Term Incentive shall mean the gross amount of any such award, before such award is reduced for tax withholding and pre-tax or after-
contributions to any employee benefit plan, and before any other special payroll deductions.
(kk) "VERIZON" or "COMPANY" means Verizon Communications Inc. or any successor. "VERIZON COMPANY" means (1) Verizon, (2) each corporation and partnership in which Verizon has a direct or indirect ownership interest of at least 50%, and (3) any other corporation, partnership, or other entity that the Plan Administrator determines shall be treated as a Verizon Company for purposes of the Plan.
2.02 GENDER AND NUMBER
Throughout the Plan, the use of masculine pronouns shall refer to both males and females. The singular form shall include the plural, where appropriate.
ARTICLE 3. PARTICIPATION
3.01 ACTIVE PARTICIPATION
(a) BECOMING AN ACTIVE PARTICIPANT
(1) ELIGIBLE EMPLOYEES ON JANUARY 1, 2002
A Senior Manager who is actively employed on January 1, 2002, shall be an "Active Participant" effective January 1, 2002.
(2) ELIGIBLE EMPLOYEES AFTER JANUARY 1, 2002
An individual who is not an Active Participant and who becomes a Senior Manager after January 1, 2002, shall be an Active Participant effective on the date on which the individual becomes a Senior Manager.
(b) DURATION OF ACTIVE PARTICIPATION
An Active Participant shall remain an Active Participant for so long as he is a Senior Manager.
(c) AFFECT ON PARTICIPATION IN OTHER PLANS
Each Participant shall not participate in any other nonqualified deferred compensation plan or arrangement of a Verizon Company if the Plan Administrator determines that the Senior Manager shall no longer participate in such plan or arrangement.
Each Senior Manager who was a Participant in the Plan before January 1, 2002, and is actively employed by a Verizon Company on or after January 1, 2002, shall no longer be subject to the terms of the Plan as it existed before January 1, 2002.
3.02 INACTIVE PARTICIPATION
(a) BECOMING AN INACTIVE PARTICIPANT
An Active Participant whose employment terminates shall be an "Inactive Participant" as of the effective date of his termination.
An Active Participant who is demoted shall become an "Inactive Participant" as of the effective date of his demotion if, in his new position after the demotion, he is not a Senior Manager.
(b) DURATION OF INACTIVE PARTICIPATION
An Inactive Participant shall remain an Inactive Participant for so long as he has a positive account balance under the Plan and does not become an Active Participant under Section 3.01(a).
ARTICLE 4. PARTICIPANT DEFERRALS
4.01 NATURE OF DEFERRALS
Each Eligible Employee may elect to defer receipt of Eligible Base Salary, Eligible Short-Term Incentive, and Other Eligible Compensation in accordance with this Article 4.
If an Eligible Employee makes an election to defer pursuant to this Article 4, Personal Deferral Credits for the amounts deferred shall be calculated and added to his Personal Deferral Sub-Account according to such procedures as the Plan Administrator may establish.
4.02 EXCLUSIVE ENTITLEMENT TO PAYMENT
If an Eligible Employee makes an election to defer pursuant to this Article 4, he waives his right to receive the amount deferred and agrees to receive instead the amounts payable to him under Article 7. No other amounts shall be due to or on behalf of an Eligible Employee as a result of his election to defer pursuant to this Article 4.
4.03 TIME AND MANNER OF DEFERRAL ELECTIONS
An Eligible Employee's election to defer (or a change in any such election to defer) must be made, executed, and delivered at a time and in a manner acceptable to the Plan Administrator.
4.04 TIMING OF ELECTIONS
(a) ELIGIBLE BASE SALARY
Subject to Section 4.03, an Eligible Employee may at any time deliver an election to defer Eligible Base Salary to the Plan Administrator, and may at any time change, revoke, or modify such election. If an individual delivers an election to the Plan Administrator before he becomes an Eligible Employee, his election shall be deemed to have been delivered on the date he becomes an Eligible Employee.
Any such election shall be effective (1) as soon as administratively practicable after the election is delivered or deemed to be delivered to the Plan Administrator or on such later date as the Eligible Employee may
elect, (2) only with respect to Eligible Base Salary earned after the effective date of the election, and (3) only with respect to Eligible Base Salary earned while the Eligible Employee is an Active Participant.
Any such election shall remain in effect until changed, revoked, or modified, and shall be deemed to be renewed automatically for each succeeding Plan Year unless changed, revoked, or modified by the Eligible Employee as provided in this Section 4.04(a).
(b) ELIGIBLE SHORT-TERM INCENTIVE
Subject to Section 4.03, an Eligible Employee may at any time deliver an election to defer an Eligible Short-Term Incentive to the Plan Administrator. Any such election may be changed, revoked, or modified at any time before, but not after, the deadline for making such election or such other period as may be determined by the Plan Administrator.
Any such election shall be effective for a Plan Year (1) only if it is
executed and delivered or deemed to be delivered before the last
business day of December before the year in which the Eligible
Short-Term Incentive to be deferred would have been payable, or such
other date as may be determined by the Plan Administrator for this
purpose, (2) only with respect to an Eligible Short-Term Incentive
earned after the election is delivered to the Plan Administrator, and
(3) only if the Eligible Employee is an Active Participant when such
Eligible Short-Term Incentive becomes payable. For purposes of the
Plan, a Participant shall be deemed to have "earned" all of his
Eligible Short-Term Incentive for a Plan Year on the last day of such
Plan Year or at such earlier date as the Plan Administrator may
determine.
Unless changed, revoked, or modified sooner, any such election (1) shall remain in effect until the beginning of the next succeeding Plan Year and (2) shall not be deemed to be renewed automatically for each succeeding Plan Year.
(c) OTHER ELIGIBLE COMPENSATION
Any election to defer receipt of Other Eligible Compensation must be delivered or deemed to be delivered to the Plan Administrator not later than the date determined by the Plan Administrator.
Any such election may be changed, revoked, or modified for such period as the Plan Administrator may determine.
4.05 AMOUNT OF DEFERRALS
An Eligible Employee may make separate deferral elections for Eligible Base Salary, Eligible Short-Term Incentive, and Other Eligible Compensation, subject to the requirements of this Article 4 and such requirements as the Plan Administrator may impose, in the following percentages or amounts:
(a) ELIGIBLE BASE SALARY
An Eligible Employee may elect to defer a whole percentage (up to 100% or such lesser percentage as the Plan Administrator may determine for this purpose) of his Eligible Base Salary or, if permitted by the Plan Administrator, a stated amount of his Eligible Base Salary.
(b) ELIGIBLE SHORT-TERM INCENTIVE
An Eligible Employee may elect to defer a whole percentage (up to 100% or such lesser percentage as the Plan Administrator may determine for this purpose) of his Eligible Short-Term Incentive or, if permitted by the Plan Administrator, a stated amount of his Eligible Short-Term Incentive.
(c) OTHER ELIGIBLE COMPENSATION
An Eligible Employee may elect to defer a whole percentage (up to 100% or such lesser percentage as the Plan Administrator may determine for this purpose) of his Other Eligible Compensation or, if permitted by the Plan Administrator, a stated amount of his Other Eligible Compensation.
ARTICLE 5. COMPANY CONTRIBUTION CREDITS
5.01 MATCHING CONTRIBUTION CREDITS
Each Active Participant who makes an election to defer pursuant to Article 4 shall have Matching Contribution Credits added to his Matching Contribution Sub-Account as provided in this Section 5.01, at a time and in a manner that the Plan Administrator approves, and as of the same date as the associated Personal Deferral Credits provided for in Article 4.
(a) ELIGIBLE BASE SALARY AND ELIGIBLE SHORT-TERM INCENTIVE
Subject to the next paragraph of this Section 5.01(a), for each Plan Year--
(1) An Eligible Employee who defers at least 6% of his Eligible Compensation for the Plan Year shall receive Matching Contribution Credits equal to 5% of his Eligible Compensation.
(2) An Eligible Employee who defers less than 6% of his Eligible Compensation for the Plan Year shall receive Matching Contribution Credits equal to the sum of (A) 100% of the first 4% of the Eligible Compensation he defers and (B) 50% of the next 2% of the Eligible Compensation he defers.
If a Participant is an Inactive Participant at the time an Eligible Short-Term Incentive becomes payable (or would otherwise become payable in the absence of a deferral election under the Plan), the Participant shall receive the Matching Contribution Credits with respect to such Eligible Short-Term Incentive (1) only if the Plan Administrator determines that the Participant shall receive such Matching Contribution Credits and (2) subject to any terms and conditions that the Plan Administrator establishes.
(b) OTHER ELIGIBLE COMPENSATION
An Eligible Employee who elects to defer all or part of his Other Eligible Compensation for the Plan Year shall receive Matching Contribution Credits only to the extent the Plan Administrator determines that the Participant shall receive such Matching Contribution Credits.
5.02 SECTION 415 CREDITS
To the extent provided in the succeeding paragraph of this Section 5.02, if the present value of a Participant's accrued benefit under the Pension Plan, upon commencement of benefits thereunder, exceeds the benefit that can be paid to the Participant from the Pension Plan under section 415 of the Code, the excess amount shall be credited to the Participant's Retirement Contribution Sub-Account as of the Participant's benefit commencement date, except that such credit shall be reduced by the amount, if any, previously credited to such Participant account under the NYNEX Senior Management Nonqualified Defined Contribution Pension Plan (the "NYNEX Defined Contribution Plan") because his benefit under a qualified retirement plan exceeded the benefit permitted to be paid from that plan under section 415 of the Code. Any credit pursuant to this Section 5.02 shall be in full satisfaction of any right to similar credits or benefits that the Participant may have under any other employee benefit plan of a Verizon Company.
5.03 RETIREMENT CONTRIBUTION CREDITS
Each Active Participant who is a Senior Manager shall have Retirement Contribution Credits added to his Retirement Contribution Sub-Account on the following basis at a time and in a manner that the Plan Administrator approves:
(a) ELIGIBLE BASE SALARY
Following commencement of participation in the Plan as a Senior Manager, Retirement Contribution Credits equal to 32% of the Participant's Eligible Base Salary shall be added to the Participant's Retirement Contribution Sub-Account for each of the first 240 months during which the Participant earns Eligible Base Salary, except that such 240-month period shall be reduced by the number of months (if any) during which the Participant previously participated in the NYNEX Defined Contribution Plan. After such 240-month (or shorter) period, Retirement Contribution Credits equal to 7% of the Participant's Eligible Base Salary shall be added to the Participant's Retirement Contribution Sub-Account for each month that the Participant is a Senior Manager and earns Eligible Base Salary.
The Retirement Contribution Credits provided for in this Section 5.03(a) shall be calculated in accordance with guidelines that the Plan Administrator shall establish.
(b) ELIGIBLE SHORT-TERM INCENTIVE
Following commencement of participation in the Plan as a Senior Manager and subject to the next paragraph of this Section 5.03(b), annual Retirement Contribution Credits equal to 32% of a Participant's Eligible Short-Term Incentive for the Plan Year shall be added to each Active Participant's Retirement Contribution Sub-Account for each Plan Year ends during the first 240 months in which the Participant earns Eligible Short-Term Incentive, except that such 240-month period shall be reduced by the number of months (if any) during which the Participant previously participated in the NYNEX Defined Contribution Plan. After such 240-month (or shorter) period, annual Retirement Contribution Credits equal to 7% of the Participant's Eligible Short-Term Incentive for the Plan Year shall be added to the Participant's Retirement Contribution Sub-Account. Such Retirement Contribution Credits shall be made on an annual basis.
If a Participant is an Inactive Participant as a result of his Retirement or involuntarily termination without Cause at the time an Eligible Short-Term Incentive becomes payable (or would otherwise become payable in the absence of a deferral election under the Plan), the Participant shall receive the Retirement Contribution Credits provided for in this Section 5.03(b) with respect to such Eligible Short-Term Incentive only if (1) the Participant executes a release in a form acceptable to the Plan Administrator or (2) the Plan Administrator determines that the Participant shall receive such Retirement Contribution Credits. A Participant who is an Inactive Participant for any other reason shall not be eligible to receive the Retirement Contribution Credits unless the Plan Administrator determines otherwise.
The Retirement Contribution Credits provided for in this Section 5.03(b) shall be added to the Participant's Retirement Contribution Sub-Account as of the date that the associated Eligible Short-Term Incentive becomes payable (or would otherwise become payable in the absence of a deferral election under the Plan).
5.04 OTHER CREDITS
Other credits shall be provided to Participants in accordance with Appendices A and B to this Plan.
ARTICLE 6. ACCOUNT INVESTMENTS
6.01 GENERAL
A Participant may allocate the balance in the Participant's Account among the Investment Funds available under the Plan in accordance with this Article 6. The Investment Funds shall consist of a set of unfunded book-entry investment accounts. A separate bookkeeping account shall be maintained for each Participant.
Except as provided in this Article 6, (a) the investment performance of each Investment Fund shall mirror the investment performance of a corresponding investment fund under the Savings Plan; (b) each Investment Fund shall be subject to any restrictions imposed on the corresponding investment fund in the Savings Plan; (c) each Investment Fund shall be available as an investment choice for the balance in a Participant's Account; and (d) if there is a change in, addition to, or deletion of any of the investment funds under the Savings Plan, a corresponding change, addition, or deletion shall be made in the Investment Funds offered under this Plan.
6.02 VERIZON SHARES FUND
(a) THE INVESTMENT FUND
The Plan shall maintain an Investment Fund known as the "Verizon Shares Fund." The investment performance of this fund shall mirror the investment performance of Verizon common stock.
Any credits added to a Participant's Matching Contribution Sub-Account, other than credits made pursuant to Appendix A, shall initially be allocated to the Verizon Shares Fund, and a Participant may thereafter transfer all or any portion of such balance out of the Verizon Shares Fund and into any other available Investment Fund in accordance with the "Diversification Transfers" provisions in section 14.17 of the Savings Plan or any successor to those provisions.
If a Participant transfers any portion of his Participant's Account into or out of the Verizon Shares Fund, such transfer shall be executed using the closing price of a share of Verizon common stock on the composite tape of New York Stock Exchange issues on the day the Participant initiates the transfer (or if there was no reported sale of Verizon common stock on
such date, on the next succeeding day on which there was such a reported sale).
(b) DIVIDEND EQUIVALENTS
Any credits in a Participant's Account allocated to the Verizon Shares Fund shall be increased on each date that a dividend is paid on Verizon common stock. The number of additional credits credited to a Participant's Account as a result of such increase shall be determined by (1) dividing the balance of a Participant's Account in the Verizon Shares Fund by the closing price of a share of Verizon common stock on the composite tape of New York Stock Exchange issues on the dividend declaration date (or if there was no reported sale of Verizon common stock on such date, on the next preceding day on which there was such a reported sale), and then (2) multiplying the amount resulting from the calculation in clause (1) by the amount of the dividend declared per share of Verizon common stock on the dividend declaration date.
(c) EFFECT OF RECAPITALIZATION
In the event of a transaction or event described in this Section 6.02(c), the balance in a Participant's Account in the Verizon Shares Fund shall be adjusted in such manner as the Plan Administrator deems equitable. A transaction or event is described in this Section 6.02(c) if and only if (1) it is a dividend or other distribution (whether in the form of cash, shares, other securities, or other property), extraordinary cash dividend, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares or other securities, the issuance of warrants or other rights to purchase shares or other securities, or other similar corporate transaction or event, and (2) the Plan Administrator determines that such transaction or event affects the shares of Verizon common stock, such that an adjustment pursuant to this Section 6.02(c) is appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.
6.03 MOODY'S INVESTMENT FUND
The Plan shall maintain an Investment Fund known as the "Moody's Investment Fund" that shall credit interest as follows: (1) balances in this Investment Fund as of the end of the immediately preceding calendar quarter that were not withdrawn from or transferred out of the Moody's Investment Fund shall
earn interest for the entire calendar quarter; and (2) all other balances
in this Investment Fund shall earn interest from the beginning of the
calendar quarter until the day they are withdrawn from or transferred out
of the Moody's Investment Fund. The rate at which interest shall be
credited for purposes of this Section 6.03 shall be the equivalent of the
annualized rate equal to the Moody's Rate as of the day immediately
preceding the beginning of the applicable calendar quarter. Any or all of
the balance of a Participant's Account allocated to the Moody's Investment
Fund may be transferred to any other Investment Fund in accordance with
Section 6.04(b), below.
6.04 INVESTMENT ELECTIONS
A Participant may allocate the balance in his Participant's Account among the available Investment Funds in whole percentages and at a time and in a manner that the Plan Administrator approves, subject to the following rules:
(a) INITIAL ELECTIONS
Each Active Participant may submit his initial investment elections at
any time. However, if an Active Participant fails to submit an
investment election before amounts are credited to his Participant's
Account, the Plan Administrator shall allocate such amounts as the
Plan Administrator deems appropriate, except that, if the individual
first becomes a Senior Manager on or after January 1, 2002, and fails
to submit an investment election before amounts are credited to his
Retirement Contribution Sub-Account, such Retirement Contribution
Credits shall initially be allocated to the Moody's Investment Fund
described in Section 6.03 and may be transferred only as provided in
Section 6.03.
Investment elections may allocate balances in a Participant's Account to any Investment Fund, and elections shall be applied uniformly to the balance in each of the Participant's sub-accounts, except that balances in the Matching Contribution Sub-Account shall initially be allocated to the Verizon Shares Fund as provided in Section 6.02 and may be transferred only as provided in Section 6.02.
(b) CHANGES IN INVESTMENT ELECTIONS
Except as otherwise provided in this Article 6, Participants shall be permitted to change their investment elections daily, and may be permitted to change their elections more frequently if the Plan Administrator so determines.
Changes in investment elections and the consequent transfers among Investment Funds shall be applied uniformly to the balances in each of the Participant's sub-accounts, except that balances in the Matching Contribution Sub-Account shall initially be allocated to the Verizon Shares Fund as provided in Section 6.02 and may be transferred only as provided in Section 6.02. Any change in investment elections shall be effected as soon as administratively practicable after the Plan Administrator receives the Participant's request for the change.
ARTICLE 7. PAYMENTS FROM THE PLAN
7.01 PARTICIPANT ELECTIONS
Each Participant shall be permitted to make an election regarding the payment of the vested balance in his Participant's Account on a form provided by the Plan Administrator. Any such election must comply with the requirements of this Article 7, must be made at a time and in a manner that the Plan Administrator approves, and shall be subject to Sections 8.04 and 8.06.
(a) TIMING OF ELECTION
A Participant's completed election form must be delivered to the Plan Administrator at least twelve months before the earlier of (1) the commencement date specified on the Participant's election form or (2) the commencement date specified by Section 7.07. Any such election that modifies a previously-delivered payment election shall also be subject to the provisions of Section 7.01(b).
Except as provided in the next paragraph of this Section 7.01(a) or in
Section 7.04, if an election does not comply with the provisions of
the preceding paragraph, (1) the election shall be disregarded for the
first twelve months following the delivery of the Participant's
election to the Plan Administrator and payment shall be made in
accordance with a valid payment election (made in accordance with
Section 7.01) in effect or, if there is no such election in effect, in
accordance with the default rules in Section 7.07) and (2) after the
expiration of such twelve-month period, any unpaid amount to which the
election applies shall be paid in accordance with the election (and
the earlier valid election under which payments were being made during
such twelve-month period shall be disregarded).
If a Participant elects to commence payment as of his termination of
employment with all Verizon Companies, and such termination occurs
during the twelve-month period immediately following the date such
election is delivered to the Plan Administrator, payment shall be made
as of the last day of the month in which the Participant terminates
employment with all Verizon Companies only (1) if the Participant
elects, before January 1, 2002, to commence payments as of such date
and such termination occurs during the twelve-month period immediately
following the delivery of such election to the Plan Administrator or
(2) if the Participant elects, within thirty days after becoming an
Active Participant, to commence payments as of the last day of the
month in which the
Participant terminates employment with all Verizon Companies and such termination occurs during the twelve-month period immediately following the delivery of such election to the Plan Administrator.
(b) MODIFYING AN ELECTION
Once each Plan Year, a Participant may modify a previously delivered
payment election with respect to the Participant's Employee Balance
and modify a previously delivered payment election with respect to the
Participant's Company Balance, provided that a modification will be
effective only with respect to payments that are scheduled to be made
more than twelve months from the date the modification is delivered to
the Plan Administrator. Such modifying elections may be made on
separate occasions, on a form provided by the Plan Administrator,
provided that each such election shall otherwise be subject to the
rules set forth in this Section 7.01 (including the requirement of
Section 7.01(a) that the date for payment commencement be at least
twelve months after the date the election is delivered to the Plan
Administrator).
If a modification delivered to the Plan Administrator is invalid for any reason with respect to any or all payments subject to the modification, such payments shall be made in accordance with the election in effect at the time the modification was delivered to the Plan Administrator or, if no such election was in effect, in accordance with the default rules in Section 7.07.
(c) DIVISION OF ACCOUNT
A Participant may divide his Employee Balance and his Company Balance into no more than two parts each (with each such part consisting of a whole percentage of the total Employee Balance or Company Balance) and may elect a different method of payment and payment commencement date for each part, except as provided in Section 8.06(d).
(d) DISABILITY OR DEATH OF PARTICIPANT
If a Participant becomes Disabled or dies, the disability or death benefit payment rules, as applicable, in Sections 7.04 and 7.05 shall apply.
(e) PAYMENT OF SMALL BENEFITS
If, on termination of employment, the vested balance in a Participant's Account is $100,000 or less, the rules applicable to small benefits in Section 7.08 shall apply.
7.02 METHOD OF PAYMENT
Payments to a Participant shall be made solely in cash and pursuant to the method provided for in this Section 7.02 that the Participant elects in accordance with Section 7.01, pursuant to the default rules in Section 7.07 if no valid election is in effect, or pursuant to the small benefit rules in Section 7.08 if the vested balance in the Participant's Account is $100,000 or less at his termination of employment. Subject to Sections 8.04 and 8.06, the Participant may elect to receive payment of all or a portion of the vested balance in his Participant's Account as follows:
(a) SINGLE SUM
A Participant may elect to receive a single-sum payment of all or a portion of the vested balance in the Participant's Account. At the time such payment is due, the amount of the payment shall be calculated by the Plan Administrator and shall be paid as soon as administratively practicable following such calculation.
(b) INSTALLMENT PAYMENTS
A Participant may elect to receive installment payments of all or a portion of the vested balance in the Participant's Account, which shall be paid monthly, quarterly, semi-annually, or annually, over a period of two to thirty years as elected by the Participant, except as provided in Section 7.03(a). Each installment shall be equal to (1) the unpaid portion of the vested balance in the Participant's Account covered by the election (as adjusted to reflect any earnings or losses thereon and any earlier payments), divided by (2) the number of remaining installments. At the time each installment is due, the Plan Administrator shall calculate the amount of the installment and shall pay the installment as soon as administratively practicable following such calculation.
(c) APPRECIATION ONLY
A Participant may elect to receive payments of appreciation with respect to the Employee Balance or Company Balance covered by an election, provided such Employee Balance or Company Balance is at least $100,000 at the time the election is delivered to the Plan Administrator. Under this option, payments shall be made to the Participant each month over a period of two to thirty years as elected by the Participant, except as provided in Section 7.03(a). At the end of the payment period, the then-unpaid balance covered by this election (adjusted to reflect such prior monthly payments) shall be paid in a lump sum as soon as administratively practicable. Each monthly payment shall be equal to the greater of (1) a fixed amount equal to two-thirds of 1% of the vested balance covered by the election before the first payment, or (2) the amount by which the current vested balance covered by the election exceeds such balance immediately after the first payment. Before each monthly payment is due, the Plan Administrator shall calculate the amount of the payment and shall pay the installment as soon as administratively practicable following such calculation.
7.03 PAYMENT COMMENCEMENT
Subject to Sections 7.08, 8.04, and 8.06, the payments to a Participant with respect to the vested balance in the Participant's Account shall commence either on a specific date in accordance with Section 7.03(a) or on termination of employment in accordance with Section 7.03(b), as selected by the Participant under Section 7.01, or otherwise shall commence pursuant to the default rules in Section 7.07.
If the Participant begins to receive payments under this Section 7.03 and becomes Disabled or dies before the vested balance of his Participant's Account is paid in accordance with this Section 7.03, the then-remaining vested balance in his Participant's Account shall be paid in accordance with Sections 7.04 (Disability) or 7.05 (Death) below.
(a) SPECIFIC DATE
A Participant may select a specific date for the commencement of payment of the vested portion of the Participant's Account, subject to the following rules:
(1) SPECIFIC DATE BEFORE TERMINATION OF EMPLOYMENT
With respect to the Participant's Employee Balance, a Participant may select a specific date that precedes the Participant's termination of employment with all Verizon Companies.
With respect to the Participant's Company Balance, a Participant's election of a specific date that precedes the Participant's termination of employment with all Verizon Companies shall be valid only if there has been a Change in Control before payments commence. If there has not been a Change in Control, the election with respect to the Company Balance shall be invalid, and such Company Balance shall be paid in accordance with the default rules in Section 7.07.
Any election to have payments commence before a Participant's termination of employment with all Verizon Companies shall apply only with respect to the vested balance of the Participant's Account as of the date such payments commence. Subject to Section 7.01(c), any amounts attributable to subsequent deferrals or credits shall be paid in accordance with either the terms of a separate election applicable to such deferrals or credits or the default rules in Section 7.07.
(2) SPECIFIC DATE AFTER TERMINATION OF EMPLOYMENT
With respect to the vested balance in the Participant's Account, a Participant may select a specific date that is after the Participant's termination of employment with all Verizon Companies.
A lump sum shall not be paid to or on behalf of a Participant more than thirty years from the date the Participant terminates employment with all Verizon Companies. For any part of a Participant's Account that is paid in a lump sum, the Participant shall be deemed to have elected to receive the lump sum on the earlier of (a) the date elected by the Participant or (b) the date that is thirty years from the date the Participant terminates employment with all Verizon Companies.
No installment or appreciation-only payments shall be made to or on behalf of a Participant more than thirty years from the date the Participant terminates employment with all Verizon Companies.
For any part of a Participant's Account that is paid in installment or appreciation-only payments, the Participant shall be deemed to have elected the number of installments or appreciation-only payments equal to the lesser of (a) the number of installments or appreciation-only payments elected by the Participant or (b) the maximum number of installments or appreciation-only payments between the date payments commence and the date that is thirty years from the date the Participant terminates employment with all Verizon Companies.
(b) TERMINATION OF EMPLOYMENT
A Participant may elect to commence receiving payments upon his termination of employment with all Verizon Companies.
The Plan Administrator shall calculate the amount of such payment or payments and pay the Participant as soon as administratively feasible after the Participant's termination of employment.
7.04 SPECIAL RULES IN THE EVENT OF DISABILITY
A Participant who incurs a Disability after he terminates employment with
all Verizon Companies shall be paid the vested balance of his Participant's
Account in accordance with a valid payment election (made in accordance
with Section 7.01) in effect at the onset of the Disability or, if there is
no such election then in effect, in accordance with the default rules in
Section 7.07.
A Participant who incurs a Disability before he terminates employment with all Verizon Companies shall be paid the vested balance of his Participant's Account (a) if the vested balance in his Participant's Account is $100,000 or less at the onset of the Disability, in accordance with the small benefit payment rules in Section 7.08 or (b) if the vested balance in his Participant's Account exceeds $100,000 at the onset of the Disability, in accordance with a valid payment election (made in accordance with Section 7.01) in effect at the onset of the Disability or, if there is no valid election in effect at the onset of the Disability, in accordance with the default rules in Section 7.07; provided that, if the vested balance in the Participant's Account exceeds $100,000 at the onset of a Disability, the Participant may make a new election regarding the form and timing of payments without regard to the 12-month requirements in Section 7.01(a) or(b), subject to the approval of the Plan Administrator.
If payments are to be made in installments, the Plan Administrator shall calculate and pay the first installment as soon as administratively practicable following the date of the Participant's Disability, provided that no payment shall be made until
the first business day of the first calendar quarter that begins after the onset of the Disability.
If the Participant begins to receive payments under this Section 7.04 and dies before the vested balance of his Participant's Account is paid in accordance with this Section 7.04, the then-remaining vested balance in his Participant's Account in the Plan shall be paid in accordance with Section 7.05 below.
7.05 DEATH BENEFITS
If a Participant dies with a vested balance in his Participant's Account that exceeds $100,000, the payment election in effect on the date of death shall be canceled (except as provided in clause (1) of the next paragraph) and the rules of this Section 7.05 shall apply. If a Participant dies with a vested balance in his Participant's Account equal to $100,000 or less, the payment election in effect on the date of death shall be canceled and payment shall be made in accordance with the small payment rules in Section 7.08.
Each Participant shall be entitled to make a payment election that provides for the then-remaining vested balance in his Participant's Account at the time of his death to be paid to the Participant's Beneficiary or Beneficiaries either (1) in accordance with a valid payment election in effect at the time of the Participant's death, (2) in two to ten annual installments, or (3) in a single sum as soon as administratively practicable after the Participant's death. Any such election must be delivered to the Plan Administrator before the Participant's death on a form provided by the Plan Administrator. A Participant may change any such election at any time before his death, but a Beneficiary shall not be permitted to change such election.
Any installment paid to a particular Beneficiary shall be equal to (1) the unpaid portion of the Participant's account balance to which the Beneficiary is entitled (as adjusted to reflect any earnings or losses thereon and any earlier payments), divided by (2) the number of remaining installments. The Plan Administrator shall calculate and pay the first installment as soon as administratively practicable following the date of the Participant's death.
With respect to any portion of the Participant's Account payable to the Beneficiary of a deceased Participant, such Beneficiary shall be permitted to change investment elections in accordance with Section 6.04(b) and to take an early payment in accordance with Section 7.06. Any such changes in investment elections or early payments shall be made on the same terms and subject to the same conditions as would be imposed if the Beneficiary were the Participant.
No payment under this Section 7.05 may be made more than thirty years after the Participant's termination of employment with all Verizon Companies. A Participant whose death benefit election would cause a payment under this
Section 7.05 to be scheduled to be made more than thirty years after the Participant's termination of employment with all Verizon Companies shall be deemed to have made a death benefit election that permits all payments to be made within thirty years of the Participant's termination of employment by applying the applicable provisions of Section 7.03(a)(2).
If a Participant dies without having made a death benefit election, the entire vested balance of his Participant's Account shall be paid in a single sum to the Participant's beneficiaries or estate as soon as administratively practicable following the date of death.
7.06 EARLY PAYMENTS
Before the commencement of any payments under Sections 7.01 through 7.05, a Participant may withdraw all or any portion of the vested balance of the Participant's Account, subject to the following rules:
(a) HARDSHIP
At the request of a Participant, the Plan Administrator may permit the payment of all or part of the vested balance in the Participant's Personal Deferral Sub-Account if the Plan Administrator determines that the Participant has incurred unusual, extraordinary expenses or hardship caused by events beyond the Participant's control, such as accident or illness. The amount that may be withdrawn shall be limited to the amount reasonably necessary to relieve the hardship or financial emergency upon which the request is based. The Plan Administrator may require a Participant who requests a payment under this Section 7.06(a) to submit such evidence as the Plan Administrator deems necessary or appropriate to substantiate the circumstances upon which the request is based.
(b) OTHER
(1) PERSONAL DEFERRAL SUB-ACCOUNT
A Participant may at any time elect that all or a designated portion of the vested balance in his Personal Deferral Sub-Account shall be paid to him 30 days following the filing of such an election; provided that the Plan Administrator may approve or disapprove such election; and provided further that, if a Participant receives a payment pursuant to this Section 7.06(b)(1), an amount equal to 6% of the amount paid to the Participant shall be permanently forfeited from the vested balance in the Participant's Personal
Deferral Sub-Account and shall not be paid to, or in respect of, the Participant at any time.
A Participant's request for a payment from his Personal Deferral Sub-Account pursuant to the preceding paragraph of this Section 7.06(b)(1) shall be denied to the extent a payment pursuant to such request would cause the vested balance in the Participant's Personal Deferral Sub-Account to be less than 6% of the amount paid to the Participant.
(2) MATCHING CONTRIBUTION SUB-ACCOUNT OR RETIREMENT CONTRIBUTION SUB-ACCOUNT
At any time following a Change in Control of Verizon, a Participant may elect that all or a designated portion of the vested balance in his Matching Contribution Sub-Account or, subject to the provisions of Sections 8.04 and 8.06, in his Retirement Contribution Sub-Account shall be paid to him 30 days following the filing of such an election; provided that the Plan Administrator may approve or disapprove such election; and provided further that, if a Participant receives a payment pursuant to this Section 7.06(b)(2), an amount equal to 6% of the amount paid to the Participant shall be permanently forfeited from the vested balance in the Participant's sub-account from which the payment is made and shall not be paid to, or in respect of, the Participant at any time.
An Inactive Participant who has terminated employment with all Verizon Companies may elect that all or a designated portion of the vested balance in his Matching Contribution Sub-Account or, subject to the provisions of Sections 8.04 and 8.06, in his Retirement Contribution Sub-Account, shall be paid to him 30 days following the filing of such an election; provided that the Plan Administrator may approve or disapprove such election; and provided further that, if a Participant receives a payment pursuant to this Section 7.06(b)(2), an amount equal to 6% of the amount paid to the Participant shall be permanently forfeited from the vested balance in the Participant's sub-account from which the payment is made and shall not be paid to, or in respect of, the Participant at any time.
A Participant's request for a payment from his Matching Contribution Sub-Account or Retirement Contribution Sub-Account pursuant to the preceding paragraphs of this Section 7.06(b)(2)
shall be denied to the extent a payment pursuant to such request would cause the vested balance in such sub-account to be less than 6% of the amount paid to the Participant.
7.07 DEFAULT FOR FORM AND TIMING OF PAYMENTS
If, with respect to all or a portion of a Participant's Account, a Participant does not make a payment election, or if his payment election is determined to be invalid and is not subject to a prior valid election, the entire vested portion of such Participant's Account that is not subject to a valid payment election shall be paid in a single sum during the 13th month following the later of (a) the last day of the month in which the Participant's 60th birthday occurs or (b) the last day of the month in which the Participant terminates employment with all Verizon Companies, provided that any payment of the balance in the Participant's Retirement Contribution Sub-Account shall be subject to the provisions of Sections 8.04.
7.08 PAYMENT OF SMALL BENEFITS
If the vested balance in a Participant's Account does not exceed $100,000 at the time of the Participant's termination of employment with all Verizon Companies (including a termination that results from Disability or death), any existing payment election with respect to such Participant's Account shall be canceled and such Participant's Account shall be paid in the form of a single sum at the time of the termination of employment (subject to Sections 8.04, and 8.06).
7.09 PRIOR PLAN PAYMENT RULES
With respect to the balance in a Participant's Account, the payment rules of this Article 7 and any payment elections made hereunder shall supersede the payment rules and any elections made under any other plan, except that, if a Participant elected under any such plan, before the fourth quarter of the 2001 Plan Year, to receive an in-service payment from such plan in 2002 with respect to an account balance or accrued benefit that was transferred to the Plan, such payment election shall be honored for 2002 but not for subsequent years.
ARTICLE 8. VESTING, FORFEITURE, NON-COMPETITION, AND NON-SOLICITATION
8.01 PERSONAL DEFERRAL SUB-ACCOUNT
Except as otherwise provided in an agreement between the Participant and a
Verizon Company regarding the crediting of Other Eligible Compensation to
the Participant's Personal Deferral Sub-Account and except as provided in
Section 7.06(b) with regard to early payments, the Participant shall at all
times be fully vested in the balance in his Personal Deferral Sub-Account,
and such balance shall under no circumstances be subject to forfeiture.
8.02 MATCHING CONTRIBUTION SUB-ACCOUNT
Each Participant shall be fully vested in the balance in his Matching Contribution Sub-Account upon the earliest to occur of the following:
(a) the Participant's account in the Savings Plan is fully vested;
(b) the Participant's employment with all Verizon Companies is involuntarily terminated other than for Cause, provided the Participant executes a release in a form acceptable to the Plan Administrator or the Plan Administrator otherwise determines that all or part of the Matching Contribution Sub-Account should be vested;
(c) the Participant becomes Disabled before his termination of employment with all Verizon Companies;
(d) the Participant dies before his termination of employment with all Verizon Companies; or
(e) there is a Change in Control (as defined in Section 8.07).
8.03 RETIREMENT CONTRIBUTION SUB-ACCOUNT
(a) PRIOR TO JULY 1, 2002
Except as otherwise provided in an agreement between the Participant and a Verizon Company regarding the crediting of Other Eligible Compensation to the Participant's Retirement Contribution Sub-Account, and subject to Sections 8.04 and 8.06 below, each Participant shall at all times be fully vested in each Retirement Contribution Credit credited on or after January 1, 2002, and before July 1, 2002 (and any related earnings).
(b) BEGINNING JULY 1, 2002
Except as otherwise provided in an agreement between the Participant and a Verizon Company regarding the crediting of Other Eligible Compensation to the Participant's Retirement Contribution Sub-Account, and subject to Section 8.04 and 8.06 below, each Participant shall be fully vested in each Retirement Contribution Credit credited after June 30, 2002 (and any related earnings), upon the earliest to occur of the following:
(1) the Participant becomes eligible to Retire;
(2) the Participant completes three years of Net Credited Service (as that term is defined in the Pension Plan) with all Verizon Companies after receiving the Retirement Contribution Credit;
(3) the Participant's involuntary termination of employment with all Verizon Companies other than for Cause, provided the Participant executes a release in a form acceptable to the Plan Administrator or the Plan Administrator otherwise determines that all or part of the Retirement Contribution Sub-Account should be vested;
(4) the Participant becomes Disabled before his termination of employment with all Verizon Companies;
(5) the Participant dies before his termination of employment with all Verizon Companies; or
(6) there is a Change in Control (as defined in Section 8.07).
8.04 FORFEITURE
(a) UNVESTED ACCOUNT BALANCE
A Participant shall forfeit the unvested portion, if any, of his Participant's Account on his termination of employment with all Verizon Companies.
(b) PORTION OF RETIREMENT CONTRIBUTION SUB-ACCOUNT
Before, but not after, a Change in Control, if the Plan Administrator determines that one or more of the events set forth in Section 8.04(b)(1) has occurred, the Plan Administrator may cause a forfeiture with respect to all or any portion of the Participant's Retirement Contribution Sub-Account set forth in Section 8.04(b)(2).
(1) CAUSES OF FORFEITURE
(A) The Participant has engaged in "Competitive Activities" as described in Section 8.05,
(B) The Participant has engaged in serious misconduct contrary to written policies and harmful to Verizon or its affiliated companies or their reputation, or
(C) The Participant has been terminated for Cause.
(2) AMOUNTS SUBJECT TO FORFEITURE
(A) All Retirement Contribution Credits added to the Participant's Retirement Contribution Sub-Account on or after January 1, 2002, other than the GTE Supplemental Executive Retirement Plan conversion credit (the "Conversion Credit") and
(B) Any interest or other earnings or gains on or after January 1, 2002, with respect to any Retirement Contribution Credits in the Participant's Retirement Contribution Sub-Account (including any interest or other earnings or gains attributable to the Conversion Credit or any interest or other earnings or gains attributable to any other credit regardless of when the credit was added to the Participant's Retirement Contribution Sub-Account).
(c) ENTIRE ACCOUNT BALANCE
Each Participant or beneficiary entitled to receive payment under the Plan shall keep the Plan Administrator advised of his current address. If the Plan Administrator is unable for a period of 36 months to locate a
Participant or beneficiary to whom a payment(s) is (are) due under the Plan, commencing with the first day of the month as of which the first such payment is due, the total amount payable to such Participant or beneficiary shall be forfeited. Should such a Participant or beneficiary contact the Plan Administrator requesting payment thereafter, the Plan Administrator shall, upon satisfaction of its requests for any corroborating documentation, restore and pay the forfeited payment in a lump sum, the value of which shall not be adjusted to reflect any interest or other earnings or gains for the period of forfeiture.
8.05 COMPETITIVE ACTIVITIES
(a) ENGAGING IN COMPETITIVE ACTIVITIES
The Plan Administrator may determine that a Participant has engaged in "Competitive Activities" if, during the period of the Participant's employment with any Verizon Company, through the first anniversary of the Participant's termination of employment with all Verizon Companies for any reason, the Participant, without the prior written consent of the Plan Administrator, (1) personally engages in "Competitive Activities" (as hereinafter defined) or (2) works for, owns, manages, operates, controls, or participates in the ownership, management, operation or control of, or provides consulting or advisory services to, any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, provided that the Participant's purchase or holding, for investment purposes, of securities of a publicly-traded company shall not constitute "ownership" or "participation in ownership" for purposes of this paragraph so long as the Participant's equity interest in any such company is less than a controlling interest.
(b) DEFINITION OF COMPETITIVE ACTIVITIES
"Competitive Activities" means business activities relating to products or services of the same or similar type as the products or services that (1) are sold (or, pursuant to an existing business plan, shall be sold) to paying customers of one or more Verizon Companies, and (2) for which the Participant had responsibility to plan, develop, manage, market, or oversee within the prior 24 months, or, in the case of an Inactive Participant, within the 24 months preceding his termination of employment with all Verizon Companies.
(c) DISCRETION OF PLAN ADMINISTRATOR
If the Plan Administrator determines that a Participant has engaged in Competitive Activities, the Plan Administrator in its sole discretion may determine what remedies to invoke.
8.06 NON-COMPETITION/NON-SOLICITATION AGREEMENT UPON OR AFTER TERMINATION OF EMPLOYMENT
(a) GENERAL
Except as provided in Section 8.06(c), any payment that meets the conditions of Section 8.06(b) shall be made only if the Participant executes an agreement provided by the Plan Administrator that (1) prohibits the Participant from engaging in Competitive Activities within one year following termination of employment with all Verizon Companies, (2) gives Verizon the right to obtain injunctive relief if the Participant violates such agreement, and (3) includes such other terms and conditions as the Plan Administrator may determine.
(b) APPLICABILITY
This Section 8.06 shall apply if (1) a Participant has elected to receive payments from his Retirement Contribution Sub-Account to commence upon termination of employment with all Verizon Companies or within one year following such termination or (2) the Participant has directed the Plan Administrator to make payments from such Retirement Contribution Sub-Account pursuant to Section 7.06.
(c) EXCEPTION FOR CHANGE IN CONTROL
Following a Change in Control, a Non-Compete Agreement shall not be required as a condition to making a payment to a Participant, and any such Non-Compete Agreement that a Participant executed before the Change in Control shall become null and void as of the effective date of the Change in Control.
(d) CONSEQUENCES OF FAILING TO EXECUTE AGREEMENT
If the Participant does not execute the Non-Compete Agreement required by this Section 8.06, no payments may be made from the Participant's Retirement Contribution Sub-Account for one year following the
Participant's termination of employment with all Verizon Companies.
During such one-year period, the provisions of the Plan (including
Section 8.04) shall apply to the Participant. At the conclusion of
such one-year period, the vested balance in the Participant's
Retirement Contribution Sub-Account shall be paid in accordance with
the Participant's payment election.
If payments would have commenced within the one-year period immediately following the Participant's termination of employment but were delayed under this Section 8.06, no retroactive payments shall be made and the Participant shall be deemed to have elected to commence payments from his Retirement Contribution Sub-Account on the date that is one year following the date of his termination of employment with all Verizon Companies, notwithstanding Section 7.01. The method of payment shall remain unchanged, except as required by Section 7.03(a)(2).
8.07 CHANGE IN CONTROL
(a) GENERAL RULE
For purposes of the Plan, and except as provided in Section 8.07(b), a "Change in Control" shall occur if:
(1) any Person, through a transaction with a Person, becomes a beneficial owner (as determined under Rule 13d-3 under the Securities Exchange Act of 1934, as amended from time to time), or has the right to acquire beneficial ownership within sixty days, through tender offer or otherwise, of shares of one or more classes of stock of the Company representing 20% or more of the total voting power of the Company's then outstanding voting stock;
(2) the Company and any Person consummate a merger, consolidation, reorganization, or other business combination; or
(3) the Board adopts resolutions authorizing the liquidation or dissolution, or sale to any Person of all or substantially all of the assets, of the Company.
(b) EXCEPTIONS TO GENERAL RULE
Notwithstanding the provisions of Section 8.07(a), a Change in Control shall not occur if:
(1) the Company's voting stock outstanding immediately before the consummation of the transaction will represent no less than 45% of the combined voting power entitled to vote for the election of directors of the surviving parent corporation immediately following the consummation of the transaction;
(2) members of the Incumbent Board will constitute at least one-half of the board of directors of the surviving parent corporation;
(3) the Chief Executive Officer or co-Chief Executive Officers of the Company will be the chief executive officer or co-chief executive officers of the surviving parent corporation; and
(4) the headquarters of the surviving parent corporation will be located in New York, New York.
ARTICLE 9. NATURE OF PLAN AND ACCOUNTS
9.01 UNFUNDED PLAN
No Participating Company shall be required to fund any obligations under the Plan. Any assets that may be accumulated by a Participating Company to meet its obligations under the Plan shall for all purposes be part of the general assets of such Participating Company. To the extent that any Participant or beneficiary acquires a right to receive payments under the Plan for which any Participating Company is liable, such rights shall be no greater than the rights of any unsecured general creditor of the applicable Participating Company.
9.02 HYPOTHETICAL ACCOUNTS
Each account and investment established under the Plan shall be hypothetical in nature and shall be maintained for bookkeeping purposes only. The accounts established under the Plan shall hold no actual funds or assets. Any liability of the Company to any Participant, former Participant, or beneficiary with respect to a right to payment shall be based solely upon contractual obligations created by the Plan. Neither the Company, the Board, nor any other Person shall be deemed to be a trustee of any amounts to be paid under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between or among the Company, a Participant, or any other Person.
ARTICLE 10. MISCELLANEOUS
10.01 PLAN ADMINISTRATOR
The Executive Vice President - Human Resources of Verizon (or, if that position is vacant, the most senior officer in the Human Resources organization of Verizon) shall have the authority and responsibility to act as "Plan Administrator," as that term is used in the Plan, except as provided in Section 2.01(cc) regarding Section 16 Persons. The Plan Administrator's authority and responsibility shall include, without limitation, the discretionary authority and responsibility to develop administrative guidelines, to distribute summary descriptions of the Plan, to notify Participants of their rights and obligations under the Plan, and to calculate balances of Participant's Accounts and the payments from the Plan. The Plan Administrator, with the advice of counsel, may delegate to one or more persons the authority to decide any dispute raised in any written claim by any Participant or beneficiary. Any appeal from such a claim shall be decided by the Plan Administrator, and the decision of the Plan Administrator shall be final and shall be binding on both the Plan and the Participant or beneficiary.
10.02 ALLOCATION OF ADMINISTRATIVE AND OTHER EXPENSES
Participants shall not be charged for their participation in the Plan or their withdrawals from the Plan, except that (a) Participants who receive an early payment shall be subject to the 6% penalty provided for in Section 7.06 and (b) the reasonable expenses of administering the Plan (including reasonable fees in connection with the set-up or maintenance of Participant accounts) may be offset against the earnings of the Investment Funds under the Plan. The Plan Administrator shall have authority to establish and maintain cost allocation guidelines that shall govern the allocation of accrued expenses under the Plan for financial accounting purposes, and the determination of any amounts by which Participating Companies are obligated to reimburse each other for disbursements and other expenditures under the Plan. Any such guidelines shall allocate to each Participating Company its reasonable and appropriate share of the direct benefit cost of the Plan, plus any associated administrative cost to the extent such cost is not offset against Investment Fund earnings.
10.03 AMENDMENT AND TERMINATION OF PLAN
The Committee may at any time amend or terminate the Plan; provided that no amendment or termination of the Plan may adversely affect the present dollar value of the vested account balance of any Participant (or Beneficiary, in the case of a deceased Participant) without his consent, except to the extent required by law; and provided further that, for a period of five years following a
Change in Control, except to the extent required by law (a) the Plan shall
not be terminated and (b) no amendment may adversely affect any right under
the Plan of a Participant (or Beneficiary, in the case of a deceased
Participant) without his consent, except that an amendment may adversely
affect the right to future Matching Contribution Credits pursuant to
Section 5.01. In addition to this general rule protecting the prior rights
of Participants, the following specific rules shall apply in the case of
certain Plan amendments or the termination of the Plan:
(a) ADMINISTRATIVE AMENDMENTS
The Plan Administrator, with advice of counsel, may develop additional terms and conditions for the administration of the Plan, and may modify the administrative terms and conditions of the Plan from time to time.
(b) SHORT-SWING PROFITS
The Plan Administrator shall have the authority (1) to adopt
amendments to the Plan that the Plan Administrator determines, with
the advice of counsel, are necessary or appropriate to ensure that
transactions under the Plan are exempt, to the maximum extent
practicable, from the short-swing trading provisions of Section 16 and
(2) to refuse any investment redirection request by a Participant who
is subject to the reporting obligations of Section 16 if the Plan
Administrator determines, with the advice of counsel, that fulfilling
such investment redirection request would cause the Participant to
engage in matching purchase and sale transactions that give rise to a
short-swing profit that the Participant would have a legal obligation
to disgorge to Verizon. Under no circumstances shall the Plan
Administrator or any of all Verizon Companies be responsible for any
liability that may be incurred by a Participant as a result of a
transaction that gives rise to such a short-swing profit.
(c) PLAN TERMINATION
If the Plan is terminated, (1) any existing deferral elections under Article 4 shall be disregarded with respect to compensation earned after the termination date, and (2) Participants shall no longer be entitled to the credits provided for in Article 5 with respect to compensation earned after the termination date. However, the remaining provisions of the Plan shall remain in effect until such time as the entire vested balance in each Participant's Account has been paid to the Participant and/or the Participant's estate or beneficiaries in accordance with Article 7.
10.04 DETERMINATION AND WITHHOLDING OF TAXES
The Plan Administrator and each Verizon Company shall have full authority, without the consent of a Participant, (a) to withhold from any compensation being deferred under the Plan, and to withhold from a Participant's other compensation from any and all sources, any taxes that it reasonably determines to be applicable to deferred amounts including, without limitation, any FICA taxes and any income taxes occasioned by the withholding of FICA taxes, (b) to withhold any FICA taxes that it reasonably determines to be due with respect to credits made to a Participant's Matching Contribution Sub-Account or Retirement Contribution Sub-Account from the Participant's other compensation from any and all sources, and (c) satisfy the responsibility of any Verizon Company to withhold any taxes by withholding such taxes from any payments under the Plan to the Participant or his beneficiaries or estate or, if necessary, by directing a payment from the Plan to satisfy such withholding responsibility.
10.05 NO ASSIGNMENT OR ALIENATION
The rights of the Participant to the balance in his Personal Deferral Sub-Account, Matching Contribution Sub-Account, and Retirement Contribution Sub-Account shall not be assignable or subject to alienation, except that the Plan may recognize and comply with domestic relations orders subject to such rules and procedures as the Plan Administrator may establish.
10.06 SEVERABILITY
If any provision of the Plan shall be held unlawful or otherwise invalid or unenforceable in whole or in part, the unlawfulness, invalidity, or unenforceability shall not affect any other provision of the Plan or part thereof, each of which shall remain in full force and effect.
10.07 CERTAIN RIGHTS RESERVED.
Nothing in the Plan shall confer upon any employee of the Company or other Person the right (a) to continue in the employment or service of the Company or affect any right that the Company may have to terminate the employment or service of (or to demote or to exclude from future participation in the Plan) any such employee or other Person at any time for any reason or (b) to receive an annual base salary of any particular amount.
10.08 TITLES AND HEADINGS NOT TO CONTROL
The titles to Articles of the Plan and the headings of Sections and subsections of the Plan are placed herein for convenience of reference only and, as such, shall have no force or effect on the interpretation of the Plan.
10.09 GOVERNING LAW
The Plan shall be construed and enforced in accordance with applicable federal law and, to the extent not preempted by federal law, the laws of the State of Delaware (without regard to the legislative or judicial conflict of laws rules of any state or other jurisdiction).
APPENDIX A. CONVERSION CREDITS
A.01 CONVERSION CREDITS
Each individual who becomes a Participant shall receive conversion credits under the Plan equal to the amount, if any, of the Participant's account balance or the present value of the Participant's accrued benefit under any nonqualified deferred compensation plan or arrangement of a Verizon Company, if the Plan Administrator determines that the employee shall no longer participate in such plan or arrangement. The Plan Administrator may make such a determination at any time (including after a Participant's termination of employment) and shall award conversion credits as soon as practicable following the date of such a determination.
Any conversion credits in a Participant's Account shall remain subject to any vesting requirements or other restrictions imposed by the plan or arrangement in which such conversion credits were credited before they were credited to the Participant's Account.
A.02 CHARACTERIZATION OF CONVERSION CREDITS
For purposes of this Appendix A, the Plan Administrator shall determine (a) the present value of the accrued benefit under any applicable plan and (b) based on the character of the account balance or accrued benefit under the applicable plan, whether conversion credits under the Plan shall be Personal Deferral Credits, Matching Contribution Credits, or Retirement Contribution Credits.
A.03 CONSEQUENCES OF CONVERSION CREDITS
A Participant who receives conversion credits pursuant to this Appendix A shall no longer be a participant in the plan (or portion of a plan) from which the account balance or accrued benefit was transferred or, in the case of an individual who was a Participant in the Plan before January 1, 2002, shall no longer be subject to the terms of the Plan as it existed before January 1, 2002, and shall no longer be entitled to any benefits thereunder. However, a Participant shall forfeit any conversion credits and related earnings if, and to the extent that, the Participant becomes entitled to a benefit under another plan that duplicates a benefit for which conversion credits are provided under this Plan.
APPENDIX B. SPECIAL RULES APPLICABLE TO OTHER CREDITS
B.01 ANNUAL TRANSITION CREDITS
If a Participant is entitled to an annual transition credit for a Plan Year, such transition credit shall be made to the Participant's Retirement Contribution Sub-Account as of December 31st of such year, unless the Participant terminates employment with all Verizon Companies during such year, in which case the transition credit shall be made as soon as practicable following the Participant's termination of employment.
B.02 POTENTIAL INTERIM AMOUNT
If a Participant is entitled to a potential interim amount ("PIA") credit for the year in which the Participant terminates employment with all Verizon Companies, such PIA shall be credited to the Participant's Retirement Contribution Sub-Account as soon as practicable following the Participant's termination of employment.
Before, but not after, a Change in Control, the Chief Executive Officer of Verizon may cause a forfeiture of any PIA credit if the Participant terminates employment from all of all Verizon Companies and the Chief Executive Officer determines that the Participant's termination of employment is seriously detrimental to the interests of any Verizon Company.
EXHIBIT 10g
Description of Split-Dollar Insurance Arrangements
Messrs. Babbio and Barr have waived their rights to receive certain previously earned deferred compensation in exchange for the Company's entering into split-dollar insurance arrangements for their benefit. Under these arrangements, the insurance premiums paid by the Company will be ultimately returned to the Company. The present value after-tax costs of these arrangements to the Company are designed to be equivalent to the after-tax costs to the Company of these waived deferred compensation obligations. The value of the premium paid by the Company in 2002 for these split-dollar insurance arrangements for Messrs. Babbio and Barr were $1,163,800 and $405,573, respectively.