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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: May 22, 2002
(Date of earliest event reported)
VERIZON COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
Delaware 1-8606 23-2259884
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.)
incorporation)
1095 Avenue of the Americas,
New York, New York 10036
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (212) 395-2121
Not applicable
(Former name or former address, if changed since last report)
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Item 9. Regulation FD Disclosure.
Set forth below are 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. In accordance with Rule 144A(d)(4)
promulgated under the Securities Act of 1933 (the "Securities Act"), these
financial statements will be provided upon request to holders of an aggregate of
$4 billion of notes issued by Cellco Partnership and Verizon Wireless Capital
LLC in December 2001 in a transaction that was exempt from registration pursuant
to Rule 144A promulgated under the Securities Act. This report is being
furnished to satisfy the obligations of Verizon Communications Inc. under
Regulation FD and shall not be deemed to be filed for purposes of Section 18 of
the Securities Exchange Act of 1934 or otherwise subject to the liabilities of
that section.
CELLCO PARTNERSHIP
(d/b/a Verizon Wireless)
Consolidated Financial Statements
For the years ended December 31, 1999, 2000 and 2001
Contents
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Page
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Independent Auditors' Reports 2
Consolidated Balance Sheets 5
Consolidated Statements of Operations and
Comprehensive Income 6
Consolidated Statements of Partners' Capital 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9-33
1
INDEPENDENT AUDITORS' REPORT
To the Board of Representatives and Partners of
Cellco Partnership d/b/a Verizon Wireless
We have audited the accompanying consolidated balance sheets of Cellco
Partnership d/b/a Verizon Wireless (the "Partnership") as of December 31, 2000
and 2001, and the related consolidated statements of operations and
comprehensive income, partners' capital, and cash flows for each of the two
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Partnership as of December 31, 2000 and 2001, and the results of its operations
and its cash flows for each of the two years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 8 to the consolidated financial statements, in
2001 the Partnership adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities."
Deloitte & Touche LLP
New York, New York
March 7, 2002
2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners and Board of Directors
of Cellco Partnership
We have audited the accompanying consolidated statements of operations
and comprehensive income, of cash flows and of partners' capital of Cellco
Partnership, (formerly known as Bell Atlantic Mobile now doing business as
Verizon Wireless) (the "Partnership") for the year ended December 31, 1999.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the consolidated financial
statements of GTE Wireless Incorporated and its land-based wireless subsidiaries
and affiliates ("GTEW"), a wholly-owned subsidiary of GTE Corporation, which
statements reflect total revenues of $3,582 million for the year ended December
31, 1999. Those statements were audited by other auditors whose report thereon
has been furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts included for GTEW, is based solely on the report of the
other auditors.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
the Partnership for the year ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America.
As described in Note 1, the accompanying financial statements give
retroactive effect to the contribution by Verizon Communications of GTEW to the
Partnership in a manner similar to the pooling of interests method of accounting
under APB 16.
PricewaterhouseCoopers LLP
New York, New York
January 20, 2000, except as
to the as if pooling of interests
with GTEW discussed in Note 1
which is as of August 14, 2000
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GTE Wireless Incorporated:
We have audited the consolidated statements of operations, changes in
stockholder's equity, and cash flows of GTE Wireless Incorporated and its
land-based wireless subsidiaries (a Delaware corporation) for the year ended
December 31, 1999 (not presented herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above (not
presented herein) present fairly, in all material respects, the consolidated
results of their operations and their cash flows for the year ended December 31,
1999 of GTE Wireless Incorporated and its land-based wireless subsidiaries in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Atlanta, Georgia
July 17, 2000
4
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Consolidated Balance Sheets
(in Millions)
AS OF DECEMBER 31, 2000 2001
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ASSETS
Current assets
Cash $ 87 $ 198
Accounts receivable, net of allowances of
$198 and $324 in 2000 and 2001, respectively 1,349 1,811
Unbilled revenue 390 335
Other receivables 378 293
Inventories, net 604 615
Note receivable - affiliate 68 -
Prepaid expenses and other current assets 110 425
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Total current assets 2,986 3,677
Property, plant and equipment, net 12,772 15,966
Deferred cellular licenses, goodwill and other intangibles, net 39,233 39,811
Investments in unconsolidated entities 70 222
Deferred charges and other assets, net 434 474
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Total assets $ 55,495 $ 60,150
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LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Short-term obligations, including current maturities $ 31 $ 458
Due to affiliates 5,873 8,359
Accounts payable and accrued liabilities 2,649 2,584
Advance billings 363 475
Other current liabilities 114 90
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Total current liabilities 9,030 11,966
Long-term debt 4,657 4,099
Due to affiliates 2,431 2,431
Deferred tax liabilities, net 2,388 2,424
Other non-current liabilities 160 320
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Total liabilities 18,666 21,240
Minority interests in consolidated entities 354 365
Partner's capital subject to redemption 20,000 20,000
Commitments and contingencies (see Note 15)
Partners' capital 16,475 18,545
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Total liabilities and partners' capital $ 55,495 $ 60,150
==================================================================================================================
See Notes to Consolidated Financial Statements
5
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Consolidated Statements of Operations and
Comprehensive Income
(in Millions)
FOR THE YEARS ENDED DECEMBER 31, 1999 2000 2001
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OPERATING REVENUE
Service revenues $ 6,967 $ 13,000 $ 16,011
Equipment and other 692 1,222 1,382
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Total operating revenue 7,659 14,222 17,393
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OPERATING COSTS AND EXPENSES
Cost of service (excluding depreciation and
amortization related to network assets included below) 1,392 2,037 2,171
Cost of equipment 935 2,023 2,434
Selling, general and administrative 2,851 5,866 7,005
Depreciation and amortization 1,105 2,897 3,709
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Total operating costs and expenses 6,283 12,823 15,319
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Operating income 1,376 1,399 2,074
OTHER INCOME (EXPENSES)
Interest expense, net (164) (507) (642)
Minority interests (76) (136) (60)
Equity in (loss) income of unconsolidated entities (2) 57 6
Other, net 4 864 (12)
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Income before provision for income taxes and cumulative
effect of a change in accounting principle 1,138 1,677 1,366
Provision for income taxes (206) (149) (62)
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Income before cumulative effect of a change in accounting
principle 932 1,528 1,304
Cumulative effect of a change in accounting principle - - (4)
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NET INCOME 932 1,528 1,300
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OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized loss on derivative financial instruments - - (2)
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COMPREHENSIVE INCOME $ 932 $ 1,528 $ 1,298
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See Notes to Consolidated Financial Statements
6
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Consolidated Statements of Partners' Capital
(in Millions)
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Partners' capital at January 1, 1999 $ 6,126
Net income 932
Contributions from partners, net 267
Other adjustments 15
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Partners' capital at December 31, 1999 7,340
Net income 1,528
Partnership interests issued in connection with Vodafone acquisition 8,000
Distribution to partners, net (393)
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Partners' capital at December 31, 2000 16,475
Net income 1,300
Contributions from partners, net 772
Accumulated other comprehensive loss (2)
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Partners' capital at December 31, 2001 $ 18,545
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See Notes to Consolidated Financial Statements
7
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Consolidated Statements of Cash Flows
(in Millions)
FOR THE YEARS ENDED DECEMBER 31, 1999 2000 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 932 $ 1,528 $ 1,300
Add: Cumulative effect of a change in accounting principle - - 4
------- ------- -------
Income before cumulative effect of a change in accounting principle 932 1,528 1,304
Adjustments to reconcile income before cumulative effect of a change
in accounting principle to net cash provided by operating activities:
Depreciation and amortization 1,105 2,897 3,709
Provision for losses on accounts receivable, net of recoveries 157 470 649
Provision for deferred income taxes 81 (61) (49)
Equity in loss (income) of unconsolidated entities 2 (57) (6)
Minority interests 76 136 60
Net loss on disposal of property, plant and equipment 8 11 9
Net loss (gain) on sale of other assets 5 (850) -
Mark-to-market adjustment - financial instruments - - 4
Changes in certain assets and liabilities (net of the effects
of purchased and disposed businesses):
Unbilled revenue and receivables, net (264) (791) (978)
Inventories, net (62) (251) (19)
Prepaid expenses and other current assets (38) 1 (207)
Deferred charges and other assets - 71 (23)
Accounts payable and accrued liabilities 115 173 (61)
Other current liabilities (21) 38 86
Other operating activities, net 71 (39) 3
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Net cash provided by operating activities 2,167 3,276 4,481
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,537) (4,908) (5,006)
Proceeds from sale of property, plant and equipment 4 21 -
Acquisitions of businesses and licenses, net of cash acquired (3,767) (1,620) (626)
Cellular licenses deposit and payment - (131) (1,691)
Investments in and contributions to unconsolidated entities (9) (46) -
Distributions from unconsolidated entities 89 65 9
Purchase of minority interests (8) (209) -
Proceeds from sale of other assets 13 1,298 3
Other investing activities, net (31) - -
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Net cash used in investing activities (5,246) (5,530) (7,311)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from affiliates 2,603 2,022 3,773
Net change in short-term obligations 35 (33) (34)
Issuance of long-term debt 352 784 4,592
Repayment of long-term debt (7) (43) (4,679)
Issuance of notes receivable - affiliate - (68) -
Contributions from partners 764 - -
Distribution to partners (601) (223) (691)
Contributions from minority investors - 86 1
Distribution to minority investors (52) (235) (21)
Other financing activities, net - (3) -
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Net cash provided by financing activities 3,094 2,287 2,941
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Increase in cash 15 33 111
Cash, beginning of year 39 54 87
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Cash, end of year $ 54 $ 87 $ 198
=======================================================================================================
See Notes to Consolidated Financial Statements
8
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
1. Formation of Verizon Wireless and Description of the Business
Formation of Verizon Wireless
Cellco Partnership ("Cellco" or the "Partnership"), formerly doing business as
Bell Atlantic Mobile ("BAM"), was a general partnership formed by Bell Atlantic
Corporation ("Bell Atlantic") and the former NYNEX Corporation ("NYNEX") which
began conducting business operations on July 1, 1995. On August 14, 1997, Bell
Atlantic and NYNEX merged into one company, Bell Atlantic. Subsequent to the
merger, Bell Atlantic held an indirect aggregate ownership interest of 100% in
Cellco.
On April 3, 2000, Bell Atlantic and Vodafone Group Plc ("Vodafone")
consummated their previously announced agreement to combine their U.S. wireless
operations. In accordance with the terms of the U.S. Wireless Alliance Agreement
(the "Alliance Agreement") dated September 21, 1999 between the two companies,
Vodafone contributed its U.S. wireless operations (the "AirTouch Properties"),
its 50% ownership interest in PrimeCo Personal Communications L.P. ("PrimeCo")
and approximately $4,000 of debt to the Partnership, in exchange for a 65.1%
interest in the Partnership. Bell Atlantic also contributed its 50% ownership
interest in PrimeCo, and retained a 34.9% interest. Bell Atlantic maintained
control of the Partnership. As of April 3, 2000, the Partnership began
conducting business as Verizon Wireless.
On June 30, 2000, Bell Atlantic and GTE Corporation ("GTE Corp.") completed a
merger of equals under a definitive merger agreement entered into on July 27,
1998 (the "Merger"). On June 30, 2000, the newly merged entity changed its name
to Verizon Communications, Inc. ("Verizon Communications"). Under the Alliance
Agreement, Verizon Communications contributed certain GTE Corp. wireless net
assets and operations ("GTE Wireless" or "GTEW") increasing its partnership
interest to 55% and decreasing Vodafone's partnership interest to 45%.
The Merger qualified as a tax-free reorganization and has been accounted for
as a pooling-of-interests business combination. Under this method of accounting,
Cellco and GTEW are treated as if they had always been combined for accounting
and financial reporting purposes in a manner similar to a pooling-of-interests
and therefore all prior period consolidated financial statements of Cellco have
been restated to reflect these operations (see Note 3). The Partnership began
consolidating the financial statements of PrimeCo on April 3, 2000. All previous
periods have been restated to include the historical results of PrimeCo on the
equity method.
Description of the Business
Under the Verizon Wireless brand name, the Partnership provides wireless voice
and data services and related equipment to consumers and business customers in
its markets. Major markets operating under the Verizon Wireless brand include
major metropolitan and rural areas throughout the United States.
2. Summary of Significant Accounting Policies
Consolidated Financial Statements and Basis of Presentation
The consolidated financial statements of Verizon Wireless include the accounts
of its majority-owned subsidiaries and the partnerships in which Verizon
Wireless has a controlling interest. Investments in businesses and partnerships
in which the Partnership does not have control, but has the ability to exercise
significant influence over operating and financial policies, are accounted for
using the equity method (see Note 5). All significant intercompany accounts and
transactions between these entities have been eliminated.
9
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates are used for, but
not limited to, the accounting for: allowance for uncollectible accounts
receivable, unbilled revenue, fair values of financial instruments, depreciation
and amortization, accrued expenses, inventory reserves, equity in income (loss)
of unconsolidated entities, allocation of purchase prices and determination of
useful lives in connection with business combinations.
Revenue Recognition
The Partnership earns revenue by providing access to the network (access
revenue) and for usage of the network (airtime/usage revenue), which includes
roaming and long distance revenue. In general, access revenue is billed one
month in advance and is recognized when earned; the unearned portion is
classified in advance billings. Airtime/usage revenue, roaming revenue and long
distance revenue are recognized when service is rendered and included in
unbilled revenue until billed. Customer activation fees, along with the related
costs up to but not exceeding the activation fees, are deferred and amortized
over the customer relationship period. Equipment sales revenue associated with
the sale of wireless handsets and accessories is recognized when the products
are delivered to and accepted by the customer, as this is considered to be a
separate earnings process from the sale of wireless services. The Partnership's
revenue recognition policies are in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements."
Selling, General and Administrative Expenses
Selling, general and administrative expense includes, among other items, all
site rentals, including tower rentals and all salaries.
The Partnership expenses advertising costs when the advertising occurs. Total
advertising expense amounted to $249, $772 and $719 for the years ended December
31, 1999, 2000, and 2001, respectively.
Inventory
Inventory consists primarily of cellular and pager equipment held for sale.
Equipment held for sale is carried at the lower of cost (determined using a
first-in, first-out method) or market.
Capitalized Software
Capitalized software consists primarily of direct costs incurred for
professional services provided by third parties and compensation costs of
employees which relate to software developed for internal use either during the
application stage or for upgrades and enhancements that increase functionality.
Costs are capitalized and are being amortized on a straight-line basis over
their estimated useful lives of three to five years. Costs incurred in the
preliminary project stage of development and maintenance are expensed in periods
when they are incurred.
Capitalized software of $176 and $291 and related accumulated amortization of
$69 and $135 as of December 31, 2000 and 2001, respectively, have been included
in deferred charges and other assets, net in the consolidated balance sheets.
10
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Property, Plant and Equipment
Property, plant and equipment primarily represents costs incurred to
construct and enhance Mobile Telephone Switching Offices (MTSOs) and cell sites.
The cost of property, plant and equipment is depreciated over its estimated
useful life using the straight-line method of accounting. Leasehold improvements
are amortized over the shorter of their estimated useful lives or the term of
the related lease. Major improvements to existing plant and equipment are
capitalized. Routine maintenance and repairs that do not extend the life of the
plant and equipment are charged to expense as incurred.
Upon the sale or retirement of property, plant and equipment, the cost and
related accumulated depreciation or amortization is eliminated from the accounts
and any related gain or loss is reflected in the statement of operations and
comprehensive income.
Interest expense and network engineering costs incurred during the
construction phase of the Partnership's network and real estate properties under
development are capitalized as part of property, plant and equipment and
recorded as construction in progress until the projects are completed and placed
into service.
Deferred Cellular Licenses, Goodwill and Other Intangibles
When the Partnership acquires interests in cellular or Personal
Communications Service ("PCS") systems, the purchase price is allocated to the
value of the tangible and identified intangible assets with the remainder
attributed to goodwill which has on a historical basis principally represented a
synergy value for the nationwide footprint. The most significant identified
intangibles are deferred cellular licenses, goodwill, and customer lists. The
Partnership's deferred cellular license balance also includes the costs incurred
to acquire licenses directly from the Federal Communications Commission ("FCC").
The value attributed to deferred cellular licenses is capitalized and amortized
on a straight-line basis over a period of forty years since the licenses are
renewable in perpetuity, and therefore, have an indefinite life. Customer lists
are being amortized principally on accelerated methods over their estimated
useful life.
Goodwill is being amortized on a straight-line basis over periods of 25 to 40
years. However, in accordance with recently issued accounting pronouncements,
goodwill and deferred cellular licenses, an indefinite life intangible asset,
arising from acquisitions after June 30, 2001 were not amortized.
The Partnership also capitalizes microwave relocation costs and the cost of
engineering plans, demographic and traffic patterns studies, and legal costs
incurred in connection with the preparation, filing, settlement, and resolution
of applications with the FCC for permits to construct cellular telephone
systems. These costs are included in the Partnership's deferred cellular license
balance.
Purchased licenses, as well as the licenses that are acquired in purchase
business combinations, are issued by the FCC for terms of up to ten years.
Historically, the FCC has granted license renewals routinely, provided the
company has complied with specific standards related to these licenses adopted
by the FCC. The licenses held by the Partnership and its subsidiaries and equity
method investees expire at various dates. The Partnership believes that it will
be able to meet all requirements necessary to secure renewal of its licenses
indefinitely.
11
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Valuation of Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. When
such events occur, the undiscounted expected future cash flows are compared to
the carrying amount of the asset. If the comparison indicates that there is an
impairment, the amount of the impairment is typically calculated using
discounted expected future cash flows. The discount rate applied to these cash
flows is based on the Partnership's weighted average cost of capital.
Financial Instruments
The Partnership uses various financial instruments, including foreign
exchange-forward contracts and interest rate swap agreements, to manage risk to
the Partnership by generating cash flows that offset the cash flows of certain
transactions in foreign currencies or underlying financial instruments in
relation to their amount and timing. The Partnership's derivative financial
instruments are for purposes other than trading (see Note 8).
Income Taxes
The Partnership is not a taxable entity for federal income tax purposes. Any
federal taxable income or loss is included in the respective partners'
consolidated federal return. Certain states, however, impose taxes at the
partnership level and such taxes are the responsibility of the Partnership and
are included in the Partnership's tax provision. The consolidated financial
statements also include provisions for federal and state income taxes, prepared
on a stand-alone basis, for all corporate entities within the Partnership.
Deferred income taxes are recorded using enacted tax law and rates for the years
in which the taxes are expected to be paid or refunds received. Deferred income
taxes are provided for items when there is a temporary difference in recording
such items for financial reporting and income tax reporting.
Through June 30, 2000, GTEW's financial results included a tax provision, as
its assets were ultimately owned by corporate entities. In connection with the
contribution of GTEW's net assets to the Partnership, Verizon Communications
assumed certain income tax liabilities that existed as of June 30, 2000.
Employee Benefit Plans
Pension and postretirement health care, dental and life insurance benefits
earned during the year, as well as interest on projected benefit obligations,
are accrued currently. Prior service costs and credits resulting from changes in
plan benefits are amortized over the average remaining service period of the
employees expected to receive benefits.
Concentrations
To the extent the Partnership's customer receivables become delinquent,
collection activities commence. No single customer is large enough to present a
significant financial risk to the Partnership. The Partnership maintains an
allowance for losses based on the expected collectibility of accounts
receivable.
The Partnership relies on local and long-distance telephone companies, some
of whom are related parties (see Note 13), and other companies to provide
certain communication services. Although management believes alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could potentially have an adverse impact on operating results.
12
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Although the Partnership attempts to maintain multiple vendors for each
required product, its network assets, which are important components of its
operations, are currently acquired from only a few sources. If the suppliers are
unable to meet the Partnership's needs as it builds out its network
infrastructure and sells service and equipment, delays and increased costs in
the expansion of the Partnership's network infrastructure or losses of potential
customers could result, which would adversely affect operating results.
Comprehensive Income
Comprehensive income consists of net income and other gains and losses
affecting partners' investment that, under generally accepted accounting
principles, are excluded from net income. Other comprehensive income is
comprised of net unrealized gains (losses) on derivative financial instruments
(see Note 8).
Segments
The Partnership has one reportable business segment and operates domestically
only. The Partnership's products and services are materially comprised of
wireless telecommunications services.
Reclassifications
Certain reclassifications have been made to the 1999 and 2000 consolidated
financial statements to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001. Effective July 1, 2001, the Partnership adopted SFAS No. 141.
SFAS No. 142 requires that goodwill and indefinite-lived intangible assets
will no longer be amortized. Instead, these assets must be reviewed annually (or
more frequently under certain conditions) for impairment in accordance with this
statement. This impairment test uses a fair value approach rather than the
undiscounted cash flows approach previously required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Intangible assets that have finite lives will continue to be
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 Partnership is required to adopt SFAS No. 142 effective January 1, 2002.
Upon adoption of SFAS No. 142, assembled workforce, included in other intangible
assets, will no longer be recognized separately from deferred cellular licenses
and goodwill. In addition, deferred cellular licenses, an indefinite life asset,
and goodwill will no longer be amortized. The Partnership has estimated the
impact of no longer amortizing deferred cellular licenses and goodwill under the
new rules of SFAS No. 142 to be approximately $1,100 on an annual basis.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard requires entities to recognize the fair value of any
legal obligation associated with the retirement of long-lived assets and to
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. The Partnership is
13
CELLCO PARTNERSHIP
(d/b/a Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
required to adopt the standard effective January 1, 2003 with early adoption
allowed. The Partnership is currently evaluating its long-lived assets
retirement obligations in relation to the provisions of SFAS No. 143 to
determine the impact, if any, on its future results of operations or financial
position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This standard re-addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
concludes that one accounting model be used for long-lived assets to be disposed
of by sale and broadens the presentation of discontinued operations to include
more disposal transactions. The Partnership is required to adopt the standard
effective January 1, 2002 with early adoption allowed. The Partnership does not
expect the impact of the adoption of SFAS No. 144 to have a material effect on
its results of operations or financial position.
3. Business Combinations and Other Transactions
Vodafone and PrimeCo
On April 3, 2000, Bell Atlantic and Vodafone consummated their previously
announced agreement to combine their U.S. wireless operations. In accordance
with the terms of the Alliance Agreement dated September 21, 1999 between the
two companies, Vodafone contributed its AirTouch properties, its 50% ownership
interest in PrimeCo and approximately $4,000 of debt to the Partnership, in
exchange for a 65.1% interest in the Partnership, and Bell Atlantic retained a
34.9% interest. Bell Atlantic maintained control of the Partnership. The
Partnership accounted for the transaction in accordance with the purchase method
of accounting. Upon completion of the Merger (see Note 1) and the contribution
of GTEW to the Partnership, effective June 30, 2000, Bell Atlantic increased its
partnership interest to 55% and Vodafone's partnership interest decreased to
45%.
Consideration of $33,910 was allocated as follows based upon an assessment of
tangible and intangible assets acquired:
Cellular licenses $ 21,354
Customer list 2,825
Assembled workforce 246
Goodwill 6,418
Net tangible assets acquired 3,067
--------------
Total $ 33,910
==============
Under the terms of the Alliance Agreement between Bell Atlantic and Vodafone,
Vodafone has the right to require the Partnership to purchase up to $20,000 of
Vodafone's interest in the Partnership with up to $10,000 being redeemed in July
2003 or 2004 and the remainder in July 2005, 2006 or 2007. Accordingly, $20,000
of capital has been classified as redeemable on the accompanying consolidated
balance sheets.
ALLTEL Overlap Transaction
Based on regulations of the FCC governing wireless communications and the
U.S. Department of Justice consent order dated December 6, 1999, certain
properties of the Partnership, AirTouch and GTEW were required to be divested in
order to eliminate overlapping operations. To effect these divestitures, some
properties were exchanged via swaps with other wireless carriers. Accordingly,
on January 31, 2000, the Partnership and GTEW, separately, signed agreements
with ALLTEL Communications ("ALLTEL") to exchange wireless interests in two
stages ("Stage I" and "Stage II"). On April 1, 2000, the Partnership executed
the Stage I transaction whereby it exchanged its interest in the southwest part
of the United States (also known as "Southwestco Wireless") for ALLTEL's
interest in eight markets. The Partnership recorded a gain on the sale of
Southwestco Wireless of approximately $848, which was included in other, net in
the consolidated statements of operations. On June 29, 2000, GTEW executed the
Stage II
14
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
transaction whereby it obtained 17 of ALLTEL's wholly owned markets and eight of
its majority owned markets in exchange for GTEW's interest in certain markets.
No gain or loss was recorded by the Partnership in the Stage II transaction as
the markets to be divested were transferred from GTEW to GTE Corp. before the
transaction was executed. The results of operations of the divested GTEW
properties were included in the Partnership's consolidated results of operations
through June 29, 2000.
The Partnership recorded the acquisition of the Stage I and Stage II ALLTEL
properties under the purchase method of accounting. The allocation of the
purchase price was finalized in the second quarter of 2001. The consideration
paid of approximately $2,441 was allocated as follows:
Cellular licenses $ 1,739
Customer list 178
Goodwill 75
Net tangible assets acquired 449
----------------
Total $ 2,441
================
The following selected unaudited pro forma information is being provided to
present a summary of the combined results of the Partnership as if the AirTouch
Properties and ALLTEL acquisitions had occurred as of January 1, 1999 and 2000,
giving effect to purchase accounting adjustments. The unaudited pro forma data
is for informational purposes only and may not necessarily reflect the results
of operations of the Partnership had the acquired business operated as part of
the Partnership for the twelve months ended December 31, 1999 and 2000, nor is
the unaudited pro forma data indicative of the results of future consolidated
operations.
Years Ended December 31,
---------------------------------------------------------------------------------
1999 2000
----------------------------------- ----------------------------------------
Historical Pro Forma Historical Pro Forma
-------------- --------------- -------------- ---------------
(unaudited) (unaudited)
Total operating revenues $ 7,659 $ 14,352 $ 14,222 $ 15,392
Net income $ 932 $ 662 $ 1,528 (a) $ 749
____________
(a) Includes a non-recurring gain of $848 related to the disposition of
Southwestco Wireless.
Ameritech
On April 5, 1999, GTE Corp. announced, along with Georgetown Partners, a
private investment firm, that it had agreed to purchase interests from Ameritech
Corporation ("Ameritech") in the Chicago, St. Louis and Central Illinois
cellular properties (the "Ameritech Properties") for $3,270. On October 8, 1999,
GTE Corp. completed its acquisition of these operations for $3,239, after
purchase price adjustments.
The Partnership's 1999 consolidated financial statements included three
months of operations of the Ameritech Properties. On a pro forma basis, the 1999
operating revenues were $8,312 and net income was $989. The unaudited pro forma
information is being provided to present the consolidated results of the
Partnership as if the acquisition had occurred as of January 1, 1999, giving
effect to purchase accounting adjustments. The unaudited pro forma data is for
informational purposes only and may not necessarily reflect the results of
operations of the Partnership had the acquired business operated as part of the
Partnership for the year ended December 31, 1999, nor is the unaudited pro forma
data indicative of the results of future consolidated operations.
15
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
GTE Wireless
As described in Note 1, all prior period consolidated financial statements
presented have been restated to include the consolidated results of operations,
financial position and cash flows of GTEW as though it had always been a part of
the Partnership.
The operating revenues and net income previously reported by the separate
entities and the combined amounts in the accompanying consolidated statements of
operations were as follows:
Year Ended Six Months Ended
December 31, June 30,
-------------------- -------------------
1999 2000
-------------------- -------------------
Operating Revenues: (unaudited)
Cellco $ 4,140 $ 4,057
GTEW 3,582 2,115
Conforming Adjustments (63) (73)
-------------------- -------------------
Combined $ 7,659 $ 6,099
==================== ===================
Net Income:
Cellco $ 653 $ 976
GTEW 280 92
Conforming Adjustments (1) 1
-------------------- -------------------
Combined $ 932 $ 1,069
==================== ===================
The significant conforming adjustments related to:
. Elimination of inter-company transactions
. Conforming accounting policies to expense customer acquisition costs as
incurred.
Other Acquisitions
In addition to the business combinations and dispositions outlined above,
during the years ended December 31, 1999, 2000 and 2001, the Partnership
purchased partnership interests and licenses for a total consideration of
approximately $1,300, $1,000 and $835, respectively. All of the acquisitions of
businesses included in these amounts were accounted for under the purchase
method of accounting with results of operations included in the consolidated
statements of operations from the date of acquisition. Had the acquisitions of
businesses been consummated on January 1 of the year preceding the year of
acquisition, the results of these acquired operations would not have had a
significant impact on the Partnership's consolidated results of operations for
each of the years presented.
Tower Transactions
In accordance with the Alliance Agreement, any tower financing transactions
accounted for by Verizon Communications as a financing were not contributed to
the Partnership. The tower financings associated with BAM and GTEW resulted from
the Partnership's continuing involvement in joint ventures ("JVs") with Crown
Castle International Corporation ("Crown"), which were established through the
contribution of communications towers in exchange for cash and equity interests
in the JVs. The Partnership leases back a portion of the towers pursuant to
lease agreements. The Partnership paid $58 and $76 to Crown related to payments
under operating leases for the years ended December 31, 2000 and 2001,
respectively.
16
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Prior to the acquisition of the AirTouch Properties, Vodafone entered into
agreements ("Sublease Agreements") to sublease all of its unused space on up to
approximately 2,500 of its communications towers to American Tower Corporation
("ATC") and SpectraSite Holdings, Inc. ("Spectrasite") in exchange for $955.
Vodafone also entered into exclusive three-year build-to-suit agreements with
ATC and Spectrasite to produce new communications towers in strategic locations.
The build-to-suit agreements were assumed by the Partnership upon the closing of
the AirTouch Properties acquisition. Several of these transactions closed in
phases throughout 2001. As of December 31, 2001, approximately 2,200 towers have
been subleased, at the monthly rate of approximately two thousand dollars per
tower. Management believes that the remaining 300 towers will not be subleased.
In accordance with the Alliance Agreement all proceeds from the subleases were
retained by or remitted to Vodafone. The Sublease Agreements require monthly
maintenance fees for the existing physical space used by the Partnership's
cellular equipment. The terms of the Sublease Agreements differ for leased
communication towers versus those owned by the Partnership and range from 20 to
99 years. The Partnership paid $26 and $41 to ATC and Spectrasite pursuant to
the Sublease Agreements for the years ended December 31, 2000 and 2001,
respectively.
4. Supplementary Financial Information
Supplementary Balance Sheet Information:
December 31,
------------------------------------
2000 2001
---------------- ---------------
Property, Plant and Equipment, Net:
Land and improvements $ 90 $ 68
Buildings (10-40 yrs.) 2,171 2,962
Cellular plant equipment (3-15 yrs.) (a) 15,969 19,647
Rental equipment (2-3 yrs.) 187 196
Furniture, fixtures and equipment (2-7 yrs.) 2,220 2,632
Leasehold improvements (5-10 yrs.) 677 737
--------------- ---------------
21,314 26,242
Less: accumulated depreciation 8,542 10,276
--------------- ---------------
Property, plant and equipment, net (b) $ 12,772 $ 15,966
=============== ===============
____________
(a) Construction-in-progress included in certain of the classifications
shown in property, plant and equipment, principally cellular plant
equipment, amounted to $1,747 and $1,065 at December 31, 2000 and
2001, respectively.
(b) Capitalized interest costs of $81 and $84 and capitalized network
engineering costs of $122 and $211 were recorded during the years
ended December 31, 2000 and 2001, respectively.
December 31,
-----------------------------------
2000 2001
--------------- --------------
Deferred Cellular Licenses, Goodwill and Other Intangibles, Net:
Deferred cellular licenses (40 yrs.) (c) (d) $ 29,842 $ 32,185
Goodwill (25-40 yrs.) 7,877 7,958
Customer lists (2-10 yrs.) 3,437 3,349
Other intangible assets (7 yrs.) 288 245
--------------- --------------
41,444 43,737
Less: accumulated amortization 2,211 3,926
--------------- --------------
Deferred cellular licenses, goodwill and other intangibles, net $ 39,233 $ 39,811
=============== ==============
_____________
(c) Capitalized interest costs of $25 were included in deferred cellular
licenses for the year ended December 31, 2001.
(d) The balance at December 31, 2001 includes a $1,740 deposit paid to the
FCC related to NextWave licenses originally awarded at the 2001 FCC
auction (see Note 15).
17
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millons)
December 31,
------------------------------------
2000 2001
---------------- ---------------
Accounts Payable and Accrued Liabilities:
Accounts payable $ 2,130 $ 1,939
Accrued liabilities 519 645
---------------- ---------------
Accounts payable and accrued liabilities $ 2,649 $ 2,584
================ ===============
Supplementary Statements of Operations Information:
For the years ended December 31,
---------------------------------------------------
1999 2000 2001
-------------- --------------- --------------
Depreciation and Amortization:
Depreciation of property, plant and equipment $ 958 $ 1,400 $ 1,939
Amortization of deferred cellular licenses, goodwill
and other intangibles, net 147 1,497 1,770
-------------- --------------- --------------
Total depreciation and amortization $ 1,105 $ 2,897 $ 3,709
============== =============== ==============
Interest Expense, Net:
Interest expense $ (197) $ (674) $ (764)
Interest income 7 86 13
Capitalized interest 26 81 109
-------------- --------------- --------------
Interest expense, net $ (164) $ (507) $ (642)
============== =============== ==============
Supplementary Cash Flows Information:
For the years ended December 31,
-----------------------------------------------
1999 2000 2001
------------ ------------- -------------
Cash paid for income taxes, net of refunds $ 148 $ 266 $ 160
Interest paid, net of amounts capitalized 135 536 634
Supplemental investing and financing non-cash
transactions:
Net assets transferred to affiliate (21) (170) (25)
Equity investment in entity under common control 125 - -
Equity contribution and conversion of affiliate payable - - 1,488
------------ ------------- -------------
Business combinations and other acquisitions:
Cash Paid $ 3,767 $ 1,620 $ 626
Debt assumed 110 4,387 -
Partnership interest exchanged - 28,251 -
Net liabilities assumed 282 3,168 209
------------ ------------- -------------
Fair value of assets acquired $ 4,159 $ 37,426 $ 835
============ ============= =============
18
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millons)
5. Investments in Unconsolidated Entities
The Partnership owns non-controlling interests in the following
unconsolidated entities, which are accounted for using the equity method of
accounting. The assets, liabilities and the results of operations of the
unconsolidated entities, in the aggregate, are immaterial to the Partnership's
consolidated financial position and results of operations.
Partnership's
Ownership Interest
December 31,
-----------------------------
Investee 2000 2001
-------- ------------ ----------
Bristol Bay Cellular Partnership 50.00% 50.00%
Railfone - Amtrak Venture 50.00% 50.00%
Iowa RSA No. 2 Limited Partnership 49.50% 49.50%
Badlands Cellular of North Dakota Limited Partnership 49.00% 49.00%
San Isabel Cellular of Colorado Limited Partnership 49.00% 49.00%
Northstar Paging/Holding LTD 48.45% 48.45%
Iowa 8 - Monona Limited Partnership 44.92% 44.92%
GTE Mobilenet of Indiana RSA #6 Limited Partnership 43.75% 43.75%
New York RSA 2 Cellular Partnership 42.86% 42.86%
St. Lawrence Seaway RSA Cellular Partnership 40.00% 40.00%
Illinois Valley Cellular RSA 2-I Partnership 40.00% 40.00%
Indiana RSA #1 Limited Partnership 40.00% 40.00%
Illinois Valley Cellular RSA 2-III General Partnership 40.00% 40.00%
Mohave Cellular Limited Partnership 33.33% 33.33%
GTE Mobilenet of Texas RSA #17 Limited Partnership 31.92% 31.92%
California RSA No. 3 Limited Partnership 27.72% 27.72%
Cal-One Cellular Limited Partnership 22.48% 22.48%
Missouri RSA 9B1 Limited Partnership 14.70% 14.70%
Jacksonville MSA Limited Partnership 14.24% 14.24%
RSA 7 Limited Partnership 14.14% 14.14%
New Mexico RSA 6-II Partnership 12.50% (a)
RSA 1 Limited Partnership 9.14% 9.14%
Virginia RSA 2 Limited Partnership 4.99% 4.99%
Wisconsin RSA #8 Limited Partnership 2.00% 2.00%
Virginia 10 RSA Limited Partnership 1.00% 1.00%
___________
(a) This investment was sold in 2001. The Partnership received proceeds of
$3 and recognized a gain of $2.
The Partnership utilizes the equity method of accounting for certain
partnerships where it owns less than 20% as it maintains the ability to exercise
significant influence over operating and financial policies.
19
CELLCO PARTNERSHIP
(d/b/a Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
6. Debt
December 31,
----------------------------------------
2000 2001
---------------- ----------------
Short-term debt consists of the following:
Credit facility and term loan $ - $ 410
Capital lease obligations 31 38
Other - 10
---------------- ------------------
31 458
---------------- ------------------
Long-term debt consists of the following:
Revolving credit facility and term loan 4,507 -
Fixed rate notes, net of discount - 2,488
Floating rate notes - 1,500
Capital lease obligations (see Note 12) 137 106
Other 13 5
---------------- ------------------
4,657 4,099
---------------- ------------------
Total debt $ 4,688 $ 4,557
================ ==================
Credit Facility and Term Loan
At December 31, 2001, borrowings under the credit facility amounted to $410
and are comprised of a $24 credit facility and a $386 term loan. The $24 credit
facility matures in April 2, 2002 and bears interest (at the Partnership's
option) at a rate equal to i) LIBOR plus 0.32%, ii) the prime rate or iii) a
competitive bid option (2.2% at December 31, 2001). Borrowings under the $386
term loan bear interest at a rate equal to LIBOR plus 0.32% (2.2% at December
31, 2001). The Partnership must repay borrowings under the term loan in June
2002. Facility fees are 0.06% of the total commitment calculated and payable
monthly. The credit facility contains customary events of default and customary
covenants, including a requirement to maintain a certain leverage ratio. The
Partnership was in compliance with all covenants at December 31, 2001.
Fixed and Floating Rate Notes
On December 17, 2001, the Partnership and Verizon Wireless Capital LLC, a
wholly owned subsidiary of the Partnership, co-issued a private placement of
$4,000 in unsecured and unsubordinated notes (the "notes"). Verizon Wireless
Capital LLC, a Delaware limited liability company, was formed for the sole
purpose of facilitating the offering of the notes and additional debt securities
of the Partnership. Other than acting as co-issuer of the Partnership
indebtedness, Verizon Wireless Capital LLC has no material assets, operations or
revenues. The Partnership is joint and severally liable with Verizon Wireless
Capital LLC on the notes. The notes include $1,500 of floating rate notes
maturing in December 2003 and $2,500, net of a $12 discount, of fixed rate notes
maturing in December 2006. These notes are non-recourse against any existing or
future partners of the Partnership. Interest on the floating rate notes is
payable quarterly in arrears at a rate equal to LIBOR plus 0.4%, except that the
interest rate in effect from December 17, 2001 to and including March 17, 2002
is 2.27%. The fixed rate notes bear interest at a rate of 5.375% due
semi-annually on each June 15 and December 15. Capitalized debt issuance costs,
included in deferred charges and other assets, net in the 2001 consolidated
balance sheet, amounted to $13 and will be amortized to the consolidated
statements of operations and comprehensive income on the straight-line method.
The Partnership may not redeem the floating rate notes at any time prior to
maturity; however, the fixed rate notes can be redeemed at any time at a
purchase price equal to 100% of the principal amount plus the following: i)
accrued interest, ii) unpaid interest on the principal amount being redeemed to
the redemption date, and iii) an additional premium. The notes contain customary
events of default and customary non-financial covenants. The Partnership was in
compliance with all covenants at December 31, 2001.
20
CELLCO PARTNERSHIP
(d/b/a Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Concurrent with the issuance of the notes, the Partnership committed to file
a registration statement to exchange the privately placed notes for a new issue
of notes registered under the Securities Act of 1933 within 230 days after the
original offering was completed. Furthermore, the Partnership has committed to
cause the registration statement to be declared effective prior to 300 days
after the private offering closed. The Partnership may be required to provide a
registration statement to affect resales of the notes. Failure to satisfy
existing obligations relating to the registration may require additional
interest to be paid to note holders.
After deducting the initial discount relating to the fixed rate notes, the
net cash proceeds from the private placement amounted to $3,988. These proceeds
were used to reduce outstanding amounts of the Partnership's credit facility.
7. Due from/to Affiliates
December 31,
-----------------------------------------
2000 2001
----------------- -----------------
Short-term portion consists of the following:
Note receivable from affiliate $ 68 $ -
================= =================
Payable to (receivable from) affiliates $ 1,572 $ (23)
Demand notes due to affiliate 4,301 8,382
----------------- -----------------
5,873 8,359
Long-term portion consists of the following:
Term notes payable to affiliate 2,431 2,431
----------------- -----------------
Total due to affiliates $ 8,304 $ 10,790
================= =================
Payable to (Receivable from) Affiliates
The Partnership has agreements with certain Verizon Communications'
subsidiaries and affiliates for the provision of services in the normal course
of business, including but not limited to direct and office telecommunication
and general and administrative services. Included in the payable to affiliate at
December 31, 2000 was approximately $1,300 due to Verizon Communications for the
acquisition of Ohio 5 and other ALLTEL Stage II properties. In the first quarter
of 2001, a $203 payable to Verizon Communications was added for the acquisition
of Illinois 8 and 9 properties. In connection with the sale of overlapping
properties by Verizon Communications, non-cash proceeds were generated and were
fully utilized for the purchase of these properties. In accordance with the U.S.
Wireless Alliance Agreement with Vodafone, in the first quarter of 2001, the
Partnership recorded an equity contribution from Verizon Communications,
relieving the affiliate payable (see Note 4).
Demand Notes Due to Affiliate
The Partnership has an agreement with Verizon Communications' wholly-owned
financing affiliate, Verizon Global Funding ("VGF") under which it could borrow,
regularly on an uncommitted basis, up to an agreed upon amount for working
capital and other general partnership purposes. Amounts payable to VGF are
offset on a daily basis by cash available in the Partnership's cash accounts. At
December 31, 2001, the maximum amount available from VGF was $20,700. Under the
terms of the agreement, all indebtedness is payable to VGF on demand.
21
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Demand note borrowings from VGF will fluctuate based upon the Partnership's
working capital and other funding requirements. Interest on the demand note
borrowings is generally based on a blended interest rate calculated by VGF using
fixed rates and variable rates applicable to borrowings by VGF to fund the
partnership and other entities affiliated with Verizon Communications. For the
years ended December 31, 2000 and 2001, the weighted-average interest rate for
all demand note borrowings from VGF was 6.7% and 4.6%, respectively.
Term Notes Payable to Affiliate
Term note borrowings from Verizon Communications' subsidiaries and
affiliates amounted to $2,431 at December 31, 2000 and 2001 and are due in 2009.
The Partnership must make quarterly prepayments to the extent that its former
Ameritech markets generate excess cash flow, as defined in the term notes.
Management does not anticipate such excess cash flow within fiscal 2002; hence
the entire amount is classified as long term. Interest on the term note
borrowings ranged from 6.32% to 6.83% and 4.61% to 5.96% in 2000 and 2001,
respectively. The term notes contain limited, customary non-financial covenants
and events of default. The Partnership was in compliance with all covenants and
restrictions at December 31, 2001.
8. Financial Instruments
Fair Value
The carrying amounts and fair values of the Partnership's financial
instruments as of December 31 consists of the following:
December 31,
---------------------------------------------------------------------
2000 2001
---------------------------------- --------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------- ---------------- --------------- --------------
Credit facility and term loan $ 4,507 $ 4,507 $ 410 $ 410
Fixed rate notes $ - $ - $ 2,488 $ 2,488
Floating rate notes $ - $ - $ 1,500 $ 1,500
Foreign exchange-forward contracts $ - $ 22 $ 48 $ 48
Partner's capital subject to redemption $ 20,000 $ 20,000 $ 20,000 $ 20,000
The Partnership's trade receivables and payables, and debt maturing within
one year are short term in nature. Accordingly, these instruments' carrying
value approximates fair value. The fair values of foreign exchange-forward
contracts are determined using quoted market prices. The fair value of the
credit facility and term loans is considered to be equivalent to the carrying
value as the interest rates are based upon variable rates. A discounted future
cash flows method is used to determine the fair value of the fixed and floating
rate notes.
22
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Interest Rate Swaps
The Partnership uses interest rate swap contracts to manage market risk and
reduce its exposure to fluctuations in interest rates on its variable rate debt.
Interest rate swaps allow the Partnership to raise funds at floating rates and
effectively swap them into fixed rates that are lower than those available to it
if fixed rate borrowings were made directly. These swaps do not involve an
exchange of the underlying principal amount. The Partnership's use of interest
rate swaps is limited; an insignificant portion of its variable rate debt
portfolio is hedged. The Partnership maintained two interest rate swap
agreements, one expired in 2000 and the other in August 2001, with an aggregate
notional amount of $40. The effect of these agreements was to limit the interest
rate exposure to 5.73% on $10 and 5.76% on $30 of the revolving credit facility.
Periodic payments and receipts under the interest rate swaps are recorded as
part of interest expense. The related amount payable to, or receivable from, the
counterparty is included in accrued interest payable or other current assets in
the consolidated balance sheets. The fair value of the interest rate swaps is
not recognized in the consolidated statements of operations as they are
accounted for as hedges. If the interest rate swaps cease to qualify as a hedge,
any subsequent gains and losses would be recognized in the statement of
operations.
The Partnership was subject to credit risk in the event of nonperformance by
the counterparty to the interest rate swap agreements.
Derivatives
The Partnership maintains foreign exchange-forward contracts to hedge
foreign currency transactions; specifically Japanese Yen denominated capital
lease obligations. As a result of the Partnership's acquisition of Vodafones's
50% ownership interest in PrimeCo (see Note 1), the Partnership has
approximately $156 of foreign exchange contracts outstanding relating to foreign
currency denominated capital lease obligations at December 31, 2001. The
contracts are designated as cash flow hedges and expire at various dates from
August 31, 2002 through April 11, 2005. The foreign exchange-forward contracts
generally require the Partnership to exchange U.S. dollars for Yen at maturity
of the Japanese Yen denominated obligations, at rates agreed to at inception of
the contracts.
The Partnership could be at risk for any currency related fluctuations if
the counterparties do not contractually comply. Should the counterparties not
comply, the ultimate impact, if any, will be a function of the difference in the
cost of acquiring Yen at the time of delivery versus the contractually agreed
upon price.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities in the consolidated balance sheets. Changes in the fair values of
derivative instruments not used as hedges will be recognized in earnings
immediately. Changes in the fair values of derivative instruments used
effectively as hedges of changes in cash flows will be recognized in other
comprehensive income/(loss) and will be recognized in the consolidated
statements of operations when the hedged item affects earnings. The ineffective
portion of a derivative's change in fair value will be immediately recognized in
earnings. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133 to address certain implementation issues.
23
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
The Partnership formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objectives and
strategies for undertaking various hedge transactions. The Partnership links
hedges to specific assets or liabilities on the consolidated balance sheets, as
appropriate.
The Partnership also assesses, both at the inception of the hedge and on an
on-going basis, whether the derivatives that are used in hedging transactions
are effective. Should it be determined that a derivative is not effective as a
hedge, the Partnership will consider discontinuing the hedge accounting
prospectively.
Effective January 1, 2001, the Partnership adopted SFAS No. 133 and SFAS No.
138. The initial impact of adoption on the Partnership's consolidated financial
statements was recorded as a cumulative transition adjustment. A charge of $4
was recorded to earnings as a cumulative effect of a change in accounting
principle for derivatives not designated as hedges and a cumulative charge of $2
was recorded to other comprehensive income/(loss) for derivatives designated as
cash flow-type hedges in our consolidated financial statements. The recognition
of assets and liabilities in the consolidated balance sheets was immaterial.
The ongoing effect of adoption on the Partnership's consolidated financial
statements will be determined each quarter by several factors, including the
specific hedging instruments in place and their relationships to hedged items,
as well as market conditions at the end of each period. The impact for the year
ended December 31, 2001 was a $4 loss for derivatives not designated as hedges.
This loss was included in other, net in the consolidated statements of
operations. The impact to other comprehensive income/(loss) for derivatives
designated as cash flow-type hedges for the year ended December 31, 2001 was
immaterial.
9. Employee Benefits
Pension and Postretirement Benefits:
The Partnership operates the "Verizon Wireless Retirement Plan" and the
"Retiree Medical, Dental and Life Plan," which consists of the former Upstate
Cellular Network ("UCN") Pension Plan and AirTouch Pension Plan. These plans
include a qualified pension plan, a nonqualified pension plan and a
postretirement benefit plan. In accordance with the Alliance Agreement, all
AirTouch pension plan assets and liabilities were transferred to the Partnership
on January 1, 2001. The beginning balance of each plan's assets and obligations
were determined under the purchase method of accounting.
The following information summarizes activity in the pension and
postretirement benefit plans:
Year Ended December 31, 2001
----------------------------------------
Pension Postretirement
Benefits Benefits
------------------ ------------------
Benefit Cost
Service cost $ 20 $ -
Interest cost 5 2
Expected return on plan assets (12) -
Recognized curtailments gain (5) -
------------------ ------------------
Net periodic benefit cost $ 8 $ 2
================== ==================
24
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Pension Postretirement
Benefits Benefits
----------------- -----------------
2001 2001
----------------- -----------------
Benefit Obligation
Benefit obligation at January 1 $ 75 $ 23
Service cost 20 -
Interest cost 5 2
Actuarial loss, net 11 1
Benefits paid (14) (1)
Curtailments (5) -
----------------- -----------------
Benefit obligation at December 31 $ 92 $ 25
----------------- -----------------
Change in Plan Assets
Fair value of plan assets at January 1 $ 144 $ -
Actual return on plan assets (7) -
Employer contributions 1 -
Benefits paid (14) -
----------------- -----------------
Fair value of plan assets at December 31 $ 124 $ -
----------------- -----------------
Funded Status
Funded status at December 31 $ 32 $ (25)
Unrecognized net actuarial loss 30 1
----------------- -----------------
Net amount recognized at December 31 $ 62 $ (24)
================= =================
Amounts recognized in the December 31 Consolidated
Balance Sheet consist of:
Prepaid pension costs $ 66 $ -
Employee benefit obligation (4) (24)
----------------- -----------------
Net amount recognized $ 62 $ (24)
================= =================
The actuarial assumptions used are based on market interest rates, past
experience, and management's best estimate of future economic conditions. The
weighted average assumptions used in determining expense and benefit obligations
are as follows:
As of December 31,
-----------------------
2001
-----------------------
Discount rate 7.25%
Expected return on plan assets 9.25%
Rate of compensation increase 5.50%
25
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
For the postretirement health care benefit plan, the Partnership assumed a
10.0% weighted average annual health care cost trend rate for 2002, gradually
declining to 5.0% in 2007 and beyond. Assumed health care trend rates have a
significant effect on the amounts reported for the postretirement benefits. A
one-percentage point change in the Partnership's healthcare cost trend rate
would have the following effects:
One-Percentage Point
------------------------------------
Increase Decrease
---------------- ----------------
Effect on total of service and interest cost components $ 0.2 $ (0.2)
Effect on postretirement benefit obligation $ 2 $ (2)
GTEW Benefit Plans:
Upon completion of the Merger, the assets and obligations for benefits
pertaining to GTE Corp's pension and postretirement plans remained with Verizon
Communications. The plans include former employees of GTEW; therefore, the
Partnership reimburses Verizon Communications for GTEW's share of the cost of
these plans. Prior to January 2001, the allocation was based on GTEW's
contribution to the GTE Corp. plans, representing an allocation of the GTE
Corp's plans' assets and liabilities, based on the number and characteristics of
GTEW's employees in relation to total GTE Corp. employees. The Partnership
recognized pension expense of $16 and $2 for the years ended December 31, 1999
and 2000, respectively, and other postretirement benefit expense of $6 and $4
for the years ended December 31, 1999 and 2000, respectively.
Beginning in 2001, the Partnership and Verizon Communications established a
new billing agreement for the costs of providing pension and other
postretirement benefits to former GTE Wireless employees for the period
commencing January 1, 2001 and ending December 31, 2004. The allocation is based
on the proportion of GTEW active salary and number of employees at the
Partnership to the total Verizon Communications active salary and number of
employees for Non-Network Services pension and postretirement plans,
respectively, plus an additional $2 per year to cover the cost of the pension
benefit improvement. The Partnership recognized pension and postretirement
benefit expense of $11 for the year ended December 31, 2001 for former GTEW
employees.
Employee Savings and Profit Sharing Retirement Plans:
The Partnership operates the Verizon Wireless Savings and Retirement Plan
(the "VZW Plan") for the benefit of its employees. During 2000, the Partnership
operated the Bell Atlantic Mobile Savings and Profit Sharing Retirement Plan
(the "BAM Plan"). The BAM Plan was amended and restated effective January 1,
2001 and is now the VZW Plan. The BAM Plan and the VZW Plan provide that
employees may make contributions and that the Partnership may make matching
contributions as well as profit sharing contributions.
Prior to 2001, employees of BAM were eligible to participate in the BAM Plan
upon the first of the month following completion of 12 months of employment.
Effective January 1, 2001, employees of the Partnership are eligible to
participate as soon as practicable following their commencement of employment.
26
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Beginning in 2001, under the employee savings component of the VZW Plan,
employees may contribute, subject to IRS limitations, up to a total of 16% of
eligible compensation under Section 401(k) of the Internal Revenue Code of 1986,
as amended. The Partnership matches 100% of the first 6% of an employee's
contributions (75% in the case of former GTE employees who continue to
participate in the GTE pension plan). The Partnership recognized approximately
$70 of expense related to matching contributions for the year ended December 31,
2001. Prior to 2001, the Partnership made 2 types of matching contributions:
fixed and variable. The fixed match was made at the rate of 50% of an employee's
contributions up to 6% of eligible compensation. The variable match was
determined at the sole discretion of the Human Resources Committee of the Board
of Representatives (the "HRC"). The HRC declared variable matching contributions
of 50% in each of the years ended December 31, 1999 and 2000. The Partnership
recognized approximately $14 and $18 of expense related to fixed and variable
matching contributions for 1999 and 2000, respectively.
Beginning in 2001, under the retirement component of the VZW Plan the
Partnership may elect, at the sole discretion of the HRC, to contribute an
additional amount to the accounts of employees who have completed at least 12
months of service by December 1, 2001 in the form of a profit sharing
contribution. The HRC declared a profit sharing contribution of 3% of employees'
eligible compensation for 1999 and 2000 and 2% for 2001. The Partnership
recognized approximately $10, $11 and $35 of expense related to profit sharing
contributions for 1999, 2000 and 2001, respectively.
10. Long-Term Incentive Plan
The 2000 Verizon Wireless Long-Term Incentive Plan (formerly known as the Bell
Atlantic Mobile 1995 Long-Term Incentive Plan) (the "Plan") provides
compensation opportunities to eligible employees and other participating
affiliates of the Partnership. The Plan provides rewards that are tied to the
long-term performance of the Partnership. Under the former Plan, Contingent
Value Appreciation Rights ("CVARs") were granted to eligible employees since
1995. A CVAR was a right to receive cash payment, upon exercise, equal to the
appreciation in the fair market value of CVARs from the date granted to the
exercise date. On November 1, 2000, all CVARs outstanding were converted to
Value Appreciation Rights ("VARs") pursuant to the Plan. The outstanding CVARs
were converted utilizing a conversion ratio representing the relationship of the
fair value of a BAM CVAR to the fair value of a Verizon Wireless VAR.
VARs reflect the change in the value of the Partnership, similar to stock
options. Once VARs become vested, employees can exercise their VARs and receive
a payment that is equal to the difference between the VAR price on the date of
grant and the VAR price on the date of exercise, less applicable taxes. VARs are
fully exercisable three years from the date of grant with a maximum term of 10
years. All VARs are granted at a price equal to the estimated fair value of the
Partnership at the date of the grant. For purposes of valuing the VARs, the
Partnership is subject to an appraisal annually. The aggregate number of VARs
that may be issued under the Plan is 343,300,000.
The Partnership accounts for VARs issued to employees as provided in APB
Opinion No. 25 "Accounting for Stock Issued to Employees" and related
interpretations and follows the disclosure only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, the Partnership records
a charge or benefit in the consolidated statements of operations and
comprehensive income each reporting period based on the change in fair value of
the award during the period.
Compensation expense resulting from the Plan was $32, $70 and $4 for the years
ended December 31, 1999, 2000 and 2001, respectively.
27
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
Awards outstanding at December 31, 1999, 2000 and 2001 under the Plan are
summarized as follows:
Weighted
Average
Exercise
Price Vested
CVARs* VARs* of VARs* VARs*
------------- -------------- ---------- --------------
Outstanding, January 1, 1999 2,374,950
Granted 828,300
Exercised (401,450)
Cancelled (92,500)
-------------
Outstanding, December 31, 1999 2,709,300
-------------
Granted 593,701 25,353,843 $ 30.00
Exercised (1,402,350) (2,064,491) 13.05
Cancelled (31,115) (145,263) 30.00
Conversion (1,869,536) 4,741,143 18.54
------------- --------------
Outstanding, December 31, 2000 - 27,885,232 29.31 2,218,305
------------- --------------
Granted - 54,600,530 17.33
Exercised - (105,312) 12.91
Cancelled - (2,728,248) 27.76
------------- --------------
Outstanding, December 31, 2001 - 79,652,202 $ 21.17 1,129,602
============= ==============
________________________
* The weighted average exercise price is presented in actual dollars; VARs and
CVARs are presented in actual units.
The following table summarizes the status of the Partnership's VARs as of
December 31, 2001:
VARs Outstanding VARs Vested
--------------------------------------------------- ---------------------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices VARs Life (Years) Price VARs Price
----------------------- ------------- ---------------- ------------- ------------- ------------
$ 9.23 - $14.79 614,266 4.90 $ 11.30 614,266 $ 11.30
$14.80 - $22.19 52,240,209 8.73 16.76 478,166 17.15
$22.20 - $30.00 26,797,727 8.60 30.00 37,170 30.00
------------ -------------
Total 79,652,202 $ 21.17 1,129,602 $ 14.39
============ =============
During 2000, the Partnership recorded a charge to operating expenses of
approximately $38 in selling, general and administrative expenses related to the
vesting of certain contingent value appreciation rights in accordance with the
Plan, in connection with the closing of the AirTouch Properties acquisition. The
vesting was triggered by a change of control provision as defined in the Plan.
28
CELLCO PARTNERSHIP
(d/b/a Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
11. Income Taxes
The provision for income taxes consists of the following:
For the Years Ended December 31,
----------------------------------------------------
1999 2000 2001
---------------- -------------- -------------
Current:
Federal $ 103 $ 158 $ 83
State and local 23 52 28
---------------- -------------- -------------
126 210 111
Deferred:
Federal 70 (38) (38)
State and local 10 (23) (11)
---------------- -------------- -------------
80 (61) (49)
---------------- -------------- -------------
Provision for income taxes $ 206 $ 149 $ 62
================ ============== =============
A reconciliation of the income tax provision computed at the statutory tax
rate to the Partnership's effective tax rate is as follows:
For the Years Ended December 31,
----------------------------------------------------
1999 2000 2001
---------------- -------------- -------------
Income tax provision at the statutory rate $ 398 $ 587 $ 478
State income taxes, net of U.S. federal benefit 22 19 16
Amortization of goodwill 12 45 36
Partnership income not subject to federal or
state income taxes (228) (500) (468)
Other, net 2 (2) -
---------------- -------------- -------------
Provision for income tax $ 206 $ 149 $ 62
================ ============== =============
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities.
The significant components of the Partnership's deferred tax assets and
(liabilities) are as follows:
December 31,
-----------------------------------
2000 2001
--------------- ----------------
Deferred tax assets:
Employee related expenses $ 27 $ 20
Bad debt 56 61
Accrued expenses 26 26
Gain on sale of assets 20 27
Net operating loss carryover 38 66
Other 18 40
--------------- ----------------
Total deferred tax assets $ 185 $ 240
=============== ================
Deferred tax liabilities:
Property, plant and equipment (162) (260)
Intangible asset (2,290) (2,189)
Other (121) (108)
--------------- ----------------
Total deferred tax liabilities $ (2,573) $ (2,557)
=============== ================
Net deferred tax asset-current $ - $ 107
Net deferred tax liability-non-current $ (2,388) $ (2,424)
Net operating loss carryovers of $164 expire at various dates principally from
September 30, 2018 through September 30, 2021.
29
CELLCO PARTNERSHIP
(d/b/a Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
12. Leases
Operating Leases
The Partnership entered into operating leases for facilities and equipment
used in its operations. Lease contracts include renewal options that include
rent expense adjustments based on the Consumer Price Index as well as annual and
end-of-lease term adjustments. For the years ended December 31, 1999, 2000 and
2001, the Partnership recognized a total of $160, $376 and $558, respectively,
as rent expense related to payments under these operating leases, which was
included in selling, general and administrative expenses in the accompanying
consolidated statements of operations and comprehensive income.
Capital Leases
The Partnership has certain sales/leasebacks for network equipment which are
accounted for as financings, whereby a sale was not recorded and a capital lease
obligation was recorded for the proceeds received. The related depreciation of
assets recorded under capital leases is included in depreciation and
amortization in the accompanying consolidated statements of operations and
comprehensive income.
Future minimum payments under these and other capital lease obligations, a
portion of which are payable in Japanese Yen, less imputed interest, and the
aggregate future minimum rental commitments under noncancellable operating
leases, excluding renewal options for the periods are as follows:
Operating Capital
Years Leases Leases
----- ----------------- ----------------
2002 $ 433 $ 38
2003 410 45
2004 396 64
2005 385 8
2006 367 -
2007 and thereafter 1,746 6
----------------- ----------------
Total minimum payments $ 3,737 161
=================
Less: imputed interest 17
----------------
Obligations under capital leases 144
Less: current capital lease obligations 38
----------------
Long-term capital lease obligations at December 31, 2001 $ 106
================
30
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
13. Other Transactions with Affiliates
In addition to transactions with affiliates in Notes 7 and 9, other
significant transactions with affiliates are summarized as follows:
For the years ended December 31,
------------------------------------------------
1999 2000 2001
------------ ------------- -------------
Statement of Operations:
Revenue related to transactions with affiliated
companies $ 26 $ 51 $ 39
Direct and office telecommunication charges $ 272 $ 340 $ 265
Certain general and administrative expenses (a) $ 82 $ 160 $ 49
Secondment agreement expenses (b) $ - $ 657 $ -
Balance Sheet:
Amounts capitalized for construction of cell sites
and other system property $ 26 $ 4 $ -
____________
(a) In addition to recurring allocations, during 2000, the Partnership
received an allocation of direct costs of approximately $46 in selling,
general and administrative expenses from Verizon Communications. The
charge related to severance costs and incentive stay agreements with
employees of GTEW that were incurred in connection with the Merger. In
2001, the affiliate general and administrative expenses were the result
of direct billings. Prior to 2001, expenses were allocated based on the
percentage of time spent on wireless-related activities. The percentage
used was determined by annual time studies. The Partnership believes
these allocations were reasonable.
(b) On April 3, 2000, Vodafone, Verizon Communications and the Partnership
entered into an employee secondment agreement pursuant to which Vodafone
agreed to loan approximately 14,000 of its employees to the Partnership
until December 31, 2000. During the period, the loaned employees
continued to be paid by Vodafone and performed services exclusively for
the Partnership, which reimbursed Vodafone for their salaries, benefits
and any relocation expenses. The Partnership reimbursed Vodafone $657 in
2000. All loaned employees became employees of the Partnership on January
1, 2001.
Under the terms of the partnership agreement between Verizon Communications
and Vodafone, the Partnership is required to make annual distributions to its
partners to pay taxes. Additionally, the Partnership is required, subject to
compliance with specified financial tests, to pay distributions to the partners
based upon a calculation specified in the partnership agreement.
Distributions were made to Verizon Communications for the year ended
December 31, 1999 in the amount of $622. In accordance with the terms of the
partnership agreement, during 2000 a $223 distribution was made to the partners
for the period April through June 30, 2000. In February 2001, a $691
distribution was made to the partners for the period July through December 31,
2000. There have been no distributions made in respect of the 2001 calendar year
due to the result of the financial tests mentioned above. Additionally,
approximately $25 of proceeds related to the sale of an asset associated with an
overlap property was received directly by Verizon Communications in December
2001 (see Note 4).
Upon finalization of the disposition of certain overlap cellular properties,
the Partnership may be required to make additional distributions or may receive
additional contributions from Verizon Communications or Vodafone to reflect the
proportionate ownership of the two partners in accordance with the Alliance
Agreement. Management is unable to estimate the impact this may have on the
financial position of the Partnership as negotiations between Verizon
Communications and Vodafone regarding the finalization of the disposition of the
overlap cellular properties is not complete.
31
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
14. Valuation and Qualifying Accounts
Balance Additions charged Write-offs, Balance at
at beginning to net of end
of the year operations recoveries of year
-------------- ----------------- -------------- -------------
Accounts Receivable Allowances:
1999 $ 81 $ 157 $ (154) $ 84
2000 $ 84 $ 470 $ (356) $ 198
2001 $ 198 $ 649 $ (523) $ 324
Inventory Allowances:
1999 $ 15 $ 14 $ (16) $ 13
2000 $ 13 $ 82 $ (74) $ 21
2001 $ 21 $ 124 $ (132) $ 13
15. Commitments and Contingencies
The Alliance Agreement contains a provision, subject to specified
limitations, that requires Vodafone and Verizon Communications to indemnify the
Partnership for certain contingencies, excluding PrimeCo contingencies, arising
prior to the formation of Verizon Wireless.
The Partnership is subject to several lawsuits and other claims including
class actions, product liability, patent infringement, partnership disputes, and
claims involving the Partnership's relations with resellers and agents. The
Partnership is also defending lawsuits filed against the Partnership and other
participants in the wireless industry alleging various adverse effects as a
result of wireless phone usage. Various consumer class action lawsuits allege
that the Partnership breached contracts with consumers, violated certain state
consumer protection laws and other statutes and defrauded customers through
concealed or misleading billing practices. These matters may involve
indemnification obligations by third parties and/or affiliated parties covering
all or part of any potential damage awards against the Partnership and/or
insurance coverage. Attorney Generals in a number of states also are
investigating certain sales, marketing and advertising practices.
All of the above matters are subject to many uncertainties, and outcomes are
not predictable with assurance. Consequently, the ultimate liability with
respect to these matters at December 31, 2001 cannot be ascertained. The
potential effect, if any, on the consolidated financial condition and results of
operations of the Partnership, in the period in which these matters are
resolved, may be material.
In addition to the aforementioned matters, the Partnership is subject to
various other legal actions and claims in the normal course of business. While
the Partnership's legal counsel cannot give assurance as to the outcome of each
of these matters, in management's opinion, based on the advice of such legal
counsel, the ultimate liability with respect to any of these actions, or all of
them combined, will not materially affect the combined financial position or
operating results of the Partnership.
On March 19, 2001, the Partnership awarded a three-year, approximately
$5,000 supply contract to telecommunications equipment maker Lucent Technologies
Inc. ("Lucent"). The contract will make Lucent the largest supplier of
high-speed, high-capacity wireless infrastructure to the Partnership. Over the
three-year contract, a minimum annual purchase threshold of $1,500 is required
for the first two-years only. As of December 2001, the remaining commitment was
approximately $3,300.
32
CELLCO PARTNERSHIP
(d/b/a/ Verizon Wireless)
Notes to Consolidated Financial Statements
(Dollars in Millions)
FCC Auction
On January 29, 2001, the bidding phase of the FCC re-auction of 1.9 GHz C
and F block broadband PCS spectrum licenses, which began December 12, 2000,
officially ended. The Partnership was the winning bidder for 113 licenses. The
total price of these licenses was $8,781, $1,822 of which has already been paid
and the balance of which will be paid when the FCC requires payment.
There were no legal challenges to the Partnership's qualifications to
acquire these licenses. However, most of the licenses that were reauctioned are
the subject of pending litigation by the original licensees, NextWave Personal
Communication Inc. and NextWave Power Partners Inc. (collectively "NextWave"),
which have appealed to the federal courts the FCC's 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 was not allowed to
repossess the NextWave licenses. The FCC subsequently reinstated NextWave's
licenses, but on October 19, 2001, the FCC filed a petition to the U.S. Supreme
Court to reverse the U.S. Court of Appeals for the D.C. Circuit's decision. In
early March 2002, the U.S. Supreme Court granted the FCC petition and agreed to
hear the appeal. Substantially all of the Partnership's $8,781 license cost
relates to the licenses subject to NextWave's appeal.
Proposed Acquisition
During the fourth quarter of 2000, the Partnership agreed to acquire the
wireless business of Price Communications Corp. ("Price") in exchange for
Verizon Wireless stock and the repayment by the Partnership of net debt. The
transaction was conditioned upon completion of a Verizon Wireless initial public
offering. The agreement permitted either party to terminate the agreement if the
closing did not occur by September 30, 2001. Because that deadline was not met,
the Partnership began discussing alternative forms of consideration and other
terms with Price for acquiring Price's wireless business.
On December 18, 2001, the Partnership and Price agreed to combine
substantially all the assets of the business operations of Price Communications
Wireless, Inc. and certain assets of the Partnership, in a transaction valued at
$1,700, including $550 in net debt that will be assumed or redeemed. Under the
terms of the transaction, Price Communications Wireless, Inc. and the
Partnership will form a limited partnership, which will be controlled and
managed by the Partnership, consisting of substantially all the assets of
Price's wireless operations and certain assets of the Partnership. Price's
partnership interest will be exchangeable into Verizon Wireless, if public, or
Verizon Communications stock, subject to several conditions. The deal will
expand the Partnership's footprint in the Southeastern U.S. and add
approximately 560,000 customers. The Partnership expects to close the
transaction during the third quarter of 2002, subject to Price stockholder
approval and other customary closing conditions.
16. Subsequent Events
The Partnership signed definitive agreements, during the fourth quarter of
2001, to acquire certain Dobson Communications Corporation wireless operations
in California, Georgia, Ohio, Tennessee and Arizona for approximately $550.
These purchases closed in the first quarter of 2002.
In January 2002, the Partnership acquired wireless licenses in South
Carolina from Carolina PCS I Limited Partnership and its subsidiaries for
approximately $105 in cash. The Partnership also expanded its service footprint
throughout a seven-county area in Northern Alabama by acquiring the business
assets of Alabama Wireless, Inc. for approximately $108 in cash.
33
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.
----------------------------------------
(Registrant)
Date: May 22, 2002 /s/ John F. Killian
------------------------------ ----------------------------------------
John F. Killian
Senior Vice President and Controller