<PAGE> 1
================================================================================
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: DECEMBER 27, 1999
(Date of earliest event reported)
GTE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW YORK 1-2755 13-1678633
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION)
1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code 972-507-5000
(Former name or former address,
if changed since last report)
================================================================================
<PAGE> 2
GTE CORPORATION
FORM 8-K
Item 5. Other Events
A Form 6-K dated December 21, 1999, filed by Vodafone Airtouch Plc ("Vodafone")
with the Securities and Exchange Commission, contained the following financial
statements of GTE Wireless Incorporated and land-based wireless subsidiaries,
which are filed as an exhibit hereto:
audited financial statements for GTE Wireless Incorporated and land-based
wireless subsidiaries at and for the years ended December 31, 1996, 1997
and 1998, together with a report from Arthur Andersen LLP, and unaudited
financial statements at and for the nine months ended September 30, 1999
and for the nine months ended September 30, 1998.
The audited financial statements for GTE Wireless Incorporated and land-based
wireless subsidiaries at and for the years ended December 31, 1996, 1997 and
1998, together with an unaudited reconciliation from U.S. GAAP to Vodafone's
accounting policies under U.K. GAAP, were also contained in a Listing
Particulars filed by Vodafone with the London Stock Exchange on December 20,
1999.
Item 7. Financial Statements and Exhibits
(c) Exhibits
23 Consent of Independent Accountants
99 Audited financial statements for GTE Wireless
Incorporated and land-based wireless subsidiaries at
and for the years ended December 31, 1996, 1997 and
1998, together with a report from Arthur Andersen
LLP, and unaudited financial statements at and for
the nine months ended September 30, 1999 and for the
nine months ended September 30, 1998.
<PAGE> 3
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.
GTE Corporation
------------------------------------------
(Registrant)
Date: December 27, 1999 /s/ Paul R. Shuell
---------------------- ------------------------------------------
Paul R. Shuell
Vice President and Controller
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
23 Consent of Independent Accountants
99 Audited financial statements for GTE Wireless Incorporated and
land-based wireless subsidiaries at and for the years ended
December 31, 1996, 1997 and 1998, together with a report from
Arthur Andersen LLP, and unaudited financial statements at and for
the nine months ended September 30, 1999 and for the nine months
ended September 30, 1998.
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, dated December 3, 1999, on the consolidated financial statements
of GTE Wireless Incorporated and land-based wireless subsidiaries included in
this Form 8-K, into the following previously filed Registration Statements:
1. Form S-8 of GTE Corporation (File No. 33-20178)
2. Form S-8 of GTE Corporation (File No. 33-65025)
3. Form S-3 of GTE Corporation (File No. 33-61661)
4. Form S-4 of GTE Corporation (File No. 33-37530)
5. Form S-8 of GTE Corporation (File No. 33-39297)
6. Form S-8 of GTE Corporation (File No. 33-50111)
7. Form S-8 of GTE Corporation (File No. 333-31455)
8. Form S-8 of GTE Corporation (File No. 333-31451)
9. Form S-8 of GTE Corporation (File No. 333-43025)
Atlanta, Georgia /s/ ARTHUR ANDERSEN LLP
December 27, 1999
<PAGE> 1
EXHIBIT 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GTE Wireless Incorporated:
We have audited the accompanying balance sheets of GTE Wireless Incorporated and
land-based wireless subsidiaries (a Delaware corporation) as of December 31,
1998, 1997 and 1996 and the related consolidated statements of operations and
cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of GTE Wireless Incorporated and
land-based wireless subsidiaries as of December 31, 1998, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
December 3, 1999
1
<PAGE> 2
GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
U.S.$ MILLION
-------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------- -------------------------
1998 1997 1996 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues and Sales:
Service revenues 2,687.1 2,552.4 2,347.5 2,305.7 2,005.8
Equipment 159.2 141.9 111.7 160.9 117.4
Other 73.8 52.6 21.9 46.2 55.1
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues and sales 2,920.1 2,746.9 2,481.1 2,512.8 2,178.3
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Costs and Expenses:
Cost of services 725.9 690.7 623.1 952.8 533.4
Cost of equipment 277.8 331.7 254.4 245.3 200.3
Selling, general and administrative 803.5 934.0 773.3 557.5 569.5
Depreciation and amortization 425.9 417.4 385.7 337.8 320.4
Special charge 87.7 - - 23.7 87.7
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 2,320.8 2,373.8 2,036.5 2,117.1 1,711.3
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Income 599.3 373.1 444.6 395.7 467.0
Other Income (Expense):
Interest expense, net (44.5) (54.4) (44.6) (29.4) (30.5)
Minority interest (52.5) (38.1) (43.4) (13.8) (43.2)
Equity in income of unconsolidated entities 128.3 129.5 107.4 74.2 96.0
Other, net - (3.1) 10.4 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 630.6 407.0 474.4 426.7 489.3
Income Taxes 258.6 172.9 188.4 173.0 201.0
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income 372.0 234.1 286.0 253.7 288.3
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
U.S.$ MILLION
-------------------------------------------------------------
SEPTEMBER 30,
DECEMBER 31, (UNAUDITED)
----------------------------------------- -------------
1998 1997 1996 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents 6.6 3.0 12.4 10.2
Receivables, less allowances of $44.8, $34.4, $26.1 and
$48.6 (unaudited) 422.3 421.4 455.9 469.9
Notes receivable - affiliate - - 169.6 --
Inventories 54.0 69.5 74.2 85.4
Deferred income tax benefits 13.2 8.8 8.9 16.3
Other 38.0 37.7 45.9 38.5
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 534.1 540.4 766.9 620.3
- ------------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, Net 2,601.5 2,579.7 2,538.7 2,624.2
Franchises, Goodwill and Other Intangibles, Net 2,178.3 2,278.8 2,365.5 2,148.5
Investments in Unconsolidated Entities 328.3 349.7 313.9 331.8
Other Assets 37.1 20.7 8.7 4.0
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 5,679.3 5,769.3 5,993.7 5,728.8
==============================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Short-term obligations, including current maturities 312.2 303.2 364.1 80.2
Accounts payable and accrued liabilities 345.7 387.6 475.0 389.9
Accrued payroll and related expenses 82.1 41.7 45.7 59.7
Taxes payable 141.3 65.1 16.3 125.3
Other 60.4 22.9 25.8 37.1
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 941.7 820.5 926.9 692.2
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 197.5 354.0 354.0 122.5
Employee Benefit Plans 141.8 107.5 82.7 164.3
Deferred Income Taxes 612.3 558.4 463.2 686.1
Minority Interest 139.4 147.2 133.1 135.5
Other Long-Term Liabilities 98.9 68.1 47.3 115.7
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,131.6 2,055.7 2,007.2 1,916.3
- ------------------------------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock 90.0 90.0 90.0 90.0
Additional paid-in capital 3,491.0 3,491.0 3,491.0 3,502.1
(Accumulated deficit) retained earnings (33.3) 132.6 405.5 220.4
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 3,547.7 3,713.6 3,986.5 3,812.5
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity 5,679.3 5,769.3 5,993.7 5,728.8
==============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
U.S.$ MILLION
----------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, (UNAUDITED)
-------------------------------------------- ----------------------------
1998 1997 1996 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 372.0 234.1 286.0 253.7 288.3
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 425.9 417.4 385.7 337.8 320.4
Deferred income taxes 50.7 95.0 141.4 81.9 74.3
Special charge 87.7 - - 23.7 87.7
Changes in current assets and current
liabilities:
Receivables - net (74.7) (31.6) (132.9) (97.6) (51.8)
Other current assets 12.7 12.9 (50.1) (31.9) 3.6
Accrued taxes and interest 79.2 37.7 (46.3) (14.6) 49.3
Other current liabilities (3.9) (72.5) 71.2 (24.6) 18.5
Other, net 60.0 97.1 47.9 77.6 8.9
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,009.6 790.1 702.9 606.0 799.2
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (439.6) (391.6) (662.9) (291.4) (272.3)
Acquisitions and investments (15.7) (13.2) (2.9) (1.2) (15.5)
Proceeds from sales of assets 159.3 31.8 274.4 5.4 124.6
Other, net (25.0) (29.7) (22.5) (8.4) (7.5)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (321.0) (402.7) (413.9) (295.6) (170.7)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt - (364.1) (1,110.0) (156.5) -
Change in short-term obligations (147.2) 472.3 (1,122.7) (150.5) (628.0)
(Dividends paid to) contributions received from
Parent (537.9) (507.0) 1,930.0 - -
Other 0.1 2.0 3.2 0.2 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (685.0) (396.8) (299.5) (306.8) (627.8)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 3.6 (9.4) (10.5) 3.6 0.7
Cash and cash equivalents, beginning of year 3.0 12.4 22.9 6.6 2.9
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 6.6 3.0 12.4 10.2 3.6
=================================================================================================================================
Cash paid during the year for:
Interest 30.0 59.0 187.9 26.4 26.8
=================================================================================================================================
Income taxes 160.2 48.1 78.7 129.5 110.5
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
U.S.$ MILLION
---------------------------------------------------------------------
Retained
Additional Earnings
Common Paid-In (Accumulated
Stock Capital Deficit) Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 90.0 1,561.0 119.5 1,770.5
Contributions by parent 1,930.0 1,930.0
Net income 286.0 286.0
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 90.0 3,491.0 405.5 3,986.5
Dividends to parent (507.0) (507.0)
Net income 234.1 234.1
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 90.0 3,491.0 132.6 3,713.6
Dividends to parent (537.9) (537.9)
Net income 372.0 372.0
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 90.0 3,491.0 (33.3) 3,547.7
Tax benefit from exercise of stock options
(unaudited) 11.1 11.1
Net income (unaudited) 253.7 253.7
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 (unaudited) 90.0 3,502.1 220.4 3,812.5
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
GTE WIRELESS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
DESCRIPTION OF BUSINESS
GTE Wireless Incorporated and land-based wireless subsidiaries (GTEW or the
Company) is a wholly owned subsidiary of GTE Corporation (Parent). GTEW provides
nationwide wireless voice and data products and services to 4.8 million
consumers and business customers in its markets. GTEW's wireless operations
serve a population of 61.4 million potential wireless customers. Major cellular
markets operating under the GTEW brand include San Francisco, Houston,
Cleveland, San Diego, Tampa, San Jose, Indianapolis, Memphis, Louisville,
Birmingham, Norfolk, Nashville, Greensboro and Honolulu. GTEW also provides 1.8
GHz wireless services in Cincinnati, Seattle and Spokane.
BASIS OF PRESENTATION
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles, which require that management make
estimates and assumptions that affect reported amounts. Actual results could
differ from these estimates.
The consolidated financial statements of GTEW include the accounts of all
majority-owned subsidiaries. All significant intercompany amounts have been
eliminated. Investments in 20%-50% owned entities and less than 20% owned
cellular partnerships over which the Company exercises significant influence are
accounted for on the equity basis.
REVENUE RECOGNITION
The Company earns service revenues primarily by providing access to the cellular
network (access revenue) and for usage of the cellular network (airtime and toll
revenues). Access revenues are recognized when earned. Airtime (including
roaming) and toll revenues are recognized when the services are rendered. Other
service revenues are recognized after services are performed or rendered and
include custom calling feature and other revenues. Equipment sales are
recognized upon delivery of the equipment to the customer. Other revenues
include landline call termination revenues and paging revenues, which are
recognized when services are rendered, and Universal Service Fund billings.
CUSTOMER ACQUISITION COSTS
The Company defers approximately two weeks of certain customer acquisition costs
in order to recognize those direct costs in the same accounting period as the
associated revenues, provided those revenues are contractual. These deferred
costs were $27.1 million, $24.3 million, and $35.5 million at December 31, 1998,
1997 and 1996, respectively, and are included in other current assets in the
accompanying consolidated balance sheets.
ADVERTISING COSTS
The Company expenses the cost of advertising as incurred. Advertising expense
was $108.8 million, $128.9 million, and $110.7 million for 1998, 1997 and 1996,
respectively, and is included as a component of selling, general and
administrative expense in the accompanying consolidated statements of
operations.
INTEREST EXPENSE, NET
The consolidated statements of operations reflect total interest expense, less
interest income and interest capitalized during construction.
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense 51.5 77.3 154.4
Interest income (0.2) (10.0) (74.8)
Interest capitalized (6.8) (12.9) (35.0)
- ---------------------------------------------------------------------------------------------------
Total 44.5 54.4 44.6
===================================================================================================
</TABLE>
6
<PAGE> 7
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
INCOME TAXES
The Company files its federal income tax return on a consolidated basis with the
Parent. Under the joint consolidated income tax agreement, the Company computes
its current and deferred income tax expense on a stand-alone basis.
The consolidated financial statements also include certain partnerships for
which, according to the Internal Revenue Code and applicable state statutes,
income and expenses are not separately taxable to the partnerships, but rather
accrue directly to the partners. Accordingly, the Company's provision for income
taxes includes income taxes of the partnerships.
Deferred income taxes are recorded using enacted tax law and rates for the years
in which the taxes are expected to be paid. Deferred income taxes are provided
for items when there is a temporary difference in recording such items for
financial reporting and income tax reporting.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
INVENTORIES
Inventories include cellular telephones, pagers, and accessories held for sale
and are stated at the lower of cost or market, determined by the average cost
method. Inventories are net of reserves for obsolescence.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. The Company records
depreciation using the straight-line method over the estimated useful lives of
the assets, which are primarily twenty years for buildings and towers, seven to
ten years for cell and switching equipment and three to five years for furniture
and fixtures and other equipment. When property is retired, the cost of the
property and the related accumulated depreciation are removed from the
consolidated balance sheet and any gain or loss on the transaction is included
in cost of services in the accompanying consolidated statements of operations.
Work in progress represents costs incurred for the construction of cell sites
and includes network engineering and capitalized interest. When these assets are
placed in service, the costs are recorded in the appropriate property, plant and
equipment accounts and depreciation begins. Depreciation expense for the years
ended December 31, 1998, 1997 and 1996 was $356.4 million, $348.8 million and
$319.4 million, respectively.
INTANGIBLES
Franchises, goodwill and other intangibles are amortized on a straight-line
basis over the period benefited or 40 years, whichever is less. Amortization
expense for the years ended December 31, 1998, 1997 and 1996 was $69.5 million,
$68.6 million and $66.3 million, respectively. Goodwill relating to investments
in unconsolidated entities is amortized on a straight-line basis over the period
benefited or 40 years, whichever is less.
7
<PAGE> 8
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
SOFTWARE
The Company classifies software as either network or non-network. For network
software, initial operating systems software is capitalized and amortized over
the life of the related hardware. All other network software is expensed as
incurred. Non-network software, which includes billing and administrative
systems, is capitalized and amortized over its useful life, not to exceed 5
years. Software maintenance and other non-network software costs are expensed as
incurred. The Company capitalized $17.3 million and $16.3 million non-network
software costs during the years ended December 31, 1998 and 1997, respectively,
in connection with the implementation of new billing and administrative systems
within the Company.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Under the provisions of this SOP,
effective January 1, 1999, GTE will be required to capitalize and amortize the
cost of all internal-use software, including network-related software it now
expenses. The network-related software expensed in 1998 was not material.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care 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. Curtailment gains and losses associated
with employee separations are recognized when they occur. Settlement gains and
losses are recognized when the significant pension obligations are settled and
the gain or loss is determinable.
VALUATION OF ASSETS
The Company periodically reviews the values assigned to long-lived assets such
as intangibles and property, plant and equipment, to determine whether any
impairments exist that are other than temporary. The Company believes that the
long-lived assets in the accompanying consolidated balance sheets are
appropriately valued.
CREDIT RISK
The Company's accounts receivable subject the Company to credit risk, as
collateral is generally not required. The Company's risk of loss is limited due
to advance billings to certain customers for services and the ability to
terminate access on delinquent accounts. The credit risk is mitigated by the
large number of customers comprising the customer base. The carrying amount of
the Company's receivables approximates their fair value.
SOURCES OF SUPPLIES
The Company relies on local telephone companies and other companies to provide
certain communication services. Although management feels alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could potentially have an adverse impact on operating results.
8
<PAGE> 9
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
Although the Company attempts to maintain multiple vendors for each required
product, its inventory and equipment, which are important components of its
operations, are currently acquired from only a few sources. If the suppliers are
unable to meet the Company's needs as it builds out its network infrastructure
and sells service and equipment, delays and increased costs in the expansion of
the Company's network infrastructure or losses of potential customers could
result, which would adversely affect operating results.
2. PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
On July 27, 1998, the Parent and Bell Atlantic Corporation entered into a merger
agreement providing for the combination of the two companies. Under the terms of
the agreement, which was unanimously approved by the boards of directors of both
companies and a majority of shareholders, the Parent's shareholders will receive
1.22 shares of Bell Atlantic Corporation stock for each share of the Parent's
stock that they own. The merger is subject to regulatory approvals.
3. SPECIAL CHARGE
During the first quarter of 1998, the Company adopted a plan to exit certain
product lines, close several retail stores and eliminate a variety of employee
functions. As a result, the Company recorded a pretax charge of $87.7 million in
the accompanying consolidated statements of operations. Costs relating to the
exit plan represent the write-off of certain fixed assets and other costs
associated with exiting the related activities. As of December 31, 1998,
liabilities of $25.5 million relating to the special charge were included in
other current liabilities in the consolidated balance sheets.
4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company owns non-controlling interests in 33 MSA and RSA partnerships
ranging from 1% to 50%. These unconsolidated entities are accounted for using
the equity method of accounting. Condensed combined financial information for
those entities is summarized as follows:
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues 2,440.6 2,356.0 2,242.2
===================================================================================================
Operating income 726.2 738.4 691.3
===================================================================================================
Net income 733.3 711.7 687.7
===================================================================================================
Equity in income of unconsol. entities 128.3 129.5 107.4
===================================================================================================
</TABLE>
9
<PAGE> 10
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
AT DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets 482.6 529.9 527.0
Property, plant and equipment, net 1,615.7 1,690.3 1,562.0
Other assets 58.0 96.4 59.6
- ---------------------------------------------------------------------------------------------------
Total 2,156.3 2,316.6 2,148.6
===================================================================================================
Current liabilities 388.6 454.8 379.4
Non-current liabilities 17.8 26.3 20.4
Other partners' share of net assets 1,421.6 1,485.8 1,434.9
Company's share of net assets 328.3 349.7 313.9
- ---------------------------------------------------------------------------------------------------
Total 2,156.3 2,316.6 2,148.6
===================================================================================================
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
AT DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land 43.1 42.3 40.2
Buildings 640.0 612.3 558.2
Network and other equipment 2,699.8 2,600.9 2,200.5
Data processing equipment 163.6 158.6 151.7
Leasehold improvements 221.0 199.0 131.7
Furniture and fixtures 49.4 62.2 55.6
Work in progress 180.9 151.5 426.8
- ---------------------------------------------------------------------------------------------------
Total 3,997.8 3,826.8 3,564.7
Accumulated depreciation (1,396.3) (1,247.1) (1,026.0)
- ---------------------------------------------------------------------------------------------------
Total property, plant and equipment, net 2,601.5 2,579.7 2,538.7
===================================================================================================
</TABLE>
Interest and network engineering costs capitalized as part of property, plant
and equipment were as follows:
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capitalized interest 6.8 12.9 35.0
Network engineering costs 33.9 45.1 48.7
- ---------------------------------------------------------------------------------------------------
Total 40.7 58.0 83.7
===================================================================================================
</TABLE>
10
<PAGE> 11
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
6. DEBT
Long-term debt as of December 31 was as follows:
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt - Parent 183.2 333.2 333.2
Industrial Revenue Bonds 14.3 20.8 20.8
- ---------------------------------------------------------------------------------------------------
197.5 354.0 354.0
===================================================================================================
</TABLE>
Long-term debt - Parent represents notes payable to GTE Corporation, bearing
interest ranging from 5.96% to 9.90%. The non-current portions of these notes
are due in 2000. The interest rates on the Industrial Revenue Bonds, which are
due after 2003, range from 65% to 71% of the SunTrust Bank of Atlanta's prime
interest rate.
Short-term obligations as of December 31 were as follows:
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Note payable - Parent 155.7 303.2 -
Current maturities of long-term debt - Parent 150.0 - 364.1
Current maturities of long-term debt - non-affiliate 6.5 - -
- ---------------------------------------------------------------------------------------------------
312.2 303.2 364.1
===================================================================================================
</TABLE>
The interest rate on the note payable to Parent is based on the Parent's
intercompany borrowing interest rate, which fluctuated between 5.46% and 6.18%
in 1998, 5.44% and 5.80% in 1997 and 5.44% and 6.07% in 1996.
7. STOCKHOLDER'S EQUITY
COMMON STOCK
The authorized and issued common stock of the Company at December 31, 1998
consisted of 1,000 shares with no par value and a stated value of $90.0 million.
ADDITIONAL PAID-IN CAPITAL
The Company received contributions from the Parent of $1,930.0 million in 1996.
No other contributions have been received since 1996.
Dividends paid to the Parent were $537.9 million and $507.0 million in 1998 and
1997, respectively. No dividends were paid to the Parent in 1996.
11
<PAGE> 12
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
The Company sponsors several qualified and nonqualified pension plans and other
postretirement benefit plans for its employees. Substantially all employees are
covered under defined benefit pension plans and postretirement health care and
life insurance plans. Pension plans are generally noncontributory.
Postretirement health care plans are generally contributory and include a limit
on the Company's share of the cost for recent and future retirees. The following
information is presented in accordance with the revised disclosure requirements
of Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits."
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of plan assets for the years ended December
31, and a statement of funded status as of December 31:
<TABLE>
<CAPTION>
U.S.$ MILLION U.S.$ MILLION
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- -----------------------------------
Pension Benefits Other Postretirement Benefits
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation at January 1 121.3 90.0 67.1 18.3 13.7 8.8
Service cost 18.7 14.2 10.4 2.2 1.7 1.0
Interest cost 11.4 8.5 6.1 1.4 1.2 0.7
Participant contributions - - - 0.1 0.1 0.1
Plan amendments 2.0 0.1 - - - -
Actuarial loss 17.4 9.7 7.2 0.1 1.8 3.2
Benefits paid (5.7) (6.2) (5.5) (0.2) (0.2) (0.1)
Curtailments and settlements (5.9) - - (0.5) - -
Other 12.1 5.0 4.7 - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at December 31 171.3 121.3 90.0 21.4 18.3 13.7
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
U.S.$ MILLION U.S.$ MILLION
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- -----------------------------------
Pension Benefits Other Postretirement Benefits
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fair value of plan assets at January 1 38.2 31.3 16.0 - - -
Actual return on plan assets 4.2 4.8 3.3 - - -
Company contributions - - - 0.1 0.1 -
Participant contributions - - - 0.1 0.1 0.1
Benefits paid (5.7) (6.2) (5.5) (0.2) (0.2) (0.1)
Curtailments and settlements (3.5) - - - - -
Other 15.6 8.3 17.5 - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 48.8 38.2 31.3 - - -
=================================================================================================================================
</TABLE>
12
<PAGE> 13
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
<TABLE>
<CAPTION>
U.S.$ MILLION U.S.$ MILLION
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- -----------------------------------
Pension Benefits Other Postretirement Benefits
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Funded status as of December 31 (122.5) (83.1) (58.7) (21.4) (18.3) (13.6)
Unrecognized transition obligation 0.1 0.2 0.2 - - -
Unrecognized prior service cost (benefit) 1.4 (0.5) (0.6) (9.2) (10.3) (11.0)
Unrecognized loss 18.8 6.9 1.9 9.1 10.2 8.6
- ---------------------------------------------------------------------------------------------------------------------------------
Net amount recognized (102.2) (76.5) (57.2) (21.5) (18.4) (16.0)
=================================================================================================================================
</TABLE>
The following table provides the amounts recognized in the consolidated balance
sheets as of December 31:
<TABLE>
<CAPTION>
U.S.$ MILLION U.S.$ MILLION
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- -----------------------------------
Pension Benefits Other Postretirement Benefits
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accrued benefit liability (102.2) (76.5) (57.2) (21.5) (18.4) (16.0)
=================================================================================================================================
</TABLE>
The following table provides the components of net periodic benefit cost for the
years ended December 31:
<TABLE>
<CAPTION>
U.S.$ MILLION U.S.$ MILLION
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- -----------------------------------
Pension Benefits Other Postretirement Benefits
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost 18.7 14.2 10.4 2.2 1.7 1.0
Interest cost 11.4 8.5 6.1 1.4 1.2 0.7
Expected return on plan assets (4.7) (3.4) (2.9) - - -
Amortization of:
Transition asset 0.1 0.1 0.1 - - -
Prior service cost (benefit) 0.1 (0.1) (0.1) (0.6) (0.6) (0.6)
Net gain - - - 0.3 0.3 0.2
Curtailments and settlements 0.2 - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 25.8 19.3 13.6 3.3 2.6 1.3
=================================================================================================================================
</TABLE>
The weighted-average assumptions used in measuring the Company's benefit
obligations as of December 31 are as follows:
<TABLE>
<CAPTION>
U.S.$ MILLION U.S.$ MILLION
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- -----------------------------------
Pension Benefits Other Postretirement Benefits
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.00% 7.25% 7.50% 7.00% 7.25% 7.50%
Annual salary increase 4.75 5.00 5.25 - - -
Expected return on plan assets 9.00 9.00 9.00 8.00 8.00 7.00
</TABLE>
13
<PAGE> 14
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
The assumed health care cost trend rate is 6.75% in 1999 and is assumed to
decrease gradually to an ultimate rate of 5.50% in the year 2004. A one
percentage point change in the assumed health care cost trend rate would have
the following effects on the Company's other postretirement benefits:
<TABLE>
<CAPTION>
U.S.$ MILLION
----------------------------
1% Increase 1% Decrease
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on 1998 service and interest costs 0.3 (0.3)
Effect on postretirement benefit obligation as of December
31, 1998 1.4 (1.3)
</TABLE>
The Parent sponsors employee savings and stock ownership plans under section
401(k) of the Internal Revenue Code. The plans cover substantially all full-time
employees of GTEW. Under the plans, GTEW provides matching contributions in
Parent common stock based on qualified employee contributions. Matching
contributions charged to income were $7.2 million, $8.3 million and $6.8 million
for 1998, 1997 and 1996, respectively.
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal 181.3 67.0 36.6
State and local 26.6 10.9 10.4
- ---------------------------------------------------------------------------------------------------
207.9 77.9 47.0
- ---------------------------------------------------------------------------------------------------
Deferred:
Federal 40.9 80.6 117.5
State and local 9.8 14.4 23.9
- ---------------------------------------------------------------------------------------------------
50.7 95.0 141.4
- ---------------------------------------------------------------------------------------------------
Provision for income taxes 258.6 172.9 188.4
===================================================================================================
</TABLE>
14
<PAGE> 15
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
A reconciliation of the income tax provision computed at the statutory tax rate
to the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at the statutory rate 220.7 142.4 166.0
State income taxes, net of US federal benefit 23.7 16.5 22.3
Amortization of goodwill 12.0 12.0 12.0
Other, net 2.2 2.0 (11.9)
- ---------------------------------------------------------------------------------------------------
Provision for income tax 258.6 172.9 188.4
===================================================================================================
</TABLE>
The significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
U.S.$ MILLION
-----------------------------------
AT DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Employee benefit obligations 38.9 31.3 23.2
Other 60.5 36.3 60.9
- ---------------------------------------------------------------------------------------------------
Total deferred tax assets 99.4 67.6 84.1
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization 597.5 522.0 444.1
Unconsolidated partnership temporary differences 36.4 34.4 27.7
Other 64.6 60.8 66.6
- ---------------------------------------------------------------------------------------------------
Net deferred tax liabilities 599.1 549.6 454.3
- ---------------------------------------------------------------------------------------------------
Deferred tax asset - current 13.2 8.8 8.9
- ---------------------------------------------------------------------------------------------------
Deferred tax liability - non-current 612.3 558.4 463.2
===================================================================================================
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and network sites under long-term operating
leases. These leases have options for renewal with provisions for increased rent
upon renewal. Rent expense for the years ended December 31, 1998, 1997 and 1996
was $80.7 million, $72.2 million and $57.5 million, respectively, and is
included in cost of services and selling, general and administrative costs in
the accompanying consolidated statements of operations.
15
<PAGE> 16
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
As of December 31, 1998, future minimum lease payments under noncancelable
operating leases with initial or remaining periods in excess of one year were as
follows:
<TABLE>
<CAPTION>
U.S.$ million
- -----------------------------------------------------------------------------
<S> <C>
1999 61.6
2000 47.5
2001 34.9
2002 23.1
2003 13.5
Subsequent years 32.5
- -----------------------------------------------------------------------------
Total 213.1
=============================================================================
</TABLE>
CONTINGENCIES
The Company is subject to several proceedings, including class actions, arising
out of the conduct of its business. These proceedings primarily involve
commercial transactions, including unfair trade practices. While the Company'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 consolidated financial position or operating results
of the Company.
11. RELATED-PARTY TRANSACTIONS
The Company recorded service and other revenues from affiliates in the amount of
$8.3 million, $8.8 million and $6.1 million for the years ended December 31,
1998, 1997 and 1996, respectively.
The Company purchases roamer administration, telecommunication services
(including toll), electronic data processing services and other operating
services from affiliates whose business is the provision of such services. The
cost of these services to the Company was $127.6 million, $123.7 million and
$58.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company also incurs general and administrative expenses from
affiliates, which were $46.4 million, $65.4 million and $54.2 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
The Company makes payments to an affiliate for the construction of cell sites
and other system property. The amounts capitalized were $21.8 million, $46.1
million and $53.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively, and are included in work in progress and other categories of
property, plant and equipment in the accompanying consolidated balance sheets.
Balances due from affiliates were $17.7 million, $7.2 million and $2.5 million
at December 31, 1998, 1997 and 1996, respectively, and are recorded in
receivables in the accompanying consolidated balance sheets. Balances due to
affiliates were $32.1 million, $29.0 million and $44.0 million at December 31,
1998, 1997 and 1996, respectively, and are recorded in accounts payable and
accrued liabilities in the accompanying consolidated balance sheets.
16
<PAGE> 17
NOTES TO GTE WIRELESS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
12. SUBSEQUENT EVENTS
AMERITECH ACQUISITION
On April 5, 1999, the Parent announced that it, along with Georgetown Partners,
a private investment firm, had agreed to acquire Ameritech Corporation's
interests in the Chicago, St. Louis and Central Illinois cellular properties for
$3,270 million. On October 8, 1999, the Parent completed its acquisition of
these operations, which include 1.7 million subscribers and more than 10.7
million net potential customers (POPs). The unit formed by these operations will
be 93% owned by the Company and 7% owned by Davenport Cellular Communications
LLC, a company wholly owned by Georgetown Partners. The unit will continue to
operate under the Ameritech Cellular(TM) brand until the later of six months
after the close of the GTE Corporation/Bell Atlantic Corporation merger, when a
new company name will be adopted across all of the Company's markets or, October
8, 2000.
TOWER TRANSACTION
On November 8, 1999, the Company announced that it had agreed to form a company
with Crown Castle International Corp. to own, operate and lease space on the
Company's existing network of towers. The newly created entity will be
controlled by Crown Castle International Corp. The Company will contribute real
estate and integral equipment, including approximately 2,300 cellular towers to
the entity, valued at approximately $900 million, and will lease back these
sites by paying a monthly lease fee of approximately $1,400 per cell site to the
entity. The Company will continue to own other cell site equipment, including
switching equipment, antennas and other electronic components.
17
