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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: DECEMBER 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 1-2755
GTE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEW YORK 13-1678633
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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Registrant's telephone number, including area code 972-507-5000
(Former name, former address and former fiscal year, if changed since
last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, par value $.05 per share New York Stock Exchange, Inc.
Chicago Stock Exchange, Incorporated
Pacific Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of GTE's voting stock held by non-affiliates at
February 29, 2000 amounted to $55,537,330,363.
GTE had 960,097,530 shares of $.05 par value common stock outstanding (excluding
42,102,754 treasury shares) at February 29, 2000.
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TABLE OF CONTENTS
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PART I
Item 1. Business 2
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 19
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 43
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 75
PART III
Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial Owners and Management 92
Item 13. Certain Relationships and Related Transactions 93
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 94
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PART I
ITEM 1. BUSINESS
GTE Corporation and subsidiaries ("GTE" or "the Company") is a leading
telecommunications provider with one of the industry's broadest arrays of
products and services. It is one of the world's largest telecommunications
companies, with 1999 revenues of more than $25 billion. GTE's National and
International Operations serve approximately 35 million telephone access lines
through subsidiaries in the United States, Canada and the Dominican Republic,
and through affiliates in Canada, Puerto Rico and Venezuela. GTE is a leading
wireless operator in the United States, with more than 7.1 million wireless
customers and the opportunity to serve 72.5 million potential wireless
customers. When we refer to "potential wireless customers" in this document, we
mean the number of people living in the relevant area served by our wireless
operations, adjusted to reflect our ownership interests in those wireless
operations.
Outside the fifty states, GTE operates wireless networks serving approximately
6.7 million customers with 34.8 million potential wireless customers through
subsidiaries in Argentina, Canada and the Dominican Republic, and affiliates in
Canada, Puerto Rico, Venezuela and Taiwan.
GTE provides internetworking services, ranging from dial-up Internet access for
residential and small-business consumers to Web-based applications for Fortune
500 companies. GTE is also a leader in directories and telecommunications-based
information services and systems.
GTE and its subsidiaries had approximately 99,000 employees, at December 31,
1999.
NATIONAL OPERATIONS
Network Services
GTE's telephone operating subsidiaries in the United States served approximately
26 million access lines in 28 states as of December 31, 1999 and provided many
types of communications services, ranging from local telephone service for the
home and office to highly complex voice and data services for business. GTE's
enhanced technology capabilities are evidenced by the growing demand for
increased bandwidth by high-capacity users and data services, such as digital
subscriber line (DSL) and CyberPOP(SM). At year-end 1999, DSL was available from
550 central offices. CyberPOP is a service which creates a point of presence
(POP) for Internet Service Providers (ISPs) that operate in or near GTE's
markets. Subsidiaries accounting for the largest portion of total Network
Services revenues are GTE California, 24%; GTE North, 22%; GTE Southwest, 13%;
and GTE Florida, 12%. The largest cities served are Los Angeles, Long Beach and
Santa Monica, California; Tampa and St. Petersburg, Florida; Honolulu, Hawaii;
Lexington, Kentucky; Fort Wayne, Indiana; Everett, Washington; and the
metropolitan area of Dallas, Texas.
Local service revenues are composed mainly of fees charged to customers for
providing local exchange services within designated franchise areas. GTE
telephone subsidiaries also provide toll services within designated geographic
areas under agreements with connecting local exchange carriers (LECs) in
conformity with state regulatory orders. GTE and other LECs compensate each
other pursuant to access charge tariffs that are subject to review and approval
by state regulatory commissions.
Network access service revenues are generated by providing access services to
long-distance carriers. The interstate portion of these service revenues is
based on switched, common-line, and special access tariffs approved by the
Federal Communications Commission (FCC). The FCC tariffs include end-user access
charges to residential and business customers. State access is based on similar
rate structures that are subject to approval by state regulatory commissions.
With the passage of the Telecommunications Act of 1996 (the Telecommunications
Act), enacted on February 8, 1996, the telephone subsidiaries are free to
operate in the areas served and to extend service to other areas subject to
conditions, restrictions and limitations of various kinds. Advances in
technology and an increase in alternative
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provision of service are beginning to erode certain of the benefits previously
derived from franchise rights granted by states or municipalities.
Also included in GTE's Network Services is an unregulated affiliate: GTE Supply.
GTE Supply is responsible for the procurement and management of inventory and
supplies for GTE's domestic telephone companies as well as other GTE
subsidiaries. GTE Supply also sells material and logistic services to third
parties.
During 1997, GTE Supply implemented its multi-year agreement with BellSouth
Telecommunications under which GTE Supply manages the procurement, inventory and
distribution of equipment and materials required for BellSouth
Telecommunications' network construction and operations and provides contract
management services. Revenues associated with this contract were approximately
$537 million during 1999.
In 1998, GTE identified certain non-strategic wireline properties to be sold.
During 1999, the company reached agreements to sell approximately 1.6 million
access lines in 13 states to seven different purchasers. These sales are
scheduled to close by the end of 2000.
GTE Wireless
GTE Wireless provides wireless services and products, including 800 MHz cellular
voice and data transmission services, 1.8 GHz Personal Communications Services
(PCS) and wireless transaction processing and support services, to more than 7.1
million subscribers. GTE manages or controls cellular operations in 80
metropolitan markets, known as Metropolitan Service Areas (MSAs), and 61 Rural
Service Areas (RSAs). On October 8, 1999 GTE completed its previously announced
acquisition of nearly half of the wireless properties formerly operated by
Ameritech Corporation for $3.25 billion in cash. These properties are located in
St. Louis, Chicago and Central Illinois and include 1.7 million subscribers.
GTE's 800 MHz cellular operations serve a population of approximately 98 million
POPs, approximately 35 million of which are in the top 50 U.S. markets,
including Chicago, Cleveland, Honolulu, Houston, Indianapolis, Nashville, St.
Louis, San Diego, San Francisco, San Jose and Tampa. GTE also owns and operates
the PCS licenses in the Cincinnati, Seattle and Spokane Major Trading Area
(MTAs) which covers approximately 9 million POPs. Cellular and PCS licenses were
granted for an initial 10-year term and are renewable for successive 10-year
terms. To date, all of GTE's cellular licenses have been renewed by the FCC
without opposition, and future license renewals are expected to be granted.
In 1996, GTE Wireless began to deploy Code Division Multiple Access (CDMA)
digital technology in its markets. As of December 31, 1999, GTE Wireless is
commercially providing CDMA service in 25 markets, with nearly all cell sites in
core markets providing digital service. GTE Wireless will continue to deploy
CDMA technology over the next several years. CDMA technology allows for clearer
calls, enhanced security, greater functionality and additional capacity to
process more calls. GTE Wireless is currently testing CDMA technology for
wireless data applications as well as offering Cellular Digital Packet Data
services in focused market segments. CDMA data service allows secure digital
dial-up access using a CDMA handset, without requiring additional equipment.
GTE Wireless owns and operates cellular systems through wholly-owned
subsidiaries and partnerships with other entities. Wireless services are
marketed to businesses and consumers, directly and through authorized agents,
and to wholesalers that resell GTE's wireless services. GTE's retail wireless
services are marketed and sold primarily under the GTE brand.
By December 31, 1999, GTE Wireless had five to seven competitors in major
markets. Competition is principally on the basis of service quality, packaging
capabilities, price and coverage area. As new entrants invest in the expansion
of their networks, they will be able to provide increasingly competitive service
offerings.
GTE Telecommunications Services Inc. (GTE TSI) provides transaction processing,
software applications, fraud detection tools and network support services that
facilitate the "roaming" of wireless subscribers and the management of wireless
markets. GTE TSI serves both large and small customers in a significant portion
of the domestic wireless market.
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Further information regarding the conditions of the Company's proposed merger
with Bell Atlantic is included in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations - "Other Factors That May
Affect Future Results - Recent Developments."
GTE Internetworking
GTE Internetworking offers a wide range of data services and solutions,
including dedicated, dial-up access to the Internet and a variety of value-added
Internet services such as managed network security, virtual private networks,
Web-server and applications hosting, digital certificates, systems integration
services and enhanced Internet services, including IP Fax and Internet call
manager. During the first year of DSL operations, GTE Internetworking grew to
more than 19,000 customers and in 1999 the dial-up business redirected its focus
toward building its in-franchise broadband business. In addition, GTE
Internetworking had over 900 Web hosting and security customers.
GTE Internetworking supports its service offering with a high bandwidth network
infrastructure, four network operations centers, nine Web hosting and server
operations centers and a technical support organization. In 1999 GTE
Internetworking completed an initial build-out of a nationwide fiber-optic
network and has already started adding extra layers of OC-192 capacity to meet
existing and anticipated market demand. This new network infrastructure is a
self-healing SONET ring network operating at bandwidths of up to OC-192 with
17,000 miles of fiber connecting over 100 metropolitan areas. Recent investments
in undersea cable have now expanded the reach of the nationwide network into
Europe, Asia and Latin America.
In 1999 and further into 2000, GTE Internetworking and America Online (AOL)
extended their strategic relationship, building upon GTE Internetworking's
existing role in providing dial-up and broadband backbone Internet services to
AOL. In addition, the companies agreed that GTE Internetworking will be
responsible for the operation and continued build-out of a portion of AOL's
dial-up network in Japan. This expanded and extended relationship with AOL runs
through 2006.
Principal competitors in the internetworking services and solutions market may,
in general, be divided into the following five groups: (1) telecommunications
companies, regional Bell operating companies, and various cable companies; (2)
Internet access and enhanced services providers; (3) on-line service providers;
(4) value-added network providers and systems integrators; and (5) research and
development organizations, and engineering services providers in the government
market. The primary factors of competition are price; quality of service;
technical expertise; quality of network backbone and infrastructure; and quality
and scope of sales, marketing, and distribution channels.
Further information regarding the conditions of the Company's proposed merger
with Bell Atlantic is included in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations - "Other Factors That May
Affect Future Results - Recent Developments."
Other National Operations
GTE Communications
One of the most significant impacts of the Telecommunications Act's passage was
the removal of certain restrictions that prohibited GTE from jointly marketing
the products and services of its regulated local telephone subsidiaries with
those of its unregulated subsidiaries, including long-distance service. In light
of this, GTE created a national sales and marketing organization called GTE
Communications Corporation (GTECC) to compete in the new, highly competitive
telecommunications environment. GTECC is composed of two primary operating
segments: 1) General Markets, composed of long-distance services, competitive
local exchange carrier (CLEC) activities for consumer and small businesses, Card
Services and Video Services; and 2) Strategic Markets which services medium and
large businesses.
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General Markets
GTE's CLEC is certified to offer competitive local exchange services in 30
states. In 1999, GTE's CLEC was operational in California, Florida, Illinois,
Indiana, Kentucky, Oregon, Tennessee, Texas and Washington. The CLEC markets
bundled telecommunications products and services to communications intensive
residential and small business customers. These product and service offerings
include local, long-distance, wireless, data, Internet-access and paging
services. The CLEC has developed integrated systems to market, fulfill, service
and bill these various products to customers. Competition is primarily from
incumbent local exchange carriers, other CLECs, cable television companies that
offer local telephone service, as well as long-distance carriers branching out
into bundled product offerings.
GTE Long Distance (GTELD) began operations in March 1996. It operates primarily
as a reseller of national and international long-distance services. GTELD
provides service in all 50 states to residential and business customers,
including long-distance services, calling cards, 800/888 services and operator
services to its customers. GTELD is also authorized to provide operator services
to customers of other carriers in 46 states. Principal competitors include AT&T
Corp., MCI/WorldCom and Sprint, in addition to smaller, regional
telecommunications providers. Additional competition is expected when the
regional Bell operating companies are permitted to offer in-region long-distance
services. Competition is based on price and pricing plans, types of services
offered, customer services and communications quality, reliability and
availability. Further information regarding the conditions of the Company's
proposed merger with Bell Atlantic is included in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Other Factors That May Affect Future Results - Recent Developments."
GTE Card Services entered the prepaid phone card market in late 1994 with the
introduction of several GTE prepaid calling cards. The prepaid phone card is a
telephone calling card with a preset amount of long-distance minutes that is
paid for by the customer at the time of purchase. This card competes in the
long-distance market by providing an alternative means of purchasing and
controlling long-distance usage for both the business and residential user. GTE
Card Services competes in this marketplace by leveraging GTE's brand name and
utilization of GTE's exclusive marketing relationships with various licensees.
Video Services was launched when the Telecommunications Act eliminated the
programming ban on telephone companies and allowed GTE to enter the wireline
video distribution business through an open video platform arrangement or via a
standard cable television operation. GTE made its initial entry into the video
market as a franchised cable TV operator. The legislation also allows GTE to
deploy video networks that are more fully integrated with its telephone
operations. Several regulatory proceedings are pending that will address the
rules associated with such integration. In the regulatory arena, pending action
by the courts and several open FCC proceedings will be closely monitored to
continuously validate GTE's video entry position. Proceedings have been opened
to address various issues including video and telephony joint use facility cost
allocation and transaction rules, new advanced services rules, rules concerning
exclusive contracts for multi-dwelling units and cable inside wiring,
implementation of video close captioning requirements and digital must carry
rules, revisions to existing cable/multi-point distribution service
cross-ownership rules, and the establishment of rules for local, multi-point
distribution services.
At the end of 1999, GTE had been granted nine video franchises in the Pinellas
County, Florida market and five video franchises in the Ventura County,
California market. Video services offerings have also been launched utilizing
digital wireless broadcast technology in Oahu, Hawaii. GTE continues to evaluate
its long-term strategic options associated with its video business.
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Strategic Markets
The Strategic Markets segment initially operated as a provider of network
monitoring services and telecommunications equipment sales to medium and large
businesses. Strategic Markets continues to expand its offering to medium and
large businesses and now provides customized telecommunications solutions
including long-distance, Internet-access and other data products. GTECC's
Strategic Markets competes as a national total service provider. The Strategic
Markets segment will begin selling out-of-franchise local services in the San
Francisco area in 2000 utilizing a GTE local switch. Competitors, generally not
full service providers, are incumbent local exchange carriers, long-distance
carriers, CLECs, value-added resellers, and other telecommunications equipment
providers.
GTE Technology and Systems
GTE Technology and Systems was primarily composed of GTE Government Systems
Corporation (a provider of communications and intelligence systems to the
military and Federal government) and the GTE Technology Organization (GTO). On
June 22, 1999, GTE entered into an agreement with General Dynamics Corporation
to sell three of the four divisions of GTE Government Systems Corporation for
$1.0 billion. The sale closed on September 1, 1999. On November 4, 1999, GTE
entered into an agreement with DynCorp to sell the remaining major division.
This sale closed on December 10, 1999.
In January 1999, GTE Corporation restructured its technology units into a single
technology organization conducting research and development in advanced network
applications and technologies and converged telecommunications. This new GTO
enables the Company to further improve time-to-market, generate additional
revenue or cost reduction, increase technical resource collaboration, attract
world class talent and derive full value from technology investment.
The GTO includes GTE Laboratories, delivering new technologies and services to
other GTE business units; BBN Technologies, conducting research and development
and offering advanced technology solutions to the external marketplace; Federal
Network Systems, providing network integration services for U.S. Government
agencies; and various technical planning groups, providing strategic technology
and network planning, new service creation, and emerging business management.
GTE Laboratories' mission is to focus on critical research and development for
GTE's telecommunications businesses aimed at enhancing revenues, increasing
productivity, evolving and managing broadband networks, evaluating technology,
and growing new businesses. GTE Laboratories consists of four operating groups
focusing on technologies and capabilities of strategic value to GTE and its
customers. The four groups are Advanced Systems Laboratory, Network
Infrastructure Laboratory, Operations Systems Laboratory and Services Research
Laboratory. Current key technical focus areas include: broadband, wireless
services and operations support.
BBN Technologies draws upon its expertise in funded research and development of
advanced technologies, including wireless communications, high-speed router
technology, network security and speech processing. It is currently focused on
satellite and terrestrial wireless data protocols, advanced quality of service
architecture, certificate authority and speech enhanced IP services, such as
unified messaging. These capabilities are used to differentiate GTE's position
in the marketplace and are also sought after by the U.S. Government and large
commercial organizations.
The Federal Network Systems (FNS) business designs, implements, operates and
maintains mission critical wide-area federal networks around the world. Members
of this group apply broad technical expertise to provide both managed network
services and security features. Federal Network Systems focuses on four business
areas: Network Services, Internetworking Engineering Support Services,
Internetworking Security and Web-Hosted Products and Services. FNS also acts as
a sales channel for affiliates to the federal market.
The GTO planning groups are responsible for developing the GTE Technology Plan
and coordinating the technology-related aspects of GTE's planning efforts.
Furthermore, the planning groups are responsible for
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managing new technology trials and the creation of new service opportunities.
The planning groups are also responsible for technology licensing and emerging
business management.
For the years 1999-97, expenditures for all company-sponsored research and
product development and improvement were $131 million, $159 million and $122
million, respectively. Additionally, $182 million, $220 million and $162
million, respectively, was expended for affiliate-sponsored research and product
development and improvement during the same periods. GTE engaged over 2,000
professional scientists and engineers on such activities.
GTE Information Services
GTE Information Services is comprised of two operating divisions: GTE
Directories (including GTE Directories International) and GTE New Media
Services.
GTE Information Services competes within the Yellow Pages industry with five
major U.S.-based directory publishers and encounters significant Yellow Pages
publisher competition in 95 percent of its domestic print markets. It also
competes against alternative advertising media, including radio, network and
cable television, newspapers, magazines, Internet, direct mail and others for
share of the total U.S. advertising media market.
Directories
GTE Directories Corporation is a leader in linking buyers and sellers through
traditional Yellow Pages advertising and Web-based services. GTE Directories has
more than 70 years experience in the Yellow Pages industry and is one of the
world's largest directory publishing companies, providing sales, publishing and
other related services for approximately 1,900 directory titles in 44 states and
14 countries, with a total circulation of approximately 42 million domestic
copies and 23 million international copies. GTE Directories has sales agent
agreements for ALLTEL Publishing's 357 directory titles and prints over 900
non-GTE directory titles. GTE Directories and Bell Atlantic have been engaged in
a successful joint directory-publishing venture, the Chesapeake Directory Sales
Company, for more than 10 years.
Internationally, GTE Directories has operations in Europe, Asia and Latin
America. In 1997, GTE Directories joined with Swedish telecom group Telia AB to
acquire Panorama Polska, Poland's largest directory publisher. Additionally, GTE
Directories acquired a majority interest in Herold Business Data, Austria's
leading directory publisher, and partnered with the Austrian National Telephone
Company to produce directories for the country. Also in 1997, GTE Directories
assumed management responsibility for the directory-publishing unit of Compania
Dominicana de Telefonos, C. por A. (CODETEL), the national telephone company in
the Dominican Republic and a wholly owned subsidiary of GTE, adding to its
existing Latin America operations in Belize and Costa Rica. In April 1999, a GTE
Directories International/Puerto Rico Telephone Company, Inc. (PRTC) consortium
entered into a joint venture with VNU World Directories Inc. to publish the
official directory for Puerto Rico beginning in January 2000. In October 1999,
the board of Costa Rica's telecommunications provider, Instituto Costarricense
de Electricidad (ICE), awarded GTE an eight-year contract renewal to continue
publishing directories for the country. GTE Directories International's
affiliate, Compania General de Directorios Telefonicos C. por A., has been the
official directory publisher for Costa Rica since 1974.
For segment reporting purposes, the financial results of directory companies
operating outside of the U.S. have been included in International Operations.
The financial results of the domestic directory activities have been included in
both Network Services and Other National Operations based on the revenue sharing
arrangements that have been established by GTE Directories and Network Services.
New Media Services
GTE New Media Services develops and markets SuperPages(R), a leading online
Yellow Pages directory shopping service for advertisers and consumers. At
superpages.com, users are offered the convenience of finding information and
purchasing products and services over the Internet in many different ways, while
advertisers can promote goods and services through Yellow Pages listings, Web
pages and shopping services according to their specific needs.
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A leader in its category, GTE SuperPages along with Bell Atlantic's BigYellow
are the exclusive providers of a comprehensive, co-branded Yellow Pages listings
and search service to AOL's 20 million plus U.S. members, as well as to the
millions of visitors to AOL.COM and AOL's Digital City. GTE SuperPages is also
the exclusive provider of the Yellow Pages listings and search service for Lycos
Internet Guide.
GTE Airfone
GTE Airfone operates a telecommunications service for passengers on board
aircraft under a license granted by the FCC in 1991. Five other licenses have
been granted by the FCC for air-to-ground service. On April 2, 1998, GTE
announced that certain non-strategic assets would be sold, including Airfone. On
June 24, 1999, GTE announced it would sell Airfone to Oak Hill Capital Partners,
L.P. However, the parties were unable to reach final terms and ended discussions
regarding the previously announced sale. GTE will continue to pursue the sale of
GTE Airfone.
During 1999, Airfone continued deployment of its new advance digital GenStar
System to its contracted airlines. Currently, Airfone has agreements with
United, Continental, Delta, Delta Shuttle, TWA, US Airways, Reno Air, Midwest
Express, US Airways Shuttle, United Express, Air Wisconsin, Mexicana and
Aeromexico. The GenStar System has been installed on 2,269 commercial aircraft
in the United States, Canada and Mexico as of December 31, 1999.
Internationally, Airfone also offers airborne telecommunications equipment and
installations to airlines in Europe and Asia. In Europe, airline partners are:
Air France/Air Inter Europe, Alitalia, British Airways and Turkish Airlines. In
Asia, airline partners include: Cathay Pacific, China Southern and Thai Airways.
Airfone and Raytheon Systems (formerly Hughes Defense Communications), pursuant
to a joint venture alliance, have continued marketing the MagnaStar digital
product for the corporate general aviation market. The MagnaStar System includes
a digital radio, designed by Magnavox, which links exclusively to the Airfone
all-digital GenStar System. As of December 31, 1999, approximately 1,600
MagnaStar units have been sold and installed.
INTERNATIONAL OPERATIONS
GTE, through its International Operations, provides telecommunications services
in Canada, Venezuela, Argentina, the Dominican Republic, Puerto Rico and Asia.
As of December 31, 1999, GTE's International Operations served approximately 9.3
million access lines and provided wireless services to approximately 6.7 million
customers.
Prior to 1999, GTE had voting control of BC TELECOM Inc. (BC TELECOM), a full-
service telecommunications provider operating in British Columbia, Canada,
through its ownership of Anglo-Canadian Telephone Company. On January 31, 1999,
BC TELECOM and TELUS Corporation, an Alberta, Canada full-service
telecommunications provider, merged to form a public company, BCT.TELUS
Communications Inc. (TELUS). GTE owns approximately 26.7% of TELUS which
currently is the second largest domestic Canadian telecommunications provider.
TELUS has the financial capacity and other capabilities to enable it to compete
in all major Canadian markets as a provider of communications services.
The Canadian telecommunications marketplace is deregulated and highly
competitive. To improve its competitive position, TELUS began a national
buildout of an extensive fiber-optic network that would allow it to provide
high-speed data services to business customers in selected cities across Canada.
As of December 31, 1999, TELUS served approximately 4.4 million access lines in
the provinces of British Columbia and Alberta, Canada and provided cellular
services to approximately 1.1 million subscribers.
Through its ownership of Anglo-Canadian Telephone Company, GTE has voting
control (50.2%) of Quebec Telephone (Quebec Tel). At December 31, 1999, Quebec
Tel served approximately 300,000 access lines in the province of Quebec, Canada
and provided wireless services to approximately 37,000 customers.
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Through GTE Holdings (Canada) Limited, a Canadian holding company, GTE owns 100%
of the common stock of Compania Dominicana de Telefonos, C. por A. (CODETEL), a
telephone company providing local, wireless and national and international
long-distance telephone service, as well as Internet-access services, in the
Dominican Republic. This company served approximately 702,000 access lines and
244,000 wireless customers at December 31, 1999. CODETEL has experienced
competition in its international toll and local and national toll markets.
However, the entrance of competitors is being addressed through enhancements and
expansion of the network, the implementation of bundled service offerings and
aggressive pricing solutions.
GTE owns, directly and indirectly through a multinational consortium, a 26.4%
ownership interest in Compania Anonima Nacional Telefonos de Venezuela (CANTV),
the telephone company in Venezuela. Under the Concession granted by the
Venezuelan government, CANTV is permitted to operate as a full-service
telecommunications provider offering local, and domestic and international
long-distance service throughout Venezuela on an exclusive basis through
November 27, 2000, except in limited circumstances. Subsequent to that date,
CANTV will be subject to direct competition for these services.
CANTV also offers wireless services, public telephones, private networks, data
transmission, directory services and other value-added services. CANTV had
approximately 2.6 million access lines in service at December 31, 1999 and
served approximately 1.2 million cellular subscribers.
Due to the high level of inflation experienced in Venezuela, CANTV's results are
substantially influenced by its ability to increase tariffs. Subject to
regulatory approval, the original Concession provided, among other things, for
quarterly tariff increases based on Venezuelan inflation rates. During 1999, the
Venezuelan telecommunications regulator, CONATEL, delayed approval of the
requested quarterly tariff increases by linking the increases to service level
mandates.
To resolve the tariff increases and mandate issues, CANTV and CONATEL began
negotiations in 1999 in accordance with the eighth year Global Review as
provided for in the Concession. CANTV and CONATEL reached an agreement that
provides for rate rebalancing between long-distance and local tariffs as well as
non-residential and residential tariffs. The agreement also revises and
rationalizes the Concession's existing service level commitments. The agreement
will take effect in March 2000 and will be valid through the remainder of 2000.
In 1994, a GTE-led consortium, Compania de Telefonos del Interior S.A. (CTI),
was awarded two cellular licenses by the National Telecommunications Commission
of Argentina. In 1999, CTI also acquired a PCS license. The concessions allow
CTI the opportunity to serve more than 17.1 million potential wireless customers
in Argentina's north and south interior regions. Competition began in CTI's
markets in April 1996 as the cellular subsidiaries of the local exchange
telephone companies entered the market. GTE holds a 10-year contract to manage
CTI's network on behalf of the consortium. On January 4, 1999, GTE's ownership
interest increased to approximately 58% from 48.1% as a result of converting
certain debt instruments to equity. As of December 31, 1999, CTI served
approximately 809,000 wireless customers.
GTE expanded its Argentine wireless presence in June 1999 by winning the bid for
one of two PCS wireless licenses for the Buenos Aires greater metropolitan area.
The PCS license, which covers a population of 13 million, complements GTE's
existing investment in CTI. GTE PCS, S.A., holder of the PCS license, is
expected to be operational in the first half of 2000. Together, CTI and GTE PCS,
S.A. will provide the first nationwide wireless service in Argentina.
On March 2, 1999, GTE completed its 40% investment in Telecomunicaciones de
Puerto Rico, Inc. (TELPRI). TELPRI owns 100% of the Puerto Rico Telephone
Company, Inc. (PRTC) and Celulares Telefonica, Inc. (CT). As of December 31,
1999, PRTC served approximately 1.3 million access lines and provided
long-distance, paging and Internet-access services. CT served 286,000 wireless
customers.
In 1997, the government of Taiwan awarded a nationwide license for digital
cellular communications services to a consortium, Taiwan Cellular Corporation,
in which GTE currently has a 13.5% interest. During 1997, GTE assisted in the
design, build-out and operation of the system, and service was launched in
January 1998. During 1999,
9
<PAGE> 11
Taiwan Cellular Corporation more than tripled its customer base and as of
December 31, 1999 served approximately 3.1 million cellular customers.
In China, GTE participates in a joint venture between GTE China and Guangzhou
Guangtong Resources Co. that operates a wireless paging system serving 20
metropolitan areas, including Beijing. At the end of 1999, approximately 182,000
paging customers were served by this network.
In Japan, GTE holds a minority interest in nine cellular partnerships created by
Nissan Motor Corp. LTD and Japan Telecom Co. LTD to provide 1.5 GHz
digital-cellular services throughout Japan. In addition, GTE participates, as a
minority owner, in a wireless partnership composed of a consortium of Japanese
companies that provides 1.9 GHz digital-cellular service.
GTE also has offices in Beijing, China and Sao Paulo, Brazil. These operations
are chartered with pursuing business development opportunities in the
telecommunications market of each respective country.
REGULATORY AND COMPETITIVE TRENDS
During 1999, regulatory and legislative activity at both the state and federal
levels continued to be a direct result of the Telecommunications Act of 1996
(Telecommunications Act). Along with promoting competition in all segments of
the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.
GTE continued in 1999 to meet the wholesale requirements of new competitors. To
date, GTE has signed over 1,200 interconnection agreements with other carriers,
providing them the capability to purchase unbundled network elements (UNEs),
resell retail services and interconnect facilities-based networks. Several of
these interconnection agreements were the result of the arbitration process
established by the Telecommunications Act, and incorporated prices or terms and
conditions based upon the FCC rules that were subsequently appealed to the U. S.
Supreme Court (Supreme Court). GTE challenged a number of such agreements in
federal district courts during 1997.
GTE's position in these challenges was supported by a decision of the Eighth
Circuit Court (Eighth Circuit) in July 1997 which stated the FCC had overstepped
its authority in several areas concerning implementation of the interconnection
provisions of the Telecommunications Act. In January 1999, the Supreme Court
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit's determination that the FCC had no
jurisdiction over pricing. As a result, the pricing rules established by the FCC
are now subject to review on their merits by the Eighth Circuit. In addition,
the Supreme Court vacated the FCC rule setting forth the UNEs that incumbent
local exchange carriers (ILECs) are required to provide to CLECs. This latter
ruling led to a proceeding before the FCC concerning what elements had to be
offered and under what conditions.
In November 1999, the FCC reaffirmed that incumbents must provide unbundled
access to five of the original seven network elements, which must be available
on either a stand-alone basis, or as a combined local service "platform" if the
elements have been previously combined by the ILEC. ILECs are no longer required
to provide unbundled operator services, including directory assistance where
alternate routing is available. In addition, in certain circumstances, local and
tandem switching need not be unbundled. However, the FCC expanded the definition
of some UNEs by specifying that components of the loop UNE must be made
available in sub-loop components, and augmenting the types of call-related
databases that must be unbundled as UNEs. The FCC also found that state
commissions can require ILECs to unbundle additional elements as long as they
are consistent with the requirements of the Telecommunications Act and the
national policy framework instituted in the FCC's order. Furthermore, the order
precludes states from removing network elements from the FCC's list of
unbundling obligations. The United State Telecom Association (USTA) has appealed
this order and GTE will participate.
In December 1999, the FCC released another order that requires ILECs to provide
line sharing to CLECs by unbundled access to the high-frequency portion of the
local loop over which the ILEC provides voice services. The FCC's stated intent
in adopting the line sharing order is to enable competitive carriers to provide
DSL services over the same lines simultaneously used by ILECs to provide basic
phone services.
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<PAGE> 12
In June 1999, the Eighth Circuit established a schedule for addressing the
issues it did not decide in 1998. Parties to this action have filed briefs and
participated in oral arguments in September 1999. The major issues are: (1) the
FCC's cost methodology used to set prices, (2) its methodology for setting
wholesale discounts, (3) the "proxy rates" it set for interconnection, UNEs, and
wholesale discounts, (4) whether ILECs should be required to combine UNEs that
are not already combined, and (5) whether the FCC can require ILECs to provide
"superior quality" to competitors than what the ILEC provides to itself. A court
decision is expected during the first half of 2000.
Concurrent with competitors' entry into GTE markets, the Company has continued
its own expansion into local, long-distance, Internet-access and wireless
services both within and outside its traditional operating areas. GTE now
provides long-distance service to approximately 3.4 million customers.
Universal Service
GTE is active before both state and federal regulators advocating development
and implementation of measures that will meet the requirements of the universal
service provisions of the Telecommunications Act. Specifically, GTE urges
regulators to identify and remove all hidden subsidies and to provide explicit
universal service subsidies.
In October 1998, the FCC issued an order selecting a cost model for universal
service. In July 1999, the United States Court of Appeals for the Fifth Circuit
(Fifth Circuit) affirmed in part, reversed in part, and remanded in part the
FCC's universal service regime. In October 1999, the FCC released two orders in
response to the Fifth Circuit decision. One order permits ILECs to continue to
recover their universal service contributions from access charges or to
establish end-user charges. The second order changed the contribution basis for
school/library funding to eliminate calculations based upon intrastate revenues.
In January 2000, GTE requested the Supreme Court to review the Fifth Circuit
decision allowing the FCC to base universal service support from the results of
a hypothetical cost model rather than historical costs that were incurred to
provide local service. GTE argued that the Fifth Circuit ignored long standing
legal precedent in permitting a major revision to ILEC cost recovery mechanisms
without ensuring the new process would not result in a constitutionally
prohibited "taking".
In November 1999, the FCC released an order selecting the cost inputs for the
federal universal service cost model. GTE is seeking reconsideration. Since the
FCC moved the implementation date of the new universal service mechanism for
non-rural carriers to January 2000, many state regulators awaited FCC action
before they began designing their universal service programs.
In November 1999, the FCC released an order dealing with implementation of the
new FCC federal high cost support mechanism for non-rural ILECs, including GTE.
The effective date for the new federal universal service plan is January 1,
2000. This plan will distribute federal high cost funds to states with higher
than average costs. The role of state commissions is to ensure reasonable
comparability within the borders of a state. Federal high cost support will be
calculated by comparing the nationwide average cost with each state's average
cost per line, and providing federal support for only states that exceed 135% of
the nationwide average. To guard against rate shock, the FCC also adopted a
"hold harmless" approach so that the amount of support provided to each
non-rural carrier under the new plan will not be less than the amount provided
today. U S WEST has appealed this order on the basis that it fails to provide a
sufficient amount of support. This FCC order also established a May 1, 2000
deadline by which state commissions must create at least three deaveraged price
zones for UNEs. In January 2000, GTE requested the FCC grant a one year delay to
give state commissions ample opportunity to implement deaveraged retail rates
and establish state universal service funds in concert with UNE deaveraging.
In December 1999, the FCC asked for comment on requests made by the North Dakota
and South Dakota state commissions and the Rural Utilities Service (RUS) asking
the FCC to redefine "voice grade access" in the FCC's universal service rules.
The FCC requires that, in order to be eligible for universal service support, a
carrier must offer, among other things, voice grade access to the public
switched telephone network. Current FCC rules specify that voice grade access
should occur in a frequency range between approximately 300 Hertz (Hz) to 3,000
Hz. The petitioners requested the frequency range be changed to 200 Hz to 3,500
HZ. GTE participated in this proceeding and opposed any change in FCC
requirements. The network is not designed for the proposed ubiquitous
requirement and would require a significant infrastructure investment and at
least a decade to implement.
11
<PAGE> 13
Price Cap
The federal price cap regime allows access prices to change each year by a
measure of inflation minus a productivity factor offset. In May 1999, the U.S.
Court of Appeals for the District of Columbia (Court) released a decision
regarding the FCC's choice of a 6.5% price cap productivity factor in a 1997
order. The Court found the FCC's choice of a 6.0% base factor and a 0.5%
Consumer Productivity Dividend to be inadequately supported. The Court remanded
the matter back to the FCC for further action and established an April 2000 date
by which the FCC must issue a revised decision. As a result, in November 1999,
the FCC initiated a rulemaking proposal requesting comments on the interstate
price cap productivity factor. Currently, it is unknown whether the single price
cap productivity factor will be applied retroactively to July 1, 1997 and remain
in effect until the next price cap performance review in 2003, or whether one
factor will apply from 1997 to 2000 and another factor apply from 2000 to 2003.
Interstate Access Revision
Effective July 1999, access charges were further reduced using a 6.5%
productivity factor in compliance with FCC requirements to reflect the impacts
of access charge reform and in making GTE's 1999 Annual Filing. The total annual
financial impact of the reduction was $113 million. Similar filings during 1997
and 1998 had already resulted in price reductions.
In August 1999, GTE, along with a coalition of local exchange and long-distance
companies (CALLS), submitted a proposal for interstate access charge and
universal service reform to the FCC. The proposal would accelerate the shift in
non-usage sensitive access revenue recovery from per-minute to flat-rated
charges, set a schedule for elimination of the price cap productivity factor,
and provide more explicit support for universal service. The coalition filed a
revised plan in March 2000 and the FCC has offered the plan for comments. A
decision by the FCC is expected in 2000.
In August 1999, the FCC released an order pertaining to access reform and
pricing flexibility. The order grants price cap LECs immediate flexibility under
certain circumstances to deaverage certain access services and permits the
introduction of new services on a streamlined basis, without prior FCC approval.
Advanced Telecommunications Services
The Telecommunications Act required the FCC to "encourage the deployment on a
reasonable and timely basis of advanced telecommunications capability to all
Americans." Further, the FCC was required to conduct a proceeding aimed at
determining the availability of advanced telecommunications, and to take action
to remove barriers to infrastructure investment and to promote competition.
In March 1999, the FCC released an order adopting a number of new collocation
rules designed to make competitive entry easier and less costly. These rules
specify how ILECs will manage such items as alternate collocation arrangements,
security, space preparation cost allocation, provisioning intervals and space
exhaustion. GTE asked the Court to review this order. In March 2000, the Court
issued a ruling granting, in part, challenges raised by GTE to the FCC's March
1999 order. The Court ruled that the FCC failed to justify its requirement that
ILECs must permit collocation of any CLEC equipment that was "used or useful"
for interconnection or access to network elements. The Court remanded this
portion of the decision back to the FCC for further deliberation.
In November 1999, the FCC released an order concluding that an ILEC's offering
of DSL services to Internet Service Providers (ISPs) pursuant to volume and term
discount plans that are a component of the ISPs' high-speed Internet service are
not a retail offering, and thus not subject to the discounted resale obligation.
The order also concluded that an ILEC's DSL offering to end-users is a retail
offering if the ILEC performs certain consumer-oriented functions, such as
provisioning of customer premises equipment and wiring, marketing, billing and
collection, and accepting repair requests directly from the end-user. The FCC
concluded that these services are subject to discounted resale obligation,
regardless of whether the service is classified as telephone exchange service
(local tariff) or exchange access service (access tariff).
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<PAGE> 14
Number Portability
In December 1998, the FCC released an order establishing cost recovery rules for
local number portability (LNP) that permitted the recovery of carrier-specific
costs directly related to the provision of long-term LNP via a federally
tariffed end-user monthly charge. GTE subsequently filed an LNP tariff with the
FCC, and in March 1999 instituted an end-user number portability fee. This
charge is levied on all business and residential customers. In June 1999, GTE's
tariffed LNP charge was reviewed and accepted by the FCC at $0.36 per access
line per month.
Internet Service Traffic
ILECs are required to provide open access to all ISPs, while cable television
operators are not. Several major cable television operators providing Internet
access through cable modem facilities are only offering their affiliated ISPs to
consumers. Cable television operators that do allow customers to select
non-affiliated ISPs often require the customer to also pay for their affiliated
ISP's service (i.e., to pay twice for the same service). GTE has been active in
encouraging municipalities engaged in reviewing cable television mergers or
franchise renewals to require cable modem open access as a condition for
approval. The City of Portland, Oregon was first to adopt such a requirement and
AT&T Corp. has appealed that decision. Arguments took place in November 1999
before the Ninth Circuit Court.
In October 1999, GTE filed an antitrust lawsuit contending that cable TV
providers' refusal to provide ISPs with "open access" to cable modem platforms
is a violation of federal antitrust law. The lawsuit filed in the U.S. District
Court in Pittsburgh, names Tele-Communications, Inc., (now a unit of AT&T
Corp.), Comcast Corp., and Excite@Home and seeks an injunction to require open
access and damages.
GTE's interconnection contracts with CLECs specify that parties compensate each
other for the exchange of local traffic, defined as traffic that is originated
by an end-user of one party and terminating to the end-user of the other party
within GTE's current local serving area. It is GTE's position that ISP traffic
does not satisfy the definition of local traffic, and that no compensation
should be paid to CLECs that carry this traffic to their ISP customers. In a
recent ruling, the FCC has clarified that ISP traffic is largely interstate and
is not local traffic. Nevertheless, the FCC permitted state commissions to
arbitrate whether ILECs should pay as reciprocal compensation for ISP-bound
traffic, based upon existing interconnection agreements, until the FCC reaches a
decision on a long-term compensation scheme. GTE challenged this FCC conclusion
in federal district court. In March 2000, the Court vacated and remanded the
FCC's ruling that ISP-bound calls are interstate, since the FCC failed to
provide a satisfactory explanation to support its ruling. As a result, the Court
did not address GTE's argument that the Telecommunications Act preempts state
commission authority to arbitrate disputes over non-local traffic.
International
The global communications environment continues to undergo significant change.
Many developed and developing countries are opening their telecommunications
markets to full infrastructure and service competition and removing old
monopolistic structures. Countries are upgrading their existing networks making
them more compatible with new Internet, data, wireless, broadband and video
technologies and applications. In addition, these rapid changes are forcing the
development of new regulatory policies. Many countries continue to face the need
for new regulations to deal with further convergence, deregulation and
privatization taking place in the global marketplace.
Throughout the Latin American region, telecommunication service providers will
face further deregulation and a series of challenges and new opportunities in
2000. The Venezuelan government is considering a new telecommunications law,
which will further open its market. CONATEL (the Venezuelan telecommunications
regulator) and CANTV, an affiliate of GTE, recently evaluated recommendations
from international industry experts and negotiated an agreement on tariff
rebalancing, network modernization commitments and quality of service standards.
The agreement will take effect in March 2000 and will be valid through the
remainder of 2000.
The Argentine telecom market has recently moved from two basic operators in
separate regions to four nationwide full-service providers. GTE's international
affiliate, CTI Integrales, is one of these full-service providers and is
expected to begin offering nationwide service in the first half of 2000. GTE's
other Argentine subsidiaries, CTI and GTE PCS, S.A., were awarded PCS licenses
in 1999. Together they will provide the first nationwide wireless service in
Argentina.
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In the Dominican Republic, CODETEL, a wholly-owned subsidiary of GTE, submitted
a price rebalancing plan to its regulatory agency, Indotel. The plan was
implemented in January 2000. It calls for increased local rates effective in
June 2000.
Since the privatization of TELPRI and changes in intra-island presubscription
regulation, GTE has played an integral role in facilitating TELPRI's entry into
the off-island long distance market. TELPRI is also aggressively pursuing the
data and Internet markets as well as improving the quality of service in its
core wireline and wireless businesses. TELPRI continues to be the largest
provider of local service on the island.
In Taiwan, where a Company affiliate provides PCS service, the legislature
passed a new Telecom Act in October 1999, which increased the limits on foreign
investment from 20% to 60% (40% direct and 20% indirect investment). GTE is
pursuing telecommunications opportunities including entering the full-service
provider business with Taiwanese partners. In addition, Taiwan has been working
to meet World Trade Organization Basic Telecom Agreement requirements in order
to become an integral member of that landmark agreement.
Due to further liberalization of the telecommunications industry in Canada,
Quebec Tel has been experiencing increasing competition. To counter this threat,
Quebec Tel will expand its service offerings outside of its franchise territory.
ENVIRONMENTAL MATTERS
GTE and some of its present and former subsidiaries, along with other unrelated
corporations, have been identified as potentially responsible parties at a
number of sites which, although lawfully used in the past, were determined to
require remediation. Remediation activities by GTE also continue at some present
or formerly owned sites pursuant to other federal or state environmental
statutes or regulations. GTE has reviewed the sites in which it has an
involvement to establish expected remediation costs. Based on this review, the
remediation cost at any individual site or at all sites in the aggregate is not
expected to be material. Factors used to evaluate expected GTE costs include
remediation and investigation cost estimates as well as legal fees, the number
of viable parties involved, the degree of GTE's involvement and past experience.
No present value discounting is used. Although the complexity of environmental
regulations and the widespread imposition of multi-party joint and several
liability at such sites make it difficult to assess GTE's share of liability,
management believes it has made adequate provision in the financial statements.
GTE's annual expenditures for site cleanups and environmental compliance have
not been and are not expected to be material. These costs include GTE's share of
cleanup and other expenses at remediation sites and outlays required to keep
existing operations in compliance with increasingly stringent environmental
regulations.
PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
Bell Atlantic and GTE Corporation have announced a proposed merger of equals
under a definitive merger agreement dated July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock they own. Bell Atlantic shareholders
will continue to own their existing shares after the merger.
The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. The completion of the merger is subject to a
number of conditions, including certain regulatory approvals and receipt of
opinions that the merger will be tax-free. At annual meetings held in May 1999,
the shareholders of each company approved the merger. All state regulatory
commissions have now approved the merger and the only remaining approval is
required from the FCC. Both companies are working diligently to complete the
merger and are targeting completion of the merger in the
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<PAGE> 16
second quarter of 2000. Further information regarding the conditions of the
Company's proposed merger with Bell Atlantic is included in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Other Factors That May Affect Future Results - Recent Developments."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this Annual Report on Form 10-K, the Company has made forward-looking
statements. These statements are based on the Company's estimates and
assumptions and are subject to certain risks and uncertainties. Forward-looking
statements include the information concerning possible or assumed future results
of operations of the Company, as well as those statements preceded or followed
by the words "anticipates," "believes," "estimates," "expects," "hopes,"
"targets" or similar expressions. For each of these statements, the Company
claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
The future results of the Company could be affected by subsequent events and
could differ materially from those expressed in the forward-looking statements.
If future events and actual performance differ from the Company's assumptions,
the actual results could vary significantly from the performance projected in
the forward-looking statements.
The following important factors could affect the future results of the Company
and could cause those results to differ materially from those expressed in the
forward-looking statements: 1) materially adverse changes in economic conditions
in the markets served by the Company or by companies in which GTE has
substantial investments; 2) material changes in available technology; 3) the
final resolution of federal, state and local regulatory initiatives and
proceedings, including arbitration proceedings, and judicial review of those
initiatives and proceedings, pertaining to, among other matters, the terms of
interconnection, access charges, universal service, unbundled network elements
and resale rates; 4) the extent, timing, success and overall effects of
competition from others in the local telephone and intraLATA toll service
markets; 5) the timing of, and regulatory or other conditions associated with,
the completion of our merger with Bell Atlantic and our ability to combine
operations and obtain revenue enhancements and cost savings following the
merger; and 6) the timing of, and regulatory or other conditions associated
with, the completion of the wireless joint venture between Bell Atlantic and
Vodafone AirTouch plc, and the ability of the new wireless enterprise to combine
operations and obtain revenue enhancements and cost savings. In addition, GTE
has embarked on a major initiative to expand its service capability in the data
communication, long-distance and enhanced services segments of the
telecommunications marketplace and to provide a bundle of products and services
both in and outside of its traditional service territories. Whether the Company
realizes the benefits of these initiatives depends on GTE's ability to
successfully develop the network facilities and systems required to provide
these enhanced services, the success of its marketing initiatives, the levels of
demand that are created for these services and the level of competition the
Company faces as it seeks to penetrate new markets and emerging markets for new
products and services. While GTE's management believes that it will be
successful in implementing these new initiatives, there are uncertainties
associated with its ability to increase revenue and income growth rates to the
levels targeted through these initiatives and its ability to do so within the
planned timeframes or investment levels.
ITEM 2. PROPERTIES
GTE Corporation owns no plant, real property, franchises, or concessions except
indirectly through its subsidiaries. The properties of GTE's subsidiaries
consist principally of land, structures and equipment required to provide
various wireline and wireless telecommunications services. Substantially all of
the properties of the U.S. telephone subsidiaries are subject to the liens of
their respective mortgages securing funded debt.
From January 1, 1995 to December 31, 1999, GTE had capital expenditures of $23.8
billion for new plant and facilities required to meet the telecommunications
services needs of its expanding customer base, to provide new and enhanced
services and to modernize plant and facilities. These additions were equal to
44% of gross plant of $54.4 billion at December 31, 1999.
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At year-end 1999, GTE's local exchange network included access lines in the
United States of approximately 26 million. In addition, at December 31, 1999,
local exchange networks operated by GTE's subsidiaries and affiliates in Canada,
Puerto Rico, the Dominican Republic and Venezuela served an additional 9.3
million access lines. At December 31, 1999, all of GTE's U.S. access lines were
served by digital switches. At December 31, 1999, GTE's domestic wireless
network composed approximately 10% of GTE's total gross plant. This network
provides service to 7.1 million U.S. customers, and has the potential of serving
72.5 million domestic customers. In addition, for the years 1997 through 1999,
GTE invested approximately $1.3 billion to build a 17,000 mile nationwide
fiber-optic network to provide high-speed data transmission services. Additional
investments in undersea cable expanded the reach of this nationwide network into
Europe, Asia and Latin America.
All of these properties are generally in good operating condition and adequate
to satisfy the needs of the businesses.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The principal market for trading in the common stock of GTE Corporation is the
New York Stock Exchange. The common stock is also listed in the United States on
the Chicago Stock Exchange and the Pacific Exchange. At February 29, 2000, there
were approximately 414,000 common shareholders of record.
High and low stock prices, as reported on the New York Stock Exchange, and
dividend data are as follows:
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------------ ------------ ------------- ------------
1999
<S> <C> <C> <C> <C>
Stock market price:
High $ 69.75 $ 76.13 $ 78.50 $ 78.13
Low 57.00 59.50 68.13 67.31
Dividends declared $ .47 $ .47 $ .47 $ .47
</TABLE>
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------------ ------------ ------------- ------------
1998
<S> <C> <C> <C> <C>
Stock market price:
High $ 60.50 $ 64.38 $ 58.69 $ 71.81
Low 47.94 55.25 46.75 53.94
Dividends declared $ .47 $ .47 $ .47 $ .47
</TABLE>
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<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues and sales $ 25,336 $ 25,473 $ 23,260 $ 21,339 $ 19,957
-------- -------- -------- -------- --------
Cost of services and sales 10,954 10,741 9,203 8,071 7,537
Selling, general and administrative 4,405 4,821 4,560 4,010 3,689
Depreciation and amortization 3,757 3,820 3,886 3,770 3,675
Special items (1,116) 755 -- -- --
-------- -------- -------- -------- --------
Operating income 7,336 5,336 5,611 5,488 5,056
-------- -------- -------- -------- --------
Net income (loss)
Income before extraordinary charges 4,063(a) 2,492(b) 2,794 2,798 2,538
Consolidated 4,033(c) 2,172(d) 2,794 2,798 (2,144)(e)
Basic earnings (loss) per common share
Income before extraordinary charges 4.18(a) 2.59(b) 2.92 2.89 2.62
Consolidated 4.15(c) 2.26(d) 2.92 2.89 (2.21)(e)
Diluted earnings (loss) per common share
Income before extraordinary charges 4.15(a) 2.57(b) 2.90 2.88 2.61
Consolidated 4.12(c) 2.24(d) 2.90 2.88 (2.20)(e)
Common dividends declared per share 1.88 1.88 1.88 1.88 1.88
Book value per share 11.19 9.06 8.39 7.62 7.05
Average common shares outstanding (in millions)
Basic 972 963 958 969 970
Diluted 979 968 962 972 973
ASSETS AND CAPITAL
Consolidated assets $ 50,832 $ 43,615 $ 42,142 $ 38,422 $ 37,019
Long-term debt 13,957 15,418 14,494 13,210 12,744
Shareholders' equity 10,827 8,766 8,038 7,336 6,871
Net cash from operations 6,319 5,890 6,164 5,899 5,033
Capital expenditures 4,940 5,609 5,128 4,088 4,034
CONSOLIDATED RATIOS AND OTHER INFORMATION
Return on common equity 40.9% 27.3% 37.6% 40.2% (20.3)%(e)
Return on investment 16.2% 10.9% 14.5% 15.6% (4.2)%(e)
Average common equity $ 9,858 $ 7,962 $ 7,433 $ 6,960 $ 10,539
Equity ratio 33.9% 35.4% 36.5% 38.1% 37.9%
Average investment $ 31,372 $ 28,662 $ 26,857 $ 24,395 $ 27,150
Research and development expenditures 131 159 122 122 137
Employees (in thousands) 99 120 114 102 106
Access minutes of use (in millions) 94,095 87,120 79,086 70,452 64,193
Access lines (in thousands)
Total 35,342 29,746 27,670 25,766 24,050
United States 26,068 23,625 21,539 20,007 18,512
Wireless subscribers (in thousands)
Total 13,873 7,567 5,701 4,445 3,547
United States 7,146 4,817 4,487 3,749 3,011
Adjusted "POPs" (in millions)(f)
Total 107.3 84.8 78.9 78.3 76.7
United States 72.5 61.4 61.3 61.9 61.7
-------- -------- -------- -------- --------
</TABLE>
(a) 1999 includes after-tax special items of $651 million, or $.66 per diluted
share ($.67 per basic share) consisting of gains from the sale of the
Government Systems business and a gain associated with the merger of BC
TELECOM Inc. and TELUS Corporation, partially offset by special charges
associated with employee separation programs, impairment of assets and
costs to exit certain small non-strategic businesses.
(b) 1998 includes after-tax special charges of $482 million, or $.50 per share
related to asset impairments, the cost of exiting certain business
activities and employee related costs.
(c) In addition to the items discussed in (a), 1999 includes after-tax
extraordinary charges of $30 million, or $.03 per share resulting from the
repurchase of $338 million in high coupon debt prior to stated maturity.
(d) In addition to the items discussed in (b), 1998 includes after-tax
extraordinary charges of $320 million, or $.33 per share resulting from the
discontinued use of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71),
by GTE's Canadian operations, and the early retirement of long-term debt
and preferred stock.
(e) During 1995, GTE's domestic telephone operating companies discontinued the
use of SFAS No. 71 resulting in a noncash, after-tax extraordinary charge
of $4.6 billion, or $4.77 per diluted share ($4.79 per basic share). In
addition, GTE redeemed long-term debt and preferred stock resulting in an
after-tax extraordinary charge of $41 million, or $.04 per share.
(f) Represents population available to be served times GTE's percentage
interest in wireless markets.
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
CONSOLIDATED OPERATIONS
Reported net income for GTE Corporation ("GTE" or "the Company") in 1999 was
$4.0 billion, or $4.12 per diluted share. In 1998, reported net income was $2.2
billion, or $2.24 per diluted share, and in 1997 reported net income was $2.8
billion, or $2.90 per diluted share. The Company's reported results were
affected by significant items, changes in the method of accounting for certain
international investments due to changes in ownership and the sale of the
Government Systems business in 1999, which are each described in further detail
in this "Overview" section. The significant items are also discussed, as they
affect reportable segments, in "Segment Results of Operations."
The table below summarizes reported and selected adjusted key financial results
for 1999-1997.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997 Percent Change
---------- ---------- ---------- -----------------------
(Dollars in Millions, Except Per-Share 1999-1998 1998-1997
Amounts) ---------- -----------
<S> <C> <C> <C> <C> <C>
REPORTED REVENUES $ 25,336 $ 25,473 $ 23,260
Accounting for international investments(a) -- (1,782) (1,755)
Normalization for sale of Government Systems(b) -- (392) (383)
---------- ---------- ----------
ADJUSTED REVENUES $ 25,336 $ 23,299 $ 21,122 8.7% 10.3%
========== ========== ==========
REPORTED OPERATING INCOME $ 7,336 $ 5,336 $ 5,611
Accounting for international investments(a) -- (577) (585)
Normalization for sale of Government Systems(b) -- (50) (54)
Special items (1,116) 755 --
---------- ---------- ----------
ADJUSTED OPERATING INCOME $ 6,220 $ 5,464 $ 4,972 13.8% 9.9%
========== ========== ==========
REPORTED NET INCOME $ 4,033 $ 2,172 $ 2,794
Special items (651) 482 --
Extraordinary charges 30 320 --
---------- ---------- ----------
ADJUSTED NET INCOME $ 3,412 $ 2,974 $ 2,794 14.7% 6.4%
========== ========== ==========
DILUTED EARNINGS PER SHARE - REPORTED $ 4.12 $ 2.24 $ 2.90
Special items (.66) .50 --
Extraordinary charges .03 .33 --
---------- ---------- ----------
DILUTED EARNINGS PER SHARE - ADJUSTED $ 3.49 $ 3.07 $ 2.90 13.7% 5.9%
========== ========== ==========
</TABLE>
(a) On January 31, 1999, BC TELECOM Inc. (BC TELECOM), previously a
majority-owned Canadian subsidiary of GTE, merged with TELUS Corporation.
GTE's ownership interest in the merged company, BCT.TELUS Communications
Inc. (TELUS), is 26.7%; therefore, beginning in 1999, GTE deconsolidated BC
TELECOM and began accounting for the investment in TELUS using the equity
method of accounting. During the fourth quarter of 1998, GTE increased its
ownership interest in CTI Holdings, S.A. (CTI) and began accounting for CTI
on a consolidated basis. For comparative discussion purposes only, 1998 and
1997 revenues and operating income have been adjusted to reflect the
current method of accounting for these international investments.
Consolidated net income and earnings per share are not affected by these
adjustments. For further information, see "Accounting for International
Investments" in this "Overview" section.
(b) GTE's Government Systems business was sold in two parcels, with closing
dates of September 1, 1999 and December 10, 1999, respectively. Reported
results for 1999 include activity associated with these business units
through their respective closing dates. For comparative purposes, revenues
and operating income have been adjusted to include activity only through
the corresponding periods in 1998 and 1997 for the Government Systems units
that were sold. Net income and earnings per share are not affected by these
adjustments. For further information, see "Strategic Repositioning - Net
Assets Held for Sale" in this "Overview" section.
19
<PAGE> 21
1999 SIGNIFICANT ITEMS
SPECIAL ITEMS
During 1999, the Company recorded a net pretax gain of $1.1 billion ($651
million after-tax, or $0.66 per diluted share), which included the following:
o During the first quarter of 1999, the Company recorded a pretax gain of
$513 million associated with the merger of BC TELECOM and TELUS. The
after-tax impact of this gain is $308 million, or $.31 per diluted share.
See "Accounting for International Investments" for additional information.
o During the first quarter of 1999, the Company also recorded a special
charge of $192 million ($119 million after-tax, or $.12 per diluted share)
associated with employee separation programs. The charge included
separation and related benefits such as outplacement and benefit
continuation costs for approximately 3,000 employees. The programs were
completed in early April 1999, as planned, consistent with the original
cost estimates.
o During the third quarter of 1999, the Company recorded special items of
$705 million ($416 million after-tax, or $.42 per diluted share). Included
in the special items was a pretax gain of $754 million on the sale of
substantially all of GTE Government Systems on September 1, 1999 to General
Dynamics Corporation for $1.0 billion in cash. The after-tax impact of this
gain was $445 million, or $.45 per diluted share. Also included was a
special charge of $49 million ($29 million after-tax, or $.03 per diluted
share) primarily related to the impairment of assets associated with the
Company's decision to exit certain small, non-core business activities.
o During the fourth quarter of 1999, the Company recorded a net pretax gain
of $90 million, primarily associated with the sale of the remaining major
division of GTE Government Systems to DynCorp, partially offset by a
special charge taken to exit certain small non-strategic businesses. The
after-tax impact of this net gain is $46 million, or $.05 per diluted
share.
OTHER SIGNIFICANT ITEMS
During 1999, the Company's results were also impacted by the following other
significant items:
o Consolidated net income for 1999 includes $1.2 billion of operating losses
related to GTE's continuing investments in its Internetworking and GTE
Communications Corporation initiatives. While the continued investment in
the high-growth sectors of the telecommunications industry is essential to
achieving GTE's long-term growth objectives, these operating losses have
partially offset the strong performance of GTE's traditional core
operations. Management expects the operating losses associated with these
initiatives to continue in 2000.
o In conjunction with continued cost-cutting initiatives, the Company
initiated an employee reduction program in the first quarter of 1999
(mentioned in "Special Items" above) that is expected to result in annual
savings of approximately $600 million. As a result of this program, the
Company recorded net gains of approximately $511 million associated with
the lump-sum settlements of pension obligations for voluntary and
involuntary employee retirements.
o During 1999, consistent with the emergence of the wireless industry's
one-rate calling plans and the associated change in the manner of reporting
customer roaming revenues, the Company reported $264 million of customer
roaming revenues on a gross basis, whereas prior to 1999 the Company netted
these revenues with roaming charges settled with other carriers. Prior year
customer roaming revenues continue to be reported on a net basis within
operating income.
o In the fourth quarter of 1999, the Company acquired several wireless
properties from Ameritech Corporation, resulting in increased 1999 revenues
of approximately $186 million and a dilutive impact of approximately $.02
per share.
o As a result of the property repositioning initiatives announced in 1998,
the Company discontinued depreciation on approximately 1.6 million
non-strategic domestic access lines and the Government Systems and Airfone
businesses that were held for sale, resulting in lower depreciation and
amortization expense of $325 million in 1999.
o As a result of adopting Statement of Position (SOP) 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" on
January 1, 1999, the Company began capitalizing certain types of network
software costs that had not been previously capitalized under existing
accounting standards. The net incremental increase in capitalized software
in 1999 compared to 1998 as a result of the adoption of SOP 98-1 was
approximately $203 million.
20
<PAGE> 22
o During 1999, the Company substantially completed its remediation efforts
for potential Year 2000 rollover issues. Year 2000 renovation costs are
expensed as incurred and totaled approximately $372 million since
inception, of which approximately $153 million was incurred in 1999.
EXTRAORDINARY CHARGE
During the first quarter of 1999, GTE repurchased $338 million of high-coupon
debt through a public tender offer prior to its stated maturity, resulting in a
one-time, after-tax extraordinary charge of $30 million (net of tax benefits of
$16 million), or $.03 per diluted share.
1998 SIGNIFICANT ITEMS
SPECIAL ITEMS
During the first quarter of 1998, the Company committed to a plan to sell or
exit various business activities and reduce costs through employee reductions
and related actions. As a result of these actions, during the first quarter of
1998, the Company recorded pretax charges of $755 million, $482 million
after-tax, or $.50 per diluted share, for the year. The strategic actions to
which the 1998 special charges relate were completed as planned consistent with
the original cost estimates. The plan included the previously mentioned proposed
sale of GTE Government Systems Corporation, GTE Airfone Incorporated and
approximately 1.6 million non-strategic domestic access lines located in 13
states. The status of these transactions is discussed in "Strategic
Repositioning - Net Assets Held for Sale".
The following table summarizes the special charges by major category and by
business unit affected (Dollars in Millions).
<TABLE>
<S> <C>
Major Category: Business Unit:
Asset impairments $483 National Operations
Exit costs 34 Network Services $171
Employee related and other actions Wireless Products and Services 91
Severance 77 Other National Operations 397
Other 30 International Operations 38
Other actions 131 Corporate and other (a) 58
---- ----
Total $755 Total $755
==== ====
</TABLE>
(a) The $58 million included in "Corporate and other" relates to severance and
related costs associated with the closing of several administrative
facilities, including the Company's corporate headquarters and worldwide
training facility in Connecticut.
Asset impairments and exit costs
Based on the decision to sell, the Company recorded a pretax charge of $200
million to reduce the carrying value of GTE Airfone's assets to estimated net
sales proceeds. No charge was recorded for GTE Government Systems or the access
lines to be sold because their estimated fair values were in excess of their
carrying values.
During the first quarter of 1998, the Company also committed to a plan to exit a
number of other non-strategic business activities. As a result, the Company
recorded a pretax charge of $156 million to reduce the carrying value of
affected assets to expected net salvage value and to recognize costs resulting
from the exit plan. The major components of the charge included:
o the write-off of network equipment and supplies for discontinued
wireless products and services ($81 million);
o the shutdown of business units developing interactive video products
and services and excess printing facilities ($42 million); and
o the write-off of impaired assets in Latin America ($33 million).
After completing the review of its operations, the Company also decided to scale
back the deployment of the hybrid fiber coax (HFC) video networks that it had
built in certain test markets. Although the Company is obligated to, and will
continue to, use the existing HFC networks to provide video service in these
markets, technological innovations
21
<PAGE> 23
have created alternative ways for the Company to deliver video and high-speed
data services in the future at a significantly lower cost. Due to the
significant change in the scale of the HFC networks and the effect on future
revenues and expenses, the Company recorded a pretax charge for impairment of
approximately $161 million based on estimated future cash flows. GTE continues
to evaluate its long-term strategic options associated with its video business.
Employee related and other actions
During the first quarter of 1998, the Company also decided to consolidate
facilities and centralize or eliminate a variety of employee functions and, as a
result, recorded a $107 million pretax charge. During the second half of 1998,
the Company closed several administrative facilities, including its corporate
headquarters in Connecticut and approximately 140 domestic retail stores and
other locations operated by its National Operations. The cost of these actions
is composed primarily of employee severance, outplacement and benefit
continuation costs for approximately 1,700 employees and other costs to exit
locations no longer used by the Company.
The Company also recorded a pretax charge of approximately $131 million related
to nonrecurring federal and state regulatory rulings affecting its Network
Services unit. Approximately two-thirds of this charge relates to nonrecurring
access rate refunds applied by the Federal Communications Commission (FCC)
retroactively in 1997. In addition, the charge also included the write-off of
mandated costs, including generic software, and other costs incurred by the
Company for which revenue recovery was not allowable under the regulatory
process.
OTHER SIGNIFICANT ITEMS
During 1998, the Company's results were also impacted by the following other
significant items:
o Consolidated net income for 1998 includes $1.0 billion of operating losses
related to GTE's continuing investments in its Internetworking and GTE
Communications Corporation initiatives, as discussed previously.
o Beginning in 1998, the Company discontinued depreciation on approximately
1.6 million non-strategic domestic access lines and the Government Systems
and Airfone businesses that were held for sale, resulting in lower
depreciation and amortization expense of approximately $100 million in
1998.
o In 1998, the Company recorded favorable true-ups of $118 million for
certain employee benefit liabilities.
EXTRAORDINARY CHARGES
During the first quarter of 1998, GTE recorded after-tax extraordinary charges
of $320 million (net of tax benefits of $256 million), or $.33 per diluted
share. Approximately $300 million of the charge related to the discontinuation
of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation," by GTE's Canadian operations. The
decision by GTE's Canadian subsidiaries to discontinue using regulatory
accounting practices was in response to rulings by the Canadian regulatory
commission in March of 1998 that opened the Canadian telecommunications market
to full competition. Under SFAS No. 71, certain assets were depreciated and
certain expenses were recognized over a longer period of time than would have
been the case in a competitive environment. This charge includes a reduction in
the net carrying value of property, plant and equipment of $270 million to
reflect impairment based on the estimated cash flows that the assets are
expected to generate in a competitive environment and a reduction in costs that
had been capitalized based on the expectation of future recovery of
approximately $30 million. In addition, during the first quarter of 1998, GTE
called $800 million of high-coupon debt and preferred stock prior to their
stated maturity date, resulting in a one-time, after-tax extraordinary charge of
$20 million.
22
<PAGE> 24
ACCOUNTING FOR INTERNATIONAL INVESTMENTS
At December 31, 1998 and 1997, GTE had a 50.8% ownership interest in BC TELECOM,
a full-service telecommunications provider in the province of British Columbia,
Canada. On January 31, 1999, BC TELECOM and TELUS Corporation merged to form a
public company, BCT.TELUS Communications Inc. (TELUS). GTE's ownership interest
in the merged company, TELUS, is approximately 26.7% and, as such, during the
first quarter of 1999, the Company changed the accounting for its investment
from full consolidation to the equity method. BC TELECOM's results of operations
for 1998 and 1997 are reflected in reported revenues and expenses, while for
1999 TELUS net results are reported as a component of "Other (Income) Expense"
in the consolidated statements of income.
CTI Holdings, S.A. (CTI), is a consortium providing cellular services in the
north and south interior regions of Argentina. During the fourth quarter of
1998, GTE increased its ownership interest in CTI and changed the accounting for
its investment from the equity method to full consolidation. CTI's net results
for 1997 and the first three quarters of 1998 are reflected in "Other (Income)
Expense," while for 1999 and the fourth quarter of 1998 CTI's results of
operations are reflected in the reported revenues and expenses of the
consolidated statements of income.
The comparative adjustments to reflect the deconsolidation of BC TELECOM and the
consolidation of CTI, consistent with current reporting, are more fully
described in the discussion of "Segment Results of Operations - International
Operations." For comparative discussion purposes only, 1998 and 1997
consolidated revenues and operating income, as previously shown, have been
adjusted to reflect the current method of accounting for these international
investments. Consolidated net income and earnings per share are not affected by
these changes in accounting methods.
STRATEGIC REPOSITIONING - NET ASSETS HELD FOR SALE
During the first quarter of 1998, the Company committed to a repositioning plan
that resulted in a decision to sell GTE Government Systems, GTE Airfone and
approximately 1.6 million non-strategic domestic access lines. When completed,
all of these transactions are expected to generate after-tax proceeds
aggregating in excess of $4 billion.
On June 22, 1999, GTE entered into an agreement with General Dynamics
Corporation to sell three of the four divisions of GTE Government Systems
Corporation, which closed on September 1, 1999. On November 4, 1999, GTE entered
into an agreement with DynCorp to sell the remaining major division, which
closed on December 10, 1999. See "1999 Significant Items." The net assets of GTE
Government Systems were classified as "Net assets held for sale" in the
consolidated balance sheets at December 31, 1998. Revenues for 1999, up to the
date of the sale, from GTE Government Systems were $1.1 billion. In 1998 and
1997, revenues were $1.4 billion and $1.3 billion, respectively.
On June 24, 1999, GTE entered into an agreement with Oak Hill Capital Partners,
L.P. (Oak Hill) to sell GTE Airfone. The agreement was terminated on October 19,
1999 when GTE and Oak Hill were unable to agree on final terms. GTE will
continue to pursue the sale of GTE Airfone. Accordingly, GTE Airfone's net
assets are classified as "Net assets held for sale" in the consolidated balance
sheets at December 31, 1999 and 1998. Revenues from GTE Airfone were $138
million, $157 million and $136 million for 1999-1997, respectively.
During 1999, the Company entered definitive agreements to sell all of the
domestic switched access lines held for sale. These access lines are located in
Alaska, Arizona, Arkansas, California, Illinois, Iowa, Minnesota, Missouri,
Nebraska, New Mexico, Oklahoma, Texas and Wisconsin. All sales are contingent
upon final agreements and regulatory approvals, and are expected to close in
2000. Based on the signing of definitive agreements, the net property, plant and
equipment of $1.7 billion related to these access lines has been reclassified as
"Net assets held for sale" in the consolidated balance sheets as of December 31,
1999. The net book value of these access lines is reflected in "Property, plant
and equipment, net" in the consolidated balance sheets at December 31, 1998. The
Company will continue to operate all of these assets until sold. The 1.6 million
access lines represent approximately 8% of the switched access lines that the
Company had in service at the end of 1999, and contributed approximately 4% to
1999 and 1998 consolidated revenues and 5% to 1997 consolidated revenues.
23
<PAGE> 25
SEGMENT RESULTS OF OPERATIONS
The following discussion covers the separate results of GTE's National and
International Operations. As discussed more fully in Note 15 to the consolidated
financial statements, GTE has four reportable segments. Three reportable
segments are within GTE's National Operations and the fourth reportable segment
is GTE's International Operations.
NATIONAL OPERATIONS
The results of GTE's National Operations include the results of the Network
Services, Wireless Products and Services, and Internetworking reportable
segments, representing 61%, 15%, and 4% of consolidated 1999 revenues,
respectively. Smaller business units comprising Other National Operations,
representing 13% of consolidated 1999 revenues, include GTE Technology and
Systems, GTE Communications Corporation, GTE Directories Corporation and GTE
Airfone.
NETWORK SERVICES
Network Services provides wireline communication services within its operating
areas, including local telephone service, toll calls within designated
geographic areas and access services that enable long-distance carriers to
complete calls to or from locations outside of GTE's operating areas. Network
Services also provides complex voice and data services, billing and collection,
operator-assistance and inventory management services to other
telecommunications companies.
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Local services $ 5,976 $ 5,814 $ 5,530
Network access services 5,511 5,316 4,896
Toll services 655 859 1,251
Directory services and other 3,432 3,259 2,847
------- ------- -------
Total revenues 15,574 15,248 14,524
Intersegment revenues (473) (305) (220)
------- ------- -------
Total external revenues $15,101 $14,943 $14,304
======= ======= =======
</TABLE>
Local services
Local service revenues are earned from providing local telephone service and
from vertical services such as Caller ID and Call Waiting.
Higher network usage was the primary reason for the increases of $162 million
and $284 million, or 3% and 5%, in local services revenues in 1999 and 1998,
respectively. This growth was generated by increases in switched access lines in
service of 4.4% in 1999 and 4.6% in 1998. Access line growth reflects higher
demand by Internet Service Providers (ISPs) and additional residential lines,
including second lines. Revenue growth was also boosted by increased revenues
from vertical services. These services contributed $81 million and $91 million
to revenue growth in 1999 and 1998, respectively. Local services revenues were
reduced by $96 million in 1999 and increased by $38 million in 1998 related to
state regulatory proceedings and other regulatory adjustments.
Network access services
Network access services revenues are based on fees charged to long-distance
carriers that use the Company's local network to provide long-distance services
to their customers. Wireless providers and other local telephone
24
<PAGE> 26
companies also pay access charges for wireless and toll calls transported or
terminated by the Company. Special access revenues arise from access charges
paid by carriers and end-users for private lines that access the Company's
network.
Network access services revenues increased $195 million and $420 million, or 4%
and 9%, in 1999 and 1998, respectively. These increases are partially due to
higher customer demand as reflected by growth in access minutes of use of 8.0%
and 10.2% in 1999 and 1998, respectively. Growth in network access revenues in
1999 and 1998 also reflects higher network usage by alternative providers of
intraLATA toll services. Special access revenues, driven by growing demand for
increased bandwidth by high-capacity users, increased $214 million and $151
million in 1999 and 1998, respectively. In addition, CyberPOP(SM), a service
which creates a point of presence (POP) for ISPs that operate in or near GTE's
markets, contributed $45 million and $98 million to revenue growth in 1999 and
1998, respectively. Revenue growth was negatively impacted in both years by
price reductions mandated by federal and state regulation. The impact of price
cap filings reduced interstate access rates $126 million and $140 million in
1999 and 1998, respectively (see "Regulatory and Competitive Trends - Price Cap"
for additional information). In 1997, the FCC also ordered significant changes
that altered the structure of access charges collected by the Company. As a
result of the order, usage-sensitive access charges paid by long-distance
carriers were reduced by $338 million in 1998. This reduction in 1998 revenues
was partially offset by $298 million of new per-line charges to long-distance
carriers and increased charges paid by the end-user customer (see "Regulatory
and Competitive Trends - Interstate Access Revision" for additional
information). Intrastate access charges were also reduced by $129 million in
1999 and $102 million in 1998 as a result of state regulatory proceedings.
Toll services
Toll services revenue is earned primarily from calls made outside the Company's
local calling area but within the same LATA (intraLATA). LATAs are geographic
areas that were defined by the FCC in the 1980s.
Toll services revenues decreased $204 million and $392 million, or 24% and 31%,
in 1999 and 1998, respectively, compared to the prior year, due to lower toll
volumes resulting from competition from alternative providers, including GTE
Communications Corporation (see "Other National Operations" for additional
information). By August 1997, all of GTE's operating areas were open to
intraLATA toll competition. Prior to full competition, intraLATA toll calls were
completed by the Company, unless the customer dialed a code to access a
different carrier. The ability to preselect a competing carrier changed this and
enabled customers to complete toll calls using another carrier without having to
dial an access code. Revenue reductions from intraLATA toll competition were
partially offset by increased network access revenues for usage of our network
by alternative providers of intraLATA toll services.
Toll revenues also declined in both years due to Company-initiated and
regulatory-mandated rate reductions. These rate reductions decreased toll
services revenues by $18 million in 1999 and $27 million in 1998.
Directory services and other
Directory services revenues result primarily from publication rights received
from GTE Directories Corporation (included in the discussion of "Other National
Operations") for sales of Yellow Pages advertising to customers in Network
Services' operating areas. Other revenues include nonregulated sales and
services such as inventory management and purchasing services, telephone
equipment sales, public telephone revenues, billing and collection and operator
services provided to affiliates and third parties.
Overall, directory services and other revenues increased $173 million and $412
million, or 5% and 14%, for 1999 and 1998, respectively, when compared to the
prior year. Directory revenue remained relatively flat from year to year.
Revenues from inventory management and purchasing services increased by $47
million in 1999 and $281 million in 1998, and billing and collection revenues
increased by $74 million in 1998, as a result of recently acquired third-party
and affiliated customers. Public telephone revenues increased $34 million in
1998 related to the Telecommunications Act, which mandated compensation to
payphone service providers for credit card and toll-free calls originating from
payphones. Prior to the Telecommunications Act, the Company was not compensated
for such calls. In 1999, a revised ruling reduced public telephone revenues by
$31 million. Other revenues were also higher as a result of increased
telecommunications services revenues and equipment sales, which contributed $114
million
25
<PAGE> 27
and $31 million for 1999 and 1998, respectively. Revenues also increased due to
increased sales of advanced products, including public safety (E911) and voice
messaging.
Intersegment revenues
Intersegment revenues at Network Services primarily represent local telephone
services provided at market rates to GTE Communications Corporation, which
markets bundled telecommunications services, and sales of inventory management
services provided to affiliates.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Cost of services and sales $5,126 $5,485 $5,028
Selling, general and administrative 2,070 2,184 2,165
Depreciation and amortization 2,564 2,591 2,605
Special charges 113 171 --
------ ------- ------
Total operating costs and expenses $9,873 $10,431 $9,798
====== ======= ======
</TABLE>
Operating costs and expenses decreased $558 million, or 5%, in 1999 compared to
1998. In general, higher costs associated with customer and access line growth
were offset by productivity improvements resulting from the employee-reduction
program initiated in the first quarter of 1999 that is expected to result in
annual savings of an estimated $450 million at Network Services. This program
also resulted in the lump-sum settlement of pension obligations for the affected
employees. Accordingly, the Company recognized net pension plan gains of $509
million. In addition, net software costs of $203 million were reflected in
"Property, plant and equipment, net" as of December 31, 1999, due to the
adoption of SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." These cost decreases are partially offset by the
absence of favorable adjustments to employee benefits and other liabilities
which reduced 1998 expenses by $118 million. Further offsetting the decreases
are increased costs of $46 million from an affiliate for customer information
pages included in the Company's White Pages directories.
The decrease in 1999 depreciation and amortization expenses is primarily driven
by the discontinuation of depreciation on approximately 1.6 million
non-strategic access lines held for sale, which reduced expense by $195 million
in 1999. This decrease is partially offset by $168 million of increased
depreciation expense on additional investment in network facilities resulting
from increased demand for access lines and data services.
The increase in 1998 operating costs and expenses compared to 1997 was primarily
driven by growth of $244 million in inventory management and purchasing services
to third-party customers and higher volumes. The 1998 increase is also due to
the recording of pension settlement gains in 1997, which resulted from lump-sum
payments from the Company's pension plan to separated employees. In addition,
costs increased in 1998 as a result of sales growth and support costs for new
initiatives. These increases were partially offset by productivity improvements
and favorable adjustments to certain employee benefit liabilities which reduced
1998 expenses by $118 million.
The decrease in 1998 depreciation and amortization costs is primarily a result
of the discontinuation of depreciation expense for the domestic access lines
held for sale, which lowered depreciation expense by $63 million. The decrease
was partially offset by the depreciation of capital additions, reflecting growth
in the demand for access lines and data services.
For a description of the special charges, see "Overview - 1999 Significant Items
and 1998 Significant Items."
WIRELESS PRODUCTS AND SERVICES
Wireless Products and Services provides wireless communications services (both
voice and data) within licensed areas in the U.S., sells wireless telephones and
accessories and provides support services to other wireless telephone companies.
26
<PAGE> 28
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Service revenues $3,276 $2,687 $2,549
Equipment sales and other 469 383 373
------ ------ ------
Total revenues $3,745 $3,070 $2,922
====== ====== ======
</TABLE>
Revenues and sales increased $675 million, or 22%, in 1999 compared to 1998. The
increase in service revenues of $589 million is attributable to several factors.
The success of the GTE CHOICE(SM) pricing plans has generated strong customer
growth and, combined with a continuing value-based marketing strategy, resulted
in an increase in service revenues of $163 million, or 6%, over 1998. GTE
Wireless increased its customer base by 12% in 1999 over 1998, excluding the
impact of the October 1999 acquisition of the Ameritech properties in Chicago,
St. Louis and Central Illinois. The newly purchased properties provided an
additional 1.7 million customers for a total increase of 2.3 million customers,
or 48%, over the prior year. At December 31, 1999, wireless customers totaled
approximately 7.1 million. An additional $162 million of the increase in service
revenues was generated in the fourth quarter by the newly acquired properties.
The remaining $264 million of the 1999 increase is the result of a change in the
manner of reporting customer roaming revenue consistent with the emergence of
the wireless industry's one-rate calling plans. During 1999, GTE reported
customer roaming revenues on a gross basis. Prior to 1999, GTE netted these
revenues with roaming charges settled with other carriers (see offsetting
increase in "Operating Costs and Expenses" below). These service revenue
increases were partially offset by a decline in the average revenue per user,
reflecting the increasing level of competition in the wireless industry. The
increase in equipment sales and other revenue of $86 million was primarily
caused by retail customer growth.
The growth in 1998 service revenues of $138 million, or 5%, was primarily
attributable to the growth in GTE's wireless customer base of 7.4% in 1998.
Total U.S. customers served reached 4.8 million in 1998. In 1998, revenue growth
resulting from the increased customer base was somewhat offset by a decline in
average revenue per user, reflecting the increasing level of competition in the
wireless industry. However, 1998 results reflected profitable growth by focusing
on higher-value customers utilizing a value-based marketing strategy.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Cost of services and sales $1,798 $1,049 $1,083
Selling, general and administrative 871 848 974
Depreciation and amortization 515 435 428
Special charges 24 91 --
------ ------ ------
Total operating costs and expenses $3,208 $2,423 $2,485
====== ====== ======
</TABLE>
Cost of services and sales
Costs of services and sales increased $749 million, or 71%, in 1999 compared
with 1998, primarily due to customer roaming charges paid to other wireless
carriers. This increase in roaming charges, $309 million in 1999 over 1998, was
caused by customer acceptance and usage of new bundled minutes plans, which
allow local, regional and national roaming at competitive rates. These costs
were partially offset by the favorable impact of a 10% annual decline in cash
cost per customer, which excludes incollect roaming costs. The change in
reporting of customer roaming revenues (see offsetting increase in "Revenues and
Sales" above) also contributed $264 million to the 1999 increase. In addition,
costs associated with newly acquired wireless properties in the fourth quarter
of 1999 contributed $76 million to the 1999 increase.
Cost of services and sales decreased $34 million, or 3%, in 1998 as compared
with 1997 despite an increased customer base. The increased volumes were offset
by reduced costs for wireless phones, favorable interconnection fees, lower
fraud losses and increased productivity throughout the organization. Cost of
services and sales also includes approximately $69 million of gains on the sale
of assets in 1998.
27
<PAGE> 29
Selling, general and administrative
Selling, general and administrative costs increased $23 million, or 3%, in 1999
compared to 1998. The increase is attributable to the impact of the newly
acquired wireless properties. In addition, higher acquisition and retention
costs to grow the customer base were partially offset by lower general and
administrative costs.
The 1998 decrease from 1997 is attributable to lower customer acquisition and
retention costs, including lower costs due to increased productivity in the
retail channel.
Depreciation and amortization
Depreciation and amortization increased $80 million, or 18%, in 1999 partially
due to $40 million of depreciation expense and amortization of goodwill in the
fourth quarter from the newly acquired wireless properties. The remainder of the
increase over 1998 is the result of continued investment in the network to
provide greater digital capacity and coverage.
Depreciation and amortization increased $7 million, or 2%, in 1998 as a result
of continuing investment in the wireless network to provide greater capacity.
The increase is partially offset by lower depreciation expense due to the
discontinuation of the Tele-Go product offering and the write-off of affected
network equipment and supplies, which is included in the special charges.
For a description of the special charges, see "Overview - 1999 Significant Items
and 1998 Significant Items."
INTERNETWORKING
The Internetworking segment offers a wide range of advanced data and
Internet-related services, including dedicated and dial-up access to the
Internet, managed network security, Web hosting, application development and
systems integration services. Internetworking also includes the investment in
GTE's national fiber-optic network which became fully operational in December
1999. Recent investments in undersea cable have now expanded the reach of the
nationwide network into Europe, Asia and Latin America.
GTE's Internetworking segment was created in mid-1997 after the acquisition of
BBN Corporation. This segment does not include the results of GTE's traditional
local data businesses, such as high-speed dedicated circuits and digital
subscriber lines, which continue to be reflected in the Company's Network
Services segment.
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Internetworking revenues $ 1,036 $ 579 $ 185
Intersegment revenues (69) (36) (11)
------- ------- -------
Total external revenues $ 967 $ 543 $ 174
======= ======= =======
</TABLE>
Internetworking data revenues for 1999 increased $457 million, or 79%, over 1998
due to customer and revenue growth from business services such as managed
connectivity, Web hosting, virtual private networks and e-commerce solutions.
The increase also reflects growth in the online service provider business,
primarily resulting from the expanded relationship with America Online (AOL),
for which GTE provides national network deployment services in support of AOL's
dial-up network.
Revenues for 1998 reflect a full year of activity, whereas 1997 revenues reflect
only a partial year, as described above. The increase in 1998 is also due to
sales of access and transport services to other ISPs and carriers and the
expanded relationship with AOL. The increase also reflects customer growth and
revenues derived from newly introduced Internet-based products and services for
both consumers and businesses.
Intersegment revenues primarily reflect the provision of backbone connectivity
to affiliates.
28
<PAGE> 30
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Cost of services and sales $ 972 $ 573 $ 302
Selling, general and administrative 425 374 136
Depreciation and amortization 191 117 86
------ ------ ------
Total operating costs and expenses $1,588 $1,064 $ 524
====== ====== ======
</TABLE>
Cost of services and sales
Cost of services and sales, consisting primarily of the cost of leasing
telecommunication circuits and labor and expenses of operating the network
infrastructure and supporting customers, increased $399 million, or 70%, in 1999
compared to 1998. The increase is primarily due to the aggressive buildout of
the Global Network Infrastructure (GNI) to provide broader access to more
customers, support a growing customer base and provide increased scope to
service customers. In addition, expenses were higher in 1999 partially due to
costs associated with the buildout and initial start-up expenses of the
international network, such as the costs to acquire circuits and international
cable access. The continued expansion of dial-up networks operated for AOL also
contributed to the 1999 increase in cost of services and sales.
The 1998 results reflect the growth in the cost of the network infrastructure
and personnel to support a growing customer base and service offerings
introduced during the year. Cost of services and sales also reflects the
continued expansion of dial-up networks operated for AOL.
Selling, general and administrative
Selling, general and administrative costs increased $51 million, or 14%, in 1999
compared with 1998 due to increased selling expenses which were directly
attributed to an increase in sales and sales-related employees both domestically
and internationally. The additional growth in the sales force resulted in higher
training expenses and costs for expansion of field offices.
The increase in 1998 costs compared to 1997 was driven by customer growth,
higher new product development costs and continued investment in the Company's
sales and marketing infrastructure, including expansion of sales channels,
advertising costs and other promotional activities related primarily to
Internet-based services for consumers and businesses.
Depreciation and amortization
Depreciation and amortization reflects the continuing investment in the network
and other infrastructure necessary to support the growth in customers and
services. At December 31, 1999, the entire 17,000 miles of the nationwide
fiber-optic network were operational and, therefore, being depreciated. At
December 31, 1998, just over two-thirds of the network was operational and being
depreciated.
Capital expenditures during 1999-1997 collectively totaled over $1.6 billion,
primarily associated with the build-out of the 17,000 mile nationwide
fiber-optic network.
29
<PAGE> 31
OTHER NATIONAL OPERATIONS
GTE's Other National Operations include: GTE Communications Corporation, GTE
Technology and Systems, GTE Directories Corporation and GTE Airfone.
Eliminations for intersegment activity occurring within National Operations are
also included in Other National Operations.
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Communications $1,513 $1,063 $ 630
Technology and Systems 1,063 1,423 1,271
Other, including eliminations 685 856 840
------ ------ ------
Total revenues $3,261 $3,342 $2,741
====== ====== ======
</TABLE>
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Cost of services and sales $ 2,507 $ 2,528 $ 1,953
Selling, general and administrative 786 689 587
Depreciation and amortization 232 207 252
Special items (768) 397 --
------- ------- -------
Total operating costs and expenses $ 2,757 $ 3,821 $ 2,792
======= ======= =======
</TABLE>
GTE Communications Corporation (GTECC) includes GTE's national sales and
marketing organization, which enables GTE to offer a complete bundle of
telecommunication services and expand beyond its traditional operating
boundaries. GTECC also includes GTE Long Distance, which provides long-distance
services to customers in all 50 states, and GTE Video Services, which provides
video services to residential and business customers in California, Florida and
Hawaii.
The increase in GTECC's 1999 revenues of $450 million, or 42%, is attributable
in part to increased revenues from long-distance operations, higher contract
sales to medium and large business customers and revenues from bundled local,
long-distance, wireless, paging and Internet services. The growth in 1999
long-distance revenues is due to a 26% increase in the number of customers since
December 31, 1998 to approximately 3.4 million customers. At December 31, 1999
there were approximately 312,000 customers of bundled services, an increase of
263% since December 31, 1998.
In 1998, GTECC's revenues grew $433 million, or 69%, compared with 1997.
Revenues from long-distance operations grew $280 million, or 88%, during 1998,
due to a 59% increase in the number of customers. Significant market share
increases in GTE's franchised territories, coupled with a significant
improvement in the rate of customer churn, contributed to this growth.
GTE Technology and Systems is primarily composed of GTE Government Systems. The
Company sold substantially all of its Government Systems business to General
Dynamics on September 1, 1999. The remaining major division was sold to DynCorp
on December 10, 1999. The sale of the GTE Government Systems business resulted
in a decrease in Technology and Systems 1999 revenues compared to 1998. The
results for 1999 only include a partial year of GTE Government Systems revenue,
whereas the 1998 and 1997 results include a full 12 months of revenue.
Included in other revenues is GTE Directories Corporation, which publishes
telephone directories and develops and markets online advertising and
information services; and GTE Airfone, a provider of airborne communications
services, which the Company intends to sell (see "Strategic Repositioning - Net
Assets Held for Sale" for additional information).
30
<PAGE> 32
Total operating costs and expenses, excluding depreciation, amortization and
special items, were slightly higher in 1999 compared with 1998 primarily due to
increased capacity costs associated with GTECC's revenue growth and higher
provisions for uncollectibles, partially offset by lower advertising and
telemarketing costs.
For a description of the special items, see "Overview - 1999 Significant Items
and 1998 Significant Items."
INTERNATIONAL OPERATIONS
GTE's International Operations, which represent 7% of 1999 consolidated
revenues, provide telecommunications services in Argentina, the Dominican
Republic, the Northern Mariana Islands and part of the province of Quebec,
Canada and operate directory-advertising companies in Europe and Latin America
through consolidated subsidiaries. GTE also participates in ventures/consortia
that are accounted for on the equity basis. These investments include
full-service telecommunications companies in Canada and Venezuela, a paging
network in China and a nationwide wireless network in Taiwan. In March 1999, GTE
completed its 40% investment in Telecomunicaciones de Puerto Rico, Inc.
(TELPRI), a full-service telecommunications provider serving the Commonwealth of
Puerto Rico.
In June 1999, GTE expanded its Argentine wireless presence by winning the bid
for one of two Personal Communications Services (PCS) wireless licenses for the
Buenos Aires greater metropolitan area. The PCS license, which covers a
population of 13 million, complements GTE's existing investment in CTI Holdings.
CTI implemented enhanced digital service during the second quarter of 1999. GTE
PCS, S.A., holder of the PCS license, is expected to be operational in the first
half of 2000. Together CTI and GTE PCS, S.A. will provide nationwide wireless
service in Argentina.
During the fourth quarter of 1998, GTE increased its ownership interest in CTI
and began accounting for its investment on a consolidated basis. The CTI net
results for 1997 and the first three quarters of 1998 are reflected in "Other
(Income) Expense." For 1999 and the fourth quarter of 1998, CTI's results of
operations are reflected in reported revenues and expenses in the consolidated
statements of income.
Prior to 1999, GTE had voting control of BC TELECOM, a full-service
telecommunications provider operating in British Columbia, Canada, through its
ownership of Anglo-Canadian Telephone Company. On January 31, 1999, BC TELECOM
and TELUS Corporation, an Alberta, Canada full-service telecommunications
provider, merged to form a public company, BCT.TELUS Communications Inc.
(TELUS). GTE owns approximately 26.7% of TELUS. Accordingly, beginning in 1999,
GTE has deconsolidated BC TELECOM and now accounts for the investment in TELUS
using the equity method of accounting. BC TELECOM's results of operations for
1998 and 1997 are reflected in reported revenues and expenses, while for 1999
the TELUS net results are reported as a component of "Other (Income) Expense" in
the consolidated statements of income.
The table below represents reported and adjusted financial results, including
the impact of the changes in accounting methods described above. The results for
the years ended December 31, 1998 and 1997 have been adjusted to reflect the
deconsolidation of BC TELECOM and the consolidation of CTI, consistent with 1999
reporting. For comparative purposes, the financial results are discussed on an
adjusted basis.
Revenues and Sales
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1999 1998 1997
-------- -------------------- ---------------------
Reported Reported Adjusted Reported Adjusted
-------- -------- -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Local services $ 368 $1,219 $ 294 $1,076 $ 240
Toll services 291 907 312 883 326
Wireless services 548 422 542 265 282
Directory services and other 647 786 404 678 299
------ ------ ------ ------ ------
Total revenues $1,854 $3,334 $1,552 $2,902 $1,147
====== ====== ====== ====== ======
</TABLE>
31
<PAGE> 33
Local services
Local service revenues are based on fees charged to customers for providing
local fixed wireline telephone service within designated franchise areas,
primarily in Quebec and the Dominican Republic. On an adjusted basis, local
services revenues increased $74 million and $54 million, or 25% and 23%, for
1999 and 1998, respectively, compared to the prior year. Local rate increases,
as part of an overall rate rebalancing effort in the Dominican Republic,
combined with increased access lines in service, contributed to the increase in
local service revenues for 1999 as compared to 1998. Local service revenues
increased in 1998 due to a rate increase in Quebec and increases in access lines
in service for both Quebec and the Dominican Republic.
Toll services
Toll, or long-distance, service revenues are based on fees charged for calls
made to a location outside of a customer's local calling area. On an adjusted
basis, toll services revenues decreased $21 million and $14 million, or 7% and
4%, for 1999 and 1998, respectively, compared to the prior year. Rate reductions
in the Dominican Republic and Quebec stemming from rebalancing programs and
competitive pressures led to an overall decrease in toll revenues for 1999.
These rate reductions are partially offset by increased toll usage. Toll
services revenues declined in 1998 due to competitively-driven,
Company-initiated rate reductions, partially offset by higher toll usage and a
change in the manner of reporting toll settlements in Quebec. Early in 1998, the
Quebec carrier began reporting toll settlements on a gross revenue and expense
basis. Previously, the carriers recorded toll settlements on a net basis (see
offsetting increase in "Cost of services and sales" below). GTE's International
Operations business units continue to implement price reductions on certain
domestic and international toll services in response to competition.
Wireless services
Wireless services represent cellular and PCS services. On an adjusted basis,
wireless services revenues increased $6 million and $260 million, or 1% and 92%,
for 1999 and 1998, respectively, compared to the prior year. Consolidated
wireless subscriber growth of 51% over the last 12 months was driven by
increased prepaid wireless subscribers within the Latin American operations.
Increased revenues resulting from additional subscribers were significantly
offset by lower average revenue per user, caused in part by weak economic
conditions in Argentina and the expansion of prepaid offerings to lower-usage
customers. The 1998 adjusted revenue increase over 1997 resulted from
significant expansion of the CTI business operation and the Argentine customer
base. Also contributing to revenue growth in 1998 was an increase in wireless
customers in both the Dominican Republic and Quebec.
Directory services and other
Directory services and other revenues result primarily from sales of Yellow
Pages advertising to local and national businesses, along with equipment and
other product revenues and sales. On an adjusted basis, directory services and
other revenues increased $243 million and $105 million, or 60% and 35%, for 1999
and 1998, respectively, compared to the prior year. The 1999 revenue increase
reflected increased product revenues and sales combined with higher Yellow Pages
advertising revenues in Canada and Europe. Due to the deconsolidation of BC
TELECOM in 1999, GTE International Directories discontinued netting
publication-right fees paid to TELUS against its Yellow Pages advertising
revenues. This classification change in reporting increased both 1999 revenues
and operating expenses by approximately $82 million (see "Operating Costs and
Expenses" below). In addition, 1999 results include the activities of Axesa
Informacion, Inc., a directory publication business in Puerto Rico for which GTE
acquired a controlling interest in April 1999, as well as revenues from annual
technology right-to-use fees paid to the Company. The increase in 1998 directory
services revenues was primarily driven by operations in Austria and Poland, that
were acquired late in 1997, as well as higher directory advertising sales in the
Costa Rican operation.
32
<PAGE> 34
Operating Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
Reported Adjusted Reported Adjusted Reported Adjusted
-------- -------- -------- -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C>
Cost of services and sales $ 719 $ 719 $1,147 $ 531 $ 882 $ 418
Selling, general and administrative 493 493 856 496 771 393
Depreciation and amortization 245 245 459 230 523 195
Special items (513) -- 38 -- -- --
------ ------ ------ ------ ------ ------
Total operating costs and expenses $ 944 $1,457 $2,500 $1,257 $2,176 $1,006
====== ====== ====== ====== ====== ======
</TABLE>
The applicable results in the table above have been adjusted to exclude special
items and reflect the deconsolidation of BC TELECOM and the consolidation of
CTI, consistent with 1999 reporting.
Cost of services and sales
Higher network and customer support costs related to increased volumes, combined
with higher equipment cost of sales associated with the increase in wireless
subscribers, contributed to the increase of $188 million, or 35%, in adjusted
cost of services and sales for 1999. The classification change for directory
publication-right fees also contributed approximately $82 million to the 1999
increase in costs. (See "Directory services and other" revenues above). The 1998
increase of $113 million, or 27%, in adjusted cost of services and sales was
primarily driven by higher operating and wireless customer acquisition costs
associated with significant increases in the CTI customer base. Also, the change
in the reporting of toll settlements in early 1998 for the Quebec operations
(see offsetting increase in "Toll services" revenues above) contributed to the
increase.
Selling, general and administrative
The 1999 decrease of $3 million, or 1%, in adjusted selling, general and
administrative expenses primarily reflects lower selling and commission expenses
related to wireless customer acquisitions within the Latin American operations.
A significant part of 1999 wireless customer growth was attributable to prepaid
customers, which have significantly lower acquisition costs than traditional
customers. Adjusted selling, general and administrative expenses in 1998
increased $103 million, or 26%, over 1997 primarily due to higher selling
expenses related to the growth in traditional wireless customer additions.
Depreciation and amortization
The increases of $15 million and $35 million, or 7% and 18%, in adjusted
depreciation and amortization expense for 1999 and 1998, respectively, compared
to the prior year, primarily reflect expansion of the wireless networks within
the Latin American operations. The expansion and modernization of the Dominican
Republic wireline network also contributed to the increase. In 1998, the effect
of shorter depreciable lives of telephone plant, primarily in Canada, was offset
by a reduction in the carrying value of plant due to the discontinuation of SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation."
For a description of the special items, see "Overview - 1999 Significant Items
and 1998 Significant Items."
Equity Income
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Reported Equity Income $ 324 $ 110 $ 85
Adjusted Equity Income 324 263 243
</TABLE>
In January 1999, BC TELECOM and TELUS Corporation merged to form BCT.TELUS
Communications Inc. (TELUS). GTE owns approximately 26.7% of TELUS. Accordingly,
beginning in 1999, GTE has deconsolidated
33
<PAGE> 35
BC TELECOM and now accounts for the investment in TELUS using the equity method
of accounting. In addition, during the fourth quarter of 1998, GTE increased its
ownership interest in CTI and began accounting for its investment on a
consolidated basis.
Equity income (reflected in "Other (Income) Expense" in the consolidated
statements of income) of $324 million for 1999 increased $61 million, or 23%,
compared to 1998, after adjusting for the changes in accounting method described
above. Taiwan Cellular Corporation, in which GTE has a 13.5% interest, became
operational in January 1998 and has added over 3 million customers to date. This
strong increase in customer growth contributed a majority of the equity earnings
growth for 1999 compared to 1998.
Adjusted equity income in 1998 increased $20 million from 1997 due to increased
earnings from GTE's investment in BC TELECOM. As described above, in the first
quarter of 1999, GTE changed its method of accounting for this investment from
consolidation to the equity basis as a result of BC TELECOM's merger with TELUS.
Adjusted results reflect this investment on the equity basis for all periods
presented.
FINANCIAL CONDITION
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Cash flows from (used in):
Operations $ 6,319 $ 5,890 $ 6,164
Investing (7,749) (5,508) (5,893)
Financing 1,899 (466) (125)
</TABLE>
OPERATIONS
GTE's primary source of funds during 1999 was cash from operations of $6.3
billion compared with $5.9 billion and $6.2 billion in 1998 and 1997,
respectively. The increase in cash from operations in 1999 compared to 1998 is
primarily due to working capital requirements that were less than the same
period last year. Cash from operations includes losses associated with the
Company's Internetworking and GTECC growth initiatives.
INVESTING
Capital expenditures totaled $4.9 billion in 1999, a 12% decrease from the $5.6
billion spent in 1998. This variance is attributable to lower capital
expenditures for the Network Services segment, the deconsolidation of BC TELECOM
to the equity method of accounting and the Company's decision in 1998 to scale
back the deployment of its hybrid fiber coax video networks. The majority of the
1999 new investments were made to acquire facilities and develop and install
applications necessary to support the growth in demand for GTE's core services,
facilitate the introduction of new products and services, and increase operating
efficiency and productivity. Significant investments have also been made to
build and expand GTE's national fiber-optic data network. GTE expects capital
expenditures to approximate $5.8 billion in 2000, as the Company continues to
provide the highest quality voice and data communications available within the
industry.
In October 1999, the Company acquired approximately half of Ameritech's wireless
properties. GTE paid $3.25 billion in cash for the properties, which are located
in St. Louis, Chicago and Central Illinois. In June 1999, the Company purchased
one of two PCS wireless licenses that were auctioned by the government of
Argentina for the Buenos Aires greater metropolitan area. The total purchase
price was $301 million of which approximately $120 million has been paid. In
March 1999, GTE completed its 40% investment in TELPRI, a full-service
telecommunications provider serving the Commonwealth of Puerto Rico. In 1997,
GTE expended over $900 million to acquire new operations, primarily BBN
Corporation, in connection with the Company's data initiatives.
34
<PAGE> 36
In 1998, GTE committed to a plan to sell GTE Government Systems, GTE Airfone and
approximately 1.6 million domestic access lines. When completed, all of these
transactions are expected to generate after-tax proceeds aggregating in excess
of $4 billion. In late 1999, GTE sold its GTE Government Systems business for
$1.2 billion. During 1999, the Company reached agreements to sell approximately
1.6 million non-strategic domestic access lines and expects to close all of
these sales in 2000.
FINANCING
Cash provided by financing activities totaled $1.9 billion during 1999 compared
with cash used of $466 million and $125 million for 1998 and 1997, respectively.
The Company retired $1.9 billion of long-term debt and preferred securities in
1999 compared with $2.0 billion and $2.4 billion in 1998 and 1997. Included in
these retirements were $489 million of 9.25% monthly income preferred securities
due 2024 which were redeemed in October 1999. The Company issued $4.6 billion of
long-term debt in 1999 compared with $3.9 billion and $2.4 billion in 1998 and
1997. Certain of GTE's domestic telephone operating subsidiaries have shelf
registration statements filed with the Securities and Exchange Commission that
total $1.9 billion as of December 31, 1999.
In August 1999, GTE announced the initiation of a share repurchase program to
offset shares issued under the Company's employee-benefit and
dividend-reinvestment programs. Under the program, the Company repurchased
approximately 17.7 million shares of its common stock valued at $1.3 billion in
1999, and completed the program with the purchase of an additional 8.4 million
shares valued at approximately $600 million through February 2000. Additionally,
the Company repurchased 11.7 million shares of its common stock valued at $536
million in 1997.
During 1999, GTE maintained $6.0 billion in committed credit facilities which
are used primarily to back up commercial paper borrowings. These facilities
include a five-year syndicated line of $2.5 billion for GTE and a 364-day
syndicated line of $1.5 billion for certain domestic telephone operating
subsidiaries. Under current terms and conditions, the $2.5 billion line will
mature in June 2002 and the $1.5 billion line, which was renewed by the Company
in June 1999, will mature in June 2000. Fifty-four banks representing 12
countries participate in these syndicated facilities. In addition to the
syndicated facilities, $1.0 billion of committed bilateral credit lines were
renewed in June 1999 and, subsequently, increased to $2.0 billion in October
1999. The bilateral lines, which are shared by GTE and certain domestic
telephone operating subsidiaries, are aligned with the maturity date of the
existing 364-day line.
GTE targets a financial profile including capitalization and credit ratios that
are appropriate for an "A" rated telecommunications corporation. This allows
GTE's shareholders to enjoy the benefits of prudent and reasonable financial
leverage, while also protecting debtholder interest and providing ready access
to the capital markets. The Company believes that its present investment grade
credit rating and those of its subsidiaries provide ready access to the capital
markets at reasonable rates and provide the Company with the financial
flexibility necessary to pursue growth opportunities as they arise.
In 2000, the funding of dividends and capital requirements for GTE's businesses
will be substantially sourced by cash from operations, although GTE's strong
financial position allows ready access to worldwide capital markets for any
additional cash requirements.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
REGULATORY AND COMPETITIVE TRENDS
During 1999, regulatory and legislative activity at both the state and federal
levels continued to be a direct result of the Telecommunications Act of 1996
(Telecommunications Act). Along with promoting competition in all segments of
the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.
GTE continued in 1999 to meet the wholesale requirements of new competitors. To
date, GTE has signed over 1,200 interconnection agreements with other carriers,
providing them the capability to purchase unbundled network elements (UNEs),
resell retail services and interconnect facilities-based networks. Several of
these interconnection
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agreements were the result of the arbitration process established by the
Telecommunications Act, and incorporated prices or terms and conditions based
upon the FCC rules that were subsequently appealed to the U. S. Supreme Court
(Supreme Court). GTE challenged a number of such agreements in federal district
courts during 1997.
GTE's position in these challenges was supported by a decision of the Eighth
Circuit Court (Eighth Circuit) in July 1997 which stated the FCC had overstepped
its authority in several areas concerning implementation of the interconnection
provisions of the Telecommunications Act. In January 1999, the Supreme Court
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit's determination that the FCC had no
jurisdiction over pricing. As a result, the pricing rules established by the FCC
are now subject to review on their merits by the Eighth Circuit. In addition,
the Supreme Court vacated the FCC rule setting forth the UNEs that incumbent
local exchange carriers (ILECs) are required to provide to competitive local
exchange carriers (CLECs). This latter ruling led to a proceeding before the FCC
concerning what elements had to be offered and under what conditions.
In November 1999, the FCC reaffirmed that incumbents must provide unbundled
access to five of the original seven network elements, which must be available
on either a stand-alone basis, or as a combined local service "platform" if the
elements have been previously combined by the ILEC. ILECs are no longer required
to provide unbundled operator services, including directory assistance where
alternate routing is available. In addition, in certain circumstances, local and
tandem switching need not be unbundled. However, the FCC expanded the definition
of some UNEs by specifying that components of the loop UNE must be made
available in sub-loop components, and augmenting the types of call-related
databases that must be unbundled as UNEs. The FCC also found that state
commissions can require ILECs to unbundle additional elements as long as they
are consistent with the requirements of the Telecommunications Act and the
national policy framework instituted in the FCC's order. Furthermore, the order
precludes states from removing network elements from the FCC's list of
unbundling obligations. The United States Telecom Association (USTA) has
appealed this order and GTE will participate.
In December 1999, the FCC released another order that requires ILECs to provide
line sharing to CLECs by unbundled access to the high-frequency portion of the
local loop over which the ILEC provides voice services. The FCC's stated intent
in adopting the line sharing order is to enable competitive carriers to provide
digital subscriber line (DSL) services over the same lines simultaneously used
by ILECs to provide basic phone services.
In June 1999, the Eighth Circuit established a schedule for addressing the
issues it did not decide in 1998. Parties to this action have filed briefs and
participated in oral arguments in September 1999. The major issues are: (1) the
FCC's cost methodology used to set prices, (2) its methodology for setting
wholesale discounts, (3) the "proxy rates" it set for interconnection, UNEs, and
wholesale discounts, (4) whether ILECs should be required to combine UNEs that
are not already combined, and (5) whether the FCC can require ILECs to provide
"superior quality" to competitors than what the ILEC provides to itself. A court
decision is expected during the first half of 2000.
Concurrent with competitors' entry into GTE markets, the Company has continued
its own expansion into local, long-distance, Internet-access and wireless
services both within and outside its traditional operating areas. GTE now
provides long-distance service to approximately 3.4 million customers.
Universal Service
GTE is active before both state and federal regulators advocating development
and implementation of measures that will meet the requirements of the universal
service provisions of the Telecommunications Act. Specifically, GTE urges
regulators to identify and remove all hidden subsidies and to provide explicit
universal service subsidies.
In October 1998, the FCC issued an order selecting a cost model for universal
service. In July 1999, the United States Court of Appeals for the Fifth Circuit
(Fifth Circuit) affirmed in part, reversed in part, and remanded in part the
FCC's universal service regime. In October 1999, the FCC released two orders in
response to the Fifth Circuit decision. One order permits ILECs to continue to
recover their universal service contributions from access charges or to
establish end-user charges. The second order changed the contribution basis for
school/library funding to eliminate calculations based upon intrastate revenues.
In January 2000, GTE requested the Supreme Court to review the Fifth Circuit
decision allowing the FCC to base universal service support from the results of
a hypothetical cost
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model rather than historical costs that were incurred to provide local service.
GTE argued that the Fifth Circuit ignored long standing legal precedent in
permitting a major revision to ILEC cost recovery mechanisms without ensuring
the new process would not result in a constitutionally prohibited "taking."
In November 1999, the FCC released an order selecting the cost inputs for the
federal universal service cost model. GTE is seeking reconsideration. Since the
FCC moved the implementation date of the new universal service mechanism for
non-rural carriers to January 2000, many state regulators awaited FCC action
before they began designing their universal service programs.
In November 1999, the FCC released an order dealing with implementation of the
new FCC federal high cost support mechanism for non-rural ILECs, including GTE.
The effective date for the new federal universal service plan is January 1,
2000. This plan will distribute federal high cost funds to states with higher
than average costs. The role of state commissions is to ensure reasonable
comparability within the borders of a state. Federal high cost support will be
calculated by comparing the nationwide average cost with each state's average
cost per line, and providing federal support for only states that exceed 135% of
the nationwide average. To guard against rate shock, the FCC also adopted a
"hold harmless" approach so that the amount of support provided to each
non-rural carrier under the new plan will not be less than the amount provided
today. U S WEST has appealed this order on the basis that it fails to provide a
sufficient amount of support. This FCC order also established a May 1, 2000
deadline by which state commissions must create at least three deaveraged price
zones for UNEs. In January 2000, GTE requested the FCC grant a one year delay to
give state commissions ample opportunity to implement deaveraged retail rates
and establish state universal service funds in concert with UNE deaveraging.
In December 1999, the FCC asked for comment on requests made by the North Dakota
and South Dakota state commissions and the Rural Utilities Service (RUS) asking
the FCC to redefine "voice grade access" in the FCC's universal service rules.
The FCC requires that, in order to be eligible for universal service support, a
carrier must offer, among other things, voice grade access to the public
switched telephone network. Current FCC rules specify that voice grade access
should occur in a frequency range between approximately 300 Hertz (Hz) to 3,000
Hz. The petitioners requested the frequency range be changed to 200 Hz to 3,500
Hz. GTE participated in this proceeding and opposed any change in FCC
requirements. The network is not designed for the proposed ubiquitous
requirement and would require a significant infrastructure investment and at
least a decade to implement.
Price Cap
The federal price cap regime allows access prices to change each year by a
measure of inflation minus a productivity factor offset. In May 1999, the U.S.
Court of Appeals for the District of Columbia (Court) released a decision
regarding the FCC's choice of a 6.5% price cap productivity factor in a 1997
order. The Court found the FCC's choice of a 6.0% base factor and a 0.5%
Consumer Productivity Dividend to be inadequately supported. The Court remanded
the matter back to the FCC for further action and established an April 2000 date
by which the FCC must issue a revised decision. As a result, in November 1999,
the FCC initiated a rulemaking proposal requesting comments on the interstate
price cap productivity factor. Currently, it is unknown whether the single price
cap productivity factor will be applied retroactively to July 1, 1997 and remain
in effect until the next price cap performance review in 2003, or whether one
factor will apply from 1997 to 2000 and another factor apply from 2000 to 2003.
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Interstate Access Revision
Effective July 1999, access charges were further reduced using a 6.5%
productivity factor in compliance with FCC requirements to reflect the impacts
of access charge reform and in making GTE's 1999 Annual Filing. The total annual
financial impact of the reduction was $113 million. Similar filings during 1997
and 1998 had already resulted in price reductions.
In August 1999, GTE, along with a coalition of local exchange and long-distance
companies (CALLS), submitted a proposal for interstate access charge and
universal service reform to the FCC. The proposal would accelerate the shift in
non-usage sensitive access revenue recovery from per-minute to flat-rated
charges, set a schedule for elimination of the price cap productivity factor,
and provide more explicit support for universal service. The coalition filed a
revised plan in March 2000 and the FCC has offered the plan for comments. A
decision by the FCC is expected in 2000.
In August 1999, the FCC released an order pertaining to access reform and
pricing flexibility. The order grants price cap LECs immediate flexibility under
certain circumstances to deaverage certain access services and permits the
introduction of new services on a streamlined basis, without prior FCC approval.
Advanced Telecommunications Services
The Telecommunications Act required the FCC to "encourage the deployment on a
reasonable and timely basis of advanced telecommunications capability to all
Americans." Further, the FCC was required to conduct a proceeding aimed at
determining the availability of advanced telecommunications, and to take action
to remove barriers to infrastructure investment and to promote competition.
In March 1999, the FCC released an order adopting a number of new collocation
rules designed to make competitive entry easier and less costly. These rules
specify how ILECs will manage such items as alternate collocation arrangements,
security, space preparation cost allocation, provisioning intervals and space
exhaustion. GTE asked the Court to review this order. In March 2000, the Court
issued a ruling granting, in part, challenges raised by GTE to the FCC's March
1999 order. The Court ruled that the FCC failed to justify its requirement that
ILECs must permit collocation of any CLEC equipment that was "used or useful"
for interconnection or access to network elements. The Court remanded this
portion of the decision back to the FCC for further deliberation.
In November 1999, the FCC released an order concluding that an ILEC's offering
of DSL services to Internet Service Providers (ISPs) pursuant to volume and term
discount plans that are a component of the ISPs' high-speed Internet service are
not a retail offering, and thus not subject to the discounted resale obligation.
The order also concluded that an ILEC's DSL offering to end-users is a retail
offering if the ILEC performs certain consumer-oriented functions, such as
provisioning of customer premises equipment and wiring, marketing, billing and
collection, and accepting repair requests directly from the end-user. The FCC
concluded that these services are subject to discounted resale obligation,
regardless of whether the service is classified as telephone exchange service
(local tariff) or exchange access service (access tariff).
Number Portability
In December 1998, the FCC released an order establishing cost recovery rules for
local number portability (LNP) that permitted the recovery of carrier-specific
costs directly related to the provision of long-term LNP via a federally
tariffed end-user monthly charge. GTE subsequently filed an LNP tariff with the
FCC, and in March 1999 instituted an end-user number portability fee. This
charge is levied on all business and residential customers. In June 1999, GTE's
tariffed LNP charge was reviewed and accepted by the FCC at $0.36 per access
line per month.
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Internet Service Traffic
ILECs are required to provide open access to all ISPs, while cable television
operators are not. Several major cable television operators providing Internet
access through cable modem facilities are only offering their affiliated ISPs to
consumers. Cable television operators that do allow customers to select
non-affiliated ISPs often require the customer to also pay for their affiliated
ISP's service (i.e., to pay twice for the same service). GTE has been active in
encouraging municipalities engaged in reviewing cable television mergers or
franchise renewals to require cable modem open access as a condition for
approval. The City of Portland, Oregon was first to adopt such a requirement and
AT&T Corp. has appealed that decision. Arguments took place in November 1999
before the Ninth Circuit Court.
In October 1999, GTE filed an antitrust lawsuit contending that cable TV
providers' refusal to provide ISPs with "open access" to cable modem platforms
is a violation of federal antitrust law. The lawsuit filed in the U.S. District
Court in Pittsburgh, names Tele-Communications, Inc., (now a unit of AT&T
Corp.), Comcast Corp., and Excite@Home and seeks an injunction to require open
access and damages.
GTE's interconnection contracts with CLECs specify that parties compensate each
other for the exchange of local traffic, defined as traffic that is originated
by an end-user of one party and terminating to the end-user of the other party
within GTE's current local serving area. It is GTE's position that ISP traffic
does not satisfy the definition of local traffic, and that no compensation
should be paid to CLECs that carry this traffic to their ISP customers. In a
recent ruling, the FCC has clarified that ISP traffic is largely interstate and
is not local traffic. Nevertheless, the FCC permitted state commissions to
arbitrate whether ILECs should pay as reciprocal compensation for ISP-bound
traffic, based upon existing interconnection agreements, until the FCC reaches a
decision on a long-term compensation scheme. GTE challenged this FCC conclusion
in federal district court. In March 2000, the Court vacated and remanded the
FCC's ruling that ISP-bound calls are interstate, since the FCC failed to
provide a satisfactory explanation to support its ruling. As a result, the
Court did not address GTE's argument that the Telecommunications Act preempts
state commission authority to arbitrate disputes over non-local traffic.
International
The global communications environment continues to undergo significant change.
Many developed and developing countries are opening their telecommunications
markets to full infrastructure and service competition and removing old
monopolistic structures. Countries are upgrading their existing networks making
them more compatible with new Internet, data, wireless, broadband and video
technologies and applications. In addition, these rapid changes are forcing the
development of new regulatory policies. Many countries continue to face the need
for new regulations to deal with further convergence, deregulation and
privatization taking place in the global marketplace.
Throughout the Latin American region, telecommunication service providers will
face further deregulation and a series of challenges and new opportunities in
2000. The Venezuelan government is considering a new telecommunications law,
which will further open its market. CONATEL (the Venezuelan telecommunications
regulator) and Compania Anonima Nacional Telefonos de Venezuela (CANTV), an
affiliate of GTE, recently evaluated recommendations from international industry
experts and negotiated an agreement on tariff rebalancing, network modernization
commitments and quality of service standards. The agreement will take effect in
March 2000 and will be valid through the remainder of 2000.
The Argentine telecom market has recently moved from two basic operators in
separate regions to four nationwide full-service providers. GTE's international
affiliate, CTI Integrales, is one of these full-service providers and is
expected to begin offering nationwide service in the first half of 2000. GTE's
other Argentine subsidiaries, CTI and GTE PCS, S.A. were awarded PCS licenses in
1999. Together they will provide the first nationwide wireless service in
Argentina.
In the Dominican Republic, Compania Dominicana de Telefonos, C. Por A.
(CODETEL), a wholly-owned subsidiary of GTE, submitted a price rebalancing plan
to its regulatory agency, Indotel. The plan was implemented in January 2000. It
calls for increased local rates effective in June 2000.
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Since the privatization of TELPRI and changes in intra-island presubscription
regulation, GTE has played an integral role in facilitating TELPRI's entry into
the off-island long distance market. TELPRI is also aggressively pursuing the
data and Internet markets as well as improving the quality of service in their
core wireline and wireless businesses. TELPRI continues to be the largest
provider of local service on the island.
In Taiwan, where a Company affiliate provides PCS service, the legislature
passed a new Telecom Act in October 1999, which increased the limits on foreign
investment from 20% to 60% (40% direct and 20% indirect investment). GTE is
pursuing telecommunications opportunities including entering the full service
provider business with Taiwanese partners. In addition, Taiwan has been working
to meet World Trade Organization Basic Telecom Agreement requirements in order
to become an integral member of that landmark agreement.
Due to further liberalization of the telecommunications industry in Canada,
Quebec Tel has been experiencing increasing competition. To counter this threat,
Quebec Tel will expand its service offerings outside of its franchise territory.
YEAR 2000 CONVERSION
GTE does not believe that the Year 2000 rollover has had, or will have, any
material adverse impacts on the Company's results of operations or liquidity.
Additionally, the Company has not experienced any material contingencies
regarding customers or major suppliers. GTE experienced no significant Year 2000
events, and service to GTE's customers was unaffected by the rollover to January
1, 2000. GTE completed its Year 2000 renovation, conducted system testing and
returned to production the essential systems that support its businesses
substantially in advance of December 31, 1999. Additionally, GTE's portion of
the public switched telephone network (PSTN) in the United States was upgraded
for Year 2000, and all of GTE's access lines have been operating using Year 2000
compliant central office switches and network elements since mid-year 1999. With
the successful transition into 2000, GTE believes that the risk of disruptions
arising from time/date transitions, that would affect GTE's ability to provide
basic services, has been eliminated.
GTE continues to enhance its normal business continuity planning to address
potential Year 2000 and other time/date interruptions. These include: potential
gradual system degradation after January 1, 2000; possible accumulation of
processing errors or degraded performance; leap year processing through February
29, 2000; and potential impacts of degrading performance from partners. GTE's
disaster preparedness recovery plans include procedures and activities for a
"multi-regional" time/date contingency, if it occurs.
The estimated total multi-year cost of GTE's Year 2000 Program is expected to
total approximately $380 million, of which $372 million has been expended
through December 31, 1999. Year 2000 renovation costs are expensed in the year
incurred. Approximately 69% of GTE's program effort involved U.S. domestic
operations. With the successful transition from 1999 to 2000, GTE has completed
its Year 2000 Program. All future efforts will be performed under normal
business operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires entities that use derivative
instruments to measure these instruments at fair value and record them as assets
or liabilities on the balance sheet. It also requires entities to reflect the
gains or losses associated with changes in the fair value of these derivatives,
either in earnings or as a separate component of comprehensive income, depending
on the nature of the underlying contract or transaction. The Company is
currently assessing the impact of adopting SFAS No. 133, which is effective
January 1, 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which
currently must be adopted by June 30, 2000. SAB No. 101 provides
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additional guidance on revenue recognition as well as criteria for when revenue
is generally realized and earned and also requires the deferral of incremental
direct selling costs. The Company is currently assessing the impact of SAB No.
101.
PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
Bell Atlantic and GTE Corporation have announced a proposed merger of equals
under a definitive merger agreement dated July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock they own. Bell Atlantic shareholders
will continue to own their existing shares after the merger.
The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. The completion of the merger is subject to a
number of conditions, including certain regulatory approvals and receipt of
opinions that the merger will be tax-free. At annual meetings held in May 1999,
the shareholders of each company approved the merger. All state regulatory
commissions have now approved the merger and the only remaining approval is
required from the FCC. Both companies are working diligently to complete the
merger and are targeting completion of the merger in the second quarter of 2000.
This Management's Discussion and Analysis is based on GTE's own historical
financial results. It does not reflect the impact that the proposed merger will
have on future financial performance of the post-merger combined company.
Further information about the proposed merger is provided in the discussion of
"Recent Developments" below and in Note 19 to the consolidated financial
statements.
RECENT DEVELOPMENTS
On January 27, 2000, GTE and Bell Atlantic filed a comprehensive proposal with
the FCC to resolve the issues associated with the long-distance and
Internet-related service offerings that GTE provides to consumers and
businesses. The FCC issued the Companies' proposal for formal public comment. If
approved by the FCC, in order to permit the closing of the GTE/Bell Atlantic
merger, this proposal would require the transfer of substantially all of GTE
Internetworking's existing nationwide data business into a separate corporation.
In exchange for the transfer of GTE Internetworking, the merged GTE/Bell
Atlantic will have an option to increase its ownership interest to a controlling
level once it receives regulatory relief to provide intraLATA long-distance and
related services. In addition, as a result of the legal prohibition that will
apply to GTE once the merger with Bell Atlantic is closed, effective March 30,
2000, GTE will no longer provide long-distance voice telephone service in the
states where Bell Atlantic operates and does not yet have approval to offer this
long-distance service. This event affects a small percentage of GTE's customer
base.
In November 1999, the Company announced that it had agreed to form a company
with Crown Castle International Corporation to own, operate and lease space on
the Company's existing network of cell sites. The newly created entity will be
controlled by Crown Castle International Corporation, and up to approximately
25% of the entity will be owned by the Company. 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 cell
sites by paying a monthly lease fee of approximately $1,400 per cell site to the
entity. The first phase closed on January 31, 2000, in which the Company
contributed over 600 cellular towers in exchange for approximately $198 million
in cash. The Company will continue to own other cell site equipment, including
switching equipment, antennas and other electronic components.
On September 21, 1999, Bell Atlantic signed a definitive agreement with Vodafone
AirTouch plc to create a national wireless business composed of both companies'
U.S. wireless assets. The completion of this transaction is subject to a number
of conditions, including certain regulatory approvals. In January 2000, the
transaction was approved by the shareholders of Vodafone AirTouch. Bell Atlantic
expects the transaction to close in April 2000. The agreement between Bell
Atlantic and Vodafone AirTouch to create a new
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wireless business and the agreement between Bell Atlantic and GTE to merge are
independent transactions. The completion of one is not contingent upon
completion of the other.
On February 1, 2000, GTE and ALLTEL Corporation signed two agreements to
exchange certain wireless interests. The agreements will resolve several
wireless overlaps related to the GTE/Bell Atlantic merger. The transactions are
expected to be completed in the second quarter of 2000. Additional wireless
overlaps related to the GTE/Bell Atlantic merger are also expected to be
resolved in the near future.
In the first quarter of 2000, the Company announced that it will retire certain
securities earlier than the stated date. It is expected that the Company will be
recording an after-tax extraordinary charge of approximately $33 million for the
early redemption of the securities.
On March 27, 2000, GTE sold GTE CyberTrust, a part of GTE's Other National
Operations, to Baltimore Technologies plc, an Internet security company.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this Management's Discussion and Analysis of Financial Condition and Results
of Operations, and elsewhere in this Annual Report on Form 10-K, the Company has
made forward-looking statements. These statements are based on the Company's
estimates and assumptions and are subject to certain risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Company, as well as those statements
preceded or followed by the words "anticipates," "believes," "estimates,"
"expects," "hopes," "targets" or similar expressions. For each of these
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The future results of the Company could be affected by subsequent events and
could differ materially from those expressed in the forward-looking statements.
If future events and actual performance differ from the Company's assumptions,
the actual results could vary significantly from the performance projected in
the forward-looking statements.
The following important factors could affect the future results of the Company
and could cause those results to differ materially from those expressed in the
forward-looking statements: 1) materially adverse changes in economic conditions
in the markets served by the Company or by companies in which GTE has
substantial investments; 2) material changes in available technology; 3) the
final resolution of federal, state and local regulatory initiatives and
proceedings, including arbitration proceedings, and judicial review of those
initiatives and proceedings, pertaining to, among other matters, the terms of
interconnection, access charges, universal service, unbundled network elements
and resale rates; 4) the extent, timing, success and overall effects of
competition from others in the local telephone and intraLATA toll service
markets; 5) the timing of, and regulatory or other conditions associated with,
the completion of our merger with Bell Atlantic and our ability to combine
operations and obtain revenue enhancements and cost savings following the
merger; and 6) the timing of, and regulatory or other conditions associated
with, the completion of the wireless joint venture between Bell Atlantic and
Vodafone AirTouch plc, and the ability of the new wireless enterprise to combine
operations and obtain revenue enhancements and cost savings. In addition, GTE
has embarked on a major initiative to expand its service capability in the data
communication, long-distance and enhanced services segments of the
telecommunications marketplace and to provide a bundle of products and services
both in and outside of its traditional service territories. Whether the Company
realizes the benefits of these initiatives depends on GTE's ability to
successfully develop the network facilities and systems required to provide
these enhanced services, the success of its marketing initiatives, the levels of
demand that are created for these services and the level of competition the
Company faces as it seeks to penetrate new markets and emerging markets for new
products and services. While GTE's management believes that it will be
successful in implementing these new
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initiatives, there are uncertainties associated with its ability to increase
revenue and income growth rates to the levels targeted through these initiatives
and its ability to do so within the planned timeframes or investment levels.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GTE views derivative financial instruments as risk management tools and, in
accordance with Company policy, does not utilize them for speculative or trading
purposes. GTE is also not a party to any leveraged derivatives. GTE is exposed
to market risk from changes in interest rates and foreign currency exchange
rates, as well as changes in the market price of GTE's common stock. GTE manages
its exposure to market risks through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments that have been authorized pursuant to the Company's policies and
procedures. The use of these derivatives allows GTE to reduce its overall
exposure to market risk, as the gains and losses on these contracts
substantially offset the gains and losses on the liabilities being hedged. In
addition, GTE enters into derivative financial instruments with a diversified
group of major financial institutions in order to manage its exposure to
nonperformance on such instruments.
GTE uses derivative financial instruments to manage its exposure to interest
rate movements and to reduce borrowing costs. GTE's net exposure to interest
rate risk primarily consists of floating rate instruments that are benchmarked
to U.S. and European short-term money market interest rates. GTE manages this
risk by using interest rate swaps to convert floating rate long-term and
short-term debt to synthetic fixed rate instruments. GTE also uses forward
interest rate swaps and forward contracts to sell U.S. Treasury bonds to hedge
interest rates on anticipated long-term debt issuances.
Based on GTE's interest rate sensitive derivative financial instruments
outstanding at December 31, 1999, a 100 basis point increase in interest rates
as of December 31, 1999, would result in a net gain to GTE of $16 million.
Conversely, a 100 basis point decrease in interest rates would result in a net
loss to GTE of $17 million. Any increase or decrease in the market value of
GTE's interest rate sensitive derivative financial instruments would be
substantially offset by a corresponding decrease or increase in the market value
of the underlying liability or anticipated debt issuance.
GTE uses foreign currency derivative instruments to reduce its exposure to
adverse changes in foreign currency rates. The use of these derivatives allows
GTE to reduce its overall exposure to exchange rate fluctuations, as the gains
and losses on these contracts substantially offset the gains and losses on
assets and liabilities being hedged. The Company's exposure to foreign exchange
rates primarily exists with respect to loans denominated in British pounds and
short-term investments denominated in Canadian dollars. As of December 31, 1999,
GTE's exposure resulting from fluctuations in foreign currency exchange rates
was not material.
In the past, GTE issued stock options to certain of its employees that had
tandem stock appreciation rights. To minimize GTE's exposure to compensation
expense related primarily to these stock appreciation rights, as well as other
forms of stock-based compensation, GTE has purchased long-term call options on
its common stock and used the gains and losses from the call options to offset
compensation expense. As of December 31, 1999, approximately 2.5 million call
options were outstanding. GTE accounts for the call options by marking to market
the gains and losses in the period that they occur.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C>
REVENUES AND SALES $ 25,336 $ 25,473 $ 23,260
-------- -------- --------
OPERATING COSTS AND EXPENSES
Cost of services and sales 10,954 10,741 9,203
Selling, general and administrative 4,405 4,821 4,560
Depreciation and amortization 3,757 3,820 3,886
Special items (1,116) 755 --
-------- -------- --------
Total operating costs and expenses 18,000 20,137 17,649
-------- -------- --------
OPERATING INCOME 7,336 5,336 5,611
OTHER (INCOME) EXPENSE
Interest - net 1,277 1,253 1,145
Equity in income of unconsolidated companies (432) (240) (217)
Other - net 137 278 265
-------- -------- --------
Income before income taxes 6,354 4,045 4,418
Income taxes 2,291 1,553 1,624
-------- -------- --------
Income before extraordinary charges 4,063 2,492 2,794
Extraordinary charges (30) (320) --
-------- -------- --------
NET INCOME $ 4,033 $ 2,172 $ 2,794
======== ======== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary charges $ 4.18 $ 2.59 $ 2.92
Extraordinary charges (.03) (.33) --
-------- -------- --------
NET INCOME $ 4.15 $ 2.26 $ 2.92
======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary charges $ 4.15 $ 2.57 $ 2.90
Extraordinary charges (.03) (.33) --
-------- -------- --------
NET INCOME $ 4.12 $ 2.24 $ 2.90
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING (IN MILLIONS):
Basic 972 963 958
Diluted 979 968 962
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE> 46
GTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
-------- --------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 936 $ 467
Receivables, less allowances of $551 and $395 5,058 4,785
Inventories and supplies 702 668
Net assets held for sale (see Note 2 and Note 11) 1,802 274
Other 945 587
-------- --------
Total current assets 9,443 6,781
-------- --------
Property, plant and equipment, net (see Note 2 and Note 11) 23,233 24,866
Prepaid pension costs 6,073 4,927
Franchises, goodwill and other intangibles 6,492 3,144
Investments in unconsolidated companies 3,932 2,210
Other assets 1,659 1,687
-------- --------
Total assets $ 50,832 $ 43,615
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term obligations, including current maturities $ 9,608 $ 4,148
Accounts payable and accrued expenses 4,410 4,138
Taxes payable 1,372 1,071
Dividends payable 458 470
Other 487 528
-------- --------
Total current liabilities 16,335 10,355
-------- --------
Long-term debt 13,957 15,418
Employee benefit plans 4,418 4,404
Deferred income taxes 3,406 1,948
Minority interests in equity of subsidiaries 1,266 1,984
Other liabilities 623 740
-------- --------
Total liabilities 40,005 34,849
-------- --------
Shareholders' equity
Common stock (1,002,200,284 and 991,374,778 shares issued) 50 50
Additional paid-in capital 8,680 7,884
Retained earnings 4,953 2,740
Accumulated other comprehensive loss (376) (375)
Guaranteed ESOP obligations (453) (509)
Treasury stock (34,791,857 and 23,377,388 shares, at cost) (2,027) (1,024)
-------- --------
Total shareholders' equity 10,827 8,766
-------- --------
Total liabilities and shareholders' equity $ 50,832 $ 43,615
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE> 47
GTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
OPERATIONS
Income before extraordinary charges $ 4,063 $ 2,492 $ 2,794
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 3,757 3,820 3,886
Special items (1,116) 755 --
Employee retirement benefits (1,272) (728) (746)
Deferred income taxes 1,217 471 456
Provision for uncollectible accounts 597 470 418
Equity in income of unconsolidated companies (432) (240) (217)
Changes in current assets and current liabilities,
excluding the effects of acquisitions and
dispositions:
Receivables - net (927) (767) (622)
Other current assets (179) (5) (220)
Accrued taxes and interest 471 381 86
Other current liabilities 9 (662) 325
Other - net 131 (97) 4
------- ------- -------
Net cash from operations 6,319 5,890 6,164
------- ------- -------
INVESTING
Capital expenditures (4,940) (5,609) (5,128)
Acquisitions and investments (3,813) (121) (927)
Proceeds from sales of assets 1,201 209 73
Other - net (197) 13 89
------- ------- -------
Net cash used in investing (7,749) (5,508) (5,893)
------- ------- -------
FINANCING
Common stock issued 851 447 288
Purchase of treasury stock (1,314) -- (576)
Dividends paid (1,828) (1,807) (1,802)
Long-term debt issued 4,637 3,934 2,407
Long-term debt and preferred securities retired (1,931) (1,988) (2,417)
Increase (decrease) in short-term obligations,
excluding current maturities 1,521 (978) 2,015
Other - net (37) (74) (40)
------- ------- -------
Net cash from (used in) financing 1,899 (466) (125)
------- ------- -------
Increase (decrease) in cash and cash equivalents 469 (84) 146
Cash and cash equivalents:
Beginning of year 467 551 405
------- ------- -------
End of year $ 936 $ 467 $ 551
======= ======= =======
CASH PAID DURING THE YEAR FOR
Interest $ 1,381 $ 1,321 $ 1,282
Income taxes 645 854 1,057
</TABLE>
See Notes to Consolidated Financial Statements.
46
<PAGE> 48
GTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional Retained Other Guaranteed
Common Paid-in Earnings Comprehensive ESOP Treasury
Stock Capital (Deficit) Loss Obligations Stock Total
--------- ---------- --------- ------------- ----------- ---------- ---------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY,
DECEMBER 31, 1996 $ 49 $ 7,416 $ 1,370 $ (168) $ (575) $ (756) $ 7,336
Net income 2,794 2,794
Dividends declared (1,800) (1,800)
Common shares issued - employee
plans (3,341,606 shares) 146 146
Treasury shares distributed -
employe plans (3,279,387
shares) 142 142
Purchase of treasury stock
(11,719,200 shares) (536) (536)
Other (2) 8 (75) 25 (44)
------- ------- ------- ------- ------- -------- --------
SHAREHOLDERS' EQUITY,
DECEMBER 31, 1997 49 7,560 2,372 (243) (550) (1,150) 8,038
Net income 2,172 2,172
Dividends declared (1,811) (1,811)
Common shares issued - employee
plans (7,121,891 shares) 1 320 321
Treasury shares distributed -
employe plans (2,875,700
shares) 126 126
Other 4 7 (132) 41 (80)
------- ------- ------- ------- ------- -------- --------
SHAREHOLDERS' EQUITY,
DECEMBER 31, 1998 50 7,884 2,740 (375) (509) (1,024) 8,766
Net income 4,033 4,033
Dividends declared (1,828) (1,828)
Common shares issued - employee
plans (10,825,506 shares) 540 540
Treasury shares distributed -
employee plans (6,320,331
shares) 311 311
Purchase of treasury stock
(17,734,800 shares) (1,314) (1,314)
Tax benefit from exercise of
stock options and other 256 8 (1) 56 319
------- ------- ------- ------- ------- -------- --------
SHAREHOLDERS' EQUITY,
DECEMBER 31, 1999 $ 50 $ 8,680 $ 4,953 $ (376) $ (453) $ (2,027) $ 10,827
======= ======= ======= ======= ======= ======== ========
</TABLE>
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Net income $ 4,033 $ 2,172 $ 2,794
------- ------- -------
Other comprehensive income (loss):
Foreign currency translation adjustments 27 (144) (90)
Unrealized gains (losses) on securities, net of taxes
of $(13), $6 and $8 (28) 12 15
------- ------- -------
Other comprehensive loss (1) (132) (75)
------- ------- -------
Comprehensive income $ 4,032 $ 2,040 $ 2,719
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
47
<PAGE> 49
GTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GTE Corporation and subsidiaries ("GTE" or "the Company") is one of the world's
largest telecommunications companies with an array of products and services that
is among the broadest in the industry. GTE's National and International
Operations serve approximately 35 million telephone access lines through
subsidiaries in the United States, Canada and the Dominican Republic, and
through affiliates in Canada, Puerto Rico and Venezuela. GTE is a leading
wireless operator in the United States, with more than 7.1 million wireless
customers and the opportunity to serve 72.5 million potential wireless
customers. Outside the fifty states, GTE operates wireless networks serving
approximately 6.7 million customers with 34.8 million potential wireless
customers through subsidiaries in Argentina, Canada and the Dominican Republic,
and affiliates in Canada, Puerto Rico, Taiwan and Venezuela. GTE also
participates in a venture which operates a paging network in China. GTE provides
internetworking services ranging from dial-up Internet access for residential
and small-business consumers to Web-based applications for Fortune 500 companies
and has in place a 17,000 mile nationwide OC-192 fiber-optic network. GTE is
also a leader in directories and telecommunications-based information services
and systems. For further information concerning our business, see Note 15.
BASIS OF PRESENTATION
GTE prepares its consolidated financial statements in accordance with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect reported amounts. Actual results could differ from those
estimates.
The consolidated financial statements of GTE include the accounts of all
majority-owned subsidiaries. All significant intercompany amounts have been
eliminated. Investments in 20% to 50%-owned companies and less than 20%-owned
cellular partnerships over which the Company exercises significant influence are
accounted for on the equity basis (see Note 5). Other investments of less than
20% are accounted for on the cost basis.
Reclassifications of prior-year data have been made, where appropriate or as
otherwise disclosed in these notes, to conform to the 1999 presentation.
REVENUE RECOGNITION
Revenues are recognized when services are rendered or products are delivered to
customers. Long-term contracts are accounted for using the
percentage-of-completion method, with revenues recognized in the proportion that
costs incurred bear to the estimated total costs at completion. Expected losses
on such contracts, if any, are charged to income currently.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment of all GTE subsidiaries is depreciated on a
straight-line basis over the following estimated useful asset lives:
<TABLE>
<CAPTION>
Average lives (in years)
------------------------
<S> <C>
Buildings 20 - 40
Inside communications plant 5 - 10
Outside communications plant 8 - 40
Furniture, vehicles and other equipment 3 - 10
</TABLE>
GTE's telephone operating subsidiaries depreciate assets using the remaining
life methodology. This method depreciates the net investment in telephone plant
less anticipated net salvage value over remaining useful asset lives and
requires the periodic review and revision of depreciation rates.
48
<PAGE> 50
When depreciable plant of the telephone subsidiaries is retired in the normal
course of business, the amount of such plant is deducted from the respective
plant and accumulated depreciation accounts. Gains or losses on disposition are
amortized with the remaining net investment in telephone plant. When depreciable
telephone plant is retired outside the normal course of business, for example if
a local exchange is sold, any resulting gain or loss is included in operating
income.
When depreciable assets of other subsidiaries are retired or otherwise disposed
of, the related cost and accumulated depreciation are deducted from the plant
accounts and any resulting gain or loss is included in operating income.
Franchises, goodwill and certain other intangibles are generally amortized on a
straight-line basis over the periods to be benefited or 40 years, whichever is
less. Certain acquired customer bases are amortized in a manner consistent with
historical attrition patterns. Amortization expense for consolidated
subsidiaries was $175 million, $131 million and $96 million in 1999-97,
respectively. Accumulated amortization was $957 million and $819 million at
December 31, 1999 and 1998, respectively. Goodwill resulting from investments in
unconsolidated subsidiaries is amortized on a straight-line basis over the
periods to be benefited or 40 years, whichever is less.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of subsidiaries operating in foreign countries are
translated into U.S. dollars using the exchange rates in effect at the balance
sheet date. Results of operations are translated using the average exchange
rates prevailing throughout the period. For most subsidiaries and affiliates,
the effects of exchange rate fluctuations on translating foreign currency assets
and liabilities into U.S. dollars are included in the other comprehensive income
component of shareholders' equity. For those affiliates operating in highly
inflationary economies, gains and losses associated with the effects of exchange
rate fluctuations on translating foreign currency assets and liabilities into
U.S. dollars are included in net income.
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 significant pension obligations are settled and the
gain or loss is determinable.
VALUATION OF ASSETS
The impairment of tangible and intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," a determination of impairment, if any, is
made based on estimated future cash flows, salvage value or expected net sales
proceeds depending on the circumstances. In instances where goodwill has been
recorded in connection with impaired assets, the carrying amount of the goodwill
is first eliminated before any reduction to the carrying value of tangible or
identifiable intangible assets. GTE's policy is to record asset impairment
losses, and any subsequent adjustments to such losses as initially recorded, as
well as net gains or losses on sales of assets as a component of operating
income. Under Accounting Principles Board Opinion No. 17, "Intangible Assets,"
the Company also annually evaluates the future period over which the benefit of
goodwill will be received, based on future cash flows, and changes the
amortization life accordingly.
INCOME TAXES
Deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each reporting period. Deferred tax assets and
liabilities are subsequently adjusted, to the extent necessary, to reflect tax
rates expected to be in effect when the temporary differences reverse. A
valuation allowance is established for deferred tax assets for which realization
is not likely.
EARNINGS PER COMMON SHARE
All earnings per share computations and presentations are in accordance with
SFAS No. 128, "Earnings per Share" (see Note 14).
49
<PAGE> 51
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.
FINANCIAL INSTRUMENTS
GTE uses a variety of financial instruments to hedge its exposure to
fluctuations in interest rates, foreign exchange rates and in compensation
expense related to GTE's common stock price appreciation. The Company does not
use financial instruments for speculative or trading purposes, nor is the
Company a party to leveraged derivatives. Amounts to be paid or received under
interest rate swaps are accrued as interest expense. Gains or losses on foreign
exchange contracts are recognized based on changes in exchange rates, as are
offsetting foreign exchange gains or losses on the foreign currency obligations
being hedged. Gains or losses on long-term call options on GTE's common stock,
which hedge GTE's exposure to compensation expense related to stock-based
compensation, are recognized based on fluctuations in the market price of GTE's
common stock. Gains or losses recognized on call options offset compensation
expense in GTE's consolidated statements of income.
INVENTORIES AND SUPPLIES
Inventories and supplies are stated at the lower of cost, determined principally
by the average cost method, or net realizable value.
SOFTWARE
Software costs are recognized in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which became effective in January 1999. GTE capitalizes costs
associated with externally acquired software (including right-to-use fees) for
internal use. Project costs associated with internally developed software are
segregated into three project stages: preliminary project stage, application
development stage and post-implementation stage. Costs associated with both the
preliminary project stage and the post-implementation stage are expensed as
incurred. Costs associated with the application development stage are
capitalized. Software maintenance and training costs are expensed as incurred.
Capitalized software is generally amortized on a straight-line basis over its
useful life, not to exceed five years for non-network software or three years
for network software.
Prior to the adoption of SOP 98-1 in 1999, GTE classified software as either
network-related or non-network related. For network-related software, initial
operating systems software was capitalized and amortized over the life of the
related hardware. All other network-related software, including right-to-use
fees, was expensed as incurred.
The net book value of capitalized software at December 31, was as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in Millions)
<S> <C> <C>
Network $203 $ --
Non-network 565 301
---- -----
Total net book value $768 $ 301
==== =====
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires entities that use derivative
instruments to measure these instruments at fair value and record them as assets
or liabilities on the balance sheet. It also requires entities to reflect the
gains or losses associated with changes in the fair value of these derivatives,
either in earnings or as a separate component of comprehensive income, depending
on the nature of the underlying contract or transaction. The Company is
currently assessing the impact of adopting SFAS No. 133, as amended, which is
effective January 1, 2001.
50
<PAGE> 52
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which currently must be adopted by June 30, 2000. SAB No. 101
provides additional guidance on revenue recognition as well as criteria for when
revenue is generally realized and earned and also requires the deferral of
incremental direct selling costs. The Company is currently assessing the impact
of SAB No. 101.
2. STRATEGIC REPOSITIONING - NET ASSETS HELD FOR SALE
During the first quarter of 1998, the Company committed to a repositioning plan
that resulted in a decision to sell GTE Government Systems, GTE Airfone and
approximately 1.6 million non-strategic domestic access lines. When completed,
all of these transactions are expected to generate after-tax proceeds
aggregating in excess of $4 billion. Given the decision to sell, the Company
stopped recording depreciation expense for these assets. Accordingly,
depreciation expense was lowered by $325 million and $100 million in 1999 and
1998, respectively.
On June 22, 1999, GTE entered into an agreement with General Dynamics
Corporation to sell three of the four divisions of GTE Government Systems
Corporation, which closed on September 1, 1999. On November 4, 1999, GTE entered
into an agreement with DynCorp to sell the remaining major division, which
closed on December 10, 1999. (See Note 3.) The net assets of GTE Government
Systems were classified as "Net assets held for sale" in the consolidated
balance sheets at December 31, 1998. Revenues for 1999, up to the date of the
sale, from GTE Government Systems were $1.1 billion. In 1998 and 1997, revenues
were $1.4 billion and $1.3 billion, respectively.
On June 24, 1999, GTE entered into an agreement with Oak Hill Capital Partners,
L.P. (Oak Hill) to sell GTE Airfone. The agreement was terminated on October 19,
1999 when GTE and Oak Hill were unable to agree on final terms. GTE will
continue to pursue the sale of GTE Airfone. Accordingly, GTE Airfone's net
assets are classified as "Net assets held for sale" in the consolidated balance
sheets at December 31, 1999 and 1998. Revenues from GTE Airfone were $138
million, $157 million and $136 million for 1999-1997, respectively.
During 1999, the Company entered definitive agreements to sell all of the
domestic switched access lines held for sale. These access lines are located in
Alaska, Arizona, Arkansas, California, Illinois, Iowa, Minnesota, Missouri,
Nebraska, New Mexico, Oklahoma, Texas and Wisconsin. All sales are contingent
upon final agreements and regulatory approvals, and are expected to close in
2000. Based on the signing of definitive agreements, the net property, plant and
equipment of $1.7 billion related to these access lines has been reclassified as
"Net assets held for sale" in the consolidated balance sheets as of December 31,
1999. The net book value of these access lines is reflected in "Property, plant
and equipment, net" in the consolidated balance sheets at December 31, 1998 (see
Note 11). The Company will continue to operate all of these assets until sold.
The 1.6 million access lines represent approximately 8% of the switched access
lines that the Company had in service at the end of 1999, and contributed
approximately 4% to 1999 and 1998 consolidated revenues and 5% to 1997
consolidated revenues.
51
<PAGE> 53
The components of the net assets held for sale at December 31 are as follows:
<TABLE>
<CAPTION>
1999(a) 1998(b)
-------- --------
(Dollars in Millions)
<S> <C> <C>
Current assets $ 24 $ 524
Property, plant and equipment, net 1,871 282
Other noncurrent assets 10 122
Current liabilities (40) (413)
Noncurrent liabilities (63) (241)
------ ------
Net assets held for sale $1,802 $ 274
====== ======
</TABLE>
(a) Represents GTE Airfone and approximately 1.6 million non-strategic
access lines, as described above.
(b) Represents GTE Government Systems and GTE Airfone, as described above.
3. SPECIAL ITEMS
1999 SPECIAL ITEMS
During 1999, the Company recorded a net pretax gain of $1.1 billion ($651
million after-tax, or $0.66 per diluted share), which included the following:
o During the first quarter of 1999, the Company recorded a pretax gain of
$513 million associated with the merger of BC TELECOM and TELUS, as
described in Note 5. The after-tax impact of this gain is $308 million, or
$.31 per diluted share.
o During the first quarter of 1999, the Company also recorded a special
charge of $192 million ($119 million after-tax, or $.12 per diluted share)
associated with employee separation programs. The charge included
separation and related benefits such as outplacement and benefit
continuation costs for approximately 3,000 employees. The programs were
completed in early April 1999, as planned, consistent with the original
cost estimates.
o During the third quarter of 1999, the Company recorded special items of
$705 million ($416 million after-tax, or $.42 per diluted share). Included
in the special items was a pretax gain of $754 million on the sale of
substantially all of GTE Government Systems on September 1, 1999 to General
Dynamics Corporation for $1.03 billion in cash. The after-tax impact of
this gain was $445 million, or $.45 per diluted share. Also included was a
special charge of $49 million ($29 million after-tax, or $.03 per diluted
share) primarily related to the impairment of assets associated with the
Company's decision to exit certain small, non-core business activities.
o During the fourth quarter of 1999, the Company recorded a net pretax gain
of $90 million, primarily associated with the sale of the remaining major
division of GTE Government Systems to DynCorp, partially offset by a
special charge taken to exit certain small non-strategic businesses. The
after-tax impact of this net gain is $46 million, or $.05 per diluted
share.
1998 SPECIAL ITEMS
During the first quarter of 1998, the Company committed to a plan to sell or
exit various business activities and reduce costs through employee reductions
and related actions. As a result of these actions, during the first quarter of
1998, the Company recorded pretax charges of $755 million, $482 million
after-tax, or $.50 per diluted share, for the year. The strategic actions to
which the 1998 special charges relate were completed as planned consistent with
the original cost estimates. The plan included the proposed sale of GTE
Government Systems Corporation, GTE Airfone Incorporated and approximately 1.6
million non-strategic domestic access lines located in 13 states. The status of
these transactions as of December 31, 1999 is discussed in Note 2.
52
<PAGE> 54
The following table summarizes the special charges by major category and by
business unit affected (Dollars in Millions).
<TABLE>
<S> <C> <C> <C>
Major Category: Business Unit:
Asset impairments $ 483 National Operations
Exit costs 34 Network Services $171
Employee related and other actions Wireless Products and Services 91
Severance 77 Other National Operations 397
Other 30 International Operations 38
Other actions 131 Corporate and other (a) 58
----- ----
Total $ 755 Total $755
===== ====
</TABLE>
(a) The $58 million included in "Corporate and other" relates to
severance and related costs associated with the closing of several
administrative facilities, including the Company's corporate
headquarters and worldwide training facility in Connecticut.
Asset impairments and exit costs
Based on the decision to sell, the Company recorded a pretax charge of $200
million to reduce the carrying value of GTE Airfone's assets to estimated net
sales proceeds. No charge was recorded for GTE Government Systems or the access
lines to be sold because their estimated fair values were in excess of their
carrying values.
During the first quarter of 1998, the Company also committed to a plan to exit a
number of other non-strategic business activities. As a result, the Company
recorded a pretax charge of $156 million to reduce the carrying value of
affected assets to expected net salvage value and to recognize costs resulting
from the exit plan. The major components of the charge included:
o the write-off of network equipment and supplies for discontinued wireless
products and services ($81 million);
o the shutdown of business units developing interactive video products and
services and excess printing facilities ($42 million); and
o the write-off of impaired assets in Latin America ($33 million).
After completing the review of its operations, the Company also decided to scale
back the deployment of the hybrid fiber coax (HFC) video networks that it had
built in certain test markets. Although the Company is obligated to, and will
continue to, use the existing HFC networks to provide video service in these
markets, technological innovations have created alternative ways for the Company
to deliver video and high-speed data services in the future at a significantly
lower cost. Due to the significant change in the scale of the HFC networks and
the effect on future revenues and expenses, the Company recorded a pretax charge
for impairment of approximately $161 million based on estimated future cash
flows. GTE continues to evaluate its long-term strategic options associated with
its video business.
Employee related and other actions
During the first quarter of 1998, the Company also decided to consolidate
facilities and centralize or eliminate a variety of employee functions and, as a
result, recorded a $107 million pretax charge. During the second half of 1998,
the Company closed several administrative facilities, including its corporate
headquarters in Connecticut and approximately 140 domestic retail stores and
other locations operated by its National Operations. The cost of these actions
is composed primarily of employee severance, outplacement and benefit
continuation costs for approximately 1,700 employees and other costs to exit
locations no longer used by the Company.
The Company also recorded a pretax charge of approximately $131 million related
to nonrecurring federal and state regulatory rulings affecting its Network
Services unit. Approximately two-thirds of this charge relates to nonrecurring
access rate refunds applied by the Federal Communications Commission (FCC)
retroactively in 1997.
53
<PAGE> 55
In addition, the charge also included the write-off of mandated costs, including
generic software, and other costs incurred by the Company for which revenue
recovery was not allowable under the regulatory process.
4. EXTRAORDINARY CHARGES
During the first quarter of 1999, GTE repurchased $338 million of high-coupon
debt through a public tender offer prior to its stated maturity, resulting in a
one-time, after-tax extraordinary charge of $30 million (net of tax benefits of
$16 million), or $.03 per diluted share.
During the first quarter of 1998, GTE recorded after-tax extraordinary charges
of $320 million (net of tax benefits of $256 million), or $.33 per diluted
share. Approximately $300 million of the charge related to the discontinuation
of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," by
GTE's Canadian operations. The decision by GTE's Canadian subsidiaries to
discontinue using regulatory accounting practices was in response to rulings by
the Canadian regulatory commission in March of 1998 that opened the Canadian
telecommunications market to full competition. Under SFAS No. 71, certain assets
were depreciated and certain expenses were recognized over a longer period of
time than would have been the case in a competitive environment. This charge
includes a reduction in the net carrying value of property, plant and equipment
of $270 million to reflect impairment based on the estimated cash flows that the
assets are expected to generate in a competitive environment and a reduction in
costs that had been capitalized based on the expectation of future recovery of
approximately $30 million. In addition, during the first quarter of 1998, GTE
called $800 million of high-coupon debt and preferred stock prior to their
stated maturity date, resulting in a one-time, after-tax extraordinary charge of
$20 million.
5. INVESTMENTS IN UNCONSOLIDATED COMPANIES
GTE's investments in companies accounted for on the equity basis at December 31,
were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in Millions)
<S> <C> <C>
CANTV $1,880 $1,751
TELUS 1,175 --
Puerto Rico 380 --
Other investments 497 459
------ ------
Total $3,932 $2,210
====== ======
</TABLE>
Compania Anonima Nacional Telefonos de Venezuela (CANTV) is the primary provider
of local telephone service and national and international long-distance service
in Venezuela. CANTV also provides wireless, Internet-access and directory
advertising services. On December 22, 1998, GTE increased its ownership interest
in CANTV from 25.9% to 26.4%. At December 31, 1999 and 1998, GTE's investment in
CANTV included unamortized goodwill of $740 million and $765 million,
respectively.
At December 31, 1998, GTE had a 50.8% ownership interest in BC TELECOM Inc. (BC
TELECOM), a full-service telecommunications provider in the province of British
Columbia, Canada. On January 31, 1999, BC TELECOM and TELUS Corporation merged
to form a public company called BCT.TELUS Communications Inc. (TELUS). GTE's
ownership interest in the merged company, TELUS, is approximately 26.7% and, as
such, during the first quarter of 1999, the Company changed the accounting for
its investment from full consolidation to the equity method. In 1998, GTE's
consolidated results include the following amounts related to BC TELECOM:
revenues of $2.2 billion, operating income of $589 million, total assets of $2.6
billion, including $1.7 billion of net property, plant and equipment, and
long-term debt of $686 million. At December 31, 1999, GTE's investment in TELUS
included unamortized goodwill of $432 million.
In March 1999, GTE completed its 40% investment in Telecomunicaciones de Puerto
Rico, Inc. (TELPRI), which provides local, wireless, long-distance, paging, and
Internet-access services. At December 31, 1999, GTE's investment in TELPRI
included unamortized goodwill of $222 million.
Other investments represent cellular partnerships in the U.S. and other
international investments.
54
<PAGE> 56
6. SHAREHOLDERS' EQUITY
The authorized common stock of GTE at December 31, 1999, consisted of two
billion shares with a par value of $.05 per share.
Accumulated other comprehensive loss includes cumulative foreign currency
translation adjustments of $(380) million, $(407) million and $(263) million at
December 31, 1999-97, respectively (see Note 1); and cumulative unrealized gains
on investments in securities of $4 million, $32 million and $20 million at
December 31, 1999-97, respectively.
In August 1999, GTE announced the initiation of a share repurchase program to
offset shares issued under the Company's employee-benefit and
dividend-reinvestment programs. Under the program, the Company repurchased
approximately 17.7 million shares of its common stock valued at $1.3 billion in
1999, and completed the program with the purchase of an additional 8.4 million
shares valued at approximately $600 million through February 2000. Additionally,
the Company repurchased 11.7 million shares of its common stock valued at $536
million in 1997.
7. STOCK OPTION PLANS
GTE maintains broad-based stock option plans that cover substantially all
employees. Prior to 1997, options were granted separately or in conjunction with
stock appreciation rights (SARs). Beginning in 1997, the granting of SARs was
discontinued. In 1997, shareholders approved the GTE Corporation 1997 Long-Term
Incentive Plan (the LTIP). Each option granted under the LTIP conveys the right
to purchase, at fair market value on the date of the grant, shares of GTE common
stock. Generally, options have a term of ten years and become vested over a
period not to exceed seven years. Through December 31, 1999, options have been
granted to purchase 55 million shares. In addition, 19.4 million options have
been granted under predecessor plans.
55
<PAGE> 57
The following table summarizes stock option activity during each of the last
three years (number of options in thousands):
<TABLE>
<CAPTION>
Stock Average
Options Price
-------- -------
<S> <C> <C>
Balance, December 31, 1996 25,914 $ 37.36
Options granted 22,208 45.28
Options exercised (3,951) 33.58
Options cancelled or forfeited (1,046) 40.31
-------- -------
Balance, December 31, 1997 43,125 41.71
Options granted 14,703 53.97
Options exercised (8,672) 39.34
Options cancelled or forfeited (2,461) 44.78
-------- -------
Balance, December 31, 1998 46,695 45.85
Options granted 27,379 66.53
Options exercised (13,737) 44.58
Options cancelled or forfeited (1,710) 58.62
-------- -------
Balance, December 31, 1999 58,627 $ 55.44
======== =======
</TABLE>
At December 31, 1999, 33.6 million options were exercisable.
GTE also maintains the Equity Participation Program (EPP). Under the EPP, a
portion of certain executives' cash bonuses under the LTIP and Executive
Incentive Plan (EIP) must be deferred and held in restricted stock units (RSUs)
for a minimum of three years, and then will be payable in GTE common stock. EPP
participants may also irrevocably elect to voluntarily defer an additional
percentage of their LTIP and EIP cash bonuses into RSUs, provided that their
mandatory and voluntary deferrals do not exceed 25% of the LTIP and EIP awards.
GTE will provide a matching contribution in RSUs in the amount of one unit for
every four units deferred by the participant. These matching RSUs were designed
as an inducement to encourage full participation in the EPP and to compensate
the executives for their agreement not to realize the economic value associated
with the RSUs for a minimum of three years.
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123, GTE continues to apply the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25). In accordance with
APB 25, compensation expense is not recognized for stock options on the date of
grant since it is GTE's practice to grant options with an exercise price equal
to the fair market value of its common stock on the date of grant. Under SFAS
No. 123, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service or vesting period. Had compensation
cost for GTE's stock options been determined under SFAS No. 123, based on the
fair market value at the grant dates, GTE's proforma net income and diluted
earnings per share at December 31 would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- -------------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C>
Net Income
As reported $4,033 $2,172 $2,794
Proforma 3,921 2,113 2,769
Diluted Earnings Per Share
As reported $ 4.12 $ 2.24 $ 2.90
Proforma 4.01 2.18 2.88
</TABLE>
56
<PAGE> 58
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for those options granted in 1999-97: expected volatility of 19%,
expected maturities of seven years, risk-free interest rates equal to the yield
on seven-year U.S. Treasury notes on the grant date and expected dividend yield
of approximately 3%.
8. MINORITY INTERESTS
Minority interests in equity of subsidiaries as of December 31 was as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ----------
(Dollars in Millions)
<S> <C> <C>
Minority interests in consolidated subsidiaries:
BC TELECOM (50.8% GTE ownership in 1998) $ -- $ 550
Cellular partnerships 422 139
CTI Holdings, S.A. (58.0% GTE ownership in 1999) 99 --
Quebec Telephone (50.2% and 50.1% GTE ownership, respectively) 76 85
Other 35 20
Preferred securities issued by subsidiaries 634 1,190
------- -------
Total minority interests in equity of subsidiaries $ 1,266 $ 1,984
======= =======
</TABLE>
In January 1999, BC TELECOM and TELUS Corporation merged to form a public
company called BCT.TELUS Communications Inc. (TELUS). GTE's ownership interest
in the merged company, TELUS, is approximately 26.7% and, as such, during the
first quarter of 1999, the Company changed the accounting for its investment
from full consolidation to the equity method (see Note 5).
Cellular partnerships for 1999 include $286 million related to the October 1999
acquisition of several wireless properties from Ameritech Corporation, of which
a 7% interest is owned by a minority shareholder. These properties which were
purchased for approximately $3.25 billion are located in St. Louis, Chicago and
Central Illinois and include approximately 1.7 million subscribers. As a result
of this acquisition, the Company recorded goodwill and customer base of
approximately $2.85 billion. The Company is in the process of completing an
appraisal of the properties acquired to determine the final values of the
separate components of tangible and intangible assets. Such an appraisal could
result in a change in the allocation of the purchase price.
CTI Holdings, S.A. (CTI), is a consortium providing cellular services in the
north and south interior regions of Argentina. During 1998, GTE increased its
ownership interest in CTI and assumed management control through the conversion
of debt to equity, and through the purchase of additional shares. As a result,
in the fourth quarter of 1998, GTE changed the accounting for its investment in
CTI from the equity method to full consolidation. The consolidation of CTI,
which increased the Company's revenues and operating income by $126 million and
$17 million, respectively, during 1998 had no effect on net income. As of
December 31, 1998, CTI had total assets of approximately $1.1 billion, including
$700 million of net property, plant and equipment, and long-term debt of $712
million.
At December 31, 1999 and 1998, preferred securities of subsidiaries include $511
million of Series B, 8.75% Monthly Income Preferred Securities maturing in 2025.
These securities, issued by GTE Delaware, a limited partnership holding solely
GTE junior subordinated debentures, were redeemed in March 2000 at a price of
$25 per share. In 1998, preferred securities issued by subsidiaries also
included $489 million of Series A, 9.25% Monthly Income Preferred Securities
issued by GTE Delaware, maturing in 2024. In October 1999, GTE redeemed the
Series A preferred securities at an option price of $25 per share.
57
<PAGE> 59
9. DEBT
Long-term debt as of December 31, was as follows:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
(Dollars in Millions)
<S> <C> <C>
GTE Corporation:
Debentures, maturing 2000 through 2028, average rates 6.9% and 7.9% $ 9,337 $ 5,300
Guaranteed ESOP obligations, maturing 2001 through 2005, average rate 9.7% 453 555
Other borrowings, maturing 2000 through 2010, average rate 6.9% 804 805
-------- --------
10,594 6,660
Telephone Subsidiaries:
First mortgage bonds, debentures and notes, maturing through 2031,
average rates 6.9% and 7.1% 7,292 8,347
Other Subsidiaries:
Debentures and notes, maturing through 2012, average rates 8.8% and 10.1% 1,117 1,340
Commercial paper expected to be refinanced on a long-term basis,
average rate 4.5% for 1998 -- 217
-------- --------
Total principal amount 19,003 16,564
Unamortized premium and (discount) - net (59) (59)
-------- --------
Total 18,944 16,505
Less: Current maturities 4,987 1,087
-------- --------
Total long-term debt $ 13,957 $ 15,418
======== ========
</TABLE>
Estimated payments of long-term debt during the next five years are: $5.0
billion in 2000; $1.3 billion in 2001; $784 million in 2002; $713 million in
2003 and $1.1 billion in 2004.
In May 1999, the Company issued $300 million of Floating Rate Debentures, due
May 2000; $1.1 billion of Floating Rate Debentures, due June 2000; and $200
million of 5.399% Debentures, also due June 2000. In June 1999, the Company
issued $1.4 billion of Floating Rate Debentures, due June 2000. In December
1999, the Company issued $975 million of Floating Rate Debentures, due December
2000 and $400 million of Floating Rate Debentures, due January 2001. The net
proceeds of all 1999 issuances were applied to repay short-term borrowings,
investments in and advances to subsidiaries to finance their operations,
including acquisitions, and for general corporate purposes.
In January 1999, GTE California, a subsidiary of GTE, issued $225.0 million of
5.50% Series G Debentures, due 2009. Net proceeds were applied toward the
repayment of other short-term borrowings incurred to finance GTE California's
construction program and for general corporate purposes.
GTE's telephone subsidiaries finance part of their construction programs through
the use of short-term loans, including commercial paper, which are refinanced at
later dates by the issuance of long-term debt or equity. As a result of this
practice, at times, the Company has negative working capital. First mortgage
bonds issued by GTE's telephone subsidiaries are secured by a lien on
substantially all telephone property, plant and equipment.
Total short-term obligations as of December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- ------
(Dollars in Millions)
<S> <C> <C>
Commercial paper - average rates 6.1% and 5.4% $4,415 $3,056
Notes payable - average rates 7.3% and 3.7% 206 5
Current maturities of long-term debt 4,987 1,087
------ ------
Total short-term obligations $9,608 $4,148
====== ======
</TABLE>
58
<PAGE> 60
At December 31, 1999, GTE had lines of credit totaling $6.0 billion available to
provide backup to its commercial paper program. No amounts had been drawn
against these lines of credit at December 31, 1999.
10. FINANCIAL INSTRUMENTS
As of December 31, 1999 and 1998, GTE had entered into interest rate swap
agreements primarily to convert floating rate long-term and short-term debt to
fixed rates. Additionally, GTE had entered into forward interest rate swap
agreements and forward contracts to sell U.S. Treasury Bonds to hedge against
changes in market interest rates on planned long-term debt issuances expected to
be completed within the next 12 months. GTE used forward foreign exchange
contracts to offset foreign exchange gains or losses on the foreign currency
obligations being hedged and used long-term call options on GTE common stock to
hedge exposure to compensation expense related to outstanding stock-equivalent
units associated with deferred compensation plans.
As of December 31, 1999 and 1998, GTE had the following financial instruments in
effect (Dollars in Millions):
<TABLE>
<CAPTION>
Notional Expiration Weighted-Average
Amount Dates Pay Rate
---------- ----------- ----------------
<S> <C> <C> <C>
Interest rate swaps:
Pay fixed
1999 $ 351 2000-2002 6.5%
1998 648 1999-2008 6.3%
Pay floating
1999 $ 200 2000
1998 124 1999-2001
Forward interest rate swap agreements:
1999 $ -- --
1998 100 1999 6.2%
Forward foreign exchange contracts:
1999 $ 440 2000-2004
1998 409 2004
Call options on GTE common stock:
1999 $ 99 2000-2006
1998 315 1999-2006
</TABLE>
GTE has entered into domestic interest rate swaps and forward interest rate swap
agreements, where GTE primarily pays fixed rates, as indicated in the previous
table, and receives floating rates, primarily based on three-month LIBOR. At
December 31, 1999 and 1998, the three-month LIBOR was 6.0% and 5.1%,
respectively.
GTE's Canadian telephone affiliate has entered into interest rate swaps, where
GTE pays floating rates, primarily Banker's Acceptance rates, and receives fixed
Canadian Dollar treasury rates. At December 31, 1998, the Banker's Acceptance
rate was 5.1%. In 1999, GTE no longer consolidates this Canadian telephone
affiliate (see Note 5).
Gains and losses recognized upon the expiration or settlement of forward
interest rate swap agreements and forward contracts to sell U.S. Treasury Bonds
are amortized over the life of the associated long-term debt issuance as a
decrease or increase to interest expense. For 1998, the net loss that is being
amortized over future periods was $85 million.
59
<PAGE> 61
Gains and losses on long-term call options on GTE's common stock, which hedge
GTE's exposure to compensation expense related to stock-based compensation, are
recognized based on fluctuations in the market price of GTE's common stock.
Gains and losses recognized on call options offset compensation expense in GTE's
consolidated statements of income.
The risk associated with these financial instruments arises from the possible
inability of counterparties to meet the contract terms and from movements in
interest and exchange rates as well as the market price of GTE's common stock.
GTE carefully evaluates and continually monitors the creditworthiness of its
counterparties and believes the risk of nonperformance is remote.
The fair values of other financial instruments included in the consolidated
balance sheets, other than long-term debt, closely approximate their carrying
value. As of December 31, 1999, the estimated fair value of long-term debt based
on either quoted market prices or an option pricing model, was lower than its
carrying value by approximately $510 million. As of December 31, 1998, the
estimated fair value of long-term debt exceeded its carrying value by
approximately $1.5 billion.
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 was as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
(Dollars in Millions)
<S> <C> <C>
Land $ 349 $ 349
Buildings 4,451 4,397
Plant and equipment 46,340 51,489
Work in progress and other 3,263 3,454
----------- ----------
Total 54,403 59,689
Accumulated depreciation (31,170) (34,823)
----------- ----------
Total property, plant and equipment - net $ 23,233 $ 24,866
=========== ==========
</TABLE>
At December 31, 1998, total property, plant and equipment - net included
approximately $1.6 billion of access lines and related equipment held for sale.
This represents gross assets of $4.4 billion less accumulated depreciation of
$2.8 billion. Based on the signing of definitive agreements in 1999, the net
book value of the access lines and related equipment has been reclassified to
"Net assets held for sale" in the consolidated balance sheets at December 31,
1999 (see Note 2).
12. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
GTE sponsors several qualified and nonqualified pension plans and other
postretirement benefit plans for most of its employees. Substantially all GTE
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 GTE's share of the cost for recent and future retirees. All
of the following information is presented in accordance with the revised
disclosure requirements of SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits."
60
<PAGE> 62
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>
Pension Benefits Other Postretirement Benefits
-------------------- -----------------------------
1999 1998 1999 1998
-------- -------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
BENEFIT OBLIGATION at January 1 $ 8,789 $ 8,649 $ 3,701 $ 4,104
Service cost 281 293 38 44
Interest cost 586 651 209 234
Plan amendments 161 10 -- (34)
Actuarial (gain) loss (674) 527 (860) (272)
Divestitures (538) -- (2) --
Benefits paid (310) (792) (234) (230)
Settlements, curtailments and terminations, net (774) (66) 25 (2)
Assets held for sale -- (435) -- (175)
Other 37 (48) 21 32
-------- -------- ------- -------
Benefit obligation at December 31 $ 7,558 $ 8,789 $ 2,898 $ 3,701
======== ======== ======= =======
Pension Benefits Other Postretirement Benefits
-------------------- -----------------------------
1999 1998 1999 1998
-------- -------- ------- -------
(Dollars in Millions)
FAIR VALUE OF PLAN ASSETS at January 1 $ 17,949 $ 16,934 $ 556 $ 524
Actual return on plan assets 2,915 2,511 40 83
Divestitures (683) -- -- --
Company contributions 82 45 199 217
Benefits paid (310) (792) (235) (230)
Settlements (1,359) (63) -- --
Assets held for sale -- (626) -- (71)
Other 45 (60) 19 33
-------- -------- ------- -------
Fair value of plan assets at December 31 $ 18,639 $ 17,949 $ 579 $ 556
======== ======== ======= =======
FUNDED STATUS as of December 31 $ 11,081 $ 9,160 $(2,319) $(3,145)
Unrecognized transition asset (152) (244) -- --
Unrecognized prior service cost (benefit) 368 241 (543) (626)
Unrecognized gain (5,630) (4,626) (655) (50)
-------- -------- ------- -------
Net amount recognized $ 5,667 $ 4,531 $(3,517) $(3,821)
======== ======== ======= =======
</TABLE>
The following table provides the amounts recognized in the consolidated balance
sheets as of December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
-------------------- -----------------------------
1999 1998 1999 1998
-------- -------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Prepaid pension costs $ 6,073 $ 4,927 $ -- $ --
Accrued benefit liability (406) (396) (3,517) (3,821)
-------- -------- ------- -------
Net amount recognized $ 5,667 $ 4,531 $(3,517) $(3,821)
======== ======== ======= =======
</TABLE>
61
<PAGE> 63
The following table provides the components of net periodic benefit cost for the
years ended December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
----------------------------- -----------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ----- ----- -----
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 281 $ 293 $ 259 $ 38 $ 44 $ 43
Interest cost 586 651 618 209 234 240
Expected return on plan assets (1,326) (1,307) (1,193) (42) (39) (32)
Amortization of:
Transition asset (68) (76) (89) -- -- --
Prior service cost (benefit) 24 26 9 (74) (79) (75)
Net gain (65) (60) (42) (17) (9) (4)
Settlements, curtailments and
terminations, net (511) (16) (205) (8) (2) --
------- ------- ------- ----- ----- -----
Net periodic benefit cost $(1,079) $ (489) $ (643) $ 106 $ 149 $ 172
======= ======= ======= ===== ===== =====
</TABLE>
Included in the net periodic benefit cost reported in the above table are
one-time costs for special termination benefits provided under voluntary and
involuntary separation programs of $148 million (included in the first quarter
1999 special charge, as described in Note 3), $19 million and $64 million in
1999-97, respectively. Curtailment and settlement gains or losses related to
these programs, divestitures occurring during the period and benefit obligations
settled through the purchase of annuities for certain retiree pensions are also
reflected in the above table. Additionally, in 1999 the Company's lump-sum
pension distributions surpassed the settlement threshold equal to the sum of the
service cost and interest cost components of net periodic pension cost requiring
settlement gain or loss recognition for all cash settlements for the year.
The weighted-average assumptions used in measuring the Company's benefit
obligations as of December 31 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
----------------------- -----------------------------
1999 1998 1999 1998
------------ --------- ----------- -----------
<S> <C> <C> <C> <C>
Discount rate 8.00% 7.00% 8.00% 7.00%
Rate of compensation increase 5.50% 4.75% -- --
</TABLE>
The expected return on pension plan assets for 1999 and 1998 was 9.00%. The
expected return on other postretirement benefits plan assets for 1999 and 1998
was 8.00%.
The assumed health care cost trend rate is 6.50% in 2000 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>
1% Increase 1% Decrease
----------- -----------
(Dollars in Millions)
<S> <C> <C> <C>
Effect on 1999 service and interest costs $ 19 $ (16)
Effect on postretirement benefit obligation as of December 31, 1999 206 (176)
</TABLE>
SAVINGS AND STOCK OWNERSHIP PLANS
GTE sponsors employee savings plans under Section 401(k) of the Internal Revenue
Code. The plans cover substantially all full-time employees. Under the plans,
GTE provides matching contributions in GTE common stock based on qualified
employee contributions. Matching contributions charged to income were $77
million, $95 million and $76 million in 1999-97, respectively.
GTE also maintains an Employee Stock Ownership Plan (ESOP). In 1989, the ESOP
borrowed $700 million to acquire, at market value, 24.6 million shares of GTE
common stock, which will be used to meet GTE's contributions
62
<PAGE> 64
to certain employee savings plans through the year 2004. The unpaid balance of
the loan, which has been guaranteed by GTE, is included in the accompanying
consolidated balance sheets as long-term debt and short-term obligations with a
similar reduction in shareholders' equity. The debt service payments, including
interest, made by the ESOP in 1999-97 totaled $105 million, $100 million and $96
million, respectively. These payments were funded by $50 million, $47 million
and $49 million of dividends accumulated on the GTE stock held by the ESOP, with
the balance from cash contributions by GTE.
13. INCOME TAXES
The income tax provision (benefit) before extraordinary charges is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Current:
Federal $ 927 $ 612 $ 725
Foreign 52 293 256
State and local 95 177 187
------ ------ ------
1,074 1,082 1,168
------ ------ ------
Deferred:
Federal 947 451 451
Foreign 148 (14) (26)
State and local 143 56 65
------ ------ ------
1,238 493 490
------ ------ ------
Amortization of deferred investment tax credits (21) (22) (34)
------ ------ ------
Total provision $2,291 $1,553 $1,624
====== ====== ======
</TABLE>
The amortization of deferred investment tax credits relates to the amortization
of investment tax credits previously deferred by GTE's telephone subsidiaries.
A reconciliation between taxes computed by applying the statutory federal income
tax rate to pretax income and income taxes provided in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Amounts computed at statutory rates $2,224 $1,416 $1,546
State and local income taxes, net of federal benefit 155 151 164
Minority interests and preferred stock dividends 7 54 44
Amortization of investment tax credits (21) (22) (34)
Other differences - net (74) (46) (96)
------ ------ ------
Total provision $2,291 $1,553 $1,624
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to the deferred income
tax (benefits) and deferred income tax liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
(Dollars in Millions)
<S> <C> <C>
Depreciation and amortization $ 2,369 $ 1,625
Employee benefit obligations (1,734) (1,810)
Prepaid pension costs 2,174 1,688
Other - net 303 278
-------- --------
Net deferred tax liability $ 3,112 $ 1,781
======== ========
</TABLE>
63
<PAGE> 65
Deferred income taxes were not provided on undistributed earnings of foreign
subsidiaries of approximately $1.3 billion at December 31, 1999, as such
earnings are expected to be permanently reinvested.
14. EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share is calculated in a similar
manner except that the weighted-average number of common shares outstanding
during the period includes the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised. The number of
shares included in diluted earnings per common share for the potential issuance
of common shares was 6.6 million in 1999, 5.2 million in 1998, and 4.3 million
in 1997. Certain outstanding options to purchase common shares were not included
in the computation of diluted earnings per common share because to do so would
have been anti-dilutive for the period, including approximately 200,000 shares
during 1999, 1.0 million shares during 1998, and 8.5 million shares during 1997.
15. SEGMENT REPORTING
The Company has two operating units, its National Operations and its
International Operations, and a Corporate group. The National Operations are
further segmented along product lines although certain activities such as
marketing and data processing are managed on a common basis. The costs of
activities managed on a common basis are allocated to the product segments based
on usage, where possible, or other factors depending on the nature of the
activity. The International Operations are organized by country. For the most
part, the National and the International Operations are independent of each
other and the various countries comprising the International Operations are
independent of each other. Affiliated transactions that occur are based on
market prices.
The three major product segments (reportable segments) within National
Operations are Network Services, Wireless Products and Services, and
Internetworking.
Network Services provides wireline communication services within franchised
areas. These services include local telephone service and toll calls as well as
access services that enable long-distance carriers to complete calls to or from
locations outside of GTE's operating areas. Network Services also provides
complex voice and data services, billing and collection, operator assistance,
inventory management services to other telecommunications companies and receives
revenues in the form of a publication right from an affiliate that publishes
telephone directories in its operating areas. The intersegment revenues at
Network Services primarily represent local telephone services provided at market
rates to GTE's national sales and marketing organization, which markets bundled
telecommunication services, and sales of inventory management services to other
GTE companies.
Wireless Products and Services provides wireless communications services (both
voice and data) within licensed areas in the U.S., sells wireless telephones and
accessories and provides support services to other wireless telephone companies.
The Internetworking segment offers a wide range of advanced data and
Internet-related services, including dedicated and dial-up access to the
Internet and a variety of value-added Internet services such as managed network
security, Web-server hosting, application development and systems integration
services. GTE's Internetworking segment was created in 1997 after the
acquisition of BBN Corporation.
The Company's National Operations also include GTE Technology and Systems, GTE
Communications Corporation, GTE Directories Corporation and GTE Airfone. GTE
Technology and Systems was primarily composed of GTE Government Systems, a
provider of communications and intelligence systems to the military and federal
government. (See Note 2 for information related to the sale of GTE Government
Systems in late 1999.) GTE Communications provides nationwide long-distance
service, video services in selected markets and bundled telecommunications
services through its national sales and marketing organization. GTE Directories
publishes telephone directories for which it receives advertising revenue and
develops and markets on-line advertising and information services for
64
<PAGE> 66
consumers and advertisers on the Internet. A portion of the advertising revenue
for directories published in Network Services' operating areas is recognized as
revenue by Network Services (approximately 60%) and a portion is recognized as
revenue by GTE Directories (approximately 40%). GTE Airfone provides
aircraft-passenger telecommunications services.
GTE's International Operations (the fourth reportable segment) provide
telecommunications services in Argentina, Canada, the Dominican Republic and the
Northern Mariana Islands and operate directory advertising companies in Europe
and Central America through consolidated subsidiaries. GTE also participates in
ventures/consortia that are accounted for on the equity basis. These investments
include full-service telecommunications companies in Canada, Puerto Rico and
Venezuela, a paging network in China and a nationwide digital-cellular network
in Taiwan.
Accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1). Operating income
includes profit on sales to affiliates. The related intersegment eliminations
for National Operations are included in Other National Operations.
The Company's reported segment results were affected by special items (see Note
3), changes in the method of accounting for certain international investments
due to changes in ownership (see Notes 5 and 8) and the sale of the Government
Systems business in 1999 (see Note 2). The amount of the special items
applicable to each business segment is included in operating income in the
following tables.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
NATIONAL OPERATIONS:
NETWORK SERVICES
Revenues and sales
Local services $ 5,976 $ 5,814 $ 5,530
Network access services 5,511 5,316 4,896
Toll services 655 859 1,251
Directory services and other 3,432 3,259 2,847
-------- -------- --------
Total revenues 15,574 15,248 14,524
Intersegment revenues (473) (305) (220)
-------- -------- --------
Total external revenues $ 15,101 $ 14,943 $ 14,304
======== ======== ========
Operating income (a) $ 5,701 $ 4,817 $ 4,726
Special charges (b) 113 171 --
Depreciation and amortization 2,564 2,591 2,605
Capital expenditures 2,843 3,362 3,245
Total assets 24,862 23,287 22,883
WIRELESS PRODUCTS AND SERVICES
Revenues and sales
Service revenues $ 3,276 $ 2,687 $ 2,549
Equipment sales and other 469 383 373
-------- -------- --------
Total revenues (c) $ 3,745 $ 3,070 $ 2,922
======== ======== ========
Operating income (a) $ 537 $ 647 $ 437
Special charges (b) 24 91 --
Depreciation and amortization 515 435 428
Capital expenditures 549 461 396
Total assets 9,514 5,783 5,889
</TABLE>
65
<PAGE> 67
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
INTERNETWORKING (d)
Revenues and sales
Internetworking revenues $ 1,036 $ 579 $ 185
Intersegment revenues (69) (36) (11)
------- ------- -------
Total external revenues $ 967 $ 543 $ 174
======= ======= =======
Operating loss $ (552) $ (485) $ (339)
Depreciation and amortization 191 117 86
Capital expenditures 746 567 322
Total assets 2,651 1,925 1,237
OTHER NATIONAL OPERATIONS (d)
Revenues and sales
GTE Communications $ 1,513 $ 1,063 $ 630
GTE Technology and Systems (e) 1,063 1,423 1,271
Other, including eliminations 685 856 840
------- ------- -------
Total revenues $ 3,261 $ 3,342 $ 2,741
======= ======= =======
Operating income (loss) (a) $ 504 $ (479) $ (51)
Special items (b) (768) 397 --
Depreciation and amortization 232 207 252
Capital expenditures 355 507 481
Total assets 2,827 2,672 1,918
INTERNATIONAL OPERATIONS: (f)
Revenues and sales
Local services $ 368 $ 1,219 $ 1,076
Toll services 291 907 883
Wireless services 548 422 265
Directory services and other 647 786 678
------- ------- -------
Total revenues $ 1,854 $ 3,334 $ 2,902
======= ======= =======
Operating income (a) $ 910 $ 834 $ 726
Special items (b) (513) 38 --
Depreciation and amortization 245 459 523
Equity income 324 110 85
Capital expenditures 380 657 648
Investments in unconsolidated companies 3,491 1,820 1,932
Revenues by country
Dominican Republic $ 652 $ 564 $ 488
Argentina 480 126 --
Canada 410 2,415 2,262
Other 312 229 152
------- ------- -------
Total revenues $ 1,854 $ 3,334 $ 2,902
======= ======= =======
Assets by country
Venezuela $ 1,837 $ 1,727 $ 1,622
Canada 1,560 2,979 3,847
Argentina 1,604 1,129 217
Dominican Republic 1,016 907 825
Other 927 543 366
------- ------- -------
Total assets $ 6,944 $ 7,285 $ 6,877
======= ======= =======
</TABLE>
66
<PAGE> 68
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
CONSOLIDATED REVENUES $ 25,336 $25,473 $23,260
CONSOLIDATED OPERATING INCOME (a) 7,336 5,336 5,611
TOTAL SPECIAL ITEMS (b) (1,116) 755 --
CONSOLIDATED ASSETS 50,832 43,615 42,142
</TABLE>
(a) Includes special items in 1999 and 1998, as indicated.
(b) See Note 3 for a description of 1999 and 1998 special items.
(c) In 1999, in conjunction with the rollout of "one rate" wireless pricing
structures that eliminate separate roaming and long-distance fees, the
Company changed its reporting to present customer roaming revenues and
expenses on a gross basis. Prior year amounts are presented on a net basis
in operating expenses. The impact of this change in the manner of reporting
was an increase in revenues and operating expenses of $264 million in 1999.
(d) BBN Technologies, a business which provides research and contracting
services for government entities, previously reported as a component of
Internetworking in 1998 and 1997, is now included with Other National
Operations. Prior period amounts have been reclassified to conform to the
1999 presentation.
(e) In late 1999, the Company sold its GTE Government Systems business. For
additional information see Note 2.
(f) See Notes 5 and 8 for a description of changes in accounting for
international investments and the resulting impact on the financial
statements.
16. COMMITMENTS AND CONTINGENCIES
GTE has noncancelable operating leases covering certain buildings, office space
and equipment. Rental expense was $436 million, $464 million and $399 million in
1999-97, respectively. Minimum rental commitments under noncancelable leases are
$255 million, $218 million, $164 million, $131 million and $107 million for the
years 2000-2004, respectively, and aggregate $629 million thereafter.
GTE and its subsidiaries and affiliates are subject to a number of proceedings
arising out of the conduct of its business, including those relating to
regulatory actions, commercial transactions, government contracts and
environmental, safety and health matters. Management believes that the ultimate
resolution of these matters will not have a materially adverse effect on the
results of operations or the financial position of GTE.
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, GTE's National
and International Operations face increasing competition in virtually all
aspects of their business. In addition, to achieve its growth objectives, GTE
has made significant investments to expand its service capability in the area of
data communications and to establish a national sales and marketing organization
to provide a bundle of voice and data communication products to customers. While
GTE management believes that it will be successful in implementing these new
initiatives, there are uncertainties associated with its ability to grow to the
levels targeted and its ability to do so within the planned timeframes or
investment levels.
67
<PAGE> 69
17. ADDITIONAL INCOME STATEMENT INFORMATION
The table below provides additional financial information related to GTE's
consolidated income statements:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Interest expense $ 1,402 $ 1,397 $ 1,283
Interest capitalized (49) (27) (48)
Interest income (76) (117) (90)
------- ------- -------
Total Interest - net $ 1,277 $ 1,253 $ 1,145
======= ======= =======
Minority interests $ 122 $ 290 $ 245
Preferred dividends 6 8 12
Other (income) expense 9 (20) 8
------- ------- -------
Total Other - net $ 137 $ 278 $ 265
======= ======= =======
</TABLE>
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's reported results were affected by one-time items (see Notes 3 and
4), changes in the method of accounting for certain international investments
due to changes in ownership (see Notes 5 and 8) and the sale of the Government
Systems business in 1999 (see Note 2).
<TABLE>
<CAPTION>
1st Qtr (a) 2nd Qtr 3rd Qtr (b) 4th Qtr (c)
----------- --------- ----------- -----------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
1999
Revenues and sales $ 5,879 $ 6,288 $ 6,428 $ 6,741
Operating income 1,682 1,461 2,378 1,815
Income before extraordinary charges 912 776 1,368 1,007
Net income 882 776 1,368 1,007
Earnings per common share before extraordinary charges:
Basic $ .94 $ .80 $ 1.40 $ 1.04
Diluted $ .93 $ .79 $ 1.39 $ 1.03
Dividends declared $ .47 $ .47 $ .47 $ .47
Stock market price:
High $ 69.75 $ 76.13 $ 78.50 $ 78.13
Low 57.00 59.50 68.13 67.31
</TABLE>
68
<PAGE> 70
<TABLE>
<CAPTION>
1st Qtr (d) 2nd Qtr 3rd Qtr 4th Qtr
----------- --------- --------- ---------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
1998
Revenues and sales $ 5,885 $ 6,277 $ 6,480 $ 6,831
Operating income 592 1,432 1,650 1,662
Income before extraordinary charges 142 673 822 855
Net income (loss) (178) 673 822 855
Earnings per common share before extraordinary charges:
Basic $ .15 $ .70 $ .85 $ .89
Diluted $ .15 $ .69 $ .85 $ .88
Dividends declared $ .47 $ .47 $ .47 $ .47
Stock market price:
High $ 60.50 $ 64.38 $ 58.69 $ 71.81
Low 47.94 55.25 46.75 53.94
</TABLE>
(a) In the first quarter of 1999, the Company recorded a net pretax gain of
$321 million ($189 million after-tax), and after-tax extraordinary charges
of $30 million. (See Notes 3 and 4).
(b) In the third quarter of 1999, the Company recorded a net pretax gain of
$705 million ($416 million after-tax). (See Note 3).
(c) In the fourth quarter of 1999, the Company recorded a net pretax gain of
$90 million ($46 million after-tax). (See Note 3).
(d) In the first quarter of 1998, the Company recorded pretax special charges
of $755 million ($482 million after-tax) and after-tax extraordinary
charges of $320 million. (See Notes 3 and 4).
19. PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
Bell Atlantic and GTE Corporation have announced a proposed merger of equals
under a definitive merger agreement dated July 27, 1998. At annual meetings held
in May 1999, the shareholders of each company approved the merger. The
completion of the merger is subject to a number of conditions, including FCC
approval and receipt of opinions that the merger will be tax-free.
The unaudited pro forma financial statements that follow are for GTE and Bell
Atlantic for the year ended December 31, 1999 in connection with the proposed
merger. Both companies have provided unaudited pro forma combined condensed
financial statements of income for the years ended December 31, 1998, 1997 and
1996 and a pro forma combined condensed balance sheet at December 31, 1998 in a
joint proxy statement and prospectus filed with the Securities and Exchange
Commission dated April 13, 1999. Bell Atlantic has supplied all information
contained in this Form 10-K relating to Bell Atlantic and GTE has supplied all
information relating to GTE.
The following unaudited pro forma combined condensed financial statements are
presented assuming that the merger of GTE and Bell Atlantic will be accounted
for as a pooling of interests. Under this method of accounting, the companies
are treated as if they had always been combined for accounting and financial
reporting purposes. These unaudited pro forma financial statements have been
prepared from, and should be read in conjunction with, the historical
consolidated financial statements and accompanying notes of GTE and Bell
Atlantic, which are included in this Form 10-K and Bell Atlantic's Form 10-K,
respectively, for the year ended December 31, 1999. The unaudited pro forma
financial information is presented for illustration purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if the merger had been completed at the dates indicated. The
information does not necessarily indicate the future operating results or
financial position of the combined company.
The following unaudited pro forma financial data was prepared by adding or
combining the historical amounts of each company and adjusting the combined
amounts for significant differences in accounting methods used by each
69
<PAGE> 71
company. These adjustments are described in the accompanying notes to the
financial statements. The unaudited pro forma combined balance sheet was
prepared by combining the balance sheets of GTE and Bell Atlantic at December
31, 1999, giving effect to the merger as if it had occurred on December 31,
1999. The unaudited pro forma combined condensed statement of income gives
effect to the merger as if it had occurred at the beginning of the earliest
period presented. The terms of the merger specify that each share of GTE common
stock will be converted into the right to receive 1.22 shares of combined
company common stock. This exchange ratio was used in computing certain of the
pro forma adjustments and in computing share and per share amounts in the
accompanying unaudited pro forma financial information.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
(Dollars in Millions, Except Per-Share Amounts) (Unaudited) Bell Atlantic GTE Adjustments Combined
- ---------------------------------------------------- ------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Operating revenues $33,174 $ 25,336 $ -- $ 58,510
Operating expenses 24,679 18,000 (36) (3d) 42,643
------- -------- ----- --------
Operating income 8,495 7,336 36 15,867
Income from unconsolidated businesses 143 432 575
Other income and (expense), net 54 (61) (7)
Interest expense 1,263 1,353 2,616
Mark-to-market adjustment for exchangeable notes (664) -- (664)
Provision for income taxes 2,557 2,291 14 (3e) 4,862
------- -------- ----- --------
INCOME FROM CONTINUING OPERATIONS $ 4,208 $ 4,063 $ 22 $ 8,293
======= ======== ===== ========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations per common share $ 2.72 $ 4.18 $ $ 3.03
------- -------- ----- --------
Weighted-average shares outstanding (in millions) 1,553 972 214 (3c) 2,739
------- -------- ----- --------
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations per common share $ 2.66 $ 4.15 $ $ 2.99
------- -------- ----- --------
Weighted-average shares - diluted (in millions) 1,583 979 215 (3c) 2,777
------- -------- ----- --------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined
Condensed Financial Statements.
70
<PAGE> 72
PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
(Dollars in Millions) (Unaudited) Bell Atlantic GTE Adjustments Combined
- -------------------------------------------------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments $ 1,936 $ 1,132 $ $ 3,068
Receivables, net 7,025 5,058 12,083
Net assets held for sale -- 1,802 1,802
Other current assets 1,635 1,451 (232) (3b)
65 (3e) 2,919
------- -------- -------- --------
10,596 9,443 (167) 19,872
------- -------- -------- --------
Plant, property and equipment, net 39,299 23,233 (166) (3d) 62,366
Investments in unconsolidated businesses 6,275 3,932 10,207
Other assets 6,444 14,224 20,668
------- -------- -------- --------
Total assets $62,614 $ 50,832 $ (333) $113,113
======= ======== ======== ========
LIABILITIES AND SHAREOWNERS' INVESTMENT
Current liabilities
Debt maturing within one year $ 5,455 $ 9,608 $ $ 15,063
Accounts payable and accrued liabilities 6,465 5,782 12,247
Other current liabilities 1,547 945 143 (3b) 2,635
------- -------- -------- --------
13,467 16,335 143 29,945
------- -------- -------- --------
Long-term debt 18,463 13,957 32,420
Employee benefit obligations 9,326 4,418 13,744
Deferred credits and other liabilities 5,478 5,295 (63) (3e) 10,710
Shareowners' investment
Common stock (2,756,484,606 shares issued) 158 50 68 (3a) 276
Contributed capital 13,550 8,680 (2,095) (3a) 20,135
Reinvested earnings 2,806 4,953 (310) (3b)
(103) (3d) 7,346
Accumulated other comprehensive income (loss) 450 (376) 74
------- -------- -------- --------
16,964 13,307 (2,440) 27,831
Less common stock in treasury, at cost 640 2,027 (2,027) (3a) 640
Less deferred compensation - employee
stock ownership plans 444 453 897
------- -------- -------- --------
Total shareowners' investment 15,880 10,827 (413) 26,294
------- -------- -------- --------
Total liabilities and shareowners' investment $62,614 $ 50,832 $ (333) $113,113
======= ======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined
Condensed Financial Statements.
71
<PAGE> 73
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Note 1 - Reclassifications
Reclassifications have been made to the historical financial
statements to conform to the presentation expected to be used by the
combined company.
Note 2 - Exchange Ratio
The terms of the merger agreement specify that each outstanding share
of GTE common stock will be converted into 1.22 shares of combined
company common stock. This exchange ratio was used in computing share
and per share amounts in the accompanying pro forma financial
information.
Note 3 - Pro Forma Adjustments
(a) A pro forma adjustment has been made to reflect the issuance of
1,180 million shares of combined company common stock in exchange for
all outstanding shares of GTE common stock as per the exchange ratio
stated in Note 2, above. The adjustment also reflects the
cancellation of shares of GTE treasury stock, but does not reflect
the impact of fractional shares.
(b) A pro forma adjustment has been made to reflect direct
incremental merger-related costs. Amounts anticipated to be incurred
(approximately $143 million) have been shown as an increase to "Other
current liabilities." Amounts incurred through December 31, 1999 by
GTE and Bell Atlantic (approximately $232 million) have been shown as
a reduction to "Other current assets." The after-tax cost of this
anticipated charge (approximately $310 million) has been reflected as
a reduction in "Reinvested earnings."
(c) Pro forma adjustments have been made to the number of weighted
average shares outstanding used in the calculation of basic and
diluted earnings per share. The number of weighted average shares
outstanding reflects the conversion of shares and share equivalents
of GTE common stock into combined company common stock in accordance
with the merger agreement.
(d) Pro forma adjustments have been made to conform GTE's accounting
policies for certain computer software costs to Bell Atlantic's
policies.
(e) Pro forma adjustments have been made for the estimated tax
effects of the adjustments discussed in (b) and (d) above.
(f) There are no significant intercompany transactions between GTE
and Bell Atlantic.
72
<PAGE> 74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of GTE Corporation:
We have audited the accompanying consolidated balance sheets of GTE Corporation
(a New York corporation) and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999, as set forth under Item 8 of this report. These
financial statements and the schedule and exhibit referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule and exhibit 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 consolidated 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 Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supporting schedule and exhibit
listed under Item 14 is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. The supporting schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Dallas, Texas ARTHUR ANDERSEN LLP
January 27, 2000
73
<PAGE> 75
MANAGEMENT REPORT
To Our Shareholders:
The management of GTE is responsible for the integrity and objectivity of the
financial and operating information contained in this annual report, including
the consolidated financial statements covered by the Report of Independent
Public Accountants. These statements were prepared in conformity with generally
accepted accounting principles and include amounts that are based on the best
estimates and judgments of management.
The Company has a system of internal accounting controls that provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Company also has instituted
policies and guidelines that require employees to maintain the highest level of
ethical standards.
In addition, the Audit Committee of the Board of Directors, consisting solely of
outside directors, meets periodically with management, the internal auditors and
the independent public accountants to review internal accounting controls, audit
results and accounting principles and practices, and annually recommends to the
Board of Directors the selection of independent public accountants.
Charles R. Lee
Chairman and
Chief Executive Officer
Lawrence R. Whitman
Deputy Chief Financial Officer
74
<PAGE> 76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The GTE Board of Directors is divided into three classes. Each class of
directors is elected for a three-year term, as follows:
<TABLE>
<CAPTION>
Class Expiration of Term
- ----- ------------------
<S> <C>
Class I 2002 GTE annual meeting; or when their successors are elected or qualified.
Class II 2000 GTE annual meeting; or when their successors are elected or qualified.
Class III 2001 GTE annual meeting; or when their successors are elected or qualified.
</TABLE>
BIOGRAPHICAL INFORMATION OF DIRECTORS
The following provides information about the directors.
<TABLE>
<CAPTION>
Principal Occupation and Other Information
Director, Age and ----------------------------------------------------------------------------------------
Year Elected a Director Class I Directors
- ----------------------- ----------------------------------------------------------------------------------------
<S> <C>
EDWARD H. BUDD Retired Chairman of the Board of The Travelers Corporation. From January 1994 to
66 1985 September 1994, Mr. Budd was Chairman of Travelers Insurance Group, Inc. Mr. Budd was
elected President and Chief Operating Officer of The Travelers Corporation in 1976,
Chief Executive Officer in 1981 and Chairman in 1982. He is a Director of Delta Air
Lines, Inc. and a member of The Business Council. He is Chairman of the Audit Committee
and a member of the Nominating Committee and the Executive Compensation and
Organizational Structure Committee of GTE.
JAMES L. KETELSEN Retired Chairman of Tenneco Inc. Mr. Ketelsen retired as Chairman of Tenneco Inc. in
69 1986 1992. He was elected Executive Vice President-Finance of Tenneco Inc. in 1972 and was
appointed Chairman and Chief Executive Officer in 1978. He is a Director of J.P. Morgan
& Co. Incorporated and its principal subsidiary, Morgan Guaranty Trust Company of New
York, and of Sara Lee Corporation and a Trustee of Northwestern University. Mr.
Ketelsen is Chairman of the Pension Trust Coordinating Committee and a member of the
Executive Compensation and Organizational Structure Committee and the Public Policy
Committee of GTE.
CHARLES R. LEE GTE Chairman and Chief Executive Officer. Mr. Lee joined GTE in 1983 as Senior
60 1989 Vice President-Finance and in 1986 he was named Senior Vice President-Finance
and Planning. He was elected President and Chief Operating Officer, effective
January 1, 1989, and became Chairman and Chief Executive Officer in 1992. Prior
to joining GTE, he held various financial and management positions in the steel,
transportation and entertainment industries. Mr. Lee is a Director of United
Technologies Corporation, USX Corporation and The Procter & Gamble Company. He
is a member of the Business Round Table, a Trustee Emeritus of the Board of
Trustees of Cornell University, a Trustee of the National Planning Association,
a member of the New American Realities Committee of the National Planning
Association, a member of The Conference Board and a Director of the Stamford
Hospital Foundation. Mr. Lee is a Personal Trustee of the GTE Foundation and a
member of the Strategic Issues, Planning and Technology Committee of GTE.
JOHN W. SNOW Chairman, President and Chief Executive Officer of CSX Corporation. A Director of CSX
60 1998 Corporation since 1985, Dr. Snow has held the title of President and CEO of this global
transportation company since April 1989 and became Chairman in February 1991. He also
serves as a Director of Circuit City Stores, Inc.; Johnson & Johnson; and USX
Corporation. He has served as Chairman of The Business Roundtable and is currently Vice
Chairman of the Business Council and Chairman of the Ron Brown Award for Corporate
Citizenship. Prior to joining CSX, he held senior posts at the U.S. Department of
Transportation. Dr. Snow is a graduate of the George Washington University Law School
and the University of Virginia with a Ph.D. in Economics. Dr. Snow is a member of the Audit
Committee, the Pension Trust Coordinating Committee and the Public Policy Committee of GTE.
</TABLE>
75
<PAGE> 77
<TABLE>
<CAPTION>
Principal Occupation and Other Information
Director, Age and ----------------------------------------------------------------------------------------
Year Elected a Director Class II Directors
- ----------------------- ----------------------------------------------------------------------------------------
<S> <C>
JAMES R. BARKER Chairman of The Interlake Steamship Co. and Vice Chairman of Mormac Marine Group, Inc.
64 1976 and the Moran Towing Company. Mr. Barker is also a Director and a principal owner of
Meridian Aggregates, Inc., a producer of aggregate products for the construction and
railroad industries. Mr. Barker was formerly Chairman of the Board of Moore McCormack
Resources, Inc. and Chairman of that company's operating subsidiaries since April 1971.
He was also Chief Executive Officer of Moore McCormack Resources, Inc. from 1971 to
January 1987. In 1969, Mr. Barker co-founded a management consulting firm, Temple,
Barker & Sloane, Inc., and served in the capacity of Executive Vice President. He is a
Director of The Pittston Company and Eastern Enterprises and is a member of the Board of
Trustees of Stamford Hospital. Mr. Barker is Chairman of the Nominating Committee and a
member of the Executive Compensation and Organizational Structure Committee and the
Strategic Issues, Planning and Technology Committee of GTE.
ROBERT F. DANIELL Retired Chairman, United Technologies Corporation. Mr. Daniell was elected
66 1996 Chairman, United Technologies Corporation, effective January 1, 1987 and retired
in April 1997. He relinquished the offices of President and Chief Operating
Officer in February 1992 and the office of Chief Executive Officer in April
1994. Mr. Daniell was elected President and Chief Operating Officer in 1984 and
named to the additional post of Chief Executive Officer, effective January 1,
1986. He was elected Senior Vice President--Defense Systems in 1983 and had
served as Vice President of United Technologies from 1982 to 1983 and President
of Sikorsky Aircraft from 1981 to 1983. He is a Director of Shell Oil Co. Mr.
Daniell is a member of the Audit Committee, the Pension Trust Coordinating
Committee and the Public Policy Committee of GTE.
MICHAEL T. MASIN GTE Vice Chairman of the Board and President-International. Mr. Masin was elected Vice
55 1989 Chairman in October 1993 and President-International in June 1995. Prior to that, he
was Managing Partner of the New York office of the law firm of O'Melveny & Myers and
Co-chair of the firm's International Practice Group. Mr. Masin joined the firm in 1969
and became a partner in 1977. He is a Director of Citigroup Inc., BCT.TELUS
Communications Inc., Compania Anonima Nacional Telefonos de Venezuela (CANTV) and
VenWorld. Mr. Masin is a member of the Board of Trustees and Executive Committee of
Carnegie Hall, the Board of Directors and Executive Committee of the W. M. Keck
Foundation, the Board of Directors of the China America Society, the Dean's Advisory
Council of Dartmouth College, the Business Committee of the Board of Trustees of the
Museum of Modern Art, the Council on Foreign Relations, and a Personal Trustee of the
GTE Foundation.
ROBERT D. STOREY Partner with the Cleveland law firm of Thompson, Hine & Flory LLP. Mr. Storey
64 1985 previously was a partner with the Cleveland law firm of McDonald, Hopkins, Burke & Haber
Co., L.P.A. Mr. Storey joined its predecessor firm in 1967 and became a partner in
1971. In 1964 he began his career as an attorney with The East Ohio Gas Company and in
1966 he became Assistant Director of The Legal Aid Society of Cleveland. He is a
Director of The Procter & Gamble Company and The May Department Stores Company. Mr.
Storey is a Trustee of Case Western Reserve University, the Kresge Foundation and the
George Gund Foundation and a former Trustee of Phillips Exeter Academy, Cleveland State
University and Overseer of Harvard University. He is a member of the Audit Committee,
the Nominating Committee and the Public Policy Committee of GTE.
</TABLE>
76
<PAGE> 78
<TABLE>
<CAPTION>
Principal Occupation and Other Information
Director, Age and ----------------------------------------------------------------------------------------
Year Elected a Director Class III Directors
- ----------------------- ----------------------------------------------------------------------------------------
<S> <C>
EDWIN L. ARTZT Retired Chairman of the Board and Chief Executive Officer of The Procter & Gamble
69 1984 Company. Mr. Artzt was Chairman of the Board and Chief Executive Officer from January
1990 until July 1995. Mr. Artz is Chairman of the Board and a Director of Spalding
Holdings Corporation and a Director of Delta Air Lines, Inc., American Express Company
and Evenflo Company, Inc. He is also a member of the Business Council. He is Chairman
of the Strategic Issues, Planning and Technology Committee, and a member of the
Nominating Committee and the Pension Trust Coordinating Committee of GTE.
SANDRA O. MOOSE Senior Vice President and Director, The Boston Consulting Group, Inc. Dr. Moose
58 1978 is a Director of Rohm and Haas Company and twenty-seven investment companies
sponsored by New England Funds, an Overseer of the Beth Israel Deaconess Medical
Center, a Trustee of the Boston Public Library Foundation, an Overseer of the
Museum of Fine Arts, a member of Visiting Committee of the Harvard School of
Public Health and a Director of the Harvard University Graduate School Alumni
Association. She is Chairperson of the Public Policy Committee and a member of
the Audit Committee and the Strategic Issues, Planning and Technology Committee
of GTE.
RUSSELL E. PALMER Chairman and Chief Executive Officer, The Palmer Group, a private investment firm. Mr.
65 1984 Palmer was formerly Dean, The Wharton School, University of Pennsylvania from 1983 until
June 1990. Prior to that, he was Managing Director and Chief Executive Officer of
Touche Ross International (now Deloitte and Touche), a worldwide accounting firm. Mr.
Palmer joined Touche Ross in 1956 and was elected Managing Director of Touche Ross
International in 1974. Mr. Palmer is a Director of The May Department Stores Company,
Honeywell International Inc., Safeguard Scientifics, Inc. and Federal Home Loan Mortgage
Corporation. He has been President of the Financial Accounting Foundation and a member
of the Board of Directors of the American Institute of Certified Public Accountants.
Mr. Palmer is a former member of the Presidential Commission on Management Improvement
and serves on the boards of a number of charitable and civic organizations. He is
Chairman of the Executive Compensation and Organizational Structure Committee and a
member of the Nominating Committee and the Strategic Issues, Planning and Technology
Committee of GTE.
</TABLE>
77
<PAGE> 79
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive officers of
GTE as of December 31, 1999.
<TABLE>
<CAPTION>
Date Assumed
Name (1) Title Age Position
- ------------------------- ------------------------------------------------- ----------- -------------------
<S> <C> <C> <C>
Charles R. Lee Chairman and Chief Executive Officer 60 May 1992
Kent B. Foster President 56 June 1995
Michael T. Masin Vice Chairman and President - International 55 June 1995
James A. Attwood, Jr. (2) Executive Vice President - Strategic Development 41 July 1998
and Planning
William P. Barr Executive Vice President - Government and 49 June 1997
Regulatory Advocacy and General Counsel
J. Randall MacDonald Executive Vice President - Human Resources and 51 June 1997
Administration
Daniel P. O'Brien Executive Vice President - Finance and Chief 45 June 1998
Financial Officer
Mary Beth Bardin Senior Vice President - Public Affairs and 45 January 1998
Communications
Paul R. Shuell Vice President and Controller 52 April 1998
Jan L. Deur Acting Vice President and Treasurer 55 August 1998
- -----------
(1) Prior to serving as executive officers of GTE, each of the officers named
has been employed in high-level management positions by GTE or a GTE
subsidiary for more than five years, with the exception of James A. Attwood,
Jr.
(2) Mr. Attwood, was appointed Executive Vice President - Strategic Development
and Planning in July 1998. He had previously served as Vice President -
International Business Development. Mr. Attwood joined GTE in 1996 as Vice
President - Corporate Planning and Development after more than ten years in
the investment banking division of Goldman, Sachs & Co. in New York and
Tokyo.
</TABLE>
78
<PAGE> 80
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION
Annual Compensation
During 1999, each non-employee member of GTE's Board of Directors participated
in a compensation program that has both stock-based and cash-based components.
By using stock-based compensation, the financial interests of GTE's non-employee
directors are aligned with its shareholders. Employee members of GTE's Board of
Directors are not paid for serving on the GTE Board of Directors or any of the
board committees.
During 1999, the GTE Board of Directors granted each non-employee director 1,000
hypothetical shares of GTE common stock, which GTE refers to as deferred stock
units, under the Deferred Stock Unit Plan for Non-Employee Members of the Board
of Directors of GTE Corporation. The plan permits a non-employee director to
receive distributions in shares of GTE common stock, as well as cash, as soon as
the non-employee director ceases to be an officer or director of GTE. There are
no voting rights attached to deferred stock units.
The deferred stock units are held in an account for the non-employee director.
Deferred stock units increase or decrease in value based on the market value of
an equivalent number of shares of GTE common stock. Each time a dividend is paid
on GTE common stock, an equivalent amount is converted to deferred stock units
and credited to the non-employee director's individual account based on the
number of deferred stock units held as of the dividend date. These awards are
not payable until the non-employee director terminates service as a director or
officer of GTE.
With respect to the cash-based component, each non-employee GTE director also
received an annual retainer in the amount of $60,000, and each non-employee
director who chaired a committee of GTE's Board of Directors received an
additional annual retainer of $2,500.
Deferred Compensation
Under the Deferred Compensation Plan for Non-Employee Members of the Board of
Directors of GTE, any non-employee GTE director may elect annually to defer all
or any part of the cash portion of the compensation and receive payments in the
future. The plan permits a non-employee director to hold the deferred amount in
deferred stock units or in an interest-bearing cash account, or both. The number
of deferred stock units is determined by dividing the amount deferred for the
calendar quarter by the average closing price of GTE common stock, as reported
on the New York Stock Exchange Composite Transactions Tape, for the most recent
20 business-day period ending on or before the last day of the quarter. Deferred
stock units change in value based on the value of an equivalent number of shares
of GTE common stock. Each time a dividend is paid on GTE common stock, an
equivalent amount is converted into deferred stock units and credited to the
non-employee director's account based on the number of deferred stock units held
as of the dividend date.
After the non-employee GTE director's service terminates, he or she may elect to
receive the amounts deferred and held in deferred stock units under this plan in
cash or shares of GTE common stock. If the amount deferred is held in a cash
account, payments will be made in cash, and the non-employee director may elect
to receive payments either before or after his or her service ends. After he or
she leaves the GTE Board of Directors, a non-employee director may also elect to
invest the balance of his or her plan account in a variety of investment
options.
CHARITABLE AWARDS PROGRAM
Non-employee directors and designated senior executives of GTE, including the
individuals named in the "Executive Compensation Tables - Summary Compensation
Table" in this Item 11, participate in a charitable awards program. Under this
program, GTE will donate an aggregate of $1,000,000 to as many as four
tax-exempt educational institutions or public charities designated by the
participant. The donations will be made in five equal annual installments after
a participant's death. Generally, the donations will be made only if: (1) the
participant dies while a director or a designated senior officer; or (2) the
participant was either (a) a director who separated from service with GTE after
completing five or more years of service as a director, or (b) a designated
senior officer who separated from service after reaching age 65 and completing
five or more years of service as an employee of GTE and who was not
involuntarily separated from service for cause; or (3) a change in control
occurs while the participant is a director or designated senior executive of
GTE. The program is financed through the purchase of life insurance by GTE.
Participants do not receive individual financial benefits from this program
since all charitable deductions accrue solely to GTE.
79
<PAGE> 81
EXECUTIVE COMPENSATION TABLES
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of the Chief
Executive Officer and each of the other four most highly compensated executive
officers of GTE who were serving as executive officers on December 31, 1999 for
services in all capacities to GTE and its subsidiaries. The table also includes
information about one executive officer of GTE who retired prior to December 31,
1999.
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------
Annual Compensation Awards Payouts
----------------------------------------- ------------------------- ----------
Securities
Restricted Underlying LTIP All Other
Name and Principal Salary Other Annual Stock Options/ Payouts Compensation
Position(1) Year ($)(2) Bonus($)(3) Compensation($) Awards($)(4) SARs(#) ($)(3)(5) ($)(6)
- ------------------------- ------ ---------- ----------- --------------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles R. Lee 1999 1,247,692 1,711,500 9,825 547,300 240,000 7,045,300 56,146
Chairman and Chief 1998 1,098,846 1,424,300 2,202 169,813 221,100 1,292,700 49,448
Executive Officer 1997 1,039,500 1,508,800 60,095 246,156 248,600 2,429,700 11,320
Kent B. Foster 1999 934,962 1,026,100 93,740 289,406 142,100 4,630,500 42,073
President(7) 1998 897,942 963,800 23,278 119,519 130,900 948,500 40,407
1997 843,538 1,011,500 58,084 172,781 182,800 1,753,000 11,320
Michael T. Masin 1999 838,247 974,800 34,766 304,975 118,600 3,904,800 33,814
Vice Chairman and 1998 779,855 918,900 3,403 107,894 109,300 807,400 33,981
President-- 1997 742,391 843,200 61,841 144,956 155,400 1,476,100 7,200
International(8)
Thomas W. White 1999 475,834 394,100 152 149,838 75,000 2,397,400 7,437,313
Senior Executive 1998 517,231 500,700 80 61,350 69,100 480,900 23,275
Vice President-- Market 1997 503,591 533,700 -- 84,756 91,700 822,400 11,320
Operations, GTE Service
Corporation(9)
William P. Barr 1999 514,615 490,500 339 155,419 66,400 1,996,200 23,158
Executive Vice 1998 478,462 420,800 64 46,988 61,200 331,000 21,531
President-- Government 1997 445,442 394,500 -- 1,936,588 304,000 510,900 11,320
and Regulatory Advocacy
and General Counsel(10)
J. Randall MacDonald 1999 404,077 413,100 4,669 125,425 50,500 1,593,700 18,183
Executive Vice 1998 374,385 354,200 1,141 734,138 139,500 295,700 16,847
President-- Human 1997 348,423 329,500 -- 50,913 62,200 485,100 10,613
Resources and
Administration(11)
</TABLE>
- ----------
(1) All persons named in the table are officers of GTE except as otherwise
noted.
(2) The data in the salary column of the table include fees received by certain
executives for serving as directors of BC TELECOM Inc., a Canadian company
in which GTE owned a 50.8% interest during 1997, 1998, and January of
1999. The data in this column also represents fees received by one
executive for serving as director of BCT.TELUS Communications Inc., in
which GTE owned a 26.7% interest, during the remainder of 1999. Mr. Masin's
salary for 1999, 1998, and 1997, includes fees of $16,829, $18,215, and
$17,182, respectively. Mr. White's salary for 1997 includes fees of $7,280.
In 1999, Mr. Masin also received BCT.TELUS Communications Inc. deferred
stock units valued at $32,725, which is included in this column. In 1998
Mr. Masin received BC TELECOM Inc. deferred stock units valued at $6,505.
In 1997, Mr. Masin and Mr. White received BC TELECOM Inc. deferred stock
units valued at $14,593 and $10,695, respectively, which are included in
this column.
80
<PAGE> 82
(3) The data in these columns represent the amounts received in 1999 by
executive officers listed in this table under GTE's Executive Incentive
Plan and Long-Term Incentive Plan. In connection with GTE's Equity
Participation Program, a portion of this amount has been deferred into
restricted stock units payable at maturity (generally, a minimum of three
years) in GTE common stock. The number of restricted stock units received
was calculated by dividing the deferred amount by the average closing price
of GTE common stock on the New York Stock Exchange Composite Transactions
Tape for the 20 consecutive trading days following the release to the
public of GTE's financial results for the fiscal year in which the bonus
was earned. Additional restricted stock units are received on each dividend
payment date based upon the amount of the dividend paid and the closing
price of GTE common stock on the New York Stock Exchange Composite
Transactions Tape on the dividend declaration date. All matching restricted
stock units granted under the GTE Equity Participation Program and the
additional matching units attributable to dividend equivalents prior to the
date GTE's shareholders approved the proposed merger with Bell Atlantic,
became fully vested upon shareholder approval.
(4) The data in this column represent the dollar value of the matching
restricted stock units based upon the average closing price described in
footnote 3 above. Matching restricted stock units are received on the basis
of one additional restricted stock unit for every four restricted stock
units deferred through bonus deferrals described in footnote 3 above. The
matching stock units were designed to increase focus on shareholder value
and to compensate the executive for agreeing not to realize the economic
value associated with deferred bonus amounts. Additional restricted stock
units are received on each dividend payment date based upon the amount of
the dividend paid and the closing price of GTE common stock on the New York
Stock Exchange Composite Transactions Tape on the dividend declaration
date. Messrs. Lee, Foster, Masin, White, Barr and MacDonald each hold a
total of 8,099, 0, 62,276, 0, 14,489, and 22,248 restricted stock units,
respectively, which had a dollar value of $571,452, $0, $4,394,166, $0,
$1,022,375 and $1,569,794, respectively, based solely upon the closing
price of GTE common stock on December 31, 1999.
(5) Under the terms of the GTE Long-Term Incentive Plan and the award
agreements, awards for the 1997-1999 and 1998-2000 cycles became
immediately non-forfeitable and payable when GTE shareholders approved the
proposed GTE/Bell Atlantic merger. Each payment equaled the average of the
performance percentage for the three award cycles that were completed
before the date the proposed GTE/Bell Atlantic merger was approved.
Projected dividends through the end of the award cycle were also included.
(6) The column "All Other Compensation" includes, for 1999, contributions by
GTE and its related companies to the GTE Savings Plan of $7,200 for each of
Messrs. Lee, Foster, Masin, Barr and MacDonald and $5,538 for Mr. White.
This column also includes contributions by GTE and its subsidiaries to the
GTE Executive Salary Deferral Plan of $48,946, $34,873, $26,614, $13,382,
$15,958, and $10,983 for each of Messrs. Lee, Foster, Masin, White, Barr
and MacDonald. The data in this column also represents payments made to Mr.
White associated with his Executive Severance Agreement, ERLIP,
Supplemental Executive Retirement Plan, Qualified Pension, Excess Pension
and banked vacation in the amounts of $1,697,800, $590,744, $631,094,
$203,299, $4,020,251, and $275,205, respectively.
(7) Mr. Foster was elected President in June 1995. He served as Vice Chairman
and President - GTE Telephone Operations Group from October 1993 until June
1995. Mr. Foster retired from GTE on December 31, 1999.
(8) Mr. Masin joined GTE as Vice Chairman effective October 1993. He was also
elected President - International in June 1995.
(9) Mr. White was elected Senior Executive Vice President - Market Operations
of GTE Service Corporation in June 1997. He served as President - GTE
Telephone Operations Group from July 1995 until June 1997, and before that
as an Executive Vice President of GTE Telephone Operations Group from 1991.
Mr. White retired from GTE on October 1, 1999.
(10) Mr. Barr was elected Executive Vice President - Government and Regulatory
Advocacy and General Counsel in June 1997 and before that served as Senior
Vice President and General Counsel from July 1994. Prior to joining GTE, he
was a partner in the Washington, D.C. office of the law firm of Shaw,
Pittman, Potts & Trowbridge since 1993. He served as Attorney General of
the United States from 1991 to 1993.
(11) Mr. MacDonald was elected Executive Vice President - Human Resources and
Administration in April 1995. He served as Vice President - Employee
Relations and Organization Development from March 1989 until April 1995.
81
<PAGE> 83
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options to the executive officers named
in the "Summary Compensation Table". The options were granted under GTE's
Long-Term Incentive Plan. In addition, these stock option grants included a
replacement stock option feature. The replacement stock option feature provides
that, if an executive exercises a stock option granted in 1999 by delivering
previously owned shares that are sufficient to pay the exercise price plus
applicable tax withholdings, the executive will receive a one-time additional
stock option grant. The number of shares represented by that option will be
equal to the number of previously owned shares surrendered in this transaction.
This replacement stock option will be granted with an exercise price equal to
fair market value on the date of grant. No stock appreciation rights were
granted to these executive officers of GTE in 1999. Each option granted may be
exercised with respect to one-third of the aggregate number of shares subject to
the grant each year, commencing one year after the date of grant. Pursuant to
Securities and Exchange Commission rules, the table also shows the value of the
options granted at the end of the option terms (ten years) if the stock price
were to appreciate annually by 5% and 10%, respectively. There is no assurance
that the stock price will appreciate at the rates shown in the table. The table
also indicates that if the stock price does not appreciate, the potential
realizable value of the options granted will be zero.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
----------------------------------------------------- ------------------------------------
% of Total
Number of Options/
Securities SARs Granted Exercise
Underlying to Employees or Base
Options/ in Fiscal Price Expiration
Name SARs Granted Year ($/Sh) Date 0% 5% 10%
- --------------------- ------------- ------------ --------- ---------- ---- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles R. Lee 240,000 .88% 65.0313 2/15/09 $ 0 $ 9,815,480 $ 24,874,355
Kent B. Foster 142,100 .52% 65.0313 2/15/09 0 5,811,582 14,727,691
Michael T. Masin 118,600 .43% 65.0313 2/15/09 0 4,850,483 12,292,077
Thomas W. White 75,000 .27% 65.0313 2/15/09 0 3,067,338 7,773,236
William P. Barr 66,400 .24% 65.0313 2/15/09 0 2,715,616 6,881,905
J. Randall MacDonald 50,500 .18% 65.0313 2/15/09 0 2,065,341 5,233,979
</TABLE>
If the price of GTE common stock appreciates, the aggregate market value of GTE
common stock held by the shareholders will also increase. For example, the
aggregate market value of GTE common stock on February 15, 1999 was
approximately $63.29 billion based upon the market price on that date. If the
share price of GTE common stock increases by 5% per year, the aggregate market
value on February 15, 2009 of the same number of shares would be approximately
$103.09 billion. If the price of GTE common stock increases by 10% per year, the
aggregate market value on February 15, 2009 would be approximately $164.16
billion.
82
<PAGE> 84
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table provides information as to options and stock appreciation
rights exercised by each of the executive officers named in the "Summary
Compensation Table" of GTE during 1999. The table sets forth the value of
options and stock appreciation rights held by such officers at year-end measured
in terms of the closing price of GTE common stock on December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options/SARs
Options/SARs at at
FY-End (#) FY-End ($)
-------------------------- ---------------------------
Shares Value
Acquired on Realized
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ------------- ----------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Lee 60,600 2,566,046 1,537,300 240,000 46,136,910 1,305,048
Kent B. Foster 32,800 1,356,607 1,156,700 0 31,022,541 0
Michael T. Masin 0 0 601,000 118,600 15,505,111 644,911
Thomas W. White 0 0 362,801 0 7,410,808 0
William P. Barr 197,600 5,669,137 269,200 66,400 5,443,993 361,063
J. Randall MacDonald 82,400 2,739,238 219,600 134,200 5,022,448 1,305,159
</TABLE>
LONG-TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR
The GTE Long-Term Incentive Plan provides for awards to participating employees,
including stock options, stock appreciation rights, performance bonuses and
other stock-based awards. Stock options awarded under the plan to the executive
officers named in the "Summary Compensation Table" are included in that table.
Senior executives of GTE, including the six executives named in the "Summary
Compensation Table", are eligible to receive annual grants of performance
bonuses under the GTE Long-Term Incentive Plan. These grants are earned during a
performance cycle that is typically three years in duration. GTE's actual
financial performance is compared to pre-established target levels for the
following key measures: revenues growth, earnings per share growth, EBITDA
growth, relative total shareholder return, and return on investment.
In establishing the targeted performance levels for the five key measures, the
GTE Executive Compensation and Organizational Structure Committee considered
GTE's past performance, the performance of its principal competitors, its
strategic goals, and its plans for implementing those goals. The targets
established by the committee with respect to these key measures are designed to
facilitate implementing GTE's strategic plans and to improve GTE's performance
relative to its peers.
At the time the targeted performance bonus levels for each cycle under the GTE
Long-Term Incentive Plan were established, a common stock equivalent unit
account was set up for each participant. Each equivalent unit account
represents an initial dollar amount for each account, which is referred to as a
target award, based on the competitive performance bonus grant practices of the
market comparison group. The value of the account was increased or decreased
based on the market price of GTE common stock. Each time a dividend was paid
on GTE common stock, an amount equal to the dividend paid on an equivalent
number of shares of GTE common stock was added to the account. This amount was
then converted into a number of equivalent units, obtained by dividing the
amount of the dividend by the average of the high and low prices of GTE common
stock on the New York Stock Exchange Composite Transactions Tape on the
dividend payment date. The resulting number of equivalent units was then
credited to the account.
83
<PAGE> 85
Under the performance criteria approved for the 1999-2002 cycle, the committee
established the minimum level of performance, or threshold, for each of the key
measures. If this threshold is not met for a particular key measure, no award
is paid for that key measure. If performance for a key measure is at the
threshold, participants receive a payment of 20% of the target award for that
key measure. However, if GTE's performance for the total shareholder return key
measure is at the threshold, a payment of 50% of the award is made. The
committee determined that this key measure was critical to GTE's success and
set an exceptionally demanding goal for total shareholder return. Accordingly,
they determined that if the threshold were met, a 50% payment would be made with
respect to total shareholder return. If GTE's performance meets the target for
the key measure, participants will receive the full value associated with
achieving that key measure. If GTE's performance exceeds the target, the award
for that key measure will exceed 100% of the target award, based upon the
formula explained below. The formula is applied separately for each key
measure. The committee anticipates that performance bonus awards will be based
in equal proportion on the attainment of the target established for each of the
five key measures. The cumulative attainment level is called the "Guideline
Performance Percentage." The value of the equivalent unit account is then
adjusted by the Guideline Performance Percentage.
<TABLE>
<CAPTION>
Estimated Future Payouts
Number of Performance or Under Non-Stock Price-Based Plan
Shares, Units Other Period Until --------------------------------------------
or Other Rights Maturation or Threshold Target
Name (#) Payout (# of Units) (# of Units) Maximum
- -------------------- --------------- ------------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Charles R. Lee 35,400 3 Years 9,945 38,249
Kent B. Foster 21,000 3 Years 5,899 22,690
Michael T. Masin 17,500 3 Years 4,916 18,909
Thomas W. White 1,540 3 Years 433 1,664
William P. Barr 9,800 3 Years 2,753 10,589
J. Randall MacDonald 7,400 3 Years 2,079 7,996
</TABLE>
GTE cannot predict future dividends. Accordingly, estimated equivalent unit
accruals in the above table are calculated for illustrative purposes only and
are based upon the dividend rate and price of GTE common stock at the close of
business on December 31, 1999. The target award is the dollar amount derived
by multiplying the equivalent unit balance credited to the participant at the
end of the award cycle by the average closing price of GTE common stock, as
reported on the New York Stock Exchange Composite Transactions Tape, during
the last 20 business days of the award cycle.
The column headed "Maximum" has intentionally been left blank because it is
not possible to determine the maximum number of equivalent units until the
award cycle has been completed. Subject to the award limit discussed above, the
maximum amount of the award is limited by the extent to which GTE's actual
results for the five key measures exceed the target levels. If GTE's actual
results during the cycle for the five key measures exceed the respective target
levels, additional awards may be paid, based on a linear interpolation. For
example, for revenue growth, the schedule is as follows:
<TABLE>
<CAPTION>
<S> <C>
Performance Increment Above Added Percentage to
Revenue Performance Target Combined Awards
- ---------------------------------------- -------------------
Each 0.1% improvement in cumulative revenue growth +2%
</TABLE>
Thus, for example, if the revenue growth key measure exceeds its target level by
.5% while the remaining four key measures are precisely at their respective
target levels, then the performance bonus will equal 110% of the combined target
award.
84
<PAGE> 86
ADDITIONAL COMPENSATION FOR EXECUTIVE OFFICERS AS A RESULT OF THE MERGER
A number of executive officers of GTE, including some officers who are also
directors, have employment agreements or retention incentives or are entitled to
benefits under employee benefit plans as a result of the proposed merger with
Bell Atlantic. Each of the employee-directors of GTE could receive significant
compensation if the merger is completed.
GTE Employment Agreements
In recognition of the highly competitive environment in the telecommunications
industry, the GTE Executive Compensation and Organizational Structure Committee
of the Board of Directors recognizes that, from time to time, it is appropriate
to enter into agreements with key members of management in order to ensure that
GTE continues to retain the services of these individuals. Messrs. Lee, Foster,
Masin, Barr, and MacDonald, will receive compensation and benefits defined below
for the term of their agreements. If the executive's employment is terminated
for reasons other than cause or he resigns for good reason, as defined in the
employment agreement, he generally will receive the compensation and benefits
provided for under the agreement as if he had not been terminated. Messrs. Lee,
Foster, Masin and MacDonald have agreed not to engage in competitive activities
for a specified period of time.
There will be no duplication between those benefits provided for by these
agreements and those provided by the executive severance agreements described
below.
Charles R. Lee
GTE has entered into an employment agreement with Mr. Lee, effective January 1,
1999, that generally provides that, assuming the merger is completed, he will
continue to be employed through June 30, 2002, with a two-year consulting period
to follow. He will become Co-Chief Executive Officer of the combined company on
the date the merger becomes effective. He will also serve as Chairman of the
Board of the combined company until June 30, 2004. If the merger does not occur
before June 30, 2004, however, he will remain employed as Chairman and Chief
Executive Officer of GTE through that date, and he and GTE will negotiate a
mutually agreeable extension. Mr. Lee's employment agreement generally provides
for:
o an annual base salary of at least $1,250,000;
o short and long-term bonus opportunities that are, in total, at
least at the same level as the total bonus opportunities available
to him immediately before he entered into the agreement;
o a special long-term performance incentive in a target amount of
$10,000,000, adjusted upward or downward based on the investment
performance and growth in GTE's average earnings per share and
subject to a vesting schedule over the term of the agreement; and
o an extra year of service for each year during the term of the
agreement for purposes of determining pension and certain other
post-retirement benefits.
85
<PAGE> 87
In the event of a qualifying termination, as described under "GTE Executive
Severance Agreements", Mr. Lee will receive benefits under his executive
severance agreement and:
o the long-term performance incentive;
o his pensionable compensation will be based on his base amount (as
defined in his executive severance agreement) if that increases
the amount of his pension; and
o instead of the extra service credit provided for by his executive
severance agreement, two-for-one service credit as if he had been
employed through June 30, 2004.
If Mr. Lee is terminated for cause or resigns without good reason:
o all salary and benefits will cease;
o he will forfeit all unvested compensation; and
o he will not receive a consulting fee.
If Mr. Lee's employment is terminated due to death or disability:
o his salary and other compensation and benefits will cease;
o he will receive two-for-one pension credit only for those years he
actually worked during the term of the employment agreement; and
o the long-term performance incentive will become payable in full
immediately.
During the consulting period described above, Mr. Lee will be an independent
contractor and will no longer be entitled to the benefits generally provided to
GTE employees. He will be paid a consulting fee of $250,000 per month and will
be provided office space and support at GTE's expense.
Kent B. Foster And Michael T. Masin
GTE entered into employment agreements with Mr. Foster and Mr. Masin, effective
October 1, 1998 through September 30, 2002. Each employment agreement generally
provides for:
o a guaranteed minimum base salary of not less than $899,000 for
Mr. Foster and $756,000 for Mr. Masin;
o short and long-term bonus opportunities and stock options
which are generally provided to other executives at the same
salary level;
o a special long-term retention incentive of $4,500,000 for Mr.
Foster and $3,500,000 for Mr. Masin, adjusted upward or downward
based on investment performance, with 60% vesting after three
years and the remainder vesting after four years; and
o credit for an extra year of service for each year during the term
of the employment agreement for purposes of determining pension
and other post-retirement benefits.
86
<PAGE> 88
In the event of a qualifying termination, as described under "GTE Executive
Severance Agreements", Mr. Foster and Mr. Masin will each receive benefits under
his executive severance agreement and:
o the long-term retention incentive; and
o instead of the two years of additional credit provided by his
executive severance agreement, special pension and benefit credit
provided for by his employment agreement.
If Mr. Foster or Mr. Masin is terminated for cause or resigns without good
reason, all salary and benefits will cease, and he will forfeit all unvested
compensation.
If Mr. Foster's or Mr. Masin's employment is terminated due to death or
disability:
o his salary and other compensation and benefits will cease;
o two-for-one pension credit will only apply to those years actually
worked during the term of the employment agreement; and
o the long-term retention incentive will become payable in full
immediately.
In addition, Mr. Masin will be considered to be fully eligible for post-
retirement benefits if he remains employed until September 30, 2002. Mr. Foster
is already fully retirement eligible.
When GTE initially employed Mr. Masin, it agreed to preserve the pension
benefits he would have received had he remained with his former employer. Upon
retiring, he will receive a single life annuity of $200,000 per year. If Mr.
Masin dies, his surviving spouse will be entitled to receive the same benefit he
was receiving. This annuity will be provided in addition to the pension and
other post-retirement benefits described above.
The agreements with Mr. Foster and Mr. Masin further provide that each will
continue as a member of the GTE Board of Directors during the term of his
agreement.
Mr. Foster separated from GTE effective December 31, 1999. Under the terms of
his separation agreement, he received severance benefits as if he had incurred a
qualifying termination. In addition, Mr. Foster received a special separation
payment of $2,046,300, and he will be eligible for a prorated Performance Bonus
(12/36ths) under the GTE Long-Term Incentive Plan for the 1999-2001 Award Cycle.
Mr. Foster's separation arrangements are subject to certain non-competition and
non-solicitation provisions and his execution of a Separation Agreement and
General Release.
William P. Barr
GTE entered into an employment agreement with Mr. Barr, effective December 1,
1997 through November 30, 2002. His agreement generally provides for:
o a guaranteed minimum base salary of not less than $465,000;
o short and long-term bonus opportunities and stock options which
are generally provided to other executives at the same salary
level;
o a one-time grant of an option to purchase 228,000 shares of GTE
common stock that vests one-third per year over three years;
o a one-time grant of 34,564 restricted stock units that vests over
a period of five years; and
o credit for an extra year of service for each year of employment
with GTE and retirement eligibility for purposes of determining
pension and other post-retirement benefits.
87
<PAGE> 89
If Mr. Barr dies or leaves GTE because he becomes disabled, or enters into
service with the federal government or an educational organization approved by
the GTE Board of Directors:
o he will be entitled only to the pension service credit described
above; and
o he will also be entitled to certain other reduced benefits as
described in his employment agreement, including immediate vesting
of a portion of his unvested equity-based awards (such as stock
options, restricted stock units and performance-bonus awards) and
certain lump sum payments of base salary and incentive
compensation under the Executive Incentive Plan and the Long-Term
Incentive Plan.
J. Randall MacDonald
GTE entered into an employment agreement with Mr. MacDonald, effective June 4,
1998 through June 3, 2001. His agreement, which will automatically renew for two
additional years unless he is notified of non-renewal by GTE, generally provides
for:
o a guaranteed minimum base salary;
o short and long-term bonus opportunities and stock options which
are generally provided to other executives at the same salary
level;
o a one-time grant of 93,000 options to purchase shares of GTE
common stock, subject to vesting based on either stock price
performance or service;
o a one-time grant of 11,687 restricted stock units, subject to the
same vesting schedule; and
o credit for an extra year of service for each year during the term
of the employment agreement for purposes of determining his
pension and other post-retirement benefits.
If Mr. MacDonald incurs a qualifying termination under his executive severance
agreement, as described under "GTE Executive Severance Agreements", he will
receive benefits under that executive severance agreement and:
o the restricted stock units and stock options provided for under
his employment agreement will immediately vest and become
exercisable; and
o he will receive the special pension credit provided for above.
If Mr. MacDonald is terminated for cause or resigns without good reason, all
salary and benefits will cease, and he will forfeit all unvested compensation.
If Mr. MacDonald's employment is terminated due to death or disability, his
salary and other compensation and benefits will cease, and he will receive
special pension credit for the years he actually worked under his agreement.
GTE Implementation and Retention Bonus Plan
On November 3, 1998, the GTE Executive Compensation and Organizational Structure
Committee of the Board of Directors approved the Implementation and Retention
Bonus Plan. This plan provides incentives to employees who are critical to
completing the merger or necessary to ensure the continuity and effectiveness of
GTE's businesses, and who are likely targets for competitive offers from other
companies.
88
<PAGE> 90
GTE has entered into agreements under the plan with each of its executive
officers. Messrs. Lee, Foster, Masin, White, Barr and MacDonald will receive
estimated cash payments equal to the following:
<TABLE>
<CAPTION>
Name Implementation and Retention Bonus
- ------------------------------------------ ----------------------------------
<S> <C>
Charles R. Lee $4,237,800
Kent B. Foster $3,037,000
Michael T. Masin $2,912,500
Thomas W. White $1,686,700
William P. Barr $1,513,200
J. Randall MacDonald $1,382,700
</TABLE>
Payment will be made in a lump-sum amount to these executive officers when the
merger becomes effective.
GTE Executive Severance Agreements
In its desire to retain key executives, GTE previously entered into executive
severance agreements with the executive officers named in the "Summary
Compensation Table". These individuals include Messrs. Lee, Foster, Masin,
White, Barr and MacDonald. These agreements provide benefits to be paid in the
event of qualifying termination following a change in control of GTE. A change
in control will occur if:
o any person or group of persons acquires, other than from GTE
or as described below, 20% (or under limited circumstances, a
lower percentage, not less than 10%) of GTE's voting power;
o three or more directors are elected in any twelve-month period
without the approval of a majority of the members of GTE's
Incumbent Board (as defined in the agreements) then serving as
members of the GTE Board of Directors;
o the members of the Incumbent Board no longer constitute a
majority of the GTE Board of Directors, or
o GTE's shareholders approve:
- a merger, consolidation or reorganization involving GTE;
- a complete liquidation or dissolution of GTE; or
- an agreement for the sale of other disposition of all or
substantially all of the assets of GTE to any person
other than a subsidiary of GTE.
An individual who initially became a director under an agreement to avoid or
settle a proxy or other election contest is not considered a member of the
Incumbent Board. In addition, a director who is elected under this type of a
settlement agreement is not considered a director who is elected or nominated by
the Incumbent Board for purposes of determining whether a change in control has
occurred. A change in control will not occur in:
o merger transactions in which
o there is at least 50% GTE shareholder continuity in the
surviving corporation,
o at least a majority of the members of the board of
directors of the surviving corporation consist of
members of the GTE Board of Directors and
o no person owns more than 20% (or under limited
circumstances, a lower percentage, not less than 10%) of
the voting power of the surviving corporation following
the transaction; and
o transactions in which GTE's securities are acquired directly from
GTE.
89
<PAGE> 91
Any executive who is terminated for reasons other than cause or who resigns for
good reason, both of which are defined under the executive severance agreements,
will generally receive:
o payment of two times the sum of the executive's base salary and
annual bonus;
o eligibility for early retirement benefits;
o pension credits for the period covered by the severance payment;
o medical and life insurance coverage for up to two years;
o GTE retiree medical and life insurance; and
o financial and outplacement counseling.
The executive severance agreements provide that there will be no duplication of
benefits with the employment agreements described above. Some of the executive
severance agreements (including the executive severance agreements with Messrs.
Lee, Foster, Masin, Barr and MacDonald) also provide for an additional payment
to compensate the executive for any excise tax that may be imposed by the
Internal Revenue Service.
The executive severance agreements will continue in effect until GTE or a
successor company has satisfied its obligations under those agreements. If an
executive were severed from GTE through a qualifying termination on June 30,
2000, the table below shows amounts Messrs. Lee, Masin, Barr and MacDonald
would likely receive.
<TABLE>
<CAPTION>
Base Salary Annual Bonus Special Enhanced Pension
Name Benefits Benefits Benefits
- ------------------------------------------ ------------------ ------------------ ---------------------------
<S> <C> <C> <C>
Charles R. Lee $2,500,000 $3,544,200 $5,888,934
Michael T. Masin $1,742,000 $2,506,333 $4,328,028
William P. Barr $1,300,167 $1,241,200 $3,209,321
J. Randall MacDonald $ 902,000 $1,053,950 $2,889,125
</TABLE>
Mr. White retired from GTE on October 1, 1999 and received severance payments
as described in the "Summary Compensation Table." Mr. Foster retired from GTE
on December 31, 1999 and received severance payments as described under "GTE
Employment Agreements."
The column "Special Enhanced Pension Benefits" lists the dollar value of
incremental pension benefits each executive officer would receive if his
employment were terminated for reasons other than cause or if he resigns for
good reason. The value of the executive's benefits already accrued through GTE's
qualified and non-qualified pension plans are excluded.
If Messrs. Lee or Masin are terminated for reasons other than cause or resign
for good reason, the executive will receive his full special long-term
performance or long-term retention incentives (described under "GTE Employment
Agreements"). These amounts are not included in this table. Also, the special
enhanced pension benefit for Mr. Masin does not include the single life annuity
of $200,000 per year described previously in the "GTE Employment Agreements"
section.
Under his employment agreement, Mr. Barr will receive base pay and bonus for
2.42 years. This value is incorporated in the figures shown for Mr. Barr. In
addition to the amounts shown for Mr. Barr in the table, he will receive an
additional payment estimated to be valued at approximately $796,240, which
represents the value of the options he would have received during the
contract had he remained employed, and a payment under the remaining long-term
incentive plan cycles for the term of his employment agreement (estimated to be
valued at approximately $1,006,274).
90
<PAGE> 92
GTE RETIREMENT PROGRAMS
Pension Plans
The following table illustrates the estimated annual benefits payable under
GTE's defined benefit pension plans. The table assumes normal retirement at age
65 and is calculated on a single life annuity basis, based upon final average
earnings (integrated with social security as described below) and years of
service:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
Final Average --------------------------------------------------------------
Earnings 15 20 25 30 35
- ----------------- --------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 300,000 $ 63,765 $ 85,020 $ 106,275 $ 127,530 $ 148,785
400,000 85,515 114,020 142,525 171,030 199,535
500,000 107,265 143,020 178,775 214,530 250,285
600,000 129,015 172,020 215,025 258,030 301,035
700,000 150,765 201,020 251,275 301,530 351,785
800,000 172,515 230,020 287,525 345,030 402,535
900,000 194,265 259,020 323,775 388,530 453,285
1,000,000 216,015 288,020 360,025 432,030 504,035
1,200,000 259,515 346,020 432,525 519,030 605,535
1,500,000 324,765 433,020 541,275 649,530 757,785
2,000,000 433,515 578,020 722,525 867,030 1,011,535
2,500,000 542,265 723,020 903,775 1,084,530 1,265,285
2,750,000 596,640 795,520 994,400 1,193,280 1,392,160
3,000,000 651,015 868,020 1,085,025 1,302,030 1,519,035
3,500,000 759,765 1,013,020 1,266,275 1,519,530 1,772,785
</TABLE>
All executive officers of GTE are employees of GTE Service Corporation, a
wholly-owned subsidiary, which maintains the GTE Service Corporation Plan for
Employees' Pensions. The GTE Service Corporation plan is a noncontributory
pension plan for the benefit of all employees of GTE Service Corporation and
participating affiliates who are not covered by collective bargaining
agreements. It provides a benefit based on a participant's years of service and
earnings. Pension benefits provided by GTE Service Corporation and contributions
to the GTE Service Corporation plan are related to basic salary and incentive
payments, exclusive of overtime, differentials, certain incentive compensation
and other similar types of payments. Under the GTE Service Corporation plan,
pensions are computed on a two-rate formula basis of 1.15% and 1.45% for each
year of service, with the 1.15% service credit being applied to that portion of
the average annual salary for the five highest consecutive years that does not
exceed $33,000, which is the portion of salary subject to the Federal Social
Security Act, and the 1.45% service credit being applied to that portion of the
average annual salary for the five highest consecutive years that exceeds this
level up to the statutory limit on compensation. As of February 29, 2000, the
credited years of service under the GTE Service Corporation plan for Messrs.
Lee, Foster, Masin, White, Barr and MacDonald are 16, 29, 6, 31, 5 and 16,
respectively, which do not reflect the pension credits described under "GTE
Employment Agreements."
Under federal law, an employee's benefits under a qualified pension plan, such
as the GTE Service Corporation plan, are limited to certain maximum amounts. GTE
maintains the Excess Pension Plan, which supplements the benefits of any
participant in the GTE Service Corporation plan in an amount by which any
participant's benefits under the GTE Service Corporation plan are limited by
law. In addition, the Supplemental Executive Retirement Plan provides additional
retirement benefits determined in a similar manner as under the GTE Service
Corporation plan on compensation accrued under certain management incentive
plans as determined by the Executive Compensation and Organizational Structure
Committee. The Supplemental Executive Retirement Plan and the GTE Excess Pension
Plan benefits are payable in a lump sum or an annuity.
Executive Retired Life Insurance Plan
GTE's Executive Retired Life Insurance Plan provides Messrs. Lee, Foster, Masin,
White, Barr and MacDonald a postretirement life insurance benefit of three times
final base salary. Upon retirement, the Executive Retired Life Insurance Plan
benefits may be paid as life insurance or, alternatively, an equivalent amount
equal to the present value of the life insurance amount (based on actuarial
factors and the interest rate then in effect), may be paid as a lump sum
payment, as an annuity or in installment payments.
91
<PAGE> 93
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF STOCK BY GTE DIRECTORS, NOMINEES FOR DIRECTORS AND EXECUTIVE
OFFICERS
Voting Stock and Stock-Based Holdings
The table below sets forth (a) the shares of GTE common stock beneficially owned
by each director, nominee for director, the chief executive officer and the
other five most highly compensated executive officers, and by all directors and
executive officers as a group; and (b) the total GTE stock-based holdings of the
named individuals and the group. No director, nominee for director or executive
officer owns as much as one-fifth of one percent of the total outstanding shares
of GTE common stock, and all directors and executive officers as a group own
less than one-half of one percent of the total outstanding shares of GTE common
stock. Unless otherwise indicated, all persons named in the table have sole
voting and investment power with respect to the shares shown in the table.
The last column of the table combines beneficial ownership of shares of GTE
common stock (including shares which may be acquired within 60 days pursuant to
the exercise of stock options) with holdings of (i) deferred stock units by
non-employee directors (which are payable in cash or shares of GTE common stock,
at the election of the director, and are accrued under the Deferred Stock Unit
Plan and under the Deferred Compensation Plan) and by executive officers (which
are payable in cash pursuant to deferrals under the GTE Executive Salary
Deferral Plan, the Executive Incentive Plan and the Long-Term Incentive Plan);
and (ii) restricted stock units by executive officers (which are payable in
shares of GTE common stock under the Equity Participation Program). This column
indicates the alignment of the named individuals and the group with the
interests of GTE's shareholders because the value of their total holdings will
increase or decrease in line with the price of GTE common stock.
<TABLE>
<CAPTION>
GTE Shares GTE Stock-Based
Beneficially Owned as Holdings as of
Name of GTE Director of February 29, 2000 February 29, 2000
- -------------------- -------------------- -----------------
<S> <C> <C>
Edwin L. Artzt 2,842 16,901
James R. Barker 4,200 100,535
Edward H. Budd 5,060 32,118
Robert F. Daniell 3,030 12,768
James L. Ketelsen 1,800 14,891
Charles R. Lee (1) 1,773,070 1,884,322
Michael T. Masin (1) (2) 645,324 724,193
Sandra O. Moose 1,800 11,570
Russell E. Palmer 2,200 11,440
John W. Snow 2,100 5,154
Robert D. Storey 300 11,710
--------- ---------
2,441,726 2,825,602
========= =========
GTE Executive Officers named in the "Summary
Compensation Table"
- --------------------------------------------
Charles R. Lee 1,773,070 1,884,322
Kent B. Foster 1,243,893 1,243,893
Michael T. Masin (2) 645,324 724,193
Thomas W. White 400,722 400,722
William P. Barr 300,843 316,103
J. Randall MacDonald 243,137 279,424
--------- ---------
4,606,989 4,848,657
========= =========
All directors and executive officers as a 5,050,679 5,537,172
group (1)(3)
</TABLE>
(1) Includes shares acquired through participation in the GTE Savings Plan.
Also included in the number of shares beneficially owned by Messrs. Lee,
Foster, Masin, White, Barr, and MacDonald and all directors and executive
officers as a group are 1,571,300; 1,156,700; 640,533; 362,801; 291,333;
236,433; and 4,646,532, respectively, which such persons have the right to
acquire within 60 days pursuant to the exercise of stock options.
(2) Mr. Masin participated in the Deferred Compensation Plan for non-employee
members of GTE's Board of Directors while he was a non-employee director of
GTE. In October 1993, Mr. Masin became an employee of GTE and since that
date he has not been eligible to receive or defer additional compensation
under the Deferred Compensation Plan or to receive new grants under any
plans for non-employee directors of GTE.
(3) Includes shares and stock-based holdings of Messrs. Foster and White, who
retired prior to February 29,2000.
92
<PAGE> 94
CANTV Stock
The following table indicates the number of Class D Common Shares of Compania
Anonima Nacional Telefonos de Venezuela ("CANTV") beneficially owned by each GTE
director or nominee, the chief executive officer and each of the other five most
highly compensated executive officers who beneficially own such shares, and by
all directors and executive officers of GTE as a group as of February 29, 2000.
A subsidiary of GTE owns approximately 7.9% of the Class D Common Shares of
CANTV and the remaining Class D Common Shares of CANTV are owned by the public.
GTE also indirectly owns 57.8% of the Class A Common Shares of CANTV through a
consortium, and the other consortium partners indirectly own the remaining Class
A Common Shares of CANTV. Only directors of GTE who own Class D Common Shares of
CANTV are named in the table. Each of these amounts shown in the following
table, and all of them in the aggregate, represented less than 1% of the
outstanding Class D Common Shares of CANTV as of February 29, 2000. All of the
following Class D Common Shares of CANTV are owned in the form of American
Depositary Shares, each representing even Class D Common Shares of CANTV.
<TABLE>
<CAPTION>
CANTV Class D Common
Shares Beneficially
Name Owned
--------------- -----------------------
<S> <C>
Kent B. Foster 1,000
Charles R. Lee 11,000
Michael T. Masin 30,450
-------
42,450
=======
All GTE directors and executive officers as a group 42,450
=======
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, GTE paid approximately $1,300,000 to subsidiaries of Citigroup
Inc., for commercial banking services and insurance premiums. Mr. Masin, Vice
Chairman and President-International and a director of GTE, is a member of the
board of directors of Citigroup Inc.
The Boston Consulting Group, Inc. received fees from GTE's subsidiaries of
approximately $3,100,000 for consulting services during 1999. Dr. Sandra O.
Moose is a director of GTE and a director of The Boston Consulting Group, Inc.
During 1999, GTE's subsidiaries paid approximately $67,200 for various fees to
CSX Corporation. Dr. John W. Snow is a director of GTE and the Chairman,
President and Chief Executive Officer of CSX Corporation.
GTE's subsidiaries utilized the services of Thompson, Hine & Flory LLP during
1999. Mr. Robert D. Storey is a director of GTE and a partner in that law firm.
93
<PAGE> 95
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
Consolidated Financial Statements - GTE Corporation and Subsidiaries:
See GTE's consolidated financial statements and report of independent
public accountants thereon in the Financial Statements section
included elsewhere herein.
2. Financial Statement Schedules:
Schedules Supporting the Consolidated Financial Statements for the
Years Ended December 31, 1999-97 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in
the consolidated financial statements or notes thereto.
3. Exhibits:
See "Index of Exhibits" included elsewhere herein.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated November 5, 1999 under
Item 5, "Other Events", and Item 7, "Financial Statements and
Exhibits." No financial statements were included with this report.
The Company filed a report on Form 8-K dated December 27, 1999 under
Item 5, "Other Events", and Item 7, "Financial Statements and
Exhibits." The report included 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.
94
<PAGE> 96
GTE Corporation and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------
Balance at Charged Deductions
Beginning Charged to (Credited) to from Balance at
Description of Year Income Other Accounts Reserves (a) Close of Year
- --------------------------------- ---------- ---------- --------------------- ------------ -------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
December 31, 1999
Allowance for uncollectible
accounts $395 $597 $26(b) $467 $551
==== ==== === ==== ====
Accrued discontinuance and
business repositioning costs $223 $184(c) $-- $ 54 $353
==== ==== === ==== ====
Special charge reserve $113 $263(d) $-- $367 $ 9
==== ==== === ==== ====
December 31, 1998
Allowance for uncollectible
accounts $333 $470 $82(b) $490 $395
==== ==== === ==== ====
Accrued discontinuance and
business repositioning costs $239 $ 17 $17(e) $ 50 $223
==== ==== === ==== ====
Special charge reserve $ -- $755(f) $-- $642 $113
==== ==== === ==== ====
December 31, 1997
Allowance for uncollectible
accounts $299 $418 $36(b) $420 $333
==== ==== === ==== ====
Accrued discontinuance and
business repositioning costs $254 $ 5 $-- $ 20 $239
==== ==== === ==== ====
</TABLE>
NOTES:
(a) Charges for which reserve was created.
(b) Recoveries of amounts written off in prior years.
(c) Primarily reserves established pursuant to the sale of Government Systems.
(d) Represents special charges for employee separation programs and the
impairment of assets associated with the exit of certain small, non-core
businesses.
(e) Primarily represents a reserve for a retention program established during
1998 related to the proposed merger with Bell Atlantic.
(f) Represents special charges for asset realization, restructuring and
workforce reduction and various other charges (including the impact of
regulatory rulings).
95
<PAGE> 97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GTE CORPORATION
----------------------------------
(Registrant)
Date March 29, 2000 By /s/ Paul R. Shuell
---------------------- ----------------------------------
Paul R. Shuell
Vice President and Controller
----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Charles R. Lee Chairman of the Board and March 29, 2000
- ----------------------- Chief Executive Officer
Charles R. Lee (Principal Executive Officer)
/s/ Lawrence R. Whitman Deputy Chief Financial Officer March 29, 2000
- -----------------------
Lawrence R. Whitman
/s/ Paul R. Shuell Vice President and Controller March 29, 2000
- ----------------------- (Principal Accounting Officer)
Paul R. Shuell
</TABLE>
96
<PAGE> 98
SIGNATURES - Continued
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Edwin L. Artzt Director March 29, 2000
- ----------------------
Edwin L. Artzt
/s/ James R. Barker Director March 29, 2000
- ----------------------
James R. Barker
/s/ Edward H. Budd Director March 29, 2000
- ----------------------
Edward H. Budd
/s/ Robert F. Daniell Director March 29, 2000
- ----------------------
Robert F. Daniell
/s/ James L. Ketelsen Director March 29, 2000
- ----------------------
James L. Ketelsen
/s/ Charles R. Lee Director March 29, 2000
- ----------------------
Charles R. Lee
/s/ Michael T. Masin Director March 29, 2000
- ----------------------
Michael T. Masin
/s/ Sandra O. Moose Director March 29, 2000
- ----------------------
Sandra O. Moose
/s/ Russell E. Palmer Director March 29, 2000
- ----------------------
Russell E. Palmer
/s/ John W. Snow Director March 29, 2000
- ----------------------
John W. Snow
/s/ Robert D. Storey Director March 29, 2000
- ----------------------
Robert D. Storey
</TABLE>
97
<PAGE> 99
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------- -----------------------------------------------------------------------------------------------------
<S> <C>
3.1 (a) Articles of Incorporation, as restated
3.2 (b) By-Laws of GTE Corporation
10.1 (c) Material Contracts - Deferred Compensation Plan for Non-Employee Members of the Board of Directors
of GTE Corporation
10.2 (d) Material Contracts - Form of Executive Severance Agreement between GTE Service Corporation and
certain key executives
10.3 (e) Material Contracts - Employment Agreements between GTE Service Corporation and certain key
executives
10.4 (f) Material Contracts - Supplemental Executive Retirement Plan
10.5 (g) Material Contracts - Long-Term Incentive Plan
10.6 (h) Material Contracts - Executive Incentive Plan
10.7 (i) Material Contracts - Executive Retired Life Insurance Plan
10.8 (j) Material Contracts - Directors' Deferred Stock Unit Plan
10.9 (k) Material Contracts - Charitable Awards Program
10.10 (l) Material Contracts - Executive Salary Deferral Plan
10.11 (m) Material Contracts - Retention Agreement between GTE Service Corporation and Armen Der Marderosian
10.12 (n) Material Contracts - Form of Retention Agreement between GTE Service Corporation and certain key
executives
10.13 Material Contracts - Separation Agreement and General Release between GTE Service Corporation
and Kent B. Foster
10.14 Material Contracts - Separation Agreement and General Release between GTE Service Corporation
and Armen Der Marderosian
10.15 (o) Material Contracts - Separation Agreement and General Release between GTE Service Corporation
and Thomas W. White
11 Statement re: Calculation of Earnings (Loss) per Common Share
12 Statement re: Calculation of the Consolidated Ratio of Earnings to Fixed Charges
21 Significant Subsidiaries of Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
- -----------------------
(a) GTE's restated Articles of Incorporation were filed as an exhibit to
GTE's 1998 Form 10-K, and are incorporated herein by reference.
(b) GTE's By-Laws were filed as an exhibit to GTE's registration statement
on Form S-3 (File No. 33-61661). An amendment to GTE's By-Laws was
filed as an exhibit to GTE's 1997 Form 10-K. These documents are
incorporated herein by reference.
(c) GTE's Deferred Compensation Plan for Non-Employee Members of the Board
of Directors of GTE Corporation was filed as an exhibit to GTE's 1997
Form 10-K. An amendment to this plan was filed as an exhibit to GTE's
1998 Form 10-K. These documents are incorporated herein by reference.
(d) Form of Executive Severance Agreements with certain key executives of
GTE were filed as exhibits to GTE's 1998 Form 10-K and GTE's Form 10-Q
for the quarter ended September 30, 1998, and are incorporated herein
by reference.
(e) Employment Agreements with certain key executives of GTE were filed as
exhibits to GTE's 1998 Form 10-K, GTE's Form 10-Q for the quarter ended
September 30, 1998 and GTE's 1997 Form 10-K, and are incorporated
herein by reference.
<PAGE> 100
(f) GTE's Supplemental Executive Retirement Plan was filed as an exhibit to
GTE's 1991 Form 10-K, and is incorporated herein by reference.
Amendments were filed with GTE's 1992, 1993 and 1994 Forms 10-K, and
are incorporated herein by reference.
(g) GTE's Long-Term Incentive Plan was filed as an exhibit to GTE's 1997
Proxy Statement. An amendment to this plan was filed as an exhibit to
GTE's 1998 Form 10-K. These documents are incorporated herein by
reference.
(h) GTE's Executive Incentive Plan was filed as an exhibit to GTE's 1997
Proxy Statement. An amendment to this plan was filed as an exhibit to
GTE's 1998 Form 10-K. These documents are incorporated herein by
reference.
(i) GTE's Executive Retired Life Insurance Plan was filed as an exhibit to
GTE's 1991 Form 10-K, and is incorporated herein by reference.
Amendments were filed with GTE's 1992 and 1993 Forms 10-K, and are
incorporated herein by reference.
(j) GTE's Directors' Deferred Stock Unit Plan was filed as an exhibit to
GTE's 1997 Form 10-K, and is incorporated herein by reference.
(k) GTE's Charitable Awards Program was filed as an exhibit to GTE's 1992
Form 10-K, and is incorporated herein by reference.
(l) GTE's Executive Salary Deferral Plan, as amended, was filed as an
exhibit to GTE's 1998 Form 10-K, and is incorporated herein by
reference.
(m) Retention Agreement between GTE Service Corporation and Armen Der
Marderosian was filed as an exhibit to GTE's 1998 Form 10-K. Portions
of this agreement were omitted pursuant to a request for confidential
treatment and were filed separately with the Securities and Exchange
Commission. The complete agreement is filed with this Form 10-K.
(n) Forms of Retention Agreement between GTE Service Corporation and
certain key executives were filed as exhibits to GTE's 1998 Form 10-K,
and are incorporated herein by reference. An amendment to the Form of
Retention Agreement between GTE Service Corporation and Jan L. Deur is
filed with this Form 10-K.
(o) Separation Agreement between GTE Service Corporation and Thomas W.
White was filed as an exhibit to GTE's Form 10-Q for the quarter ended
September 30, 1999, and is incorporated herein by reference.
<PAGE> 1
Exhibit 10.11
January 22, 1999 (Revised)
Armen Der Marderosian
[Address]
[Address]
Dear Armen:
I want to personally let you know how much your many contributions to
GTE and your valued leadership have been appreciated. In light of those
accomplishments and your agreement to take on the role of assisting GTE in
connection with the divestiture of Government Systems (the "Galaxy
Transaction"), I want to provide you with an appropriate transition arrangement
in connection with your departure from GTE. This letter (the "Letter Agreement")
sets out the terms of that arrangement.
A. CONTINUED EMPLOYMENT AND SEPARATION
1. SPECIAL ASSIGNMENT PERIOD. From the effective date of this Letter
Agreement through the later of (a) successful completion of a divestiture of all
or substantially all of the assets of Government Systems ("Transaction
Completion") or the decision of the Board of Directors of GTE Corporation to
terminate divestiture efforts, or (b) shareholder approval or termination of the
proposed merger between Bell Atlantic Corporation and GTE (the "Merger"), you
will have primary responsibility for the Galaxy Transaction and will perform
such other duties as directed by me. During this period, referred to as the
"Special Assignment Period," you will remain at your current salary level. In
the event that neither Transaction Completion nor shareholder approval of the
Merger occurs, GTE will provide you with a transition arrangement, the terms of
which will be decided at that time but which will provide benefits which are, at
a minimum, equivalent to those otherwise available to you under GTE's
Involuntary Separation Program ("ISEP") as then in effect.
2. SEPARATION BENEFITS. You will irrevocably terminate your employment
with GTE upon conclusion of the Special Assignment Period. If shareholder
approval of the Merger has occurred at that time, you will receive separation
benefits as set forth in, and in accordance with the terms of, your Executive
Severance Agreement. If shareholder approval has not occurred and you do not
become a "Transferred Employee" (as such term is defined in ISEP) after
completion of the Galaxy Transaction, you will be eligible to receive separation
benefits in accordance with the terms of ISEP or any successor plan which may
exist. Of course, if shareholder approval has not occurred and you become a
Transferred Employee, you will not be eligible for ISEP benefits. You will also
receive a lump sum payment for all accrued, unused (but unpaid) vacation upon
the termination of your employment with GTE, but you will not receive service
credit for same.
<PAGE> 2
Armen Der Marderosian
January 22, 1999 (Revised)
Page 2
3. EIP. You will continue to participate in GTE's Executive Incentive
Plan ("EIP"), or any successor plan which may exist, during the Special
Assignment Period on the same basis as other executives at your level, subject
to the terms of that plan. If your EIP payment for the year in which you
separate from employment has not been paid out as a result of shareholder
approval of the Merger, your award for that year will be prorated based on the
number of calendar months of service you completed in that year. Any amount to
which you are entitled under EIP will be payable at the same time payments are
made to other EIP participants. The Executive Compensation and Organizational
Structure Committee of the Board of Directors of GTE, its designee, its
successor or its successor's designee (the "ECC") will determine the amount of
your actual awards. You will be eligible to defer your EIP award, but you will
not receive a match for those amounts under the company's Equity Participation
Program ("EPP").
4. LTIP. You will continue to participate in GTE's Long Term Incentive
Plan ("LTIP"), or any successor plan that may exist, on the same terms as other
executives at your level during the Special Assignment Period. In the event of
shareholder approval of the Merger, outstanding options will vest and
Performance Bonus Awards will be paid out in accordance with the terms of your
Award Agreements. Following, or in the absence of, shareholder approval, any
outstanding stock options under LTIP will vest immediately upon your separation
from employment, and you will have two years or longer to exercise those
options, subject to the terms of and any restrictions established by the option
agreements. Outstanding LTIP cash awards that have not been paid out as a result
of the shareholder approval of the Merger will be prorated to reflect the number
of actual full months of service you completed in the outstanding cycles. All
payments under LTIP will be paid at the same time payments are made to other
participants. The ECC will determine the amount of your actual awards. You will
be eligible to defer your award, but you will not receive a match under the
company's EPP.
5. TERMINATION OF EMPLOYMENT. In accordance with company policy, GTE
reserves the right to terminate your employment prior to the end of the Special
Assignment Period for Cause, which, for purposes of this Letter Agreement, will
be as determined by your supervisor at the time with the concurrence of the
Executive Vice President - Human Resources and Administration or his successor.
If you are discharged for Cause, elect to resign or retire, or die or become
disabled (within the meaning of GTE's Long Term Disability Plan) prior to the
expiration of the Special Assignment Period, all further obligations under this
Letter Agreement shall cease (except for, in the case of termination due to
death or disability, your right to any prorated Transaction Completion Bonus or
Partial Bonus as provided for below), and you will not be entitled to separation
benefits under this Letter Agreement.
<PAGE> 3
Armen Der Marderosian
January 22, 1999 (Revised)
Page 3
B. TRANSACTION COMPLETION BONUS
1. TRANSACTION COMPLETION BONUS. Subject to the conditions set out
herein, on or about 45 days following the Transaction Completion, you will
receive a special "Transaction Completion Bonus" equal (before withholding of
applicable taxes) to an amount as set forth in either paragraph (a) or (b)
below.
(a) One and one-half times the sum of (i) your base annual
salary as of Transaction Completion and (ii) the prior three-year average
corporate rating under EIP (as of Transaction Completion) for your grade level
multiplied by an amount equal to 100% of norm for that grade level; or
(b) As set out in the chart below, a bonus based on the
established minimum, target, and maximum sales price for Government Systems (as
determined by the Galaxy Transaction documents). If the sales price falls
between minimum and target or target and maximum, the bonus will be calculated
using linear interpolation (see Attachment A).
<TABLE>
<CAPTION>
Estimated
Sales Price Bonus Formula Bonus*
------------------------------------------------------------------------------------------
<S> <C> <C>
Minimum ($980,000,000 One times base pay $ 390,000
or less)
Target ($1.3 Billion) 1.5 times base and bonus $1,044,196
Maximum ($1.6 Billion 2.5 times base and bonus $1,673,660
or greater)
</TABLE>
*Actual based on prior three-year average corporate rating (currently
estimated at 146.7) times norm in place upon Transaction Completion.
At the time you execute this Letter Agreement, you must make an
irrevocable election as to which formula you want to be used to calculate your
potential bonus. If you do not make an election at the time you execute this
Letter Agreement, you will be eligible solely for the bonus set forth in
paragraph B(1)(a) above.
2. PARTIAL BONUS. In the event that the Board of Directors of GTE
Corporation decides to terminate efforts to divest all or substantially all of
the assets of Government Systems, on or about 45 days from the date of that
decision (the "Termination Date"), you will receive a special bonus (a "Partial
Bonus") equal, before withholding of applicable taxes, to 25% of the Transaction
Completion Bonus you would have received under option B(1)(a), above, if the
Transaction Completion had occurred on the Termination Date.
3. INVOLUNTARY TERMINATION WITHOUT CAUSE. If, prior to Transaction
Completion or, if applicable, the Termination Date, your employment is
terminated
<PAGE> 4
Armen Der Marderosian
January 22, 1999 (Revised)
Page 4
involuntarily without Cause and for reasons other than your death or disability,
you will receive a payment equal to the Transaction Completion Bonus, or, as the
case may be, Partial Bonus, to which you would have been entitled under the
terms of this Letter Agreement had your employment continued through Transaction
Completion or, if applicable, the Termination Date. Payment will be made at the
same time the bonus would have been paid had you remained employed through
Transaction Completion or, if applicable, the Termination Date. Under no
circumstances will your resignation from employment or retirement for any reason
constitute an involuntary termination without Cause for purposes of the
incentive provided for by this Letter Agreement.
4. DEATH OR DISABILITY. If the Galaxy Transaction is completed and you
die or become disabled (within the meaning of GTE's Long Term Disability Plan)
prior to the Transaction Completion, you, or, in the event of your death, your
estate, will receive a prorated Transaction Completion Bonus based on the ratio
of (i) the number of days you remained actively employed between the date of
this Letter Agreement and Transaction Completion to (ii) the number of days
between the date of this Letter Agreement and Transaction Completion. If efforts
to divest all or substantially all of the assets of Government Systems are
terminated, and should you die or become disabled (within the meaning of GTE's
Long Term Disability Plan) prior to the Termination Date, you or, in the event
of your death, your estate, will receive a Partial Bonus equal to the Partial
Bonus you would have received had you remained actively employed through the
Termination Date. The prorated Transaction Completion Bonus or the Partial Bonus
payable under this paragraph shall be paid at the same time such bonus would
have been paid had you remained actively employed through the Transaction
Completion or, if applicable, the Termination Date.
5. CIRCUMSTANCES WHEN NO BONUS WILL BE PAID. Should you resign or
retire for any reason prior to Transaction Completion or, if applicable, the
Termination Date, or should you at any time engage in conduct that would
constitute Cause for your discharge, you will not be eligible to receive any
portion of the Transaction Completion Bonus or Partial Bonus.
6. DEFERRAL. The Transaction Completion Bonus or Partial Bonus, as the
case may be, may be deferred under the EIP deferral regulations, or any
successor arrangement, in accordance with the terms of those regulations.
Amounts deferred under this Letter Agreement shall not, however, be eligible for
match under EPP.
7. PAYMENT TAXABLE/NOT BENEFIT BEARING. Applicable taxes will be
withheld from any bonus payment made pursuant to this Letter Agreement. Neither
the Transaction Completion Bonus nor the Partial Bonus shall be treated as
compensation for purposes of computing or determining any benefit under any
pension, savings, insurance, or other employee compensation or benefit plan
maintained by GTE.
<PAGE> 5
Armen Der Marderosian
January 22, 1999 (Revised)
Page 5
8. NO DUPLICATION OF BENEFITS. Except for grants and agreements
specifically approved by the ECC, there shall be no duplication between any
retention incentive payment provided for by this Letter Agreement and any other
retention incentive program that provides for payment of a retention bonus for
continued employment during any part of the same period covered by this Letter
Agreement. As a result, any bonus payment otherwise due under this Letter
Agreement shall be reduced by any amounts due under any such retention incentive
program.
9. RELEASE REQUIREMENT. Payment of any Transaction Completion Bonus or
Partial Bonus under this Letter Agreement is contingent upon your executing a
release of claims against GTE in a form acceptable to GTE.
C. GENERAL PROVISIONS
1. PROHIBITION AGAINST RECRUITING OR HIRING. Commencing on the date of
this Letter Agreement and through the first anniversary of the termination of
your employment for any reason from GTE (which, for purposes of this Letter
Agreement, includes GTE Corporation, any corporate subsidiary or other company
affiliated with GTE Corporation, any company in which GTE Corporation owns
directly or indirectly an equity interest of at least ten percent, and the
successors and assigns of any such company, including, following the Merger,
Bell Atlantic Corporation, its subsidiaries, affiliates, and other related
entities and their successors and assigns) you agree that you will not, without
the prior written consent of the ECC:
(i) Recruit or solicit any employee of GTE for employment or for
retention as a consultant or provider of services;
(ii) Hire, or participate with another company or third party in
the process of hiring, any employee of GTE;
(iii) Provide names or other information about GTE employees to any
person or business under circumstances that you know or should
know could lead to the use of that information for purposes of
recruiting or hiring; or
(iv) Interfere with the relationship between GTE and any of its
employees, agents, or representatives.
Provided, however, that the provisions of this paragraph will not apply in the
event that you become employed by any entity to which all or substantially all
of the assets of Government Systems are sold.
2. PROHIBITION AGAINST SOLICITING GTE CUSTOMERS. Commencing on the date
of this Letter Agreement and through the first anniversary of the termination of
your employment for any reason from GTE, you agree that you will not solicit or
contact, directly or indirectly, any customer, client, or prospect of GTE with
whom you or any of the GTE employees reporting to you had any contact at any
time during the year preceding your termination for the purpose of inducing such
customer, client, or prospect to cease being, or
<PAGE> 6
Armen Der Marderosian
January 22, 1999 (Revised)
Page 6
to not become, a customer or client of GTE or to divert business from GTE.
Provided, however, that the provisions of this paragraph will not apply in the
event that you become employed by any entity to which all or substantially all
of the assets of Government Systems are sold.
3. CONFIDENTIALITY. You agree that you will not disclose or discuss the
existence or terms of this Letter Agreement under any circumstances where it
reasonably could be expected that such information would, directly or
indirectly, come to the attention of any present or past GTE employee,
consultant, or contractor. You further agree that you will require any person
with whom you share information about this Letter Agreement to adhere to the
same standard of confidentiality.
4. PROPRIETARY INFORMATION. You agree that you will at all times comply
with your obligations under the Employee Agreement Relating to Intellectual
Property (Policy 412) or its equivalent and preserve the confidentiality of all
Proprietary Information and trade secrets of GTE, and the Proprietary
Information and trade secrets of third parties, including customers, that are in
the possession of GTE, by not disclosing the same to any third party or using
the same, or any portion thereof, for the benefit of anyone other than GTE.
"Proprietary Information" means information obtained or developed by you or to
which you had access during your employment with GTE, including, but not limited
to, customer information and trade secrets and proprietary information of GTE
and third parties that has not been fully disclosed in a writing generally
circulated by GTE to the public at large without any restrictions on use or
disclosure. You agree that you will return all copies, in whole or in part, in
any form, of trade secrets or Proprietary Information in your possession or
control upon any termination of employment or upon request by GTE, whichever
occurs earlier, without making or retaining a copy.
5. SURVIVAL OF AND CONSIDERATION FOR COVENANTS. You acknowledge and
agree that the compensation and benefits provided for pursuant to this Letter
Agreement include consideration for the covenants contained in paragraphs 1, 2,
3 and 4 of Section C of this Letter Agreement and that, except as specifically
provided by the terms of this Letter Agreement, the obligations set out in
paragraphs 1, 2, 3 and 4 of Section C of this Letter Agreement survive any
cancellation, termination, or expiration of this Letter Agreement or the
termination of your employment with GTE.
6. BUSINESS DISCRETION OF GTE. Nothing in this Letter Agreement is
intended to limit the discretion of GTE to take any action with regard to the
sale that GTE may consider appropriate, including, without limitation,
postponing Transaction Completion or terminating sales efforts. This Letter
Agreement does not entitle you to remain in the employ of GTE for any minimum or
prescribed period or term and does not modify the at-will status of your
employment.
<PAGE> 7
Armen Der Marderosian
January 22, 1999 (Revised)
Page 7
7. ASSIGNMENT BY GTE. GTE may assign this Letter Agreement without your
consent. You may not assign this Letter Agreement, and no person other than you
(or your estate) may assert your rights under this Letter Agreement.
8. DISPUTE RESOLUTION. You agree that the ECC shall have sole
discretion to interpret this Letter Agreement and to resolve any and all
disputes under this Letter Agreement. You further agree that the ECC's
determination shall be final and binding.
9. WAIVER. The waiver by GTE of any breach of this Letter Agreement
shall not be construed as a waiver of any subsequent breach.
10. GOVERNING LAW. This Letter Agreement shall be interpreted and
enforced in accordance with the laws of the State of New York, disregarding its
choice of law rules.
11. REMEDIES. You acknowledge that irreparable injury to GTE will
result in the event of any breach by you of any of the covenants or obligations
under this Letter Agreement, including other obligations referenced herein. In
the event of a breach of any of your covenants and commitments under this Letter
Agreement, including any other obligations referenced herein, GTE shall not be
obligated to make any payment otherwise required under this Letter Agreement and
may, at GTE's discretion, require you to repay any amounts already paid to you,
including amounts that may have been deferred. In addition, GTE reserves all
rights to seek any and all remedies and damages permitted under law, including,
but not limited to, injunctive relief, equitable relief, and compensatory and
punitive damages.
12. DEFINITIONS/RELATIONSHIP TO OTHER AGREEMENTS. The definitions
contained in this Letter Agreement, including, but not limited to, the
definition of Cause, shall be controlling for purposes of this Letter Agreement.
These definitions shall not be modified by, nor shall they modify, definitions
for terms in any other agreement to which you may be a party.
13. ENTIRE AGREEMENT. You acknowledge and agree that, except for your
Executive Severance Agreement, this Letter Agreement, including the required
release, sets forth the entire understanding of the parties with regard to the
subject matter addressed herein and that this Letter Agreement supersedes all
prior agreements (other than your Executive Severance Agreement) and
communications, whether written or oral, pertaining to the subject matter
described herein. The Letter Agreement shall not be modified except by written
agreement duly executed by you and GTE.
<PAGE> 8
Armen Der Marderosian
January 22, 1999 (Revised)
Page 8
Again, Armen, we appreciate your leadership and valuable contributions
to the company. I hope that the terms of this Letter Agreement and the incentive
just described will provide you with a level of comfort as you continue your
important role at GTE and our efforts to make the transaction a success. If this
Letter Agreement meets with your satisfaction, please sign below, fax a copy to
me no later than 8:00 a.m. EST on Monday, January 25, 1999, and return the
original to me by overnight mail, to be received no later than Tuesday, January
26, 1999.
Sincerely,
Thomas White
TW:jls
I have read, understand, and agree to the terms of this Letter Agreement.
- ------------------------------------
Armen Der Marderosian
- ------------------------------------
Date
I irrevocably elect the following bonus calculation formula for purposes of
determining the amount of any Transaction Completion Bonus, or, in the event of
my death or disability prior to Transaction Completion, any portion thereof, to
which I am entitled under this Letter Agreement.
_______ (a) bonus based on annual salary and average EIP as described in
paragraph B(1)(a) of this Letter Agreement.
or
_______ (b) bonus based on price obtained at Transaction Completion and as
described in paragraph B(1)(b) of this Letter Agreement.
- -------------------------------------
Armen Der Marderosian
- -------------------------------------
Date
<PAGE> 1
EXHIBIT 10.12
January 24, 2000 PERSONAL & CONFIDENTIAL
Mr. Jan Deur
Dear Jan:
In considering your many contributions and the critical nature of your role as
we work toward conclusion of the merger with Bell Atlantic, the senior
management team has determined that you should be eligible for an increased
level of incentive under your Merger Implementation and Retention Bonus
Agreement (the "Agreement") dated January 11, 1999. Accordingly, paragraph 1 of
your Agreement is amended as follows:
On or about 45 days following the Closing Date, you will receive a merger
implementation and retention bonus (a "Merger Bonus") equal (before
withholding of applicable taxes) to 1.5 times the sum of (i) your base
annual salary as of the Closing Date and (ii) the prior three-year average
corporate rating (as of the date of shareholder approval of the Merger)
under GTE's Executive Incentive Plan ("EIP") for your grade level (as of
the Closing Date) multiplied by an amount equal to 100% of norm for that
grade level under EIP.
Of course, this will also result in an increase in the final amount of any
Partial Bonus to which you may become entitled (in lieu of the Merger Bonus)
under paragraph 2 of your Agreement should GTE's Board of Directors terminate
the Definitive Agreement to merge with Bell Atlantic Corporation. The remaining
terms of your Agreement will remain in full force and effect.
Jan, I hope this change to your Agreement meets with your satisfaction and
provides you additional incentive to continue your important contributions to
the GTE team as we move forward. If you are amenable to this amendment, please
sign and date below and return the original to me.
Sincerely,
Charles R. Lee
I have read, understand, and agree to the above terms, including the amendment
of my Merger Implementation and Retention Agreement dated January 11, 1999.
- ----------------------
Jan Deur
- ----------------------
Date
<PAGE> 1
EXHIBIT 10.13
SEPARATION AGREEMENT AND GENERAL RELEASE
This Agreement is by and between GTE Service Corporation (the "Company")
and Kent B. Foster ("Foster").
PART I
In consideration of the provisions in Part II, the Company agrees as
follows:
1. Foster will receive for the following:
(a) A payment under the GTE Corporation 1997 Executive Incentive Plan
("EIP") for the 1999 Plan Year, provided that such payment will be in an amount
determined by, and subject to the approval of, the Executive Compensation and
Organizational Structure Committee of the Board of Directors or its designee
("ECC").
(b) A prorated Performance Bonus (12/36ths) under the GTE Corporation
1997 Long-Term Incentive Plan ("LTIP") for the 1999-2001 Award Cycle, provided
that, except as specifically limited by the following sentence, such payment
will be governed by the terms of the LTIP and the relevant Performance Bonus
Agreement (including, but not limited to, those provisions in paragraph 7(a)
which provide for non-payment of an award in the event the participant engages
in prohibited competitive activities), and will be in an amount determined by,
and subject to the approval of, the ECC. Notwithstanding the foregoing, Section
8 ("Payment after Change in Control") of the Performance Bonus Agreement for the
1999-2001 Award Cycle shall not be applicable, under any circumstances, to any
payment made pursuant to this paragraph and, thus, Foster will not be eligible
for the Target Payment provided for by Section 8.
(c) A Merger Implementation and Retention Bonus, pursuant to the terms
of the agreement dated January 11, 1999 governing same (including, but not
limited to, those provisions concerning forfeiture and repayment upon breach of
covenants contained in that agreement) and subject to, as provided for in that
agreement, closing of the proposed merger with Bell Atlantic Corporation or a
subsidiary thereof.
(d) The benefits specified by Foster's Executive Severance Agreement,
dated June 4, 1998, and Foster's Employment Agreement, dated January 7, 1999
(the "January 1999 Agreement"), as amended by Foster's Agreement with the
Company, dated November 1, 1999 (the "November 1999 Agreement") and the November
MacDonald memorandum (the "November 1999 Memorandum").
Any payment under this section shall be made at the time such payments
are made to similarly situated executives. Foster will not be eligible to defer
any portion of, and will not be eligible for an Equity Participation Program
match on, any portion of such payments.
2. By making this Agreement, the Company does not admit that it has done
any wrongful act, and the Company specifically states that it has not committed
any tort, breach of contract, or violation of any federal, state, or local
statute or ordinance.
<PAGE> 2
PART II
In consideration of the provisions in Part I, Foster agrees as follows:
1. Effective either December 31, 1999 or, if Foster elects, January 1,
2000, Foster irrevocably retires from his position with the Company and from any
officer, director, or other positions he holds for GTE Corporation or any of its
affiliates, and from any internal or external Boards where he represents GTE (as
defined in paragraph 3 below). Foster agrees not to seek reinstatement, recall,
or future employment with GTE on or after the date of this Agreement.
Foster agrees that GTE retains the right to make future organizational changes,
including but not limited to the right to combine, create, and/or fill
positions, including, but not limited to, his former position. He agrees,
further, that he is not eligible for and will not seek an alternative position
with GTE (as defined in paragraph 3 below) prior to his separation from
employment.
2. Foster agrees and understands that the EIP and prorated LTIP payments
described in Part I, paragraph 1 and the benefits described in the November 1999
Agreement above are more than any payments or benefits due to him under the
Company's policies or practices. Except as relating to severance and retention
benefits he is entitled to receive under his Executive Severance Agreement, the
January 1999 Agreement, the November 1999 Memorandum, and the November 1999
Agreement or any bonus to which he may become entitled under his Merger
Implementation and Retention Bonus agreement, Foster waives and forever
discharges GTE (as defined in paragraph 3 below) from any liability to provide
any notice of termination, including but not limited to any notice under the
Worker Adjustment and Retraining Notification Act, or to pay any salary, bonus
(short or long term), salary continuance, separation pay, severance pay,
retention bonus, or pay, retirement incentive, or payments or benefits arising
under any other plan, policy, practice, or program (offered on a qualified or
non-qualified or voluntary or involuntary basis) which may have been payable as
a result of the termination of his employment, except as provided in paragraph 3
below. Foster agrees that, should the Company offer any retirement incentive,
early retirement, or voluntary or involuntary separation plan or program on or
after the date of this Agreement, he shall not be eligible to participate. In
addition, Foster has not relied on any statement, agreement, or promise of
eligibility for any benefits, other than those set forth in this Agreement.
3. Foster agrees to release GTE Service Corporation, GTE Corporation, Bell
Atlantic Corporation, any related and affiliated companies, and their successors
(including, after the merger, Bell Atlantic Corporation and any affiliated
companies), and any and all current, former and future directors, employees,
officers, agents, and contractors of these companies, and any and all employee
pension or welfare benefit plans of these companies, including current and
former trustees and administrators of these plans (the entities and persons
referenced above are collectively referred to in this Agreement as "GTE") from
all known and unknown claims, charges, or demands Foster may have based on his
employment with GTE or the termination of that employment, including a release
of any rights or claims Foster may have under the Age Discrimination in
Employment Act ("ADEA"), which prohibits age discrimination in employment; Title
VII of the Civil Rights Act of 1964, and the Civil Rights Act of 1991, which
prohibit discrimination in employment based on race, color, sex, religion, and
national origin; the Americans with Disabilities Act, which prohibits
discrimination based upon disability; Section 1981 of the Civil Rights Act of
1866, which prohibits discrimination based on race; the Employee Retirement
Income Security Act, which governs employee benefits; any state laws against
discrimination; or any other federal, state, or local statute or common law
relating to employment. This includes a release by Foster of any claims for
wrongful discharge, breach of contract, employment-related torts, or any other
claims in any way related to Foster's employment with GTE or the termination of
that employment.
-2-
<PAGE> 3
This release does not include, however, a waiver of any claim to the payments
provided for by this Agreement or any right Foster may have to vested benefits
under any pension, savings, or deferred compensation plan; pay for banked and
accrued (but unused) vacation; outstanding stock options; outstanding stock
appreciation rights; or any severance benefits to which he is entitled under his
Executive Severance Agreement and the November 1999 Agreement. Notwithstanding
the preceding paragraph, Foster does not release, discharge, or waive any rights
to indemnification Foster may have under the By-Laws of the Company, the laws of
the State of New York, or any insurance coverage maintained by or on the behalf
of the Company, nor will the Company take any action intended, directly or
indirectly, to encumber or adversely affect Foster's rights under such
indemnification arrangement.
GTE hereby releases Foster, Foster's family, heirs, successors, agents and
attorneys from, and agrees not to sue or join in any suit against such parties
for, all known and unknown claims, charges, or demands GTE may have based on
Foster's conduct that he believed to be in good faith to be in the course and
scope of his employment; provided, however, that this release will not extend to
any conduct of Foster that constituted a knowing violation of any law,
regulation, or ordinance.
4. Foster has not filed and promises not to file, or permit to be filed on
his behalf, any lawsuit or complaint against GTE regarding the claims released
in Part II, paragraph 3 above. Foster also promises to opt out of and to take
such other steps as he has the power to take to disassociate himself from any
class seeking relief against GTE regarding any claims released in Part II,
paragraph 3. If a court, administrative agency, arbitrator, or any other
decision maker with authority awards Foster money damages or other relief, with
respect to claims released in Part II, paragraph 3, Foster hereby assigns to the
Company all rights and interest in such money damages and other relief.
5. Foster agrees not to disclose the terms of this Agreement, that this
Agreement exists, or that he received any payments from the Company to anyone
except his attorney, his financial planner, or his immediate family. If he does
disclose the terms of this Agreement to his immediate family, his financial
planner, or his attorney, he will advise them that they must not disclose the
terms of this Agreement.
6. Foster further agrees to take no action that would disparage or cause
GTE (including its employees, directors, and shareholders) embarrassment or
humiliation or otherwise cause or contribute to GTE (including its employees,
directors, and shareholders) being held in disrepute or in a negative light by
the general public or GTE's clients, shareholders, customers, federal or state
regulatory agencies, employees, agents, officers, or directors.
Foster will cooperate and make all reasonable efforts to assist the Company in
any investigation of matters involving GTE. Foster also agrees to testify as a
witness and be available for interviews and to assist GTE in preparation for any
legal proceedings involving GTE in which Foster has direct knowledge or specific
expertise. Foster will be compensated appropriately and reimbursed for
reasonable expenses.
Nothing in this Agreement shall be construed to prevent Foster from giving
compelled truthful testimony before any federal or state agency or in any
judicial proceeding; provided that, in order to permit GTE to seek an injunction
or other judicial relief, he will timely notify GTE in advance of any such
proceeding in which he expects to be called to testify or for which he has
received a subpoena.
-3-
<PAGE> 4
No executive officer or member of the Board of Directors of GTE Corporation will
take any action that is intended to disparage or cause Foster embarrassment or
humiliation or otherwise cause or contribute to Foster being held in disrepute
or in a negative light by the general public. Notwithstanding the foregoing, GTE
reserves all rights to take any lawful measure to protect confidential and
proprietary information or to enforce any provision of this Agreement and to
provide truthful testimony before any federal or state agency or in any judicial
proceeding.
7. Foster acknowledges and agrees that GTE has the right to seek injunctive
relief in order to preclude Foster from engaging in activity that would
constitute or result in a breach of his obligations under this Agreement or the
Covenants set forth in his January 7, 1999 Agreement. If Foster breaches this
Agreement or files a lawsuit or complaint regarding claims Foster has released,
in addition to the Additional Remedies set forth in his January 7, 1999
Agreement, Foster will pay for all costs incurred by GTE, including reasonable
attorneys' fees, in defending against his claim or in any suit by GTE to enforce
this Agreement.
8. Foster understands that he has been given 21 days to review and consider
this Agreement before signing it. Foster further understands that he may use as
much of this 21-day period as he wishes prior to signing this Agreement.
9. Foster may revoke this Agreement within seven days after he signs it. If
Foster wishes to revoke this Agreement within this seven-day period, written
notice of revocation should be delivered to the office of J. Randall MacDonald,
by the close of business seven days after Foster signs the Agreement. This
Agreement will not become effective or enforceable until seven days after Foster
signs it. If Foster revokes this Agreement, it will not be effective or
enforceable, and he will not receive the benefits described in Part I, paragraph
1.
10. Foster agrees that the Company advised him to consult with an attorney
before signing this Agreement.
11. The parties participated jointly in the negotiation of this Agreement,
and each party had the opportunity to obtain the advice of legal counsel and to
review, comment upon, and redraft this Agreement. Accordingly, it is agreed that
no rule of construction shall apply against any party or in favor of any party,
and any uncertainty or ambiguity shall not be interpreted against any one party
and in favor of the other.
12. Foster and the Company agree that the sections in the January 7, 1999
Agreement captioned Governing Law, Additional Remedies and Arbitration will
apply to any disputes relating to this Agreement.
13. In the event that any one or more of the provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Agreement.
14. This Separation Agreement and General Release, Foster's Executive
Severance Agreement, Foster's Employment Agreement dated January 7, 1999, the
November 1999 Agreement, the November 1999 Memorandum, and Foster's Merger
Implementation and Retention Bonus Agreement constitute the entire Agreement
between Foster and the Company as to the subject matter addressed herein and
shall be binding upon the heirs, successors, and assigns of Foster and the
Company. No other promises or agreements with regard to this subject matter have
been made to Foster other than those in this Agreement. Foster is not relying on
any statement, representation, or warranty that is not contained in this
Agreement.
-4-
<PAGE> 5
Foster acknowledges that he has read this Agreement carefully, fully understands
the meaning of the terms of this Agreement, and is signing this Agreement
knowingly and voluntarily.
Subscribed and sworn to before ------------------------------
me this ___ day of _______________, 1999. Kent B. Foster
- ----------------------------------------- -------------------
Notary Public Date
Subscribed and sworn to before GTE Service Corporation
me this ___ day of _______________, 1999.
- ----------------------------------------- ------------------------------
Notary Public By:
Title:
-------------------
Date
-5-
<PAGE> 6
Nov 1, 1999
Kent B. Foster
[Address]
[Address]
Dear Kent:
On behalf of the GTE Board of Directors and the entire management team, I want
to thank you for the critical contributions you have made in your career at GTE
and your role in positioning GTE as a leader in the telecommunications industry
as we face the challenges ahead of the twenty first century.
I am writing to summarize the arrangements that we have agreed upon regarding
your transition from employment with GTE Service Corp. ("GTE").
1. You will have elected to retire from employment with GTE as of December 31,
1999 or January 1, 2000. You will notify me of the retirement date you have
selected as soon as possible.
2. Except as modified by this Agreement, your entitlement to separation benefits
following the separation of your employment will be governed by the relevant
provisions of your Employment Agreement, dated January 7, 1999 ("Employment
Agreement") and your Executive Severance Agreement, dated June 4, 1998 ("ESA").
Thus, you will be entitled to severance, benefits, outplacement counseling, and
eligible for a tax gross-up payment, if applicable, pursuant to Sections 2.1,
2.2, 2.3, 2.6, 5.2, and 5.4 of your ESA, as well as additional pension and
benefit credit (in lieu of service credit under Section 2.5 of your ESA) and the
Long-Term Retention Incentive in accordance with the terms of your Employment
Agreement. In addition, you will receive a Merger Implementation and Retention
Bonus (assuming the merger closes) in accordance with, and subject to the terms
of, your agreement governing that bonus.
3. At the same time that GTE makes the severance payment to you pursuant to
Section 2.1 of your ESA, GTE also will make a cash payment to you equal to the
sum of your current base pay and 130% of your norm EIP payment for 1999 (or
greater, but not to exceed the average of the EIP ESA formula). This additional
cash payment (which will not be in lieu of any other payment you are entitled to
receive) will not be treated as compensation for purposes of calculating your
benefits under GTE's benefit plans, policies, and
<PAGE> 7
Kent B. Foster
November 1, 1999
Page 2
arrangements. This payment will be subject to your compliance with the covenants
set forth in your January 7, 1999 agreement captioned "Covenants", as modified
by this Agreement, "Confidentiality" and "Additional Remedies."
4. The benefits described in this Agreement are the only separation benefits to
which you are entitled under your Employment Agreement, your ESA, and GTE's
benefit plans, policies, and arrangements.
5. You will be eligible for a payment under the GTE Corporation 1997 Executive
Incentive Plan ("EIP") for 1999 and a prorated (12/36ths) Performance Bonus
under the GTE 1997 Long-Term Incentive Plan ("LTIP") for the 1999-2001 Award
Cycle. These payments will be calculated as described in the attached Separation
Agreement and General Release (the "Release"). Consistent with the terms of the
Release, both your EIP payment and your prorated Performance Bonus will be paid
at the time such payments are made to similarly situated executives. You will
not participate in the EIP beyond 1999, and you will not participate in LTIP for
future Award Cycles nor will you be eligible to receive any additional grants of
stock options.
6. In accordance with GTE policy, you will not be eligible to defer any portion
of the severance payments provided for by your ESA and by this Agreement, the
payments under the EIP, the prorated payment under LTIP, and any Merger
Implementation and Retention Bonus and, thus, you will not be eligible for a
match on these amounts under the Equity Participation Program.
7. Paragraphs (a) ("Prohibited Conduct") and (b) ("Competitive Activities") of
the Covenants section of your Employment Agreement are deleted and replaced by
the following:
"During the period of your employment with GTE, and for a period ending with 24
months following your separation from employment, you will not work for, own,
manage, operate, control, participate in the ownership, management, operation,
or control of, or provide consulting or advisory services to any of the
following companies or to any company or person affiliated with any of such
companies: SBC, BellSouth, US West, AT&T, Sprint, MCI Worldcom, Qwest
Communications, Williams Communications Group, Level 3, Global Crossing, Nextel,
Intermedia, McLeodUSA, Winstar, and Nextlink, their respective affiliates,
subsidiaries, related entities, lines of business, and successors, and all
business entities, including joint ventures, in which any of them is a partner
or has an ownership interest; provided that your purchase or holding, for
<PAGE> 8
Kent B. Foster
November 1, 1999
Page 3
investment purposes, of securities in a publicly-traded company shall not
constitute 'ownership' or 'participation in ownership' for purposes of this
paragraph so long as your equity interest in any such company is less than a
controlling interest.
"It is our hope that if you seek other employment following your separation from
employment with GTE, you will do so outside the telecommunications industry.
However, if you wish to engage, during the period in which the preceding
paragraph applies, in any `Competitive Activities' (as that term was defined in
your Employment Agreement before its amendment on Nov 1, 1999) that are not
prohibited by the preceding paragraph, you will not do so without the advance
written consent of the Chairman of GTE (or, following the merger with Bell
Atlantic, the Chairman of the new company), which consent will not be
unreasonably withheld."
The two-year exercise period provided for stock options and stock appreciation
rights (collectively "options") by Section 2.7 of your ESA will be extended to
five years; provided that no option may be exercised after the expiration of the
maximum term of the option; and provided further that if GTE's Executive
Compensation and Organizational Structure Committee or its designee (the "ECC")
determines in its sole discretion that this paragraph would preclude the use of
pooling of interest accounting, the ECC may, in its sole discretion, eliminate
or modify this paragraph to the extent required to allow pooling of interest
accounting. In addition, and notwithstanding anything to the contrary in LTIP or
in your Stock Option Agreements ("Option Agreements"), all of your outstanding
options that were granted before 1999 will be subject, after December 31, 2001,
to the forfeiture provisions set forth in the Option Agreements, disregarding
the Change in Control provisions of LTIP and the Option Agreements. Options
granted to you in 1999 will be subject to such forfeiture provisions at all
times. The elimination or modification of this paragraph by the ECC in
accordance with the foregoing provisions will not entitle you to any additional
compensation or benefits.
8. GTE will provide you with the additional benefits specified in Randy
MacDonald's memorandum to you regarding transition arrangements, dated October
29, 1999. The financial counseling benefits specified in that memorandum will be
in lieu of the financial counseling benefit provided by Section 2.4 of your ESA.
<PAGE> 9
Kent B. Foster
November 1, 1999
Page 4
9. In consideration of the benefits conferred upon you by this Agreement, you
will, on your last day of employment with GTE, execute a Release furnished to
you by GTE, substantially in the form attached hereto. If you do not timely
execute the Release, or if you execute and then revoke the Release in accordance
with the terms of the Release, this Agreement will have no force or effect, and
you will not be entitled to any payments or benefits under this Agreement.
10. Except as modified by this Agreement, all of the terms of the Employment
Agreement, the ESA, and the other compensation and benefit plans in which you
participate shall remain in effect in accordance with their terms, including but
not limited to all of your outstanding stock options and stock appreciation
rights, deferred compensation, retirement arrangements, and the "Covenants" and
"Additional Remedies" sections of your Employment Agreement. This Agreement sets
forth the entire understanding of you and GTE regarding your transition from
employment with GTE, and supersedes all prior agreements and communications,
whether oral or written, between you and GTE regarding this subject. This
Agreement will not be modified except by written agreement of you and GTE.
<PAGE> 10
Kent B. Foster
November 1, 1999
Page 5
By way of information, Randy MacDonald will be your contact person with regard
to the specific benefits you will be receiving under this Agreement.
Please indicate your acceptance by signing below and returning to me by November
22, 1999.
Again, on behalf of the entire GTE team, I want to thank you for your many
contributions and many years of valuable service with GTE.
Sincerely yours,
C.R. Lee
cc: J.R. MacDonald
I agree to the terms set forth above.
- -------------------------------------
Kent B. Foster
Attachment
<PAGE> 11
Revised 11/15/99
Revised 10/29/99
10/28/99
To: Kent Foster
Fr: Randy MacDonald
Re: Transition Arrangements
As you requested, I wanted to summarize the points we have agreed to so far with
regard to your transition. By way of information, I will be serving as the
contact person for GTE as we work to finalize terms and thereafter will work
with you to implement them.
1. GTE will provide you an office at either a GTE site or a mutually agreeable
location for one year. In addition, we will provide you secretarial support
for the same period of time. Of course, if you commence new employment
during this one-year period, all of the above will cease.
2. You will keep your home computer, fax machine and other similar types of
equipment, and GTE will pay the costs of customary maintenance on that
equipment for the duration of its useful life.
3. The security that GTE has added to your home will be turned over to you
inasmuch as it would be more expensive to GTE to remove and restore the
home areas to their proper condition.
4. GTE will provide you with financial counseling for the calendar years 2000
and 2001 under the same terms as the counseling you presently receive.
<PAGE> 12
5. GTE will pay the dues for the TPC at Las Colinas and the LaSima Club for
one year. You will be responsible for payment of all other expenses. At the
end of the one-year period, the Company will assist you in transferring the
membership in the TPC at Las Colinas to your name or under our corporate
umbrella. Of course, you will be responsible for all expenses associated
with the transfer and maintenance of such membership thereafter.
If these terms correspond to your understanding, please sign below and
return to me.
cc: C. R. Lee
I agree with the above terms.
-------------------------------- ----------------
Kent Foster Date
<PAGE> 13
February 4, 2000
Kent B. Foster
[Address]
[Address]
Dear Kent:
GTE has consulted Arthur Andersen regarding the impact of your option exercise
period on GTE's ability to use pooling of interest accounting treatment for the
proposed merger with Bell Atlantic. As a result, your November 1, 1999 letter
agreement is amended to clarify our understanding of the original terms of the
Agreement by replacing the last paragraph in paragraph 7 with the paragraph
below. This amendment is written in legal terms to be consistent with the
paragraph being replaced. While some of the language is identical to the
existing provisions, changes have been made where necessary to reflect our
initial understanding.
"Except as provided in the remainder of this paragraph, the two-year
exercise period provided for stock options and stock appreciation
rights (collectively "options") by Section 2.7 of your ESA will remain
in effect without change. Following either the merger with Bell
Atlantic, or the announced abandonment of the merger by GTE, GTE's
Executive Compensation and Organizational Structure Committee or its
designee (the "ECC") will consider whether the two-year exercise period
can be extended to five years without precluding the use of pooling of
interest accounting. If the ECC determines, in its sole discretion,
that the two-year exercise period can be so extended without precluding
the use of pooling of interest accounting, the ECC will so extend the
two-year exercise period to five years from the date of your
retirement; provided that no option may be exercised after the
expiration of the maximum term of the option. In addition, if the
two-year exercise period is extended in accordance with the preceding
provisions of this paragraph, notwithstanding anything to the contrary
in LTIP or in your Stock Option Agreements ("Option Agreements"), all
of your outstanding options that were granted before 1999 will be
subject, after December 31, 2001, to the forfeiture provisions set
forth in the Option Agreements, disregarding the Change in Control
provisions of LTIP and the Option Agreements. Options granted to you in
1999 will be subject to such forfeiture provisions at all times. If the
ECC determines in its sole discretion that this paragraph would
preclude the use of pooling of interest accounting, the ECC may, in its
sole discretion, eliminate or modify this paragraph to the extent
required to allow pooling of interest accounting. The
<PAGE> 14
Kent B. Foster
February 4, 2000
Page 2
elimination or modification of this paragraph by the ECC, or the
failure of the ECC to extend your option exercise period, in
accordance with the foregoing provisions will not entitle you to any
additional compensation or benefits."
In addition, separate and apart from the above and consistent with paragraph 4
of my October 28, 1999 memorandum to you, GTE will provide you with financial
counseling at a cost not to exceed $50,000 per year for the calendar years 2000
and 2001. Any financial counseling costs that you incur in excess of $50,000 per
year will be your responsibility.
If you have any question about this amendment, please let me know.
Sincerely yours,
J. Randall MacDonald
Executive Vice President-
Human Resources & Administration
JRM:jls
c: D. Foster
<PAGE> 1
EXHIBIT 10.14
SEPARATION AGREEMENT AND GENERAL RELEASE
This Agreement is by and between GTE Service Corporation (the "Company") and
Armen Der Marderosian ("Der Marderosian").
PART I
In consideration of the provisions in Part II, the Company agrees as
follows:
1. Der Marderosian will be eligible for:
(a) A Transaction Completion Bonus, subject to the terms of
(including, but not limited to, the covenants prohibiting solicitation of GTE
customers and solicitation or hiring of GTE employees), and calculated as
described in, paragraph B(1)(b) of Thomas White's January 22, 1999 letter (the
"January 1999 Letter Agreement"), including, for purposes of such calculation,
the sales prices obtained for both the sale of Government Systems to General
Dynamics and the sale of ISD;
(b) A payment under the GTE Corporation 1997 Executive Incentive
Plan ("EIP") for the 1999 Plan Year, provided that such payment will be governed
by the terms of the EIP and will be in an amount determined by, and subject to
the approval of, the Executive Compensation and Organizational Structure
Committee of the Board of Directors or its designee (the "ECC");
(c) A prorated Performance Bonus (12/36ths) under the GTE
Corporation 1997 Long-Term Incentive Plan for the 1999-2001 Award Cycle,
provided that, except as specifically limited by the following sentence, such
payment will be governed by the terms of the LTIP and the relevant Performance
Bonus Agreement (including, but not limited to, those provisions in paragraph
7(a) which provide for non-payment of the award in the event the participant
engages in any business that is directly or indirectly competitive with or
detrimental to the interests of GTE) and will be in an amount determined by, and
subject to the approval of, the ECC. Notwithstanding the foregoing, Section 8
("Payment after Change in Control") of the Performance Bonus Agreement for the
1999-2001 Award Cycle shall not be applicable, under any circumstances, to any
payment made pursuant to this paragraph, and, thus, Der Marderosian will not be
eligible to receive the Target Payment provided for by Section 8.
Any payment under this section shall be made at the same time
payments are made to other participants in the governing plans, where
applicable. Der Marderosian will not be eligible to defer any portion of, and
will not be eligible for an Equity Participation Program match on, any portion
of such payments.
2. By making this Agreement, the Company does not admit that it has
done anything wrong, and the Company specifically states that it has not
committed any tort, breach of contract, or violation of any federal, state, or
local statute or ordinance.
PART II
In consideration of the provisions in Part I, Der Marderosian agrees as
follows:
1. Effective December 31, 1999, Der Marderosian irrevocably resigns
from his position with the Company and from any officer, director, or other
positions he holds for GTE Corporation or any of its affiliates, and from any
internal or external Boards where he represents GTE (as defined in paragraph 3
<PAGE> 2
below). Der Marderosian agrees not to seek reinstatement, recall, or future
employment with GTE on or after the date of this Agreement.
Der Marderosian agrees that GTE retains the right to make future organizational
changes, including but not limited to the right to combine, create, and/or fill
positions, including, but not limited to, his former position. He agrees,
further, that he is not eligible for and will not seek an alternative position
with GTE (as defined in paragraph 3 below) prior to his separation from
employment.
2. Der Marderosian agrees and understands that the payments described
in Part I, paragraph 1 above are more than any payments or benefits due to him
under the Company's policies or practices. Except as relating to severance
benefits available to him under his Executive Severance Agreement dated June 4,
1998 and the Transaction Completion Bonus provided for under his January 1999
Letter Agreement, Der Marderosian waives and forever discharges GTE (as defined
in paragraph 3 below) from any liability to provide any notice of termination,
including but not limited to any notice under the Worker Adjustment and
Retraining Notification Act, or to pay any additional salary continuance,
separation pay, severance pay, retention bonus, or pay, retirement incentive, or
payments or benefits arising under any other plan, policy, practice, or program
(offered on a qualified or non-qualified or voluntary or involuntary basis)
which may have been payable as a result of the termination of his employment,
except as provided in paragraph 3 below. Der Marderosian agrees that, should the
Company offer any retirement incentive, early retirement, or voluntary
separation program on or after the date of this Agreement, he shall not be
eligible to participate. In addition, Der Marderosian has not relied on any
statement, agreement, or promise of eligibility for any benefits, other than
those set forth in this Agreement.
3. Der Marderosian agrees to release GTE Service Corporation, GTE
Corporation, any related and affiliated companies, and their successors
(including, after the merger, Bell Atlantic Corporation and any affiliated
companies), and any and all current, former and future directors, employees,
officers, agents, and contractors of these companies, and any and all employee
pension or welfare benefit plans of these companies, including current and
former trustees and administrators of these plans (the entities and persons
referenced above are collectively referred to in this Agreement as "GTE") from
all known and unknown claims, charges, or demands Der Marderosian may have based
on his employment with GTE or the termination of that employment, including a
release of any rights or claims Der Marderosian may have under the Age
Discrimination in Employment Act ("ADEA"), which prohibits age discrimination in
employment; Title VII of the Civil Rights Act of 1964, and the Civil Rights Act
of 1991, which prohibit discrimination in employment based on race, color, sex,
religion, and national origin; the Americans with Disabilities Act, which
prohibits discrimination based upon disability; Section 1981 of the Civil Rights
Act of 1866, which prohibits discrimination based on race; the Employee
Retirement Income Security Act, which governs employee benefits; any state laws
against discrimination; or any other federal, state, or local statute or common
law relating to employment. This includes a release by Der Marderosian of any
claims for wrongful discharge, breach of contract, employment-related torts, or
any other claims in any way related to Der Marderosian's employment with GTE or
the termination of that employment.
This release does not include, however, a waiver of any right Der Marderosian
may have to vested benefits under any pension or savings plan, Worker's
Compensation, pay for banked and accrued (but unused) vacation or personal
holidays, unemployment compensation, any severance payments under his June 4,
1998 Executive Severance Agreement, any consulting fees to which Der Marderosian
may become entitled under J. Randall MacDonald's December 14, 1999 letter, or
the Transaction Completion Bonus provided for by his January 1999 Letter
Agreement.
4. Der Marderosian has not filed and promises not to file, or permit to
be filed on his behalf, any lawsuit or complaint against GTE regarding the
claims released in Part II, paragraph 3 above; provided, however, that nothing
herein shall limit Der Marderosian's right to file a charge of discrimination
with the Equal Employment Opportunity Commission or any state fair employment
practice agency. Der Marderosian
<PAGE> 3
also promises to opt out of and to take such other steps as he has the power to
take to disassociate himself from any class seeking relief against GTE regarding
any claims released in Part II, paragraph 3. If a court, administrative agency,
arbitrator, or any other decision maker with authority awards Der Marderosian
money damages or other relief, with respect to claims released in Part II,
paragraph 3, Der Marderosian hereby assigns to the Company all rights and
interest in such money damages and other relief.
5. Der Marderosian agrees not to disclose the terms of this Agreement,
that this Agreement exists, or that he received any payments from the Company to
anyone except his attorney, his financial planner, or his immediate family
(spouse, children, siblings, parents). If he does disclose the terms of this
Agreement to his immediate family, his financial planner, or his attorney, he
will advise them that they must not disclose the terms of this Agreement.
6. Der Marderosian acknowledges that, during his employment with GTE,
he has had access to confidential information relating to GTE. Der Marderosian
will not use or disclose any such confidential information without first
obtaining the consent of the Company.
Der Marderosian agrees to comply with the provisions of GTE H.R. Policy 412
(Attachment I) provided that, in the event of a conflict between Policy 412 and
this Agreement, the terms of this Agreement shall take precedence.
Contemporaneously with the execution of this Agreement, if Der Marderosian has
not executed a copy of the Business and Scientific Information Agreement, he
shall do so (Policy Attachment A). Upon his termination, Der Marderosian shall
execute Policy Attachment D.
Der Marderosian further agrees to take no action that would cause GTE (including
its employees, directors, and shareholders) embarrassment or humiliation or
otherwise cause or contribute to GTE (including its employees, directors, and
shareholders) being held in disrepute by the general public or GTE's clients,
shareholders, customers, federal or state regulatory agencies, employees,
agents, officers, or directors.
Der Marderosian will cooperate and make all reasonable efforts to assist the
Company in any investigation of matters involving GTE. Der Marderosian also
agrees to testify as a witness and be available for interviews and to assist GTE
in preparation for any legal proceedings involving GTE in which Der Marderosian
has direct knowledge or specific expertise. Der Marderosian will be compensated
appropriately and reimbursed for reasonable expenses.
Nothing in this Agreement shall be construed to prevent Der Marderosian from
giving compelled truthful testimony before any federal or state agency or in any
judicial proceeding; provided that, in order to permit GTE to seek an injunction
or other judicial relief, he will timely notify GTE in advance of any such
proceeding in which he expects to be called to testify or for which he has
received a subpoena.
7. Der Marderosian agrees that, if he breaks any of his promises in
Part II, paragraph 6 of this Agreement or the promises contained in paragraphs 1
through 4 of Section C of the January 1999 Letter Agreement, he will repay to
GTE, as liquidated damages, all amounts previously received under this Agreement
(excluding amounts to which he would have been entitled under GTE's Involuntary
Separation Program, which Der Marderosian agrees are sufficient consideration
for his promises in paragraphs 1 through 5 of this Agreement, and payments from
GTE's qualified pension and savings plans) and that GTE shall have no obligation
to make any further payments otherwise required by the January 1999 Letter
Agreement (excluding payments to which Der Marderosian is entitled under GTE's
qualified pension and savings plans). These liquidated damages are based upon
the parties' recognition that damages to GTE due to Der Marderosian's breaking
of these promises are not capable of measurement with any degree of certainty.
The amount specified is not to be considered a penalty or forfeiture, but solely
as liquidated damages. Notwithstanding the foregoing, Der Marderosian agrees
that GTE has no adequate remedy at law should Der Marderosian break any of these
promises, that GTE would suffer irreparable harm in the event of such breach,
that money damages alone will be insufficient or undeterminable, and that such
breach will entitle
<PAGE> 4
GTE, as a matter of right and without limitation of any other available remedy
(including the recovery of damages described above) to immediate injunctive
relief in any court of competent jurisdiction, it being intended that all rights
and remedies of GTE are cumulative and nonexclusive of other rights or remedies.
Der Marderosian specifically agrees that the liquidated damages provided for
herein are intended to address past harm to GTE and would not preclude GTE from
seeking injunctive relief to prevent future harm.
Further, if Der Marderosian breaks any of his promises, as described above, or
files a lawsuit or complaint regarding claims he has released, Der Marderosian
will pay for all costs incurred by GTE, including reasonable attorneys' fees, in
defending against his claim or enforcing the provisions of this Agreement, the
January 1999 Letter Agreement, or J. Randall MacDonald's December 14, 1999
letter.
8. Der Marderosian understands that he has been given at least 21 days
to review and consider this Agreement before signing it. Der Marderosian further
understands that he may use as much of this consideration period as he wishes
prior to signing this Agreement.
9. Der Marderosian may revoke this Agreement within seven days after he
signs it. If Der Marderosian wishes to revoke this Agreement within this
seven-day period, written notice of revocation should be delivered to the office
of J. Randall MacDonald, by the close of business seven days after Der
Marderosian signs the Agreement. This Agreement will not become effective or
enforceable until seven days after Der Marderosian signs it. If Der Marderosian
revokes this Agreement, it will not be effective or enforceable, and he will not
receive the benefits described in Part I, paragraph 1.
10. Der Marderosian is advised to consult with an attorney before
signing this Agreement.
11. The parties participated jointly in the negotiation of this
Agreement, and each party had the opportunity to obtain the advice of legal
counsel and to review, comment upon, and redraft this Agreement. Accordingly, it
is agreed that no rule of construction shall apply against any party or in favor
of any party, and any uncertainty or ambiguity shall not be interpreted against
any one party and in favor of the other.
12. Der Marderosian and the Company hereby consent that any disputes
relating to this Agreement will be governed by New York law, without regard to
its choice of law rules and will be brought in a court sitting in New York, New
York.
13. In the event that any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Agreement.
14. This Separation Agreement and General Release, the June 4, 1998
Executive Severance Agreement, the January 1999 Letter Agreement, and J. Randall
MacDonald's December 14, 1999 letter constitute the entire Agreement between Der
Marderosian and the Company as to the subject matter addressed herein and shall
be binding upon the heirs, successors, and assigns of Der Marderosian and the
Company. No other promises or agreements with regard to this subject matter have
been made to Der Marderosian. Der Marderosian is not relying on any statement,
representation, or warranty that is not contained in this Agreement, the June 4,
1998 Executive Severance Agreement, the January 1999 Letter Agreement, or J.
Randall MacDonald's December 14, 1999 letter. Der Marderosian acknowledges that
he has read this Agreement carefully, fully understands the meaning of the terms
of this Agreement, and is signing this Agreement knowingly and voluntarily.
Subscribed and sworn to before ----------------------------------
me this ___ day of __________, 1999. Armen Der Marderosian
- ------------------------------------ --------------------
Notary Public Date
Subscribed and sworn to before GTE Service Corporation
me this ___ day of __________, 1999.
- ------------------------------------ ----------------------------------
Notary Public By:
Title:
--------------------
Date
<PAGE> 5
PERSONAL & CONFIDENTIAL
December 14, 1999
Mr. Armen Der Marderosian
[Address]
[Address]
Dear Armen:
As we discussed, with the sale of Government Systems Corporation nearly
complete, you will be separating from employment with GTE effective December 31,
1999. That being the case, I wanted to take this opportunity to thank you, on
behalf of the entire senior management team at GTE, for your many years of
dedicated service and numerous contributions. Your leadership has been critical
to GTE's success.
I also wanted to provide you with an overview of your separation benefits and to
set out the terms of the consulting arrangement we previously discussed.
SEVERANCE BENEFITS
Consistent with the terms of your January 22, 1999 Letter Agreement, you will
receive severance benefits as set forth in, and in accordance with the terms of,
your Executive Severance Agreement. As per our prior discussions, however, in
lieu of the outplacement counseling provided for by your Executive Severance
Agreement, GTE will provide you counseling through a third party firm, selected
by GTE, to assist you in your efforts to obtain board seats with suitable
entities. You will be allowed to keep your office furniture and your home and
office communications/computer equipment, and GTE will pay the cost of
connectivity for this equipment through the first quarter of 2000, in order to
facilitate this placement process.
Upon execution of the attached Separation Agreement and General Release (the
"Release"), you will be eligible for a Transaction Completion Bonus (calculated
as set forth in paragraph B(1)(b) of your Letter Agreement and including, for
purposes of that calculation, the sale of both Government Systems and ISD), a
payment under the Executive Incentive Plan ("EIP") for 1999, and a prorated
Performance Bonus (12/36ths) under the Long-Term Incentive Plan ("LTIP") for the
1999-2001 Award Cycle. These payments will be governed by the terms of, and
calculated as described in, the
<PAGE> 6
Mr. Armen Der Marderosian
December 14, 1999
Page 2
Release and, with regard to any EIP payment and prorated Performance Bonus, will
be paid at the same time such awards are made to other participants. The Release
also contains information regarding the consequences of your failure to keep the
promises set forth in paragraphs 1 through 4 of section C of your January 22,
1999 Letter Agreement. If you fail to sign the release or if you sign and revoke
the release within seven days of signing it, you will not receive any of the
payments described in this paragraph.
You will not participate in EIP beyond 1999 and will not be eligible for future
stock option grants or Performance Bonus Awards under LTIP (beyond the prorated
award for the 1999-2001 Award Cycle, as described above). You will receive a
lump sum payment for your banked, accrued vacation. In accordance with company
policy, you will not be eligible to defer any portion of your vacation pay, the
severance payment provided for by your Executive Severance Agreement, your EIP
payment, your prorated Performance Bonus, or your Transaction Completion Bonus,
and, thus, you will not be eligible for a match on these amounts under the
Equity Participation Program.
Jack D'Angelo will serve as your primary contact with regard to your severance
benefits. Please contact him if you have any questions.
CONSULTING ARRANGEMENT
We particularly appreciate your agreement to serve as a consultant to GTE on
certain matters following your separation. Your specialized skills and expertise
in these areas will greatly aid GTE in meeting the numerous challenges that lie
ahead. In particular, you will provide consulting services in connection with
matters related to Government Systems, technology issues, Y2K projects, and any
related legal matters. You will serve as an independent contractor and, as such,
will not be entitled to the benefits available to GTE employees. Your primary
contacts will be Bill Edwards (on Government Systems matters), Tom Muldoon (on
technology issues), Mike Crawford (on Y2K matters), and Bruce Brafman (on any
related legal matters). Attendance at Y2K presentations and celebrations and
appropriate retirement celebrations (e.g. Kent Foster and Horace Lindsay) during
the first quarter of 2000 are permitted and considered workdays.
It is currently anticipated that you will provide consulting services, upon
request by the above GTE contacts, through, at minimum, the first quarter of
2000. You will receive a fee of $3,333.33 per day of service for the first 30
days you provide consulting services. The fees for these initial 30 days of
service will be counted toward a minimum guaranteed total consulting fee of
$100,000 for the first quarter of 2000. If you provide services in excess of the
initial 30 days in the first quarter of 2000, or if you provide
<PAGE> 7
Mr. Armen Der Marderosian
December 14, 1999
Page 3
services beyond the first quarter of 2000, you will receive a daily fee of
$5,000 for any calendar day in which you provide more than three hours of
consulting services, including travel time. GTE will reimburse you for all
reasonable business expenses incurred during the performance of consulting
services for GTE upon presentation of acceptable documentation, provided such
expenses are approved in advance by the appropriate GTE executive using your
services.
GTE reserves the right to terminate the consulting relationship at any time for
any reason. You will, however, receive the $100,000 minimum consulting fee
regardless of termination of the consulting arrangement unless GTE terminates
that arrangement due to your violation of the covenants contained in your
January 22, 1999 Letter Agreement, due to a conflict of interest (including, by
way of example only, your engaging in competitive business activities), or due
to your failure or inability to provide satisfactory services, in which case you
will be paid only those fees earned and approved expenses incurred as of the
date of the termination of the consulting relationship.
You will be responsible for any and all taxes associated with the arrangements
described above and for any for any insurance, licenses, or professional fees
associated with the performance of requested consulting services. You understand
and agree that GTE is contracting for your personal services and that you cannot
delegate your responsibilities under this agreement.
As you are aware, you have ongoing obligations regarding confidential and
proprietary information to which you had access during your employment. Further,
you agree that any confidential or proprietary information you receive or
develop during the performance of consulting services for GTE will be treated in
full confidence and will not be revealed to any third party or used for any
purpose other than as authorized by GTE. Any material developed or produced
during the course of your consulting relationship with GTE will become the sole
and exclusive property of GTE, and GTE shall have the right to use such
materials for any purpose without payment of additional compensation to you. You
also agree to obtain all necessary licenses, releases, authorizations, and
permits to utilize any material or information from other sources in providing
services to GTE.
If these terms are acceptable to you, please sign and date this agreement where
indicated below and return an original to me within five (5) business days.
<PAGE> 8
Mr. Armen Der Marderosian
December 14, 1999
Page 4
Again, Armen, your leadership and dedication to GTE over the years are greatly
appreciated. We wish you the best, and I hope these severance arrangements
provide you the financial security to pursue your goals for the future.
Sincerely,
J. Randall MacDonald
Executive Vice President -
Human Resources & Administration
JRM:jls
Enclosure
c: J. D'Angelo
I have read, understand, and agree to the above terms and conditions.
- -------------------------------
Armen Der Marderosian
- -------------------------------
Date
<PAGE> 1
Exhibit 11
GTE CORPORATION AND SUBSIDIARIES
Calculation of Earnings (Loss) per Common Share
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C> <C>
Net income (loss):
Before extraordinary charges $ 4,063 $ 2,492 $ 2,794 $ 2,798 $ 2,538
Extraordinary charges (30) (320) -- -- (4,682)
-------- -------- -------- -------- --------
Consolidated net income (loss) 4,033 2,172 2,794 2,798 (2,144)
-------- -------- -------- -------- --------
Adjustments to net income (loss):
Add: Interest expense, net of tax effect,
on employees' stock plans -- -- -- -- 2
-------- -------- -------- -------- --------
Total adjustments -- -- -- -- 2
-------- -------- -------- -------- --------
Adjusted consolidated net income (loss):
Before extraordinary charges 4,063 2,492 2,794 2,798 2,540
Extraordinary charges (30) (320) -- -- (4,682)
-------- -------- -------- -------- --------
Adjusted consolidated net income (loss) $ 4,033 $ 2,172 $ 2,794 $ 2,798 $ (2,142)
======== ======== ======== ======== ========
Average Common Shares Outstanding (in
millions):
Average basic common shares 972 963 958 969 970
Adjustments to basic common shares:
Add: Employees' stock and stock option 7 5 4 3 3
plans
-------- -------- -------- -------- --------
Adjusted average diluted common shares 979 968 962 972 973
======== ======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic (a):
Before extraordinary charges $ 4.18 $ 2.59 $ 2.92 $ 2.89 $ 2.62
Extraordinary charges (.03) (.33) -- -- (4.83)
-------- -------- -------- -------- --------
Consolidated $ 4.15 $ 2.26 $ 2.92 $ 2.89 $ (2.21)
======== ======== ======== ======== ========
Diluted (b):
Before extraordinary charges $ 4.15 $ 2.57 $ 2.90 $ 2.88 $ 2.61
Extraordinary charges (.03) (.33) -- -- (4.81)
-------- -------- -------- -------- --------
Consolidated $ 4.12 $ 2.24 $ 2.90 $ 2.88 $ (2.20)
======== ======== ======== ======== ========
</TABLE>
(a) Computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding during the period.
(b) Reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock.
<PAGE> 1
Exhibit 12
GTE CORPORATION AND SUBSIDIARIES
Statements of the Consolidated Ratio of Earnings to Fixed Charges
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charges $ 4,063 $ 2,492 $ 2,794 $ 2,798 $ 2,538
Add (deduct):
Income taxes 2,291 1,553 1,624 1,614 1,466
Interest expense 1,402 1,397 1,283 1,146 1,151
Capitalized interest (net of amortization) (49) (7) (13) (35) (23)
Preferred stock dividends of Parent -- -- -- -- 6
Dividends on preferred securities
of subsidiaries 86 98 101 106 98
Additional income requirement on
preferred dividends of subsidiaries 3 5 7 10 10
Minority interests 41 199 155 149 145
Portion of rent expense representing 145 155 133 131 128
interest
-------- -------- -------- -------- --------
7,982 5,892 6,084 5,919 5,519
Deduct - Minority interests (51) (329) (280) (263) (246)
-------- -------- -------- -------- --------
Adjusted earnings $ 7,931 $ 5,563 $ 5,804 $ 5,656 $ 5,273
======== ======== ======== ======== ========
Fixed charges:
Interest expense $ 1,402 $ 1,397 $ 1,283 $ 1,146 $ 1,151
Dividends on preferred securities
of subsidiaries 86 98 101 106 98
Additional income requirement on
preferred dividends of subsidiaries 3 5 7 10 10
Portion of rent expense representing interest 145 155 133 131 128
-------- -------- -------- -------- --------
1,636 1,655 1,524 1,393 1,387
Deduct - Minority interests (44) (60) (66) (68) (70)
-------- -------- -------- -------- --------
Adjusted fixed charges $ 1,592 $ 1,595 $ 1,458 $ 1,325 $ 1,317
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 4.98(a) 3.49(b) 3.98 4.27 4.00
</TABLE>
(a) Excluding pretax special items of $(1,116) million, or $(651) million
after-tax (see Note 3 in Item 8), the Company's ratio of earnings to fixed
charges for the year ended December 31, 1999 would have been 4.28.
(b) Excluding pretax special charges of $755 million, or $482 million after-tax
(see Note 3 in Item 8), the Company's ratio of earnings to fixed charges
for the year ended December 31, 1998 would have been 3.96.
<PAGE> 1
Exhibit 21
GTE CORPORATION AND SUBSIDIARIES
Significant Subsidiaries of Registrant at December 31, 1999
<TABLE>
<CAPTION>
Percent of Voting
Control Owned by
Company Incorporated In Direct Parent
- -------------------------------------- ----------------- -----------------------------
<S> <C> <C>
GTE California Incorporated California 99.60(a)
GTE Florida Incorporated Florida 100.00
GTE North Incorporated Wisconsin 100.00
GTE Northwest Incorporated Washington 100.00
GTE South Incorporated Virginia 100.00
GTE Southwest Incorporated Delaware 100.00
GTE Hawaiian Telephone Company Incorporated Hawaii 100.00
</TABLE>
(a) As of March 2000, percent of voting control owned by direct parent is 100%.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, dated January 27, 2000, on the consolidated financial statements
and supporting schedule of GTE Corporation and subsidiaries included in this
Form 10-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)
Dallas, Texas ARTHUR ANDERSEN LLP
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 936,000
<SECURITIES> 0
<RECEIVABLES> 5,609,000
<ALLOWANCES> 551,000
<INVENTORY> 702,000
<CURRENT-ASSETS> 9,443,000
<PP&E> 54,403,000
<DEPRECIATION> 31,170,000
<TOTAL-ASSETS> 50,832,000
<CURRENT-LIABILITIES> 16,335,000
<BONDS> 13,957,000
0
0
<COMMON> 50,000
<OTHER-SE> 10,777,000
<TOTAL-LIABILITY-AND-EQUITY> 50,832,000
<SALES> 25,336,000
<TOTAL-REVENUES> 25,336,000
<CGS> 10,954,000
<TOTAL-COSTS> 18,000,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,402,000
<INCOME-PRETAX> 6,354,000
<INCOME-TAX> 2,291,000
<INCOME-CONTINUING> 4,063,000
<DISCONTINUED> 0
<EXTRAORDINARY> 30,000
<CHANGES> 0
<NET-INCOME> 4,033,000
<EPS-BASIC> 4.15
<EPS-DILUTED> 4.12
</TABLE>
