<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: MARCH 31, 2000
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)
NEW YORK 13-1678633
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 972-507-5000
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
The Company had 962,754,766 shares of $.05 par value common stock outstanding
(excluding 39,445,518 treasury shares) at April 30, 2000.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GTE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
------- -------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C>
REVENUES AND SALES $ 6,100 $ 5,879
OPERATING COSTS AND EXPENSES
Cost of services and sales 2,662 2,617
Selling, general and administrative 900 981
Depreciation and amortization 993 920
Special items (40) (321)
------- -------
Total operating costs and expenses 4,515 4,197
------- -------
OPERATING INCOME 1,585 1,682
OTHER (INCOME) EXPENSE
Interest - net 382 309
Other - net (89) (70)
------- -------
Income before income taxes 1,292 1,443
Income taxes 476 531
------- -------
INCOME BEFORE EXTRAORDINARY CHARGES 816 912
Extraordinary charges (9) (30)
------- -------
NET INCOME 807 882
Redemption of subsidiary preferred stock (8) --
------- -------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 799 $ 882
======= =======
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary charges $ .84 $ .94
Extraordinary charges (.01) (.03)
------- -------
NET INCOME $ .83 $ .91
======= =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary charges $ .84 $ .93
Extraordinary charges (.01) (.03)
------- -------
NET INCOME $ .83 $ .90
======= =======
AVERAGE COMMON SHARES OUTSTANDING (IN MILLIONS)
Basic 962 969
Diluted 968 976
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
GTE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- ------------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 344 $ 936
Receivables, less allowances of $597 and $551 4,993 5,058
Inventories and supplies 735 702
Net assets held for sale 1,773 1,802
Other 923 945
-------- --------
Total current assets 8,768 9,443
-------- --------
Property, plant and equipment, at cost 55,120 54,403
Accumulated depreciation (31,734) (31,170)
-------- --------
Total property, plant and equipment, net 23,386 23,233
-------- --------
Prepaid pension costs 6,719 6,073
Franchises, goodwill and other intangibles, net of accumulated
amortization of $1,022 and $957 6,467 6,492
Investments in unconsolidated companies 4,062 3,932
Other assets 1,612 1,659
-------- --------
Total assets $ 51,014 $ 50,832
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
GTE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited) - Continued
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- ------------
(Dollars in Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term obligations, including current maturities $ 10,795 $ 9,608
Accounts payable and accrued expenses 4,363 4,410
Taxes payable 1,249 1,372
Other 927 945
-------- --------
Total current liabilities 17,334 16,335
-------- --------
Long-term debt 13,643 13,957
Employee benefit plans 4,411 4,418
Deferred income taxes 3,678 3,406
Minority interests in equity of subsidiaries 658 1,266
Other liabilities 591 623
-------- --------
Total liabilities 40,315 40,005
-------- --------
Shareholders' Equity
Common stock (1,002,200,284 shares issued) 50 50
Additional paid-in capital 8,671 8,680
Retained earnings 5,310 4,953
Accumulated other comprehensive loss (397) (376)
Guaranteed ESOP obligations (437) (453)
Treasury stock (41,425,534 and 34,791,857 shares, at cost) (2,498) (2,027)
-------- --------
Total shareholders' equity 10,699 10,827
-------- --------
Total liabilities and shareholders' equity $ 51,014 $ 50,832
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
GTE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------- -------
(Dollars in Millions)
<S> <C> <C>
OPERATIONS
Income before extraordinary charges $ 816 $ 912
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 993 920
Special items (40) (321)
Employee retirement benefits (664) (154)
Deferred income taxes 244 363
Provision for uncollectible accounts 139 98
Equity in income of unconsolidated companies (120) (105)
Changes in current assets and current liabilities, excluding the
effects of acquisitions and dispositions (99) (28)
Other - net 61 (156)
------- -------
Net cash from operations 1,330 1,529
------- -------
INVESTING
Capital expenditures (1,121) (935)
Acquisitions and investments (5) (373)
Other - net (42) 44
------- -------
Net cash used in investing (1,168) (1,264)
------- -------
FINANCING
Common stock issued 101 135
Purchase of treasury stock (577) --
Dividends paid (455) (454)
Long-term debt issued 455 222
Long-term debt and preferred securities retired (780) (864)
Increase in short-term obligations, excluding current maturities 538 724
Other - net (36) (54)
------- -------
Net cash used in financing (754) (291)
------- -------
Decrease in cash and cash equivalents (592) (26)
Cash and cash equivalents:
Beginning of period 936 467
------- -------
End of period $ 344 $ 441
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
GTE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein have
been prepared by GTE Corporation (the Company) pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. However,
in the opinion of management of the Company, the condensed consolidated
financial statements include all adjustments, which consist only of normal
recurring accruals, necessary to present fairly the financial information for
such periods. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's 1999 Annual Report on Form 10-K.
Reclassifications of prior year data have been made, where appropriate, to
conform to the 2000 presentation.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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.
In December 1999, the SEC 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 costs. The Company is
currently assessing the impact of SAB No. 101.
NOTE 3. SPECIAL ITEMS
During the first quarter of 2000, the Company recorded a pretax net gain of $40
million, comprised of the gain on the sale of CyberTrust (a part of GTE's Other
National Operations), partially offset by the write-down of certain impaired
assets. The after-tax impact of the net gain is $20 million, or $.02 per diluted
share.
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. 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.
6
<PAGE> 7
GTE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
NOTE 4. EXTRAORDINARY CHARGES
During the first quarter of 2000, GTE retired $128 million of debt prior to the
stated maturity date, resulting in a one-time, after-tax extraordinary charge of
$9 million (net of tax benefits of $6 million), or $.01 per diluted share.
During the first quarter of 1999, GTE repurchased $338 million of high-coupon
debt through a public tender offer prior to the stated maturity date, resulting
in a one-time, after-tax extraordinary charge of $30 million (net of tax
benefits of $16 million), or $.03 per diluted share.
NOTE 5. 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 $79 million and $82 million for the first
quarter of 2000 and 1999, respectively.
In late 1999, GTE sold GTE Government Systems Corporation. Revenues for the
three months ended March 31, 1999 from GTE Government Systems were $323 million.
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 condensed
consolidated balance sheets at March 31, 2000 and December 31, 1999. Revenues
from GTE Airfone were $34 million and $37 million for the quarters ended March
31, 2000 and 1999, 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. The net property, plant and equipment of $1.7 billion related to these
access lines is classified as "Net assets held for sale" in the condensed
consolidated balance sheets as of March 31, 2000 and December 31, 1999. 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
consolidated revenues and approximately 7% of consolidated operating income.
7
<PAGE> 8
GTE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
NOTE 6. COMPREHENSIVE INCOME
The components of total comprehensive income are presented in the following
table:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------ ------
(Dollars in Millions)
<S> <C> <C>
Net income $ 807 $ 882
Other comprehensive income (loss):
Foreign currency translation adjustments (3) (9)
Unrealized gains (losses) on securities, net of taxes of $2 and $(6) 4 (12)
Minimum pension liability adjustment, net of taxes of $(12) (22) --
----- -----
Subtotal (21) (21)
----- -----
Total comprehensive income $ 786 $ 861
===== =====
</TABLE>
NOTE 7. SEGMENT REPORTING
GTE has four reportable segments. As described below, three reportable segments
are within GTE's National Operations unit and the fourth reportable segment is
the International Operations unit. The three major product segments (reportable
segments) within National Operations are Network Services, Wireless Products and
Services, and Genuity (formerly Internetworking).
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. Within National Operations, the costs of certain
activities which are managed on a common basis are allocated to the segments
based on usage, where possible, or other factors depending on the nature of the
activity.
Affiliated transactions that occur are based on market prices. Operating income
includes profit on sales to affiliates. The related intersegment eliminations
for National Operations are included in Other National Operations.
The following table represents segment income statement results for the three
months ended March 31, 2000 and 1999 and balance sheet results as of March 31,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
-------- --------
(Dollars in Millions)
<S> <C> <C>
NATIONAL OPERATIONS:
NETWORK SERVICES (a) (b)
Revenues and sales
Local services $ 1,582 $ 1,467
Network access services 1,336 1,333
Other 844 848
-------- --------
Total revenues 3,762 3,648
Intersegment revenues (143) (76)
-------- --------
Total external revenues $ 3,619 $ 3,572
======== ========
Operating income (c) $ 1,368 $ 1,087
Special charges (d) -- 113
Depreciation and amortization 665 648
Capital expenditures 720 656
Total assets 25,019 24,949
</TABLE>
8
<PAGE> 9
GTE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
<TABLE>
<CAPTION>
2000 1999
------- -------
(Dollars in Millions)
<S> <C> <C>
WIRELESS PRODUCTS AND SERVICES (a) (e)
Revenues and sales
Service revenues $ 940 $ 714
Equipment sales and other 149 122
------- -------
Total revenues $ 1,089 $ 836
======= =======
Operating income (c) $ 156 $ 141
Special charges (d) -- 24
Depreciation and amortization 166 114
Capital expenditures 146 64
Total assets 9,566 9,557
GENUITY (a)
Revenues and sales $ 250 $ 163
Intersegment revenues (11) (4)
------- -------
Total external revenues $ 239 $ 159
======= =======
Operating loss $ (197) $ (127)
Depreciation and amortization 51 40
Capital expenditures 155 89
Total assets 2,706 2,521
OTHER NATIONAL OPERATIONS (a) (b) (f)
Revenues and sales
GTE Communications $ 429 $ 341
GTE Technology and Systems -- 352
Other, including eliminations 162 159
------- -------
Total revenues $ 591 $ 852
======= =======
Operating loss (g) $ (61) $ (110)
Special items (d) (40) 42
Depreciation and amortization 45 56
Capital expenditures 49 48
Total assets 3,156 2,827
INTERNATIONAL OPERATIONS:
Revenues and sales
Local services $ 89 $ 80
Toll services 74 72
Wireless services 147 151
Directory services and other 121 101
------- -------
Total revenues $ 431 $ 404
======= =======
Operating income (c) $ 72 $ 586
Special items (d) -- (513)
Depreciation and amortization 64 62
Equity income 91 82
Capital expenditures 51 62
Investments in unconsolidated companies 3,574 3,491
</TABLE>
9
<PAGE> 10
GTE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
<TABLE>
<CAPTION>
2000 1999
-------- --------
(Dollars in Millions)
<S> <C> <C>
Revenues by country
Dominican Republic $ 172 $ 148
Argentina 118 128
Canada 96 84
Other 45 44
-------- --------
Total revenues $ 431 $ 404
======== ========
Assets by country
Venezuela $ 1,875 $ 1,837
Argentina 1,604 1,604
Canada 1,594 1,560
Dominican Republic 991 1,016
Other 946 927
-------- --------
Total assets $ 7,010 $ 6,944
======== ========
CONSOLIDATED REVENUES $ 6,100 $ 5,879
CONSOLIDATED OPERATING INCOME (g) (h) 1,585 1,682
TOTAL SPECIAL ITEMS (d) (40) (321)
CONSOLIDATED ASSETS 51,014 50,832
</TABLE>
(a) For comparative purposes, 1999 results have been restated to reflect
changes in the management structure of GTE and changes in reporting (see
(b) below), consistent with the 2000 presentation.
(b) Consistent with industry practice, effective January 1, 2000, GTE changed
its method of recognizing directory publishing revenues. GTE Directories, a
wholly-owned subsidiary of GTE, publishes telephone directories for which
it receives advertising revenue. Under the previous method of revenue
recognition, approximately 60% of the advertising revenue for directories
published in GTE's operating areas was recognized as revenue in GTE's
Network Services segment results. The remaining 40% was recognized as
revenue by GTE Directories and included in the Company's Other National
Operations results. Under the new method, GTE Directories now recognizes
100% of the directory publishing revenues. Network Services, in-turn, bills
GTE Directories for customer listing information and billing and collection
services. There is no impact to GTE's consolidated revenue and net income
as a result of this change.
(c) Includes special items in 1999.
(d) See Note 3 for a description of special items.
(e) 2000 results include the impact of the acquisition of several wireless
properties from Ameritech Corporation in late 1999.
(f) In late 1999, GTE sold GTE Government Systems Corporation.
(g) Includes special items in 2000 and 1999.
(h) Consolidated operating income for 2000 includes pension settlement gains
recorded at other business units.
NOTE 8. 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. 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 certain regulatory approvals and
receipt of opinions that the merger will be tax-free. All state regulatory
commissions have now approved the merger and the only remaining approval is
required from the Federal Communications Commission. In April 2000, we announced
that the combined company will be called Verizon Communications.
10
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GTE CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
OVERVIEW
Reported net income for GTE Corporation ("GTE" or "the Company") for the first
quarter of 2000 was $807 million, or $.83 per diluted share. For the first
quarter of 1999, reported net income was $882 million, or $.90 per diluted
share. The Company's reported results were affected by significant items and the
sale of the Government Systems business in 1999, which are each described in
further detail in the "Consolidated Results" section and in "Segment Results",
as they affect reportable segments. Net income for the quarter ended March 31,
2000 includes the effects of a net after-tax gain of $20 million, or $.02 per
diluted share, and an after-tax extraordinary charge of $9 million, or $.01 per
diluted share. Net income for the first quarter of 1999 includes the effects of
a net after-tax gain of $189 million, or $.19 per diluted share, and an
after-tax extraordinary charge of $30 million, or $.03 per diluted share.
CONSOLIDATED RESULTS
The table below summarizes reported and selected adjusted key financial results:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------- Percent
2000 1999 Change
--------- --------- --------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C>
REPORTED REVENUES $ 6,100 $ 5,879
Normalization for sale of Government Systems (a) -- (323)
------- -------
ADJUSTED REVENUES $ 6,100 $ 5,556 9.8%
======= =======
REPORTED OPERATING INCOME $ 1,585 $ 1,682
Normalization for sale of Government Systems (a) -- (23)
Special items (40) (321)
------- -------
ADJUSTED OPERATING INCOME $ 1,545 $ 1,338 15.5%
======= =======
REPORTED NET INCOME $ 807 $ 882
Special items (20) (189)
Extraordinary charges 9 30
------- -------
ADJUSTED NET INCOME $ 796 $ 723 10.1%
======= =======
DILUTED EARNINGS PER SHARE - REPORTED $ .83 $ .90
Special items (.02) (.19)
Extraordinary charges .01 .03
------- -------
DILUTED EARNINGS PER SHARE - ADJUSTED $ .82 $ .74 10.8%
======= =======
</TABLE>
(a) GTE's Government Systems business was sold in late 1999. Reported results
for 1999 include activity associated with this business unit. For
comparative purposes, 1999 revenues and operating income have been adjusted
to exclude Government Systems. Net income and earnings per share are not
affected by these adjustments. For further information, see "Other Factors
That May Affect Future Results - Strategic Repositioning - Net Assets Held
for Sale."
Adjusted revenues increased $544 million, or 9.8%, in the first quarter of 2000
compared to the first quarter of 1999. This increase was primarily due to
additional revenue of $202 million from the acquisition of wireless properties
from Ameritech Corporation in the fourth quarter of 1999. In addition, the sale
of data products and services, primarily through Genuity (formerly
Internetworking) and Network Services, generated increased revenues of
approximately $170 million, or 32%.
11
<PAGE> 12
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Adjusted operating income increased $207 million, or 15.5%, from the same
quarter last year. Consolidated results for the first quarter of 2000 include
$329 million of operating losses related to GTE's continuing investments in
Genuity (formerly Internetworking) and GTE Communications Corporation. While the
continued investment in these 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. The operating losses from these initiatives were
$63 million higher than the first quarter of 1999. Offsetting these losses were
growth in revenues and the recognition of a pretax gain of $487 million,
associated with lump-sum settlements of pension obligations for former employees
electing deferred vested pension cash-outs and for current employees who met
certain eligibility requirements. In addition, Network Services operating income
results for the first quarter of 2000 include $113 million of unfavorable
regulatory and one-time adjustments compared to $62 million favorability in the
first quarter of 1999, resulting in a $175 million net reduction in operating
income. Also, offsetting operating income increases were increased costs at
Wireless Products and Services from additional roaming costs of $75 million.
Special Items
During the first quarter of 2000, the Company recorded a pretax net gain of $40
million, comprised of the gain on the sale of CyberTrust (a part of GTE's Other
National Operations), partially offset by the write-down of certain impaired
assets. The after-tax impact of the net gain is $20 million, or $.02 per diluted
share.
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. 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.
Extraordinary Charges
During the first quarter of 2000, GTE retired $128 million of debt prior to the
stated maturity date, resulting in a one-time, after-tax extraordinary charge of
$9 million (net of tax benefits of $6 million), or $.01 per diluted share.
During the first quarter of 1999, GTE repurchased $338 million of high-coupon
debt through a public tender offer prior to the stated maturity date, resulting
in a one-time, after-tax extraordinary charge of $30 million (net of tax
benefits of $16 million), or $.03 per diluted share.
SEGMENT RESULTS
The following discussion covers the separate results of GTE's National and
International Operations. As discussed more fully in Note 7 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.
12
<PAGE> 13
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
NATIONAL OPERATIONS
The results of GTE's National Operations include the results of the Network
Services, Wireless Products and Services, and Genuity (formerly Internetworking)
reportable segments, representing 61%, 18%, and 4% of consolidated first quarter
2000 revenues, respectively. Smaller business units comprising Other National
Operations, representing 10% of first quarter 2000 consolidated revenues,
include 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 franchised 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 to businesses, dial-up Internet access to
residential users, billing and collection, operator-assistance and inventory
management services to other telecommunications companies.
Revenues and Sales
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------- Increase Percent
2000 1999 (Decrease) Change
----------- -------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Local services $ 1,582 $ 1,467 $ 115 8%
Network access services 1,336 1,333 3 --
Other 844 848 (4) --
------- ------- -------
Total revenues 3,762 3,648 114 3%
Intersegment revenues (143) (76) (67) --
------- ------- -------
Total external revenues $ 3,619 $ 3,572 $ 47 1%
======= ======= =======
</TABLE>
Local services
The increase in local services revenues for the first quarter of 2000 compared
to the same period in 1999 was primarily generated by an increase in switched
access lines in service of 4.1%. Access line growth reflects higher demand by
Internet Service Providers (ISPs) and additional residential lines, including
second lines. Revenue growth was also attributable to increased revenues from
consumer value-added services of $18 million in the first quarter of 2000
compared to the same period of 1999. Further impacting local revenue growth was
the favorable impact of rate rebalancing in Texas. Although revenue neutral,
this legislation permitted increases to local rates with corresponding
reductions in intrastate access and toll rates, thereby allowing the Company to
be more competitive.
Network access services
The increase in network access services revenues for the first quarter of 2000
compared to the same period in 1999 was the result of higher customer demand,
reflected by growth in access minutes of use of 4.8%, driven in part by higher
network usage by alternative providers of intraLATA toll services. Special
access revenues increased, fueled by a 37% growth in special access lines,
driven by growing demand for increased bandwidth by high-capacity users. These
increases were partially offset by the above-mentioned Texas rate rebalancing
legislation.
Other
Other service revenues decreased in the first quarter of 2000 compared to the
same period in 1999 due to lower toll revenue of $25 million, resulting from
continued competition from alternative providers of intraLATA toll services, and
lower revenues from public telephones of $8 million, due to decreased volumes
associated with product
13
<PAGE> 14
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
substitution. These decreases are partially offset by increased revenues from
inventory management and purchasing services of $37 million.
Intersegment revenues
Intersegment revenues at Network Services primarily represents
telecommunications services provided at market rates to GTE Communications,
which provides long-distance service and markets bundled telecommunications
services, and network access services provided to affiliates.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------- Increase Percent
2000 1999 (Decrease) Change
---------- ---------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Cost of services and sales $ 1,231 $ 1,276 $ (45) (4)%
Selling, general and administrative 498 524 (26) (5)%
Depreciation and amortization 665 648 17 3%
Special charges -- 113 (113) --
---------- ---------- ----------
Total operating costs and expenses $ 2,394 $ 2,561 $ (167) (7)%
========== ========== ==========
</TABLE>
Operating costs and expenses, excluding special charges, decreased $54 million,
or 2% in the first quarter of 2000 compared to the same quarter of 1999. In
general, the favorable settlement of pension obligations was offset by higher
costs associated with customer and access line growth, increased
telecommunications equipment sales volumes and sales growth and support costs
for new initiatives, such as digital subscriber lines (DSL). The lump-sum
settlement of pension obligations for certain eligible active and former
employees resulted in the recognition of $254 million in pension settlement
gains in the first quarter of 2000. Partially offsetting this decrease were
higher costs due to growth in access lines and the implementation of DSL. Also,
expenses increased $34 million from the growth of inventory management and
purchasing services to third party customer accounts. In addition, expenses
increased $26 million associated with reciprocal compensation paid to
competitive local exchange carriers (CLECs) that terminate traffic on behalf of
ISPs. Favorable 1999 adjustments to certain employee benefits and other
liabilities reduced expenses by $43 million in the first quarter of 1999,
further offsetting the increase in the first quarter of 2000. An additional
increase in expenses of $17 million resulted from higher demand for nonregulated
telecommunications services and equipment.
The increase in depreciation and amortization expense in the first quarter of
2000 compared to the same period in 1999 is due to the continuing investment in
the network necessary to support the access line growth from higher demand by
ISPs and additional customer lines.
For a description of the special charges, see "Consolidated Results - Special
Items."
WIRELESS PRODUCTS AND SERVICES
Wireless Products and Services provides wireless voice and data communications
services within licensed areas in the U.S., sells cellular telephones and
accessories and provides support services to other cellular telephone companies.
14
<PAGE> 15
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Revenues and Sales
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------- Percent
2000 1999 Increase Change
---------- ---------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Service revenues $ 940 $ 714 $ 226 32%
Equipment sales and other 149 122 27 22%
---------- ---------- ----------
Total revenues $ 1,089 $ 836 $ 253 30%
========== ========== ==========
</TABLE>
The increase in total revenues for the first quarter of 2000 resulted primarily
from the acquisition of wireless properties from Ameritech in the fourth quarter
of 1999. These newly acquired wireless properties generated $202 million of the
revenue increase. In addition, the increase is attributable to growth in
wireless subscribers of 16% (excluding the newly acquired subscribers), due to
the success of the GTE CHOICE(SM) pricing plans, other value-based products and
services and prepaid programs. These increases are partially offset by lower
average revenue per user, which resulted from more competitive pricing plans in
the current year. At March 31, 2000, wireless voice customers totaled
approximately 7.4 million.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------- Increase Percent
2000 1999 (Decrease) Change
---------- ---------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Cost of services and sales $ 523 $ 351 $ 172 49%
Selling, general and administrative 244 206 38 18%
Depreciation and amortization 166 114 52 46%
Special charges -- 24 (24) --
---------- ---------- ----------
Total operating costs and expenses $ 933 $ 695 $ 238 34%
========== ========== ==========
</TABLE>
Operating costs and expenses, excluding special charges, increased $262 million,
or 39%, in the first quarter of 2000 compared to the same period in 1999,
primarily due to expenses of $185 million associated with the newly acquired
wireless properties. Excluding the expenses from these new properties and
special charges, expenses increased $77 million, or 11%, from the first quarter
of 1999. This increase resulted from additional roaming costs of $75 million,
driven by higher customer roaming volume associated with the expanded coverage
of the GTE CHOICE pricing plans, and customer acquisition, retention and
equipment costs of $39 million, partially offset by lower network maintenance
and systems expenditures of $18 million.
For a description of the special charges, see "Consolidated Results - Special
Items."
GENUITY (formerly Internetworking)
On April 7, 2000, Genuity Inc., formerly known as GTE Internetworking, filed a
registration statement with the Securities and Exchange Commission (SEC). For
additional information, see "Other Factors That May Affect Future Results --
Recent Developments."
Genuity 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.
Genuity also includes the investment in GTE's nationwide 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.
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.
15
<PAGE> 16
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Revenues and Sales
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------- Increase Percent
2000 1999 (Decrease) Change
---------- ---------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Revenues and sales $ 250 $ 163 $ 87 53%
Intersegment revenues (11) (4) (7) --
---------- ---------- ----------
Total external revenues $ 239 $ 159 $ 80 50%
========== ========== ==========
</TABLE>
Genuity's data revenues for the first quarter of 2000 increased over the first
quarter of 1999 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 an expanded relationship with America Online
(AOL), for which GTE provides national network deployment services in support of
AOL's dial-up network in the United States.
Intersegment revenues reflect affiliate activity between Genuity and other
entities within National Operations.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------- Percent
2000 1999 Increase Change
---------- ---------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Cost of services and sales $ 288 $ 176 $ 112 64%
Selling, general and administrative 108 74 34 46%
Depreciation and amortization 51 40 11 28%
---------- ---------- ----------
Total operating costs and expenses $ 447 $ 290 $ 157 54%
========== ========== ==========
</TABLE>
The increase in cost of services and sales for the first quarter of 2000
compared with the same period in 1999 reflects growth in the cost of the network
infrastructure to support a growing customer base and new service offerings, as
well as the continued expansion of dial-up networks operated for AOL. Selling,
general and administrative costs increased in the first quarter of 2000 compared
with the first quarter of 1999 due to increased selling expenses associated with
customer growth and an increased sales force. Depreciation and amortization
expenses increased for the first quarter of 2000 compared with the same period
in 1999 primarily due to the continued investment in building the network
infrastructure and supporting growth in Genuity's Internet offerings.
OTHER NATIONAL OPERATIONS
GTE's Other National Operations include: GTE Communications Corporation (GTECC),
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.
16
<PAGE> 17
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Revenues and Sales
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------- Increase Percent
2000 1999 (Decrease) Change
---------- ---------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Communications $ 429 $ 341 $ 88 26%
Technology and Systems -- 352 (352) --
Other, including eliminations 162 159 3 2%
---------- ---------- ----------
Total revenues $ 591 $ 852 $ (261) (31)%
========== ========== ==========
</TABLE>
Operating Costs and Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------- Percent
2000 1999 Decrease Change
---------- ---------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Cost of services and sales $ 457 $ 667 $ (210) (31)%
Selling, general and administrative 190 197 (7) (4)%
Depreciation and amortization 45 56 (11) (20)%
Special items (40) 42 (82) --
---------- ---------- ----------
Total operating costs and expenses $ 652 $ 962 $ (310) (32)%
========== ========== ==========
</TABLE>
GTECC includes GTE's national sales and marketing organization, which enables
GTE to offer a complete bundle of telecommunications services and expand beyond
its traditional operating boundaries. GTECC also includes GTE Long Distance,
which provides long-distance services to customers in most of the United States,
and GTE Video Services, which provides video services to residential and
business customers in California, Florida and Hawaii.
The increase in GTECC's revenues for the first quarter of 2000 is attributable
in part to increased revenues from long-distance operations and bundled local,
long-distance, wireless, paging and Internet services. The growth in
long-distance revenues in the first quarter of 2000 is due to a 23% increase in
the number of customers since March 31, 1999 to approximately 3.5 million
customers. At March 31, 2000, there were approximately 365,000 customers of
bundled services, an increase of 238% since March 31, 1999.
GTE Technology and Systems was 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. Therefore, results for the first quarter of 2000 do not
include GTE Government Systems.
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). GTE Directories' revenues are
slightly higher in the first quarter of 2000 due to growth in revenues from
SuperPages.com(R), the Company's Internet directory service.
Total operating costs and expenses, excluding special charges, were
approximately $300 million lower in the first quarter of 2000 compared to the
first quarter of 1999 due to the sale of Government Systems in late 1999. This
decrease was partially offset by higher costs in the first quarter of 2000
associated with customer growth at GTECC.
For a description of the special charges, see "Consolidated Results - Special
Items."
17
<PAGE> 18
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
INTERNATIONAL OPERATIONS
GTE's International Operations, which represent 7% of 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 Canada, Europe, Puerto Rico 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, Venezuela and
Puerto Rico, as well as a digital-cellular network in Taiwan.
Revenues and Sales
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------- Increase Percent
2000 1999 (Decrease) Change
---------- ---------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Local services $ 89 $ 80 $ 9 11%
Toll services 74 72 2 3%
Wireless services 147 151 (4) (3)%
Directory services and other 121 101 20 20%
---------- ---------- ----------
Total revenues and sales $ 431 $ 404 $ 27 7%
========== ========== ==========
</TABLE>
Local services
Local rate increases in the Dominican Republic, combined with increased access
lines in service, contributed to the increase in the first quarter of 2000
compared with the same period in 1999.
Toll services
The increase is attributable to higher toll volumes and a change in the method
of reporting toll settlements at operations in the Dominican Republic (CODETEL).
In the second half of 1999, CODETEL began reporting toll settlements on a gross
revenue and expense basis (see "Operating Costs and Expenses" below). The
increase was partially offset by rate reductions stemming from rebalancing
programs and competitive pressures.
Wireless services
Wireless subscribers increased 37% compared to the first quarter of 1999. A
decline in the average revenue per customer, due to the migration of Latin
American subscribers to prepaid cellular service, more than offset the revenue
benefit resulting from an increased customer base.
Directory services and other
The increase in directory services and other revenues is primarily attributable
to brand and technology fees paid to the Company by certain of its international
affiliates. New services revenues generated by QuebecTel also contributed to the
increase.
Operating Costs and Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------- Percent
2000 1999 Increase Change
---------- ---------- ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Cost of services and sales $ 168 $ 154 $ 14 9%
Selling, general and administrative 127 115 12 10%
Depreciation and amortization 64 62 2 3%
Special item -- (513) 513 --
---------- ---------- ----------
Total operating costs and expenses $ 359 $ (182) $ 541 --
========== ========== ==========
</TABLE>
18
<PAGE> 19
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Higher network and customer support costs related to customer growth, combined
with increased equipment costs associated with cellular customer additions,
contributed to the increase in cost of services and sales. A change in the
reporting of toll settlements at CODETEL also contributed to the increase in
cost of services and sales (see "Toll services" above). The increase in selling,
general and administrative expenses is primarily due to QuebecTel's new business
initiatives. Investments in CODETEL's wireless networks contributed to the
increase in depreciation and amortization.
For a description of the special item, see "Consolidated Results - Special
Items."
Equity Income
<TABLE>
<CAPTION>
Three Months Ended March 31,
- ---------------------------- Percent
2000 1999 Increase Change
-------- -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
$ 91 $ 82 $ 9 11%
</TABLE>
Equity earnings increased $9 million, or 11%, for the first quarter of 2000
compared to the same period in 1999. In March 1999, GTE completed its 40%
investment in Telecomunicaciones de Puerto Rico, Inc. (TELPRI). In addition,
strong results at Taiwan Cellular Corporation contributed to the increase in
equity income.
CONSOLIDATED FINANCIAL CONDITION
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
2000 1999
---------- -----------
(Dollars in Millions)
<S> <C> <C>
Cash flows from (used in):
Operations $ 1,330 $ 1,529
Investing (1,168) (1,264)
Financing (754) (291)
</TABLE>
OPERATIONS
The decrease in cash from operations primarily reflects higher cash expenses,
partially offset by additional cash from increased revenues.
INVESTING
Capital expenditures totaled $1.1 billion in the first quarter of 2000, a 20%
increase from the $935 million spent in the first quarter of 1999. The majority
of the 2000 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. In April 2000, the Company announced a
significantly increased capital expenditure plan that will enable Genuity to
accelerate the build-out of its network infrastructure. Under the new plan,
GTE's capital expenditures for 2000 are expected to be $6.8 billion, a $1.0
billion increase from previous estimates. Cash used for acquisitions and
investments was $5 million in the first quarter of 2000 compared to $373 million
in the first quarter of 1999, which included GTE's purchase in March 1999 of
approximately 40% of Telecomunicaciones de Puerto Rico, Inc. (TELPRI) for
approximately $360 million.
In 1998, GTE committed to a plan 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. In late 1999, the Company sold its GTE
Government Systems business for $1.2 billion. During 1999, the Company reached
agreements to sell approximately 1.6 million domestic access lines and expects
to close all of these sales in 2000.
19
<PAGE> 20
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
FINANCING
Cash used in financing activities totaled $754 million during the first quarter
of 2000 compared with $291 million for the same period in 1999. The Company
retired $780 million of long-term debt and preferred securities in the first
quarter of 2000 compared with retirements of $864 million in the first quarter
of 1999. The net change in short-term debt provided cash of $538 million in the
first quarter of 2000 compared with $724 million in the first quarter of 1999.
The Company issued $455 million of long-term debt in the first quarter of 2000
compared with $222 million in the first quarter of 1999.
In August 1999, GTE initiated 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 the second half of 1999, and completed
the program with the purchase of an additional 8.4 million shares valued at $577
million in the first quarter of 2000.
During the first quarter of 2000, 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 will mature in
June 2000. Fifty-four banks representing 12 countries participate in these
syndicated facilities. In addition to the syndicated facilities, GTE also
maintains $2.0 billion of committed bilateral credit lines. 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. Several
domestic telephone operating subsidiaries have shelf registration statements
filed with the Securities and Exchange Commission that total $1.6 billion as of
March 31, 2000.
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. At March 31, 2000, the Company had $6.0
billion of unused bank lines of credit available to back up commercial paper
borrowings and for working capital requirements.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
REGULATORY AND COMPETITIVE TRENDS
During the first quarter of 2000, 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 2000 to meet the wholesale requirements of new competitors. To
date, GTE has signed over 1,300 interconnection agreements with other carriers,
providing them the capability to purchase unbundled network elements (UNES),
resell retail services and interconnect facilities-based networks.
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 3.5 million customers.
20
<PAGE> 21
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Universal Service
In November 1999, the Federal Communications Commission (FCC) released an order
dealing with implementation of the new FCC federal high cost support mechanism
for non-rural incumbent local exchange carriers (ILECs), including GTE. The
effective date for the new federal universal service plan was 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.
However, on April 6, 2000, the FCC denied GTE's request for an extension of
time. The FCC expects state commissions, rather than the individual telephone
companies, to file a waiver of the May 1, 2000 deadline, if necessary. On April
28, 2000, the FCC granted temporary waivers to seven state commissions allowing
them to delay compliance up to six months. The remaining states that GTE
operates in have already adopted permanent deaveraged UNE rates.
International
Throughout the Latin American region, telecommunication carriers are facing
further market liberalization and new challenges and opportunities in 2000. The
Venezuelan government has delayed consideration of a new telecommunications law,
which will further open its market, due to the upcoming presidential election in
May 2000. In addition, Compania Anonima Nacional Telefonos de Venezuela (CANTV),
an affiliate of GTE, launched broadband access services and announced plans in
February 2000 to invest an additional $45 million to expand its offering during
2000.
GTE's wireless affiliate in Argentina, CTI Integrales, began offering nationwide
long-distance service in March 2000. GTE PCS, S.A., one of GTE's Argentine
subsidiaries, will launch wireless service in the metropolitan Buenos Aires
region in the second quarter of 2000.
Due to increased competition in the telecommunications industry in Canada, TELUS
announced its intention to acquire 70% of the QuebecTel Group (QuebecTel). GTE
currently owns approximately 27% of TELUS and 51% of QuebecTel. TELUS intends to
acquire 49% of QuebecTel from its public minority shareholders and 21% from GTE.
Following the transaction TELUS and GTE will own 70% and 30% of QuebecTel,
respectively. Due to GTE's current majority ownership, QuebecTel is considered a
foreign-owned entity under Canadian law and restricted from out-of-franchise
expansion. This acquisition releases QuebecTel from the out-of-franchise
restrictions and supports TELUS' national expansion strategy in Canada.
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, which GTE plans to reinvest in other growth
initiatives. Given the decision to sell, the Company stopped recording
depreciation expense for these assets. Accordingly, depreciation expense was
lowered by $79 million and $82 million for the first quarter of 2000 and 1999,
respectively.
In late 1999, GTE sold GTE Government Systems Corporation. Revenues for the
three months ended March 31, 1999 from GTE Government Systems were $323 million.
21
<PAGE> 22
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
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 condensed
consolidated balance sheets at March 31, 2000 and December 31, 1999. Revenues
from GTE Airfone were $34 million and $37 million for the quarters ended March
31, 2000 and 1999, 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. The net property, plant and equipment of $1.7 billion related to these
access lines is classified as "Net assets held for sale" in the condensed
consolidated balance sheets as of March 31, 2000 and December 31, 1999. 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
consolidated revenues and approximately 7% of consolidated operating income.
Management believes that future net income and EPS will not be affected as the
proceeds from these sales will be reinvested in other growth initiatives.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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.
In December 1999, the SEC 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 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. 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 certain regulatory approvals and
receipt of opinions that the merger will be tax-free. 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
22
<PAGE> 23
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
second quarter of 2000. In April 2000, we announced that the combined company
will be called Verizon Communications.
Future operating revenues, expenses and net income of the combined company may
not follow the same historical trends, or reflect the same dependence on
economic and competitive factors, as presented above in the discussion of GTE's
own historical results of operations and financial condition. You should refer
to our Current Report on Form 8-K dated May 11, 2000, for unaudited pro forma
financial information for the period ended December 31, 1999.
Further information about the proposed merger is provided in the discussion of
"Recent Developments" below.
RECENT DEVELOPMENTS
On April 10, 2000, GTE filed a Current Report on Form 8-K with the SEC
announcing that GTE's Board of Directors approved an increased capital
expenditure plan that will enable Genuity, formerly GTE Internetworking, to
accelerate the build-out of its network infrastructure. The build-out will
require capital expenditures of $1.8 billion to $2 billion in 2000, and $11
billion to $13 billion over five years. In addition, the Form 8-K also announced
that Genuity filed a registration statement on April 7, 2000 (that is not yet
effective) with the SEC for the initial public offering of the company's shares.
Proceeds will be used to offset a portion of these capital expenditures. The
transition of Genuity to a public company is part of a comprehensive proposal
filed with the FCC on January 27, 2000 (in order to complete the GTE/Bell
Atlantic merger), to resolve the issues associated with the long-distance and
Internet-related service offerings that GTE provides to consumers and
businesses. Since GTE took this action prior to the merger with Bell Atlantic,
the Company also provided guidance for GTE on a standalone basis. Assuming a
public offering of Genuity, the impact to GTE of the increase in capital
spending, as well as additional costs for customer acquisition will be as
follows:
o For the year 2000, GTE's revenue growth is expected to be in the high
single digits, consistent with prior guidance.
o Earnings per share growth for the full year on a standalone basis is
expected to be in the high single digits.
o Earnings per share growth in 2001 and 2002 is expected to be in the 10
percent range and will accelerate to at least the mid-teens thereafter.
On April 3, 2000, Bell Atlantic and Vodafone AirTouch plc combined in a joint
venture their U.S. cellular, paging and PCS businesses and formed a new
nationwide company, Verizon Wireless, that will offer wireless products and
services coast-to-coast. Upon completion of the GTE-Bell Atlantic merger, GTE's
domestic wireless assets will be combined with Verizon Wireless.
On March 31, 2000, TELUS announced a plan to acquire 70% of QuebecTel. GTE
currently owns approximately 27% of TELUS and 51% of QuebecTel. Under the
proposed transaction, TELUS would acquire 49% of QuebecTel from the public
minority shareholders and 21% from GTE. Following the transaction TELUS and GTE
will own 70% and 30% of QuebecTel, respectively. For further information, see
"Regulatory and Competitive Trends - International."
In November 1999, the Company announced that it had agreed to form a company
with Crown Castle International Corporation (CCIC) to own, operate and lease
space on the Company's existing network of towers. The newly created entity will
be controlled by CCIC, and up to 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 637 cellular towers in
exchange for approximately $198 million in cash and $51 million in equity. The
Company contributed 1,607 towers in exchange for $480 million in cash and $147
million in equity in the second phase, which closed effective April 1, 2000. The
Company will continue to own other cell site equipment, including switching
equipment, antennas and other electronic components.
23
<PAGE> 24
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
OTHER MATTERS
Consistent with industry practice, effective January 1, 2000, GTE changed its
method of recognizing directory publishing revenues. GTE Directories, a
wholly-owned subsidiary of GTE, publishes telephone directories for which it
receives advertising revenue. Under the previous method of revenue recognition,
approximately 60% of the advertising revenue for directories published in GTE's
operating areas was recognized as revenue in GTE's Network Services segment
results. The remaining 40% was recognized as revenue by GTE Directories and
included in the Company's Other National Operations results. Under the new
method, GTE Directories now recognizes 100% of the directory publishing
revenues. Network Services, in-turn, bills GTE Directories for customer listing
information and billing and collection services. This change has no impact on
GTE's consolidated results of operations. For segment reporting purposes, 1999
results for Network Services and GTE Directories (part of "Other National
Operations") in this Management's Discussion and Analysis and in Note 7 to the
condensed consolidated financial statements have been restated to conform to the
2000 presentation.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this Management's Discussion and Analysis, 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 outcome 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 toll service markets; 5) the
success of our efforts to expand 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; 6) 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 7) the ability of Verizon Wireless to
combine operations and obtain revenue enhancements and cost savings.
24
<PAGE> 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in GTE's market risks since December 31, 1999.
25
<PAGE> 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
10 Material Contracts - Letter Agreement between GTE Service
Corporation and James Attwood
11 Statement re: Calculation of Earnings per Common Share
12 Statement re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K dated April 10, 2000 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 May 11, 2000 under Item
5, "Other Events", and Item 7, "Financial Statements and Exhibits."
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GTE Corporation
-----------------------------------
(Registrant)
Date: May 12, 2000 /s/ Paul R. Shuell
------------------------- -----------------------------------
Paul R. Shuell
Vice President and Controller
Date: May 12, 2000 /s/ Marianne Drost
------------------------- -----------------------------------
Marianne Drost
Secretary
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10 Material Contracts - Letter Agreement between GTE Service Corporation and James Attwood
11 Statement re: Calculation of Earnings per Common Share
12 Statements re: Calculation of the Consolidated Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10
PERSONAL & CONFIDENTIAL
February 14, 2000
Mr. James Attwood
[Address]
[Address]
Dear Jim:
On behalf of the entire senior management team at GTE, I am pleased to offer you
this special compensation agreement (the "Agreement") with GTE Service
Corporation ("Service Corp.") in recognition of the critical nature of your
ongoing role with GTE.
SPECIAL ACCOUNT - Service Corp. will establish a special phantom account (the
"Special Account") on your behalf, credited, as of June 1, 1998, with $782,000.
The Special Account will be credited with interest, beginning June 1, 1998, at
an interest rate equal to the Moody's Rate (as defined in the Payment Deferral
Regulations for GTE Corporation's 1997 Executive Incentive Plan). So long as you
remain employed by Service Corp., you will vest in the balance of this Special
Account 10% per year at the conclusion of each of the first four years following
June 1, 1998 (e.g., you became 10% vested on May 31, 1999), and the remaining
60% will vest at the end of the fifth year (in other words, on May 31, 2003).
Notwithstanding the foregoing schedule, if a Change in Control occurs while you
are employed by GTE, you will be immediately 100% vested in the balance in the
Special Account. For this purpose, "Change in Control" is defined in accordance
with your Executive Severance Agreement, dated June 4, 1998, except that neither
the proposed merger between GTE and Bell Atlantic Corporation (the "Merger") nor
any event associated with the Merger (including the approval of the Merger by
GTE's shareholders) will be treated as a Change in Control. As the balance of
the Special Account becomes vested, the vested amount shall become payable to
you; provided, however, that you may elect to defer receipt of any payment due
to you with respect to your vested interest in the Special Account in accordance
with GTE's deferral regulations so long as you are actively employed by GTE at
the time such payment is due to be made
<PAGE> 2
Mr. James Attwood
February 14, 2000
Page 2
under this Agreement. The portion of the account which vested on May 31, 1999
will be treated as deferred with interest accruing at the Moody's Rate. You will
not, however, be eligible for a match under the GTE Equity Participation Program
for any such deferral. Neither the amounts credited to, nor the amounts paid in
respect of, the Special Account will be treated as compensation for purposes of
GTE's compensation and benefit programs.
ADDITIONAL PENSION AND BENEFIT CREDIT - Commencing as of June 1, 1998, you will
receive an extra year of service for each year for which you actually work for
GTE up to May 31, 2003, for purposes of determining (1) your pension benefits,
(2) your right to pension, post-retirement medical, and Executive Retirement
Life Insurance Plan ("ERLIP") benefits, and (3) whether you are a retiree for
purposes of determining the exercisability of stock options. The benefits
provided by this paragraph are referred to in this Agreement as "Special Service
Credit."
TERMINATION PROVISIONS -
If you incur a Qualifying Termination under the terms of your Executive
Severance Agreement you will be eligible for severance benefits pursuant to your
Executive Severance Agreement, except that, in lieu of the special pension
credit provided for by your Executive Severance Agreement, you will receive the
Special Service Credit provided for in this Agreement as if your employment had
continued through May 31, 2003, and you will become fully vested in and receive
the balance of the Special Account.
If you voluntarily terminate employment with GTE for any reason (other than a
Good Reason as defined in your Executive Severance Agreement), you will be
entitled to the previously vested portion of the Special Account. You will not
receive the unvested balance in the Special Account, and you will not receive
the Special Service Credit.
If you terminate employment with GTE by reason of your death or disability (as
determined by GTE), you (or, in the event of your death, your beneficiary) will
be entitled to the previously vested portion of the Special Account and the
Special Service Credit that has accrued as of your termination date. You will
not receive
<PAGE> 3
Mr. James Attwood
February 14, 2000
Page 3
the unvested balance in the Special Account, and you will not be entitled to any
benefits under your Executive Severance Agreement.
If your employment with GTE is terminated by GTE for Cause, you will be entitled
to the previously vested portion of the Special Account. You will not receive
the unvested balance in your Special Account, and you will not receive the
Special Service Credit. For purposes of this paragraph, "Cause" is defined as a
good faith determination by the Chief Executive Officer of GTE Corporation (or
its successor) ("CEO"), after consultation with outside legal counsel, that you
have committed an act or omission that is materially contrary to GTE's best
interests or that you materially breached any of the terms and conditions of
this Agreement.
RESCISSION - If GTE's Executive Compensation and Organizational Structure
Committee or its designee (the "ECC") determines in its sole discretion that any
provision of this Agreement would preclude the use of pooling of interest
accounting, the ECC may, in its sole discretion, eliminate or modify that
provision to the extent required to allow pooling of interest accounting.
RELEASE - You will not be entitled to any benefits under this Agreement
following the termination of your employment unless, at the time you terminate
your employment, you execute a release satisfactory to Service Corp. releasing
GTE, its affiliates, shareholders, directors, officers, employees,
representatives, and agents and their successors and assigns from any and all
employment-related claims you or your successors and beneficiaries might then
have against them (excluding any claims you might then have under this Agreement
or any employee benefit plan that is subject to the vesting standards imposed by
the Employee Retirement Income Security Act of 1974, as amended).
COVENANTS - In consideration for the benefits and agreements described above,
your continued access to highly confidential and proprietary information, and
your access to strategic confidential information related to the Merger, you
agree that you will execute and comply with the covenants set forth in Exhibit A
hereto, which are an integral part of this Agreement and subject to all of the
terms and conditions in this Agreement.
<PAGE> 4
Mr. James Attwood
February 14, 2000
Page 4
GTE - For purposes of this Agreement, including Exhibit A, "GTE" refers not only
to Service Corp., but also to GTE Corporation and all of its affiliates,
subsidiaries, related entities, lines of business and corporate successors
(including, following the Merger, Bell Atlantic Corporation and its
subsidiaries, affiliates, and related entities) and all business enterprises,
including joint ventures, in which it is a partner or has an ownership interest.
EFFECT ON EXECUTIVE SEVERANCE AGREEMENT - Nothing in this Agreement extends the
term of, or the protections afforded to you by, your Executive Severance
Agreement.
NONDUPLICATION OF BENEFITS/NO SEVERANCE - The payment of any severance or
separation benefits under this Agreement will fulfill all GTE obligations under
associated plans and programs. No provision of this Agreement will require GTE
to provide you with any payment, benefit, or grant that duplicates any payment,
benefit, or grant that you are entitled to receive under your Executive
Severance Agreement or under any GTE compensation or benefit plan, award
agreement, or other arrangement.
ASSIGNMENT - Service Corp. may, without your consent, assign its rights and
obligations under this Agreement to any other entity that is a part of GTE, and
if Service Corp. makes such an assignment, all references in this Agreement to
"Service Corp." shall be deemed to refer to the assignee. However, you may not
assign your rights and obligations under this Agreement.
GOVERNING LAW - To the extent not preempted by federal law, the provisions of
this Agreement will be construed and enforced in accordance with the laws of the
State of New York, excluding any conflicts or choice of law rule or principle
that might otherwise refer construction or interpretation of this provision to
the substantive law of another jurisdiction, and any dispute shall be brought in
a court sitting in New York City, New York.
SEVERABILITY - Should any part of this Agreement be held to be enforceable only
if modified, a court of competent jurisdiction is empowered to reform this
Agreement accordingly. In addition, any such modification or reformation of a
clause contained in this Agreement will not affect the validity of the remainder
of
<PAGE> 5
Mr. James Attwood
February 14, 2000
Page 5
this Agreement, the balance of which will continue to be binding upon the
parties hereto with any such modification to become a part hereof and treated as
though contained in this Agreement.
Jim, I believe this arrangement provides you and your family with financial
security as our industry and GTE evolve. We recognize the requirements that have
been and will be placed on you are significant. It is my hope that this
compensation arrangement provides you with a level of comfort to allow you to
continue to perform your responsibilities in an exemplary manner. Please
indicate your acceptance by signing below.
Sincerely yours,
J. Randall MacDonald
Executive Vice President -
Human Resources & Administration
c: C. R. Lee
I agree to the terms described above.
- ------------------------
James Attwood
- ------------------------
Date
<PAGE> 6
EXHIBIT A
COVENANTS
In consideration of the benefits described in the foregoing Agreement, continued
access to highly confidential and proprietary information, and access to
strategic confidential information related to the Disposition (as defined in the
foregoing Agreement), I, James Attwood, agree as follows:
(a) DISCLOSURE AND USE OF INFORMATION - I will not, directly or indirectly,
without the prior written consent of GTE, use, attempt to use, disclose, or
otherwise make known to any person or entity (other than GTE or otherwise as
authorized by GTE in the performance of services for GTE) any of the following,
in whole or in part:
(i) any and all knowledge, materials, or information of GTE which is
not generally made available to the public by GTE relating to, without
limitation, its business; properties; accounting; books and records;
trade secrets; reports; memoranda; correspondence; business,
regulatory, or marketing strategies; salaries; customers; suppliers;
know-how; inventions; products; discoveries; processes; or formulae;
as well as any other knowledge, materials, or information not
generally made available to the public by GTE that I may acquire or
may have acquired in the course of my employment with GTE; or
(ii) any knowledge or information of a confidential or proprietary
nature of third parties that I may acquire or may have acquired in the
course of my employment with GTE.
Upon termination of my employment with Service Corp. for any reason, and
thereafter, if any information specified in paragraph (i) or (ii) (hereinafter
collectively referred to as "Information") comes into or is discovered in my
possession, I shall immediately return to GTE all tangible and electronic
versions, in whole or in part, of such Information.
If I am required to disclose any Information pursuant to applicable laws,
regulations, or court order, I will immediately inform GTE thereof and afford
GTE the opportunity to limit such disclosure and/or to secure protective orders
before making such disclosure.
(b) INTERFERENCE WITH BUSINESS RELATIONS - I will not, without the prior written
consent of GTE, directly or indirectly and including, by way of example only, by
virtue of my role as an executive or employee of another company, during my
employment by Service Corp. and for the Designated Period (as defined below):
(i) solicit, influence, or induce any employee of GTE to engage in
any activity that paragraph (c), below, prohibits me from engaging in
or solicit, influence, or induce any employee of GTE to terminate his
or her
<PAGE> 7
employment with GTE (provided that the foregoing will not prohibit me
from providing references for former employees of GTE upon request
without using Information);
(ii) employ, retain, or offer to employ or retain any person who is
or was employed by GTE, unless such person has ceased to be employed
by GTE for a period of at least 2 years;
(iii) solicit, influence, or induce, or in any manner attempt to
solicit, influence, or induce, any client, customer or prospect of GTE
(1) to cease being, or not to become, a customer of GTE or (2) to
divert any business of such customer or prospect from GTE; or
(iv) otherwise interfere with, disrupt, or attempt to interfere with
or to disrupt the relationship, contractual or otherwise, between GTE
and any of its customers, clients, prospects, suppliers, consultants,
or employees.
(c) NONCOMPETITION - Because I will be given access to Information relating to
high-level decision-making (including, but not limited to, confidential analyses
of the evolving telecommunications market, confidential assessments of the
technical capabilities and strategic plans of GTE and Competing Businesses (as
defined below), and continued access to confidential and proprietary information
relating to GTE's businesses), which I agree to maintain in confidence and trust
for the benefit of GTE and which I will use only for the benefit of GTE, and
because the disclosure and/or use of such Information would be inevitable if I
am employed by or associated with a Competing Business (as defined below), I
agree as follows: During my employment with Service Corp. and for the Designated
Period (as defined below), except as specifically permitted in writing by the
CEO or after a Qualifying Termination following a Change in Control (as those
terms are defined in my Executive Severance Agreement, as modified by this
Agreement), I will not, directly or indirectly, engage in or provide services as
a partner, officer, director, trustee, proprietor, manager, supervisor,
executive, employee, paid or voluntary consultant, independent contractor, agent
or associate, shareholder of or member in, or participate in the ownership,
management, operation, or control of, any Competing Business.
(i) The foregoing provisions of this paragraph ("Noncompetition") will
not prohibit me from directly or indirectly owning, as a passive
investment, up to 2% of the outstanding shares of any Competing
Business (as defined above) that is listed or traded on a national
securities exchange or in an over-the-counter securities market,
provided that I am not involved, directly or indirectly, in the
management of or provide any services or consulting to such Competing
Business.
(ii) I recognize that GTE provides services to customers throughout
the United States and North America, as well as Latin America, Europe,
and many other parts of the world. GTE's business is international in
scope
<PAGE> 8
and continues to develop worldwide. I also recognize that, with the
passage of the Telecommunications Act of 1996, GTE's business and
business strategies are constantly evolving in a fiercely competitive,
worldwide market. Further, I acknowledge that my job responsibilities
and/or the Information that I will receive extend throughout the
entire geographic area in which GTE provides products or services.
(iii) I also acknowledge that the inevitable use and disclosure of
Information would result if I were to breach these Covenants.
The "Designated Period" means the period beginning on the date my employment
with Service Corp. terminates, and ending on the second anniversary of the date
my employment with Service Corp. terminates.
A "Competing Business" is defined as the following entities and their
affiliates, subsidiaries, related entities, lines of business and corporate
successors and all business enterprises, including joint ventures, in which any
of them is a partner or has an ownership interest: Sprint Corporation, AT&T
Corp., MCI WorldCom, Inc., LCI International, Inc., Cable & Wireless PLC, Bell
Atlantic Corp., SBC Communications Inc., U S West Inc., BellSouth Corp.,
Telefonica de Espana S.A., British Telecommunications PLC, DIGEX, Incorporated,
Qwest Communications International Inc., Cisco Systems, Inc., Ascend
Communications, Inc., Vodafone Airtouch, NEXTEL Communications, Inc., Teleport
Communications Group, Inc., PSINet Inc., Earthlink Network Inc., Yahoo Inc.,
Cylink Corporation, Microsoft Corporation and America Online, Inc.; provided
that Bell Atlantic Corp. shall be eliminated from the foregoing list on and
after the effective date of the Merger.
I acknowledge that the limitations and restrictions imposed by these Covenants
are reasonable in scope, duration, and geographic territory, and are designed to
provide GTE with limited, legitimate, and reasonable protection against
subsequent diminution of the value of its business attributable to any
disclosure or use of Information by me for the benefit of any Competing Business
(as defined above).
I further acknowledge that these Covenants are supported by sufficient
consideration, particularly in light of the Information to which I have been and
will be given access, as well as the professional and economic benefits,
including compensation and pension benefits, provided to me as a direct result
of my entering into this Agreement with Service Corp.
I also acknowledge that I have broad-based skills that will serve as the basis
for opportunities of employment with other businesses that are not Competing
Businesses (as defined above). I acknowledge that when my employment with
Service Corp. terminates, I will be able to earn a livelihood without violating
any of the terms of this Agreement.
<PAGE> 9
These Covenants will continue to apply after any expiration, termination, or
cancellation of this Agreement. My breach of any provision of these Covenants
will result in my immediate forfeiture of all rights under this Agreement, and I
will immediately return to Service Corp. any payment I have previously received
under this Agreement.
I agree that my breach of any of these Covenants will result in irreparable harm
and injury to GTE, that money damages alone will be insufficient or
undeterminable, and that such breach will entitle GTE, as a matter of right and
without limitation of any other remedy available to it, including the recovery
of damages, to immediate injunctive relief in any court of competent
jurisdiction, it being intended that all rights and remedies of GTE under this
Agreement are cumulative and nonexclusive of such other rights or remedies. I
further agree that I will pay for any applicable attorneys' fees and court costs
incurred by GTE if GTE is required to seek the enforcement of or to defend the
terms of this Agreement, including these Covenants.
The obligations imposed on me by these Covenants are in addition to, and not in
lieu of, any and all other policies and agreements of GTE regarding the
foregoing Covenants.
- ---------------------------
James Attwood
- ---------------------------
Date
<PAGE> 1
Exhibit 11
GTE CORPORATION AND SUBSIDIARIES
Calculation of Earnings (Loss) per Common Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
-------- --------
(In Millions, Except Per-Share Amounts)
<S> <C> <C>
Net Income Available to Common Shareholders:
Income before extraordinary charges $ 816 $ 912
Deduct - Redemption of subsidiary preferred stock (8) --
-------- --------
Income available to common shareholders before extraordinary charges (1) 808 912
Extraordinary charges (9) (30)
-------- --------
Net income available to common shareholders (1) $ 799 $ 882
======== ========
Average basic common shares 962 969
Adjustments to basic common shares:
Add - Employees' stock and stock option plans 6 7
-------- --------
Adjusted average diluted common shares 968 976
======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic (2)
Before extraordinary charges $ .84 $ .94
Extraordinary charges (.01) (.03)
-------- --------
Consolidated $ .83 $ .91
======== ========
Diluted (3)
Before extraordinary charges $ .84 $ .93
Extraordinary charges (.01) (.03)
-------- --------
Consolidated $ .83 $ .90
======== ========
</TABLE>
(1) Income and net income available to common shareholders is the same for
purposes of calculating basic and diluted earnings per share.
(2) Computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding during the period.
(3) Reflects the potential dilution that could occur if stock options or other
contracts to issue common stock were exercised.
<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,
Three Months Ended ---------------------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
------------------ ------- ------- ------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charges $ 816 $ 4,063 $ 2,492 $ 2,794 $ 2,798 $ 2,538
Add (deduct):
Income taxes 476 2,291 1,553 1,624 1,614 1,466
Interest expense 417 1,402 1,397 1,283 1,146 1,151
Capitalized interest (net of amortization) (13) (49) (7) (13) (35) (23)
Preferred stock dividends of Parent -- -- -- -- -- 6
Dividends on preferred securities of subsidiaries 9 86 98 101 106 98
Additional income requirement on preferred
dividends of subsidiaries 1 3 5 7 10 10
Minority interests 10 41 199 155 149 145
Portion of rent expense representing interest 39 145 155 133 131 128
------- ------- ------- ------- ------- -------
1,755 7,982 5,892 6,084 5,919 5,519
Deduct - Minority interests (7) (51) (329) (280) (263) (246)
------- ------- ------- ------- ------- -------
Adjusted earnings $ 1,748 $ 7,931 $ 5,563 $ 5,804 $ 5,656 $ 5,273
======= ======= ======= ======= ======= =======
Fixed charges:
Interest expense $ 417 $ 1,402 $ 1,397 $ 1,283 $ 1,146 $ 1,151
Dividends on preferred securities of subsidiaries 9 86 98 101 106 98
Additional income requirement on preferred
dividends of subsidiaries 1 3 5 7 10 10
Portion of rent expense representing interest 39 145 155 133 131 128
------- ------- ------- ------- ------- -------
466 1,636 1,655 1,524 1,393 1,387
Deduct - Minority interests (13) (44) (60) (66) (68) (70)
------- ------- ------- ------- ------- -------
Adjusted fixed charges $ 453 $ 1,592 $ 1,595 $ 1,458 $ 1,325 $ 1,317
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.86(a) 4.98(b) 3.49(c) 3.98 4.27 4.00
</TABLE>
(a) Excluding pretax special items of $(40) million, or $(20) million after-tax
(see Note 3 in Part I. Financial Information), the Company's ratio of
earnings to fixed charges for the three months ended March 31, 2000 would
have been 3.77.
(b) Excluding pretax special items of $(1,116) million, or $(651) million
after-tax, the Company's ratio of earnings to fixed charges for the year
ended December 31, 1999 would have been 4.28.
(c) Excluding pretax special charges of $755 million, or $482 million
after-tax, the Company's ratio of earnings to fixed charges for the year
ended December 31, 1998 would have been 3.96.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 344,000
<SECURITIES> 0
<RECEIVABLES> 5,590,000
<ALLOWANCES> 597,000
<INVENTORY> 735,000
<CURRENT-ASSETS> 8,768,000
<PP&E> 55,120,000
<DEPRECIATION> 31,734,000
<TOTAL-ASSETS> 51,014,000
<CURRENT-LIABILITIES> 17,334,000
<BONDS> 13,643,000
0
0
<COMMON> 50,000
<OTHER-SE> 10,649,000
<TOTAL-LIABILITY-AND-EQUITY> 51,014,000
<SALES> 6,100,000
<TOTAL-REVENUES> 6,100,000
<CGS> 2,662,000
<TOTAL-COSTS> 4,515,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 417,000
<INCOME-PRETAX> 1,292,000
<INCOME-TAX> 476,000
<INCOME-CONTINUING> 816,000
<DISCONTINUED> 0
<EXTRAORDINARY> 9,000
<CHANGES> 0
<NET-INCOME> 807,000
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.83
</TABLE>
