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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: DECEMBER 31, 1998
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 1-6417
GTE CALIFORNIA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-0510200
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 972-507-5000
(Former name, former address and former fiscal year, if changed since
last report)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
4 1/2% Series Cumulative Preferred Stock $20 Par Value
4 1/2% Series Cumulative Preferred Stock $20 Par Value
5 % Series Cumulative Preferred Stock $20 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The Company had 70,000,000 shares of $20 par value common stock outstanding at
February 28, 1999. The Company's common stock is 100% owned by GTE Corporation.
The aggregate market value of the registrant's voting preferred stock held by
non-affiliates at February 28, 1999, amounted to $4,241,121.
Document incorporated by reference: Proxy Statement for Annual Meeting of
Shareholders (Incorporated in Part III).
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PART I
Item 1. Business
GTE California Incorporated (the Company) was incorporated in California in
1929. The Company is a wholly-owned subsidiary of GTE Corporation (GTE) and
provides communications services in the states of California, Nevada and
Arizona.
The Company has a wholly-owned subsidiary, Contel Advance Systems, Inc., which
markets telecommunications customer premise equipment and other products and
services.
The Company's principal line of business is providing communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for industry. The Company provides local telephone
service within its franchise area and intraLATA (Local Access Transport Area)
toll service between the Company's facilities and the facilities of other
telephone companies within the Company's LATAs. InterLATA service to other
points in and out of the states in which the Company operates is provided
through connection with long distance carriers (IXCs). These common carriers
are charged fees (access charges) for interconnection to the Company's local
facilities. Business and residential customers also pay access charges to
connect to the local network to obtain long distance service. The Company earns
other revenues by providing such services as billing and collection and
operator services to IXCs. At December 31, 1998, the Company served 5,459,357
access lines in its service territories.
At December 31, 1998, the Company had 12,444 employees.
The Company has written agreements with the Communications Workers of America
(CWA) and the International Brotherhood of Electrical Workers (IBEW) covering
substantially all non-management employees. No agreements expired in 1998. The
new tentative agreement with the CWA is expected to be ratified by April 1999
and will expire in March 2002, and the agreement with the IBEW will expire in
September 1999. No significant problems are expected in reaching new
agreements.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
California, Nevada and Arizona for its intrastate business operations and by
the Federal Communications Commission (FCC) for its interstate operations.
As was the case in 1997, much of 1998's regulatory and legislative activity at
both the state and federal levels was 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.
INTERSTATE SERVICES
The Company has finalized interconnection agreements with various competitive
local exchange carriers (LECs). A number of these interconnection agreements
were the result of the arbitration process established by the
Telecommunications Act, and incorporated prices or terms and conditions based
upon the FCC rules that were subsequently overturned by the Eighth Circuit
Court (Eighth Circuit) in July 1997. The Company challenged a number of such
agreements in 1997. The Company's position in these challenges was supported by
the Eighth Circuit's July 1997 decision stating that the FCC had overstepped
its authority in several areas concerning implementation of the interconnection
provisions of the Telecommunications Act. In January 1999, the U.S. Supreme
Court (Supreme Court) reversed in part and affirmed in part the Eighth
Circuit's decisions. The Supreme Court reversed the Eighth Circuit on many of
the FCC rules related to pricing and costing, which had been previously
reversed by the Eighth Circuit on jurisdictional grounds. The pricing rules
established by the FCC will
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now be remanded back to the Eighth Circuit for a determination on the merits.
On the other hand, the Supreme Court vacated the FCC rules requiring incumbent
LECs to provide unbundled network elements (UNEs) to competitive LECs. This
latter ruling will be the subject of continued proceedings before the FCC and
the state commissions concerning what elements will have to be offered and
under what conditions. Pending the final rulemaking by the FCC on the
provisions of UNEs, the Company will continue to provide individual UNEs under
existing interconnection agreements.
Interstate Access Revision
Access charge reform continued to be a major issue in 1998. Effective January
1998, the FCC altered the structure of access charges that the Company collects
by reducing and restructuring the per minute charges paid by IXCs and
implementing new per-line charges. The FCC also created an access charge
structure that resulted in different access charges for primary and secondary
residential access lines and single and multi-line business access lines. In
aggregate, the annual reductions in usage sensitive access charges paid by IXCs
were intended to be offset by new per-line charges and the charges paid by
end-user customers. Effective July 1998, access charges were further reduced in
compliance with FCC requirements to reflect the impacts of access charge reform
and in making the Company's 1998 Annual Filing. Similar filings during 1997 had
already resulted in annual price reductions.
The FCC Access Reform Order released in May 1997 revamped the rate structure
through which LECs and IXCs charge customers for using the local phone network
to make long distance calls. GTE and numerous other parties challenged the
FCC's May 1997 Access Reform Order before the Eighth Circuit based on the
premise that the FCC did not eliminate the universal service subsidies hidden
within interstate access charges (as directed by the Telecommunications Act),
and the FCC created additional subsidy charges paid only by business and
multi-line residential customers. In August 1998, the Eighth Circuit denied all
of the petitions for review of the Access Reform Order.
In October 1998, the FCC began a proceeding to refresh the record used in the
1997 access charge reform proceedings. The FCC will determine whether to retain
or modify its market-based access charge reform approach, or to adopt a
prescriptive approach. In addition, the FCC will decide whether the 6.5%
productivity offset should be changed. An order is expected to be released
prior to July 1999.
Universal Service
In May 1997, the FCC released a decision relating to implementation of the
Telecommunications Act's provisions on universal service. GTE and numerous
other parties have challenged the FCC's decision before the U.S. Court of
Appeals for the Fifth Circuit on the grounds that the FCC did not follow the
requirements of the Telecommunications Act to develop a sufficient, explicit
and competitively neutral universal service program. Oral arguments were held
in December 1998. A final decision on the appeal is expected in 1999.
In its Order on Reconsideration of the May 1997 decision dated July 1998, the
FCC referred some key issues back to the Federal-State Joint Board (Joint
Board) on universal service. The Joint Board issued its Second Recommended
Decision in November 1998. The recommendations were generic in nature and
require further development. Comments and reply comments on the Joint Board's
recommendations were filed in late December 1998 and January 1999,
respectively. An order from the FCC is expected in the second quarter of 1999,
which may reject or change the Joint Board's recommendations.
In October 1998, the FCC issued an order selecting a cost model for universal
service and plans to select cost inputs by the first quarter of 1999 and a
revenue benchmark by mid-1999. For this reason, the FCC moved the
implementation date of the new universal service mechanism for non-rural
carriers to July 1999. The Company filed a Petition for Reconsideration in
December 1998, stating that the adopted model is incomplete and requires
additional time for proper evaluation. GTE is currently awaiting action from
the FCC.
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Payphone Orders
In June 1996, the FCC issued its first Report and Order implementing the
payphone compensation provisions of the Telecommunications Act. As part of the
overall goal of promoting competition among payphone service providers (PSPs),
this order mandated compensation to all PSPs for calls for which they were not
previously compensated originating from payphones, including credit card and
toll-free calls.
Subsequently, in October 1997, the FCC issued a second Report and Order to
address some of the issues vacated by the U.S. Court of Appeals in Washington,
D.C. concerning the FCC's first Report and Order mentioned above. In this
second Order, the FCC established a new non-coin per-call rate of 28.4 cents
for compensation that all PSPs were eligible to receive beginning in October
1997. In February 1999, after a court remand, the FCC ordered a new per-call
rate of 24.0 cents for compensation that all PSPs were eligible to receive
beginning in the second quarter of 1999. GTE will appeal the order.
In April 1998, the FCC issued an order, which granted the IXCs a waiver of the
per-call compensation requirement so that they may pay per-phone instead of
per-call compensation for the payphones for which the FCC had granted
technology waivers. The Company will receive per-phone compensation under this
waiver until the technology is installed on those payphones that are not
currently capable of measuring per-call detail.
Price Cap
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. This plan limits the rates a carrier may
charge rather than regulating on a traditional rate-of-return basis. The price
caps for a variety of service categories change annually using a price cap
index that is a function of inflation less a predetermined productivity offset.
The FCC's May 1997 Price Cap Order revised the price cap plan for incumbent
price cap LECs by adopting a productivity offset of 6.5%. In June of 1997, GTE
and several other parties challenged the FCC's Price Cap Order before the Court
of Appeals for the District of Columbia Circuit. The issue presented for review
was whether, in computing its new 6.5% productivity offset, the FCC arbitrarily
manipulated the evidence to achieve a predetermined outcome. Oral arguments are
set for the first half of 1999 with a decision expected later in the year.
Advanced Data Service
In August 1998, the FCC released a Memorandum Opinion and Order finding that
the pro-competitive provisions of the Telecommunications Act apply equally to
advanced services and to circuit-switched voice services. In comments filed in
September 1998, GTE outlined a comprehensive plan to rapidly deploy advanced
data services, such as asymmetric digital subscriber line (ADSL) service, in a
framework that permits real competition between incumbents and competitors. The
matter is pending before the FCC. In October 1998, the FCC found in favor of
GTE's position that ADSL service is interstate in nature and properly tariffed
at the federal level. The FCC specifically concluded that traffic to an
Internet Service Provider (ISP) does not terminate at the ISP's local server
but continues on to the ultimate destination or destinations at distant
interstate or international websites accessed by the end user.
Number Portability
In December 1998, the FCC released a Memorandum Opinion and Order regarding
cost recovery for the deployment of local number portability (LNP). This order
follows the FCC's Third Report and Order, which determined that carriers may
recover carrier specific costs directly related to the provision of long-term
LNP via a federally tariffed end-user monthly charge beginning no earlier than
February 1999. GTE filed a LNP tariff and instituted an end-user number
portability fee per line, which began appearing on customer bills after
February 1, 1999. The FCC is investigating the costs supporting the filing.
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Internet Service Traffic
On February 25, 1999, the FCC adopted an order finding that dial-up ISP-bound
traffic is largely interstate based on a traditional examination of the
end-to-end nature of the communication. In this ruling the FCC made it clear
that its actions will not subject the Internet to regulation or eliminate the
current Enhanced Service Provider exemption. The order stated that in the
absence of a federal rule that existing state arbitration decisions on the issue
may be appropriate under certain conditions. GTE is currently reviewing its
existing contracts and FCC orders and will take further action as necessary. The
order also contained a Notice of Proposed Rulemaking to consider the appropriate
compensation for this traffic in the future. GTE has appealed the FCC's
conclusion that it does not have to set a rate after it finds the traffic to be
jurisdictionally interstate.
Further information regarding the Company's activities with the various state
regulatory agencies is included in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations - "REGULATORY AND COMPETITIVE
TRENDS - INTRASTATE SERVICES."
OTHER DEVELOPMENTS
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies. Under the terms of the
agreement, which was unanimously approved by the boards of directors of both
companies, GTE shareholders will receive 1.22 shares of Bell Atlantic stock for
each GTE share they own. The merger is subject to shareholder and regulatory
approvals.
In April 1998, GTE announced the planned sale of local telephone exchanges that
have approximately 1.6 million access lines in 13 states. Specifically, access
lines in the states of California and Arizona have been identified for sale or
trade. The identified assets constituted approximately 1% of the average
switched access lines that the Company had in service during 1998. FCC and
state commission approvals of the access line sales will be required.
Preliminary meetings have been held with the regulators. Transition of these
properties to the buyers will occur during 1999 and into 2000.
During the first quarter of 1999, GTE also continued the review of its
operations and cost structure to ensure they were consistent with its growth
objectives. In connection with this ongoing review, GTE initiated voluntary and
involuntary employee separation programs that will result in a one-time charge
for GTE during the first quarter of 1999. The amount of the charge is not yet
determinable since it will depend on the level of voluntary separations. The
components of the charge will include separation and related benefits such as
outplacement and benefit continuation costs and the cost of assets or
facilities that will no longer be used by GTE. The impact of this announcement
on the Company is unknown at this time.
ENVIRONMENTAL MATTERS
GTE maintains monitoring and compliance programs related to environmental
matters. Currently, the Company, along with other unrelated corporations, has
been named as a potentially responsible party at a number of "Superfund sites."
These are sites which, although lawfully used in the past, were determined to
require remediation. Remediation activities by GTE also continue at some
present or formerly owned sites pursuant to other federal or state
environmental statutes or regulations. GTE has reviewed each site in which it
has an involvement to establish an expected remediation cost. Based on this
review, the remediation cost at any individual site or at all sites in the
aggregate is not expected to be material. Factors used to evaluate expected GTE
costs include remediation and investigation cost estimates as well as legal
fees, the number of viable parties involved, the degree of GTE's involvement
and past experience. No present value discounting is used. Although the
complexity of environmental regulations and the widespread imposition of
multi-party joint and several liability at Superfund sites make it difficult to
assess the Company's share of liability, management believes it has made
adequate provision in the financial statements.
The Company's annual expenditures for site cleanups and environmental
compliance have not been and are not expected to be material. Costs incurred
include the Company's share of cleanup expenses for Superfund sites and outlays
required to keep existing operations in compliance with environmental
regulations.
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Item 2. Properties
The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services. All of these
properties, located in the states of California, Nevada and Arizona, are
generally in good operating condition and are adequate to satisfy the needs of
the business. Substantially all of the Company's property is subject to the
liens of its respective mortgages securing funded debt. From January 1, 1994 to
December 31, 1998, the Company made capital expenditures of $2.7 billion for
new plant and facilities required to meet telecommunication service needs and
to modernize plant and facilities. These additions were equal to 26% of gross
plant of $10.5 billion at December 31, 1998.
Item 3. Legal Proceedings
There are no pending legal proceedings which would have a material impact on
the Company's consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market information is omitted since the Company's common stock is wholly-owned
by GTE.
SHAREHOLDER SERVICES
BankBoston, N.A., Transfer Agent and Registrar for GTE and the Company's common
stock and preferred stock, should be contacted with any questions relating to
shareholder accounts. This includes the following:
o Account information o Statements and reports
o Dividends o Change of address
o Market prices o Lost certificates
o Transfer instructions
Shareholders may call toll-free at 800/225-5160 anytime, seven days a week.
Customer Service Representatives are available Monday through Friday between
the hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States call
781/575-2990.
Or write to BankBoston, N.A., c/o EquiServe, L.P., P.O. Box 8031, Boston, MA
02266-8031.
Shareholders with e-mail addresses can send inquiries to
http://www.equiserve.com
For overnight delivery services, use the following address:
BankBoston, N.A.
c/o EquiServe, L.P.
Blue Hills Office Park
150 Royall Street
Mail Stop 4502-60
Canton, MA 02021
The BankBoston, N.A. address where shareholders, banks and brokers may deliver
certificates is Securities Transfers and Reporting Services, 100 William St.,
Galleria, New York, NY 10038.
PARENT COMPANY ANNUAL REPORT
To obtain a copy of the 1998 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call 800/225-5160.
INFORMATION VIA THE INTERNET
World Wide Web users can access information about GTE at: http://www.gte.com
OTHER SECURITIES
Questions regarding the bonds, debentures and preferred securities of the
Company should be directed to Treasury Department-Capital Markets, GTE
Corporation, 1255 Corporate Drive, Irving, TX 75038, or call 972/507-5038.
PRODUCTS AND SERVICES HOTLINE
Shareholders may call 800/828-7280 to receive information concerning GTE
products and services.
DIVERSITY AT GTE
The Company and GTE strive to be a workplace of choice in which people of
diverse backgrounds are valued, challenged, acknowledged and rewarded, leading
to higher levels of fulfillment and productivity. A copy of our Diversity at
GTE brochure is available upon request from the GTE Corporate Secretary's
Office.
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Item 6. Selected Financial Data (See Note 3 to the Company's consolidated
financial statements included in Item 8)
GTE California Incorporated and Subsidiaries
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Selected Income Statement Items (a) 1998 1997 1996 1995 (b) 1994
- ----------------------------------- ---------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Revenues and sales $ 3,369.6 $ 3,322.4 $ 3,141.2 $ 3,144.8 $ 3,319.9
Operating costs and expenses 2,117.8 2,186.5 2,198.6 2,454.6 2,374.2
---------------------------------------------------------------------
Operating income 1,251.8 1,135.9 942.6 690.2 945.7
Interest - net 118.4 101.9 98.6 111.8 105.8
Other - net (2.7) 0.7 (1.1) -- --
Income taxes 454.6 390.5 329.3 235.5 339.6
---------------------------------------------------------------------
Income before extraordinary charges 681.5 642.8 515.8 342.9 500.3
Extraordinary charges -- -- -- (711.1) --
---------------------------------------------------------------------
Net income (loss) $ 681.5 $ 642.8 $ 515.8 $ (368.2) $ 500.3
=====================================================================
Dividends declared on common stock $ 711.5 $ 659.6 $ 504.2 $ 325.9 $ 422.8
Dividends declared on preferred stock 2.4 3.2 4.8 4.8 4.9
Selected Balance Sheet Items
- ----------------------------
Property, plant and equipment, net $ 3,912.1 $ 3,799.3 $ 3,754.6 $ 3,994.6 $ 5,361.5
Total assets 5,605.5 5,320.3 5,083.4 5,345.5 6,718.7
Long-term debt 1,691.2 1,466.7 1,280.2 1,375.8 1,370.2
Shareholders' equity 1,763.4 1,795.8 1,848.6 1,841.7 2,540.6
</TABLE>
(a) Per share data is omitted since the Company's common stock is 100% owned
by GTE Corporation.
(b) In the fourth quarter of 1995, the Company discontinued the use of
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation," resulting in a non-cash,
after-tax extraordinary charge of $710.9 million (net of tax benefits of
$493.9 million). The charge primarily represented a reduction in the net
book value of telephone plant and equipment through an increase in
accumulated depreciation. In addition, during 1995, the Company redeemed
long-term debt prior to stated maturity, resulting in an after-tax
extraordinary charge of $0.2 million.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BUSINESS OPERATIONS
GTE California Incorporated (the Company) provides a wide variety of
communications services ranging from local telephone service for the home and
office to highly complex voice and data services for various industries. At
December 31, 1998, the Company served 5,459,357 access lines in the states of
California, Nevada and Arizona. The Company is a wholly-owned subsidiary of GTE
Corporation (GTE).
On September 10, 1992, the Company entered into an Agreement of Merger with
Contel of California, Inc., a California corporation (Contel California). The
agreement provided that Contel California would merge with and into the
Company, with the Company to be the surviving corporation in the merger (the
Merger). On October 5, 1995, the Governor of the State of California signed a
law which clarified the authority of the California Public Utilities Commission
(CPUC) to allocate the merger savings between ratepayers and shareholders with
not less than 50% going to the ratepayers of the merged company. On April 10,
1996, in accordance with the enacted legislation, the CPUC granted final
approval of the Merger. As part of the order, the CPUC ordered $69.7 million of
merger savings to be returned to the ratepayers of both companies, which
represented half of the total savings expected to be realized by the Merger
over a five-year period. The Company received approval to return these savings
to local, toll and access customers beginning in mid-1996. On December 16,
1997, the CPUC approved a stipulation agreement, which included the
incorporation of the remaining merger savings into the Company's prospective
rates.
The Merger was completed on December 31, 1996 and was accounted for in a manner
consistent with a transfer of entities under common control, which is similar
to a "pooling of interests." Accordingly, the financial statements include the
combined historical results of operations and financial position of the Company
and Contel California as though the Merger had occurred at the beginning of
each period presented and reflect the elimination of all significant
intercompany transactions.
RESULTS OF OPERATIONS
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net income $ 681.5 $ 642.8 $ 515.8
</TABLE>
Net income increased in 1998 by $38.7 million or 6%, primarily as the result of
growth in network access services revenues and other services and sales
revenues combined with lower operating costs and expenses, which is partially
offset by reduced toll revenues.
Net income increased 25% or $127.0 million during 1997, largely due to revenue
growth from local and network access services revenues and the impact of the
stipulation agreement approved by the CPUC in December 1997, mentioned
previously.
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<TABLE>
<CAPTION>
REVENUES AND SALES
(Dollars in Millions) Increase Percent
1998 1997 (Decrease) Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Local services $ 1,434.4 $ 1,477.1 $ (42.7) (3)%
Network access services 1,045.6 924.6 121.0 13%
Toll services 303.0 399.1 (96.1) (24)%
Other services and sales 586.6 521.6 65.0 12%
--------------- --------------- ---------------
Total revenues and sales $ 3,369.6 $ 3,322.4 $ 47.2 1%
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Millions) Increase Percent
1997 1996 (Decrease) Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Local services $ 1,477.1 $ 1,333.2 $ 143.9 11%
Network access services 924.6 870.5 54.1 6%
Toll services 399.1 490.1 (91.0) (19)%
Other services and sales 521.6 447.4 74.2 17%
--------------- --------------- ---------------
Total revenues and sales $ 3,322.4 $ 3,141.2 $ 181.2 6%
=============== =============== ===============
</TABLE>
Local Services Revenues
Local services revenues are based on fees charged to customers for providing
local-exchange service within designated franchise areas. Local services
revenues decreased in 1998 due to: (1) a decline in non-recurring charges paid
by customers of $26.9 million; (2) decreases in miscellaneous local services
such as private line revenues, contracted voicemail, directory assistance and
operator services and Extended Area Service (EAS) transitional support payments,
which aggregated to $32.1 million; and (3) a $17.7 million decrease from the
impact of the CPUC Implementation Rate Design (IRD) recorded in 1997. As an
offset to these decreases in local services revenues, the Company's access lines
grew by 4% generating $17.2 million in additional basic local revenues, $18.9
million in CentraNet(R) services growth and $9.3 million from Integrated
Services Digital Network (ISDN) and Digital Channel Services (DCS).
In the fourth quarter of 1997, the CPUC approved a stipulation agreement in
which the remaining merger expense savings will be incorporated into the
Company's prospective rates, as discussed above. Accordingly, the Company
reversed the remaining reserve balance, resulting in a $91.5 million favorable
impact on the 1997 revenues compared to 1996. Excluding the effect of this
item, local services revenues in 1997 increased 4% or $52.4 million. Access
line growth of 5% in 1997 generated additional revenues of $30.8 million from
basic local services, $15.9 million from CentraNet(R) services and $11.4
million from ISDN and DCS growth. Demand for custom calling features, such as
SmartCall(R) and CLASS services, contributed $25.3 million to the increase. In
addition, the Company's 1997 California Price Cap Index generated $25.1 million
of additional revenues, partially offset by $19.4 million in lower revenues
resulting from the removal of EAS transitional support payments. The 1997
increase was also partially offset by settlement reserves recorded in 1997
totaling $11.5 million, reduced support payments of $11.4 million received from
the California High Cost Fund, a fund established to subsidize rural providers
for the costs of providing universal service, and a net reduction of $11.3
million associated with the CPUC's IRD ruling in 1996.
Network Access Services Revenues
Network access services revenues are based on fees charged to long distance
carriers (IXCs) that use the Company's local-exchange network in providing
long distance services. In addition, residential and business customers pay
end-user access fees to connect to the local network to obtain long distance
service. Cellular service providers and other local-exchange carriers also pay
access charges for cellular and intraLATA (Local Access Transport Area) toll
calls carried by the Company. The increase in network access services revenues
in 1998 is primarily due to greater demand for increased bandwidth services by
high capacity users, which resulted in $77.8 million in special access revenue
growth. In addition, revenues increased $54.7 million as a result of intrastate
sharing agreements and $58.1 million due to a 12% increase in access minutes
of use. Offsetting these increases is a decrease of $44.0 million
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resulting from the impact of interstate access rate reductions and sharing
provisions from the 1997 and 1998 FCC price caps. In 1997, the Federal
Communications Commission (FCC) ordered significant changes that altered the
structure of access charges collected by the Company. These changes, effective
January 1, 1998, resulted in a $25.3 million decrease in network access
services revenues in 1998.
Increased demand in 1997 for access services by IXCs resulted in a 21% increase
in minutes of use and $85.4 million in additional revenues. Special access
revenues grew $26.0 million due to greater demand for increased bandwidth
services by high capacity users. These increases were partially offset by a
$26.4 million revenue reduction from the sharing provisions and rate changes
associated with the FCC 1996 and 1997 price cap filings. In addition, revenues
from intrastate sharing arrangements and end-user access charges declined by
$11.6 million and $6.0 million, respectively.
For further explanation of FCC actions see "REGULATORY AND COMPETITIVE TRENDS -
INTERSTATE SERVICES."
Toll Services Revenues
The Company's toll services revenues are based on fees charged for service
beyond a customer's local calling area but within the LATA. The decrease of
toll services revenues in 1998 compared to 1997 is primarily due to $103.2
million in reduced toll volumes, resulting from intraLATA toll competition.
Partially offsetting this decrease is the effect of the annual revision of the
California Rate Index, which produced a favorable impact of $15.2 million.
The 1997 decrease reflects reduced toll services revenues of $80.9 million
resulting from increased intraLATA toll competition and the impact of optional
discount calling plans, which effectively lowered intrastate long distance
rates. The decrease also includes a net reduction of $10.8 million associated
with the CPUC's IRD ruling in 1996, partially offset by the positive impact of
the $8.6 million reserve recorded in 1996 for operating tax settlements.
Other Services and Sales Revenues
The increase in other services and sales revenues in 1998 compared to 1997 is
partially due to a favorable impact of $12.8 million associated with the FCC's
order increasing payphone compensation from IXCs (as discussed in "REGULATORY
AND COMPETITIVE TRENDS - INTERSTATE SERVICES.") Higher usage and recurring
charges related to wireless products and services increased revenues by $16.9
million, with additional growth of $16.9 million from billing and collection
services. In addition, equipment rental revenues grew by $6.7 million in 1998
and demand for voice messaging services contributed to $5.1 million revenue
growth.
The 1997 increase reflects a $14.3 million favorable impact from the FCC's
order on payphone interim compensation (as discussed in "REGULATORY AND
COMPETITIVE TRENDS - INTERSTATE SERVICES") and an $18.8 million growth in
revenues from Emergency 911 equipment and voice messaging services. Other
factors contributing to the increase include: $11.5 million from higher billing
and collection revenues, $5.4 million from growth in wireless products and
services revenues, and $5.1 million from increased sales of products and
services to high capacity users. In addition, the revenue reduction recorded in
1996 related to a settlement on the State of California's telecommunications
network (CALNET) project produced a $9.5 million favorable impact on 1997
revenues.
10
<PAGE> 12
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
(Dollars in Millions) Increase Percent
1998 1997 (Decrease) Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Cost of services and sales $ 1,003.1 $ 1,056.4 $ (53.3) (5)%
Selling, general and administrative 525.8 511.8 14.0 3%
Depreciation and amortization 588.9 618.3 (29.4) (5)%
--------------- --------------- ---------------
Total operating costs and expenses $ 2,117.8 $ 2,186.5 $ (68.7) (3)%
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Millions) Increase Percent
1997 1996 (Decrease) Change
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Cost of services and sales $ 1,056.4 $ 1,052.5 $ 3.9 --
Selling, general and administrative 511.8 477.7 34.1 7%
Depreciation and amortization 618.3 668.4 (50.1) (7)%
--------------- --------------- ---------------
Total operating costs and expenses $ 2,186.5 $ 2,198.6 $ (12.1) (1)%
=============== =============== ===============
</TABLE>
The 1998 decrease in total operating costs and expenses is primarily due to
lower benefit costs of $82.1 million, including the favorable true-up of
certain employee benefits, and other liabilities. A decrease of $19.1 million
due to higher selling and marketing costs in 1997, resulting from efforts to
stimulate demand for enhanced services and preserve market share, also
contributed to lower operating costs. Partially offsetting these decreases are
$30.3 million in charges related to corrective action taken with Street Address
directories (see section entitled "OTHER DEVELOPMENTS") and increased costs
from an affiliate for customer information pages included in the Company's
White Pages directories. Pension settlement gains of $16.8 million recorded in
1997, which resulted from lump-sum payments from the Company's pension plans,
partially offset the decreases noted previously. In addition, the Universal
Service Fund, which established the support mechanisms to ensure continued
availability of affordable local telephone service and created new programs to
provide discounted telecommunications services to schools, libraries and rural
health care providers, increased operating costs and expenses by $13.9 million
in 1998 compared to 1997. The 1998 depreciation and amortization expense
decreased primarily as the result of lower depreciation rates, reflecting
higher net salvage values of certain telephone plant and equipment that went
into effect in the third quarter of 1997.
A change in depreciation rates to reflect higher net salvage values related to
certain telephone plant and equipment caused a $59.9 million decrease in 1997
depreciation expense, which was partially offset by a $9.9 million increase
related to 1997 additions to plant. A net decrease in 1997 pension expense
resulting from gains on lump-sum payments from the Company's benefit plans,
offset by the impact of other pension-related adjustments recorded in 1997,
reduced total operating costs expenses by $49.2 million. In addition, billing
and collection expense, order processing costs, and operating taxes were lower
in 1997 by a combined $21.6 million. These decreases were partially offset by
$30.1 million in higher labor and benefits costs, and a $38.3 million increase
in selling and marketing expenses resulting from efforts aimed at stimulating
customer demand for enhanced services and preserving market share in an
increasingly competitive environment. Total expense reductions were also
partially offset by the negative impact of the reversal, in 1996, of the $28.9
million reserve established for the Communications Workers of America
arbitration and $9.2 million in higher data processing costs.
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
(Dollars in Millions) Percent
1998 1997 Increase Change
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest - net $ 118.4 $ 101.9 $ 16.5 16%
Income taxes 454.6 390.5 64.1 16%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Millions) Percent
1997 1996 Increase Change
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest - net $ 101.9 $ 98.6 $ 3.3 3%
Income taxes 390.5 329.3 61.2 19%
</TABLE>
11
<PAGE> 13
Interest - net increased in 1998 compared to 1997, as well as 1997 compared to
1996. The increases are primarily attributable to higher average debt levels.
Income tax expense increased in 1998 primarily as a result of an increase in
pretax income and other tax adjustments. The 1997 increase in income tax
expense is primarily due to a corresponding increase in pretax income,
partially offset by adjustments to prior years' tax liabilities.
CAPITAL RESOURCES AND LIQUIDITY
Management believes the Company has adequate internal and external resources
available to meet ongoing operating requirements for construction of new plant,
modernization of facilities and payment of dividends. The Company generally
funds its construction program from operations, although external financing is
available. Short-term financings can be obtained through borrowings from the
Company's parent, GTE, or GTE Funding Incorporated, an affiliate of the
Company. The Company participates with other affiliates in a $1.5 billion,
364-day syndicated revolving line of credit and has access to an additional
$1.0 billion in short-term liquidity through GTE and GTE Funding Incorporated's
bi-lateral revolving lines of credit. The Company also has an existing shelf
registration statement outstanding for an additional $275.0 million of
debentures.
The Company's primary source of funds during 1998 was cash from operations of
$1.1 billion compared to $1.0 billion in 1997. The increase is primarily
reflective of improved results from operations and lower working capital
requirements.
Net cash used in investing activities was $688.0 million and $625.6 million
during 1998 and 1997, respectively. The Company's capital expenditures during
1998 totaled $692.9 million compared to $629.4 million in 1997. The majority of
new investment is being made to meet the demands of growth, modernize
facilities and develop and install new software, all of which are required to
support new products and enhanced services. The Company's capital expenditures
for 1999 are expected to be slightly less than the 1998 level.
Cash used in financing activities was $394.5 million in 1998 compared to $418.8
million in 1997. This included dividend payments of $666.7 million in 1998
compared to $617.0 million in 1997. Short-term financings, including the net
change in affiliate notes, increased $224.6 million in 1998 compared to an
increase of $221.9 million in 1997. The Company retired $150.2 million of
long-term debt and preferred stock in 1998 compared to total retirements of
$318.8 million in 1997. The Company issued $200.0 million of 6.75% debentures
in May 1998 to repay short-term borrowings. The Company issued $300.0 million
of 6.70% debentures in September 1997 for repayment of short-term borrowings
incurred to finance the Company's construction program and for general
corporate purposes. During 1997, the Company entered into forward interest rate
swap agreements and forward contracts to hedge against changes in market
interest rates of planned long-term debt issuances. These agreements were
completed in May 1998. A gain of approximately $0.2 million occurred upon
settlement of these agreements and is being amortized over the life of the
associated long-term debt issuances as an offset to interest expense.
REGULATORY AND COMPETITIVE TRENDS
The Company is subject to regulation by the regulatory bodies of the states of
California, Nevada and Arizona for its intrastate business operations and by
the FCC for its interstate operations.
As was the case in 1997, much of 1998's regulatory and legislative activity at
both the state and federal levels was 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.
12
<PAGE> 14
INTERSTATE SERVICES
The Company has finalized interconnection agreements with various competitive
local exchange carriers (LECs). A number of these interconnection agreements
were the result of the arbitration process established by the
Telecommunications Act, and incorporated prices or terms and conditions based
upon the FCC rules that were subsequently overturned by the Eighth Circuit
Court (Eighth Circuit) in July 1997. The Company challenged a number of such
agreements in 1997. The Company's position in these challenges was supported by
the Eighth Circuit's July 1997 decision stating that the FCC had overstepped
its authority in several areas concerning implementation of the interconnection
provisions of the Telecommunications Act. In January 1999, the U.S. Supreme
Court (Supreme Court) reversed in part and affirmed in part the Eighth
Circuit's decisions. The Supreme Court reversed the Eighth Circuit on many of
the FCC rules related to pricing and costing, which had been previously
reversed by the Eighth Circuit on jurisdictional grounds. The pricing rules
established by the FCC will now be remanded back to the Eighth Circuit for a
determination on the merits. On the other hand, the Supreme Court vacated the
FCC rules requiring incumbent LECs to provide unbundled network elements (UNEs)
to competitive LECs. This latter ruling will be the subject of continued
proceedings before the FCC and the state commissions concerning what elements
will have to be offered and under what conditions. Pending the final rulemaking
by the FCC on the provisions of UNEs, the Company will continue to provide
individual UNEs under existing interconnection agreements.
Interstate Access Revision
Access charge reform continued to be a major issue in 1998. Effective January
1998, the FCC altered the structure of access charges that the Company collects
by reducing and restructuring the per minute charges paid by IXCs and
implementing new per-line charges. The FCC also created an access charge
structure that resulted in different access charges for primary and secondary
residential access lines and single and multi-line business access lines. In
aggregate, the annual reductions in usage sensitive access charges paid by IXCs
were intended to be offset by new per-line charges and the charges paid by
end-user customers. Effective July 1998, access charges were further reduced in
compliance with FCC requirements to reflect the impacts of access charge reform
and in making the Company's 1998 Annual Filing. Similar filings during 1997 had
already resulted in annual price reductions.
The FCC Access Reform Order released in May 1997 revamped the rate structure
through which LECs and IXCs charge customers for using the local phone network
to make long distance calls. GTE and numerous other parties challenged the
FCC's May 1997 Access Reform Order before the Eighth Circuit based on the
premise that the FCC did not eliminate the universal service subsidies hidden
within interstate access charges (as directed by the Telecommunications Act),
and the FCC created additional subsidy charges paid only by business and
multi-line residential customers. In August 1998, the Eighth Circuit denied all
of the petitions for review of the Access Reform Order.
In October 1998, the FCC began a proceeding to refresh the record used in the
1997 access charge reform proceedings. The FCC will determine whether to retain
or modify its market-based access charge reform approach, or to adopt a
prescriptive approach. In addition, the FCC will decide whether the 6.5%
productivity offset should be changed. An order is expected to be released
prior to July 1999.
Universal Service
In May 1997, the FCC released a decision relating to implementation of the
Telecommunications Act's provisions on universal service. GTE and numerous
other parties have challenged the FCC's decision before the U.S. Court of
Appeals for the Fifth Circuit on the grounds that the FCC did not follow the
requirements of the Telecommunications Act to develop a sufficient, explicit
and competitively neutral universal service program. Oral arguments were held
in December 1998. A final decision on the appeal is expected in 1999.
In its Order on Reconsideration of the May 1997 decision dated July 1998, the
FCC referred some key issues back to the Federal-State Joint Board (Joint
Board) on universal service. The Joint Board issued its Second Recommended
Decision in November 1998. The recommendations were generic in nature and
require further
13
<PAGE> 15
development. Comments and reply comments on the Joint Board's recommendations
were filed in late December 1998 and January 1999, respectively. An order from
the FCC is expected in the second quarter of 1999, which may reject or change
the Joint Board's recommendations.
In October 1998, the FCC issued an order selecting a cost model for universal
service and plans to select cost inputs by the first quarter of 1999 and a
revenue benchmark by mid-1999. For this reason, the FCC moved the
implementation date of the new universal service mechanism for non-rural
carriers to July 1999. The Company filed a Petition for Reconsideration in
December 1998, stating that the adopted model is incomplete and requires
additional time for proper evaluation. GTE is currently awaiting action from
the FCC.
Payphone Orders
In June 1996, the FCC issued its first Report and Order implementing the
payphone compensation provisions of the Telecommunications Act. As part of the
overall goal of promoting competition among payphone service providers (PSPs),
this order mandated compensation to all PSPs for calls for which they were not
previously compensated originating from payphones, including credit card and
toll-free calls.
Subsequently, in October 1997, the FCC issued a second Report and Order to
address some of the issues vacated by the U.S. Court of Appeals in Washington,
D.C. concerning the FCC's first Report and Order mentioned above. In this
second Order, the FCC established a new non-coin per-call rate of 28.4 cents
for compensation that all PSPs were eligible to receive beginning in October
1997. In February 1999, after a court remand, the FCC ordered a new per-call
rate of 24.0 cents for compensation that all PSPs were eligible to receive
beginning in the second quarter of 1999. GTE will appeal the order.
In April 1998, the FCC issued an order, which granted the IXCs a waiver of the
per-call compensation requirement so that they may pay per-phone instead of
per-call compensation for the payphones for which the FCC had granted
technology waivers. The Company will receive per-phone compensation under this
waiver until the technology is installed on those payphones that are not
currently capable of measuring per-call detail.
Price Cap
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. This plan limits the rates a carrier may
charge rather than regulating on a traditional rate-of-return basis. The price
caps for a variety of service categories change annually using a price cap
index that is a function of inflation less a predetermined productivity offset.
The FCC's May 1997 Price Cap Order revised the price cap plan for incumbent
price cap LECs by adopting a productivity offset of 6.5%. In June of 1997, GTE
and several other parties challenged the FCC's Price Cap Order before the Court
of Appeals for the District of Columbia Circuit. The issue presented for review
was whether, in computing its new 6.5% productivity offset, the FCC arbitrarily
manipulated the evidence to achieve a predetermined outcome. Oral arguments are
set for the first half of 1999 with a decision expected later in the year.
Advanced Data Service
In August 1998, the FCC released a Memorandum Opinion and Order finding that
the pro-competitive provisions of the Telecommunications Act apply equally to
advanced services and to circuit-switched voice services. In comments filed in
September 1998, GTE outlined a comprehensive plan to rapidly deploy advanced
data services, such as asymmetric digital subscriber line (ADSL) service, in a
framework that permits real competition between incumbents and competitors. The
matter is pending before the FCC. In October 1998, the FCC found in favor of
GTE's position that ADSL service is interstate in nature and properly tariffed
at the federal level. The FCC specifically concluded that traffic to an
Internet Service Provider (ISP) does not terminate at the ISP's local server
but continues on to the ultimate destination or destinations at distant
interstate or international websites accessed by the end user.
14
<PAGE> 16
Number Portability
In December 1998, the FCC released a Memorandum Opinion and Order regarding
cost recovery for the deployment of local number portability (LNP). This order
follows the FCC's Third Report and Order, which determined that carriers may
recover carrier specific costs directly related to the provision of long-term
LNP via a federally tariffed end-user monthly charge beginning no earlier than
February 1999. GTE filed a LNP tariff and instituted an end-user number
portability fee per line, which began appearing on customer bills after
February 1, 1999. The FCC is investigating the costs supporting the filing.
Internet Service Traffic
On February 25, 1999, the FCC adopted an order finding that dial-up ISP-bound
traffic is largely interstate based on a traditional examination of the
end-to-end nature of the communication. In this ruling the FCC made it clear
that its actions will not subject the Internet to regulation or eliminate the
current Enhanced Service Provider exemption. The order stated that in the
absence of a federal rule that existing state arbitration decisions on the issue
may be appropriate under certain conditions. GTE is currently reviewing its
existing contracts and FCC orders and will take further action as necessary. The
order also contained a Notice of Proposed Rulemaking to consider the appropriate
compensation for this traffic in the future. GTE has appealed the FCC's
conclusion that it does not have to set a rate after it finds the traffic to be
jurisdictionally interstate.
INTRASTATE SERVICES
The Company provides local-exchange services to customers within its designated
franchise areas and toll services within designated geographic areas called
Local Access and Transport Areas (LATAs) under agreements with connecting LECs
in conformity with state regulatory orders. The Company also provides long
distance access services directly to IXCs and other customers who provide
service between LATAs.
New Regulatory Framework
The 1998 intrastate price cap filing did not impact revenues but included rate
adjustments resulting from rate and surcharge integration with tariffs relating
to the former Contel California service territories. The 1999 price cap filing
will reduce revenues by $47.2 million and the surcredit was implemented in
February 1999.
A final decision in the Third Triennial Review was issued in October 1998. This
decision imposed (1) continued suspension of the productivity factor aspect
until 2001; (2) suspension of sharing until 2001; (3) elimination of annual
review and approval of depreciation rate changes; and (4) basic residential
service capped at current rates through 2001.
Recovery of Implementation Costs
In compliance with a March 1996 decision, the Company established a memorandum
account to record actual costs incurred to implement competitive local exchange
service from January 1996. In November 1998 the CPUC issued a decision that
addressed the following issues: (1) definition of implementation costs; (2)
rationale for cost recovery; and (3) amount, timing and method of cost recovery.
The order defines "implementation costs" as those one-time costs incurred in
response to a regulatory order implementing the infrastructure to enable
competitive LECs to compete with the incumbent LEC. The CPUC concluded that
costs should be recovered through an end-user surcharge that will spread the
cost burden among all customers in a competitively neutral manner.
15
<PAGE> 17
Universal Service
In September 1998, the CPUC issued its decision that commenced the claims
process for the California High Cost Fund-B (CHCF-B), one of two universal
service projects introduced in 1997. The decision requires two surcredits: (1)
a "permanent" surcredit to offset the ongoing recovery from the CHCF-B, and (2)
a "catch-up" surcredit to return to end users the offset of the Company's
CHCF-B claims from February 1997 to August 1998. This surcredit in the amount
of approximately $74 million will be completed over a yet-to-be-determined
three-month period in 1999, and will not affect income because funds recovered
from the CHCF-B have been held in reserve.
Open Access and Network Architecture Development Proceeding
In September 1997, the Company submitted cost studies to the CPUC for UNEs and
retail services. A final order on the Company's UNE costs is anticipated in the
second quarter 1999 and a final order on UNE prices is anticipated in late
1999. In a separate phase of the Open Access and Network Architecture
Development (OANAD) proceeding, the Company filed a pricing proposal for
Operational Support Systems (OSS) in March 1998 along with testimony regarding
what constitutes a "reasonable markup" for UNEs, arbitrage, and price floor
determinations. A final order on these matters is expected in the first half of
1999.
In December 1998, the CPUC issued its final order concerning non-recurring and
changeover costs associated with OSS interfaces. The CPUC adopted Pacific
Bell's cost model for non-recurring and changeover costs and ruled that it was
appropriate to use Pacific Bell's cost model to determine the Company's costs,
adjusted to conform to its policy objectives and to reflect Company-specific
adjustments to set its forward-looking costs. The CPUC rejected the Company and
Pacific Bell cost studies concerning OSS recurring costs and directed the
Company and Pacific Bell to seek recovery through the memorandum account
procedure established in the local competition proceeding. The Company filed an
Application for Rehearing in January 1999.
In October 1997, in another phase of the OANAD proceeding, the Company
submitted testimony regarding the proper avoided cost model and the resulting
permanent resale discount. Hearings were held in November and December 1997.
Eight parties submitted testimony and four avoided cost models will be subject
to review. The CPUC's goal is to select one model to determine the proper
resale discount. A final order is anticipated during the first half of 1999. A
collocation phase was added to the OANAD proceeding in June 1998 to determine
appropriate methods of collocation and to establish prices for the adopted
methods. The Company, Pacific Bell and AT&T/MCI submitted cost studies in
October 1998. Hearings were held in February and March of 1999 and a final
decision is expected in June 1999.
Merger
In December 1998, GTE and Bell Atlantic filed a Joint Application requesting
approval of the GTE/Bell Atlantic merger. The Applicants propose that
California ratepayers receive rate reductions reflecting fifty percent of the
forecasted merger-related net cost savings attributable to the regulated
intrastate Category I and II services. Applicants estimate the total amount of
such net savings is $137.8 million over four years, the present value of which
is $92.3 million. Applicants propose to allocate fifty percent of the present
value of the net savings, or $46.2 million, to California ratepayers in two
ways: (1) An annual surcredit of $10.8 million for a four-year period that
would apply to local, toll and access services with the exception of basic
residential service, and (2) Increase the level of the Company's corporate
donations to community-based organizations and programs by $2.5 million per
year for a minimum of four years.
Property Tax Proceeding
In 1995, the CPUC issued an interim decision directing the Company and Pacific
Bell regarding the impact of a property tax savings settlement. The Company and
Pacific Bell filed Applications for Rehearing of this decision. A ruling in
favor of flowing benefits to the ratepayer would require a refund of the tax
reduction for all prior applicable years. However, the Company does not believe
such a ruling would result in a material impact to the Company's results of
operations, as it has adequately reserved for this contingency.
16
<PAGE> 18
PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for a combination of the two companies. Under terms of the agreement,
which was unanimously approved by the boards of directors of both companies, GTE
shareholders will receive 1.22 shares of Bell Atlantic stock for each GTE share
they own. The merger is subject to shareholder and regulatory approvals. The
merger agreement requires the consent of several regulatory and governmental
agencies, including the Department of Justice (DOJ), FCC and various state
public utility commissions (PUCs). In August 1998, GTE and Bell Atlantic advised
the DOJ of the merger. On October 2, 1998, GTE and Bell Atlantic filed for
approval of the merger with the FCC and notified and/or filed for approval of
the parent company merger in every state PUC and the District of Columbia where
required. The DOJ and FCC reviews will continue into 1999. As of December 31,
1998, GTE had completed, or substantially completed, merger approvals in 34
states. GTE anticipates the remaining states will approve the merger sometime in
1999.
OTHER DEVELOPMENTS
Property Sale
In April 1998, GTE announced the planned sale of local telephone exchanges that
have approximately 1.6 million access lines in 13 states. Specifically, access
lines in the states of California and Arizona have been identified for sale or
trade. The identified assets constituted approximately 1% of the average
switched access lines that the Company had in service during 1998. FCC and
state commission approvals of the access line sales will be required.
Preliminary meetings have been held with the regulators. Transition of these
properties to the buyers will occur during 1999 and into 2000.
Foreign Language Assistance Center Proceeding
The CPUC conducted an investigation of allegations that personnel of the
Company destroyed or altered documents during a 1992-1993 CPUC probe of sales
improprieties at the Company's Foreign Language Assistance Center. During 1997,
the Company asked former California Supreme Court Chief Justice Malcolm M.
Lucas to investigate the allegations. In October 1997, former Chief Justice
Lucas submitted his report to the Company and the CPUC. In response to the
Lucas report, the Company has disciplined four employees. In February 1998, the
CPUC ordered a formal investigation into the marketing practices of the Foreign
Language Assistance Center as well as allegations that the Company provided
misleading information. The Company agreed with the CPUC staff to settle this
proceeding for $9.8 million, payable over three years with no interest. In
December 1998, the CPUC unanimously approved the settlement. The Company
established a reserve for this amount in 1998.
Street Address Directories
In March and April 1998, the Company took action to correct errors discovered
in certain specialty directories known as Street Address directories. Less than
two percent of the Company's customers with non-published, non-listed and
non-address directory listings had their information erroneously printed in the
Street Address books, which are specialty marketing directories generally used
by a limited number of California businesses on a leased basis. Once the full
scope of the errors was known, the Company took immediate action to develop and
implement a comprehensive plan to retrieve and replace the directories in
question. This included seeking and obtaining a temporary restraining order
preventing the use, copy or distribution of the directories by any remaining
holders. Efforts were also made to contact all customers who had requested
non-published, non-listed or non-address listings, in addition to the small
percentage impacted by the errors. In September 1998, additional publication
errors relating to a small number of the non-published customers involved in
the Street Address directories problem, were discovered in some white page
directories. The financial impact, if any, of potential CPUC or legal actions
that may arise as a result of these occurrences cannot be determined at this
time. The CPUC is expected to rule on this matter in the first half of 1999.
17
<PAGE> 19
1999 Developments
During the first quarter of 1999, GTE also continued the review of its
operations and cost structure to ensure they were consistent with its growth
objectives. In connection with this ongoing review, GTE initiated voluntary and
involuntary employee separation programs that will result in a one-time charge
for GTE during the first quarter of 1999. The amount of the charge is not yet
determinable since it will depend on the level of voluntary separations. The
components of the charge will include separation and related benefits such as
outplacement and benefit continuation costs and the cost of assets or
facilities that will no longer be used by GTE. The impact of this announcement
on the Company is unknown at this time.
YEAR 2000 CONVERSION
General
The Year 2000 issue concerns the potential inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000, and has industry-wide implications. GTE has had an active Year 2000
program in place since 1995. This program is necessary because the Year 2000
issue could impact telecommunications networks, systems and business processes
at GTE. Although GTE maintains a significant portion of its own systems and
infrastructure, it also depends on certain, material external supplier products
that GTE must verify as Year 2000 compliant in their condition of use. In 1997,
GTE's Year 2000 methodology and processes were certified by the Information
Technology Industry Association of America. GTE presently expects that the
essential functions of its telecommunications businesses will complete Year
2000 testing by June 30, 1999.
State of Readiness
GTE's Year 2000 program is focused on both information technology (IT) and
non-IT systems, including: 1) telecommunications network elements that
constitute the portion of the public switched telephone network (PSTN) for
which GTE is responsible; 2) systems that directly support GTE's
telecommunications network operations and interactions with customers; 3)
systems and products that support GTE's national and international business
units; 4) legacy software that supports basic business operations, customer
premise equipment and interconnection with other telecommunications carriers;
and 5) systems that support GTE's physical infrastructure, financial operations
and facilities.
Corporate-wide, essential remediation was approximately 76% complete as of
December 31, 1998. In addition to the essential remediation budget, GTE has set
aside funds equivalent to approximately 12% of it's overall Year 2000 budget.
These funds are planned for verification, problem resolution and administrative
program closeout in the last six months of 1999 and to address contingencies
and millennium program operations and control through March 2000. GTE's portion
of the PSTN in the United States has been upgraded substantially for Year 2000;
92% of GTE's access lines are already operational using Year 2000 compliant
central office switches. Additionally, over 95% of GTE's essential legacy
software has been remediated. Over the next six months, the focus will be on
deployment and testing of these systems throughout GTE's operations.
GTE's Year 2000 program has been organized into five phases as follows.
Awareness: program definition and general education; Assessment: analysis and
prioritization of systems supporting the core business; Renovation: rectifying
Year 2000 issues; Validation: testing the Year 2000 solutions; Implementation:
placing the tested systems into production. Awareness and Assessment are more
than 95% complete; System Renovation, including supplier products, is
approximately 89% complete; Validation, including enterprise testing in
operational environments, and Implementation, including regional deployment,
are approximately 60% complete. It is anticipated that the Renovation,
Validation and Implementation phases for essential functions will be complete
in June 1999.
In summary, compliant product deployment and enterprise testing for most of
GTE's domestic telecommunications-related businesses, including national and
international interoperability and validation, are presently expected to be
complete by the end of June 1999.
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<PAGE> 20
Successful conclusion of GTE's Year 2000 program depends upon timely delivery
of Year 2000 compliant products and services from external suppliers.
Approximately 1,450 of third-party products used by GTE have been determined to
be "vital" products, critical to GTE's business and operations. As of December
31, 1998, Year 2000 compliant versions, or suitable alternatives, for 99% of
these vital supplier products have been provided and are currently undergoing
certification testing by GTE.
Use of Independent Verification and Validation
GTE's Year 2000 program management office has established a corporate-wide
quality oversight and control function that reviews and evaluates quality
reports on the Year 2000 issue. Each GTE business unit has access to an
independent quality team that evaluates the conversion and testing of legacy
applications and third-party supplier products. This quality assurance process
is expected to be completed in August 1999. Separately, GTE's corporate
internal auditors conduct periodic reviews and report significant findings, if
any, to business unit and corporate management and the audit committee of the
Board of Directors. Program status is also reported each quarter to GTE's
external auditors.
Cost to Address Year 2000 Issues
The current estimate for the cost of GTE's Year 2000 Program is approximately
$370 million. Through December 31, 1998, expenditures totaled $219 million. The
current estimate for the cost of remediation for the Company is approximately
$52 million. Through December 31, 1998, expenditures totaled $23.9 million.
Year 2000 remediation costs are expensed in the year incurred. GTE has not
elected to replace or accelerate the planned replacement of systems due to the
Year 2000 issue.
Currently supporting GTE's Year 2000 program worldwide are an estimated 1,000
to 1,200 full-time equivalent workers (both company employees and contractors).
Approximately 12% of these full-time equivalent workers are engaged in all
aspects of program management; 30% are engaged in legacy system conversion; 25%
are involved in external supplier management; 30% are involved in testing at
all levels; and 3% are addressing contingency planning and interoperability
operations both nationally and internationally. Approximately 75% of GTE's
program effort involves U.S. domestic operations of all types.
Risks of Year 2000 Issues
GTE has begun to examine the risks associated with its "most reasonably likely
worst case Year 2000 scenarios." To date, GTE has no indication that any
specific function or system is so deficient in technical progress as to
threaten GTE's present schedule. GTE's program and plans currently indicate a
compliant network infrastructure to be deployed by the end of June 1999. A
general, unspecific, schedule shift that would erode progress beyond January 1,
2000, cannot reasonably be calculated. If, however, there were a schedule delay
lasting no more than six months, such schedule erosion would likely affect only
nonessential systems due to the prioritization of work schedules.
Other scenarios might include a possible but presently unforeseen failure of
key supplier or customer business processes or systems. This situation could
conceivably persist for some months after the millennium transition and could
lead to possible revenue losses. GTE's present assessment of its key suppliers
and customers does not indicate that this scenario is likely.
To date, GTE has not encountered any conditions requiring tactical contingency
planning to its existing Year 2000 program; however, contingency planning for
business and network operations and customer contact during 1999 and 2000 is
ongoing.
GTE is bolstering its normal business continuity planning to address potential
Year 2000 interruptions. In addition, GTE's disaster preparedness recovery
teams are including procedures and activities for a "multi-regional" Year 2000
contingency, if it occurs. GTE is also developing its plans with respect to
possible occurrences immediately before,
19
<PAGE> 21
during, and after the millennium transition. Under consideration are:
"follow-the-sun" time-zone impact analysis; coordination with other (non-PSTN)
telecommunications providers; a Year 2000 "war room" operation to provide high
priority recovery support, plans for key personnel availability, command
structures and contingency traffic routing; and plans for round-the-clock,
on-call repair teams.
RECENT ACCOUNTING PRONOUNCEMENTS
Computer Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Under the provisions of this
SOP, effective January 1, 1999, the Company will be required to capitalize and
amortize the cost of all internal-use software, including network-related
software it previously expensed.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, "Reporting Comprehensive Income." During the years
ended December 31, 1998, 1997 and 1996, there were no differences between net
income and comprehensive income.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires entities that use derivative
instruments to measure these instruments at fair value and record them as assets
or liabilities on the balance sheet. It also requires entities to reflect the
gains or losses associated with changes in the fair value of these derivatives,
either in earnings or as a separate component of comprehensive income, depending
on the nature of the underlying contract or transaction. The Company is
currently assessing the impact of adopting SFAS No. 133, which is effective
January 1, 2000.
INFLATION
The Company's management generally does not believe inflation has a significant
impact on the Company's earnings. However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this Management's Discussion and Analysis of Financial Condition and Results
of Operations, 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; (2) material changes in
available technology; (3) the final resolution of federal, state and local
regulatory initiatives and proceedings, including arbitration proceedings, and
judicial review of those initiatives and proceedings, pertaining to, among
other matters, the terms of
20
<PAGE> 22
interconnection, access charges, universal service, unbundled network elements
and resale rates; (4) the extent, timing, success and overall effects of
competition from others in the local telephone and intraLATA toll service
markets; and (5) the success and expense of our remediation efforts and those
of our suppliers, customers, joint ventures, non-controlled investments and all
interconnecting carriers in achieving Year 2000 compliance.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company views derivative financial instruments as risk management tools
and, in accordance with Company policy, does not utilize them for speculative
or trading purposes. The Company is also not a party to any leveraged
derivatives. The Company is exposed to market risk from changes in interest
rates. The Company manages its exposure to market risks through its regular
operating and financing activities and, when deemed appropriate, through the
use of derivative financial instruments that have been authorized pursuant to
the Company's policies and procedures. The use of these derivatives allows the
Company to reduce its overall exposure to market risk, as the gains and losses
on these contracts substantially offset the gains and losses on the liabilities
being hedged.
The Company uses derivative financial instruments to manage its exposure to
interest rate movements and to reduce borrowing costs. The Company's net
exposure to interest rate risk primarily consists of floating rate instruments
that are benchmarked to U.S. money market interest rates. The Company manages
this risk by using interest rate swaps to convert floating rate short-term debt
to synthetic fixed rate instruments. The Company also uses forward contracts to
sell U.S. Treasury bonds to hedge interest rates on anticipated long-term debt
issuance.
21
<PAGE> 23
Item 8. Financial Statements and Supplementary Data
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Consolidated Statements of Income (Note 3)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------ ----------- ---------- ----------
(Dollars in Millions)
<S> <C> <C> <C>
REVENUES AND SALES (a)
Local services $ 1,434.4 $ 1,477.1 $ 1,333.2
Network access services 1,045.6 924.6 870.5
Toll services 303.0 399.1 490.1
Other services and sales 586.6 521.6 447.4
----------- ---------- ----------
Total revenues and sales 3,369.6 3,322.4 3,141.2
----------- ---------- ----------
OPERATING COSTS AND EXPENSES (b)
Cost of services and sales 1,003.1 1,056.4 1,052.5
Selling, general and administrative 525.8 511.8 477.7
Depreciation and amortization 588.9 618.3 668.4
----------- ---------- ----------
Total operating costs and expenses 2,117.8 2,186.5 2,198.6
----------- ---------- ----------
OPERATING INCOME 1,251.8 1,135.9 942.6
OTHER (INCOME) EXPENSE
Interest - net (c) 118.4 101.9 98.6
Other - net (2.7) 0.7 (1.1)
----------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,136.1 1,033.3 845.1
Income taxes 454.6 390.5 329.3
----------- ---------- ----------
NET INCOME $ 681.5 $ 642.8 $ 515.8
=========== ========== ==========
</TABLE>
(a) Includes billings to affiliates of $121.8 million, $128.5 million and
$130.6 million for the years 1998-1996, respectively.
(b) Includes billings from affiliates of $445.3 million, $184.4 million and
$194.0 million for the years 1998-1996, respectively.
(c) Includes interest paid to affiliate of $17.8 million and $15.3 million for
the years 1998 and 1997, respectively.
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation.
The accompanying notes are an integral part of these statements.
22
<PAGE> 24
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------ ---------- ----------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16.4 $ 9.9
Receivables, less allowances of $65.9 million and $65.2 million 661.8 618.4
Accounts receivable from affiliates 10.8 66.4
Note receivable from affiliate 0.4 14.2
Inventories and supplies 54.8 51.1
Prepaid insurance 43.3 6.5
Deferred income tax benefits 27.8 1.7
Other 4.4 27.2
---------- ----------
Total current assets 819.7 795.4
---------- ----------
Property, plant and equipment, net (including $40.7 million held for
sale at December 31, 1998, see Note 11) 3,912.1 3,799.3
Prepaid pension costs 847.9 706.5
Other assets 25.8 19.1
---------- ----------
Total assets $ 5,605.5 $ 5,320.3
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 150.2
Notes payable to affiliate 281.7 95.8
Accounts payable 113.9 181.0
Affiliate payables and accruals 131.8 175.3
Advanced billings and customer deposits 88.3 65.6
Taxes payable 163.6 26.8
Accrued interest 26.7 30.2
Accrued payroll costs 97.6 89.2
Dividends payable 205.5 158.2
Accrued employee benefit plans 87.8 43.9
Other 82.5 148.7
---------- ----------
Total current liabilities 1,279.4 1,164.9
---------- ----------
Long-term debt 1,691.2 1,466.7
Deferred income taxes 579.2 394.9
Deferred employee benefit plans 157.7 225.4
Other liabilities 134.6 272.6
---------- ----------
Total liabilities 3,842.1 3,524.5
---------- ----------
Shareholders' equity:
Preferred stock 50.0 50.0
Common stock (70,000,000 shares issued) 1,400.0 1,400.0
Additional paid-in capital 82.2 82.2
Retained earnings 231.2 263.6
---------- ----------
Total shareholders' equity 1,763.4 1,795.8
---------- ----------
Total liabilities and shareholders' equity $ 5,605.5 $ 5,320.3
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 25
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows (Note 3)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------ ---------- ---------- ----------
(Dollars in Millions)
<S> <C> <C> <C>
OPERATIONS
Net income $ 681.5 $ 642.8 $ 515.8
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 588.9 618.3 668.4
Deferred income taxes 158.2 133.0 53.5
Provision for uncollectible accounts 74.7 71.3 69.4
Change in current assets and current liabilities:
Receivables - net (62.5) (142.7) 28.0
Other current assets (35.5) (27.0) 5.4
Accrued taxes and interest 151.1 (40.5) (35.3)
Other current liabilities (195.9) 56.7 (97.7)
Other - net (271.5) (279.8) (136.4)
---------- ---------- ----------
Net cash from operations 1,089.0 1,032.1 1,071.1
---------- ---------- ----------
INVESTING
Capital expenditures (692.9) (629.4) (434.1)
Other - net 4.9 3.8 22.3
---------- ---------- ----------
Net cash used in investing (688.0) (625.6) (411.8)
---------- ---------- ----------
FINANCING
Long-term debt issued 197.6 295.1 98.4
Long-term debt and preferred stock retired, including premiums
paid on early retirement (150.2) (318.8) (45.3)
Dividends (666.7) (617.0) (485.2)
Decrease in short-term obligations, excluding current maturities -- (71.0) (129.1)
Net change in affiliate notes 224.6 292.9 (114.2)
Other - net 0.2 -- 5.0
---------- ---------- ----------
Net cash used in financing (394.5) (418.8) (670.4)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 6.5 (12.3) (11.1)
Cash and cash equivalents:
Beginning of year 9.9 22.2 33.3
---------- ---------- ----------
End of year $ 16.4 $ 9.9 $ 22.2
========== ========== ==========
Cash paid during the year for:
Interest $ 134.5 $ 101.0 $ 106.2
---------- ---------- ----------
Income taxes $ 259.0 $ 332.0 $ 310.8
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 26
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity (Note 3)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
---------- ---------- ----------- --------- ----------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Shareholders' equity, December 31, 1995 $ 81.9 $ 1,400.0 $ 82.2 $ 277.6 $ 1,841.7
Net income 515.8 515.8
Dividends declared (508.9) (508.9)
-------- ---------- --------- -------- ----------
Shareholders' equity, December 31, 1996 81.9 1,400.0 82.2 284.5 1,848.6
Net income 642.8 642.8
Dividends declared (662.8) (662.8)
Redemption of preferred stock (31.9) (0.9) (32.8)
-------- ---------- --------- -------- ----------
Shareholders' equity, December 31, 1997 50.0 1,400.0 82.2 263.6 1,795.8
Net income 681.5 681.5
Dividends declared (713.9) (713.9)
-------- ---------- --------- -------- ----------
Shareholders' equity, December 31, 1998 $ 50.0 $ 1,400.0 $ 82.2 $ 231.2 $ 1,763.4
======== ========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 27
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
GTE California Incorporated (the Company) provides a wide variety of
communications services ranging from local telephone service for the home and
office to highly complex voice and data services for various industries. At
December 31, 1998, the Company served 5,459,357 access lines in the states of
California, Nevada and Arizona. The Company is a wholly-owned subsidiary of GTE
Corporation (GTE).
Basis of Presentation
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amounts. Actual results
could differ from those estimates.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Contel Advanced Systems, Inc. All significant
intercompany transactions have been eliminated.
Reclassifications of prior-year data have been made, where appropriate, to
conform to the 1998 presentation.
Transactions with Affiliates
GTE Supply (100% owned by GTE) provides construction and maintenance equipment,
supplies and electronic repair services to the Company. These purchases and
services amounted to $217.6 million, $176.9 million and $119.5 million for the
years 1998-1996, respectively. Such purchases and services are recorded in the
accounts of the Company at the lower of cost, including a return realized by
GTE Supply, or fair market value.
The Company is billed for data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies. The Company's consolidated
financial statements also include allocated expenses resulting from the sharing
of certain executive, administrative, financial, accounting, marketing,
personnel, engineering and other support services being performed at
consolidated work centers within GTE. The amounts charged for these affiliated
transactions are based on proportional cost allocation methodologies. These
charges amounted to $404.6 million, $175.4 million and $188.2 million for the
years 1998-1996, respectively. The significant increase in 1998 charges is due
to a reorganization of support functions within GTE. The cost of these support
functions, which was previously recorded directly by the Company, is now
allocated to the Company on a proportional cost basis.
GTE Funding Incorporated (an affiliate of the Company) provides short-term
financing and investment vehicles and cash management services for the Company.
The Company is contractually obligated to repay all amounts borrowed on its
behalf by GTE Funding Incorporated. Interest expense on these borrowings
amounted to approximately $17.8 million and $15.3 million for the years 1998
and 1997.
The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories. In addition, when Directories
sells Yellow Page directory advertising to customers within the Company's
franchise area, the Company records a portion of the sale as revenue. Revenues
from these activities amounted to $121.8 million, $128.5 million and $130.6
million for the years 1998-1996, respectively. Also, the Company is billed for
certain printing and other costs associated with telephone directories,
including the cost of customer contact information pages which are included in
the Company's White Pages directories. These charges amounted to $40.7 million,
$9.0 million and $5.8 million for the years 1998-1996, respectively.
26
<PAGE> 28
Revenue Recognition
Revenues are recognized when earned. This is generally based on usage of the
Company's local-exchange networks or facilities. For other products and
services, revenues are generally recognized when services are rendered or
products are delivered to customers.
Depreciation and Amortization
The Company depreciates assets using the remaining life methodology and
straight-line depreciation rates. This method depreciates the remaining net
investment in telephone plant, less anticipated net salvage value, over
remaining economic asset lives. This method requires the periodic review and
revision of depreciation rates.
The economic asset lives used by the Company are as follows:
<TABLE>
<CAPTION>
Average lives (in years)
------------------------
<S> <C>
Fiber-optic cable 20
Copper wire 15
Switching equipment 10
Circuit equipment 8
</TABLE>
When depreciable telephone plant is retired in the normal course of business,
the amount of such plant is deducted from the respective plant and accumulated
depreciation accounts. Gains or losses on disposition are amortized with the
remaining net investment in telephone plant.
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on projected benefit obligations are
accrued currently. Prior service costs and credits resulting from changes in
plan benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Curtailment gains and losses associated
with employee separations are recognized when they occur. Settlement gains and
losses associated with employee separations are recognized when the pension
obligations are settled and the gain or loss is determinable.
Valuation of Assets
The impairment of tangible or intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
the Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination
of impairment, if any, is made based on estimated future cash flows, salvage
value or expected net sales proceeds depending on the circumstances. In
instances where goodwill has been recorded in connection with impaired assets,
the carrying amount of the goodwill is first eliminated before any reduction to
the carrying value of tangible or identifiable intangible assets. The Company's
policy is to record asset impairment losses, and any subsequent adjustments to
such losses as initially recorded, as well as net gains or losses on sales of
assets as a component of operating income. Under Accounting Principles Board
Opinion No. 17, "Intangible Assets," the Company also annually evaluates the
future period over which the benefit of goodwill will be received, based on
future cash flows, and changes the amortization life accordingly.
Income Taxes
The Company's results are included in GTE's consolidated Federal income tax
return. The Company participates in a tax-sharing agreement with GTE and remits
tax payments to GTE based on its tax liability on a separate company basis.
Deferred tax assets and liabilities are established for temporary differences
between the way certain income and expense items are reported for financial
reporting and tax purposes. Deferred tax assets and liabilities are
subsequently adjusted, to the extent necessary, to reflect tax rates expected
to be in effect when the temporary differences reverse. A valuation allowance
is established for deferred tax assets for which realization is not likely.
Cash and Cash Equivalents
Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
27
<PAGE> 29
Financial Instruments
The Company uses a variety of financial instruments to hedge its exposure to
fluctuations in interest. The Company does not use financial instruments for
speculative or trading purposes, nor is the Company a party to leveraged
derivatives. Amounts to be paid or received under interest rate swaps are
accrued as interest expense.
Inventories and Supplies
Inventories and supplies are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.
Software
The Company classifies software as either network related or non-network
related. For network-related software, initial operating systems software is
capitalized and amortized over the life of the related hardware. All other
network-related software, including right-to-use fees, is expensed as incurred.
Non-network related software, which includes billing and administrative systems,
is capitalized and amortized over 5 years. Software maintenance costs are
expensed as incurred. In 1998 and 1997, $76.8 million and $23.9 million,
respectively, of software expenditures were capitalized associated with the
implementation of new administrative systems within the Company.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Under the provisions of this SOP,
effective January 1, 1999, the Company will be required to capitalize and
amortize the cost of all internal-use software, including network-related
software it previously expensed. During 1998, the Company expensed
network-related software of approximately $51.2 million.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." During the years ended December 31, 1998, 1997 and 1996,
there were no differences between net income and comprehensive income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company is
currently assessing the impact of adopting SFAS No. 133, which is effective
January 1, 2000.
2. PROPOSED MERGER WITH BELL ATLANTIC CORPORATION
On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies. Under the terms of the
agreement, which was unanimously approved by the boards of directors of both
companies, GTE shareholders will receive 1.22 shares of Bell Atlantic stock for
each GTE share they own. The merger is subject to shareholder and regulatory
approvals.
28
<PAGE> 30
3. LEGAL ENTITY MERGER
On September 10, 1992, the Company entered into an Agreement of Merger with
Contel of California, Inc., a California corporation. The agreement provided
that Contel California would merge with and into the Company, with the Company
to be the surviving corporation in the merger (the Merger).
The Merger, which occurred on December 31, 1996, was accounted for in a manner
consistent with a transfer of entities under common control, which is similar
to a "pooling of interests." All material intercompany transactions have been
eliminated.
Listed below are details of the results of operations of the previously
separate enterprises that are included in the current combined net income:
<TABLE>
<CAPTION>
GTE California Contel California GTE California
Year Ended December 31, 1996 (Pre-Merger) (Pre-Merger) (Post-Merger)
- ---------------------------- ------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C> <C>
Revenues and sales $ 2,789.9 $ 351.3 $ 3,141.2
Operating income 796.1 146.5 942.6
Net income 435.6 80.2 515.8
</TABLE>
4. PLANNED ASSET SALES
During the first quarter of 1998, the Company committed to a plan that resulted
in a decision to sell approximately 46,000 switched access lines located in
California and Arizona. Due to the regulatory approvals that are required, it
is projected that most of the sales of local access lines will close in 2000.
As a result, the net book value of these lines, which approximates $40.7
million, continues to be reported in "Property, plant and equipment, net" in
the consolidated balance sheets. Until sold, the Company intends to continue to
operate all of these assets. Based on the decision to sell, however, the
Company stopped recording depreciation expense for these assets.
Due to the centralized manner in which GTE's local telephone companies are
managed and since the access lines to be sold represent portions of states
rather than entire operating companies, revenues and operating income
applicable to the access lines to be sold are not readily determinable. The
46,000 access lines represent approximately 1% of the average switched access
lines that the Company had in service during 1998.
29
<PAGE> 31
5. PREFERRED STOCK
Cumulative preferred stock, not subject to mandatory redemption and exclusive
of amounts held in treasury, is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Shares Amount Shares Amount
------------ ------------ ------------- ------------
Authorized and (Dollars in Millions) (Dollars in Millions)
outstanding:
<S> <C> <C> <C> <C>
$ 20 par value
4 1/2% Series (issued in 1945) 280,312 $ 5.6 280,312 $ 5.6
4 1/2% Series (issued in 1956) 718,862 14.4 718,862 14.4
5 % Series (issued in 1957) 1,500,000 30.0 1,500,000 30.0
------------ ------------ ------------- ------------
Total 2,499,174 $ 50.0 2,499,174 $ 50.0
============ ============ ============= ============
</TABLE>
At the Company's option, these series of preferred stock are redeemable at
premiums, in whole or in part, on thirty days notice.
There were no retirements, redemptions, or other activity in 1998.
In May 1997, the Company redeemed all outstanding shares of 7.48% Series
preferred stock with cash from operations. The Company incurred $0.9 million in
premiums associated with this redemption.
The 4 1/2% Series (1945 issue) is entitled to one vote per share, with the
right to vote cumulatively in the election of directors. Otherwise, the
preferred shareholders have no voting rights.
No shares of preferred stock were reserved for officers and employees, or for
options, warrants, conversions or other rights. The Company is not in arrears
in its dividend payments at December 31, 1998.
6. COMMON STOCK
The authorized common stock of the Company consists of 100,000,000 shares with
a par value of $20 per share. All outstanding shares of common stock are held
by GTE.
There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.
At December 31, 1998, $49.3 million of retained earnings were restricted as to
the payment of cash dividends on common stock under the most restrictive terms
of the Articles of Incorporation.
30
<PAGE> 32
7. DEBT
Long-term debt as of December 31, was as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
(Dollars in Millions)
<S> <C> <C>
First mortgage bonds:
9.41 % Series W, maturing through 2014 $ 40.0 $ 40.0
9.44 % Series X, due 2015 30.0 30.0
6 1/4 % Series TT, due 1998 -- 150.0
----------- ----------
70.0 220.0
----------- ----------
Debentures:
5 5/8 % Series A, due 2001 300.0 300.0
6 3/4 % Series B, due 2004 250.0 250.0
8.07 % Series C, due 2024 250.0 250.0
7.0 % Series D, due 2008 100.0 100.0
6.70 % Series E, due 2009 300.0 300.0
6.75 % Series F, due 2027 200.0 --
----------- ----------
1,400.0 1,200.0
----------- ----------
Other:
Notes payable expected to be refinanced on a long-term basis 225.0 200.0
Capitalized leases 0.2 0.5
----------- ----------
Total principal amount 1,695.2 1,620.5
Less: unamortized discount and premium - net (4.0) (3.6)
----------- ----------
Total 1,691.2 1,616.9
Less: current maturities -- (150.2)
----------- ----------
Total long-term debt $ 1,691.2 $ 1,466.7
=========== ==========
</TABLE>
Long-term debt as of December 31, 1998 includes $225.0 million of short-term
borrowings in the form of affiliate notes payable. These affiliate notes
payable represent notes payable to GTE and GTE Funding Incorporated, an
affiliate company that provides short-term financing and investment vehicles
and cash management services for the Company. The $225.0 million of short-term
borrowings was refinanced in January 1999 with the issuance of $225.0 million
of 5.50% Series G Debentures, due 2009. Net proceeds from the January 1999
issuance were also applied toward the repayment of other short-term borrowings
incurred to finance the Company's construction program and for general
corporate purposes.
Long-term debt as of December 31, 1997, includes $200.0 million of short-term
borrowings in the form of affiliate notes payable, which the Company refinanced
in May 1998 with the issuance of $200.0 million of 6.75% Series F Debentures,
due 2027.
In May and December 1997, the Company retired $225.0 million of long-term debt
and incurred $0.7 million in premiums associated with these retirements. In
June and September 1997, the Company retired $60.0 million of long-term debt.
In September 1997, the Company issued $300.0 million of 6.70% Series E
Debentures, due 2009. The net proceeds were applied toward the repayment of
short-term borrowings incurred to finance the Company's construction program
and for general corporate purposes.
31
<PAGE> 33
The aggregate principal amount of bonds and debentures that may be issued is
subject to the restrictions and provisions of the Company's indentures. None of
the securities shown above were held in sinking or other special funds of the
Company or pledged by the Company. Debt discounts and premiums on the Company's
outstanding long-term debt are amortized over the lives of the respective
issues. Substantially all of the Company's telephone plant is subject to the
liens of the indentures under which the bonds listed above were issued.
Estimated payments of long-term debt during the next five years are less than
$0.1 million in 1999; $2.5 million in 2000; $302.5 million in 2001; $2.5 million
in 2002; and $2.5 million in 2003.
Total short-term obligations as of December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
(Dollars in Millions)
<S> <C> <C>
Notes payable to affiliate - average rate 5.4% and 6.2% $ 281.7 $ 95.8
Current maturities of long-term debt -- 150.2
--------- --------
Total $ 281.7 $ 246.0
========= ========
</TABLE>
At December 31, 1998, the Company had a note payable with GTE Funding in the
amount of $272.4 million, which the Company is contractually obligated to pay.
The Company participates with other affiliates in a $1.5 billion, 364-day
syndicated revolving line of credit and has access to an additional $1.0
billion in short-term liquidity through GTE and GTE Funding Incorporated's
bi-lateral revolving lines of credit. Also, the Company has an existing shelf
registration statement outstanding for an additional $275.0 million of
debentures.
32
<PAGE> 34
8. FINANCIAL INSTRUMENTS
The Company entered into forward interest rate swap agreements to hedge against
changes in market interest rates.
The forward contracts to sell U.S. Treasury Bonds, entered into during 1998,
were executed to hedge planned long-term debt issuances that were completed in
January 1999. The forward interest rate swap agreements and forward contracts
to sell U.S. Treasury Bonds, entered into during 1997, to hedge against changes
in market interest rates of planned long-term debt issuances, were completed in
May 1998. In 1998, a gain of approximately $0.2 million occurred upon
settlement of these agreements and is being amortized over the life of the
associated long-term debt issuance as an offset to interest expense.
As of December 31, 1998 and 1997, the Company had the following financial
instruments in effect:
<TABLE>
<CAPTION>
Weighted
Notional Expiration Average Pay
(Dollars in Millions) Amount Dates Rate
--------------------------- ----------- ------------- ---------------
<S> <C> <C> <C>
Forward interest rate
contracts:
1998 $ 100.0 1999 6.22%
1997 310.0 1998-2000 6.70%
Interest rate swap
agreements:
1998 110.0 2000 6.67%
1997 -- -- --
</TABLE>
The Company has entered into interest rate swaps and forward interest rate swap
agreements, where the Company pays fixed rates, as indicated in the table
above, and receives floating rates, primarily based on three month LIBOR. At
December 31, 1998 and 1997, the three month LIBOR was 5.1% and 5.8%,
respectively.
The risk associated with these financial instruments arises from the possible
inability of counterparties to meet the contract terms and from movements in
interest rates. The Company carefully evaluates and continually monitors the
creditworthiness of its counterparties and believes the risk of nonperformance
is remote.
The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value. As of December 31, 1998 and 1997, the
estimated fair value of long-term debt based on either reference to quoted
market prices or an option pricing model, exceeded the carrying value by
approximately $128.6 million and $24.4 million, respectively.
33
<PAGE> 35
9. INCOME TAXES
The income tax provision is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Current:
Federal $ 239.1 $ 202.6 $ 231.5
State 57.3 54.9 44.3
-------- -------- --------
296.4 257.5 275.8
Deferred:
Federal 131.6 118.5 51.6
State 35.4 26.5 17.1
-------- -------- --------
167.0 145.0 68.7
Amortization of deferred investment tax credits (8.8) (12.0) (15.2)
-------- -------- --------
Total provision $ 454.6 $ 390.5 $ 329.3
======== ======== ========
</TABLE>
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pretax income and income taxes provided in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(Dollars in Millions)
<S> <C> <C> <C>
Amounts computed at statutory rates $ 396.8 $ 360.2 $ 294.1
State and local income taxes, net of federal income tax effect 60.3 52.9 39.9
Amortization of deferred investment tax credits (8.8) (12.0) (15.2)
Other differences - net 6.3 (10.6) 10.5
--------- --------- ---------
Total provision $ 454.6 $ 390.5 $ 329.3
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to the deferred income
tax benefits and deferred income tax liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(Dollars in Millions)
<S> <C> <C>
Depreciation and amortization $ 297.9 $ 256.9
Employee benefit obligations (85.1) (106.3)
Prepaid pension cost 300.3 197.1
Investment tax credits 13.5 22.3
Other - net 24.8 23.2
--------- ---------
Net deferred tax liability $ 551.4 $ 393.2
========= =========
</TABLE>
34
<PAGE> 36
10. EMPLOYEE BENEFIT PLANS
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," in February 1998. The new standard does not change
the measurement or recognition of costs for pension or other postretirement
plans. It standardizes disclosures and eliminates those that are no longer
useful.
Certain disclosures are required to be made of the components of pension
credits, postretirement benefit costs and the funded status of the plans,
including the actuarial present value of accumulated plan benefits, accumulated
or projected benefit obligation and the fair value of plan assets. We do not
present such disclosures because the structure of the GTE plans does not permit
the plans' data to be readily disaggregated.
Pension Plans
The Company participates in noncontributory defined benefit pension plans
sponsored by GTE covering substantially all employees. The benefits to be paid
under these plans are generally based on years of credited service and average
final earnings. GTE's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plans' benefit obligation to employees upon their retirement. The assets of the
plans consist primarily of corporate equities, government securities and
corporate debt securities.
The significant weighted-average assumptions used by GTE for the pension
measurements were as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Discount rate 7.00% 7.25%
Rate of compensation increase 4.75% 5.00%
Expected return on plan assets 9.00% 9.00%
</TABLE>
Net periodic benefit credit was $141.4 million, $139.5 million and $137.5
million for the years 1998-1996, respectively.
Postretirement Benefits Other than Pensions
Substantially all of the Company's employees are covered under postretirement
healthcare and life insurance benefit plans sponsored by GTE. The determination
of benefit cost for postretirement health plans is generally based on
comprehensive hospital, medical and surgical benefit plan provisions. The
Company intends to fund amounts for postretirement benefits as deemed
appropriate.
Postretirement benefit cost (credit) was ($2.3) million, $52.4 million and
$86.1 million for the years 1998-1996, respectively. The weighted-average
assumptions used by GTE in the actuarial computations for postretirement
benefits were as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Discount rate 7.00% 7.25%
Expected return on plan assets 8.00% 8.00%
</TABLE>
Savings Plans
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions. Matching contributions charged
to income were $11.1 million, $11.2 million and $10.8 million in 1998-1996,
respectively.
35
<PAGE> 37
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
(Dollars in Millions)
<S> <C> <C>
Land $ 59.9 $ 60.9
Buildings 754.7 718.6
Plant and equipment 9,405.0 8,396.2
Construction in progress and other 293.7 902.2
---------------- -----------------
Total 10,513.3 10,077.9
Accumulated depreciation (6,601.2) (6,278.6)
---------------- -----------------
Total property, plant and equipment - net $ 3,912.1 $ 3,799.3
================ =================
</TABLE>
At December 31, 1998, total property, plant and equipment - net included $40.7
million of access lines and related equipment held for sale (see Note 4). This
represents gross assets of $144.3 million less accumulated depreciation of
$103.6 million.
12. REGULATORY AND COMPETITIVE MATTERS
The Company is subject to regulation by the regulatory bodies of the states of
California, Nevada and Arizona for its intrastate business operations and by
the Federal Communications Commission for its interstate operations.
As was the case in 1997, much of 1998's regulatory and legislative activity at
both the state and federal levels was 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.
13. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable operating leases covering certain buildings,
office space and equipment. Rental expense was $32.9 million, $43.1 million and
$40.9 million in 1998-1996, respectively. Minimum rental commitments under
noncancelable leases are $13.3 million, $9.0 million, $6.9 million, $6.1
million and $4.9 million for the years 1999-2003, respectively, and aggregate
$9.7 million thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and environmental, safety and health matters. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the results of operations or the financial position of the Company.
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, the Company's
operations face increasing competition in virtually all aspects of its
business. The Company supports greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers allow an opportunity for all service providers to participate equally
in a competitive marketplace under comparable conditions.
36
<PAGE> 38
14. SEGMENT REPORTING
Effective December 31, 1998, GTE adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting financial information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial reports.
The Company does not have separate reportable segments of its own. The Company
is part of the Network Services product segment of GTE's National Operations.
Network Services provides wireline communication services within franchised
areas. These services include local telephone service and toll calls as well as
access services that enable long distance carriers to complete calls to or from
locations outside of the Company's operating areas. Network Services also
provides complex voice and data services to businesses, billing and collection,
and operator assistance services to other telecommunications companies and
receives revenues in the form of a publication right from an affiliate that
publishes telephone directories in its operating areas.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized 1998 and 1997 quarterly financial data is as follows:
<TABLE>
<CAPTION>
Revenues Operating Net
and Sales Income Income
--------------- --------------- ---------------
(Dollars in Millions)
<S> <C> <C> <C>
1998
First Quarter $ 735.3 $ 207.8 $ 108.1
Second Quarter 839.4 335.0 181.9
Third Quarter 903.5 431.7 237.5
Fourth Quarter 891.4 277.3 154.0
--------------- --------------- ---------------
Total $ 3,369.6 $ 1,251.8 $ 681.5
=============== =============== ===============
1997
First Quarter $ 781.1 $ 240.9 $ 128.3
Second Quarter 809.8 215.2 117.5
Third Quarter (a) 821.3 306.4 170.8
Fourth Quarter (a) 910.2 373.4 226.2
--------------- --------------- ---------------
Total $ 3,322.4 $ 1,135.9 $ 642.8
=============== =============== ===============
</TABLE>
(a) Third and fourth quarter 1997 operating income includes the effects of a
reduction to depreciation rates to reflect higher net salvage values
related to certain of its telephone plant and equipment.
16. SUBSEQUENT EVENTS (UNAUDITED)
In January 1999, the Company issued $225.0 million of 5.50% Series G
Debentures, due 2009. The net proceeds were applied to repay short-term
borrowings used to finance the Company's construction program and for general
corporate purposes.
During 1998, the Company entered into forward contracts to sell $100.0 million
of U.S. Treasury Bonds in order to hedge against future changes in market
interest rates related to the debt the Company called and subsequently
refinanced in January 1999, as mentioned above.
37
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
GTE California Incorporated:
We have audited the accompanying consolidated balance sheets of GTE California
Incorporated (a California corporation and wholly-owned subsidiary of GTE
Corporation) and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1998, as set forth under
Item 8 and Schedule II of this report. These financial statements and the
schedule and exhibit referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the schedule and exhibit based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE California Incorporated
and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supporting schedule and exhibit
listed under Item 14 are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not a required part of the
basic financial statements. The supporting schedule and exhibit have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Dallas, Texas ARTHUR ANDERSEN LLP
January 28, 1999
38
<PAGE> 40
MANAGEMENT REPORT
To Our Shareholders:
The management of GTE California Incorporated (the Company) is responsible for
the integrity and objectivity of the financial and operating information
contained in this Annual Report on Form 10-K, including the consolidated
financial statements covered by the Report of Independent Public Accountants.
These statements were prepared in conformity with generally accepted accounting
principles and include amounts that are based on the best estimates and
judgments of management.
The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles. This system includes written policies and
procedures, an organizational structure that segregates duties, and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines which require employees to maintain
the highest level of ethical standards.
DAVID R. BOWMAN
President
LAWRENCE R. WHITMAN
Vice President - Finance and Planning
39
<PAGE> 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
40
<PAGE> 42
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's Proxy Statement covering the Annual
Meeting of Shareholders to be held May 12, 1999, which is incorporated herein by
reference. A complete list of executive officers names, ages and positions of
the Registrant as of March 2, 1999, is provided below.
Identification of Executive Officers
<TABLE>
<CAPTION>
Year Assumed
Name Age Present Position Position
- --------------------------- --------- ---------------------------- ---------------------------------------------
<S> <C> <C> <C>
John C. Appel 50 1995 Executive Vice President - Network Operations
David R. Bowman 55 1997 President
Quentin E. Bredeweg (1) 42 1998 Vice President - Regulatory
William M. Edwards, III (2) 50 1998 Vice President - Property Repositioning
Gregory D. Jacobson 47 1994 Treasurer
Robert G. McCoy 54 1997 Vice President - Retail Markets
William G. Mundy (3) 49 1998 Vice President - General Counsel
Barry W. Paulson 47 1996 Vice President - Operations
Planning and Support
Richard L. Schaulin 56 1995 Vice President - Human Resources
Stephen L. Shore (4) 47 1998 Controller
Larry J. Sparrow 55 1995 Vice President - Wholesale Markets
Lawrence R. Whitman (5) 47 1998 Vice President - Finance and Planning
</TABLE>
(1) Quentin E. Bredeweg was appointed Vice President - Regulatory
in May 1998.
(2) William M. Edwards, III was appointed Vice President - Property
Repositioning in July 1998. He served as Vice President - Controller
until April 1998.
(3) William G. Mundy was appointed Vice President - General Counsel in January
1998 replacing Richard M. Cahill.
(4) Stephen L. Shore was appointed Controller in May 1998
replacing William M. Edwards, III.
(5) Lawrence R. Whitman was appointed Vice President - Finance and Planning in
May 1998 replacing Gerald K. Dinsmore.
Each of these executive officers has been an employee of the Company or an
affiliated company for the last five years. Except for duly elected officers and
directors, no other employees had a significant role in decision making. All
officers are appointed for a term of one year. There are no family relationships
between any of the directors or executive officers of the Company.
41
<PAGE> 43
Item 11. Executive Compensation
Reference is made to the Registrant's Proxy Statement covering the Annual
Meeting of Shareholders to be held May 12, 1999, which is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's Proxy Statement covering the Annual
Meeting of Shareholders to be held May 12, 1999, which is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's Proxy Statement covering the Annual
Meeting of Shareholders to be held May 12, 1999, which is incorporated herein
by reference.
42
<PAGE> 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - See GTE California Incorporated's
consolidated financial statements and report of independent
accountants thereon in the Financial Statements section included
elsewhere herein.
(2) Financial Statement Schedules - Schedules supporting the
consolidated financial statements for the years ended December 31,
1998-1996 (as required):
II - Valuation and Qualifying Accounts
Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits - Included in this report or incorporated by reference.
2.1* Agreement of Merger, dated September 10, 1992, between GTE
California Incorporated and Contel of California, Inc.
(Exhibit 2.1 of the 1993 Form 10-K, File No. 1-6417)
3.1* Articles of Incorporation and Bylaws (Exhibit 3 of the 1988
Form 10-K, File No. 1-6417)
3.2* Certificate of Amendment of the Articles of Incorporation
dated March 26, 1998 (Exhibit 3.2 of the March 31, 1998 Form
10-Q, File No. 1-6417)
3.3* Amendment to Bylaws (amended April 17, 1998) (Exhibit 3.1
of the March 31, 1998 Form 10-Q, File No. 1-6417)
3.4* Certificate of Amendment of the Articles of Incorporation
dated April 21, 1998 (Exhibit 3.3 of the March 31, 1998 Form
10-Q, File No. 1-6417)
4.1* Indenture dated as of December 1, 1993, between GTE
California Incorporated and Bank of America National Trust
and Savings Association, as Trustee, dated as of December
1, 1993 (Exhibit 4.1 of the Company's Registration
Statement on Form S-3, File No. 33-51541, filed with the
Securities and Exchange Commission on December 17, 1993)
4.2* First Supplemental Indenture dated as of April 15, 1996,
between GTE California Incorporated and First Trust of
California, National Association, as Trustee (as successor
trustee to Bank of America National Trust and Savings
Association) (Exhibit 4.3 of the Company's Report on Form
8-K, dated April 23, 1996)
10.1 Material Contracts - Severance Agreement between GTE and
John C. Appel
10.2 Material Contracts - Severance Agreements between GTE and
Richard L. Schaulin, Larry J. Sparrow and Lawrence R.
Whitman
10.3 Material Contracts - Retention Agreement between GTE and
John C. Appel
10.4 Material Contracts - Retention Agreements between GTE and
David R. Bowman, Richard L. Schaulin, Larry J. Sparrow and
Lawrence R. Whitman
12 Statements re: Calculation of the Consolidated Ratio of
Earnings to Fixed Charges
23 Consent of Independent Public Accountants
26* Revised Form of Invitation for Bids pertaining to
Registration Statements on Form S-3 (Exhibit 26.1 of the
Company's Registration Statement on Form S-3, File No.
333-46677)
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
* Denotes exhibits incorporated herein by reference to previous filings with
the Securities and Exchange Commission as designated.
43
<PAGE> 45
GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
Schedule II- Valuation and Qualifying Accounts
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in Millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------
Charged Deductions
Balance at Charged (Credited) to from
Beginning to Other Reserves Balance at
Description of Year Income Accounts (Note 1) Close of Year
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible
accounts for the
years ended:
December 31, 1998 $ 65.2 $ 74.7 $ 14.7 (2) $ 88.7 $ 65.9
====================================================================================
December 31, 1997 $ 72.0 $ 71.3 $ 70.7 (2) $ 148.8 $ 65.2
====================================================================================
December 31, 1996 $ 61.7 $ 69.4 $ 74.0 (2) $ 133.1 $ 72.0
====================================================================================
Accrued restructuring costs
for the year ended:
December 31, 1996 $ 224.9 $ -- $ (54.9) (3) $ 170.0 $ --
====================================================================================
</TABLE>
NOTES:
(1) Charges for which reserve was created.
(2) Recoveries of previously written-off amounts.
(3) Represents amounts necessary to satisfy commitments related to the
re-engineering program that have been reclassified to accounts payable and
accrued expenses.
44
<PAGE> 46
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GTE CALIFORNIA INCORPORATED
---------------------------
(Registrant)
Date March 26, 1999 By /s/ David R. Bowman
-------------- ---------------------------
David R. Bowman
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ David R. Bowman President March 26, 1999
- ---------------------------- (Principal Executive Officer)
David R. Bowman
/s/ Lawrence R. Whitman Vice President - Finance and Planning March 26, 1999
- ---------------------------- and Director
Lawrence R. Whitman (Principal Financial Officer)
/s/ Stephen L. Shore Controller March 26, 1999
- ---------------------------- (Principal Accounting Officer)
Stephen L. Shore
/s/ John C. Appel Director March 26, 1999
- ----------------------------
John C. Appel
/s/ Mateland L. Keith, Jr. Director March 26, 1999
- ----------------------------
Mateland L. Keith, Jr.
</TABLE>
45
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
10.1 Material Contracts - Severance Agreement between GTE and John C. Appel
10.2 Material Contracts - Severance Agreements between GTE and Richard L. Schaulin,
Larry J. Sparrow and Lawrence R. Whitman
10.3 Material Contracts - Retention Agreement between GTE and John C. Appel
10.4 Material Contracts - Retention Agreements between GTE and David R. Bowman,
Richard L. Schaulin, Larry J. Sparrow and Lawrence R. Whitman
12 Statements re: Calculation of the Consolidated Ratio of Earnings to Fixed Charges
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT ("Agreement") dated June 4, 1998, by and between GTE
Service Corporation, a New York corporation (the "Company"), and <<Name>> (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Company recognizes the valuable services that the
Executive has rendered thereto and desires to be assured that the Executive will
continue to attend to the business and affairs of the Company without regard to
any potential or actual change in control of GTE Corporation, a New York
corporation and the Company's sole shareholder ("GTE"); and
WHEREAS, the Executive is willing to continue to serve the
Company, but desires assurance that he will not be materially disadvantaged by a
change in control of GTE;
NOW, THEREFORE, in consideration of the Executive's continued
service to the Company and the mutual agreements herein contained, the Company
and the Executive hereby agree as follows:
ARTICLE I
ELIGIBILITY FOR BENEFITS
Section 1.1. Qualifying Termination. Except as provided in
Section 2.6 hereof, the Company shall not be required to provide any benefits to
the Executive pursuant to this Agreement unless a Qualifying Termination occurs
before the Agreement expires in accordance with Section 6.1 hereof. For purposes
of this Agreement, a Qualifying Termination shall occur only if
(a) a Change in Control occurs, and
(b) (i) within two years after the Change in Control, the
Company terminates the Executive's employment other than for Cause; or
(ii)(A) within two years after the Change in Control,
a Good Reason arises, and (B) the Executive terminates employment with the
Company within (I) six months after the Good Reason arises or (II) two years
after the Change in Control, whichever occurs later; provided, that a Qualifying
Termination shall not occur if the Executive's employment with the Company
terminates by reason of the Executive's Retirement, Disability, or death. A
Qualifying Termination may occur even though the Executive retires from
employment with the Company other than by reason of Retirement or Disability.
Section 1.2. Change in Control. Except as provided below, a
Change in Control shall be deemed to occur when and only when the first of the
following events occurs:
(a) an acquisition (other than directly from GTE) of
securities of GTE by any Person, immediately after which such Person, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of securities of GTE representing 20 percent or more of the Voting Power or such
lower percentage of the Voting Power that, from time to time, would cause the
Person to constitute an "Acquiring Person" (as such term is defined in the
Rights Plan); provided that,
<PAGE> 2
in determining whether a Change in Control has occurred, the acquisition of
securities of GTE in a Non-Control Acquisition shall not constitute an
acquisition that would cause a Change in Control; or
(b) three or more directors, whose election or nomination for
election is not approved by a majority of the members of the "Incumbent Board"
(as defined below) then serving as members of the Board, are elected within any
single 12-month period to serve on the Board; provided that an individual whose
election or nomination for election is approved as a result of either an actual
or threatened "Election Contest" (as described in Rule 14a-11 promulgated under
the Securities Exchange Act of 1934, as amended from time to time) or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board (a "Proxy Contest"), including by reason of any
agreement intended to avoid or settle any Election Contest or Proxy Contest,
shall be deemed not to have been approved by a majority of the Incumbent Board
for purposes hereof; or
(c) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board; "Incumbent Board" shall mean
individuals who, as of the close of business on June 4, 1998, are members of the
Board; provided that, if the election, or nomination for election by GTE's
shareholders, of any new director was approved by a vote of at least
three-quarters of the Incumbent Board, such new director shall, for purposes of
this Agreement, be considered as a member of the Incumbent Board; provided
further that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or
threatened Election Contest or other actual or threatened Proxy Contest,
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(d) approval by shareholders of GTE of:
(i) a merger, consolidation, or reorganization
involving GTE, unless
(A) the shareholders of GTE, immediately
before the merger, consolidation, or reorganization, own, directly or indirectly
immediately following such merger, consolidation, or reorganization, at least 50
percent of the combined voting power of the outstanding voting securities of the
corporation resulting from such merger, consolidation, or reorganization (the
"Surviving Corporation") in substantially the same proportion as their ownership
of the voting securities immediately before such merger, consolidation, or
reorganization;
(B) individuals who were members of the
Incumbent Board immediately prior to the execution of the agreement providing
for such merger, consolidation or reorganization constitute at least a majority
of the board of directors of the Surviving Corporation; and
(C) no Person (other than GTE or any
subsidiary of GTE, any employee benefit plan (or any trust forming a part
thereof) maintained by GTE, the Surviving Corporation, or any subsidiary of GTE,
or any Person who, immediately prior to such merger, consolidation, or
reorganization, had Beneficial Ownership of securities representing 20 percent
(or such lower percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (a) of this definition of "Change in Control") or
more of the Voting Power) has Beneficial Ownership of securities representing 20
percent (or such lower percentage the acquisition of which would cause a Change
in Control pursuant to paragraph (a) of this definition of "Change in Control")
or more of the combined Voting Power of the Surviving Corporation's then
outstanding voting securities;
(ii) a complete liquidation or dissolution of GTE; or
(iii) an agreement for the sale or other disposition
of all or substantially all of the assets of GTE to any Person (other than a
transfer to a subsidiary of GTE).
<PAGE> 3
For purposes of this Section, the following terms shall have
the definitions set forth below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended from time to time.
"Board" means the Board of Directors of GTE.
"Non-Control Acquisition" means an acquisition by (1) an
employee benefit plan (or a trust forming a part thereof) maintained by GTE or
any of its subsidiaries, (2) GTE or any of its subsidiaries, or (3) any Person
in connection with a "Non-Control Transaction."
"Non-Control Transaction" means a transaction described in
clauses (A) through (C) of paragraph (d)(i) of the definition of "Change in
Control" herein.
"Person" shall mean any individual, firm, corporation,
partnership, joint venture, association, trust, or other entity; and a Person
shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially
own," any securities:
(x) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(y) which such Person or any of such Person's Affiliates or
Associates has (i) the right or obligation to acquire (whether such right or
obligation is exercisable or effective immediately or only after the passage of
time) pursuant to any agreement, arrangement, or understanding (whether or not
in writing) or upon the exercise of conversion rights, exchange rights, rights
(other than the rights granted pursuant to the Rights Plan), warrants or
options, or otherwise; provided that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," securities tendered pursuant to
a tender or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange; or (ii) the right to vote pursuant to any agreement,
arrangement, or understanding (whether or not in writing); provided that a
Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this clause (y) if the agreement, arrangement, or
understanding to vote such security (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations of the Securities
Exchange Act of 1934, as amended from time to time, and (B) is not also then
reportable by such person on Schedule 13D under the Securities Exchange Act of
1934, as amended from time to time (or any comparable or successor report); or
(z) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such Person
or any of such Person's Affiliates or Associates has any agreement, arrangement,
or understanding (whether or not in writing), or with which such Person or any
of such Person's Affiliates or Associates have otherwise formed a group for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy as
described in clause (ii)(A) of subparagraph (y), above), or disposing of any
securities of GTE.
"Rights Plan" means the Rights Agreement, dated as of December
7, 1989, between GTE and The First National Bank of Boston (as successor Rights
Agent to State Street Bank and Trust Company), as it may be amended from time to
time, or any successor thereto.
<PAGE> 4
"Voting Power" means the voting power of all securities of GTE
then outstanding generally entitled to vote for the election of directors of
GTE.
Section 1.3. Termination for Cause. The Company shall have
Cause to terminate the Executive for purposes of Section 1.1 hereof only if the
Executive (a) engages in unlawful acts intended to result in the substantial
personal enrichment of the Executive at the Company's expense, or (b) engages
(except by reason of incapacity due to illness or injury) in a material
violation of his responsibilities to the Company that results in a material
injury to the Company. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to him a Notice of Termination, consisting of a copy of a resolution
duly adopted by the affirmative vote of not less than three quarters of the
entire membership of GTE's Board of Directors at a duly held meeting of the
Board of Directors (with reasonable notice to the Executive and an opportunity
for the Executive, together with counsel, to be heard before the Board of
Directors), finding that the Executive has engaged in the conduct set forth
above in this Section 1.3 and specifying the particulars thereof in detail.
GTE's Board of Directors may not delegate or assign its duties under this
Section 1.3.
Section 1.4. Termination for Good Reason. The Executive shall
have a Good Reason for terminating employment with the Company only if one or
more of the following occurs after a Change in Control:
(a) a change in the Executive's status or position(s) with the
Company that, in the Executive's reasonable judgment, represents a demotion from
the Executive's status or position(s) in effect immediately before the Change in
Control;
(b) the assignment to the Executive of any duties or
responsibilities that, in the Executive's reasonable judgment, are inconsistent
with the Executive's status or position(s) in effect immediately before the
Change in Control;
(c) layoff or involuntary termination of the Executive's
employment, except in connection with the termination of the Executive's
employment for Cause or as a result of the Executive's Retirement, Disability,
or death;
(d) a reduction by the Company in the Executive's total
compensation (which shall be deemed, for this purpose, to be equal to his base
salary plus the greater of (i) the most recent award that he has earned under
the GTE Corporation Executive Incentive Plan, as amended from time to time, or
any successor thereto (the "EIP"), or (ii) an EIP award equal to the Executive's
Average Percentage of the annual value (i.e., the dollar amount) of the normal
payment under the EIP for the Executive's salary level (such annual value and
normal payment being those that are in effect under the EIP immediately before
the date on which the Change in Control occurs for the Executive's salary level
immediately before the date on which the Change in Control occurs). For purposes
of this paragraph (d), the Executive's "Average Percentage" means the average of
the Executive's Annual Percentages for the Determination Years. For purposes of
this paragraph (d), the Executive's "Annual Percentage" for each Determination
Year means a fraction (expressed as a percentage), the numerator of which is the
EIP award earned by the Executive for such Determination Year, and the
denominator of which is the annual value of the normal payment under the EIP for
the Executive's salary level (such annual value and normal payment being those
that were in effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For purposes of this
paragraph (d), a "Determination Year" means each of the last three EIP plan
years ending before the date on which the Change in Control occurs (or, if less,
the number of those three plan years during which the Executive was a
participant in the EIP);
<PAGE> 5
(e) a material increase in the Executive's responsibilities or
duties without a commensurate increase in total compensation;
(f) the failure by the Company to continue in effect any Plan
in which the Executive is participating at the time of the Change in Control (or
plans or arrangements providing the Executive with substantially equivalent
benefits) other than as a result of the normal expiration of any such Plan in
accordance with its terms as in effect at the time of the Change in Control;
(g) any action or inaction by the Company that would adversely
affect the Executive's continued participation in any Plan on at least as
favorable a basis as was the case on the date of the Change in Control, or that
would materially reduce the Executive's benefits in the future under the Plan or
deprive him of any material benefits that he enjoyed at the time of the Change
in Control, except to the extent that such action or inaction by the Company is
required by the terms of the Plan as in effect immediately before the Change in
Control, or is necessary to comply with applicable law or to preserve the
qualification of the Plan under section 401(a) of the Internal Revenue Code of
1986, as amended from time to time or any successor thereto (the "Code") and
except to the extent that the Company provides the Executive with substantially
equivalent benefits;
(h) the Company's failure to provide and credit the Executive
with the number of days of paid vacation, holiday, or leave to which he is then
entitled in accordance with the Company's normal vacation, holiday, or leave
policy in effect immediately before the Change in Control;
(i) the imposition of any requirement that the Executive be
based anywhere other than within 50 miles of where his principal office was
located immediately before the Change in Control;
(j) a material increase in the frequency or duration of the
Executive's business travel;
(k) the Company's failure to obtain the express assumption of
this Agreement by any successor to the Company as provided by Section 6.3
hereof;
(l) any attempt by the Company to terminate the Executive's
employment that is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 1.3 hereof or that does not afford the Executive the
procedural protections prescribed by that Section; or
(m) any violation by the Company of any agreement (including
this Agreement) between it and the Executive. Notwithstanding the foregoing, no
action by the Company shall give rise to a Good Reason if it results from the
Executive's termination for Cause, Retirement, or death, and no action by the
Company specified in paragraphs (a) through (d) of the preceding sentence shall
give rise to a Good Reason if it results from the Executive's Disability. A Good
Reason shall not be deemed to be waived by reason of the Executive's continued
employment as long as the termination of the Executive's employment occurs
within the time prescribed by Section 1.1(b)(ii)(B) hereof. For purposes of this
Section 1.4, "Plan" means any compensation plan, such as an incentive, stock
option, or restricted stock plan, or any employee benefit plan, such as a
thrift, pension, profit-sharing, stock bonus, long-term performance award,
medical, disability, accident, or life insurance plan, or a relocation plan or
policy, or any other plan, program or policy of the Company that is intended to
benefit employees.
Section 1.5. Retirement. For purposes of this Agreement,
"Retirement" shall mean the Executive's termination of employment upon or after
attaining age 65.
<PAGE> 6
Section 1.6. Disability. For purposes of this Agreement,
"Disability" shall mean an illness or injury that prevents the Executive from
performing his duties (as they existed immediately before the illness or injury)
on a full-time basis for six consecutive months.
Section 1.7. Notice. If a Change in Control occurs, the
Company shall notify the Executive of the occurrence of the Change in Control
within two weeks after the Change in Control.
ARTICLE II
BENEFITS AFTER A QUALIFYING TERMINATION
Section 2.1. Basic Severance Payment.
(a) If the Executive incurs a Qualifying Termination, the
Company shall pay to the Executive a cash amount equal to 200% of the Base
Amount. The Base Amount shall be an amount equal to the greater of
(A) the sum of (I) the Executive's base annual salary
immediately before the Change in Control plus (II) the Executive's Average
Percentage of the annual value (i.e., the dollar amount) of the normal payment
under the EIP for the Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP immediately before the date
on which the Change in Control occurs for the Executive's salary level
immediately before the date on which the Change in Control occurs). For purposes
of this paragraph (A), the Executive's "Average Percentage" means the average of
the Executive's Annual Percentages for the Determination Years. For purposes of
this paragraph (A), the Executive's "Annual Percentage" for each Determination
Year means a fraction (expressed as a percentage), the numerator of which is the
EIP award earned by the Executive for such Determination Year, and the
denominator of which is the annual value of the normal payment under the EIP for
the Executive's salary level (such annual value and normal payment being those
that were in effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For purposes of this
paragraph (A), a "Determination Year" means each of the last three EIP plan
years ending before the date on which the Change in Control occurs (or, if less,
the number of those three plan years during which the Executive was a
participant in the EIP); or
(B) the sum of (I) the Executive's base annual salary
immediately before the Qualifying Termination plus (II) the Executive's Average
Percentage of the annual value (i.e., the dollar amount) of the normal payment
under the EIP for the Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP immediately before the date
on which the Qualifying Termination occurs for the Executive's salary level
immediately before the date on which the Qualifying Termination occurs). For
purposes of this paragraph (B), the Executive's "Average Percentage" means the
average of the Executive's Annual Percentages for the Determination Years. For
purposes of this paragraph (B), the Executive's "Annual Percentage" for each
Determination Year means a fraction (expressed as a percentage), the numerator
of which is the EIP award earned by the Executive for such Determination Year,
and the denominator of which is the annual value of the normal payment under the
EIP for the Executive's salary level (such annual value and normal payment being
those that were in effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For purposes of this
paragraph (B), a "Determination Year" means each of the last three EIP plan
years ending before the date on which the Qualifying Termination occurs (or, if
less, the number of those three plan years during which the Executive was a
participant in the EIP).
(b) The Company shall make the payment to the Executive
pursuant to subsection (a) of this Section 2.1 in a lump sum within 30 days of
the Qualifying Termination.
<PAGE> 7
Section 2.2. Insurance. If the Executive incurs a Qualifying
Termination, the Company shall provide the Executive, at the Company's expense,
for a period beginning on the date of the Qualifying Termination, the same
medical insurance and life insurance coverage as was in effect immediately
before the Change in Control (or, if greater, as in effect immediately before
the Qualifying Termination occurs). Such coverage shall end upon the expiration
of 24 months after the Qualifying Termination. For purposes of this Section 2.2,
"at the Company's expense" means that the Company shall make all contributions
or premium payments required to obtain coverage, and that the Executive shall
not make any such contributions or premium payments, but that the Executive
shall be subject to any deductibles and co-payment provisions in effect
immediately before the Change in Control (or, if applicable, immediately before
the Qualifying Termination). Except to the extent otherwise required by law, the
period of coverage for any health care continuation coverage required by the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, shall begin
on the date of the Executive's Qualifying Termination.
Section 2.3. Outplacement Counseling. If the Executive incurs
a Qualifying Termination, the Company shall make available to the Executive, at
the Company's expense, outplacement counseling that is at least equivalent to
the outplacement counseling that the Company provided to its terminated senior
executives during the most recent year that ended before the Change in Control
occurred and during which the Company provided outplacement counseling to its
terminated senior executives. Subject to the foregoing, the Executive may select
the organization that will provide the outplacement counseling; provided, that
this sentence shall not require the Company to provide the Executive with
outplacement counseling that is more costly to the Company than the outplacement
counseling that this Section 2.3 otherwise requires the Company to provide to
the Executive.
Section 2.4. Financial Counseling. If the Executive incurs a
Qualifying Termination, the Company shall, within 30 days of the Qualifying
Termination, make available to the Executive three individual financial
counseling sessions, of at least two hours each and at times and locations that
are convenient to the Executive, with a nationally recognized financial
counseling firm. At the financial counseling sessions, the financial counseling
firm shall provide the Executive with detailed financial advice that is tailored
to the Executive's particular personal and financial situation. The Company
shall specify to the Executive the information regarding his personal and
financial situation that he must provide to the financial counseling firm in
order for the firm to provide the counseling services required by this Section
2.4. The Company shall take all reasonable and appropriate measures to assure
that the financial counseling firm preserves the confidentiality of all
information conveyed by the Executive to the counseling firm.
Section 2.5. Benefit Credit. If the Executive incurs a
Qualifying Termination,
(a) the Executive shall receive service credit, for the
purpose of receiving benefits and for vesting, retirement eligibility, benefit
accrual, and all other purposes, under all employee benefit plans sponsored by
the Company (including, but not limited to, health, life insurance, pension,
savings, stock, and stock ownership plans, but excluding the Company's
short-term and long-term disability plans) in which he participated immediately
before the Change in Control, for 24 months;
(b) for purposes of determining the Executive's benefits under
all defined benefit pension plans maintained by the Company, including the GTE
Excess Pension Plan and the GTE Supplemental Executive Retirement Plan
(collectively "SERP"), the Executive's compensation shall include the amount
payable to the Executive pursuant to Section 2.1 hereof, and for purposes of
this subsection (b), the Executive shall be deemed to have received such amount
in monthly installments, each equal to 1/24th of the amount payable to the
Executive pursuant to Section 2.1 hereof; and
<PAGE> 8
(c) the Executive shall be considered to have not less than 76
points and 15 years of Accredited Service for purposes of determining (i) his
eligibility for early retirement benefits under the Company's defined benefit
pension plans (including, but not limited to, the SERP), and (ii) his
eligibility for benefits under the GTE Executive Retired Life Insurance Plan (or
any predecessor or successor thereto).
Notwithstanding the service credit granted under subsection (a) of this Section
2.5 and the compensation recognized under subsection (b) of this Section 2.5,
nothing in this Section 2.5 shall prevent the Executive from receiving any
benefits to which the Executive is entitled under any defined benefit or defined
contribution pension plan maintained by the Company, including the SERP (as such
benefits are modified by this Agreement) in any form permitted by such plans
(including but not limited to a lump-sum distribution) immediately following the
Executive's Qualifying Termination. To the extent that the Company's
tax-qualified retirement plans cannot provide the benefits specified by this
Section 2.5 without jeopardizing the tax qualification of such plans, the
Company shall provide such benefits under the SERP.
Section 2.6. Certain Additional Payments by the Company.
(a) Except as provided in Section 2.6(f) hereof, if any
payment or distribution by the Company to or for the benefit of the Executive,
whether pursuant to the terms of this Agreement or otherwise (a "Payment"), is
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), the Company shall make an
additional payment (a "Gross-Up Payment") to the Executive in an amount such
that, after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any federal, state, or local income and employment taxes and Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed on the Payment.
(b) Subject to the provisions of Section 2.6(c) hereof, all
determinations under this Section 2.6, including whether a Gross-Up Payment is
required and the amount of the Gross-Up Payment, shall be made by the Company's
certified public accounting firm immediately before the Change in Control occurs
(the "Accounting Firm"), which shall provide detailed supporting calculations to
both the Company and the Executive within 15 business days after the Change in
Control (or any other change in ownership or effective control that triggers
application of the Excise Tax) and, if a Qualifying Termination occurs, within
15 days after the Qualifying Termination. All fees and expenses of the
Accounting Firm shall be borne solely by the Company. The initial Gross-Up
Payment determined pursuant to this Section 2.6(b) shall be paid by the Company
to the Executive within five days after it receives the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by the Executive, it shall furnish the Executive with a written opinion that
failure to report the Excise Tax on the Executive's applicable federal tax
return will not result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding on the Company and the
Executive. Notwithstanding the foregoing, as a result of uncertainty in applying
Section 4999 of the Code, it is possible that the Company will not have made
Gross-Up Payments that it should have made hereunder (an "Underpayment"). If the
Company exhausts its remedies pursuant to Section 2.6(c) hereof and the
Executive thereafter is required to pay any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment, inform the Company and the
Executive of the Underpayment in writing, and, within five days of receiving
such written report, the Company shall pay the amount of such Underpayment to or
for the benefit of the Executive.
<PAGE> 9
(c) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be given
as soon as practicable but no later than ten business days after the Executive
is informed in writing of such claim and shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim before the expiration of 30 days following
the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing before the expiration of such
30-day period that it desires to contest such claim, the Executive shall (i)
give the Company any information reasonably requested by the Company relating to
such claim, and (ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney selected by the Company; provided, that the Company shall pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any tax, including interest and
penalties, imposed as a result of such representation and payment of costs and
expenses. The Company shall control all proceedings in connection with such
contest and may, at its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or to contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before any
appropriate administrative tribunal or court, as the Company shall determine;
provided, that if the Company directs the Executive to pay such claim and sue
for a refund, the Company shall advance the amount of such payment to the
Executive, on an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any tax, including interest or penalties,
imposed with respect to such advance. The Company's control of the contest shall
be limited to issues with respect to which a Gross-Up Payment would be payable
hereunder, and the Executive shall be entitled to settle or contest any other
issue.
(d) If, after the Executive receives an advance by the Company
pursuant to Section 2.6(c) hereof, the Executive becomes entitled to receive a
refund claimed pursuant to such Section 2.6(c), the Executive shall (subject to
the Company's complying with the requirements of such Section 2.6(c)) promptly
pay to the Company the amount of such refund (together with any interest
thereon, after taxes applicable thereto). If, after the Executive receives an
amount advanced by the Company pursuant to Section 2.6(c) hereof, a
determination is made that the Executive shall not be entitled to any refund
claimed pursuant to such Section 2.6(c), and the Company does not notify the
Executive in writing of its intent to contest such denial of refund before the
expiration of 30 days after such determination, the Executive shall not be
required to repay such advance, and the amount of such advance shall offset, to
the extent thereof, the amount of the required Gross-Up Payment.
(e) Any payments otherwise required by this Section 2.6 shall
be made regardless of whether a Qualifying Termination occurs.
(f) If the Executive Compensation and Organizational Structure
Committee of the Board (or any successor thereto) determines in its sole
discretion that (i) consummation of a transaction may be contingent upon the
parties' ability to use pooling of interest accounting and (ii) a provision of
this Section would preclude the use of pooling of interest accounting, said
Committee may, in its sole discretion, eliminate or modify that provision to the
extent required to allow pooling of interest accounting; provided that said
Committee may not take any action pursuant to this Section 2.6(f) after a Change
in Control.
Section 2.7. Stock Options and Stock Appreciation Rights. If
the Executive incurs a Qualifying Termination, the Executive may exercise any
then outstanding stock options and stock appreciation rights under the GTE
Long-Term Incentive Plan (or any successor thereto) for a period of at least two
years following the date of such Qualifying Termination (but not beyond the
maximum term of the option or stock appreciation right specified by the terms of
the stock option or stock appreciation right).
Section 2.8. Nonduplication. Nothing in this Agreement shall
require the Company to make any payment or to provide any benefit or service
credit that GTE, the Company, or any affiliate of either of them (the "GTE
Group") is required to provide with respect to the Executive under any other
contract, agreement, policy, plan, or arrangement, including a separation policy
or employment agreement ("Other Agreement"). In order to accomplish the
foregoing, if the GTE Group is required, under any Other Agreement, to make any
payment or to provide any benefit or service credit that also is required to be
made or to be provided under this Agreement, the payment, benefit, or service
credit required by this Agreement shall be reduced by the payment, benefit, or
service credit that the GTE Group is required to make or to provide with respect
to the Executive under the Other Agreement.
<PAGE> 10
ARTICLE III
EFFECT ON INVOLUNTARY SEPARATION POLICY
Section 3.1. Involuntary Separation Policy. Nothing in this
Agreement shall cause the Executive to be deprived of any benefits to which the
Executive is entitled under any Company severance or salary continuation policy
(including but not limited to any benefits pursuant to an involuntary separation
program or similar program maintained under a pension plan sponsored by the
Company); provided that, in accordance with Section 2.8 hereof, any such
benefits shall reduce any benefits payable under this Agreement.
ARTICLE IV
TAX MATTERS
Section 4.1. Withholding. The Company may withhold from any
amounts payable to the Executive hereunder all federal, state, city or other
taxes that the Company may reasonably determine are required to be withheld
pursuant to any applicable law or regulation.
ARTICLE V
COLLATERAL MATTERS
Section 5.1. Nature of Payments. All payments to the Executive
under this Agreement shall be considered either payments in consideration of his
continued service to the Company or severance payments in consideration of his
past services thereto.
Section 5.2. Legal Expenses. The Company shall pay all legal
fees and expenses that the Executive may incur as a result of the Company's
contesting the validity, the enforceability or the Executive's interpretation
of, or determinations under, this Agreement; provided, that this Section 5.2
shall be operative only if and to the extent that (a) the Company fails to
establish a trust that defrays all such legal fees and expenses or (b) the
Company establishes such a trust, but the trust fails to pay all such legal fees
and expenses.
Section 5.3. Mitigation. The Executive shall not be required
to mitigate the amount of any payment provided for in this Agreement either by
seeking other employment or otherwise. Except as provided in Section 2.2 hereof,
the amount of any payment provided for herein shall not be reduced by any
remuneration that the Executive may earn from employment with another employer
or otherwise following his Qualifying Termination.
Section 5.4. Interest. If the Company fails to make, or cause
to be made, any payment provided for herein within 30 days of the date on which
the payment is due, the Company shall make such payment together with interest
thereon. The interest shall accrue and be compounded monthly. The interest rate
shall be equal to 120 percent of the prime rate as reported by The Wall Street
Journal for the first business day of each month, effective for the ensuing
month. The interest rate shall be adjusted at the beginning of each month.
Section 5.5. Prior Agreement. Any agreement between the
Company and the Executive that is entitled "Executive Severance Agreement" and
that was executed by the parties before the date hereof is hereby canceled and
shall have no force or effect.
<PAGE> 11
Section 5.6. Authority. The execution of this Agreement has
been authorized by the Board of Directors of the Company and by the Board of
Directors of GTE.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1. Term of Agreement. This Agreement shall become
effective on the date hereof and shall continue in effect until the earliest of
(a) July 1, 2001, if no Change in Control has occurred before that date; (b) the
termination of the Executive's employment with the Company for any reason prior
to a Change in Control; (c) the Company's termination of the Executive's
employment for Cause, or the Executive's resignation for other than Good Reason,
following a Change in Control and the Company's and the Executive's fulfillment
of all of their obligations hereunder; and (d) the expiration following a Change
in Control of two years and six months and the fulfillment by the Company and
the Executive of all of their obligations hereunder. Notwithstanding the
foregoing, commencing on July 1, 2001, and on July 1 of each year thereafter,
the expiration date prescribed by clause (a) of the preceding sentence shall
automatically be extended for an additional year unless, not later than December
31 of the immediately preceding year, one of the parties hereto shall have given
notice to the other party hereto that it (or he) does not wish to extend the
term of this Agreement. Furthermore, nothing in this Article VI shall cause this
Agreement to terminate before both the Company and the Executive have fulfilled
all of their obligations hereunder.
Section 6.2. Governing Law. Except as otherwise expressly
provided herein, this Agreement and the rights and obligations hereunder shall
be construed and enforced in accordance with the laws of the State of New York.
Section 6.3. Successors to the Company. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the Company
and any successor thereto, including, without limitation, any corporation or
corporations acquiring directly or indirectly all or substantially all of the
business or assets of the Company, whether by merger, consolidation, sale or
otherwise, but shall not otherwise be assignable by the Company. Without
limitation of the foregoing sentence, the Company shall require any successor
(whether direct or indirect, by merger, consolidation, sale or otherwise) to all
or substantially all of the business or assets of the Company, by agreement in
form satisfactory to the Executive, expressly, absolutely and unconditionally to
assume and to agree to perform this Agreement in the same manner and to the same
extent as the Company would have been required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean the
Company as heretofore defined and any successor to all or substantially all of
its business or assets that executes and delivers the agreement provided for in
this Section 6.3 or that becomes bound by this Agreement either pursuant to this
Agreement or by operation of law. As used in this Agreement, "GTE" shall mean
GTE as heretofore defined and any successor to all or substantially all of its
business or assets.
Section 6.4. Noncorporate Entities. If any provision of this
Agreement refers to the board of directors of an entity that has no board of
directors, the reference to board of directors shall be deemed to refer to the
body, committee, or person that has duties and responsibilities with respect to
the entity that most closely approximate those of a board of directors of a
corporation.
Section 6.5. Successor to the Executive. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Executive and his personal and legal representatives, executors, administrators,
heirs, distributees, legatees and, subject to Section 6.6 hereof, his designees
("Successors"). If the Executive should die while amounts are or may be payable
to him under this Agreement, references hereunder to the "Executive" shall,
where appropriate, be deemed to refer to his Successors; provided, that nothing
in this Section 6.5 shall
<PAGE> 12
supersede the terms of any plan or arrangement (other than this Agreement) that
is affected by this Agreement.
Section 6.6. Nonalienability. No right of or amount payable to
the Executive under this Agreement shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance, charge, execution, attachment, levy or similar process or to set
off against any obligations or to assignment by operation of law. Any attempt,
voluntary or involuntary, to effect any action specified in the immediately
preceding sentence shall be void. However, this Section 6.6 shall not prohibit
the Executive from designating one or more persons, on a form satisfactory to
the Company, to receive amounts payable to him under this Agreement in the event
that he should die before receiving them.
Section 6.7. Notices. All notices provided for in this
Agreement shall be in writing. Notices to the Company shall be deemed given when
personally delivered or sent by certified or registered mail or overnight
delivery service to GTE Service Corporation, 1255 Corporate Drive, P.O. Box
152257, Irving, TX 75015-2257, Attention: Corporate Secretary. Notices to the
Executive shall be deemed given when personally delivered or sent by certified
or registered mail or overnight delivery service to the last address for the
Executive shown on the records of the Company. Either the Company or the
Executive may, by notice to the other, designate an address other than the
foregoing for the receipt of subsequent notices.
Section 6.8. Amendment. No amendment to this Agreement shall
be effective unless in writing and signed by both the Company and the Executive;
provided that amendments may be made to this Agreement by the Executive
Compensation and Organizational Structure Committee of the Board (or any
successor thereto) in accordance with Section 2.6(f) hereof prior to a Change in
Control.
Section 6.9. Waivers. No waiver of any provision of this
Agreement shall be valid unless approved in writing by the party giving such
waiver. No waiver of a breach under any provision of this Agreement shall be
deemed to be a waiver of such provision or any other provision of this Agreement
or any subsequent breach. No failure on the part of either the Company or the
Executive to exercise, and no delay in exercising, any right or remedy conferred
by law or this Agreement shall operate as a waiver of such right or remedy, and
no exercise or waiver, in whole or in part, of any right or remedy conferred by
law or herein shall operate as a waiver of any other right or remedy.
Section 6.10. Severability. If any provision of this Agreement
shall be held unlawful or otherwise invalid or unenforceable in whole or in
part, such unlawfulness, invalidity or unenforceability shall not affect any
other provision of this Agreement or part thereof, each of which shall remain in
full force and effect. If the making of any payment or the provision of any
other benefit required under this Agreement shall be held unlawful or otherwise
invalid or unenforceable, such unlawfulness, invalidity or unenforceability
shall not prevent any other payment or benefit from being made or provided under
this Agreement, and if the making of any payment in full or the provision of any
other benefit required under this Agreement in full would be unlawful or
otherwise invalid or unenforceable, then such unlawfulness, invalidity or
unenforceability shall not prevent such payment or benefit from being made or
provided in part, to the extent that it would not be unlawful, invalid or
unenforceable, and the maximum payment or benefit that would not be unlawful,
invalid or unenforceable shall be made or provided under this Agreement.
Section 6.11. Agents. The Company may make arrangements to
cause any agent or other party, including an affiliate of the Company, to make
any payment or to provide any benefit that the Company is required to make or to
provide hereunder; provided, that no such arrangement
<PAGE> 13
shall relieve or discharge the Company of its obligations hereunder except to
the extent that such payments or benefits are actually made or provided.
Section 6.12. Captions. The captions to the respective
articles and sections of this Agreement are intended for convenience of
reference only and have no substantive significance.
Section 6.13. Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original but
all of which together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
GTE SERVICE CORPORATION
By:
--------------------------------------
Charles R. Lee
--------------------------------------
Participant
--------------------------------------
Date
<PAGE> 1
EXHIBIT 10.2
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT ("Agreement") dated June 4, 1998, by and between GTE
Service Corporation, a New York corporation (the "Company"), and <<NAME>> (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Company recognizes the valuable services that the
Executive has rendered thereto and desires to be assured that the Executive
will continue to attend to the business and affairs of the Company without
regard to any potential or actual change in control of GTE Corporation, a New
York corporation and the Company's sole shareholder ("GTE"); and
WHEREAS, the Executive is willing to continue to serve the Company,
but desires assurance that he will not be materially disadvantaged by a change
in control of GTE;
NOW, THEREFORE, in consideration of the Executive's continued service
to the Company and the mutual agreements herein contained, the Company and the
Executive hereby agree as follows:
ARTICLE I
ELIGIBILITY FOR BENEFITS
Section 1.1. Qualifying Termination. Except as provided in Section 2.6
hereof, the Company shall not be required to provide any benefits to the
Executive pursuant to this Agreement unless a Qualifying Termination occurs
before the Agreement expires in accordance with Section 6.1 hereof. For
purposes of this Agreement, a Qualifying Termination shall occur only if
(a) a Change in Control occurs, and
(b) (i) within two years after the Change in Control, the Company
terminates the Executive's employment other than for Cause; or
(ii)(A) within two years after the Change in Control, a Good Reason
arises, and (B) the Executive terminates employment with the Company within (I)
six months after the Good Reason arises or (II) two years after the Change in
Control, whichever occurs later; provided, that a Qualifying Termination shall
not occur if the Executive's employment with the Company terminates by reason of
the Executive's Retirement, Disability, or death. A Qualifying Termination may
occur even though the Executive retires from employment with the Company other
than by reason of Retirement or Disability.
Section 1.2. Change in Control. Except as provided below, a Change in
Control shall be deemed to occur when and only when the first of the following
events occurs:
(a) an acquisition (other than directly from GTE) of securities of GTE
by any Person, immediately after which such Person, together with all
Affiliates and Associates of such Person, shall be the Beneficial Owner of
securities of GTE representing 20 percent or more of the Voting Power or such
lower percentage of the Voting Power that, from time to time, would cause the
Person to
<PAGE> 2
constitute an "Acquiring Person" (as such term is defined in the Rights Plan);
provided that, in determining whether a Change in Control has occurred, the
acquisition of securities of GTE in a Non-Control Acquisition shall not
constitute an acquisition that would cause a Change in Control; or
(b) three or more directors, whose election or nomination for election
is not approved by a majority of the members of the "Incumbent Board" (as
defined below) then serving as members of the Board, are elected within any
single 12-month period to serve on the Board; provided that an individual whose
election or nomination for election is approved as a result of either an actual
or threatened "Election Contest" (as described in Rule 14a-11 promulgated under
the Securities Exchange Act of 1934, as amended from time to time) or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board (a "Proxy Contest"), including by reason of any
agreement intended to avoid or settle any Election Contest or Proxy Contest,
shall be deemed not to have been approved by a majority of the Incumbent Board
for purposes hereof; or
(c) members of the Incumbent Board cease for any reason to constitute
at least a majority of the Board; "Incumbent Board" shall mean individuals who,
as of the close of business on June 4, 1998, are members of the Board; provided
that, if the election, or nomination for election by GTE's shareholders, of any
new director was approved by a vote of at least three-quarters of the Incumbent
Board, such new director shall, for purposes of this Agreement, be considered
as a member of the Incumbent Board; provided further that no individual shall
be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened Election Contest
or other actual or threatened Proxy Contest, including by reason of any
agreement intended to avoid or settle any Election Contest or Proxy Contest; or
(d) approval by shareholders of GTE of:
(i) a merger, consolidation, or reorganization involving GTE,
unless
(A) the shareholders of GTE, immediately before the merger,
consolidation, or reorganization, own, directly or indirectly immediately
following such merger, consolidation, or reorganization, at least 50 percent of
the combined voting power of the outstanding voting securities of the
corporation resulting from such merger, consolidation, or reorganization (the
"Surviving Corporation") in substantially the same proportion as their
ownership of the voting securities immediately before such merger,
consolidation, or reorganization;
(B) individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute at least a majority of the board of
directors of the Surviving Corporation; and
(C) no Person (other than GTE or any subsidiary of GTE, any
employee benefit plan (or any trust forming a part thereof) maintained by GTE,
the Surviving Corporation, or any subsidiary of GTE, or any Person who,
immediately prior to such merger, consolidation, or reorganization, had
Beneficial Ownership of securities representing 20 percent (or such lower
percentage the acquisition of which would cause a Change in Control pursuant to
paragraph (a) of this definition of "Change in Control") or more of the Voting
Power) has Beneficial Ownership of securities representing 20 percent (or such
lower percentage the acquisition of which would cause a Change in Control
pursuant to paragraph (a) of this definition of "Change in Control") or more of
the combined Voting Power of the Surviving Corporation's then outstanding
voting securities;
(ii) a complete liquidation or dissolution of GTE; or
(iii) an agreement for the sale or other disposition of all or
substantially all of the assets of GTE to any Person (other than a transfer to
a subsidiary of GTE).
<PAGE> 3
For purposes of this Section, the following terms shall have the
definitions set forth below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended from time to time.
"Board" means the Board of Directors of GTE.
"Non-Control Acquisition" means an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by GTE or any of
its subsidiaries, (2) GTE or any of its subsidiaries, or (3) any Person in
connection with a "Non-Control Transaction."
"Non-Control Transaction" means a transaction described in clauses (A)
through (C) of paragraph (d)(i) of the definition of "Change in Control"
herein.
"Person" shall mean any individual, firm, corporation, partnership,
joint venture, association, trust, or other entity; and a Person shall be
deemed the "Beneficial Owner" of, and shall be deemed to "beneficially own,"
any securities:
(x) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(y) which such Person or any of such Person's Affiliates or Associates
has (i) the right or obligation to acquire (whether such right or obligation is
exercisable or effective immediately or only after the passage of time)
pursuant to any agreement, arrangement, or understanding (whether or not in
writing) or upon the exercise of conversion rights, exchange rights, rights
(other than the rights granted pursuant to the Rights Plan), warrants or
options, or otherwise; provided that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," securities tendered pursuant
to a tender or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange; or (ii) the right to vote pursuant to any agreement,
arrangement, or understanding (whether or not in writing); provided that a
Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this clause (y) if the agreement, arrangement, or
understanding to vote such security (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations of the Securities
Exchange Act of 1934, as amended from time to time, and (B) is not also then
reportable by such person on Schedule 13D under the Securities Exchange Act of
1934, as amended from time to time (or any comparable or successor report); or
(z) which are beneficially owned, directly or indirectly, by any other
Person (or any Affiliate or Associate thereof) with which such Person or any of
such Person's Affiliates or Associates has any agreement, arrangement, or
understanding (whether or not in writing), or with which such Person or any of
such Person's Affiliates or Associates have otherwise formed a group for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy as
described in clause (ii)(A) of subparagraph (y), above), or disposing of any
securities of GTE.
"Rights Plan" means the Rights Agreement, dated as of December 7,
1989, between GTE and The First National Bank of Boston (as successor Rights
Agent to State Street Bank and Trust Company), as it may be amended from time
to time, or any successor thereto.
<PAGE> 4
"Voting Power" means the voting power of all securities of GTE then
outstanding generally entitled to vote for the election of directors of GTE.
Section 1.3. Termination for Cause. The Company shall have Cause to
terminate the Executive for purposes of Section 1.1 hereof only if the
Executive (a) engages in unlawful acts intended to result in the substantial
personal enrichment of the Executive at the Company's expense, or (b) engages
(except by reason of incapacity due to illness or injury) in a material
violation of his responsibilities to the Company that results in a material
injury to the Company. Notwithstanding the foregoing, the Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a Notice of Termination, consisting of a copy of a
resolution duly adopted by the affirmative vote of not less than three quarters
of the entire membership of GTE's Board of Directors at a duly held meeting of
the Board of Directors (with reasonable notice to the Executive and an
opportunity for the Executive, together with counsel, to be heard before the
Board of Directors), finding that the Executive has engaged in the conduct set
forth above in this Section 1.3 and specifying the particulars thereof in
detail. GTE's Board of Directors may not delegate or assign its duties under
this Section 1.3.
Section 1.4. Termination for Good Reason. The Executive shall have a
Good Reason for terminating employment with the Company only if one or more of
the following occurs after a Change in Control:
(a) a change in the Executive's status or position(s) with the Company
that, in the Executive's reasonable judgment, represents a demotion from the
Executive's status or position(s) in effect immediately before the Change in
Control;
(b) the assignment to the Executive of any duties or responsibilities
that, in the Executive's reasonable judgment, are inconsistent with the
Executive's status or position(s) in effect immediately before the Change in
Control;
(c) layoff or involuntary termination of the Executive's employment,
except in connection with the termination of the Executive's employment for
Cause or as a result of the Executive's Retirement, Disability, or death;
(d) a reduction by the Company in the Executive's total compensation
(which shall be deemed, for this purpose, to be equal to his base salary plus
the greater of (i) the most recent award that he has earned under the GTE
Corporation Executive Incentive Plan, as amended from time to time, or any
successor thereto (the "EIP"), or (ii) an EIP award equal to the Executive's
Average Percentage of the annual value (i.e., the dollar amount) of the normal
payment under the EIP for the Executive's salary level (such annual value and
normal payment being those that are in effect under the EIP immediately before
the date on which the Change in Control occurs for the Executive's salary level
immediately before the date on which the Change in Control occurs). For
purposes of this paragraph (d), the Executive's "Average Percentage" means the
average of the Executive's Annual Percentages for the Determination Years. For
purposes of this paragraph (d), the Executive's "Annual Percentage" for each
Determination Year means a fraction (expressed as a percentage), the numerator
of which is the EIP award earned by the Executive for such Determination Year,
and the denominator of which is the annual value of the normal payment under
the EIP for the Executive's salary level (such annual value and normal payment
being those that were in effect under the EIP for such Determination Year for
the Executive's salary level for such Determination Year). For purposes of this
paragraph (d), a "Determination Year" means each of the last three EIP plan
years ending before the date on which the Change in Control occurs (or, if
less, the number of those three plan years during which the Executive was a
participant in the EIP);
<PAGE> 5
(e) a material increase in the Executive's responsibilities or duties
without a commensurate increase in total compensation;
(f) the failure by the Company to continue in effect any Plan in which
the Executive is participating at the time of the Change in Control (or plans
or arrangements providing the Executive with substantially equivalent benefits)
other than as a result of the normal expiration of any such Plan in accordance
with its terms as in effect at the time of the Change in Control;
(g) any action or inaction by the Company that would adversely affect
the Executive's continued participation in any Plan on at least as favorable a
basis as was the case on the date of the Change in Control, or that would
materially reduce the Executive's benefits in the future under the Plan or
deprive him of any material benefits that he enjoyed at the time of the Change
in Control, except to the extent that such action or inaction by the Company is
required by the terms of the Plan as in effect immediately before the Change in
Control, or is necessary to comply with applicable law or to preserve the
qualification of the Plan under section 401(a) of the Internal Revenue Code of
1986, as amended from time to time or any successor thereto (the "Code") and
except to the extent that the Company provides the Executive with substantially
equivalent benefits;
(h) the Company's failure to provide and credit the Executive with the
number of days of paid vacation, holiday, or leave to which he is then entitled
in accordance with the Company's normal vacation, holiday, or leave policy in
effect immediately before the Change in Control;
(i) the imposition of any requirement that the Executive be based
anywhere other than within 50 miles of where his principal office was located
immediately before the Change in Control;
(j) a material increase in the frequency or duration of the
Executive's business travel;
(k) the Company's failure to obtain the express assumption of this
Agreement by any successor to the Company as provided by Section 6.3 hereof;
(l) any attempt by the Company to terminate the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 1.3 hereof or that does not afford the Executive the
procedural protections prescribed by that Section; or
(m) any violation by the Company of any agreement (including this
Agreement) between it and the Executive. Notwithstanding the foregoing, no
action by the Company shall give rise to a Good Reason if it results from the
Executive's termination for Cause, Retirement, or death, and no action by the
Company specified in paragraphs (a) through (d) of the preceding sentence shall
give rise to a Good Reason if it results from the Executive's Disability. A
Good Reason shall not be deemed to be waived by reason of the Executive's
continued employment as long as the termination of the Executive's employment
occurs within the time prescribed by Section 1.1(b)(ii)(B) hereof. For purposes
of this Section 1.4, "Plan" means any compensation plan, such as an incentive,
stock option, or restricted stock plan, or any employee benefit plan, such as a
thrift, pension, profit-sharing, stock bonus, long-term performance award,
medical, disability, accident, or life insurance plan, or a relocation plan or
policy, or any other plan, program or policy of the Company that is intended to
benefit employees.
Section 1.5. Retirement. For purposes of this Agreement, "Retirement"
shall mean the Executive's termination of employment upon or after attaining
age 65.
Section 1.6. Disability. For purposes of this Agreement, "Disability"
shall mean an illness or injury that prevents the Executive from performing his
duties (as they existed immediately before the illness or injury) on a
full-time basis for six consecutive months.
<PAGE> 6
Section 1.7. Notice. If a Change in Control occurs, the Company shall
notify the Executive of the occurrence of the Change in Control within two
weeks after the Change in Control.
ARTICLE II
BENEFITS AFTER A QUALIFYING TERMINATION
Section 2.1. Basic Severance Payment.
(a) If the Executive incurs a Qualifying Termination, the Company
shall pay to the Executive a cash amount equal to 200% of the Base Amount. The
Base Amount shall be an amount equal to the greater of
(A) the sum of (I) the Executive's base annual salary
immediately before the Change in Control plus (II) the Executive's Average
Percentage of the annual value (i.e., the dollar amount) of the normal payment
under the EIP for the Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP immediately before the
date on which the Change in Control occurs for the Executive's salary level
immediately before the date on which the Change in Control occurs). For
purposes of this paragraph (A), the Executive's "Average Percentage" means the
average of the Executive's Annual Percentages for the Determination Years. For
purposes of this paragraph (A), the Executive's "Annual Percentage" for each
Determination Year means a fraction (expressed as a percentage), the numerator
of which is the EIP award earned by the Executive for such Determination Year,
and the denominator of which is the annual value of the normal payment under
the EIP for the Executive's salary level (such annual value and normal payment
being those that were in effect under the EIP for such Determination Year for
the Executive's salary level for such Determination Year). For purposes of this
paragraph (A), a "Determination Year" means each of the last three EIP plan
years ending before the date on which the Change in Control occurs (or, if
less, the number of those three plan years during which the Executive was a
participant in the EIP); or
(B) the sum of (I) the Executive's base annual salary
immediately before the Qualifying Termination plus (II) the Executive's Average
Percentage of the annual value (i.e., the dollar amount) of the normal payment
under the EIP for the Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP immediately before the
date on which the Qualifying Termination occurs for the Executive's salary
level immediately before the date on which the Qualifying Termination occurs).
For purposes of this paragraph (B), the Executive's "Average Percentage" means
the average of the Executive's Annual Percentages for the Determination Years.
For purposes of this paragraph (B), the Executive's "Annual Percentage" for
each Determination Year means a fraction (expressed as a percentage), the
numerator of which is the EIP award earned by the Executive for such
Determination Year, and the denominator of which is the annual value of the
normal payment under the EIP for the Executive's salary level (such annual
value and normal payment being those that were in effect under the EIP for such
Determination Year for the Executive's salary level for such Determination
Year). For purposes of this paragraph (B), a "Determination Year" means each of
the last three EIP plan years ending before the date on which the Qualifying
Termination occurs (or, if less, the number of those three plan years during
which the Executive was a participant in the EIP).
(b) The Company shall make the payment to the Executive pursuant to
subsection (a) of this Section 2.1 in a lump sum within 30 days of the
Qualifying Termination.
<PAGE> 7
Section 2.2. Insurance. If the Executive incurs a Qualifying
Termination, the Company shall provide the Executive, at the Company's expense,
for a period beginning on the date of the Qualifying Termination, the same
medical insurance and life insurance coverage as was in effect immediately
before the Change in Control (or, if greater, as in effect immediately before
the Qualifying Termination occurs). Such coverage shall end upon the expiration
of 24 months after the Qualifying Termination. For purposes of this Section
2.2, "at the Company's expense" means that the Company shall make all
contributions or premium payments required to obtain coverage, and that the
Executive shall not make any such contributions or premium payments, but that
the Executive shall be subject to any deductibles and co-payment provisions in
effect immediately before the Change in Control (or, if applicable, immediately
before the Qualifying Termination). Except to the extent otherwise required by
law, the period of coverage for any health care continuation coverage required
by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended,
shall begin on the date of the Executive's Qualifying Termination.
Section 2.3. Outplacement Counseling. If the Executive incurs a
Qualifying Termination, the Company shall make available to the Executive, at
the Company's expense, outplacement counseling that is at least equivalent to
the outplacement counseling that the Company provided to its terminated senior
executives during the most recent year that ended before the Change in Control
occurred and during which the Company provided outplacement counseling to its
terminated senior executives. Subject to the foregoing, the Executive may
select the organization that will provide the outplacement counseling;
provided, that this sentence shall not require the Company to provide the
Executive with outplacement counseling that is more costly to the Company than
the outplacement counseling that this Section 2.3 otherwise requires the
Company to provide to the Executive.
Section 2.4. Financial Counseling. If the Executive incurs a
Qualifying Termination, the Company shall, within 30 days of the Qualifying
Termination, make available to the Executive three individual financial
counseling sessions, of at least two hours each and at times and locations that
are convenient to the Executive, with a nationally recognized financial
counseling firm. At the financial counseling sessions, the financial counseling
firm shall provide the Executive with detailed financial advice that is
tailored to the Executive's particular personal and financial situation. The
Company shall specify to the Executive the information regarding his personal
and financial situation that he must provide to the financial counseling firm
in order for the firm to provide the counseling services required by this
Section 2.4. The Company shall take all reasonable and appropriate measures to
assure that the financial counseling firm preserves the confidentiality of all
information conveyed by the Executive to the counseling firm.
Section 2.5. Benefit Credit. If the Executive incurs a Qualifying
Termination,
(a) the Executive shall receive service credit, for the purpose of
receiving benefits and for vesting, retirement eligibility, benefit accrual,
and all other purposes, under all employee benefit plans sponsored by the
Company (including, but not limited to, health, life insurance, pension,
savings, stock, and stock ownership plans, but excluding the Company's
short-term and long-term disability plans) in which he participated immediately
before the Change in Control, for 24 months;
(b) for purposes of determining the Executive's benefits under all
defined benefit pension plans maintained by the Company, including the GTE
Service Corporation Supplemental Executive Retirement Plan ("SERP"), the
Executive's compensation shall include the amount payable to the Executive
pursuant to Section 2.1 hereof, and for purposes of this subsection (b), the
Executive shall be deemed to have received such amount in monthly installments,
each equal to 1/24th of the amount payable to the Executive pursuant to Section
2.1 hereof; and
(c) the Executive shall be considered to have not less than 76 points
and 15 years of Accredited Service for purposes of determining (i) his
eligibility for early retirement benefits under the Company's defined benefit
pension plans (including, but not limited to, the SERP), and (ii) his
<PAGE> 8
eligibility for benefits under the GTE Executive Retired Life Insurance Plan
(or any predecessor or successor thereto).
Notwithstanding the service credit granted under subsection (a) of this Section
2.5 and the compensation recognized under subsection (b) of this Section 2.5,
nothing in this Section 2.5 shall prevent the Executive from receiving any
benefits to which the Executive is entitled under any defined benefit or
defined contribution pension plan maintained by the Company, including the SERP
(as such benefits are modified by this Agreement) in any form permitted by such
plans (including but not limited to a lump-sum distribution) immediately
following the Executive's Qualifying Termination. To the extent that the
Company's tax-qualified retirement plans cannot provide the benefits specified
by this Section 2.5 without jeopardizing the tax qualification of such plans,
the Company shall provide such benefits under the SERP.
Section 2.6. Certain Additional Payments by the Company.
(a) If any payment or distribution by the Company to or for the
benefit of the Executive, whether pursuant to the terms of this Agreement or
otherwise (a "Payment"), is subject to the excise tax imposed by Section 4999
of the Code or any interest or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as the "Excise Tax"),
the Company shall make an additional payment (a "Gross-Up Payment") to the
Executive in an amount such that, after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any federal, state, or local income and
employment taxes and Excise Tax imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed on the Payment.
(b) Subject to the provisions of Section 2.6(c) hereof, all
determinations under this Section 2.6, including whether a Gross-Up Payment is
required and the amount of the Gross-Up Payment, shall be made by the Company's
certified public accounting firm immediately before the Change in Control
occurs (the "Accounting Firm"), which shall provide detailed supporting
calculations to both the Company and the Executive within 15 business days
after the Change in Control (or any other change in ownership or effective
control that triggers application of the Excise Tax) and, if a Qualifying
Termination occurs, within 15 days after the Qualifying Termination. All fees
and expenses of the Accounting Firm shall be borne solely by the Company. The
initial Gross-Up Payment determined pursuant to this Section 2.6(b) shall be
paid by the Company to the Executive within five days after it receives the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with a
written opinion that failure to report the Excise Tax on the Executive's
applicable federal tax return will not result in the imposition of a negligence
or similar penalty. Any determination by the Accounting Firm shall be binding
on the Company and the Executive. Notwithstanding the foregoing, as a result of
uncertainty in applying Section 4999 of the Code, it is possible that the
Company will not have made Gross-Up Payments that it should have made hereunder
(an "Underpayment"). If the Company exhausts its remedies pursuant to Section
2.6(c) hereof and the Executive thereafter is required to pay any Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment, inform the
Company and the Executive of the Underpayment in writing, and, within five days
of receiving such written report, the Company shall pay the amount of such
Underpayment to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall
<PAGE> 9
not pay such claim before the expiration of 30 days following the date on which
he gives such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the Company
notifies the Executive in writing before the expiration of such 30-day period
that it desires to contest such claim, the Executive shall (i) give the Company
any information reasonably requested by the Company relating to such claim, and
(ii) take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including, without
limitation, accepting legal representation with respect to such claim by an
attorney selected by the Company; provided, that the Company shall pay directly
all costs and expenses (including additional interest and penalties) incurred
in connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any tax, including interest and penalties,
imposed as a result of such representation and payment of costs and expenses.
The Company shall control all proceedings in connection with such contest and
may, at its sole option, either direct the Executive to pay the tax claimed and
sue for a refund or to contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination before any
appropriate administrative tribunal or court, as the Company shall determine;
provided, that if the Company directs the Executive to pay such claim and sue
for a refund, the Company shall advance the amount of such payment to the
Executive, on an interest-free basis, and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any tax, including interest or
penalties, imposed with respect to such advance. The Company's control of the
contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder, and the Executive shall be entitled to settle or
contest any other issue.
(d) If, after the Executive receives an advance by the Company
pursuant to Section 2.6(c) hereof, the Executive becomes entitled to receive a
refund claimed pursuant to such Section 2.6(c), the Executive shall (subject to
the Company's complying with the requirements of such Section 2.6(c)) promptly
pay to the Company the amount of such refund (together with any interest
thereon, after taxes applicable thereto). If, after the Executive receives an
amount advanced by the Company pursuant to Section 2.6(c) hereof, a
determination is made that the Executive shall not be entitled to any refund
claimed pursuant to such Section 2.6(c), and the Company does not notify the
Executive in writing of its intent to contest such denial of refund before the
expiration of 30 days after such determination, the Executive shall not be
required to repay such advance, and the amount of such advance shall offset, to
the extent thereof, the amount of the required Gross-Up Payment.
(e) Any payments otherwise required by this Section 2.6 shall be made
regardless of whether a Qualifying Termination occurs.
Section 2.7. Stock Options and Stock Appreciation Rights. If the
Executive incurs a Qualifying Termination, the Executive may exercise any then
outstanding stock options and stock appreciation rights under the GTE Long-Term
Incentive Plan (or any successor thereto) for a period of at least two years
following the date of such Qualifying Termination (but not beyond the maximum
term of the option or stock appreciation right specified by the terms of the
stock option or stock appreciation right).
Section 2.8. Nonduplication. Nothing in this Agreement shall require
the Company to make any payment or to provide any benefit or service credit
that GTE, the Company, or any affiliate of either of them (the "GTE Group") is
required to provide with respect to the Executive under any other contract,
agreement, policy, plan, or arrangement, including a separation policy or
employment agreement ("Other Agreement"). In order to accomplish the foregoing,
if the GTE Group is required, under any Other Agreement, to make any payment or
to provide any benefit or service credit that also is required to be made or to
be provided under this Agreement, the payment, benefit, or service credit
required by this Agreement shall be reduced by the payment, benefit, or service
credit that the GTE Group is required to make or to provide with respect to the
Executive under the Other Agreement.
<PAGE> 10
ARTICLE III
EFFECT ON INVOLUNTARY SEPARATION POLICY
Section 3.1. Involuntary Separation Policy. Nothing in this Agreement
shall cause the Executive to be deprived of any benefits to which the Executive
is entitled under any Company severance or salary continuation policy
(including but not limited to any benefits pursuant to an involuntary
separation program or similar program maintained under a pension plan sponsored
by the Company); provided that, in accordance with Section 2.8 hereof, any such
benefits shall reduce any benefits payable under this Agreement.
ARTICLE IV
TAX MATTERS
Section 4.1. Withholding. The Company may withhold from any amounts
payable to the Executive hereunder all federal, state, city or other taxes that
the Company may reasonably determine are required to be withheld pursuant to
any applicable law or regulation.
ARTICLE V
COLLATERAL MATTERS
Section 5.1. Nature of Payments. All payments to the Executive under
this Agreement shall be considered either payments in consideration of his
continued service to the Company or severance payments in consideration of his
past services thereto.
Section 5.2. Legal Expenses. The Company shall pay all legal fees and
expenses that the Executive may incur as a result of the Company's contesting
the validity, the enforceability or the Executive's interpretation of, or
determinations under, this Agreement; provided, that this Section 5.2 shall be
operative only if and to the extent that (a) the Company fails to establish a
trust that defrays all such legal fees and expenses or (b) the Company
establishes such a trust, but the trust fails to pay all such legal fees and
expenses.
Section 5.3. Mitigation. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement either by
seeking other employment or otherwise. Except as provided in Section 2.2
hereof, the amount of any payment provided for herein shall not be reduced by
any remuneration that the Executive may earn from employment with another
employer or otherwise following his Qualifying Termination.
Section 5.4. Interest. If the Company fails to make, or cause to be
made, any payment provided for herein within 30 days of the date on which the
payment is due, the Company shall make such payment together with interest
thereon. The interest shall accrue and be compounded monthly. The interest rate
shall be equal to 120 percent of the prime rate as reported by The Wall Street
Journal for the first business day of each month, effective for the ensuing
month. The interest rate shall be adjusted at the beginning of each month.
Section 5.5. Prior Agreement. Any agreement between the Company and
the Executive that is entitled "Executive Severance Agreement" and that was
executed by the parties before the date hereof is hereby canceled and shall
have no force or effect.
<PAGE> 11
Section 5.6. Authority. The execution of this Agreement has been
authorized by the Board of Directors of the Company and by the Board of
Directors of GTE.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1. Term of Agreement. This Agreement shall become effective
on the date hereof and shall continue in effect until the earliest of (a) July
1, 2001, if no Change in Control has occurred before that date; (b) the
termination of the Executive's employment with the Company for any reason prior
to a Change in Control; (c) the Company's termination of the Executive's
employment for Cause, or the Executive's resignation for other than Good
Reason, following a Change in Control and the Company's and the Executive's
fulfillment of all of their obligations hereunder; and (d) the expiration
following a Change in Control of two years and six months and the fulfillment
by the Company and the Executive of all of their obligations hereunder.
Notwithstanding the foregoing, commencing on July 1, 2001, and on July 1 of
each year thereafter, the expiration date prescribed by clause (a) of the
preceding sentence shall automatically be extended for an additional year
unless, not later than December 31 of the immediately preceding year, one of
the parties hereto shall have given notice to the other party hereto that it
(or he) does not wish to extend the term of this Agreement. Furthermore,
nothing in this Article VI shall cause this Agreement to terminate before both
the Company and the Executive have fulfilled all of their obligations
hereunder.
Section 6.2. Governing Law. Except as otherwise expressly provided
herein, this Agreement and the rights and obligations hereunder shall be
construed and enforced in accordance with the laws of the State of New York.
Section 6.3. Successors to the Company. This Agreement shall inure to
the benefit of and shall be binding upon and enforceable by the Company and any
successor thereto, including, without limitation, any corporation or
corporations acquiring directly or indirectly all or substantially all of the
business or assets of the Company, whether by merger, consolidation, sale or
otherwise, but shall not otherwise be assignable by the Company. Without
limitation of the foregoing sentence, the Company shall require any successor
(whether direct or indirect, by merger, consolidation, sale or otherwise) to
all or substantially all of the business or assets of the Company, by agreement
in form satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and to agree to perform this Agreement in the same
manner and to the same extent as the Company would have been required to
perform it if no such succession had taken place. As used in this Agreement,
"Company" shall mean the Company as heretofore defined and any successor to all
or substantially all of its business or assets that executes and delivers the
agreement provided for in this Section 6.3 or that becomes bound by this
Agreement either pursuant to this Agreement or by operation of law. As used in
this Agreement, "GTE" shall mean GTE as heretofore defined and any successor to
all or substantially all of its business or assets.
Section 6.4. Noncorporate Entities. If any provision of this Agreement
refers to the board of directors of an entity that has no board of directors,
the reference to board of directors shall be deemed to refer to the body,
committee, or person that has duties and responsibilities with respect to the
entity that most closely approximate those of a board of directors of a
corporation.
Section 6.5. Successor to the Executive. This Agreement shall inure to
the benefit of and shall be binding upon and enforceable by the Executive and
his personal and legal representatives, executors, administrators, heirs,
distributees, legatees and, subject to Section 6.6 hereof, his designees
("Successors"). If the Executive should die while amounts are or may be payable
to him
<PAGE> 12
under this Agreement, references hereunder to the "Executive" shall, where
appropriate, be deemed to refer to his Successors; provided, that nothing in
this Section 6.5 shall supersede the terms of any plan or arrangement (other
than this Agreement) that is affected by this Agreement.
Section 6.6. Nonalienability. No right of or amount payable to the
Executive under this Agreement shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, hypothecation, encumbrance,
charge, execution, attachment, levy or similar process or to set off against
any obligations or to assignment by operation of law. Any attempt, voluntary or
involuntary, to effect any action specified in the immediately preceding
sentence shall be void. However, this Section 6.6 shall not prohibit the
Executive from designating one or more persons, on a form satisfactory to the
Company, to receive amounts payable to him under this Agreement in the event
that he should die before receiving them.
Section 6.7. Notices. All notices provided for in this Agreement shall
be in writing. Notices to the Company shall be deemed given when personally
delivered or sent by certified or registered mail or overnight delivery service
to GTE Service Corporation, __________________, ________, ___________ _____,
Attention: Corporate Secretary. Notices to the Executive shall be deemed given
when personally delivered or sent by certified or registered mail or overnight
delivery service to the last address for the Executive shown on the records of
the Company. Either the Company or the Executive may, by notice to the other,
designate an address other than the foregoing for the receipt of subsequent
notices.
Section 6.8. Amendment. No amendment to this Agreement shall be
effective unless in writing and signed by both the Company and the Executive;
provided that if the Executive Compensation and Organizational Structure
Committee of the Board (or any successor thereto) determines in its sole
discretion that (i) consummation of a transaction may be contingent upon the
parties' ability to use pooling of interest accounting and (ii) this Agreement,
or any provision of this Agreement, would preclude the use of pooling of
interest accounting, said Committee may, in its sole discretion, rescind this
Agreement in its entirety, or eliminate or modify any such provision, to the
extent required to allow pooling of interest accounting, except that said
Committee may not take any action pursuant to this proviso after a Change in
Control.
Section 6.9. Waivers. No waiver of any provision of this Agreement
shall be valid unless approved in writing by the party giving such waiver. No
waiver of a breach under any provision of this Agreement shall be deemed to be
a waiver of such provision or any other provision of this Agreement or any
subsequent breach. No failure on the part of either the Company or the
Executive to exercise, and no delay in exercising, any right or remedy
conferred by law or this Agreement shall operate as a waiver of such right or
remedy, and no exercise or waiver, in whole or in part, of any right or remedy
conferred by law or herein shall operate as a waiver of any other right or
remedy.
Section 6.10. Severability. If any provision of this Agreement shall
be held unlawful or otherwise invalid or unenforceable in whole or in part,
such unlawfulness, invalidity or unenforceability shall not affect any other
provision of this Agreement or part thereof, each of which shall remain in full
force and effect. If the making of any payment or the provision of any other
benefit required under this Agreement shall be held unlawful or otherwise
invalid or unenforceable, such unlawfulness, invalidity or unenforceability
shall not prevent any other payment or benefit from being made or provided
under this Agreement, and if the making of any payment in full or the provision
of any other benefit required under this Agreement in full would be unlawful or
otherwise invalid or unenforceable, then such unlawfulness, invalidity or
unenforceability shall not prevent such payment or benefit from being made or
provided in part, to the extent that it would not be unlawful, invalid or
unenforceable, and the maximum payment or benefit that would not be unlawful,
invalid or unenforceable shall be made or provided under this Agreement.
<PAGE> 13
Section 6.11. Agents. The Company may make arrangements to cause any
agent or other party, including an affiliate of the Company, to make any
payment or to provide any benefit that the Company is required to make or to
provide hereunder; provided, that no such arrangement shall relieve or
discharge the Company of its obligations hereunder except to the extent that
such payments or benefits are actually made or provided.
Section 6.12. Captions. The captions to the respective articles and
sections of this Agreement are intended for convenience of reference only and
have no substantive significance.
Section 6.13. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original but all
of which together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
GTE SERVICE CORPORATION
By:
----------------------------
Charles R. Lee
----------------------------
Participant
----------------------------
Date
<PAGE> 1
EXHIBIT 10.3
January 11, 1999
<<FIRST_NAME>> <<LAST_NAME>>
<<Street>>
<<City>>, <<St>> <<Zip_Code>>
Dear <<_____________>>:
As you know, on July 27, 1998, GTE Corporation entered into an
Agreement and Plan of Merger (the "Definitive Agreement") with Bell Atlantic
Corporation ("Bell Atlantic"). In line with this decision, the businesses of
the two companies will be merged (the "Merger") on a date yet to be determined
("the Closing Date"). It is crucial that we continue to conduct business as
usual during the period preceding the Closing Date and that we retain people
like yourself whose skill is essential to our ongoing business efforts and/or
the Merger. This Agreement is intended to provide you with an incentive to
continue your employment through the Closing Date.
1. Merger Bonus. On or about 45 days following the Closing Date, you
will receive a merger implementation and retention bonus (a "Merger Bonus")
equal (before withholding of applicable taxes) to one and one half times the
sum of (i) your base annual salary as of the Closing Date and (ii) the prior
three-year average corporate rating (as of the date of shareholder approval of
the Merger) under GTE's Executive Incentive Plan ("EIP") for your grade level
as of the Closing Date multiplied by an amount equal to 100% of norm for that
grade level under EIP.
2. Involuntary Termination Without Cause. If your employment is
terminated involuntarily without Cause (and for reasons other than your death
or disability) prior to the Closing Date, you will receive a payment equal to
the Merger Bonus to which you would have been entitled had your employment
continued through the Closing Date. Payment will be made at the same time such
bonuses are paid to other eligible employees. Under no circumstances will your
resignation from employment or retirement for any reason constitute an
involuntary termination without Cause for purposes of this Agreement.
3. Death or Disability. Should the Merger be concluded as anticipated
and you die or become disabled (within the meaning of GTE's Long Term
Disability Plan) prior to the Closing Date, you, or, in the event of your
death, your estate, will receive a prorated Merger Bonus based on the ratio of
(i) the number of days you remained actively employed between the date of this
Agreement and the Closing Date to (ii) the number of days between the date of
this Agreement and the Closing Date. The prorated
<PAGE> 2
Merger Bonus payable under this paragraph shall be paid at the same time the
Merger Bonus is paid to other eligible employees.
4. Circumstances When No Bonus Will Be Paid. You will not receive a
Merger Bonus if the Closing Date does not occur. Should you resign or retire
for any reason prior to the Closing Date or should you at any time engage in
conduct that would constitute Cause, you will not be eligible to receive any
portion of the Merger Bonus. For purposes of this Agreement, Cause means (i)
failure to perform satisfactorily the duties assigned to you; (ii) breach of
any of the terms of this Agreement; (iii) violation of a law (other than a
traffic violation or minor civil offense), whether or not there has been a
conviction; or (iv) breach of any written company policy or agreement,
including, but not limited to, the Employee Agreement Relating to Intellectual
Property (Policy 412) or its equivalent (the "Employee Agreement Relating to
Intellectual Property"), or the Standards of Business Conduct, as each is
amended from time to time.
5. Prohibition Against Recruiting or Hiring. Commencing on the date of
this Agreement, and, in the event your employment is terminated for any reason,
for one year following such termination, you agree that you will not, without
the prior written consent of the Executive Compensation and Organizational
Structure Committee of GTE Corporation's Board of Directors, its designee, its
successor, or its successor's designee (the "ECC"):
(i) Recruit or solicit any employee of GTE (which, for purposes
of this Agreement, includes GTE Corporation, any corporate
subsidiary or other company affiliated with GTE Corporation,
any company in which GTE Corporation owns directly or
indirectly an equity interest of at least ten percent, and
the successors and assigns of any such company, including,
following the Merger, Bell Atlantic Corporation, its
subsidiaries, affiliates, and other related entities and
their successors and assigns) for employment or retention as
a consultant or provider of services;
(ii) Hire, or participate with another entity or third party in
the process of hiring, any employee of GTE;
(iii) Provide names or other information about GTE employees to any
person or business under circumstances that you know or
should know could lead to the use of that information for
purposes of recruiting or hiring; or
(iv) Interfere with the relationship between GTE and any of its
employees, agents, or representatives.
6. Prohibition Against Soliciting GTE Customers. Commencing on the
date of this Agreement, and, in the event your employment with GTE is
terminated for any reason, for one year following such termination, you agree
that you will not solicit or contact, directly or indirectly, any customer,
client, or prospect of GTE with whom you or any of the GTE employees reporting
to you had any contact at any time during the year preceding your termination
for the purpose of inducing such customer, client, or prospect to cease being,
or to not become, a customer or client of GTE or to divert business from GTE.
<PAGE> 3
7. Confidentiality. You agree that you will not disclose or discuss
either the existence or the terms of this Agreement under any circumstances
where such information could reasonably be expected to, directly or indirectly,
come to the attention of any present or former employee, contractor, or
consultant of GTE. You further agree that you will require anyone with whom you
share information regarding this Agreement to adhere to the same standard of
confidentiality.
8. Proprietary Information. You agree that you will at all times
comply with your obligations under the Employee Agreement Relating to
Intellectual Property and preserve the confidentiality of all Proprietary
Information and trade secrets of GTE and the Proprietary Information and trade
secrets of third parties, including customers, that are in the possession of
GTE by not disclosing the same to any other party or using the same, or any
portion thereof, for the benefit of anyone other than GTE. "Proprietary
Information" means information obtained or developed by you or to which you had
access during your employment with GTE, including, but not limited to, customer
information and other trade secrets and Proprietary Information of GTE and
third parties that has not been fully disclosed in a writing generally
circulated by GTE to the public at large without any restrictions on use or
disclosure. You agree that you will return all copies, in whole or in part, in
any form, of trade secrets and Proprietary Information in your possession or
control in the event of your termination of employment or upon request by GTE,
whichever occurs earlier, without making or retaining a copy.
9. Survival Of And Consideration For Covenants. You acknowledge and
agree that any payment made pursuant to this Agreement includes consideration
for the covenants contained in paragraphs 5, 6, 7, and 8 of this Agreement and
that the obligations set out in paragraphs 5, 6, 7, and 8 of this Agreement
survive any cancellation, termination, or expiration of this Agreement or the
termination of your employment with GTE.
10. Deferral. Amounts otherwise payable to you under this Agreement
may be deferred under GTE's EIP deferral regulations, or any successor
arrangement, in accordance with the terms of those regulations. Amounts
deferred under this Agreement shall not, however, be eligible for match under
GTE's Equity Participation Plan.
11. Payment Taxable/Not Benefit Bearing. Applicable taxes will be
withheld from any payment made pursuant to this Agreement. Amounts payable
under this Agreement shall not be treated as compensation for purposes of
computing or determining any benefit under any pension, savings, insurance, or
other employee compensation or benefit plan maintained by GTE.
12. No Duplication Of Benefits. Except for grants and agreements
specifically approved by the ECC, there shall be no duplication between any
payment provided for by this Agreement and any other retention incentive
program that provides for payment of a retention bonus for continued employment
during any part of the same time period covered by this Agreement. As a result,
any payment otherwise due under
<PAGE> 4
this Agreement shall be reduced by any amounts due under any such retention
incentive program.
13. Business Discretion Of GTE. Nothing in this Agreement is intended
to limit the discretion of GTE to take any action with regard to the Merger
that GTE may consider appropriate, including, without limitation, postponing
the Closing Date or terminating the Definitive Agreement. This Agreement does
not entitle you to remain in the employ of GTE for any minimum or prescribed
period of term and does not modify the at-will status of your employment.
14. Assignment By GTE. GTE may assign this Agreement without your
consent to any company that acquires all or substantially all of the stock or
assets of GTE, or into which or with which GTE is merged or consolidated. This
Agreement may not be assigned by you, and no person other than you (or your
estate) may assert your rights under this Agreement.
15. Dispute Resolution. You agree that the ECC shall have sole
discretion to interpret this Agreement and to resolve any and all disputes
under this Agreement, including, but not limited to, issues arising under
paragraphs 2, 4, 5, 6, 7, and 8. You further agree that the ECC's determination
shall be final and binding.
16. Waiver. The waiver by GTE of any breach of this Agreement shall
not be construed as a waiver of any subsequent breach.
17. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of New York, disregarding its choice of
law rules.
18. Remedies. You acknowledge that irreparable injury to GTE will
result in the event of any breach by you of any of the covenants or obligations
under this Agreement, including other obligations referenced herein. In the
event of a breach of any of your covenants and commitments under this
Agreement, including any other obligations referenced herein, GTE shall not be
obligated to make any payment otherwise required under this Agreement and may,
at GTE's discretion, require you to repay any amounts already paid to you,
including amounts that may have been deferred. In addition, GTE reserves all
rights to seek any and all remedies and damages permitted under law, including,
but not limited to, injunctive relief, equitable relief, and compensatory and
punitive damages.
19. Definitions/Relationship To Other Agreements. The definitions
contained in this Agreement, including but not limited to the definition of
Cause, shall be controlling for purposes of this Agreement. These definitions
shall not be modified by, nor shall they modify, definitions for terms in any
other agreement to which you may be a party.
20. Entire Agreement. You acknowledge and agree that this Agreement
sets forth the entire understanding of the parties with regard to the subject
matter addressed
<PAGE> 5
herein and that this Agreement supersedes all prior agreements and
communications, whether written or oral, pertaining to the incentive described
herein. This Agreement shall not be modified except by written agreement duly
executed by you and GTE.
I hope that the terms of this Agreement and the incentive just
described will provide you with a level of comfort as you continue your
valuable contributions to GTE. GTE believes you have made and will continue to
make a difference in our future -- we are truly pleased to have you on our
team. If this Agreement meets with your satisfaction, please sign below and
return the original to me within fifteen (15) business days.
Sincerely,
Charles R. Lee
Chairman & Chief Executive Officer
I have read, understand and agree to the foregoing.
- ------------------------------------------
Employee's Signature
- -------------------------------------------
Date
<PAGE> 1
EXHIBIT 10.4
January 11, 1999
<<FIRST_NAME>> <<LAST_NAME>>
<<Street>>
<<City>>, <<St>> <<Zip_Code>>
Dear <<___________>>:
As you know, on July 27, 1998, GTE Corporation entered into an
Agreement and Plan of Merger (the "Definitive Agreement") with Bell Atlantic
Corporation ("Bell Atlantic"). In line with this decision, the businesses of
the two companies will be merged (the "Merger") on a date yet to be determined
("the Closing Date"). It is crucial that we continue to conduct business as
usual during the period preceding the Closing Date and that we retain people
like yourself whose skill is essential to our ongoing business efforts and/or
the Merger. This Agreement is intended to provide you with an incentive to
continue your employment through the Closing Date [or, should the Definitive
Agreement be terminated, the date of such termination (the "Termination
Date").]
1. Merger Bonus. On or about 45 days following the Closing Date, you
will receive a merger implementation and retention bonus (a "Merger Bonus")
equal (before withholding of applicable taxes) to one times the sum of (i) your
base annual salary as of the Closing Date and (ii) the prior three-year average
corporate rating (as of the date of shareholder approval of the Merger) under
GTE's Executive Incentive Plan ("EIP") for your grade level as of the Closing
Date multiplied by an amount equal to 100% of norm for that grade level under
EIP.
2. Partial Bonus. If the Definitive Agreement is terminated, on or
about 45 days following the Termination Date, you will receive, in lieu of the
Merger Bonus described above, a special bonus (a "Partial Bonus") equal (before
withholding of applicable taxes) to 25% of the Merger Bonus you would have
otherwise received had the Closing Date occurred on the Termination Date.
3. Involuntary Termination Without Cause. If your employment is
terminated involuntarily without Cause (and for reasons other than your death
or disability) prior to the Closing Date [or, if applicable, the Termination
Date], you will receive a payment equal to the Merger Bonus [or, as the case
may be, Partial Bonus] to which you would have been entitled had your
employment continued through the Closing Date [or Termination Date]. Payment
will be made at the same time such bonuses are paid to other eligible
employees. Under no circumstances will your resignation from
<PAGE> 2
employment or retirement for any reason constitute an involuntary termination
without Cause for purposes of this Agreement.
4. Death or Disability. Should the Merger be concluded as anticipated
and you die or become disabled (within the meaning of GTE's Long Term
Disability Plan) prior to the Closing Date, you, or, in the event of your
death, your estate, will receive a prorated Merger Bonus based on the ratio of
(i) the number of days you remained actively employed between the date of this
Agreement and the Closing Date to (ii) the number of days between the date of
this Agreement and the Closing Date. [Should the Definitive Agreement be
terminated and you die or become disabled before the Termination Date, you, or,
in the event of your death, your estate, will receive an amount equal to the
Partial Bonus to which you would have been entitled had you remained actively
employed through the Termination Date.] The prorated Merger Bonus [or the
Partial Bonus] payable under this paragraph shall be paid at the same time the
Merger Bonus [or Partial Bonus] is paid to other eligible employees.
5. Circumstances When No Bonus Will Be Paid. Should you resign or
retire for any reason prior to the Closing Date [or, if applicable, the
Termination Date,] or should you at any time engage in conduct that would
constitute Cause, you will not be eligible to receive any portion of the Merger
Bonus [or Partial Bonus]. For purposes of this Agreement, Cause means (i)
failure to perform satisfactorily the duties assigned to you; (ii) breach of
any of the terms of this Agreement; (iii) violation of a law (other than a
traffic violation or minor civil offense), whether or not there has been a
conviction; or (iv) breach of any written company policy or agreement,
including, but not limited to, the Employee Agreement Relating to Intellectual
Property (Policy 412) or its equivalent (the "Employee Agreement Relating to
Intellectual Property"), or the Standards of Business Conduct, as each is
amended from time to time.
6. Prohibition Against Recruiting or Hiring. Commencing on the date of
this Agreement, and, in the event your employment is terminated for any reason,
for one year following such termination, you agree that you will not, without
the prior written consent of the Executive Compensation and Organizational
Structure Committee of GTE Corporation's Board of Directors, its designee, its
successor, or its successor's designee (the "ECC"):
(i) Recruit or solicit any employee of GTE (which, for purposes
of this Agreement, includes GTE Corporation, any corporate
subsidiary or other company affiliated with GTE Corporation,
any company in which GTE Corporation owns directly or
indirectly an equity interest of at least ten percent, and
the successors and assigns of any such company, including,
following the Merger, Bell Atlantic Corporation, its
subsidiaries, affiliates, and other related entities and
their successors and assigns) for employment or retention as
a consultant or provider of services;
(ii) Hire, or participate with another entity or third party in
the process of hiring, any employee of GTE;
<PAGE> 3
(iii) Provide names or other information about GTE employees to any
person or business under circumstances that you know or
should know could lead to the use of that information for
purposes of recruiting or hiring; or
(iv) Interfere with the relationship between GTE and any of its
employees, agents, or representatives.
7. Prohibition Against Soliciting GTE Customers. Commencing on the
date of this Agreement, and, in the event your employment with GTE is
terminated for any reason, for one year following such termination, you agree
that you will not solicit or contact, directly or indirectly, any customer,
client, or prospect of GTE with whom you or any of the GTE employees reporting
to you had any contact at any time during the year preceding your termination
for the purpose of inducing such customer, client, or prospect to cease being,
or to not become, a customer or client of GTE or to divert business from GTE.
8. Confidentiality. You agree that you will not disclose or discuss
either the existence or the terms of this Agreement under any circumstances
where such information could reasonably be expected to, directly or indirectly,
come to the attention of any present or former employee, contractor, or
consultant of GTE. You further agree that you will require anyone with whom you
share information regarding this Agreement to adhere to the same standard of
confidentiality.
9. Proprietary Information. You agree that you will at all times
comply with your obligations under the Employee Agreement Relating to
Intellectual Property and preserve the confidentiality of all Proprietary
Information and trade secrets of GTE and the Proprietary Information and trade
secrets of third parties, including customers, that are in the possession of
GTE by not disclosing the same to any other party or using the same, or any
portion thereof, for the benefit of anyone other than GTE. "Proprietary
Information" means information obtained or developed by you or to which you had
access during your employment with GTE, including, but not limited to, customer
information and other trade secrets and Proprietary Information of GTE and
third parties that has not been fully disclosed in a writing generally
circulated by GTE to the public at large without any restrictions on use or
disclosure. You agree that you will return all copies, in whole or in part, in
any form, of trade secrets and Proprietary Information in your possession or
control in the event of your termination of employment or upon request by GTE,
whichever occurs earlier, without making or retaining a copy.
10. Survival Of And Consideration For Covenants. You acknowledge and
agree that any payment made pursuant to this Agreement includes consideration
for the covenants contained in paragraphs 6, 7, 8, and 9 of this Agreement and
that the obligations set out in paragraphs 6, 7, 8, and 9 of this Agreement
survive any cancellation, termination, or expiration of this Agreement or the
termination of your employment with GTE.
11. Deferral. Amounts otherwise payable to you under this Agreement
may be deferred under GTE's EIP deferral regulations, or any successor
arrangement, in
<PAGE> 4
accordance with the terms of those regulations. Amounts deferred under this
Agreement shall not, however, be eligible for match under GTE's Equity
Participation Plan.
12. Payment Taxable/Not Benefit Bearing. Applicable taxes will be
withheld from any payment made pursuant to this Agreement. Amounts payable
under this Agreement shall not be treated as compensation for purposes of
computing or determining any benefit under any pension, savings, insurance, or
other employee compensation or benefit plan maintained by GTE.
13. No Duplication Of Benefits. Except for grants and agreements
specifically approved by the ECC, there shall be no duplication between any
payment provided for by this Agreement and any other retention incentive
program that provides for payment of a retention bonus for continued employment
during any part of the same time period covered by this Agreement. As a result,
any payment otherwise due under this Agreement shall be reduced by any amounts
due under any such retention incentive program.
14. Business Discretion Of GTE. Nothing in this Agreement is intended
to limit the discretion of GTE to take any action with regard to the Merger
that GTE may consider appropriate, including, without limitation, postponing
the Closing Date or terminating the Definitive Agreement. This Agreement does
not entitle you to remain in the employ of GTE for any minimum or prescribed
period of term and does not modify the at-will status of your employment.
15. Assignment By GTE. GTE may assign this Agreement without your
consent to any company that acquires all or substantially all of the stock or
assets of GTE, or into which or with which GTE is merged or consolidated. This
Agreement may not be assigned by you, and no person other than you (or your
estate) may assert your rights under this Agreement.
16. Dispute Resolution. You agree that the ECC shall have sole
discretion to interpret this Agreement and to resolve any and all disputes
under this Agreement, including, but not limited to, issues arising under
paragraphs 3, 5, 6, 7, 8, and 9. You further agree that the ECC's determination
shall be final and binding.
17. Waiver. The waiver by GTE of any breach of this Agreement shall
not be construed as a waiver of any subsequent breach.
18. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of New York, disregarding its choice of
law rules.
19. Remedies. You acknowledge that irreparable injury to GTE will
result in the event of any breach by you of any of the covenants or obligations
under this Agreement, including other obligations referenced herein. In the
event of a breach of any of your covenants and commitments under this
Agreement, including any other obligations referenced herein, GTE shall not be
obligated to make any payment otherwise
<PAGE> 5
required under this Agreement and may, at GTE's discretion, require you to
repay any amounts already paid to you, including amounts that may have been
deferred. In addition, GTE reserves all rights to seek any and all remedies and
damages permitted under law, including, but not limited to, injunctive relief,
equitable relief, and compensatory and punitive damages.
20. Definitions/Relationship To Other Agreements. The definitions
contained in this Agreement, including but not limited to the definition of
Cause, shall be controlling for purposes of this Agreement. These definitions
shall not be modified by, nor shall they modify, definitions for terms in any
other agreement to which you may be a party.
21. Entire Agreement. You acknowledge and agree that this Agreement
sets forth the entire understanding of the parties with regard to the subject
matter addressed herein and that this Agreement supersedes all prior agreements
and communications, whether written or oral, pertaining to the incentive
described herein. This Agreement shall not be modified except by written
agreement duly executed by you and GTE.
I hope that the terms of this Agreement and the incentive just
described will provide you with a level of comfort as you continue your
valuable contributions to GTE. GTE believes you have made and will continue to
make a difference in our future -- we are truly pleased to have you on our
team. If this Agreement meets with your satisfaction, please sign below and
return the original to me within fifteen (15) business days.
Sincerely,
Charles R. Lee
Chairman & Chief Executive Officer
I have read, understand and agree to the foregoing.
- ------------------------------------------
Employee's Signature
- -------------------------------------------
Date
<PAGE> 1
Exhibit 12
GTE CALIFORNIA INCORPORATED AND SUBSIDIARIES
Statements of the Consolidated Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- ----------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charges $ 681.5 $ 642.8 $ 515.8 $ 342.9 $ 500.3
Add - Income tax expense 454.6 390.5 329.3 235.5 339.6
- Fixed charges 139.8 124.3 119.7 133.6 131.8
----------- ----------- ---------- ---------- ----------
Adjusted earnings $ 1,275.9 $ 1,157.6 $ 964.8 $ 712.0 $ 971.7
=========== =========== ========== ========== ==========
Fixed charges:
Interest expense $ 128.9 $ 110.0 $ 106.1 $ 120.0 $ 115.0
Portion of rent expense representing
interest 10.9 14.3 13.6 13.6 16.8
----------- ----------- ---------- ---------- ----------
Adjusted fixed charges $ 139.8 $ 124.3 $ 119.7 $ 133.6 $ 131.8
=========== =========== ========== ========== ==========
RATIO OF EARNINGS TO FIXED CHARGES 9.13 9.31 8.06 5.33 7.37
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report, dated January 28, 1999, on the consolidated financial statements and
supporting schedule and exhibit of GTE California Incorporated and subsidiary
included in this Form 10-K, into the following previously filed Registration
Statements:
1. Form S-3 of GTE California Incorporated and subsidiary
(File No. 333-46677)
2. Form S-3 of GTE California Incorporated and subsidiary
(File No. 333-63651)
ARTHUR ANDERSEN LLP
Dallas, Texas
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,400
<SECURITIES> 0
<RECEIVABLES> 738,900
<ALLOWANCES> 65,900
<INVENTORY> 54,800
<CURRENT-ASSETS> 819,700
<PP&E> 10,513,300
<DEPRECIATION> 6,601,200
<TOTAL-ASSETS> 5,605,500
<CURRENT-LIABILITIES> 1,279,400
<BONDS> 1,691,200
0
50,000
<COMMON> 1,400,000
<OTHER-SE> 313,400
<TOTAL-LIABILITY-AND-EQUITY> 5,605,500
<SALES> 3,369,600
<TOTAL-REVENUES> 3,369,600
<CGS> 1,003,100
<TOTAL-COSTS> 2,117,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,900
<INCOME-PRETAX> 1,136,100
<INCOME-TAX> 454,600
<INCOME-CONTINUING> 681,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 681,500
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
