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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 1-8606
BELL ATLANTIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2259884
(State of incorporation) (I.R.S. Employer
Identification No.)
1095 Avenue of the Americas 10036
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number (212) 395-2121
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
----- -----
At September 30, 1997, 776,639,234 shares of the registrant's Common Stock were
outstanding, after deducting 11,383,576 shares held in treasury.
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Table of Contents
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<TABLE>
<CAPTION>
Item No. Page
Part I. Financial Information
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<S> <C>
1. Financial Statements
Condensed Consolidated Statements of Income
For the three and nine months ended September 30, 1997 and 1996... 2-3
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996.......................... 4-5
Condensed Consolidated Statement of Changes in Shareowners' Investment
For the nine months ended September 30, 1997...................... 6
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996............. 7
Notes to Condensed Consolidated Financial Statements................ 8-14
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 15-30
Part II. Other Information
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1. Legal Proceedings..................................................... 31
5. Other Information..................................................... 31
6. Exhibits and Reports on Form 8-K...................................... 31-32
</TABLE>
1
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Part I - Financial Information
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Item 1. Financial Statements
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BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
1997 1996
-------- ---------
<S> <C> <C>
OPERATING REVENUES.................................... $7,373.9 $7,376.6
-------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes.......... 2,337.8 2,181.6
Depreciation and amortization......................... 1,724.0 1,331.5
Taxes other than income............................... 475.2 390.6
Other................................................. 2,415.9 1,805.7
-------- --------
6,952.9 5,709.4
-------- --------
OPERATING INCOME...................................... 421.0 1,667.2
Income (Loss) from Unconsolidated Businesses.......... (121.5) 14.9
Other Income and (Expense), Net....................... (13.0) (35.0)
Interest Expense...................................... 298.1 266.4
-------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES....... (11.6) 1,380.7
Provision for Income Taxes............................ 68.5 508.9
-------- --------
NET INCOME (LOSS)..................................... $ (80.1) $ 871.8
======== ========
PER COMMON SHARE
- --------------------------------------------------------------------------------
NET INCOME (LOSS)..................................... $ (.10) $ 1.13
======== ========
Cash Dividends Declared............................... $ .77 $ .72
======== ========
Weighted Average Number of Common Shares
Outstanding (in millions)............................ 776.4 774.9
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
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BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1997 1996
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<S> <C> <C>
OPERATING REVENUES.................................... $22,498.2 $21,750.0
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OPERATING EXPENSES
Employee costs, including benefits and taxes.......... 6,956.9 6,592.3
Depreciation and amortization......................... 4,459.1 4,027.8
Taxes other than income............................... 1,252.4 1,132.3
Other................................................. 6,102.4 5,385.0
--------- ---------
18,770.8 17,137.4
--------- ---------
OPERATING INCOME...................................... 3,727.4 4,612.6
Income (Loss) from Unconsolidated Businesses.......... (236.9) 51.9
Other Income and (Expense), Net....................... (19.5) (65.4)
Interest Expense...................................... 918.7 813.0
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.. 2,552.3 3,786.1
Provision for Income Taxes............................ 1,037.4 1,394.5
--------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE....................... 1,514.9 2,391.6
Cumulative effect of change in accounting principle
Directory publishing, net of tax..................... -- 273.1
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NET INCOME............................................ $ 1,514.9 $ 2,664.7
========= =========
PER COMMON SHARE
- --------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE....................... $ 1.95 $ 3.10
Cumulative effect of change in accounting principle... -- .35
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NET INCOME............................................ $ 1.95 $ 3.45
========= =========
Cash Dividends Declared............................... $ 2.25 $ 2.16*
========= =========
Weighted Average Number of Common Shares
Outstanding (in millions)............................ 775.8 772.8
========= =========
</TABLE>
*Includes payment of $.005 per common share for redemption of rights under our
Shareholder Rights Plan.
See Notes to Condensed Consolidated Financial Statements.
3
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BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions)
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Assets
- ------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.............................. $ 315.8 $ 249.4
Short-term investments................................. 166.8 300.5
Accounts receivable, net of allowances of $591.6 and
$566.7................................................ 6,147.2 6,168.9
Inventories............................................ 516.0 478.4
Prepaid expenses....................................... 730.5 716.3
Other.................................................. 579.0 507.6
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8,455.3 8,421.1
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PLANT, PROPERTY AND EQUIPMENT.......................... 76,470.8 75,679.5
Less accumulated depreciation.......................... 41,746.3 39,544.7
------------- ------------
34,724.5 36,134.8
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INVESTMENTS IN UNCONSOLIDATED BUSINESSES............... 5,137.4 4,922.2
OTHER ASSETS........................................... 4,573.7 3,883.0
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TOTAL ASSETS........................................... $ 52,890.9 $ 53,361.1
============= ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
- ---------------------------------------
Liabilities and Shareowners' Investment
- ---------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
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<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year....................... $ 6,131.7 $ 2,884.2
Accounts payable and accrued liabilities............ 5,444.6 5,974.6
Other............................................... 1,536.7 1,491.1
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13,113.0 10,349.9
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LONG-TERM DEBT...................................... 13,071.4 15,286.0
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EMPLOYEE BENEFIT OBLIGATIONS........................ 10,031.4 9,588.0
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................... 1,826.5 1,846.9
Unamortized investment tax credits.................. 258.8 288.8
Other............................................... 956.9 865.9
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3,042.2 3,001.6
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MINORITY INTEREST, INCLUDING A PORTION SUBJECT TO
REDEMPTION REQUIREMENTS............................ 948.5 2,014.2
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PREFERRED STOCK OF SUBSIDIARY....................... 135.0 145.0
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SHAREOWNERS' INVESTMENT
Series preferred stock ($.10 par value; none
issued)............................................ -- --
Common stock ($.10 par value; 788,022,810 shares and
787,000,254 shares issued)......................... 78.8 78.7
Contributed capital................................. 13,275.4 13,295.0
Reinvested earnings................................. 993.8 1,279.8
Foreign currency translation adjustment............. (528.5) (319.4)
-------------- -------------
13,819.5 14,334.1
Less common stock in treasury, at cost.............. 580.4 589.3
Less deferred compensation-employee stock
ownership plans.................................... 689.7 768.4
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12,549.4 12,976.4
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TOTAL LIABILITIES AND SHAREOWNERS' INVESTMENT....... $ 52,890.9 $ 53,361.1
============== =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareowners' Investment
(Unaudited)
(Dollars in Millions and Shares in Thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997
------------------
Shares Amount
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<S> <C> <C>
COMMON STOCK
Balance at beginning of period......................... 787,000 $ 78.7
Shares issued:
Employee plans........................................ 1,019 .1
Shareowner plans...................................... 4 -
------- --------
Balance at end of period............................... 788,023 78.8
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CONTRIBUTED CAPITAL
Balance at beginning of period......................... 13,295.0
Shares distributed:
Employee plans....................................... (19.6)
--------
Balance at end of period............................... 13,275.4
--------
REINVESTED EARNINGS
Balance at beginning of period......................... 1,279.8
Net income............................................. 1,514.9
Dividends declared..................................... (1,765.6)
Shares distributed:
Employee plans........................................ (51.2)
Tax benefit of dividends paid to ESOPs................. 16.3
Other.................................................. (.4)
--------
Balance at end of period............................... 993.8
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FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at beginning of period......................... (319.4)
Translation adjustments, net........................... (209.1)
--------
Balance at end of period............................... (528.5)
--------
TREASURY STOCK
Balance at beginning of period......................... 11,270 589.3
Shares purchased....................................... 7,901 535.3
Shares distributed:
Employee plans........................................ (7,761) (542.4)
Shareowner plans...................................... (26) (1.8)
------- --------
Balance at end of period............................... 11,384 580.4
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DEFERRED COMPENSATION--ESOPs
Balance at beginning of period......................... 768.4
Amortization........................................... (78.7)
--------
Balance at end of period............................... 689.7
--------
TOTAL SHAREOWNERS' INVESTMENT.......................... $12,549.4
=========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
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BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1997 1996
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 1,514.9 $ 2,664.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 4,459.1 4,027.8
Cumulative effect of change in
accounting principle, net of tax..................... -- (273.1)
Loss from unconsolidated businesses.................... 281.7 22.5
Dividends received from unconsolidated businesses...... 101.1 95.4
Amortization of unearned lease income.................. (80.2) (72.2)
Other items, net....................................... (39.3) 97.4
Changes in certain assets and liabilities, net of
effects from acquisition/disposition of businesses... (236.8) (462.8)
--------- ----------
Net cash provided by operating activities................ 6,000.5 6,099.7
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CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments..................... 175.4 (53.5)
Additions to plant, property and equipment............... (4,883.1) (4,149.6)
Proceeds from sale of plant, property and equipment...... 1.6 5.8
Investment in leased assets.............................. (109.2) (97.1)
Proceeds from leasing activities......................... 62.0 85.3
Investment in notes receivable........................... (32.8) (19.1)
Proceeds from notes receivable........................... 34.1 132.8
Acquisition of businesses, less cash acquired............ -- (2.2)
Proceeds from Telecom Corporation of New Zealand Limited
share repurchase plan................................... 114.6 --
Investments in unconsolidated businesses, net............ (574.3) (444.0)
Proceeds from disposition of businesses.................. 360.6 4.2
Other, net............................................... 157.3 85.0
--------- ----------
Net cash used in investing activities.................... (4,693.8) (4,452.4)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings................................. 436.0 49.9
Principal repayments of borrowings and capital lease
obligations............................................. (505.7) (332.3)
Net change in short-term borrowings with original
maturities of three months or less...................... 1,031.3 (586.8)
Dividends paid........................................... (1,768.3) (1,628.7)
Proceeds from sale of common stock....................... 484.4 296.2
Purchase of common stock for treasury.................... (564.4) (83.8)
Minority interest........................................ (.1) 566.8
Reduction in preferred stock of subsidiary............... (10.0) --
Net change in outstanding checks drawn on controlled
disbursement accounts................................... (343.5) (179.1)
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Net cash used in financing activities.................... (1,240.3) (1,897.8)
--------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 66.4 (250.5)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 249.4 462.9
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 315.8 $ 212.4
========= ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
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BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
- --------------------------------------------------------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared based upon Securities and Exchange Commission rules that permit reduced
disclosure for interim periods. These financial statements give retroactive
effect to the merger of Bell Atlantic Corporation and NYNEX Corporation (see
Note 2). These financial statements reflect all adjustments which are necessary
for a fair presentation of results of operations and financial position for the
interim periods shown including normal recurring accruals and other items (see
Note 2). The results for the interim periods are not necessarily indicative of
results for the full year. For a more complete discussion of significant
accounting policies and certain other information, you should refer to the
financial statements filed with the 1996 Form 10-K's of both Bell Atlantic
Corporation and NYNEX Corporation and Note 3 below.
In this report, Bell Atlantic Corporation is referred to as "we" or "Bell
Atlantic." Reference to Bell Atlantic is also made in connection with
information about Bell Atlantic prior to the merger. NYNEX Corporation is
referred to as "NYNEX."
2. Bell Atlantic -- NYNEX Merger
- --------------------------------------------------------------------------------
On August 14, 1997, Bell Atlantic and NYNEX completed a merger of equals under a
definitive merger agreement entered into on April 21, 1996 and amended on July
2, 1996. The stockholders of each company approved the merger at special
meetings held in November 1996.
Under the terms of the amended agreement, NYNEX became a wholly owned
subsidiary of Bell Atlantic. NYNEX stockholders received 0.768 of a share of
Bell Atlantic common stock for each share of NYNEX common stock that they owned.
This resulted in the issuance of 350.2 million shares of Bell Atlantic common
stock.
NYNEX is a global communications and media corporation, providing a full
range of communications services in the northeastern United States and in high
growth markets around the world. NYNEX has expertise in telecommunications,
wireless communications, directory publishing, and video entertainment and
information services.
The merger qualified as a tax-free reorganization and has been accounted for
as a pooling of interests. Under this method of accounting, the companies are
treated as if they had always been combined for accounting and financial
reporting purposes and, therefore, we have restated our financial information
for all dates and periods prior to the merger.
The combined results reflect certain reclassifications to conform to the
presentation used by Bell Atlantic and certain adjustments to conform accounting
methodologies between Bell Atlantic and NYNEX. Results of operations for
certain interim periods prior to the merger have been combined and conformed as
follows:
8
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<TABLE>
<CAPTION>
(Dollars in Millions)
- ------------------------------------------------------------------------------------------------------------
Six months Three months Nine months
ended ended ended
June 30, 1997 September 30, 1996 September 30, 1996
------------- ------------------ ------------------
<S> <C> <C> <C>
Operating revenues:
Bell Atlantic................................... $ 6,854.6 $3,266.6 $ 9,710.1
NYNEX........................................... 6,815.1 3,423.7 10,123.5
Reclassifications (a)........................... .1 .1 .4
Cellular consolidation (b)...................... 1,454.5 686.2 1,916.0
--------- -------- ---------
Combined........................................ $15,124.3 $7,376.6 $21,750.0
========= ======== =========
Net income:
Bell Atlantic................................... $ 1,014.5 $ 465.4 $ 1,535.9
NYNEX........................................... 540.1 394.5 1,097.3
Cellular consolidation (b)...................... 3.3 (3.5) (7.5)
SFAS No. 106 adjustment (c)..................... 39.1 16.3 44.5
Other (d)....................................... (2.0) (.9) (5.5)
--------- -------- ---------
Combined........................................ $ 1,595.0 $ 871.8 $ 2,664.7
========= ======== =========
</TABLE>
(a) Reclassifications have been made to conform to our post-merger
presentation.
(b) An adjustment has been made to conform accounting methodologies and to
consolidate the accounts of cellular operations that were jointly
controlled by NYNEX and Bell Atlantic prior to the merger and accounted
for by both companies using the equity method.
(c) An adjustment has been made to reflect the adoption by NYNEX of the
immediate recognition of the transition benefit obligation under Statement
of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," effective January 1,
1993, to conform to the method used by Bell Atlantic.
(d) Other adjustments have been made to conform the accounting policies of the
companies, and to record the related tax effects of these adjustments.
Merger-Related Costs
Results of operations for the third quarter of 1997 include merger-related pre-
tax costs totaling approximately $443 million ($335 million after-tax),
consisting of $200 million for direct incremental costs, $223 million for
employee severance costs, and $20 million for transition and integration costs.
Direct incremental costs consist of expenses associated with completing the
merger transaction such as professional and regulatory fees, compensation
arrangements and shareowner-related costs. Employee severance costs represent
the benefit costs for the separation by the end of 1999 of approximately 3,100
management employees who are entitled to benefits under preexisting separation
pay plans. Transition and integration costs consist of costs associated with
integrating the operations of Bell Atlantic and NYNEX.
Additional Charges
In the third quarter of 1997, we recorded pre-tax charges of approximately $1.1
billion ($711 million after-tax) in connection with consolidating operations and
combining organizations and for special items arising in the quarter. A
discussion of the most significant of these charges follows:
We recognized pre-tax charges of approximately $352 million ($221 million
after-tax) for the write-down of obsolete fixed assets ($297 million pre-tax)
and for the cost of consolidating certain redundant real estate properties ($55
million pre-tax).
9
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We determined in the third quarter of 1997 that we would no longer pursue a
multichannel, multipoint, distribution system (MMDS) as part of our video
strategy. As a result, we recognized liabilities for purchase commitments
associated with the MMDS technology, and costs associated with closing the
operations of our Tele-TV partnership because this operation no longer supports
our current video strategy. We also wrote-down our remaining investment in CAI
Wireless Systems, Inc. We recognized total pre-tax expense of approximately
$202 million ($159 million after-tax) related to these video investments and
operations.
Results for the third quarter of 1997 also included pre-tax charges of
approximately $349 million ($220 million after-tax) for contingencies associated
with various regulatory and legal matters and federal, state and local tax
issues; and approximately $172 million ($111 million after-tax) for other
miscellaneous expense items.
3. Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
DESCRIPTION OF BUSINESS
The merger of Bell Atlantic and NYNEX creates a diversified telecommunications
company that operates in a region stretching from Maine to Virginia (Maine, New
Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New York,
Pennsylvania, New Jersey, Maryland, Delaware, District of Columbia, West
Virginia and Virginia). Our nine operating telephone subsidiaries provide local
telephone services including voice and data transport, enhanced and custom
calling features, network access, directory assistance, private lines, and
public telephones. We also provide systems integration, customer premises
equipment distribution, directory and electronic publishing and financing
services. We currently market long distance services in selected areas outside
of our geographic region.
We provide domestic wireless services in 25 states and have international
wireless investments in Latin America, Europe and the Pacific Rim.
We have other international investments in telecommunications companies in New
Zealand, Thailand and the Philippines. We own an interest in an integrated
telecommunications and television entertainment service company in the United
Kingdom, and we are the managing sponsor of a company that has constructed
undersea fiberoptic cable between Europe and Asia.
The telecommunications industry is undergoing substantial changes as a result
of the Telecommunications Act of 1996, other public policy changes and
technological advances. These changes are likely to bring increased competitive
pressures, but will also open new markets to us, such as long distance services
in our geographic region, upon completion of certain requirements of the
Telecommunications Act.
CONSOLIDATION
The consolidated financial statements include our controlled or majority-owned
subsidiaries. Investments in businesses in which we do not have control, but
have the ability to exercise significant influence over operating and financial
policies, are accounted for using the equity method. Investments in which we do
not have the ability to exercise significant influence over operating and
financial policies are accounted for under the cost method. All significant
intercompany accounts and transactions have been eliminated.
Grupo Iusacell, S.A. de C.V.
In February 1997, we consummated a restructuring of our investment in Grupo
Iusacell, S.A. de C.V. (Iusacell), a Mexican wireless company, to permit us to
assume control of the Board of Directors and management of Iusacell. Under the
terms of the restructuring, we exchanged certain Series B and D shares of
Iusacell stock for Series A shares, enabling us to elect a majority of the Board
of Directors. This exchange of shares did not affect our economic ownership
percentage of Iusacell. We also paid a premium of $50.0 million to the current
majority owner. We also converted approximately $33 million of subordinated
debt into Series A shares, thereby, increasing
10
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our economic ownership from 41.9% to 42.1%, and we are obligated to provide
Iusacell up to $150 million in subordinated convertible financing as Iusacell
may require from time to time. As a result of the restructuring, we changed the
accounting for our Iusacell investment from the equity method to full
consolidation in the first quarter of 1997.
United Kingdom Operations
In the second quarter of 1997, we transferred our interests in cable television
and telecommunications operations in the United Kingdom to Cable & Wireless
Communications PLC (CWC) in exchange for an 18.5% ownership interest in CWC.
This transaction was accounted for as a nonmonetary exchange of similar
productive assets and, as a result, no gain or loss was recorded. Prior to the
transfer, we included the accounts of these operations in our consolidated
financial statements. As a result of this transaction, we account for our
investment in CWC under the equity method.
USE OF ESTIMATES
We prepare our financial statements under generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts or certain disclosures. Actual results could differ
from those estimates.
REVENUE RECOGNITION
Our operating telephone subsidiaries recognize revenues when services are
rendered based on usage of our local exchange network and facilities. Our other
subsidiaries recognize revenues when products are delivered or services are
rendered to customers.
MAINTENANCE AND REPAIRS
We charge the cost of maintenance and repairs, including the cost of replacing
minor items not constituting substantial betterments, to operating expense.
EARNINGS PER COMMON SHARE
We calculate earnings per share by dividing net income by the weighted average
number of shares outstanding during the period.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with a maturity of 90 days or less
when purchased to be cash equivalents, except cash equivalents held as short-
term investments. Cash equivalents are stated at cost, which approximates market
value.
SHORT-TERM INVESTMENTS
Our short-term investments consist primarily of cash equivalents held in trust
to pay for certain employee benefits. Short-term investments are stated at cost,
which approximates market value.
INVENTORIES
We include in inventory new and reusable materials of the operating telephone
subsidiaries which are stated principally at average original cost, except that
specific costs are used in the case of large individual items. Inventories of
our other subsidiaries are stated at the lower of cost (determined principally
on either an average or first-in, first-out basis) or market.
PLANT AND DEPRECIATION
We state plant, property and equipment at cost. Our operating telephone
subsidiaries' depreciation expense is principally based on the composite group
remaining life method and straight-line composite rates. This method provides
for the recognition of the cost of the remaining net investment in telephone
plant, less anticipated net salvage value, over the remaining asset lives. This
method requires the periodic revision of depreciation rates.
11
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Our operating telephone subsidiaries discontinued accounting for their
operations under SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation" in August 1994 (Pennsylvania, New Jersey, Maryland, Delaware,
District of Columbia, West Virginia and Virginia) and June 1995 (New York and
New England). For financial reporting purposes, we no longer use asset lives
set by regulators. As a result, we began using shorter estimated asset lives for
certain categories of plant and equipment.
When we replace or retire depreciable telephone plant, the carrying amount of
such plant is deducted from the respective accounts and charged to accumulated
depreciation. Gains or losses on disposition are amortized with the remaining
net investment in telephone plant.
Plant, property and equipment of our other subsidiaries is depreciated on a
straight-line basis over their estimated useful lives.
When the depreciable assets of our other subsidiaries are retired or otherwise
disposed of, the related cost and accumulated depreciation are deducted from the
plant accounts, and any gains or losses on disposition are recognized in income.
CAPITALIZATION OF INTEREST COSTS
We capitalize interest on funds borrowed to finance the acquisition or
construction of plant assets. Capitalized interest is reported as a cost of
plant and a reduction in interest cost. Before we discontinued SFAS No. 71, our
operating telephone subsidiaries recorded an allowance for funds used during
construction, which included both interest and equity return components, as a
cost of plant and as an item of other income.
GOODWILL
Goodwill is the excess of the acquisition cost of businesses over the fair value
of the identifiable net assets acquired. We amortize goodwill on a straight-line
basis over periods not exceeding 40 years. We assess the impairment of goodwill
related to our consolidated subsidiaries under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Goodwill related to our unconsolidated businesses accounted for under the equity
method is reviewed whenever events or changes in circumstances indicate that the
carrying value may not be recoverable and a determination of impairment (if any)
is made based on estimates of future cash flows.
FOREIGN CURRENCY TRANSLATION
The functional currency for nearly all of our foreign operations is the local
currency. For these foreign entities, we translate income statement amounts at
average exchange rates for the period, and we translate assets and liabilities
at end-of-period exchange rates. We present these translation adjustments as a
separate component of Shareowners' Investment. We report exchange gains and
losses on intercompany foreign currency transactions of a long-term nature in
Shareowners' Investment. Other exchange gains and losses are reported in
income.
When a foreign entity operates in a highly inflationary economy, we use the
U.S. dollar as the functional currency rather than the local currency. We
translate nonmonetary assets and liabilities and related expenses into U.S.
dollars at historical exchange rates. We translate all other income statement
amounts using average exchange rates for the period. Monetary assets and
liabilities are translated at end-of-period exchange rates, and any gains or
losses are reported in income. Effective October 1, 1996, we consider Grupo
Iusacell, S.A. de C.V., our investment in Mexico, to operate in a highly
inflationary economy.
DERIVATIVE INSTRUMENTS
We have entered into derivative transactions to manage our exposure to
fluctuations in foreign exchange rates, interest rates and tax rates. We have
implemented strategies using a variety of derivatives including foreign currency
forward contracts, foreign currency swaps, interest rate swap agreements,
interest rate caps and floors, and basis swap agreements.
12
<PAGE>
Fair Value Method
We use the fair value method of accounting for our foreign currency derivatives
which requires us to record these derivatives at fair value on our balance
sheet, with changes in value recorded in income or shareowners' investment.
Depending upon the nature of the derivative instruments, the fair value of these
instruments may be recorded in Current Assets, Other Assets, Current Liabilities
and Deferred Credits and Other Liabilities on our balance sheet.
Gains and losses and related discounts or premiums arising from foreign currency
derivatives which hedge our net investments in consolidated foreign subsidiaries
and investments in foreign entities accounted for under the equity method are
included in Shareowners' Investment as foreign currency translation adjustments
and reflected in income upon sale or substantial liquidation of the investment.
Certain of these derivatives also include an interest element, which is recorded
in Interest Expense over the lives of the contracts. Gains and losses from
derivatives which hedge our short-term transactions are included in Other Income
and Expense, Net, and discounts or premiums on these contracts are included in
income over the lives of the contracts. Gains and losses from derivatives
hedging identifiable foreign currency commitments are deferred and reflected as
adjustments to the related transactions. If the foreign currency commitment is
no longer likely to occur, the gain or loss is recognized immediately in income.
We have entered into basis swap agreements which protect a portion of our
leveraged lease portfolio from the effects of increases in corporate tax rates.
We also account for our basis swap agreements using the fair value method of
accounting. Under this method, these agreements are carried at fair value and
included in Other Assets or Deferred Credits and Other Liabilities on our
balance sheet. Changes in the unrealized gain or loss is included in Other
Income and Expense, Net.
Accrual Method
Interest rate swap agreements and interest rate caps and floors that qualify as
hedges are accounted for under the accrual method. An instrument qualifies as a
hedge if it effectively modifies and/or hedges the interest rate characteristics
of the underlying fixed or variable interest rate debt, having matching notional
amounts and maturities. Under the accrual method, no amounts are recognized on
our balance sheet related to the principal balances. The interest differential
to be paid or received, which is accrued as interest rates change, and premiums
related to caps and floors are recognized as adjustments to Interest Expense
over the lives of the agreements. These interest accruals are recorded in
Current Assets and Accounts Payable and Accrued Liabilities on our balance
sheet. If we terminate an agreement, the gain or loss is recorded as an
adjustment to the basis of the underlying liability and amortized over the
remaining original life of the agreement. If the underlying liability matures
or is extinguished, the related derivative would no longer qualify for accrual
accounting and would then be accounted for at fair value, with changes in that
value included in income.
INCOME TAXES
Bell Atlantic and its domestic subsidiaries file a consolidated federal income
tax return.
Our operating telephone subsidiaries use the deferral method of accounting for
investment tax credits earned prior to repeal of investment tax credits by the
Tax Reform Act of 1986. We also defer certain transitional credits earned after
the repeal. These credits are being amortized as a reduction to the Provision
for Income Taxes over the estimated service lives of the related assets.
DIRECTORY PUBLISHING
Effective January 1, 1996, we changed our method of accounting for directory
publishing revenues and expenses from the amortized method to the point-of-
publication method. Under the point-of-publication method, revenues and expenses
are recognized when the directories are published, rather than over the lives of
the directories.
STOCK-BASED COMPENSATION
We account for stock-based employee compensation plans under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Effective January 1, 1996, we adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
13
<PAGE>
4. New Accounting Standards
- --------------------------------------------------------------------------------
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 establishes the criteria to
evaluate whether a transfer of financial assets should be accounted for as a
pledge of collateral in a secured borrowing or as a sale. It also provides
guidance on the recognition and measurement of servicing assets and liabilities
and on the extinguishment of liabilities. SFAS No. 125 was amended in December
1996 by SFAS No. 127, which deferred the effective date of specific provisions
of the standard for one year.
Under SFAS No. 125, we are required to adopt certain provisions of the
standard that apply to transactions occurring after December 31, 1996. SFAS No.
127 deferred the adoption of the remaining provisions until December 31, 1997.
We do not expect the adoption of SFAS No. 125 and SFAS No. 127 to have a
material impact on our results of operations or financial position.
Earnings per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which will
replace the current rules for earnings per share computations, presentation and
disclosure. Under the new standard, basic earnings per share excludes dilution
and is computed by dividing income available to common shareowners by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. SFAS No. 128 requires a dual presentation of basic and
diluted earnings per share on the face of the income statement.
We will be required to adopt SFAS No. 128 in the fourth quarter of this year
and, as required by the standard, we will provide basic and dilutive earnings
per share data for all periods presented. Our basic earnings per share amounts
are not expected to be materially different from those computed under the
present accounting standard.
5. Long-Term Debt-Bell Atlantic Financial Services, Inc.
- --------------------------------------------------------------------------------
Our medium-term notes are issued by Bell Atlantic Financial Services, Inc.
(FSI), a wholly owned subsidiary. FSI debt securities (aggregating $633.6
million at September 30, 1997) have the benefit of a Support Agreement dated
August 15, 1997 between Bell Atlantic and FSI under which Bell Atlantic will
make payments of interest, premium (if any) and principal on the FSI debt should
FSI fail to pay. The holders of FSI debt do not have recourse to the stock or
assets of our operating telephone subsidiaries; however, they have recourse to
dividends paid to Bell Atlantic by any of our consolidated subsidiaries as well
as assets not covered by the exclusion. The carrying value of the available
assets reflected in our condensed consolidated financial statements was
approximately $13.4 billion at September 30, 1997.
6. Commitments and Contingencies
- --------------------------------------------------------------------------------
In connection with certain incentive plan commitments with state regulatory
commissions, we have deferred revenues which will be recognized as the
commitments are met or obligations are satisfied under the plans. In addition,
several state and federal regulatory proceedings may require our operating
telephone subsidiaries to refund a portion of the revenues collected in the
current and prior periods. Finally, there are various legal actions pending to
which we are a party. We have established reserves for specific liabilities in
connection with regulatory and legal matters which we currently deem to be
probable and estimable.
We do not expect that the ultimate resolution of these matters in future
periods will have a material effect on our financial position, but it could have
a material effect on results of operations.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
(Tables shown in Dollars in Millions, Except Per Share Amounts)
- --------
Overview
- --------
The third quarter of 1997 marked a period of significant change for our company.
We completed the merger with NYNEX Corporation (NYNEX) on August 14, 1997,
creating one of the world's largest diversified telecommunications companies.
The merger was accounted for as a pooling of interests, meaning that for
accounting and financial reporting purposes the companies are treated as if they
had always been combined. Therefore, we have restated our financial information
for all dates and periods prior to the merger. The financial statements
presented reflect the new presentation used by our company. You should read
Note 2 to our condensed consolidated financial statements for additional
information on the merger transaction.
We reported a loss of $80.1 million, or $.10 per share, for the third quarter
of 1997 and net income of $1,514.9 million, or $1.95 per share, for the nine
month period ended September 30, 1997. In 1996, our net income was $871.8
million, or $1.13 per share, for the third quarter and $2,664.7 million, or
$3.45 per share, for the nine month period.
Our results for 1997 were affected by merger-related costs and other special
items recorded during the year. After adjusting for such items, net income was
$969.4 million, or $1.25 per share, for the third quarter of 1997 and $2,875.9
million, or $3.71 per share, for the nine month period ended September 30, 1997.
Results for 1996 were also affected by special charges and one-time items. When
adjusted for such items, net income was $885.7 million, or $1.14 per share, for
the third quarter of 1996 and $2,564.7 million, or $3.32 per share, for the
first nine months of 1996. The most significant of these items for both years
are discussed below.
Merger-Related Costs
Merger-related costs for the third quarter of 1997 totaled approximately $443
million ($335 million after-tax or $.43 per share), consisting of $200 million
of direct incremental costs, $223 million for employee severance costs, and $20
million of transition and integration costs. Direct incremental costs consist
of expenses associated with completing the merger transaction such as
professional and regulatory fees, compensation arrangements and shareowner-
related costs. Employee severance costs represent benefit costs for the
separation by the end of 1999 of approximately 3,100 management employees who
are entitled to benefits under preexisting separation pay plans. Transition and
integration costs consist of costs associated with integrating the operations of
Bell Atlantic and NYNEX.
We expect to incur between $400 million and $500 million (pre-tax) in
additional transition and integration merger-related expenses over the three
years following the closing of the merger.
Additional Charges
In the third quarter of 1997, we recorded pre-tax charges of approximately $1.1
billion ($711 million after-tax or $.92 per share) in connection with
consolidating operations and combining organizations and for special items
arising in the quarter.
We recognized pre-tax charges of approximately $352 million ($221 million
after-tax or $.29 per share) for the write-down of obsolete fixed assets ($297
million pre-tax) and for the cost of consolidating certain redundant real estate
properties ($55 million pre-tax).
15
<PAGE>
We determined in the third quarter of 1997 that we would no longer pursue a
multichannel, multipoint, distribution system (MMDS) as part of our video
strategy. As a result, we recognized liabilities for purchase commitments
associated with the MMDS technology and costs associated with closing the
operations of our Tele-TV partnership because this operation no longer supports
our current video strategy. We also wrote-down our remaining investment in CAI
Wireless Systems, Inc. We recognized total pre-tax expense of approximately $202
million ($159 million after-tax or $.21 per share) related to these video
investments and operations.
Results for the third quarter of 1997 also included pre-tax charges of
approximately $349 million ($220 million after-tax or $.28 per share) for
contingencies associated with various regulatory and legal matters and federal,
state and local tax issues; and approximately $172 million (pre-tax) ($111
million after-tax or $.14 per share) for other miscellaneous expense items.
Other Charges and Special Items
Other charges arising in the third quarter of 1997 included $59.3 million ($.08
per share) for our equity share of formation costs previously announced by Cable
& Wireless Communications PLC (CWC) and $18.9 million ($12.2 million after-tax
or $.02 per share) for costs associated with our current retirement incentive
program. Year-to-date 1997, we incurred $453.1 million in costs ($286.1
million after-tax or $.37 per share) associated with this program.
We recognized a pre-tax gain of $41.4 million ($31.5 million after-tax or $.04
per share) on the disposition of our interest in SkyNetwork Television Limited
of New Zealand in the third quarter of 1997. In July 1997, we recorded a state
income tax benefit of $75.4 million as a result of a change in New Jersey state
tax law. This tax benefit was partially offset by other tax issues recorded in
the third quarter of 1997, resulting in a net tax benefit of $35.6 million ($.05
per share).
In 1996, costs associated with our retirement incentive program totaled $21.9
million ($13.9 million after-tax or $.01 per share) for the third quarter and
$176.9 million ($110.5 million after-tax or $.14 per share) for the first nine
months. We also incurred pre-tax charges of $165.0 million ($108.3 million
after-tax or $.14 per share) for regulatory and other matters arising during the
nine month period ended September 30, 1996. We recorded a pre-tax gain of $66.3
million ($45.7 million after-tax or $.06 per share) on the disposition of a non-
strategic investment in the first quarter of 1996.
Cumulative Effect of Change in Accounting Principle
Effective January 1, 1996, we changed our method of accounting for directory
publishing revenues and expenses. We adopted the point-of-publication method,
meaning that we now recognize directory revenues and expenses upon publication
rather than over the lives of the directories. We recorded an after-tax
increase in income of $273.1 million, or $.35 per share, in the first quarter of
1996, representing the cumulative effect of this accounting change.
Changes in Accounting for Investments in Unconsolidated Businesses
- --------------------------------------------------------------------------------
Grupo Iusacell, S.A. de C.V.
In February 1997, we consummated a restructuring of our investment in Grupo
Iusacell, S.A. de C.V. (Iusacell), a Mexican wireless company, to permit us to
assume control of the Board of Directors and management of Iusacell. Under the
terms of the restructuring, we exchanged certain Series B and D shares of
Iusacell stock for Series A shares, enabling us to elect a majority of the Board
of Directors. This exchange of shares did not affect our economic ownership
percentage of Iusacell. We also paid a premium of $50.0 million to the majority
owner. We also converted approximately $33 million of subordinated debt into
Series A shares, thereby, increasing our economic ownership from 41.9% to 42.1%,
and we are obligated to provide Iusacell up to $150 million in subordinated
convertible financing as Iusacell may require from time to time. As a result of
the restructuring, we changed the accounting for our Iusacell investment from
the equity method to full consolidation in the first quarter of 1997.
16
<PAGE>
United Kingdom Operations
In the second quarter of 1997, we transferred our interests in cable television
and telecommunications operations in the United Kingdom to CWC in exchange for
an 18.5% ownership interest in CWC. This transaction was accounted for as a
nonmonetary exchange of similar productive assets and, as a result, no gain or
loss was recorded. Prior to the transfer, we included the accounts of these
operations in our consolidated financial statements. As a result of this
transaction, we account for our investment in CWC under the equity method.
- --------------------------------------------------------------------------------
These and other items affecting the comparison of our results of operations for
the three and nine month periods ended September 30, 1997 and 1996 are discussed
in the following sections.
- ---------------------
Results of Operations
- ---------------------
Our financial results for the three and nine month periods ended September 30,
1997, as compared to the same periods in 1996, are summarized as follows:
<TABLE>
<CAPTION>
Three months Nine months % Change
-------------------- ---------------------- -----------------------
For the Period Ended September 30 1997 1996 1997 1996 Quarter Year-to-Date
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $7,373.9 $7,376.6 $22,498.2 $21,750.0 (.04)% 3.4%
Operating expenses 6,952.9 5,709.4 18,770.8 17,137.4 21.8 9.5
-------------------------------------------
Operating income 421.0 1,667.2 3,727.4 4,612.6 (74.7) (19.2)
Income (loss) from unconsolidated
businesses (121.5) 14.9 (236.9) 51.9 * *
Other income and (expense), net (13.0) (35.0) (19.5) (65.4) 62.9 70.2
Interest expense 298.1 266.4 918.7 813.0 11.9 13.0
Provision for income taxes 68.5 508.9 1,037.4 1,394.5 (86.5) (25.6)
-------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle (80.1) 871.8 1,514.9 2,391.6 (109.2) (36.7)
Net Income (Loss) $ (80.1) $ 871.8 $ 1,514.9 $ 2,664.7 (109.2) (43.1)
===========================================
Per Common Share
Income (loss) before cumulative effect of
change in accounting principle $ (.10) $ 1.13 $ 1.95 $ 3.10 (108.8)% (37.1)%
Net income (loss) (.10) 1.13 1.95 3.45 (108.8) (43.5)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Percentage not meaningful.
- ----------------------------
Operating Revenue Statistics
- ----------------------------
<TABLE>
<CAPTION>
1997 1996 % Change
- ------------------------------------------------------------------
<S> <C> <C> <C>
At September 30
- ---------------
Access Lines in Service (in thousands)
Residence 25,079 24,362 2.9%
Business 13,839 13,158 5.2
Public 459 463 (.9)
----------------
Total Access Lines in Service 39,377 37,983 3.7
================
</TABLE>
<TABLE>
<CAPTION>
Three months Nine months % Change
-------------- ---------------- -----------------------
1997 1996 1997 1996 Quarter Year-to-Date
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended September 30
- ---------------------------------
Access Minutes of Use (in millions) 40,473 37,676 118,791 111,239 7.4% 6.8%
</TABLE>
17
<PAGE>
- ------------------
Operating Revenues
- ------------------
<TABLE>
<CAPTION>
Three months Nine months % Change
------------------ ---------------------- -----------------------
For the Period Ended September 30 1997 1996 1997 1996 Quarter Year-to-Date
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Local services $3,321.5 $3,151.4 $ 9,773.8 $ 9,331.8 5.4% 4.7%
Network access services 1,666.2 1,822.5 5,377.8 5,347.6 (8.6) .6
Long distance services 546.7 614.2 1,678.1 1,872.0 (11.0) (10.4)
Ancillary services 465.8 444.9 1,362.7 1,268.4 4.7 7.4
Directory and information services 496.1 519.4 1,649.4 1,631.0 (4.5) 1.1
Wireless services 842.0 709.7 2,439.7 1,988.2 18.6 22.7
Other services 35.6 114.5 216.7 311.0 (68.9) (30.3)
--------------------------------------------
Total Operating Revenues $7,373.9 $7,376.6 $22,498.2 $21,750.0 (.04) 3.4
============================================
</TABLE>
Local Service Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Third Quarter $170.1 5.4%
- --------------------------------------------------------------------------------
Nine Months $442.0 4.7%
- --------------------------------------------------------------------------------
Local service revenues are earned by our operating telephone subsidiaries from
the provision of local exchange, local private line, public telephone (pay
phone) and value-added services. Value-added services are a family of services
which expand the utilization of the network. These services include products
such as Caller ID, Call Waiting and Return Call, as well as more mature products
such as Touch-Tone.
Higher usage of our network facilities was the primary reason for the increase
in local service revenues in the third quarter and nine month periods ended
September 30, 1997. This growth was generated by an increase in access lines in
service of 3.7% from September 30, 1996 and stronger business message volumes in
the second and third quarters of 1997. Access line growth reflects primarily
higher demand for Centrex services and an increase in additional residential
lines. Higher revenues from private line and switched data services also
contributed to the revenue growth in 1997.
Revenue growth in both periods of 1997 was boosted by increased revenues from
value-added services. This increase was principally the result of higher
customer demand and usage, fueled in part by the introduction of new and
enhanced optional features.
Growth in local service revenues was positively affected by a change in the
classification of revenues earned from Optional Calling Plans, which were
recorded as long distance services revenues in the first nine months of 1996.
In the fourth quarter of 1996, the annual amount was reclassified from long
distance services revenues to local service revenues.
For a discussion of the Telecommunications Act of 1996, which will open the
local exchange market to competition, see "Factors That May Impact Future
Results" beginning on page 26.
Network Access Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase/(Decrease)
- --------------------------------------------------------------------------------
Third Quarter $(156.3) (8.6)%
- --------------------------------------------------------------------------------
Nine Months $30.2 .6%
- --------------------------------------------------------------------------------
Network access revenues are earned from long distance carriers for their use of
our local exchange facilities in providing long distance services to their
customers, and from end-user subscribers. Switched access revenues are derived
from usage-based charges paid by long distance carriers for access to our
network. Special access revenues arise from access charges paid by long
distance carriers and end-users who have private networks. End-user access
revenues are earned from our customers who pay for access to our network.
18
<PAGE>
Network access revenues in the third quarter and first nine months of 1997
were negatively affected by price reductions as mandated by federal and state
price cap and incentive plans. Effective July 1, 1997, we implemented price
decreases of approximately $430 million on an annual basis for interstate access
services, in connection with the Federal Communications Commission's (FCC) price
cap plan. Rate reductions for intrastate access services were also implemented
in connection with price cap and incentive plans filed in certain state
jurisdictions. Revenues for both periods of 1997 were also reduced by special
charges of approximately $136 million for contingencies associated with
regulatory matters, as previously discussed.
These revenue reductions were partially offset in the third quarter and more
than offset year-to-date by higher customer demand as reflected by growth in
access minutes of use of 7.4% in the three month period and 6.8% in the nine
month period over the same periods in 1996. Volume growth was boosted by
expansion of the business market, particularly for high capacity services.
Higher end-user revenues attributable to an increase in access lines in service
also contributed to revenue growth in both periods of 1997. Revenue growth for
the nine month period was positively impacted by the effect of prior year
accruals for regulatory matters, as previously described.
We expect that the impact of price decreases, in connection with the FCC's
price cap plan effective July 1, 1997, will be more than offset by volume
increases and the effect of prior year accruals. For a further discussion of
FCC rulemakings concerning price caps, access charges and universal service, see
"Factors That May Impact Future Results--Recent Developments--FCC Orders"
beginning on page 27.
Long Distance Services Revenues
- --------------------------------------------------------------------------------
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Third Quarter $(67.5) (11.0)%
- --------------------------------------------------------------------------------
Nine Months $(193.9) (10.4)%
- --------------------------------------------------------------------------------
Long distance services revenues are earned primarily from calls made outside a
customer's local calling area, but within the same service area of our operating
telephone subsidiaries (intraLATA toll). Other long distance services that we
provide include 800 services, Wide Area Telephone Service (WATS), corridor
services, and long distance services outside of our region.
Increased competition for intraLATA toll, WATS and private line services and
company-initiated price reductions contributed substantially to the reduction in
long distance services revenues in 1997. The effect on revenues from competition
for intraLATA toll services increased in the second and third quarters of 1997
as a result of the introduction of presubscription in many states throughout our
region. We implemented price reductions on certain long distance services as
part of our response to competition. These revenue decreases were partially
offset by higher calling volumes generated by an increase in access lines in
service.
Revenues in both periods of 1997 were negatively affected by the
aforementioned change in the classification of Optional Calling Plan revenues to
local service.
We believe that competition for long distance services, including the
introduction of presubscription in many of our operating telephone subsidiaries,
which began in 1996, will continue to impact future revenue trends. You should
read "Factors That May Impact Future Results--Competition--IntraLATA Toll
Services" beginning on page 28 for a further discussion of presubscription.
Ancillary Services Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Third Quarter $20.9 4.7%
- --------------------------------------------------------------------------------
Nine Months $94.3 7.4%
- --------------------------------------------------------------------------------
Our company provides ancillary services which include systems integration
services, plant and construction services for other telecommunications carriers,
billing and collection services for long distance carriers, customer premises
equipment (CPE) services, facilities rental services, voice messaging, ISDN and
other high bandwidth services.
19
<PAGE>
Higher ancillary services revenues in the nine month period were principally
the result of new contracts with business customers for systems integration
services and higher demand for CPE services. Strong revenue growth from voice
messaging services, principally Answer Call, also contributed to higher revenues
in both periods. We also recognized higher revenues in 1997 as a result of the
introduction of customer late payment charges by several of our operating
telephone subsidiaries during 1996.
Directory and Information Services Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase/(Decrease)
- --------------------------------------------------------------------------------
Third Quarter $(23.3) (4.5)%
- --------------------------------------------------------------------------------
Nine Months $18.4 1.1%
- --------------------------------------------------------------------------------
We earn directory and information services revenues primarily from local
advertising and marketing services provided to businesses in our White and
Yellow Pages directories within our region, international directory services,
and electronic publishing services. We also provide database services and
directory marketing services outside of our region. Revenues from our Internet
services businesses are also included in this revenue category.
Directory and information services revenues in the third quarter and year-to-
date 1997 were negatively affected by the timing of directory publishing dates,
principally a New York directory that changed from a September to an October
publication date. Excluding the effect of the New York directory, revenues
increased $21.1 million or 4.4% in the third quarter of 1997 and $62.8 million
or 4.0% in the first nine months of 1997, as compared to the same periods last
year.
These revenue increases were principally attributable to volume increases and
higher rates charged for directory publishing services.
Wireless Services Revenues
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Third Quarter $132.3 18.6%
- --------------------------------------------------------------------------------
Nine Months $451.5 22.7%
- --------------------------------------------------------------------------------
Wireless services include revenues generated from our consolidated subsidiaries
that provide cellular and paging communications services, including Bell
Atlantic Mobile, our domestic unit, and our Iusacell investment in Mexico. As
described earlier, as a result of the restructuring of our Iusacell investment,
we account for this investment as a fully consolidated subsidiary, while in the
prior year, we accounted for this investment under the equity method.
Strong growth in our domestic cellular customer base of 24.9% and higher usage
were the primary reasons for the increase in wireless services revenues in both
the third quarter and first nine months of 1997. Revenues also increased in
both periods as a result of the recognition of Iusacell's operating revenues for
the first nine months of 1997.
Other Services Revenues
- --------------------------------------------------------------------------------
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Third Quarter $(78.9) (68.9)%
- --------------------------------------------------------------------------------
Nine Months $(94.3) (30.3)%
- --------------------------------------------------------------------------------
Other services include revenues from our telecommunications consulting, real
estate and financing businesses. As described earlier, we account for our CWC
investment under the equity method beginning in the second quarter of 1997.
Prior to this transaction, this operation was accounted for as a fully
consolidated subsidiary.
The decline in other services revenues in both periods was caused principally
by the effect of the CWC transaction and by the sale of our real estate
properties business in the second quarter of 1997.
20
<PAGE>
- ------------------
Operating Expenses
- ------------------
<TABLE>
<CAPTION>
Three months Nine months % Change
------------------ ---------------------- -----------------------
For the Period Ended September 30 1997 1996 1997 1996 Quarter Year-to-Date
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employee costs $2,337.8 $2,181.6 $ 6,956.9 $ 6,592.3 7.2% 5.5%
Depreciation and amortization 1,724.0 1,331.5 4,459.1 4,027.8 29.5 10.7
Taxes other than income 475.2 390.6 1,252.4 1,132.3 21.7 10.6
Other operating expenses 2,415.9 1,805.7 6,102.4 5,385.0 33.8 13.3
-------------------------------------------
Total Operating Expenses $6,952.9 $5,709.4 $18,770.8 $17,137.4 21.8 9.5
===========================================
</TABLE>
For purposes of our discussion, reference to the network subsidiaries includes
our nine operating telephone subsidiaries, two subsidiaries that provide
centralized services and support, and network-related subsidiaries providing
systems integration, CPE distribution, inside wiring, long distance, and
directory and information services.
Employee Costs
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Third Quarter $156.2 7.2%
- --------------------------------------------------------------------------------
Nine Months $364.6 5.5%
- --------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes.
Employee costs increased in the three and nine month periods of 1997
principally as a result of merger-related costs recorded in the third quarter of
1997. As described earlier, we recognized approximately $223 million in benefit
costs for the separation by the end of 1999 of approximately 3,100 management
employees who are entitled to benefits under preexisting separation pay plans.
We also recorded approximately $53 million of direct incremental merger-related
costs associated with compensation arrangements. The nine month increase also
reflects higher year-to-date costs of approximately $276 million in connection
with our retirement incentive program. For a further discussion of our
retirement incentive program see "Other Matters--Retirement Incentives" on page
29.
Other items contributing to the increase in employee costs, but to a lesser
extent, in both periods of 1997 were annual salary and wage increases and the
effect of increased work force levels principally as a result of higher business
volumes at our network and domestic wireless subsidiaries. Work force levels
grew 4.7% from September 30, 1996. The effect of consolidating our Iusacell
investment, as described earlier, also contributed to the expense increases in
1997.
These expense increases were partially offset by a reduction in benefit costs
caused by a number of factors, including an increase in the discount rate used
to develop pension and postretirement benefit costs, favorable pension plan
asset returns and lower than expected medical claims. Lower overtime pay for
repair and maintenance activity at our network subsidiaries and the effect of
accounting for our CWC investment under the equity method also reduced employee
costs in 1997.
Depreciation and Amortization
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Third Quarter $392.5 29.5%
- --------------------------------------------------------------------------------
Nine Months $431.3 10.7%
- --------------------------------------------------------------------------------
Depreciation and amortization expense increased in the three and nine month
periods of 1997 over the same periods in 1996 principally as a result of the
recording of approximately $297 million for write-downs of obsolete fixed assets
in the third quarter of 1997, as previously mentioned.
21
<PAGE>
Higher depreciation expense in both periods was also caused by growth in
depreciable plant and changes in the mix of plant assets at our network and
domestic wireless subsidiaries. The effect of consolidating our Iusacell
investment, as described earlier, also contributed to the expense increases in
1997.
These expense increases were partially offset by lower rates of depreciation
and the effect of accounting for our CWC investment under the equity method, as
described earlier.
Taxes Other Than Income
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Third Quarter $84.6 21.7%
- --------------------------------------------------------------------------------
Nine Months $120.1 10.6%
- --------------------------------------------------------------------------------
Taxes other than income consist of taxes for gross receipts, property, capital
stock and other nonincome-based items.
The increase in taxes other than income in both periods was substantially due
to charges recorded in the third quarter of 1997 for state and local tax
contingencies of approximately $55 million and for taxes incurred as part of
direct incremental merger-related costs of approximately $25 million.
Other Operating Expenses
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Third Quarter $610.2 33.8%
- --------------------------------------------------------------------------------
Nine Months $717.4 13.3%
- --------------------------------------------------------------------------------
Other operating expenses consist of contract services, rent, network software
costs, the provision for uncollectible accounts receivable, and other costs.
The rise in other operating expenses in the three and nine month periods of
1997 was largely due to the recording of merger-related costs and other special
items aggregating approximately $556 million in the third quarter of 1997. The
charges contributing to the increases in other operating expenses included;
direct incremental merger-related costs of approximately $122 million,
transition merger-related costs of approximately $20 million, video-related
charges of approximately $69 million, costs to consolidate certain redundant
real estate properties of approximately $55 million, charges for regulatory,
legal and other contingencies of approximately $126 million, and other
miscellaneous expense items of approximately $164 million.
Other operating expenses for both periods also included increased costs at our
operating telephone subsidiaries to comply with certain requirements of the
Telecommunications Act of 1996 to permit our eventual entry into the in-region
long distance business and higher interconnection payments to competitive local
exchange and wireless carriers to terminate calls on their networks. We also
reported higher expenses as a result of the consolidation of our Iusacell
investment and higher business volumes at our domestic wireless, systems
integration services, and marketing subsidiaries. Another item affecting both
periods, but to a lesser extent, was higher costs associated with entering new
businesses, such as out-of-region long distance services.
These expense increases were partially offset by the effects of the timing of
network software purchases at our operating telephone subsidiaries, accounting
for our CWC investment under the equity method, and the timing of directory
publication dates. Year-to-date expense increases were reduced by the effect of
certain accruals for regulatory and other matters recorded in the first half of
1996, as previously described.
We expect to continue to incur costs associated with our entry into the out-
of-region long distance businesses and with compliance with the
Telecommunications Act of 1996, for the remainder of 1997. We also anticipate
that we will incur additional costs associated with business initiatives in
fixed wireless and long distance at Iusacell.
22
<PAGE>
Income (Loss) from Unconsolidated Businesses
- --------------------------------------------------------------------------------
1997-1996 (Decrease)
- --------------------------------------------------------------------------------
Third Quarter $(136.4) - %
- --------------------------------------------------------------------------------
Nine Months $(288.8) - %
- --------------------------------------------------------------------------------
Income (loss) from unconsolidated businesses includes equity income and losses
and goodwill amortization related to these investments. As described earlier,
in the second quarter of 1997 we began accounting for our investment in CWC
under the equity method, and in the first quarter of 1997 we fully consolidated
our investment in Iusacell.
We recognized a loss from unconsolidated businesses in third quarter and nine
month periods ended September 30, 1997 principally as a result of special
charges recognized in the third quarter of 1997 of approximately $133 million
related to certain video investments and operations and $59.3 million for our
equity share of formation costs previously announced by CWC. Higher equity
losses and goodwill amortization associated with our investments in several
ventures, primarily a personal communications services (PCS) joint venture,
PrimeCo Personal Communications, L.P. (PrimeCo), also contributed to equity
losses in 1997. In November 1996, PrimeCo launched commercial service in 16
major cities throughout the country. The nine month period was also reduced by
the effect of a pre-tax gain of $66.3 million recognized in the first quarter of
1996 on the disposition of a non-strategic investment.
These factors were offset, in part, by a pre-tax gain of $41.4 million on the
disposition of our interest in SkyNetwork Television Limited of New Zealand, and
by the effect of consolidating our Iusacell investment, as described earlier.
We also recognized a gain on the sale of Iusacell's interest in an Ecuadorian
cellular company in the third quarter of 1997.
We expect that our earnings in 1997, as compared to 1996, will continue to be
reduced by our share (approximately 46%) of the increased losses associated with
PrimeCo.
Other Income and (Expense), Net
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Third Quarter $22.0 62.9%
- --------------------------------------------------------------------------------
Nine Months $45.9 70.2%
- --------------------------------------------------------------------------------
Other income and (expense), net, consists primarily of interest and dividend
income, minority interest in net income (loss) of consolidated businesses, and
gains and losses on non-operating assets and investments.
The principal items affecting the change in other income and expense, net, in
both periods of 1997 were the recognition of Iusacell's net loss credited to
minority interest and the effect of accounting for our equity investment income
in CWC in the second quarter of 1997. Other individual items recorded in the
third quarter and nine month periods were not material.
Interest Expense
- --------------------------------------------------------------------------------
1997-1996 Increase
- --------------------------------------------------------------------------------
Third Quarter $31.7 11.9%
- --------------------------------------------------------------------------------
Nine Months $105.7 13.0%
- --------------------------------------------------------------------------------
Interest expense increased in the three and nine month periods of 1997
principally as a result of higher borrowing levels at our network and wireless
subsidiaries and the effect of the consolidation of our Iusacell investment. A
reduction in capitalized interest costs associated with our PrimeCo investment
also contributed to the rise in interest expense.
23
<PAGE>
Effective Income Tax Rates
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30
- --------------------------------------------------------------------------------
1997 40.6%
- --------------------------------------------------------------------------------
1996 36.8%
- --------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a percentage
of income before provision for income taxes and cumulative effect of change in
accounting principle.
The higher effective income tax rate for the nine month period ended September
30, 1997 resulted from the effect of certain merger-related costs and special
charges for which there were no corresponding tax benefits. Adjustments to the
valuation allowance resulting from our re-evaluation of tax planning strategies
in light of the merger also contributed to the higher effective income tax rate
in 1997. These factors were partially offset by the effect of a change in the
New Jersey state income tax law.
On July 14, 1997, the State of New Jersey enacted a law which repeals the
gross receipts tax and extends the Corporate Business Tax, a tax based on net
income, to telecommunication utilities including local exchange carriers. The
law is effective January 1, 1998. We anticipate that our future annual New
Jersey income tax liability will be approximately equal to our current annual
New Jersey gross receipts tax liability and, therefore, the impact of the new
law will not be material to ongoing results of operations. As required under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," the effect of this tax law change on deferred tax assets/liabilities
must be included in income from continuing operations for the period that
includes the enactment date. This one-time adjustment of deferred income taxes
generated a $75.4 million state income tax benefit (net of federal income tax
expense) in the third quarter of 1997.
- -------------------
Financial Condition
- -------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30 1997 1996 Change
- -----------------------------------------------------------------------------
Cash Flows From (Used In):
<S> <C> <C> <C>
Operating activities $ 6,000.5 $ 6,099.7 $ (99.2)
Investing activities (4,693.8) (4,452.4) (241.4)
Financing activities (1,240.3) (1,897.8) 657.5
- -----------------------------------------------------------------------------
</TABLE>
We use the net cash generated from our operations and from external financing to
fund capital expenditures for network expansion and modernization, pay
dividends, and invest in new businesses. While current liabilities exceeded
current assets at September 30, 1997 and 1996 and December 31, 1996, our sources
of funds, primarily from operations and, to the extent necessary, from readily
available external financing arrangements, are sufficient to meet ongoing
operating requirements. We expect that presently foreseeable capital
requirements will continue to be financed primarily through internally generated
funds. Additional debt or equity financing may be needed to fund additional
development activities or to maintain our capital structure to ensure our
financial flexibility.
We use derivatives to manage interest rate, foreign exchange and other
financial risks which could jeopardize our financing and operating flexibility
and to facilitate our overall financing strategy. Derivative agreements are
tied to specific liabilities or assets and hedge the related economic exposures.
We do not hold derivatives for trading purposes. The use of derivatives is not
expected to have a material impact on our financial condition or results of
operations.
The notional amounts of our derivative contracts are used to calculate
contractual payments to be exchanged and are not a measure of our credit risk or
our future cash requirements. Credit risk related to derivatives is limited to
nonperformance by counterparties to our contracts. We manage that credit risk
by limiting our exposure to any one financial institution and by monitoring our
counterparties' credit ratings. We believe the risk of loss due to
nonperformance of counterparties is remote and that any losses would not be
material to our financial condition or results of operations.
24
<PAGE>
Cash Flows From Operating Activities
- --------------------------------------------------------------------------------
Our primary source of funds continued to be cash generated from operations.
Cash flows from operations were lower in the first nine months of 1997, as
compared to the same period in 1996, principally as a result of merger-related
costs paid during the third quarter of 1997.
Cash Flows Used in Investing Activities
- --------------------------------------------------------------------------------
Capital expenditures continued to be our primary use of capital resources. We
invested approximately $4.0 billion in the first nine months of 1997, as
compared to $3.2 billion in the first nine months of 1996, to support our
network businesses in order to facilitate the introduction of new products and
services, enhance responsiveness to competitive challenges, and increase the
operating efficiency and productivity of the network. The increase in telephone
plant expenditures is principally due to the timing of construction plans.
During the first nine months of 1997, we invested $574.3 million in
unconsolidated businesses including approximately $304 million in PrimeCo to
fund the continued build-out of its PCS network; $107 million in FLAG, a company
that has constructed undersea fiberoptic cable between Europe and Asia and in
which we are the managing partner; and $163.3 million in leasing and other
partnerships. Cash investing activities in unconsolidated businesses in the
first nine months of 1996 totaled $444.0 million, which included investments of
approximately $140 million in PrimeCo, $113 million in international wireless
joint ventures, $31 million in FLAG, and $160 million in leasing and other
partnerships.
Our short-term investments consist principally of cash equivalents held in
trust accounts for the payment of certain employee benefits. During the first
nine months of 1997, we invested $140.0 million in a vacation pay trust and $8.1
million in other investments, compared to $130.0 million in the vacation pay
trust and $26.4 million in other investments in the first nine months of 1996.
We held short-term investments of $271.7 million at December 31, 1996 and we
held no short-term investments at December 31, 1995. Proceeds from the sale of
short-term investments were $323.5 million year-to-date 1997, compared to $102.9
million year-to-date 1996.
Year-to-date 1997, we received cash proceeds of $271.5 million from the sales
of our real estate properties and our interest in a joint venture. We also
received approximately $52 million from the disposition of our interest in
SkyNetwork Television Limited of New Zealand, approximately $30 million from the
sale of Iusacell's interest in an Ecuadorian cellular company, and $7.1 million
from the disposition of other investments.
During the first nine months of 1997, we received cash proceeds of $114.6
million from Telecom Corporation of New Zealand's (Telecom) share repurchase
plan. In connection with that plan, we anticipate that Telecom will continue to
repurchase a portion of our stock investment, to the extent necessary to keep
our percentage ownership interest in Telecom from exceeding the maximum
permitted level of 24.95%. Telecom's plan is expected to result in total cash
proceeds to us of approximately $155 million to $165 million in 1997.
Cash Flows Used in Financing Activities
- --------------------------------------------------------------------------------
As in prior years, dividend payments were a significant use of capital
resources. We determine the appropriateness of the level of our dividend
payments on a periodic basis by considering such factors as long-term growth
opportunities, internal cash requirements, and the expectations of our
shareowners. In September 1997, we announced a quarterly dividend payment of
$.77 per share, an annual rate of $3.08 per share, as contemplated in the Merger
Agreement. The new dividend payment is equivalent to what former NYNEX
shareowners would have received from the NYNEX quarterly dividend of $.59 per
share. Cash dividends declared in the first and second quarters of 1997 were
$.74 per share.
We increased our long-term debt (including capital lease obligations) and
short-term debt by $1,032.9 million from December 31, 1996. This increase is
principally due to an increase in telephone plant construction and new
investments in PrimeCo and other wireless subsidiaries, including the
consolidation of our Iusacell investment. The effects of these capital
expenditures were partially offset by proceeds from the Telecom share repurchase
plan and from sales of our real estate properties and other investments.
25
<PAGE>
Our debt ratio was 60.5% as of September 30, 1997, compared to 58.0% as of
September 30, 1996 and 58.3% as of December 31, 1996.
In September 1996, we classified $1.8 billion of commercial paper borrowings
as Long-term Debt as a result of our intent to refinance these borrowings on a
long-term basis using an unsecured revolving credit facility. We no longer
maintain the revolving credit facility. As a result, all commercial paper is
classified as Debt Maturing Within One Year.
As of September 30 1997, we had unused bank lines of credit in excess of $5.0
billion. Our subsidiaries have shelf registrations for the issuance of up to
$2.7 billion of unsecured debt securities. We also have established a $1.0
billion Euro Medium-term Note Program through a subsidiary for the issuance of
debt securities. The debt securities of our subsidiaries continue to be
accorded high ratings by primary rating agencies.
In the second quarter of 1997, we reduced our Series B Preferred Stock of
Subsidiary by 100,000 shares through the purchase of the stock by a wholly owned
subsidiary for $10.0 million.
As a result of the consolidation of our Iusacell investment in the first
quarter of 1997 and the transfer of our interests in United Kingdom operations
to CWC for an equity interest in CWC in the second quarter of 1997, our
condensed consolidated balance sheet at September 30, 1997 reflects increases
and decreases in certain categories of assets and liabilities; however, these
transactions had no material effect on our financial condition.
- --------------------------------------
Factors That May Affect Future Results
- --------------------------------------
Bell Atlantic - NYNEX Merger
- --------------------------------------------------------------------------------
The merger of Bell Atlantic and NYNEX was completed on August 14, 1997. We had
previously announced that we expected to recognize recurring expense savings of
approximately $600 million annually and approximately $300 million a year in
capital savings, in each case, by the third year following the closing of the
merger by consolidating and integrating networks and operating systems,
eliminating approximately 3,100 management positions, centralizing procurement,
reducing the need for contract services, consolidating real estate, combining
information systems and eliminating duplicative operations. We are now targeting
an additional $500 million in annual cost savings by the year 2000. We also
expect to add approximately $400 million a year in revenues from our current
product portfolio by using our best marketing and advertising practices.
Telecommunications Industry Changes
- --------------------------------------------------------------------------------
The telecommunications industry is undergoing substantial changes as a result of
the Telecommunications Act of 1996 (the Act), other public policy changes and
technological advances. These changes are likely to bring increased competitive
pressures in our current businesses, but will also open new markets to us.
The Act became law on February 8, 1996 and replaced the Modification of Final
Judgment (MFJ). In general, the Act includes provisions that open local
exchange markets to competition and permit Bell Operating Companies, such as our
company, to provide interLATA (long distance) services and to engage in
manufacturing, previously prohibited by the MFJ. However, our ability to
provide in-region long distance service is largely dependent on satisfying
certain conditions contained in the Act. The requirements include a 14-point
"competitive checklist" of steps we must take which will help competitors offer
local service, through resale, the purchase of unbundled network elements, or
through their own networks. We must also demonstrate to the FCC that our entry
into the in-region long distance market would be in the public interest.
We expect to petition the FCC for permission to enter the in-region long
distance market in New York by early 1998 and one or more other states during
the first half of 1998, and we anticipate entering the long distance market in
at least one jurisdiction during the second half of 1998. The timing of our
long distance entry in each of our 14 jurisdictions depends on the receipt of
FCC approval. There can be no assurance that any approval will be forthcoming
in time to permit us to enter the in-region long distance market on this
schedule.
26
<PAGE>
A U. S. Court of Appeals recently found that the FCC unlawfully attempted to
preempt state authority in implementing key provisions of the Act. It also
found that several particularly objectionable provisions of the FCC's rules were
inconsistent with the statutory requirements. In particular, it affirmed that
states have exclusive jurisdiction over the pricing of interconnection elements
and the appropriate wholesale discount and that the FCC could not lawfully allow
competitors to "pick and choose" isolated terms out of negotiated
interconnection agreements. This decision should not delay the advent of local
competition, since, under the previous stay of the FCC's rules, a number of
interconnection agreements have been concluded and states have proceeded to
adopt pricing and other standards for local interconnection.
We are unable to predict definitively the impact that the Act will ultimately
have on our business, results of operations or financial condition. The
financial impact will depend on several factors, including the timing, extent
and success of competition in our markets, and the timing, extent and success of
our pursuit of new opportunities resulting from the Act.
We anticipate that these industry changes, together with the rapid growth,
enormous size and global scope of these markets, will attract new entrants and
encourage existing competitors to broaden their offerings. Current and
potential competitors in telecommunication services include long distance
companies, other local telephone companies, cable companies, wireless service
providers, and other companies that offer network services. Some of these
companies have a strong market presence, brand recognition and existing customer
relationships, all of which contribute to intensifying competition and may
affect our future revenue growth. You should read the "Competition" section
below for additional information.
Recent Developments--FCC Orders
- --------------------------------------------------------------------------------
On May 7, 1997, the FCC adopted orders to reform the interstate access charge
system, to modify its price cap system and to implement the "universal service"
requirements of the Act. While there are additional decisions pending on
Universal Service and Access Reform, based on the decisions to date we do not
believe that these proceedings will result in a material adverse impact on our
results of operations or financial condition.
Access Charges
Interstate access charges are the rates long distance carriers pay for use and
availability of the operating telephone subsidiaries' facilities for the
origination and termination of interstate interLATA service. On May 7, 1997,
the FCC adopted changes to the tariff structures it has prescribed for such
charges in order to permit the operating telephone subsidiaries to recover a
greater portion of their costs through rates which reflect the manner in which
those costs are incurred. Beginning in January 1998, the FCC will require a
phased restructuring of access charges so, that interstate costs of the
operating telephone subsidiaries which do not vary based on usage will be
recovered from long distance carriers through flat rate charges, and those
interstate costs that do vary based on usage be recovered from long distance
carriers through usage-based rates. In addition, the FCC will require
establishment of separate usage-based charges for originating and for
terminating interstate interLATA traffic.
A portion of the operating telephone subsidiaries' interstate costs are also
recovered through flat monthly charges to subscribers ("subscriber line
charges"). Under the FCC's order, subscriber line charges for primary
residential and single line businesses will remain unchanged initially, but such
charges for additional residential lines and multi-line businesses will rise.
Price Caps
The FCC also adopted modifications to its price cap rules that affect access
rate levels. Under the FCC's price cap rules, our price cap index is adjusted
annually by an inflation index (GDP-PI) less a fixed percentage intended to
reflect increases in productivity ("Productivity Factor"). In the prior year,
our Productivity Factor was 5.3%. Effective July 1, 1997, the FCC created a
single Productivity Factor of 6.5% for all price cap companies, and eliminated
requirements to share a portion of future interstate earnings. The FCC required
that rates be set as if the higher Productivity Factor had been in effect since
July 1996. Any local exchange company that earns a rate of return on its
interstate services of less than 10.25% in any calendar year will be permitted
to increase its interstate
27
<PAGE>
rates in the following year. The FCC also ordered elimination of recovery for
amortized costs associated with our implementation of equal access to all long
distance carriers.
On June 30, 1997, we made our Annual Access Tariff Filing of Interstate Rates,
which became effective on July 1, 1997. The rates included in the filing
resulted in annual price decreases totaling approximately $430 million, of which
$59 million is a result of one-time adjustments that will only be in effect
until July 1998.
The FCC is expected to adopt an order in 1998 to address the conditions under
which the FCC would relax or remove existing access rate structure requirements
and price cap restrictions as increased local market competition develops. We
are unable to predict the results of this further proceeding.
Universal Service
The FCC also adopted rules designed to preserve "universal service" by ensuring
that a basket of designated services is widely available and affordable to all
customers, including low-income customers and customers in areas that are
expensive to serve. The FCC's universal service support will approximate $1.5
billion for high cost areas pending completion of further FCC proceedings. The
FCC, in conjunction with the Federal-State Joint Board on Universal Service,
will determine the methodology for determining high cost areas for non-rural
carriers, and the proper amount of federal universal service support for high
cost areas. A new federal high cost universal service support mechanism will
become effective January 1, 1999.
The FCC also adopted rules to implement the Act's requirements to provide
discounted telecommunications services to schools and libraries, beginning
January 1, 1998, and to ensure that not-for-profit rural health care providers
have access to such services at rates comparable to those charged their urban
counterparts.
All telecommunications carriers will be required to contribute funding for
these universal service programs. The federal universal service funding needs as
of January 1, 1998 will require each of our operating telephone subsidiaries to
contribute approximately 2% of its interstate retail revenues for high cost and
low income subsidies. Each of our operating telephone subsidiaries will also be
contributing a portion of its total retail revenues for schools, libraries and
not-for-profit health care. Our operating telephone subsidiaries will recover
these contributions through interstate charges to long distance carriers and end
users.
Competition
- --------------------------------------------------------------------------------
IntraLATA Toll Services
IntraLATA toll services are calls that originate and terminate within the same
LATA, but cover a greater distance than a local call. These services are
generally regulated by state regulatory commissions rather than federal
authorities. All of our state regulatory commissions (except in the District of
Columbia, where intraLATA toll service is not provided) permit other carriers to
offer intraLATA toll services within the state.
Until the implementation of "presubscription," intraLATA toll calls in these
states were completed by our operating telephone subsidiaries unless the
customer dialed a code to access a competing carrier. Presubscription changed
this dialing method and enable customers to make these toll calls using another
carrier without having to dial an access code.
The Act addressed the issue of presubscription for intraLATA toll calls by
prohibiting a state from requiring presubscription or "dialing parity" until the
earlier of such time as the Bell Operating Company is authorized to provide long
distance services originating in the state or three years from the effective
date of the Act. This prohibition does not apply to a final order requiring
presubscription that was issued on or prior to December 19, 1995 or to states
consisting of a single LATA.
New York Telephone Company substantially completed implementation of intraLATA
presubscription in the first quarter of 1996, and fully completed intraLATA
presubscription implementation by September 1996. By November 1997, our
operating telephone subsidiaries in Delaware, Maine, New Hampshire, New Jersey,
Pennsylvania, Rhode Island, Vermont, and West Virginia had also implemented
intraLATA presubscription. We expect to offer intraLATA presubscription in
Maryland, Massachusetts and Virginia coincident with our offering of long
distance services in those states, as required by the Act.
28
<PAGE>
Implementation of presubscription for intraLATA toll services could have a
material negative effect on intraLATA toll service revenues, in those
jurisdictions where, as noted above, presubscription has been implemented before
we are permitted to offer long distance services. The adverse impact on
intraLATA toll services revenues is expected to be partially offset by an
increase in intraLATA access revenues.
Local Exchange Services
Local exchange services have historically been subject to regulation by state
regulatory commissions. Applications from competitors to provide and resell
local exchange services have been approved in all of our state jurisdictions.
The Act is expected to significantly increase the level of competition in all of
our local exchange markets.
- -------------
Other Matters
- -------------
Retirement Incentives
- --------------------------------------------------------------------------------
NYNEX has previously disclosed that it expected the total number of employees
who would elect to leave under its current retirement incentive program through
its completion in 1998 to be in the range of 19,000 to 21,000, consisting of
approximately 9,000 to 10,000 management and 10,000 to 11,000 associate
employees. NYNEX has also disclosed that it anticipated that the additional
charges to be recorded in connection with the program would be in the range of
$2.2 billion ($1.4 billion after-tax). NYNEX had accrued approximately $1.1
billion of pre-tax charges in 1993 for severance and postretirement medical
benefits under a force reduction plan.
As of September 30, 1997, 18,516 employees (9,329 management and 9,187
associates) had elected to leave under the program, and additional charges of
approximately $1.9 billion ($1.2 billion after-tax) had been recorded in
connection with the program. The management portion of the program was
completed as of March 31, 1997.
Based on the experience of employee take rates under the program and
management's most recent assessment of work volume and productivity trends, we
are currently considering and discussing with the unions possible changes in the
program for associates. We now expect that, if the program were fully
implemented, the total number of employees electing to leave under the program,
and the associated additional charges, would be substantially greater than
previously estimated.
Our objective is to distribute the program take rates in a way that allows us
to match retirements with downsizing caused by productivity improvements. This
effort could result in an extension of the program.
In connection with the 1993 force reduction plan, the total remaining reserves
were approximately $121 million for employee severance and $143 million for
postretirement medical costs, as of December 31, 1996. During the first nine
months of 1997, employee severance reserves of approximately $59 million were
transferred primarily to the pension liability and $61 million of postretirement
medical liability were applied on a per employee basis for associates who left
Bell Atlantic under the 1993 retirement incentive plan. At September 30, 1997,
approximately $62 million of employee severance reserves and $82 million of
postretirement medical liability remained.
Year "2000" Systems Modifications
- --------------------------------------------------------------------------------
We are continually in the process of updating our information and network
systems and, as part of that process, we are evaluating the costs associated
with modifying and testing our systems for the Year 2000. We expect to make
some of the necessary modifications through our ongoing investment in systems
upgrades. We are not yet able to estimate the incremental cost of the Year 2000
conversion effort but such costs will be expensed as incurred. The incremental
costs incurred to date have not been material. We intend to complete
substantially all conversion work by the end of 1998 and to conduct testing
throughout 1999. We expect to complete this effort on a timely basis without
disruption to our customers or operations.
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Other Information
- --------------------------------------------------------------------------------
At a Bell Atlantic Analyst Conference on October 22, 1997, we made the following
statements:
(i) We are comfortable with current analysts' estimates of $4.90 to $5.00
per share for 1997, excluding transition and integration costs and other
special items.
(ii) We are targeting 1998 earnings growth within the 10%-12% range,
excluding transition and integration costs.
(iii) We have established a long-term revenue growth target for our Network
subsidiaries, excluding any in-region long distance revenues, of
approximately 2.5% in 1998, and approaching 5% thereafter.
Cautionary Statement Concerning Forward--Looking Statements
- --------------------------------------------------------------------------------
Information contained above with respect to expected financial results and
future events and trends in this Management's Discussion and Analysis is
forward-looking, based on our estimates and assumptions and subject to risks and
uncertainties. For those statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
The following important factors could affect the future results of our company
and could cause those results to differ materially from those expressed in the
forward-looking statements: (i) materially adverse changes in economic
conditions in the markets served by us; (ii) the final outcome of FCC
rulemakings with respect to interconnection agreements, access charge reform and
universal service; (iii) future state regulatory actions and economic conditions
in our operating areas; (iv) the extent, timing and success of competition from
others in the local telephone and intraLATA toll service markets; and (v) the
timing of our entry and profitability in the in-region long distance market.
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- ---------------------------
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings
- --------------------------------------------------------------------------------
For background concerning our contingent liabilities under the Plan of
Reorganization governing the divestiture by AT&T Corp. (formerly American
Telephone and Telegraph Company) of certain assets of the former Bell System
operating companies with respect to private actions relating to pre-divestiture
events, see Item 3 of Bell Atlantic Corporation's Annual Report on Form 10-K for
the year ended December 31, 1996.
Item 5. Other Information
- --------------------------------------------------------------------------------
We will hold our 1998 Annual Meeting of Shareowners on May 1, 1998, at The
Playhouse Theatre in the DuPont Building, Wilmington, Delaware.
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) Exhibits:
Exhibit Number
10a(i) Description of Amendment to Bell Atlantic Senior Management Short Term
Incentive Plan, effective August 14, 1997.
10j(i) Description of Amendment and Administrative Change to Bell Atlantic 1985
Incentive Stock Option Plan, effective August 14, 1997.
10x Bell Atlantic Salary Program for Senior Managers, effective August 14,
1997.
10y Description of Changes in Compensation for Outside Directors of Bell
Atlantic, effective August 14, 1997.
10aa Employment Agreement, dated August 14, 1997, by and between Bell Atlantic
Corporation and Raymond W. Smith.
10bb Employment Agreement, dated August 14, 1997, by and between Bell Atlantic
Corporation and Ivan G. Seidenberg.
11 Computation of Per Common Share Earnings.
27 Financial Data Schedule.
31
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(b) Reports on Form 8-K filed during the quarter ended September 30, 1997:
A Current Report on Form 8-K, dated July 22, 1997, was filed regarding Bell
Atlantic's second quarter 1997 financial results.
A Current Report on Form 8-K, dated August 14, 1997, was filed regarding the
consummation of the merger of a wholly owned subsidiary of Bell Atlantic
Corporation with and into NYNEX Corporation.
A Current Report on Form 8K/A, Amendment No. 1, dated August 14, 1997, was
filed. This report included (i) pro forma combined condensed statements of
income of Bell Atlantic and NYNEX for the three months ended March 31, 1997 and
1996, the three and six months ended June 30, 1997 and 1996, the three months
ended September 30, 1996, the three months and year ended December 31, 1996, and
the years ended December 31, 1995 and 1994, and (ii) pro forma combined
condensed balance sheets of Bell Atlantic and NYNEX as of December 31, 1996,
1995, and 1994 and June 30, 1997.
32
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Signatures
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BELL ATLANTIC CORPORATION
Date: November 14, 1997 By /s/ Frederic V. Salerno
------------------------
Frederic V. Salerno
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 10, 1997.
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EXHIBIT 10a(i)
Description of Amendment to Bell Atlantic Senior Management Short Term Incentive
Plan (the "STIP Plan")
On August 14, 1997, the merger of a subsidiary of Bell Atlantic Corporation (the
"Corporation") with a subsidiary of NYNEX Corporation was culminated, and, on
that date, the Human Resources Committee ("HRC") of the Board of Directors of
the Corporation approved certain plan amendments and changes to administrative
policies with respect to the STIP Plan, which is a short term incentive bonus
program for executive officers of the Corporation and for other "Senior
Managers" of the Corporation and its subsidiaries. The HRC action was effective
immediately as of the date of approval.
Pursuant to the action of the HRC, the program shall apply to the top 200-300
"Senior Managers" of the Corporation and its subsidiaries.
Under the terms of the new post-merger policy for the STIP Plan, short term
incentives shall continue to be awarded annually based on a mix of financial,
operational and service performance results. Under the new HRC policy, 50
percent of the maximum award shall be comparable to market median levels, and
maximum awards shall be of sufficient value to recognize outstanding
performance.
Short term awards shall be awarded entirely in cash, and a Senior Manager may
elect to receive the cash incentive at or about the time of the HRC's annual
determination of the amount of the award, or to voluntarily defer the receipt of
some or all of the award in accordance with the terms of the Bell Atlantic
Deferred Compensation Plan. The feature of the STIP Plan which, to date, has
provided for 20 percent of the bonus to be awarded in deferred shares of the
Corporation's common stock was eliminated. Awards shall be stated on a scale of
0% to 100% of maximum, rather than 0% to 200% of target.
The HRC approved a schedule of maximum short-term incentives as a multiple of a
Senior Manager's annual rate of base salary which is in effect at the beginning
of the performance period.
<PAGE>
EXHIBIT 10j(i)
Description of Amendment and Administrative Change to Bell Atlantic 1985
Incentive Stock Option Plan (the "Stock Option Plan")
On August 14, 1997, the merger of a subsidiary of Bell Atlantic Corporation (the
"Corporation") with a subsidiary of NYNEX Corporation was culminated, and, on
that date, the Human Resources Committee ("HRC") of the Board of Directors of
the Corporation approved certain plan amendments and changes to administrative
policies with respect to the Stock Option Plan, which is a short term incentive
program for executive officers of the Corporation and for other "Senior
Managers" of the Corporation and its subsidiaries. The HRC action was effective
immediately as of the date of approval.
Pursuant to the action of the HRC, the program shall apply to the top 200-300
"Senior Managers" of the Corporation and its subsidiaries.
The HRC approved a schedule of projected dollar values for annual stock option
grants, as a multiple of a Senior Manager's annual rate of base salary which is
in effect at the time of the grant.
On September 23, 1997, the HRC approved a temporary change in the rules relating
to the permissible period of exercise of outstanding options under the Stock
Option Plan for optionees who separate from service after the Merger closing
date and on or before December 31, 1999 (the "Merger Transition Period"), under
circumstances in which an employee who is not disabled and not eligible to
retire would, under the previously applicable rule, have 90 days to exercise any
then-outstanding options (such circumstances are referred to herein as a
"Company-Initiated Separation Without Cause");
Pursuant to the HRC's action, if an optionee with outstanding options under the
Stock Option Plan (1) separates from service during the Merger Transition
Period, and (2) the separation from service is pursuant to a Company-Initiated
Separation Without Cause, and (3) the optionee executes and delivers a
comprehensive legal release to the administrator of the Stock Option Plan, then
any such outstanding stock options shall remain exercisable until the fifth
anniversary of the separation from service date (or, if earlier, the tenth
anniversary of the respective dates of grant of the various outstanding
options); provided, however, if the optionee declines to deliver such an
executed legal release, the options shall expire at the end of the 90th day
following the separation from service.
<PAGE>
EXHIBIT 10x
Bell Atlantic Salary Program for Senior Managers
On August 14, 1997, the merger of a subsidiary of Bell Atlantic Corporation (the
"Corporation") with a subsidiary of NYNEX Corporation was culminated, and, on
that date, the Human Resources Committee ("HRC") of the Board of Directors of
the Corporation approved a salary program for executive officers of the
Corporation and for other "Senior Managers" of the Corporation and its
subsidiaries. The HRC action was effective immediately as of the date of
approval.
Pursuant to the action of the HRC, the program shall apply to the top 200-300
"Senior Managers" of the Corporation and its subsidiaries. Salaries shall be
determined in a market-based manner with reference to pay offered at 43
comparable companies. Salaries for Senior Managers shall be commensurate with
median levels among such comparable companies. Except for salaries for each of
the two most senior officers of the Corporation (which shall be set without
reference to compensation "Bands"), salaries for all other executive officers
and Senior Managers shall fall within four broad compensation "Band" ranges.
<PAGE>
EXHIBIT 10y
Description of Changes in Compensation for Outside Directors of Bell Atlantic
On August 14, 1997, the merger of a subsidiary of Bell Atlantic Corporation (the
"Corporation") with a subsidiary of NYNEX Corporation was culminated, and, on
that date, the Board of Directors of the Corporation (the "Board") approved
certain plan amendments and changes to administrative policies with respect to
the compensation plans and programs for non-employee members of the Board
("Outside Directors").
Effective July 1, 1997, the retainer fee which shall be payable to Outside
Directors shall be $30,000 per annum, payable quarterly, commencing with the
payment in July 1997 for the third quarter of 1997. The meeting fee which shall
be payable to Outside Directors shall be $1,500 per meeting of the Board or any
committee of the Board which the Outside Director attends, commencing
immediately.
Each Outside Director who theretofore was a director of NYNEX Corporation
immediately ceased to receive any compensation under the NYNEX Non-Employee
Director Retainer Stock Plan, and each such Director shall instead participate
in the Bell Atlantic Stock Compensation Plan for Outside Directors. For 1997,
in lieu of the grant of stock options on 1,000 shares of the Corporation's stock
which is generally granted to a new Outside Director under the plan, the Board
granted to each such Director stock options on 1,250 shares of the Corporation's
stock, with an exercise price equal to the fair market value of the
Corporation's stock.
<PAGE>
EXHIBIT 10aa
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and between Bell Atlantic Corporation, a Delaware
corporation (the "Company"), and Raymond W. Smith (the "Executive"), dated as of
the 14th day of August, 1997.
W I T N E S S E T H
WHEREAS, the Company and NYNEX Corporation, a Delaware corporation
("NYNEX"), have entered into an Amended and Restated Agreement and Plan of
Merger, dated as of July 2, 1996 (the "Merger Agreement"), whereby NYNEX will
merge with a wholly-owned subsidiary of the Company; and
WHEREAS, the Company and NYNEX wish to provide for the orderly succession
of the management of the Company following the Effective Time (as defined in the
Merger Agreement); and
WHEREAS, the Company and NYNEX further wish to provide for the employment
by the Company of the Executive, and the Executive wishes to serve the Company,
in the capacities and on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Executive, and the
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for an initial period (the "Initial Period") and unless the Executive
elects not to continue his employment pursuant hereto, for a further period (the
"Secondary Period") (the Initial Period and the Secondary Period are hereinafter
collectively referred to in the aggregate as the "Employment Period"). The
Initial Period shall begin at the Effective Time, and end on (i) the later of
(a) one year following the Effective Time but no later than December 31, 1998;
or (b) July 1, 1998; or (ii) such earlier date as the Executive ceases to be
Chief Executive Officer of the Company for any reason. A Secondary Period shall
begin at the end of the Initial Period and end on December 31, 1998, or on such
earlier date as the Executive ceases to be the Chairman of the Company for any
reason.
2. POSITION AND DUTIES. (a) During the Initial Period, the Executive
shall serve as Chairman and as Chief Executive Officer of the Company, and if
there shall be a Secondary Period, during the Secondary Period, the Executive
shall serve as Chairman, in each case with such duties and responsibilities as
are customarily assigned to such positions, and such other duties and
responsibilities not inconsistent therewith as may from time to time be assigned
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<PAGE>
to him by the Board. At the expiration of the Initial Period, the Executive
shall resign as Chairman and Chief Executive Officer of the Company; provided,
however, that if there shall be a Secondary Period, then the Executive shall
only resign as Chief Executive Officer at the expiration of the Initial Period,
and shall resign as Chairman at the expiration of the Secondary Period. The
Executive shall be a member of the Board on the first day of the Employment
Period, and the Board shall propose the Executive for re-election to the Board
and for the positions specified above throughout the Employment Period.
(b) The President of the Company shall report to the Executive. An Office
of the Chairman, which shall be comprised solely of the Chairman and the
President, shall be established and the other principal executive officers of
the Company shall report to that Office of the Chairman. During the Employment
Period, the Executive shall serve as Chairman of the Board and as Chief
Executive Officer of the Company, with such duties and responsibilities as are
customarily assigned to such positions, and such other duties and
responsibilities not inconsistent therewith as may from time to time be assigned
to him by the Board.
(c) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive shall devote
reasonable attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive under this Agreement, use the
Executive's reasonable best efforts to carry out such responsibilities
faithfully and efficiently. It shall not be considered a violation of the
foregoing for the Executive to serve on corporate, industry, civic or charitable
boards or committees, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
(d) The Company's headquarters shall be located in New York City. The
Company shall reimburse the Executive for reasonable expenses incurred by him
while working in the New York City area during the Employment Period and shall
make an apartment in the New York City area available for use by the Executive
(or provide appropriate reimbursement or allowance for the Executive's occupancy
of an apartment in the New York City area) during the Employment Period and for
a period up to one year after the Employment Period. In the event such expense
reimbursements or the Executive's use of the apartment are not treated as
business expenses excludable from the Executive's gross income for income tax
purposes, the Company shall provide the Executive with a gross-up payment for
the additional income taxes payable by the Executive as a result of such expense
reimbursements and use of the apartment. In addition, the Company shall assure
that the Executive suffers no financial loss on the sale of the second home that
the Executive has maintained in Maryland in connection with the duties performed
by the Executive at the Company's offices in Arlington, Virginia. The amount of
the loss shall be the excess, if any, of the Executive's adjusted basis (as
determined under the Internal Revenue Code) in that home over the adjusted sale
price (as determined under Section 1034(b) of the Internal Revenue Code) of the
home; provided, however, that: (a) such excess shall be reduced by the tax
benefit to the Executive resulting from such loss; and (b) the Company shall
also pay
2
<PAGE>
to the Executive a gross-up payment for the additional income taxes payable by
the Executive as a result of the payment for any such loss.
3. COMPENSATION. (a) BASE SALARY. The Executive's compensation during the
Employment Period shall be determined by the Board upon the recommendation of
the committee of the Board having responsibility for approving the compensation
of senior executives (the "Compensation Committee"), subject to the next
sentence and Section 3(b). During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary") of not less than his annual
base salary from the Company as in effect immediately before the Effective Time.
The Annual Base Salary shall be payable in accordance with the Company's regular
payroll practice for its senior executives, as in effect from time to time.
During the Employment Period, the Annual Base Salary shall be reviewed for
possible increase at least annually. Any increase in the Annual Base Salary
shall not limit or reduce any other obligation of the Company under this
Agreement. The Annual Base Salary shall not be reduced after any such increase,
and the term "Annual Base Salary" shall thereafter refer to the Annual Base
Salary as so increased.
(b) INCENTIVE COMPENSATION. During the Employment Period, the Executive
shall participate in short-term incentive compensation plans and long-term
incentive compensation plans (the latter to consist of plans offering stock
options, restricted stock and/or other long-term incentive compensation, as
adopted and approved by the Compensation Committee from time to time) providing
him with the opportunity to earn, in the aggregate, on a year-by-year basis,
short-term and long-term incentive compensation (the "Incentive Compensation")
at least equal to the aggregate amounts that he had the opportunity to earn
under the ordinary annual grants under the comparable plans of the Company as in
effect immediately before the Effective Time. In addition, the Incentive
Compensation awards made to the Executive with respect to the final year of the
Employment Period shall be at least equal to the highest awards made to any
other senior executive of the Company for that year.
(c) OTHER BENEFITS. (i) During the Employment Period and thereafter: (A)
the Executive shall be entitled to participate in all applicable incentive,
savings and retirement plans, practices, policies and programs of the Company to
the same extent as other senior executives (or, where applicable, retired senior
executives) of the Company, and (B) the Executive and/or the Executive's
eligible dependents, as the case may be, shall be eligible for participation in,
and shall receive all benefits under, all applicable welfare benefit plans,
practices, policies, and programs provided by the Company, other than severance
plans, practices, policies and programs but including, without limitation,
medical, prescription, dental, disability, salary continuance, vacation pay
(under the Company's current accrual policies such that 1999 vacation shall be
earned by virtue of completion of the Employment Period as of December 31,
1998), employee life insurance, group life insurance, accidental death and
travel accident insurance plans and programs, and, upon retirement, all
applicable retirement benefit plans to the same extent, and subject to the same
terms, conditions, cost-sharing requirements and the like, as other senior
executives of the Company, as such plans may be amended from time to time.
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(ii) During the Employment Period, the Executive shall participate in such
one or more supplemental executive retirement plans as may be adopted and
amended by the Compensation Committee from time to time ("SERPS") such that the
aggregate value of the retirement benefits that he and his beneficiaries will
receive at the end of the Employment Period under all pension benefit plans of
the Company and its affiliates (whether qualified or not) will be not less than
the benefits he would have received had he continued, through the end of the
Employment Period, to participate in the Bell Atlantic Cash Balance Plan and the
Bell Atlantic Senior Management Retirement Income Plan (collectively, the
"Company Plans"), as in effect immediately before the Effective Time.
(iii) In consideration of Executive's agreement to retire at the end of the
Employment Period, rather than at a later date, the Board shall give
consideration to any impairment of compensation or awards that Executive may
incur by reason of retiring at that time and to the extent that the Board
reasonably determines that such an impairment has occurred, shall, on or before
the date of Executive's retirement, undertake to eliminate any such impairment
in such manner as the Board then deems appropriate.
(d) FRINGE BENEFITS. During the Employment Period, the Executive shall be
entitled to receive fringe benefits of comparable value as he received from the
Company immediately before the Effective Time. Financial counseling services,
which are included in such fringe benefits, shall continue to be provided to the
Executive by the Company for two (2) years after the end of the Employment
Period in accordance with the Company's current policies. Further, for such
period after the Employment Period that the Executive continues to represent the
Company on corporate, industry, civic or charitable boards or advisory councils
(but not less than five (5) years), the Company shall continue to provide the
Executive with office space, secretarial support and use of corporate aircraft
(including limited personal use in accordance with the Company's current
policies).
(e) LIFE INSURANCE. (i) Subject to the further terms set forth below, the
Company agrees to participate in the purchase of a life insurance policy (the
"Policy") on the Executive's life under which, by collateral assignment,
endorsement, or co-ownership agreement, a death benefit shall be payable to the
Raymond W. Smith Life Insurance Trust or such successor beneficiary or
beneficiaries as the trustees of that trust may subsequently designate (the
"Beneficiary").
(ii) Attached hereto is a schedule showing the Beneficiary's share of the
death benefit and premiums under the Policy for each year of the scheduled
coverage period. The Company agrees to pay such portion of the Policy premiums
(after taking account of the Beneficiary's share of the premiums) as necessary
to maintain the Policy in force during the Employment Period and thereafter
until the Executive's ninety-fifth (95th) birthday (or his earlier death) and to
assure that the death benefit under the Policy during such period is at least
equal to the Beneficiary's share, as determined under that schedule. The Company
shall commence making
4
<PAGE>
such premium payments as of the first date that premiums are due under the
Policy, provided that if such date precedes the Effective Time and the merger
does not occur, the Company shall have no further obligation under this Section
3(e). The Company's obligations under this Section 3(e) shall also cease in the
event that (i) the Beneficiary has not paid or reimbursed the Company for the
Beneficiary's share of any annual premium, or (ii) the Executive has taken any
action that would give rise to a forfeiture of benefits under the Bell Atlantic
Senior Management Retirement Income Plan.
(iii) Nothing in this Agreement shall obligate the Company to pay premiums
of any particular amount or at any particular time under the Policy, and the
Company shall have the right at any time before the Executive's death to
withdraw all or any portion of the cash surrender value of the Policy, provided
--------
that the Company has paid or thereafter continues to pay sufficient premiums (in
excess of the Beneficiary's scheduled share) for the Policy to remain in force
and for the death benefit to remain at least equal to the Beneficiary's
scheduled share of the death benefit for the period described in paragraph (ii),
and further provided that, if the Company fails for any reason to pay sufficient
----------------
premiums (in excess of the Beneficiary's scheduled share) for the death benefit
to remain at that level for that period, the Company shall be liable upon the
Executive's death to make such payments as are necessary to place the
Beneficiary (and, if relevant, the Executive's estate) in the same financial
position (after taking account of any resulting income or other taxes) as if the
Company had paid sufficient premiums for the Beneficiary's share of the death
benefit under the Policy to remain at the scheduled level for the period
described in paragraph (ii). The Company's share of the death benefit under the
Policy shall be limited to the excess, if any, of the total Policy death benefit
over the Beneficiary's scheduled share.
(iv) Notwithstanding subparagraph (iii), nothing in this Agreement shall
preclude the Beneficiary from paying additional premiums or acquiring such
additional incidents of ownership under the Policy as the Company and
Beneficiary may agree. Further, in the event that the Company concludes that the
Executive has taken any action that would result in a forfeiture of benefits
under the Bell Atlantic Senior Management Retirement Income Plan, the Company
shall take no action to prevent the Policy from remaining in force, provided
that the Beneficiary agrees to pay all subsequent premiums that may be required
under the Policy; in such event, the Company's interest in the cash surrender
value of the Policy shall be limited to the portion of the cash surrender value
attributable to the premium payments theretofore made by the Company, adjusted
for any withdrawals made by the Company.
(v) The Executive shall possess no incidents of ownership in the Policy,
including the power to change the Beneficiary, to surrender or cancel the
Policy, to assign the Policy, to revoke an assignment of the Policy, to pledge
the Policy for a loan, or to obtain from the insurer a loan against the Policy.
5
<PAGE>
(vi) In the event that the purchase of the Policy gives rise to any
obligation by the Company to withhold taxes with respect to a tax liability of
the Executive, the Company shall have the right to withhold such taxes out of
other amounts payable to the Executive or to satisfy the withholding obligations
in such other manner as the Company and the Executive may agree.
(vii) The Company further agrees to use its best efforts to enable the
Executive, the Beneficiary, or another beneficiary designated by the Executive
to purchase additional life insurance from the same insurer on comparable terms,
provided that the Company shall have no obligation to make any premium payments
or advances or incur any other cost for such other life insurance policy or
policies.
4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. The Company shall be entitled to terminate the Executive's
employment because of the Executive's Disability during the Employment Period.
"Disability" means that (i) the Executive has been unable, for the period
specified in the Company's disability plan for senior executives, but not less
than a period of 180 consecutive business days, to perform the Executive's
duties under this Agreement, as a result of physical or mental illness or
injury, and (ii) a physician selected by the Company or its insurers, and
acceptable to the Executive or the Executive's legal representative, has
determined that the Executive is disabled within the meaning of the applicable
disability plan for senior executives. A termination of the Executive's
employment by the Company for Disability shall be communicated to the Executive
by written notice, and shall be effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), unless the Executive
returns to full-time performance of the Executive's duties before the Disability
Effective Date.
(b) BY THE COMPANY. (i) The Company may terminate the Executive's
employment during the Employment Period for Cause or without Cause. "Cause"
means the conviction of the Executive for the commission of a felony, or willful
misconduct by the Executive, in either case that results in material and
demonstrable damage to the business or reputation of the Company. No act or
failure to act on the part of the Executive shall be considered "willful" unless
it is done, or omitted to be done, by the Executive in bad faith or without
reasonable belief that the Executive's action or omission was in the best
interests of the Company. Any act or failure to act that is based upon authority
given pursuant to a resolution duly adopted by the Board, or the advice of
counsel for the Company, shall be conclusively presumed to be done, or omitted
to be done, by the Executive in good faith and in the best interests of the
Company.
(ii) A termination of the Executive's employment for Cause shall be
effected in accordance with the following procedures. The Company shall give the
Executive written notice ("Notice of Termination for Cause") of its intention to
terminate the Executive's employment for Cause, setting forth in reasonable
detail the specific conduct of the Executive that it considers to constitute
Cause and the specific provision(s) of this Agreement on which it relies, and
stating
6
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the date, time and place of the Special Board Meeting for Cause. The "Special
Board Meeting for Cause" means a meeting of the Board called and held
specifically for the purpose of considering the Executive's termination for
Cause, that takes place not less than ten and not more than twenty business days
after the Executive receives the Notice of Termination for Cause. The Executive
shall be given an opportunity, together with counsel, to be heard at the Special
Board Meeting for Cause. The Executive's termination for Cause shall be
effective when and if a resolution is duly adopted at the Special Board Meeting
for Cause by affirmative vote of three quarters of the entire membership of the
Board stating that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in the Notice of Termination for Cause and that
such conduct constitutes Cause under this Agreement.
(iii) A termination of the Executive's employment without Cause shall be
effected in accordance with the following procedures. The Company shall give the
Executive written notice ("Notice of Termination without Cause") of its
intention to terminate the Executive's employment without Cause, stating the
date, time and place of the Special Board Meeting without Cause. The "Special
Board Meeting without Cause" means a meeting of the Board called and held
specifically for the purpose of considering the Executive's termination without
Cause, that takes place not less than ten and not more than twenty business days
after the Executive receives the Notice of Termination without Cause. The
Executive shall be given an opportunity, together with counsel, to be heard at
the Special Board Meeting without Cause. The Executive's termination without
Cause shall be effective when and if a resolution is duly adopted at the Special
Board Meeting without Cause by affirmative vote of three quarters of the entire
membership of the Board stating that the Executive is terminated without Cause.
(c) GOOD REASON. (i) The Executive may terminate employment for Good
Reason or without Good Reason. "Good Reason" means:
A. the assignment to the Executive of any duties or
responsibilities inconsistent in any respect with those customarily
associated with the positions to be held by the Executive pursuant
to this Agreement, or any other action by the Company that results
in a diminution in the Executive's position, authority, duties or
responsibilities, other than an isolated, insubstantial and
inadvertent action that is not taken in bad faith and is remedied
by the Company promptly after receipt of notice thereof from the
Executive;
B. any failure by the Company to comply with any provision
of Section 3 of this Agreement, other than an isolated,
insubstantial and inadvertent failure that is not taken in bad
faith and is remedied by the Company promptly after receipt of
notice thereof from the Executive;
C. any requirement by the Company that the Executive's
services be rendered primarily at a location or locations other
than that provided for in paragraph (d) of Section 2 of this
Agreement;
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D. any purported termination of the Executive's employment
by the Company for a reason or in a manner not expressly permitted
by this Agreement;
E. any failure by the Company to comply with paragraph (c)
of Section 10 of this Agreement; or
F. any other material breach of this Agreement by the
Company that either is not taken in good faith or is not remedied
by the Company promptly after receipt of notice thereof from the
Executive.
(ii) A termination of employment by the Executive for Good Reason
shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth in
reasonable detail the specific conduct of the Company that constitutes Good
Reason and the specific provision(s) of this Agreement on which the
Executive relies. A termination of employment by the Executive for Good
Reason shall be effective on the fifth business day following the date when
the Notice of Termination for Good Reason is given, unless the notice sets
forth a later date (which date shall in no event be later than 30 days
after the notice is given).
(iii) A termination of the Executive's employment by the Executive
without Good Reason shall be effected by giving the Company written notice
of the termination.
(d) NO WAIVER. The failure to set forth any fact or circumstance in a
Notice of Termination for Cause or a Notice of Termination for Good Reason shall
not constitute a waiver of the right to assert, and shall not preclude the party
giving notice from asserting, such fact or circumstance in an attempt to enforce
any right under or provision of this Agreement.
(e) DATE OF TERMINATION. The "Date of Termination" means the date of the
Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or without
Cause or by the Executive for Good Reason is effective, or the date on which the
Executive gives the Company notice of a termination of employment without Good
Reason, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) OTHER THAN FOR CAUSE,
DEATH OR DISABILITY, OR FOR GOOD REASON. If, during the Employment Period, the
Company terminates the Executive's employment for any reason other than Cause,
death or Disability, or the Executive terminates employment for Good Reason, the
Executive shall, upon termination of employment, cease active participation, and
commence participation as a retiree, in all retirement benefit plans applicable
to similarly situated senior executives, as such plans may be amended from time
to time. In such event, the Executive's benefits under the SERPs, including any
additional accrued benefit under any qualified defined benefit plan which the
Executive will have been precluded from receiving due to the termination
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of his employment prior to the end of the Employment Period, shall be calculated
as though the Executive had remained employed with the Company pursuant to the
terms of this Agreement and had voluntarily retired at the end of the Employment
Period, but any cashout or annuity conversion of a SERP benefit shall be based
on the Executive's actual age at the time of commencing the benefit. Moreover,
in such event, subject to the terms and conditions of this Agreement, the
Company shall continue to provide the Executive with the compensation and
benefits set forth in paragraphs (a) and (b) of Section 3 as if he had remained
employed by the Company pursuant to this Agreement through the end of the
Employment Period and then retired; provided, that the Incentive Compensation
for such period shall be equal to the maximum Incentive Compensation that the
Executive would have been eligible to earn for such period; provided, further
that in lieu of any further grants of stock-based Incentive Compensation in the
form of options or otherwise, the Executive shall be paid cash equal to the
Black-Scholes value (without regard to any restrictions) of the stock options,
and the fair market value (without regard to any restrictions) of any restricted
stock and other stock-based awards that would otherwise have been granted; and
provided, further, that the Company shall pay to the Executive a sum equal to
the sum of: (a) the maximum value of any and all company matching contributions
or other company contributions which the Executive could have received under any
qualified or nonqualified defined contribution retirement plan, and (b) the
maximum value of the premiums to purchase employee welfare benefits which the
Executive would have received in the form of Company-paid benefits (as measured
by the Company's average plan cost of providing such benefits to such a
participant), which the Executive (and any of his eligible beneficiaries) could
have received had he remained employed pursuant to this Agreement until the end
of the Employment Period. In addition to the foregoing, any restricted stock
outstanding on the Date of Termination and all options outstanding on the Date
of Termination in either case granted by the Company shall remain in effect and
exercisable for the maximum period of years allowed, from the date of the
Executive's actual retirement, under the original terms of the restricted stock
or stock options. Further, any restricted stock and all options granted by the
Company on or after the Effective Time outstanding on the Date of Termination
shall be fully vested and exercisable and shall remain in effect and exercisable
for the maximum period of years allowable, from the date of the Executive's
actual retirement, under the terms of the Company's stock option plan applicable
to a senior executive who is eligible to retire. The payments and benefits
provided pursuant to this paragraph (a) of Section 5 are intended as liquidated
damages for a termination of the Executive's employment by the Company other
than for Cause or Disability or for the actions of the Company leading to a
termination of the Executive's employment by the Executive for Good Reason, and
shall be the sole and exclusive remedy therefor.
(b) DEATH AND DISABILITY. If the Executive's employment is terminated by
reason of the Executive's death or Disability during the Employment Period, the
Company shall pay to the Executive or, in the case of the Executive's death, to
the Executive's designated beneficiaries (or, if there is no such beneficiary,
to the Executive's estate or legal representative), in a lump sum in cash within
30 days after the Date of Termination, the sum of the following amounts (the
"Accrued Obligations"): (1) any portion of the Executive's Annual Base Salary
through the Date of Termination that has not yet been paid; (2) an amount
representing any grants of Incentive
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Compensation, other than stock options, which have not, prior to the date of
Disability termination or death, resulted in awards of cash or shares for the
period that includes the Date of Termination, computed by assuming that the
amount of all such Incentive Compensation would be equal to the maximum amount
of such Incentive Compensation that the Executive would have been eligible to
earn for such period, and multiplying that amount by a fraction, the numerator
of which is the number of days in such period through the Date of Termination,
and the denominator of which is the total number of days in the relevant period;
(3) any compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) that has not yet been paid; and (4) any
accrued but unpaid Incentive Compensation and vacation pay; and the Company
shall have no further obligations under this Agreement, except as specified in
Section 6 below, and except as provided under the terms and conditions of any
stock options which are outstanding on such date of Disability termination or
death.
(c) BY THE COMPANY FOR CAUSE; BY THE EXECUTIVE OTHER THAN FOR GOOD REASON.
If the Executive's employment is terminated by the Company for Cause or the
Executive voluntarily terminates employment, other than for Good Reason, during
the Employment Period, the Company shall pay to the Executive in a lump sum in
cash within 30 days of the Date of Termination, (1) any portion of the
Executive's Annual Base Salary through the Date of Termination that has not been
paid; (2) any compensation previously deferred by the Executive (together with
any accrued interest or earnings thereon) that has not yet been paid; and (3)
any accrued but unpaid Incentive Compensation and vacation pay; and the Company
shall have no further obligations under this Agreement, except as specified in
Section 6 below.
(d) The Company's obligation to deliver the liquidated damages payments
described in paragraph (a) of this Section 5 shall be contingent on the
Executive delivering to the Company, on or about the Date of Termination, a
legal release in a form acceptable to counsel to the Company, releasing the
Company, its affiliates, and the current and former directors, officers and
employees of the Company, subject to the Company's continuing obligations under
this Agreement, and subject to the Executive's continuing rights under the terms
and conditions of the compensation and benefit plans in which the Executive is a
participant, as such plans may be amended from time to time. Moreover, the
Company's obligation to pay any such liquidated damages shall cease in the event
that the Board determines that the Executive, subsequent to his Termination of
Employment, has either materially breached any covenant of this Agreement which
then remains in force, or violated the terms of any agreement prohibiting
competition by the Executive which may then be in force as applied to the
Executive.
(e) (i) In the event that any payment or benefit received or to be
received by the Executive pursuant to the terms of this agreement (the "Contract
Payments") or of any other plan, arrangement or agreement of the Company (or any
affiliate) ("Other Payments" and, together with the Contract Payments, the
"Payments") would be subject to the excise tax (the "Excise Tax") imposed by
Section 4999 of the Code as determined as provided below, the Company shall pay
to the Executive, at the time specified in Section 5(e)(ii) below, an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of the
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Excise Tax on Payments and any federal, state and local income tax and the
Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions
to tax payable by the Executive with respect thereto, shall be equal to the
total present value (using the applicable federal rate (as defined in Section
1274(d) of the Code in such calculation) of the Payments at the time such
Payments are to be made. For purposes of determining whether any of the Payments
will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the
total amount of the Payments shall be treated as "parachute payments" within the
meaning of section 280G(b)(2) of the Code, and all "excess parachute payments"
within the meaning of section 280G(b)(1) of the Code shall be treated as subject
to the Excise Tax, except to the extent that, in the opinion of independent
counsel selected by the Company and reasonably acceptable to the Executive
("Independent Counsel"), a Payment (in whole or in part) does not constitute a
"parachute payment" within the meaning of section 280G(b)(2) of the Code, or
such "excess parachute payments" (in whole or in part) are not subject to the
Excise Tax, (2) the amount of the Payments that shall be treated as subject to
the Excise Tax shall be equal to the lesser of (A) the total amount of the
Payments or (B) the amount of "excess parachute payments" within the meaning of
section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the
value of any noncash benefits or any deferred payment or benefit shall be
determined by Independent Counsel in accordance with the principles of sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at
the highest marginal rates of federal income taxation applicable to the
individuals in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest marginal rates of taxation
applicable to individuals as are in effect in the state and locality of the
Executive's residence in the calendar year in which the Gross-Up Payment is to
be made, net of the maximum reduction in federal income taxes that can be
obtained from deduction of such state and local taxes, taking into account any
limitations applicable to individuals subject to federal income tax at the
highest marginal rates.
(ii) The Gross-Up Payments provided for in Section 5(e)(i) hereof shall be
made upon the earlier of (i) the payment to the Executive of any Payment or (ii)
the imposition upon the Executive or payment by the Executive of any Excise Tax.
(iii) If it is established pursuant to a final determination of a court or
an Internal Revenue Service proceeding or the opinion of Independent Counsel
that the Excise Tax is less than the amount taken into account under Section
5(e)(i) hereof, the Executive shall repay to the Company within thirty (30) days
of the Executive's receipt of notice of such final determination or opinion the
portion of the Gross-Up Payment attributable to such reduction (plus the portion
of the Gross-Up Payment attributable to the Excise Tax and federal, state and
local income tax imposed on the Gross-Up Payment being repaid by the Executive
if such repayment results in a reduction in Excise Tax or a federal, state and
local income tax deduction) plus any interest received by the Executive on the
amount of such repayment. If it is established pursuant to a final determination
of a court or an Internal Revenue Service proceeding or the opinion of
Independent Counsel that the Excise Tax exceeds the amount taken into account
hereunder (including by reason of any payment the existence or amount of which
cannot be determined at
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the time of the Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect of such excess within thirty (30) days of the Company's
receipt of notice of such final determination or opinion.
(iv) In the event of any change in, or further interpretation of, sections
280G or 4999 of the Code and the regulations promulgated thereunder, the
Executive shall be entitled, by written notice to the Company, to request an
opinion of Independent Counsel regarding the application of such change to any
of the foregoing, and the Company shall use its best efforts to cause such
opinion to be rendered as promptly as practicable. All fees and expenses of
Independent Counsel incurred in connection with this agreement shall be borne by
the Company.
6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
for which the Executive may qualify, nor, subject to paragraph (f) of Section
11, shall anything in this Agreement limit or otherwise affect such rights as
the Executive may have under any contract or agreement with the Company or any
of its affiliated companies. Vested benefits and other amounts that the
Executive is otherwise entitled to receive under the Incentive Compensation, the
SERPS, or any other plan, policy, practice or program of, or any contract of
agreement with, the Company or any of its affiliated companies on or after the
Date of Termination shall be payable in accordance with the terms of each such
plan, policy, practice, program, contract or agreement, as the case may be,
except as explicitly modified by this Agreement.
7. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in, and otherwise to perform its obligations under, this Agreement
shall not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action that the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and, except as
specifically provided in paragraph (a) of Section 5 with respect to benefits
described in clause (B) of paragraph (c)(iii) of Section 3, such amounts shall
not be reduced, regardless of whether the Executive obtains other employment.
8. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies and
their respective businesses that the Executive obtains during the Executive's
employment by the Company or any of its affiliated companies and that is not
public knowledge (other than as a result of the Executive's violation of this
Section 8) ("Confidential Information"). The Executive shall not communicate,
divulge or disseminate Confidential Information at any time during or after the
Executive's employment with the Company, except with the prior written consent
of the Company or as otherwise required by law or legal process.
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9. ATTORNEYS' FEES. The Company agrees to pay, as incurred, to the
fullest extent permitted by law, all legal fees and expenses that the Executive
may reasonably incur as a result of any contest (regardless of the outcome) by
the Company, the Executive or others of the validity or enforceability of or
liability under, or otherwise involving, any provision of this Agreement,
together with interest on any delayed payment at the applicable federal rate
provided for in Section 7872(f)(2)(A) of the Code.
10. SUCCESSORS. (a) This Agreement is personal to the Executive and,
without the prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would have been required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean both the Company as
defined above and any such successor that assumes and agrees to perform this
Agreement, by operation of law or otherwise.
11. MISCELLANEOUS. (a) This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified except by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
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(b) All notices and other communications under this Agreement shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Mr. Raymond W. Smith
1600 Hagy's Ford Road
11-A
Penn Valley, Pennsylvania 19072
If to the Company:
Bell Atlantic Corporation
1095 Avenue of the Americas
New York, NY 10036
Attention: General Counsel
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 11. Notices and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(d) Notwithstanding any other provision of this Agreement, the Company may
withhold from amounts payable under this Agreement all federal, state, local and
foreign taxes that are required to be withheld by applicable laws or
regulations.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provisions of, or to assert, any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to paragraph (c) of Section 4 of this
Agreement) shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement.
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(f) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof. Nothing in this Agreement is intended to nullify any other obligation of
the Executive under any agreement or benefit plan which prohibits the disclosure
of proprietary information or prohibits the Executive from engaging in
competitive activities against the Company.
(g) The Company shall cause to be maintained through January 1, 1999
Section 5.11 of the Bylaws of the Company which requires (among other things) a
three-quarters vote of the entire Board in order to amend or modify the terms of
this Agreement.
(h) The rights and benefits of the Executive under this Agreement may not
be anticipated, assigned, alienated or subject to attachment, garnishment, levy,
execution or other legal or equitable process except as required by law. Any
attempt by the Executive to anticipate, alienate, assign, sell, transfer,
pledge, encumber or charge the same shall be void. Payments hereunder shall not
be considered assets of the Executive in the event of insolvency or bankruptcy.
(i) This Agreement may be executed in several counterparts, each of which
shall be deemed an original, and said counterparts shall constitute but one and
the same instrument.
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
------------------------------------------------
Raymond W. Smith
Bell Atlantic Corporation
By
----------------------------------------------
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EXHIBIT 10bb
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and between Bell Atlantic Corporation, a Delaware
corporation (the "Company"), and Ivan G. Seidenberg (the "Executive"), dated as
of the 14th day of August, 1997.
W I T N E S S E T H
WHEREAS, the Company and NYNEX Corporation, a Delaware corporation
("NYNEX"), have entered into an Amended and Restated Agreement and Plan of
Merger, dated as of July 2, 1996 (the "Merger Agreement"), whereby NYNEX will
merge with a wholly-owned subsidiary of the Company; and
WHEREAS, the Company and NYNEX wish to provide for the orderly succession
of the management of the Company following the Effective Time (as defined in the
Merger Agreement); and
WHEREAS, the Company and NYNEX further wish to provide for the employment
by the Company of the Executive, and the Executive wishes to serve the Company,
in the capacities and on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Executive, and the
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for an initial period (the "Initial Period") and a further period
(the "Secondary Period") (the Initial Period and the Secondary Period are
hereinafter collectively referred to in the aggregate as the "Employment
Period"). The Initial Period shall begin at the Effective Time and end on (i)
the later of (a) one (1) year following the Effective Time, but no later than
December 31, 1998; or (b) July 1, 1998; or (ii) such earlier date as Raymond W.
Smith ceases to be Chief Executive Officer of the Company for any reason. The
Secondary Period shall begin at the end of the Initial Period and end on that
date which is four (4) years after the first day of the Initial Period.
2. POSITION AND DUTIES. (a) During the Initial Period, the Executive
shall serve as the sole Vice Chairman of the Company, and as President and Chief
Operating Officer of the Company; during the Secondary Period, the Executive
shall serve as the sole Vice Chairman of the Company, and as President and Chief
Executive Officer of the Company; and on and after any date during the
Employment Period as of which Raymond W. Smith ceases to be Chairman of the
Company, but in no event later than December 31, 1998, the Executive also shall
serve as the Chairman of the Company; in each case with such duties and
responsibilities as
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are customarily assigned to such positions, and such other duties and
responsibilities not inconsistent therewith as may from time to time be assigned
to him by the Board of Directors of the Company (the "Board"). The Executive
shall be a member of the Board on the first day of the Employment Period, and
the Board shall propose the Executive for re-election to the Board and for
positions specified above throughout the Employment Period.
(b) Until the Executive becomes Chairman, he shall report directly to the
Chairman and shall be the only officer reporting directly to the Chairman. An
Office of the Chairman comprised solely of the Chairman and the Executive shall
be established and the principal executive officers of the Company shall report
to that Office of the Chairman.
(c) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive shall devote
reasonable attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive under this Agreement, use the
Executive's reasonable best efforts to carry out such responsibilities
faithfully and efficiently. It shall not be considered a violation of the
foregoing for the Executive to serve on corporate, industry, civic or charitable
boards or committees, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
(d) The Company's headquarters shall be located in New York City, and the
Executive shall reside in the general area of New York City.
3. COMPENSATION. (a) BASE SALARY. The Executive's compensation during the
Employment Period shall be determined by the Board upon the recommendation of
the committee of the Board having responsibility for approving the compensation
of senior executives (the "Compensation Committee"), subject to the next
sentence and Section 3(b). During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary") of not less than his annual
base salary from NYNEX as in effect immediately before the Effective Time. The
Annual Base Salary shall be payable in accordance with the Company's regular
payroll practice for its senior executives, as in effect from time to time.
During the Employment Period, the Annual Base Salary shall be reviewed for
possible increase at least annually. Any increase in the Annual Base Salary
shall not limit or reduce any other obligation of the Company under this
Agreement. The Annual Base Salary shall not be reduced after any such increase,
and the term "Annual Base Salary" shall thereafter refer to the Annual Base
Salary as so increased.
(b) INCENTIVE COMPENSATION. During the Employment Period, the Executive
shall participate in short-term incentive compensation plans and long-term
incentive compensation plans (the latter to consist of plans offering stock
options, restricted stock and/or other long-term incentive compensation, as
adopted and approved by the Compensation Committee from time to time) providing
him with the opportunity to earn, in the aggregate, on a year-by-year basis,
short-term and long-term incentive compensation (the "Incentive
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Compensation") at least equal to the aggregate amounts that he had the
opportunity to earn under the ordinary annual grants under the comparable plans
of NYNEX as in effect immediately before the Effective Time.
(c) OTHER BENEFITS. (i) During the Employment Period and thereafter: (A)
the Executive shall be entitled to participate in all applicable incentive,
savings and retirement plans, practices, policies and programs of the Company to
the same extent as other senior executives (or, where applicable, retired senior
executives) of the Company, and (B) the Executive and/or the Executive's
eligible dependents, as the case may be, shall be eligible for participation in,
and shall receive all benefits under, all applicable welfare benefit plans,
practices, policies, and programs provided by the Company, other than severance
plans, practices, policies and programs but including, without limitation,
medical, prescription, dental, disability, salary continuance, employee life
insurance, group life insurance, accidental death and travel accident insurance
plans and programs, and, upon retirement, all applicable retirement benefit
plans to the same extent, and subject to the same terms, conditions, cost-
sharing requirements and the like, as other senior executives of the Company, as
such plans may be amended from time to time.
(ii) During the Employment Period, the Executive shall participate in one
or more supplemental executive retirement plans as may be adopted and amended by
the Compensation Committee from time to time ("SERPS") such that the aggregate
value of the retirement benefits that he and his beneficiaries will receive at
the end of the Employment Period under all pension benefit plans of the Company
and its affiliates (whether qualified or not) will be not less than the benefits
he would have received had he continued, through the end of the Employment
Period, to participate in the NYNEX Management Pension Plan, NYNEX Senior
Management Non-Qualified Defined Contribution Pension Plan (Executive Retirement
Account Plan), NYNEX Senior Management Non-Qualified Supplemental Savings Plan,
(collectively, the "NYNEX Plans"), as in effect immediately before the Effective
Time.
(iii) During the Employment Period, the Company shall provide the Executive
with life insurance coverage (the "Life Insurance Coverage") issued by
Metropolitan Life Insurance Company (or a comparable insurance carrier)
providing a death benefit to such beneficiary or beneficiaries as the Executive
may designate of not less than five (5) times his Annual Base Salary which has a
cash value feature which accumulates over a fifteen (15) year period at the end
of which period the Company recovers the premiums which it has paid into any
policy or policies providing such Life Insurance Coverage.
(d) FRINGE BENEFITS. During the Employment Period, the Executive shall be
entitled to receive fringe benefits of comparable value as he received from
NYNEX immediately before the Effective Time.
4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. The Company shall be entitled to terminate the Executive's
employment because of the Executive's Disability during the Employment Period.
"Disability" means that (i)
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the Executive has been unable, for the period specified in the Company's
disability plan for senior executives, but not less than a period of 180
consecutive business days, to perform the Executive's duties under this
Agreement, as a result of physical or mental illness or injury, and (ii) a
physician selected by the Company or its insurers, and acceptable to the
Executive or the Executive's legal representative, has determined that the
Executive is disabled within the meaning of the applicable disability plan for
senior executives. A termination of the Executive's employment by the Company
for Disability shall be communicated to the Executive by written notice, and
shall be effective on the 30th day after receipt of such notice by the Executive
(the "Disability Effective Date"), unless the Executive returns to full-time
performance of the Executive's duties before the Disability Effective Date.
(b) BY THE COMPANY. (i) The Company may terminate the Executive's
employment during the Employment Period for Cause or without Cause. "Cause"
means the conviction of the Executive for the commission of a felony, or willful
misconduct by the Executive, in either case that results in material and
demonstrable damage to the business or reputation of the Company. No act or
failure to act on the part of the Executive shall be considered "willful" unless
it is done, or omitted to be done, by the Executive in bad faith or without
reasonable belief that the Executive's action or omission was in the best
interests of the Company. Any act or failure to act that is based upon authority
given pursuant to a resolution duly adopted by the Board, or the advice of
counsel for the Company, shall be conclusively presumed to be done, or omitted
to be done, by the Executive in good faith and in the best interests of the
Company.
(ii) A termination of the Executive's employment for Cause shall be effected
in accordance with the following procedures. The Company shall give the
Executive written notice ("Notice of Termination for Cause") of its intention to
terminate the Executive's employment for Cause, setting forth in reasonable
detail the specific conduct of the Executive that it considers to constitute
Cause and the specific provision(s) of this Agreement on which it relies, and
stating the date, time and place of the Special Board Meeting for Cause. The
"Special Board Meeting for Cause" means a meeting of the Board called and held
specifically for the purpose of considering the Executive's termination for
Cause, that takes place not less than ten and not more than twenty business days
after the Executive receives the Notice of Termination for Cause. The Executive
shall be given an opportunity, together with counsel, to be heard at the Special
Board Meeting for Cause. The Executive's termination for Cause shall be
effective when and if a resolution is duly adopted at the Special Board Meeting
for Cause by affirmative vote of (A) three-quarters of the entire membership of
the Board if such action is taken prior to January 1, 1999, or (B) a majority of
the entire membership of the Board if such action is taken on or after January
1, 1999, in either case stating that, in the good faith opinion of the Board,
the Executive is guilty of the conduct described in the Notice of Termination
for Cause and that such conduct constitutes Cause under this Agreement.
(iii) A termination of the Executive's employment without Cause shall be
effected in accordance with the following procedures. The Company shall give the
Executive written notice ("Notice of Termination without Cause") of its
intention to terminate the Executive's employment without Cause, stating the
date, time and place of the Special Board Meeting
4
<PAGE>
without Cause. The "Special Board Meeting without Cause" means a meeting of the
Board called and held specifically for the purpose of considering the
Executive's termination without Cause, that takes place not less than ten and
not more than twenty business days after the Executive receives the Notice of
Termination without Cause. The Executive shall be given an opportunity, together
with counsel, to be heard at the Special Board Meeting without Cause. The
Executive's termination without Cause shall be effective when and if a
resolution is duly adopted at the Special Board Meeting without Cause by
affirmative vote of (A) three-quarters of the entire membership of the Board if
such action is taken prior to January 1, 1999, or (B) a majority of the entire
membership of the Board if such action is taken on or after January 1, 1999, in
either case stating that the Executive is terminated without Cause.
(c) GOOD REASON. (i) The Executive may terminate employment for Good
Reason or without Good Reason. "Good Reason" means:
A. the failure of the Company to appoint the Executive to
the position of Chief Executive Officer of the Company upon the
expiration of the Initial Period or Chairman on or before January
1, 1999, or in either case on any earlier date as of which Raymond
W. Smith ceases to serve in either such capacity;
B. the assignment to the Executive of any duties or
responsibilities inconsistent in any respect with those customarily
associated with the positions to be held by the Executive pursuant
to this Agreement, or any other action by the Company that results
in a diminution in the Executive's position, authority, duties or
responsibilities, other than an isolated, insubstantial and
inadvertent action that is not taken in bad faith and is remedied
by the Company promptly after receipt of notice thereof from the
Executive;
C. any failure by the Company to comply with any provision
of Section 3 of this Agreement, other than an isolated,
insubstantial and inadvertent failure that is not taken in bad
faith and is remedied by the Company promptly after receipt of
notice thereof from the Executive;
D. any requirement by the Company that the Executive's
services be rendered primarily at a location or locations other
than that provided for in paragraph (d) of Section 2 of this
Agreement;
E. any purported termination of the Executive's employment
by the Company for a reason or in a manner not expressly permitted
by this Agreement;
F. any failure by the Company to comply with paragraph (c)
of Section 10 of this Agreement; or
5
<PAGE>
G. any other material breach of this Agreement by the
Company that either is not taken in good faith or is not remedied
by the Company promptly after receipt of notice thereof from the
Executive.
(ii) A termination of employment by the Executive for Good Reason shall be
effectuated by giving the Company written notice ("Notice of Termination for
Good Reason") of the termination, setting forth in reasonable detail the
specific conduct of the Company that constitutes Good Reason and the specific
provision(s) of this Agreement on which the Executive relies. A termination of
employment by the Executive for Good Reason shall be effective on the fifth
business day following the date when the Notice of Termination for Good Reason
is given, unless the notice sets forth a later date (which date shall in no
event be later than 30 days after the notice is given).
(iii) A termination of the Executive's employment by the Executive without
Good Reason shall be effected by giving the Company written notice of the
termination.
(d) NO WAIVER. The failure to set forth any fact or circumstance in a
Notice of Termination for Cause or a Notice of Termination for Good Reason shall
not constitute a waiver of the right to assert, and shall not preclude the party
giving notice from asserting, such fact or circumstance in an attempt to enforce
any right under or provision of this Agreement.
(e) DATE OF TERMINATION. The "Date of Termination" means the date of
the Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or without
Cause or by the Executive for Good Reason is effective, or the date on which the
Executive gives the Company notice of a termination of employment without Good
Reason, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) OTHER THAN FOR
CAUSE, DEATH OR DISABILITY, OR FOR GOOD REASON. If, during the Employment
Period, the Company terminates the Executive's employment for any reason other
than Cause, death or Disability, or the Executive terminates employment for Good
Reason, the Executive shall, upon termination of employment, cease active
participation, and commence participation as a retiree, in all retirement
benefit plans applicable to similarly situated senior executives, as such plans
may be amended from time to time. In such event, the Executive's benefits under
the SERPs, including any additional accrued benefit under any qualified defined
benefit plan which the Executive will have been precluded from receiving due to
the termination of his employment prior to the end of the Employment Period,
shall be calculated as though the Executive had remained employed with the
Company pursuant to the terms of this Agreement and had voluntarily retired at
the end of the Employment Period, but any cashout or annuity conversion of a
SERP benefit shall be based on the Executive's actual age at the time of
commencing the benefit. Moreover, in such event, subject to the terms and
conditions of this Agreement, the Company shall continue to provide the
Executive with the compensation and benefits set forth in paragraphs (a) and (b)
of Section 3 as if he had remained employed by the Company pursuant to this
Agreement through the end of the Employment Period and then
6
<PAGE>
retired; provided, that the Incentive Compensation for such period shall be
equal to the maximum Incentive Compensation that the Executive would have been
eligible to earn for such period; provided, further that in lieu of any further
grants of stock-based Incentive Compensation in the form of options or
otherwise, the Executive shall be paid cash equal to the Black-Scholes value
(without regard to any restrictions) of the stock options, and the fair market
value (without regard to any restrictions) of any restricted stock and other
stock-based awards that would otherwise have been granted; and provided,
further, that the Company shall pay to the Executive a sum equal to the sum of:
(a) the maximum value of any and all company matching contributions or other
company contributions which the Executive could have received under any
qualified or nonqualified defined contribution retirement plan, and (b) the
maximum value of the premiums to purchase employee welfare benefits which the
Executive would have received in the form of Company-paid benefits (as measured
by the Company's average plan cost of providing such benefits to such a
participant), which the Executive (and any of his eligible beneficiaries) could
have received had he remained employed pursuant to this Agreement until the end
of the Employment Period. In addition to the foregoing, any restricted stock
outstanding on the Date of Termination shall be fully vested as of the Date of
Termination and all options outstanding on the Date of Termination shall be
fully vested and exercisable and shall remain in effect and exercisable for the
maximum period of years allowable, from the date of the Executive's actual
retirement, under the terms of the Company's stock option plan applicable to a
senior executive who is eligible to retire. The payments and benefits provided
pursuant to this paragraph (a) of Section 5 are intended as liquidated damages
for a termination of the Executive's employment by the Company other than for
Cause or Disability or for the actions of the Company leading to a termination
of the Executive's employment by the Executive for Good Reason, and shall be the
sole and exclusive remedy therefor. Notwithstanding any other provisions of this
Section, in the event that the Executive, not later than the third anniversary
of the Effective Time, resigns for Good Reason within the meaning of Section
4(c)(A), upon failing to have been appointed Chief Executive Officer of the
Company upon the expiration of the Initial Period or Chairman on or before
January 1, 1999, or in either case upon the earlier cessation of Raymond W.
Smith to serve in either such capacity, the liquidated damages otherwise payable
under this Section shall be supplemented by the amount by which the remuneration
earned by the Chairman and Chief Executive Officer of the Company from (i) the
second anniversary of the Effective Time (or, if earlier, the date on which a
person other than the Executive was appointed as successor to Raymond W. Smith
as Chairman and Chief Executive Officer), to (ii) the fourth anniversary of the
Effective Time, exceeded the remuneration which the Executive earned while in
active service, or had a right under this Agreement to earn subsequent to his
Date of Termination, during that period.
(b) DEATH AND DISABILITY. If the Executive's employment is terminated by
reason of the Executive's death or Disability during the Employment Period, the
Company shall pay to the Executive or, in the case of the Executive's death, to
the Executive's designated beneficiaries (or, if there is no such beneficiary,
to the Executive's estate or legal representative), in a lump sum in cash within
30 days after the Date of Termination, the sum of the following amounts (the
"Accrued Obligations"): (1) any portion of the Executive's Annual Base Salary
through the Date of Termination that has not yet been paid; (2) an amount
representing any grants of Incentive
7
<PAGE>
Compensation, other than stock options, which have not, prior to the date of
Disability termination or death, resulted in awards of cash or shares for the
period that includes the Date of Termination, computed by assuming that the
amount of all such Incentive Compensation would be equal to the maximum amount
of such Incentive Compensation that the Executive would have been eligible to
earn for such period, and multiplying that amount by a fraction, the numerator
of which is the number of days in such period through the Date of Termination,
and the denominator of which is the total number of days in the relevant period;
(3) any compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) that has not yet been paid; and (4) any
accrued but unpaid Incentive Compensation and vacation pay; and the Company
shall have no further obligations under this Agreement, except as specified in
Section 6 below, and except as provided under the terms and conditions of any
stock options which are outstanding on such date of Disability termination or
death.
(c) BY THE COMPANY FOR CAUSE; BY THE EXECUTIVE OTHER THAN FOR GOOD REASON.
If the Executive's employment is terminated by the Company for Cause or the
Executive voluntarily terminates employment, other than for Good Reason, during
the Employment Period, the Company shall pay to the Executive in a lump sum in
cash within 30 days of the Date of Termination, (1) any portion of the
Executive's Annual Base Salary through the Date of Termination that has not been
paid; (2) any compensation previously deferred by the Executive (together with
any accrued interest or earnings thereon) that has not yet been paid; and (3)
any accrued but unpaid Incentive Compensation and vacation pay; and the Company
shall have no further obligations under this Agreement, except as specified in
Section 6 below.
(d) The Company's obligation to deliver the liquidated damages payments
described in paragraph (a) of this Section 5 shall be contingent on the
Executive delivering to the Company, on or about the Date of Termination, a
legal release in a form acceptable to counsel to the Company, releasing the
Company, its affiliates, and the current and former directors, officers and
employees of the Company, subject to the Company's continuing obligations under
this Agreement, and subject to the Executive's continuing rights under the terms
and conditions of the compensation and benefit plans in which the Executive is a
participant, as such plans may be amended from time to time. Moreover, the
Company's obligation to pay any such liquidated damages shall cease in the event
that the Board determines that the Executive, subsequent to his Termination of
Employment, has either materially breached any covenant of this Agreement which
then remains in force, or violated the terms of any agreement prohibiting
competition by the Executive which may then be in force as applied to the
Executive.
(e) (i) In the event that any payment or benefit received or to be
received by the Executive pursuant to the terms of this agreement (the "Contract
Payments") or of any other plan, arrangement or agreement of the Company (or any
affiliate) ("Other Payments" and, together with the Contract Payments, the
"Payments") would be subject to the excise tax (the "Excise Tax") imposed by
Section 4999 of the Code as determined as provided below, the Company shall pay
to the Executive, at the time specified in Section 5(e)(ii) below, an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of the Excise Tax on Payments and any federal, state
and local income tax and the Excise Tax upon the
8
<PAGE>
Gross-Up Payment, and any interest, penalties or additions to tax payable by the
Executive with respect thereto, shall be equal to the total present value (using
the applicable federal rate (as defined in Section 1274(d) of the Code in such
calculation) of the Payments at the time such Payments are to be made. For
purposes of determining whether any of the Payments will be subject to the
Excise Tax and the amounts of such Excise Tax, (1) the total amount of the
Payments shall be treated as "parachute payments" within the meaning of section
280G(b)(2) of the Code, and all "excess parachute payments" within the meaning
of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
except to the extent that, in the opinion of independent counsel selected by the
Company and reasonably acceptable to the Executive ("Independent Counsel"), a
Payment (in whole or in part) does not constitute a "parachute payment" within
the meaning of section 280G(b)(2) of the Code, or such "excess parachute
payments" (in whole or in part) are not subject to the Excise Tax, (2) the
amount of the Payments that shall be treated as subject to the Excise Tax shall
be equal to the lesser of (A) the total amount of the Payments or (B) the amount
of "excess parachute payments" within the meaning of section 280G(b)(1) of the
Code (after applying clause (1) hereof), and (3) the value of any noncash
benefits or any deferred payment or benefit shall be determined by Independent
Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the
Code. For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal income taxes at the highest marginal
rates of federal income taxation applicable to the individuals in the calendar
year in which the Gross-Up Payment is to be made and state and local income
taxes at the highest marginal rates of taxation applicable to individuals as are
in effect in the state and locality of the Executive's residence in the calendar
year in which the Gross-Up Payment is to be made, net of the maximum reduction
in federal income taxes that can be obtained from deduction of such state and
local taxes, taking into account any limitations applicable to individuals
subject to federal income tax at the highest marginal rates.
(ii) The Gross-Up Payments provided for in Section 5(e)(i) hereof shall be
made upon the earlier of (i) the payment to the Executive of any Payment or (ii)
the imposition upon the Executive or payment by the Executive of any Excise Tax.
(iii) If it is established pursuant to a final determination of a court or
an Internal Revenue Service proceeding or the opinion of Independent Counsel
that the Excise Tax is less than the amount taken into account under Section
5(e)(i) hereof, the Executive shall repay to the Company within thirty (30) days
of the Executive's receipt of notice of such final determination or opinion the
portion of the Gross-Up Payment attributable to such reduction (plus the portion
of the Gross-Up Payment attributable to the Excise Tax and federal, state and
local income tax imposed on the Gross-Up Payment being repaid by the Executive
if such repayment results in a reduction in Excise Tax or a federal, state and
local income tax deduction) plus any interest received by the Executive on the
amount of such repayment. If it is established pursuant to a final determination
of a court or an Internal Revenue Service proceeding or the opinion of
Independent Counsel that the Excise Tax exceeds the amount taken into account
hereunder (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in
9
<PAGE>
respect of such excess within thirty (30) days of the Company's receipt of
notice of such final determination or opinion.
(iv) In the event of any change in, or further interpretation of, sections
280G or 4999 of the Code and the regulations promulgated thereunder, the
Executive shall be entitled, by written notice to the Company, to request an
opinion of Independent Counsel regarding the application of such change to any
of the foregoing, and the Company shall use its best efforts to cause such
opinion to be rendered as promptly as practicable. All fees and expenses of
Independent Counsel incurred in connection with this agreement shall be borne by
the Company.
6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
for which the Executive may qualify, nor, subject to paragraph (f) of Section
11, shall anything in this Agreement limit or otherwise affect such rights as
the Executive may have under any contract or agreement with the Company or any
of its affiliated companies. Vested benefits and other amounts that the
Executive is otherwise entitled to receive under the Incentive Compensation, the
SERPS, the Insurance Coverage, or any other plan, policy, practice or program
of, or any contract of agreement with, the Company or any of its affiliated
companies on or after the Date of Termination shall be payable in accordance
with the terms of each such plan, policy, practice, program, contract or
agreement, as the case may be, except as explicitly modified by this Agreement.
7. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in, and otherwise to perform its obligations under, this Agreement
shall not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action that the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and, except as
specifically provided in paragraph (a) of Section 5 with respect to benefits
described in clause (B) of paragraph (c)(i) of Section 3, such amounts shall not
be reduced, regardless of whether the Executive obtains other employment.
8. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies and
their respective businesses that the Executive obtains during the Executive's
employment by the Company or any of its affiliated companies and that is not
public knowledge (other than as a result of the Executive's violation of this
Section 8) ("Confidential Information"). The Executive shall not communicate,
divulge or disseminate Confidential Information at any time during or after the
Executive's employment with the Company, except with the prior written consent
of the Company or as otherwise required by law or legal process.
9. ATTORNEYS' FEES. The Company agrees to pay, as incurred, to the
fullest extent permitted by law, all legal fees and expenses that the Executive
may reasonably incur as a
10
<PAGE>
result of any contest (regardless of the outcome) by the Company, the Executive
or others of the validity or enforceability of or liability under, or otherwise
involving, any provision of this Agreement, together with interest on any
delayed payment at the applicable federal rate provided for in Section
7872(f)(2)(A) of the Code.
10. SUCCESSORS. (a) This Agreement is personal to the Executive and,
without the prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would have been required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean both the Company as
defined above and any such successor that assumes and agrees to perform this
Agreement, by operation of law or otherwise.
11. MISCELLANEOUS. (a) This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified except by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
(b) All notices and other communications under this Agreement shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Mr. Ivan G. Seidenberg
5 Quail Hollow Road
West Nyack, New York 10994
If to the Company:
Bell Atlantic Corporation
1095 Avenue of the Americas
New York, NY 10036
Attention: General Counsel
11
<PAGE>
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 11. Notices and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(d) Notwithstanding any other provision of this Agreement, the Company may
withhold from amounts payable under this Agreement all federal, state, local and
foreign taxes that are required to be withheld by applicable laws or
regulations.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provisions of, or to assert, any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to paragraph (c) of Section 4 of this
Agreement) shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement.
(f) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof; provided, however, that the Company shall assume at the Effective Time
-------- -------
the Retention Agreement for the benefit of the Executive adopted by NYNEX in
February 1996, a copy of which is attached hereto as Exhibit "A". Nothing in
this Agreement is intended to nullify any other obligation of the Executive
under any agreement or benefit plan which prohibits the disclosure of
proprietary information or prohibits the Executive from engaging in competitive
activities against NYNEX or the Company.
(g) The Company shall cause to be maintained through January 1, 1999
Section 5.11 of the Bylaws of the Company which requires (among other things) a
three-quarters vote of the entire Board in order to amend or modify the terms of
this Agreement.
(h) The rights and benefits of the Executive under this Agreement may not
be anticipated, assigned, alienated or subject to attachment, garnishment, levy,
execution or other legal or equitable process except as required by law. Any
attempt by the Executive to anticipate, alienate, assign, sell, transfer,
pledge, encumber or charge the same shall be void. Payments hereunder shall not
be considered assets of the Executive in the event of insolvency or bankruptcy.
(i) This Agreement may be executed in several counterparts, each of which
shall be deemed an original, and said counterparts shall constitute but one and
the same instrument.
12
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board, the Company has caused this
Agreement to be executed in its name on its behalf, all as of the day and year
first above written.
------------------------------------------------
Ivan G. Seidenberg
Bell Atlantic Corporation
By
----------------------------------------------
13
<PAGE>
Exhibit 11
1 of 2
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Per Common Share Earnings
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net Income (loss)................................. $ (80.1) $ 871.8
============ ============
Earnings (Loss) Per Common Share
Weighted average shares outstanding............... 776,413,701 774,949,952
============ ============
Net income (loss)................................. $ (.10) $ 1.13
============ ============
Primary Earnings (Loss) Per Common Share*
Weighted average shares outstanding............... 776,413,701 774,949,952
Incremental shares from assumed exercise of
stock options and payment of deferred
performance share awards....................... - 4,619,991
------------ ------------
Total shares...................................... 776,413,701 779,569,943
============ ============
Net income (loss)................................. $ (.10) $ 1.12
============ ============
Fully Diluted Earnings (Loss) Per Common Share*
Weighted average shares outstanding............... 776,413,701 774,949,952
Incremental shares from assumed exercise of
stock options and payment of deferred
performance share awards....................... - 4,718,121
------------ ------------
Total shares...................................... 776,413,701 779,668,073
============ ============
Net income (loss)................................. $ (.10) $ 1.12
============ ============
</TABLE>
* Calculation is presented in accordance with Regulation S-K item 601(b)(11)
although not required by footnote 2 to paragraph 14 of Accounting Principles
Board Opinion No. 15 because it results in dilution of less than 3%. For the
three months ended September 30, 1997, common stock equivalents have been
excluded from the calculation since they result in an anti-dilutive effect on
net loss per share.
<PAGE>
Exhibit 11
2 of 2
BELL ATLANTIC CORPORATION AND SUBSIDIARIES
Computation of Per Common Share Earnings
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Income before cumulative effect of
change in accounting principle.................... $ 1,514.9 $ 2,391.6
Cumulative effect of change in accounting principle.. -- 273.1
------------ ------------
Net income........................................... $ 1,514.9 $ 2,664.7
============ ============
Earnings Per Common Share
Weighted average shares outstanding.................. 775,769,366 772,801,541
============ ============
Income before cumulative effect of
change in accounting principle.................... $ 1.95 $ 3.10
Cumulative effect of change in accounting principle.. -- .35
------------ ------------
Net Income........................................... $ 1.95 $ 3.45
============ ============
Primary Earnings Per Common Share*
Weighted average shares outstanding.................. 775,769,366 772,801,541
Incremental shares from assumed exercise of stock
options and payment of deferred performance share
awards............................................ 7,776,793 7,265,744
------------ ------------
Total shares......................................... 783,546,159 780,067,285
============ ============
Income before cumulative effect of
change in accounting principle.................... $ 1.93 $ 3.07
Cumulative effect of change in accounting
principle........................................... -- .35
------------ ------------
Net income........................................... $ 1.93 $ 3.42
============ ============
Fully Diluted Earnings Per Common Share*
Weighted average shares outstanding.................. 775,769,366 772,801,541
Incremental shares from assumed exercise
of stock options and payment of deferred
performance share awards.......................... 9,129,751 7,333,452
------------ ------------
Total shares......................................... 784,899,117 780,134,993
============ ============
Income before cumulative effect of
change in accounting principle.................... $ 1.93 $ 3.07
Cumulative effect of change in accounting
principle......................................... -- .35
------------ ------------
Net income........................................... $ 1.93 $ 3.42
============ ============
</TABLE>
* Calculation is presented in accordance with Regulation S-K item 601(b)(11)
although not required by footnote 2 to paragraph 14 of Accounting Principles
Board Opinion No. 15 because it results in dilution of less than 3%.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 483
<SECURITIES> 0
<RECEIVABLES> 6,739
<ALLOWANCES> 592
<INVENTORY> 516
<CURRENT-ASSETS> 8,455
<PP&E> 76,471
<DEPRECIATION> 41,746
<TOTAL-ASSETS> 52,891
<CURRENT-LIABILITIES> 13,113
<BONDS> 13,071
0
0
<COMMON> 79
<OTHER-SE> 12,471
<TOTAL-LIABILITY-AND-EQUITY> 52,891
<SALES> 0
<TOTAL-REVENUES> 22,498
<CGS> 0
<TOTAL-COSTS> 18,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 919
<INCOME-PRETAX> 2,552
<INCOME-TAX> 1,037
<INCOME-CONTINUING> 1,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,515
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 0
</TABLE>
