<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
F O R M 10 - Q
X Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 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: 1-2755
......
GTE Corporation
......................................................
(Exact name of registrant as specified in its charter)
New York 13-1678633
........................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Stamford Forum, Stamford, Conn. 06904
.....................................................
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 203-965-2000
............
........................................................................
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X
NO .
GTE had 956,180,846 shares of $.05 par value common stock outstanding
(excluding 27,120,592 treasury shares) at July 31, 1997.
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
GTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(In Millions)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $1,613 $1,511 $ 3,218 $ 2,997
Network access services 1,260 1,161 2,412 2,293
Toll services 608 609 1,251 1,216
Cellular services 719 643 1,396 1,246
Directory services 372 399 558 622
Other services and sales 1,120 970 2,138 1,870
Total revenues and sales 5,692 5,293 10,973 10,244
OPERATING COSTS AND EXPENSES
Cost of services and sales 2,194 1,948 4,146 3,869
Selling, general & administrative 1,115 1,065 2,142 1,916
Depreciation and amortization 977 941 1,933 1,870
Total costs and expenses 4,286 3,954 8,221 7,655
OPERATING INCOME 1,406 1,339 2,752 2,589
OTHER (INCOME) EXPENSE
Interest expense 312 285 616 568
Interest capitalized (10) (11) (23) (21)
Interest income (13) (13) (29) (27)
Other - net 20 35 40 32
309 296 604 552
INCOME BEFORE INCOME TAXES 1,097 1,043 2,148 2,037
Income taxes 426 401 812 779
NET INCOME $ 671 $ 642 $ 1,336 $1,258
EARNINGS PER COMMON SHARE $ .70 $ .66 $ 1.39 $ 1.29
DIVIDENDS DECLARED PER COMMON SHARE $ .47 $ .47 $ .94 $ .94
AVERAGE COMMON SHARES 956 972 958 973
The accompanying notes are an integral part of these statements.
-1-
</TABLE>
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated net income for the second quarter and first six months of 1997
was $671 million and $1.34 billion, or $.70 per share and $1.39 per share,
respectively, compared with $642 million and $1.26 billion, or $.66 per
share and $1.29 per share in the second quarter and first half of 1996,
respectively. Results for the second quarter of 1997 include the impact of
recently announced data initiatives. Excluding the effects of the new data
initiatives, second quarter 1997 earnings per share increased 11 percent
over last year. The results for the first six months of 1996 include an
after-tax gain on the sale of nonstrategic telephone properties of $8
million or $.01 per share. Excluding this gain and the 1997 data
initiatives, earnings per share for the first half of 1997 increased 11
percent over last year.
Operating income for the second quarter and first six months of 1997 was
$1.41 billion and $2.75 billion, respectively, compared with $1.34 billion
and $2.59 billion, in the second quarter and first half of 1996,
respectively. These increases are due primarily to continued growth in
GTE's core wireline and wireless revenues and the favorable impact of
ongoing operating cost-reduction programs. Partially offsetting these
improvements were costs associated with the data initiatives, higher selling
and marketing expenses associated with the growth of wireless and
long-distance customers, the launch of personal communications services
("PCS") and increased video activities. Excluding the effects associated
with the new data initiatives, operating income for the second quarter and
first six months of 1997 rose 7.5 percent and 7.6 percent to $1.44 billion
and $2.78 billion, respectively.
Consolidated revenues and sales for the second quarter of 1997 increased 7.5
percent to $5.69 billion compared with $5.29 billion in the second quarter
of 1996. The increase reflects continued strength in GTE's core wireline
and wireless services, combined with new and expanded services.
Consolidated revenues and sales for the first six months of 1997 increased 7
percent to $10.97 billion compared to $10.24 billion in the same period last
year.
For the second quarter of 1997, minutes of use of GTE's domestic
local-exchange network for long-distance calling grew at an annual rate of
14.4 percent, while total domestic access lines increased 8.3 percent to
20.7 million. Access lines per employee, a key indicator of productivity,
increased from 305 a year ago to 324, representing a 6.2 percent
improvement. Internationally, GTE serves an additional 5.9 million access
lines.
Domestic cellular service revenues in the second quarter of 1997 totaled
$654 million, an 11 percent increase over the same period last year, as
customer growth continued. During the second quarter of 1997, GTE added
137,000 new domestic cellular customers bringing total U.S. customers served
to 4,146,000 an increase of 28 percent over a year ago. Customer growth at
-2-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
GTE's international operations increased 31 percent, bringing total cellular
customers served worldwide to over 5 million.
GTE is one of the largest publicly held telecommunications companies in the
world. In the United States, GTE offers local and wireless service in 29
states and long-distance service in all 50 states. GTE was the first among
its peers to offer "one-stop shopping" for local, long-distance and Internet
access services. Outside the United States, where GTE has operated for more
than 40 years, GTE serves over 6.8 million customers. GTE is also a leader
in government and defense communications systems and equipment, directories
and telecommunication-based information services, and aircraft-passenger
telecommunications.
Other (Income) Expense
Other-net for the first half of 1996 includes a pre-tax gain of $12 million,
resulting from the sale of nonstrategic local-exchange telephone properties.
CAPITAL RESOURCES AND LIQUIDITY
Cash from operations for the first six months of 1997 totaled $2.83 billion
compared with $2.82 billion in 1996. The increase in cash from operations
reflects the improved operating results during the first six months of 1997.
Cash used in investing activities totaled $2.74 billion compared with $1.54
billion in the first six months of 1996. Acquisitions and investments for
the first six months of 1997, includes approximately $593 million to acquire
approximately 96 percent of the outstanding shares of BBN Corporation
("BBN") common stock at a price of $29 per share. BBN, based in Cambridge,
Massachusetts, is a leading provider of high performance end-to-end Internet
solutions such as World Wide Web site hosting, network security, consulting,
systems integration, and dedicated and dial-up Internet access for
government and commercial customers. Its 2,200 employees have extensive
experience in leading-edge Internet and other telecommunications
applications. Twenty-eight years ago, BBN created ARPANET, the forerunner
of the Internet.
Proceeds from sales of assets for the first half of 1996 includes
approximately $261 million from the sales of PCS licenses. Capital
expenditures totaled $2.03 billion, compared with $1.66 billion in the first
six months last year. For the full year 1997, capital expenditures are
expected to be approximately $5 billion compared with $4.1 billion in 1996.
The majority of this investment is being made in GTE's telephone operations
to meet the demands of growth, modernize facilities and position GTE as a
low-cost provider of high-quality voice, data and video telecommunications
services. Significant investments are also being made in GTE's other
businesses, such as mobile-cellular, to increase capacity and continue to
improve and expand the network.
-3-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Cash from financing activities for the first six months of 1997 totaled $454
million, compared with cash used of $1.0 billion in the same period last
year. During the first half of 1997, $903 million of dividend payments and
$576 million expended for the repurchase of approximately 11.7 million
shares of GTE common stock, were offset by a net increase in long and
short-term borrowings of $1.9 billion.
In August 1997, GTE's Board of Directors authorized the repurchase of up to
an additional 20 million shares of currently issued GTE common stock in the
open market or in privately negotiated transactions. This program is in
addition to the 25 million share buy-back program announced in August 1996.
The repurchase of shares under this new program, and the remaining shares
under the 1996 program, will occur from time to time in the future,
depending upon market conditions and GTE's need to finance new or expanded
business opportunities. The shares acquired will be made available for use
in GTE's employee benefit and dividend reinvestment programs, as well as
other general corporate purposes.
In June 1997, GTE's Board of Directors approved the filing of a $3 billion
shelf registration statement with the Securities and Exchange Commission
("SEC") which included a Medium-Term Note ("MTN") program. The first
transaction under this program is expected to occur during the third quarter
of 1997. GTE expects that this program will replace a significant portion
of its traditional long-term bond financings. The benefits of an MTN
program include lower rates than traditional debentures and more flexibility
with regard to amounts issued, timing and speed to market. The MTN program
has received the same ratings as GTE Corporation's debenture program.
In March 1997, GTE's senior debt was upgraded by Standard and Poor's to an
"A" rating. This rating, along with the investment grade ratings of GTE's
subsidiaries, provide ready access to the capital markets at reasonable
rates and provides GTE with the financial flexibility necessary to pursue
growth opportunities as they arise. At June 30, 1997, GTE had $4.5 billion
of unused bank lines of credit available to back up commercial paper
borrowings and for working capital requirements.
RECENT DEVELOPMENTS
In July 1997, the U.S. Court of Appeals for the Eighth Circuit ("Eighth
Circuit") issued an opinion and order vacating significant portions of the
Federal Communications Commission's ("FCC") rules purporting to implement
the local competition provisions of the Telecommunications Act of 1996 ("the
Act"). GTE, together with other incumbent local-exchange carriers ("ILECs")
and a number of state commissions, had challenged various portions of the
FCC rules.
In its opinion, the Eighth Circuit ruled that the FCC had no jurisdiction to
promulgate rules setting the prices at which ILECs must make available to
competitors unbundled network elements and services for resale. In
addition, the Eighth Circuit made a number of other rulings favorable to
-4-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
GTE, including, that the FCC's rule allowing requesting carriers to pick and
choose among individual provisions of other interconnection agreements,
rather than to adopt the terms and conditions of a single agreement in its
entirety, was unlawful; that the FCC does not have the authority to review
interconnection agreements approved by state commissions or to enforce the
terms of such agreements; that the FCC rule requiring ILECs to provide
interconnection and unbundled network elements at levels of quality that are
superior to those levels at which the ILECs provide them to themselves was
unlawful; and that it is the requesting carriers, not the ILECs, that must
combine unbundled network elements.
On the other hand, the Eighth Circuit rejected certain arguments advanced by
GTE. For example, it ruled that a requesting carrier may gain access to all
of the unbundled network elements that, when combined by the requesting
carrier, are sufficient to enable the requesting carrier to provide a
finished service, and it upheld most of the standards applied by the FCC in
determining which network elements an ILEC must make available.
The time for parties to seek rehearing before the Eighth Circuit has not yet
expired. In addition, the FCC has announced that it intends to seek Supreme
Court review of the Eighth Circuit's ruling.
In May 1997, the FCC issued orders on universal service and access charge
reform. GTE Midwest Incorporated has filed petitions for review of each of
these orders in Federal Court, and GTE is currently assessing the effect of
these orders.
In its order on access charge reform, the FCC revised the price cap plan for
regulating ILECs by requiring price cap LECs to increase their productivity
factor to 6.5 percent retroactive to July 1996. The order also eliminated
the sharing requirements of the price cap rules. In June 1997, in
accordance with the order, GTE submitted its 1997 annual price cap filing.
The 1997 interstate access filing resulted in an annual price reduction of
approximately $254 million, effective July 1, 1997. Prior to this order,
GTE had submitted a rate change filing in May 1997, as GTE's access rates
were priced significantly below the FCC's maximum price. This rate change
filing resulted in an annual price increase of $151 million, effective
June 3, 1997. Overall, the net effect of these access filings resulted in
an annual price reduction of approximately $103 million.
In accordance with the Act, GTE is continuing to negotiate with requesting
carriers over the terms of interconnection, unbundled network elements and
resale rates. In some cases, the parties have been unable to agree within
the statutory period for negotiation and have gone to arbitration before
various state regulatory commissions. Since November 1996, a number of
state commission decisions determining the prices and terms of unresolved
issues were released. Subsequent decisions are expected to be issued
throughout 1997.
-5-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
GTE is challenging state arbitration decisions in cases where GTE believes
that state commissions have made decisions that violate the Act and are
inconsistent with its pro-competitive objectives. GTE fully endorses
genuine local competition. Through the second quarter of 1997, GTE
operating companies had filed one or more complaints in Federal District
Court in each of the following states: California, Florida, Hawaii,
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Nebraska,
New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Virginia,
Washington and Wisconsin. A number of these complaints have been dismissed
without prejudice on the ground that they were filed before the arbitrated
agreements had received final approval from state commissions. In such
cases, GTE is refiling complaints after final approval has occurred.
In May 1997, GTE announced initiatives to become a leading national provider
of telecommunications services, including the acquisition of BBN
Corporation, a leading provider of end-to-end Internet solutions. In
addition, GTE announced a strategic alliance with Cisco Systems, Inc. to
jointly develop enhanced data and Internet services for customers; and, the
purchase of a national, state-of-the-art fiber-optic network from Qwest
Communications. For additional information, including the modification of
certain financial projections previously made by GTE, reference is made to
GTE Corporation's Form 8-K and Schedule 14D-1 and 13D filed on May 6, 1997
and May 12, 1997, respectively, which are incorporated herein by reference.
As of June 30, 1997, GTE had expended $593 million related to the
acquisition of BBN, and made payments totaling approximately $113 million
toward the purchase of the network from Qwest.
In April 1997, GTE announced the relocation of its corporate-staff functions
to the greater-Dallas area, where its Telephone Operations and Directories
businesses are headquartered. The transfers to Dallas and the consolidation
of certain staffs are expected to begin within the next few months, and will
continue through 1998. GTE is continuing to develop the specific transition
plan associated with the announcement which will determine the timing and
extent of any financial impact.
-6-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(In Millions)
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 949 $ 405
Receivables, less allowances
of $310 and $299 million 4,460 4,482
Inventories and supplies 885 673
Deferred income tax benefits 174 200
Other 311 273
Total Current Assets 6,779 6,033
PROPERTY, PLANT AND EQUIPMENT, at cost 54,596 53,481
Accumulated depreciation (31,696) (30,579)
Total Property, Plant and Equipment, net 22,900 22,902
INVESTMENTS AND OTHER ASSETS:
Employee benefit plans 3,904 3,639
Franchises, goodwill and other intangibles,
net of accumulated amortization of $525
and $488 million 3,075 2,507
Investments in unconsolidated companies 2,187 2,035
Other assets 1,402 1,306
Total Investments and Other Assets 10,568 9,487
Total Assets $40,247 $38,422
The accompanying notes are an integral part of these statements.
-7-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(In Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations, including
current maturities $ 3,479 $ 2,497
Accounts payable and accrued expenses 3,753 4,156
Taxes payable 927 754
Dividends payable 468 472
Other 461 435
Total Current Liabilities 9,088 8,314
Long-term debt 14,098 13,210
Employee benefit plans 4,755 4,688
Deferred income taxes 1,518 1,474
Minority interests in equity of subsidiaries 2,249 2,316
Other liabilities 1,183 1,084
Total Liabilities 32,891 31,086
SHAREHOLDERS' EQUITY:
Common stock - shares issued 982,938,821
and 980,911,281 49 49
Additional paid-in capital 7,279 7,248
Retained earnings 1,809 1,370
Guaranteed ESOP obligations (562) (575)
Treasury stock - 27,845,587
and 17,813,275 shares, at cost (1,219) (756)
Total Shareholders' Equity 7,356 7,336
Total Liabilities and
Shareholders' Equity $40,247 $38,422
The accompanying notes are an integral part of these statements.
-8-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
1997 1996
(In Millions)
Operations
Net income $1,336 $1,258
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 1,933 1,870
Change in current assets and current
liabilities, excluding the effects of
acquisitions and dispositions (532) (475)
Deferred income taxes and other - net 91 166
Net cash from operations 2,828 2,819
Investing
Capital expenditures (2,033) (1,655)
Acquisitions and investments (700) (233)
Proceeds from sales of assets 17 316
Other - net (22) 29
Net cash used in investing (2,738) (1,543)
Financing
Common stock issued 162 263
Purchase of treasury stock (576) (464)
Long-term debt issued 1,533 1,099
Long-term debt and preferred securities retired (1,379) (317)
Dividends paid (903) (915)
Increase (decrease) in short-term obligations,
excluding current maturities 1,634 (740)
Other - net (17) 63
Net cash (used in) from financing 454 (1,011)
Increase in cash and temporary
investments 544 265
Cash and temporary investments:
Beginning of period 405 332
End of period $ 949 $ 597
Cash paid during the period for:
Interest $ 540 $ 505
Income taxes 531 560
The accompanying notes are an integral part of these statements.
-9-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The unaudited Condensed Consolidated Financial Statements included
herein have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, in the opinion of management of the Company,
the Condensed Consolidated Financial Statements include all
adjustments, consisting only of normal recurring accruals, necessary
to present fairly the financial information for such periods. These
Condensed Consolidated Financial Statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1996 Annual Report on Form 10-K.
Reclassifications of prior year data have been made in the
accompanying condensed consolidated financial statements where
appropriate to conform to the 1997 presentation.
(2) PROPERTY SALES:
In connection with the program to sell or trade a small percentage of
nonstrategic domestic local-exchange telephone properties, during
the first quarter of 1996, GTE recorded a pre-tax gain of $12 million,
which increased net income by $8 million, or $.01 per share.
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("FAS 128"), establishing standards for computing and presenting
earnings per share ("EPS"). The new standard is effective for year-end
1997 financial statements. Upon adoption, all prior-period EPS data,
including the first three quarters of 1997, must be restated.
The goal of FAS 128 is to harmonize the EPS calculation in the United
States with those common in other countries and to simplify complex
provisions of APB Opinion No. 15, "Earnings per Share" ("APB 15"). The
primary change is that the concept of primary EPS has been replaced by
basic EPS. Basic EPS is computed by dividing reported earnings
available to common stockholders by weighted average shares
outstanding. No dilution for any potentially dilutive securities is
included. Fully diluted EPS, now called diluted EPS, is still
required.
-10-
<PAGE>
GTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As required, GTE currently calculates EPS in accordance with APB 15.
Had GTE calculated EPS in accordance with FAS 128, basic EPS and
diluted EPS would not have been materially different than the amounts
reported as primary and fully diluted EPS in accordance with APB 15.
Derivative Financial Instruments
In January 1997, the SEC issued amendments to its rules which clarify
and expand disclosure requirements for derivative financial
instruments. As of June 30, 1997, there has been no significant change
in the market risk, or accounting policy associated with derivative
financial instruments as stated in GTE's 1996 Annual Report on Form
10-K.
-11-
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(11) Statement re: Calculation of earnings per common
share.
(10) Material Contracts - Employment Agreement between GTE
Service Corporation and George H. Conrades.
(12) Statement re: Calculation of the ratio of earnings to
fixed charges.
(27) Financial Data Schedule.
(b) GTE filed a report on Form 8-K dated May 6, 1997, under
Item 5, "Other Events" and Item 7 "Financial Statements
and Exhibits." GTE also filed a report on Form 8-K dated
June 10, 1997, under Item 5, "Other Events." No financial
information was included in either report.
-12-
<PAGE>
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.
GTE Corporation
.............................
(Registrant)
Date: August 13, 1997 By William M. Edwards, III
.............................
William M. Edwards, III
Vice President and Controller
Date: August 13, 1997 By Marianne Drost
.............................
Marianne Drost
Secretary
-13-
<PAGE>
Exhibit 10
June 27, 1997
Mr. George Conrades
3 Channing Place
Cambridge, MA 02138
Dear George:
I want to let you know how pleased and excited I am that you will continue
to lead BBN Corporation ("BBN") as it integrates with the data strategy of
GTE Corporation ("GTE"). I am confident that, with you as part of the GTE
team, we will be better able to take on the many challenges, and take
advantage of the many opportunities, that face us. We have constructed a
compensation package as described in this letter ("Letter Agreement") which
recognizes your value to our data business and which will reward you based
on your contributions, the success of the data business, and the success of
GTE.
Term of Letter Agreement: Subject to the early termination provisions
described below, the term of this Letter Agreement will begin on July 1,
1997 and end on June 30, 1999 (the "Term"). The Term may be extended by
mutual written agreement.
Position: Your position will be Executive Vice President and President -
Data, GTE Corporation, and you will report to me. Your principal office
will be located in the greater Dallas, Texas area.
Base Salary: You will receive an annual base salary of $450,000. You will
be on the GTE Service Corporation ("Service Corp.") payroll.
Executive Incentive Plan: You will participate in GTE's Executive Incentive
Plan ("EIP") as if you were employed for the full 1997 calendar year in
accordance with the terms of the EIP. For 1997, the anticipated EIP payout
range for your position will be a norm of $211,500 and a maximum (200% of
norm) of $423,000. The target bonus is typically 130% of norm, or in your
case, $274,950. For illustrative purposes, a bonus opportunity with a
payout at 150% of the norm would provide you with a bonus of $317,250 for
the full 1997 calendar year. Recommended payouts for EIP awards are based
on your actual performance, the performance of your business unit, and the
performance of GTE and its affiliates (the "Company") and are subject to the
approval of the Executive Compensation and Organizational Structure
Committee ("ECC") of the GTE Board of Directors (the "Board"). Subject to
the EIP deferral regulations, awards typically are paid in the first quarter
of the following calendar year.
Long-Term Incentive Plan: You will participate in GTE's Long-Term Incentive
Plan ("LTIP") which provides for stock option grants and performance bonus
awards (collectively referred to herein as "LTIP Grants").
a. Stock Options. On or about July 1, 1997, you will be granted an
option to purchase 75,000 shares of GTE common stock. In addition, in each
of 1998 and 1999, you will be eligible for a grant of a stock option which,
at your current level, typically would be to purchase approximately 62,200
shares of GTE common stock. The exercise price per share for each option
<PAGE>
described in this paragraph will be based on the average of the high and low
price of GTE common stock on the New York Stock Exchange composite tape on
the date each grant is approved by the ECC. Each grant will vest on a
one-third per year basis over a period of three years from the grant date.
If you separate from employment at the end of the Term, you will have five
years from your separation date to exercise your GTE stock options which are
or become vested during that five-year period, but in no event more than ten
years from the date of the grant ("Special Exercise Period").
b. Performance Bonus Awards. Effective on the date you become
employed by Service Corp., you will be eligible for participation in the
following outstanding LTIP performance bonus award cycles, 1995-1997,
1996-1998, and 1997-1999, as though you were employed by Service Corp. on
the first day of each outstanding award cycle. As such, you will receive
the following number of performance units for each award cycle: 1995-1997 -
5,900 units, 1996-1998 - 7,400 units, and 1997-1999 - 7,400 units.
Performance in the LTIP is based on achievement of financial objectives by
the Company over a three-year period. Subject to the LTIP deferral
regulations, payment typically is made during the first quarter of the year
following the last year of the award cycle. Actual payment for each cycle
will depend on actual Company performance, the accumulation of dividend
equivalents, and the value of GTE common stock and is subject to ECC
approval.
The ECC has the sole discretion to determine the amount, if any, of an LTIP
Grant to an executive, as well as the value of any payment with respect to
any Performance Bonus Award. Of course, you will be treated in the same
manner as other similarly situated senior executives of Service Corp. with
respect to LTIP Grants.
Special Bonus: In addition to the LTIP performance bonus opportunities
described above, you will be eligible for a special performance bonus
opportunity based on specific performance measures as follows: revenue
growth, operating income, net income, capital expenditures, operating cash
flow, and return on investment for GTE's data business ("Special Bonus").
The target payment for the Special Bonus is $250,000 per fiscal year, and I
will be responsible for determining whether the performance targets for the
Special Bonus have been met. For purposes of the Special Bonus, a "fiscal
year" commences July 1 and ends June 30, and the first fiscal year will
commence July 1, 1997 and end June 30, 1998. The maximum payment for a
fiscal year is $500,000, and, of course, for each performance measure no
payment will be made if certain performance targets are not met. You will
be provided with more details regarding the Special Bonus under separate
cover within the next few days. The Special Bonus is eligible for deferral
but is not eligible for the Equity Participation Program (as described in
the immediately succeeding paragraph).
Savings/Deferred Compensation Opportunities: You will be eligible to
participate in the GTE Savings Plan and the GTE Executive Salary Deferral
Plan in accordance with the plan provisions. These provisions are described
in booklets being sent to you under separate cover.
GTE's EIP and LTIP deferral programs allow for up to 100 percent deferral of
awards to some pre-selected date in the future. In addition, GTE recently
has introduced a new feature, the "Equity Participation Program" ("EPP"),
which, at your level will require a mandatory deferral of a specified
percentage of your combined EIP and LTIP awards into GTE restricted stock
<PAGE>
units. If, for example, your combined EIP and LTIP awards equal more than
$400,000 and not more than $800,000, the required deferral percentage will
be 20%, and if your combined EIP and LTIP awards equal more than $800,000,
the required deferral percentage will be 25%. GTE will match deferrals
under the EPP on a one-for-four basis, subject to certain forfeiture
provisions.
Pension Benefits/Executive Retired Life Insurance Plan ("ERLIP"): You will
be eligible to participate in the Service Corp. basic pension plan and the
Supplemental Executive Retirement Plan ("SERP"). However, if you terminate
employment with the Company before you meet the plans' generally applicable
vesting requirements (generally, five years of service), you will not be
entitled to receive any benefits from the plans. If, during the Term, any
enhanced retirement benefits are offered to employees pursuant to the basic
pension plan, the SERP, or otherwise in connection with a voluntary or
involuntary separation or retirement program, you will not be eligible for
such enhanced benefits. Moreover, you will only be eligible for ERLIP
benefits if you separate from employment with the requisite number of years
of service (generally, ten years).
Other Benefit Plans: As a Service Corp. employee, you will be entitled to a
full range of benefits as detailed in the GTE CHOICES Benefits Program
Summary booklet being sent to you under separate cover.
Changes to Benefits and Compensation Plans/Summary of Terms: As you
probably know, the Company reserves the right to modify or terminate any of
its benefit plans or compensation plans, including but not limited to any of
the executive benefit plans or compensation plans described in this letter.
You should know that this Letter Agreement is intended only as a brief
summary of the terms of the GTE benefit and compensation plans. In the
event of any conflict with the description in this Letter Agreement and the
plan terms, the plan terms will control.
Vacation: You will be entitled to four weeks of vacation annually.
Perquisites: You will receive perquisites provided to other executives at
your level in accordance with Service Corp. policy. In addition, you will
receive the sum of $2,500 per month to cover the cost of maintaining an
apartment in Dallas during the Term. During the Term, you also will receive
$1,000 per month as a car allowance, and you will be reimbursed for the
reasonable and customary expenses of one country club membership in either
the greater Boston or greater Dallas area (not including special assessments
in excess of $500 or personal, non-business expenses). Finally, during the
Term, you will be reimbursed for reasonable travel expenses you incur for
travel between Cambridge, Massachusetts and Dallas, Texas, in accordance
with Service Corp. policy.
Intellectual Property: As a Service Corp. employee, you must agree to
comply with the provisions of GTE's Intellectual Property Rights Agreement
and policies. I am enclosing a copy of the Intellectual Property Rights
Agreement, which reflects those policies and which you will need to execute
on or before commencing employment.
Separation Benefit: Since you already have an executive severance agreement
as described below, upon your separation from employment with the Company
during or at the end of the Term, you will not be eligible to participate in
any separation program sponsored by the Company whether payable from a
<PAGE>
qualified plan or from the Company's general assets, other than the BBN
executive severance agreement and GTE Change in Control Agreement, both as
described below.
Executive Severance Agreement: You agree that neither the offer nor the
acceptance of your new position as described in this Letter Agreement shall
constitute a triggering event for the receipt of severance benefits under
the Executive Severance Agreement between you and BBN, dated January 5, 1994
(the "Severance Agreement"). You further agree: that the Severance
Agreement shall remain in effect until June 30, 1999; that the Severance
Agreement applies only to those of your BBN benefits (including compensation
arrangements) that were in effect prior to the consummation of the GTE/BBN
tender offer on June 10, 1997; that the Severance Agreement will not apply
to any of the benefits and compensation arrangements described in this
Letter Agreement; and that by entering into this Letter Agreement, you
consent to an amendment of the Severance Agreement to so provide. As we
have discussed, the significance of the Severance Agreement remaining in
effect until June 30, 1999 is that, if you separate from employment with GTE
on or before June 30, 1999, other than on account of your death, total
disability, or retirement after normal retirement date, and other than for
"Cause" as set forth in the Severance Agreement, such separation will
constitute a triggering event for the receipt of severance benefits under
the Severance Agreement.
You will be eligible for an executive Change in Control Agreement from GTE
("Change in Control Agreement") which is similar to the change in control
agreements provided to other executives at your level; provided that any
payments or benefits payable pursuant to the Change in Control Agreement
will be reduced dollar for dollar by any payments or benefits paid to you or
which you are eligible to receive solely pursuant to the Severance
Agreement.
Early Termination of Term: In the event any of the following occurs prior
to the expiration of the Term, any salary earned through the date of
separation will be paid as soon as practicable following such separation and
you will receive no further salary; your EIP, LTIP performance bonus awards,
and the Special Bonus will be pro-rated to your date of separation (but
these bonuses will not be paid until the date they would otherwise have been
paid if any one of the events described below had not occurred); all
unvested options as of your separation date will be canceled; the Special
Exercise Period will be shortened if you separate prior to attaining age 60,
so that you will have one year from your separation date to exercise your
GTE stock options which are vested on the date of separation; your deferral
opportunities and other benefits will be determined in accordance with the
relevant plan documents; your entitlement to the perquisites will cease on
your date of separation; and you will not be entitled to any other
compensation or benefits:
a. You voluntarily separate from employment for any reason including
as a result of invoking your Severance Agreement;
b. Your employment is terminated for "Cause";
c. You die; or
d. You become disabled (within the meaning of the Company's Long-Term
Disability Plan).
<PAGE>
For purposes of this Letter Agreement, "Cause" is defined as your commission
of a felony which is intended to result in your substantial personal
enrichment at the Company's expense, or your conviction of a crime involving
moral turpitude.
In the unlikely event your employment is involuntarily terminated for
reasons other than those set forth in a-d above, this Letter Agreement will
remain in effect until the end of the Term.
Of course, in the event of a Change in Control as defined in the Change in
Control Agreement, the provisions of that Change in Control Agreement will
apply.
Applicable Law: This Letter Agreement shall be construed in accordance with
the laws of the State of New York determined without regard to its choice of
law rules, and any disputes will be resolved by courts in the State of New
York.
Entire Agreement: Except as specifically provided in this Letter Agreement,
this Letter Agreement sets forth our entire understanding and supersedes any
prior agreement or understanding relating to your employment with GTE and
the matters contained in this Letter Agreement. No amendment to this Letter
Agreement will be effective unless it is in writing and signed by both you
and GTE.
George, as we discussed, we believe that GTE is well positioned to
capitalize on the significant opportunities which the merger with BBN has to
offer, in particular the enhancement of GTE's data strategy. To help us get
there, we need you on the GTE team. This letter presents what I consider to
be a very attractive employment offer. I trust you agree and recognize that
if we can exceed our business targets, the compensation rewards will be
significant. If any aspect of this letter raises questions, please contact
me or Randy MacDonald.
Please indicate your acceptance of this offer by signing below and return
the signed acceptance to me, retaining one copy for your records.
Sincerely,
Kent B. Foster
I agree to the terms and conditions as set forth in this Letter Agreement
and accept the position of Executive Vice President and President - Data,
GTE Corporation.
George Conrades DATE: July 1, 1997
cc: J. R. MacDonald
bcc: M.A. Cameron
R.L. Campbell
E.D. Singer
<TABLE>
Exhibit 11
GTE CORPORATION AND SUBSIDIARIES
CALCULATION OF EARNINGS PER COMMON SHARE
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(In Thousands)
<S> <C> <C> <C> <C>
Consolidated net income $670,527 $641,811 $1,335,874 $1,258,089
Adjustments to consolidated net income:
Add - Interest expense, net of tax
effect, on employees' stock plans - 578 - 813
Adjusted consolidated net income $670,527 $642,389 $1,335,874 $1,258,902
Average common shares 955,533 971,844 958,115 973,240
Adjustments to common shares:
Add - Employees' stock and stock option plans 1,634 3,774 1,699 3,255
Adjusted average common shares 957,167 975,618 959,814 976,495
EARNINGS PER COMMON SHARE:
Primary (1) $.70 $.66 $1.39 $1.29
Fully diluted (2) $.70 $.66 $1.39 $1.29
(1) Computed by dividing consolidated net income for the periods by the average
common shares outstanding. Common stock equivalents are excluded from this
computation since they do not have a 3% dilutive effect.
(2) Computed assuming conversion or exercise of those preferred stocks and stock plans that
would have a dilutive effect.
(a) Equivalent common shares to be added to average shares for the employees' stock
plan, stock ownership plan and stock options are computed according to the
"treasury stock" method.
(b) Consolidated net income for the periods is adjusted to reflect the increase in
income for the interest accrued, net of tax effect, on funds received from
installments under the employees' stock plan.
</TABLE>
<TABLE>
Exhibit 12
GTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Six Months Ended Years Ended December 31
June 30, 1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income from continuing operations $1,335,874 $2,798,270 $2,537,949 $2,440,869 $ 971,978 $1,760,704
Add (deduct) -
Income taxes 811,796 1,613,261 1,466,426 1,532,482 567,747 966,589
Interest expense 615,539 1,146,481 1,150,625 1,139,233 1,298,234 1,475,670
Capitalized interest (net of
amortization) (8,673) (34,984) (22,971) (6,045) (3,421) (4,931)
Preferred stock dividends of Parent - - 5,598 9,910 17,825 26,331
Dividends on preferred securities of
subsidiaries 52,005 106,643 98,604 18,252 22,162 23,429
Additional income requirement on preferred
dividends of subsidiaries 4,274 9,640 9,664 11,426 12,739 12,671
Minority interests 85,073 149,467 145,437 140,464 112,335 112,425
Portion of rent expense representing
interest 61,166 130,660 128,034 139,715 153,058 196,533
2,957,054 5,919,438 5,519,366 5,426,306 3,152,657 4,569,421
Deduct - Minority interests (133,877) (263,122) (246,678) (242,937) (236,944) (248,979)
Adjusted earnings available
for fixed charges from
continuing operations $2,823,177 $5,656,316 $5,272,688 $5,183,369 $2,915,713 $4,320,442
Fixed Charges:
Interest charges $ 615,539 $1,146,481 $1,150,625 $1,139,233 $1,298,234 $1,475,670
Dividends on preferred secrities
of subsidiaries 52,005 106,643 98,604 18,252 22,162 23,429
Additional income requirement on preferred
dividends of subsidiaries 4,274 9,640 9,664 11,426 12,739 12,671
Portion of rent expense representing
interest 61,166 130,660 128,034 139,715 153,058 196,533
732,984 1,393,424 1,386,927 1,308,626 1,486,193 1,708,303
Deduct - Minority interests (31,700) (68,166) (70,052) (68,096) (78,421) (86,504)
Adjusted fixed charges $ 701,284 $1,325,258 $1,316,875 $1,240,530 $1,407,772 $1,621,799
Ratio of Earnings to Fixed Charges - continuing
operations 4.03 4.27 4.00 4.18 2.07 2.66
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUNE-30-1997
<CASH> 949
<SECURITIES> 0
<RECEIVABLES> 4,460
<ALLOWANCES> 0
<INVENTORY> 885
<CURRENT-ASSETS> 6,779
<PP&E> 54,596
<DEPRECIATION> 31,696
<TOTAL-ASSETS> 40,247
<CURRENT-LIABILITIES> 9,088
<BONDS> 14,098
<COMMON> 49
0
0
<OTHER-SE> 7,307
<TOTAL-LIABILITY-AND-EQUITY> 40,247
<SALES> 10,973
<TOTAL-REVENUES> 10,973
<CGS> 8,221
<TOTAL-COSTS> 8,221
<OTHER-EXPENSES> 40
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 303
<INCOME-PRETAX> 1,051
<INCOME-TAX> 386
<INCOME-CONTINUING> 616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,336
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.39
</TABLE>
