<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
<TABLE>
<S> <C> <C>
NEW YORK 13-1678633
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE STAMFORD FORUM
STAMFORD, CONNECTICUT 06904 AREA CODE (203) 965-2000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (TELEPHONE NUMBER)
</TABLE>
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
<TABLE>
<CAPTION>
NAME OF EACH DOMESTIC EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ------------------------------
<S> <C>
COMMON STOCK, PAR VALUE $.05 PER SHARE NEW YORK STOCK EXCHANGE, INC.
CHICAGO STOCK EXCHANGE, INCORPORATED
PACIFIC EXCHANGE, INC.
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE, INC.
CHICAGO STOCK EXCHANGE, INCORPORATED
PACIFIC EXCHANGE, INC.
</TABLE>
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of GTE's voting stock held by non-affiliates at
January 31, 1998 amounted to $52,110,227,799.
GTE had 958,745,247 shares of $.05 par value common stock outstanding
(excluding 25,658,980 treasury shares) at January 31, 1998.
DOCUMENT INCORPORATED BY REFERENCE:
GTE's Proxy Statement for Annual Meeting of Shareholders to be held on
April 15, 1998 (Incorporated in Part III).
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS.
BUSINESS OF GTE COMPANIES
GTE Corporation and subsidiaries ("GTE") is one of the largest
telecommunications companies in the world. GTE's domestic and international
operations serve 27.7 million access lines through subsidiaries in the United
States, Canada, and the Dominican Republic and an affiliate in Venezuela. GTE is
a leading wireless operator in the United States, with the potential of serving
61.3 million wireless and personal communications services customers. Outside
the United States, GTE operates wireless networks serving some 17.6 million POPs
through subsidiaries in Canada and the Dominican Republic and affiliates in
Venezuela and Argentina. GTE also participates in ventures/consortia which
operate a paging network in China and a nationwide digital cellular network in
Taiwan. GTE provides internetworking services ranging from dial-up Internet
access for residential and small business consumers to Web-based applications
for Fortune 500 companies. GTE is also a leader in government and defense
communications systems and equipment, aircraft-passenger telecommunications,
directories and telecommunications-based information services and systems. GTE
also has subsidiaries engaged in financing, insurance, leasing and other
activities offering financial and related services primarily to GTE operating
companies. One of these subsidiaries, GTE Service Corporation, furnishes, at
cost, advisory and consulting services related to administration, operations,
accounting methods and procedures, insurance, human resources, financing,
Federal and state taxes and other matters to GTE operating companies. GTE and
its subsidiaries had approximately 114,000 employees, at December 31, 1997.
DOMESTIC
Wireline Services
NETWORK SERVICES
GTE's telephone operating subsidiaries in the United States served
approximately 21.5 million access lines in 28 states as of December 31, 1997 and
provided many types of communications services, ranging from local telephone
service for the home and office to highly complex voice and data services for
business. Subsidiaries accounting for the largest portion of total domestic
network services revenues are GTE California, 23 percent; GTE North, 21 percent;
GTE Southwest, 13 percent; and GTE Florida, 11 percent. The largest cities
served are Los Angeles, Long Beach and Santa Monica, California; Tampa and St.
Petersburg, Florida; Honolulu, Hawaii; Lexington, Kentucky; Fort Wayne, Indiana;
and Erie, Pennsylvania.
Local services revenues are comprised mainly of fees charged to customers
for providing local-exchange services within the designated franchise area. GTE
telephone subsidiaries also provide toll services within designated geographic
areas under agreements with connecting local-exchange carriers ("LECs") in
conformity with individual state regulatory orders. GTE and other LECs
compensate each other pursuant to access charge tariffs that are subject to
review and approval by state regulatory commissions.
Network access services revenues are generated by providing access services
to interexchange carriers. The interstate portion of these service revenues is
based on switched, common-line, and special access tariffs approved by the
Federal Communications Commission ("FCC"). The FCC tariffs include end-user
access charges to residential and business customers. State access is based on
similar rate structures that are subject to approval by state regulatory
commissions.
With the passage of the Telecommunications Act of 1996 ("the Act"), enacted
on February 8, 1996, the telephone subsidiaries are free to operate in the areas
served and to extend service to other areas subject to conditions, restrictions
and limitations of various kinds.
Advances in technology and an increase in alternative provision of service
are beginning to erode certain of the benefits previously derived from franchise
rights granted by states or municipalities.
1
<PAGE> 3
In some cases, municipalities have the right to acquire the telephone
system within the municipal limits on certain terms and conditions.
Also included in GTE's domestic telephone operations are two major
unregulated affiliates: GTE Data Services Incorporated ("GTEDS") and GTE Supply.
GTEDS, GTE's software development and information processing subsidiary,
provides data processing and information management services to GTE's telephone
subsidiaries and other non-affiliated companies. GTE Supply is responsible for
the procurement and distribution of supplies for GTE's domestic telephone
operating companies, as well as other GTE subsidiaries. GTE Supply also sells
material and logistic services to non-affiliates.
GTEDS continues to expand the level of service that it provides to
non-affiliated companies. During 1997, GTEDS began performing under a three-year
contract to provide a customer billing services system and other systems to the
Portuguese national telecommunications company. Work has continued on the $20
million processing services contract with National Electronic Information Corp.,
the nation's largest commercial health care claims clearing house. In addition,
contracts were signed with Blue Cross/Blue Shield of Alabama, Arkansas and North
Dakota for a medical claims processing system at a combined value of
approximately $20 million and to license the medical claims processing system to
Blue Cross/Blue Shield of Maryland.
During 1997, GTE Supply implemented its multi-year agreement with BellSouth
Telecommunications ("BST") under which GTE Supply manages the procurement,
inventory and distribution of equipment and materials required for BST's network
construction and operations, and contract management services. Revenues
associated with this contract exceeded $200 million during 1997, the phase-in
year. Full year 1998 revenues are expected to reach $500 million.
GTE COMMUNICATIONS
One of the most significant impacts of the Act's passage was the removal of
certain restrictions previously included in GTE's Consent Decree. Prior to
February 1996, GTE was restricted from jointly marketing the products and
services of its regulated local telephone subsidiaries with those of its
interexchange subsidiaries. In light of this, GTE created GTE Communications
Corporation ("GTECC") to compete in the new, highly competitive
telecommunications environment. GTECC is comprised of three divisions: GTE Long
Distance ("GTELD"), GTE Card Services and GTE's competitive local-exchange
carrier ("CLEC").
GTELD began operation as an interexchange carrier in March 1996. It
operates as a switchless reseller of interexchange and international
long-distance services. A substantial portion of GTELD's switching and
transmission capacity is provided under a reseller agreement. GTELD provides a
full range of services in all 50 states to residential and business customers,
including long-distance services, calling cards, 800/888 services and operator
services to its presubscribed customers. GTELD is also authorized to provide
alternative operator services in 40 states and is currently operational in
Pennsylvania, Texas and Virginia. Principal competitors include AT&T, MCI and
Sprint, in addition to smaller, regional telecommunications providers.
Additional competition is expected when the regional Bell operating companies
are permitted to offer in-region long-distance services. Competition is based on
price and pricing plans, type of services offered, customer service and
communications quality, reliability and availability.
GTE Card Services entered the prepaid phone card market in late 1994 with
the introduction of several GTE prepaid calling cards. The prepaid phone card is
a telephone calling card with a preset amount of calling available that is
prepaid by the customer at the time of purchase. This card competes in the
long-distance market by providing an alternative means of purchasing and
controlling long-distance usage for both the business and residential user. GTE
Card Services competes in this marketplace through leverage of GTE's brand name
and utilization of GTE's exclusive marketing relationships with various
licensees. In addition, GTE Card Services has marketed a combination calling
card/credit card in conjunction with Associates National Bank since 1992.
GTE's CLEC is certified to offer competitive local-exchange services in 20
states, and has applications pending in several others. GTE's CLEC is currently
operational in California, Florida, Texas and Washington.
2
<PAGE> 4
Service in additional states is planned to begin during 1998. The CLEC markets
value-added telecommunications products and services nationwide to
communications intensive residential and business customers. These product and
service offerings will include local-exchange service, long-distance, wireless,
data, internet, paging and video. The CLEC is developing the integrated systems
to market, fulfill, service and bill these various products to customers.
With regard to video services, the Act eliminated the telephone company
programming ban and allowed GTE the flexibility to choose to enter the wireline
video distribution business through an open video platform arrangement or via a
standard cable television operation ("Title VI"). GTE made its initial entry
into the video market under Title VI.
The legislation also allows GTE to deploy video networks which are fully
integrated with its telephone operations. In the regulatory arena, pending
action by the courts and several open FCC proceedings will be closely monitored
to continuously validate GTE's video entry decision. Open proceedings addressing
video/telephony joint use facility cost allocation, rules concerning cable
inside wiring, implementation of video close captioning requirements, revisions
to existing cable/multi-point distribution service cross-ownership rules and the
establishment of rules for local, multi-point distribution services continue to
evolve.
At the end of 1997, GTE had been granted 7 video franchises in the Pinellas
County, Florida market and 5 video franchises in the Ventura County, California
market. Construction of the cable television networks in those markets is
underway and approximately 58,000 video subscribers were acquired in 1997,
bringing GTE's total video subscribers to approximately 73,000. The most
technologically-advanced hybrid fiber/coaxial network available is being
deployed. Services currently being offered over this network include over 150
channels of programming, high-speed cable modem Internet access and GTE's
interactive mainStreet(TM) service.
The americast(TM) joint venture, in which GTE and various other
telecommunications providers participate, arranges network program licensing and
content packaging for the partners' video offerings. In addition, the venture is
focusing on marketing strategy, technology selection and the creation of an
advanced navigator. During 1997, SBC Interactive, Inc. withdrew from the
venture. americast and the remaining partners commenced arbitration proceedings
in October 1997 to contest this withdrawal. The impact of SBC Communication's
proposed acquisition of the Southern New England Telephone Company on the
latter's participation in the venture is presently unknown. GTE is not currently
aware of any other changes in the venture's direction or structure.
GTE INTERNETWORKING
During 1997, GTE acquired BBN Corporation ("BBN"), a leading provider of
Internet services to businesses and a provider of contract research and
development services to governmental and other organizations. Formed by
combining BBN with GTE's existing Internet services business, GTE Internet-
working ("Internetworking") offers a wide range of Internet and internetworking
services and solutions, including dedicated and dial-up access to the Internet
and a variety of value-added Internet services such as managed network security,
web server hosting, application development and systems integration services. In
December 1997, Internetworking acquired the assets of Genuity, Inc., a
value-added provider of distributed application hosting solutions. At the end of
1997, Internetworking had over 2,600 dedicated connections, 270,000 dial-up
subscribers and 700 web hosting and security customers.
Internetworking supports its service offerings with a high bandwidth
network infrastructure, two network operations centers, 13 web hosting and
server operations centers, and a technical support organization. It is currently
participating in a major buildout of a nationwide network, with planned
completion by mid-1999. This new network infrastructure is a self-healing SONET
ring network with more than 15,000 miles connecting over 100 metropolitan areas.
Internetworking has entered into an agreement with America On-line ("AOL")
to build, maintain, and operate a significant portion of AOL's nationwide,
high-speed, dial-in network. The contract with AOL includes substantial
pass-through costs to Internetworking for telecommunications circuits and other
services
3
<PAGE> 5
provided by local and interexchange carriers. In November 1997, Internetworking
announced that it was awarded a $500 million extension of its contract with AOL,
bringing the total value of this contract to approximately $1.2 billion through
June 2002.
Internetworking draws upon its expertise in funded research and development
of advanced technologies, including wireless communications, high-speed router
technology, network security, and speech processing. It is currently focused on
satellite and terrestrial wireless data protocols, multigigabit router
development, advanced quality of service architecture, certificate authority,
and speech enhanced IP services, such as unified messaging. These capabilities
are used to differentiate Internetworking's position in the marketplace and are
also sought after by the U.S. Government and large commercial organizations. The
backlog of orders for this part of the business at December 31, 1997 was
approximately $120 million.
Principal competitors in the internetworking services and solutions market
may, in general, be divided into the following five groups: (1)
telecommunications companies, regional Bell operating companies, and various
cable companies; (2) Internet access providers; (3) on-line services providers;
(4) value-added networks and systems integrators; and (5) research and
development, and engineering services providers in the government market. The
primary factors of competition are price, quality of service, technical
expertise, quality of network backbone and infrastructure, and quality and scope
of sales, marketing, and distribution channels.
Wireless Services
GTE WIRELESS
Wireless Services is comprised of GTE Wireless Products and Services ("GTE
Wireless")and GTE Telecommunications Services Inc. ("GTE TSI").
Wireless Services includes 800 MHz cellular telephone and wireless data
transmission services, 1.8 GHz Personal Communications Services ("PCS") and
cellular transaction processing and support services provided by GTE TSI. GTE
Wireless provides cellular services and products to approximately 4.5 million
subscribers through its 800 MHz operations and PCS services.
GTE is one of the largest providers of cellular services in the United
States in terms of population in the areas served. GTE manages or controls 73
metropolitan markets, known as metropolitan statistical areas ("MSAs"), and 53
rural service areas ("RSAs"). GTE's ownership position in U.S. markets was
obtained through the FCC lottery and settlement process as well as through
purchases and exchanges of licenses with other cellular service providers. GTE's
800 MHz cellular operations serve a population of approximately 52 million POPs,
approximately 17 million of which are in the top 30 U.S. markets. In 1997, GTE's
U.S. cellular operations increased their customer base by 19 percent to
approximately 4.5 million.
GTE's cellular licenses were generally granted for an initial 10-year term
and are renewable for successive 10-year terms. FCC license renewal applications
continue to be filed and are presently being processed by the FCC with no
opposition.
In December 1994, the FCC began the auctions of the first series of new 1.8
GHz PCS licenses. These new licenses will enable up to six additional wireless
competitors to enter each market. Two licenses (each at 30 MHz of spectrum) in
each of 51 large service areas across the U.S. called "Major Trading Areas"
("MTAs") were issued in June 1995. GTE won licenses in the broadband spectrum
auction, held by the FCC, including the Cincinnati, Seattle, Denver and Atlanta
MTAs. In June 1996, GTE sold the Denver MTA license to a wholly-owned subsidiary
of Western Wireless Corporation and sold the Atlanta MTA license to InterCel
Inc. as part of our efforts to strategically reposition our areas of coverage.
Since GTE's purchase of these 1.8 GHz licenses, GTE has entered into
certain transactions that strategically reposition the areas covered by the
licenses and permit GTE to focus its energies and resources on the specific
areas that most benefit GTE's strategy. In March 1996, GTE purchased the
Spokane-Billings MTA license from Poka Lambro Telephone Cooperative, Inc., and
simultaneously entered into an agreement
4
<PAGE> 6
to partition certain areas covered by this MTA to Elltel Wireless, Inc., 3
Rivers PCS Inc., and Montana Wireless, Inc. On December 12, 1995, GTE
partitioned the areas covered by Yakima and Kittitas counties in the Seattle MTA
to Elltel Wireless, Inc.
In April 1997, GTE completed transactions with Clifton-Forge Waynesboro
Telephone Company, CFW Communications Company, CFW Cellular, Inc. ("CFW"), R&B
Communications, Inc. and R&B Telephone ("R&B") under which GTE purchased from
CFW and R&B their combined 60 percent limited partnership interest in the
Roanoke MSA Limited Partnership, and partitioned to CFW and R&B portions of
GTE's 1.8 GHz Cincinnati MTA license, including the following smaller service
areas called "Basic Trading Areas": Charleston, West Virginia; Huntington, West
Virginia/Ashford, Kentucky; Logan, West Virginia; Portsmouth, Ohio and
Williamson, West Virginia/Pikeville, Kentucky. Additionally, CFW purchased from
GTE a 10 percent limited partnership interest in the Virginia RSA 6 Cellular
Limited Partnership.
The PCS network in GTE's remaining franchise areas, which cover
approximately 9 million POPs, became operational in 1997.
GTE's cellular operations have always experienced direct competition from
the second cellular licensee in each market. Beginning in 1996, GTE started to
experience competition from PCS license holders in certain markets. Competition
from PCS providers in GTE's markets will continue to increase as the networks of
the license holders are built-out over the next several years. Competition is
principally on the basis of service quality, service offering and packaging
capabilities, price and coverage area. In addition to the direct cellular
competitors in each market, Enhanced Specialized Mobile Radio operators also
represent additional competition.
In 1996, GTE Wireless began to deploy Code Division Multiple Access
("CDMA") digital technology in its markets. As of December 31, 1997, GTE
Wireless has deployed CDMA service in 16 markets, and will continue to deploy
CDMA over the next several years. CDMA technology allows for clearer calls,
enhanced security, greater functionality and additional capacity to process more
calls.
GTE continued its deployment of Cellular Digital Packet Data services
("CDPD") in 1997. CDPD provides efficient transmission of data over cellular
networks with the added benefits of airlink encryption and mobility services.
CDPD is a more cost effective means than traditional circuit switched data for
users to remotely access their host systems or other services. The service is
also a fast, efficient way for cellular users to transmit short bursts of data,
such as credit card verifications for retail businesses, service and order
information for field sales representatives and delivery tracking for
transportation businesses.
GTE TSI provides transaction processing, software applications, fraud
detection tools and network support services that facilitate the "roaming" of
cellular subscribers and the management of cellular markets. GTE TSI serves both
large and small customers in a significant portion of domestic markets. GTE TSI
competes through product innovation, technology deployment, provision of
flexible product solutions and quality customer service.
GTE AIRFONE
GTE Airfone ("Airfone") operates a telecommunications service for
passengers onboard aircraft under a license granted by the FCC in 1991. Five
other licenses have been granted by the FCC for air-to-ground service, and two
companies, In-Flight Phone Corporation and Claircom, have initiated service.
During 1995, MCI acquired partial ownership of In-Flight, while Claircom merged
with AT&T to become known as AT&T Wireless. In January 1997, In-Flight Phone
Corporation filed for bankruptcy protection under Chapter 11.
During 1997, Airfone continued deployment of its new advanced digital
GenStar System(SM), to its contracted airlines. In May 1997, Airfone was awarded
the airborne telephone contract with Continental Airlines. Currently, Airfone
has agreements with United, Delta, TWA, US Airways, Reno Air, Midwest Express,
US Air Shuttle, United Express, Air Wisconsin, Mexicana and AeroMexico. At
December 31, 1997, the GenStar System was installed on approximately 2,028
commercial aircraft in the U.S., Canada and Mexico.
5
<PAGE> 7
Internationally, Airfone also offers airborne telecommunications equipment
and installations to airlines in Europe and Asia. In Europe, airline partners
are: Air France/Air Inter Europe, Alitalia, British Airways and Turkish
Airlines. In Asia, airline partners include: All Nippon Airways, Cathay Pacific,
China Southern and Thai Airways.
Airfone and Hughes Defense Communications, pursuant to a joint venture
alliance, continued marketing the Magnastar digital product for the corporate
general aviation market. The Magnastar System(SM) includes a digital radio,
designed by Magnavox, which links exclusively to the Airfone all-digital GenStar
System. As of December 31, 1997, over 800 Magnastar units have been sold.
Airfone will continue to actively compete for digital service contracts and
initiate marketing programs designed to promote system usage based on enhanced
quality, reliability, new feature offerings and the flexibility for future
capabilities. Current features include data and fax service, conference calling,
ground-to-air calling, seat-to-seat calling and a variety of information
services.
Directories
GTE annually publishes or provides sales and other telephone
directory-related services primarily through GTE Directories Corporation ("GTE
Directories") for approximately 2,600 directory titles in 47 states, the
District of Columbia and 16 foreign countries with a total circulation of
approximately 96 million copies. With over sixty years of industry experience,
GTE Directories', one of the world's largest telephone directory publishers, is
a leader in the business of linking buyers and sellers together through
effective advertising and information media. In the United States, GTE
Directories competes directly within the $11.5 billion yellow pages industry
which consists of seven major and numerous smaller U.S.-based directory
publishers. Indirectly, GTE Directories competes with other advertising-based
media such as cable TV, newspapers, television, radio, and direct mail.
GTE Directories has three primary customer groups: the businesses that
purchase advertising in its directories and other related products; the
consumers who use the directories and other advertising and information services
GTE Directories provides; and the telephone companies and other entities that
contract for directory publishing production, printing, distribution and/or
sales services.
Internationally, GTE Directories has operations in Europe, Asia and Latin
America. In 1997, GTE partnered with Swedish telecom group Telia AB to acquire
US West Polska, Poland's largest directory publisher. Additionally, GTE acquired
Herold Business Data, Austria's leading directory publisher. These two
acquisitions complement GTE Directories' other European operations in Belgium
and Hungary.
INTERNATIONAL
GTE, through its international operations, provides telecommunications
services in Canada, Venezuela, Argentina, the Dominican Republic and offers
paging services in twenty major metropolitan areas in China. As of December 31,
1997, GTE's international operations served approximately 6.1 million access
lines and provided cellular and paging services to over 1.5 million customers.
Through its ownership of common stock of Anglo-Canadian Telephone Company,
GTE has voting control of BC TELECOM ("BC Tel") and Quebec Telephone ("Quebec
Tel").
At December 31, 1997, BC Tel served approximately 2.5 million access lines
in the province of British Columbia, Canada and provided cellular services to
approximately 400,000 subscribers.
During 1997, a series of regulatory rulings were announced which opened the
telecommunications industry in British Columbia to full competition in 1998. The
regulatory reforms establish a framework, including the implementation of a
price cap regime, under which new competitors can immediately enter the market.
Beginning in 1994 with the introduction of equal access for long-distance
services, BC Tel has been impacted by the effects of competition in its markets.
At December 31, 1997, BC Tel's residential long-
6
<PAGE> 8
distance market share was reduced to approximately 75 percent from 78 percent at
the end of 1996. BC Tel is aggressively addressing competition in the
long-distance market through the implementation of various customer retention
and winback initiatives.
At December 31, 1997, Quebec Tel served approximately 293,000 access lines
in the province of Quebec, Canada and provided cellular services to
approximately 23,000 customers.
In addition, GTE, through GTE Holdings (Canada) Limited, a Canadian holding
company, owns the common stock of Compania Dominicana de Telefonos, C. por A.
("Codetel"), a telephone company providing local, wireless and national and
international long-distance telephone service in the Dominican Republic. This
company served approximately 649,000 access lines and 92,000 cellular customers
at December 31, 1997. Codetel has experienced competition in its international
toll and local and national markets. However, the entrance of competitors is
being addressed through enhancements and expansion of the network, the
implementation of service bundling and aggressive pricing solutions.
GTE owns, directly and through a multinational consortium, a 25.9 percent
ownership interest in Compania Anonima Nacional Telefonos de Venezuela
("CANTV"), the telephone company in Venezuela. Under a concession granted by
law, CANTV is a full service telecommunications provider offering local,
wireless and domestic and international long-distance service throughout
Venezuela on an exclusive basis until October 2000, except in limited
circumstances. Beginning in October 2000, however, CANTV will be subject to
direct competition for these services. CANTV also offers paging services, public
telephones, private networks, data transmission, directory services and other
value added services.
GTE and its four consortium partners have a 40 percent ownership interest
in CANTV, while GTE, as the owner of 51 percent of the consortium, is managing
CANTV. In connection with the Venezuelan government's initial public offering of
a portion of its interest in CANTV, GTE acquired a 5.5 percent direct ownership
interest at the end of 1996. This brought GTE's effective ownership interest in
CANTV to 25.9 percent. CANTV had approximately 2.7 million access lines in
service at December 31, 1997 and served approximately 375,000 cellular
subscribers.
Due to the high level of inflation experienced in Venezuela, CANTV's
results are substantially influenced by its ability to increase tariffs. CANTV
operates under a Concession Agreement with the Venezuelan government that
provides, among other things, for quarterly tariff increases based on the
previous rates of inflation in Venezuela. The ability to obtain timely tariff
increases and ongoing cost reduction and productivity improvement programs,
improved operating margins when compared with 1996.
In April 1996, the Venezuelan government lifted foreign exchange controls
allowing the local currency to move to a market-based exchange rate. As a
result, the local currency devalued by approximately 65 percent. However, due to
the mix of local currency and U.S. dollar denominated assets and liabilities,
the devaluation did not have a significant impact on GTE's results. Fluctuations
in currency exchange rates have not been significant since this initial
devaluation.
In 1994, a GTE-led consortium, Compania de Telefonos del Interior ("CTI"),
was awarded two cellular licenses by the National Telecommunications Commission
of Argentina. The concession allows CTI to provide cellular services in the
north and south interior regions of Argentina -- areas with a total population
of 22 million. Competition began in CTI's markets in April 1996 as the cellular
subsidiaries of the local-exchange telephone companies entered the market. GTE,
as operator, has a 25.5 percent ownership interest in CTI, and holds a ten-year
contract to manage the network. During 1997, CTI more than tripled it's customer
base and as of December 31, 1997, CTI served over 300,000 cellular customers.
GTE also has offices in Beijing, China and Sao Paulo, Brazil. These
operations are chartered with pursuing business development opportunities within
the telecommunications market of each respective country. The first opportunity,
announced in December 1995, was the establishment of a joint venture between GTE
China and Guangzhou Guangtong Resources Co. to construct and operate a wireless
paging system that currently serves 20 metropolitan areas, including Beijing. At
the end of 1997, over 130,000 paging customers were served by this network.
7
<PAGE> 9
In Japan, GTE holds a minority interest in nine cellular partnerships
created by Nissan Motor Corp. LTD and Japan Telecom Co. LTD to provide 1.5 GHz
digital-cellular services throughout Japan. In addition, GTE participates, as a
minority owner, in a cellular partnership comprised of a consortium of Japanese
companies that provides 1.9 GHz PHS (comparable to PCS) service.
Early in 1997, the government of Taiwan announced that it had awarded a
nationwide license for digital cellular communications services to a consortium
in which GTE has a 12 percent interest. During 1997, GTE assisted in the design,
build-out and operation of the system, and service was launched in January 1998.
GTE estimates that it will invest approximately $90 million in the venture over
the next several years.
TECHNOLOGY AND SYSTEMS
GTE Government Systems Corporation ("GSC") develops, manufactures and
integrates customized command, control, communications and intelligence systems
for the defense and national security agencies of the U.S. Government and
selected foreign governments. In addition, GSC provides information systems,
telecommunications services and electronic system operation and maintenance
support services for civilian agencies of the Federal government and for
commercial users, both domestically and internationally. As a major part of this
business focus, GSC provides and manages integrated system solutions tailored to
customer information processing and telecommunications requirements.
During 1997, GSC received orders valued at $1.4 billion, an 18 percent
increase compared with 1996. GSC is strengthening its presence with traditional
military customers while aggressively attempting to offset a declining defense
market by broadening its penetration of the civilian agencies of the Federal
government. GSC is exploiting selected niches in the domestic commercial
marketplace and transitioning its capabilities, products and services to
non-defense applications. GSC is addressing complex telecommunications and
information processing needs in markets such as health care, banking and finance
in addition to pursuing selected programs and markets in the international
defense and commercial telecommunications arenas.
GSC's principal U.S. competitors include CSC, Martin Lockheed, Bell
Atlantic, AT&T, TRW, Harris, EDS, Raytheon and Motorola. Major foreign
competitors include Thomson-CSF, Ericsson and Siemens.
GTE's research and development work is centered principally at GTE
Laboratories Incorporated. Activities in research and new product development
and improvement are also conducted at the various GTE business units. Both
research and product development are focused on telecommunications operations
and applications.
The key areas of emphasis include: the automation of telecommunications
operations, network management, intelligent network migration, broadband
information transport, network architecture design and planning, wireless
communications, advanced database capabilities, network quality improvements,
exchange video distribution, and support for industry standards development.
For the years 1997 -- 1995, expenditures for all company-sponsored research
and product development and improvement were $122 million, $122 million and $137
million, respectively. Additionally, $162 million, $126 million and $162
million, respectively, was expended for customer-sponsored research and product
development and improvement during the same periods. In total, GTE engaged over
1,900 professional scientists and engineers on such activities.
REGULATORY AND COMPETITIVE TRENDS
GTE's telephone subsidiaries hold franchises, licenses and permits adequate
for the conduct of their business in the markets which they serve. Advances in
technology, together with a number of regulatory, legislative and judicial
actions, continue to accelerate and expand the level of competition and
opportunities available to GTE.
8
<PAGE> 10
Much of the regulatory and legislative activity that occurred in the United
States in 1997 was a direct result of the Telecommunications Act of 1996 ("the
Act") adopted by Congress. The Act is intended to promote competition in all
sectors of the telecommunications marketplace, while preserving and advancing
universal telephone service.
The Act presents GTE with both challenges and opportunities. GTE will face
additional competition from numerous sources, such as other incumbent LECs, new
competitive local-exchange carriers, wireless carriers, cable television service
providers, and long-distance companies. However, GTE is now permitted to provide
a full array of local, long-distance, Internet access, wireless, and video
services both within and outside of its traditional operating areas, and thus
generate new sources of revenue from customers previously beyond reach. In fact,
GTE now provides long-distance and Internet access service to 1,717,000 and
272,000 customers, respectively.
GTE supports greater competition in telecommunications, provided that
consumers benefit from an opportunity for all service providers to participate
in a competitive marketplace under comparable conditions. GTE believes that a
number of recent FCC and state regulatory agency decisions did not establish
comparable conditions; consequently, GTE has exercised its right to challenge
actions it believes act to increase competition at the expense of the
shareholders of incumbent firms.
In July 1997, the U.S. Court of Appeals for the Eighth Circuit ("Eighth
Circuit") released its decision on the challenge filed in 1996 by GTE and
numerous other parties to rules developed by the FCC to implement the
interconnection provisions of the Act. The Act required LECs to make their
retail services available to competitors. The FCC required that prices for both
resold service and network elements be set using a methodology created by the
FCC. The court challenge asserted the FCC's rules were inconsistent with the
Act. The July 1997 court decision found that the FCC overstepped its authority
in many instances, and upheld GTE's position that state regulatory agencies bear
the primary responsibility of the majority of decisions as to how competing
firms interconnect their networks and the associated compensation. In January
1998, the U.S. Supreme Court announced that it would review this decision. Oral
argument in the Supreme Court is expected to take place in October 1998, with a
final decision likely to be issued no later than June 1999.
The favorable ruling by the Eighth Circuit did not impede the progress of
competition. GTE has processed over 100,000 requests from competitors for resold
lines, and is currently processing over 20,000 orders per month. GTE has
finalized more than 350 interconnection agreements with various competitive
LECs, and is currently in the process of negotiating approximately 900
additional agreements. A number of these interconnection agreements adopted as a
result of the arbitration process established by the Act incorporate prices or
terms and conditions based upon the FCC's rules that were overturned by the
Eighth Circuit. Thus, GTE has exercised its right to challenge a number of such
agreements. GTE has lawsuits pending in federal district court in 14 states.
In May 1997, the FCC released two new major decisions related to
implementation of the Act's provisions -- the universal service and access
charge reform orders. The universal service order established the support
mechanisms to ensure continued availability of affordable local telephone
service, and created new programs to provide discounted telecommunications
services to schools, libraries and rural health care providers. GTE and numerous
other parties have challenged the FCC's decision before the U.S. Court of
Appeals for the Fifth Circuit on the grounds that the FCC did not follow the
requirements of the Act to develop a sufficient, explicit and competitively
neutral universal service program. A decision is expected in 1998.
The access charge reform order also released in May 1997, revamped the rate
structure for use of the local network by interexchange carriers to originate
and complete long-distance calls. GTE and numerous other parties also challenged
this decision before the Eighth Circuit based on the belief that the FCC not
only failed to remove all the universal service subsidies hidden within
interstate access charges, but in fact created additional subsidy charges paid
only by business and multi-line residence customers. Oral argument has been held
and a decision is expected in 1998.
9
<PAGE> 11
Also in May 1997, the FCC released a decision completing a periodic review
of its price cap regulatory oversight of interstate access charges. GTE and
numerous other LECs have challenged this decision before the Eighth Circuit
based on the belief that the FCC established a fundamentally unfair annual price
reduction formula, and required retroactive price reductions. Oral argument has
been held and a decision on this challenge is also expected in 1998.
Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service. Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives for telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into GTE markets. In
total, approximately 72% of the regulated revenues for GTE's domestic telephone
operations are under some form of alternative regulation, including 100% of the
interstate revenues. Approximately 62% of GTE's domestic access lines are in ten
states that have adopted incentive regulation plans for intrastate service,
including California, Florida and Texas, the states where GTE's largest
operations are located. GTE filed interstate access revisions during 1997 that
became effective June 3, 1997 and July 1, 1997. Overall, these filings resulted
in a net annual price reduction of $103 million. In 1997, the FCC also ordered
significant changes that altered the structure of access charges collected by
GTE, effective January 1, 1998. Generally, the FCC reduced and restructured the
per minute charges paid by long-distance carriers and implemented new per line
charges. The FCC also created an access charge structure that resulted in
different access charges for residential primary and secondary lines and single
line and multi-line business lines. In aggregate, the reductions in usage
sensitive access charges paid by long-distance carriers were offset by new per
line charges and the charges paid by end-users.
For the provision of interstate access services, GTE operates under the
terms of the FCC's "price cap" incentive plan. The price cap mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved. Under this approach, the maximum prices that the
LEC may charge are increased or decreased each year by a price cap index based
upon inflation less a predetermined productivity target. LECs have limited
pricing flexibility provided they do not exceed the allowed price cap.
In the May 1997 order on its price cap triennial review, the FCC revised
the price cap plan for LECs by adopting a uniform productivity factor of 6.0%,
with an additive consumer productivity dividend of .5%. The FCC also eliminated
the sharing requirements of the price cap rules.
During 1997, other regulatory and legislative developments occurred at the
state level to further open the telecommunications marketplace to competition.
For example, the California Public Utilities Commission ("CPUC") continued its
efforts to promote competition by addressing unbundling of network elements and
updating its March 1996 resale decision to expand the scope of retail services
to be discounted and offered for resale. The CPUC also opened an investigation
to examine the level of access to the Operational Support System ("OSS") of
incumbent LECs as well as the quality and speed of access to the OSS.
During 1997, the CPUC introduced two new universal service programs. In
order to meet California's universal service goal in a competitive arena, the
California High Cost Fund-B revises the mechanism for maintaining affordable
basic local service rates in high cost areas. The California Teleconnect program
offers discounts to eligible schools, libraries, government-owned hospitals and
health care organizations and tax exempt community-based organizations to
encourage the use of advanced telecommunications services. Subsequent to the FCC
order on universal service, the CPUC adopted the FCC discount matrix for schools
and libraries and modified its California Teleconnect program to be compatible.
California operates under a state price cap mechanism. On December 20,
1996, the CPUC approved GTE's 1997 price cap filing. The decision authorized GTE
to collect $27.5 million in rates via a surcharge commencing January 1, 1997.
The 1998 price cap filing did not result in any changes to revenues, however
rate adjustments, effective in 1998, were included as a result of rate and
surcharge integration with the former Contel of California serving territories.
10
<PAGE> 12
Internationally, the accelerated pace of regulatory and competitive change
has continued. In Canada, the Canadian Radio-television and Telecommunications
Commission, the telecommunications regulatory authority, issued an order opening
the market for local services to full competition and implemented a price cap
regime effective January 1, 1998. To meet this competition, aggressive marketing
of customer services and technologically advanced product service offerings have
been implemented to minimize loss of market share. In addition, cost saving
efforts through planned workforce reductions are being implemented. In the
Dominican Republic, competitive pressures for international and local toll
traffic have continued to impact revenues and operating margins. However, the
introduction of new products and services, upgrading and expansion of the
network, as well as the implementation of productivity improvement programs, are
expected to help offset the impact of competition. In Venezuela, a workforce
transformation plan is being implemented to more effectively meet customer needs
and prepare for the opening of competition in telecommunications during the year
2000.
GTE continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable conditions.
GTE intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace. GTE expects its financial results to benefit from reduced costs and
the introduction of new products and services that will result in increased
usage of its telephone and mobile-cellular networks. However, it is likely that
such improvements will be offset, in part, by continued strategic pricing
reductions and the effects of increased competition.
ENVIRONMENTAL MATTERS
GTE and some of its present and former subsidiaries, along with other
unrelated corporations, have been named as potentially responsible parties at a
number of Federal and state "Superfund" sites. These are sites which, although
lawfully used in the past, were determined to require remediation. Remediation
activities by GTE also continue at some present or formerly owned sites pursuant
to other federal or state environmental statutes or regulations. GTE has
reviewed the sites in which it has an involvement to establish expected
remediation costs. Based on this review, the remediation cost at any individual
site or at all sites in the aggregate is not expected to be material. Factors
used to evaluate expected GTE costs include remediation and investigation cost
estimates as well as legal fees, the number of viable parties involved, the
degree of GTE's involvement and past experience. No present value discounting is
used. Although the complexity of environmental regulations and the widespread
imposition of multi-party joint and several liability at Superfund Sites make it
difficult to assess GTE's share of liability, management believes it has made
adequate provision in the financial statements.
GTE's annual expenditures for site cleanups and environmental compliance
have not been and are not expected to be material. These costs include GTE's
share of cleanup and other expenses at remediation sites, outlays required to
keep existing operations in compliance with increasingly stringent environmental
regulations and GTE's underground storage tank replacement program.
ITEM 2. PROPERTIES.
PROPERTIES OF GTE COMPANIES
GTE owns no plant, real property, franchises, or concessions except
indirectly through its investments in subsidiaries.
The properties of GTE's subsidiaries consist principally of land,
structures and equipment required to provide various wireline and wireless
telecommunications services. Substantially all of the properties of the U.S.
telephone subsidiaries are subject to the liens of their respective mortgages
securing funded debt.
11
<PAGE> 13
From January 1, 1993 to December 31, 1997, GTE made capital expenditures of
$21.3 billion for new plant and facilities required to meet telecommunication
service needs and to modernize plant and facilities. These additions were equal
to 38 percent of gross plant of $56 billion at December 31, 1997.
At year-end 1997, access lines served in the United States totaled 21.5
million. In addition, at December 31, 1997, GTE's subsidiary telephone companies
in Canada and the Dominican Republic and GTE's affiliate in Venezuela served 6.1
million access lines. At December 31, 1997, 98 percent of GTE's U.S. access
lines were connected to digital switches, compared with 86 percent in 1993.
During 1997, GTE continued the installation of fiber-optic cable, bringing total
miles installed throughout GTE's domestic network to approximately 1,262,000
miles.
At year-end 1997, GTE had 5 laboratories in the U.S.
All of these properties are generally in good operating condition and
adequate to satisfy the needs of the businesses.
In the fourth quarter of 1995, GTE discontinued the use of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("FAS 71").
In general, FAS 71 required GTE's telephone subsidiaries to depreciate
their telephone plant and equipment over lives approved by regulators that, in
many cases, extended beyond the assets' economic lives. FAS 71 also required the
deferral of certain costs based upon approvals received from regulators to
recover such costs in the future. As a result of these requirements, the
recorded net book value of GTE's assets, primarily telephone plant and
equipment, was in many cases higher than that which would otherwise have been
recorded based on their economic lives. See Note 2 to GTE's Consolidated
Financial Statements included elsewhere herein for the effects of discontinuing
FAS 71 on GTE's recorded property balances.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
At January 31, 1998, there were approximately 484,000 common shareholders
of record.
QUARTERLY FINANCIAL DATA (UNAUDITED)
GTE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1ST QTR 2ND QTR 3RD QTR 4TH QTR
--------- --------- --------- ---------
(Millions of Dollars, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
1997
Revenues and sales...................................... $5,281 $5,692 $5,940 $6,347
Operating income........................................ 1,346 1,406 1,487 1,372
Net income.............................................. 665 671 756 702
------ ------ ------ ------
Earnings per common share(a):
Basic................................................. $.69 $.70 $.79 $.73
Diluted............................................... $.69 $.70 $.79 $.73
------ ------ ------ ------
Dividends declared per common share..................... $.47 $.47 $.47 $.47
------ ------ ------ ------
Stock market price:
High.................................................. $49.38 $47.50 $48.38 $52.25
Low................................................... 43.13 41.13 42.88 40.50
Close................................................. 46.63 43.88 45.38 52.25
------ ------ ------ ------
1996
Revenues and sales...................................... $4,951 $5,293 $5,344 $5,751
Operating income........................................ 1,250 1,339 1,445 1,454
Net income.............................................. 616 642 756 784
------ ------ ------ ------
Earnings per common share(a):
Basic................................................. $.63 $.66 $.78 $.81
Diluted............................................... $.63 $.66 $.78 $.81
------ ------ ------ ------
Dividends declared per common share..................... $.47 $.47 $.47 $.47
------ ------ ------ ------
Stock market price:
High.................................................. $49.25 $45.63 $45.00 $46.50
Low................................................... 40.50 40.88 37.75 38.25
Close................................................. 43.38 44.75 38.50 45.38
------ ------ ------ ------
</TABLE>
- ---------------
(a) In the fourth quarter of 1997, GTE adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share," accordingly prior-period amounts
have been restated to conform to the new requirements (see Notes 2 and 15 to
the Consolidated Financial Statements).
(b) First-quarter 1996 net income includes an after-tax gain on the sale of
nonstrategic domestic local-exchange telephone properties of $8 million, or
$.01 per share (see Note 13 to the Consolidated Financial Statements).
13
<PAGE> 15
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
GTE Corporation
One Stamford Forum
Stamford, CT 06904
203-965-2000
INFORMATION VIA THE INTERNET
World Wide Web users can access information about GTE at:
http://www.gte.com
SHAREHOLDER SYSTEMATIC INVESTMENT PLAN. Under this plan, GTE shareholders
may reinvest their dividends or make optional payments toward the purchase of
additional shares of common stock. Shareholders wishing information about this
plan should contact BankBoston, N.A. at 800-225-5160.
DIVIDEND DIRECT DEPOSIT SERVICE. GTE offers its registered shareholders
the option of having dividends deposited directly into their checking or savings
accounts at any financial institution participating in the Automated Clearing
House (ACH) system. This service is provided at no charge. To sign up for this
service, shareholders should contact BankBoston, N.A. at 800-225-5160.
DIVIDENDS AND EARNINGS. GTE has generally paid its dividends on the first
day of January, April, July and October. Earnings have generally been announced
the third week of January, April, July and October. Shareholders may call
800-225-5160 at BankBoston, N.A. to hear quarterly financial highlights.
SHAREHOLDER SERVICES. BankBoston, N.A., Transfer Agent and Registrar for
GTE's common stock, should be contacted with any questions relating to
shareholder accounts. This includes:
<TABLE>
<S> <C> <C>
- - Account Information - Dividends - Market Prices
- - Transfer Instructions - Statements and Reports
- - Change of Address - Lost Certificates
</TABLE>
Shareholders may call toll free at 800-225-5160 any time, seven days a
week. Customer Service Representatives are available Monday through Friday
between the hours of 8 a.m. and 5 p.m. Eastern Time. Outside the United States
call 781-575-2990.
Or write to:
BankBoston, N.A.
c/o Boston EquiServe, L.P.
P.O. Box 8031
Boston, MA 02266-8031
Shareholders with e-mail addresses can send inquiries to:
http://www.equiserve.com
For overnight delivery services, use the following address:
BankBoston, N.A.
c/o Boston EquiServe, L.P.
Blue Hills Office Park
150 Royall Street
Mail Stop 4502-60
Canton, MA 02021
The BankBoston, N.A. address where shareholders, banks and brokers may
deliver certificates:
Securities Transfers and Reporting Services
55 Broadway
New York, NY 10006
14
<PAGE> 16
ANNUAL MEETING. The 1998 Annual Meeting of Shareholders will be held at 2
p.m. on Wednesday, April 15, at the Italian Center, 1620 Newfield Avenue,
Stamford, Connecticut.
INVESTOR RELATIONS. Security analysts, institutional investors and other
members of the financial community requesting information about GTE should
contact:
Investor Relations Department
GTE Corporation
One Stamford Forum
Stamford, CT 06904
203-965-2789
Int'l Telex: 4750071
Fax: 203-965-2520
http//www.gte.com
STOCK EXCHANGE LISTINGS. GTE Corporation (symbol: GTE) is listed on the
New York Stock Exchange, the Chicago, Pacific and other regional stock exchanges
in the United States and on stock exchanges in Amsterdam, Basel, Geneva,
Lausanne, London, Paris, Zurich and Tokyo.
AUDITORS. Arthur Andersen LLP
400 Atlantic Street
Stamford, CT 06912
REQUESTS FOR ANNUAL REPORTS. Shareholders may obtain an additional printed
copy of this annual report or a copy of the annual Form 10-K filed with the
Securities and Exchange Commission, by calling 1-800-225-5160.
An audiocassette version of the 1997 annual report is available to visually
impaired shareholders by contacting:
Public Affairs and Communications
GTE Corporation
One Stamford Forum
Stamford, CT 06904
203-965-3436
OTHER SECURITIES. Questions regarding the bonds, debentures and preferred
securities of GTE or its subsidiaries should be directed to:
Treasury Department
Capital Markets
GTE Corporation
One Stamford Forum
Stamford, CT 06904
203-965-3425
PRODUCTS AND SERVICES HOTLINE. Shareholders may call 1-800-828-7280 to
receive information concerning GTE products and services.
DIVERSITY AT GTE. GTE strives to be a workplace of choice in which people
of diverse backgrounds are valued, challenged, acknowledged and rewarded,
leading to higher levels of fulfillment and productivity. A copy of our
Diversity at GTE brochure is available upon request from the Corporate
Secretary's Office.
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
GTE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FIVE-YEAR ANNUAL
1997 1996 1995 1994 1993 GROWTH RATE*
------- ------- ------- ------- ------- ----------------
(Millions of Dollars, Except Per-Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues and sales
Local services.................. $ 6,607 $ 6,060 $ 5,743 $ 5,137 $ 5,062 6.5%
Network access services......... 4,923 4,618 4,363 4,348 4,398 1.8
Toll services................... 2,429 2,500 2,548 3,285 3,321 (7.6)
Cellular services............... 2,817 2,562 2,191 1,666 1,178 26.2
Directory services.............. 1,507 1,527 1,383 1,372 1,438 1.6
Other services and sales........ 4,977 4,072 3,729 3,720 3,935 1.8
------- ------- ------- ------- ------- ----
Total revenues and
sales.................. 23,260 21,339 19,957 19,528 19,332 3.5
------- ------- ------- ------- ------- ----
Cost of services and sales........ 9,203 8,071 7,537 7,677 7,848 1.8
Selling, general and
administrative.................. 4,560 4,010 3,689 3,667 3,817 2.4
Depreciation and amortization..... 3,886 3,770 3,675 3,432 3,419 3.5
Restructuring costs............... -- -- -- -- 1,840(a) --
------- ------- ------- ------- ------- ----
Operating income......... 5,611 5,488 5,056 4,752 2,408(b) 12.7
------- ------- ------- ------- ------- ----
Net income (loss)
Income before extraordinary
charges(d).................... 2,794(C) 2,798 2,538 2,441 972 17.1
Consolidated(g)................. 2,794 2,798 (2,144)(e) 2,441 882(f) --
Earnings (loss) per common share
Income before extraordinary
charges(d).................... 2.92(C) 2.89 2.62 2.55 1.03 15.8
Consolidated(g)................. 2.92 2.89 (2.21)(e) 2.55 .93(f) --
Diluted earnings (loss) per common
share
Income before extraordinary
charges(d).................... 2.90 2.88 2.61 2.54 1.03 15.8
Consolidated(g)................. 2.90 2.88 (2.20) 2.54 .93 --
Common dividends declared per
share........................... 1.88 1.88 1.88 1.88 1.85 1.1
Book value per share.............. 8.39 7.62 7.05(e) 10.85 9.96 (6.6)
Average common shares outstanding
(in millions)................... 958 969 970 958 945 1.1
ASSETS AND CAPITAL
Consolidated assets............... 42,142 38,422 37,019(e) 42,500 41,575 (1.1)
Long-term debt and redeemable
preferred stock................. 14,494 13,210 12,744 12,236 13,103 .4
Shareholders' equity.............. 8,038 7,336 6,871(e) 10,483 9,593 (6.5)
Net cash from operations.......... 6,244 5,899 5,033 4,740 5,373 4.7
Capital expenditures.............. 5,128 4,088 4,034 4,192 3,893 4.3
CONSOLIDATED RATIOS AND OTHER
INFORMATION
Return on common equity(g)........ 37.6% 40.2% (20.3)% 24.8% 8.8% --
Return on investment(g)........... 14.5% 15.6% (4.2)% 13.1% 6.9% --
Average common equity............. 7,433 6,960 10,539 9,838 10,030 (5.3)
Equity ratio...................... 36.5% 38.1 37.9%(e) 46.2% 42.6% --
Average investment................ 26,857 24,395 27,150 25,647 27,322 (1.4)
Research and development.......... 122 122 137 139 135 (4.6)
Employees (in thousands)
Total.................... 114 102 106 111 117 (3.0)
United States............ 94 83 85 89 94 (2.6)
------- ------- ------- ------- ------- ----
</TABLE>
- ---------------
Notes to Selected Financial Data appear on following pages
16
<PAGE> 18
SELECTED FINANCIAL DATA
GTE CORPORATION AND SUBSIDIARIES -- (CONTINUED)
<TABLE>
<CAPTION>
FIVE-YEAR ANNUAL
1997 1996 1995 1994 1993 GROWTH RATE*
------- ------- ------- ------- ------- ----------------
(Millions of Dollars, Except Per-Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL OPERATIONS (INCLUDED
ABOVE)(H)
Revenues and sales................ $ 2,902 $ 2,711 $ 2,477 $ 2,483 $ 2,420 4.0
Income before extraordinary
charges......................... 366 339 206 265 321 5.2
Total assets...................... 6,877 6,516 5,808 5,727 5,449 5.4
------- ------- ------- ------- ------- ----
NETWORK STATISTICS
Access minutes of use (in
millions)....................... 79,640 70,452 64,193 59,247 55,864 8.6%
Access lines (in thousands)
Total(i)........................ 27,670 25,766 24,050 22,739 21,972 5.5
United States(i)................ 21,539 20,007 18,512 17,427 17,059 5.2
Switched........................ 18,378 17,416 16,650 16,022 15,915 3.1
------- ------- ------- ------- ------- ----
Wireless subscribers (includes PCS
in thousands)
Total........................... 5,701 4,445 3,547 2,660 1,787 36.1
United States................... 4,487 3,749 3,011 2,339 1,585 32.7
------- ------- ------- ------- ------- ----
Adjusted "POPs" (in millions)(j)
Total........................... 78.9 78.3 76.7 68.0 63.4 6.1
United States................... 61.3 61.9 61.7 53.0 53.0 3.9
------- ------- ------- ------- ------- ----
Domestic Wireline Operations
Revenues and sales.............. $15,134 $13,965 $13,375 $13,212 $13,162 2.6
Operating income(a)............. 4,491 3,982 3,621 3,490 1,962(b) 11.2
Operating cash flow margin(k)... 47.7% 48.3% 47.8% 46.4% 34.7% --
Capital expenditures............ 3,607 2,690 2,564 2,821 2,811 2.7
------- ------- ------- ------- ------- ----
Domestic Cellular Operations
Service revenues................ $ 2,549 $ 2,347 $ 2,019 $ 1,539 $ 1,082 25.9
Operating income................ 449 461 410 278 124 45.6
Operating cash flow margin(k)... 33.5% 36.0% 36.8% 35.3% 31.9% --
Capital expenditures............ 297 600 709 610 389 .8
------- ------- ------- ------- ------- ----
</TABLE>
- ---------------
* Least-squares method; percentages have been omitted where not meaningful.
(a) During 1993, GTE recorded one-time restructuring costs of $1.8 billion,
which reduced net income by $1.2 billion, or $1.22 per share.
(b) Includes a $74 million pretax charge ($46 million after-tax, or $.05 per
share) for the cost of voluntary separation programs at domestic telephone
operations.
(c) Includes costs associated with the new data initiatives that reduced net
income by $242 million, or $.25 per share.
(d) 1996, 1995, 1994 and 1993 include after-tax gains of $8 million, or $.01 per
share; $11 million, or $.01 per share; $162 million, or $.17 per share; and
$91 million, or $.10 per share, respectively, on sales of certain
nonstrategic domestic local-exchange telephone properties.
(e) See Note 2 on Extraordinary Charges.
(f) During 1993, GTE redeemed, prior to scheduled maturity, $2.1 billion of
high-coupon first-mortgage bonds of five of its telephone subsidiaries.
These redemptions resulted in an after-tax extraordinary charge of $90
million (net of tax benefits of $53 million), or $.10 per share.
17
<PAGE> 19
SELECTED FINANCIAL DATA
GTE CORPORATION AND SUBSIDIARIES -- (CONTINUED)
(g) Excluding the special items described in footnotes (a) through (f), net
income, earnings per common share, diluted earnings per share, return on
common equity and return on investment would have been:
<TABLE>
<CAPTION>
FIVE-YEAR ANNUAL
1997 1996 1995 1994 1993 GROWTH RATE*
------ ------ ------ ------ ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net income (in millions)........ $3,036 $2,790 $2,527 $2,279 $2,077 11.2%
Earnings per common share....... 3.17 2.88 2.61 2.38 2.20 10.0
Diluted earnings per common
share......................... 3.16 2.87 2.60 2.37 2.19 10.0
Return on common equity......... 40.6% 40.1% 23.2% 23.3% 20.4% --
Return on investment............ 15.6% 15.5% 12.8% 12.5% 11.2% --
</TABLE>
(h) Includes GTE's international subsidiaries and affiliates.
(i) Access lines exclude 448,000 and 440,000 net lines sold during 1994 and
1993, respectively. Total access lines include 2.7 million, 2.5 million, 2.4
million, 2.3 million and 2.0 million lines served by CANTV in Latin America
in 1997-93, respectively. Excluding the effect of CANTV and the access lines
sold during 1994 and 1993, the five-year total access line growth rate was
5.9%.
(j) Represents population to be served times GTE's percentage interest in
wireless markets.
(k) Represents operating income before depreciation and amortization divided by
revenues.
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Return to Shareholders
GTE's primary objective is to maximize shareholders' long-term total
return, consisting of share-price appreciation and dividends. Total return to
GTE shareholders in 1997 increased to 20% compared with 8% appreciation in 1996.
GTE generated a three-year 1997 average total return of 25.3% compared with the
regional Bell operating companies of 30.6%.
GTE's commitment to shareholder value is supported by clear investment
criteria: investments must be in the Company's integrated telecommunications
business, and they must be expected to earn more than their cost of capital over
time. GTE's commitment to shareholder value is also supported by a policy of
maintaining a dividend payout ratio that is competitive with peer companies.
Consistent with this policy, GTE maintained its dividend at $1.88 per share in
1997, resulting in a dividend payout ratio of 64%.
Consolidated Operations
GTE had another strong year in 1997. Domestically, GTE realized record
growth in access lines and network usage and strong growth in wireless
customers. Internationally, network services revenues grew 7%, driven by
increased usage of network access lines, higher rates in the Canadian operations
and wireless subscriber growth in Canada and the Dominican Republic.
Consolidated net income in 1997 was $3.0 billion, or $3.17 per share,
excluding the impact of data initiatives. This is a 10% earnings per share
growth compared with consolidated net income in 1996 of $2.8 billion, or $2.88
per share, excluding the impact of gains ($8 million, or $.01 per share)
associated with the sale of nonstrategic domestic telephone properties.
Including the effects of the new 1997 data initiatives, reported earnings per
share of $2.92 was achieved on $2.8 billion of net income.
Consolidated revenues and sales grew 9% in 1997 to $23.3 billion compared
with $21.3 billion reported in 1996. Strong volume growth in network services
operations and substantial increases in wireless customers more than offset
lower, more competitive pricing. Outside the U.S., local rate rebalancing
programs in Canada and the Dominican Republic more than offset toll revenue
losses resulting from competitive pressures.
GTE's Network Services experienced record growth, adding 1.5 million access
lines, an increase of 7.7%, and achieving a 13.0% increase in minutes of use.
During 1997, GTE added 738,000 new domestic wireless customers, bringing
total domestic wireless customers to 4,487,000 and total worldwide wireless
customers to 5,701,000, representing a 28.3% growth rate over the 4,445,000
served at the end of 1996.
The rollout of new and expanded services also drove the increase in
revenues. These services, which include interlata long-distance, CentraNet(R),
data and custom-calling features, such as caller ID, call waiting and voice
messaging, increased these revenues 55% to $1.9 billion in 1997. This compares
with $1.2 billion of revenues recorded in 1996. These new services are expected
to continue to contribute a larger percentage of GTE's total revenue stream in
future years as a result of strong business and consumer demand.
Operating income for 1997 reached a record $5.6 billion, up 2% from the
$5.5 billion reported in 1996. The increase was accomplished while investing in
new strategic opportunities, such as the data initiatives, that began in 1997.
Excluding the data initiatives, 1997 operating income from core operations was
$6.0 billion, representing 9% growth over last year. Investments in other
initiatives, such as long distance, PCS, video and GTE SuperPages(R), as well as
GTE's new sales, service and marketing activities, reduced operating income by
$456 million. Net interest expense increased from 1996 levels due to higher debt
balances, partly offset by favorable interest rates. Other expense totaled $48
million in 1997 compared with $50 million in 1996. The slight improvement
reflects GTE's increased ownership in and higher earnings from CANTV, the
Venezuelan telephone company in which GTE has a 25.9% equity interest, and
income from unconsolidated domestic wireless subsidiaries. GTE's effective
income tax rate in 1997 increased to 36.8% from 36.6% in 1996.
19
<PAGE> 21
In 1996, consolidated revenues and sales totaled $21.3 billion compared
with $20.0 billion in 1995. Strong volume growth in telephone operations and
substantial increases in cellular customers more than offset lower, more
competitive pricing. In the U.S., price reductions and regulatory actions
reduced revenues by approximately $160 million and $450 million in 1996 and
1995, respectively.
Operating income in 1996 increased 8.5% over 1995. The increase was due to
higher revenues and ongoing cost reductions from process re-engineering
activities. The increase was partially offset by higher costs associated with
the expansion of core wireline and wireless businesses, as well as investments
in new initiatives. Income was $2.8 billion, or $2.88 per share, in 1996, an
increase of 10% compared with $2.5 billion, or $2.61 per share, in 1995,
excluding special items.
For a discussion of the use of financial instruments and contingencies, see
Notes 9 and 16 to Consolidated Financial Statements. During 1995, GTE adopted
accounting principles appropriate for nonregulated companies and recorded
extraordinary charges totaling $4.7 billion, or $4.83 per share, as discussed in
Note 2 to the Consolidated Financial Statements.
Local Service Revenues
Local service revenues are based on fees charged to customers for providing
local telephone exchange service within designated franchise areas. Local
service revenues increased 9% to $6.6 billion in 1997. This growth was
attributable to adding a record 1.5 million domestic access lines in service
during 1997, a 7.7% growth rate, including a 426,000, or 8.9%, increase in
business lines and a 267,000, or 16.0%, increase in residential second lines.
The growth in second lines is attributable to strong consumer demand for access
to the Internet, online computer services and fax machines. Additionally,
159,000 international access lines were added in 1997.
Network Access Service Revenues
Interstate and intrastate network access service revenues are based on fees
charged to interexchange carriers that use GTE's local-exchange network in
providing long-distance services to their customers. Network access service
revenues of $4.9 billion grew 7% from $4.6 billion in 1996. The impact of the
13.0% growth in minutes of use of GTE's domestic localexchange network for
long-distance calling was partially offset by competitive and
regulatory-mandated rate reductions totaling $120 million.
Toll Service Revenues
Toll service revenues are based on fees charged for service beyond a
customer's local calling area but within the local access transport area (LATA),
and also include revenues of GTE Long Distance service introduced in 1996. Toll
service revenues decreased 3% to $2.4 billion from the 1996 level. This decline
was primarily attributable to price reductions to meet less expensive
competitive access and regulatory-mandated rate reductions. Partially offsetting
these reductions were $274 million of higher revenues related to GTE Long
Distance service.
Cellular Service Revenues
Cellular service revenues grew 10% to $2.8 billion from $2.6 billion in
1996. The growth in revenues was primarily attributable to the growth in
customers both in the U.S. and internationally. Total U.S. customers served at
the end of 1997 reached 4,487,000, an increase of 20% over 1996. Cellular market
penetration increased to 9.1% in 1997 compared with 7.8% in 1996. The revenue
growth was tempered by a decline in revenues per customer per month in the U.S.,
reflecting price competition and continued growth of casual and security users
in the customer base. During the year, revenues per customer in the U.S.
averaged $51 per month compared with $60 in 1996, a 15.0% decline.
20
<PAGE> 22
Directory Services Revenues
Directory services revenues result primarily from the sale of Yellow Pages
advertising and also include fees charged to print, publish and distribute
telephone directories. GTE annually publishes or provides sales and other
directory-related services for approximately 2,600 different directories in 47
states and 16 foreign countries. Directory services revenues declined slightly,
1% to $1.5 billion in 1997.
Other Services and Sales
Other services and sales include revenues from: GTE Government Systems,
which provides integrated telecommunication systems and customized solutions and
equipment to U.S. government defense and civilian agencies as well as commercial
users both domestically and internationally; GTE Airfone, which provides
aircraft-based telecommunication services for passengers; and telephone and
cellular equipment sales and services. In addition, other services and sales
includes revenue from data initiatives of $279 million in 1997. GTE continued
strengthening its data initiatives by acquiring BBN Corporation (BBN) based in
Cambridge, Massachusetts. BBN 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. In total, other services and sales revenues increased to $5.0 billion
in 1997, reflecting an increase of 22% due to the new data initiatives and
higher non-network related equipment and systems sales. During 1997, GTE
Government Systems received orders valued at $1.4 billion, an 18% increase over
1996.
Cost of Services and Sales
Cost of services and sales increased 14% to $9.2 billion in 1997 compared
with $8.1 billion in 1996, primarily reflecting the growth in sales of
telecommunication systems and equipment as well as increased costs associated
with the new initiatives that GTE started over the past two years. Partly
offsetting these increases are productivity improvements such as the rollout of
technologically-advanced systems, thereby reducing labor-intensive processes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 14% in 1997 to $4.6
billion from $4.0 billion in 1996. The growth in these operating costs is
primarily related to higher selling and advertising costs, which grew 34% from
1996 levels. In addition, the increase is associated with the strong customer
growth and support of the data and other new initiatives, within GTE's core
wireline and wireless operations. Partially offsetting these increases were
ongoing cost containment and reduction programs in general and administrative
costs, which have been implemented across all business units, in addition to a
reduction in pension costs due to the purchase of annuities for certain
retirees.
Depreciation and Amortization
Depreciation and amortization increased 3% to $3.9 billion in 1997 compared
with $3.8 billion in 1996. The increase reflects the expansion of the wireline
network to meet demand for additional lines, enhanced calling features and
switched data services, and the continued deployment of enabling technologies
for broadband services. The wireless network was also expanded to provide
significantly higher capacity and to improve service quality. These increases
were partially offset by a reduction in depreciation rates in 1997 to reflect
higher salvage values related to certain telephone plant and equipment.
Other Income and Expense
In 1997, GTE reported other expense of $48 million compared with $50
million in 1996. Other income and expense is comprised primarily of minority
interests and earnings of unconsolidated subsidiaries, including international
ventures and cellular partnerships.
21
<PAGE> 23
Minority interests increased $6 million in 1997 to $245 million as a result
of higher earnings in the Canadian operations. The increase in minority interest
was more than offset by higher income from unconsolidated subsidiaries.
Equity in income of unconsolidated subsidiaries improved considerably in
1997 and 1996. Higher earnings in 1997 of 13% were provided by CANTV. GTE's
results from CANTV were favorably affected by operating improvements stemming
from timely rate increases, productivity gains resulting from employee
reductions, and other cost controls. In addition, 1997 results were favorably
impacted by GTE's increase in its ownership level of CANTV from 20.4% to 25.9%
in the fourth quarter of 1996. In contrast, during 1995, CANTV operated within a
weak economy with currency controls and limited access to international banking
and capital markets. As a result of these conditions, CANTV made a relatively
small contribution to GTE's 1995 earnings.
Due to the high level of inflation in Venezuela, CANTV's financial
performance is highly dependent on its ability to increase tariffs. In 1997-96,
CANTV successfully obtained tariff increases, generally in accordance with the
Concession Agreement with the Venezuelan government.
Regulatory and Competitive Trends
Much of the regulatory and legislative activity that occurred in the U.S.
in 1997 was a direct result of the Telecommunications Act of 1996 (1996 Act)
adopted by Congress. The 1996 Act is intended to promote competition in all
sectors of the telecommunications marketplace, while preserving and advancing
universal telephone service.
The 1996 Act presents GTE with both challenges and opportunities. GTE is
facing additional competition from numerous sources, such as other incumbent
local-exchange carriers, new competitive local-exchange carriers, wireless
carriers, cable television service providers, and long-distance companies.
However, GTE is now permitted to provide a full array of local, long-distance,
Internet-access, wireless, and video services both within and outside of its
traditional operating areas, and thus generate new sources of revenue from
customers previously beyond reach. In fact, GTE now provides long-distance and
Internet-access services to 1,717,000 and 272,000 customers, respectively.
GTE is a strong supporter of competition in all telecommunications markets.
The Company's position remains constant: the benefits of competition should not
be divided between customers or industry segments. There must be fair,
reasonable rules at the state and federal level that enable all service
providers to participate equitably in the marketplace and benefit everyone. GTE
believes the FCC and a number of state regulatory agencies did not establish
these comparable conditions. GTE has consequently exercised its right to
challenge regulatory actions it believes unfairly disadvantage its customers and
shareholders.
In July 1997, the U.S. Eighth Circuit Court released its decision on the
challenge filed in 1996 by GTE and numerous other parties to rules developed by
the FCC to implement the interconnection provisions of the 1996 Act. The prices
for both resold service and network elements were required to be set using a
methodology created by the FCC. The court challenge asserted the FCC's rules
were inconsistent with the 1996 Act. The July 1997 court decision found that the
FCC overstepped its authority in a number of areas, and upheld GTE's position
that state regulatory agencies bear the primary responsibility for determining
the prices which competing firms must pay when interconnecting their networks.
On January 26, 1998, the U.S. Supreme Court announced that it would review this
decision. Oral argument in the Supreme Court is expected to take place in
October 1998, with a final decision likely to be issued no later than June 1999.
This favorable ruling did not impede the progress of competition. GTE has
processed over 100,000 requests from competitors for resold lines, is currently
processing over 20,000 orders per month and expects higher volumes per month in
the future. GTE has finalized more than 350 interconnection agreements with
various competitive local-exchange carriers, and is currently in the process of
negotiating approximately 900 additional agreements. A number of these
interconnection agreements, adopted as a result of the arbitration process
established by the 1996 Act, incorporate prices or terms and conditions based
upon the FCC's rules
22
<PAGE> 24
that were overturned by the Eighth Circuit Court. Thus, GTE has exercised its
right to challenge a number of such agreements. GTE has lawsuits pending in
federal district court in 14 states.
In May 1997, the FCC released two new major decisions related to
implementation of the 1996 Act's provisions: the universal service and access
charge reform orders. The universal service order established the support
mechanisms to ensure continued availability of affordable local telephone
service and created new programs to provide discounted telecommunications
services to schools, libraries and rural health care providers. GTE and numerous
other parties have challenged the FCC's decision before a Federal Court of
Appeals on the grounds that the FCC did not follow the requirements of the 1996
Act to develop a sufficient, explicit and competitively neutral universal
service program. A decision is expected in 1998.
The FCC access charge order revamped the rate structure through which local
and long-distance companies charge customers for using the local phone network
to make long-distance calls. The FCC ordered $18.5 billion in cuts for
longdistance companies to be accomplished by increasing the access charges for
businesses and residential customers with more than one phone line. GTE and
numerous other parties also challenged this decision before a federal appeals
court, charging the FCC: did not eliminate the universal service subsidies
implicit in interstate access charges as directed by the 1996 Act; and created
additional subsidy charges paid only by businesses and multiline residential
customers.
Also in May 1997, the FCC released a decision completing a periodic review
of its price cap regulatory oversight of interstate access charges. GTE and
numerous other local-exchange carriers have challenged this decision before a
Federal Court of Appeals based on the belief that the FCC established a
fundamentally unfair price reduction formula and required retroactive price
reductions. A decision on this challenge is also expected in 1998.
Approximately 62% of GTE's domestic access lines are in 10 states that have
adopted incentive regulation plans for intrastate service, including California,
Florida and Texas, the states where GTE's largest operations are located.
Approximately 72% of the regulated revenues for GTE's domestic telephone
operations are under some form of alternative regulation, including 100% of the
interstate revenues. GTE filed interstate access revisions during 1997 that
became effective June 3, 1997 and July 1, 1997. Overall, these filings resulted
in a net annual price reduction of $103 million. In 1997, the FCC also ordered
significant changes that altered the structure of access charges collected by
GTE, effective January 1, 1998. Generally, the FCC reduced and restructured the
per minute charges paid by long-distance carriers and implemented new per line
charges. The FCC also created an access charge structure that resulted in
different access charges for residential primary and secondary lines and single
line and multiline business lines. In aggregate, the reductions in usage
sensitive access charges paid by long-distance carriers were offset by new per
line charges and the charges paid by end-users.
Internationally, the pace of regulatory and competitive change continued to
accelerate during 1997, which allows GTE the opportunity to more fully
participate in the $600 billion annual world telecom market. Currently, 20% of
the world market operates in a competitive mode, and by the year 2000, this will
have shifted to 80%. Much of this shift is associated with the 1997 World Trade
Organization (WTO) agreement on trade in basic telecommunications. This
agreement was signed by 69 countries that represent 94% of global
telecommunications services.
Across Latin America, intensive efforts to institute market liberalization
are underway with Brazil, Mexico, Ecuador and Guatemala leading the way. In
Venezuela, where GTE is a major participant in a wide range of telecom services
through CANTV, the market is scheduled for competitive liberalization in
November 2000. In Argentina, important regulatory changes have instituted
"calling party pays" in the cellular market. In addition, a decision is in the
courts that could allow GTE's cellular venture CTI to carry its customers'
long-distance calls. Further, CTI has gained the right to bid for a license to
offer PCS service in Buenos Aires, which would extend its service coverage to
the entire country. In the Dominican Republic, CODETEL maintains its solid
position as a full service provider of choice in an increasingly competitive
telecom market.
23
<PAGE> 25
Europe opened its market to extensive competition on January 1, 1998, as
part of its WTO commitment. GTE continues to evaluate the many opportunities
made available by this opening of one of the most prosperous telecom markets in
the world.
In Asia, where GTE's position is growing, massive untapped markets are just
beginning to emerge. GTE is involved in providing fixed wireless service in
northern India, PCS service in Taiwan and paging service in China. Although
China and Taiwan have not currently committed to the WTO agreement, these
countries, along with all of Asia, continue their movement toward market
liberalization. From its base in Asia, GTE will share in the region's growth.
In Canada, GTE already provides a wide range of telecom services through
its BC TEL and Quebec Tel operations. These companies provide the opportunity
for further growth as Canada's market flourishes under that country's
competitive initiatives, which include the implementation of a price cap regime,
rebalancing of local rates and the opening of competition in local service in
British Columbia effective January 1, 1998. The Canadian telephone operations
currently follow accounting prescribed by Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(FAS 71). Given the changes discussed above, GTE's Canadian telephone operations
are studying whether the use of FAS 71 continues to be appropriate. If they were
to determine that the use of FAS 71 was no longer appropriate, they would be
required to write-off certain deferred costs and obligations and reduce the
carrying value of their plant and equipment to the extent that it is considered
unrecoverable. The financial impact of such a determination, which would be non
cash, could be material.
Around the globe, GTE continues to support the orderly transition to
competitive telecommunications markets that allow all efficient service
providers to work together under unbiased laws and regulations to bring the best
in telecommunications services to the consumer.
GTE Growth Initiatives
In 1997, GTE continued to position itself to respond aggressively to
competitive developments and benefit from new opportunities.
In May 1997, GTE announced plans to become a leading national provider of
data communications services that included the acquisition of BBN Corporation, a
leading supplier of end-to-end Internet solutions. BBN Corporation brings
valuable skills, a leading position in the Internet market and an impressive
list of Fortune 500 clients. 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. This expansion of data services continued in
November 1997 with the announcement of the acquisition of Genuity Inc.
(Genuity), a subsidiary of Bechtel Enterprises. Genuity is a premier value-added
provider of distributed application hosting solutions.
During 1997, GTE established an organization that could take advantage of
the new opportunities available as a result of the changing regulatory
environment. GTE Communications Corporation is the enabling marketing and sales
organization, permitting GTE to go beyond its traditional franchise boundaries
and compete effectively in the marketplace. By packaging products and services,
such as traditional wireline, wireless, long-distance and Internet services on
one bill, GTE is positioned to capture high value, high margin customers, both
inside and outside of franchise territories. GTE Communications Corporation is
initially reselling other companies' facilities, including those of GTE's
in-franchise local-exchange carriers. However, as the marketplace dictates,
variations of service delivery may occur that could include the following
possibilities: a GTE network, supporting all information transport (voice, video
and data) over wireline and wireless; a series of alliances; or through least
cost routing as a reseller.
In addition, GTE activated its first PCS wireless network in Cincinnati in
February. PCS wireless networks were also activated in April and May, in Seattle
and Spokane, respectively, completing the PCS market launch. At year end there
were 19,000 customers.
GTE is also actively pursuing expansion of its international operations to
capitalize on opportunities for long-term profitable growth.
24
<PAGE> 26
GTE expanded paging service through a joint venture with a major Chinese
wireless telecommunications operator. This service now encompasses 20 major
metropolitan areas. This effort has generated over 135,000 customers. In January
1997, the government of Taiwan awarded a digital cellular license to Pacific
Cellular Corporation, a consortium in which GTE holds a minority interest as the
only foreign stakeholder. GTE expects to invest approximately $135 million into
this venture. The planned network will include approximately 1,200 cell sites,
representing the largest network on any frequency in the country. Service was
launched in January 1998.
Capital Investment, Resources and Liquidity
Return on Equity
GTE's return on average common equity was 40.6% in 1997 compared with 40.1%
in 1996, excluding the impact of data initiatives and the 1996 gains on the
sales of certain nonstrategic domestic telephone properties.
Capitalization
GTE targets a capital structure and overall credit position that is
appropriate for an "A" rated company. This allows GTE's shareholders to enjoy
the benefits of prudent and reasonable financial leverage, while also protecting
debtholder interests and ensuring ready access to the capital markets.
In June 1996, Moody's raised its rating on GTE Corporation's senior debt to
A3 from Baa1 and in March 1997, Standard & Poor's raised its rating on GTE
Corporation's senior debt to A from A-. In October 1997, due to the proposed
offer to merge with MCI, the rating was reduced to Baa1 by Moody's. Although MCI
has approved an alternate offer, GTE's offer remains open. Due to the
uncertainty of the closing of the other offer for MCI and GTE's open offer, four
major rating agencies have continued a negative "watch listing" on GTE's debt
rating.
During 1997, GTE renegotiated its two syndicated credit facilities totaling
$4.0 billion, including a five-year line of $2.5 billion for GTE Corporation and
a 364-day line of $1.5 billion for certain domestic telephone operating
subsidiaries. Fifty-four banks representing 12 countries participated in these
syndicated facilities, which will be used primarily to back up commercial paper
borrowings. In December 1997, GTE negotiated bilateral credit agreements for an
additional $2.0 billion in credit capacity. These facilities, which are shared
by GTE Corporation and certain domestic telephone operating subsidiaries, are
aligned with the maturity date of the existing 364-day line. The additional
capacity provides greater flexibility to incur additional indebtedness of a
shorter-term duration during periods when it may not be desirable to access the
capital markets to refinance short-term debt.
In June 1997, GTE's Board of Directors approved the filing of a $3 billion
shelf registration statement with the Securities and Exchange Commission that
included the establishment of a public Medium-Term Note (MTN) program. The
benefits of an MTN program include lower rates than traditional debentures due
to more flexibility with regard to amounts issued, timing and speed to market.
Notes issued under the MTN program have received the same credit ratings as GTE
Corporation's debentures.
Total equity as a percentage of total capitalization was 36.5% at the end
of 1997 compared with 38.1% in 1996.
Cash Flow
GTE's cash flow from operations increased to $6.2 billion in 1997 from $5.9
billion in 1996, reflecting the improved 1997 operating results from domestic
and international operations. The improvement in operating results is reflected
in the "Earnings before income taxes plus depreciation and amortization"
(EBITDA) performance measure. EBITDA represents operating income, adjusted to
include the net earnings from unconsolidated subsidiaries less minority
interest, plus depreciation and amortization. For 1997, EBITDA amounted to $9.6
billion, reflecting a favorable increase of $249 million.
25
<PAGE> 27
Capital expenditures totaled $5.1 billion in 1997, a 25% increase from the
$4.1 billion spent in 1996. The majority of the 1997 new investments were made
to meet demands of growth, modernize facilities and continue to position GTE as
the low-cost provider of high-quality voice, data and video telecommunications
services. Other expenditures were made to improve and expand GTE's wireless and
data networks, including an approximately $264 million initial investment to
build a state-of-the-art national fiber-optic network. GTE expects capital
expenditures to remain at approximately the same level in 1998. Reduced capital
requirements within GTE's core wireline business are expected to be partially
offset by increased expenditures on GTE's new data initiatives.
Additional cash used in investing activities totaled $845 million during
1997. Acquisitions and investments in the new data initiatives accounted for a
majority of the increase and included approximately $625 million to acquire all
of the outstanding shares of BBN. In addition, approximately $90 million was
used to acquire Genuity Inc., whose applications enable customers to transfer
their business applications to the Internet.
In 1997-95, GTE announced plans to repurchase up to 20, 25 and 20 million
shares, respectively, of its currently issued common stock from time to time,
depending on market conditions. The shares will be used to satisfy the
requirements of GTE's employee benefit and dividend reinvestment programs. Of
the announced repurchase plans, a total of 38.8 million shares had been
repurchased under the 1996 and 1995 programs. Cash used for the purchase of
these shares was $1.7 billion. Repurchases under the 1997 program will continue
in the future, considering the Company's targeted credit profile, stock price
and related factors.
In 1996, GTE's cash flow from operations increased to $5.9 billion from
$5.0 billion in 1995, reflecting improved 1996 operating results.
Capital expenditures totaled $4.1 billion in 1996, about $50 million more
than the 1995 level. The 1996 total reflected expenditures used for the
deployment of broadband video networks in California and Florida, buildout of
the new wireless PCS networks and other requirements to support new revenue
growth initiatives and expanded service capabilities, partially offset by lower
spending on domestic cellular networks. Other investing activity included $190
million for the purchase of CANTV shares during the initial public offering by
the government of Venezuela and subsequent market purchases.
In 1998, the funding of dividends and capital requirements for GTE's
businesses will be substantially sourced by cash from operations, although GTE's
strong financial position allows ready access to worldwide capital markets for
any additional cash requirements.
Forward-Looking Statements
GTE estimates that core earnings per share from operations will grow not
less than 10% in 1998, and that for 1999 and beyond consolidated earnings per
share, including the effects of the data initiatives, will grow at an
accelerated level of 30% to 50% higher than the previous guidance of 10%.
Consolidated revenue growth will accelerate from the current 9% growth rate to
10% to 12% over the longer term, with much of that growth driven by expanded
services like long-distance, video, value-added data communications and
Internet-related services. In addition, the new marketing and sales initiative
will generate significant revenue growth through sales of bundled services.
Operating margins for domestic telephone operations are expected to be
consistent with margins achieved in 1997.
GTE has projected domestic wireless operations will grow consistent with
the industry. Cellular revenues per customer, however, is expected to continue a
downward trend as more residential customers sign up and new competitors enter
the market.
GTE continues to project that the amount of net income contributed by its
international operations in 1995 will double by the year 2000.
26
<PAGE> 28
Risk Management
GTE views derivative financial instruments as risk management tools and, in
accordance with Company policy, does not utilize them for speculative or trading
purposes. GTE is also not a party to any leveraged derivatives. GTE is exposed
to market risk from changes in interest rates and foreign currency exchange
rates, as well as changes in the market price of GTE's common stock. GTE manages
its exposure to market risks through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments that have been authorized pursuant to the Company's policies and
procedures. The use of these derivatives allows GTE to reduce its overall
exposure to market risk, as the gains and losses on these contracts
substantially offset the gains and losses on the liabilities being hedged. In
addition, GTE enters into derivative financial instruments with a diversified
group of major financial institutions in order to manage its exposure to
nonperformance on such instruments.
GTE uses derivative financial instruments to manage its exposure to
interest rate movements and to reduce borrowing costs. GTE's net exposure to
interest rate risk primarily consists of floating rate instruments that are
benchmarked to U.S. and European short-term money market interest rates. GTE
manages this risk by using interest rate swaps to convert floating-rate
long-term and short-term debt to synthetic fixed rate instruments. GTE also uses
forward interest rate swaps and forward contracts to sell U.S. Treasury bonds to
hedge interest rates on anticipated long-term debt issuances.
Based on GTE's interest rate sensitive derivative financial instruments
outstanding at December 31, 1997, a 100 basis point increase in interest rates
as of December 31, 1997 would result in a net increase in the market value of
these instruments of $96 million. Conversely, a 100 basis point decrease in
interest rates would result in a $108 million net reduction in the market value
of these instruments. Any increase or decrease in the market value of GTE's
interest rate sensitive derivative financial instruments would be substantially
offset by a corresponding decrease or increase in the market value of the
underlying liability or anticipated debt issuance.
GTE uses foreign currency derivative instruments to reduce its exposure to
adverse changes in foreign currency rates. The use of these derivatives allows
GTE to reduce its overall exposure to exchange rate fluctuations, as the gains
and losses on these contracts substantially offset the gains and losses on the
liabilities being hedged. The Company's exposure to foreign exchange rates
primarily exists with the British pound and the Canadian dollar. As of December
31, 1997, GTE's exposure resulting from fluctuations in foreign currency
exchange rates was not material.
In the past, GTE issued stock options to certain of its employees that had
tandem stock appreciation rights. To minimize GTE's exposure to compensation
expense related to these stock appreciation rights, GTE purchased long-term call
options on its common stock. As of December 31, 1997, a $5 change in the
per-share price of GTE's common stock would impact GTE's pretax earnings by $50
million. However, gains and losses recognized on granted employee options are
substantially offset by gains and losses recognized on the purchased call
options.
Year 2000 Conversion
The Year 2000 issue has an industry-wide impact. GTE has had an active Year
2000 Program in place. The GTE Year 2000 methodology and processes were
certified in 1997 by the Information Technology Association of America. This
program is necessary because the Year 2000 issue would impact systems, networks
and business processes at GTE. This program includes: inventory; assessment and
analysis of systems, networks and business processes; remediation of any
impacted software; and validation testing. The current estimate for the cost of
remediation for GTE and affiliates is approximately $350 million. Year 2000
remediation costs are expensed in the year incurred. Through 1997, expenditures
totaled $67 million. GTE currently has approximately 1,200 full time equivalents
(company employees and contractors) mobilized throughout its business units to
address the Year 2000 issue. Continued success is dependent on the timely
delivery of Year 2000 compliant products and services from its suppliers. GTE
currently believes that its essential processes, systems and business functions
will be ready for the millennium transition.
27
<PAGE> 29
Risk Factors
GTE's forward-looking statements are based upon a series of projections and
estimates regarding the economy, the telecommunications industry, the effects of
federal, state and local regulations on the industry in general and within GTE's
markets, as well as key performance indicators that affect the company directly.
These projections and estimates regarding the economy and the telecommunications
industry relate to the demand for and pricing of services, the effects of
competition, the impact of universal service and the success of new products,
services and new businesses such as bundled services through the new marketing
and sales initiative, value-added data communications, Internet-related
services, long distance and video.
With regard to the effects of regulation, GTE has assumed fair and
reasonable resolutions to any pending and potential federal, state and local
regulatory initiatives and proceedings, including arbitration proceedings before
various state regulatory commissions. GTE has assumed that the favorable rulings
of the Court of Appeals for the Eighth Circuit regarding the terms of
interconnection, unbundled network elements and resale rates will be upheld by
the U.S. Supreme Court, which announced it would review this decision.
The risk management discussion and the estimated exposures included herein
are forward-looking statements of market risk assuming certain adverse market
conditions occur. Actual results in the future may differ significantly from
these estimated exposures due to actual developments in the global financial
markets. The analysis methods used by the company to assess and mitigate risk
should not be considered projections or forecasts of future events or losses.
In developing its forward-looking statements, GTE has made certain
assumptions relating to key performance indicators that have a direct bearing on
GTE's ability to attain these projections. These assumptions include the
continued annual growth of telephone access lines and minutes of use, new and
expanded services, wireless volumes, and customer growth. They also assume
productivity improvements and the absence of disruption to GTE's markets.
If future events and actual performance differ from that assumed for the
risk factors noted above, GTE's actual results could vary significantly from the
performance projected in the forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements included elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AS OF DECEMBER 31,
1997(a).
EXECUTIVE OFFICERS OF GTE
<TABLE>
<CAPTION>
DATE
ASSUMED
PRESENT
NAME(B) TITLE AGE POSITION
------- ----- --- ---------
<S> <C> <C> <C>
Charles R. Lee............ Chairman and Chief Executive Officer 58 May 1992
Kent B. Foster............ President 54 June 1995
Michael T. Masin(c)....... Vice Chairman and 53 June 1995
President -- International
Thomas W. White........... Senior Executive Vice President -- Market
Operations, GTE Service Corporation 51 June 1997
William P. Barr(d)........ Executive Vice President -- Government and
Regulatory Advocacy and General Counsel 47 June 1997
George H. Conrades(e)..... Executive Vice President and President --
GTE Internetworking 59 July 1997
Armen Der Marderosian..... Executive Vice President -- Technology
and Systems 60 June 1997
J. Michael Kelly.......... Executive Vice President -- Finance and
Planning 41 June 1997
J. Randall MacDonald...... Executive Vice President -- Human
Resources
and Administration 49 June 1997
Dan J. Cohrs(f)........... Vice President -- Corporate Planning and
Development, GTE Service Corporation 45 July 1997
William M. Edwards, III... Vice President and Controller 49 July 1997
Daniel P. O'Brien......... Vice President and Treasurer 43 July 1997
</TABLE>
- ---------------
(a) Reference is made to pages 22 to 26 of GTE's Proxy Statement covering the
Annual Meeting of Shareholders to be held on April 15, 1998, which is
incorporated herein by reference, for information concerning directors of
GTE.
(b) Prior to serving as executive officers of GTE, each of the officers named
has been employed in high-level management positions by GTE or a GTE
subsidiary for more than five years, with the exception of Michael T. Masin,
William P. Barr, George H. Conrades and Dan J. Cohrs.
(c) Mr. Masin joined GTE as Vice Chairman effective October 20, 1993. He was
also elected President -- International on June 30, 1995. He had been a
director of GTE since 1989. Prior to joining GTE as Vice Chairman, he was
the Managing Partner of the New York Office of O'Melveny & Myers and
Co-chair of the firm's international practice group. Mr. Masin joined the
firm in 1969 and became a partner in 1977.
(d) Mr. Barr was elected Executive Vice President -- Government and Regulatory
Advocacy and General Counsel effective June 5, 1997. He had served as Senior
Vice President and General Counsel since 1994. Prior to joining GTE, he was
a partner in the Washington, D.C. office of the law firm of Shaw, Pittman,
Potts & Trowbridge since 1993. He served as Attorney General of the United
States from 1991 to 1993. Mr. Barr joined the Department of Justice as
Assistant Attorney General in charge of the Office of Legal Counsel in 1989,
and subsequently served as Deputy Attorney General prior to his appointment
as Attorney General.
(e) Mr. Conrades was elected Executive Vice President and President -- GTE
Internetworking effective July 9, 1997. He served as president and chief
executive officer of BBN Corporation since January 1994.
29
<PAGE> 31
Prior to joining BBN, he had been employed for more than 30 years at IBM,
most recently as Senior Vice President and General Manager of IBM United
States.
(f) Mr. Cohrs was elected Vice President -- Corporate Planning and Development,
GTE Service Corporation, effective July 9, 1997. He had previously served as
Vice President and Treasurer since 1995 and had been Assistant
Treasurer -- Capital Markets of GTE Service Corporation since June 1993.
Prior to joining GTE, he had been Vice President -- International Finance
for Northwest Airlines ("Northwest") in Tokyo, and before that was
Northwest's Vice President -- Capital Markets.
ITEM 11. EXECUTIVE COMPENSATION.
See pages 6 to 20 of GTE's Proxy Statement covering the Annual Meeting of
Shareholders to be held on April 15, 1998, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See pages 20 to 22 of GTE's Proxy Statement covering the Annual Meeting of
Shareholders to be held on April 15, 1998, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See page 20 of GTE's Proxy Statement covering the Annual Meeting of
Shareholders to be held on April 15, 1998, which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
Consolidated Financial Statements -- GTE Corporation and
Subsidiaries:
See GTE's consolidated financial statements and report of
independent public accountants thereon in the Financial Statements
section included elsewhere herein.
2. Financial Statement Schedules:
Schedules Supporting the Consolidated Financial Statements for the
Years Ended December 31, 1997 -- 1995 (as required):
II -- Valuation and Qualifying Accounts
Note: Schedules other than the one listed above are omitted as not
applicable, not required, or the information is included in the
consolidated financial statements or notes thereto.
3. Exhibits:
See "Index of Exhibits" included elsewhere herein.
(b) GTE filed a report on Form 8-K dated October 15, 1997, under Item 5,
"Other Events", and Item 7, "Financial Statements and Exhibits." No
financial information was filed with this report.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 6th day, March
1998.
GTE CORPORATION
--------------------------------------
(Registrant)
By /s/ WILLIAM M. EDWARDS, III
------------------------------------
(William M. Edwards, III)
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
(1) Principal executive officer:
By /s/ CHARLES R. LEE March 7, 1998
- --------------------------------------------
(Charles R. Lee)
Chairman of the Board and
Chief Executive Officer
(2) Principal financial officer:
By /s/ J. MICHAEL KELLY March 6, 1998
- --------------------------------------------
(J. Michael Kelly)
Executive Vice President -- Finance
and Planning
(3) Principal accounting officer:
By /s/ WILLIAM M. EDWARDS, III March 6, 1998
- --------------------------------------------
(William M. Edwards, III)
Vice President and Controller
(4) Directors:
By /s/ EDWIN L. ARTZT March 7, 1998
- --------------------------------------------
(Edwin L. Artzt -- Director)
By /s/ JAMES R. BARKER March 7, 1998
- --------------------------------------------
(James R. Barker -- Director)
By /s/ EDWARD H. BUDD March 7, 1998
- --------------------------------------------
(Edward H. Budd -- Director)
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
By /s/ ROBERT F. DANIELL March 7, 1998
- --------------------------------------------
(Robert F. Daniell -- Director)
By /s/ KENT B. FOSTER March 7, 1998
- --------------------------------------------
(Kent B. Foster -- Director)
By /s/ JAMES L. JOHNSON March 7, 1998
- --------------------------------------------
(James L. Johnson -- Director)
By /s/ RICHARD W. JONES March 7, 1998
- --------------------------------------------
(Richard W. Jones -- Director)
By /s/ JAMES L. KETELSEN March 7, 1998
- --------------------------------------------
(James L. Ketelsen -- Director)
By /s/ CHARLES R. LEE March 7, 1998
- --------------------------------------------
(Charles R. Lee -- Director)
By /s/ MICHAEL T. MASIN March 7, 1998
- --------------------------------------------
(Michael T. Masin -- Director)
By /s/ SANDRA O. MOOSE March 7, 1998
- --------------------------------------------
(Sandra O. Moose -- Director)
By /s/ RUSSELL E. PALMER March 7, 1998
- --------------------------------------------
(Russell E. Palmer -- Director)
By /s/ ROBERT D. STOREY March 7, 1998
- --------------------------------------------
(Robert D. Storey -- Director)
</TABLE>
32
<PAGE> 34
FINANCIAL STATEMENTS
33
<PAGE> 35
CONSOLIDATED STATEMENTS OF INCOME
GTE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1997 1996 1995
------- ------- -------
(Millions of Dollars, Except
Per-Share Amounts)
<S> <C> <C> <C>
REVENUES AND SALES
Local services.............................................. $ 6,607 $ 6,060 $ 5,743
Network access services..................................... 4,923 4,618 4,363
Toll services............................................... 2,429 2,500 2,548
Cellular services........................................... 2,817 2,562 2,191
Directory services.......................................... 1,507 1,527 1,383
Other services and sales.................................... 4,977 4,072 3,729
------- ------- -------
Total revenues and sales.......................... 23,260 21,339 19,957
------- ------- -------
OPERATING COSTS AND EXPENSES
Cost of services and sales.................................. 9,203 8,071 7,537
Selling, general and administrative......................... 4,560 4,010 3,689
Depreciation and amortization............................... 3,886 3,770 3,675
------- ------- -------
Total operating costs and expenses................ 17,649 15,851 14,901
------- ------- -------
OPERATING INCOME............................................ 5,611 5,488 5,056
OTHER (INCOME) EXPENSE
Interest -- net............................................. 1,145 1,026 1,047
Other -- net................................................ 48 50 5
------- ------- -------
Income before income taxes.................................. 4,418 4,412 4,004
Income taxes................................................ 1,624 1,614 1,466
------- ------- -------
Income before extraordinary charges......................... 2,794 2,798 2,538
Extraordinary charges....................................... -- -- (4,682)
------- ------- -------
NET INCOME (LOSS)........................................... $ 2,794 $ 2,798 $(2,144)
------- ------- -------
EARNINGS (LOSS) PER COMMON SHARE
Before extraordinary charges................................ $ 2.92 $ 2.89 $ 2.62
Extraordinary charges....................................... -- -- (4.83)
------- ------- -------
NET INCOME (LOSS)........................................... $ 2.92 $ 2.89 $ (2.21)
------- ------- -------
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Before extraordinary charges................................ $ 2.90 $ 2.88 $ 2.61
Extraordinary charges....................................... -- -- (4.81)
------- ------- -------
NET INCOME (LOSS)........................................... $ 2.90 $ 2.88 $ (2.20)
------- ------- -------
AVERAGE COMMON SHARES OUTSTANDING (IN MILLIONS)
Basic....................................................... 958 969 970
Diluted..................................................... 962 972 973
------- ------- -------
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE> 36
CONSOLIDATED BALANCE SHEETS
GTE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
--------- ---------
(Millions of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 551 $ 405
Receivables, less allowances of $333 and $299............... 4,782 4,482
Inventories and supplies.................................... 846 673
Deferred income tax benefits................................ 51 200
Other....................................................... 307 273
------- -------
Total current assets.............................. 6,537 6,033
------- -------
Property, plant and equipment, net.......................... 24,080 22,902
Prepaid pension costs....................................... 4,361 3,639
Franchises, goodwill and other intangibles.................. 3,232 2,507
Investments in unconsolidated companies..................... 2,335 2,035
Other assets................................................ 1,597 1,306
------- -------
Total assets...................................... $42,142 $38,422
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term obligations, including current maturities........ $ 3,398 $ 2,497
Accounts payable and accrued expenses....................... 4,672 4,156
Taxes payable............................................... 771 754
Dividends payable........................................... 466 472
Other....................................................... 534 435
------- -------
Total current liabilities......................... 9,841 8,314
------- -------
Long-term debt.............................................. 14,494 13,210
Employee benefit plans...................................... 4,756 4,688
Deferred income taxes....................................... 1,782 1,474
Minority interests.......................................... 2,253 2,316
Other liabilities........................................... 978 1,084
------- -------
Total liabilities................................. 34,104 31,086
------- -------
SHAREHOLDERS' EQUITY
Common stock -- shares issued 984,252,887 and 980,911,281... 49 49
Additional paid-in capital.................................. 7,317 7,248
Retained earnings........................................... 2,372 1,370
Guaranteed ESOP obligations................................. (550) (575)
Treasury stock -- 26,253,088 and 17,813,275 shares, at
cost...................................................... (1,150) (756)
------- -------
Total shareholders' equity........................ 8,038 7,336
------- -------
Total liabilities and shareholders' equity........ $42,142 $38,422
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE> 37
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1997 1996 1995
------- ------- -------
(Millions of Dollars)
<S> <C> <C> <C>
OPERATIONS
Income before extraordinary charges......................... $ 2,794 $ 2,798 $ 2,538
Adjustments to reconcile income before extraordinary charges
to net cash from operations:
Depreciation and amortization............................. 3,886 3,770 3,675
Deferred income taxes..................................... 456 415 484
Changes in current assets and current liabilities,
excluding the effects of acquisitions and dispositions:
Receivables -- net..................................... (622) (571) (561)
Other current assets................................... (220) 26 (92)
Accrued taxes and interest............................. 86 (109) (25)
Other current liabilities.............................. 405 (220) (598)
Other -- net.............................................. (541) (210) (388)
------- ------- -------
Net cash from operations.......................... 6,244 5,899 5,033
------- ------- -------
INVESTING
Capital expenditures........................................ (5,128) (4,088) (4,034)
Acquisitions and investments................................ (927) (476) (798)
Proceeds from sales of assets............................... 73 337 314
Other -- net................................................ 9 (50) 17
------- ------- -------
Net cash used in investing........................ (5,973) (4,277) (4,501)
------- ------- -------
FINANCING
Common stock issued......................................... 288 444 385
Purchase of treasury stock.................................. (576) (967) (133)
Dividends paid.............................................. (1,802) (1,825) (1,827)
Long-term debt and preferred securities issued.............. 2,407 2,038 1,098
Long-term debt and preferred securities retired............. (2,417) (582) (1,553)
Increase (decrease) in short-term obligations, excluding
current maturities........................................ 2,015 (725) 1,529
Other -- net................................................ (40) 68 (22)
------- ------- -------
Net cash used in financing........................ (125) (1,549) (523)
------- ------- -------
Increase in cash and cash equivalents....................... 146 73 9
Cash and cash equivalents:
Beginning of year...................................... 405 332 323
------- ------- -------
End of year............................................ $ 551 $ 405 $ 332
------- ------- -------
CASH PAID DURING THE YEAR FOR
Interest............................................... $ 1,282 $ 1,088 $ 1,133
Income taxes........................................... 1,057 1,325 985
------- ------- -------
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE> 38
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
GTE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
ADDITIONAL RETAINED GUARANTEED
PREFERRED COMMON PAID-IN EARNINGS ESOP TREASURY
STOCK STOCK CAPITAL (DEFICIT) OBLIGATIONS STOCK TOTAL
--------- ------ ---------- --------- ----------- -------- -------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY, DECEMBER 31,
1994............................... $ 10 $48 $7,627 $ 3,422 $(624) $ -- $10,483
Net loss............................. (2,144) (2,144)
Dividends declared................... (1,824) (1,824)
Common and treasury stock issued
under employee and shareholder
plans (13,564,835 shares).......... 1 369 43 413
Purchase of treasury stock (3,589,200
shares)............................ (133) (133)
Retirement of preferred stock
(265,895 shares)................... (10) (10)
Other................................ 53 12 21 86
---- --- ------ ------- ----- ------- -------
SHAREHOLDERS' EQUITY, DECEMBER 31,
1995............................... -- 49 8,049 (534) (603) (90) 6,871
Net income........................... 2,798 2,798
Dividends declared................... (915) (905) (1,820)
Common and treasury stock issued
under employee and shareholder
plans (11,570,646 shares).......... 110 340 450
Purchase of treasury stock
(23,533,200 shares)................ (1,006) (1,006)
Other................................ 4 11 28 43
---- --- ------ ------- ----- ------- -------
SHAREHOLDERS' EQUITY, DECEMBER 31,
1996............................... -- 49 7,248 1,370 (575) (756) 7,336
Net income........................... 2,794 2,794
Dividends declared................... (1,800) (1,800)
Common and treasury stock issued
under employee and shareholder
plans (6,620,993 shares)........... 146 142 288
Purchase of treasury stock
(11,719,200 shares)................ (536) (536)
Other................................ (77) 8 25 (44)
---- --- ------ ------- ----- ------- -------
SHAREHOLDERS' EQUITY, DECEMBER 31,
1997............................... $ -- $49 $7,317 $ 2,372 $(550) $(1,150) $ 8,038
---- --- ------ ------- ----- ------- -------
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
GTE Corporation and subsidiaries (GTE) is one of the largest
telecommunications companies in the world. GTE's domestic and international
operations serve 27.7 million access lines in the United States, Canada, the
Dominican Republic and Venezuela. GTE is a leading wireless operator in the
United States, with the potential of serving 61.3 million wireless and personal
communications services customers. Outside the United States, GTE operates
wireless networks serving some 17.6 million POPs through subsidiaries in Canada
and the Dominican Republic and affiliates in Venezuela and Argentina. GTE
provides internetworking services ranging from dial-up Internet access for
residential and small business consumers to Web-based applications for Fortune
500 companies. GTE is also a leader in government and defense communications
systems and equipment, directories, telecommunications-based information
services and systems and aircraft-passenger telecommunications.
Basis of Presentation
GTE prepares its consolidated financial statements in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amounts. Actual results could
differ from those estimates.
The consolidated financial statements of GTE include the accounts of all
majority-owned subsidiaries. All significant intercompany amounts have been
eliminated. Investments in 20%-50% owned companies are accounted for on the
equity basis. Investments of less than 20% are generally accounted for on the
cost basis.
Reclassifications of prior-year data have been made, where appropriate, to
conform to the 1997 presentation.
Revenue Recognition
Revenues are generally recognized when services are rendered or products
are delivered to customers. Long-term contracts are generally accounted for
using the percentage of completion method, with revenues recognized in the
proportion that costs incurred bear to the estimated total costs at completion.
Expected losses on such contracts, if any, are charged to income currently.
Depreciation and Amortization
All subsidiaries provide for depreciation on a straight-line basis over the
estimated economic lives of their assets. Prior to 1996, GTE's telephone
subsidiaries provided for depreciation on a straight-line basis over asset lives
approved by regulators (see Note 2).
Franchises, goodwill and other intangibles are amortized on a straight-line
basis over the periods to be benefited or 40 years, whichever is less.
Amortization expense for consolidated subsidiaries was $143 million, $90 million
and $87 million in 1997-95, respectively. Accumulated amortization was $677
million and $488 million at December 31, 1997 and 1996, respectively.
Goodwill resulting from investments in unconsolidated subsidiaries is
amortized on a straight-line basis over the periods to be benefited or 40 years,
whichever is less.
Foreign Currency Translation
Assets and liabilities of subsidiaries operating in foreign countries are
translated into U.S. dollars using the exchange rates in effect at the balance
sheet date. Results of operations are translated using the average exchange
rates prevailing throughout the period. The effects of exchange rate
fluctuations on translating foreign currency assets and liabilities into U.S.
dollars are included in shareholders' equity. Translation gains and losses of
affiliates operating in highly-inflationary economies are included in net income
as they occur.
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Material curtailment/settlement gains
and losses associated with employee separations are recognized in the period in
which they occur.
Income Taxes
Deferred tax assets and liabilities are established for temporary
differences between the way certain income and expense items are reported for
financial reporting and tax purposes and are subsequently adjusted to reflect
changes in tax rates expected to be in effect when the temporary differences
reverse. A valuation allowance is established for deferred tax assets for which
realization is not likely.
Deferred income taxes are not provided on undistributed earnings of foreign
subsidiaries, aggregating approximately $612 million at December 31, 1997, as
such earnings are expected to be permanently reinvested in these companies.
Earnings Per Common Share
In the fourth quarter of 1997, GTE adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128), which supersedes
Accounting Principles Board Opinion No. 15. Under FAS 128, earnings per common
share is computed by dividing net income (loss) available to common stockholders
by the weighted-average number of common shares outstanding during 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 or resulted in the issuance of common stock. Prior-period
amounts have been restated, where appropriate, to conform to the requirements of
FAS 128 (see Note 15).
Cash and Cash Equivalents
Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
Financial Instruments
GTE uses a variety of financial instruments to hedge its exposure to
fluctuations in interest and foreign exchange rates and in compensation expense
related to GTE's common stock price appreciation. The Company does not use
financial instruments for speculative or trading purposes, nor is the Company a
party to leveraged derivatives. Amounts to be paid or received under interest
rate swaps are accrued as interest expense. Gains or losses on foreign exchange
contracts are recognized based on changes in exchange rates, as are offsetting
foreign exchange gains or losses on the foreign currency obligations being
hedged. Gains or losses on long-term call options on GTE's common stock, which
hedge GTE's exposure to compensation expense related to outstanding stock
appreciation rights (SARs), are recognized based on fluctuations in the market
price of GTE's common stock. Gains or losses recognized on these call options
offset SARs expense or income in GTE's consolidated statements of income.
Inventories and Supplies
Inventories and supplies are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. EXTRAORDINARY CHARGES
In response to legislation and the increasingly competitive environment in
which telephone subsidiaries operate, GTE discontinued the use of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71), in the fourth quarter of 1995.
As a result of the decision to discontinue FAS 71, GTE recorded a noncash,
after-tax extraordinary charge of $4.6 billion (net of tax benefits of $2.8
billion), or $4.79 per share, in the fourth quarter of 1995. The charge
primarily represented a reduction in the net book value of telephone plant and
equipment of domestic telephone subsidiaries through an increase in accumulated
depreciation. GTE shortened the depreciable lives of its telephone plant and
equipment in 1996, which ranged from 11 to 30 years, to 8 to 20 years for
circuit equipment, switching equipment, copper and fiberoptic cable.
In addition, during 1995, GTE redeemed, prior to their stated maturity, 12
series of its preferred stock totaling $71 million, including $10 million of
perpetual preferred, and $932 million of its telephone operating subsidiaries'
long-term debt. These redemptions resulted in an after-tax extraordinary charge
of $41 million (net of tax benefits of $21 million), or $.04 per share.
3. INVESTMENTS IN UNCONSOLIDATED COMPANIES
GTE's investments in unconsolidated subsidiaries include its investments in
Compania Anonima Nacional Telefonos de Venezuela (CANTV) and Compania de
Telefonos del Interior (CTI) as well as its investments in cellular partnerships
in the U.S. and other international investments.
During the fourth quarter of 1996, GTE increased its ownership in CANTV
from 20.4% to 25.9% through the purchase of $190 million of additional shares in
connection with the initial public offering of CANTV shares by the Venezuelan
government and subsequent market purchases. CANTV is the primary provider for
local, national long-distance and international long-distance telephone service
in Venezuela. CANTV also provides other telecommunications and related services,
including cellular, Internet access and directory advertising services. At
December 31, 1997 and 1996, GTE had an investment in CANTV of $1.6 billion and
$1.5 billion, including $787 million and $812 million of goodwill, respectively.
GTE has a 25.5% ownership interest in CTI, an international consortium
providing cellular services in the north and south interior regions of
Argentina. At December 31, 1997 and 1996, GTE had an investment in CTI of $208
million and $113 million, respectively, and through December 31, 1997 provided
$182 million in guarantees to banks and other shareholders.
Other investments in unconsolidated subsidiaries, primarily cellular
partnerships, were $482 million and $400 million at December 31, 1997 and 1996,
respectively, including goodwill of approximately $23 million and $24 million,
respectively.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"(FAS
130). FAS 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. FAS 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The adoption of this standard will have no impact on GTE's results of
operations, financial position or cash flows.
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS 131).
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
areas and major customers. FAS 131 is effective for financial statements for
fiscal years beginning after December 15, 1997. Financial statement disclosures
for prior periods are required to be restated. GTE expects changes in its
disclosure. The adoption of FAS 131 will have no impact on GTE's consolidated
results of operations, financial position or cash flows.
5. SHAREHOLDERS' EQUITY
Preferred Stock
During 1995, GTE retired, prior to its stated maturity, perpetual preferred
stock of approximately $10 million (see Note 2).
Common Stock
The authorized common stock of GTE at December 31, 1997 consisted of two
billion shares with a par value of $.05 per share. In 1997, GTE's Board of
Directors authorized the repurchase of up to 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 repurchase
program announced in August 1996.
Additional Paid-In Capital
Dividends for the first and second quarters of 1996 were paid entirely from
additional paid-in capital as a result of the extraordinary charges taken as of
December 31, 1995 in connection with the discontinuance of FAS 71 (see Note 2).
Beginning in the third quarter of 1996, dividends were paid from retained
earnings.
Additional paid-in capital includes cumulative foreign currency translation
adjustments of $(263) million, $(173) million and $(192) million at December 31,
1997-95, respectively, and the cumulative unrealized gains on investments in
debt and equity securities of $20 million, $5 million and $20 million at
December 31, 1997-95, respectively.
6. STOCK OPTION AND SHAREHOLDER RIGHTS PLANS
Stock Option Plans
GTE maintains broad-based stock option plans that cover substantially all
employees. Prior to 1997, options were granted separately or in conjunction with
stock appreciation rights (SARs). Beginning in 1997, the granting of SARs was
discontinued. The options allow the purchase of GTE common stock at the market
price on the date of grant and have a term of 10 years. The options vest over
periods not exceeding seven years.
The number of shares that are available for granting in each year is
limited to four-tenths of one percent of GTE's outstanding common stock as of
December 31 of the preceding year. Any unused amount is carried forward and made
available for granting in the subsequent year.
In 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). As permitted by FAS 123, GTE continues to apply the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25). The differences
between the recognition and measurement provisions of FAS 123 and APB 25 would
impact GTE's results of operations by less than $.03 per share.
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock option activity during each of the
last three years:
<TABLE>
<CAPTION>
STOCK AVERAGE
OPTIONS PRICE
------- -------
(Number of Options
in Thousands)
<S> <C> <C>
Balance, December 31, 1994................................. 12,264 $31.01
Options granted.......................................... 5,728 33.54
Options exercised........................................ (2,375) 29.17
Options cancelled or forfeited........................... (183) 33.16
------ ------
Balance, December 31, 1995................................. 15,434 32.21
Options granted.......................................... 13,268 41.96
Options exercised........................................ (2,634) 30.29
Options cancelled or forfeited........................... (154) 37.51
------ ------
Balance, December 31, 1996................................. 25,914 37.36
Options granted.......................................... 22,208 45.28
Options exercised........................................ (3,951) 33.58
Options cancelled or forfeited........................... (1,046) 40.31
------ ------
Balance, December 31, 1997................................. 43,125 $41.71
------ ------
</TABLE>
At December 31, 1997, 13.4 million options were exercisable.
Shareholder Rights Plan
GTE maintains a shareholder rights plan. Under the original provisions of
this plan, a right to purchase one one-thousandth of a share of series A
participating no par preferred stock for $200 (a "Right") was granted for each
outstanding share of GTE common stock. As a result of a two-for-one stock split
effected after the adoption of the plan, each share of GTE common stock is
currently entitled to one-half of a Right. The Rights become exercisable only if
a person or group, without GTE's prior consent, (i) acquires or commences a
tender or exchange offer for 20% or more of GTE common stock, or (ii) acquires
10% or more of GTE common stock and executes an agreement with GTE to effect a
merger or other business combination. The Rights have certain anti-takeover
effects designed to cause substantial dilution to a person or group that
attempts to acquire GTE on terms not approved by GTE's Board of Directors. The
Rights may be redeemed by GTE at a price of $.01 per Right, at any time prior to
becoming exercisable. Rights that are not redeemed or exercised will expire on
December 7, 1999.
7. MINORITY INTERESTS
Minority interests in equity of subsidiaries as of December 31 was as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Millions of Dollars)
<S> <C> <C>
Minority interests in consolidated subsidiaries:
BC TEL (50.8% GTE ownership)............................. $ 789 $ 784
Quebec Telephone (50.6% GTE ownership)................... 85 84
Cellular partnerships and other.......................... 170 139
Preferred securities issued by subsidiaries................ 1,209 1,309
------ ------
Total minority interests in equity of
subsidiaries................................... $2,253 $2,316
------ ------
</TABLE>
Preferred securities issued by subsidiaries include two issues, Series A
and B, totaling $1.0 billion of Monthly Income Preferred Securities. These
securities, issued by GTE Delaware, a limited partnership holding solely GTE
junior subordinated debentures, are subject to optional redemption at a price of
$25 per
42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share. Series A and B become callable beginning October 17, 1999 and March 6,
2000 and have cumulative annual dividend rates of 9.25% and 8.75% with
maturities in 2024 and 2025, respectively.
8. DEBT
Long-term debt as of December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Millions of Dollars)
<S> <C> <C>
GTE Corporation:
Debentures, maturing 1998 through 2027, average rates
8.7% and 9.0%....................................... $ 4,150 $ 3,350
Guaranteed ESOP obligations, maturing 1999 through
2005, average rate 9.7%............................. 555 593
Sinking fund debenture at a rate of 10.8%.............. -- 200
Other borrowings, maturing 2000 through 2010, average
rates 6.1% and 6.0%................................. 807 411
------- -------
5,512 4,554
Telephone Subsidiaries:
First mortgage bonds, debentures and notes, maturing
through 2031, average rates 7.5% and 7.6%........... 7,412 7,835
Other Subsidiaries:
Debentures and notes, maturing through 2012, average
rates 7.3% and 7.5%................................. 696 1,062
Commercial paper expected to be refinanced on a long-term
basis, average rates 6.0% and 5.3%..................... 1,963 631
------- -------
Total principal amount......................... 15,583 14,082
Less: Premium and (discount) -- net.................... 13 12
------- -------
Total.......................................... 15,596 14,094
Less: Current maturities............................... (1,102) (884)
------- -------
Total long-term debt........................... $14,494 $13,210
------- -------
</TABLE>
Estimated payments of long-term debt during the next five years are: $1,102
million in 1998; $1,274 million in 1999; $863 million in 2000; $791 million in
2001; and $832 million in 2002.
GTE's telephone subsidiaries finance part of their construction programs
through the use of short-term loans, including commercial paper, which are
refinanced at later dates by issues of long-term debt or equity.
First mortgage bonds issued by GTE's telephone subsidiaries are secured by
a lien on substantially all telephone property, plant and equipment.
Total short-term obligations as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Millions of Dollars)
<S> <C> <C>
Commercial paper -- average rates 6.1% and 5.6%............ $2,259 $1,580
Notes payable to banks -- average rates 6.9% and 6.5%...... 37 33
Current maturities of long-term debt....................... 1,102 884
------ ------
Total............................................ $3,398 $2,497
------ ------
</TABLE>
GTE and its subsidiaries had available unused lines of credit aggregating
$6.4 billion at December 31, 1997.
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FINANCIAL INSTRUMENTS
As of December 31, 1997 and 1996, GTE had entered into interest rate swap
agreements primarily to convert $1,425 million and $800 million, respectively,
of floating rate long-term and short-term debt to fixed rates. GTE had entered
into foreign exchange contracts having a contract value of $579 million and $484
million at December 31, 1997 and 1996, respectively. Call options on GTE's
common stock having a notional contract value of $380 million and $428 million
were outstanding at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, GTE had entered into forward interest rate
swap agreements and forward contracts to sell U.S. Treasury Bonds to hedge
against changes in market interest rates on $1,460 million and $400 million,
respectively, of planned long-term debt issuances expected to be completed
within the next twelve months. Gains and losses recognized upon the expiration
or settlement of forward interest rate swap agreements and forward contracts to
sell U.S. Treasury Bonds are amortized over the life of the associated long-term
debt issuance as an offset or addition to interest expense.
The risk associated with these off-balance-sheet financial instruments
arises from the possible inability of counterparties to meet the contract terms
and from movements in interest and exchange rates as well as the market price of
GTE's common stock. GTE carefully evaluates and continually monitors the
creditworthiness of its counterparties and believes the risk of nonperformance
is remote.
The fair values of financial instruments, other than long-term debt,
closely approximate their carrying value. As of December 31, 1997 and 1996, the
estimated fair value of long-term debt based on either reference to quoted
market prices or an option pricing model, exceeded the carrying value by
approximately $600 million and $450 million, respectively.
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Millions of Dollars)
<S> <C> <C>
Land................................................... $ 369 $ 364
Buildings.............................................. 4,534 4,395
Plant and equipment.................................... 45,715 42,963
Work in progress and other............................. 5,872 5,759
-------- --------
Total........................................ 56,490 53,481
Accumulated depreciation............................... (32,410) (30,579)
-------- --------
Total property, plant and equipment -- net... $ 24,080 $ 22,902
-------- --------
</TABLE>
Depreciation expense in 1997-95 for GTE's telephone subsidiaries was
equivalent to a composite average percentage of 6.8%, 7.0% and 7.2%,
respectively. During 1997, depreciation was partially offset by a reduction in
depreciation rates to reflect higher salvage values related to certain telephone
plant and equipment.
11. EMPLOYEE BENEFIT PLANS
Retirement Plans
GTE sponsors noncontributory defined benefit pension plans covering
substantially all employees. The benefits to be paid under these plans are
generally based on years of credited service and average final earnings. GTE's
funding policy, subject to the minimum funding requirements of employee benefit
and tax laws, is to contribute such amounts as are determined on an actuarial
basis to accumulate funds sufficient to meet the plans' benefit obligation to
employees upon their retirement. The assets of the plans consist primarily
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of corporate equities, government securities and corporate debt securities.
During 1997, pension costs and obligations were reduced due to the purchase of
annuities for certain retirees.
The components of the net pension credit for 1997-95 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(Millions of Dollars)
<S> <C> <C> <C>
Benefits earned during the year................... $ 259 $ 250 $ 213
Interest cost on projected benefit obligations.... 618 593 568
Return on plan assets:
Actual.......................................... (2,689) (2,079) (2,420)
Deferred........................................ 1,496 943 1,413
Other -- net...................................... (122) (138) (177)
------- ------- -------
Net pension credit...................... $ (438) $ (431) $ (403)
------- ------- -------
</TABLE>
The expected long-term rate of return on plan assets was 9.0% for 1997,
9.0% for 1996 and 8.5% for 1995. The funded status of the plans and the net
prepaid pension cost at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Millions of Dollars)
<S> <C> <C>
Vested benefit obligations................................. $ 5,930 $ 5,644
------- -------
Accumulated benefit obligations............................ $ 6,766 $ 6,260
------- -------
Plan assets at fair value.................................. $16,934 $15,097
Less: Projected benefit obligations........................ 8,649 8,067
------- -------
Excess of assets over projected obligations................ 8,285 7,030
Unrecognized net transition asset.......................... (318) (427)
Unrecognized net gain...................................... (3,910) (3,230)
------- -------
Net prepaid pension cost......................... $ 4,057 $ 3,373
------- -------
</TABLE>
Included in the previous table are prepaid pension costs of $4.4 billion
and $3.6 billion and accrued pension liabilities of $304 million and $266
million for 1997 and 1996, respectively.
Assumptions used to develop the projected benefit obligations at December
31 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Discount rate............................................... 7.25% 7.50%
Rate of compensation increase............................... 5.00% 5.25%
</TABLE>
Postretirement Benefits Other Than Pensions
Substantially all of GTE's employees are covered under postretirement
health care and life insurance benefit plans. In addition, many retirees outside
the U.S. are covered by government sponsored and administered programs. The
determination of benefit cost for postretirement health plans is generally based
on comprehensive hospital, medical and surgical benefit plan provisions. GTE
funds amounts for postretirement benefits as deemed appropriate from time to
time. Plan assets consist primarily of corporate equities, government securities
and corporate debt securities.
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The postretirement benefit cost for 1997-95 included the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
(Millions of Dollars)
<S> <C> <C> <C>
Benefits earned during the year.......................... $ 43 $ 49 $ 46
Interest on accumulated postretirement benefit
obligations............................................ 240 255 258
Actual return on plan assets............................. (44) (21) (41)
Amortization of prior service benefits................... (75) (53) (50)
Other -- net............................................. 8 (2) 17
----- ---- ----
Postretirement benefit cost.................... $ 172 $228 $230
----- ---- ----
</TABLE>
The following table sets forth the plans' funded status and the accrued
postretirement benefit obligations as of December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
(Millions of
Dollars)
<S> <C> <C>
Accumulated postretirement benefit obligations attributable
to:
Retirees.................................................. $2,954 $2,812
Fully eligible active plan participants................... 219 293
Other active plan participants............................ 931 960
------ ------
Total accumulated postretirement benefit obligations........ 4,104 4,065
Less: Fair value of plan assets............................. 524 416
------ ------
Excess of accumulated obligations over plan assets.......... 3,580 3,649
Unrecognized prior service benefits......................... 731 554
Unrecognized net loss....................................... (248) (62)
------ ------
Accrued postretirement benefit obligations........ $4,063 $4,141
------ ------
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 7.25% and 7.5% at December 31, 1997 and December 31,
1996, respectively. The assumed health care cost trend rate was 8.25% in 1997
and 8.75% in 1996 and is assumed to decrease gradually to an ultimate rate of
6.0% in the year 2004. A one percentage point increase in the assumed health
care cost trend rates for each future year would have increased 1997 costs by
approximately $27 million and the accumulated postretirement benefit obligations
as of December 31, 1997 by approximately $340 million.
Savings and Stock Ownership Plans
GTE sponsors employee savings plans under section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time employees. Under the
plans, GTE provides matching contributions in GTE common stock based on
qualified employee contributions. Matching contributions charged to income were
$76 million, $80 million and $85 million in the years 1997-95, respectively.
GTE also maintains an Employee Stock Ownership Plan (ESOP). In 1989, the
ESOP borrowed $700 million to acquire, at market value, 24.6 million shares of
GTE common stock, which will be used to meet GTE's contributions to certain
employee savings plans through the year 2004. The unpaid balance of the loan,
which has been guaranteed by GTE, is included in the accompanying consolidated
balance sheets as long-term debt with a similar reduction in shareholders'
equity. The debt service payments, including interest, made by the ESOP for the
years 1997-95 totaled $96 million, $92 million and $88 million, respectively.
These payments were funded by $49 million, $45 million and $45 million of
dividends accumulated on the GTE stock held by the ESOP and by $47 million, $47
million and $43 million of cash contributions by GTE in 1997-95, respectively.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INTEREST -- NET
The (income) and expense components of interest -- net are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(Millions of Dollars)
<S> <C> <C> <C>
Interest expense..................................... $1,283 $1,146 $1,151
Interest capitalized................................. (48) (61) (49)
Interest income...................................... (90) (59) (55)
------ ------ ------
Total...................................... $1,145 $1,026 $1,047
------ ------ ------
</TABLE>
13. OTHER -- NET
The (income) and expense components of other -- net are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(Millions of Dollars)
<S> <C> <C> <C>
Minority interests..................................... $ 245 $ 239 $ 227
Preferred dividends.................................... 12 17 22
Equity in income of unconsolidated companies........... (217) (201) (107)
Gains on sales of nonstrategic telephone properties.... -- (12) (16)
Other.................................................. 8 7 (121)
----- ----- -----
Total........................................ $ 48 $ 50 $ 5
----- ----- -----
</TABLE>
In 1996, GTE completed its program to sell or exchange nonstrategic
domestic local-exchange telephone properties (representing less than 5% of its
U.S. access lines). Telephone properties serving 11,700 and 10,000 access lines
were sold in 1996 and 1995, respectively, for cash of $30 million in each year.
Pretax gains, associated with these sales, were recorded by GTE in 1996 and 1995
of $12 million and $16 million, respectively.
14. INCOME TAXES
Income before income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(Millions of Dollars)
<S> <C> <C> <C>
Domestic............................................. $3,720 $3,799 $3,550
Foreign............................................ 698 613 454
------ ------ ------
Total...................................... $4,418 $4,412 $4,004
------ ------ ------
</TABLE>
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(Millions of Dollars)
<S> <C> <C> <C>
Current:
Federal............................................ $ 725 $ 851 $ 711
Foreign............................................ 256 241 173
State and local.................................... 187 107 98
------ ------ ------
1,168 1,199 982
------ ------ ------
Deferred:
Federal............................................ 451 399 439
Foreign............................................ (26) (38) 14
State and local.................................... 65 97 90
------ ------ ------
490 458 543
------ ------ ------
Amortization of deferred investment tax
credits -- net..................................... (34) (43) (59)
------ ------ ------
Total...................................... $1,624 $1,614 $1,466
------ ------ ------
</TABLE>
The amortization of deferred investment tax credits -- net, relates to the
amortization of investment tax credits previously deferred by GTE's telephone
subsidiaries.
A reconciliation between taxes computed by applying the statutory federal
income tax rate to pretax income and income taxes provided in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(Millions of Dollars)
<S> <C> <C> <C>
Amounts computed at statutory rates.............. $1,546 $1,544 $1,401
State and local income taxes, net of federal tax
benefits....................................... 164 133 122
Minority interests and preferred stock
dividends...................................... 44 44 43
Amortization of investment tax credits -- net.... (34) (43) (59)
Other differences -- net......................... (96) (64) (41)
------ ------ ------
Total provision........................ $1,624 $1,614 $1,466
------ ------ ------
</TABLE>
The tax effects of temporary differences that give rise to the deferred
income tax benefits and deferred income tax liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Millions of Dollars)
<S> <C> <C>
Depreciation and amortization............................ $ 1,830 $ 1,696
Employee benefit obligations............................. (1,873) (1,870)
Prepaid pension cost..................................... 1,439 1,189
Investment tax credits................................... 60 95
Other -- net............................................. 275 164
------- -------
Total.......................................... $ 1,731 $ 1,274
------- -------
</TABLE>
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EARNINGS (LOSS) PER COMMON SHARE
The reconciliation of basic and diluted per-share computations is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
(Millions of Dollars,
Except Per-Share Amounts)
<S> <C> <C> <C>
Net income (loss) from:
Income before extraordinary charges........... $2,794 $2,798 $ 2,538
Extraordinary charges......................... -- -- (4,682)
------ ------ -------
Net income (loss)............................... 2,794 2,798 (2,144)
------ ------ -------
Adjustment to net income (loss):
Add: Interest expense, net of tax effect, on
employees' stock plans..................... -- -- 2
------ ------ -------
Total adjustments..................... -- -- 2
------ ------ -------
Adjusted net income (loss) from:
Income before extraordinary charges........... 2,794 2,798 2,540
Extraordinary charges......................... -- -- (4,682)
------ ------ -------
Adjusted net income (loss)...................... $2,794 $2,798 $(2,142)
------ ------ -------
Average common shares........................... 958 969 970
Adjustment to common shares:
Add: Employees' stock and stock option
plans...................................... 4 3 3
------ ------ -------
Total adjustments..................... 4 3 3
------ ------ -------
Adjusted average common shares.................. 962 972 973
------ ------ -------
Earnings (loss) per common share:
Basic
Income before extraordinary charges........... $ 2.92 $ 2.89 $ 2.62
Extraordinary charges......................... -- -- (4.83)
------ ------ -------
Net income (loss)..................... $ 2.92 $ 2.89 $ (2.21)
------ ------ -------
Diluted
Income before extraordinary charges........... $ 2.90 $ 2.88 $ 2.61
Extraordinary charges......................... -- -- (4.81)
------ ------ -------
Net income (loss)..................... $ 2.90 $ 2.88 $ (2.20)
------ ------ -------
</TABLE>
Certain outstanding options to purchase common shares were not included in
the respective computations of diluted earnings (loss) per common share because
the options' exercise prices were greater than the average market price of the
common shares. For each of the years presented these outstanding options
consisted of the following: during 1997, 8.5 million shares at an average price
of $48.59 expiring in 2007, during 1996, 8.7 million shares at an average price
of $43.69 expiring in 2006 and during 1995, 0.2 million shares at an average
price of $38.33 expiring in 2005.
16. COMMITMENTS AND CONTINGENCIES
GTE has noncancelable operating leases covering certain buildings, office
space and equipment. Rental expense was $399 million, $392 million and $384
million in 1997-95, respectively. Minimum rental commitments under noncancelable
leases through 2002 do not exceed $244 million annually and aggregate $663
million thereafter.
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GTE and its unconsolidated affiliates are subject to a number of
proceedings arising out of the conduct of its business, including those relating
to regulatory actions, commercial transactions, government contracts and
environmental, safety and health matters. Management believes that the ultimate
resolution of these matters will not have a material adverse effect on the
results of operations or the financial position of GTE.
Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition. As a result, GTE's wireline
and wireless operations face increasing competition in virtually all aspects of
their business. GTE supports greater competition in telecommunications provided
that, overall, the actions to eliminate existing legal and regulatory barriers
allow an opportunity for all service providers to participate equally in a
competitive marketplace under comparable conditions.
50
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of GTE Corporation:
We have audited the accompanying consolidated balance sheets of GTE
Corporation (a New York corporation) and subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31, 1997
as set forth on pages 38 through 52 of this report. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GTE Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1995
the Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation."
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supporting schedule listed under Item
14 is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
supporting schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Stamford, Connecticut
January 27, 1998
51
<PAGE> 53
MANAGEMENT REPORT
To Our Shareholders:
The management of GTE is responsible for the integrity and objectivity of
the financial and operating information contained in this annual report,
including the consolidated financial statements covered by the Report of
Independent Public Accountants. These statements were prepared in conformity
with generally accepted accounting principles and include amounts that are based
on the best estimates and judgments of management.
The Company has a system of internal accounting controls that provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Company also has instituted
policies and guidelines that require employees to maintain the highest level of
ethical standards.
In addition, the Audit Committee of the Board of Directors, consisting
solely of outside directors, meets periodically with management, the internal
auditors and the independent public accountants to review internal accounting
controls, audit results and accounting principles and practices, and annually
recommends to the Board of Directors the selection of independent public
accountants.
Charles R. Lee
Chairman and
Chief Executive Officer
J. Michael Kelly
Executive Vice President --
Finance and Planning
52
<PAGE> 54
SUPPORTING SCHEDULE
53
<PAGE> 55
SCHEDULE II
GTE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997 - 1995
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------ ---------- -------------------------- ----------- ----------
ADDITIONS
--------------------------
BALANCE AT CHARGED DEDUCTIONS BALANCE AT
BEGINNING CHARGED (CREDITED) TO FROM END OF
DESCRIPTION OF YEAR TO INCOME OTHER ACCOUNTS RESERVES(1) YEAR
----------- ---------- --------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Allowance for uncollectible accounts.... $299 $418 $ 36(2) $420 $333
==== ==== ===== ==== ====
Accrued discontinuance and business
repositioning costs.................. $254 $ 5 $ -- $ 20 $239
==== ==== ===== ==== ====
DECEMBER 31, 1996
Allowance for uncollectible accounts.... $263 $376 $ 240(2) $580 $299
==== ==== ===== ==== ====
Accrued discontinuance and business
repositioning costs.................. $258 $ 9 $ 1(3) $ 14 $254
==== ==== ===== ==== ====
Accrued telephone restructuring costs... $512 $ -- $(214)(4) $298 $ --
==== ==== ===== ==== ====
DECEMBER 31, 1995
Allowance for uncollectible accounts.... $207 $373 $ 267(2) $584 $263
==== ==== ===== ==== ====
Accrued discontinuance and business
repositioning costs.................. $302 $ -- $ 7(3) $ 51 $258
==== ==== ===== ==== ====
Accrued telephone restructuring costs... $957 $ -- $ -- $445 $512
==== ==== ===== ==== ====
</TABLE>
- ---------------
(1) Charges for which reserve was created.
(2) Recoveries of amounts written off in prior years.
(3) Primarily reclassifications from other accounts.
(4) Represents amounts necessary to satisfy commitments related to the
re-engineering program that have been reclassified to accounts payable and
accrued expenses.
54
<PAGE> 56
EXHIBITS
<PAGE> 57
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
3.1(a) Articles of Incorporation, as restated
3.2(b) By-Laws of GTE Corporation
3.3(b) Amendments to By-Laws of GTE Corporation (effective January
15, 1998)
10-1 Material Contracts -- Deferred Compensation Plan for
Directors
10-2(c) Material Contracts -- Agreements Between GTE and Key
Executives
10-3 Material Contracts -- Employment Agreement between GTE
Service Corporation and William P. Barr
10-4(d) Material Contracts -- Supplemental Executive Retirement Plan
10-5(e) Material Contracts -- Long-Term Incentive Plan
10-6(f) Material Contracts -- Executive Incentive Plan
10-7(g) Material Contracts -- Executive Retired Life Insurance Plan
10-8 Material Contracts -- Directors' Deferred Stock Unit Plan
10-9(h) Material Contracts -- Charitable Awards Program
10-10(i) Material Contracts -- Salary Deferral Plan
11 Statement re: Calculation of Earnings (Loss) Per Common
Share
12 Statement re: Calculation of the Ratio of Earnings to Fixed
Charges
21 Significant Subsidiaries of Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
- ---------------
(a) GTE's restated Articles of Incorporation were filed as an exhibit to GTE's
Form 8-K filed on January 21, 1997, and are incorporated herein by
reference.
(b) GTE's By-Laws (except for the amendments, 3.3 above, filed with this Form
10-K) were filed as an exhibit to GTE's registration statement on Form S-3
(File No. 33-61661), and are incorporated herein by reference.
(c) Agreements with certain key executives of GTE (except for the agreement,
10-3 above, filed with this Form 10-K) were filed as exhibits to GTE's Form
10-Q for the quarter ended June 30, 1997, GTE's Form 8-K filed on September
11, 1987, and GTE's 1989, 1990, 1991, 1992, 1993, 1994 and 1995 Forms 10-K,
and are incorporated herein by reference.
(d) GTE's Supplemental Executive Retirement Plan was filed as an exhibit to
GTE's 1991 Form 10-K and is incorporated herein by reference. Amendments
were filed with GTE's 1992, 1993 and 1994 Forms 10-K, and are incorporated
herein by reference.
(e) GTE's Long-Term Incentive Plan was filed as an exhibit to GTE's 1997 Proxy
Statement, and is incorporated herein by reference.
(f) GTE's Executive Incentive Plan was filed as an exhibit to GTE's 1997 Proxy
Statement, and is incorporated herein by reference.
(g) GTE's Executive Retired Life Insurance Plan was filed as an exhibit to GTE's
1991 Form 10-K and is incorporated herein by reference. Amendments were
filed with GTE's 1992 and 1993 Forms 10-K, and are incorporated herein by
reference.
(h) GTE's Charitable Awards Program was filed as an exhibit to GTE's 1992 Form
10-K, and is incorporated herein by reference.
(i) GTE's Salary Deferral Plan was filed as an exhibit to GTE's 1994 Form 10-K,
and is incorporated herein by reference.
<PAGE> 1
EXHIBIT 3.3
AMENDMENTS
TO THE
BY-LAWS OF GTE CORPORATION
EFFECTIVE JANUARY 15, 1998
Section 9 of the By-Laws of the Corporation is amended, effective for all
meetings of shareholders of the Corporation following the 1998 Annual Meeting of
Shareholders, by deleting the first paragraph thereof in its entirety and
replacing it with the following paragraph:
SECTION 9. INTRODUCTION OF BUSINESS AT A MEETING OF STOCKHOLDERS. At an
annual or special meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
properly brought before an annual or special meeting of stockholders. To be
properly brought before an annual or special meeting of stockholders, business
must be (i) in the case of a special meeting, specified in the notice of the
special meeting (or any supplement thereto) given by or at the direction of the
Board, or (ii) in the case of an annual meeting, properly brought before the
meeting by or at the direction of the Board, or otherwise properly brought
before the annual meeting by a stockholder. For business to be properly brought
before an annual meeting of stockholders by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less than 90 days nor
more than 120 days prior to the date of the annual meeting; provided, however,
that if less than 100 days' notice or prior public disclosure of the date of the
annual meeting is given or made to stockholders, notice by the stockholder to be
timely must be so delivered or received not later than the close of business on
the 10th day following the earlier of (i) the day on which such notice of the
date of the meeting was mailed or (ii) the day on which such public disclosure
was made.
Section 22 of the By-Laws of the Corporation is amended, effective for all
meetings of shareholders of the Corporation following the 1998 Annual Meeting of
Shareholders, by deleting the first paragraph thereof in its entirety and
replacing it with the following paragraph:
SECTION 22. NOMINATION OF DIRECTORS. Only persons nominated in accordance
with the procedures set forth in this Section shall be eligible for election as
directors. Nominations of persons for election to the Board may be made at a
meeting of stockholders (i) by or at the direction of the Board, or (ii) by any
stockholder of the Corporation entitled to vote for the election of directors at
such meeting who complies with the notice procedures set forth in this Section
22. Such nominations, other than those made by or at the direction of the Board,
shall be made pursuant to timely notice in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation not less than
90 days nor more than 120 days prior to the date of a meeting; provided,
however, that if fewer than 100 days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so delivered or received not later than the close of
business on the 10th day following the earlier of (i) the day on which such
notice of the date of such meeting was mailed or (ii) the day on which such
public disclosure was made.
<PAGE> 1
EXHIBIT 10-1
DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE MEMBERS OF
THE BOARD OF DIRECTORS OF GTE CORPORATION
AMENDED AND RESTATED
AS OF JANUARY 1, 1997
(EXCEPT AS OTHERWISE PROVIDED)
<PAGE> 2
DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE MEMBERS OF
THE BOARD OF DIRECTORS OF GTE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I INTRODUCTION
1.01 Name of Plan..........................................
1.02 Purpose of Plan.......................................
1.03 Restatement of Plan...................................
ARTICLE II ELIGIBILITY AND ELECTION TO DEFER
2.01 Eligibility...........................................
2.02 Election to Defer.....................................
2.03 Designation of Beneficiaries..........................
2.04 Deemed Deferral of Retirement Plan Pension Value......
ARTICLE III ACCOUNTS AND INVESTMENTS
3.01 Accounts..............................................
3.02 Investments...........................................
3.03 Hypothetical Nature of Accounts and Investments.......
ARTICLE IV PAYMENTS
4.01 Exclusive Entitlement to Payment......................
4.02 Payment Commencement Date.............................
4.03 Method of Payment.....................................
4.04 Limitations on Rights to Payment......................
4.05 Interim Payments......................................
ARTICLE V MISCELLANEOUS
5.01 Severability..........................................
5.02 Board Authority.......................................
5.03 Change in Control.....................................
5.04 Usage and Definitions.................................
</TABLE>
<PAGE> 3
ARTICLE I
INTRODUCTION
1.01. NAME OF PLAN.
This Plan shall be known as the Deferred Compensation Plan for Non-Employee
Members of the Board of Directors of GTE Corporation.
1.02. PURPOSE OF PLAN.
The purpose of the Plan is to provide non-employee directors of GTE
Corporation the opportunity to defer receipt of cash compensation payable to
them for services to GTE Corporation as directors.
1.03. RESTATEMENT OF PLAN.
(a) Effective Date of Restatement. This document amends and restates the
Plan effective as of January 1, 1997.
(b) Deferrals Affected by Restatement. All deferral elections made on or
after January 1, 1997, shall be governed by the terms of the Plan as amended and
restated herein. In addition, unless a director elects otherwise on or before
September 26, 1997, all deferral elections made before January 1, 1997, shall be
governed by the terms of the Plan as amended and restated herein; provided that
the elections relating to such deferral elections shall remain in full force and
effect, but shall thereafter be subject to modification solely in accordance
with the Plan as amended and restated herein.
1
<PAGE> 4
ARTICLE II
ELIGIBILITY AND ELECTION TO DEFER
2.01. ELIGIBILITY.
Each director of GTE Corporation (other than a director who is also an
employee of GTE Corporation or a subsidiary or affiliate thereof) shall be
eligible to defer all or part of his cash compensation for services to GTE
Corporation as a director in accordance with Section 2.02.
2.02. ELECTION TO DEFER.
An eligible director who wishes to defer all or part of the cash
compensation that he will earn during an Annual Service Period for services to
GTE Corporation as a director shall submit an election to the Executive Vice
President -- Human Resources & Administration of GTE Corporation or his
successor or designee ("EVP-HR") that satisfies each of the requirements set
forth in paragraphs (1) through (7), below. Such deferral shall be referred to
herein as an "Annual Deferral."
(1) Deadline for Submitting Election. The election for an Annual
Service Period shall be submitted before the beginning of the annual
meeting of the shareholders of GTE Corporation that coincides with the
beginning of the Annual Service Period.
(2) Form of Election. The election shall be in writing and in a form
acceptable to the EVP-HR.
(3) Amount of Deferral. The election shall specify the amount or the
percentage of the director's cash compensation for the Annual Service
Period that he wishes to defer. The election shall apply to cash
compensation only and shall not apply to non-cash compensation (such as
awards of hypothetical shares of GTE Common Stock granted pursuant to the
Deferred Stock Unit Plan). The amount or percentage deferred pursuant to
the election shall be no less than 5 percent and no more than 100 percent
of the cash compensation the director earns during the Annual Service
Period for services to GTE Corporation as a director.
(4) Deemed Investment of Deferral. The election shall specify which
portion of the Annual Deferral shall be treated as invested in GTE Common
Stock in accordance with Section 3.02(a), and which portion of the Annual
Deferral shall be treated as invested in the Moody's Fund in accordance
with Section 3.02(b). Notwithstanding any other provision of the Plan, the
Annual Deferral shall be treated as invested solely in GTE Common Stock if
the director elects to receive payments with respect to the Annual Deferral
either in the form of split-stream flexible installments or in the form of
GTE Common Stock pursuant to paragraph (6), below. If, with respect to
different portions of the Annual Deferral, the director elects different
investment options in accordance with this paragraph (4), or different
payment commencement dates in accordance with Section 4.02, or different
methods of payment in accordance with Section 4.03, the preceding sentence
shall be applied separately with respect to each such portion of the Annual
Deferral.
(5) Payment Commencement Date. The election shall specify the date,
selected by the director in accordance with Section 4.02, on which payments
with respect to the Annual Deferral are to commence under the Plan (i.e.,
either his Release Date or a fixed date in the future). Notwithstanding any
other provision of the Plan, payments with respect to the Annual Deferral
shall not commence before the director's Release Date if he elects either
(A) to treat the Annual Deferral as invested in GTE Common Stock pursuant
to paragraph (4), above, or (B) to receive payments with respect to the
Annual Deferral either in the form of split-stream flexible installments or
in the form of GTE Common Stock pursuant to paragraph (6), below. If, with
respect to different portions of the Annual Deferral, the director elects
different investment options in accordance with paragraph (4), above, or
different payment commencement dates in accordance with Section 4.02, or
different methods of payment in accordance with Section 4.03, the preceding
sentence shall be applied separately with respect to each such portion of
the Annual Deferral.
2
<PAGE> 5
(6) Method of Payment. The election shall specify the method,
selected by the director in accordance with Section 4.03, in which payments
with respect to the Annual Deferral are to be made under the Plan (i.e.,
whether such payments are to be made in the form of a lump sum, annual
installments, or flexible installments, and whether such payments are to be
made in cash or in GTE Common Stock).
(7) Election Irrevocable. The amount of deferral, the deemed
investment of the deferral, the payment commencement date, and the method
of payment elected by a director with respect to an Annual Deferral
pursuant to paragraphs (3) through (6), above, shall not be revocable or
subject to modification at any time. Notwithstanding the foregoing, a
director may at any time submit a request to the EVP-HR to modify the
payment commencement date, the method of payment, or both, with respect to
the Annual Deferral, provided that the request is submitted before any
payment is made to the director with respect to the Annual Deferral
pursuant to Article IV. If the original election specified that the Annual
Deferral be treated as invested in GTE Common Stock, or if either the
original election or the requested modification specifies that payments
with respect to the Annual Deferral be made in the form of split stream
installments or in GTE Common Stock, the modification shall not become
effective before the director's Release Date. If the modification has the
effect of accelerating all or part of any payment otherwise due the
director under Article IV, the request shall be subject to the approval of
the EVP-HR, which approval the EVP-HR may grant or deny in his sole
discretion. If the modification has the effect of deferring until a later
calendar year all or part of any payment otherwise due the director under
Article IV, the request shall be granted to the extent of such deferral,
provided that the request is submitted on or before the last day of the
calendar year immediately preceding the calendar year in which the payment
otherwise would have been made to the director under Article IV. If the
modification has the effect of deferring until a later date within the same
calendar year all or part of any payment otherwise due the director under
Article IV during such calendar year, the request shall be granted to the
extent of such deferral, provided that the request is submitted before the
date on which the payment otherwise would have been made to the director
under Article IV. A director may, in his sole discretion, specify that his
request for a modification pursuant to this paragraph (7) be submitted to
the Board of Committee for its prior approval. If, with respect to
different portions of the Annual Deferral, the director elects different
investment options in accordance with paragraph (4), above, or different
payment commencement dates in accordance with Section 4.02, or different
methods of payment in accordance with Section 4.03, this paragraph (7)
shall be applied separately with respect to each such portion of the Annual
Deferral.
2.03. DESIGNATION OF BENEFICIARIES.
A director who makes a deferral election pursuant to Section 2.02 may
designate one or more beneficiaries under the Plan with respect to such
deferral. Notwithstanding Section 2.02(7), a director may, at any time, revoke a
prior designation and make a new designation pursuant to this Section 2.03. Any
such designation or revocation shall be in writing and shall be submitted to the
EVP-HR in such form and in such manner as is acceptable to the Board. If a
director dies before he has received all payments due him under the Plan, the
remaining payments shall be made to his beneficiaries in accordance with his
designation, or, if there is no such beneficiary, then to the director's
personal representative. All such payments shall be made in accordance with the
payment schedule (or schedules) that would have applied to the director had he
survived, unless the director specified in his designation that a shorter
payment schedule (or schedules) is to take effect upon his death.
2.04. DEEMED DEFERRAL OF RETIREMENT PLAN PENSION VALUE.
(a) Pension Deferral. Notwithstanding any other provision of the Plan,
each director who was a non-employee member of the Board on December 31, 1996,
shall be deemed to have made an additional deferral under the Plan as of such
date. The amount of such deferral shall equal the dollar amount of the
director's accrued pension value under the Retirement Plan as reported on his
Decision Form. Such deferral shall be referred to herein as the director's
"Pension Deferral." No reduction shall be made in a director's current cash
compensation on account of his Pension Deferral.
3
<PAGE> 6
(b) Deemed Investment of Pension Deferral. In the case of a director who
elected Transition Option 3, the entire amount of his Pension Deferral shall be
treated as invested in GTE Common Stock in accordance with Section 3.02(a). In
the case of a director who elected Transition Option 4, the entire amount of his
Pension Deferral shall be treated as invested in the Moody's Fund in accordance
with Section 3.02(b). In the case of a Director who elected to allocate his
accrued pension value between Transition Options 3 and 4, the entire amount of
his Pension Deferral shall be treated as invested as follows: (1) the portion of
the deferral that is treated as invested in GTE Common Stock in accordance with
Section 3.02(a) shall equal the entire amount of the deferral multiplied by the
allocation percentage the director elected with respect to Transition Option 3,
and (2) the portion of the deferral that is treated as invested in the Moody's
Fund in accordance with Section 3.02(b) shall equal the entire amount of the
deferral multiplied by the allocation percentage the director elected with
respect to Transition Option 4. For purposes of applying Section 3.02(a)(1) to
any portion of a director's Pension Deferral that is treated as invested in GTE
Common Stock, the average closing price of GTE Common Stock, as reported on the
composite tape of New York Stock Exchange issues for the last 20 business days
of December 1996, shall be deemed to be forty-two dollars and sixty-two and
one-half cents ($42.625). A separate subaccount shall be maintained with respect
to a director's Pension Deferral in accordance with Section 3.01, as if the
Pension Deferral were an Annual Deferral under Section 2.02. On and after his
Release Date, a director shall be entitled to direct the deemed investment of
the portion of the balance in his account that is attributable to his Pension
Deferral in accordance with Section 3.02, as if the Pension Deferral were an
Annual Deferral under Section 2.02.
(c) Method of Payment and Designated Beneficiary. Payments with respect to
a director's Pension Deferral shall be made as follows. If a director made an
election to defer under the Plan all or part of his cash compensation with
respect to the Annual Service Period commencing in 1997, the Pension Deferral
shall be treated in the same manner as the 1997 Annual Deferral with respect to
the payment commencement date, the method of payment and the designated
beneficiary. If a director did not make an election to defer under the Plan all
or part of his cash compensation with respect to the Annual Service Period
commencing in 1997, the Pension Deferral shall be treated in the same manner as
the 1997 award of deferred stock units under the Deferred Stock Unit Plan with
respect to the payment commencement date, the method of payment and the
designated beneficiary. The director shall be entitled to modify the payment
commencement date, the method of payment, and/or the designated beneficiary
otherwise provided for under this subsection (c) with respect to his Pension
Deferral. Any such modification shall be made in accordance with Sections
2.02(7) and 2.03, as if the Pension Deferral were an Annual Deferral under
Section 2.02.
4
<PAGE> 7
ARTICLE III
ACCOUNTS AND INVESTMENTS
3.01. ACCOUNTS.
(a) Establishment of Accounts. A separate account shall be maintained for
each director who makes a deferral election pursuant to Section 2.02. Such
account shall be (1) credited with the amounts deferred by the director pursuant
to Section 2.02, (2) credited (or charged, as the case may be) with the
investment results determined pursuant to Section 3.02, and (3) charged with the
amounts paid by the Plan to or on behalf of the director pursuant to Article IV.
(b) Subaccounts. Within each director's account, separate subaccounts
shall be maintained to the extent necessary for the administration of the Plan.
For example, it may be necessary to maintain separate subaccounts where the
director has specified different payment commencement dates or different methods
of payment with respect to his Annual Deferrals for different Annual Service
Periods.
3.02. INVESTMENTS.
(a) Deemed Investment in GTE Common Stock. The portion of the balance in a
director's account that is attributable to the portion of his Annual Deferrals
that he has elected to treat as invested in GTE Common Stock pursuant to Section
2.02(4) shall be treated as if it were invested in GTE Common Stock until his
Release Date. Thereafter, such portion shall be treated as if it were invested
in one or more of the investment options specified in the Savings Plan
Provisions in accordance with subsection (c), below. Notwithstanding the
preceding sentence, on or after a director's Release Date, any portion of the
balance in his account that is subject to a split-stream flexible installment
election under Section 4.03(3) or with respect to which he has elected to
receive payments in the form of GTE Common Stock pursuant to Section 4.03(4)
shall be treated as if it were invested in GTE Common Stock. The deemed
investment in GTE Common Stock of all or part of the balance in a director's
account shall be determined in accordance with the following rules:
(1) Conversion into GTE Common Stock. Any amount that would have been
paid to a director during a calendar quarter but for his deferral election
pursuant to Section 2.02 shall be converted into an equivalent number of
hypothetical shares of GTE Common Stock (including hypothetical fractional
shares) by dividing the amount deferred for that quarter by the average
closing price of GTE Common Stock, as reported on the composite tape of New
York Stock Exchange issues for the most recent 20 business days ending on
or before the last day of such quarter.
(2) Deemed Reinvestment of Dividends. The number of hypothetical
shares of GTE Common Stock credited to a director's account shall be
increased on each date that a dividend is paid on GTE Common Stock. The
number of additional hypothetical shares of GTE Common Stock credited to a
director's account as a result of such increase shall be determined, first,
by multiplying the total number of hypothetical shares of GTE Common Stock
credited to the director's account immediately before such increase by the
amount of the dividend paid per share of GTE Common Stock on the dividend
payment date, and, then, by dividing the product so determined by the
average of the high and low price of GTE Common Stock on the composite tape
of New York Stock Exchange issues on the dividend payment date (or if there
was no reported sale of GTE Common Stock on such date, on the next
preceding day on which there was such a reported sale). Notwithstanding the
foregoing and Section 3.01(a) (3), on any date a split-stream flexible
installment is payable to a director, no increase pursuant to this
paragraph (2) shall be made, but neither shall the amount of such
installment be charged against the director's account (unless the
installment is a final split-stream flexible installment).
(3) Conversion Out of GTE Common Stock. The dollar value of the
hypothetical shares of GTE Common Stock credited to a director's account on
any date shall be determined by multiplying the number of hypothetical
shares of GTE Common Stock credited to the director's account on that date
by the average closing price of GTE Common Stock, as reported on the
composite tape of New York Stock Exchange issues for the most recent 20
business days ending on or before that date.
5
<PAGE> 8
(4) Effect of Recapitalization. In the event of a transaction or
event described in this paragraph (4), the number of hypothetical shares of
GTE Common Stock credited to a director's account shall be adjusted in such
manner as the Board, in its sole discretion, deems equitable. A transaction
or event is described in this paragraph (4) if and only if (A) it is a
dividend or other distribution (whether in the form of cash, shares, other
securities, or other property), extraordinary cash dividend,
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
shares or other securities, the exercisability of stock purchase rights
received under the Rights Plan, the issuance of warrants or other rights to
purchase shares or other securities, or other similar corporate transaction
or event, and (B) the Board determines that such transaction or event
affects the shares of GTE Common Stock, such that an adjustment pursuant to
this paragraph (4) is appropriate to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under this
Plan.
(b) Deemed Investment in Moody's Fund. The portion of the balance in a
director's account that is attributable to the portion of his Annual Deferrals
that he has elected to treat as invested in the Moody's Fund pursuant to Section
2.02(4) shall be treated as if it were invested in the Moody's Fund until his
Release Date. Thereafter, such portion shall be treated as if it were invested
in one or more of the investment options specified in the Savings Plan
Provisions in accordance with subsection (c), below. The deemed investment in
the Moody's Fund of all or part of the balance in a director's account shall be
determined in accordance with the following rules:
(1) Deferral Credits to Moody's Fund. Any amount that would have been
paid to a director during a calendar quarter but for his deferral election
pursuant to Section 2.02 shall be credited to the Moody's Fund as of the
last day of such quarter.
(2) Transfer Credits to Moody's Fund. Any amount deemed transferred
to the Moody's Fund pursuant to the investment election procedures
specified in subsection (c), below, shall be credited to the Moody's Fund
as of the date of transfer.
(3) Interest Credits to Moody's Fund. Interest shall be credited to
the Moody's Fund on the last day of each calendar quarter in accordance
with the definition of "Moody's Fund" in Section 5.04(b).
(c) Deemed Investment in Savings Plan Investment Options After Release
Date. On and after a director's Release Date, the portion of the balance in his
account that is not required to be treated as if it were invested in GTE Common
Stock on and after his Release Date pursuant to subsection (a), above, shall be
treated as if it were invested in one or more of the investment options
specified in the Savings Plan Provisions, and a director shall be entitled to
direct the deemed investment of such portion of the balance in his account among
such investment options on the same terms and conditions applicable under the
Savings Plan Provisions. The deemed investment in one or more of the investment
options specified in the Savings Plan Provisions of all or part of the balance
in a director's account shall be determined in accordance with the following
rules:
(1) Moody's Fund. The investment options specified in the Savings
Plan Provisions shall be deemed to include the Moody's Fund. The portion of
the balance in a director's account that is treated as invested in the
Moody's Fund before his Release Date in accordance with subsection (b),
above, shall continue to be treated as if it were invested in the Moody's
Fund on and after the director's Release Date unless and until the director
elects otherwise in accordance with the investment direction procedures
specified in this subsection (c).
(2) GTE Common Stock. On and after a director's Release Date, the
portion of the balance in his account that is not required to be treated as
if it were invested in GTE Common Stock on and after his Release Date
pursuant to subsection (a), above, shall not be treated as if it were
invested in GTE Common Stock. However, subject to paragraph (4) below, at
any time on or after his Release Date, a director may elect to have all or
part of such portion of the balance in his account treated as if it were
invested in the GTE Stock Portfolio specified in the Savings Plan
Provisions. Furthermore, the portion of the balance in a director's account
that is treated as invested in GTE Common Stock before his Release
6
<PAGE> 9
Date in accordance with subsection (a), above, and that is not required to
be treated as if it were invested in GTE Common Stock on and after his
Release Date pursuant to subsection (a), above, shall be treated as if it
were invested in the GTE Stock Portfolio specified in the Savings Plan
Provisions on and after the director's Release Date unless and until the
director elects otherwise in accordance with the investment direction
procedures specified in this subsection (c).
(3) Determination of Purchase and Sale Prices. In the case of any
deemed investment in a medium other than United States currency, the
purchase (or sale) price per unit of the deemed investment at any time
shall be the same as the actual purchase (or sale) price per unit paid (or
received) by the Trustee of the GTE Savings Plan for the same investment at
the same time, or, if there is no actual purchase (or sale) by the Trustee
at the same time, at the nearest time thereafter.
(4) Limitation on Deemed Investment in GTE Stock Portfolio. During
the six-month period following his Release Date, a director shall not be
entitled to direct that any portion of the balance in his account be
treated as invested in the GTE Stock Portfolio specified in the Savings
Plan Provisions if at any previous time such portion was treated as
invested in any investment other than GTE Common Stock or the GTE Stock
Portfolio.
3.03. HYPOTHETICAL NATURE OF ACCOUNTS AND INVESTMENTS.
Each account and investment established under this Article III shall be
hypothetical in nature and shall be maintained for bookkeeping purposes only. In
accordance with Section 4.04 (a), neither the Plan nor any of the accounts or
investments established hereunder shall hold any actual funds or assets.
7
<PAGE> 10
ARTICLE IV
PAYMENTS
4.01. EXCLUSIVE ENTITLEMENT TO PAYMENT.
A director's deferral election pursuant to Section 2.02 shall constitute a
waiver of his right to receive the amount deferred and an agreement to receive
in lieu thereof the amounts payable to him at the times, in the amounts, and in
the form specified in this Article IV. No other amounts shall be due or payable
to the director under this Plan as a result of his deferral election pursuant to
Section 2.02.
4.02. PAYMENT COMMENCEMENT DATE.
The payments to a director with respect to an Annual Deferral shall
commence on the date selected by the director in accordance with either
paragraph (1) or (2), below. A director may select different payment
commencement dates with respect to his Annual Deferrals for different Annual
Service Periods. In addition, a director may select different payment
commencement dates with respect to different portions of his Annual Deferral for
the same Annual Service Period.
(1) Release Date. The director may select his Release Date as the
payment commencement date.
(2) Fixed Date. Alternatively, the director may select as the payment
commencement date a fixed date that is at least 6 months after the end of
the Annual Service Period to which the deferral election applies, and that
is no later than the last day of the director's life expectancy, determined
as of the age he will have attained on the payment commencement date.
Notwithstanding the preceding sentence, the director's selection of a
payment commencement date that occurs before his Release Date shall be
subject to the conditions set forth in Section 2.02(5).
4.03. METHOD OF PAYMENT.
The payments to a director with respect to an Annual Deferral shall be made
pursuant to the method selected by the director in accordance with paragraph
(1), (2), or (3), below. All payments to a director with respect to an Annual
Deferral shall be made solely in cash, except as provided in paragraph (4),
below, which permits a director to elect to receive payments with respect to an
Annual Deferral in the form of GTE Common Stock. A director may select different
methods of payment with respect to his Annual Deferrals for different Annual
Service Periods. In addition, a director may select different methods of payment
with respect to different portions of his Annual Deferral for the same Annual
Service Period.
(1) Lump Sum. The director may elect to receive payment with respect
to an Annual Deferral in a lump sum. The lump sum shall be payable to the
director on the payment commencement date and shall equal the portion of
the balance in his account attributable to the Annual Deferral, determined
as of the payment commencement date.
(2) Annual Installments. The director may elect to receive the
payments with respect to an Annual Deferral in two or more annual
installments. If so, the director shall indicate in his election pursuant
to Section 2.02 the number of annual installments he wishes to elect. The
number of annual installments elected shall not exceed 20 and shall not
extend the period of payment beyond the director's life expectancy,
determined as of the age he will have attained on the payment commencement
date. If the number of annual installments elected by a director would
otherwise exceed the limits in the preceding sentence, he shall be deemed
to have elected the maximum number of annual installments permitted under
the preceding sentence. The annual installments shall be payable to the
director beginning on the payment commencement date and on each anniversary
thereof until the total number of installments elected by the director have
been paid. Each annual installment shall equal the portion of the balance
in the director's account attributable to the Annual Deferral, determined
as of the date the installment is payable, multiplied by a fraction, the
numerator of which is one, and the denominator of which is the excess of
the total number of installments elected by the director over the number of
installment payments previously made under the schedule. For example, the
respective fractions under a
8
<PAGE> 11
5-year installment schedule are 1/5 for the first installment, 1/4 for the
second installment, 1/3 for the third installment, 1/2 for the fourth
installment, and 1/1 for the fifth and final installment.
(3) Flexible Installments. The director may elect to receive the
payments with respect to an Annual Deferral in accordance with any other
reasonable method he specifies. Such payments shall be referred to herein
as flexible installments. If a director elects to receive the payments with
respect to an Annual Deferral in the form of flexible installments, he
shall indicate in his election pursuant to Section 2.02 the method under
which he wishes the date and the amount of each such installment to be
determined. Flexible installments shall be payable to the director on the
dates and in the amounts determined in accordance with the method specified
in his election. Regardless of the method of payment he elects, no
installment shall be payable to a director before the payment commencement
date he has selected in accordance with Section 4.02. Nor shall any
installment be payable to a director to the extent that the portion of the
balance in his account attributable to the Annual Deferral has been
depleted, determined as of the date the installment is otherwise payable to
him. Furthermore, the period over which flexible installments are paid to a
director shall not exceed the lesser of 20 years or the director's life
expectancy, determined as of the age he will have attained on the payment
commencement date. If the period over which a director has elected to
receive flexible installments would otherwise exceed the maximum period
permitted under the preceding sentence, a final installment shall be
payable to the director upon the expiration of such maximum period. Such
final installment shall equal the portion of the balance in the director's
account attributable to the Annual Deferral, determined as of the date the
installment is payable. For purposes of this paragraph (3), flexible
installments shall include but not be limited to split-stream installments
as described in the Plan prior to this amendment and restatement; provided
that, in the event a director elects to receive all or part of his payments
in split-stream installments, the portion of the balance in his account
that is subject to a split-stream installment election shall at all times
be treated as invested solely in GTE Common Stock.
(4) Payment in the Form of GTE Common Stock. Notwithstanding the
general requirement of this Section 4.03 that all payments to a director
with respect to an Annual Deferral be made solely in cash, a director may
elect to receive payments with respect to an Annual Deferral in the form of
GTE Common Stock rather than cash. In the case of an Annual Deferral that
is subject to a split-stream installment election under paragraph (3),
above, the number of shares of GTE Common Stock to be distributed to the
director pursuant to each installment (other than the final installment)
shall be determined by dividing the dollar amount of the installment that
would otherwise be paid to the director under paragraph (3), above, by the
average closing price of GTE Common Stock, as reported on the composite
tape of New York Stock Exchange issues for the most recent 20 business days
ending on or before the date of payment. Distributions in the form of GTE
Common Stock shall be made in whole shares only, and any resulting
fractional shares shall be distributed in cash. In accordance with Sections
2.02(4) and 3.02(a), the portion of the balance in a director's account
with respect to which he has elected to receive payments in the form of GTE
Common Stock shall at all times be treated as invested solely in GTE Common
Stock.
4.04. LIMITATIONS ON RIGHTS TO PAYMENT.
(a) Rights Unsecured. The right of any person to receive one or more
payments under the Plan shall be an unsecured claim against the general assets
of GTE Corporation.
(b) Rights Not Assignable. No payment due any person under the Plan shall
be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge. Any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, or charge such payment shall be void.
No such payment or interest therein shall be liable for or subject to the debts,
contracts, liabilities, or torts of any director or beneficiary. If any director
or beneficiary becomes bankrupt or attempts to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge any payment under the Plan, the
Board may direct that such payment be suspended and that all future payments to
which such person otherwise would be entitled be held and applied for the
benefit of such person, the person's children or other dependents, or any of
them, in such
9
<PAGE> 12
manner and in such proportions as the Board may deem proper. Notwithstanding the
foregoing, a director may assign his right to payment under the Plan to GTE
Corporation or its affiliates.
(c) Rights Forfeited Upon Competition. A director who, without the written
consent of GTE Corporation, engages in competition with GTE Corporation or any
subsidiary thereof, accepts employment with or acquires or holds any substantial
interest in any business that is competitive with the business carried on by GTE
Corporation or any subsidiary thereof, or serves as an officer or director of
any corporation engaged in competition with the business carried on by GTE
Corporation or any subsidiary thereof, shall forfeit all rights to any payments
under the Plan that would otherwise be payable to the director or his
beneficiaries on or after the initial date of such action by the director. The
purchase by a director, for investment, on a recognized securities exchange, of
stock or other securities of a competitor of GTE Corporation or subsidiary
thereof representing not more than one percent of the total voting power
represented by all outstanding stock and securities of such competitor, or the
holding thereof, shall not be deemed to constitute the acquisition or holding of
a substantial interest in such competitor for purposes of this subsection (c).
This subsection (c) shall not apply to any director on or after the occurrence
of a Change in Control.
4.05. INTERIM PAYMENTS.
At any time on or after January 1, 1998, a director may elect that 94% of
all (or a designated portion of) his account balance shall be paid to him within
61 days following the filing of such an election; provided that the EVP-HR may
approve or disapprove such election in his sole discretion. If a director
receives a payment pursuant to this Section 4.05, the remaining 6% of the
director's entire account balance (or the designated portion thereof) shall be
permanently forfeited and shall not be paid to, or in respect of, the director.
10
<PAGE> 13
ARTICLE V
MISCELLANEOUS
5.01. SEVERABILITY.
If any provision of the Plan is held unlawful or otherwise invalid or
unenforceable in whole or in part, the unlawfulness, invalidity, or
unenforceability shall not affect any other provision of the Plan or part
thereof, each of which shall remain in full force and effect.
5.02. BOARD AUTHORITY.
(a) In General. Except to the extent that the Plan specifically provides
otherwise, the Board shall have the sole authority and discretion (1) to amend,
suspend, or terminate the Plan, (2) to interpret the Plan, (3) to establish and
revise rules and regulations relating to the Plan, (4) to delegate such
responsibilities or duties as it deems desirable, and (5) to make any other
determination that it believes necessary or advisable for the administration of
the Plan. Unless otherwise provided, the Board shall be deemed to have delegated
such authority and discretion to the Committee.
(b) Plan Termination. Except to the extent that the Plan specifically
provides otherwise, the Board may terminate the Plan at any time. Upon
termination of the Plan, all amounts deferred before the date of termination,
and any rights to payment with respect to such deferred amounts, shall continue
to be governed by the provisions of the Plan in effect immediately before the
date of termination.
5.03. CHANGE IN CONTROL.
(a) Plan Modifications Following Change in Control. Notwithstanding any
provision of the Plan to the contrary, the Board may amend, modify, or suspend
the Plan (including the Change in Control Provisions) at any time before a
Change in Control occurs, but except as may be required by law, after a Change
in Control occurs: (1) the Change in Control Provisions shall not be amended,
modified, suspended, or terminated, directly or indirectly, and (2)(A) no other
provisions of the Plan shall be amended, modified, suspended, or terminated,
directly or indirectly, (B) no rules, regulations, or procedures under the Plan
shall be established or modified, (C) no interpretation of the Plan shall be
adopted, (D) no determination under the Plan shall be made, and (E) no authority
or discretion shall be exercised, in a manner that would alter the meaning or
operation of the Change in Control Provisions or that would undermine or
frustrate their purposes.
(b) Rights Protected Following Change in Control. Notwithstanding any
provision of the Plan to the contrary, no amendment, suspension, or termination
of the Plan, or revocation of any required approval by the Board, effected after
a Change in Control shall operate to reduce, eliminate, or otherwise adversely
affect any director's or beneficiary's right to receive any payment under the
Plan (including, without limitation, the amount, timing, and method thereof) in
accordance with any deferral election made prior to the date of such amendment,
suspension, termination, or revocation of approval and in accordance with any
investment or payment option permitted (irrespective of any requirement for
approval) pursuant to the Plan as in effect on the date immediately preceding
the date on which the Change in Control occurs. Notwithstanding any provision of
the Plan to the contrary, upon and after a Change in Control, the rights
described in the immediately preceding sentence shall be fully vested,
nonforfeitable contractual rights enforceable by or on behalf of any director or
former director against GTE Corporation or any successor to all or substantially
all of the business or assets of GTE Corporation. After the date on which a
Change in Control occurs, any director, former director, or beneficiary (which
terms shall include, for the purposes of this subsection (b), any executor,
personal representative, heir, or legatee of a deceased former director) may
apply to the trustee of the GTE Service Corporation Benefits Protection Trust
for assistance (which may include, without limitation, legal counsel and the
institution of litigation) in enforcing the rights of the director, former
director, or beneficiary under the Plan and pursuing any claims he might have
under the terms of the Plan; provided that any director, former director, or
beneficiary who applies for such assistance shall be subject to and bound by any
limitations that said trustee may impose. No director, former director, or
beneficiary shall be required to notify or seek the assistance of said trustee
as a condition of or prerequisite to any other action that might be
11
<PAGE> 14
taken by or on behalf of the director, former director, or beneficiary in order
to enforce his rights or pursue his claims under the Plan, and the fees,
expenses and costs that he may incur in any such other action shall not be the
responsibility of the GTE Service Corporation Benefits Protection Trust or the
trustee thereof.
5.04. USAGE AND DEFINITIONS.
(a) Titles and Headings Not to Control. The titles to Articles and the
headings of Sections, subsections, paragraphs, and subparagraphs in this Plan
are placed herein for convenience of reference only and, as such, shall be of no
force or effect in the interpretation of the Plan.
(b) Definitions. Unless the context clearly indicates otherwise, the
following terms, when used in capitalized form in this Plan, shall have the
meanings set forth below.
Acquiring Person. "Acquiring Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person, without
the prior approval of GTE Corporation, shall be the Beneficial Owner of
securities representing 20% or more of the Voting Power or who or which was
such a Beneficial Owner at any time after the date of the Rights Plan,
whether or not such Person continues to be the Beneficial Owner of
securities representing 20% or more of the Voting Power, but shall not mean
(i) GTE Corporation, (ii) any Subsidiary, (iii) any employee benefit plan
of GTE Corporation or any of its Subsidiaries, or (iv) any entity holding
securities of GTE Corporation organized, appointed or established by GTE
Corporation or any of its Subsidiaries for or pursuant to the terms of any
such plan; provided, however, that if:
(1) any New York State law shall be hereinafter promulgated or
amended (whether by amendment to the definition of "interested
shareholder" as used in section 505(a)(2)(i) of the New York Business
Corporation Law ("NYBCL") or otherwise) to provide that a New York
corporation may issue rights or options which include restrictions or
conditions of the type set forth in section 505(a)(2)(i) of the NYBCL
relating either
(A) to a Person holding a percentage (the "Lower Percentage") of
the outstanding voting stock of a New York corporation which is lower
than 20% or
(B) to any Person without regard to the percentage of the
outstanding voting stock of a New York corporation held by such
Person, and
(2) such law or amendment is applicable to GTE Corporation,
then an "Acquiring Person" shall be deemed to mean, for all purposes under
the Plan as of the effective date of such law or amendment, the Beneficial
Owner of securities representing the greater of (I) 10% of the Voting Power
or (II) the Lower Percentage of the Voting Power.
Affiliate. "Affiliate" shall have the meaning ascribed to such term in
Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
Annual Deferral. "Annual Deferral" shall mean the deferral with
respect to an Annual Service Period elected by a director in accordance
with Section 2.02.
Annual Service Period. "Annual Service Period" shall mean a period
that commences at the beginning of the annual meeting of the shareholders
of GTE Corporation, and that ends at the beginning of the immediately
succeeding annual meeting of the shareholders of GTE Corporation.
Article. "Article" shall mean an article of this Plan.
Associate. "Associate" shall have the meaning ascribed to such term in
Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
12
<PAGE> 15
Beneficial Owner. A person shall be deemed the "Beneficial Owner" of,
and shall be deemed to "beneficially own," any securities:
(1) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(2) which such Person or any of such Person's Affiliates or
Associates has (A) the right or obligation to acquire (whether such
right or obligation is exercisable or effective immediately or only
after the passage of time) pursuant to any agreement, arrangement, or
understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights (other than the rights
granted pursuant to the Rights Plan), warrants or options, or otherwise;
provided that a Person shall not be deemed the "Beneficial Owner" of, or
to "beneficially own," securities tendered pursuant to a tender or
exchange offer made by such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
exchange; or (B) the right to vote pursuant to any agreement,
arrangement, or understanding (whether or not in writing); provided that
a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this clause (B) if the agreement,
arrangement, or understanding to vote such security (i) arises solely
from a revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations of the Exchange Act, and (ii) is not also then
reported by such person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(3) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any
agreement, arrangement, or understanding (whether or not in writing), or
with which such Person or any of such Person's Affiliates have otherwise
formed a group for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy as described in clause (B)(i) of paragraph
(2), above), or disposing of any securities of GTE Corporation.
Board. "Board" shall mean the Board of Directors of GTE Corporation.
Change in Control. A "Change in Control" shall occur when and only
when the first of the following events occurs:
(1) an acquisition (other than directly from GTE Corporation) of
securities of GTE Corporation by any Person, immediately after which
such Person, together with all Affiliates and Associates of such Person,
shall be the Beneficial Owner of securities of GTE Corporation
representing 20 percent or more of the Voting Power or such lower
percentage of the Voting Power that, from time to time, would cause the
Person to constitute an "Acquiring Person"; provided that in determining
whether a Change in Control has occurred, the acquisition of securities
of GTE Corporation in a Non-Control Acquisition shall not constitute an
acquisition that would cause a Change in Control; or
(2) three or more directors, whose election or nomination for
election is not approved by a majority of the members of the "Incumbent
Board" (as defined below) then serving as members of the Board, are
elected within any single 12-month period to serve on the Board;
provided that an individual whose election or nomination for election is
approved as a result of either an actual or threatened "Election
Contest" (as described in Rule 14a-11 promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a person other than the Board (a "Proxy Contest"),
including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest, shall be deemed not to have been
approved by a majority of the Incumbent Board for purposes hereof; or
(3) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board; "Incumbent Board" shall
mean individuals who, as of January 16, 1997, are members of the Board,
provided that if the election, or nomination for election by GTE
Corporation's shareholders, of any new director was approved by a vote
of at least three-quarters of the Incumbent
13
<PAGE> 16
Board, such new director shall, for purposes of the Plan, be considered
as a member of the Incumbent Board; provided further that no individual
shall be considered a member of the Incumbent Board if such individual
initially assumed office as a result of either an actual or threatened
Election Contest or other actual or threatened Proxy Contest, including
by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(4) approval by shareholders of GTE Corporation of:
(A) a merger, consolidation, or reorganization involving GTE
Corporation, unless
(i) the shareholders of GTE Corporation, immediately before
the merger, consolidation, or reorganization, own, directly or
indirectly immediately following such merger, consolidation, or
reorganization, at least 50 percent of the combined voting power
of the outstanding voting securities of the corporation resulting
from such merger, consolidation, or reorganization (the
"Surviving Corporation") in substantially the same proportion as
their ownership of the voting securities immediately before such
merger, consolidation, or reorganization;
(ii) individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation, or reorganization constitute at least
a majority of the board of directors of the Surviving
Corporation; and
(iii) no Person (other than GTE Corporation or any
Subsidiary, any employee benefit plan (or any trust forming a
part thereof) maintained by GTE Corporation, the Surviving
Corporation or any Subsidiary, or any Person who, immediately
prior to such merger, consolidation, or reorganization had
Beneficial Ownership of securities representing 20 percent (or
such lower percentage the acquisition of which would cause a
Change in Control pursuant to paragraph (1) of this definition of
"Change in Control") or more of the Voting Power) has Beneficial
Ownership of securities representing 20 percent (or such lower
percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (1) of this definition of "Change
in Control") or more of the combined voting power of the
Surviving Corporation's then outstanding voting securities;
(B) a complete liquidation or dissolution of GTE Corporation; or
(C) an agreement for the sale or other disposition of all or
substantially all of the assets of GTE Corporation to any Person
(other than a transfer to a Subsidiary).
Change in Control Provisions. "Change in Control Provisions" shall
mean (1) the last sentence of Section 4.04(c), (2) Section 5.03, and (3)
this Section 5.04(b).
Committee. "Committee" shall mean the Executive Compensation and
Organizational Structure Committee of the Board, or any successor committee
thereto.
Decision Form. "Decision Form" shall mean the form so labeled that was
included in a booklet entitled "Board of Directors Compensation," which was
shipped by GTE Corporation on or about January 30, 1997, to directors who
were non-employee members of the Board on December 31, 1996. The completed
Decision Forms of the group of eligible directors are maintained in the
records of the Retirement Plan.
Deferred Stock Unit Plan. "Deferred Stock Unit Plan" shall mean the
Deferred Stock Unit Plan for Non-Employee Members of the Board of Directors
of GTE Corporation, as amended and in effect from time to time, or any
successor plan thereto.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended and in effect from time to time, or any successor thereto.
GTE Common Stock. "GTE Common Stock" shall mean the common stock of
GTE Corporation.
14
<PAGE> 17
Moody's Fund. "Moody's Fund" shall mean a hypothetical investment
option, the assets of which are held in United States currency, and which
is credited on the last day of each calendar quarter with interest on the
balance as of the immediately preceding day at a rate per annum that is
equal to the average yield on long-term, high-grade corporate bonds as
reported by Moody's Investors Service, or such other substantially similar
yield designated by the Board.
Non-Control Acquisition. "Non-Control Acquisition" shall mean an
acquisition by (1) an employee benefit plan (or a trust forming a part
thereof) maintained by (A) GTE Corporation or (B) any of its Subsidiaries,
(2) GTE Corporation or any of its Subsidiaries, or (3) any Person in
connection with a Non-Control Transaction.
Non-Control Transaction. "Non-Control Transaction" shall mean a
transaction described in clauses (i) through (iii) of subparagraph (4)(A)
of the definition of "Change in Control" herein.
Pension Deferral. "Pension Deferral" shall mean the deemed deferral
provided for certain directors under Section 2.04.
Person. "Person" shall mean any individual, firm, corporation,
partnership, joint venture, association, trust, or other entity.
Plan. "Plan" shall mean the Deferred Compensation Plan for
Non-Employee Members of the Board of Directors of GTE Corporation, as
amended and in effect from time to time.
Release Date. "Release Date" shall mean, with respect to a director,
the first day on which the director is no longer either a "director" or an
"officer" of GTE Corporation, within the meaning of section 16 of the
Exchange Act.
Retirement Plan. "Retirement Plan" shall mean the Retirement Plan for
Non-Employee Members of the Board of Directors of GTE Corporation, as in
effect prior to its amendment and restatement as of January 1, 1997.
Rights Plan. "Rights Plan" shall mean the Rights Agreement, dated as
of December 7, 1989, between GTE Corporation and The First National Bank of
Boston (as successor Rights Agent to State Street Bank and Trust Company),
as it may be amended from time to time, or any successor thereto.
Savings Plan Provisions. "Savings Plan Provisions" shall mean the
investment option and investment direction provisions of Article VI of the
GTE Savings Plan, as amended and restated effective January 1, 1993, and as
amended and in effect from time to time thereafter, including any successor
provision or provisions to such Article VI. The Savings Plan Provisions
shall not include, without limitation, any provision in such Article VI
relating to the Loan Fund or to any restriction on investment direction
applicable to Company-Matching Contributions.
Section. "Section" shall mean a section of this Plan.
Subsidiary. "Subsidiary" of any Person shall mean any corporation or
other entity of which a majority of the voting power of the voting equity
securities or voting interest is owned, directly or indirectly, by such
Person, or which is otherwise controlled by such Person.
Transition Option. "Transition Option" shall mean one of the options
listed on the Decision Form. "Transition Option 1" shall mean the "Current
Plan" option listed on the Decision Form. "Transition Option 2" shall mean
the "Lock & Freeze" option listed on the Decision Form. "Transition Option
3" shall mean the "Convert to Deferred GTE Stock Units" option listed on
the Decision Form. "Transition Option 4" shall mean the "Convert to
Deferred Cash" option listed on the Decision Form. The Decision Form also
permitted an eligible director the option of allocating his accrued pension
value under the Retirement Plan among Transition Options 2, 3, and 4 by
indicating the respective percentage to be allocated to each of these
options. In accordance with the Decision Forms submitted by the eligible
directors, which became final and binding on March 3, 1997, no eligible
director selected Transition Option 1 or 2, and no eligible director
elected to allocate any percentage of his accrued pension value under the
Retirement Plan to Transition Option 2.
Voting Power. "Voting Power" shall mean the voting power of all
securities of GTE Corporation then outstanding generally entitled to vote
for the election of directors of GTE Corporation.
15
<PAGE> 1
EXHIBIT 10-3
[GTE LETTERHEAD]
January 20, 1998
Dear Bill,
I am pleased to offer you an employment agreement (the "Agreement") with
GTE Service Corporation ("GTE") which will provide for employment stability for
you and long-term wealth-creation opportunity for you and your family. In
return, GTE can expect your continued leadership for the foreseeable future as
well as your value-added advice and counsel on the broad array of issues and
challenges facing GTE today and in the future.
GENERAL -- Under this Agreement, you will continue as a Senior Executive of
GTE at a grade level no less than level 25 or its equivalent. During the term of
this Agreement, you will continue to receive the same benefits as other GTE
executives at your grade level (except for ISEP or separation or severance
benefits) as well as any benefit to which you are entitled under your Executive
Severance Agreement ("ESA"), which this Agreement supplements. In addition, the
terms of your employment will be governed by the following:
TERM -- The term of this Agreement will be from December 1, 1997, through
November 30, 2002. We expect that, in light of changes in the industry and the
importance of dealing with Congress and federal regulators, you will spend up to
one-half of your time in Washington, D.C., during the term of this Agreement.
BASE SALARY -- During the term of this Agreement, your annual base salary
will be not less than $465,000 per year.
EIP AND LTIP -- During the term of this Agreement, on an annual basis, GTE
will provide you the opportunity to earn an annual bonus, in accordance with the
terms and conditions of the Executive Incentive Plan ("EIP") and an annual
long-term incentive award in accordance with the terms and conditions of the
Long-Term Incentive Plan ("LTIP"), in each case at a level commensurate with the
opportunity offered to other GTE executives at your salary level. In addition,
on an annual basis, GTE will provide you a stock option grant, in accordance
with the terms and conditions of the LTIP, at a level commensurate with the
opportunity offered to other GTE executives at your grade level.
ONE-TIME OPTION GRANT -- On December 5, 1997, the Executive Compensation
and Organizational Structure Committee approved the grant to you of an option to
purchase 228,000 shares of GTE Corporation common stock at market value on the
date of grant, subject to the terms of the option award agreement (which will in
no way alter your rights and benefits under this Agreement) and conditional upon
your signing this Agreement. The option vests at the rate of one-third per year
of employment (with such period beginning on December 5, 1997), so that it will
be fully vested if you remain employed by GTE until December 4, 2000.
ONE-TIME RESTRICTED STOCK UNIT ("RSU") -- On December 5, 1997, the
Executive Compensation and Organizational Structure Committee approved the grant
to you of restricted GTE Corporation stock units priced at date of issuance to
be equal in value to $1,880,000 and conditional upon your signing this
Agreement. These units have a 5-year vesting schedule and vest 10% per year for
each of the first 4 years of employment
<PAGE> 2
January 20, 1998
Page 2
(with such period beginning on December 5, 1997) and then 60% on December 4,
2002, subject to the terms of the RSU award agreement. The RSUs will be credited
with dividend equivalents. As the RSUs vest, you will be eligible to receive
both the units and the dividends or, subject to applicable deferral regulations,
you may elect to defer the dividends and vested units. Vested RSU's will not be
forfeited. Details will be provided in your RSU award agreement (which will in
no way alter your rights and benefits under this Agreement).
LOAN -- You may borrow up to $300,000 from GTE, at a market interest rate
determined by GTE, for a term of up to 5 years; provided that you must repay any
unpaid balance of the loan principal and interest no later than November 30,
2002. The interest rate will be equal to the rate required to avoid creating any
imputed income to you under the Internal Revenue Code. If, in accordance with
the RSU Agreement, you elect to receive any cash payments with respect to the
RSUs on or before November 30, 2002, you may elect to have all or part of such
cash payments (net of any applicable tax withholding) applied against any unpaid
balance of the loan principal and interest.
RETIREMENT --
ADDITIONAL PENSION AND BENEFIT CREDIT -- If you remain employed by GTE
until November 30, 2002:
(i) You will be credited with an extra year of service for each year
for which you actually worked for GTE (including service for GTE before the
date of this Agreement) through November 30, 2002, for purposes of
determining your pension benefits, and you will be deemed to have satisfied
the Rule of 76 for purposes of determining your right to pension,
post-retirement medical, and Executive Retirement Life Insurance Plan
("ERLIP") benefits; and
(ii) Your pension benefits will not be less than those determined in
accordance with paragraph (i), above, and the provisions of GTE's pension
plan as in effect on the date of this Agreement. Your service after
November 30, 2002, however, will be credited in accordance with the
applicable plan provisions and will not be affected by the preceding
provisions of this Section.
If your employment terminates before November 30, 2002, by reason of
involuntary separation by GTE (other than for Cause (as defined below)),
separation for Good Reason (as defined below), or a Qualifying Termination
following a Change in Control (as those terms are defined in your ESA), you will
be entitled to the benefits provided by the preceding provisions of this Section
as though your employment continued until November 30, 2002; provided that your
service credit will be equal to the greater of (a) the service credit to which
you are entitled under the preceding provisions of this Section, or (b) the sum
of (1) the service credit to which you are entitled under the preceding
provisions of this Section as applied solely to your service up to the date your
employment terminates (that is, an extra year of service for each year of your
actual service) and (2) the additional service credit to which you are entitled
under your ESA.
If your employment terminates before November 30, 2002, by reason of your
death, disability, as defined by GTE's long-term disability plan as in effect on
the date of this Agreement ("Disability"), entry into service with the federal
government or, as approved by the Board of Directors of GTE Corporation (the
"Board"), entry into service with an educational organization, you will be
credited with an extra year of service for each year for which you actually
worked for GTE (including service for GTE before the date of this Agreement)
through November 30, 2002, for purposes of determining your pension benefits,
but you will not be entitled to any other benefits under the preceding
provisions of this Section (such as being deemed to have satisfied the Rule of
76); provided that if you are Disabled, you will be eligible to receive any
additional GTE benefits that you may be entitled to receive under GTE's benefit
plans by reason of your Disability.
If your employment terminates before November 30, 2002, by reason of
involuntary termination for Cause (as defined below) or by reason of your
voluntary termination of employment without Good Reason (other than to accept a
position with the federal government or, as approved by the Board, a position
with an
<PAGE> 3
January 20, 1998
Page 3
educational organization), you will not be entitled to any benefits under the
preceding provisions of this Section.
The benefits prescribed by the preceding provisions of this Retirement
Section will be paid out of GTE's funded plans, out of GTE's general assets, or
both, at GTE's discretion. If you are not deemed to satisfy the Rule of 76, the
pension benefits provided pursuant to the preceding provisions of this Section
will be subject to actuarial reduction in accordance with the applicable
provisions of GTE's pension plans. In any event, such pension benefits will be
offset by the actuarial equivalent of any pension benefits to which you are
otherwise entitled under GTE's pension plans.
TERMINATION PROVISIONS --
- CHANGE IN CONTROL -- Subject to Board approval, your ESA will be amended
to provide for a full gross-up payment to cover any excise taxes you may
owe if your employment is terminated after a Change in Control (as
defined in your ESA). Upon the occurrence of a Change in Control, your
RSUs and stock options will immediately vest. In addition, if you incur a
Qualifying Termination (as defined in your ESA) following a Change in
Control, your benefits under this Agreement will be as follows:
(A) LUMP-SUM CASH PAYMENT -- You will receive a lump-sum cash payment
equal to the greater of (i) the Severance Payment to which you are entitled
under your ESA or (ii) a cash payment equal to the sum of (w) your salary
for the remaining term of this Agreement, (x) your EIP awards for the
remaining term of this Agreement, (y) your LTIP performance-bonus awards
for the remaining term of this Agreement, and (z) an amount to be paid in
lieu of any stock options that otherwise would be granted to you during the
remaining term of this Agreement. For purposes of the preceding sentence,
your salary for the remaining term of this Agreement will be deemed equal
to the greater of your salary immediately before the Change in Control or
your salary immediately before your Qualifying Termination; each EIP award
for the remaining term of this Agreement will be deemed to be equal to the
average dollar amount of the 3 most recent annual bonus awards you earned
before the Change in Control; each LTIP award for the remaining term of
this Agreement will be deemed to be equal to the average dollar amount of
the performance-bonus awards you earned for the 3 most recent full award
cycles ending before the Change in Control; and the amount referred to in
clause (z), above, will be determined by the Table attached hereto and
incorporated herein by reference.
(B) INSURANCE -- You will be entitled to receive continued medical and
life insurance coverage in accordance with your ESA for the period
prescribed by your ESA or, if longer, until November 30, 2002 at which time
you will receive the post retirement medical and ERLIP benefits referred to
in the Retirement Section.
(C) FINANCIAL COUNSELING AND OUTPLACEMENT SERVICES -- You will receive
financial counseling and outplacement services in accordance with your ESA.
(D) SERVICE CREDIT -- You will be deemed to have satisfied the Rule of
76, and you will receive service credit in accordance with the Section
captioned "Additional Pension and Benefit Credit," above.
If the provisions of this Section apply, you will not be entitled to
payments or benefits under the following Sections that address termination
of employment under other circumstances.
- VOLUNTARY TERMINATION BY YOU -- You may terminate your employment under
this Agreement without Good Reason at any time by giving the Chief
Executive Officer of GTE Corporation ("CEO") written notice of intent to
terminate, delivered at least 30 calendar days prior to the effective
date of such termination (such period not to include vacation). The
termination will automatically become effective upon the expiration of
the 30-day notice period. Upon the effective date of such termination,
your base salary and any other GTE benefits will cease to accrue, you
will forfeit all unvested stock
<PAGE> 4
January 20, 1998
Page 4
options and unvested restricted stock units, and GTE will have no further
obligations under this Agreement.
- GOVERNMENT OR EDUCATIONAL SERVICE -- If you terminate employment with GTE
to enter service with the federal government or, as approved by the
Board, to work for an educational organization, your base salary and any
other GTE benefits will cease to accrue, one-half of your then unvested
equity-based awards (such as stock options, RSUs, and performance-bonus
awards) will immediately vest, and you will receive a lump-sum payment
equal to one-half of the sum of (a) your then current annual base pay for
the remaining term of this Agreement plus (b) your Projected EIP Amount.
Your Projected EIP Amount will be equal to the sum of your projected
annual bonus award for each year during the term of this Agreement for
which your annual bonus has not been determined at the time your
employment terminates. The projected annual bonus payment for each such
year will be equal to the average dollar amount of your 3 most recent
annual bonus awards at the time your employment terminates. The value of
your then-outstanding and future performance-bonus awards (that is, the
cash awards under LTIP) will be converted to a cash value equal to the
sum of (x) 100% of the target award for each award cycle that commenced
before your employment terminated multiplied by the percentage of that
award cycle that has elapsed at the time your employment terminates plus
(y) 50% of the target award for each award cycle that has commenced (or
is scheduled to commence) before December 1, 2002, multiplied by the
percentage of that award cycle that is scheduled to occur after your
employment terminates and before December 1, 2002; provided that, for
purposes of this sentence, any target award that has not been established
at the time your employment terminates will be deemed to be equal to the
average dollar value of the performance-bonus awards you earned for the 3
most recent full award cycles under LTIP ending before your employment
terminates. The amount determined pursuant to the preceding sentence will
be paid to you in an immediate lump sum in lieu of your then-outstanding
and future performance-bonus awards. You will have a period of at least
90 days from the date your employment terminated within which to exercise
any then outstanding and vested stock options. This paragraph will not
apply if you are entitled, by reason of the termination of your
employment, to greater benefits under other provisions of this Agreement
or by the terms of any plan or award agreement. If there are any legal
restrictions or limitations on the amount of the lump-sum payment that
GTE can make to you under these circumstances, GTE will pay you the
lesser of (I) the amount that it is legally permitted to pay under such
restrictions or (II) the amount that is otherwise payable hereunder.
- TERMINATION DUE TO DEATH OR DISABILITY -- If you die or become Disabled
during the term of this Agreement, your base salary and any other GTE
benefits will cease to accrue, and GTE will pay you or your beneficiary,
as appropriate, all benefits to which you or your beneficiary has a right
pursuant to GTE's compensation and benefit plans.
- INVOLUNTARY TERMINATION BY GTE -- GTE may terminate your employment under
this Agreement at any time, for any reason. However, in the event that
GTE terminates your employment for any reason other than death,
Disability, or for Cause, such termination shall be deemed an Involuntary
Termination by GTE. In the event of such an Involuntary Termination, you
will be entitled to continue to receive all payments, benefits and grants
due you hereunder (including any compensation and benefits to which you
are entitled under the second, fourth and fifth paragraphs of this
Agreement, but excluding all perquisites, e.g. credit cards, first class
air travel and car service (which will cease)) for the remaining term of
this Agreement as and when such payments, benefits and grants would have
been provided if your employment under this Agreement had not been
terminated; provided further that if you are involuntary terminated on or
after December 1, 2001 and before November 30, 2002 you will receive a
continuation of all payments, benefits, and grants for the remaining term
of this Agreement in accordance with the preceding provisions of this
paragraph and a continuation of your base salary (with no other payments,
benefits, or grants) from the expiration of the term of this
<PAGE> 5
January 20, 1998
Page 5
Agreement until the first anniversary of the date your employment
terminates. In lieu of any stock options that otherwise would have been
granted to you after your termination of employment, GTE will grant you
phantom stock options (that is, stock appreciation rights payable in
cash) with respect to the same number of shares that would have been
covered by the options that otherwise would have been granted to you.
Such phantom stock options will be subject to the terms and conditions
that apply to annual stock options then being granted to other GTE
executives at your salary level under LTIP, except that (a) the phantom
stock options will vest on November 30, 2002, and (b) you will have a
period of at least 90 days to exercise the phantom stock options
following November 30, 2002.
Notwithstanding the foregoing, the value of your then-outstanding and
future performance-bonus awards (that is, the cash awards under LTIP) will
be determined to be equal to 100% of the target award for each award cycle
multiplied by the percentage of that award cycle that occurs before
December 1, 2002; provided that, for purposes of this sentence, any target
award that has not yet been established at the time your employment
terminates will be deemed to be equal to the target award established at
the time of payment for each award cycle for other GTE executives at your
salary level (as your salary level was established immediately before your
employment terminated). The amounts determined pursuant to the preceding
sentence will be paid to you in accordance with the provisions of LTIP that
apply from time to time to other GTE executives at your salary level.
Notwithstanding the foregoing provisions of this paragraph, all cash
compensation (i.e., base salary and annual and long term cash bonus awards)
to which you are entitled under this Agreement following the termination of
your employment will be reduced by any cash compensation (i.e., base salary
and annual and long term cash bonus awards) that you earn for the same
period of time as a result of your subsequent employment (disregarding for
this purpose any pension benefits to which you are entitled under this
Agreement or to which you become entitled as a result of any subsequent
employment and disregarding further any investment income or income
attributable to your self employment).
For as long as GTE has obligations to you under this Involuntary
Termination Section, you will keep GTE informed regarding the terms and
condition of any subsequent employment and the corresponding compensation
and benefits earned from such employment, and you will provide or cause to
provide to GTE, in writing, correct, complete, and timely information
concerning the same.
- TERMINATION FOR GOOD REASON -- You may terminate your employment under
this Agreement for Good Reason by giving the CEO 30 calendar days'
written notice of such intent to terminate which sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for such
termination. Good Reason means the occurrence of any one or more of the
following without your written consent:
(a) A material reduction in your total compensation,
(b) A material diminution of your duties as they existed on the date
of this Agreement, or
(c) A material breach by GTE of any provision, including the third
paragraph, of this Agreement.
Notwithstanding the foregoing, GTE will have 15 calendar days from its
receipt of such notice to cure the action specified. In the event of a
cure by GTE within the 15-day period, the action in question will not
constitute Good Reason.
Except as provided in the preceding paragraph, upon the lapse of the 30
calendar days' notice period, the Good Reason termination will take
effect, and your obligation to serve GTE, and GTE's obligation to employ
you, under the terms of this Agreement, will terminate simultaneously,
and you will receive benefits (and have obligations) equal to those that
you would have received if your employment had been terminated
involuntarily by GTE without Cause.
If you do not fulfill the notice and explanation requirements imposed by
this Section, the resulting termination of employment will be deemed a
voluntary termination (without Good Reason).
<PAGE> 6
January 20, 1998
Page 6
- TERMINATION FOR CAUSE -- Nothing in this Agreement prevents GTE from
terminating your employment under this Agreement for "Cause."
In the event of your termination for Cause, GTE will pay you your full
accrued base salary and accrued vacation time through the date of your
termination, and GTE will have no further obligations under this Agreement.
"Cause" will be determined by the Board in the exercise of good faith and
reasonable judgment, and means:
(a) Your conviction, by a court of competent jurisdiction, of a
felony;
(b) Your material breach of the applicable code of professional
responsibility;
(c) Your commission of an act of fraud upon, or an act of material
dishonesty toward, GTE or an affiliate thereof; or
(d) Any willful or reckless failure by you to observe or perform your
material duties to GTE, other than by reason of your death or Disability.
COVENANTS -- In consideration for the benefits described above, you agree
that you will not, without the prior written consent of GTE, directly or
indirectly:
(A) DISCLOSURE OF INFORMATION -- During the term of this Agreement and
forever thereafter, except as required by law, use, attempt to use,
disclose, or otherwise make known to any person or entity (other than the
Board or otherwise in the course of the business of GTE Corporation and its
affiliates):
(i) Any knowledge or information, including without limitation,
lists of customers or suppliers, trade secrets, know-how, inventions,
products, discoveries, processes, and formulae, as well as any data and
records pertaining thereto, that you may acquire in the course of your
employment; or
(ii) Any knowledge or information of a confidential nature
(including all unpublished matters) relating to, without limitation, the
business, properties, accounting, books and records, trade secrets, or
memoranda of GTE Corporation or its affiliates.
(B) EMPLOYMENT -- During the term of this Agreement and for a period
of 12 consecutive months immediately thereafter employ or retain or arrange
to have any other person, firm, or other entity employ or retain or
otherwise participate in the employment or retention of any person who is
an employee of GTE Corporation or its affiliates.
The obligations imposed on you by this Section are in addition to, and not
in lieu of, any and all other policies and/or agreements of GTE regarding the
foregoing covenants.
This Section will continue to apply after the term of this Agreement ends.
Your violation of any provision of this Section will result in your immediate
forfeiture of all rights under this Agreement. GTE also may obtain injunctive
relief and any other remedy available under law for such violation.
MISCELLANEOUS --
COMPARABLE TREATMENT -- During the term of this Agreement, while employed
by GTE, you will be eligible to receive benefits under any existing or future
GTE fringe benefit program on the same basis as the benefits provided to any
other GTE executive at your grade level.
NONDUPLICATION OF BENEFITS/NO SEVERANCE -- The payment of any benefits
hereunder, unless otherwise specifically stated herein, will be in lieu of any
other ISEP or separation or severance benefits and will fulfill all GTE
obligations under associated plans and programs.
<PAGE> 7
January 20, 1998
Page 7
OTHER GTE PLANS -- Except to the extent otherwise explicitly provided by
this Agreement, any awards made to you under any GTE compensation or benefit
plan or program will be governed by the terms of that plan or program and any
applicable award agreement thereunder. Notwithstanding the foregoing, you will
not be entitled to participate in any GTE compensation or benefit plan that is
established after your employment with GTE terminates, and, except as
specifically provided in this Agreement, you will not be entitled to any
additional grants or awards under any GTE compensation or benefit plan after
your employment with GTE terminates.
TAXES -- GTE may withhold from any benefits payable under this Agreement
all taxes that GTE reasonably determines to be required pursuant to any law,
regulation, or ruling. However, it is your obligation to pay all required taxes
on any amounts provided under this Agreement, regardless of whether withholding
is required.
CONFIDENTIALITY -- Except to the extent otherwise required by law, you will
keep the terms of this Agreement confidential.
GOVERNING LAW -- To the extent not preempted by federal law, the provisions
of this Agreement will be construed and enforced in accordance with the laws of
the State of New York, determined without regard to its choice-of-law rules.
Bill, I believe this generous offer provides you and your family with
financial security as our industry and GTE evolve. We recognize the requirements
that have been and will be placed on you are significant. It is my hope that
this compensation arrangement provides you with a level of comfort to allow you
to continue to perform your responsibilities in an exemplary manner. Please
indicate your acceptance by signing below.
Sincerely yours,
[LEE SIGNATURE]
cc: C. R. Lee
J. R. MacDonald
I agree to the terms described above.
[BARR SIGNATURE]
William P. Barr
<PAGE> 8
ATTACHMENT TO AGREEMENT
BETWEEN GTE SERVICE CORPORATION AND WILLIAM P. BARR
DATED JANUARY 19, 1998
The amount to be paid, in accordance with paragraph (a)(ii)(z) of the
Change in Control section of the Termination Provisions of the Agreement, in
lieu of any stock options that otherwise would be granted will be determined by
applying the following Table:
<TABLE>
<CAPTION>
THE AMOUNT PAYABLE UNDER PARAGRAPH (A)(II)(Z) IS THE
FOLLOWING PERCENTAGE OF THE GREATER OF (1) YOUR BASE SALARY IN
IF YOUR QUALIFYING TERMINATION OCCURS DURING THE PERIOD EFFECT IMMEDIATELY BEFORE THE CHANGE IN CONTROL OR (2) YOUR
DESIGNATED BELOW (DEFINED BY ANNUAL GRANTS OF STOCK OPTIONS BASE SALARY IN EFFECT IMMEDIATELY BEFORE THE QUALIFYING
UNDER THE LTIP) TERMINATION
- ----------------------------------------------------------- --------------------------------------------------------------
<S> <C>
Before the 1999 annual grant........................ 368%
After the 1999 annual grant and before the 2000 annual
grant............................................. 251%
After the 2000 annual grant and before the 2001 annual
grant............................................. 148%
After the 2001 annual grant and before the 2002 annual
grant............................................. 62%
After the 2002 annual grant......................... 0%
</TABLE>
Notwithstanding the foregoing, GTE has the right, after each annual grant
of stock options under LTIP, to change the percentages in the foregoing Table to
reflect the actual number of shares covered by the annual grant made to you,
such grant to be for the same number of shares as granted to other executives at
your grade level; provided that no such change may be made after a Change in
Control occurs.
<PAGE> 1
EXHIBIT 10-8
DEFERRED STOCK UNIT PLAN FOR NON-EMPLOYEE MEMBERS OF
THE BOARD OF DIRECTORS OF GTE CORPORATION
AMENDED AND RESTATED
EFFECTIVE JANUARY 1, 1997
<PAGE> 2
DEFERRED STOCK UNIT PLAN FOR NON-EMPLOYEE MEMBERS OF
THE BOARD OF DIRECTORS OF GTE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I INTRODUCTION
1.01 Name of Plan................................................
1.02 Purpose of Plan.............................................
1.03 Restatement of Plan.........................................
ARTICLE II AWARDS AND PAYMENT ELECTIONS
2.01 Awards......................................................
2.02 Payment Elections...........................................
2.03 Designation of Beneficiaries................................
ARTICLE III ACCOUNTS AND INVESTMENTS
3.01 Accounts....................................................
3.02 Investments.................................................
3.03 Hypothetical Nature of Accounts and Investments.............
ARTICLE IV PAYMENTS
4.01 Exclusive Entitlement to Payment............................
4.02 Payment Commencement Date...................................
4.03 Method of Payment...........................................
4.04 Limitations on Rights to Payment............................
ARTICLE V MISCELLANEOUS
5.01 Severability................................................
5.02 Board Authority.............................................
5.03 Change in Control...........................................
5.04 Usage and Definitions.......................................
</TABLE>
<PAGE> 3
ARTICLE I
INTRODUCTION
1.01. NAME OF PLAN.
This Plan shall be known as the Deferred Stock Unit Plan for Non-Employee
Members of the Board of Directors of GTE Corporation. Prior to its amendment and
restatement by this instrument, the Plan was known as the "Phantom Stock Plan
for Non-Employee Members of the Board of Directors of GTE Corporation" (the
"Prior Plan").
1.02. PURPOSE OF PLAN.
The purpose of the Plan is to benefit the shareholders of GTE Corporation
by increasing the proprietary interests of non-employee directors of GTE
Corporation in the growth and success of GTE Corporation.
1.03. RESTATEMENT OF PLAN.
(a) EFFECTIVE DATE OF RESTATEMENT. The Prior Plan was established on
November 5, 1992. This instrument amends and restates the Prior Plan as the
Plan, effective as of January 1, 1997.
(b) AWARDS AFFECTED BY RESTATEMENT. All Awards made on or after January 1,
1997, and the elections relating thereto, shall be governed by the terms of the
Plan as amended and restated herein. In addition, unless a director elects
otherwise on or before September 26, 1997, all Awards made to the director
before January 1, 1997, and the elections relating thereto, shall be governed
prospectively by the terms of the Plan as amended and restated herein; provided
that the elections relating to such Awards shall remain in full force and
effect, but shall thereafter be subject to modification solely in accordance
with the Plan as amended and restated herein.
1
<PAGE> 4
ARTICLE II
AWARDS AND PAYMENT ELECTIONS
2.01. AWARDS.
On February 26, 1997 and on February 15th of each calendar year after 1997,
each director of GTE Corporation who is a member of the Board on that date shall
receive an award of one thousand (1,000) hypothetical shares of GTE Common
Stock. In addition, each director who first becomes a member of the Board on a
date after February 26, 1997 for the 1997 calendar year or February 15th during
any calendar year after 1997, as applicable, shall receive an award thirty (30)
days after he first becomes a member of the Board of one thousand (1,000)
hypothetical shares of GTE Common Stock. Notwithstanding any other provision of
the Plan, no individual shall be eligible to receive an Award under this Plan
unless, on the Award Date, he is a member of the Board and is not an employee of
GTE Corporation or any subsidiary or affiliate thereof. Each Award shall be
automatic, shall not require any action on the part of the Board or its
designees, and shall be made by crediting the director's account maintained
pursuant to Section 3.01 with one thousand (1,000) hypothetical shares of GTE
Common Stock.
2.02. PAYMENT ELECTIONS.
(a) Express Election. A director who receives an Award pursuant to Section
2.01 may submit an election to the Executive Vice President -- Human Resources &
Administration or his successor or designee ("EVP-HR") that specifies the time
and the manner in which the director wishes to receive payments with respect to
the Award. Such election shall satisfy each of the requirements set forth in
paragraphs (1) through (5), below.
(1) Deadline for Submitting Election. A director's election with
respect to an Award shall be submitted on or before the Award Date.
Notwithstanding the preceding sentence, a director's election with respect
to an Award made on February 26, 1997, shall be submitted on or before
March 31, 1997.
(2) Form of Election. The election shall be in writing and in a form
acceptable to the EVP-HR.
(3) Payment Commencement Date. The election shall specify the date,
selected by the director in accordance with Section 4.02, on which payments
with respect to the Award are to commence under the Plan (i.e., any date on
or after his Release Date).
(4) Method of Payment. The election shall specify the method,
selected by the director in accordance with Section 4.03, in which payments
with respect to the Award are to be made under the Plan (i.e., whether such
payments are to be made in the form of a lump sum, annual installments, or
flexible installments, and whether such payments are to be made in cash or
in GTE Common Stock).
(5) Election Irrevocable. The payment commencement date and the
method of payment elected by a director with respect to an Award pursuant
to paragraphs (3) and (4), above, shall not be revocable or subject to
modification at any time. Notwithstanding the foregoing, a director may at
any time submit a request to the EVPHR to modify the payment commencement
date, the method of payment, or both, with respect to the Award, provided
that the modification does not become effective before the director's
Release Date, and provided further that the request is submitted before any
payment is made to the director with respect to the Award pursuant to
Article IV. If the modification has the effect of accelerating all or part
of any payment otherwise due the director under Article IV, the request
shall be subject to the approval of the EVP-HR, which approval the EVP-HR
may grant or deny in his sole discretion. If the modification has the
effect of deferring until a later calendar year all or part of any payment
otherwise due the director under Article IV, the request shall be granted
to the extent of such deferral, provided that the request is submitted on
or before the last day of the calendar year immediately preceding the
calendar year in which the payment otherwise would have been made to the
director under Article IV. If the modification has the effect of deferring
until a later date within the same calendar year all or part of any payment
otherwise due the director under Article IV during such calendar year, the
request shall be granted to the extent of such deferral, provided that the
request is submitted before the
2
<PAGE> 5
date on which the payment otherwise would have been made to the director
under Article IV. A director may, in his sole discretion, specify that his
request for a modification pursuant to this paragraph (5) be submitted to
the Board or the Committee for its prior approval.
(b) Default Election. A director who fails to make an express election
with respect to an Award in accordance with subsection (a), above, shall be
deemed to have made such an election. The payment commencement date and the
method of payment under a deemed election pursuant to this subsection (b) shall
be the same as specified in the director's most recent express election in
effect on the Award Date under subsection (a), above. If the director has no
express election in effect on the Award Date under subsection (a), above, or if
his most recent express election under that subsection does not satisfy the
requirements of Sections 4.02 and 4.03 with respect to his current Award, then
the payment commencement date and the method of payment under the deemed
election pursuant to this subsection (b) shall be the same as specified in the
director's most recent deferral election in effect on the Award Date under the
Deferred Compensation Plan. If the director has no deferral election in effect
on the Award Date under the Deferred Compensation Plan, or if his most recent
deferral election under that plan does not satisfy the requirements of Sections
4.02 and 4.03 with respect to his current Award, he shall be deemed to have
elected to receive his payments with respect to the Award in 10 annual
installments payable in cash in accordance with Section 4.03(2) commencing on
his Release Date. A deemed election pursuant to this subsection (b) shall not be
revocable or subject to modification except in accordance with the provisions of
subsection (a)(5), above.
2.03. DESIGNATION OF BENEFICIARIES.
A director who receives an Award pursuant to Section 2.01 may designate one
or more beneficiaries under the Plan with respect to such Award. Notwithstanding
Section 2.02(a)(5), a director may, at any time, revoke a prior designation and
make a new designation pursuant to this Section 2.03. Any such designation or
revocation shall be in writing and shall be submitted to the EVP-HR in such form
and in such manner as is acceptable to the Board. If a director dies before he
has received all payments due him under the Plan, the remaining payments shall
be made to his beneficiaries in accordance with his designation, or, if there is
no such beneficiary, then to the director's personal representative. All such
payments shall be made in accordance with the payment schedule (or schedules)
that would have applied to the director had he survived, unless the director
specified in his designation that a shorter payment schedule (or schedules) is
to take effect upon his death.
3
<PAGE> 6
ARTICLE III
ACCOUNTS AND INVESTMENTS
3.01. ACCOUNTS.
(a) Establishment of Accounts. A separate account shall be maintained for
each director who receives an Award pursuant to Section 2.01. Such account shall
be (1) credited with the Awards granted to the director pursuant to Section
2.01, (2) credited (or charged, as the case may be) with the investment results
determined pursuant to Section 3.02, and (3) charged with the amounts paid by
the Plan to or on behalf of the director pursuant to Article IV.
(b) Subaccounts. Within each director's account, separate subaccounts
shall be maintained to the extent necessary for the administration of the Plan.
For example, it may be necessary to maintain separate subaccounts where the
director has specified different payment commencement dates or different methods
of payment with respect to his Awards granted on different Award Dates.
3.02. INVESTMENTS.
(a) Deemed Investment in GTE Common Stock. Until a director's Release
Date, the entire balance in his account shall be treated as if it were invested
in GTE Common Stock. In addition, on or after a director's Release Date, the
portion of the balance in his account that is subject to a split-stream flexible
installment election under Section 4.03(3) or with respect to which he has
elected to receive payments in the form of GTE Common Stock pursuant to Section
4.03(4) shall be treated as if it were invested in GTE Common Stock. The deemed
investment in GTE Common Stock of all or part of the balance in a director's
account shall be determined in accordance with the following rules:
(1) Deemed Reinvestment of Dividends. The number of hypothetical
shares of GTE Common Stock credited to a director's account shall be
increased on each date that a dividend is paid on GTE Common Stock. The
number of additional hypothetical shares of GTE Common Stock credited to a
director's account as a result of such increase shall be determined, first,
by multiplying the total number of hypothetical shares of GTE Common Stock
credited to the director's account immediately before such increase by the
amount of the dividend paid per share of GTE Common Stock on the dividend
payment date, and, then, by dividing the product so determined by the
average of the high and low price of GTE Common Stock on the composite tape
of New York Stock Exchange issues on the dividend payment date (or if there
was no reported sale of GTE Common Stock on such date, on the next
preceding day on which there was such a reported sale). Notwithstanding the
foregoing and Section 3.01(a)(3), on any date a split-stream flexible
installment is payable to a director, no increase pursuant to this
paragraph (1) shall be made, but neither shall the amount of such
installment be charged against the director's account (unless the
installment is a final split-stream flexible installment).
(2) Conversion Out of GTE Common Stock. The dollar value of the
hypothetical shares of GTE Common Stock credited to a director's account on
any date shall be determined by multiplying the number of hypothetical
shares of GTE Common Stock credited to the director's account on that date
by the average closing price of GTE Common Stock, as reported on the
composite tape of New York Stock Exchange issues for the most recent 20
business days ending on or before that date.
(3) Effect of Recapitalization. In the event of a transaction or
event described in this paragraph (3), the number of hypothetical shares of
GTE Common Stock credited to a director's account shall be adjusted in such
manner as the Board, in its sole discretion, deems equitable. A transaction
or event is described in this paragraph (3) if and only if (A) it is a
dividend or other distribution (whether in the form of cash, shares, other
securities, or other property), extraordinary cash dividend,
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
shares or other securities, the exercisability of stock purchase rights
received under the Rights Plan, the issuance of warrants or other rights to
purchase shares or other securities, or other similar corporate transaction
or event, and (B) the Board determines that such transaction or event
4
<PAGE> 7
affects the shares of GTE Common Stock, such that an adjustment pursuant to
this paragraph (3) is appropriate to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under this
Plan.
(b) Deemed Investment in Savings Plan Investment Options. On and after a
director's Release Date, the portion of the balance in his account that is not
required to be treated as if it were invested in GTE Common Stock on and after
his Release Date pursuant to subsection (a), above, shall be treated as if it
were invested in one or more of the investment options specified in the Savings
Plan Provisions, and a director shall be entitled to direct the deemed
investment of such portion of the balance in his account among such investment
options on the same terms and conditions applicable under the Savings Plan
Provisions. The deemed investment in one or more of the investment options
specified in the Savings Plan Provisions of all or part of the balance in a
director's account shall be determined in accordance with the following rules:
(1) Moody's Fund. The investment options specified in the Savings
Plan Provisions shall also be deemed to include a Moody's Fund, the assets
of which are held in United States currency, and which is credited on the
last day of each calendar quarter with interest on the balance as of the
immediately preceding day at a rate per annum that is equal to the average
yield on long-term, high-grade corporate bonds as reported by Moody's
Investors Service, or such other substantially similar yield designated by
the Board.
(2) GTE Common Stock. On and after a director's Release Date, the
portion of the balance in his account that is not required to be treated as
if it were invested in GTE Common Stock on and after his Release Date
pursuant to subsection (a), above, shall not be treated as if it were
invested in GTE Common Stock. However, subject to paragraph (4) below, at
any time on or after his Release Date, a director may elect to have all or
part of such portion of the balance in his account treated as if it were
invested in the GTE Stock Portfolio specified in the Savings Plan
Provisions.
(3) Determination of Purchase and Sale Prices. In the case of any
deemed investment in a medium other than United States currency, the
purchase (or sale) price per unit of the deemed investment at any time
shall be the same as the actual purchase (or sale) price per unit paid (or
received) by the Trustee of the GTE Savings Plan for the same investment at
the same time, or, if there is no actual purchase (or sale) by the Trustee
at the same time, at the nearest time thereafter.
(4) Limitation on Deemed Investment in GTE Stock Portfolio. During
the six-month period following his Release Date, a director shall not be
entitled to direct that any portion of the balance in his account be
treated as invested in the GTE Stock Portfolio specified in the Savings
Plan Provisions if at any previous time such portion was treated as
invested in any investment other than GTE Common Stock or the GTE Stock
Portfolio.
3.03. HYPOTHETICAL NATURE OF ACCOUNTS AND INVESTMENTS.
Each account and investment established under this Article III shall be
hypothetical in nature and shall be maintained for bookkeeping purposes only. In
accordance with Section 4.04(a), neither the Plan nor any of the accounts or
investments established hereunder shall hold any actual funds or assets.
5
<PAGE> 8
ARTICLE IV
PAYMENTS
4.01. EXCLUSIVE ENTITLEMENT TO PAYMENT.
An Award made pursuant to Section 2.01 shall entitle a director to receive
the payments due him at the times, in the amounts, and in the form specified in
this Article IV. No other amounts shall be due or payable to a director under
this Plan.
4.02. PAYMENT COMMENCEMENT DATE.
The payments to a director with respect to an Award shall commence on the
date selected by the director in accordance with this Section 4.02. Such date
shall be a date that is on or after his Release Date, and that is no later than
the last day of his life expectancy, determined as of the age he will have
attained on the payment commencement date. A director may select different
payment commencement dates with respect to his Awards granted on different Award
Dates. In addition, a director may select different payment commencement dates
with respect to different portions of his Award granted on the same Award Date.
4.03. METHOD OF PAYMENT.
The payments to a director with respect to an Award shall be made pursuant
to the method selected by the director in accordance with paragraph (1), (2), or
(3), below. All payments to a director with respect to an Award shall be made
solely in cash, except as provided in paragraph (4), below, which permits a
director to elect to receive payments with respect to an Award in the form of
GTE Common Stock. A director may select different methods of payment with
respect to his Awards granted on different Award Dates. In addition, a director
may select different methods of payment with respect to different portions of
his Award granted on the same Award Date.
(1) Lump Sum. The director may elect to receive payment with respect
to an Award in a lump sum. The lump sum shall be payable to the director on
the payment commencement date and shall equal the portion of the balance in
his account attributable to the Award, determined as of the payment
commencement date.
(2) Annual Installments. The director may elect to receive the
payments with respect to an Award in two or more annual installments. If
so, the director shall indicate in his election pursuant to Section 2.02(a)
the number of annual installments he wishes to elect. The number of annual
installments elected shall not exceed 20 and shall not extend the period of
payment beyond the director's life expectancy, determined as of the age he
will have attained on the payment commencement date. If the number of
annual installments elected by a director would otherwise exceed the limits
in the preceding sentence, he shall be deemed to have elected the maximum
number of annual installments permitted under the preceding sentence. The
annual installments shall be payable to the director beginning on the
payment commencement date and on each anniversary thereof until the total
number of installments elected by the director have been paid. Each annual
installment shall equal the portion of the balance in the director's
account attributable to the Award, determined as of the date the
installment is payable, multiplied by a fraction, the numerator of which is
one, and the denominator of which is the excess of the total number of
installments elected by the director over the number of installment
payments previously made under the schedule. For example, the respective
fractions under a 5-year installment schedule are 1/5 for the first
installment, 1/4 for the second installment, 1/3 for the third installment,
1/2 for the fourth installment, and 1/1 for the fifth and final
installment.
(3) Flexible Installments. The director may elect to receive the
payments with respect to an Award in accordance with any other reasonable
method he specifies. Such payments shall be referred to herein as flexible
installments. If a director elects to receive the payments with respect to
an Award in the form of flexible installments, he shall indicate in his
election pursuant to Section 2.02(a) the method under which he wishes the
date and the amount of each such installment to be determined. Flexible
6
<PAGE> 9
installments shall be payable to the director on the dates and in the
amounts determined in accordance with the method specified in his election.
Regardless of the method of payment he elects, no installment shall be
payable to a director before the payment commencement date he has selected
in accordance with Section 4.02. Nor shall any installment be payable to a
director to the extent that the portion of the balance in his account
attributable to the Award has been depleted, determined as of the date the
installment is otherwise payable to him. Furthermore, the period over which
flexible installments are paid to a director shall not exceed the lesser of
20 years or the director's life expectancy, determined as of the age he
will have attained on the payment commencement date. If the period over
which a director has elected to receive flexible installments would
otherwise exceed the maximum period permitted under the preceding sentence,
a final installment shall be payable to the director upon the expiration of
such maximum period. Such final installment shall equal the portion of the
balance in the director's account attributable to the Award, determined as
of the date the installment is payable. For purposes of this paragraph (3),
flexible installments shall include but not be limited to split-stream
installments as described in the Prior Plan; provided that, in the event a
director elects to receive all or part of his payments in split-stream
installments, the portion of the balance in his account that is subject to
a split-stream installment election shall at all times be treated as
invested solely in GTE Common Stock.
(4) Payment in the Form of GTE Common Stock. Notwithstanding the
general requirement of this Section 4.03 that all payments to a director
with respect to an Award be made solely in cash, a director may elect to
receive payments with respect to an Award in the form of GTE Common Stock
rather than cash. In the case of an Award that is subject to a split-stream
installment election under paragraph (3), above, the number of shares of
GTE Common Stock to be distributed to the director pursuant to each
installment (other than the final installment) shall be determined by
dividing the dollar amount of the installment that would otherwise be paid
to the director under paragraph (3), above, by the average closing price of
GTE Common Stock, as reported on the composite tape of New York Stock
Exchange issues for the most recent 20 business days ending on or before
the date of payment. Distributions in the form of GTE Common Stock shall be
made in whole shares only, and any resulting fractional shares shall be
distributed in cash. In accordance with Section 3.02(a), the portion of the
balance in a director's account with respect to which he has elected to
receive payments in the form of GTE Common Stock shall at all times be
treated as invested solely in GTE Common Stock.
4.04. LIMITATIONS ON RIGHTS TO PAYMENT.
(a) Rights Unsecured. The right of any person to receive one or more
payments under the Plan shall be an unsecured claim against the general assets
of GTE Corporation.
(b) Rights Not Assignable. No payment due any person under the Plan shall
be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge. Any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, or charge such payment shall be void.
No such payment or interest therein shall be liable for or subject to the debts,
contracts, liabilities, or torts of any director or beneficiary. If any director
or beneficiary becomes bankrupt or attempts to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge any payment under the Plan, the
Board may direct that such payment be suspended and that all future payments to
which such person otherwise would be entitled be held and applied for the
benefit of such person, the person's children or other dependents, or any of
them, in such manner and in such proportions as the Board may deem proper.
Notwithstanding the foregoing, a director may assign his right to payment under
the Plan to GTE Corporation or its affiliates.
(c) Rights Forfeited Upon Competition. A director who, without the written
consent of GTE Corporation, engages in competition with GTE Corporation or any
subsidiary thereof, accepts employment with or acquires or holds any substantial
interest in any business that is competitive with the business carried on by GTE
Corporation or any subsidiary thereof, or serves as an officer or director of
any corporation engaged in competition with the business carried on by GTE
Corporation or any subsidiary thereof, shall forfeit all rights to any payments
under the Plan that would otherwise be payable to the director or his
beneficiaries on or after the initial date of such action by the director. The
purchase by a director, for investment, on a recognized securities exchange, of
stock or other securities of a competitor of GTE Corporation or subsidiary
thereof
7
<PAGE> 10
representing not more than one percent of the total voting power represented by
all outstanding stock and securities of such competitor, or the holding thereof,
shall not be deemed to constitute the acquisition or holding of a substantial
interest in such competitor for purposes of this subsection (c). This subsection
(c) shall not apply to any director on or after the occurrence of a Change in
Control.
8
<PAGE> 11
ARTICLE V
MISCELLANEOUS
5.01. SEVERABILITY.
If any provision of the Plan is held unlawful or otherwise invalid or
unenforceable in whole or in part, the unlawfulness, invalidity, or
unenforceability shall not affect any other provision of the Plan or part
thereof, each of which shall remain in full force and effect.
5.02. BOARD AUTHORITY.
(a) In General. Except to the extent that the Plan specifically provides
otherwise, the Board shall have the sole authority and discretion (1) to amend,
suspend, or terminate the Plan, (2) to interpret the Plan, (3) to establish and
revise rules and regulations relating to the Plan, (4) to delegate such
responsibilities or duties as it deems desirable, and (5) to make any other
determination that it believes necessary or advisable for the administration of
the Plan. Unless otherwise provided, the Board shall be deemed to have delegated
such authority and discretion to the Committee.
(b) Plan Termination. Except to the extent that the Plan specifically
provides otherwise, the Board may terminate the Plan at any time. Upon
termination of the Plan, all Awards made before the date of termination, and any
rights to payment with respect to such Awards, shall continue to be governed by
the provisions of the Plan in effect immediately before the date of termination.
5.03. CHANGE IN CONTROL.
(a) Plan Modifications Following Change in Control. Notwithstanding any
provision of the Plan to the contrary, the Board may amend, modify, or suspend
the Plan (including the Change in Control Provisions) at any time before a
Change in Control occurs, but except as may be required by law, after a Change
in Control occurs: (1) the Change in Control Provisions shall not be amended,
modified, suspended, or terminated, directly or indirectly, and (2)(A) no other
provisions of the Plan shall be amended, modified, suspended, or terminated,
directly or indirectly, (B) no rules, regulations, or procedures under the Plan
shall be established or modified, (C) no interpretation of the Plan shall be
adopted, (D) no determination under the Plan shall be made, and (E) no authority
or discretion shall be exercised, in a manner that would alter the meaning or
operation of the Change in Control Provisions or that would undermine or
frustrate their purposes.
(b) Rights Protected Following Change in Control. Notwithstanding any
provision of the Plan to the contrary, no amendment, suspension, or termination
of the Plan, or revocation of any required approval by the Board, effected after
a Change in Control shall operate to reduce, eliminate, or otherwise adversely
affect any director's or beneficiary's right to receive any payment under the
Plan (including, without limitation, the amount, timing, and method thereof) in
accordance with any Award made prior to the date of such amendment, suspension,
termination, or revocation of approval and in accordance with any investment or
payment option permitted (irrespective of any requirement for approval) pursuant
to the Plan as in effect on the date immediately preceding the date on which the
Change in Control occurs. Notwithstanding any provision of the Plan to the
contrary, upon and after a Change in Control, the rights described in the
immediately preceding sentence shall be fully vested, nonforfeitable contractual
rights enforceable by or on behalf of any director or former director against
GTE Corporation or any successor to all or substantially all of the business or
assets of GTE Corporation. After the date on which a Change in Control occurs,
any director, former director, or beneficiary (which terms shall include, for
the purposes of this subsection (b), any executor, personal representative,
heir, or legatee of a deceased former director) may apply to the trustee of the
GTE Service Corporation Benefits Protection Trust for assistance (which may
include, without limitation, legal counsel and the institution of litigation) in
enforcing the rights of the director, former director, or beneficiary under the
Plan and pursuing any claims he might have under the terms of the Plan; provided
that any director, former director, or beneficiary who applies for such
assistance shall be subject to and bound by any limitations that said trustee
may impose. No director, former director, or beneficiary shall be required to
notify or seek the assistance of said trustee as a condition of or prerequisite
to any other action that might be
9
<PAGE> 12
taken by or on behalf of the director, former director, or beneficiary in order
to enforce his rights or pursue his claims under the Plan, and the fees,
expenses and costs that he may incur in any such other action shall not be the
responsibility of the GTE Service Corporation Benefits Protection Trust or the
trustee thereof.
5.04. USAGE AND DEFINITIONS.
(a) Titles and Headings Not to Control. The titles to Articles and the
headings of Sections, subsections, paragraphs, and subparagraphs in this Plan
are placed herein for convenience of reference only and, as such, shall be of no
force or effect in the interpretation of the Plan.
(b) Definitions. Unless the context clearly indicates otherwise, the
following terms, when used in capitalized form in this Plan, shall have the
meanings set forth below.
Acquiring Person. "Acquiring Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person, without
the prior approval of GTE Corporation, shall be the Beneficial Owner of
securities representing 20% or more of the Voting Power or who or which was
such a Beneficial Owner at any time after the date of the Rights Plan,
whether or not such Person continues to be the Beneficial Owner of
securities representing 20% or more of the Voting Power, but shall not mean
(i) GTE Corporation, (ii) any Subsidiary, (iii) any employee benefit plan
of GTE Corporation or any of its Subsidiaries, or (iv) any entity holding
securities of GTE Corporation organized, appointed or established by GTE
Corporation or any of its Subsidiaries for or pursuant to the terms of any
such plan; provided, however, that if:
(1) any New York State law shall be hereinafter promulgated or
amended (whether by amendment to the definition of "interested
shareholder" as used in section 505(a)(2)(i) of the New York Business
Corporation Law ("NYBCL") or otherwise) to provide that a New York
corporation may issue rights or options which include restrictions or
conditions of the type set forth in section 505(a)(2)(i) of the NYBCL
relating either
(A) to a Person holding a percentage (the "Lower Percentage") of
the outstanding voting stock of a New York corporation which is lower
than 20% or
(B) to any Person without regard to the percentage of the
outstanding voting stock of a New York corporation held by such
Person, and
(2) such law or amendment is applicable to GTE Corporation,
then an "Acquiring Person" shall be deemed to mean, for all purposes under
the Plan as of the effective date of such law or amendment, the Beneficial
Owner of securities representing the greater of (I) 10% of the Voting Power
or (II) the Lower Percentage of the Voting Power.
Affiliate. "Affiliate" shall have the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
Article. "Article" shall mean an article of this Plan.
Associate. "Associate" shall have the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
Award. "Award" shall mean the annual award of hypothetical shares of
GTE Common Stock made to a director pursuant to Section 2.01. Solely to the
extent provided in Section 1.03(b), "Award" shall also mean a Phantom Stock
Award made under the Prior Plan.
Award Date. "Award Date" shall mean the date on which an Award is
made to a director pursuant to Section 2.01.
10
<PAGE> 13
Beneficial Owner. A person shall be deemed the "Beneficial Owner" of,
and shall be deemed to "beneficially own," any securities:
(1) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(2) which such Person or any of such Person's Affiliates or
Associates has (A) the right or obligation to acquire (whether such
right or obligation is exercisable or effective immediately or only
after the passage of time) pursuant to any agreement, arrangement, or
understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights (other than the rights
granted pursuant to the Rights Plan), warrants or options, or otherwise;
provided that a Person shall not be deemed the "Beneficial Owner" of, or
to "beneficially own," securities tendered pursuant to a tender or
exchange offer made by such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
exchange; or (B) the right to vote pursuant to any agreement,
arrangement, or understanding (whether or not in writing); provided that
a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this clause (B) if the agreement,
arrangement, or understanding to vote such security (i) arises solely
from a revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations of the Exchange Act, and (ii) is not also then
reported by such person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(3) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any
agreement, arrangement, or understanding (whether or not in writing), or
with which such Person or any of such Person's Affiliates have otherwise
formed a group for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy as described in clause (B)(i) of paragraph
(2), above), or disposing of any securities of GTE Corporation.
Board. "Board" shall mean the Board of Directors of GTE Corporation.
Change in Control. A "Change in Control" shall occur when and only
when the first of the following events occurs:
(1) an acquisition (other than directly from GTE Corporation) of
securities of GTE Corporation by any Person, immediately after which
such Person, together with all Affiliates and Associates of such Person,
shall be the Beneficial Owner of securities of GTE Corporation
representing 20 percent or more of the Voting Power or such lower
percentage of the Voting Power that, from time to time, would cause the
Person to constitute an "Acquiring Person"; provided that in determining
whether a Change in Control has occurred, the acquisition of securities
of GTE Corporation in a Non-Control Acquisition shall not constitute an
acquisition that would cause a Change in Control; or
(2) three or more directors, whose election or nomination for
election is not approved by a majority of the members of the "Incumbent
Board" (as defined below) then serving as members of the Board, are
elected within any single 12-month period to serve on the Board;
provided that an individual whose election or nomination for election is
approved as a result of either an actual or threatened "Election
Contest" (as described in Rule 14a-11 promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a person other than the Board (a "Proxy Contest"),
including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest, shall be deemed not to have been
approved by a majority of the Incumbent Board for purposes hereof; or
(3) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board; "Incumbent Board" shall
mean individuals who, as of January 16, 1997, are members of the Board,
provided that if the election, or nomination for election by GTE
Corporation's shareholders, of any new director was approved by a vote
of at least three-quarters of the Incumbent
11
<PAGE> 14
Board, such new director shall, for purposes of the Plan, be considered
as a member of the Incumbent Board; provided further that no individual
shall be considered a member of the Incumbent Board if such individual
initially assumed office as a result of either an actual or threatened
Election Contest or other actual or threatened Proxy Contest, including
by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(4) approval by shareholders of GTE Corporation of:
(A) a merger, consolidation, or reorganization involving GTE
Corporation, unless
(i) the shareholders of GTE Corporation, immediately before
the merger, consolidation, or reorganization, own, directly or
indirectly immediately following such merger, consolidation, or
reorganization, at least 50 percent of the combined voting power
of the outstanding voting securities of the corporation resulting
from such merger, consolidation, or reorganization (the
"Surviving Corporation") in substantially the same proportion as
their ownership of the voting securities immediately before such
merger, consolidation, or reorganization;
(ii) individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation, or reorganization constitute at least
a majority of the board of directors of the Surviving
Corporation; and
(iii) no Person (other than GTE Corporation or any
Subsidiary, any employee benefit plan (or any trust forming a
part thereof) maintained by GTE Corporation, the Surviving
Corporation or any Subsidiary, or any Person who, immediately
prior to such merger, consolidation, or reorganization had
Beneficial Ownership of securities representing 20 percent (or
such lower percentage the acquisition of which would cause a
Change in Control pursuant to paragraph (1) of this definition of
"Change in Control") or more of the Voting Power) has Beneficial
Ownership of securities representing 20 percent (or such lower
percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (1) of this definition of "Change
in Control") or more of the combined voting power of the
Surviving Corporation's then outstanding voting securities;
(B) a complete liquidation or dissolution of GTE Corporation; or
(C) an agreement for the sale or other disposition of all or
substantially all of the assets of GTE Corporation to any Person
(other than a transfer to a Subsidiary).
Change in Control Provisions. "Change in Control Provisions" shall
mean (1) the last sentence of Section 4.04(c), (2) Section 5.03, and (3)
this Section 5.04(c).
Committee. "Committee" shall mean the Executive Compensation and
Organizational Structure Committee of the Board, or any successor committee
thereto.
Deferred Compensation Plan. "Deferred Compensation Plan" shall mean
the Deferred Compensation Plan for Non-Employee Members of the Board of
Directors of GTE Corporation, as amended and in effect from time to time,
or any successor plan thereto.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended and in effect from time to time, or any successor
thereto.
GTE Common Stock. "GTE Common Stock" shall mean the common stock of
GTE Corporation.
Non-Control Acquisition. "Non-Control Acquisition" shall mean an
acquisition by (1) an employee benefit plan (or a trust forming a part
thereof) maintained by (A) GTE Corporation or (B) any of its Subsidiaries,
(2) GTE Corporation or any of its Subsidiaries, or (3) any Person in
connection with a Non-Control Transaction.
Non-Control Transaction. "Non-Control Transaction" shall mean a
transaction described in clauses (i) through (iii) of subparagraph (4)(A)
of the definition of "Change in Control" herein.
12
<PAGE> 15
Person. "Person" shall mean any individual, firm, corporation,
partnership, joint venture, association, trust, or other entity.
Phantom Stock Award. "Phantom Stock Award" shall mean an award made
under the Prior Plan.
Plan. "Plan" shall mean the Deferred Stock Unit Plan for Non-Employee
Members of the Board of Directors of GTE Corporation, as amended and in
effect from time to time.
Prior Plan. "Prior Plan" shall mean the Phantom Stock Plan for
Non-Employee Members of the Board of Directors of GTE Corporation, as in
effect prior to its amendment and restatement as of January 1, 1997.
Release Date. "Release Date" shall mean, with respect to a director,
the first day on which the director is no longer either a "director" or an
"officer" of GTE Corporation, within the meaning of section 16 of the
Exchange Act.
Rights Plan. "Rights Plan" shall mean the Rights Agreement, dated as
of December 7, 1989, between GTE Corporation and The First National Bank of
Boston (as successor Rights Agent to State Street Bank and Trust Company),
as it may be amended from time to time, or any successor thereto.
Savings Plan Provisions. "Savings Plan Provisions" shall mean the
investment option and investment direction provisions of Article VI of the
GTE Savings Plan, as amended and restated effective January 1, 1993, and as
amended and in effect from time to time thereafter, including any successor
provision or provisions to such Article VI. The Savings Plan Provisions
shall not include, without limitation, any provision in such Article VI
relating to the Loan Fund or to any restriction on investment direction
applicable to Company-Matching Contributions.
Section. "Section" shall mean a section of this Plan.
Subsidiary. "Subsidiary" of any Person shall mean any corporation or
other entity of which a majority of the voting power of the voting equity
securities or voting interest is owned, directly or indirectly, by such
Person, or which is otherwise controlled by such Person.
Voting Power. "Voting Power" shall mean the voting power of all
securities of GTE Corporation then outstanding generally entitled to vote
for the election of directors of GTE Corporation.
13
<PAGE> 1
EXHIBIT 11
GTE CORPORATION AND SUBSIDIARIES
CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net income (loss) from:
Continuing operations...................... $2,793,566 $2,798,270 $ 2,537,949 $2,440,869 $971,978
Extraordinary charges...................... -- -- (4,682,000) -- (89,990)
---------- ---------- ----------- ---------- --------
Consolidated net income (loss)............. 2,793,566 2,798,270 (2,144,051) 2,440,869 881,988
---------- ---------- ----------- ---------- --------
Adjustments to net income (loss):
Add: Preferred dividend requirements on
dilutive convertible preferred
stocks................................ -- -- 417 621 237
Interest expense, net of tax effect,
on employees' stock plans............ -- -- 1,853 1,441 --
---------- ---------- ----------- ---------- --------
Total adjustments.................. -- -- 2,270 2,062 237
---------- ---------- ----------- ---------- --------
Adjusted consolidated net income (loss) from:
Continuing operations...................... 2,793,566 2,798,270 2,540,219 2,442,931 972,215
Extraordinary charges...................... -- -- (4,682,000) -- (89,990)
---------- ---------- ----------- ---------- --------
Adjusted consolidated net income (loss)...... $2,793,566 $2,798,270 $(2,141,781) $2,442,931 $882,225
========== ========== =========== ========== ========
Average common shares........................ 957,603 968,852 969,930 957,948 944,678
---------- ---------- ----------- ---------- --------
Adjustments to common shares:
Add: Dilutive convertible preferred
stocks................................ -- -- 419 572 288
Employees' stock and stock option
plans................................ 4,321 3,397 2,797 2,130 2,131
---------- ---------- ----------- ---------- --------
Total adjustments.................. 4,321 3,397 3,216 2,702 2,419
---------- ---------- ----------- ---------- --------
Adjusted average common shares............... 961,924 972,249 973,146 960,650 947,097
========== ========== =========== ========== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic(1)
Continuing operations................... $2.92 $2.89 $ 2.62 $2.55 $1.03
Extraordinary charges................... -- -- (4.83) -- (.10)
----- ----- ------ ----- -----
Consolidated.......................... $2.92 $2.89 $(2.21) $2.55 $ .93
===== ===== ====== ===== =====
Diluted(2)
Continuing operations................... $2.90 $2.88 $ 2.61 $2.54 $1.03
Extraordinary charges................... -- -- (4.81) -- (.10)
----- ----- ------ ----- -----
Consolidated.......................... $2.90 $2.88 $(2.20) $2.54 $ .93
===== ===== ====== ===== =====
</TABLE>
- ---------------
(1) Computed by dividing net income (loss) available to common stockholders by
the weighted-average number of common shares outstanding during the period.
(2) Reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock.
<PAGE> 1
EXHIBIT 12
GTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF THE RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net earnings available for fixed
charges:
Income from continuing operations... $2,793,566 $2,798,270 $2,537,949 $2,440,869 $ 971,978
Add (deduct) --
Income taxes..................... 1,624,000 1,613,261 1,466,426 1,532,482 567,747
Interest expense................. 1,282,579 1,146,481 1,150,625 1,139,233 1,298,234
Capitalized interest (net of
amortization).................. (12,917) (34,984) (22,971) (6,045) (3,421)
Preferred stock dividends of
Parent......................... -- -- 5,598 9,910 17,825
Dividends on preferred securities
of subsidiaries................ 101,604 106,643 98,604 18,252 22,162
Additional income requirement on
preferred dividends of
subsidiaries................... 6,789 9,640 9,664 11,426 12,739
Minority interests............... 155,332 149,467 145,437 140,464 112,335
Portion of rent expense
representing interest.......... 132,891 130,660 128,034 139,715 153,058
---------- ---------- ---------- ---------- ----------
6,083,844 5,919,438 5,519,366 5,426,306 3,152,657
Deduct -- Minority interests........ (280,206) (263,122) (246,678) (242,937) (236,944)
---------- ---------- ---------- ---------- ----------
Adjusted earnings available for
fixed charges from continuing
operations..................... $5,803,638 $5,656,316 $5,272,688 $5,183,369 $2,915,713
========== ========== ========== ========== ==========
Fixed Charges:
Interest charges.................... $1,282,579 $1,146,481 $1,150,625 $1,139,233 $1,298,234
Dividends on preferred securities of
subsidiaries..................... 101,604 106,643 98,604 18,252 22,162
Additional income requirement on
preferred dividends of
subsidiaries..................... 6,789 9,640 9,664 11,426 12,739
Portion of rent expense representing
interest......................... 132,891 130,660 128,034 139,715 153,058
---------- ---------- ---------- ---------- ----------
1,523,863 1,393,424 1,386,927 1,308,626 1,486,193
Deduct -- Minority interests........ (66,291) (68,166) (70,052) (68,096) (78,421)
---------- ---------- ---------- ---------- ----------
Adjusted fixed charges........... $1,457,572 $1,325,258 $1,316,875 $1,240,530 $1,407,772
========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges --
continuing operations............... 3.98 4.27 4.00 4.18 2.07
========== ========== ========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21
GTE CORPORATION AND SUBSIDIARIES
SIGNIFICANT SUBSIDIARIES OF REGISTRANT AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENT OF VOTING
CONTROL OWNED BY
COMPANY(A) INCORPORATED IN DIRECT PARENT
- ---------- ------------------ -----------------
<S> <C> <C>
Contel Federal Systems, Inc. ........................... Delaware 100.00
GTE Government Systems Corporation.................... Delaware 100.00
GTE Telecom Incorporated.............................. Delaware 100.00
GTE Products of Connecticut Corporation................. Connecticut 100.00
GTE Laboratories Incorporated......................... Delaware 100.00
GTE China Incorporated.................................. Delaware 100.00
GTE Leasing Corporation................................. Delaware 100.00
GTE Anglo Holding Company Incorporated.................. Delaware 100.00
Anglo-Canadian Telephone Company...................... Quebec 86.39
BC TELECOM Inc..................................... Canada 50.75
BC TEL........................................... Canada 100.00
BC TEL Services Inc.............................. Canada 100.00
Canadian Telephones and Supplies Ltd.......... British Columbia 100.00
Quebec-Telephone...................................... Quebec 50.59
GTE Holdings (Canada) Limited........................... Canada 100.00
Compania Dominicana de Telefonos, C. por A. .......... Dominican Republic 100.00
GTE International Telecommunications Incorporated....... Delaware 100.00
GTE do Brasil Limitada................................ Brazil 100.00
GTE PCS International Incorporated.................... Delaware 100.00
GTE Venezuela Incorporated(b)......................... Delaware 100.00
VenWorld Telecom, C.A. ............................ Venezuela 51.00
Compania Anonima Nacional Telefonos de Venezuela
(CANTV)....................................... Venezuela 40.00
GTE California Incorporated............................. California 99.60
GTE Florida Incorporated................................ Florida 100.00
GTE Midwest Incorporated................................ Delaware 100.00
GTE North Incorporated.................................. Wisconsin 100.00
GTE Northwest Incorporated.............................. Washington 100.00
GTE South Incorporated.................................. Virginia 100.00
GTE Southwest Incorporated.............................. Delaware 100.00
GTE Hawaiian Telephone Company Incorporated............. Hawaii 100.00
GTE Communications Corporation.......................... Delaware 100.00
GTE Data Services Incorporated.......................... Delaware 100.00
GTE Finance Corporation................................. Delaware 100.00
GTE Information Services Incorporated................... Delaware 100.00
GTE Directories Corporation........................... Delaware 100.00
GTE Internetworking Incorporated........................ Delaware 100.00
BBN Corporation......................................... Massachusetts 100.00
GTE Intelligent Network Services Incorporated........... Delaware 100.00
GTE Investment Management Corporation................... Delaware 100.00
GTE Main Street Incorporated............................ Delaware 100.00
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
PERCENT OF VOTING
CONTROL OWNED BY
COMPANY(A) INCORPORATED IN DIRECT PARENT
- ---------- ------------------ -----------------
<S> <C> <C>
GTE Media Ventures Incorporated......................... Delaware 100.00
GTE Wireless Incorporated............................... Delaware 100.00
GTE Airfone Incorporated.............................. Delaware 100.00
GTE Mobile Communications International
Incorporated....................................... Delaware 100.00
CTI Compania de Telefonos del Interior S.A......... Argentina 25.50
CTI Norte Compania de Telefonos del Interior
S.A.............................................. Argentina 25.50
GTE Cellular Communications Corporation............... California 79.00
GTE Realty Corporation.................................. Delaware 100.00
GTE Reinsurance Company Limited......................... Vermont 100.00
GTE Service Corporation................................. New York 100.00
GTE Vantage Incorporated................................ Delaware 100.00
GTE VisNet Incorporated................................. Delaware 100.00
</TABLE>
- ---------------
(a) GTE's share of the earnings of all subsidiaries listed is included in GTE's
consolidated financial statements.
(b) GTE also directly owns 5.5% of CANTV through a direct purchase of CANTV
shares in the fourth quarter of 1996.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, dated January 27, 1998, on the consolidated financial statements
and supporting schedule of GTE Corporation and subsidiaries included in this
Form 10-K, into the following previously filed Registration Statements:
1. Form S-8 of GTE Corporation (File No. 33-20178)
2. Form S-8 of GTE Corporation (File No. 33-65025)
3. Form S-3 of GTE Corporation (File No. 33-63145)
4. Form S-3 of GTE Corporation (File No. 33-61661)
5. Form S-4 of GTE Corporation (File No. 33-37530)
6. Form S-8 of GTE Corporation (File No. 33-39297)
7. Form S-8 of GTE Corporation (File No. 33-50111)
8. Form S-8 of GTE Corporation (File No. 333-31455)
9. Form S-8 of GTE Corporation (File No. 333-31451)
10. Form S-8 of GTE Corporation (File No. 333-43025)
11. Form S-3 of GTE Corporation (File No. 333-31333)
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 551
<SECURITIES> 0
<RECEIVABLES> 4,782
<ALLOWANCES> 0
<INVENTORY> 846
<CURRENT-ASSETS> 6,537
<PP&E> 56,490
<DEPRECIATION> 32,410
<TOTAL-ASSETS> 42,142
<CURRENT-LIABILITIES> 9,841
<BONDS> 14,494
0
0
<COMMON> 49
<OTHER-SE> 7,989
<TOTAL-LIABILITY-AND-EQUITY> 42,142
<SALES> 23,260
<TOTAL-REVENUES> 23,260
<CGS> 17,649
<TOTAL-COSTS> 17,649
<OTHER-EXPENSES> 48
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,145
<INCOME-PRETAX> 4,418
<INCOME-TAX> 1,624
<INCOME-CONTINUING> 2,794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,794
<EPS-PRIMARY> 2.92
<EPS-DILUTED> 2.90
</TABLE>
