<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: SEPTEMBER 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 1-2755
GTE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-1678633
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1255 Corporate Drive, SVC04C08, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 972-507-5000
One Stamford Forum, Stamford, Conn. 06904
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The Company had 965,108,694 shares of $.05 par value common stock outstanding
(excluding 23,421,316 treasury shares) at October 31, 1998.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
(Dollars in Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
REVENUES AND SALES
Local services $ 1,760 $ 1,647 $ 5,261 $ 4,865
Network access services 1,337 1,271 3,953 3,683
Toll services 574 609 1,737 1,860
Wireless services 770 714 2,233 2,110
Directory services 495 407 1,069 965
Other services and sales 1,544 1,292 4,389 3,430
------- ------- ------- -------
Total revenues and sales 6,480 5,940 18,642 16,913
------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Cost of services and sales 2,617 2,309 7,786 6,455
Selling, general and administrative 1,250 1,156 3,552 3,298
Depreciation and amortization 963 988 2,875 2,921
Special charges -- -- 755 --
------- ------- ------- -------
Total operating costs and expenses 4,830 4,453 14,968 12,674
------- ------- ------- -------
OPERATING INCOME 1,650 1,487 3,674 4,239
OTHER (INCOME) EXPENSE
Interest - net 312 299 912 863
Other - net 10 (12) 54 28
------- ------- ------- -------
Total other expense 322 287 966 891
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,328 1,200 2,708 3,348
Income taxes 506 444 1,071 1,256
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY CHARGES 822 756 1,637 2,092
Extraordinary charges -- -- (320) --
------- ------- ------- -------
NET INCOME $ 822 $ 756 $ 1,317 $ 2,092
======= ======= ======= =======
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary charges $ .85 $ .79 $ 1.70 $ 2.18
Extraordinary charges -- -- (.33) --
------- ------- ------- -------
Net income $ .85 $ .79 $ 1.37 $ 2.18
======= ======= ======= =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary charges $ .85 $ .79 $ 1.69 $ 2.18
Extraordinary charges -- -- (.33) --
------- ------- ------- -------
Net income $ .85 $ .79 $ 1.36 $ 2.18
======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING (in millions):
Basic 964 956 962 958
Diluted 968 959 967 961
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
GTE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 771 $ 551
Receivables, less allowances of $372 and $333 4,966 4,782
Inventories and supplies 824 846
Other 521 358
-------- --------
Total current assets 7,082 6,537
-------- --------
Property, plant and equipment, at cost 58,683 56,490
Accumulated depreciation (34,967) (32,410)
-------- --------
Total property, plant and equipment, net 23,716 24,080
-------- --------
Prepaid pension costs 4,726 4,361
Franchises, goodwill and other intangibles, net of
accumulated amortization of $791 and $677 3,040 3,232
Investments in unconsolidated companies 2,460 2,335
Other assets 1,407 1,597
-------- --------
Total assets $ 42,431 $ 42,142
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
GTE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited) - Continued
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Dollars in Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term obligations, including current
maturities $ 3,433 $ 3,398
Accounts payable and accrued expenses 4,585 4,672
Taxes payable 1,163 771
Other 1,081 1,000
-------- --------
Total current liabilities 10,262 9,841
-------- --------
Long-term debt 14,886 14,494
Deferred income taxes 1,564 1,782
Employee benefit plans 4,684 4,756
Minority interests in equity of subsidiaries 1,979 2,253
Other liabilities 848 978
-------- --------
Total liabilities 34,223 34,104
-------- --------
Shareholders' equity
Common stock (988,172,062 and 984,252,887 shares
issued) 49 49
Additional paid-in capital 7,743 7,560
Retained earnings 2,337 2,372
Accumulated other comprehensive loss (353) (243)
Guaranteed ESOP obligations (519) (550)
Treasury stock (23,957,146 and 26,253,088 shares,
at cost) (1,049) (1,150)
-------- --------
Total shareholders' equity 8,208 8,038
-------- --------
Total liabilities and shareholders' equity $ 42,431 $ 42,142
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
GTE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1998 1997
------- -------
(Dollars in Millions)
<S> <C> <C>
OPERATIONS
Income before extraordinary charges $ 1,637 $ 2,092
Adjustments to reconcile income before extraordinary
charges to net cash from operations:
Depreciation and amortization 2,875 2,921
Special charges 755 --
Changes in current assets and current liabilities,
excluding the effects of acquisitions and
dispositions (585) (695)
Deferred income taxes and other - net 39 11
------- -------
Net cash from operations 4,721 4,329
------- -------
INVESTING
Capital expenditures (3,951) (3,330)
Acquisitions and investments (130) (686)
Other - net 244 (2)
------- -------
Net cash used in investing (3,837) (4,018)
------- -------
FINANCING
Common stock issued 283 216
Purchase of treasury stock -- (576)
Long-term debt issued 3,488 2,268
Long-term debt and preferred securities retired (1,911) (1,478)
Dividends paid (1,354) (1,352)
Increase (decrease) in short-term obligations,
excluding current maturities (1,140) 1,113
Other - net (30) (26)
------- -------
Net cash from (used in) financing (664) 165
------- -------
Increase in cash and cash equivalents 220 476
Cash and cash equivalents:
Beginning of period 551 405
------- -------
End of period $ 771 $ 881
======= =======
Cash paid during the period for:
Interest $ 753 $ 848
Income taxes 556 907
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
GTE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein have
been prepared by GTE Corporation (the Company) pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, in the opinion of
management of the Company, the condensed consolidated financial statements
include all adjustments, which consist only of normal recurring accruals,
necessary to present fairly the financial information for such periods. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's 1997 Annual Report on Form 10-K.
Reclassifications of prior year data have been made, where appropriate, to
conform to the 1998 presentation.
NOTE 2. SPECIAL AND EXTRAORDINARY CHARGES
During the first quarter of 1998, the Company recorded pretax special charges of
$755 million, which reduced net income by $482 million, or $.50 per diluted
share. The special charges are related to impairment of assets, including the
write-down of Hybrid Fiber Coax (HFC) test market technologies in the Company's
video business, a reserve for the disposition of GTE Airfone (Airfone) assets
and other asset impairments; as well as the cost of exiting certain business
activities, consolidation efforts and other items.
In addition, during the first quarter of 1998, the Company recorded after-tax
extraordinary charges totaling $320 million, or $.33 per diluted share,
reflecting the discontinuance of regulatory accounting at the Company's Canadian
telephone operations, and the redemption of high-coupon debt and preferred stock
prior to stated maturity.
NOTE 3. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income
includes both net income and other comprehensive income.
5
<PAGE> 7
GTE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
The components of total comprehensive income (loss) are presented in the
following table:
<TABLE>
<CAPTION>
(Dollars in Millions) Nine Months Ended
September 30,
-------------------
1998 1997
------- -------
<S> <C> <C>
Net income $ 1,317 $ 2,092
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax (116) (65)
Unrealized gains on securities, net of tax 6 6
------- -------
Subtotal (110) (59)
------- -------
Total comprehensive income $ 1,207 $ 2,033
======= =======
</TABLE>
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
Employee Benefit Disclosures
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The new standard will require the Company to revise certain of the
disclosures included in its Annual Report to shareholders beginning with the
1998 Annual Report. The adoption of SFAS No. 132 will have no impact on the
consolidated results of operations or financial condition.
Computer Software
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 defines internal-use
software and requires that the cost of such software be capitalized and
amortized over its useful life. Presently, the Company's practice is to
capitalize initial operating system and certain application software and expense
the cost of other software, including right-to-use fees. The Company is
currently assessing the impact of capitalizing and amortizing the cost of all
types of internal-use software as required by SOP 98-1, effective January 1,
1999.
Costs of Start-Up Activities
In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities" to provide guidance to all non-governmental entities on
financial reporting of costs of start-up activities. SOP 98-5 must be adopted no
later than January 1, 1999, and requires that costs of start-up activities be
expensed as incurred. Based on the Company's current policy for costs of
start-up activities, SOP 98-5 will not have an impact on the consolidated
results of operations or financial condition.
6
<PAGE> 8
GTE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
is currently assessing the impact of adopting SFAS No. 133 and intends to
implement as of January 1, 2000.
7
<PAGE> 9
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations
RESULTS OF OPERATIONS
Net Income
<TABLE>
<CAPTION>
September 30,
---------------- Increase Percent
(Dollars in Millions) 1998 1997 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $ 822 $ 756 $ 66 9%
Nine months ended 1,317 2,092 (775) (37)%
</TABLE>
The results of operations for the first nine months of 1998 include after-tax
special charges of $482 million, or $.50 per diluted share. The special charges
are related to impairment of assets, including the write-down of HFC test market
technologies in the Company's video business, a reserve for the disposition of
Airfone's assets and other asset impairments; as well as the cost of exiting
certain business activities, consolidation efforts and other items. In addition,
the 1998 year-to-date results reflect a non-cash extraordinary charge of $300
million after-tax, or $.31 per diluted share, to discontinue the use of
regulatory accounting principles at the Company's Canadian telephone operations
and a one-time $20 million after-tax, or $.02 per diluted share, charge for the
redemption of high-coupon debt and preferred stock prior to stated maturity.
During the first nine months of 1998, costs associated with the Company's new
data initiatives reduced net income by $317 million, or $.33 per diluted share.
Excluding these costs, the amounts associated with the special charges and the
extraordinary charges previously described, net income for the first nine months
of 1998 would have been $2.4 billion, or $2.52 per diluted share, an increase of
11% over the same period in 1997. The increase is primarily a result of core
revenue growth from both domestic and international operations, partially offset
by an increase in operating costs and expenses, including costs associated with
the Company's competitive local exchange carrier (CLEC) and long-distance
business.
Operating Income
<TABLE>
<CAPTION>
September 30,
---------------------- Increase Percent
(Dollars in Millions) 1998 1997 (Decrease) Change
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Three months ended $ 1,650 $ 1,487 $ 163 11%
Nine months ended 3,674 4,239 (565) (13)%
</TABLE>
The 1998 year-to-date operating income results reflect the pretax special
charges of $755 million. In addition, operating income for the third quarter and
first nine months of 1998 reflects operating losses associated with the data
initiatives of $121 million and $422 million, respectively. Excluding these
items, operating income for the third quarter and first nine months of 1998 rose
12% to $1.8 billion and 11% to $4.9 billion, respectively,
8
<PAGE> 10
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
primarily as a result of core revenue growth from both domestic and
international operations. Operating income for the third quarter and first nine
months of 1998 also reflects operating losses associated with the Company's CLEC
and long-distance business.
REVENUES AND SALES
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended
September 30,
------------------ Increase Percent
1998 1997 (Decrease) Change
------- ------- ---------- ------
<S> <C> <C> <C> <C>
Local services $1,760 $1,647 $ 113 7%
Network access services 1,337 1,271 66 5%
Toll services 574 609 (35) (6)%
Wireless services 770 714 56 8%
Directory services 495 407 88 22%
Other services and sales:
Data 202 127 75 59%
Other 1,342 1,165 177 15%
------ ------ -----
Total revenues and sales $6,480 $5,940 $ 540 9%
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Millions) Nine Months Ended
September 30,
------------------ Increase Percent
1998 1997 (Decrease) Change
------- ------- ---------- ------
<S> <C> <C> <C> <C>
Local services $ 5,261 $ 4,865 $ 396 8%
Network access services 3,953 3,683 270 7%
Toll services 1,737 1,860 (123) (7)%
Wireless services 2,233 2,110 123 6%
Directory services 1,069 965 104 11%
Other services and sales:
Data 565 138 427 309%
Other 3,824 3,292 532 16%
------- ------- -------
Total revenues and sales $18,642 $16,913 $ 1,729 10%
======= ======= =======
</TABLE>
Local services revenues increased primarily due to a 5% increase in domestic and
international switched access lines and an increase in new and enhanced services
such as CentraNet(R), call waiting, Caller ID and voicemail. Since the
9
<PAGE> 11
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Telecommunications Act was passed in 1996, the Company has lost only 60,000 of
its 22.7 million total domestic access lines to competitive resale.
Network access services revenues increased due to a 12% increase in domestic
minutes of use generating additional revenues of $67 million and $218 million
for the third quarter and first nine months of 1998, respectively, while
domestic special access lines increased 22% to 3.7 million due to greater demand
for increased bandwidth by Internet Service Providers (ISPs) and other
high-capacity users. In addition, year-to-date revenues increased due to a
change in the reporting of revenue settlements at the domestic telephone
companies (see "OPERATING COSTS AND EXPENSES" for the impact to expenses).
Partially offsetting these increases were mandatory access rate changes that
reduced access charges collected by the Company (see "FEDERAL REGULATORY
DEVELOPMENTS" for additional information regarding access rate changes).
Toll services revenues declined due to the continuing impacts of intraLATA
(local access transport area) toll competition. Partially offsetting the decline
were increases in long-distance revenues driven by a 71% increase in
long-distance subscribers since the third quarter of 1997 and increases in toll
revenues resulting from a change in the reporting of toll settlements agreed
upon by all major Canadian carriers earlier in 1998 (see "OPERATING COSTS AND
EXPENSES" regarding Canadian toll settlements).
Wireless services revenue growth is primarily driven by customer additions,
partially offset by a decrease in revenues per subscriber per month due to the
effects of competition. U.S. wireless customers served grew to 4.7 million, an
increase of 9% over 1997. Customer growth at the Company's consolidated
international operations increased 22%, bringing total wireless customers served
worldwide to 5.3 million, representing an improvement of 0.5 million or 10%.
Directory services revenues increased primarily due to improved sales
performance and higher electronic yellow pages revenues, as well as revenue
generated from the acquisition of international directory operations in Poland
and Austria during the fourth quarter of 1997. In addition, the increase in
revenues during the third quarter was favorably affected by the timing of the
publication of certain directories.
Other services and sales revenues increased for the three and nine months ended
September 30, 1998 as a result of new and increased contract sales, and an
increase in data revenues of $75 million in the third quarter and $427 million
year-to-date over the same periods in 1997. The year-to-date increase in other
services and sales revenues also reflects an increase in equipment sales.
Excluding revenues related to the data
10
<PAGE> 12
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
initiatives, other services and sales revenues increased $177 million or 15% and
$532 million or 16% for the third quarter and year-to-date, respectively.
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
(Dollars in Millions) Three Months Ended
September 30,
------------------ Increase Percent
1998 1997 (Decrease) Change
------- ------- ---------- ------
<S> <C> <C> <C> <C>
Cost of services and sales $2,617 $2,309 $ 308 13%
Selling, general and administrative 1,250 1,156 94 8%
Depreciation and amortization 963 988 (25) (3)%
------ ------ -----
Total operating costs and expenses $4,830 $4,453 $ 377 8%
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Millions) Nine Months Ended
September 30,
------------------ Increase Percent
1998 1997 (Decrease) Change
------- ------- ---------- ------
<S> <C> <C> <C> <C>
Cost of services and sales $ 7,786 $ 6,455 $ 1,331 21%
Selling, general and administrative 3,552 3,298 254 8%
Depreciation and amortization 2,875 2,921 (46) (2)%
Special charges 755 -- 755 --
------- ------- -------
Total operating costs and expenses $14,968 $12,674 $ 2,294 18%
======= ======= =======
</TABLE>
In general, operating costs and expenses increased to support growth in
customers, access lines and new and enhanced services. Year-to-date expenses are
higher than the same period in 1997 due to a change in the reporting of network
access revenue settlements at the domestic telephone companies and a change in
the reporting of toll settlements at the Company's Canadian operations (see
"REVENUES AND SALES" for the impact to revenues). Data initiatives contributed
$80 million and $627 million to the increases for the three and nine months
ended September 30, 1998, respectively. Also, costs associated with the
Company's CLEC and long-distance business contributed to the third quarter and
year-to-date increases. These increases in costs were partially offset by a
year-to-date decrease in customer acquisition and marketing costs for wireless
services, the true-up of certain employee benefit and other liabilities, as well
as a $26 million pretax gain on the sale of various wireless and international
assets during the third quarter of 1998.
11
<PAGE> 13
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
As a result of the charges discussed in Note 2, depreciation expense was reduced
by approximately $46 million and $113 million, respectively, for the three and
nine months ended September 30, 1998 compared to the same periods in 1997. Also,
during the fourth quarter of 1997, the domestic telephone operating companies
completed their annual study of depreciation rates and adjusted them to reflect
current estimates of salvage value. The net effect of these adjustments reduced
depreciation by approximately $22 million and $121 million, respectively, for
the third quarter and first nine months of 1998. Partially offsetting these
decreases were increases in depreciation expense due to increased plant
balances.
Special charges of $755 million pretax were recorded during the first quarter of
1998. The special charges are related to impairment of assets totaling $454
million, including the write-down of HFC test market technologies in the
Company's video business, a reserve for the disposition of Airfone's assets and
other asset impairments; as well as $301 million for the cost of exiting certain
business activities, consolidation efforts and other items. As of September 30,
1998, $454 million of the charge (non-cash) has been applied to reduce the
carrying value of assets to their net realizable value, while $131 million has
been used in connection with severance and other costs incurred to exit certain
business activities and consolidate certain operating activities. At September
30, 1998, a reserve of $170 million remains for additional costs similar to
those described above. The Company expects to utilize the remaining reserve, in
accordance with the original plan, throughout 1998 and into 1999.
OTHER INCOME STATEMENT ITEMS
Interest-net increased $13 million or 4% in the third quarter of 1998 and $49
million or 6% year-to-date, compared to the same periods in 1997. The increase
is primarily due to higher average debt levels incurred primarily to finance the
Company's construction program.
Other-net increased $22 million and $26 million for the three and nine months
ended September 30, 1998, respectively. The increases are primarily due to
higher minority interest associated with higher income at the Company's Canadian
subsidiaries.
Income taxes increased $62 million or 14% in the third quarter of 1998 and
decreased $185 million or 15% year-to-date, compared to the same periods in
1997. These variances are primarily due to corresponding changes in pretax
income.
12
<PAGE> 14
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
During the first quarter of 1998, the Company recorded a non-cash, after-tax
extraordinary charge of $300 million to discontinue the use of regulatory
accounting principles at the Company's Canadian telephone operations and a
one-time after-tax extraordinary charge of $20 million, reflecting premiums paid
on the redemption of high-coupon debt and preferred stock prior to stated
maturity.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary source of funds during the first nine months of 1998 was
cash from operations of $4.7 billion compared to $4.3 billion for the same
period in 1997. The year-to-year increase in cash from operations primarily
reflects a decrease in the Company's working capital requirements and an
increase in results of operations before the special charges.
Cash used in investing activities totaled $3.8 billion, compared with $4.0
billion in the first nine months of 1997. Capital expenditures totaled $4.0
billion compared with $3.3 billion in the first nine months of last year.
Capital expenditures are expected to be $5.5 billion for year-end 1998 compared
with $5.1 billion in 1997. The majority of new investment is being made to
acquire facilities and develop and install software necessary to support the
growth in demand for GTE'S core services, facilitate the introduction of new
products and services, and increase operating efficiency and productivity.
Significant investments are also being made to build and expand the Company's
national fiber optic data network. Acquisitions and investments for the nine
months ended September 30, 1997 primarily reflect the acquisition of BBN
Corporation. Other investing includes proceeds from the sale of various wireless
and international assets. As the Company announced in the first quarter of 1998,
the sale of certain non-strategic assets should continue to provide cash
proceeds (see "RECENT DEVELOPMENTS" for additional information).
In July 1998, a GTE-led consortium amended its agreement to purchase a majority
stake in the Puerto Rico Telephone Company (PRTC) by agreeing to purchase 51%
plus one share of PRTC for $444 million. At closing, which is expected in early
1999, the Company expects that Popular, Inc. (a member of the consortium) will
acquire 5% of PRTC and that either Popular, Inc. or other local Puerto Rican
investors will acquire an additional 5%. The consortium will contribute 1% of
PRTC's shares to a PRTC employee stock ownership plan. GTE expects to retain a
40% investment in PRTC.
Cash used in financing activities totaled $664 million during the first nine
months of 1998 compared to cash provided of $165 million for the same period
13
<PAGE> 15
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
in 1997. During the first nine months of 1998 and 1997, dividend payments
totaled $1.4 billion. In addition, financing activities during the first nine
months of 1998 include a $437 million net increase in long and short-term
borrowings and the issuance of $283 million of common stock, as well as other
net items. In April 1998, the Company issued $2.1 billion of debentures and used
the net proceeds to reduce short-term debt obligations. The transaction
consisted of four tranches with maturities ranging from 8 to 30 years. This
long-term debt offering was the largest in the Company's history.
The Company believes that its present investment grade credit rating and those
of its subsidiaries provides ready access to the capital markets at reasonable
rates and provides the Company with the financial flexibility necessary to
pursue growth opportunities as they arise. At September 30, 1998, the Company
had $5.0 billion of unused bank lines of credit available to back up commercial
paper borrowings and for working capital requirements.
FEDERAL REGULATORY DEVELOPMENTS
Interstate Access Revision
The Company filed interstate access revisions during 1997 that became effective
in June 1997 and July 1997. Overall, these filings resulted in a net annual
price reduction of $106 million. In 1997, the Federal Communications Commission
(FCC) also altered the structure of access charges collected by the Company,
effective January 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 primary and secondary residential access lines and
single and multi-line business access lines. In aggregate, the annual reductions
in usage sensitive access charges paid by long-distance carriers were offset by
new per-line charges and the charges paid by end-user customers. Effective July
1998, access charges were further reduced by $120 million annually in compliance
with FCC requirements to reflect the impacts of access charge reform and in
making the Company's 1998 Annual Filing.
The FCC Access Reform Order released in May 1997 revamped the rate structure
through which local and long-distance companies charge customers for using the
local phone network to make long-distance calls. GTE and numerous other parties
challenged the FCC's decisions in this order before the Eighth Circuit Court of
Appeals based on the belief that the FCC did not eliminate the universal service
subsidies hidden within interstate access charges as directed by the
Telecommunications Act of 1996 (TA96), and that the FCC created additional
subsidy charges paid only by business and multi-line
14
<PAGE> 16
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
residential customers. On August 19, 1998, the Eighth Circuit announced its
decision on the multiple appeals of the FCC Access Reform Order. The opinion
denies all of the petitions for review of the access charge order. The Company
is considering its options.
In October 1998, the FCC began a proceeding to "refresh the record" used in the
1997 access charge reform proceedings. The FCC will determine whether to retain
or modify its "market based" access charge reform approach, or to adopt a
"prescriptive" approach.
Universal Service
In May 1997, the FCC released a decision relating to implementation of the
TA96's provision on universal service. GTE and numerous other parties have
challenged the FCC's decision before the U.S. Court of Appeals for the Fifth
Circuit on the grounds that the FCC did not follow the requirements of the TA96
to develop a sufficient, explicit and competitively neutral universal service
program. Oral argument is scheduled for December 1998. A final decision on the
appeal is expected to be issued by mid-1999.
In its Order on Reconsideration dated July 13, 1998, the FCC referred some key
issues back to the Federal-State Joint Board (the Board) on universal service.
The Board's recommendations are due in the fourth quarter of 1998. In its
October 22, 1998 Order, the FCC selected a "synthesis" model platform for
universal service and plans to select cost inputs by the first quarter of 1999
and a revenue benchmark by mid-1999. The implementation date of the new
universal service mechanism for non-rural carriers was moved to July 1999. The
Company is assessing the Order and its options.
The Eighth Circuit Court ruling on FCC access reform (see previous discussion of
"Interstate Access Revision") also impacts universal service. Specifically, the
FCC is not required to eliminate all implicit subsidies before the explicit
universal service mechanism is implemented in July 1999.
Price Cap
For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan. This plan limits the rates a carrier may
charge rather than the rate-of-return it may earn. The price caps for a variety
of service categories change annually using a price cap index that is a function
of inflation less a predetermined productivity offset. The FCC's May 1997 Price
Cap Order revised the price cap plan for incumbent price cap LECs by adopting a
productivity offset of 6.5%. This matter is before the FCC as discussed above.
In June of 1997, GTE and several other parties challenged the FCC's Price Cap
Order before the Court of Appeals for the District of Columbia Circuit. The
15
<PAGE> 17
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
issue presented for review is whether, in computing its new 6.5% productivity
offset, the FCC arbitrarily manipulated the evidence to achieve a predetermined
outcome. Oral arguments are set for the first quarter of 1999 with a decision
expected later in the year. Associated with the FCC's current activity to
"refresh the record" for access reform discussed above, the FCC will decide
whether the 6.5% productivity offset should be changed.
RECENT DEVELOPMENTS
On October 19, 1998, BC TELECOM Inc. (BC TELECOM), a majority owned investment
of GTE's, and TELUS Corporation (TELUS) announced plans to merge and create a
new, growth-oriented, telecommunications company. The new merged company will be
called BCT.TELUS Communications, Inc. (BCT.TELUS) until a new branding strategy
is developed. BC TELECOM and TELUS shareholders will receive both voting and
non-voting shares on a pro rata basis in the new merged company. Each BC TELECOM
shareholder will receive 0.75 of a voting share and 0.25 of a non-voting share
in BCT.TELUS for each BC TELECOM share held. Each TELUS share will be exchanged
for 0.75 of a voting share and 0.25 of a non-voting share, in each case
multiplied by a share exchange ratio of 0.7773. Under terms of the merger
agreement GTE's ownership interest in the combined company will be approximately
27%. Accordingly, upon completion of the proposed merger, GTE will change its
method of accounting for its investment from a consolidated basis to the equity
method. At the time of this change, the final terms and conditions and structure
of the transaction may result in the recognition of a gain by GTE. The merger is
subject to approval by the shareholders of both companies as well as court and
regulatory approvals, and is expected to be completed early in 1999. As a merger
of equals, BC TELECOM and TELUS will share responsibility for management of the
new company.
On July 27, 1998, the Company and Bell Atlantic Corporation (Bell Atlantic)
entered into a merger agreement providing for the combination of the two
companies in a merger of equals transaction. Under terms of the definitive
agreement, which was unanimously approved by the boards of directors of both
companies, GTE shareholders will receive 1.22 shares of Bell Atlantic stock for
each GTE share they own. The merger is expected to be accounted for as a pooling
of interests, is subject to shareholder and regulatory approvals, and is
expected to be completed during the second half of 1999. For additional
information regarding the merger, refer to the Form 8-K filed by the Company
dated July 27, 1998.
In May 1998, the Company filed a private antitrust lawsuit in U.S. Federal
District Court in Washington, D.C. to block the proposed $38 billion merger of
WorldCom, Inc. (WorldCom) and MCI Communications Corporation (MCI) to ensure the
combined mega-company will not have the ability to monopolize the Internet or
significantly endanger competition in long-distance telephone markets. The
Company is currently conducting confirmatory discovery to ensure that the
Internet concern has
16
<PAGE> 18
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
been remedied by the commitments made to the European Commission and the U.S.
Department of Justice. The suit also cites the significantly diminished
competition in the retail long-distance market that would be created by merging
the second and fourth largest long-distance telephone companies. Combining
WorldCom-MCI removes the key supplier from the wholesale long-distance market,
i.e., WorldCom, and lessens competition for long-distance resellers, like the
Company, that compete with AT&T Corp., MCI and Sprint Corporation.
In April 1998, the Company announced a series of actions designed to further
sharpen its strategic focus and improve its competitive position by
repositioning non-strategic properties and reducing costs. The Company expects
to generate after-tax proceeds of $2 billion to $3 billion by selling
non-strategic or under-performing operations and plans to reduce annual costs by
more than $500 million through improved efficiencies and productivity while it
continues to invest in new high-growth opportunities. The assets identified for
sale represent approximately 6% of consolidated assets and generate
approximately 10% of consolidated revenues. The Company's goal is to complete
these asset sales during 1999 and into 2000. For more information regarding
these announcements, please refer to the Forms 8-K filed by the Company, dated
April 2, 1998 and April 14, 1998.
Recent storm damage to GTE's telecommunications network in the Dominican
Republic from hurricane Georges was significantly covered by available insurance
and did not have a material financial or operational impact to the Company.
STATEMENT OF RISK FROM INTERNATIONAL ASSETS
The Company, together with its subsidiaries, conducts international operations
in Latin America, Canada, Europe and Asia. Based on the countries in which GTE
operates, its foreign activities and assets are subject to economic and
political uncertainties. Overall, GTE continues to closely monitor the markets
in which it operates and does not anticipate any materially adverse impact on
its financial position as a result of the current downturn in the economies of
several of these countries.
17
<PAGE> 19
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
YEAR 2000 CONVERSION
General
The Year 2000 issue concerns the potential inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000, and has industry-wide implications. GTE has had an active Year 2000
program in place since 1995. This program is necessary because the Year 2000
issue could impact telecommunications networks, systems and business processes
at GTE. Although GTE maintains a significant portion of its own systems and
infrastructure, the Company also depends on certain, material external supplier
products that GTE must verify as Year 2000 compliant in their condition of use.
GTE's program methodology is very similar to the General Accounting Office (GAO)
methodology, and in 1997 GTE's Year 2000 methodology and processes were
certified by the Information Technology Industry Association of America. GTE
presently expects that its core operations and essential functions will be ready
for the millennium transition.
State of Readiness
GTE's Year 2000 program is focused on both information technology (IT) and
non-IT systems, including: 1) telecommunications network elements that
constitute the portion of the public switched telephone network (PSTN) for which
GTE is responsible; 2) systems that directly support GTE's telecommunications
network operations and interactions with customers; 3) legacy software that
supports basic business operations, customer premise equipment and
interconnection with other telecommunications carriers; and 4) systems that
support GTE's physical infrastructure, financial operations and facilities.
Company-wide, essential remediation was approximately 63% complete as of
September 30, 1998. In addition to the essential remediation budget, GTE has set
aside funds equivalent to 12% of the Company's overall Year 2000 budget. These
funds are planned for program closeout and verification in the last six months
of 1999 and to address contingencies and millennium program operations and
control through March 2000. GTE's portion of the PSTN in the United States has
been upgraded substantially for Year 2000; 69% of GTE's digital access lines are
already operational using Year 2000 compliant central office switches.
Additionally, over 75% of the Company's legacy software has been remediated.
Over the next nine months GTE's focus will be the deployment of these systems
throughout operations and the testing of those systems under actual operating
conditions.
18
<PAGE> 20
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
Using the nomenclature of the GAO, GTE's Year 2000 program can be characterized
as follows: Management, including transition into the Year 2000, is 43%
complete, with a projected end date of March 2000; Awareness is approximately
60% complete and is expected to continue until June 1999; System Assessment is
approximately 62% complete and is expected to be completed by December 1998;
System Renovation, including supplier products, is approximately 76% complete,
with intended completion by December 1998 for essential functions; Validation,
including enterprise testing in operational environments, is 44% complete, with
an expected completion in June 1999; and Implementation, including regional
deployment, is 63% complete, with an expected completion in June 1999.
In summary, compliant product rollout (deployment) and enterprise testing of
GTE's telecommunications-related businesses, including national and
international interoperability and verification, are presently expected to be
complete by the end of June 1999. Due to its relatively recent acquisition of
BBN Corporation, GTE's data initiative is presently targeting completion of its
key infrastructure systems by the end of September 1999.
Successful conclusion of GTE's Year 2000 program depends upon timely delivery of
Year 2000-compliant products and services from external suppliers. Approximately
1,450 of third-party products used by GTE have been determined to be "vital"
products, critical to GTE's business and operations. As of September 30, 1998,
Year 2000-compliant versions, or suitable alternatives, for 53% of these vital
supplier products have been provided. GTE presently expects that by December 31,
1998, Year 2000-compliant versions, or suitable alternatives, of third-party
supplier products for GTE's critical or major legacy and support systems will
have been delivered.
Use of Independent Verification and Validation
GTE's Year 2000 program management office has established a company-wide quality
oversight and control function that reviews and evaluates quality reports on the
Year 2000 issue. Each GTE business unit has access to an independent quality
team that evaluates the conversion and testing of legacy applications and
third-party supplier products. Separately, GTE's corporate internal and external
auditors conduct periodic reviews of each business unit's Year 2000 activities
and report significant findings, if any, to business unit and corporate
management.
Cost to Address Year 2000 Issues
The current estimate for the cost of GTE's Year 2000 Program is approximately
$370 million. Through September 30, 1998, expenditures totaled $177 million.
Year 2000 remediation costs are expensed in the year incurred. These
expenditures constitute approximately 6% of the 1998 IT budget and are
19
<PAGE> 21
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
projected to be approximately 4% of the 1999 IT budget. GTE has not elected to
replace, or to accelerate the schedule of a planned replacement of, systems due
to the Year 2000 issue. The cost of GTE's Year 2000 program includes an
estimated cost for the Puerto Rico Telephone Company's Year 2000 program.
Currently supporting GTE's Year 2000 program worldwide are an estimated 1,000 to
1,200 full-time equivalent workers (both company employees and contractors).
Approximately 12% of these full-time equivalent workers are engaged in all
aspects of program management; 30% are engaged in legacy system conversion; 25%
are involved in external supplier management; 30% are involved in testing at all
levels; and 3% are addressing contingency planning and interoperability
operations both nationally and internationally. Approximately 78% of GTE's
program effort involves U.S. domestic operations of all types. Twenty-two
percent (22%) of the effort is dedicated to GTE's international operations.
Risks of Year 2000 Issues
GTE has begun to examine the risks associated with its "most reasonably likely
worst case Year 2000 scenarios." To date, GTE has no indication that any
specific function or system is so deficient in technical progress as to threaten
GTE's present schedule. GTE's program and plans currently indicate a compliant
network infrastructure to be deployed by the end of June 1999. A general,
unspecific, schedule shift that would erode progress beyond January 1, 2000,
cannot reasonably be calculated. If, however, there were a schedule delay
lasting no more than six months, such schedule erosion would likely affect only
nonessential systems due to the prioritization of work schedules.
Other scenarios might include a possible but presently unforeseen failure of key
supplier or customer business processes or systems. This situation could
conceivably persist for some months after the millennium transition and could
lead to possible revenue losses. GTE's present assessment of its key suppliers
and customers does not indicate that this scenario is likely.
To date, GTE has not encountered any conditions requiring tactical contingency
planning to its existing Year 2000 program; however, contingency planning for
business and network operations and customer contact during 1999 and 2000 is
ongoing.
GTE is bolstering its normal business continuity planning to address potential
Year 2000 interruptions. In addition, GTE's disaster preparedness recovery teams
are including procedures and activities for a "multi-regional" Year 2000
contingency, if it occurs. GTE is also developing its plans with respect to
possible occurrences immediately before, during, and after the millennium
transition. Under consideration are: "follow-the-sun" time-zone
20
<PAGE> 22
GTE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations - Continued
impact analysis; coordination with other (non-PSTN) telecommunications
providers; a Year 2000 "war room" operation to provide high priority recovery
support, plans for key personnel availability, command structures and
contingency traffic routing; and plans for round-the-clock, on-call repair
teams.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Information contained in this Management's Discussion and Analysis with respect
to expected financial results and future events and trends is forward-looking,
based on the Company's estimates and assumptions and is subject to risks and
uncertainties. For those statements, the Company claims the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
The following important factors could affect the future results of the Company
and could cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in the markets served by the Company or by companies in which GTE has
substantial investments; (2) material changes in available technology; (3) the
final resolution of federal, state and local regulatory initiatives and
proceedings, and judicial review of those initiatives and proceedings pertaining
to, among other matters, the terms of interconnection, access charges, universal
service, unbundled network elements and resale rates; (4) the extent, timing,
success and overall effects of competition from others in the local telephone
and intraLATA toll service markets; and (5) the success and expense of our
remediation efforts and those of our suppliers, customers and all
interconnecting carriers in achieving Year 2000 compliance. In addition, GTE
has embarked on a major initiative to expand its service capability in the data
communication and enhanced services segments of the telecommunications
marketplace and to provide a bundle of products and services both in and outside
of its traditional service territories utilizing the Company's CLEC. While GTE
management believes that it will be successful in implementing these new
initiatives, there are uncertainties associated with its ability to grow to the
levels targeted and its ability to do so within the planned timeframes or
investment levels.
21
<PAGE> 23
PART II. OTHER INFORMATION
GTE CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
10-1 Material Contracts - Form of Executive Severance
Agreement between GTE Service Corporation and each of
William P. Barr, Kent B. Foster, J. Randall
MacDonald, Michael T. Masin and Charles R. Lee
10-2 Material Contracts - Form of Executive Severance
Agreement between GTE Service Corporation and each of
James A. Attwood, Jr., Mary Beth Bardin, Daniel P.
O'Brien and Paul R. Shuell
10-3 Material Contracts - Employment Agreement between GTE
Service Corporation and J. Randall MacDonald
11 Statement re: Calculation of Earnings per Common
Share
12 Statement re: Calculation of the Consolidated Ratio
of Earnings to Fixed Charges
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K dated July 27, 1998
under Item 5, "Other Events", and Item 7, "Financial
Statements and Exhibits." No financial statements were
included with this report.
22
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GTE Corporation
----------------------------------
(Registrant)
Date: November 13, 1998 /s/ Paul R. Shuell
----------------------- ----------------------------------
Paul R. Shuell
Vice President and Controller
Date: November 13, 1998 /s/ Marianne Drost
----------------------- ----------------------------------
Marianne Drost
Secretary
23
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10-1 Material Contracts - Form of Executive Severance
Agreement between GTE Service Corporation and each of
William P. Barr, Kent B. Foster, J. Randall
MacDonald, Michael T. Masin and Charles R. Lee
10-2 Material Contracts - Form of Executive Severance
Agreement between GTE Service Corporation and each of
James A. Attwood, Jr., Mary Beth Bardin, Daniel P.
O'Brien and Paul R. Shuell
10-3 Material Contracts - Employment Agreement between GTE
Service Corporation and J. Randall MacDonald
11 Statement re: Calculation of Earnings per Common
Share
12 Statements re: Calculation of the Consolidated Ratio
of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10-1
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT ("Agreement") dated June 4, 1998, by and between GTE
Service Corporation, a New York corporation (the "Company"), and <<Name>> (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Company recognizes the valuable services that the
Executive has rendered thereto and desires to be assured that the Executive
will continue to attend to the business and affairs of the Company without
regard to any potential or actual change in control of GTE Corporation, a New
York corporation and the Company's sole shareholder ("GTE"); and
WHEREAS, the Executive is willing to continue to serve the
Company, but desires assurance that he will not be materially disadvantaged by
a change in control of GTE;
NOW, THEREFORE, in consideration of the Executive's continued
service to the Company and the mutual agreements herein contained, the Company
and the Executive hereby agree as follows:
ARTICLE I
ELIGIBILITY FOR BENEFITS
Section 1.1. Qualifying Termination. Except as provided
in Section 2.6 hereof, the Company shall not be required to provide any
benefits to the Executive pursuant to this Agreement unless a Qualifying
Termination occurs before the Agreement expires in accordance with Section 6.1
hereof. For purposes of this Agreement, a Qualifying Termination shall occur
only if
(a) a Change in Control occurs, and
(b) (i) within two years after the Change in Control, the
Company terminates the Executive's employment other than for Cause; or
(ii)(A) within two years after the Change in Control,
a Good Reason arises, and (B) the Executive terminates employment with the
Company within (I) six months after the Good Reason arises or (II) two years
after the Change in Control, whichever occurs later; provided, that a
Qualifying Termination
<PAGE> 2
-2-
shall not occur if the Executive's employment with the Company terminates by
reason of the Executive's Retirement, Disability, or death. A Qualifying
Termination may occur even though the Executive retires from employment with the
Company other than by reason of Retirement or Disability.
Section 1.2. Change in Control. Except as provided below,
a Change in Control shall be deemed to occur when and only when the first of
the following events occurs:
(a) an acquisition (other than directly from GTE) of
securities of GTE by any Person, immediately after which such Person, together
with all Affiliates and Associates of such Person, shall be the Beneficial
Owner of securities of GTE representing 20 percent or more of the Voting Power
or such lower percentage of the Voting Power that, from time to time, would
cause the Person to constitute an "Acquiring Person" (as such term is defined
in the Rights Plan); provided that, in determining whether a Change in Control
has occurred, the acquisition of securities of GTE in a Non-Control Acquisition
shall not constitute an acquisition that would cause a Change in Control; or
(b) three or more directors, whose election or nomination
for election is not approved by a majority of the members of the "Incumbent
Board" (as defined below) then serving as members of the Board, are elected
within any single 12-month period to serve on the Board; provided that an
individual whose election or nomination for election is approved as a result of
either an actual or threatened "Election Contest" (as described in Rule 14a-11
promulgated under the Securities Exchange Act of 1934, as amended from time to
time) or other actual or threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board (a "Proxy Contest"), including by
reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest, shall be deemed not to have been approved by a majority of the
Incumbent Board for purposes hereof; or
(c) members of the Incumbent Board cease for any reason
to constitute at least a majority of the Board; "Incumbent Board" shall mean
individuals who, as of the close of business on June 4, 1998, are members of
the Board; provided that, if the election, or nomination for election by GTE's
shareholders, of any new director was approved by a vote of at least
three-quarters of the Incumbent Board, such new director shall, for purposes of
this Agreement, be considered as a member of the Incumbent Board; provided
further that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or
threatened Election Contest or other actual or threatened Proxy Contest,
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(d) approval by shareholders of GTE of:
<PAGE> 3
-3-
(i) a merger, consolidation, or reorganization
involving GTE, unless
(A) the shareholders of GTE, immediately
before the merger, consolidation, or reorganization, own, directly or
indirectly immediately following such merger, consolidation, or reorganization,
at least 50 percent of the combined voting power of the outstanding voting
securities of the corporation resulting from such merger, consolidation, or
reorganization (the "Surviving Corporation") in substantially the same
proportion as their ownership of the voting securities immediately before such
merger, consolidation, or reorganization;
(B) individuals who were members of the
Incumbent Board immediately prior to the execution of the agreement providing
for such merger, consolidation or reorganization constitute at least a majority
of the board of directors of the Surviving Corporation; and
(C) no Person (other than GTE or any
subsidiary of GTE, any employee benefit plan (or any trust forming a part
thereof) maintained by GTE, the Surviving Corporation, or any subsidiary of
GTE, or any Person who, immediately prior to such merger, consolidation, or
reorganization, had Beneficial Ownership of securities representing 20 percent
(or such lower percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (a) of this definition of "Change in Control") or
more of the Voting Power) has Beneficial Ownership of securities representing
20 percent (or such lower percentage the acquisition of which would cause a
Change in Control pursuant to paragraph (a) of this definition of "Change in
Control") or more of the combined Voting Power of the Surviving Corporation's
then outstanding voting securities;
(ii) a complete liquidation or dissolution of GTE;
or
(iii) an agreement for the sale or other
disposition of all or substantially all of the assets of GTE to any Person
(other than a transfer to a subsidiary of GTE).
For purposes of this Section, the following terms shall have
the definitions set forth below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended from time to time.
"Board" means the Board of Directors of GTE.
<PAGE> 4
-4-
"Non-Control Acquisition" means an acquisition by (1) an
employee benefit plan (or a trust forming a part thereof) maintained by GTE or
any of its subsidiaries, (2) GTE or any of its subsidiaries, or (3) any Person
in connection with a "Non-Control Transaction."
"Non-Control Transaction" means a transaction described in
clauses (A) through (C) of paragraph (d)(i) of the definition of "Change in
Control" herein.
"Person" shall mean any individual, firm, corporation,
partnership, joint venture, association, trust, or other entity; and a Person
shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially
own," any securities:
(x) which such Person or any of such Person's Affiliates
or Associates beneficially owns, directly or indirectly;
(y) which such Person or any of such Person's Affiliates
or Associates has (i) the right or obligation to acquire (whether such right or
obligation is exercisable or effective immediately or only after the passage of
time) pursuant to any agreement, arrangement, or understanding (whether or not
in writing) or upon the exercise of conversion rights, exchange rights, rights
(other than the rights granted pursuant to the Rights Plan), warrants or
options, or otherwise; provided that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," securities tendered pursuant
to a tender or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange; or (ii) the right to vote pursuant to any agreement,
arrangement, or understanding (whether or not in writing); provided that a
Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this clause (y) if the agreement, arrangement, or
understanding to vote such security (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations of the Securities
Exchange Act of 1934, as amended from time to time, and (B) is not also then
reportable by such person on Schedule 13D under the Securities Exchange Act of
1934, as amended from time to time (or any comparable or successor report); or
(z) which are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any agreement,
arrangement, or understanding (whether or not in writing), or with which such
Person or any of such Person's Affiliates or Associates have otherwise formed a
group for the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy as described in clause (ii)(A) of subparagraph (y), above), or
disposing of any securities of GTE.
<PAGE> 5
-5-
"Rights Plan" means the Rights Agreement, dated as of December
7, 1989, between GTE and The First National Bank of Boston (as successor Rights
Agent to State Street Bank and Trust Company), as it may be amended from time
to time, or any successor thereto.
"Voting Power" means the voting power of all securities of GTE
then outstanding generally entitled to vote for the election of directors of
GTE.
Section 1.3. Termination for Cause. The Company shall
have Cause to terminate the Executive for purposes of Section 1.1 hereof only
if the Executive (a) engages in unlawful acts intended to result in the
substantial personal enrichment of the Executive at the Company's expense, or
(b) engages (except by reason of incapacity due to illness or injury) in a
material violation of his responsibilities to the Company that results in a
material injury to the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to him a Notice of Termination, consisting of a copy
of a resolution duly adopted by the affirmative vote of not less than three
quarters of the entire membership of GTE's Board of Directors at a duly held
meeting of the Board of Directors (with reasonable notice to the Executive and
an opportunity for the Executive, together with counsel, to be heard before the
Board of Directors), finding that the Executive has engaged in the conduct set
forth above in this Section 1.3 and specifying the particulars thereof in
detail. GTE's Board of Directors may not delegate or assign its duties under
this Section 1.3.
Section 1.4. Termination for Good Reason. The Executive
shall have a Good Reason for terminating employment with the Company only if
one or more of the following occurs after a Change in Control:
(a) a change in the Executive's status or position(s)
with the Company that, in the Executive's reasonable judgment, represents a
demotion from the Executive's status or position(s) in effect immediately
before the Change in Control;
(b) the assignment to the Executive of any duties or
responsibilities that, in the Executive's reasonable judgment, are inconsistent
with the Executive's status or position(s) in effect immediately before the
Change in Control;
(c) layoff or involuntary termination of the Executive's
employment, except in connection with the termination of the Executive's
employment for Cause or as a result of the Executive's Retirement, Disability,
or death;
<PAGE> 6
-6-
(d) a reduction by the Company in the Executive's total
compensation (which shall be deemed, for this purpose, to be equal to his base
salary plus the greater of (i) the most recent award that he has earned under
the GTE Corporation Executive Incentive Plan, as amended from time to time, or
any successor thereto (the "EIP"), or (ii) an EIP award equal to the
Executive's Average Percentage of the annual value (i.e., the dollar amount) of
the normal payment under the EIP for the Executive's salary level (such annual
value and normal payment being those that are in effect under the EIP
immediately before the date on which the Change in Control occurs for the
Executive's salary level immediately before the date on which the Change in
Control occurs). For purposes of this paragraph (d), the Executive's "Average
Percentage" means the average of the Executive's Annual Percentages for the
Determination Years. For purposes of this paragraph (d), the Executive's
"Annual Percentage" for each Determination Year means a fraction (expressed as
a percentage), the numerator of which is the EIP award earned by the Executive
for such Determination Year, and the denominator of which is the annual value
of the normal payment under the EIP for the Executive's salary level (such
annual value and normal payment being those that were in effect under the EIP
for such Determination Year for the Executive's salary level for such
Determination Year). For purposes of this paragraph (d), a "Determination
Year" means each of the last three EIP plan years ending before the date on
which the Change in Control occurs (or, if less, the number of those three plan
years during which the Executive was a participant in the EIP);
(e) a material increase in the Executive's
responsibilities or duties without a commensurate increase in total
compensation;
(f) the failure by the Company to continue in effect any
Plan in which the Executive is participating at the time of the Change in
Control (or plans or arrangements providing the Executive with substantially
equivalent benefits) other than as a result of the normal expiration of any
such Plan in accordance with its terms as in effect at the time of the Change
in Control;
(g) any action or inaction by the Company that would
adversely affect the Executive's continued participation in any Plan on at
least as favorable a basis as was the case on the date of the Change in
Control, or that would materially reduce the Executive's benefits in the future
under the Plan or deprive him of any material benefits that he enjoyed at the
time of the Change in Control, except to the extent that such action or
inaction by the Company is required by the terms of the Plan as in effect
immediately before the Change in Control, or is necessary to comply with
applicable law or to preserve the qualification of the Plan under section
401(a) of the Internal Revenue Code of 1986, as amended from time to time or
any successor thereto (the "Code") and except to the extent that the Company
provides the Executive with substantially equivalent benefits;
<PAGE> 7
-7-
(h) the Company's failure to provide and credit the
Executive with the number of days of paid vacation, holiday, or leave to which
he is then entitled in accordance with the Company's normal vacation, holiday,
or leave policy in effect immediately before the Change in Control;
(i) the imposition of any requirement that the Executive
be based anywhere other than within 50 miles of where his principal office was
located immediately before the Change in Control;
(j) a material increase in the frequency or duration of
the Executive's business travel;
(k) the Company's failure to obtain the express
assumption of this Agreement by any successor to the Company as provided by
Section 6.3 hereof;
(l) any attempt by the Company to terminate the
Executive's employment that is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 1.3 hereof or that does not afford the
Executive the procedural protections prescribed by that Section; or
(m) any violation by the Company of any agreement
(including this Agreement) between it and the Executive. Notwithstanding the
foregoing, no action by the Company shall give rise to a Good Reason if it
results from the Executive's termination for Cause, Retirement, or death, and
no action by the Company specified in paragraphs (a) through (d) of the
preceding sentence shall give rise to a Good Reason if it results from the
Executive's Disability. A Good Reason shall not be deemed to be waived by
reason of the Executive's continued employment as long as the termination of
the Executive's employment occurs within the time prescribed by Section
1.1(b)(ii)(B) hereof. For purposes of this Section 1.4, "Plan" means any
compensation plan, such as an incentive, stock option, or restricted stock
plan, or any employee benefit plan, such as a thrift, pension, profit-sharing,
stock bonus, long-term performance award, medical, disability, accident, or
life insurance plan, or a relocation plan or policy, or any other plan, program
or policy of the Company that is intended to benefit employees.
Section 1.5. Retirement. For purposes of this Agreement,
"Retirement" shall mean the Executive's termination of employment upon or after
attaining age 65.
Section 1.6. Disability. For purposes of this Agreement,
"Disability" shall mean an illness or injury that prevents the Executive from
performing his duties (as they existed immediately before the illness or
injury) on a full-time basis for six consecutive months.
<PAGE> 8
-8-
Section 1.7. Notice. If a Change in Control occurs, the
Company shall notify the Executive of the occurrence of the Change in Control
within two weeks after the Change in Control.
ARTICLE II
BENEFITS AFTER A QUALIFYING TERMINATION
Section 2.1. Basic Severance Payment.
(a) If the Executive incurs a Qualifying Termination, the
Company shall pay to the Executive a cash amount equal to 200% of the Base
Amount. The Base Amount shall be an amount equal to the greater of
(A) the sum of (I) the Executive's base annual
salary immediately before the Change in Control plus (II) the Executive's
Average Percentage of the annual value (i.e., the dollar amount) of the normal
payment under the EIP for the Executive's salary level (such annual value and
normal payment being those that are in effect under the EIP immediately before
the date on which the Change in Control occurs for the Executive's salary level
immediately before the date on which the Change in Control occurs). For
purposes of this paragraph (A), the Executive's "Average Percentage" means the
average of the Executive's Annual Percentages for the Determination Years. For
purposes of this paragraph (A), the Executive's "Annual Percentage" for each
Determination Year means a fraction (expressed as a percentage), the numerator
of which is the EIP award earned by the Executive for such Determination Year,
and the denominator of which is the annual value of the normal payment under
the EIP for the Executive's salary level (such annual value and normal payment
being those that were in effect under the EIP for such Determination Year for
the Executive's salary level for such Determination Year). For purposes of
this paragraph (A), a "Determination Year" means each of the last three EIP
plan years ending before the date on which the Change in Control occurs (or, if
less, the number of those three plan years during which the Executive was a
participant in the EIP); or
(B) the sum of (I) the Executive's base annual
salary immediately before the Qualifying Termination plus (II) the Executive's
Average Percentage of the annual value (i.e., the dollar amount) of the normal
payment under the EIP for the Executive's salary level (such annual value and
normal payment being those that are in effect under the EIP immediately before
the date on which the Qualifying Termination occurs for the Executive's salary
level immediately before the date on which the Qualifying Termination occurs).
For purposes of this paragraph (B), the Executive's "Average Percentage" means
the average of the Executive's Annual Percentages for the Determination Years.
For purposes of this paragraph (B), the Executive's "Annual Percentage" for
each
<PAGE> 9
-9-
Determination Year means a fraction (expressed as a percentage), the numerator
of which is the EIP award earned by the Executive for such Determination Year,
and the denominator of which is the annual value of the normal payment under
the EIP for the Executive's salary level (such annual value and normal payment
being those that were in effect under the EIP for such Determination Year for
the Executive's salary level for such Determination Year). For purposes of
this paragraph (B), a "Determination Year" means each of the last three EIP
plan years ending before the date on which the Qualifying Termination occurs
(or, if less, the number of those three plan years during which the Executive
was a participant in the EIP).
(b) The Company shall make the payment to the Executive
pursuant to subsection (a) of this Section 2.1 in a lump sum within 30 days of
the Qualifying Termination.
Section 2.2. Insurance. If the Executive incurs a
Qualifying Termination, the Company shall provide the Executive, at the
Company's expense, for a period beginning on the date of the Qualifying
Termination, the same medical insurance and life insurance coverage as was in
effect immediately before the Change in Control (or, if greater, as in effect
immediately before the Qualifying Termination occurs). Such coverage shall end
upon the expiration of 24 months after the Qualifying Termination. For
purposes of this Section 2.2, "at the Company's expense" means that the Company
shall make all contributions or premium payments required to obtain coverage,
and that the Executive shall not make any such contributions or premium
payments, but that the Executive shall be subject to any deductibles and
co-payment provisions in effect immediately before the Change in Control (or,
if applicable, immediately before the Qualifying Termination). Except to the
extent otherwise required by law, the period of coverage for any health care
continuation coverage required by the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, shall begin on the date of the
Executive's Qualifying Termination.
Section 2.3. Outplacement Counseling. If the Executive
incurs a Qualifying Termination, the Company shall make available to the
Executive, at the Company's expense, outplacement counseling that is at least
equivalent to the outplacement counseling that the Company provided to its
terminated senior executives during the most recent year that ended before the
Change in Control occurred and during which the Company provided outplacement
counseling to its terminated senior executives. Subject to the foregoing, the
Executive may select the organization that will provide the outplacement
counseling; provided, that this sentence shall not require the Company to
provide the Executive with outplacement counseling that is more costly to the
Company than the outplacement counseling that this Section 2.3 otherwise
requires the Company to provide to the Executive.
<PAGE> 10
-10-
Section 2.4. Financial Counseling. If the Executive
incurs a Qualifying Termination, the Company shall, within 30 days of the
Qualifying Termination, make available to the Executive three individual
financial counseling sessions, of at least two hours each and at times and
locations that are convenient to the Executive, with a nationally recognized
financial counseling firm. At the financial counseling sessions, the financial
counseling firm shall provide the Executive with detailed financial advice that
is tailored to the Executive's particular personal and financial situation.
The Company shall specify to the Executive the information regarding his
personal and financial situation that he must provide to the financial
counseling firm in order for the firm to provide the counseling services
required by this Section 2.4. The Company shall take all reasonable and
appropriate measures to assure that the financial counseling firm preserves the
confidentiality of all information conveyed by the Executive to the counseling
firm.
Section 2.5. Benefit Credit. If the Executive incurs a
Qualifying Termination,
(a) the Executive shall receive service credit, for the
purpose of receiving benefits and for vesting, retirement eligibility, benefit
accrual, and all other purposes, under all employee benefit plans sponsored by
the Company (including, but not limited to, health, life insurance, pension,
savings, stock, and stock ownership plans, but excluding the Company's
short-term and long-term disability plans) in which he participated immediately
before the Change in Control, for 24 months;
(b) for purposes of determining the Executive's benefits
under all defined benefit pension plans maintained by the Company, including
the GTE Excess Pension Plan and the GTE Supplemental Executive Retirement Plan
(collectively "SERP"), the Executive's compensation shall include the amount
payable to the Executive pursuant to Section 2.1 hereof, and for purposes of
this subsection (b), the Executive shall be deemed to have received such amount
in monthly installments, each equal to 1/24th of the amount payable to the
Executive pursuant to Section 2.1 hereof; and
(c) the Executive shall be considered to have not less
than 76 points and 15 years of Accredited Service for purposes of determining
(i) his eligibility for early retirement benefits under the Company's defined
benefit pension plans (including, but not limited to, the SERP), and (ii) his
eligibility for benefits under the GTE Executive Retired Life Insurance Plan
(or any predecessor or successor thereto). [Note: This sentence superseded by
the following provisions for Michael T. Masin.]
[Applicable to Michael T. Masin ONLY:
<PAGE> 11
-11-
(c) if the Executive has not completed at least 10 years
of service for purposes of determining whether he has a nonforfeitable interest
in his accrued benefit under a funded define benefit pension plan maintained by
the Company in which he participated immediately before the Change in Control,
then in addition to any service credit that the Executive receives pursuant to
Section 2.5(a) hereof, the Executive shall receive credit for each year of
service with which he is otherwise credited (without regard to Section 2.5(a)
hereof) for vesting, retirement eligibility, benefit accrual, and all other
purposes under the plan, under the SERP, and under the GTE Executive Retired
Life Insurance Plan (or any predecessor or successor thereto) in accordance
with the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years of Service Otherwise Credited Service Credited
Without Regard to Section 2.5(a) Pursuant to this Section 2.5(c)
- -------------------------------------------------------------------------------------------------
<S> <C>
5 or less 2 times years of service otherwise credited
- -------------------------------------------------------------------------------------------------
more than 5, but not more than 10 10 years of service
- -------------------------------------------------------------------------------------------------
more than 10 years of service otherwise credited
- -------------------------------------------------------------------------------------------------
</TABLE>
(d) the Executive shall be considered to have not less
than 76 points and 15 years of Accredited Service for purposes of determining
(i) his eligibility for early retirement benefits under the Company's defined
benefit pension plans (including, but not limited to, the SERP), and (ii) his
eligibility for benefits under the GTE Executive Retired Life Insurance Plan
(or any predecessor or successor thereto) and for purposes of determining his
eligibility under the Company's post retirement medical benefits plan (as in
effect immediately prior to the Change in Control).]
Notwithstanding the service credit granted under subsection (a) of this Section
2.5 and the compensation recognized under subsection (b) of this Section 2.5,
nothing in this Section 2.5 shall prevent the Executive from receiving any
benefits to which the Executive is entitled under any defined benefit or
defined contribution pension plan maintained by the Company, including the SERP
(as such benefits are modified by this Agreement) in any form permitted by such
plans (including but not limited to a lump-sum distribution) immediately
following the Executive's Qualifying Termination. To the extent that the
Company's tax-qualified retirement plans cannot provide the benefits specified
by this Section 2.5 without jeopardizing the tax qualification of such plans,
the Company shall provide such benefits under the SERP. [Applicable to Michael
T. Masin ONLY: and, in the case of GTE's post retirement medical plan as
specified in Section 2.5(d), if the benefit cannot be provided on a tax-free
basis, the Company shall provide such benefit on a basis
<PAGE> 12
-12-
that avoids an adverse income tax effect upon the Executive (for example, by
purchasing third party insurance).]
Section 2.6. Certain Additional Payments by the Company.
(a) Except as provided in Section 2.6(f) hereof, if any
payment or distribution by the Company to or for the benefit of the Executive,
whether pursuant to the terms of this Agreement or otherwise (a "Payment"), is
subject to the excise tax imposed by Section 4999 of the Code or any interest
or penalties are incurred by the Executive with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), the Company shall
make an additional payment (a "Gross-Up Payment") to the Executive in an amount
such that, after payment by the Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including, without
limitation, any federal, state, or local income and employment taxes and Excise
Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed on the Payment.
(b) Subject to the provisions of Section 2.6(c) hereof,
all determinations under this Section 2.6, including whether a Gross-Up Payment
is required and the amount of the Gross-Up Payment, shall be made by the
Company's certified public accounting firm immediately before the Change in
Control occurs (the "Accounting Firm"), which shall provide detailed supporting
calculations to both the Company and the Executive within 15 business days
after the Change in Control (or any other change in ownership or effective
control that triggers application of the Excise Tax) and, if a Qualifying
Termination occurs, within 15 days after the Qualifying Termination. All fees
and expenses of the Accounting Firm shall be borne solely by the Company. The
initial Gross-Up Payment determined pursuant to this Section 2.6(b) shall be
paid by the Company to the Executive within five days after it receives the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with a
written opinion that failure to report the Excise Tax on the Executive's
applicable federal tax return will not result in the imposition of a negligence
or similar penalty. Any determination by the Accounting Firm shall be binding
on the Company and the Executive. Notwithstanding the foregoing, as a result
of uncertainty in applying Section 4999 of the Code, it is possible that the
Company will not have made Gross-Up Payments that it should have made hereunder
(an "Underpayment"). If the Company exhausts its remedies pursuant to Section
2.6(c) hereof and the Executive thereafter is required to pay any Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment, inform the
Company and the Executive of the Underpayment in writing, and, within five days
of receiving such written report, the Company shall pay the amount of such
Underpayment to or for the benefit of the Executive.
<PAGE> 13
-13-
(c) The Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if successful, would require
the payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten business days after the
Executive is informed in writing of such claim and shall apprise the Company of
the nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim before the expiration of 30 days
following the date on which he gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing before
the expiration of such 30-day period that it desires to contest such claim, the
Executive shall (i) give the Company any information reasonably requested by
the Company relating to such claim, and (ii) take such action in connection
with contesting such claim as the Company shall reasonably request in writing
from time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney selected by the
Company; provided, that the Company shall pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax
basis, for any tax, including interest and penalties, imposed as a result of
such representation and payment of costs and expenses. The Company shall
control all proceedings in connection with such contest and may, at its sole
option, either direct the Executive to pay the tax claimed and sue for a refund
or to contest the claim in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any appropriate administrative
tribunal or court, as the Company shall determine; provided, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis, and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any tax, including interest or penalties, imposed with
respect to such advance. The Company's control of the contest shall be limited
to issues with respect to which a Gross-Up Payment would be payable hereunder,
and the Executive shall be entitled to settle or contest any other issue.
(d) If, after the Executive receives an advance by the
Company pursuant to Section 2.6(c) hereof, the Executive becomes entitled to
receive a refund claimed pursuant to such Section 2.6(c), the Executive shall
(subject to the Company's complying with the requirements of such Section
2.6(c)) promptly pay to the Company the amount of such refund (together with
any interest thereon, after taxes applicable thereto). If, after the Executive
receives an amount advanced by the Company pursuant to Section 2.6(c) hereof, a
determination is made that the Executive shall not be entitled to any refund
claimed pursuant to such Section 2.6(c), and the Company does not notify the
Executive in writing of its intent to contest such denial of refund before the
expiration of 30 days after such
<PAGE> 14
-14-
determination, the Executive shall not be required to repay such advance, and
the amount of such advance shall offset, to the extent thereof, the amount of
the required Gross-Up Payment.
(e) Any payments otherwise required by this Section 2.6
shall be made regardless of whether a Qualifying Termination occurs.
(f) If the Executive Compensation and Organizational
Structure Committee of the Board (or any successor thereto) determines in its
sole discretion that (i) consummation of a transaction may be contingent upon
the parties' ability to use pooling of interest accounting and (ii) a provision
of this Section would preclude the use of pooling of interest accounting, said
Committee may, in its sole discretion, eliminate or modify that provision to
the extent required to allow pooling of interest accounting; provided that said
Committee may not take any action pursuant to this Section 2.6(f) after a
Change in Control.
Section 2.7. Stock Options and Stock Appreciation Rights.
If the Executive incurs a Qualifying Termination, the Executive may exercise
any then outstanding stock options and stock appreciation rights under the GTE
Long-Term Incentive Plan (or any successor thereto) for a period of at least
two years following the date of such Qualifying Termination (but not beyond the
maximum term of the option or stock appreciation right specified by the terms
of the stock option or stock appreciation right).
Section 2.8. Nonduplication. [Applicable to Michael T.
Masin ONLY: (a)] Nothing in this Agreement shall require the Company to make
any payment or to provide any benefit or service credit that GTE, the Company,
or any affiliate of either of them (the "GTE Group") is required to provide
with respect to the Executive under any other contract, agreement, policy,
plan, or arrangement, including a separation policy or employment agreement
("Other Agreement"). In order to accomplish the foregoing, if the GTE Group is
required, under any Other Agreement, to make any payment or to provide any
benefit or service credit that also is required to be made or to be provided
under this Agreement, the payment, benefit, or service credit required by this
Agreement shall be reduced by the payment, benefit, or service credit that the
GTE Group is required to make or to provide with respect to the Executive under
the Other Agreement.
[Applicable to Michael T. Masin ONLY:
(b) Subsection (a) shall not apply to the benefits provided in
accordance with the second and third sentences of the paragraph entitled
"Pension Agreement" of the letter agreement, dated October 20, 1994, executed
by Charles R. Lee and Michael T. Masin, providing for a life annuity pension of
$200,000 per year and the continuation of that annuity to the Executive's wife
after the Executive's death.]
<PAGE> 15
-15-
ARTICLE III
EFFECT ON INVOLUNTARY SEPARATION POLICY
Section 3.1. Involuntary Separation Policy. Nothing in
this Agreement shall cause the Executive to be deprived of any benefits to
which the Executive is entitled under any Company severance or salary
continuation policy (including but not limited to any benefits pursuant to an
involuntary separation program or similar program maintained under a pension
plan sponsored by the Company); provided that, in accordance with Section 2.8
hereof, any such benefits shall reduce any benefits payable under this
Agreement.
ARTICLE IV
TAX MATTERS
Section 4.1. Withholding. The Company may withhold from
any amounts payable to the Executive hereunder all federal, state, city or
other taxes that the Company may reasonably determine are required to be
withheld pursuant to any applicable law or regulation.
ARTICLE V
COLLATERAL MATTERS
Section 5.1. Nature of Payments. All payments to the
Executive under this Agreement shall be considered either payments in
consideration of his continued service to the Company or severance payments in
consideration of his past services thereto.
Section 5.2. Legal Expenses. The Company shall pay all
legal fees and expenses that the Executive may incur as a result of the
Company's contesting the validity, the enforceability or the Executive's
interpretation of, or determinations under, this Agreement; provided, that this
Section 5.2 shall be operative only if and to the extent that (a) the Company
fails to establish a trust that defrays all such legal fees and expenses or (b)
the Company establishes such a trust, but the trust fails to pay all such legal
fees and expenses.
Section 5.3. Mitigation. The Executive shall not be
required to mitigate the amount of any payment provided for in this Agreement
either by seeking other employment or otherwise. Except as provided in Section
2.2 hereof, the amount of any payment provided for herein shall not be reduced
by any
<PAGE> 16
-16-
remuneration that the Executive may earn from employment with another employer
or otherwise following his Qualifying Termination.
Section 5.4. Interest. If the Company fails to make, or
cause to be made, any payment provided for herein within 30 days of the date on
which the payment is due, the Company shall make such payment together with
interest thereon. The interest shall accrue and be compounded monthly. The
interest rate shall be equal to 120 percent of the prime rate as reported by
The Wall Street Journal for the first business day of each month, effective for
the ensuing month. The interest rate shall be adjusted at the beginning of
each month.
Section 5.5. Prior Agreement. Any agreement between the
Company and the Executive that is entitled "Executive Severance Agreement" and
that was executed by the parties before the date hereof is hereby canceled and
shall have no force or effect.
Section 5.6. Authority. The execution of this Agreement
has been authorized by the Board of Directors of the Company and by the Board
of Directors of GTE.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1. Term of Agreement. This Agreement shall
become effective on the date hereof and shall continue in effect until the
earliest of (a) July 1, 2001, if no Change in Control has occurred before that
date; (b) the termination of the Executive's employment with the Company for
any reason prior to a Change in Control; (c) the Company's termination of the
Executive's employment for Cause, or the Executive's resignation for other than
Good Reason, following a Change in Control and the Company's and the
Executive's fulfillment of all of their obligations hereunder; and (d) the
expiration following a Change in Control of two years and six months and the
fulfillment by the Company and the Executive of all of their obligations
hereunder. Notwithstanding the foregoing, commencing on July 1, 2001, and on
July 1 of each year thereafter, the expiration date prescribed by clause (a) of
the preceding sentence shall automatically be extended for an additional year
unless, not later than December 31 of the immediately preceding year, one of
the parties hereto shall have given notice to the other party hereto that it
(or he) does not wish to extend the term of this Agreement. Furthermore,
nothing in this Article VI shall cause this Agreement to terminate before both
the Company and the Executive have fulfilled all of their obligations
hereunder.
<PAGE> 17
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Section 6.2. Governing Law. Except as otherwise expressly
provided herein, this Agreement and the rights and obligations hereunder shall
be construed and enforced in accordance with the laws of the State of New York.
Section 6.3. Successors to the Company. This Agreement
shall inure to the benefit of and shall be binding upon and enforceable by the
Company and any successor thereto, including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the business or assets of the Company, whether by merger,
consolidation, sale or otherwise, but shall not otherwise be assignable by the
Company. Without limitation of the foregoing sentence, the Company shall
require any successor (whether direct or indirect, by merger, consolidation,
sale or otherwise) to all or substantially all of the business or assets of the
Company, by agreement in form satisfactory to the Executive, expressly,
absolutely and unconditionally to assume and to agree to perform this Agreement
in the same manner and to the same extent as the Company would have been
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as heretofore defined and any
successor to all or substantially all of its business or assets that executes
and delivers the agreement provided for in this Section 6.3 or that becomes
bound by this Agreement either pursuant to this Agreement or by operation of
law. As used in this Agreement, "GTE" shall mean GTE as heretofore defined and
any successor to all or substantially all of its business or assets.
Section 6.4. Noncorporate Entities. If any provision of
this Agreement refers to the board of directors of an entity that has no board
of directors, the reference to board of directors shall be deemed to refer to
the body, committee, or person that has duties and responsibilities with
respect to the entity that most closely approximate those of a board of
directors of a corporation.
Section 6.5. Successor to the Executive. This Agreement
shall inure to the benefit of and shall be binding upon and enforceable by the
Executive and his personal and legal representatives, executors,
administrators, heirs, distributees, legatees and, subject to Section 6.6
hereof, his designees ("Successors"). If the Executive should die while
amounts are or may be payable to him under this Agreement, references hereunder
to the "Executive" shall, where appropriate, be deemed to refer to his
Successors; provided, that nothing in this Section 6.5 shall supersede the
terms of any plan or arrangement (other than this Agreement) that is affected
by this Agreement.
Section 6.6. Nonalienability. No right of or amount
payable to the Executive under this Agreement shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance, charge, execution, attachment, levy or similar process or to set
off against any obligations or to assignment by operation of law. Any attempt,
voluntary or
<PAGE> 18
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involuntary, to effect any action specified in the immediately preceding
sentence shall be void. However, this Section 6.6 shall not prohibit the
Executive from designating one or more persons, on a form satisfactory to the
Company, to receive amounts payable to him under this Agreement in the event
that he should die before receiving them.
Section 6.7. Notices. All notices provided for in this
Agreement shall be in writing. Notices to the Company shall be deemed given
when personally delivered or sent by certified or registered mail or overnight
delivery service to GTE Service Corporation, 1255 Corporate Drive, P.O. Box
152257, Irving, TX 75015-2257, Attention: Corporate Secretary. Notices to the
Executive shall be deemed given when personally delivered or sent by certified
or registered mail or overnight delivery service to the last address for the
Executive shown on the records of the Company. Either the Company or the
Executive may, by notice to the other, designate an address other than the
foregoing for the receipt of subsequent notices.
Section 6.8. Amendment. No amendment to this Agreement
shall be effective unless in writing and signed by both the Company and the
Executive; provided that amendments may be made to this Agreement by the
Executive Compensation and Organizational Structure Committee of the Board (or
any successor thereto) in accordance with Section 2.6(f) hereof prior to a
Change in Control.
Section 6.9. Waivers. No waiver of any provision of this
Agreement shall be valid unless approved in writing by the party giving such
waiver. No waiver of a breach under any provision of this Agreement shall be
deemed to be a waiver of such provision or any other provision of this
Agreement or any subsequent breach. No failure on the part of either the
Company or the Executive to exercise, and no delay in exercising, any right or
remedy conferred by law or this Agreement shall operate as a waiver of such
right or remedy, and no exercise or waiver, in whole or in part, of any right
or remedy conferred by law or herein shall operate as a waiver of any other
right or remedy.
Section 6.10. Severability. If any provision of this
Agreement shall be held unlawful or otherwise invalid or unenforceable in whole
or in part, such unlawfulness, invalidity or unenforceability shall not affect
any other provision of this Agreement or part thereof, each of which shall
remain in full force and effect. If the making of any payment or the provision
of any other benefit required under this Agreement shall be held unlawful or
otherwise invalid or unenforceable, such unlawfulness, invalidity or
unenforceability shall not prevent any other payment or benefit from being made
or provided under this Agreement, and if the making of any payment in full or
the provision of any other benefit required under this Agreement in full would
be unlawful or otherwise invalid or unenforceable, then
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such unlawfulness, invalidity or unenforceability shall not prevent such
payment or benefit from being made or provided in part, to the extent that it
would not be unlawful, invalid or unenforceable, and the maximum payment or
benefit that would not be unlawful, invalid or unenforceable shall be made or
provided under this Agreement.
Section 6.11. Agents. The Company may make arrangements to
cause any agent or other party, including an affiliate of the Company, to make
any payment or to provide any benefit that the Company is required to make or
to provide hereunder; provided, that no such arrangement shall relieve or
discharge the Company of its obligations hereunder except to the extent that
such payments or benefits are actually made or provided.
Section 6.12. Captions. The captions to the respective
articles and sections of this Agreement are intended for convenience of
reference only and have no substantive significance.
Section 6.13. Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
but all of which together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
GTE SERVICE CORPORATION
By: /s/ CHARLES R. LEE
---------------------------------
---------------------------------
Participant
---------------------------------
Date
<PAGE> 1
Exhibit 10-2
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT ("Agreement") dated June 4, 1998, by and
between GTE Service Corporation, a New York corporation (the "Company"), and
((Name)) (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company recognizes the valuable services that the
Executive has rendered thereto and desires to be assured that the Executive will
continue to attend to the business and affairs of the Company without regard to
any potential or actual change in control of GTE Corporation, a New York
corporation and the Company's sole shareholder ("GTE"); and
WHEREAS, the Executive is willing to continue to serve the
Company, but desires assurance that he will not be materially disadvantaged by a
change in control of GTE;
NOW, THEREFORE, in consideration of the Executive's continued
service to the Company and the mutual agreements herein contained, the Company
and the Executive hereby agree as follows:
ARTICLE I
ELIGIBILITY FOR BENEFITS
Section 1.1. Qualifying Termination. Except as provided in
Section 2.6 hereof, the Company shall not be required to provide any benefits to
the Executive pursuant to this Agreement unless a Qualifying Termination occurs
before the Agreement expires in accordance with Section 6.1 hereof. For purposes
of this Agreement, a Qualifying Termination shall occur only if
(a) a Change in Control occurs, and
(b) (i) within two years after the Change in Control, the
Company terminates the Executive's employment other
than for Cause; or
(ii)(A) within two years after the Change in Control,
a Good Reason arises, and (B) the Executive terminates employment with the
Company within (I) six months after the Good Reason arises or (II) two years
after the Change in Control, whichever occurs later; provided, that a Qualifying
Termination shall not occur if the Executive's employment with the Company
terminates by
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reason of the Executive's Retirement, Disability, or death. A Qualifying
Termination may occur even though the Executive retires from employment with the
Company other than by reason of Retirement or Disability.
Section 1.2. Change in Control. Except as provided below, a
Change in Control shall be deemed to occur when and only when the first of the
following events occurs:
(a) an acquisition (other than directly from GTE) of
securities of GTE by any Person, immediately after which such Person, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of securities of GTE representing 20 percent or more of the Voting Power or such
lower percentage of the Voting Power that, from time to time, would cause the
Person to constitute an "Acquiring Person" (as such term is defined in the
Rights Plan); provided that, in determining whether a Change in Control has
occurred, the acquisition of securities of GTE in a Non-Control Acquisition
shall not constitute an acquisition that would cause a Change in Control; or
(b) three or more directors, whose election or nomination for
election is not approved by a majority of the members of the "Incumbent Board"
(as defined below) then serving as members of the Board, are elected within any
single 12-month period to serve on the Board; provided that an individual whose
election or nomination for election is approved as a result of either an actual
or threatened "Election Contest" (as described in Rule 14a-11 promulgated under
the Securities Exchange Act of 1934, as amended from time to time) or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board (a "Proxy Contest"), including by reason of any
agreement intended to avoid or settle any Election Contest or Proxy Contest,
shall be deemed not to have been approved by a majority of the Incumbent Board
for purposes hereof; or
(c) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board; "Incumbent Board" shall mean
individuals who, as of the close of business on June 4, 1998, are members of the
Board; provided that, if the election, or nomination for election by GTE's
shareholders, of any new director was approved by a vote of at least
three-quarters of the Incumbent Board, such new director shall, for purposes of
this Agreement, be considered as a member of the Incumbent Board; provided
further that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or
threatened Election Contest or other actual or threatened Proxy Contest,
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(d) approval by shareholders of GTE of:
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(i) a merger, consolidation, or reorganization
involving GTE, unless
(A) the shareholders of GTE, immediately
before the merger, consolidation, or reorganization, own, directly or indirectly
immediately following such merger, consolidation, or reorganization, at least 50
percent of the combined voting power of the outstanding voting securities of the
corporation resulting from such merger, consolidation, or reorganization (the
"Surviving Corporation") in substantially the same proportion as their ownership
of the voting securities immediately before such merger, consolidation, or
reorganization;
(B) individuals who were members of the
Incumbent Board immediately prior to the execution of the agreement providing
for such merger, consolidation or reorganization constitute at least a majority
of the board of directors of the Surviving Corporation; and
(C) no Person (other than GTE or any
subsidiary of GTE, any employee benefit plan (or any trust forming a part
thereof) maintained by GTE, the Surviving Corporation, or any subsidiary of GTE,
or any Person who, immediately prior to such merger, consolidation, or
reorganization, had Beneficial Ownership of securities representing 20 percent
(or such lower percentage the acquisition of which would cause a Change in
Control pursuant to paragraph (a) of this definition of "Change in Control") or
more of the Voting Power) has Beneficial Ownership of securities representing 20
percent (or such lower percentage the acquisition of which would cause a Change
in Control pursuant to paragraph (a) of this definition of "Change in Control")
or more of the combined Voting Power of the Surviving Corporation's then
outstanding voting securities;
(ii) a complete liquidation or dissolution of GTE; or
(iii) an agreement for the sale or other disposition
of all or substantially all of the assets of GTE to any Person (other than a
transfer to a subsidiary of GTE).
For purposes of this Section, the following terms shall have
the definitions set forth below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended from time to time.
"Board" means the Board of Directors of GTE.
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"Non-Control Acquisition" means an acquisition by (1) an
employee benefit plan (or a trust forming a part thereof) maintained by GTE or
any of its subsidiaries, (2) GTE or any of its subsidiaries, or (3) any Person
in connection with a "Non-Control Transaction."
"Non-Control Transaction" means a transaction described in
clauses (A) through (C) of paragraph (d)(i) of the definition of "Change in
Control" herein.
"Person" shall mean any individual, firm, corporation,
partnership, joint venture, association, trust, or other entity; and a Person
shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially
own," any securities:
(x) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(y) which such Person or any of such Person's Affiliates or
Associates has (i) the right or obligation to acquire (whether such right or
obligation is exercisable or effective immediately or only after the passage of
time) pursuant to any agreement, arrangement, or understanding (whether or not
in writing) or upon the exercise of conversion rights, exchange rights, rights
(other than the rights granted pursuant to the Rights Plan), warrants or
options, or otherwise; provided that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," securities tendered pursuant to
a tender or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange; or (ii) the right to vote pursuant to any agreement,
arrangement, or understanding (whether or not in writing); provided that a
Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this clause (y) if the agreement, arrangement, or
understanding to vote such security (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations of the Securities
Exchange Act of 1934, as amended from time to time, and (B) is not also then
reportable by such person on Schedule 13D under the Securities Exchange Act of
1934, as amended from time to time (or any comparable or successor report); or
(z) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such Person
or any of such Person's Affiliates or Associates has any agreement, arrangement,
or understanding (whether or not in writing), or with which such Person or any
of such Person's Affiliates or Associates have otherwise formed a group for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy as
described in clause (ii)(A) of subparagraph (y), above), or disposing of any
securities of GTE.
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"Rights Plan" means the Rights Agreement, dated as of December
7, 1989, between GTE and The First National Bank of Boston (as successor Rights
Agent to State Street Bank and Trust Company), as it may be amended from time to
time, or any successor thereto.
"Voting Power" means the voting power of all securities of GTE
then outstanding generally entitled to vote for the election of directors of
GTE.
Section 1.3. Termination for Cause. The Company shall have
Cause to terminate the Executive for purposes of Section 1.1 hereof only if the
Executive (a) engages in unlawful acts intended to result in the substantial
personal enrichment of the Executive at the Company's expense, or (b) engages
(except by reason of incapacity due to illness or injury) in a material
violation of his responsibilities to the Company that results in a material
injury to the Company. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to him a Notice of Termination, consisting of a copy of a resolution
duly adopted by the affirmative vote of not less than three quarters of the
entire membership of GTE's Board of Directors at a duly held meeting of the
Board of Directors (with reasonable notice to the Executive and an opportunity
for the Executive, together with counsel, to be heard before the Board of
Directors), finding that the Executive has engaged in the conduct set forth
above in this Section 1.3 and specifying the particulars thereof in detail.
GTE's Board of Directors may not delegate or assign its duties under this
Section 1.3.
Section 1.4. Termination for Good Reason. The Executive shall
have a Good Reason for terminating employment with the Company only if one or
more of the following occurs after a Change in Control:
(a) a change in the Executive's status or position(s) with the
Company that, in the Executive's reasonable judgment, represents a demotion from
the Executive's status or position(s) in effect immediately before the Change in
Control;
(b) the assignment to the Executive of any duties or
responsibilities that, in the Executive's reasonable judgment, are inconsistent
with the Executive's status or position(s) in effect immediately before the
Change in Control;
(c) layoff or involuntary termination of the Executive's
employment, except in connection with the termination of the Executive's
employment for Cause or as a result of the Executive's Retirement, Disability,
or death;
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(d) a reduction by the Company in the Executive's total
compensation (which shall be deemed, for this purpose, to be equal to his base
salary plus the greater of (i) the most recent award that he has earned under
the GTE Corporation Executive Incentive Plan, as amended from time to time, or
any successor thereto (the "EIP"), or (ii) an EIP award equal to the Executive's
Average Percentage of the annual value (i.e., the dollar amount) of the normal
payment under the EIP for the Executive's salary level (such annual value and
normal payment being those that are in effect under the EIP immediately before
the date on which the Change in Control occurs for the Executive's salary level
immediately before the date on which the Change in Control occurs). For purposes
of this paragraph (d), the Executive's "Average Percentage" means the average of
the Executive's Annual Percentages for the Determination Years. For purposes of
this paragraph (d), the Executive's "Annual Percentage" for each Determination
Year means a fraction (expressed as a percentage), the numerator of which is the
EIP award earned by the Executive for such Determination Year, and the
denominator of which is the annual value of the normal payment under the EIP for
the Executive's salary level (such annual value and normal payment being those
that were in effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For purposes of this
paragraph (d), a "Determination Year" means each of the last three EIP plan
years ending before the date on which the Change in Control occurs (or, if less,
the number of those three plan years during which the Executive was a
participant in the EIP);
(e) a material increase in the Executive's responsibilities or
duties without a commensurate increase in total compensation;
(f) the failure by the Company to continue in effect any Plan
in which the Executive is participating at the time of the Change in Control (or
plans or arrangements providing the Executive with substantially equivalent
benefits) other than as a result of the normal expiration of any such Plan in
accordance with its terms as in effect at the time of the Change in Control;
(g) any action or inaction by the Company that would adversely
affect the Executive's continued participation in any Plan on at least as
favorable a basis as was the case on the date of the Change in Control, or that
would materially reduce the Executive's benefits in the future under the Plan or
deprive him of any material benefits that he enjoyed at the time of the Change
in Control, except to the extent that such action or inaction by the Company is
required by the terms of the Plan as in effect immediately before the Change in
Control, or is necessary to comply with applicable law or to preserve the
qualification of the Plan under section 401(a) of the Internal Revenue Code of
1986, as amended from time to time or any successor thereto (the "Code") and
except to the extent that the Company provides the Executive with substantially
equivalent benefits;
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(h) the Company's failure to provide and credit the Executive
with the number of days of paid vacation, holiday, or leave to which he is then
entitled in accordance with the Company's normal vacation, holiday, or leave
policy in effect immediately before the Change in Control;
(i) the imposition of any requirement that the Executive be
based anywhere other than within 50 miles of where his principal office was
located immediately before the Change in Control;
(j) a material increase in the frequency or duration of the
Executive's business travel;
(k) the Company's failure to obtain the express assumption of
this Agreement by any successor to the Company as provided by Section 6.3
hereof;
(l) any attempt by the Company to terminate the Executive's
employment that is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 1.3 hereof or that does not afford the Executive the
procedural protections prescribed by that Section; or
(m) any violation by the Company of any agreement (including
this Agreement) between it and the Executive. Notwithstanding the foregoing, no
action by the Company shall give rise to a Good Reason if it results from the
Executive's termination for Cause, Retirement, or death, and no action by the
Company specified in paragraphs (a) through (d) of the preceding sentence shall
give rise to a Good Reason if it results from the Executive's Disability. A Good
Reason shall not be deemed to be waived by reason of the Executive's continued
employment as long as the termination of the Executive's employment occurs
within the time prescribed by Section 1.1(b)(ii)(B) hereof. For purposes of this
Section 1.4, "Plan" means any compensation plan, such as an incentive, stock
option, or restricted stock plan, or any employee benefit plan, such as a
thrift, pension, profit-sharing, stock bonus, long-term performance award,
medical, disability, accident, or life insurance plan, or a relocation plan or
policy, or any other plan, program or policy of the Company that is intended to
benefit employees.
Section 1.5. Retirement. For purposes of this Agreement,
"Retirement" shall mean the Executive's termination of employment upon or after
attaining age 65.
Section 1.6. Disability. For purposes of this Agreement,
"Disability" shall mean an illness or injury that prevents the Executive from
performing his duties (as they existed immediately before the illness or injury)
on a full-time basis for six consecutive months.
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Section 1.7. Notice. If a Change in Control occurs, the
Company shall notify the Executive of the occurrence of the Change in Control
within two weeks after the Change in Control.
ARTICLE II
BENEFITS AFTER A QUALIFYING TERMINATION
Section 2.1. Basic Severance Payment.
(a) If the Executive incurs a Qualifying Termination, the
Company shall pay to the Executive a cash amount equal to 200% of the Base
Amount. The Base Amount shall be an amount equal to the greater of
(A) the sum of (I) the Executive's base annual salary
immediately before the Change in Control plus (II) the Executive's Average
Percentage of the annual value (i.e., the dollar amount) of the normal payment
under the EIP for the Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP immediately before the date
on which the Change in Control occurs for the Executive's salary level
immediately before the date on which the Change in Control occurs). For purposes
of this paragraph (A), the Executive's "Average Percentage" means the average of
the Executive's Annual Percentages for the Determination Years. For purposes of
this paragraph (A), the Executive's "Annual Percentage" for each Determination
Year means a fraction (expressed as a percentage), the numerator of which is the
EIP award earned by the Executive for such Determination Year, and the
denominator of which is the annual value of the normal payment under the EIP for
the Executive's salary level (such annual value and normal payment being those
that were in effect under the EIP for such Determination Year for the
Executive's salary level for such Determination Year). For purposes of this
paragraph (A), a "Determination Year" means each of the last three EIP plan
years ending before the date on which the Change in Control occurs (or, if less,
the number of those three plan years during which the Executive was a
participant in the EIP); or
(B) the sum of (I) the Executive's base annual salary
immediately before the Qualifying Termination plus (II) the Executive's Average
Percentage of the annual value (i.e., the dollar amount) of the normal payment
under the EIP for the Executive's salary level (such annual value and normal
payment being those that are in effect under the EIP immediately before the date
on which the Qualifying Termination occurs for the Executive's salary level
immediately before the date on which the Qualifying Termination occurs). For
purposes of this paragraph (B), the Executive's "Average Percentage" means the
average of the Executive's Annual Percentages for the Determination Years. For
purposes of this
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paragraph (B), the Executive's "Annual Percentage" for each Determination Year
means a fraction (expressed as a percentage), the numerator of which is the EIP
award earned by the Executive for such Determination Year, and the denominator
of which is the annual value of the normal payment under the EIP for the
Executive's salary level (such annual value and normal payment being those that
were in effect under the EIP for such Determination Year for the Executive's
salary level for such Determination Year). For purposes of this paragraph (B), a
"Determination Year" means each of the last three EIP plan years ending before
the date on which the Qualifying Termination occurs (or, if less, the number of
those three plan years during which the Executive was a participant in the EIP).
(b) The Company shall make the payment to the Executive
pursuant to subsection (a) of this Section 2.1 in a lump sum within 30 days of
the Qualifying Termination.
Section 2.2. Insurance. If the Executive incurs a Qualifying
Termination, the Company shall provide the Executive, at the Company's expense,
for a period beginning on the date of the Qualifying Termination, the same
medical insurance and life insurance coverage as was in effect immediately
before the Change in Control (or, if greater, as in effect immediately before
the Qualifying Termination occurs). Such coverage shall end upon the expiration
of 24 months after the Qualifying Termination. For purposes of this Section 2.2,
"at the Company's expense" means that the Company shall make all contributions
or premium payments required to obtain coverage, and that the Executive shall
not make any such contributions or premium payments, but that the Executive
shall be subject to any deductibles and co-payment provisions in effect
immediately before the Change in Control (or, if applicable, immediately before
the Qualifying Termination). Except to the extent otherwise required by law, the
period of coverage for any health care continuation coverage required by the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, shall begin
on the date of the Executive's Qualifying Termination.
Section 2.3. Outplacement Counseling. If the Executive incurs
a Qualifying Termination, the Company shall make available to the Executive, at
the Company's expense, outplacement counseling that is at least equivalent to
the outplacement counseling that the Company provided to its terminated senior
executives during the most recent year that ended before the Change in Control
occurred and during which the Company provided outplacement counseling to its
terminated senior executives. Subject to the foregoing, the Executive may select
the organization that will provide the outplacement counseling; provided, that
this sentence shall not require the Company to provide the Executive with
outplacement counseling that is more costly to the Company than the outplacement
counseling that this Section 2.3 otherwise requires the Company to provide to
the Executive.
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Section 2.4. Financial Counseling. If the Executive incurs a
Qualifying Termination, the Company shall, within 30 days of the Qualifying
Termination, make available to the Executive three individual financial
counseling sessions, of at least two hours each and at times and locations that
are convenient to the Executive, with a nationally recognized financial
counseling firm. At the financial counseling sessions, the financial counseling
firm shall provide the Executive with detailed financial advice that is tailored
to the Executive's particular personal and financial situation. The Company
shall specify to the Executive the information regarding his personal and
financial situation that he must provide to the financial counseling firm in
order for the firm to provide the counseling services required by this Section
2.4. The Company shall take all reasonable and appropriate measures to assure
that the financial counseling firm preserves the confidentiality of all
information conveyed by the Executive to the counseling firm.
Section 2.5. Benefit Credit. If the Executive incurs a
Qualifying Termination,
(a) the Executive shall receive service credit, for the
purpose of receiving benefits and for vesting, retirement eligibility, benefit
accrual, and all other purposes, under all employee benefit plans sponsored by
the Company (including, but not limited to, health, life insurance, pension,
savings, stock, and stock ownership plans, but excluding the Company's
short-term and long-term disability plans) in which he participated immediately
before the Change in Control, for 24 months; (b) for purposes of determining the
Executive's benefits under all defined benefit pension plans maintained by the
Company, including the GTE Service Corporation Supplemental Executive Retirement
Plan ("SERP"), the Executive's compensation shall include the amount payable to
the Executive pursuant to Section 2.1 hereof, and for purposes of this
subsection (b), the Executive shall be deemed to have received such amount in
monthly installments, each equal to 1/24th of the amount payable to the
Executive pursuant to Section 2.1 hereof; and
(c) the Executive shall be considered to have not less than 76
points and 15 years of Accredited Service for purposes of determining (i) his
eligibility for early retirement benefits under the Company's defined benefit
pension plans (including, but not limited to, the SERP), and (ii) his
eligibility for benefits under the GTE Executive Retired Life Insurance Plan (or
any predecessor or successor thereto).
Notwithstanding the service credit granted under subsection (a) of this Section
2.5 and the compensation recognized under subsection (b) of this Section 2.5,
nothing in this Section 2.5 shall prevent the Executive from receiving any
benefits to which the Executive is entitled under any defined benefit or defined
contribution pension
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plan maintained by the Company, including the SERP (as such benefits are
modified by this Agreement) in any form permitted by such plans (including but
not limited to a lump-sum distribution) immediately following the Executive's
Qualifying Termination. To the extent that the Company's tax-qualified
retirement plans cannot provide the benefits specified by this Section 2.5
without jeopardizing the tax qualification of such plans, the Company shall
provide such benefits under the SERP.
Section 2.6. Certain Additional Payments by the Company.
(a) If any payment or distribution by the Company to or for
the benefit of the Executive, whether pursuant to the terms of this Agreement or
otherwise (a "Payment"), is subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), the
Company shall make an additional payment (a "Gross-Up Payment") to the Executive
in an amount such that, after payment by the Executive of all taxes (including
any interest or penalties imposed with respect to such taxes), including,
without limitation, any federal, state, or local income and employment taxes and
Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed on the Payment.
(b) Subject to the provisions of Section 2.6(c) hereof, all
determinations under this Section 2.6, including whether a Gross-Up Payment is
required and the amount of the Gross-Up Payment, shall be made by the Company's
certified public accounting firm immediately before the Change in Control occurs
(the "Accounting Firm"), which shall provide detailed supporting calculations to
both the Company and the Executive within 15 business days after the Change in
Control (or any other change in ownership or effective control that triggers
application of the Excise Tax) and, if a Qualifying Termination occurs, within
15 days after the Qualifying Termination. All fees and expenses of the
Accounting Firm shall be borne solely by the Company. The initial Gross-Up
Payment determined pursuant to this Section 2.6(b) shall be paid by the Company
to the Executive within five days after it receives the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by the Executive, it shall furnish the Executive with a written opinion that
failure to report the Excise Tax on the Executive's applicable federal tax
return will not result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding on the Company and the
Executive. Notwithstanding the foregoing, as a result of uncertainty in applying
Section 4999 of the Code, it is possible that the Company will not have made
Gross-Up Payments that it should have made hereunder (an "Underpayment"). If the
Company exhausts its remedies pursuant to Section 2.6(c) hereof and the
Executive
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thereafter is required to pay any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment, inform the Company and the Executive
of the Underpayment in writing, and, within five days of receiving such written
report, the Company shall pay the amount of such Underpayment to or for the
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be given
as soon as practicable but no later than ten business days after the Executive
is informed in writing of such claim and shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim before the expiration of 30 days following
the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing before the expiration of such
30-day period that it desires to contest such claim, the Executive shall (i)
give the Company any information reasonably requested by the Company relating to
such claim, and (ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney selected by the Company; provided, that the Company shall pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any tax, including interest and
penalties, imposed as a result of such representation and payment of costs and
expenses. The Company shall control all proceedings in connection with such
contest and may, at its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or to contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before any
appropriate administrative tribunal or court, as the Company shall determine;
provided, that if the Company directs the Executive to pay such claim and sue
for a refund, the Company shall advance the amount of such payment to the
Executive, on an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any tax, including interest or penalties,
imposed with respect to such advance. The Company's control of the contest shall
be limited to issues with respect to which a Gross-Up Payment would be payable
hereunder, and the Executive shall be entitled to settle or contest any other
issue.
(d) If, after the Executive receives an advance by the Company
pursuant to Section 2.6(c) hereof, the Executive becomes entitled to receive a
refund claimed pursuant to such Section 2.6(c), the Executive shall (subject to
the Company's complying with the requirements of such Section 2.6(c)) promptly
pay to the Company the amount of such refund (together with any interest
thereon,
<PAGE> 13
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after taxes applicable thereto). If, after the Executive receives an amount
advanced by the Company pursuant to Section 2.6(c) hereof, a determination is
made that the Executive shall not be entitled to any refund claimed pursuant to
such Section 2.6(c), and the Company does not notify the Executive in writing of
its intent to contest such denial of refund before the expiration of 30 days
after such determination, the Executive shall not be required to repay such
advance, and the amount of such advance shall offset, to the extent thereof, the
amount of the required Gross-Up Payment.
(e) Any payments otherwise required by this Section 2.6 shall
be made regardless of whether a Qualifying Termination occurs.
Section 2.7. Stock Options and Stock Appreciation Rights. If
the Executive incurs a Qualifying Termination, the Executive may exercise any
then outstanding stock options and stock appreciation rights under the GTE
Long-Term Incentive Plan (or any successor thereto) for a period of at least two
years following the date of such Qualifying Termination (but not beyond the
maximum term of the option or stock appreciation right specified by the terms of
the stock option or stock appreciation right).
Section 2.8. Nonduplication. Nothing in this Agreement shall
require the Company to make any payment or to provide any benefit or service
credit that GTE, the Company, or any affiliate of either of them (the "GTE
Group") is required to provide with respect to the Executive under any other
contract, agreement, policy, plan, or arrangement, including a separation policy
or employment agreement ("Other Agreement"). In order to accomplish the
foregoing, if the GTE Group is required, under any Other Agreement, to make any
payment or to provide any benefit or service credit that also is required to be
made or to be provided under this Agreement, the payment, benefit, or service
credit required by this Agreement shall be reduced by the payment, benefit, or
service credit that the GTE Group is required to make or to provide with respect
to the Executive under the Other Agreement.
ARTICLE III
EFFECT ON INVOLUNTARY SEPARATION POLICY
Section 3.1. Involuntary Separation Policy. Nothing in this
Agreement shall cause the Executive to be deprived of any benefits to which the
Executive is entitled under any Company severance or salary continuation policy
(including but not limited to any benefits pursuant to an involuntary separation
program or similar program maintained under a pension plan sponsored by the
Company); provided that, in accordance with Section 2.8 hereof, any such
benefits
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shall reduce any benefits payable under this Agreement.
ARTICLE IV
TAX MATTERS
Section 4.1. Withholding. The Company may withhold from any
amounts payable to the Executive hereunder all federal, state, city or other
taxes that the Company may reasonably determine are required to be withheld
pursuant to any applicable law or regulation.
ARTICLE V
COLLATERAL MATTERS
Section 5.1. Nature of Payments. All payments to the Executive
under this Agreement shall be considered either payments in consideration of his
continued service to the Company or severance payments in consideration of his
past services thereto.
Section 5.2. Legal Expenses. The Company shall pay all legal
fees and expenses that the Executive may incur as a result of the Company's
contesting the validity, the enforceability or the Executive's interpretation
of, or determinations under, this Agreement; provided, that this Section 5.2
shall be operative only if and to the extent that (a) the Company fails to
establish a trust that defrays all such legal fees and expenses or (b) the
Company establishes such a trust, but the trust fails to pay all such legal fees
and expenses.
Section 5.3. Mitigation. The Executive shall not be required
to mitigate the amount of any payment provided for in this Agreement either by
seeking other employment or otherwise. Except as provided in Section 2.2 hereof,
the amount of any payment provided for herein shall not be reduced by any
remuneration that the Executive may earn from employment with another employer
or otherwise following his Qualifying Termination.
Section 5.4. Interest. If the Company fails to make, or cause
to be made, any payment provided for herein within 30 days of the date on which
the payment is due, the Company shall make such payment together with interest
thereon. The interest shall accrue and be compounded monthly. The interest rate
shall be equal to 120 percent of the prime rate as reported by The Wall Street
Journal for the first business day of each month, effective for the ensuing
month. The interest rate shall be adjusted at the beginning of each month.
<PAGE> 15
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Section 5.5. Prior Agreement. Any agreement between the
Company and the Executive that is entitled "Executive Severance Agreement" and
that was executed by the parties before the date hereof is hereby canceled and
shall have no force or effect.
Section 5.6. Authority. The execution of this Agreement has
been authorized by the Board of Directors of the Company and by the Board of
Directors of GTE.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1. Term of Agreement. This Agreement shall become
effective on the date hereof and shall continue in effect until the earliest of
(a) July 1, 2001, if no Change in Control has occurred before that date; (b) the
termination of the Executive's employment with the Company for any reason prior
to a Change in Control; (c) the Company's termination of the Executive's
employment for Cause, or the Executive's resignation for other than Good Reason,
following a Change in Control and the Company's and the Executive's fulfillment
of all of their obligations hereunder; and (d) the expiration following a Change
in Control of two years and six months and the fulfillment by the Company and
the Executive of all of their obligations hereunder. Notwithstanding the
foregoing, commencing on July 1, 2001, and on July 1 of each year thereafter,
the expiration date prescribed by clause (a) of the preceding sentence shall
automatically be extended for an additional year unless, not later than December
31 of the immediately preceding year, one of the parties hereto shall have given
notice to the other party hereto that it (or he) does not wish to extend the
term of this Agreement. Furthermore, nothing in this Article VI shall cause this
Agreement to terminate before both the Company and the Executive have fulfilled
all of their obligations hereunder.
Section 6.2. Governing Law. Except as otherwise expressly
provided herein, this Agreement and the rights and obligations hereunder shall
be construed and enforced in accordance with the laws of the State of New York.
Section 6.3. Successors to the Company. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the Company
and any successor thereto, including, without limitation, any corporation or
corporations acquiring directly or indirectly all or substantially all of the
business or assets of the Company, whether by merger, consolidation, sale or
otherwise, but shall not otherwise be assignable by the Company. Without
limitation of the
<PAGE> 16
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foregoing sentence, the Company shall require any successor (whether direct or
indirect, by merger, consolidation, sale or otherwise) to all or substantially
all of the business or assets of the Company, by agreement in form satisfactory
to the Executive, expressly, absolutely and unconditionally to assume and to
agree to perform this Agreement in the same manner and to the same extent as the
Company would have been required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean the Company as heretofore
defined and any successor to all or substantially all of its business or assets
that executes and delivers the agreement provided for in this Section 6.3 or
that becomes bound by this Agreement either pursuant to this Agreement or by
operation of law. As used in this Agreement, "GTE" shall mean GTE as heretofore
defined and any successor to all or substantially all of its business or assets.
Section 6.4. Noncorporate Entities. If any provision of this
Agreement refers to the board of directors of an entity that has no board of
directors, the reference to board of directors shall be deemed to refer to the
body, committee, or person that has duties and responsibilities with respect to
the entity that most closely approximate those of a board of directors of a
corporation.
Section 6.5. Successor to the Executive. This Agreement shall
inure to the benefit of and shall be binding upon and enforceable by the
Executive and his personal and legal representatives, executors, administrators,
heirs, distributees, legatees and, subject to Section 6.6 hereof, his designees
("Successors"). If the Executive should die while amounts are or may be payable
to him under this Agreement, references hereunder to the "Executive" shall,
where appropriate, be deemed to refer to his Successors; provided, that nothing
in this Section 6.5 shall supersede the terms of any plan or arrangement (other
than this Agreement) that is affected by this Agreement.
Section 6.6. Nonalienability. No right of or amount payable to
the Executive under this Agreement shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance, charge, execution, attachment, levy or similar process or to set
off against any obligations or to assignment by operation of law. Any attempt,
voluntary or involuntary, to effect any action specified in the immediately
preceding sentence shall be void. However, this Section 6.6 shall not prohibit
the Executive from designating one or more persons, on a form satisfactory to
the Company, to receive amounts payable to him under this Agreement in the event
that he should die before receiving them.
Section 6.7. Notices. All notices provided for in this
Agreement shall be in writing. Notices to the Company shall be deemed given when
personally delivered or sent by certified or registered mail or overnight
delivery service to GTE Service Corporation, 1255 Corporate Drive, P.O. Box
152257, Irving, TX 75015-
<PAGE> 17
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2257, Attention: Corporate Secretary. Notices to the Executive shall be deemed
given when personally delivered or sent by certified or registered mail or
overnight delivery service to the last address for the Executive shown on the
records of the Company. Either the Company or the Executive may, by notice to
the other, designate an address other than the foregoing for the receipt of
subsequent notices.
Section 6.8. Amendment. No amendment to this Agreement shall
be effective unless in writing and signed by both the Company and the Executive;
provided that if the Executive Compensation and Organizational Structure
Committee of the Board (or any successor thereto) determines in its sole
discretion that (i) consummation of a transaction may be contingent upon the
parties' ability to use pooling of interest accounting and (ii) this Agreement,
or any provision of this Agreement, would preclude the use of pooling of
interest accounting, said Committee may, in its sole discretion, rescind this
Agreement in its entirety, or eliminate or modify any such provision, to the
extent required to allow pooling of interest accounting, except that said
Committee may not take any action pursuant to this proviso after a Change in
Control.
Section 6.9. Waivers. No waiver of any provision of this
Agreement shall be valid unless approved in writing by the party giving such
waiver. No waiver of a breach under any provision of this Agreement shall be
deemed to be a waiver of such provision or any other provision of this Agreement
or any subsequent breach. No failure on the part of either the Company or the
Executive to exercise, and no delay in exercising, any right or remedy conferred
by law or this Agreement shall operate as a waiver of such right or remedy, and
no exercise or waiver, in whole or in part, of any right or remedy conferred by
law or herein shall operate as a waiver of any other right or remedy.
Section 6.10. Severability. If any provision of this Agreement
shall be held unlawful or otherwise invalid or unenforceable in whole or in
part, such unlawfulness, invalidity or unenforceability shall not affect any
other provision of this Agreement or part thereof, each of which shall remain in
full force and effect. If the making of any payment or the provision of any
other benefit required under this Agreement shall be held unlawful or otherwise
invalid or unenforceable, such unlawfulness, invalidity or unenforceability
shall not prevent any other payment or benefit from being made or provided under
this Agreement, and if the making of any payment in full or the provision of any
other benefit required under this Agreement in full would be unlawful or
otherwise invalid or unenforceable, then such unlawfulness, invalidity or
unenforceability shall not prevent such payment or benefit from being made or
provided in part, to the extent that it would not be unlawful, invalid or
unenforceable, and the maximum payment or benefit that would not be unlawful,
invalid or unenforceable shall be made or provided under this Agreement.
<PAGE> 18
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Section 6.11. Agents. The Company may make arrangements to
cause any agent or other party, including an affiliate of the Company, to make
any payment or to provide any benefit that the Company is required to make or to
provide hereunder; provided, that no such arrangement shall relieve or discharge
the Company of its obligations hereunder except to the extent that such payments
or benefits are actually made or provided.
Section 6.12. Captions. The captions to the respective
articles and sections of this Agreement are intended for convenience of
reference only and have no substantive significance.
Section 6.13. Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original but
all of which together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
GTE SERVICE CORPORATION
By: /s/ CHARLES R. LEE
----------------------------------------
Charles R. Lee
----------------------------------------
Participant
----------------------------------------
Date
<PAGE> 1
Exhibit 10-3
June 4, 1998
Mr. J. Randall MacDonald
[Address]
[Address]
Dear Randy:
I am pleased to offer you this employment agreement (the "Agreement") with GTE
Service Corporation ("Service Corp.") which will provide for employment
stability for you and long-term wealth-creation opportunity for you and your
family. In return, Service Corp. 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.
PURPOSE - Service Corp. enters into this Agreement with you because the
rapidly-changing and increasingly competitive global telecommunications market,
which has resulted from the Telecommunications Act of 1996, has required and
will require GTE to make critical strategic, marketing, and technical decisions.
These decisions by GTE will be based, in whole or in part, on confidential
analyses of the evolving telecommunications market, confidential assessments of
the technical capabilities and strategic plans of GTE and Competing Businesses
(as defined below) and confidential or proprietary information regarding GTE's
technology, resources, and business opportunities or other confidential or
proprietary information relating to GTE's business. Service Corp. seeks by this
Agreement to ensure that you remain a part of the management team that plays a
central role in this decision-making process.
In consideration for your entering into this Agreement, including the
restrictions on the disclosure and use of confidential or proprietary
information and the limitations on your working for a Competing Business for the
Designated Period (as defined below), Service Corp. is providing you the
security of a fixed-term agreement, restricted stock units, additional stock
options, and other benefits.
GENERAL - Under this Agreement, you will continue as a Senior Executive of
Service Corp. at a grade level no less than level 24 or its equivalent. During
the term of this Agreement, you will continue to receive the same benefits as
other Service Corp. executives at your grade level (except that you will not
receive involuntary
<PAGE> 2
Mr. J. Randall MacDonald
June 4, 1998
Page 2
separation program ("ISEP") or other separation and severance benefits). In
addition, the terms of your employment will be governed by the following:
TERM - The term of this Agreement will be from June 4, 1998, through June 3,
2001; provided that unless Service Corp. gives you written notice to the
contrary before the earlier of a Change in Control (as defined in your Executive
Severance Agreement ("ESA")) or March 6, 2001 (a "Non-Renewal Notice"), the term
of this Agreement will automatically be extended through June 3, 2003. Whenever
this Agreement refers to the term of the Agreement, it refers to the term then
in effect (either the initial 3-year term or, if Service Corp. does not give you
a Non-Renewal Notice, the extended 5-year term). Whenever this Agreement refers
to the "Expiration Date," it refers to June 3, 2003, except that if Service
Corp. gives you a Non-Renewal Notice, "Expiration Date" refers to June 3, 2001.
LOCATION - During the term of this Agreement, you will perform services for
Service Corp. at your current location, at Service Corp.'s headquarters, or at
any other location designated by Service Corp. as necessary or appropriate for
the discharge of your responsibilities under this Agreement; provided that in
the event of any change in your principal work location, you will be eligible
for relocation assistance under the terms of any Service Corp. relocation policy
then applicable to other Service Corp. executives at your grade level.
BASE SALARY - During the term of this Agreement, your annual base salary will
not be less than $364,000 per year; provided that if you are granted a merit
increase in your base salary, your base salary will not thereafter be reduced
below that increased level during the term of this Agreement.
EIP AND LTIP - During the term of this Agreement, on an annual basis, Service
Corp. will provide you the opportunity to earn an annual bonus in accordance
with the terms and conditions of the Executive Incentive Plan or any successor
plan ("EIP") and an annual grant of a long-term cash incentive award in
accordance with the terms and conditions of the Long-Term Incentive Plan or any
successor plan ("LTIP"), in each case at a level commensurate with the
opportunity offered to other Service Corp. executives at your grade level. In
addition, on an annual basis, Service Corp. 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 Service Corp. executives at
your grade level.
ONE-TIME OPTION GRANT - On June 4, 1998, the Executive Compensation and
Organizational Structure Committee (the "ECC") approved the grant to you of an
option to purchase 93,000 shares of GTE Corporation common stock at market value
on the date of grant, subject to the terms of the option award agreement and
<PAGE> 3
Mr. J. Randall MacDonald
June 4, 1998
Page 3
conditional upon your signing this Agreement. The option will vest in accordance
with the following provisions: 50% of the option will vest when the price of a
share of GTE common stock (the "Stock Price") reaches $85, and 100% of the
option will vest when the Stock Price reaches $95. For this purpose, the Stock
Price will be deemed to have reached a specified price upon the 20th consecutive
trading day on the New York Stock Exchange on which GTE common stock has closed
at a price of at least the specified price. The option also will vest, without
regard to the Stock Price, at the rate of 10% per year of employment for each of
the first four continuous years of employment following June 4, 1998, and the
remaining 60% of the option will vest after you complete five continuous years
of employment following June 4, 1998. In addition, 100% of the option will vest,
without regard to the Stock Price, on June 3, 2002, if Service Corp. gives you a
Non-Renewal Notice, and such option will thereupon be exercisable for a period
of at least 90 days. Regardless of whether it is vested, however, the option is
subject to rescission by GTE, as explained below under "Rescission."
ONE-TIME RESTRICTED STOCK UNIT GRANT - On June 4, 1998, the ECC approved the
grant to you of 11,687 restricted GTE Corporation stock units ("RSUs"),
conditional upon your signing this Agreement. These RSUs vest and become payable
in accordance with the vesting and exercisability provisions that apply to the
stock option grant described in the preceding Section ("One-Time Option Grant"),
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
RSUs and the related dividend equivalents or, subject to applicable deferral
regulations, you may elect to defer receipt of the vested RSUs and the related
dividend equivalents. Except as provided below, vested RSUs will not be
forfeited. Details will be provided in your RSU award agreement. Regardless of
whether they are vested, however, the RSUs are subject to rescission by GTE, as
explained below under "Rescission".
RETIREMENT -
ADDITIONAL PENSION AND BENEFIT CREDIT - If you remain employed by Service Corp.
until the Expiration Date:
(i) You will be credited with an extra year of service for each year for
which you actually worked for GTE during the term of this Agreement for
purposes of determining (x) your pension benefits, (y) your right to
pension, post-retirement medical, and Executive Retirement Life
Insurance Plan ("ERLIP") benefits, and (z) whether you are a retiree
for purposes of determining the exercisability of stock options and the
payment of RSUs; and
<PAGE> 4
Mr. J. Randall MacDonald
June 4, 1998
Page 4
(ii) Your pension benefits will not be less than those determined in
accordance with paragraph (i), above, and in accordance with the
provisions of Service Corp.'s pension plan as in effect on the date of
this Agreement. Your service before June 4, 1998, and after the
Expiration Date, however, will be credited in accordance with the
applicable plan provisions and will not be affected by the preceding
provisions of this Section ("Additional Pension and Benefit Credit").
If your employment terminates before June 3, 2003, by reason of involuntary
termination for Cause (as defined below) or by reason of your voluntary
termination of employment without Good Reason (as defined below), you will not
receive any service credit pursuant to the provisions of this Section
("Additional Pension and Benefit Credit").
If your employment terminates before June 3, 2003, by reason of your death or
disability, as defined by Service Corp.'s long-term disability plan as in effect
on the date of this Agreement ("Disability"), you will be credited with an extra
year of service for each year for which you actually worked for Service Corp.
during the term of this Agreement for purposes of determining your pension
benefits, but you will not be entitled to any other benefits under the preceding
provisions of this Section ("Additional Pension and Benefit Credit"); provided
that if you are Disabled, you will be eligible to receive any additional Service
Corp. benefits that you may be entitled to receive under Service Corp.'s benefit
plans by reason of your Disability.
Notwithstanding the preceding provisions of this Section ("Additional Pension
and Benefit Credit"), if you have a Qualifying Termination following a Change in
Control (as those terms are defined in your ESA), you will be entitled to the
service credit provided by the preceding provisions of this Section as though
your employment continued until June 3, 2003. The service credit provided in
accordance with this paragraph will be in lieu of the additional 2 years of
service credit that otherwise would be provided under your ESA; however, the
other provisions of your ESA will not be adversely affected by this Agreement.
The benefits prescribed by the preceding provisions of this Section ("Additional
Pension and Benefit Credit") will be paid out of Service Corp.'s funded plans,
out of Service Corp.'s general assets, or both, at Service Corp.'s discretion.
Any pension benefits provided pursuant to the preceding provisions of this
Section will be subject to actuarial reduction in accordance with the applicable
provisions of Service Corp.'s pension plans, and will be offset by the actuarial
equivalent of any pension benefits to which you are otherwise entitled under
Service Corp.'s pension plans.
<PAGE> 5
Mr. J. Randall MacDonald
June 4, 1998
Page 5
ELECTION - You may elect to decline to receive all of the benefits provided
pursuant to the provisions of the immediately preceding Section ("Additional
Pension and Benefit Credit") and to receive, in lieu of all such benefits, an
option to purchase 69,750 shares of GTE Corporation common stock at market value
on June 4, 1998, subject to the terms and conditions of the option award
agreement, which will be identical with the terms and conditions applicable to
the option described above under "One-Time Option Grant," including the
provisions described below under "Rescission." Any election that you make
pursuant to this Section ("Election") must be made by signing your name on the
designated Signature Line at the end of this Agreement at the same time that you
accept the terms of this Agreement. If you make such an election, your election
will be irrevocable. If you do not make an affirmative and timely election
pursuant to this Section, you will be eligible to receive benefits pursuant to
the provisions of the immediately preceding Section, and you will not receive
the stock option described in this Section.
TERMINATION PROVISIONS -
o CHANGE IN CONTROL - Your ESA will be amended to provide for a full
gross-up payment to cover any excise taxes you may owe after a Change
in Control (as defined in your ESA); provided that the gross-up
provision will be subject to rescission by GTE, as explained below
under "Rescission." Upon the occurrence of a Change in Control, your
then-outstanding RSUs and stock options will immediately vest, but will
remain payable or exercisable, as the case may be, in accordance with
their generally applicable terms. However, upon the occurrence of a
Qualifying Termination (as defined in your ESA) following a Change in
Control, your then-outstanding RSUs and stock options will immediately
become payable or exercisable, as the case may be, for a period of at
least 2 years, and you will receive service credit in accordance with
the Section captioned "Additional Pension and Benefit Credit," in lieu
of the 2 additional years of service credit that otherwise would be
provided under your ESA. Although you will not be entitled to any
additional payments, benefits, or grants under this Agreement following
the Qualifying Termination, you also will receive any other benefits to
which you are entitled under your ESA.
If you incur a Qualifying Termination after a Change in Control (as
those terms are defined in your ESA), except as provided above, your
entitlement to benefits will be determined solely by your ESA and any
relevant GTE compensation and benefit plans and award agreements. If
the preceding provisions of this Section ("Change in Control") apply,
you will not be entitled to payments or benefits under the following
Sections that address termination of employment under other
circumstances.
<PAGE> 6
Mr. J. Randall MacDonald
June 4, 1998
Page 6
o VOLUNTARY TERMINATION BY YOU - You may terminate your employment under
this Agreement 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 before 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 Service Corp. benefits will cease to accrue, you will
forfeit all unvested stock options and unvested RSUs, and Service Corp.
will have no further obligations under this Agreement. A termination of
employment in accordance with this paragraph will be deemed a
"Voluntary Termination."
o TERMINATION DUE TO DEATH OR DISABILITY - Except as provided above under
"Additional Pension and Benefit Credit," 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 Service Corp. will pay you or your
beneficiary, as appropriate, all benefits to which you or your
beneficiary has a right pursuant to Service Corp.'s compensation and
benefit plans.
o INVOLUNTARY TERMINATION BY SERVICE CORP. - Service Corp. may terminate
your employment under this Agreement at any time, for any reason.
However, if Service Corp. terminates your employment for any reason
other than death, Disability, or Cause (as defined below), such
termination will be deemed an Involuntary Termination by Service Corp.
If Service Corp. gives you a Non-Renewal Notice without Cause, an
Involuntary Termination will be deemed to occur under this Agreement on
June 3, 2001.
In the event of an Involuntary Termination, you will be entitled to
continue to receive all payments, benefits, and grants due you under
this Agreement (but excluding all perquisites, e.g., club memberships,
credit cards, first class air travel, and car service (which will
cease)) until (i) June 3, 2002, if the Involuntary Termination occurs
on or before June 3, 2001, or (ii) June 3, 2003, if the Involuntary
Termination occurs after June 3, 2001 (such date hereinafter referred
to as the "Termination Date"), as and when such payments, benefits, and
grants would have been provided if your employment under this Agreement
had not been terminated; provided that if you are involuntarily
terminated on or after June 4, 2002, and before June 3, 2003, you will
receive a continuation of all payments, benefits, and grants until June
3, 2003, in accordance with the preceding provisions of this paragraph
and a continuation of your base salary (with no other payments,
<PAGE> 7
Mr. J. Randall MacDonald
June 4, 1998
Page 7
benefits, or grants) from June 4, 2003, 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, Service Corp. 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 Service
Corp. executives at your grade level under LTIP, except that (a) the
phantom stock options will vest on the Termination Date, and (b) you
will have a period of at least 90 days to exercise the phantom stock
options following the Termination Date. Similarly, following your
Involuntary Termination, all of your then-outstanding stock options and
RSUs will continue to be subject to the applicable vesting schedules
then in effect, except that such options and RSUs will vest on the
Termination Date and you will have a period of at least 90 days to
exercise the stock options following the Termination Date.
Notwithstanding the foregoing, the value of your then-outstanding and
future performance-bonus awards (that is, the cash bonus awards under
LTIP) will be equal to 75% of target for your grade level for each
award cycle (but not more than the actual corporate rating for the
award cycle) multiplied by the percentage of that award cycle that
occurs on or before the Termination Date; 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 Service Corp. executives at your grade level (as your grade
level was established immediately before your employment terminated).
In addition, the value of any future payments under EIP will be equal
to 115% of norm at your grade level for each year (but not more than
the actual corporate rating for the year) multiplied by the percentage
of that year that occurs on or before the Termination Date. The amounts
determined pursuant to the two preceding sentences will be paid to you
in accordance with the provisions of LTIP and EIP that apply from time
to time to other Service Corp. executives at your grade level.
Notwithstanding the foregoing provisions of this Section ("Involuntary
Termination by Service Corp."), all cash compensation (e.g., base
salary and annual and long-term cash bonus awards) otherwise payable to
you following the termination of your employment will be reduced by any
cash compensation (e.g., hiring bonus, base salary, or annual or
long-term cash
<PAGE> 8
Mr. J. Randall MacDonald
June 4, 1998
Page 8
bonus award) that you earn or become entitled to that is attributable
to the same period of time as a result of your subsequent employment
or self-employment (disregarding for this purpose any pension benefits
to which you are entitled under this Section).
For as long as Service Corp. has obligations to you under this Section
("Involuntary Termination by Service Corp."), you will keep Service
Corp. 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 Service
Corp., in writing, correct, complete, and timely information concerning
the same.
o 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. For purposes of this Section ("Termination
For Good Reason"), "Good Reason" means a material breach by Service
Corp. of the terms and conditions of this Agreement.
Notwithstanding the foregoing, Service Corp. will have 15 calendar
days from its receipt of such notice to cure the action specified in
the notice. In the event of a cure by Service Corp. 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 Service Corp., and Service Corp.'s
obligation to employ you, under the terms of this Agreement, will
terminate simultaneously, and you will be deemed to have incurred an
Involuntary Termination, with the consequences described above under
"Involuntary Termination by Service Corp."
If you do not fulfill the notice and explanation requirements imposed
by this Section ("Termination For Good Reason"), the resulting
termination of employment will be deemed a Voluntary Termination. In
addition, if Service Corp. does not give you a Non-Renewal Notice, and
you decline to remain employed by Service Corp. until June 3, 2003,
without Good Reason, the resulting termination of employment will be
deemed a Voluntary Termination.
o TERMINATION FOR CAUSE - Nothing in this Agreement prevents Service
Corp. from terminating your employment under this Agreement for
"Cause."
<PAGE> 9
Mr. J. Randall MacDonald
June 4, 1998
Page 9
In the event of your termination for Cause, Service Corp. will pay you
your full accrued base salary and accrued vacation time through the
date of your termination, and Service Corp. will have no further
obligations under this Agreement.
For purposes of this Section ("Termination For Cause"), "Cause" is
defined as a good faith determination by the CEO, after consultation
with outside legal counsel, that you have committed an act or omission
that is materially contrary to GTE's best interests or that you
materially breached any of the terms and conditions of this Agreement.
RESCISSION - If the ECC determines in its sole discretion that (i) consummation
of a transaction may be contingent upon the parties' ability to use pooling of
interest accounting and (ii) a provision of this Agreement (or the excise tax
gross-up provision in your ESA) would preclude the use of pooling of interest
accounting, the Committee may, in its sole discretion, eliminate or modify that
provision to the extent required to allow pooling of interest accounting. If any
grant described above under "One-Time Option Grant," "One-Time Restricted Stock
Unit Grant," or "Election" is rescinded pursuant to this Section ("Rescission"),
the covenants set forth in paragraphs (b) and (c), below (under "Covenants")
will no longer apply to you.
RELEASE - You will not be entitled to any benefits under this Agreement
following the termination of your employment unless, at the time you terminate
your employment, you execute a release satisfactory to Service Corp. releasing
GTE, its affiliates, shareholders, directors, officers, employees,
representatives, and agents and their successors and assigns from any and all
employment-related claims you or your successors and beneficiaries might then
have against them (excluding any claims you might then have under this
Agreement, your ESA, or any employee benefit plan that is subject to the vesting
standards imposed by the Employee Retirement Income Security Act of 1974, as
amended).
COVENANTS - In consideration for the benefits and agreements described above,
you agree that:
(a) DISCLOSURE AND USE OF INFORMATION - You will not, directly or indirectly,
without the prior written consent of GTE, during the term of this Agreement,
during the Designated Period (as defined below) and thereafter, use, attempt to
use, disclose, or otherwise make known to any person or entity (other than GTE
or otherwise as authorized by GTE in the performance of services for GTE) any of
the following, in whole or in part:
<PAGE> 10
Mr. J. Randall MacDonald
June 4, 1998
Page 10
(i) any and all knowledge, materials, or information of GTE which is
not generally made available to the public by GTE relating to, without
limitation, its business; properties; accounting; books and records;
trade secrets; reports; memoranda; correspondence; business,
regulatory, or marketing strategies; salaries; customers; suppliers;
know-how; inventions; products; discoveries; processes; or formulae; as
well as any other knowledge, materials, or information not generally
made available to the public by GTE that you may acquire or may have
acquired in the course of your employment with GTE; or
(ii) any knowledge or information of a confidential or proprietary
nature of third parties that you may acquire or may have acquired in
the course of your employment with GTE.
Upon termination of your employment with Service Corp. for any reason, and
thereafter, if any information specified in paragraph (i) or (ii) (hereinafter
collectively referred to as "Information") comes into or is discovered in your
possession, you shall immediately return to GTE all tangible and electronic
versions, in whole or in part, of such Information.
If you are required to disclose any Information pursuant to applicable laws,
regulations, or court order, you will immediately inform GTE thereof and afford
GTE the opportunity to limit such disclosure and/or to secure protective orders
before making such disclosure.
(b) INTERFERENCE WITH BUSINESS RELATIONS - You will not, without the prior
written consent of GTE, directly or indirectly, during your employment by
Service Corp. and for the Designated Period (as defined below):
(i) induce any employee of GTE to engage in any activity that
paragraph (c), below, prohibits you from engaging in or to terminate
his or her employment with GTE (provided that the foregoing will not
prohibit you from providing references for former employees of GTE upon
request without using Information);
(ii) employ, retain, or offer to employ or retain any person who is
or was employed by GTE, unless such person has ceased to be employed by
GTE for a period of at least 2 years;
(iii) solicit or induce, or in any manner attempt to solicit or
induce, any client, customer or prospect of GTE (1) to cease being, or
not to
<PAGE> 11
Mr. J. Randall MacDonald
June 4, 1998
Page 11
become a customer of GTE or (2) to divert any business of such customer
or prospect from GTE; or
(iv) otherwise interfere with, disrupt, or attempt to interfere with
or disrupt the relationship, contractual or otherwise, between GTE and
any of its customers, clients, prospects, suppliers, consultants, or
employees.
(c) NONCOMPETITION - Because you will be given access to Information relating to
high-level decision-making (discussed above in the Section captioned "Purpose"),
which you agree to maintain in confidence and trust for the benefit of GTE and
which you will use only for the benefit of GTE, and because the disclosure
and/or use of such Information would be inevitable if you are employed by or are
associated with a Competing Business (as defined below), you agree as follows:
During your employment with Service Corp. and for the Designated Period (as
defined below), except as specifically permitted in writing by the CEO or after
a Qualifying Termination following a Change in Control (as those terms are
defined in your ESA), you will not, directly or indirectly, engage in or provide
services as a partner, officer, director, trustee, proprietor, manager,
supervisor, executive, employee, paid or voluntary consultant, independent
contractor, agent or associate, shareholder of or member in, or participate, in
the ownership, management, operation or control of any Competing Business.
(i) The "Designated Period" means the period beginning on the date
your employment with Service Corp. terminates, and ending the earlier
of (1) June 3, 2003, or (2) the second anniversary of the date your
employment with Service Corp. terminates; provided that the Designated
Period shall not end as long as Service Corp. has any obligation under
this Agreement to pay you salary or salary continuation, except for any
obligation that Service Corp. might have to pay you deferred
compensation.
(ii) A "Competing Business" is defined as the following entities and
their affiliates, subsidiaries, related entities, lines of business and
corporate successors and all business enterprises, including joint
ventures, in which any of them is a partner or has an ownership
interest: MCI Communications Corporation, Sprint Corporation, AT&T
Corp., WorldCom, Inc., LCI International, Inc., Cable & Wireless PLC,
Ameritech Corp., Bell Atlantic Corp., SBC Communications Inc., U S West
Inc., BellSouth Corp., Telefonica de Espana S.A., British
Telecommunications PLC, DIGEX, Incorporated, Qwest Communications
International Inc., Netscape Communications
<PAGE> 12
Mr. J. Randall MacDonald
June 4, 1998
Page 12
Corporation, Cisco Systems, Inc., Ascend Communications, Inc.,
Airtouch Communications, Inc., NEXTEL Communications, Inc., Teleport
Communications Group, Inc., PSINet Inc., Earthlink Network Inc., Yahoo
Inc., Cylink Corporation, Microsoft Corporation and America Online,
Inc.
(iii) The foregoing provisions of this paragraph (c) will not
prohibit you from directly or indirectly owning, as a passive
investment, up to 2% of the outstanding shares of any Competing
Business (as defined above) that is listed or traded on a national
securities exchange or in an over-the-counter securities market,
provided that you are not involved, directly or indirectly, in the
management of or provide any services or consulting to such Competing
Business.
(iv) You recognize that GTE provides services to customers throughout
the United States and North America, as well as Latin America, Europe,
and many other parts of the world. GTE's business is international in
scope and continues to develop worldwide. You also recognize that, with
the passage of the Telecommunications Act of 1996, GTE's business and
business strategies are constantly evolving in a fiercely competitive,
worldwide market. Further, you acknowledge that your job
responsibilities and/or the Information that you will receive extend
throughout the entire geographic area in which GTE provides products or
services.
(v) You also acknowledge that the inevitable use and disclosure of
Information would result if you were to breach the covenant in this
paragraph (c).
(vi) You acknowledge that the limitations and restrictions imposed by
this Agreement are reasonable in scope, duration, and geographic
territory, and are designed to provide GTE with limited, legitimate,
and reasonable protection against subsequent diminution of the value of
its business attributable to any disclosure or use of Information by
you for the benefit of any Competing Business (as defined above).
(vii) You further acknowledge that this paragraph (c) is supported by
sufficient consideration, particularly in light of the Information to
which you have been and will be given access, as well as the
professional and economic benefits, including stock options, RSUs,
pension benefits, and the security of a fixed-term agreement, provided
to you
<PAGE> 13
Mr. J. Randall MacDonald
June 4, 1998
Page 13
as a direct result of your entering into this Agreement with Service
Corp.
(viii) You also acknowledge that you have broad-based skills that
will serve as the basis for opportunities of employment with other
businesses that are not Competing Businesses (as defined above). You
acknowledge that when your employment with Service Corp. terminates,
you will be able to earn a livelihood without violating any of the
terms of this Agreement.
(ix) If you breach any provision of this paragraph (c), any payments,
benefits, and grants that otherwise might be owed to you under this
Agreement will automatically be canceled.
This Section ("Covenants") will continue to apply after any expiration,
termination, or cancellation of this Agreement. Your breach of any provision of
this Section will result in your immediate forfeiture of all rights under this
Agreement.
You agree that your breach of any of the covenants in this Section ("Covenants")
will result in irreparable harm and injury to GTE, that money damages alone will
be insufficient or undeterminable, and that such breach will entitle GTE, as a
matter of right and without limitation of any other remedy available to it,
including the recovery of damages, to immediate injunctive relief in any court
of competent jurisdiction, it being intended that all rights and remedies of GTE
under this Agreement are cumulative and nonexclusive of such other rights or
remedies. You further agree that you will pay for any applicable attorneys' fees
and court costs incurred by GTE if GTE is required to seek the enforcement of or
to defend the terms of this Agreement.
The obligations imposed on you by this Section ("Covenants") are in addition to,
and not in lieu of, any and all other policies and agreements of GTE regarding
the foregoing covenants.
MISCELLANEOUS -
GTE - For purposes of this Agreement, "GTE" refers not only to Service Corp.,
but also to GTE Corporation and all of its affiliates, subsidiaries, related
entities, lines of business and corporate successors and all business
enterprises, including joint ventures, in which it is a partner or has an
ownership interest.
NONDUPLICATION OF BENEFITS/NO SEVERANCE - The payment of any benefits hereunder
will be in lieu of any other ISEP or separation or severance benefits and
<PAGE> 14
Mr. J. Randall MacDonald
June 4, 1998
Page 14
will fulfill all GTE obligations under associated plans and programs, except to
the extent that you become entitled to such benefits after a Qualifying
Termination following a Change in Control (as those terms are defined in your
ESA). No provision of this Agreement will require GTE to provide you with any
payment, benefit, or grant that duplicates any payment, benefit, or grant that
you are entitled to receive under your ESA or under any GTE compensation or
benefit plan, award agreement, or other arrangement.
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 Service Corp. 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 Service Corp. 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 not
disclose, in whole or in part, any of the terms of this Agreement. This Section
("Confidentiality") does not prevent you from disclosing the terms of this
Agreement to your spouse or to your legal or financial adviser, provided that
you take all reasonable measures to assure that he or she does not disclose the
terms of this Agreement to a third party except as otherwise required by law.
GOVERNING LAW - To the extent not preempted by federal law, the provisions of
this Agreement will be construed and enforced in accordance with the laws of the
State of New York, excluding any conflicts or choice of law rule or principle
that might otherwise refer construction or interpretation of this provision to
the substantive law of another jurisdiction.
ASSIGNMENT - Service Corp. may, without your consent, assign its rights and
obligations under this Agreement to any other entity that is a part of GTE, and
if Service Corp. makes such an assignment, all references in this Agreement to
"Service Corp." shall be deemed to refer to the assignee. However, you may not
assign your rights and obligations under this Agreement.
<PAGE> 15
Mr. J. Randall MacDonald
June 4, 1998
Page 15
SEVERABILITY - Should any part of this Agreement be held to be enforceable only
if modified, a court of competent jurisdiction is empowered to reform this
Agreement accordingly. In addition, any such modification or reformation of a
clause contained in this Agreement will not affect the validity of the remainder
of this Agreement, the balance of which will continue to be binding upon the
parties hereto with any such modification to become a part hereof and treated as
though contained in this Agreement.
Randy, 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,
/s/ CHARLES R. LEE
- ------------------------------------
Charles R. Lee
cc: M.T. Masin
K.B. Foster
J.R. MacDonald
I agree to the terms described above.
- ------------------------------------
Signature Line
IN ADDITION TO SIGNING ABOVE, SIGN BELOW IF YOU WISH TO MAKE THE FOLLOWING
IRREVOCABLE ELECTION. IF YOU DO NOT WISH TO MAKE THE FOLLOWING ELECTION, DO NOT
SIGN BELOW.
In accordance with the election offered to me above under "Additional Pension
and Benefit Credit," I irrevocably decline eligibility for the additional
pension and benefit
<PAGE> 16
Mr. J. Randall MacDonald
June 4, 1998
Page 16
credit described under "Additional Pension and Benefit Credit," and I
irrevocably elect to accept, in lieu thereof, the stock option grant described
under "Additional Pension and Benefit Credit."
- ------------------------------------
Signature Line
<PAGE> 1
EXHIBIT 11
GTE CORPORATION AND SUBSIDIARIES
Calculation of Earnings (Loss) per Common Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
(In Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Net income:
Before extraordinary charges $ 822 $ 756 $ 1,637 $ 2,092
Extraordinary charges -- -- (320) --
------- ------- ------- -------
Consolidated net income $ 822 $ 756 $ 1,317 $ 2,092
======= ======= ======= =======
Average basic common shares 964 956 962 958
Adjustments to basic common shares:
Add - Employees' stock and stock
option plans 4 3 5 3
------- ------- ------- -------
Adjusted average diluted common shares 968 959 967 961
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE:
Basic (1)
Before extraordinary charges $ .85 $ .79 $ 1.70 $ 2.18
Extraordinary charges -- -- (.33) --
------- ------- ------- -------
Consolidated $ .85 $ .79 $ 1.37 $ 2.18
======= ======= ======= =======
Diluted (2)
Before extraordinary charges $ .85 $ .79 $ 1.69 $ 2.18
Extraordinary charges -- -- (.33) --
------- ------- ------- -------
Consolidated $ .85 $ .79 $ 1.36 $ 2.18
======= ======= ======= =======
</TABLE>
(1) Computed by dividing net income 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
Statements of the Consolidated Ratio of Earnings to Fixed Charges
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions) Nine Months
Ended Years Ended December 31,
September 30, --------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net earnings available for fixed charges:
Income before extraordinary charge $ 1,637 $ 2,794 $ 2,798 $ 2,538 $ 2,441 $ 972
Add (deduct)
- Income taxes 1,071 1,624 1,614 1,466 1,532 568
- Interest expense 1,022 1,283 1,146 1,151 1,139 1,298
- Capitalized interest (net of amortization) (6) (13) (35) (23) (6) (3)
- Preferred stock dividends of Parent -- -- -- 6 10 18
- Dividends on preferred securities of subsidiary 74 101 106 98 18 22
- Additional income requirement on preferred
dividends of subsidiaries 4 7 10 10 12 13
- Minority interests 151 155 149 145 140 112
- Portion of rent expense representing interest 112 133 131 128 140 153
------- ------- ------- ------- ------- -------
4,065 6,084 5,919 5,519 5,426 3,153
Deduct - Minority interests (241) (280) (263) (246) (243) (237)
------- ------- ------- ------- ------- -------
Adjusted earnings $ 3,824 $ 5,804 $ 5,656 $ 5,273 $ 5,183 $ 2,916
======= ======= ======= ======= ======= =======
Fixed charges:
Interest expense $ 1,022 $ 1,283 $ 1,146 $ 1,151 $ 1,139 $ 1,298
Dividends on preferred securities of subsidiaries 74 101 106 98 18 22
Additional income requirement on preferred
dividends of subsidiaries 4 7 10 10 12 13
Portion of rent expense representing interest 112 133 131 128 140 153
------- ------- ------- ------- ------- -------
1,212 1,524 1,393 1,387 1,309 1,486
Deduct - Minority interests (44) (66) (68) (70) (68) (78)
------- ------- ------- ------- ------- -------
Adjusted fixed charges $ 1,168 $ 1,458 $ 1,325 $ 1,317 $ 1,241 $ 1,408
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.27 (a) 3.98 4.27 4.00 4.18 2.07
</TABLE>
(a) Excluding special charges, the Company's ratio of earnings to fixed
charges for the nine months ended September 30, 1998 would have been
3.92.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 771
<SECURITIES> 0
<RECEIVABLES> 5,338
<ALLOWANCES> 372
<INVENTORY> 824
<CURRENT-ASSETS> 7,082
<PP&E> 58,683
<DEPRECIATION> 34,967
<TOTAL-ASSETS> 42,431
<CURRENT-LIABILITIES> 10,262
<BONDS> 14,886
0
0
<COMMON> 49
<OTHER-SE> 8,159
<TOTAL-LIABILITY-AND-EQUITY> 42,431
<SALES> 18,642
<TOTAL-REVENUES> 18,642
<CGS> 7,786
<TOTAL-COSTS> 14,968
<OTHER-EXPENSES> 54
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,022
<INCOME-PRETAX> 2,708
<INCOME-TAX> 1,071
<INCOME-CONTINUING> 1,637
<DISCONTINUED> 0
<EXTRAORDINARY> 320
<CHANGES> 0
<NET-INCOME> 1,317
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
